Macrosynthesis
TLDR
- How Japan tanked tech stocks
- Jobs report turned markets around last week
- Still more pain to come to markets, possibly
- Sweetgreen, Eli Lilly, Oppfi exceed expectations
- Dutch Bros to brew less coffee, stock tanks
- Lyft, AirBnB issue weak guidance
Last Week's Market Turbulence Started in Japan
On Sunday, August 4th, futures opened with a violent downturn. Bitcoin, along with other major indices, plummeted. The selloff was particularly severe in Japan, where the Nikkei 225 fell over 12%, marking its worst single-day decline since 1987. Global stock markets experienced significant downturns, with major U.S. indices, including the Dow Jones, S&P 500, and Nasdaq, dropping more than 4% in early trading.
Market volatility, driven by fears of a slowing U.S. economy and concerns over the Federal Reserve’s response, further fueled widespread selling of megacap tech stocks. The VIX - a measure of market fear - saw its largest intraday percentage gain since COVID started and Level 2 investors earned 100% returns from their VIX positions heading into the week. Although some blamed recession indicators for the sharp decline in equity prices, the correlation between the market pullback and the Japanese Yen was more evident.
Weak labor market data and uneven corporate earnings further contributed to the selloff. Additionally, U.S. job growth slowed for the third month, and the unemployment rate rose to 4.3%.
What Turned Markets Around Last Week?
The bounce back in equity prices was pronounced after the Bank of Japan announced they would hold off on their rate hike until market volatility settled. A better than expected Jobs report showed the unemployment claims falling from the previous week, calming the nerves of those crying recession early. And the market rallied in response. As a result, Japanese and global stocks rebounded. For the week the S&P 500 and Nasdaq ended flat.
Why Did the Stock Market Sell Off Last Week? The Japan Carry Trade Explained
For 30 years, Japan maintained a 0% interest rate on its currency, allowing investors to borrow yen at no cost and invest globally in assets like U.S. T-Bills and the Nasdaq. Recently, the Bank of Japan (BOJ) increased interest rates by 0.25%, a nearly unprecedented move. This rate hike has caused investors to worry that their previously free capital is no longer free, prompting them to unwind trades and repatriate funds back to Japan. The estimated scale of these trades is over $500 billion, highlighting the significant impact of the yen's interest rate on global financial markets. This situation escalated earlier this week until the BOJ announced that they would be holding off on further rate hikes. There's a detailed description in our YouTube video.
Will Stocks Continue to Decline Due to Japanese Carry Trade?
The short answer is: maybe. There have been different estimates of how much of this leveraged trade is left to unwind. Some say 25% while others think we're only half done. Since no investor wants to tank their own returns, we're likely see some calm creep back in just longer enough for markets to recover some losses before the next drawdown occurs. Any additional event - weather, war, bad earnings - could trigger the selloff before then.
Is the Market Finally "Broadening" Beyond Big Tech?
The long-awaited profit growth in S&P 500 companies outside the "Magnificent Seven" tech giants is somewhat materializing, marking their first increase since Q4 2022. While earnings show strength, AI-related stocks underperformed lofty expectations, and revenue misses were more common. Despite this, overall executive optimism remains high, with positive earnings guidance expected for Q3 2024.
Industrial and Energy Stocks Outperformed Last Week
Industrials and Energy both increased by +1.2%, while Utilities and Consumer Discretionary stocks fell by nearly -1%. The Russell 2000 declined by over -1.5%, whereas the Russell 1000 Value rose by +2.53%.
Next Week
In the U.S., attention will be on the CPI and PPI reports, along with speeches from Federal Reserve officials. Key data releases include retail sales, consumer confidence, housing starts, building permits, and industrial production. The U.K. will see data on unemployment, inflation, GDP growth, and retail sales. China will report on loans, house prices, retail sales, and unemployment. Additionally, Q2 GDP growth rates will be announced for Japan, the Netherlands, Poland, and Thailand.
Commodity Movers
Natural Gas
+8.95% (1W Chg)
-7.99% (1M Chg)
Silver
-3.90% (1W Chg)
-11.04% (1M Chg)
Cocoa
+20.63% (1W Chg)
+12.37% (1M Chg)
Potatoes
-11.64% (1W Chg)
-27.2% (1M Chg)
Noteworthy Events
AI Stock and Options Trading Summary
Amid the turbulence of the market selloff, the second-quarter earnings season pushed forward with significant developments. Key performances included Uber's (UBER) 19% year-over-year growth in gross bookings, Caterpillar's (CAT) raised profit forecast for the year, Airbnb's (ABNB) disappointing guidance for the current quarter, and Walt Disney's (DIS) streaming services posted a quarterly profit for the first time. Google was told it violated antitrust laws by paying Apple and Samsung to make Google the default search on the phones, opening up the possibility of penalties following Alphabet's appeal. The news didn't rattle Google stock and options traders and the stock price remained the same. Meanwhile, Cisco and Dodge parent company Stellantis laid off thousands of workers, as noted by LevelFields AI stock alerts.
Why Dutch Brothers Coffee Stock Dropped 20% on Slowing Expansion Plans
Dutch Bros (BROS) shares dropped 20% last week after the company reported strong revenue growth but indicated a slowdown in new store openings for 2024. Despite posting 30% revenue growth in the second quarter, driven by new openings and same-store sales growth, the company guided for the low end of its expected new shop openings. The spooked stock and options traders, who dumped the stock on fears their growth days were over. Dutch Bros revenue reached $324.92 million. Net income saw a significant boost, rising 334% year-over-year to $11.9 million. The company's diluted earnings per share (EPS) climbed to $0.12, reflecting a 140% improvement and forward P/E ratio of 72.
Sweetgreen's Stock is Sweet to Shareholders
Sweetgreen's stock surged +20% August 9th after reporting better-than-expected Q2 revenue of $184.6 million, a 21% increase from the previous year. The company improved same-store sales by 9% and reduced its net loss to $14.5 million. Management raised their fiscal year 2024 revenue and EBITDA guidance, reflecting strong performance.
Eli Lily Beats Earnings, Stock Rallies
Eli Lilly's shares surged over +9% August 8th after reporting Q2 earnings that far exceeded expectations, driven by strong sales of its diabetes drug Mounjaro and weight loss injection Zepbound. The company raised its full-year revenue guidance by $3 billion, expecting $45.4 to $46.6 billion in revenue. Eli Lilly also increased its adjusted earnings forecast to $16.10 to $16.60 per share. The stock is trading at a P/E of 110 in anticipation of massive earnings growth.
Why Was Fortinet Stock Up Last Week?
Fortinet shares jumped 25% August 7th, leading the S&P 500, after the company reported strong Q2 results and positive guidance. The cybersecurity firm posted adjusted earnings of 57 cents per share on $1.43 billion in revenue, surpassing analysts' expectations of 41 cents per share on $1.40 billion in revenue.
Lyft Issues Weak Guidance Citing Slower Bookings
Lyft reported Q2 earnings with a 10% increase in active riders and a 17% surge in gross bookings. The company introduced a price lock feature and generated $256.4 million in free cash flow. Despite these gains, Lyft's shares dropped over -17% after they lowered expected profits below analyst estimates.
Customers Bank Gets Flagged by Government As Deficient in Risk Management
Customers Bancorp's (CUBI) stock plunged 16% after the Federal Reserve issued an enforcement action, citing significant deficiencies in the bank's risk management and compliance related to anti-money laundering and digital asset services. The bank must submit a corrective plan within 60 days, addressing these concerns and improving oversight.
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OppFi was Up 45% Last Week and +76% Since It's Special Dividend
Lending tech firm, OppFi, announced earnings per share of 29 cents recently, blowing past the 16 cent analyst estimate. While revenue was up a few percent, earnings grew nearly 50% year over year. They raised revenue guidance to $520M and earnings estimates to 75 cents for 2024, equating to a forward P/E ratio of just 6. Analysts raised their target price to $6/share (it's at 4.50/share).
How would we have known about this stock before the big move?
That's easy - from the special dividend it announced April 9th. The announcement showed leadership's faith in their cash flow which was foreshadowing of its coming earnings beat. Companies doing poorly don't give away cash. We flagged this event for our Level 2 subscribers when it happened.
The takeaway: Not every event on LevelFields is a day trade. Many are there as indicators of longer term trends. The special dividend scenario is one of them.
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NOTE: The graph above depicts the sum of all gains made by the trade setups we send each week to our Level 2 subscribers since the program was started in late 2022. We're approaching an extraordinary 4,000% return on these trades.
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