#181 - King Kong vs Godzilla, Jobber Raises Huge 100mm Series D and The Beginning of The End For Canadian Telecoms
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Market and earnings season update
MSFT vs. GOOG Bard
Starlink vs. Canadian Telecoms
Jobber raises 100mm series D
Recommendations and Predictions
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February is very interesting month within the context of the presidential cycle and bull market cycles.
February tends to be one of the worst months. It often is a digestion month within the most bullish cycle.
And prices are responding to this.
The S&P 500 is essentially halfway between its January 2022 all-time high and the October 2022 lows. This year’s gains have put it right at that fulcrum point. Many commentators argue 2023’s ramp is due to a better macro environment. Fair, but 2023’s rally also could just be a classic “January effect”. The next 2 weeks will matter – a lot – to market psychology.
The Cleveland Fed’s Inflation Nowcast is predicting a hotter than expected CPI report this Tuesday. Separately, non-shelter services inflation will be a key set of inflation categories to watch.
Q4 US corporate earnings season continues to be well below average, both in terms of revenue and earnings beat rates/amounts.
Forward year earnings expectations for the S&P 500 are basically the same now ($249/share for 2023) as they were a year ago ($248/share for 2022). The S&P is down 7 pct in the last year because valuations contract when companies miss earnings expectations. PE multiples expand only when companies start beating estimates again.
Fed Funds Futures reset last week and now do not expect the FOMC to cut policy rates later this year.
China’s economic reopening appears to be gaining some real traction now that New Year’s celebrations are over. Daily air quality is generally worse than Q1 2022 levels in Beijing, Shanghai, Tianjin, Shenzhen, and Guangzhou. This strongly suggests higher levels of economic activity across the country.
Halfway back, but why? The S&P 500 is almost exactly halfway between its all-time high and its 2022 lows:
Friday’s close: 4,090
January 3, 2022 high: 4,797
October 12, 2022 lows: 3,577
Difference to midpoint from Friday’s close: +2.4 percent
The index’s year to date rally of 6.5 percent is why we are so close to the metaphorical fulcrum on the market’s seesaw, but what is the cause of that move?
The simplest answer is a classic “January effect”, where stocks rally in the new year since they no longer have the selling pressures associated with December’s tax loss harvesting. Consider the following recent returns for the S&P 500, Russell 2000, and NASDAQ Composite:
The S&P 500 was down 5.9 percent in December 2022, at least in part due to tax loss selling after a very difficult year (index -18.0 pct in 2022). It then rallied 6.2 percent in January 2023.
The Russell 2000 was down 6.6 percent in December 2022 but then rallied 9.7 pct in January 2023. Unlike the S&P, which is up 0.3 pct in February, the Russell has given up a bit of its 2023 gains this month and is now only up 9.0 pct on the year.
The NASDAQ Composite was down 8.7 percent in December 2022 but up 10.7 percent in January 2023 and a further 1.2 pct for the current month to date.
With this rally in US stocks has come a shift in market narratives to explain why we’ve begun the year on such a strong note. A few examples of now-popular bullish themes:
China’s economic reopening will boost growth across southeast Asia and Europe. This is especially important for the latter region, which just a few months ago seemed destined for a deep recession in 2023 due to energy prices, high interest rates, and geopolitical concerns.
The US economy is still in good shape even after the Federal Reserve’s aggressive rate increases last year. Job growth was nothing short of stunning last month and unemployment remains low. A simple fact to consider: you can’t have a recession if labor markets remain strong.
Inflation is coming down. WTI crude oil prices are down 17 percent year over year. Housing inflation has clearly just peaked. Services inflation remains an issue, but this should decline this year even if the US economy continues to grow modestly.
Markets feel they have a handle on upcoming Fed policy decisions. We’ll get a few more 25 basis point rate hikes, but then the FOMC should pause for the rest of 2023.
Takeaway: there is certainly some truth to the bull case, but how much of it is simply a result of trying to fit a fundamental narrative around what may have been a technical move in January/early February related to December’s tax loss selling.
One thing seems certain: the next few weeks will be very important to market psychology. If we can hold the year’s gains, it will show January was not just a dead cat bounce. If we cannot, all the recent bullish narratives will seem (at best) premature.
💸Reformed Millennials - Post of The Week
Zeihan On Canada - Interview
Some notes on the first 40 mins:
conflicts north America cares about shrinks and china fails to transition as its demographics fall apart
the business case for Canadian export of LNG has drastically improved due to the Ukraine war
natural gas pipe east is almost impossible because of the province's politics
pipelines need to go west to serve japan's future needs
timing lines up well to serve japan and a future global shortage
natural gas emits half the carbon as coal...
hydrogen is new and the current tech is the most carbon-intensive energy production on the planet (theory is it's going to fall fast)
GEOGRAPHIC AND POLITICAL:
the population is very stretched out hugging the south
each province cares more about its relationship with America than it does with the rest of their Canadian partners
Canada had a very privileged position during the cold war because we were between America and Russia and we levered it to get sweet deals from America
NAFTA 2 not as good as NAFTA 1
labor structure is distorting as people move out of Vancouver, Montreal, and Toronto
Canadian Demographics are deteriorating because we aren't having enough children
Alberta is the exception to our country's demographic problem
result of the above 2 notes is that taxes are going up and capital is going to become incredibly competitive
immigration is our cheat code. highly educated and pay heavy taxes because they are young
Mexico is fastest growing country for the next 30 years
House development (multi-family)
manufacturing and processing in prairies
robotics and ai dependent on immigration of 350-550k ppl/yr
Markets Video and Tweets of the Week:
Association and connecting the creative charm bracelet:
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🔮Best Links of The Week🔮
The LULU of the Medical field - Source: Trina Spear of FIGS
How to lose a monopoly - Source: Ben Evans
The New Gatekeepers Presentations - Source: Ben Evans
Must Read of the Day: "The prices of metals used to make objects such as aircraft and electrical wire have rebounded toward last year’s highs, lifted by China’s pandemic reopening and low global supplies... Behind the gains: a faster-than-expected reopening in China, where pandemic lockdowns lowered demand from the world’s largest consumer of commodities. Europe also dodged predictions that sanctions on Russia would lead to winter energy shortages, lifting demand from manufacturers and consumers. And in the U.S., signs of unexpected economic resilience have increased expectations for robust demand." Source: WSJ
"US oil producers flush with cash after a year of bumper profits are hunting for deals as concerns grow that the shale patch’s best drilling sites are becoming more scarce, priming the sector for a wave of consolidation. Bankers and lawyers have reported a sharp uptick in activity in recent weeks as buyers and sellers across the sector mobilise teams for a barrage of dealmaking after a lengthy dry spell — especially in the sprawling Permian Basin of Texas and New Mexico, the world’s most prolific oilfield." Source: FT
StyleCaster put together a list of the "best Super Bowl Commercials of 2023" with their videos on YouTube. It includes everything from Ben Affleck working a Dunkin' Donuts drive-thru and Maya Rudolph rebranding m&m's as "Ma&Ya’s" to Ben Stiller and Steve Martin roasting each other to promote Pepsi Zero Sugar. You can watch them all here.