Macrosynthesis
Last Week's Recap
All three major U.S. stock indices ended Friday in the red, with the Dow Jones down 110 points and the S&P 500 and Nasdaq declining by 0.2% and 0.1%, respectively. Investors remained cautious due to expectations of sustained high interest rates. September's S&P Global PMIs showed a slowing services sector. Apple, Meta, and Nvidia offset losses from Tesla, while Ford gained 1.9% amid positive union negotiation news. For the week, the Dow dropped 1.7%, while the S&P 500 and Nasdaq fell 2.8% and 3.6%, respectively.
The Federal Reserve maintained interest rates but signaled a potential rate hike later this year and fewer rate cuts in 2024. The central bank also raised its GDP growth forecasts and expects lower unemployment, though it maintained a soft landing for the economy was not is base case projection - an assessment that shook market confidence. Jobless claims for last week fell to 201,000, beating expectations.
U.S Private Sector
The U.S. Composite PMI for September 2023 dropped slightly to 50.1 from 50.2 in August, indicating stagnant private sector activity. This is the fourth consecutive month of PMI decline, showcasing the weakest performance since February. The service sector hit an eight-month low, and manufacturing decreased.
BOJ Stays in Last Place
During its September meeting, the Bank of Japan unanimously voted to keep its key short-term interest rate at 0.1%. Amid global and domestic uncertainties that heavily influence inflation in Japan, the BoJ plans to continue its monetary easing strategy, targeting a 2% inflation rate along with wage increases.
The committee also stated it is open to additional easing measures if inflation expectations rise. The Yen is in a state of uncertainty with the BOJ having to face the reality of being beaten by inflation and watching their currency devalue further or moving quickly which will further damage their economy.
iShares MSCI Japan ETF (EWJ): +22.99% (1YR)
Container Shipping Falls to Concerning Levels
The container shipping industry faces declining demand and increasing overcapacity, causing spot rates to slide into loss-making territory. This downturn significantly impacts ocean carrier Zim, with 70% of its trans-Pacific business relying on spot rates this year.
Major trade lanes between Asia and both the U.S. and Europe have seen significant rate drops. While Zim initially benefited from spot rates exceeding contract rates, the premium has collapsed, adding uncertainty to the company's future earnings.
Zim Integrated Shipping Services (ZIM): -54.44% (1YR)
Reckless Spending on Pennsylvania Ave
The Heritage Foundation's recent report reveals that the U.S. national debt has surpassed $33 trillion, with $7.5 trillion added between March 2020 and December 2022. This equals about $57,400 per household. The report blames both Trump and Biden administrations for fiscal challenges and criticizes pandemic spending for intensifying problems like inflation and supply chain issues. The Inflation Reduction Act is also faulted for exacerbating the situation.
Concurrently, a potential government shutdown is anticipated on Oct. 1 due to House Republicans demanding spending cuts, which could impact pay for millions, including the military. The possibility of a full shutdown, however, is unlikely and will more likely be resolved by a continuing resolution (short term) budget.
Commodity Movers
Orange Juice
+3.12% (1W Chg)
+85.65% (YoY Chg)
UK Gas
+3.29% (1D Chg)
+12.74% (1W Chg)
Uranium
+5.65% (1W Chg)
+34.36% (YoY Chg)
Silver
+2.37% (1M Chg)
+25.03% (YoY Chg)
Last Week's Top Bearish Events
Noteworthy Events
Squarespace
Squarespace shares rose by 4.2% on Friday after UBS issued a "buy" rating, citing the company's strong product range and increasing brand recognition.
Arm Holdings
Arm Holdings' stock declined by 1.6% on Friday after Susquehanna issued a neutral rating for the chip design company. Although the stock surged about 25% on its Nasdaq debut on September 14, it's currently trading at its initial offering price of $51.
Cisco Buys Splunk
Cisco's shares dropped 3.9% on Thursday following its announcement to acquire cybersecurity firm Splunk for $157 per share, valuing the deal at approximately $28 billion. In response, Splunk's stock surged by 19.1%. Splunk currently trades at $144.75.
Klayvio
Shares of the marketing company, Klaviyo, rose approximately 2.9% by Thursday's close. They went public at $36.75 on Wednesday, surpassing their offering price of $30 per share. KVYO closed the week at $33.39.
Instacart
Instacart shares dropped almost 11% one day after its Nasdaq debut. The grocery delivery company's stock opened at $42 on Tuesday, marking a 40% increase from its $30 offering price. It now currently trades at $29.95.
CASE STUDY: Advance Auto Parts -48%
On May 31st, AAP announced they'd be reducing their dividend along with the projected earnings for the year. The stock cratered and continued falling over the coming months. Since the event, it's down 48 percent.
The dividend reduction scenario is the canary in the coal mine - the warning that a company's business model is starting to fail and a major rework is needed, if it's possible. In a bearish environment, this bearish event does extremely well.
Investors can play the scenario in multiple ways - shorting the stock, buying put options, selling calls, or buying the dip in the hope of a turnaround. Those running put options would've realized a ~3X return on this one.
Upcoming Catalysts:
Notable Earnings
Tuesday
Costco (COST)
Cintas (CTAS)
TD Synnex (SNX)
Wednesday
Micron Technology (MU)
Thursday
Nike (NKE)
Accenture (ACN)