👉 Week in Review: 10/2/22

Welcome to our community!

Our friend Katie Stockton (here’s her Substack research) was a guest on The Compound and Friends podcast this Friday and said some incredibly nice things about the content we publish over here.

We saw an encouraging influx of new subscribers and wanted to personally thank each of you for dropping your email address and some for even deciding to support our work. We look forward to sharing more content with you!

Note — we usually publish these “Week in Review” posts mid-afternoon on Sundays. The Rate of Return team was traveling this weekend, so we apologize for the later than normal post. 

“A Sustained Period of Below-Trend Growth…”

This is something Fed Chair Jerome Powell spoke bluntly about back in August and we followed up with the breakdown linked above. It’s equally as important to listen to global business leaders as it is listening to Federal Reserve leadership:

You don’t think the pain could get much worse than it has felt?

Think again. Below is a 100-year view of the S&P 500 on a logarithmic scale. You should see this and say “wow — things have been pretty dang good for the last decade or so!”

That’s absolutely right. The economy’s been strong and interest rates have been relatively low for likely your entire life. Odds are — 90% of the readers of this newsletter (including us!) have never experienced a lot of the macroeconomic adversity that’s going on / is to come.

Remember — The market started this century by taking ~13 years to make and keep new highs. Do we predict that to happen here? Probably not — but who knows? The main takeaway is those folks that DCA’ed throughout those 13 years were greatly rewarded over the subsequent decade. Your entries into the market matter and your ability to have a long-term mindset will likely be tested. Stay vigilant, stay patient, and have your plan ready for long-term wealth building.

Read on to get some of our specific insights into recent market activity that could increase or ease up the essentially-promised economic pain above.

Week in Review — Too Long, Didn’t Read:

CarMax shares crater, Micron has a bad quarter (as predicted), Nike has an inventory problem, Tesla makes remarkable progress with its humanoid robot, Amazon impresses with product updates across the board, Great Britain is playing with fire, Hurricane Ian wreaks havoc, Consumer Confidence isn’t low enough, Consumer Spending looks to take discretionary spending hits, and US Home Prices see their first MoM decrease in a decade.

Key Earnings Announcements:

CarMax’s is seeing slower same-store sales growth than expected, Micron Technology is cutting costs across the board in 2023, and Nike has a major inventory problem — catalyzing their management to cut 2023 guidance. 

• CarMax (KMX)

Key Metrics

Revenue: $8.1 billion, an increase of +2% YoY

Operating Income: $167.5 million, compared to $367.8 million last year

Profits: $125.9 million, compared to $285.2 million last year

Earnings Release Callout

“As we navigate the near-term pressures facing our industry, we are further sharpening our focus on driving additional operational efficiencies across our business.

We will also remain focused on continuing our work to achieve our long-term goals, including further improving our omnichannel experience for our customers and associates through enhancing the seamlessness of our online and in-store offerings and growing our diversified business model.”

My Takeaway

• Micron Technology (MU)

Key Metrics

Revenue: $6.6 billion, compared to $8.6 billion last year

Operating Income: $1.5 billion, compared to $3.0 billion last year

Profits: $1.5 billion, compared to $2.6 billion last year

Earnings Release Callout

“Our technology and manufacturing leadership in both DRAM and NAND, deep customer relationships, diverse product portfolio, and strong balance sheet put Micron on solid footing to navigate the weakened near-term supply-demand environment.

We are taking decisive steps to reduce our supply growth including a nearly 50% wafer fab equipment CapEx cut versus last year, and we expect to emerge from this down-cycle well positioned to capitalize on the long-term demand for memory and storage.”

My Takeaway

• Nike (NKE)

Key Metrics

Revenue: $12.7 billion, an increase of +4% YoY

Operating Income: $1.8 billion, compared to $2.1 billion last year

Profits: $1.5 billion, compared to $1.9 billion last year

Earnings Release Callout

“Our competitive advantages, including the strength of our brand, deep consumer connections and pipeline of innovative product, continue to prove that our strategy is working. We expect our unrelenting focus on better serving the consumer to continue to fuel growth and create value like only NIKE can.”

My Takeaway

Investor Events / Global Affairs:

Tesla shows off its dancing robot, Amazon impresses with an updated suite of products, and the situation in the UK is unbelievably fragile.

• Tesla (TSLA) AI Day

As you may recall from the most recent Week Ahead post, Tesla’s AI Day was heavily anticipated for updates on the Optimus humanoid robot. While Musk admitted that this was only a “rough development robot” in its current state — the creation was able to walk around the stage, wave to the crowd, and even dance for the first time without any mechanical support on stage. Musk noted that the robot could cost less than $20,000 to own if mass produced and that it already has the ability to individually perform simple tasks such as watering plants or moving objects in an assembly line.

• Amazon (AMZN) Product Event

This past week, Amazon held its largest product event of the year — providing updates on Kindle, Echo speakers, Ring security, Eero routers, and Fire TV. Below are some quick takeaways:

• Kindle — The company released a surprising variant of Kindle e-readers, which include the ability to write on them as a tablet. The Kindle Scribe (pictured above) will cost $340 with the pen included.

• Echo Smart Speakers — Improved bass and better sound for the popular $50 Echo Dot speaker. Updates for older models of the larger Echo Studio speaker, which will improve sound. Updates to Echo Auto for its in-car tech, including roadside assistance features. The Halo Rise was debuted — the “sleep tracker you don’t have to wear.” It sits on your nightstand and has a sunrise alarm clock lamp built-in.

• Home Security Systems — The new Ring Spotlight cameras can map the motion of individuals in the vicinity of your home, so you can see if package deliverers walked around the premises. The Blink Floodlight and Blink Mini cameras are a more affordable solution than the Ring offerings. $100 can get you a wired floodlight and $35 can get you a Blink Mini wide-lense camera.

• Routers — the new Eero Mesh Routers will eliminate the need for power cords and cost $300 for a three-piece WiFi setup. You’ll also have the ability to allow fourth-generation Echo Dot smart speakers to serve as mesh extenders within the WiFi network.

• Fire TV — Improved 65-inch ($800) and 75-inch QLED ($1,100) TVs are available for preorder. The Fire TV remote will begin working with most Amazon-branded video devices and have a backlight — so you can find it just by calling out for it. The Fire TV Cube has 4K upscaling for your cable box and will allow you to change the channel just by speaking.

• Great Britain’s Economic Time Bomb

We’ve spoken a lot about currency issues around the world (here, here, and here for example). The meme-lovers show a strong US Dollar and suggest it to be a good thing. This isn’t necessarily true. It’s nice that we have essentially locked the dollar into remaining as the global reserve currency for the foreseeable future, but as other currencies continue to crumble — they will unload their US-denominated reserves (mostly treasury bonds) and we expect the USD to have a rather dramatic drop at some point in the coming quarters. 

One of those “crumbling currencies” is the British Pound (GBP). So what’s happening? The TLDR is that Britain’s newly-elected Prime Minister, Liz Truss, announced a plan to cut taxes and conduct quantitative tightening (QT). She wants less free money and overall the government to have less domain over public money. But then the pension funds started freaking out.

The messy chart below may seem confusing, but what it shows is the fragility of the GILT market — which you can think of as Britain’s treasuries. Last week, demand for long bonds in England collapsed in response to the tax cut plans. The BoE then stepped in to buy $69 billion USD worth of long-dated GILTS to save the market. The yield on 30-year inflation-linked GILTs, favored by highly-leveraged pension funds, soared 76 basis points on Tuesday — the largest increase on record.

So what happened?

“I still don’t understand. Please explain in simple terms.”

No problem. The British financial system is not operating properly and there’s a sense of zero stability. People with lots of money invested in the markets based on norms that have been long-established and protected by the government. When things appeared to be changing in how the government treats monetary policy (tax changes, trying to tame inflation, QT, etc.) — investors freaked out and sold their bond positions. When investors freaked out and sold, the government felt a need to do what it didn’t want to do — print more money and prop up its own markets for survival.

Great Britain has joined the ranks of Japan in kicking the proverbial “can down the road” with market fundamentals and inflationary dangers. 

Major Economic Events:

Hurricane Ian is set to be one of the most expensive storms in US history, the spread of the Consumer Confidence Index remains in recessionary territory, Consumer Spending still rises, but appears to be dialing back on discretionary items, and US Home Prices see their first decline since 2012. 

• Hurricane Ian — The “500-Year Flood Event”

First off — thoughts and prayers go out to all readers that were directly or indirectly impacted by Hurricane Ian. This was a colossal storm, at an already difficult time for American families. While we’re going to spend a moment touching on the economic & financial ramifications of the storm — we’re not forgetting that the most important impact here is on the lives themselves.

Hurricane Ian By The Numbers:

• Death Toll — 62, expected to rise by the hundreds

• Economic Damage Estimation — $70-$120 billion

• People That Have Lost Power — 4+ million

• Gulf Coast Oil Rigs Evacuated — 14 oil rigs, halting 11% of the region’s oil output

• Residences in Medium-to-High Flash Flood Risk — 7.2 million

• Estimated Reconstruction Costs — $260-$300 billion

• Starlink Satellites by Elon Musk to Assist Impacted Areas — 120-160 units

• Consumer Confidence Index

Consumer confidence improved in September for the second consecutive month supported in particular by jobs, wages, and declining gas prices. The Present Situation Index rose again, after declining from April through July. The Expectations Index also improved from summer lows, but recession risks nonetheless persist. Concerns about inflation dissipated further in September—prompted largely by declining prices at the gas pump—and are now at their lowest level since the start of the year.

Consumers were more positive about the short-term business conditions outlook in September.

• 19.3% of consumers expect business conditions to improve, up from 17.3%.

• 21.0% expect business conditions to worsen, down from 21.7%.

• Consumer Spending

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased +0.4% in August after falling -0.2% in July. Consensus estimates projected a +0.2% rise in consumer spending.

Spending was led by services, where outlays surged +0.8% after edging up +0.1% in July. There were also increases in spending on transportation services, healthcare, dining out, and hotel / motel accommodation.

• US Home Price Index

The Case-Shiller US National Home Price Index posted its first month-over-month decline since 2012. It’s important to note that housing price declines take many months to develop — as corrections hit every market on different timelines. For example, between May and August, home values in San Jose fell -10.6% while home values grew +2% in Orlando.

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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.