THIS WEEK: Navigating the Earnings Jungle

Here we go!

1. Tech Earnings Roller Coaster

THE DOWNTURN DEEPENS

The stock market downturn deepened, driven by major tech companies' earnings, despite a retreat in Treasury yields from a Monday peak of over 5%. Both the S&P 500 and Nasdaq slipped below their 200-day averages. Meanwhile, reduced capital expenditure forecasts affected several other tech firms.

Microsoft surpassed Wall Street's expectations for its fiscal first quarter, primarily due to robust cloud computing sales. The company also projected better outcomes for the upcoming quarter. The company witnessed a 27% rise in overall EPS and a 13% increase in revenue to $56.5B, marking the third consecutive quarter of growth acceleration for both metrics. In Alphabet's financial results, Wall Street expressed concerns over the figures from the Google Cloud division. This division invests significantly to compete with giants like Amazon and Microsoft, especially in handling substantial artificial intelligence tasks.

Meta’s concern arose from remarks by CFO Susan Li during the earnings call about the fourth quarter's advertising market. Given the escalating tensions in the Middle East and the unpredictable impact on ad expenditure, Meta issued a broader revenue guidance range than usual. On the other hand, Amazon crushed earnings with arguably their best quarter under new CEO Andy Jassy. Revenue increased by 13% in the third quarter, indicating that the business is gaining momentum following a challenging 2022 marked by skyrocketing inflation and climbing interest rates.

🎯 GRIT TAKE:

All four tech firms initiated significant cost-saving actions either…Upgrade to GRIT VIP to read complete GRIT Takes! 🤩 Only 4 hours left to get 50% off your annual VIP subscription!

2. Genevieve’s Corner

NASDAQ IN CORRECTION TERRITORY!

What's Genevieve's doing—buying or selling?

Hi Everyone! 👋

Another week, another flood of earnings releases, economic data, and notable news! Here we go:

U.S GDP

What recession? U.S. GDP soared +4.9% in Q3.

More than DOUBLE Q2 growth.

And the most since 2021.

Notably:

• Personal spending accounted for ~70% of this surge, up +4%

• Government spending accounted for 17% of this surge, up +4.6%

• AND VERY notably within government spending, Defense spending was up +8%!

Can this pace continue?

Likely not.

The consumer: They are now tapping credit cards to pay for stuff like groceries to Taylor Swift tickets. Credit card debt is now at a record high, and worse, INTEREST on that credit card debt is at a record high…

And for the government – the national debt has reached a record high of +$33 trillion and is climbing.

The U.S. budget deficit is also alarming! It hit $1.7 trillion, up from $1.38 trillion in 2022.

This is the most significant annual budget shortfall ever recorded outside COVID-19 years.

And here’s another record you don’t want to break, which is likely unsustainable.

U.S. interest payments on debt just hit an all-time high. YTD (end of August):

• Interest on debt: $633B

• Spending on Defence: $659B

Probably nothing…

Also interesting to see in the table below (not annualized) how much more substantial U.S GDP growth was in Q3 compared to other G7 countries.

U.S. strength is leading the world, for now.

This may mean potentially bad news for the FED as it may add more pressure to raise rates one more time before the end of 2023.

Next meeting Nov 1^st, 2023 – mark your calendars!

BILLIONAIRES

Bill Ackman announced on Twitter that he covered his bond short.

This big short – a bet against the U.S 30-year Treasury bonds - netted him +$200M – not bad for 12 weeks of work. 😉

GRIT social media followers were alerted on August 6^th with THIS VIDEO that went viral on TikTok and has now been viewed +224,000 times!

Bill Ackman says, “There is too much risk in the world to remain short bonds at current long-term rates” and, “The economy is slowing faster than recent data suggests.”

So Bill is bearish, and so are other billionaires Ray Dalio, Michael Burry, Paul Singer, and Bill Gross.

One billionaire who isn’t bearish is Steve Cohen.

His $31.4B hedge fund, Point72 Asset Management, is still “pretty positive” on the economy. He expects economic growth to jump next year and equity markets to rally 3% to 5%, prompting interest rates to rise “higher than people think,” as per Bloomberg.

S&P & NASDAQ

S&P 500 and NASDAQ both officially enter correction territory.

Two-thirds of S&P 500 stocks are now trading below 200-day moving averages.

EARNINGS

Since reporting earnings, tech stocks have lost +$200B in market value.

Despite mostly beating earnings, these stocks are getting hammered.

Except for Microsoft – it’s gained +$75B in value!

Next month: NVIDIA and Apple report.

Fingers crossed! 🤞🏻

Important to note: “For the 29% of S&P 500 companies that have reported third-quarter results so far, earnings are up +11% .. but without the contributions of the ‘Magnificent 7’ stocks, index EPS growth would drop to -8.6%” (Bernstein)

Seven stocks are LITERALLY holding up the stock market!

🚀 Genevieve’s Take:

Want to know what I think of Microsoft, Google, Visa, and Amazon earnings and what I am doing with my positions? Upgrade to GRIT VIP to find out. Get 50% off your annual subscription now until October 31st at midnight! 🎃

Wild times.

Genevieve Roch-Decter

3. Matt Allen’s Corner

MENTAL MODELS WILL MAKE YOU A BETTER INVESTOR

One of the most essential traits of a great investor is the ability to think outside the box. Using mental models allows me to think outside the box to become a better investor. Charlie Munger was the one whom I learned these from initially. Munger believes that people who think broadly and understand many different models from different disciplines make better investment decisions. In my corner, I will break down two of my favorite mental models.

The first mental model is the Swiss army knife approach. Let’s say that you were learning to drive a car. Would you only learn how to use the accelerator? Absolutely not. If you only used the accelerator while driving a car, it would be a disaster for you and others. Before you become a good driver, you need to learn how to use the wheel, the brakes, the turn signals, and many other things. To be a successful thinker, you need to learn about multiple ideas. Charlie calls this “worldly wisdom.”

Here is one of my favorite analogies:

To the man with a hammer, every problem looks like a nail.

The man with the hammer will torture himself because the only way that he thinks is to use the hammer to solve his problems. You would rather be the man with a Swiss army knife who realizes that different problems need different tools.

In corporations, you see this every single day. The marketing department will only care about marketing. In academia, the science department will only care about science.

The second model is first-principles thinking. This is one of the best ways to reverse-engineer complicated problems and unleash creative possibilities. The philosopher Aristotle made this mental model famous and used by Elon Musk, Peter Thiel, and Jeff Bezos.

The idea of first principles thinking is to simplify complex problems into essential elements and then reassemble them from the ground up. In other words, the average person looks at solving problems like previous people or generations have solved. Peter Thiel is the founder of PayPal and an early investor in Facebook. He is among the best investors ever to find the next big company. Thiel has used first principles thinking for years. Theil believes in “vertical progress,” which means going from 0 to 1 or doing something no one has ever done. Vertical progress is much more complex than “horizontal progress:” going from 1 to n, copying things that already work.

In Matt Allen terms, if Henry Ford had not used first principles thinking, he would have tried to give everyone a faster horse. The average person is stuck on how it has “always been,” but you have to look at problems with first principles thinking. When investing, the next Amazon will not be an internet company. The next Amazon might be a company where you shop in the Metaverse. Sounds crazy, right? How crazy did Amazon sound in the 1990’s?

I hope you have a great week!

🎯 GRIT TAKE:

Charlie is one of the most brilliant people that has ever lived. I do not mean… Upgrade to GRIT VIP to read complete GRIT Takes! 🤩 Only 4 hours left to get 50% off your annual VIP subscription!

Stay Gritty,

Matt Allen

4. What’s Moving the Market

MACRO ANALYSIS

TONS of macro this week: We’re talking PCE, GDP, and you guess it… RATES! Starting off with GDP, we had an absolute blowout figure. Real GDP in Q3 came in at a thundering +4.9% vs. estimates of +4.5%. While some of this jump came from trade and inventories that will likely be “given back” in Q4, the underlying data still shows a strong economy (for now...). Remember, according to some, a recession is defined as two consecutive quarters of a country's real GDP decline. So far, so good – but a particular hedge fund manager thinks there is more to the story…

We also got Fed Chair Jerome Powell’s favorite inflation indicator: PCE. Core PCE increased 3.7% YoY, lower than the 3.8% in August, while headline PCE was up 3.4%, the same as the prior month. While reaching new lows is a positive sign, inflation still sticks around and above the Fed’s goal of 2%. Personal spending also rose 0.7%, better than the 0.5% forecast.

🎯 GRIT TAKE: Why do all these economic data points matter?… Upgrade to GRIT VIP to read complete GRIT Takes! 🤩 Only 4 hours left to get 50% off your annual VIP subscription!

5. Comin’ Up

EARNINGS AND ECONOMIC DATA

💰 Earnings:

Monday: McDonald’s, Lowes, ON

Tuesday: Pfizer, AMD, BP, Anheuser Busch

Wednesday: PayPal, Qualcomm, CVS, Humana

Thursday: Apple, Starbucks, Eli Lilly, Shell

Friday: Berkshire Hathaway, Dominion Energy

📈 Major Economic Events:

Monday: None

Tuesday: Economic cost index

Wednesday: ADP employment

Thursday: Initial jobless claims, U.S. nonfarm payrolls

Friday: U.S. unemployment rate

The author of this newsletter owns ETF’s (exchange traded funds) that may hold ownership interests in the companies discussed in this newsletter as of the published date of this newsletter. An insider to GRIT Capital Corporation currently holds an ownership interest in SPDR S&P 500 ETF (SPY), Microsoft Corp (MSFT), Alphabet Inc Class C (GOOG), Amazon.com, Inc. (AMZN), NVIDIA Corp (NVDA), Visa Inc (V), Texas Instruments Inc (TXN), Waste Management, Inc. (WM) as of the published date of this newsletter. The insider to GRIT Capital Corporation does not guarantee that they will maintain their ownership interest in SPDR S&P 500 ETF (SPY), Microsoft Corp (MSFT), Alphabet Inc Class C (GOOG), Amazon.com, Inc. (AMZN), NVIDIA Corp (NVDA), Visa Inc (V), Texas Instruments Inc (TXN), Waste Management, Inc. (WM) and may increase or sell such interest at any time.