Macrosynthesis

Last Week

A significant drop in Michigan's consumer sentiment to a six-month low was influenced by rising inflation expectations for the year ahead. Higher than expected jobless claims also fueled a stock rally on hopes of a fed rate cut, as 231,000 people filed for unemployment benefits in the U.S. last month. But not so fast - a Federal Reserve official called for prudence in rate cuts, in light of unexpectedly strong inflation data.

Over the week, the S&P 500, Dow Jones, and Nasdaq posted gains of 1.3%, 1.9%, and 0.5%, respectively. Sector-wise, Health Services led with a 3.68% increase, followed by Utilities at 3.33%, and Producer Manufacturing, which rose by 2.95%. Process Industries, Commercial Services, and Non-Energy Minerals also saw gains of 2.39%, 2.30%, and 2.26% respectively, while Consumer Non-Durables advanced by 2.05%, highlighting a broadly positive week across various sectors. Notably, Shopify shares slid -19% after forecasting revenue growth between 13-19%, a reduction from its average growth rate of 26 percent.

Government Surplus Rises?

In April 2024, the U.S. government's budget surplus grew to $210 billion, a 19% increase from the previous year, thanks to a rise in tax receipts from individuals and businesses. Over the first half of the fiscal year, the deficit shrank by 8% to $855 billion as receipts climbed by 10%. Interest on the national debt grew significantly, marking a major expenditure after Social Security.

No Love for the Little Guy

A recent Bloomberg article revealed that a looming debt crisis threatens the U.S. stock market's riskiest small-cap stocks, with the Russell 2000 facing significant refinancing needs over the next five years. Despite attractive valuations, the economic uncertainty and rising interest rates make these stocks less appealing to investors. The Russell 2000's performance lags significantly behind the S&P 500, reflecting investor hesitance and a shift towards more stable, large-cap stocks.

Global Fragmentation

In a speech at Stanford University, IMF Deputy Managing Director Gita Gopinath warned of the fragmentation in global trade, intensified by geopolitical tensions leading to the formation of economic blocs aligned with the U.S., China, or remaining non-aligned.  Some nations increased gold reserves to mitigate sanction risks. For example, Russia's gold reserves have more than doubled within the last ten years. China's has also doubled and has been accelerating as of recently. This realignment also reflects shifting preferences towards regional currencies over the U.S. dollar in international transactions.

A new study on the use of AI in drug discovery shows promising trends, with AI-discovered molecules displaying high initial success rates, indicating potential shifts in the pharmaceutical industry's approach to research and development.

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The upcoming week is pivotal with key U.S. economic reports on retail sales and the consumer price index (CPI) anticipated, which could influence further rate cut expectations. Additionally, major earnings reports are expected from companies like Walmart, Home Depot, Alibaba, and Cisco. Google is also set to host its I/O Developer Conference, with expected announcements related to AI enhancements.

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Commodity Movers

Natural Gas

+5.14% (1W Chg)

+12.60% (1M Chg)

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Silver

+6.09% (1W Chg)

-1.09% (1M Chg)

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Gold

+2.54% (1W Chg)

+17.08% (YoY Chg)

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Potatoes

+53.21% (1W Chg)

+15.01% (1M Chg)

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Noteworthy Events    

Apple is Open to AI

Apple is poised to integrate OpenAI's ChatGPT into the iPhone as part of a wider initiative to enhance AI features on its devices, aiming for a reveal at the Worldwide Developers Conference in June 2024. The partnership would be to integrate Chat GPT into iOS 18. Discussions with Google about using its Gemini chatbot are ongoing but have not yet resulted in a deal.

Supernova

Novavax shares surged by 98.7% on May 10th, following an announcement of a multi-billion dollar partnership with Sanofi. Starting next year, they plan to market Novavax's Covid vaccine jointly and work on developing combination vaccines for both coronavirus and flu.

Talk to my AI First

Bumble's stock rose by 11.4% on May 9th after the company reported first-quarter earnings of 19 cents per share, surpassing the expected 7 cents. Revenue also exceeded forecasts, reaching $267.8 million against an anticipated $265.4 million. Bumble’s founder, Whitney Wolfe Herd, discussed the potential of using artificial intelligence to foster healthier and more equitable relationships in the future, suggesting that AI could play a significant role in how people connect and form relationships digitally.

A Tale of Two Cities

Uber Technologies experienced a 5.7% decline in stock value on May 7th after its first-quarter earnings, which revealed mixed results. While the company's revenue of $10.13 billion slightly exceeded the expected $10.11 billion, it posted a loss of 32 cents per share, contrary to the anticipated earnings of 23 cents per share. In contrast, Lyft's shares rose by 7.1% following a report of better-than-expected growth in the first quarter. Revenue reached $1.28 billion, surpassing the forecasted $1.16 billion, and total bookings also exceeded expectations.

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LEVEL 2 TRADE UPDATES

A SNIPPET OF WHAT WE SEND WEEKLY

AVAV - the drone maker's stock popped +10% last week following a report it received a large portion of a $500M order for its drones from the U.S. Defense Department. The stock rose to 190/share before pulling back. This has been one of our top picks this year - we recommended it at 121/share - as the U.S. government is waking up to the fact that drone wars are the future of warfare. Our near term exit target is 200/share, but if you're a longer term investor this is one stock to stay in until its acquired.

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RTX - we're up 39% on our July calls in just a few weeks and pretty close to our target exit price of $8. Equity holders are fine to keep holding to the target exit of 110.

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CASE STUDY: Using Dividend Increases for Long-term Investing

Stock: BMI

Returns: +118%

Badger Meter, Inc., established in 1905 and based in Milwaukee, Wisconsin, is a notable player in the flow measurement and control industry, delivering comprehensive solutions across the United States and internationally. The company specializes in producing and marketing a wide array of products including mechanical and static water meters, advanced radio technologies, and software services primarily for municipal water utilities.

Over a three-year period, the company demonstrated robust financial performance, with its stock soaring 118%—significantly outperforming the S&P 500's 28% rise in the same timeframe. This impressive growth was punctuated by three double digit dividend increases, underscoring management's adeptness in navigating challenging market conditions and affirming their operational success. These strategic dividend enhancements not only reflected the company's strong financial health but also acted as key catalysts in boosting investor confidence.

Using these events collectively as a research tool and ongoing monitoring tool for investments can significantly boost returns.

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Upcoming Catalysts:

EARNINGS

Monday

• StoneCo (STNE)
• Paysafe (PSFE)

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Tuesday

• Home Depot (HD)
• Alibaba (BABA)
• Jack In The Box (JACK)
• Prestige Consumer (PBH)

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Wednesday

• Cisco Systems (CSCO)
• Copa Holdings (CPA)

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Thursday

• Walmart (WMT)
• Deere (DE)

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Friday

• RBC Bearings (RBC)

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The LevelFields Team