January 15, 2025
What You Need to Know Today:
The Fed faces an impossible task in 2025
I think we can expect another huge tax cut package to extend the tax cuts from 2017, and a set of tariffs on China, the European Union, and other trading partners with duties of somewhere between 20% and 200%, and an effort to deport 11 million illegal immigrants (and maybe a few legal immigrants too) And in the face of that policy mix I don’t think there’s any way for the Federal Reserve to reach its goals of getting inflation down to 2%, of lowering interest rates from levels left from the pandemic emergency, and of keeping the economy strong enough to prevent unemployment from climbing. Can’t be done. The Fed doesn’t even begin to have the tools to tackle all those challenges at once. And there’s a non-zero and statistically significant chance of a really serious mistake that would take a big bite out of the economy and the prices of financial assets. Can I tell you why I believe this?
Viking Therapeutics up 28% today as obesity drug moves to Phase III trials
Viking Therapeutic (VKTX) has announced that its subcutaneous obesity drug candidate VK2735 is moving into Phase III development. Viking is currently preparing for an end-of-Phase II meeting with the Food & Drug Administration later this year. Just as significant–maybe more?–pharmacokinetics data for VK2735 continues to show the potential for once-a-month dosing. The market-leading GLP diabetes/weight-loss drugs from Eli Lilly (LLY) and Novo Nordisk (NVO) require weekly injections. That dosing advantage gives VK2735 the potential to be the best-in-class obesity drug. (Viking is also at work on an oral version of the drug.)
U.S. economy grew at 2.8% annual rate in second quarter
The U.S. economy grew at a stronger than expected 2.8% annualized rate in the second quarter. The growth rate for the quarter that ended in June was double the 1.4% rate in the first quarter. Consumer spending and business investments drove almost all of the second quarter’s growth. But below the top line numbers I can see a slowdown in some fundamental trends from the first quarter.
Tesla’s got a margin problem–and I don’t see a quick fix
Shares of Tesla (TSLA) fell 12.3% Wednesday July 24, after the company delivered bad financial news in its second quarter earnings report. If you own Tesla or are thinking of buying the shares on this tumble, or indeed you own any stock in the current market, you need to understand the exact nature of Tesla’s troubles.
China cuts interest rates in a new attempt to jump start economy
On Monday, July 22, the People’s Bank of China lowered its benchmark lending rates and an important short-term policy rate.
The precise timing was a surprise although leaders at the recently concluded third plenum had flagged continuing problems in the real estate sector and soft consumer demand. This is a hugely important change in policy for the People’s Bank, which had recently shied away from cutting rates in an effort to prevent further erosion in the yuan versus the U.S. dollar, and to lower inflation caused by higher prices for imports. The move, I think, signals the hugh level of anxiety in the Beijing leadership at the economy’s refusal to respond to previous stimulus moves.
Too early to buy CrowdStrike on the dip–wait until just before the September 4 earnings report
Nothing like being at the center of the largest IT “event” in history to send a stock tumblling. Last week CrowdStrike (CRWD), one of the biggest makers of cybersecurity software, pushed out a flawed update that caused an error in the Microsoft Windows operating system that runs millions of computers at point of sales terminals and reservation systems at business such as Starbucks, at airports and airlines, and at banks and financial markets. The file “C-00000291*.sys,” was buried in an update for CrowdStrike’s Falcon sensor product and caused an error in Microsoft Windows operating system. Repairing the damage is expected to take months such much the work has to be done manually. Meanwhile CrowdStrikes shares are in free fall. The shares lost 11% on Friday and dropped another 13.5% today.
Step #8 in my Special Report: Sell DE, CAT and BHP tomorrow
Today I posted Step #8 in my Special Report: 8 Steps to Protect Your Portfolio from the Global Debt Bomb. I recommended selling Deere (DE), Caterpillar (CAT), and BHP Group (BHP) out of portfolios ahead of rising yields i the bond market. (In the case of Deere, I said I would keep my position in my long-term portfolio but sell the position in my 12-18 month portfolio.) Here’s what I posted in my Special Report
Live Market Report (20 minute delay)
Financial markets begin, and I stress “begin,” to price in a debt ceiling default
You’d only notice if you’re paying very close attention to yields at the short end of the Treasury market. But bond traders are seeing what looks like the very beginning of a move to price in the possibility of a default by the U.S. government on its debt if the debt ceiling isn’t raised sometime between now and September. Analysts at JPMorgan Chase noted last week that yields on a three-month Treasury bill have spiked, while one-month yields have plummeted, a gap they noted is the “widest in over 20 years.” The gap may reflect investors’ fear of a default over the summer.
Look out below! Central banks to claw back $1 trillion in liquidity provided during banking crisis
Global central banks injected $1 trillion into financial markets during the first quarter, according to calculations by Citigroup as they sought to limit the damage from a banking crisis that claimed Silicon Valley Bank and Credit Suisse. That cash injection was equivalent, Citigroup says, to a 50 basis point cut to global investment-grade risk premium. Which goes a way to explaining the huge risk-on rally in the first months of 2023. And now, Citigroup warns, central banks will be looking to claw back some of that cash.
Please Watch My New YouTube Video: Trend of the Week Consumers Are Falling Behind on Their Debt Payments
This week’s Trend of the Week is Consumers Are Falling Behind on Debt Payments. Although the economy has been slowing for some time, there’s been a lag in consumers falling behind on debt payments. Until recently, consumers seem to have been relying on funds saved during the Covid crisis, but we’re now starting to see that life raft disappear as consumers start to sink underwater on debt payments. This isn’t a good sign for banks that may already be struggling with unrealized losses from the banking crisis. Wells Fargo recently put aside $1.2 billion for potential loan losses and other banks are following suit. About 20% of consumers are using “buy now, pay later” credit card features for things like groceries, showing that the slowing economy and slowing wage growth are finally catching up with consumers. Watch those delinquency rates going forward.
Intuitive Surgical reports a surprisingly strong first quarter
Last week Intuitive Surgical (ISRG) surprised everybody, including, apparently, management. Intuitive Surgical’s first-quarter revenue grew 14% year-over-year to $1.7 billion. (Wall Street was expecting $1.6 billion.) Surgical procedures performed using the company’s da Vinci system, rose 26% year-over-year, well above expectations for 15% growth. And the company raised guidance for global procedure growth to 18% to 21% from the prior guidance of 12% to 16%.
The stock market is trading in narrower and narrower bands
Important observation out of Morningstar on Friday. While the Morningstar U.S. Market Index is up 15.4% from its bear-market low on October 14, the market is only 1.4% higher than it was at the end of November. AND in recent months, the stock market has been moving in tighter and tighter bands. So far in April, the Morningstar U.S. Market Index has only moved up 0.9%. That puts the month on track to show one of the flattest monthly returns since May 2022.
Disney begins second round of cuts of 7,000 jobs today
Layoffs aren’t just for technology companies right now. Disney (DIS) has begun the second round of a projected three rounds of job cuts that will add up to a total reduction of 7,000 employees this year.
The Fed’s preferred inflation number coms out on April 28 , but the Fed can’t comment on it
The Bureau of Economic Analysis is scheduled to report the Personal Consumption Expenditures index, the Federal Reserve’s preferred measure of inflation, on April 28. But because the Fed’s pre-meeting quiet period stretches from April 22 to May 4, there won’t be any comments from Fed officials to spin the data for the financial markets. That could be, well, awkward, since it will leave Wall Street more in the dark than usual about what the inflation results mean. The PCE index is expected by economists surveyed by Bloomberg to have fallen in March to a 4.1% annual rate from the 5% reported for February. If the inflation numbers come in on expectations, investors and traders will be left wondering if the drop is enough to lead the Fed to stop its interest rate increases after a 25 basis point boost at the May 3 meeting.
Saturday Night Quarterback says, For the week ahead expect…
I expect to see the growth economy’s last stand when the Bureau of Economic Analysis the Advanced Estimate of first-quarter GDP on Thursday, April 27. The Atlanta Federal Reserve Bank’s GDPNow forecast predicts that the U.S. economy grew at a 2.5% real year-over-year rate in the first quarter of 2023. That would be roughly equal to the revised 2.6% growth rate in the fourth quarter of 2022. Which would be great news if projections from economists didn’t show growth turning negative in the second and third quarters. The growth estimate for growth for all of 2023 is around 0.4% (the Federal Reserve) or 0.3% (Goldman Sachs.)
Another sign of a credit problems? American Express adds $320 million to provisions for bad credit card debt in first quarter
A big increase in provisions for bad credit card debt overshadowed beats on revenue and confirmed positive revenue guidance for 2023. The company reported earnings of $2.40 a share, below the consensus projection of $2.65.
Tesla margins worse than expected and stock tumbles today
Tesla’s (TSLA) first-quarter earnings, reported yesterday April 19, after the market close, met expectations. But first-quarter automotive gross profit margins came in worse than expected. Tesla reported a profit of 85 cents a share, meeting expectations, on sales of $23.33 billion, just a touch below forecasts for $23.67 billion. Tesla’s other business generated a record $303 million in gross profit. Tesla deployed 3.9 gigawatt hours of battery storage in the quarter, up about 300% year over year. But, automotive gross profit margins, excluding regulatory credits, came in below 16%, down from about 21%
Watch My New YouTube Video: Quick Pick Newmont
Today’s Quick Pick is Newmont Corporation (NYSE: NEM). Newmont is the world’s largest gold miner but the stock hasn’t benefited very much from the recent rallies in gold. Unlike Barrick Gold, Newmont is not a low-cost miner, but it does have huge reserves as well as promising joint ventures–including one with Barrick in Nevada. The company is growing production and produced about 2.2 million ounces of gold in 2022, with production going up to a forecasted 2.7 million by 2027. Newmont likely hasn’t seen a huge rally yet because of the cost of energy. Mining gold takes a lot of energy and with recently higher gas/diesel prices, costs of mining and production have gone up and margins have been squeezed. However, looking forward to mid or late 2023, those margins will, in my opinion, start to look a lot better. If we hit a recession while inflation remains relatively high and energy prices come down, Newmont will benefit from lower costs and recession gold rallies. I would call Newmont my second choice gold stock to Barrick. Morningstar rates Newmont at 10% undervalued right now. This is a good time to buy and look for it to outperform in the second half of 2023.
Wanta play Banc Whac-a-Mole?
Thank goodness the banking crisis is over. (Where’s that sarcasm emoji when you need it?) Today, shares of Western Alliance Bancorporation (WAL) closed up 24.12% after the bank reported that deposits hadn’t fled the bank in the first quarter as rapidly as was feared. Signature Bank (SBNY), which is being shut down by regulators rallied a huge 26.01%. Granted that was from a share price of just 16.5 cents a share. Excuse me when I remember that the stock traded at $143.17 on February 2. The SPDR S&P Banking ETF (KBE) closed up 3.07% on the day. The regional bank ETF, SPDR S&P Regional Banking ETF (KRE) closed p 3.94%
Please Watch My New YouTube Video: China’s Economy Is Back
Today’s topic is China’s Economy is Back. On April 18, China reported 4.5% year-over-year GDP growth for the first quarter. While it wasn’t the 5% growth rate that the Chinese government has set as a target, it was better than the 4% forecast by economists. This growth rate comes on the heels of a 4th quarter with only 2.9% year-over-year growth. Other numbers showed strength too. For example, retail sales rose 10.6% year-over-year beating forecasts of 7.4%. But the economy isn’t cooking on all burners: Industrial production was up only 3.9%, just missing the forecasts of 4%. The iShares China Large-Cap ETF (FXI) is a good way to buy into China’s economy. There was a big rally from November to December as investors anticipated China’s economy speeding out of its Covid slump. But that rally was followed by a drop as the Chinese economy struggled with a resurgence in Covid cases. Now we’re seeing that drop start turn around. Individual stocks like Alibaba (BABA) and JD.com (JD) show charts with a similar pattern and can be expected to start to climb as the economy continues to pick up.
Tesla’s latest price cut puts intense scrutiny on margins in tonight’s earnings report
With the company due to report first-quarter earnings after the market close on Wednesday, April 19, yesterday, April 18, Tesla (TSLA) cut prices of its Model 3 and Model Y electric vehicles again.
Netflix misses, badly, on subscribers in the first quarter
Last night after the market close, Netflix (NFLX) reported first-quarter 2023 results that showed new subscribers grew by just 1.75 million in the first quarter against expectations for 2.3 million additions. Earnings and revenue projections disappointed investors: Netflix said it anticipates earning $2.84 per share on $8.24 billion in the second quarter. Wall Street analysts had forecast earnings of $3.05 per share on $8.5 billion in revenue. For the first quarter, revenue and earnings for the first quarter roughly matched Wall Street consensus estimates. Revenue was $8.16 billion versus an expected $8.18 billion. Earnings per share were $2.88 versus $2.86 expected Today, April 19, shares of Netflix were down 3.34% as of noon New York time.
Please Watch My New YouTube Video: Trend of the Week Banks–It Can Still Get Worse
This week’s Trend of the Week is Banks: It Can Still Get Worse. First Republic (FRC) is an example of a really hammered regional bank. They have about $4.2 billion in unrealized losses and the bank doesn’t look viable. On March 6, FRC stock was at $122, and by March 20, it had dropped to $12 and hasn’t really gone up since. Most recently, on April 10, the bank announced it will no longer pay the dividend for preferred shares–a surprising move as preferred shares are generally safe from such dividend cuts. This is just one example of how it’s still possible for things to get worse in the sector. As bank earnings season gets underway, you can expect a lot more bad news, with banks reporting high amounts of unrealized losses. In some cases, those unrealized losses could truly imperil the banks. I’m not sure where the worst problems will be and which banks are most affected, but we’ll see them start to pop up as earnings reports come out and banking Whac-A-Mole begins.
Special Report: 10 Picks for the Coming Recession
10 Picks for the Coming Recession. This one is especially difficult. Not only do I face the usual crystal-ball problem that comes up whenever you try to pick an investment for the future–what’s the macro and micro world going to look like in 6 months or a year from now–but I’ve got two big Recession-specific challenges. First, is there actually going to be a Recession in 2023? All the signs, in my opinion, point toward a recession in the second and third quarters, but it’s by no means guaranteed that we’ll have the two quarters of negative GDP growth that’s required by the minimal definition of a recession. And what’s the point, you might well ask, of making picks for a coming recession that never arrives? And, second, how bad will this recession be?
China’s economy is picking up speed, but not quickly enough for impatient Asian markets
China’s economy grew at a faster-than-expected pace in the first quarter. Gross domestic product grew 4.5% year-on-year in the first three months of the year, data from the National Bureau of Statistics (NBS) showed on Tuesday, faster than the 2.9% in the previous quarter. It beat analyst forecasts for a 4.0% expansion and marked the strongest growth in a year. But investors in Asian financial markets reacted with disappointment
Truly bad “possibilities” on a debt ceiling default move up in the calendar
The exact date that the federal government could run out of accounting gimmicks and actually default on the national debt is open to debate. Could be June or July or as late as December or even sometime in 2024. The estimates are all over the block. Which is one reason that the stock market isn’t pricing in this potential event. The timing largely depends on the pace of tax payments. The more the government collects and the sooner, the farther away a default would be. Now with income tax day upon us, Yahoo Finance is reporting two new studies that say a default is on the schedule for earlier than expected.
Saturday Night Quarterback says, For the week ahead…
I expect the earnings season story for the coming week to continue to be dominated by banks. But whereas last week, Friday specifically, was all about big banks, this coming week will be dominated by earnings reports from regional and smaller banks. That’s the very kind of banks that are the focus of worry about the collapse of Silicon Valley Bank and Signature Bank. We will, however, get a sprinkle of earnings reports from non-bank names just to add some spice to the week.
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