The Week in Charts (4/30/24)

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The most important charts and themes in markets and investing…

1) Expectations Are Everything

When it comes to markets, expectations are everything, and during earnings season this is on full display.

When expectations are extremely low, an upside surprise becomes increasingly likely.

That was indeed the case with Tesla last week which entered earnings in a 64% drawdown.

Tesla reported a 9% drop in revenues (biggest YoY decline since 2012), a 55% drop in net income, and gross margins of 17.4% (down from 29.1% two years ago).

And how did the stock react? It was up 13% in after hours trading.

On the other side of the sentiment spectrum was Meta, which entered earnings up 138% over the prior year. Needless to say, expectations were extremely high.

What did they report? A 27% increase in revenues (highest YoY growth rate since 2021), a 117% increase in net income, and operating margins of 38% (up from 25% a year ago). By all accounts, it was a blowout quarter.

And how did the stock react? It was down 15% in after hours trading. Expectations are everything in markets.

2) Cash-Generating Machines

Google and Microsoft both reported earnings last week and both continue to be cash-generating machines. Within the S&P 500, only Apple has a higher operating cash flow over the last 12 months.

Google’s revenues increased 15% over the last year to a new 1st Quarter high of $80.5 billion while Net Income increased 57% YoY to a record $23.7 billion. Operating margins moved up to 32% from 25% a year ago.

Sitting on a mountain of cash (highest among the magnificent 7), Google also approved its first quarterly dividend ($0.20 per share) and an additional $70 billion for potential buybacks.

Microsoft’s revenues increased 17% over the last year to a new 1st quarter high of $61.9 billion. Net income grew 20% YoY to $21.9 billion (2nd highest quarter ever). Operating profit margins moved up to 45% from 42% a year ago.

3) Slower Growth, Higher Inflation

US Real GDP came in at 1.6% in the first quarter, which was below expectations (2.3% consensus) and the slowest growth rate since Q2 2022.

The US economy has now been in an expansion for 48 months (4 years), with annualized real GDP growth of 4.6% over that time.

But much of that outsized growth is due to the measurement from the covid lows. If we look at the past five years, Real GDP has increased at 2.4% per year, which is right in line with the growth rate during the previous expansion (June 2009 to February 2020).

Accompanying the slowdown in growth during Q1 was a pickup in inflation, with the price index for gross domestic purchases increasing 3.1%. That’s a significant move up from the 1.9% increase in Q4 2023.

4) And Then There Was One (Rate Cut)

The Fed’s preferred measure of inflation (Core PCE) remained at 2.8% in March, above expectations for a decline to 2.7%. Overall PCE rose to 2.7% (expectations: 2.6%), the highest reading since last October. Any remaining chance of June rate cut is likely gone after this report.

The market is now pricing in just one rate cut in all of 2024 (occurring in September), down from expectations of 6-7 cuts at the start of the year.

5) Warren Buffet on “Playing Offense”

Berkshire Hathaway’s cash pile hit a record $168 billion in Q4, a significant increase from the $105 billion it held in cash near the 2022 stock market lows.

Why are they holding so much cash?

To be in a position to play offense during periods of market turmoil while others “scramble for survival”…

“Having loads of liquidity lets us sleep well. Moreover, during the episodes of financial chaos that occasionally erupt in our economy, we will be equipped both financially and emotionally to play offense while others scramble for survival.” – Warren Buffett

When will they deploy some of that cash?

Likely when valuations are at more compelling levels. The current CAPE Ratio of 34 for the S&P 500 is above the 97th percentile of historical readings.

6) Can’t Afford The Homes They’re Living In

38% of US Homeowners surveyed by Redfin said they didn’t think they could afford to buy the home they are living in today at current prices/mortgage rates. An additional 20% said they “might not” be able to afford their current home.

How is that possible?

Most current homeowners purchased their homes when prices and mortgage rates were much lower. At current prices/mortgage rates, the math simply doesn’t work.

Last week, the 30-Year Mortgage Rate in the US moved up to 7.17%, its highest level since last November. 3 years ago the mortgage rate was below 3%.

The monthly mortgage payment needed to buy the median priced home for sale in the US has increased 92% over the last 4 years (from $1,480 to a record $2,840). Needless to say, incomes haven’t grown by nearly that month, making the average house unaffordable to the average American.

7) Higher Yields, Higher Prospective Returns

The 10-Year US Treasury Yield moved up to 4.70% last week, the highest level since last November. Meanwhile, the inflation-adjusted yield moved up to 2.28%.

The good news for bond investors today? The future is likely to be much better than the past. The single best predictor of future returns for bonds (97% correlation) is the starting yield. And with yields getting closer to 5%, prospective returns have not been this high since 2007.

8) Cooling Sentiment

After a 6% pullback in the S&P 500, sentiment has moved back to neutral from the overbullish extremes we saw at the end of March.

For the first time this year, there were more bears than bulls in the AAII Sentiment Poll (-1.8% spread) and Active Managers who were leveraged long (>100%) have reduced their equity exposure down to 59% (NAAIM Exposure Index).

9) A Few Interesting Stats…

a) Meta’s Reality Labs division has lost a total of $46 billion since the 4th quarter of 2020.

b) “You have to be wildly optimistic to believe that corporate profits as a percent of GDP can, for any sustained period, hold much above 6%.” – Warren Buffett, 1999

c) Only 35% of securitized office loans that expired in 2023 were paid off, the smallest percentage on record with data going back to 2007.

d) Americans in the poorest 1% of zip codes spend $600/year on lottery tickets while those in the richest 1% spend only $150/year. As a percentage of income, the poorest households spend 30x more than the richest households (see video discussion here).

e) “Since September, when California moved to require large fast-food chains to bump up their minimum hourly pay to $20 in April, fast-food and fast-casual restaurants in California have increased prices by 10% overall, outpacing all other states.” – WSJ/Datassential

And that’s all for this week. Have a great week!

-Charlie

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