FT Saturday Nuggets

The big theme for near-term investment decisions is; should we trim equity exposure to mitigate risk of higher-than-expected interest rate increases, or is the worst over?  The data suggest that near future interest rate decisions will be higher, and that equity prices could go down.

Saturday [3/4/2023] Macro Economic Nuggets

The two-year U.S. Treasury yielded 4.94% on 3/3/2023.  Federal Reserve Governor Wall was quoted as saying if inflation cools, and labor data are muted, then the Fed’s peak interest rate target could remain, between 5.1% and 5.4%.  Futures markets are pricing in a peak interest rate of 5.45%.  So, in light of recent strong labor data, and return to higher than expected and growing inflation data, it appears as if interest rates may increase to higher levels than the market expects, which is bad news for stock prices.

Earnings Outlook from Lipper

I/B/E/S Lipper’s 3/3/2023 S&P Aggregate reported expected earnings growth of negative 4.5% for 1Q2023, unchanged from last week.  4Q2022, which is almost all reported is negative 3.2%.  So, earnings are expected to decline.  The report predicted negative 3.5, negative 3.2 percent and positive 10.6% for each the following quarters, 2Q2023 through 4Q2023, respectively.  The risk appears to be that all the earnings growth in 2023 is in the fourth quarter; if interest rates rise higher than expected, growth may slow, and earnings forecast may be reduced.  Again, possible bad news for stock prices.

Upcoming Macro Calendar

• 3/7 & 3/8 Powell Fed Chair Congress Testimony
• 3/8 Biege Book
• 3/9 Jobless
• 3/10 Unemployment
• 3/14 CPI & hourly earnings
• 3/15 PPI & Homebuilders Survey
• 3/16 Housing Starts
• 3/17 Capacity, Leading Indicators, Cons. Sentiment

Financial Times’ Article Shell Oil’s Discount [3/4/2024]

FT reports that Shell trades at 3 x cash flow versus XOM and CVX.  FT explains that part of the reason for the discount is that investors don’t like Shell’s carbon reduction strategy on one hand, and unlike XOM, Shell has not maximized its oil profits.  In 2019, Shell stated they would reduce production by 1% to 2% per year as part of a carbon zero strategy, and production is down 10%.  It is unclear if Shell can close the valuation discount.

Review of Last Week’s Barron’s Ideas

Both Neste and Schneider were up moderately from Monday, in line with the market.