Welcome to another issue of the Weekend Edition.
Thank you to all who’ve read and subscribed to the newsletter this week!
Here’s what we cover this week:
Sector Focus - Hospitality Earnings
Earnings of Week - Summary
The Week Ahead - Economic & Earnings Calendar
Let’s dive in ⬇️
Market Recap - 02 May to 06 May, 2022
After a brief break last week, my newsletter returns to a market full of sound and fury but, it certainly does not signify “nothing”.
The initial reaction to the Fed announcement and presser was nothing short of… crazy. The Fed just announced that they’re pulling the plug on liquidity and destroying demand and the market displays exuberance.
I do believe much of that activity was driven by hedgers and MMs and all those complications but, I’m also quite sure a great many jumped on the “everything’s fine” band wagon and bid the market up.
Of course, we did see a quick reversal of that and the Nasdaq and Russell closed at ~25% below it’s 52-week high with the S&P closing almost 15% below it’s 52-week high.
Bonds didn’t do any better either. Not only did rates increase, the yield curve steepened sending term premium spiralling. Real yields rose the fastest since 2008.
The interesting thing is, international bonds are not doing any better and it seems like fear has spread throughout with almost nowhere to hide. Here’s a snapshot of the Vanguard International Bond ETF.
Sector Focus - Hospitality Earnings
This week we had a host of earnings reports from hospitality and travel companies. We’ve had a few false starts with the great re-opening but it seems like things are finally taking shape.
Booking Holdings (BKNG) discussed that gross travel bookings for the summer are currently running 15% higher than in 2019. This re-affirms the guidance coming from the airlines that we saw a few weeks ago. The stronger Online Travel Agents (OTAs) like Booking (BKNG) or Expedia (EXPE) remain a good space with leisure booking picking up. As does AirBNB (ABNB).
The hospitality sector is also picking up steam particularly where leisure travel is concerned. Hotel occupancy in the US increased 66.6% during the last week of April according to STR.
Marriott (MAR) and Marriott Vacations (VAC) both posted nice beats. Marriott is reinstating their dividend and proposing a share buyback. However, most of their revenues were driven by leisure spending vs. business corporate spending which is still slow to take off. They also had a nice boost from their properties in Dubai because of the Expo. That’s over now.
MAR however was down on earnings, while VAC was not. Marriott’s clientele is still focused more on business and corporate travelers. While weekday occupancy has increased remarkably in the US, the Central Business Districts still remain a laggard when compared to pre-pandemic levels.
Despite the great numbers and the optimistic guidance, there remains an issue with the pipeline of hotels for MAR as well. This is a major issue for hotel operators given that they rely on a steady stream of properties coming online for them to actually make money.
“While signing activity has been picking up nicely, 2022 gross room additions are expected to be impacted by the diminished construction starts the industry has experienced throughout the pandemic, particularly here in the U.S.”
Potential longs: BKNG, ABNB, EXPE, VAC
Potential shorts: MAR, CZR
Earnings of the Week
A long list of earnings this week. But, not with moves to break the market. The market broke all on its own. 😆
Overall, 87% of the companies in the S&P 500 have reported actual results for Q1 2022 to date. Of these companies, 79% have reported actual EPS above estimates, which is above the five-year average of 77%. In aggregate, companies are reporting earnings that are 4.9% above estimates, which is below the five-year average of 8.9%. - FactSet
The Week Ahead
Our favorite Fed speakers are back in action but most importantly, we get CPI numbers next week.
Powell did exactly as we expected:
increased raised by 50bps
Balance sheet runoff starting on 1 June with $30B treasuries and $17.5B MBS per month
In three months, this will increase to $60B treasuries and $35B MBS per month
He also discussed two more 50 bps rate hikes during the year
The truth is, this is steep and the market has never experienced anything of this sort before. With liquidity reducing at this pace, there’s no doubt that volatility will increase and we will see sharper moves in the market.
Will we crash? I don’t know. No one can answer that with any certainty but history is not on our side. I did write about that earlier this week but, if you even go further back it’s the same situation. Almost every time the Fed pulls the plug on liquidity, the market starts to decline.
There are still pockets of strength in the market and there are still good companies to invest in. It’s just a matter of finding them and putting your money in the right places.
Here’s wishing you a happy weekend, and safe investing.
Ayesha Tariq, CFA
There’s always a story behind the numbers
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None of the above is Investment Advice. I may or may not have positions in any of the stocks mentioned. I have a short position in $MAR as of the date of publication of this newsletter. I have no affiliation with any of the companies that are mentioned.