July 10-14, 2023

Tactical Signal 9

Sowell’s technical signals continue to remain in full position (100%) despite last week’s market breather. Improved visibility will be gained from earnings season kick-off.

As Apple reached a peak market cap value of $3 trillion, last week’s equity markets paused on interest rate fears after a strong job and better-than-expected GDP report, squashing the recession narrative. Other stock heavyweights reaching record prices include NVIDIA @ $439.90 on 6/20 and Microsoft @ $351.47 on 6/16.

The S&P 500 index and Nasdaq Composite lost 1.11% and 0.91%, respectively, while YTD gains remain firmly at 11.59% and 31.12%. With unemployment at 3.6%, ADP reports the U.S. added 497,000 private sector jobs ahead of the consensus estimate of 228k. Although factory orders were 0.3% below the consensus estimate of 0.6%, the U.S. economy continued to expand as the 1st quarter recorded a 2% growth in GDP. The resiliency of the economy is distancing the recession pundits from reality, indicative of bond yields starting to widen and gap up, albeit still inverted: The U.S. 10-Yr yields increased from 3.81% to 4.06%; The U.S. 30-Yr yields rose from 3.85% to 4.05%. As a result, bonds reflected by the Bloomberg US Aggregate returned -1.30%, while Long-term Treasuries returned -3.28% last week.

This week will begin to tee up 2nd quarter earnings seasons starting this Friday with the largest financial institutions reporting, including Blackrock, Citigroup, JP Morgan, and Wells Fargo. With the strong labor market, investors will look towards this week’s economic report largely focused on June’s CPI and PPI report as the bellwether for interest rates and the Fed. With the Fed skipping on last month’s interest rate increase, hopes of the Fed pausing rate hikes beyond July are dwindling, with stronger investor sentiment pointing to the Fed maintaining its ground to future rate increases, possibly heightening market fears.

“I noted that China’s growth has lifted hundreds of millions out of poverty and made clear that the United States is not seeking to decouple from China. There is an important distinction between decoupling, on the one hand, and on the other hand, diversifying critical supply chains or taking targeted national security actions. We know that a decoupling of the world’s two largest economies would be disastrous for both countries and destabilizing for the world. And it would be virtually impossible to undertake. We want a dynamic and healthy global economy that is open, free, and fair – not one that is fragmented or forces countries to take sides.”

 – Secretary of the Treasury Janet Yellen, Press Conference in Beijing, July 8, 2023.


Delta Keeps Climbing

Delta Climbing

Air travel is the one thing that really is a conundrum of a product. When we think about one of America’s favorite pastimes, vacationing is right up there with sports and gaming. A “vacation” is often centered around a sporting event, Super Bowl, the U.S. Open, or gaming like Las Vegas or Indian gaming resorts. For all the smiles we have anticipating an upcoming vacation, is there anything more to bring a frown and anxiety than air travel?

When I think of all the consumer “products” out there, is there anything that ranks the worst as airplane travel and the quickest to bring discomfort? Every aspect of flight travel is horrendous. From the preparation, regulation, and execution, there is nothing redeeming to air travel other than it’s the only way to get to most places “quickly.” But even then, that may be questionable with the traffic these days around most regional airports.

The pain doesn’t end at touchdown. Just this last trip to LAX, getting an Uber was a complete nightmare as new rules forced travelers to take a shuttle to another area outside of the terminal to order and obtain an Uber. If I said that I waited 45 minutes, it would only be true because I stopped keeping time after 45 minutes.

One way to get back at the worst consumer experience is to own the stock and at least make a little money off your patronage. Peter Lynch would be proud, the famous and most successful portfolio manager whose investing creed was to own what you used.

During Covid, it was clear that airline travel would take the brunt of the impact of the lockdown. And why not? I’m certain that I caught one of my Covid infections on a plane. The other was the yoga studio.

Pre-Covid Delta Airlines (DAL) stock was trading at around $60; let me remind you that even then, it would ring true that air travel was a poor product. Delta, the largest domestic airline, operates approximately 1,200 planes and was founded in 1924. During Covid, DAL stock fell all the way down to $22 and reasonably might have gone even lower. But unique to airlines, there is a government put option that provides some floor of protection to the largest air carriers as they present a national security risk if there were no airlines. One could argue that airlines were “bailed out” through Covid relief legislation. Today, DAL has rallied back to $48!

And despite the lasting changes that Covid has had on travel, particularly business travel, airlines and specifically DAL have come back quite strong. Ironically, the worse the travel experience, the more profitable the airline. At least, that’s one man’s opinion.

Without going too deep, fewer flights mean packed flights, charges for luggage, heavy luggage, internet access, and food and drinks. Did I say that the flights are packed? Flight travel is almost back to pre-pandemic levels; see the Bureau of Transportation Statistics below.

As a barometer or altimeter…Delta forecasted $4B in free cash flow for 2024 this week, close to pre-pandemic levels. With lower oil prices and travel robust, DAL is forecasted to deliver almost $6 annual a share boosting that forecast this week up from pandemic lows of a -$10 annual loss. The evidence shows that despite rising inflation and fear of recession, the consumer is still strong, and vacation travel remains robust. The current forward p/e for DAL is around 7x, even after a 50%+ gain over the last year. So, while you are smashed into a middle seat on a full flight, just know that DAL could boost your portfolio to the stratosphere.

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Advisory services offered through Sowell Management, a Registered Investment Advisor. The views expressed represent the opinion of Sowell Management. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Stated information is derived from proprietary and non-proprietary sources that have not been independently verified for accuracy or completeness. While Sowell Management believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and Sowell Management’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements. Investing in securities involves risks, including the potential loss of principal. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles, or from economic or political instability in other nations. Past performance is not indicative of future results.


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