Domino’s Pizza delivers cold sales results

Stocks rallied yesterday despite a hotter-than-expected inflation figure… energy was the culprit. The Fed thinks that rates are sufficiently painful, but it is still confused… read more about it in today’s note.

Confusion or delusion. People sometimes wonder what I am peering at when I am sitting at my desk, FOR HOURS, squinting at my screens. Well, let me answer the question like this. I watch those screens so you can afford to miss a thing or two as you go about your daily business. Beyond that, you know just how overwhelming the amount of data on stocks, bonds, notes, alternatives, the economy, academic research, news, opinions, and whatnot there is swirling out there, with every, each, and all of them together piling up to foil your financial plans. So, how do we do it? Well, we used to do it with hundreds of people who would squint at thousands of screens and compile neat piles of paper to be collated by a committee who would try to draw conclusions about those piles of paper. Ultimately a compiled statement would be created and released to investors. Effective, yes, painful, indeed, accurate, mostly, but timely, definitely not! Thankfully, today, we have computers to help us out. One of the things we task those computers with is processing massive amounts of news, releases, transcripts, etc. That processing helps us make sure that we don’t miss any critical bits of publicly available data. Imagine collecting every word associated with, say, Apple over a 2-day period. Every Tweet (if it’s even called that anymore), every news feed, every SEC release, every analyst report, every Reddit thread, etc. That’s a lot of words… FOR A HUMAN.

But not for a computer. Computers then take all those words, remove all the unnecessary stuff (like punctuations, odd characters, and emojis ), and tally them up. Interesting so far? Of course, it is, but you are probably thinking, “Mark, so what do you do with all those word tallies?” Well, we can visually look at them in a word cloud and see if something stands out, but that is usually not clear, nor scalable. Wait, we can use natural language processing, you know, the stuff that is behind all that AI excitement over the past year. THE SAME STUFF WE HAVE BEEN USING since at least 2008. That natural language processing can read all of that collected text and attempt to tease out sentiment. It is mostly pretty straightforward… mostly. When someone Tweets “buy Apple” or “Apple is awesome,” you can safely put 2 checkmarks in the “positive” column. But what if someone Tweets “an apple a day keeps the doctor away,” and tags $AAPL? Is that positive or negative… or even relevant? So, it is not always that easy. Imagine, that we have sentiment on every stock that we watch, every day… thanks to computers… and my programming skills in R programming language . Those are certainly good things to know, but unfortunately, they have not been shown to have any causal relationship with stock movement. In other words, you can’t make money using it, but it is certainly nice to know if the internet likes the same stocks that you like… and that eating apples might be good for your health. HOWEVER, natural language algorithms are really accurate at certain types of analysis. Wouldn’t it be interesting if you could process all the transcripts from all FOMC meetings in the past several years and find out how many times they mention positive or negative things about the economy or inflation.

Well, I don’t have to run that algorithm today, because the great folks over at Bloomberg already did, and I am going to share some of those results with you. Check out this chart and follow me to the finish.

Bloomberg economists ran all these FOMC meeting minutes through natural language processing algorithms and searched for phrases that were like “upside risk” and “downside risk” related to the economy and tallied them up. Now, you understand what “downside risk” means when it comes to the economy right? Think recession. Well, think of “upside risk” as the economy running too hotly and causing more inflation. On this chart you can see how Fed members were clearly worried about the economy declining through early 2021 when suddenly they started to fathom “upside risk” or more inflationary pressure. By the end of last year, AND ALL THOSE RATE HIKES, the risk perception appeared all on the downside. In the last 5 meetings you can see how “upside risk” made its return and began to grow (white bars). HOWEVER, you can also see that “downside risk” grew almost symmetrically with “upside risk,” and there is only one way to interpret that. The Fed is on the fence on whether the economy is going to fall apart or whether it is going to heat up again and foil all their plans to kill inflation. So, then, it’s anything goes with rates? Not so fast. Put down the computer, Poindexter, and maybe read the minutes from the meeting, you know, the old-fashioned way. If you did, you would note that Fed members believe that rates are sufficiently restricting the economy. That means, for now, rates may not have to go higher. Computers, AI, algorithms, and so on are fantastic tools, but at the end of the day, your reading glasses are probably the ones you should rely on most, and I am told that apples, indeed, are good for your health… in moderation, of course.

WHAT’S HAPPENING BEFORE THE MORNING BELL

Domino’s Pizza Inc (DPZ) shares are lower by -2.48 in the premarket after it announced that it missed Revenue targets by -2.27% in the past quarter. In the past months, 30% of analysts have modified their price targets, 3 up, 5 down, and 18 unchanged. Dividend yield: 1.36%. Potential average analyst upside: +16.6%.

Target Corp (TGT) shares are higher by +2.81% in the premarket after BofA upgraded its rating to BUY after its recent pullback. BofA raised its price to $135 from $120. The company is expected to release earnings on 11/16. Dividend yield: 4.03%. Potential average analyst upside: +35.8%.

YESTERDAY’S MARKETS

NEXT UP

• Consumer Price Index / CPI (Sept) is expected to come in at +3.6%, slightly down from last month's YoY change of +3.7%.
• Initial Jobless Claims (Oct 7) is expected to come in at 210k, higher than last week’s 207k claims.
• Fed speakers today: Logan, Bostic, and Collins.