Behind The Street - Issue #11
January 17, 2022
January 17, 2022
Behind The Street Newsletter
Welcome to earnings season.
Last Friday JPMorgan $JPM, Citigroup $C, and Wells Fargo $WFC, all reported Q4 earnings. Results came in better than expected with slight beats across the board and JPMorgan getting a boost from releasing $1.3billion from loan loss reserves.
A loan loss provision is an income statement expense set aside to allow for uncollected loans and loan payments. During the thick of the 2020 Covid pandemic, banks rushed to set aside funds in anticipation of major defaults that thankfully, never materialized.
I believe this trend will continue as more banks accelerate cuts to loan loss reserves as economic conditions improve and economic data shows less defaults and a decrease in forbearances.
JPMorgan and Citi fell after their reports while Wells Fargo gained on the day.
Looking forward to Tuesday we have Bank of New York Mellon $BK, Charles Schwab $SCHW, Goldman Sachs $GS, and PNC Financial Services Group $PNC all reporting earnings. Wednesday Morgan Stanley $MS also reports Q4 earnings.
I always like to pay close attention when the financials report because it allows us to take a behind the scenes look into the spending habits of millions of consumers.
We can view the credit and debit card spending data from major card issuers such a JPMorgan, Citibank, CapitalOne, Bank of America, and Wells Fargo to name a few. If we take into consideration that consumer spending comprises almost 70% of GDP, then paying close attention to credit and debit spending should give us a pretty good idea as to whether we will see growth in the overall economy.
For example, JPMorgan reported debit and credit card sales volumes up 26% in Q4 View $JPM Q4 Earnings here. Citigroup showed that card spending in North America was $115 billion, up 24% year on year, and Wells Fargo reported debit card volumes were up 16% to $122.4 billion.
Aside from consumer credit and debit card data, traditional Investment Banking revenue was strong across the board as M&A activity ramped in Q4 in addition to a wave of IPO’s hitting the market. Major Banks continue to rake in record fee income due to a pickup in activity that is expected to continue into 2022.
At JPMorgan gross Investment Banking revenue was up 50% to $1.5 billion solidifying a number one ranking for Global Investment Banking fees with 9.5% wallet share for the year. Overall, out of the financials that have reported so far, things are looking good as we head into a rising interest rate environment that should give an extra boost to the financial sector in future quarters.
Lastly keep an eye on Home Lending as this will give us an idea as to the health of the housing market. So far at JPMorgan Home Lending had another strong quarter with originations at $42 billion, up 30%. Tight inventory and high demand continue to propel this housing market higher as we continue to see multiple offers, sometimes over asking, on many homes across the county.
U.S. 10 Year Treasury
The yield on the U.S. 10 Year Treasury ticked up again to 1.793% on Friday. It is important to watch the 10 Year Yield because it is often used as a proxy for mortgage rates and investor confidence in the economy.
In addition, in the short term when rates rise valuation of high growth tech stocks tend to come down. This is because as rates rise the future earnings of these companies are now worth less today, being that many growth stocks on the market currently have little to no earnings.
Mortgage rates have now jumped to their highest levels since March of 2020.
A 30-year fixed rate mortgage on average now costs 3.55%. Despite the rise in interest rates the median price for existing homes rose 13.9% in November to $353,900. On Thursday we will hear from The National Association of Realtors as they report existing home sales for December.
Many economists are expecting 6.39 million existing homes sold coming in slightly less than in November. In my view, record low inventory will continue to drive this housing market as we still see increased demand due to continued remote work and even schooling from home.
Americans are looking for more space in suburbs as they bet the work from home trend will continue for the foreseeable future.
Light Crude Oil Futures
Crude is coming up on a major technical level after selling off and finding support at its 200-day moving average around $70. The last swing high for crude was $84.80 back in November of 2021. We have bounced from key support and are making a run back towards $85, currently trading at $83.75 on the $CL futures contract.
Many major financial firms on wall street are warning of a commodity’s super cycles, possible lasting over 5 years. My price target for crude remains $100 for 2022.
Higher Crude prices is important for the health of the market. When crude is higher, the energy sector gets a boost that in turn boosts the financial sector, propelling the S&P 500 higher. Financials make up a 10% weighting in the S&P 500 while Energy only makes up about 3%. Over the years it seems the S&P 500 has morphed into a Technology index with 28% weighting in Technology.
As of June 29, the following are the five largest S&P 500 index constituents by weight:
1) $AAPL - 5.89%
2) $MSFT - 5.63%
3) $AMZN - 4.07%
4) $FB - 2.32%
5) $GOOGL - 2.03%
Distribution Days: (Days where index sells off in heavier volume than previous day. Signaling institutional selling. 5 - 6 distribution days in the span of 4 weeks signals market weakness) Investor’s Business Daily
Current Distribution Count: Uptrend Under pressure
Leaders up in volume: $MOS, $AMAT, $ONTO, $UCTT
Leaders down in volume: $JBHT, $HLI
Bitcoin: Nothing good happens below the 50 Day
There is an old saying that nothing good happens below the 50 – Day moving average and Bitcoin is holding steady below its 50 day. In addition, Bitcoin is now well below its long term 200 day moving average. If you are a trend trader now is not the time to be buying Bitcoin.
However, if you have a long-term time horizon and plan on holding for five years or more, I think a monthly dollar cost average into the crypto asset is wise. When you are a trend trader its best to buy break outs over new highs. The trend is your friend and right now the trend is down.
It is best to wait until Bitcoin breaks back above its 200 – day moving average on higher-than-average volume to start a new position. For now, the trend is down. You can go to Tradingview.com and create a free account to track Bitcoin 24/7, you can add a 200 – day moving average by clicking the indicators tap at the top left of the screen.
Many are drawn to the crypto asset due to it being an uncorrelated asset. According to the International Monetary Fund, Bitcoin’s correlation to the S&P 500 was just 0.01 from 2017 to 2019, this suggests that Bitcoin and Equities moves independently.
Assets that move in lock step have a value of 1, assets with no price relationship have a value of 0. However according to Barron’s this changed in 2020 – 2021 when Central Banks flooded markets with liquidity. Correlation jumped to 0.36, meaning that the assets are moving closer together. This trend continued across the board from stocks, crypto, and real estate. As Central Banks print and print, prices of assets begin to inflate. Generally speaking, anything you bought post COVID went up.
S&P 500 & NASDAQ
I would like to see the major indexes roll over here and give back 10 – 15 percent. Many individual names are already down 30%+ due to P/E compression and front running of Federal Reserve interest rate hikes. The Fed has stated that they will continue to accelerate their tapering of asset purchases at a faster rate than once thought in an effort to fight off inflation.
This has sent shock waves through the market brining valuations down across the board, but mainly in growth stocks. I’d like to see a pull back to 14,100 on the NASDAQ and 4230 on the S&P 500. That would equate to a 12% pull back in the S&P 500 and roughly the same on the NASDAQ.
These price levels also represent key areas of support as prices come down to the previous swing high from April 2021. This would allow two earnings cycles to pass and as companies report strong earnings, they will grow into their valuations and seem more attractive to investors.
History shows that during midterm election years volatility tends to be higher and stock market returns lower. April through September are the worst months for the stock market during midterm election years while markets tend to perform best in November and December finishing the year much stronger than it started. So far, the trend seems to be continuing as January shows stock prices continuing to sell off with growth stocks leading the decline.
In my view markets should catch a bid once the Federal Reserve makes its first rate hike around March of 2022. Contrary to popular opinion, I believe markets will react positively to a Fed Rate hike, by that time the first rate hike should already be priced into the market. Markets are forward looking. Use the 200 – day moving average as your guide, major indexes are still above their respective 200 days but we can very well crack on higher than normal volume.
I want to leave you off with one of my favorite Stanley Druckenmiller interviews. Mr. Druckenmiller is considered to be one of the greatest investors of all time. This is a 30-minute interview that will be well worth you time. Grab a coffee, tea and let me know what you think. Click Here: Stanley Druckenmiller Explains how he makes 30% return every year! - YouTube
Thank You