Sub-prime Amazon

Stocks were hit hard on Friday as investor panic struck in the low-liquidity final hours of April. Inflation is still running hot and the war in Ukraine is not helping matters.

Inconvenient. Come on now, it’s May and it’s a Monday morning after a restful and mostly sunny weekend. Nothing better than a beautiful spring morning of birds singing and bees buzzing. Well, if you live in my neck of the woods, mother nature has treated you with anything but. At present, Wall Street is in the midst of a torrential downpour topped with a cacophony of thunder. Ok, so I have buffeted myself with an extra espresso this morning and forced myself to look, once again at Friday’s market action. I am sure that you know by now that it was not pleasant. It did not start out pleasant and just got more unpleasant as the session wore on. Amazon.com was the founder of the morning pain, having missed on its EPS targets. In fact, it not only missed, but it announced that it had lost money last quarter. A clear disappointment as the company has not announced a losing quarter since Q4 of 2014. Making matters worse, the company attributed the loss to rising transportation and labor costs. Transportation inflation has been one of the key contributors to the sharp rise in the producer prices over these past many months with a key driver being rising fuel costs. Labor inflation has been affecting a broader set of companies as they struggle to get workers on the job. These pains accentuate the already growing fear amongst analysts that the US may be facing a period of high inflation and low growth, otherwise referred to as the dreaded stagflation. Some inflation is caused naturally and is largely cyclical in nature. Those typically resolve themselves naturally and the Fed-driven monetary policy helps push them along. However, in the current situation, a significant amount of upward price pressure is being driven by forces outside the control of the Fed. Rising raw materials costs are the result of supply chain hang-ups and the war in Ukraine – problems that cannot be solved by raising interest rates. What can, and ultimately will, happen as a result of higher borrowing costs is a slowdown of economic growth. Higher prices, lower growth… need I say more?

Also, on Friday we got a glimpse of a key inflation metric, followed closely by the Fed, the Personal Consumption Expenditures Deflator, or PCE Deflator. The release showed that prices grew by +6.6% from a year ago, after the same number came in at +6.3% last month. Economists, and indeed all of us, were hoping inflation had peaked a month earlier and the announcement foiled those hopes. The release was not all bad news. The PCE Core Deflator came in lower than expected and below last month’s reading, suggesting a peak. The core number does not count energy. We know that energy has risen as a result of Russian sanctions, which will resolve itself as the world raises supply, albeit slowly. The release had a material effect on treasury yields which experienced quite a bit of volatility last week. Treasury traders have been attempting to handicap the path of Fed policy and its success…or failure in the years to come. Later this week, the Fed is largely expected to raise its key lending rate by +50 basis points in addition to announcing plans to shrink its balance sheet. Both measures are designed to slow the economy and fight inflation.

If you have been reading carefully up to this point, you have certainly recognized the recurring theme of inflation and slower growth. Friday’s news came at an inconvenient juncture. It was a Friday on the last trading day of the month, which always has the potential to be volatile. Amazon’s disappointing earnings came at a time when the growth-oriented Nasdaq has already suffered great losses since last making highs in November. This week ahead will not only feature many more high-profile earnings releases but also the FOMC meeting and the monthly employment situation. These are all part of a recipe for investor anxiety, which drove the markets lower on Friday. I often write that the market rarely does what is convenient for us, and Friday was a sharp reminder of that. I also like to write how investors should control what they can, doing homework and attempting to pick the strongest investments that fit their goals and risk appetites. You can’t always be right, but careful due diligence will increase the probability of long-term success. I am looking at the week ahead for Wall Street. The weather appears as if it will remain unsettled while the climate inside the stock exchange appears similar. I do see that, as of now, the clouds are expected give way to sun by the weekend…convenient. I will welcome it.

WHAT’S SHAKIN’

Activision Blizzard Inc (ATVI) shares are higher by +3.71% in the pre-market after Warren Buffett revealed that he increased his stake in the company over the weekend. Microsoft announced they agreed to acquire the company and the transaction has not yet gotten regulatory approval. Buffet believes that the deal will be approved, which would enable him to earn money on the merger arbitrage. Dividend income: 0.62%. Potential average analyst target upside: +24.4%.

Moody’s Corp (MCO) shares are lower by -3.63% in the pre-market after it announced that it missed on EPS estimates by -0.99% while it beat on Revenue targets by +0.84%. Though the company maintained its dividend, it lowered its FY guidance to flat for the year. Dividend income: 0.88%. Potential average analyst target upside: +19.6%.

FRIDAY’S MARKETS

Stocks took a drubbing on Friday as investors anxiously sold shares after a big miss by Amazon and continued fear of inflation and economic slowdown. The S&P500 Index fell by -3.63%, the Dow Jones Industrial Average gave up -2.77%, the Nasdaq Composite Index dropped by -4.17%, the Russell 2000 Index traded lower by -2.81%, the S&P500 ESG Index declined by -3.79%. Bonds were lower and 10-year Treasury Note yields gained +11 basis points to 2.93%. Cryptos fell by -5.22% and Bitcoin fell by -3.33%.

NXT UP

• Construction Spending (March) is expected to have grown by +0.8%, higher than the +0.5% growth reported in the prior month.
• ISM Manufacturing (April) may have risen to 57.6 from 57.1.
• After the closing bell: Earnings from Clorox, MGM Resorts, Williams Co, Mosaic, Expedia, Transocean, Chegg, ZoomInfo, Avis Budget Group, Devon Energy, and Diamondback Energy.
• Ahead this week: lots of earnings along with more PMIs, Durable Goods Orders, Factory Orders, JOLTS Job Openings, monthly employment numbers, and the FOMC Meeting. Please check out the attached earnings and economic release calendars for times and details.