Layoffs are bullish (if you also do this) ❖ Kicking the rate cut can in "60 Minutes" ❖ A critical Red Sea target ❖ Get data on your side no matter what happens…
By Michael Salvatore, Editor, TradeSmith Daily
How does a struggling cosmetics company, which is down by more than half from its 2021 peak, add $10 billion to its market cap?
If you're Estée Lauder (EL), just beat your earnings estimates…
But also lay off 3,150 workers… tell shareholders business is slow in Asia, which once drove a huge chunk of your sales… and lower your earnings guidance.
Confused? I get it. Layoffs and poor earnings forecasts don't sound like a recipe for 15% gains in a single day.
But it speaks to a fascinating trend in motion right now… getting lean and mean.
Estée Lauder is hardly the first (nor likely the last) company to get a standing ovation for cutting its workforce in 2024. Big tech companies started the trend and are continuing it.
Google announced fresh job cuts on Jan. 10, with over a thousand employees laid off in the next week. From that date until its recent peak, GOOG saw a 7.6% climb to a new high.
On Jan. 18, Microsoft announced it would cut 10,000 jobs by March, or about 5% of its workforce. The stock surged 4.4% to a new high not long after.
Amazon has been at the layoffs game for years. It's shed more than 27,000 jobs from 2022 through today. But its recent blowout earnings, with a year-over-year net income surge from $278 million to $10.6 billion, show precisely why Wall Street is happy to hear about job losses.
Big tech is aggressively cutting costs to keep growth rates elevated. They're unwinding the post-pandemic-era employment bloat, where ultra-cheap money let them hire up to meet unprecedented — and short-lived — demand.
Not to mention the implication beneath all of this, especially in tech… that these jobs can be cheaply replaced with A.I.
It's worth asking: how can unemployment remain so low (at 3.7%) and job gains so high (353K added in January) with all these layoffs?
The answer is simple. Zoom out. The Magnificent 7 may dominate the stock market, but the U.S. economy is much more than that. We're talking about tens of thousands of roles in a workforce of 161 million.
The data shows the job market is healthy. And these layoffs, while unfortunate, are indeed just a normalization from the wackiness of 2021… that feels bigger and louder because it comes from the top brass of big tech.
And it's far from the only move toward "normalization"…
Say goodbye to traditional stock picks. Industry titans warn of a disruptive "Weird Wealth Event" that could reshape America's financial landscape. They foresaw the 669% Nvidia stock explosion. Now up: a tiny sub-$5 stock. Opportunity knocks!
❖ Jerome Powell took to "60 Minutes" for Wall Street's latest ice bath…
He cast doubt on rate cuts happening anytime soon.
Here's Bloomberg with the key details:
The "danger of moving too soon is that the job's not quite done, and that the really good readings we've had for the last six months somehow turn out not to be a true indicator of where inflation's heading," Powell said in the interview with CBS's Scott Pelley, according to a transcript provided by the network.
"We don't think that's the case," he said. "But the prudent thing to do is to, is to just give it some time and see that the data continue to confirm that inflation is moving down to 2% in a sustainable way."
Powell said it isn't likely that the Federal Open Market Committee, the Fed panel that sets interest rates, "will reach that level of confidence" about inflation's path by its March 19-20 gathering, echoing remarks he made at a press conference last Wednesday.
Pelley said in a voiceover that Powell suggested the first cut could happen around the middle of the year, though the transcript of the interview — which included comments that were not aired during the show — did not indicate that.
I interpret "middle of the year" as the June 12 meeting. As I write, traders are pricing in a 40% chance of a 25-point cut by then, and a 47% chance of a 50-point cut.
Importantly, Powell also said the current rate forecast — a consensus estimate of about 75 basis points in cuts in 2024 — probably won't change.
Traders still expect far too much from the Fed, and far too soon. Ending the year with rates between 4.5% and 4.75% feels entirely appropriate… provided the economy continues to handle it well.
One interesting facet to note is the amount of investment-grade corporate debt issuance last month. It surged to $191.3 billion, the highest level of the last year at a 27% annual rise.
Here's a chart from the Securities Industry and Financial Markets Association (SIFMA), showing the issuance over the last year:
With this issuance, corporations are shouting from the rooftops that they're happy to borrow at these rates. Consider that corporations can issue as much debt as they want — unlike the U.S. Treasury — and there may be no better signal that rates are in about the right place.
As we've said time and again, rates will come down. But it'll be slow and mild.
Barring an unforeseen black swan-style crisis, rates simply aren't going to zero again. Even in that scenario, the Fed would probably hesitate. Such a move could reignite the inflation problem in spectacular fashion.
Especially when inflation risks abound… one of which has gone severely underestimated by Wall Street.
❖ Houthi rebels in the Red Sea are a growing problem…
It hasn't been getting a ton of play in the media, what with big tech earnings and the Federal Reserve taking center stage.
But this is a major inflation threat at best… and at worst, a prelude to yet another prolonged U.S. military conflict in the Middle East.
As we've covered before, Iran-aligned Houthi rebels have been attacking commercial vessels in the Red Sea, a key shipping route.
Last week, three U.S. soldiers were killed in a drone attack on a military base in Jordan. The U.S. retaliated on Friday, with strategic airstrikes aimed at slowing the Houthis' disruptions in the Red Sea.
How effective the strikes were remains to be seen. But on Monday, Houthi militants threatened destroying the submarine fiber optic cables that lay at the floor of the Red Sea.
An estimated 17% of the world's internet traffic passes through this area. Disrupting that could have vast and lasting consequences on the world's supply chains, without the need for attacking individual vessels.
Here's The Guardian on the likelihood of this happening:
Security analysts at the Gulf Security Forum claimed last week in a report that the "cables have been kept safe more due to the Houthis' relative technological underdevelopment than for a lack of motivation".
It added "the Houthis have maintained the capability to harass surface shipping through missiles and fast-attack craft but lack the submersibles necessary to reach the cables".
However, it warned the cables at some points run at a depth of 100 metres, reducing the need for hi-tech submarines. In 2013, three divers were arrested in Egypt for attempting to cut an undersea cable near the port of Alexandria that provides much of the internet capacity between Europe and Egypt.
Moammar al-Eryani, the information minister in Yemen's Aden-based government, said the Houthis posed a serious threat to "one of the most important digital infrastructures in the world", adding the Houthis are a terrorist group that has no ceiling or limits.
Imagine waking up one day and your internet is out… or slowed to a crawl. You hear that an undersea cable got severed in the Red Sea and it'll take (ballparking, here) months to fix.
How does it affect your life? Are you able to work? Look up your doctor's phone number? Navigate to a place you've never been?
Now, imagine this affecting not just you, but 17% of global internet traffic.
All the digital infrastructure we rely on every single day. And all the big tech companies holding up the stock market…
In such a scenario, safe to say we'd see market volatility… potentially even a COVID-style short-term panic. I'd also anticipate precious metals and oil to surge in the initial shock — real assets, not digital ones, that will sustain demand through a digital purge.
As always, the best time prepare for good markets and bad markets is right now.
The key feature is our proprietary algorithm that measures each stock's individual volatility to tell you the exact price at which to cut your losses on any given stock position.
But TradeStops has evolved significantly since then, fine-tuning this algorithm to give you a pinpoint-specific health checkup on every stock you own — something we refer to as the "Pulse Check."
This tool shows you, in about 10 seconds, if there are any stocks lurking in your portfolio set to underperform the market in good times or bad.
In the background, it's running 3,000 data points and making 9,250 separate calculations each day — for each stock — to determine a stock's health.
But all you see is a detailed, easy-to-read report with the health readout on every one of your holdings.
P.S. Do you lean bullish, bearish, or somewhere in between in today's environment? What factors are you considering in your view of the markets?
I always love to hear from you about the things you have on your mind when it comes to investing. You send me feedback anytime at Feedback@TradeSmithDaily.com.
Get Instant Access
Click to read these free reports and automatically sign up for research throughout the week.
TradeSmith is not registered as an investment adviser and operates under the publishers' exemption of the Investment Advisers Act of 1940. The investments and strategies discussed in TradeSmith's content do not constitute personalized investment advice. Any trading or investment decisions you take are in reliance on your own analysis and judgment and not in reliance on TradeSmith. There are risks inherent in investing and past investment performance is not indicative of future results.
Post a Comment
Post a Comment