CWS Market Review – October 17, 2023

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The First Q3 Earnings Reports Are Coming In

We’re getting a look at the first batch of Q3 earnings reports. On Friday, three of the big banks released their earnings reports. I’m not sure why the banks always go first. Perhaps it’s easier for the accountants.

In any event, all three banks beat earnings and all three stocks gapped up in Friday’s trading, although Citigroup eventually gave it all back and closed slightly lower. I’ll be frank, this hasn’t been a great year for many bank stocks.

This is a YTD chart of the S&P 500 Financials:

Let’s start with Citigroup’s (C). The financial behemoth has had a tough year, but it reported Q3 earnings of $1.52 per share. That was a 31-cent beat. I was not expecting results that good. The key stat for any bank is net interest margin. For Citigroup, that was 2.49% last quarter. Wall Street had been expecting 2.41%.

JPMorgan Chase (JPM) is always one to watch. JPM said it made $4.33 per share for Q3. That was well above expectations of $3.90 per share. JPM is probably the most important bank in the country (behind the Federal Reserve). JPM has nearly $4 trillion in assets. Still, deposits are down 4% from last year.

CEO Jamie Dimon said, “Now may be the most dangerous time the world has seen in decades.” I’m afraid he may be right. The good news is that JPM’s economists are saying that a soft landing is more likely than a recession.

Wells Fargo (WFC) is probably in the most difficult spot. The bank has even talked about layoffs and closing branches. WFC’s CEO said, “this company is not efficient—like period, end of story.”

Unfortunately, that’s about the only statement this bank has gotten right in the past three years. For Q3, Wells said it made $1.39 per share. That’s up significantly from the 86 cents per share it made in Q2. The Q3 results beat Wall Street’s forecast of $1.24 per share. Wells has a way to go before it’s healthy again.

On Tuesday, Goldman Sachs (GS) said it made $5.47 per share last quarter. Wall Street had been expecting $5.31 per share. The bank said it had stronger-than-expected trading revenue. Overall profits were down 33% to $2.058 billion.

Interestingly, both Wells Fargo and JPMorgan tapped the bond market after their earnings reports. Wells sold $6 billion in bonds in two parts. JPM did a three-part offering worth a total of $7.25 billion. This could mean the banks think rates and spreads may go even higher. Another possibility is that the banks maybe are adjusting their balance sheets ahead of new capital requirement rules.

This has been a rough stretch for the bond market. Even blue-chip bond yields are the highest they’ve been since 2009.

How Strong Is the Economy?

Get ready for next Thursday, October 26. That is when the government will release its first report on Q3 GDP growth. In plain English, this is the report card for the U.S. economy.

This report will be especially interesting because there’s a big divergence among economists. The consensus among Wall Street economists is for growth of just under 3.0%. That’s pretty average, maybe a little on the high side.

On the other side is the Atlanta Fed. Their GDPNow model is very bullish. It currently sees Q3 GDP growth of 5.1%. What does the Atlanta Fed know that no one else does? Beats me.

Growth of more than 5% would be remarkable considering all the rate hikes from the Fed and the fact that the manufacturing sector has been in a recession for more than a year.

Plus, the S&P 500 hasn’t done much since late-July. Mortgage rates are soaring, and the 10-year Treasury just touched 4.8%. Earlier today, we learned that homebuilder confidence fell to a 10-month low. Measures of housing affordability are the lowest on record.

According to stats from S&P Global Market Intelligence, the S&P 500 is now tracking earnings growth of -0.86% for Q3. That’s down from -0.59% one month ago.

The big loser is the Energy Sector. Earnings for that sector are projected to fall by 36.2%. It’s still very early, but so far, 84.2% of companies have beaten earnings estimates while 66.7% have beaten on sales.

The current consensus has the S&P 500 earning $218.67 per share for 2023. That’s the index-adjusted number. That means the S&P 500 is going for almost exactly 20 times this year’s forecasted earnings.

We did have some good economic news on Tuesday. The Commerce Department released the retail sales report for September. Last month, retail sales rose by 0.7%. That more than doubled Wall Street’s forecast for 0.3%.

The retail sales report can be tricky, so we should always look at the details. If we exclude car sales, then retail sales increased by 0.6%. Wall Street had been expecting an increase of 0.2%. All three retail sales reports for Q3 were above expectations.

The retail sales numbers are not adjusted for inflation. Over the last year, retail sales were up 3.8% while inflation increased by 3.7%.

Sales gains were broad-based on the month, with the biggest rise coming at miscellaneous store retailers, which saw an increase of 3%. Online sales climbed 1.1% while motor vehicle parts and dealers saw a 1% increase and food services and drinking places grew by 0.9%, good for a yearly increase of 9.2%, which led all categories.

There were only a few categories that showed a decline; electronics and appliances stores as well as clothing retailers both saw decreases of 0.8% on the month.

Wall Street is up in the air regarding the Fed’s next move. The current consensus is that the Fed won’t do anything in November. That’s probably right. For December or January, however, futures traders think there’s a decent but not overwhelming chance that the Fed will give us another rate hike.

Rite Aid Goes Bust

This weekend, Rite Aid (RADCQ) filed for bankruptcy. This is a sad ending for a company that seemed to offer so much promise.

To be honest, Rite Aid has been in a death spiral for a few years, so the ending wasn’t much of a surprise.

The major problem for Rite Aid is that it faced a slew of lawsuits related to opioid sales. The company has tons of debt, declining sales and mounting legal bills. It’s hard to come back from that.

With Chapter 11, the company will still be in business, but they’ll have to restructure. That means many of the stores will close, but that will take some time. Your local Rite Aid will probably be there for you.

The lawsuits claim that Rite Aid knowingly filled prescriptions for the addictive painkillers. The DOJ has also gotten in on the act.

I remember in the 1990s when Rite Aid was a terrific stock. Check out Rite Aid’s performance from 1990 through 1998:

It seems to have a limitless future. This is a great example of reading too much into a company’s past performance. It’s as if the chart is speaking to you and pointing ever higher.

It’s easy to fall into that trap, but that’s not how investing works. Here’s the same graph but through today:

Well, that’s quite a different story. To quote Warren Buffett, “If past history was all that is needed to play the game of money, the richest people would be librarians.”

Also, notice how long it took. There’s the famous exchange from The Sun Also Rises:

“How did you go bankrupt?” Bill asked. “Two ways,” Mike said. “Gradually and then suddenly.”

Same for Rite Aid.

That’s all for now. I’ll have more for you in the next issue of CWS Market Review.

– Eddy

P.S. If you want more info on our ETF, you can check out the ETF’s website.

Posted by on October 17th, 2023 at 6:51 pm


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.