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Catalyst watch for the week of October 8. Seeking Alpha Senior Executive Editor Kim Khan on the most notable catalyst for the week, CPI. He also discusses a topic suggested by a listener, clean energy stocks and why they underperform compared to traditional energy. Julie gives a brief bank earnings preview. Banks start reporting earnings on Friday, October 13.
Julie Morgan: Kim, next week we have CPI.
Kim Khan: Yeah, the big inflation number that everyone will be watching and it’s coming in kind of tandem. We’re recording this the day before the September payrolls report and then there’s the September CPI report that’s coming next Thursday.
For the numbers, the CPI people are looking for a 0.2%, 0.3% rise in headline and core — having that core rate get closer to 4%, goes below that, that would be big news. I feel like it’s a bit of a Godfather III type of market in the way that I think I’m out and they pull me back in and that’s what’s happening now.
Basically, I think I’m — I can look beyond the Fed because they’re kind of — they’re done with their tightening cycle. But no, the Fed is still holding sway over this, but really through their button man, which is the bond market. And the bond market is really in control of things right now.
The Sovereign Treasury Bond market, because of the rates on the long end are going so high and making such huge moves. For an example, we saw this past week, the 10-year treasury yield peak at 4.9% and that was overnight, Tuesday and Wednesday. Right now, it’s trading back as we record Thursday afternoon at 4.7%. So you see the 20 basis point move from there.
Those are really major moves and that’s signs of a very jittery market of a lot of volatility in that market. And a lot of people trying to gauge just how long the Fed is going to be tightening and higher for longer mode and really trading off every piece of economic data.
So getting back to the CPI, this is going to be a really big one because we’re in the bad news is good news, good news is bad news camp again. So if it’s weak economic data, the market is going to like that.
Bonds are going to catch a little bit of a bid and yields are going to go down and that’s going to help stocks go up and we’ve seen the opposite as well happen.
So, if it looks like the economy is humming along, good news for the economy, but bad news for growth stock shareholders because those rates pop right up back again and it’s starting to really take a dent on risk appetite.
JM: Okay Kim, you have another analogy, Godfather. And before it was cat and dog, I remember Marvel, tell me, how do you correlate Godfather?
KK: Well, for the famous quote of just when I think I’m out, they pull me back in from Michael Corleone in Godfather Part III, which is what many people consider the only good part of that movie. It was a really, really bad sequel, but we won’t dwell on that.
And so the Fed is pulling us back in again. The market thought it could actually for a while start trading on more fundamental things for equity investors, for earnings, for expected valuations, for free cash flow, things like that.
And as soon as they start to try and drill down into these company specific things, you get this kind of wave of selling and all stocks go down because people are worried that the Fed is not going to cut until say in autumn of next year. And that’s mainly because the bond market is acting the way it is, it’s really like on a hair trigger. And we have seen that kind of volatile trade in the bond market for a while.
So that’s suddenly the narrative again. And so we don’t get to look beyond the Fed. Every time we get these big economic indicators, we have to pay attention to how that plays out in the Fed universe in J Powell’s thinking.
JM: Okay. This just basically means, I’m going to actually have to watch the Godfather movies. I have to say, I’ve never watched either of them. So I’m just, I know that sounds bad. But yeah, that’s me.
KK: It sounds terrible.
JM: All righty Kim. So let’s talk bank earnings now. Banks will start reporting Q3 earnings on Friday October 13th. I spoke to one of our editors about this and this is what they had to say.
Following the turmoil in March, deposit levels will still be of interest. Maybe not so much at big banks like JPMorgan Chase, Citigroup, and Bank of America. But at the midsize regionals like Western Alliance, Metropolitan Bank and First Horizon.
There’s also concern about credit quality. So the provision for loan losses will continue to be important.
Capital markets and M&A related activity will still probably be muted, she says. And with interest rates at/or near the peak investors will be looking to see if banks net interest income makes any further gains.
It’s Liz Kiesche, who writes on this topic on Seeking Alpha and she’ll have a bank earnings preview no later than Thursday of next week. Again, banks will start reporting Q3 earnings on Friday, October 13th.
But there’s another company reporting earnings also next week, which is Delta Airlines. It’ll also be interesting to see what Delta has to say about a story that came out this week, that said, it is the latest carrier to find fake aircraft engine parts. Again, we’ll be looking out for that.
So Kim, our next topic is a suggestion from one of our listeners, Garden of Brett. Thanks for your comment. By the way, this one is for you.
Recently Garden of Brett reached out about environmentally responsible stocks and why they aren’t performing very well and lagging behind traditional energy stocks.
Kim, what did you come up with on this topic?
KK: This is a great and timely question from our listener. If we look specifically, more narrowly, at the alternative energy stocks, they’ve just been taking a pounding. And if you look at the S&P Global Clean Energy Index, the FT pointed out that it’s down about 20%, so lost a fifth of its value in the past two weeks. And it’s on a pace for its worst performance since 2013 if it sticks with this year-to-date performance through the rest of 2023.
A lot of factors that are playing into this, but we go back to these higher rates that we’re seeing in the treasury market again. And that’s really kind of putting the screws to these clean energy companies and alternative energy companies.
There are several reasons for this. One is that they have agreed long term contracts where they fix the price of how much they’re selling energy for. And they did this, they’ve done this in the past couple of years and they haven’t even completed the projects, but they’ve already got contracts for it. And so all of a sudden you’re seeing an inflationary environment where everything they’re doing is costing them more, but they’re still locked in at the same price they have to sell to and also these companies have a lot of leverage. They’re borrowing a lot. And to manage this leverage or to refinance and everything, they’re doing it at a much higher cost because of these high rates.
JM: Okay. So this all, as you said, it all goes back to what you mentioned when you were talking about CPI, it’s the rising rates.
KK: Yeah. And it’s not just in the corporate sector – market. It’s also in the consumer sector because solar energy companies are seeing demand wane because of financing costs for panel installations are surging.
That’s what our energy editor, Carl Surran wrote about this past week. And our listener did give us a few names that I wanted to just highlight looking at how our Quant rating system views them.
There’s Plug Power, ChargePoint, Origin Materials. All of those now currently are rated by our Quant rating system which takes a variety of different factors into account as either sell or strong sell.
So there’s not a lot of love there in the Quant system for these stocks. Growth and momentum are where they get really poor grades. Some would say Plug Power also on valuation.
And then another big name NextEra Energy, which is really in the crosshairs of sellers right now. That does a little better on Quant. It gets a hold and actually a buy for Wall Street analysts and from Seeking Alpha analysts, but it’s really facing some harsh selling.
I encourage you to go in Seeking Alpha and check out the chart and check out the metrics and check out the momentum technicals because it’s quite a drop and it could close now as we’re recording below 50 for the first time, I think in almost like more than 3.5 years.
So business is costing more for these companies. They’re locked into these contracts where they’re selling energy at a consistent price and can’t raise their prices. And buyers are having a tough time staying with these stocks.
JM: And Kim referred to an article written by Carl Surran about this. I will be sure to link that in show notes. Kim, is there anything else you’d like to add?
KK: I’d just like to circle back to what we talked about at the end of last week. Constellation Brands was out with its earnings today and it did outperform a little bit on revenue mainly because of its beer brands. So I guess people are still buying the Modelo beer and also the Chelada Modelo, which I didn’t even know they had. But it sounds interesting and I’m going to try.
JM: Oh, I wonder what that tastes like.
KK: Spicy.
JM: Spicy. I like spicy, especially being from Louisiana. Well, Kim, that’s it for this week. We’ll see you next time.
KK: Thanks Julie.
JM: And if you’d like to write in and have Kim research a topic, be sure to leave us a comment on Seeking Alpha or your favorite podcast platform. Thanks for listening.
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