I cannot believe I did not send this out on Monday. I really was not feeling well.
Well, enjoy this weekend special.
I think it’s pretty spot on that Halloween is today. Because the Stock Market is in a very scary place right now. We are fully in a bear market and there is no safety anywhere. Everywhere you look there is blood in the markets. Even your favorite Big Tech companies do not seem so immune to economic slowdowns or recessions (more on this below).
At least that was what I was thinking before Friday. Almost like a witch tempting children with candy. The market finished the week very well into the green! So the question on every investor’s mind is, "Is this a TRICK or a TREAT?" Are we really getting candy or is this just a trap for the witch to boil us in some soup?
Weekly Market Returns:
YTD Market Returns:
For all my Trick or Treaters, please be safe out there. I hope you get more treats than tricks. But when you get those treats make sure you check them before you eat them. For my investors, do not make these times trick you into making horrible decisions about your future.
Tale of the Tape
Economy
So No Recession?
GDP aka Gross Domestic Product aka Are we in a recession number for the Third Quarter of 2022 was released on Thursday. Unfortunately for the doomsayers, the number was higher than expected. The US economy grew by 2.6% when compared to 2021. It was bolstered by steady consumer spending (aka the American Superpower) and a reduction in the trade deficit (exporting more than importing).
After 2 consecutive quarters of negative GDP, it was nice to see the turnaround. However, this does not mean we are home free. Digging into the numbers there are a few things that stood out to me. Wages increased but savings are decreasing:
Current-dollar personal income increased by $291.2 billion in the third quarter
Personal Saving rate was 3.3 percent in the third quarter, compared with 3.4 percent in the second quarter.
It may be a slight change but over time that small change makes a massive difference. Axios’ Neil Irwin and Courtney Brown also point out that, "final sales to private domestic purchasers — an indicator of underlying trend growth — rose at only a 0.1% rate in Q3, falling from 2.1% in Q1 and 0.5% in Q2.”
Fancy word to say, people are spending less money.
My Takeaway: The Fed is getting the slowdown it wants. The problem is inflation and a higher interest rate environment are putting pressure on the bottom lines of citizens. It might just be time for the Fed to leave things alone for a bit and allow the economy to find a new normal. Keep that Emergency Fund funded and ready!
Earnings
Google was the first of the Big Tech companies to report earnings last week. As expected things were not great, seems Snap gave us an adequate preview of what to expect with Google. Every single metric came in less than analysts expected.
Total revenue grew by only 6% from last year, which is the slowest growth for Google since 2013.
YouTube revenue declined by 2%
Losses from Google Cloud continue to increase rather than decrease
The stock fell 7% once the numbers were released.
The pressure on Google's revenue is forcing significant changes for the company. Google has been canceling a lot of its money-losing ventures. Including:
Canceling the Pixelbook Laptops
Cutting funding for Area 120, an in-house start-up generator where Gmail, AdSense, and a bunch of other ideas were created for Google
A slowdown in hiring and a reduction in the headcount of the company
Canceled Google Stadia, their gaming division
My Takeaway: The Fed is finally getting what it wants. Companies are cutting spending as their top and bottom lines are getting challenged. However; these are temporary headwinds for Google. Google's business is still strong and resilient but it finally has a challenger in TikTok. Recently, a study showed that 10% of all adults now get their news from TikTok. Which is 3x what it was in 2020.
Microsoft followed up on Google's earnings and things looked decent for the company. However; the stock fell by 6% just like Google. The main challenge for Microsoft is the comparison to last year.
Revenues only grew by 10% versus 20%+ over the last two years
Net income (profit) fell by 14% due to a $3 billion tax impairment
Azure Cloud only grew by 37% versus 40%+ over the last two years
LinkedIn only grew 9%
But the past performance was not the reason the stock fell. Microsoft said they would "only" make $52 billion next quarter which would be a 2% growth, analysts were expecting $56 Billion. We have to always keep in mind, the Stock Market is a future discounting machine. Meaning future expectations matter much more than past performance.
My Takeaway: Nothing has changed for me. A slowdown was expected especially after the amazing two years we have seen. However, this also shows that companies are slowing down on making capital investments in their business. Especially with the slowed growth of Microsoft Azure.
That is all you need to know. Everything is just going wrong for Facebook aka Meta right now. Costs are increasing while revenue is slowing drastically.
Revenue is down 4%
Profits are down 52%
This one is kinda weird. Amazon reported a decent quarter but investors punished the company. The stock dropped 13% immediately after the earnings were released. Unlike Facebook, this was undeserved:
Earnings: 28 cents per share
Revenue: $127.10 billion vs. $127.46 billion, according to Refinitiv estimates
Amazon Web Services: $20.5 billion vs. $21.1 billion expected, according to StreetAccount
Advertising: $9.55 billion vs. $9.48 billion expected, according to StreetAccount
Nothing in the report, screams “SELL”.
Amazon fell into the same problem Microsoft faced, they gave future guidance that investors did not like:
Amazon said it expects to post fourth-quarter revenue between $140 billion and $148 billion, representing year-over-year growth of 2% to 8%. Analysts were expecting sales to come in at $155.15 billion, according to Refinitiv.
My Takeaway: As they say, “Actions speak louder than words.” I bought more shares on Amazon on Friday and am likely to buy more this Friday. I am playing a different game from analysts, they are focused on the next 6 months. I am focused on the next 5 years. I don’t care how lumpy and inconsistently the cash comes in.
There is Big Tech and then there is APPLE. They may play the same sport, but Apple plays in a totally different league. First, let’s marvel at the Results:
EPS $1.29 vs. $1.27 est.
Revenue. $90.15 billion vs. $88.90 billion estimated, up 8.1% year-over-year
iPhone revenue: $42.63 billion vs. $43.21 billion estimated, up 9.67% year-over-year
Mac revenue: $11.51 billion vs. $9.36 billion estimated, up 25.39% year-over-year
iPad revenue: $7.17 billion vs. $7.94 billion estimated, down 13.06% year-over-year
Other Products revenue: $9.65 billion vs. $9.17 billion estimated, up 9.85% year-over-year
Services revenue: $19.19 billion vs. $20.10 billion estimated, up 4.98% year-over-year
Gross margin: 42.3% vs. 42.1% estimated
You may be asking yourself, “why is this so impressive?” Well, that is a great question.
In the same period when Microsoft saw a decline in PC sales, Apple saw a 25% increase in Mac sales.
In a period where Google saw its slowest revenue growth, Apple which already makes much more saw its revenue grow faster
Even with inflation and a strong dollar, Apple’s margins remain intact. No other big tech company was able to do that.
Apple is just different and it is time we acknowledge it. Will there come a day when they get challenged and are forced to bend the knee? Yes
But that day is not today and tomorrow does not look so good either. Right now, Tim Apple sits on the Iron Throne and rules with a High Walled Ecosystem.
Stats of the Week
The number of jobs that have been cut this year in the news media industry
CNN, Netflix, Warner Bros, and Discovery to name a few companies have had significant layoffs this year
This is just more signs of a slowdown in the economy. This time with advertising dollars beginning to seize up
Looking Ahead
This week is all more about the economy than stocks.
FOMC
To kick things off, we have Papa Powell and the Fed hosting their bimonthly FOMC meeting. I believe I have a preview of what Powell will say during his speech on Wedesday:
Okay, this is from every other speech he has given. But the point is the Fed are focused on destroying inflation and I see no sign of them changing their mind any time soon. Expect the Stock market to react very violently on Wednesday for either what Powell said or didn’t say.
Oh and Something Something Something Jobs……
Sports I Care About Update
Okay Man U.
Making me a believer once again. After getting absolutely destroyed by Man City, Man U has been on a tear. They have not lost in 8 matches. They have won 7 and tied 1.
Things are looking really good for the team right now. However, they are still extremely sloppy and look very beatable. They still have a long ways to go to challenge the best teams.
Extras
I hope one day, someone will love me like men and women love Taylor Swift. With her new album, Midnights, Taylor Swift broke the record for the most-streamed album in a single day.