HOT GROWTH SUMMER😉😜 - Market Update October 23 - 27
The Predicted Recession is no where to be found
The future is not just unknown. It is unknowable.
-Howard Marks
Rather than trying to predict what might happen, always focus on the details of the things we do know. Especially when it comes to a beast as complicated as the US Economy. Two truths I always hold to be true for my finances:
Take care of my finances by staying out of debt and having an emergency fund to weather short-term volatility
Invest because over the long term the stock market will be my way to build wealth.
As Morgan Housel puts it, “Short-term Pessimist. Long Term Optimist.” Ignore the “financial experts”, always predicting something.
Welcome back to the Rambling Mind Newsletter. This is your Market Update.
In this week’s post, we talk about:
The Stellar Q3 from the US Economy
Ford and UAW labor agreement
Earnings from 4 of 7 Big Tech Companies: Microsoft (my fave), Google, Meta, and Amazon.
US growing pile of debt
Close out with my fave sports (Good news I’m not sad this week). Thank you for spending some time with me. Let’s begin
Markets
Even the power of great earnings from the Big Tech companies could not help the markets this week.
This newsletter is 2,312 words a 10-min read
Tale of the Tape
Economy
U.S. Economy is like REALLY STRONG
Remember how everyone (including myself) predicted we would go into some kind of recession this year? Well, not only was every single person absolutely WRONG! The US experienced one of the fastest-growing economic quarters in a long time.
🔍Details: As Papa Powell and the Fed raised interest rates at the fastest pace known to man, the expectation was for the economy to take a beating as people and businesses pulled back on their spending. However, the exact opposite has happened. Consumer demand has remained strong as inflation has slowly crept away.
Consumer demand has helped boost growth in the labor market and companies’ profits (more on this below). The US GDP grew 4.9% in Q3 combined with growth of 2% in both Q1 and Q2, which shows the underlying strength of the US economy.
💬In Their Words: As Treasury Department officials Eric Van Nostrand and Tara Sinclair wrote in a post, "Even today, most advanced economies are below the trend growth path that they were on before the pandemic – except the United States, which is on track this year to return to reach the level that would have been predicted by the pre-pandemic trend."
Or as Warren Buffet says, "Don't bet against America."
😑😕Negative Kelechi Enters The Chat: As great as these numbers are, these all reflect the past and tell us nothing about what will happen in the future. There are plenty of headwinds (fancy finance term for challenges) ahead. A few to think about:
Student loans restarted in October
War in Gaza
Oil prices
Long tail effect of inflation on things like insurance costs
High-interest rates: 8% mortgages, 12% auto loans, 25%+ Credit cards
As EY's chief economist points out, "While these signs of economic strength will fuel speculations that the economy is reaccelerating, we do not expect such strong momentum will be sustained. Cost fatigue, rising debt servicing costs, and slowing job growth are about to be felt more widely by consumers and businesses. In that regard, the broad-based pullback in business equipment investment is a cautionary tale."
My Takeaway: The superpower of Americans strikes again. Our ability to spend no matter the circumstance. However; like I said last week, what is good for the economy is not necessarily great for your personal finances. GDP grows by people spending more. I would caution everyone to ensure you have taken care of the necessities. Mainly having an emergency fund, paying off your debts, and investing consistently. If you take care of these things, the economic climate should mean absolutely nothing to you.
One Detroit automaker is no longer dealing with union strikes. Ford on Tuesday agreed to terms with the United Auto Workers for a new labor contract that includes the largest pay increases in years.
🔍Details: Union Workers will receive a 25% increase in pay over the next 4 years, starting with an 11% increase.
Cost of living adjustments, that had been previously suspended, are brought back
Temporary workers will see raises of more than 150%
Union won the right to strike over any future plant closures (a protection against the increased adoption of electric vehicle expansion)
💬In Their Words: UAW President Shawn Fain said "We told Ford to pony up and they did."
Kelechi Takeaway: YUP! You right!!
Ford CEO Jim Farley said in a statement, "We are pleased to have reached a tentative agreement on a new labor contract with the UAW covering our U.S. operations."
Kelechi Takeaway: Why you lying Jim? You know you mad! LOL
Takeaway: Sam Fiorani of AutoForecast Solutions said, "This lays the groundwork for the next two contracts and they should fall in line fairly quickly because all three were within a narrow gap of each other."
It is estimated that the strike has cost the economy about $9.3 Billion and the 3 automakers over $1 billion. With Ford coming to the table and working out a deal, expect Chrysler and GM to come to the table sooner rather than later.
Earnings
We make money and then even more money.
🔍Details: Microsoft reported earnings on Tuesday night and smashed all expectations. Especially with Azure Cloud, which continues to grow like the weeds in my backyard during summer (Thank God for winter. Next year we try a new method to destroy these green monsters 😤).
🔢By The Numbers: Revenue in the Quarter was $56 Billion, an increase of 15% from last year during the same quarter.
The largest revenue driver was the Cloud division of Microsoft, this part of the business did not exist 10 years ago.
Profit grew 27% to $22 Billion
📈Stock Move After Earnings: Stocks jumped almost 5% after the release of earnings.
What to Watch: “Looking on a competitive basis, we feel good about our execution, we feel good about taking share and we feel good about consistent trends,” Amy Hood, Microsoft CFO said.
Microsoft is hitting on all cylinders. They expect to have a continued revenue growth rate of 15% which is insane for a company this large. However, Microsoft has found ways to continue driving growth. Its acquisition of OpenAI is paying dividends as more companies buy into Artificial Intelligence. Also now that it has closed its deal to acquire Activision, expect its entertainment division to grow as well. Plus the best social media site these days seems to be LinkedIn and guess who owns it. YUP, Microsoft. I just cannot see anything that can stop this company.
As a long-time owner of Microsoft, I am extremely happy but also wish I owned more. Oh well.
How investors reacted after Google released their earnings.
🔍Details: Google reported earnings on Tuesday. Although overall revenues were better than expected. It fell short of expectations for Cloud revenue which is seen as Google's future big money maker. Google Cloud is growing but not nearly as quickly as investors had been hoping for. Which was in complete contrast with the numbers shown by Microsoft.
🔢By The Numbers: Google returned to double-digit revenue growth for the first time in over a year, after advertising revenue crashed last year.
Revenue was $76 Billion for the Quarter
Profit was $19 Billion for the Quarter (so much damn money)
📉Stock Move After Earnings: The stock was crushed after the report. It fell 8% and continued falling into the weekend.
What to Watch: Can Google grow its cloud to compete with Microsoft and Amazon? As Lee Munson, chief investment officer of Portfolio Wealth Advisor said, “If you want this stock to keep going higher, you’ve got to have cloud become more profitable. It’s a third-rate cloud platform. We need to see it make money.”
🤨My Takeaway: Everyone is overreacting. Google will play a massive role in the data and cloud infrastructure needed for the new artificial intelligence future. But I might be biased. Google is my largest single-stock position. I might take this chance to buy more (I did).
🔍Details: Like most tech companies, Amazon went into cost-cutting mode last year. Laying off over 27,000 employees and ending unprofitable business ventures. All to make the business more profitable. It seemed to work very well because every single part of the business showed strong growth.
🔢By the Numbers: Overall revenue grew 13% to $143 billion
Which is insane considering Amazon was already making over $130 Billion per quarter.
Profits tripled to $9 Billion
The advertising business for Amazon continues to be a major bright spot outpacing both Facebook and Google, with growth of 26%
Amazon estimates to make $167 Billion in the fourth quarter
📈Stock Move After Earnings: Initially the stock tanked after earnings were released but quickly rose 6% as investors digested the news and realized things are going amazingly well for the company.
What to Watch: As Amazon switches from overall growth to becoming profitable. I expect that $9 Billion to quickly become $30 billion/quarter over the next two years and revenues to be over $200 Billion/Quarter. However, there are some challenges facing Amazon. The biggest is Lina Khan at the FCC suing Amazon over anticompetitive practices. If that case breaks up the company, then things change quickly. For now, the future is looking very bright for the Brown-Box-with-a-Smile-on-it company.
Facebook would like to thank all of us for being so anxious, fearful, angry, and greedy. Our raw emotions are Facebook’s profits.
🔍Details: After cutting thousands of employees over the last two years, Facebook is seeing a huge return to profitability.
🔢By The Numbers: Facebook returned to 20% revenue growth with its core advertising business outgrowing competitors like Google.
Revenue grew 23% to $34 Billion
Profits grew 163% from last year to $12 Billion
Time spent on Facebook and Instagram has increased (see entry sentence)
📉Stock Move After Earnings: Initially the stock rallied up 3% but receded due to expected reduced advertising in the Middle East.
What to Watch: Will Meta ever use the word metaverse again? Since using the phrase "year of efficiency", Zuck has moved away from talking about the metaverse as much. However, two new devices were released recently: Ray-ban Meta Smart Glasses and Quest 3. To reflect there is still a focus on it, but how will the story be told moving forward?
Meta SUED by ERRYONE: Pretty much every state in the United States is suing Meta for harming teens and kids. All I have to say is IT'S ABOUT TIME!!
Stats of the Week
I typically ignore all US debt talk because managing the US debt is not like managing a household budget. You are optimizing for two completely different outcomes. However, the Debt surged by 23% ($1.7 Trillion). To service the debt, it costs the U.S. $659 Billion. My ears are now perked up.
When diving into the details more than 40% of the deficit is due to reduced tax revenues. Essentially, there is no real problem if the government collects the taxes it is owed. Rather than allowing Ultra High Net Worth Individuals ($30 million+), High Net Worth Individuals ($5 million+), and Corporations to avoid or evade paying taxes.
My Takeaway: The US has been spending more to meet the needs of its citizens and allies (driven by Democratic Senators, Representatives, and the President) which is necessary. But due to political pressure (mainly from Republican Senators & Representatives), taxes have been cut and new laws have added ways to avoid paying taxes.
If the government remains as divided as it has been over the last decade or so, I expect things to continue getting worse.
Looking Ahead
Economy
Interest Rates: On Tuesday, the Federal Reserve will meet to discuss and set interest rates. It is expected that Papa Powell and his Fed buddies will hold rates steady at 5.25%. Over the last two weeks, the Bond Market has done the Fed’s job of helping tighten the market.
The 10-year Treasuries interest rate is used as a benchmark to set rates on almost every loan including mortgages, credit cards, savings accounts, auto loans, etc. Increased to a 30-year high of 5%.
There has also been a steepening of the yield curve between the 10-year and 30-year treasuries. This has been inverted for the last year (which usually is a sign of a recession but as we saw above. The recession never materialized.)
Jerome Powell has been very clear that interest rates will remain much higher for longer.
Jobs: Next week, we get all the usual Job Report numbers from the Bureau of Labor Statistics (BLS) and ADP for October.
September had an unbelievable 300,000+ jobs added to the economy.
It is expected that 170,000 jobs will be added to the economy in October with unemployment remaining around 4%.
All indications of a very healthy economy. Which can be hard to accept when prices remain elevated from what we are used to.
Earnings Barage Continues
The largest company in the world by market cap will report earnings this week. King Apple, the greatest money-printing machine the world has ever known, will be reporting earnings on Thursday.
I expect Apple* to report revenue between $92-94 Billion with profits of about $22-$24 Billion
There are other companies report such as Airbnb*, AMD, etc. But meh
Sports I Love
As Expected
This is one loss I cannot be mad about. Man City is World’s better than Man U. I am choosing not to be upset at the trashness that is Man U. I am choosing to protect my mental health. OHHH SAAAAA
*I am a tiny shareholder in this company.