Monday, January 29, 2024

Morning Note: Mixed-Bag Earnings Commentary, Again on "Soft Landings" -- And -- Your Weekly Results Update (And 2 Must-Read, Timely, Quotes!)

Here's another round of earnings call highlights... Color-coding reflects our view of the economic implications therein:

Sherwin Williams: "On the architectural side, US new residential sentiment has improved. Single family starts have been up y/o/y for 6 consecutive months. Mortgage rates are expected to begin moderating but will remain well above historic levels. 

In residential repaint, existing home sales drove a portion of our sales and have declined y/o/y for 28 straight months. The trajectory of recovery is not clear here and the LIRA (Leading Indicator of Remolding Activity) index is forecasting negative remodeling spend in 2024."

"In new commercial, starts slowed considerably in 2023, which we expect will impact completions starting midway through 2024. Commercial lending standards have also tightened, and the Architecture Billings Index has been negative for 5 consecutive months."

On the pricing and cost front, it is really a mixed situation, "our outlook assumes our raw material costs will be down by a low single digit percentage in 2024 compared to 2023...While raw materials will likely be a benefit for us, other costs including wages, healthcare, energy and transportation are expected to be up in the mid to high single digit range in 2024."

As a result and for those who think the drop in inflation (outside of rents which is an easy call here) is an easy trip, "Paint Stores Group is implementing a 5% price increase effective February 1. The Performance Coatings and the Consumer Brands Group are also likely to have some targeted pricing activity in 2024, though at a more modest level than Paint Stores."

Union Pacific: "The economic environment continues to look muted in 2024, particularly in the first half. We are off to a poor start in January based on severe winter storms and market challenges we are seeing in coal and intermodal."

LVMH: "The fourth quarter delivered higher growth than the third. That's good news. We know that there were some uncertainties in the market, but that went well. Organic growth was sustained across all our activities, except in Wines & Spirits."

American Airlines: "Demand remains strong, and we've seen robust bookings to start the year as travel trends have begun to normalize across entities. We're also very encouraged by the trends we're seeing in business travel. Domestic revenues from business travel ended the fourth quarter at approximately 90% of 2019 levels."

"Consumer spend across all segments from low to high spend has remained relatively stable. Our data does not indicate any meaningful behavior change across consumer segments."

"In the US, consumer holiday spend growth was in the mid single digits on a y/o/y basis (in nominal terms). Consumer retail spending was similar to last year. However, retail spending on key shopping days from Thanksgiving to Cyber Monday was much stronger. E-commerce increased its share of retail spending vs last year."

Capital One: 
"Top line growth trends in the domestic card business remained strong, even with growth moderating somewhat in the fourth quarter."

"The charge-off rate for the quarter was up 213 bps y/o/y to 5.35%. The 30 plus delinquency rate at quarter end increased 118 bps from the prior year to 4.6%. On a sequential quarter basis, the charge off rate was up 95 bps and the 30 plus delinquency rate was up 30 bps."

"Auto originations declined 7% y/o/y."

"Loan growth on the commercial side fell 1% and we continue to see basically no C&I loans growth from the commercial banks. The modest declines are largely the result of choices we made earlier in the year to tighten credit."

IBM: “Technology demand will continue to be strong and serve as a major driving force behind global economic and business growth. It allows businesses to scale, offer better services, drive efficiencies, and seize new market opportunities.” 

“We see that there is a remarkably resilient economy. We can see that across South Asia from India to Japan, to the Middle East. Europe has kept remarkably resilient despite the conflict in Eastern Europe. Then when we come to North America, the economy here is resilient. Latin America, despite some early predictions, has actually done quite well.”  

ASML: “The uncertainty remains in the market due to a number of global macro concerns, while the semiconductor industry is currently working through the bottom of the cycle.”  

“Looking at the market segments, customers are indicating they are seeing healthy growth this year, primarily driven by AI-related demand for both Logic and Memory but also expected from other end markets as inventory levels improve.” 

“Coming off a very strong year in 2023 with 60% growth in Logic revenue, we expect some pause in demand as customers digest the capacity additions and while utilization levels improve.” 

Texas Instruments: “Our results reflect increasing weakness in industrial and a sequential decline in automotive as customers work to reduce their inventory levels.”  

“The industrial market was down mid-teens as we saw that increasing weakness. The automotive market was down mid single digits after 3.5 years of very strong growth. Personal electronics was about flat. Next, communications equipment was down low single digits. Lastly, enterprise systems grew low single digits.”

“In the fourth quarter, we did see weakness in industrial, increasing weakness there. We saw the sequential decline in automotive. As the guide would suggest, we believe that we'll just continue to operate in a weak environment and one where customers are continuing to rebalance their inventories overall.” 

HT Peter Boockvar and Bespoke Investment Group.

Our latest economic update was titled Traveling Through Soft Landing Valley. In case you missed it, here's the gist from BCA:
"Our base case is that the soft landing will prove to be a transitory state. The tailwind to consumption from excess savings is softening. According to our US Investment strategists’ estimates, excess savings will be fully depleted by midyear. Labor market indicators are already showing softening demand which will eventually lead to higher unemployment. Meanwhile, tightening lending standards and weakening credit demand reflect the impact of the Fed’s aggressive hiking cycle. The implication is that the economic backdrop will deteriorate this year as the economy moves towards recession, creating a headwind for risk assets."

And here's your weekly sector, region and asset class results update:

Asian equities were mostly green overnight, with 10 of the 16 markets we track closing higher.

Same for Europe so far this morning, although barely, with 10 of the 19 bourses we follow trading up as I type.

US equity averages -- amid, once again, stinky breadth (65% of the members, and half of the sectors, of the SP500 are down as I type) -- are mixed to start the session: Dow down 28 points (0.07%), SP500 down 0.05%, SP500 Equal Weight down 0.22%, Nasdaq 100 up 0.06%, Nasdaq Comp up 0.11%, Russell 2000 up 0.13%.

This morning the VIX sits at 13.94.

Oil futures are down 1.47%, nat gas futures are down 3.68%, gold's up 0.17%, silver's up 0.23%, copper futures are up 0.25% and the ag complex (DBA) is down 0.72%.

The 10-year treasury is up (yield down) and the dollar is up 0.36%.

Among our 33 core positions (excluding options hedges, cash and money market funds), 13 -- led by EIDO (Indonesia equities), LTPZ (long-term TIPs), SPTL (long-term treasuries), EWM (Malaysia equties) and VPL (Asia-Pac equities) -- are in the green so far this morning... The losers are being led lower by Range Resources, URNM (uranium miners), AT&T, XLE (energy stocks) and EWZ (Brazil equities).

"It's waiting that helps you as an investor, and a lot of people just can't stand to wait. If you didn't get the deferred gratification gene, you've got to work very hard to overcome that." 

--Charlie Munger
"We gorge on the food we know is bad for us and chase the stocks we understand may be very risky for us. This is because we fear missing out on the instant gratification we may get from consuming and buying them."

--Gautam Baid 

Have a great day!

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