Financials Delivered. Energy...
Macro Perspectives
We've talked about the big banks the past couple of days. If you look just a bit past the headlines, you find that the performance of the biggest banks in the U.S. have been good - despite enduring what increasingly looks like a technical recession in the first half of the year (technical recession = two consecutive quarters of negative growth).
As we've discussed here in my daily notes, this is negative growth AFTER the effects of 40+ year high inflation. For perspective, nominal growth is still running hot (6%+) - that means the economy is still moving, demand is still there.
With that, the biggest takeaway from bank earnings: the consumer is strong, and balance sheets and credit worthiness (for both business and consumers) remain strong.
So, we've talked about the opportunity in bank stocks. Yesterday, they led the way, in a day of broad stock market strength;
JP Morgan was up 2.5%.
Bank of America was up 3.6%.
Citi was up 4.2%.
Wells Fargo was up 4%.
Goldman Sachs was up 5.6% on the day.
We heard from Haliburton - the biggest provider of products and services to the energy industry - before the bell as well. They beat on earnings, and beat on revenue estimates. They put up huge growth numbers, just compared to the past quarter!
That should wake up the investment community to energy and commodity stocks, both of which are benefiting from structural supply shortages, and high prices - a recipe for expanding margins. Yet both (the stocks & industry) of which have been pummeled in the past five weeks.
Since June 8th, the energy sector ETF (XLE) declined ~30% - this is an industry that put up record numbers in Q1, and we will very likely find that they set new records in Q2.
Is it because oil prices are in the political crosshairs? It's not just energy stocks that have been battered in the past month, it's broad commodities stocks, as you can see in this chart below…
What are these commodities primarily priced in? U.S. dollars.
What has been screaming higher since June? The dollar.
So, with a soaring dollar, weaker commodities prices are buffering the pain for global consumers.
But the dollar is rolling over now.
This should align well with the timing of Q2 earnings in commodities stocks (i.e. a buying opportunity). Even after some weakness in commodity prices late in the quarter, I suspect we will find these commodity producing companies continuing to produce a ton of cash, with which they have been paying down debt and returning large amounts to shareholders (share value creation).
Commodity stocks are a gift to buy on this sharp correction.
NB: I’ve previously discussed an Energy focussed Beta Trade. The rationale is summerised below.
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