The Weekend Edition # 20

Markets remain under pressure, Three shades of Debt, Earnings

Ayesha Tariq

Dec 4, 2021

Welcome to another issue of the Weekend Edition.

Happy December! Thank you to all who’ve read and subscribed to the newsletter this week!

Now, let’s grab a cup of coffee ☕️, while we take a look at what happened in the markets this week.

Here’s what we cover:

Market Recap and Economic Data
Macro - Three shades of Debt - Federal, Household, Corporate
Earnings - Marvell, Kroger, Docusign
Around the Markets - Jack, WeWork, Gilead
The Week Ahead - Event Calendar
Closing Thoughts - let’s stay sharp

Let’s dive in ⬇️

Market Recap - Nov 29 - Dec 3, 2021

It certainly has been quite a rough week. Volatility levels have spiked and we saw a number of events putting downward pressure on the market’s uptrend. We hit the 50-day Moving Average for all three broad market indices with the Nasdaq closing only slightly above the line.

Omicron - the new covid variant - is wreaking havoc on the market. Surprisingly, even the news of the Delta variant didn’t have these drastic effects. Although data on the variant’s severity is yet to be confirmed, the market is taking the news hard.
Fed Chair Powell decided to retire the word “transitory” when describing inflation and he talked about discussing an acceleration in the tapering program during the next meeting which is Dec 14-15.
A few companies reporting this week really gapped down on earnings - Docusign & Asana. A few IPOs are not doing too well either - Robinhood, DoorDash, CoinBase, AllBirds.
Oil fell hard during the week but then rebounded slightly after the OPEC+ meeting on Dec 2, 2021, where they announced the increase of 400,000 barrels starting January 2022. We’re still down for the week.
As we saw last week, there was a flight to safety in bonds. Bond buying activity increased so stock buying activity decreased. Yields are heading back down and with that bank stocks also took a hit.
Bitcoin, Ethereum and other cryptos are falling hard signalling a risk-off sentiment.
Two sectors led the week - and finished in the green - Utilities and Real Estate.

Economic Indicators Round-up

This Friday was Jobs Friday and we had a few more important economic indicators:

Construction Data - Residential & Private construction declined while non-residential and public construction increased slightly. Homebuilders are still struggling with supply chain issues, higher material and labor costs. We hear from Toll Brothers this week, so we’ll see what they have to say.
Manufacturing Data - The ISM Manufacturing Index came in at 61.1% slightly above October’s 60.8%, marking the 18th straight month of expansion. (Anything above 50% indicates expansion).
Jobs Data - The Unemployment rate reduced to 4.2% from 4.6% in the previous month. Nonfarm payroll, however, increased by a mere 210K vs. 531K in the previous month.

Macro - Three Shades of Debt

Federal Government Debt (Blue Line): USD 24.7 Trillion (Now USD 28.9T)
Household & Non-Profit Debt (Red Line): USD 17.3 Trillion
Non-financial Corporate Debt (Green Line): USD 11.2 Trillion

[the data above is upto Q2, 2021]

We’re all quite aware of the Federal Debt Ceiling issue. They’ve announced the transfer of USD 118B to the Highway Trust Fund under the Build Back Better program. So, the consensus was that the Treasury gets maxed out by mid December. However, congress passed a stopgap bill on Dec 2 which will now fund the government until Feb 18.

US Household and Corporate Debt has also increased over the last two years. With historically low cost of borrowing, this shouldn’t come as a surprise. Many have refinanced their existing debt to push out maturities. So what will the next few years look like?

Federal Debt

According to projections from the Congressional Budget Office, interest payments will continue to increase and lead to a larger total deficit.

Household Debt

Total US household debt has now passed $15T driven by mortgages. A growing portion of this debt is floating rate debt, including Adjustable Rate Mortgages and Credit Cards. Increased interest payments will no doubt cause cash flow pressures.

Corporate Debt

Companies who’ve borrowed to get them through the pandemic now sit on a mountain of debt. And soon they’re about to be hit with a higher cost of borrowing, eroding their bottom line & reducing their ability to spend for growth.

Those who’ve issued fixed rate bonds have pushed out their maturities. Many of these companies are below investment grade and will probably look to refinance the debt coming due, which will likely be at much higher rates at the time. Unless they’ve managed a path to robust profitability, there will certainly be a few struggling companies among them.

Green across board - earnings and revenues. Yet, we saw a number of stocks sell off. We’ve been seeing mixed reactions to earnings with a number of growth & tech stocks.

Marvell’s (MRVL) stock soared to ATH on an earnings beat and raise. The company did well with capitalizing on their data center (+109% YoY) & carrier infrastructure business (+28% YoY). The company has strong growth catalysts with 5G and the migration of data to the cloud.
Docusign (DOCU) dropped over 40% as the company reported lower than estimated billings and guided lower revenue growth for Q4. It’s disappointing really. I think Docusign has an amazing product and they could really change the way corporate offices work. But, the market chalked this up as a pandemic play and the stock price has been under pressure for while.
Kroger (KR) saw its share price increase a good 12% on upbeat earnings. Same-store sales turned positive, after two straight quarters of decline. Despite seeing a decline in gross margins due to inflation, the company posted a solid EPS beat.

Around the Markets

Jack (TWTR, SQ) - Jack Dorsey stepped down as CEO of Twitter and then changed Square’s name to Block, with a strategy to gravitate towards blockchain. I’m long SQ but I’m still on the fence about this.
WeWork (WE) - stuff just doesn’t stop happening with this one. Earlier in the week, WeWork filed an 8K saying that they would be restating their financial results because they’d been accounting for equity incorrectly. What was classified as permanent equity should actually be a liability. They say this had to do with BowX and not them. Regardless of whose fault it is… the market is getting it right. The stock is now down to $7.67.
Gilead (GILD) had to recall vials of Remdesivir, after shards of glass was found in some of them. Not good!

The Week Ahead

Earnings

Closing Thoughts

I don’t think we’re quite done yet with the selling and I will still tread lightly. We may see a bounce on Monday but I think the markets will remain volatile until the Omicron news sinks in. We’re facing multiple headwinds and these need to be absorbed.

Here’s wishing you a happy weekend and safe investing.

Sincerely yours,

Ayesha Tariq, CFA

@ayeshatariq

There’s always a story behind the numbers

None of the above is Investment Advice and all views are personal. I may or may not have positions in any of the stocks mentioned. I have a long position in $SQ as of the date of publication of this newsletter. I have no affiliation with any of the companies that are mentioned.

Banking on the Market