May 22nd, 2022

Global stock markets opened for trade this past week with a modicum of momentum coming out of the previous Friday’s rally. Hopes for further improvement in the China zero Covid situation and valuation compression finally seemed to have offset some of the relentless selling pressure allowing risk assets to hold onto very modest, marginal gains. The U.S. 10-year yield appeared to find resistance around 3% amid weaker than expected manufacturing data which also may have convinced some to wade back into equity markets. Investors’ moods soured quickly, though, after Walmart and Target reported quarterly results. Both high profile managements were caught off guard by the staggering surge in freight costs and supply chain issues which along with changing consumer behavior resulted in a significant hit to their profitability. Shares of each company tumbled an eye popping 20+% on Tuesday and Wednesday respectively, the biggest one day declines for those shares since 1987’s Black Monday. By Friday the S&P futures traded below the May 12th intraday low and the Dow was staring at its 8th straight weekly decline which was the longest losing streak since 1932. For the week, the Dow and S&P lost 3%, the 50/50 Nasdaq/Russell benchmark fell 2.6%, Japan and China’s stock markets gained 2%, and European bourses had modest losses. Our BSD Global Tech Hedge Fund retreated 1.5% last week. Federal Reserve officials remained unnerved in their most recent commentary, and even admitted they welcomed the recent repricing seen in markets. A cadre of officials underscored a unified message that the central bank will do what is necessary to get inflation down. 50 basis point rate hikes at the next two meetings appear to be a given, but Fed officials remain realistic that rates will likely have to go significantly higher than that, but just how much higher remains to be seen. Oil prices continued to work against the Fed as well. Despite the clear slowdown in China, increasing global growth concerns crude oil prices moved up 2% this week. The U.S. dollar finally downshifted, helped in part by lower U.S. Treasury yields. The Euro rose to a two week high after ECB members continued to note concerns around the greenbacks recent strength. The ECB’s Knot like many others threw his support behind a 25 basis point hike in July, but also opined that a 50 basis point move could be warranted if inflation data were to worsen. Bitcoin remained heavy dipping back below the 30K mark. In corporate news this week, major retailer earnings drew most of the market’s attention. While Walmart revenue grew during the quarter, higher supply chain and employee costs ate into profits. Target’s quarter told largely the same story, with management noting fuel and freight costs could be $1B higher in 2022 than it had expected. Home Depot blew away estimates, while BJ’s Wholesale kept margins largely intact as it posted beats on its top and bottom line and saw gains in member traffic. Kohl’s cut its FY forecast, as did Ross Stores, which subsequently saw its shares drop the most since 1986. On the manufacturing side, Deere boosted its FY guidance despite seeing continued rising costs that have pressured margins and affected their consumer base buying power. Colgate told investors they are seeing supply chain pressures abate, though some costs are still rising. Renault confirmed it would divest its Russia unit and controlling interest in AVTOVAZ, becoming the latest automaker to leave the country over its invasion of Ukraine. McDonald’s also agreed to sell its Russian assets to a current Siberian licensee, who will operate the stores under a new brand. U.S. government officials reportedly have found that the black box from the China Eastern plane crash in March points to an ‘intentional nosedive’ as the cause and there are no indications of problems with the Boeing aircraft.

Investors will be jittery going into the coming week with more retailers due to report, following on the jarring reports from Target and Walmart that precipitated broad selling across sectors last week. Costco, Best Buy, Advance Auto Parts, Nordstrom, Dick’s Sporting Goods and Macy’s are a few of the key reports to watch from consumer-facing companies. Fed speakers are back on the circuit next week and FOMC minutes will be released just as traders begin to assess the impact of recession talk on future rate hike plans. In the coming week, the second look at first quarter gross domestic product is announced Thursday, as well as PCE data on Friday which is closely watched by the Fed. On the corporate calendar, JPMorgan will hold a key analyst day event and annual meetings at McDonald’s and Amazon hold more intrigue than normal. On the tech front, Zoom, Nvidia, Dell and Nutanix report their previous quarter earnings reports this coming week.

The BSD Global Tech Hedge Fund is 85% invested across a couple dozen tech vendors and tech end-users, with a 45% short equity indices hedge on the invested stock portfolio, which will incrementally grow (with a ‘laddered’ Nasdaq put option position) if the market deteriorates further.