Macrodosing

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A hotter than expected inflation report threw more cold water on the 2023 stock rally, sending the indexes down for the week.

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The core inflation rate rose 0.6% in January from December, up from a 0.4% rise the previous month. Annualized, this equates to a 4.7% increase year over year. In December, the same measurement read 4.6% year-over-year increase.

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Put plainly, inflation rose in January, leaving the market to reprice the likelihood the Federal Reserve will hike rates more and longer than expected to cool a hot economy in the U.S.

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For low profit companies, this means the net present value of future cash flows gets discounted, making them worth less today. The Ark Innovation ETF - a collection of such stock - was down -8% last week on the news.

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Bear Crawl

In other good/bad news, consumer spending rose 1.8% In January, breaking a trend of diminishing consumer spending. The greatest increase in spending was for autos and auto parts, as shown in the table above.

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The bears marched their spokespeople across the news to declare the recent rally a "head fake," and predict a downward slide from here.  We discuss how far it can go in our Level 2 Weekly Analysis.

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Return of the Bond Eye

Weighing on the market's bull run is growing competition for dollar bills from T- bills and bonds. Why risk money in stocks when bonds are paying over 5% annually, risk free (many money managers are asking)? And as they allocate capital to bonds, that leaves less money going into stocks.

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Lower demand = lower prices, until the Fed changes course or reaches the end of their hiking.

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The Politics of War

An uncomfortable series of political moves is setting the stage for long-term geopolitical tensions and alliances. Russia pulled out of a nuclear arms treaty with the U.S. which limited the number of nuclear weapons each country holds. There's already enough to kill most of us - now there's no ceiling for making more.

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The move was retaliation for the U.S. sending $40B in weapons to Ukraine to kill Russian soldiers.

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If you haven't seen the movie, it's a good time to watch Charlie Wilson's War as we're replaying the 1980s events in Afghanistan in Ukraine.

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Following the U.S. popping Chinese spy balloons over U.S. and Canadian soil with Raytheon rockets, the Chinese Air Force flew a fighter jet across the nose of a U.S. surveillance plane in the South China Sea, in an effort to turn the plane away from self-proclaimed Chinese waters.

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The Chinese navy has been massively building up its presence in the area over many years. In response, the U.S. is increasing its military bases in the Philippines and supplying Taiwan with weapons and fighter jets.

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Also disturbing last week was news that China may start selling weapons and ammo to Russia for use against Ukraine.

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China has shown itself to be more aligned with its own interests than world peace, as the nation continues buying more oil and gas from Russia despite pleas from Europe to cut off Russia's primary means for funding their unprovoked attack on Ukraine.

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The events suggest a future where perspective and power is divided between two major alliances: China-Russia vs NATO. It also suggests there will may more volatility ahead for Chinese equities.

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Does the House Always Win?

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Investors will gain further insight into the state of the housing market as pending home sales data is released early Monday. We issued some guidance on how to play it and the sector in our Level 2 weekly analysis.

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Noteworthy Events

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The Race Continues

On February 21st, Russian President Putin announced that Russia is suspending its participation in the strategic offensive arms treaty. This comes as President Biden visited Ukraine and announced additional funding and support for their war effort against Russia. These geopolitical developments indicate a growing demand for advanced weapons, which could benefit government contractors such as Lockheed Martin.

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Lockheed Martin recently secured an additional contract worth $1.1B to integrate hypersonic strike capability onto surface ships and provide launcher systems, weapon control, missile components, and platform integration systems. In addition, Lockheed Martin Space was awarded $1.18B due to a modification in a previous contract. These contract wins are positive indicators of the company's growth prospects.

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Walmart Reports Strong Earnings Amid Consumer Pressure

On February 21, Walmart, the renowned retail giant for its discounted products, reported better-than-expected earnings and revenue for the three-month period. Nevertheless, during the earnings call, Walmart's Chief Financial Officer, John David Rainey, expressed caution about the uncertain macro environment and the "considerable pressure on the consumer" for the upcoming fiscal year.

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According to a report by LendingClub, 64% of Americans are currently living paycheck to paycheck, indicating a significant increase of 61% from one year ago. This drastic rise highlights the need for consumers to re-evaluate their spending habits as they start the new year.

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Despite the positive news, WMT's stock price fell nearly 2% in the past week.

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Chemical Disaster in Ohio  

A federal class action lawsuit was filed on February 20, 2023, in the U.S. District Court for the Northern District of Ohio against Norfolk Southern. The lawsuit was filed on behalf of certain named individual local residents and business owners, as well as a class of all others similarly affected, over the February 3, 2023 derailment and toxic spill in East Palestine, Ohio.

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With several class action lawsuits being filed, federal and state authorities are focusing on the company's liability. Insurance companies are also likely to demand that the train company bear hefty costs, according to a legal expert who spoke to Business Insider.

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On Tuesday, the U.S. Environmental Protection Agency held Norfolk Southern responsible for the cleanup of the chemicals and the derailment site. The company could be charged $70,000 per day if the cleanup - which will cost up to a billion dollars - is insufficient.

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During a press conference on Thursday, NTSB chief Jennifer Homendy stated, "We call things accidents. There is no accident. Every single event we investigate is preventable." She referred to the derailment as "100% preventable."

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Norfolk Southern has agreed to comply with regulators and has donated $25,000 to the town. Residents within a one-mile radius are eligible to receive a $1,000 "convenience" check from the company. Although the company has released its proposed remediation plan, it is likely to face lawsuits from states, locals, and insurers.

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NSC is down -7.5% in the last month with little sign of slowing the downward trend.

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KNOWLEDGE CORNER: THE TREND IS YOUR FRIEND

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We've setup the scenarios to find event catalysts. But it's important to know there are other events happening that could get in the way of the stock price moving in the expected direction. Last week, we talked about earnings announcements. This week, we'll talk about the market indexes and futures.

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In the same way that really crap weather puts us all in a bad mood, a bad day for the stock market in general can affect the impact of events on individual companies. If the market is in a selloff from bad economic news like we got last week, the price action from events will be off. Sentiment on those days is gloomy and bullish trade volume driving bullish events will be lower.  

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This is why we add win rate for each scenario - so you can be aware of the confounding events.

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If you're trading the events and not using them to invest longer term, look at the futures for the market indexes prior to trading. If they are way down, that will put a damper on bullish scenarios unless the market sentiment reverses during the day. If there is a selloff, it's best to use bearish scenarios to ride the negative trend.  

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This is very much a look before your leap warning. It doesn't take long, but it can be costly to forget to go with the market trend.

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Every brokerage platform should show the futures for the S&P 500. If they don't, it's on Yahoo Finance's home page.

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CASE STUDY: Fiserv Buyback

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Fiserv, Inc., together with its subsidiaries, provides payment and financial services technology worldwide. The company operates through Acceptance, Fintech, and Payments segments.  FSRV (pictured above) announced a the authorization of a large (75 million shares) buyback last week and shares popped in response.

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LevelFields AI sent an alert at 830am, February 23th. The stock rose 3% on the event, with most of the move occurring late in the day after 1pm.

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As is usually the case, volume was low premarket and jumped at the open following a short downturn in price.

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The stock opened at 114.71 per share and rose from there to a day high of 117 per share at 3:30pm ET. The gain from the alert was +3%.

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Fiserv got an analyst upgrade on the news, with a price target of 154/share.

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Key Earnings Announcements This Week

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February 27

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LendingTree (TREE)  

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Other Notable Earnings:

• Li Auto (LI)
• Groupon (GRPN)
• Zoom (ZM)
• Workday (WDAY)

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February 28

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Target (TGT)

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Other Notable Earnings:

• 3D Systems (DDD)
• Advance Auto Parts (AAP)
• Celsius (CELH)
• Blink Charging (BLNK)
• Clean Energy Fuels (CLNE)
• Duolingo (DUOL)
• First Solar (FSLR)
• GoodRx (GDRX)
• Virgin Galactic (SPCE)
• Rivian Automotive (RIVN)
• Bulder's First (BLDR)

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March 1

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Dollar Tree

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Other Notable Earnings:

• Snowflake (SNOW)
• Jack In The Box (JACK)
• Salesforce (CRM)
• Splunk (SPLK)
• Smith & Wesson Brands (SWBI)

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March 2

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Broadcom (AVGO)    

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Other Notable Earnings:

• Anheuser-Busch InBev (BUD)
• C3.AI (AI)
• Dell (DELL)

Economic Reports:

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2/28

• Consumer Confidence
• Housing Price Index

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3/1

• Auto Sales

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3/2

• Jobless Claims
• Productivity Rate (Q4)
• 3/3
• EU PPI
• Fed Bostic Speech

The LevelFields Team