Good morning contrarians! Welcome to the Daily Contrarian, our morning look at events likely to move markets. It is Thursday, July 25. The Bottom Line segment of today’s podcast starts at (4:31) for listeners who want to skip ahead. Be sure to check out the ‘Stocks on the Contrarian Radar’ segment, which today has a bit of a different bent, at the bottom of this page and (7:37) on the podcast.
State of Play
Stocks got beaten up yesterday, apparently in (over)reaction to earnings the previous evening from Google (GOOG 0.00%↑) and Tesla (TSLA 0.00%↑). Tech stocks saw the worst of it, but it was a bad session all around. Nasdaq and S&P 500 had their worst day since 2022. As we look at our board of indicators for signs of direction at 0655, risk-off appears to be in order:
Stock index futures are pointing lower, with tech leading the drop again. The Nasdaq is down 0.4% with S&P futures down 0.2%;
Commodities are dropping. WTI crude oil is down almost 2% to trade around $76/barrel, the lowest level in weeks. Copper is down 0.7%. Gold and silver are dropping as well, gold by 1.8%;
Cryptos are selling off too. Bitcoin is down 3.5% to trade around $64,000. Ethereum, which just yesterday (right?) saw the launch of spot ETFs, is down 9%;
Bonds are seeing bids. Flight to safety? The 2-year yield is down 6 basis points to 4.35% whilst the 10-year is down 7bps to 4.22% (yields move inversely to prices).
Today’s Known Events
Earnings are once again the major story. Some of these have already come in. The weird thing is that investors appear to be punishing stocks even after positive reports:
Swiss chipmaker STMicroelectronics (STM 0.00%↑) cut its revenue outlook and that stock is dropping in the pre-market, to the tune of 12% at the time of this writing;
Hasbro (HAS 0.00%↑) beat on top- and bottom-line estimates and that stock is rising in the pre-market, up 2%;
Honeywell (HON 0.00%↑) beat top- and bottom-line estimates and appears to have raised guidance but the stock is still being punished in the pre-market, down 7%;
Royal Caribbean (RCL 0.00%↑) beat estimates and reinstated its dividend. It also appears to have raised guidance but here too investors are punishing the stock, which is down 3%;
Southwest Airlines (LUV 0.00%↑) also beat estimates but here too the stock is dropping, down 4% at the time of this writing;
American Airlines (AAL 0.00%↑), RTX (RTX 0.00%↑), Keurig Dr. Pepper (KDP 0.00%↑), New York Community Bancorp (NYCB 0.00%↑), and Harley-Davidson (HOG 0.00%↑) are all due before the open at 0930.
We’re due to get a first look at second-quarter GDP at 0830. Economists who were surveyed expect growth of 2.0%, an improvement over the 1.4% seen in Q1. There are a bunch of numbers in this report, not least of which a reading on personal consumption expenditures. This is expected to increase 2.6% for the quarter, down from the 3.1% reading seen for Q1. There is a Core PCE figure as well, which is expected to come in at 2.7% versus 3.7% in Q1.
Seeing how it’s Thursday we’ll also get initial jobless claims at 0830. The expectation here is for 237,000 new claims, down a bit from the 243,000 recorded last week but north of the four-week average which is 235,000.
The Bottom Line©️
Chances are, the GDP report won’t impact markets much. It usually doesn’t because markets are forward-looking beasts and last quarter’s GDP is, well, for last quarter. Having said that, the rate of change is of course ever important when it comes to economic growth. So figure this will matter, even if there are probably other ways economists can extrapolate economic growth without depending on the official government data.
What the existing data around housing, employment, and retail activity tells us is there are no immediate signs of full-on economic retrenchment. Certainly not for the full three months ending June 30. Not that that has stopped doomers, of course. There’s already some talk of a possible rate cut at next week’s Fed meeting. This is in all likelihood premature. Fed fund futures, which are usually pretty good about predicting these things, are pointing to a 93% chance that the Fed leaves its key interest rate unchanged at the FOMC meeting that concludes on Wednesday.
It’s worth noting that consumer staples stocks held up well yesterday. Johnson & Johnson (JNJ 0.00%↑) actually gained 2.5% on the day. So did General Mills (GIS 0.00%↑). Hershey (HSY 0.00%↑) gained 1% with Kraft Heinz (KHC 0.00%↑) right behind it. Clorox (CLX 0.00%↑) and Colgate-Palmolive (CL 0.00%↑) finished green. Even Pfizer (PFE 0.00%↑) rallied, up 1.5%.
What that tells us is that for all the drama surrounding yesterday’s sell-off, it was not a liquidity event where investors sell everything to generate cash. As the movement in the above stocks demonstrates, investors were happy to put the cash into other risk assets. That in and of itself makes yesterday’s selloff look more like a blip than a secular trend. However, this morning’s movement looks suspiciously more like traditional risk-off, with bonds rallying…
Stocks on the Contrarian Radar
Might this be a buying opportunity for AI chipmakers? It might, if you buy the narrative that these things are going to fundamentally transform the order of things — and more importantly that corporations are going to keep ordering these things. Nvidia (NVDA 0.00%↑), which is very much the poster child of this whole AI chip craze, is down 23% from its all-time high. That’s already bear market territory. Is that an overreaction? You tell me.
Camtek (CAMT 0.00%↑), one of our ‘undiscovered’ AI chip names, has suffered a similar fate. This one is in the portfolio already. It’s very much a NVDA proxy, but The Contrarian may add to his (very small) position if it sinks more.
Lamb Weston (LW 0.00%↑) was just discussed in this space on Monday. The Contrarian felt it wasn’t cheap enough then. Well, it reported earnings yesterday and those were awful. Management cautioned of “another challenging year” ahead. More disconcerting were the CEO’s comments about restaurant traffic:
“The operating environment has changed rapidly over the past 12 months as global restaurant traffic and frozen potato demand softened due to menu price inflation continuing to negatively affect global restaurant traffic.”
Lamb Weston CEO Tom Werner. Source: press release
Investors punished the stock, to the tune of a 28% (!) drawdown yesterday. Does that make it cheap? Maybe not if management expects these issues to “persist through much, if not all, of fiscal 2025,” as the CEO said.
But forget LW for a minute. If restaurant traffic is dropping, and this persists, then doesn’t that speak to consumers pulling back on discretionary spending? If only we had a major restaurant chain that just reported earnings? Wait, we do! Chipotle (CMG 0.00%↑) reported yesterday and told a different story. (No, Chipotle doesn’t buy frozen potatoes, but it is certainly a restaurant chain that would speak to a drop in restaurant traffic if indeed there is one. And, well, CMG’s earnings were stellar. Same-store sales rose 11% for example. That doesn’t sound very recession-y).
So what’s going on here? Is this a company-specific issue? Remember that companies will blame macro factors for lousy performance. Sometimes these macro factors are indeed an overhang on the entire economy. Other times, it’s just an excuse for the company losing business. Which one is this?
The market for its part does not seem concerned about restaurants. The Chipotle news even sent other restaurant chains higher yesterday. Yes, even McDonald’s (MCD 0.00%↑), which unlike Chipotle definitely purchases large quantities of frozen potatoes.
So either investors aren’t doing their homework (and didn’t read LW’s earnings report) or LW’s observations are misplaced, perhaps intentionally, to detract from company-specific issues. Either way, it doesn’t speak well for going long LW here. So The Contrarian will sit this one out. He will be watching restaurant chain earnings though. McDonald’s and Shake Shack (SHAK 0.00%↑) report next week…
Housekeeping
Obviously this is not investment advice (duh). Do your own research, make your own decisions.
This Substack chat tracks The Contrarian’s trades in (almost) real time. The full portfolio is available upon request.
If this daily thing is drowning your inbox and/or you CBF to bother with it and prefer to just get the guest feature or actionable highlights — you can control these settings on your account page.
Finally, if you enjoy this and want others to experience it, please gift a subscription to your friends (or even your enemies).
GDP, Earnings, Restaurant Traffic Concerns