Macrosynthesis

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Get Ya Money Up

The dollar index approached 103.2, heading for its fifth consecutive weekly rise after Federal Reserve minutes highlighted inflation concerns and potential policy tightening. However, some officials warned against excessive rate hikes. Despite a decline in U.S. unemployment claims indicating a robust labor market, the dollar weakened against the sterling due to persistent UK inflation.

Yuan Tumbles

The offshore Chinese yuan weakened past 7.30 per dollar due to unfavorable economic data and another interest rate cut by the central bank of China. In July, key indicators like industrial production, retail sales, and fixed asset investment in China underperformed expectations, and unemployment rose. Furthermore, new bank loans in China decreased by 89% from June to July, heightening economic concerns. On August 15, the People’s Bank of China reduced its one-year lending rate by 15 basis points. Additionally, a property sector crisis involving major developers added to the yuan's downward pressure.

China Flooded as Property Sector Sounds Alarm

In 2017, Xi Jinping proposed the “Xiong’an New Area,” an eco-friendly hub south of Beijing. Despite its ambition, concerns arose due to its flood-prone location. After record floods in 2023, these concerns intensified, although Xiong’an itself was mostly unaffected. There's speculation about flood decisions being influenced to protect this project.

The flood is not all that is causing analysts to worry. Since 2021's debt crisis, 40% of Chinese home sales companies - mainly private developers - have defaulted. This has led to unfinished homes, unpaid suppliers, and a decline in bond and share values. Just this week, China's property  giant, Evergrande, filed for Bankruptcy protection in New York.

The crisis threatens China's property market and overall economy. S&P Global Rating warned of potential sales decline, and Country Garden's financial trouble further underscores the economic challenges, given its vast reach across China.

Oil Sinks

Oil prices fell over 2% this week, breaking a seven-week rise, due to concerns over China's economic downturn and potential US rate hikes. Despite China's unexpected rate cut, worries intensified about its economy, especially amidst its property sector crisis. Meanwhile, the Federal Reserve indicated potential prolonged restrictive policies, while OPEC+ cuts by major suppliers like Saudi Arabia and Russia made investors wary.

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Last Week's Recap

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On Friday, the Dow Jones slightly rose, ending a four-session loss streak, while the S&P 500 remained unchanged and the Nasdaq dropped by 0.2% due to concerns about prolonged high interest rates and new credit risks in China.

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During the ongoing earnings season, which is coming to an end, Keysight Technologies' stock plummeted by 13.7% after underwhelming quarterly results. Similarly, Deere and Estee Lauder saw decreases of 5.3% and 3.3% following disappointing reports. Conversely, Applied Materials and Ross Stores enjoyed upticks of 3.7% and 5% after positive earnings announcements.

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In other developments, Evergrande declared US bankruptcy following profit alerts from state developers and Country Garden's bond default, leading to a rise in Chinese private credit costs. For the week, the Dow Jones shed 2%, and both the S&P 500 and Nasdaq recorded their third consecutive week of over 2% losses.

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Last Week's Top Events

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Noteworthy Events    

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Xpeng

The electric car manufacturer's stock fell 5% Friday following a Q2 loss of 2.8 billion yuan, surpassing the anticipated 2.13 billion yuan loss predicted analysts. Nonetheless, the company met revenue expectations, reporting 5.06 billion yuan.

KeySight

Keysight shares dropped 12% Friday due to a subdued fiscal fourth-quarter projection. The electronic design firm predicted adjusted earnings per share between $1.83 and $1.89, with revenue ranging from $1.29 billion to $1.31 billion.

Ross Stores

Ross Stores' stock rose 6% Friday after reporting second-quarter earnings of $1.32 per share, surpassing the analysts' expectation of $1.16.

Deere

Farm equipment maker John Deere (DE) shares dropped over 3% despite reporting strong fiscal third quarter results, with earnings of $10.20 per share on revenue of $15.8 billion.

Cisco

Cisco, the major computer networking company, saw its shares rise by 2.2% after it reported better-than-expected earnings on Wednesday. The adjusted earnings per share for its fiscal fourth quarter were $1.14, surpassing the analysts' expectation of $1.06.

Hawaii Fire Hits Electric Company

Shares of Hawaiian Electric (HE) slipped -31% last week on news the company might be responsible for starting the wild fires that ravaged the island. Shares are down -65% in the past month.

The Next Big Short?

This week, reports revealed that Michael Burry's Scion Capital bought $890M worth of SPY stock option putts and $740M worth of QQQ option putts on a bet the market will decline. The big bets represent 93% of the fund's portfolio. Burry has been bearish for the past two years straight. He was correct for one of them.

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LEVEL 2 TRADE UPDATES

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A peak behind the curtain

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‍YANG - we are up +34% on our YANG (leveraged China short) Jan 2024 calls at the $10 strike price in just a few days.

C3.AI (AI) - the only reason this stock had been rising this year is because it has AI in its name. The company's revenues have been flat year over year, as have its earnings. When ChatGPT was released, the resulting AI mania led to the stock being bought up on the hope its AI ambitions are realized. Now that we’re in the midst of a market pullback, the stock’s glam is wearing off. We gave the idea to short the stock at the end of June at 37.41/share and exit when the stock fell below 30. It hit 28.50 last week (+22% gain) and it’s very likely to see 24/share.

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CPG - the stock had a nice +18% run but has topped out.

CASE STUDY: DINO Moves +5%

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HF Sinclair (DINO) announced a $1 billion buyback program. Looking at the event impact a day later, we see the price ended up just 0.76%. On a quick view, it seems the event had little impact on the stock price. But this assessment would be incorrect.

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The alert of the event arrived at 7am August 16th. At market open the stock rocketed up, climbing +5% over the 90 minutes that followed. And as is often the case, the stock began selling off as investors took gains and the broader market began reacting to macroeconomic news.

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So what’s the lesson here?

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The event created opportunity for gains - more opportunity than is reflected in the 1-day price move.  Analyzing gains from an entry to day high price would show the events on the platform as generating larger returns. We analyzed this already here.

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Often times, when events occur premarket, the price peaks in the late morning. It may retrace late in the day or in the days that follows, however, as was the case with DINO.

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Upcoming Catalysts:

Notable Earnings

Monday

• Zoom Video Communications (ZM)
• Fabrinet (FN)

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Tuesday

• Toll Brothers (TOL)
• Macy's (M)
• Dick's Sporting Goods (DKS)
• Medtronic (MDT)

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Wednesday

• NVIDIA (NVDA)
• Dycom (DY)
• Analog Devices (ADI)
• Snowflake (SNOW)

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Thursday

• Dollar Tree (DLTR)
• Intuit (INTU)
• Ulta Beauty (ULTA)
• Royal Bank of Canada (RY)

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This is not financial advice. All information represent opinions only for informational purposes.

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The LevelFields Team