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- 👉 The Investing Week Ahead: 5/8/23
👉 The Investing Week Ahead: 5/8/23
Debt ceiling analysis + this week's earnings..
Good morning.
We’ve all seen headlines about the debt ceiling — two things come to mind:
Nothing’s new. The government (on both sides of the aisle) spends too much and we know it’s probably going to screw us over at some point.
Whatever. That “some point” isn’t right now. They will just raise the debt ceiling again and we can talk about this in a few years like always.
What does any of this actually mean though?
If Congress can’t suspend or raise the debt limit, then the risk of the U.S. defaulting on its debt becomes an actual reality.
What this would tangibly look like would be the Treasury prioritizing the payment of debt obligations, while limiting discretionary spending (like education and transportation).
Goldman Sachs estimates that 1/10th of economic activity would immediately halt if this were to actually happen.
A think tank named Third Way believes that ~3 million jobs would be lost as a result.
Treasury Secretary Janet Yellen says that failure to raise the debt ceiling would lead to “economic and financial catastrophe.”
Bloomberg Economist Bill Dudley says that “markets and the economy are in no way prepared for the shock that failing to reach a deal would deliver.”
It can’t really be overstated how dangerous a debt default would be to the economy as a whole, the U.S. dollar, or the stock market.
It’s obviously never happened before, so economists and market analysts have long-expected it to be a “Doomsday” type of scenario.
What’s happened in the past?
Well, the debt ceiling has been raised a whopping 74 times since March 1962.
Below shows what happened after the contentious unfolding of the 2011 debt ceiling negotiations — following the Great Financial Crisis:
In the past, we have pretty much always had politicians advance their agenda and try to use the debt ceiling “must-do deal” as a pawn for getting more of what they want.
Every negotiation has been different, but essentially none of them ever end up with the limit being respected and firmly adhered to.
What do we expect to happen?
Of course, the classic kicking of the can down the road.
However — it appears that Republicans are holding relatively strong on their demands for raising the debt ceiling, while Democrats don’t want to impede progress of the Biden administration’s agenda.
A few things that Republicans want include:
Not moving forward with student loan forgiveness.
Lessening the increased funding for the IRS.
Adding new work requirements for programs like Medicaid.
Decreasing domestic discretionary government spending.
Raising the debt limit by $1.5 trillion or until March 31st – whichever comes first.
There’s about 3 weeks until the June 1st deadline, and less-than-stellar progress has been made. Our guess would be a short-term extension of the debt ceiling in order to (literally) buy lawmakers more time.
“I think if the White House understands how important it is for us to do things like claw back unobligated Covid funds, not spend $500 billion on an unconstitutional student loan forgiveness, start to unlock American energy… I think they’re going to find Republicans receptive if the White House understands our values.”
– Rep. Dusty Johnson (Republican View)
“When you pay the debt or not it doesn't have a damn thing to do with what your budget is… They're two separate issues. Let's get it straight, they are trying to hold the debt hostage to get us to agree to some draconian cuts, some magnificently difficult and damaging cuts."
– President Joe Biden (Democrat view)
Key Earnings Announcements:
PayPal, Hims & Hers, Airbnb, and Dutch Bros have our attention.
Monday (5/8): BioNTech, Devon Energy, Dish Network, KKR, Lucid Motors, McKesson, Palantir, PayPal, Tyson, Viatris
Tuesday (5/9): Affirm, Airbnb, Celsius, Duke Energy, Dutch Bros, Fisker, Luminar, Nikola Motors, Novavax, Occidental Petroleum, Rivian, Twilio, Under Armour, Upstart, Wynn Resorts
Wednesday (5/10): Allegro Microsystems, Beyond Meat, Blackstone Secured Lending, Brookfield Asset Management, Disney, Icahn Enterprises, FirstCitizens Bank, LI Auto, Robinhood, Roblox, Teva Pharmaceuticals, The Trade Desk, Unity Software, Wendy’s
Thursday (5/11): Cyberark Software, Fiverr, JD.com, Krispy Kreme, U.S. Foods, Yeti
Friday (5/12): Embecta, Spectrum Brands
What We’re Watching:
PayPal raised Q1’23 guidance in its last earnings call — projecting Revenue Growth of +7.5% and GAAP EPS of $0.62-$0.64 (compared to $0.43 in Q1’22)
Hims & Hers laid out its three driving components for future growth during its Q4’22 earnings report: 1) driving adoption of Hims products, 2) scaling the Hers platform, and 3) disciplined category capability expansion.
Airbnb saw 393.7 million “Nights & Experiences” booked during 2022 (+31% YoY). This company has been put through the wringer lately regarding high prices and competition from VRBO (and hotels). Check out this link for their most recent upgrades to the platform + the announcement of Airbnb Rooms.
You may need to click into the picture above, but the takeaway from Dutch Bros’ income statement is that Net Loss continues to be slashed as the days go buy.
This company is trying to expand quickly, and is willing to delay profitability in order to achieve massive scale. The introducing of more adjusted-based financial metrics in recent Dutch Bros earnings results could be a bit of a red flag though.
Investor Events / Global Affairs:
YTD Winners and touching on the Oil Market.
Approaching Yearly Highs
Some of America’s biggest stocks are shown above — all of which are less than 5% from new 52-week highs.
Don’t get us wrong — the data is clear that the vast majority of S&P 500 returns YTD are thanks to Big Tech, but names in Consumer Defense and Healthcare seem to be performing well too.
Also don’t get us wrong about this — we expect a pullback in the market and a “hard landing” in the economy. However, we’re in a stock picker’s market — which means there’s always money to be made.
The chart above from Jaguar Analytics is a great one to bookmark and study.
One of our takeaways for you is if the Fed fails to lower consumer prices (higher inflation) and the economic gets shakier (low real economic growth) — we’re going long on Energy.
Oil Market Check-Up
Speaking of energy…
Oil prices posted a third-straight weekly decline last week amid heavy concerns over the demand outlook.
Recession fears apparently beginning to fade has now caused crude prices to rally +3% on Monday morning.
"Rather than underlying fundamentals, the selling frenzy over the past week has been driven by worries about demand linked to recession risks and the strain in the U.S. banking sector… The upshot is that there is a big disconnect between oil balances and oil prices."
Major Economic Events:
Marginal inflation improvements are expected this week, leaving room for a “big beat” if prices for consumers and producers come in less hot than expected.
Monday (5/8): Fed Senior Loan Survey, Speech by Chicago Fed President Goolsbee, Wholesale Inventories
Tuesday (5/9): Speeches by Fed Gov. Jefferson & New York Fed President Williams
Wednesday (5/10): Consumer Price Index
Thursday (5/11): Producer Price Index, Speech by Fed Gov. Waller
Friday (5/12): Consumer Sentiment, Import Price Index, Panel on Economy by Fed Gov. Jefferson & St. Louis Fed President Bullard
What We’re Watching:
Headline Consumer Inflation:
Core Consumer Inflation (less energy and food):
Headline Producer Inflation:
Core Producer Inflation (less energy, food, & trade services):
Events-Driven Winners:
Which stocks moved the most last week.
Our friends at LevelFields scrub through thousands of data points each week to determine how events impact stock prices.
If you’re starting your investing journey or are interested in buying T-bills yielding 5% or more, consider visiting Public.com.
Disclaimer: This is not financial advice or recommendation for any investment. The content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.
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