Stocks struggled for direction today being largely mixed as investors weigh the risk of when the US will go into recession and how deep that recession will be.
The NASDAQ was able to stay in the green throughout the day as Bond Yields fell. The DOW and S&P 500 swung between gains and losses before staging a late day rally into the close.
The consensus by economists is we should have a mild “garden variety” recession. The timing is becoming more split between this year and next year.
D&D sees a double dip recession with a mild one possibly happening right now and then a second recession that will be deeper with credit defaults in the back half of 2023.
San Francisco and the greater Bay Area is already in a recession and seeing the bulk of the nations corporate layoffs due to the heavy Tech industry. Unlike most cities in the US rents are falling in SF and housing prices remain relatively stable.
The San Francisco Bay Area is ranked the 5th largest GDP in the world and second in the US on the Global Financial Centres Index as of September 2021. What happens in SF has ripple effects across not just the United States but the entire world.
The usual bustling downtown of SF has remained a ghost town since the Pandemic hit and there is not a lot of signs downtown will recover without a major shift away from traditional tech companies towards luring BioTech companies to come into the city from South San Francisco and Silicon Valley. Virtually the only thing left in San Francisco’s downtown is the SF Stock Exchange and Financial companies.
In mid-term election years that have seen a Bear Market the majority of times the market bottoms between May and October of the midterm year.
We have already had price multiple reduction (the P in P/E) but still haven’t had a reduction in earnings (the E in P/E).
Currently we are in no mans land in-between earnings seasons but that starts up again in July. We are likely to see some reduction of earnings outlook during the July-August period which could create another bottom.
However we could certainly create another new bottom or retest lows again in Sept-Oct leading up to the mid-term elections.
D&D is seeing at least two more opportunities for entry points into this market. The first entry point being when earnings get downgraded next earnings season and the second entry point when we get pre-election volatility.
Post election D&D does see both the fundamentals and technicals to allow for a large rally into year end.
D&D is waiting for those next two entry points to buy more MegaCap Tech stocks.
Right now the only thing D&D is looking to buy is the weakness in Energy and finding price discovery to add to our energy holdings while Oil is near $100. D&D does see Oil going back up over the summer and into the winter with prices around $120-$140 a barrel of WTI.
The Retail Industry has a potential wave of upcoming bankruptcies with Revlon being just the first. Fitch Ratings shows the companies in most danger include Serta Simmons, Anastasia Beverly Hills, Rodan & Fields, Billabong’s Boardriders, Men’s Wearhouse, Isagenix International and Outerstuff.
The Education Department agrees to cancel $6 billion in debt for around 200,000 student loan borrowers.
Rock group Pink Floyd is seeking $500 million for their catalog of songs.
Stock Specific News:
Occidental Petroleum gets further backing from Warren Buffet as he buys another $500 million of shares, raising his stake to 16.3%.
United Airlines is cutting 12% of Newark flights to help curb delays (which is about 50 flights a day out of Newark). United has blamed airport construction delays and capacity constraints.
American Airlines is cutting 4 small cities (Islip NY, Ithaca NY, Toledo Ohio, Dubuque Iowa) from airline routes due to pilot shortages.
KB Home shares jumped after beating on earnings with $2.32 a share compared to estimate of $2.03.
WeWork got upgraded to outperform by Credit Suisse citing the benefit of the hybrid work and co-working.
Snowflake upgraded to overweight by JP Morgan citing attractive valuation and high customer satisfaction levels.
Altria Group officially has their Juul e-cigarettes banned in the US by the FDA.
Netflix lays off 300 employees as the companies revenue growth slows.
Market Knowledge Tip:
Going Short in a Bear Market.
It is very dangerous to be net short in a Bear Market as at any given time you could take it on the chin with massive up days in the market. The largest rallies happen during Bear Markets so tight stops are needed in getting in and out of a net short.
The better way to play shorting the market is via Options contracts with selling calls or buying puts. With Options you are only risking around 1/10 the principle as you do with being net short.
The potential downside of being net long is a stock going to $0 whereas the potential downside of being net short is unlimited with a stock going higher.
Closing Markets (as of 1:15pm PST)
DOW up 0.64%
S&P 500 up 0.95% (3,795.73)
NASDAQ up 1.62%
VIX up 0.35% to 29.05
2 Year Note down -3.82bp to 3.02%
10 Year Note down -6.73bp to 3.09%
Oil down -2.062% to $104 a barrel.
Gold down -0.593% to $1827.50 an ounce.
Bitcoin up 3.23% to $20,991.36
Ethereum up 5.70% to $1,136.82
~ Dave James / Principal Trader and Market Strategist