The holidays are HERE!

We’re thankful to have you as readers and are wishing each of you a blessed time, with safe travels.

Here’s your “random thing that’s interesting to chew on” for today… what is going on in San Francisco?!

The city’s annual budget is $14 billion. From 2010-2011, it was $6.5 billion. The population of the city is almost the same that it was a decade before, yet the budget has more-than-doubled.

Here’s some approximated budgets of similar-sized cities:

Austin, TX: $1.3B
Denver, CO: $1.66B
Indianapolis, IN: $1.46B
San Jose, CA: $3B
Seattle, WA: $7.4B

The interesting thing about political and governmental offices is that they —to some extent — must operate as their own business.
With nearly every company in the country currently finding ways to cut back on expenses — will local & regional governments be doing the same? Or will they exhibit poor money management leading to higher taxes? Just food for thought — San Francisco is still one of our favorite places to visit!
Here’s the Mayor of SF talking about the city’s challenging budget deficit — despite having a larger budget than some entire countries throughout the world. Shoutout to Austin Allred for the inspiration.

Key Earnings Announcements:

Nike, FedEx, and General Mills have our attention heading into the holidays.

The most anticipated earnings releases for the week are Nike #NKE, FedEx #FDX, General Mills #GIS, Carnival #CCL, Micron Technology #MU, Rite Aid #RAD, FuelCell Energy #FCEL, CarMax #KMX, FactSet #FDS, and The Toro Company #TTC.

Monday (12/19): Heico, Steelcase

Tuesday (12/20): AAR, BlackBerry, Embecta Corp, FedEx, FactSet, FuelCell Energy, General Mills, Nike

Wednesday (12/21): Carnival, Cintas, Micron, MillerKnoll, Rite Aid, Toro

Thursday (12/22): CarMax, Mission Produce, Paychex

Friday (12/23): N/A — Stock Market Closes at 1pm ET.

What We’re Watching:
Nike (NKE)
Analysts expect Nike to report EPS of 65 cents with revenue of $12.57 billion. Investors are hoping to have their nerves eased regarding Nike’s operations in China. Last quarter, Nike’s revenue in greater China dropped by -13%. The quarter before that, it was -20%. Last week, Citi revealed that it expects Nike to exceed their earnings expectations due to recent sales and margin momentum — especially given the recently relaxed Covid restrictions in China. No position.
FedEx (FDX)
This marks the first investor report for FedEx since they announced plans in September to cut costs between $2.2-$2.7 billion this fiscal year. Additionally, FedEx announced a program to accelerate progress toward $4 billion in cost savings by 2025. This report is critical for FedEx, as investors are eager to hear about the company’s progress during its busiest time of the year — the holidays.
Analysts expect EPS of $2.83 on $23.7 billion in revenue. The same quarter last year saw EPS of $4.83 on $23.5 billion in revenue. So pretty much — EPS is expected to be nearly sliced in half, while revenue is expected to slightly grow YoY. FedEx is in a tough spot. No position.
General Mills (GIS)
General Mills is one of the few companies that has completely defied the odds of a rocky stock market by maintaining a steady uptrend all year. In fact — GIS set a new all-time-high share price of $88 last week. It’s estimated that adjusted earnings grew +7% to $1.06 per share on revenues of $5.19 billion, which would be up +3.4% YoY. Management also recently raised full-year sales guidance, while admitting that there likely will be a strain on margins. Expectations are high for General Mills, and we’ll report back on if they can live up to the recent share price eruption.

Investor Events / Global Affairs:

Europe’s energy crisis has entered “unaffordable” territory, Goldman Sachs is surprised by the resilience of retail investors, and North Korea keeps making a scene.

Europe’s Energy Crisis

According to Bloomberg, Europe has taken a ~$1 trillion hit from the fallout of the Russia vs. Ukraine war. After the conclusion of the winter months, the region will need to refill its gas reserves with little-to-no deliveries from Russia — who produces more than 1 out of every 10 barrels of oil in the world.

Brussels-based think tank Bruegel believes that a state of emergency could last for years as the support provided by central governments becomes increasingly unaffordable. About half of European Union member states have debt exceeding the bloc’s limit of 60% of gross domestic product.

We’ve written about the European energy crisis many times (One | Two | Three | Four | Five) — so we won’t harp on it too much. However, we feel that American investors need to keep a much closer eye on our EU friends. Global markets are far too interconnected for us to believe that this just disappears and doesn’t impact us.

“Once you add everything up — bailouts, subsidies — it is a ridiculously large amount of money... It’s going to be a lot harder for governments to manage this crisis next year.” — Martin Devenish, Director @ S-RM Consulting

Current State: Institutional vs. Retail Investors

This year, US equity mutual funds and ETFs (popular among individual investors) have attracted more than $100 billion in net inflows — one of the highest amounts on record going back to 2000.

According to Goldman Sachs, institutional preparation for stock market pain hasn’t been fully reciprocated by individual investors. Households typically sell about $10 billion in stocks after the S&P 500 falls at least 10% from its peak — which happened in both 2015 and 2018. With the S&P 500 on its way to its worst year in more than a decade — Wall Street is curious to see how much longer the Average Joe can stand the volatility.

“The fact that you have not seen very much selling from households is surprising.” — Ben Snider, Managing Director @ Goldman Sachs

North Korea’s Historic Weapons Testing

On Sunday, North Korea launch two more ballistic missiles off its east coast — adding to what has been a historic year for weapons activity. Kim Jung Un’s regime has conducted more than 30 rounds of weapons tests in 2022 — more than it’s ever done in a single year (by a huge margin).

As the country remains sealed-off “due to Covid-19” — North Korea has seen its economy focus more on domestic agricultural production and boosting the local economy, opposed to the typical level of trade it shares with its northern neighbor — China.

South Korea and Japan have been vocal about the need to take defense from North Korea more seriously than ever before. Japan has shifted its strategy from purely defensive, to spending $37 billion to develop “standoff missiles” by as early as 2026. Currently, the Japan-US Alliance features $8.6 billion in Japanese costs to host some 55,000 US troops in the country. The country’s missile upgrades are expected to be in place during the timeframe of the current partnership agreement — which runs through 2027.

The US is more involved with Japan and South Korea than meets the eye — and the 2022 weapons-testing-spree by Kim Jung Un is of critical importance to our country, not just the neighboring ones.

"China and Russia are determined to shield North Korea…So I think North Korea's space to play is much bigger than it ever was." — Senior US State Department Official

Major Economic Events:

The Fed’s preferred inflation gauge will give us some final, end of year insights into the recently positive progress of taming prices.

**A wide range of housing data this week will give us a better understanding of the severity of impact from mortgage rate hikes.**

Monday (12/19): NAHB Home Builders’ Index

Tuesday (12/20): Building Permits, Housing Starts

Wednesday (12/21): Consumer Confidence Index, Current Account Deficit, Existing Home Sales

Thursday (12/22): Chicago Fed National Activity Index, Index of Leading Economic Indicators, Final Sales to Domestic Purchasers, GDP (Revision), Gross Domestic Income (Revision)

Friday (12/23): Consumer Spending, Core Capital Equipment Orders, Disposable Income, Durable Goods Orders, New Home Sales, PCE Price Index, UMich Consumer Sentiment, UMich 5-Year Inflation Expectations

What We’re Watching:
Core PCE
Core PCE is the Fed’s preferred measure for inflation because it views the metric as a more comprehensive measure of the growth of goods and services prices than any other measurement. Core PCE is considerably less volatile than Core CPI.
Last month’s reading (for October), showed that Core PCE rose +0.2% MoM and +5% YoY. This month’s reading (for November), is expected to have a +0.2% MoM increase and a slower +4.7% YoY increase. This would match the lowest Core PCE yearly increase of 2022 — notched in July.
Consumer Confidence Index
The Conference Board a non-profit business membership and research group that counts over 1,000 public and private corporations as members. Each month, they release their Consumer Confidence Index (November’s is shown above).
We love watching this metric because it’s currently right near the benchmark level of 100 as we head into a potentially rocky 2023. We’re expecting this chart to fall rather substantially throughout the first half of next year, and we’ll be reporting back on results for December.

Events-Driven Winners:

Which stocks moved the most last week.

LevelFields_event_driven_winners_10Jun2022

Our friends at LevelFields scrub through thousands of data points each week to determine how events impact stock prices.

Slowly at First, then All at Once:
Avaya Holdings (AVYA) Stock Performance, 5-Year Chart, Seeking Alpha
Last week, Avaya Holdings (AVYA) revealed that it is nearing chapter 11 bankruptcy filing. In February of 2021 — the stock had a share price of over $32. At time of writing, the stock is worth 19 cents. Avaya’s stock traded near $21 at the beginning of the year but has fallen steadily over the course of the year as concerns grew about the firm’s debt burden and accounting practices.
For years, bankruptcies have had a steady trend of becoming less common. We, very sadly, believe this trend will be turned around in 2023 — and we very much hope that we are incorrect!
USCourts.gov

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Disclaimer: This is not financial advice or recommendation for any investment. The content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.

Rate of Return by Austin Hankwitz

👉 The Investing Week Ahead: 12/19/22