👉 The Investing Week Ahead: 4/24/23

“The ‘bank walk’ continues, resulting in a buying frenzy of short (~1-month) bills. Why this part of the curve? The avg. maturity of money market fund securities are 26 days, or ~1 month? It is a popular place to put new money (from banks) to work.

So, more than avoiding the debt ceiling, "x-date" is going on with the bill curve distortions. Why does it matter? The banking crisis is not over. As I explained a few weeks ago, few can define the bank crisis in the first place.

I define it as a ‘bank walk,’ which is intensifying.

To be clear, a bank walk will NOT lead to another bank failure, wrong metric. But it will kill their profitability, especially the smaller banks. This is the market's message. Smaller banks are doing worse.

And the cumulative impact of the bank walk on deposits will be to kill lending. Not today, so looking at the loan data now will not show it yet. But there are some signs the lending pullback might be BEGINNING.

And the lending pullback, especially from the struggling smaller banks, will really set back the economy. Collectively they matter, as shown below. (Small banks have $6.8T in assets, more than JPM and BAC combined).

Why? Because one-third of the workforce is employed by a company of fewer than 100 employees. Nearly half by a company of fewer than 500 employees. They need small and regional banks to lend to them, not say no because they are constricted by a cumulative ‘bank walk.’

Conclusion — the current economy, inflation, and Fed thinking are irrelevant. What is coming next matters, as is always the case. The answer will be the "bank walk's" cumulative impact on markets, the economy, and lending. It will be a significant drag later this year.”

We’ll be digesting this train of thought more over the coming weeks.

What We’re Watching:

For the first time since 2015 — Amazon’s most recent earnings report revealed that Net Income for the trailing twelve months came in negative (-108% YoY). 

We’re eager to hear if they expect Amazon Web Services (AWS) to continue carrying the team — and how it can impact their quest in reaching positive Free Cash Flow for the first time since Q3’21.

"Our community continues to grow and I'm pleased with the strong engagement across our apps. Facebook just reached the milestone of 2 billion daily actives…The progress we're making on our AI discovery engine and Reels are major drivers of this. Beyond this, our management theme for 2023 is the 'Year of Efficiency' and we're focused on becoming a stronger and more nimble organization."

— Mark Zuckerberg, Meta Founder & CEO, Q4’22 Earnings

“The next major wave of computing is being born, as the Microsoft Cloud turns the world’s most advanced AI models into a new computing platform… We are committed to helping our customers use our platforms and tools to do more with less today and innovate for the future in the new era of AI.”

— Satya Nadella, Microsoft Chairman & CEO

In the most recently quarterly report, Microsoft’s Free Cash Flow was $4.9 billion — down -43% YoY. After Operating Expenses surged +19% YoY due to investments in cloud engineering, the Nuance acquisition, and improving LinkedIn — we’re interested to see if FCF improves.

“Naftogaz hopes to sign a contract with Halliburton that would help increase production to a target of 13.5 billion cubic metres this year, a jump of about 1 billion cubic metres from 2022 levels.” — Reuters

Interesting. This war is so obviously filled with nefarious action and a bunch of bad actors. The question is what is our true end game from the American perspective?

“Bed Bath & Beyond joins a growing list of once-ubiquitous retail chains seeking court protection. Some like J.C. Penney Co. continue to operate hundreds of stores; others like Sears and Toys ‘R’ Us closed most of their locations; while Circuit City and Linens ‘n Things disappeared altogether.” — WSJ

Remember — Lyft has entered “dumpster fire” territory for a lot of folks over the past few months. See below for an analyst quote that we shared with you in February 2023:

“In 22 years on the Street as a tech analyst we have listened to 1,000s of conference call with many highs and lows.

Last night's Lyft call was a Top 3 worst call we have ever heard as in our opinion as management is trying to play darts blindfolded with the expense structure going forward and gave an EBITDA outlook which was a debacle for the ages.”

Smart Asset resources: Link 1 | Link 2

What We’re Watching:

With the Core PCE Index as the Fed’s preferred inflation gauge — there’s a couple of ways in which you can view inflation’s trend.

The first is that the month-over-month increases have been less severe. They still aren’t great, but they may seem manageable — especially when paired with the PCE Index decelerating year-over-over.

The second is by looking at the Core PCE’s rise over the last five years. Despite the decent progress of late — one could argue that there’s still a serious amount of work to be done:

Above shows a look at Deloitte’s forecasts for GDP. Below shows the interesting trend of deglobalization for the United States:

“Reengineering supply chains will inevitably mean a rise in overall costs.

Just as the “China price” held inflation in check for years, an attempt to avoid dependency on China might create inflationary pressures in the later years of our forecast horizon. And if markets won’t accept inflation, companies may to have to accept lower profits to diversify supply chains.

Globalization offered a comparatively painless way to improve many people’s standard of living; deglobalization will likely involve painful costs and may limit real income growth during the recovery.”

— United States Economic Forecast, Deloitte Insights

Lastly, here’s a great synopsis of where GDP could be heading by Roth MKM Partners Chief Economist and Market Strategist Michael Darda. He believes that Nominal GDP could fall below zero.