The Opportunity & The Biggest Risk
A short update as earnings roll out. Where is the financial system breaking? If at all.
Our first round of earnings came out today and to say they were dismal is an understatement. Even Walmart realized (who wasn’t even supposed to report today) that they should “warn” investors of the upcoming numbers and guidance for Q2. Needless to say, they are having a difficult time. However, it doesn’t stop there.
Whirlpool WHR 0.00%↑ announced earnings and they were bad, as expected. It is noteworthy that the stock is up 2% after hours.
Weber Grills WEBR 0.00%↑ signals with a near 13% down day that the consumer is in trouble. In addition, they were announcing some unusual news about their credit line that could signal debt problems? The CEO was replaced today and we will have to see how this story plays out.
Tomorrow, we have another loaded day. Expect UPS to give us a gauge on e-commerce orders and the consumers strength as well as economic activity.
The Opportunity
The exciting thing is that it’s looking like a lot of this has been priced in. Last week we had bank earnings and many banks did not come out with the best results and the stock price was relatively flat. The same happened today with WHR 0.00%↑. In yesterdays Substack I laid out the case for what can go right and why this is an opportunity:
The Risk is What I Want to Focus On Here
Pay attention to the “break” in the financial system in the coming weeks. During 2007, few investors knew where it was and where to look. Hindsight suggests housing. In 2018, we saw the repo market begin to crush the markets, this was a shock to the markets.
I don’t know where the next major risk catalyst is and I don’t believe the market knows either
If the market knew what was happening, it would justify another larger leg lower. We are not heading lower, we are moving sideways. This deflationary risk is what I mentioned a few weeks ago. Basically:
Easy lending practices = Causation for credit unwind (defltion)
The Biggest Risk in the Financial System is a Deflationary Event
Pay attention for clues and signs of DEFLATION as the Fed gears up for another rate hike and as the recession narrative engulfs the market. Deflation is the bigger risk.
My hope is that this “soft landing” can be pulled off as we take the economy from over heating to cooling off. I’ll keep you updated with what I see.
Stay Tuned, Stay Classy
Dillon