Quick Takes

A Shot Across the Bow?

There is so much focus on narratives these days, we are increasingly compelled to play by the old rule. Watch what they do, don’t listen to what they say. We’ve been watching what JP Morgan has been doing:

June 24: JPM announces layoffs in the mortgage unit. It took about a nanosecond for JPM to adjust staff when rates began to rise. That’s unusual when you plan to be in the business for the long term.

June 28: After the FED bank stress test, JPM declined to raise its dividend, unlike Morgan Stanley, Bank of America and others. The reason given was ‘stringent capital requirements’.

Fast forward to July 14 and JPM misses 2Q earnings expectations and suspends its stock buyback program. The press release states: “… geopolitical tension, high inflation, waning consumer confidence, the uncertainty about how high rates have to go and the never-before-seen quantitative tightening and their effects on global liquidity, combined with the war in Ukraine and its harmful effect on global energy and food prices are very likely to have negative consequences on the global economy sometime down the road.”

It wasn’t long ago that JPM chairperson, Jamie Dimon, warned of a possible ‘economic hurricane’ ahead. It is now very clear that he expects that hurricane to arrive.


Has the World Gone Subscription Crazy?

Just when you thought it couldn’t get any more bizarre, you see this headline in the Wall Street Journal: “Want Heated Seats in Your BMW? There’s a Monthly Fee for That.” It seems everyone wants to copy the software industry and not sell a product, but a subscription. (More details in this article). So, on top of new car prices rising 20%-30% during COVID, now they want you to pay even more for the software that allows your heated seats to function. We figure this will provide some support for used car prices.


Will Earnings Tell the tale?

Second quarter earnings reports started this past week led by the financials, which were largely a mess. Over the next 2-3 weeks, most of the S&P 500 will report second quarter earnings and we think this will be a critical period. Stock valuations have already come down, as long as you believe that 2022-23 earnings estimates are accurate. We expect a series of downside earnings surprises due to mounting economic weakness in Q2 as well as the strong dollar.


You Think it’s Bad Here?

The inflation we are experiencing now is no fun. Trips to the grocery store and gas station are eye opening. The good news for us is that we get paid in dollars. We own the strong currency. The global problem is that strength in the dollar makes inflation worse around the globe. Why? Because the dollar is the worlds reserve currency and commodities are generally priced in dollars no matter where you buy them. So, inflation pressures in third world countries are even worse than they are here. Not only are commodity prices higher, but their currency value is lower. The result? Witness the situation in Sri Lanka.

And Europe has some unique troubles on top of everything else. Their dependency on Russia for energy needs has backfired badly. Not only is Europe experiencing high inflation, production is beginning to be cut to conserve energy. That’s an economic double whammy. Whatever your thoughts about a recession in the U.S., it’s particularly hard to see a near term European future that does not include a recession. Weakness in EU economies are part of the earnings headwind for U.S. multinationals.


Globalized Payback?

It used to be that international markets were a strong portfolio diversifier because the economic cycles were rarely synchronized. When one region was doing poorly, another was often performing well. Globalization has tied global economies together such that when one region declines, it has strong ripple effects across the globe. After the euphoria of a post-COVID synchronized global recovery, we could now be a facing the prospect of a global synchronized recession in the near future. The last time that happened as 2008-09.


Is the Gasoline Market Correcting?

Weekly oil industry data took an interesting turn this week. Implied demand for gasoline turned down (blue line below) in a period of typically strong seasonal demand for gas. One week isn’t a trend, but it bears watching.



Somewhat more telling is the trend in gasoline inventories. On the chart below, the gray shaded area is the range of where inventories have been over the last five years. The blue line is where they are in 2022. The significance here is that inventories are 1) rising; and 2) inventories are rising during a period in which they are typically falling. The implication, if the trend continues, is that we should be seeing additional relief at the gas pump soon.



What We’re Reading

Intel CEO to Congress: Don’t go on August recess util Chip Act is passed

Retail sales rose more than expected in June

America’s freight railroads are incredibly chaotic right now

Japan’s Lack of Inflation Is Tied to Loose Monetary Policy

Uniper Starts Using Winter Gas with Urgent Bailout Needed



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Articles, General News, Weekly Commentary

By: Adam