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AM Brew, May 27th 2022
Yesterday's 2% rise on the S&P500 appears to be a confirmation day indicating the start of a short snapback rally from heavily sold conditions. Retail earnings were the main culprit: Target & Walmart sparked a quick downdraft, as positive earnings news from Nordstrom, BestBuy, the dollar stores, Williams Sonoma and Macys' was enough to provide investors confidence that things are not as bad for the consumer. After falling a nearly unprecedented 8 weeks in a row, a snapback rally is not a surprse.
This morning DELL is up 9% pre-market on strong earnings and another retailer, ULTA is up 7% after raising guidance - those girls gotta stay beautiful. Of course, things are bifurcated out there in retail-land, and GAP is down 18% due to a poor profit outlook, supply chain challenges ( hampering their ability to respond to changing consumer tastes ) and a tough casual apparel market has the stock now trading under $10 for the first time since the pandemic.
China is taking unprecedented steps to stimulate their economy. Normally this would make us super bullish, as China's lockdowns made the economic situation, in their own words "worse than the spring of 2020". Unfortunately a large increase in aggregate demand from China is not necessarily what we need in this inflation environment - although this is good for the supply part of the manufacturing chain, it is negative on the demand side. Even worse, oil was up 3% yesterday - it looks like its going to be a blazing hot summer and China is ramping up their economy. Watch out, oil doesn't look to be done and its testing the top of the cup pattern:
Not sure if we believe it, but the WSJ this morning published a chart that shows earnings estimates continue to rise at the same time that prices are falling:
This seems too good to be true. Generally analysts estimates start the year in January optimistically high then come down throughout the year as reality sets in. It certainly doesn't feel like earnings are up 7% for the S&P500 since January. Anyhow, this week's snapback rally is absolutely earnings driven, and the earnings are not so bad, especiallly at these new lower valuations.
Insider interviewed award-winning mutual fund manager Bill Miller. He had a couple of interesting quotes:
"When people say, 'What's the best investment decision you ever made?' Buying Amazon in the IPO. 'What's the worst ever?' Selling a share of Amazon."
"Bitcoin is the only economic entity in the world where the supply is unaffected by the demand." (Miller noted that if the gold price soars, more people will mine gold and supply will increase, whereas there's a fixed supply of bitcoin.) "I consider bitcoin an insurance policy against financial catastrophe." (Miller gave the example of a national government privatizing a country's banks and emptying its citizens' accounts, and suggested bitcoin would provide an escape from the seizures.)
We agree with Miller that Bitcoin at this point should be viewed as insurance against government excess. Check out our post "we are bouncing, what's next" - interesting charts.
Stepping back from the daily news and thinking about the big picture, it appears that, on the margin, there is more marginal bad news than good. Liquidity is still tight, we are the closest to WW3 in decades, politics everywhere is a mess (even Marcos is back), and despite getting through covid successfully, inflation is bad, oil prices are still rising and more people are squeezed. In the USA, its easier to get guns than baby food, so things are still not great.