Macrosynthesis  

Last Week's Recap

Striking Out

Oil stocks declined last week while oil prices rose after the U.S. and Britain announced they had carried out air strikes on Iran-backed militants in Yemen that have been disrupting trade in the Red Sea.

Houthi militants have been attacking container ships, forcing major shipping companies to divert their routes around South Africa, driving shipping costs up by 100%. Ocean freight carrier stocks have risen in response, with DAC rising and CMRE up 7% over the past month.

The kickoff of corporate earnings also influenced the market last week, with Bank of America, Wells Fargo, and UnitedHealth stocks declining despite varied results. Delta Airlines and Tesla fell sharply, whereas Citigroup rose after workforce reduction plans.

Over the week, the S&P, Nasdaq, and Dow all gained with Tech, Consumer Staples, Telecom and Healthcare sectors gaining while utilities, energy and financials declined.

U.S. markets are closed Monday for Martin Luther King Day.

Producer Prices...Fall?

In December 2023, US producer prices unexpectedly fell by 0.1%, mirroring November's decline and defying a projected 0.1% rise. A significant drop in diesel fuel prices led to a 0.4% decrease in goods costs, while service prices remained stable. Core PPI, excluding food and energy, was unchanged, below the anticipated 0.2% increase. Annually, the headline PPI rose slightly to 1%, with core PPI decreasing to 1.8%.

A Bad Tale for China

In 2023, China faced a significant economic downturn, with its stock market at a five-year low and down nearly 50% from its 2021 peak. The country grappled with record high debts over 300% of GDP, deflationary pressures, and declining trade. CPI and PPI figures showed continued deflation, impacted by soft industrial product demand and lower energy prices. Trade data revealed a contraction in exports and imports in 2023, indicating slowing economic growth. Additionally, China's credit underperformed, with new loans below expectations, reflecting sluggish credit demand despite policy easing efforts. These challenges point towards a difficult path to economic reflation for China.

The issues within China are not endured by them alone. A recent Zero Hedge article highlights the end of China's role as a global deflator and the impact on worldwide inflation. The piece argues that China's early exploitation of cheap labor and large-scale credit issuance, which previously suppressed global inflation, has reached its limits.

With the depletion of inexpensive labor and a shift towards speculative and unproductive investments, China now faces rising inflation and wages. This change signals the end of low inflation facilitated by globalization and China's economic model. The global economy, which has relied on China for deflationary pressure, now faces the challenge of rising inflation without a comparable deflator.

A potential financial crisis in China could significantly impact U.S. agriculture due to China's substantial land ownership. As of now, China holds 384,000 acres of U.S. agricultural land, a 30% increase since 2019. A major portion of this is under Smithfield Foods, a key U.S. pork producer owned by Hong Kong's WH Group. With rising meat prices and production costs, a decline in demand is expected, which could affect companies like YUM China (YUMC), one of the world's largest restaurant companies, leading to reduced profit margins.

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Commodity Movers

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Natural Gas

+15.29% (1W Chg)

+45.52% (1M Chg)

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Orange Juice

-9.85% (1M Chg)

-15.98% (YoY Chg)

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Tea

-16.99% (1W Chg)

-21.28% (1M Chg)

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Salmon

+18.55% (1W Chg)

+32.38% (YoY Chg)

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Noteworthy Events    

United We Fall

United Airlines' stock dropped -9% Friday following the Federal Aviation Administration's announcement of an audit of Boeing's production line. This decision was made after a Boeing 737 Max 9, operated by Alaska Airlines, lost a piece of the aircraft mid-flight. Boeing's stock also fell by -2% due to the investigation, and is down -15% the past month. United Airlines reported discovering loose hardware on similar aircraft types in its fleet.

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Tesla Falls

Tesla's stock dropped -4% Friday after the company announced price reductions for its Model 3 and Model Y vehicles in China. Additionally, Tesla revealed plans to temporarily suspend production at its German factory due to supply chain issues caused by disturbances in the Red Sea.

A Smaller Citi

Citigroup intends to cut approximately 20,000 jobs by the end of 2026, which equates to about 10% of its current workforce. This decision is part of the bank's most significant restructuring effort in many years. The plan was revealed alongside the announcement of a fourth-quarter loss.

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SEC Green Lights Crypto ETF

Crypto stocks experienced losses following an initial surge Thursday, as Bitcoin's price fluctuated after the U.S. SEC approved the first U.S. spot Bitcoin ETFs. Key players in the sector saw significant declines over the week: Iris Energy and CleanSpark dropped -18.64% and -19.88%, respectively. Marathon Digital and Riot Platforms faced steeper falls, losing -23.34% and -22.37%. Additionally, crypto exchanges Coinbase and MicroStrategy saw their shares decline by -17.24% and -23.77%, respectively.

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The losses follow massive price run-ups on expectations the SEC would approve the new ETFs. This is a "buy the rumor, sell the news situation."

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The new BTC ETFs include: IBIT, GBTC, BTCO

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Unity Software

Unity Software, a company specializing in gaming technology, saw its stock drop 8% Tuesday following its announcement on Monday to lay off 1,800 employees. This reduction represents approximately 25% of the company's total workforce and is part of a wider restructuring initiative.

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CASE STUDY: TAYD +17.99%

Taylor Devices, Inc., a company engaged in designing and manufacturing shock absorption and seismic damping solutions, including those for airplanes, drones, and nuclear power plants, announced its fiscal year 2024 second quarter and first half results. The firm reported a slight decrease in second quarter sales but an increase in first half sales compared to the previous year. Notably, net earnings rose significantly.

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The company also declared a substantial stock repurchase, buying back 459,015 shares at a discounted price, reflecting a strong balance sheet and the intent to enhance shareholder value. The CEO emphasized the company's solid financial position and capacity for continued profitable growth following this strategic move.

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LevelFields users were alerted to the 'Stock Buyback' at 9 am Wednesday- leaving them able to catch TAYD's +17.99% 1D return. TAYD opened on Wednesday with a price of $23.83, reached a price of $28.45, 24 hours later, and ended the week at $28.30.

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The average one-day return for micro-cap industrial companies within the scenario is just below 5.5% with a win rate of over 75%.

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Upcoming Catalysts:

EARNINGS

Monday, January 8 - Market Closed

Tuesday, January 9 - Goldman Sachs (GS), Morgan Stanley (MS)

Wednesday, January 10 - Kinder Morgan (KML), Charles Schwab (SCHW), Alcoa (AA)

Thursday, January 11 - M&T Bank (MTB)

Friday, January 12 - Travelers (TRV), State Street (STT)

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The LevelFields Team