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After a lengthy gap, the Fed fund rate is above the headline CPI (YoY) rate (see graph below). Is this significant?
Happy Friday and the weekend ahead! Welcome to this 26th post of investing, not rocket science! Investing Doesn't Have to Be Rocket Science: this is our Non-Expert Guide to Portfolio Management.
Let’s begin with a summary of the FOMC interest rate decision and press conference:
· Fed increases interest rates by 25bps to the range of 5% to 5.25%
· The statement continues to emphasize the Fed’s commitment to returning inflation to its 2% target.
· In the last FOMC, the statement softened its tone about future rate increases from "ongoing rate increases." to "some additional policy firming may be appropriate.” In this FOMC, the tone has further softened to “The Committee will closely monitor incoming information and assess the implications for monetary policy.”
· The data it will assess before determining future course of action on interest rates are “a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.”
· The Fed will continue to trim its balance sheet.
In the press conference, the Fed Chair;
· Expressed his confidence in the financial sector.
· said the committee expects credit tightening in the financial sector to slow down inflation.
· expects the debt ceiling debate to reach a favorable conclusion without the US defaulting on its debt obligations.
· he continues to remain optimistic that below average growth does not necessarily mean a recession.
There were no economic projections released in this FOMC. The next meeting is scheduled to be between June 13 and 14th which will also include economic projections. You can read the post summarizing the previous FOMC here (post 14 of the series).
A quick recap of this blog series (investing, not rocket science) so far:
In the 1st post: I defined a basic portfolio framework. The objective of this million dollar portfolio is beat inflation and an equity index. The investment style presented here is active portfolio management, without the use of leverage and a time horizon greater than 5 years. The benchmark index is the MSCI ACWI IMI. Typically, there are two posts a week, which includes details of the portfolio and actionable evaluations (Mondays and Fridays).
From posts 2 to 20: I have evaluated 67 stocks and 4 potential bond additions.
Posts 21 onwards have been focused on the Q1 2023 earnings announcements, particularly of stocks in the portfolio and in the watch-list. The portfolio is long 16 stocks, 1 Bond and short 1 stock. You can read all about it in the previous posts here: https://www.claritech.app/blog
You can click on the charts, graphs or illustrations to expand or zoom in. There is no remuneration received to evaluate specific companies or to add to the portfolio or the watch-list. The Amazon adverts you see are the source of revenue for this free blog (subject to purchases or subscriptions).
Continuing the FOMC summary
A look at the graph below (source: https://fred.stlouisfed.org/) suggests that prior to the Financial Crisis of 2008, interest rates have generally been above the inflation rate. Does this cause a recession? Rising interest rates do not necessarily cause a recession. See illustration of QoQ GDP Growth.
The Fed Chair speaks of below average growth – what is that?
GDP data for the last 70 years (since 1953): QoQ growth has averaged 1.5%. Post the financial crisis, QoQ GDP growth has reduced to 1.1%. So does below average mean QoQ GDP growth less than 1%? Meanwhile, inflation has averaged 3.8% since 1961 and 2.5% post the financial crisis. The FOMC target inflation looks to be below average as well. In my opinion, inflation may not come down as quickly as we may be inclined to think. Then there is the delicate balance between below average growth and below average inflation.
ECB Interest Rate Decision – a summary
· ECB increases interest rates by 0.25% to 3.75%
· Continues to be data driven decisions
· “Policy rates will be brought to levels sufficiently restrictive to achieve a timely return of inflation to the 2% medium-term target and will be kept at those levels for as long as necessary.”
· Discontinue reinvesting under (Eurosystem’s asset purchase programme) from July 2023
See below for a graph of the Central Bank Assets in the Eurozone and the US.
Q12023 Earnings - Stocks in the portfolio and watch list
This a snapshot of the earnings announced this week for select stocks (and not a comprehensive list), pending a detailed analysis in future posts.
Stocks in the portfolio and watch list
Apple posted earnings of US$ 1.52 per share and revenues of 94.8B, beating analyst estimates on both. Compared to the same quarter last year, EPS is flat and revenues have fallen -2.6%. iPhone sales beat expectations with revenues of US$ 51.3B (vs US$ 48.9B expected). Revenues from Services, Mac and iPad came in lower than expected. Revenues for wearables were at US$ 8.7B compared to expectations of US$ 8.5B
AP Moeller Maersk announced its interim results for the quarter. Revenues for the quarter was at US$ 14.2 B, which missed analyst estimates. According to the company’s statement, revenues were down -26% as normalization takes place, affecting volumes across all its segments. Earnings per share was lower by -64% at US$ 131.
Trends in Financials (TTM): Operating income moderates while earnings yield continues to rise, as does the free cash flow. Revenues, revenue growth and net income declines.
AMD announced results of US$0.6 per share and revenue of 5.4B, beating analyst expectations on both. Compared to prior year, EPS was lower by -46% and revenue has fallen -8%. Chip sales has seen a 64% YoY decline in revenue largely due to drop in global PC sales in Q1. Gaming and Embedded divisions beat analyst expectations in revenues and offset the decline in chip sales. The company expects rise in sales in chip sales (client division) and data center division in the current quarter.
Trends in financials (TTM): Rise in shareholder yield, while cash flow is stable. Declines in Revenue growth, operating income margin, net income and earnings yield.
Lloyds Banking Group posted earnings of 0.022 per share and revenue of £4.79B, missing analyst estimates on both. According to a statement from the company, Net Interest income was up 20% YoY, operating costs were up 5% and profit after tax was up 43%. Net interest margin remained the same at 3.22%. Provisions were lower QoQ from 465m to 243m, and higher YoY from 177m in Q1 2021.
Trends in financials (TTM): Improvements seen in Revenue Growth, Shareholder yield and Free cash flow. Trends continue to rise in Revenues, Operating Income Margin and Earnings yield.
Emerson Electric announced earnings of US$ 1.19 per share and revenue of US$ 3.75B beating analyst expectations on both. EPS is lower by -15% YoY and Revenues are lower by -21% YoY. The company completed a US$ 2 B share buyback in Q1. The company expects revenues to grow between 9% to 10% in this fiscal year.
Trends in Financials (TTM): Revenues, Earnings Yield, Operating Income Margin and Net income continue to remain stable. Revenue growth has seen a rise and is likely peaking out. Shareholder yield sees a rise in trend, while free cash flow, although positive, is currently declining.
American Financial Group posted earnings of 2.89 per share and revenue of US$ 1.43B, missing analyst estimates on both. EPS declined -18% YoY while Revenues have risen 10%. According to a statement from the company, the lower EPS was primarily due to lower returns in AFG’s alternative investment portfolio compared to the prior year period, and lower year-over-year underwriting profit in the Specialty Property and Casualty (“P&C”) insurance operations. These were partially offset by higher other net investment income.
Trends in Financials (TTM): Stable net income, revenue growth and earnings yield. Shareholder yield has risen while free cash flow continues to decline.
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In other earnings this week:
Pfizer posted earnings of US$1.23 per share and revenue of US$18.28B, beating analyst estimates on both. EPS declined -24% and revenue declined -28% from Q1 2022.
HSBC Holdings PLC announced earnings of £0.29 per share and revenue of £16.16B, beating analyst expectations on revenue but missing on EPS. Compared to Q1 2022, EPS have fallen -33% and revenues declined -13%.
Starbucks posted earnings of US$0.74 per share and revenue of 8.72B, beating analyst estimates on both. Revenue grew 8% and earnings per share grew 3% YoY.
Ford announced earnings of 0.63 per share and revenue of US$ 39B, beating analyst estimates on both. This was a 65% rise in EPS and a 21% growth in revenue from Q1 2022.
In the next post, we discuss portfolio performance and a summary of the Q1 2023 earnings in the US and Euro area.
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