Macrosynthesis

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The Week Ahead

The upcoming week will be driven by key economic data from the US, China, Mexico, Brazil, India, Russia, the UK, and Australia. Notably, investors will focus on inflation, with the US releasing data on consumer prices, producer prices, and import/export prices. Market participants will also closely monitor the University of Michigan's preliminary reading of consumer sentiment and inflation expectations for May.

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US inflation is expected to remain steady with a 0.4% monthly increase in April and an annual rate of 5%. Core inflation is projected to rise by 0.4% monthly, resulting in an annual rate easing to 5.5% from 5.6%. Producer prices are forecasted to grow by 0.3% monthly, potentially reducing the yearly rate to 2.5% from 2.7%.

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Internationally, China, Mexico, Brazil, India, and Russia are scheduled to release their own CPI figures. The UK will announce Q1 GDP growth data and the Bank of England's interest rate decision. China is set to publish external trade data, while Australia will report on consumer and business confidence.

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Lastly, the earnings season is wrapping up, with prominent companies such as PayPal, Airbnb, and Walt Disney releasing quarterly results.

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Don't Bank on It

In February of this year, an FRS report from the Federal Reserve Bank revealed that 722 banks reported unrealized losses exceeding 50% of capital. Thirty-one of these banks reported negative tangible equity levels.  

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C-suite members at public companies are discussing credit tightening more now during earnings calls than they did during the 2008 financial crisis (see chart above). The trends points to evidence that credit tightening at banks is beginning to make a difference in how executives run their companies.

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US Default?

Rating agencies are now talking about downgrading the United States' credit rating as the Treasury announced this week that they will buy back government debt next year for the first time in decades.

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A potential U.S. debt default would have widespread repercussions for financial markets, including increased volatility and investor hardship. Furthermore, a default would lead to higher interest rates, impacting the borrowing costs for businesses and consumers.

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Breakout Denied

Despite expectations that the Federal Reserve's pause in interest-rate hikes would boost the stock market, the S&P 500 and Dow Jones experienced declines of 0.8% and 1.2% respectively last week, while only the Nasdaq Composite finished higher with a 0.1% gain. The main reason for this decline can be attributed to the ongoing collapse of bank stocks, with the SPDR S&P Bank ETF dropping -8.1%.

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High-interest rates have put pressure on banks as depositors seek higher-yielding alternatives. Additionally, the Fed's plan to maintain high rates offers little help to the situation.

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We discuss the clear winner in all of this in our Level 2 weekly analysis.

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Last Week's Top Events

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Noteworthy Events

This Week's Recap

In Friday's trading session, the Dow Jones Industrial Average closed 540 points higher, while the S&P 500 and Nasdaq 100 indexes rose 1.8% and 2.2%, respectively. These gains were primarily driven by a strong rebound in regional banks, a better-than-expected jobs report that alleviated concerns of an impending recession, and better than expected earnings results.

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Two regional banks, PacWest and Western Alliance, led the bank sector's gains Friday by surging 81.7% and 49.3% after a JPMorgan upgrade. In a recent note, JPMorgan stated that Western Alliance, Zions Bancorp, and Comerica appear "substantially mispriced" due to short-selling activity. This has contributed to the overall bullish sentiment in the financial sector.

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In addition, investors welcomed strong earnings from Apple, pushing its stock price up by 4.7%. This further fueled market optimism and helped propel the broader market indices higher.

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On the economic front, the US nonfarm payrolls and wage growth accelerated more than expected in April, indicating that the US economy remains robust. This data challenges the expectation that the Federal Reserve would end its rate-hike cycle, suggesting that the economy could withstand further tightening.

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Despite the strong session on Friday, the Dow and S&P 500 posted weekly losses of 1.5% and 0.9%, respectively. The Nasdaq, however, managed to gain 0.1% and hit its 37-week high.

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Market bears growled that we've reached the peak of the latest bear market rally, and that stocks would retreat in May.

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Central Bank Digital Accountability Currency

On May 2nd, the Texas House committee passed a bill to create 100% reserve gold and silver-backed transactional currencies. This legislation, introduced by Rep. Mark Dorazio (R), aims to establish gold and silver as legal tender and facilitate the issuance of digital currencies fully backed by gold and silver. If enacted, the bill could challenge the Federal Reserve's monopoly on money and offer an alternative to central bank digital currencies (CBDCs).

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Shopify Defies

Shares of Shopify jumped nearly +30% for week on event catalysts they beat earnings estimates and would continue improving profits by firing 20% of their workforce.

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Eli Lily announced positive results of its Alzheimer's drug, sending the stock up +7% on the event. The drug company's stock is up almost 50% over the past year, as investors expect big things from its obesity and Alzheimer's therapies.

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J&J Spinoff

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Kenvue (KVUE)

Johnson & Johnson spun off its consumer health unit in a new IPO last week.  The company, Kenvue (KVUE), includes well-known brands like Band-Aid, Neutrogena, Listerine, and Tylenol. The IPO starts trading Friday.

The spinoff started trading Thursday just under our target entry price of $26/share and rose 3% over the week. It's now the world’s largest pure-play consumer health company by revenue with $15.1 billion in net sales in 2021. Revenue is expected to grow 3-4% annually and consistently.

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CASE STUDY: SHOP Layoffs

Thursday morning, Shopify announced plans to layoff around 20% of its workers while beating earnings estimates.

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LevelFields users were alerted to the Mass Layoffs announcement Thursday morning, which resulted in a  +19% 2D return in the SHOP share price from the open.

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Turn on alerts for the scenario and avoid missing out.

Upcoming Catalysts:

Notable Earnings

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Monday

• PayPal Holdings (PYPL)
• Devon Energy (DVN)
• BioNTech (BNTX)
• KKR (KKR)
• Lucid Group (LCID)
• Plug Power (PLUG)
• Six Flags (SIX)
• Tyson Foods (TSN)
• Western Digital (WDC)

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Tuesday

• Airbnb (ABNB)
• Allbirds (BIRD)
• CarGurus (CARG)
• Clean Energy Fuels (CLNE)
• Blink Charging (BLNK)
• DigitalOcean (DOCN)
• Duolingo (DUOL)
• Fox Corp (FOXA)
• H&R Block (HRB)

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Wednesday

• Walt Disney (DIS)
• Beyond Meat (BYND)
• Corsair Gaming (CRSR)
• Li Auto (LI)
• GoodRX (GDRX)
• Roblox (RBLX)

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Thursday

• JD.Com (JD)
• U.S Foods (USFD)
• Fiverr (FVRR)
• Krispey Kreme (DNUT)
• Nio (NIO)

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Economic Reports

Wednesday

• U.S CPI

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Thursday

• U.S PPI
• Jobless Claims

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Friday

• U.S Import Price Index

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Level 2 Trades Preview

A shameless self-promotion of our recent work.

Celsius (CELH)

Celsius (CELH) - a healthy energy drink which recently inked a huge distribution deal with Pepsi. The company is growing revenues 100% y/y and has an earnings announcement coming May 8th.  As predicted in last week's L2 alerts, shares rose in advance of its earnings release (+8%).

NuBank (NU)

Shares of digital bank, NuBank, are on the rise (+5.6%). The stock got a boost thanks to press surrounding the Berkshire Hathaway investor day. There were many articles that noted NuBank to be one the the few holdings of cash-heavy Berkshire Hathaway.  We flagged the stock in November for Level 2 members when it was trading around $4/share.

Gold

Our GLD calls are up 12% just a few weeks after recommending them as a hedge against crises. We are expecting more gains as the banking crisis continues to unfold.

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

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The LevelFields Team