Macrosynthesis

Last Week's Recap

That's a Wrap

U.S. stocks closed mixed on Friday, with the S&P 500 and Nasdaq 100 falling, ending a 6-day winning streak, while the Dow Jones rose slightly. Core PCE inflation slowed, aligning with forecasts. American Express surged 7.1% on strong revenue projections, and Capital One Financial gained 4.6% after robust Q4 revenue. However, Intel and Visa dropped due to disappointing outlooks, and Spirit Airlines plummeted 13.3% amid merger concerns. Next week, attention turns to the Fed's rate decision, employment data, and earnings from major companies. Globally, the Bank of England's policy decision and Q4 GDP data will be in focus.

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Inflation Cools?

In December 2023, U.S. core PCE prices, excluding food and energy, rose 0.2% monthly and 2.9% annually, below the 3% forecast and the lowest since February 2021, signaling continued disinflation. Overall PCE, including food and energy, matched expectations with a 0.2% monthly and 2.6% annual increase. Goods prices barely rose, while service prices stayed high at 3.9%.

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Consumer Still Spending More

In December 2023, U.S. personal spending grew by 0.7%, surpassing forecasts of 0.4% and following a revised 0.4% increase in November. The $133.9 billion rise in PCE was driven by a $75.6 billion increase in service spending and a $58.4 billion rise in goods spending. Key contributors included financial services, healthcare, recreation services, motor vehicles, prescription drugs, and gasoline. Real PCE, adjusted for inflation, matched November's 0.5% growth, with goods spending up 1.1% and services up 0.3%.

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Not to Burst the Bubble, But..

The recent PCE inflation data, in line with expectations, might prompt the Federal Reserve to consider a rate cut in March. However, such a move could be premature, as leading indicators suggest inflation might rise again later in the year. Wage growth, profit margins, and inflation in China, along with supply-chain pressures from attacks on freight carriers in the Suez Canal, indicate potential re-acceleration in prices.

A March rate cut, or any cut this year, may be a policy error, particularly as liquidity conditions worsen and government interest costs rise. The Fed is expected to cut rates, but likely won't meet the market's expectation of approximately 135 basis points reduction in 2024. This could lead to a repricing of stocks come March, as growth stocks would be subject to slightly lower valuations under the scenario where rates are not cut to this level.

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Border Crisis and Ukraine Talks

Bipartisan U.S. Senate talks on border security, crucial for further Ukraine aid, face challenges due to growing opposition from Republicans aligned with Trump. Negotiators are adjusting the legislation to appeal to Senate conservatives. Senate Democratic leader Schumer remains optimistic, while McConnell advocates combining border security with aid for Ukraine, Israel, and Taiwan.

The border deal is getting pressure from Trump, who wants Republicans to wait until he's in office to secure funding for the border out of fear of giving democrats a political win heading into elections.

The border bill would provide billions in funding to continue building a border wall, modernizing security in U.S. ports, increasing the number of border patrol agents, and altering laws and processing of applications for U.S. visas.  The holdup could put defense funding for U.S. allies (Ukraine, Israel) at risk, which would be a negative for defense stocks like Lockheed Martin and Raytheon.

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Commodity Movers

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Lean Hogs

+5.72% (1W Chg)

+7.05% (1M Chg)

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Urals Oil

+13.63% (1W Chg)

+20.55% (YoY Chg)

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Natural Gas

+5.66% (1D Chg)

+11.47% (1M Chg)

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Tea

+5.22% (1W Chg)

-16.03% (1M Chg)

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AI Stock Alerts Last Week & Performance

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U.S. Debt Growing Like Kudzu

The US government recently borrowed $47 billion in a single day, contributing to a $3 trillion increase in total US debt since the supposed resolution of the debt ceiling crisis in June 2023. Since October 1st, the government has been borrowing approximately $10 billion per day. What's concerning is that for the next 340 days, there is effectively no limit on the US debt ceiling. If borrowing continues at the current pace, the US could reach $37 trillion in total federal debt this year.

Net interest payments on this debt cost $659 billion in fiscal year 2023 - the second highest expense behind defense spending. A year prior, the annual interest cost was $184 billion less. Unfortunately, neither party seems able to control spending, as evidenced by the chart above, which shows the increase in federal debt by President. Both Republicans and Democrats have contributed to the current crisis.

The largest portion of U.S. Debt is actually owned by the U.S. via the Social Security program, as well as by U.S. banks and State Government. So a default by the U.S. in paying its debt would hurt the U.S. holders of that debt the most.

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Noteworthy Events    

Jet Blues

‍Spirit Airlines' stock dropped -13.4% Friday following JetBlue's announcement that their proposed $3.8 billion merger might be called off due to unfulfilled conditions. In contrast, JetBlue's shares saw a 2.3% increase.

All Aboard the American Express

American Express saw its shares surge by +7.1% Friday following the release of its full-year earnings forecast, which exceeded market predictions. The company expects its annual earnings to range from $12.65 to $13.15 per share. However, it's important to note that their fourth-quarter performance fell short of expectations, and the company set aside a large pile of money for expected credit card defaults.

Hit and a Miss

Tesla's stock fell -12.13% Thursday following a report of disappointing auto revenue and a forecast of slower growth in 2024. This led to a number of firms reducing their price targets for Tesla shares and adopting a more cautious stance on the company's short-term prospects.

Need a Life Line

Humana's stock dropped -11.69% Thursday following the company's announcement that rising medical costs are anticipated to impact its earnings negatively. The health insurer forecasts its adjusted earnings for 2024 to be around $16 per share, which is substantially lower than the $29.10 per share analysts had predicted.

Netflix Crushes It

Netflix shares surged by almost +11% Wednesday following their fourth-quarter earnings report, which exceeded revenue expectations and showcased significant subscriber growth. The company reported an addition of 13.1 million subscribers in the quarter, surpassing analyst projections of 256 million and reaching a total of 260.8 million members.

PayPal CEO Promises Big Changes

‍PayPal's stock dipped slightly following its "Innovation Day," where CEO Alex Chriss's promise to "shock the world" fell short of convincing investors that the new products would yield an imminent turnaround. They announced six AI-driven enhancements, including a faster checkout, a recommendation engine for shoppers, and Venmo updates.  The company processes payments for 25% of ecommerce sites, so there's still opportunities to deliver value and find cost efficiencies. But these announcements left investors wanting more.

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CASE STUDY: BAH +13.6%

Booz Allen Hamilton Corporation's (BAH) stock rose sharply Friday after reporting third-quarter earnings of $1.41 per share, surpassing estimates of $1.14 per share. The company's sales reached $2.57 billion, exceeding the expected $2.54 billion. Additionally, Booz Allen Hamilton increased its quarterly dividend and raised its FY24 guidance. As a result, shares surged by 13.6% to $147.33 after opening just below $138.80.

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The company specializes in providing management and technology consulting, analytics, engineering, digital, mission operations, and cyber solutions to various sectors in the United States.

The upward share price is a statistical reaction to the higher earnings, which came in 23% higher than expected. Likewise, if 1.41 is the new quarterly earnings, then four times that amount (four quarters) is $5.64 (the top range of their guidance). At a P/E of 25, the stock gets a valuation of $141/share. It's currently trading at 146.

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Upcoming Catalysts:

EARNINGS

Monday, January 29 - Graco (GGG), F5 (FFIV), Whirlpool (WHR), Nucore (NUE)

Tuesday, January 30 - Google (GOOGL), Microsoft (MSFT), Advanced Micro Devices (AMD), Electronic Arts (EA), HCA (HCA), Hubbell (HUBB), UPS, Pfizer (PFE)

Wednesday, Jan 31 - Align Technology (ALGN), Boeing (BA), Meritage Homes (MTH)

Thursday, Feb 1 - Amazon (AMZN), Apple (AAPL), Clorox (CLX), Quest Diagnostics (DGX), META

Friday, Feb 2 - Cigna (CI), AbbVie (ABBV)

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