Preview of the week starting 10 Oct 2022 - can Pepsi reverse its downtrend?

Public Holidays
Nil - China, Hong Kong, Singapore and the US

Earnings Calendar

Some of the key Earnings in October 2022

Personally, I am interested in the earnings for PEPSICO, Blackrock and TSMC.  Of course, there is a suite of bank earnings to follow starting on Friday.  For Blackrock, it coulod give a glance into the outlook of financial investments.  For TSMC, it could give a prequel of what the chip market could be heading to.  To me, the earnings (EPS) and revenue would be looked upon but what is of most value is their market outlook.

PEPSI

Overview of PEPSI portfolio by suredividend dot come

PepsiCo, Inc. manufactures, markets, distributes, and sells various beverages and convenient foods worldwide. As one of the "dividends aristocrats", this is a product that is well liked, operating in the "Consumer Defensive" sector.  The company grew 3.34% from a year ago but is still on a downtrend since August 2022.

The current price of 161.61 is above the 52-week low of 153.37 and a short distance from the 52-week high of 181.07.  The company has managed to grow over the Covid years and will the company be able to reverse its current downtrend?

From the coming earnings' forecast, PEPSI is expected to reap in 1.84 and 20.78B for its EPS and revenue respectively.  As a staple, its outlook will be important indicator into market sentiments.  In event of downturn, the market may opt for "cheaper" options or reduce some consumption.  

Economic Calendar

Economic Calendar starting 10 Oct 2022

Personally, I am paying close attention to these few announcements:

• Producer Price Index (PPI)

Investopedia defines PPI as the following: The Producer Price Index (PPI) measures the change in the price of goods sold by manufacturers. It is a leading indicator of consumer price inflation, which accounts for the majority of overall inflation.

A higher than expected reading should be taken as positive/bullish for the USD, while a lower than expected reading should be taken as negative/bearish for the USD.

Technically, PPI is the inflation that the manufacturers take on.  Usually, inflation over here can be passed on to consumers pending the "price elasticity" of the products. 

• Initial jobless claims - this is an important data point for the Federal Reserve's coming interest rate hike as they manage both unemployment and inflation.
• Crude Oil Inventories - this is one of the forward indicator coming to how the market plan their (oil) production in anticipation of market demand (typically) a few months down the road.  Thus, if the drawdown is lesser, it is usually treated as a bearish signal for the market.  This usually implies a "lesser" demand from the market.
• Retail Sales - this represents customer spending.
• CPI (inflation) - please refer to the section below.

Deep dive into the inflation numbers
The most important news in the coming week should be the Consumer Price Index (CPI) update on 13 Oct 2022.  CPI represents inflation in the economy.  Inflation is the "invisible" tax on all (affecting especially the lower income demographics as prices are rising, leading to a lesser disposable income and thus, reduced spending power.  With the "favourable" unemployment number of 3.5% announced on 7th Oct 2022, this will be a key reference for the Federal Reserve's coming interest rate hike.  It is expected that the inflation to remain elevated and the market seems to be factoring in a 75 basis points rate hike.

Monthly 12-month inflation rate in the United States from January 2020 to August 2022

From the chart above, inflation may have peaked.  However, it is to note that this is based on a "12-month rate".  This meant that the inflationary impact prior to the periods before the 12 months was removed from the calculation.  I do not think that there is any fraudulent intent but we do need a time frame defined to express its magnitude within a defined period of time.  To better understand the inflationary impact and changes, we should also look at the cumulative inflationary impact as per the chart below:

US cumulative inflation chart (1913 - July 2022)

(Source: https://inflationdata.com/articles/2022/08/10/u-s-cumulative-inflation-since-1913/)

It can be a tad far-fetched to appreciate how the cumulative inflation reached 2,923.22% between 1913 to July 2022.  However, if we are to narrow this down between December 2009 to July 2022, we get a cumulative inflation rate of approximately 820% (using 2,923.23 less 2,103.56).  To appreciate the inflationary impact of the aggressive money printing since Covid in 2020, let us look at the increase in cumulative inflation between December 2019 (2,522.18%) and July 2022 (2,923.22%).  Between this period (Dec 2019 to July 2022), the US has experienced cumulative inflation of 400+% in over 2+ years (32 months to be exact).  This works out to be over 12% average inflation every month using Dec 2019 as the base month.

Without getting into the technicality of the "basket of goods and services and their respective weightage", different sources have claimed that the inflation (CPI) figure may not always represent what is experienced on the ground.  In fact, the US Bureau of Labor Statistics published an article in Aug 2012 titled " Consumer Price Index data quality: how accurate is the U.S. CPI?"  In this article, they addressed concerns about the basket, the sampling and the methodology.  The article can be found in the link below: https://www.bls.gov/opub/btn/volume-1/consumer-price-index-data-quality-how-accurate-is-the-us-cpi.htm

My muse and news

• One of the biggest challenges to developed countries is the low birth rates. 
• One of the best biggest challenges to Tesla could be geopolitical.
• <Bloomberg> $Meta announced layoffs. With Big Tech accounting for ~25% of the S&P500, the macro will get even more challenging in the coming days. "layoff > reduced spending > less demand > less production > repeat" is the recessionary cycle.
• Reminder. Spend within our means and do not leverage. Reminding myself, my friends,  companies and governments alike.
• <The Guardian> IMF chief warns of breakdown of the global economy. 
• Tesla achieves a BBB credit rating, from a BB+ rating. 
• Shipping a 40’ container from China to Los Angeles & Long Beach will now cost about $4,900 in Sep 2022 compared to a high of USD17,500 in Sep 2021. China/US West Coast rates are down 72% Y-O-Y. China/US East Coast rates down 54% Y-O-Y
• Global slowing down as per WTO.
• <CBO> CBO’s projections: net interest outlays increase from $352 billion (2021) to $399 billion, or 1.6% of GDP in 2022. This outlay triples to $1.2 trillion by 2032, 3.3% of GDP, 1.3% points higher than their 50-year average as a share of economic output.
• <ABC News> “it took this nation 200 years to pile up its first trillion dollars in national debt, &since the pandemic, we have been adding at the rate of 1 trillion nearly every quarter." - Sung Won Sohn, an economics professor at Loyola Marymount University
• <Reuters> US looks to release more oil inventories from her reserves, not happy with this outcome from OPEC+. This should add an inflationary impact on prices and utilities. 
• <Oilprice> According to the latest reports on OPEC+, the extended cartel is considering a production cut as deep as 2 million barrels daily. This would be the biggest cut in production since the first pandemic year when lockdowns destroyed demand.
• BYD expands in Shenzhen
• <CNBC>  August Job openings totaled 10.05 million, a 10% drop from the 11.17 million reported in July (1 million less than expected). Job Openings & Labor Turnover numbers are watched closely by the Fed which is trying to reverse runaway inflation.
• BYD's order backlog reaches 700,000 units, aims for 280,000 monthly deliveries by year-end
• BYD sold a record 201,259 new energy vehicles (NEVs) in September, the 7th consecutive month of record sales & the first time the number exceeded 200,000 units. That's up 183.07% from 71,099 units in Sep 2021 & 15.06% from 174,915 units in August.
• <CNBC> Vietnam in contrast saw exports jump by 30.4% in April from a year ago, following a nearly 19.1% year-on-year increase in March, Wind showed.
• <WSJ> Ocean carriers are cancelling dozens of sailings on the world’s busiest routes during what is normally their peak season, the latest sign of the economic whiplash hitting companies as inflation weighs on global trade and consumer spending.
• <FT> Cold weather warning adds to Europe’s gloom as it battles energy crisis. Less wind and rain could hit renewable power as the continent seeks to wean itself off Russian gas
• When recession is mixed with energy crisis, a persistent falling oil price may imply a potential drop in inflation. But it can also imply demand destruction.  Price is the result of demand and supply. 
• The Q3 bottom-up EPS estimate (which is an aggregation of the median EPS estimates for Q3 for all the companies in the index) decreased by 6.6% (to $55.51 from $59.44) from June 30 to September 29.

Market Outlook
Following last Friday's decline, how would the S&P 500 look for the coming week?

1D S&P500 chart as of 08 Oct 2022

My observations are:

(MA - moving averages, EMA - exponential moving averages)

• The Stochastic indicator - downtrend
• The MACD indicator - though it has bottomed up, it seems that there may be a double bottom forming.
• Moving Averages lines - the candles are under both MA50 & MA200.  This points to a bearish trend in both mid/long term
• Exponential Moving Averages lines - while the lines are closer, they still point to a downtrend.
• Note the down gap between 6 & 7 Oct 2022 - this is usually a bearish sign. As per the news, this was caused by the favourable "unemployment" rate that implies that the Fed can continue its hawkish stand.  This implies that the Fed is likely to continue its hawkish approach towards interest rates.
• S&P500 tested the region near 3,800 but could not break this ceiling.  As of 7th October, S&P500 is languishing at 3,639.

From the collective of indicators above, it is likely that the downtrend should continue but a bottom should be reached soon (and eventually).

My investing muse
With the technical indicators pointing to a downtrend, the market waits anxiously for the CPI (inflation) figure which will be revealed on Thursday.  The market is expected to thread cautiously till the CPI is announced.  It should be a case of anticipated "bad news" (inflation remaining heightened) versus "not so bad" news (inflation rate has fallen better than expected).  In both cases, US inflation continues to weigh on the economy.  With this, the market will start to "factor in" the amount of interest rate hike with 75 basis points a "common" expectation.

In Ukraine, Russia has annexed the 4 regions, giving them the "option" to declare war in self defense when attacked.  With the latest explosion at the prized Crimea bridge, Russia has the "grounds" to declare war as "self defense".  How this will unfold lies largely in the hands of President Putin.  I think that Ukraine will try to recover as much ground as possible, knowing the risks of a provoked Russia.  Russia does not need to call "bluff" with the wide array of arsenal they have.  When cornered, they may feel desperate enough to deploy "desperate" measures like chemical, biological and nuclear weaponaries. 

Nord Stream pipeline was attacked and till now, it is unclear who is the culprit.  Russia and the west are calling each other guilty respectively.  While the culprit is not confirmed, the energy crisis is heightened.  Europe is facing challenges and US is trying to help with their gas supplies.  Update from Reuters:

Through June of this year, the U.S exported about 57 bcm of gas as LNG with 39 bcm, or 68%, going to Europe, Refinitiv data shows. That is compared with 34 bcm, or 35%, of LNG exports shipped to Europe for all of 2021.

While this is not sufficient (leading to the energy crisis in Europe), this remains an option for Europe.

With the series of weather extremities, many place like Puerto Rico, USA's Florida, Pakistan, China have suffered.  The weather has destroyed homes, properties, lives, businesses and affected industries like agriculture, energy, supply chain, tourism.  The costs of these are not easy to quantify.  However, the amount incurred in damges will be large as homes, cities & infrastructures need to be rebuilt.  These would "delay" the revitalization efforts as countries rebuild from the Covid19 pandemic.

In the coming weeks, earnings of banks and the Big Tech would be announced.  It is expected to see earnings compression (lesser earnings). With the likes of Google, Meta and Amazon announcing job freeze, revenue fall and retrenchment, it is expected for the earnings to "disappoint".  What would weigh on the market is not so much the EPS or revenue but more so of the market outlook.

I recommend all to spend within our means, save "cash for the crash", invest with what we can afford to lose.  There will be great companies available at good discounts following the downturn.  Let us not forget to do our due diligence and add the margin of safety.  When the opportunities present themselves, let us step up and "invest" bravely.  For me, I intend to purchase the shortlisted companies in tranches.