Close But No Cigar

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That's the mixed message Fed Chair Jerome Powell sent markets last week which caused massive intraday swings in the market indexes. Investors tried to make sense of a Fed press release for its .75% interest rate hike last week which signaled the central bank would take a more cautious approach to future rate hikes paired with a press conference where Powell made clear higher rates were likely coming soon. It appears the Fed was attempting to note they were aware of their "cumulative impact" on the economy and that they were not insulated from seeing the wreckage they are causing, but also noted they had a job to do in slowing inflation that was not yet done.  

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The more aggressive tone of the press conference reversed market celebrations over the weaker tone of the press release, and threw cold water on the bear market rally for those expecting the Fed to signal they would ease off the throttle of their rate increase.

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New economic data was also mixed, as the unemployment rate finally went up (good for markets, bad for people) while the U.S. economy added more jobs than expected in October.  

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What does all this mean? It's likely we're heading towards 5% Fed fund rates, but at a slower pace from here. The high rates will chill the housing market, send home prices down, and continue to put downward pressure on valuations for companies needing to borrow money.

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It also means a strong dollar, which causes problems for international companies that lose money in exchange rates. For now, the playbook remains investing in companies that mostly do business in the U.S.

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The mass layoffs in the tech sector reflect the growing weakness in the economy and concerns about cash flow management. Stripe, a once $95B payment processor powering software companies and ecommerce, announced they were laying off 14% of the workforce last week. Lyft, Morgan Stanley, Intel, Upstart, and Zillow have all recently announced major layoffs as well.

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Apple, one of the best performing megacap tech companies this year and a bellwhether for the global economy, implemented a hiring freeze and is reportedly reviewing all budgets for opportunities to cut costs. Amazon and Microsoft have done the same, indicating that a global decline in demand is imminent, making investing in broad indexes unlikely to bring returns. But trading events and individual stocks can, so let's discuss those.

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Energy On Fire

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Previous newsletters and alerts noted that Arch Resources (ARCH) was a hot stock, moving from $133/share to $165/share in two weeks, following a big earnings beat and announcement of a near $11/share dividend coming soon.  We shared exactly how we’re trading this for Level 2 members.  Their competitor, ARLP, is also doing well, announcing record revenues and dividend increases last week.

EOG Resources announced a $1.50 special dividend last week and a 10% dividend increase following a strong earnings report showing its quarterly revenues and earnings increased 58% and 74%, respectively, over the previous year. The oil and gas producer's stock was up 6% last week and 33% over the past three months.

Enerplus Corp. (ERF) stock rose 6% following a solid earnings report and an announcement it would increase its dividend 10%. The company doubled cash flow from 2021 and is returning 60% of its free cash flow to shareholders. As revenues and earnings continue to do well, it will continue buying back shares and paying dividends.

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ADNT Up 14% On Buyback

Automative seat maker Adient announced a 17% stock buyback and solid earnings, sending the stock flying up +14% on the news and back into positive terroritory for the year. The company issued a rosey outlook for 2023, despite concerns that rising rates will decrease demand for cars.

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Big Oil is Big Again

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We sent the following notice out last week to Level 2 members. COP rose $7 after we sent it, before settling up $6.

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We're buying shares of Conoco COP at market price. They increased earnings 90%, announced a 20B buyback, increased their dividend to about 4%, and announced an additional special dividend of 70 cents per share for those who own the stock through Dec 27th. With the market as bad as it is, and energy prices likely to rise over the short term until economic activity really slows, it doesn't get much better than COP.

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For protection from volatility, we may sell covered calls if the the options values increase substantially today.

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$135 options calls for December rose to a near $9/share premium. That's brings to total gain on the $128 entry price to $13/share (10%) in a few days. That's $1300 for those who bought 100 shares.

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Banking on the Pet Market?

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Morgan Stanley is bullish on bulldogs and other pets. The pet market, according to the bank's new research report, will grow 8% a year annually.

It seems that COVID was at least good for dogs and cats. Households adopted 5 million more furry friends over the past few years, largely due to people working from home and businesses becoming increasingly accomodative to pets.

“An outcome in line with this expectation would increase total spending in the industry by 134% over the next decade, from $118 billion in 2019 to $277 billion by 2030,” says Simeon Gutman, an equity analyst covering hardline, broadline and food retail at Morgan Stanley.

They aren't the only ones calling on the dogs - activist investor Jana Partners revealed a large position in Freshpet in September 2022, as noted by LevelFields alerts, and the stock has steadily risen +40% since then.

We'll dive into the industry more in this week's Level 2 newsletter to find the pet companies with the biggest catalysts behind them.

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Knowledge Corner

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Using LevelFields Data to Spot Trends

In the Latest Events section of the Dashboard, you can filter the data to reveal sector trends. The easiest way is to filter by one or two scenario types, such as dividend increases and buybacks. Then, filter by sector, one at a time. Doing so will reveal the sectors giving the most money back to shareholders. This is a solid indicator of the sectors that doing well now, and likely will continue to do well in the future.

Management teams willing to give a lot of operating capital back to shareholders are less worried about the impact of the future on their companies than leaders who are cutting staff, budgets, and dividends. Since companies have the best view on forward-looking revenues and earnings, sometime all you need to do is watch the event trends to spot the next mini-bull market.

Key Earnings Announcements This Week

Nov 7:

• FANG (est: $6.36)
• Oil and Natural Gas
• LYFT  (est: $0.08)
• Car Sharing
• TRIP (est: $0.38)
• Travel Booking
• GRPN (est:-$0.44)
• Consumer Services

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Nov 8:

• DIS (est: $0.57)
• Entertainment company's guidance on its parks business will help predict outcome for travel in 2023
• BLNK (est:-$0.47)
• EV Charging
• BLDR (est: $3.30)
• Building Materials

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Nov 9:

• PSX - oil refiner is approaching 52wk high
• RIVN - Rivian looking for redemption and ease of supply chain issues and recalls following one of the worst post-IPO performanceds in decades
• BYND (est: -$1.14)
• Alternative Meat company will talk up its new fake steaks and earnings outlook
• CGC (est: -$0.26)
• Pot stock valuation has been popped -75%
• HGV (est: $0.77)
• Hotels

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Nov 10:

• AZN (est: $1.52)
• Strongly coming off support lines with a deep bench of drugs in the pipeline
• BZH (est: $2.06)
• Home Builders getting hammered
• NIO (est: -$1.31)
• Chinese Electric Vehicle maker is already down -72% from its high
• RL (est: $2.07)
• Fashion

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Nov 11:

• AQN (est: $0.16)
• Power and Utilities

Economic Reports Due:

• Monday
• U.S Consumer Credit
• Tuesday
• Election Day
• Wednesday
• Richmond Fed President speaks on outlook
• Thursday
• Fed Gov. Christopher Waller speaks on central bank digital currencies
• U.S Consumer price index
• Initial jobless claims
• Friday
• Veterans Day holiday

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The LevelFields Team