A rough quarter awaits investors; Markets Break When Interest Rates Rise Fast; Why not go to cash?; Herb Greenberg's new Empire Real Wealth; Musk's follow-up with Kanye West; Funny tweet

1) Yesterday's New York Times DealBook had a quick overview of the upcoming earnings season:

A rough quarter awaits investors

It's earnings season, with the S&P 500 heavyweights PepsiCo and Delta Air Lines and the big banks set to report third-quarter results this week. Investors' big fear: Companies will reveal that the combination of inflation and slowing economic growth has eaten into profits.

It's a mixed picture. Just 65 companies in the S&P 500 have warned that third-quarter results are likely to disappoint, according to the market data firm FactSet, while 41 companies have delivered earnings upgrades. And S&P 500 companies are expected to report that on average, revenue jumped by nearly 9% last quarter. But profits are only expected to grow by 2.4%, the most lackluster increase since the worst days of the COVID pandemic in 2020.

Almost all of the earnings growth is coming from the energy sector. Of the 11 sectors in the S&P 500, only four – energy, airlines, real estate, and consumer discretionary industries like restaurants and hotels – are expected to show overall growth. The bottom lines of energy companies are expected to jump an average of 117% versus a year ago, which is the biggest increase of any sector. Without the 21 energy companies in the S&P 500, the bottom lines of the remaining companies would actually drop, by 4.2% on average, according to Bank of America.

The strong dollar is bad news for multinational companies. Although the recent rise in the dollar is a boon to U.S. travelers, it's bad news for exports, which make up about 40% of sales for S&P 500 companies. A strong dollar means American goods are more expensive to overseas buyers, and less profitable back home when foreign revenues are converted into dollars. John Butters, a senior earnings analyst at FactSet, says that of companies fessing up to earnings problems, about half have pointed to the dollar as a contributing factor.

2) In last Monday's e-mail, I argued that we are nowhere near the brink of a calamity like the global financial crisis in 2008, and on Tuesday, I wrote that the chaos in the U.K. isn't likely to spread here.

That said, there are definitely strains in the market that I'm following closely. With stocks down more than 20% this year, I think this has already been discounted, but there are no certainties here, only probabilities...

For more on this, here's a Wall Street Journal article: Markets Break When Interest Rates Rise Fast: Here Are the Cracks. Excerpt:

Central banks are raising interest rates at the fastest pace in more than 40 years – and signs of stress are showing.

Recent turmoil in British bond and currency markets is one. That disturbance has exposed potential risks lurking in pensions and government bond markets, which were relative oases of calm in past financial flare-ups.

The Federal Reserve and other central banks are raising interest rates to beat back inflation by slowing economic growth. The risk, in addition to losses in wealth and household savings, is that increases can cause disruptions in lending, which swelled when rates were low.

Major U.S. stock markets recorded their worst first nine months of a calendar year since 2002, before rallying this week. Treasury bonds, one of the world's most widely held securities, have become harder to trade.

There also are signs of strain in markets for corporate debt and concerns about emerging-market debt and energy products.

Most analysts still don't expect a repeat of the 2007-09 global financial crisis, citing reforms that have made the largest banks more resilient, new central bank tools, and fewer indebted U.S. households.

"So far there haven't been any really bad surprises," said William Dudley, former president of the Federal Reserve Bank of New York.

Some pain is expected in the fight against inflation. Raising interest rates usually leads to lower stock prices, higher bond yields, and a stronger dollar.

Yet abrupt adjustments can lead to a slowdown more severe than what the Fed and other central banks want. Threats to financial stability sometimes spread from unexpected sources.

"There are no immaculate tightening cycles," said Mark Spindel, chief investment officer of MBB Capital Partners in Washington. "Stuff breaks."

And here's the Financial Times: 'Someone will get hurt': Investors and analysts warn on rising market stress. Excerpt:

Investors and Wall Street analysts are sounding the alarm about a possible "market accident," as successive bouts of tumult in U.S. stocks and bonds and a surging dollar cause rising levels of stress in the financial system.

A gauge of strain in U.S. markets – produced by the Treasury's Office of Financial Research – has soared to its highest level since the coronavirus pandemic ructions of May 2020.

Even as equities on Wall Street start the new quarter with gains, the OFR's Financial Stress index is near a two-year high at 3.1, where zero denotes normal market functioning. That has added to a growing list of benchmarks which suggest trading conditions in U.S. government debt, corporate bonds, and money markets are increasingly stretched.

"The velocity of things breaking around the world...  is obviously a 'neon swan' telling us that we are clearly now in the market accident stage," said Charlie McElligott, a strategist at Nomura.

Lastly, here's an FT interview with former Treasury Secretary Larry Summers: The destabilization wrought by British errors will not be confined to Britain. Excerpt:

It is not, I believe, the case that British pension funds only owned pound-denominated assets. And there is, I think, the underestimated phenomenon of what others would call contagion and an economist might call "reputational externalities," where seeing something happening in one place raises concerns about it happening in other places. And so, I think, the destabilization wrought by British errors will not be confined to Britain...

I think the situation is indeed, as I suggested, very fragile. I suspect that the reputational externality aspect is the more important aspect for the global system, and that has already happened. And so, I'm not sure that just how well or poorly it plays out from here will have huge global implications.

And I think it must be acknowledged that once investors are primarily watching other investors rather than judging the fundamentals for themselves, matters have become highly problematic in any financial crisis. And we are now at the stage where the focus is on the hydraulics rather than the economics. It's on the flows and who is moving in what direction...

I disagree with the historian Adam Tooze about many things, but I think he has found an apt term in using the term "poly-crisis" to refer to the many aspects of this situation. I can remember previous moments of equal or even greater gravity for the world economy, but I cannot remember moments when there were as many separate aspects and as many cross-currents as there are right now.

Look at what is going on in the world: a very significant inflation issue across much of the world, and certainly much of the developed world; a significant monetary tightening under way; a huge energy shock, especially in the European economy, which is both a real shock, obviously, and an inflation shock; growing concern about Chinese policymaking and Chinese economic performance, and indeed also concern about its intentions towards Taiwan; and then, of course, the ongoing war in Ukraine.

3) With so much uncertainty in the markets, why not sell everything and go to cash?

My colleague Herb Greenberg answered this in Thursday's Empire Financial Daily (which you can subscribe to right here – it's free!): The Simplest Way to Take Back Your Financial Future in Today's Market Chaos. Excerpt:

...avoiding stocks entirely can mean missing out on big gains in the future. Just consider the numbers...

According to JPMorgan Asset Management, if you had invested $10,000 and missed the 10 best days from 2002 to 2021, your gains would have been cut by more than half. If you had missed 30 days, you would have missed out on more than 80% of potential gains.

Herb also talked about how he's helping subscribers to his new service, Empire Real Wealth, navigate these difficult times:

The point here isn't calling tops and bottoms... I'm saying that I've been there, I've seen it all, and now that I'm 70, I'm taking everything I learned and sharing that with anybody who will listen – anybody who wants to invest in real businesses, not speculate on lottery tickets.

The lesson is exceedingly clear...

When it comes to investing, even with the best companies, there is no straight line.

While the market can go down and stay down for extended periods, it's up substantially from each of those disasters. Or to put it in perspective... From its lows in 1974, the S&P 500 is up nearly 7,000%...

With Empire Real Wealth, we're helping you take back control of your portfolio... your retirement account... and your future.

The stocks we've chosen for our inaugural portfolio are one great company after another...

They tend to be industry leaders with solid business models, proven track records, healthy balance sheets, and strong cash flows that also happen to be generous with their dividends and are reducing their share count through buybacks.

Some are cheaper than others valuation-wise, but on average they trade for less than the S&P 500, pay a higher dividend yield, and boast earnings that are growing at a faster five-year compound annual growth rate ("CAGR").

Better yet, this group of stocks really has gone "on sale."

Today, the Empire Real Wealth portfolio trades at a discount of nearly 25% to the S&P 500, while yielding 3.5% – more than twice that of the market.

Don't let the market's volatility stop you from taking advantage of this incredible opportunity to own some of the best businesses in the world.

Right now, you can gain access to Empire Real Wealth for what's likely the lowest price we'll ever offer: just $49 for the first year. Even better, we're offering a 60-day, no-questions-asked, full refund offer, so you can check it out with zero risk.

What do you have to lose? Get all the details right here.

4) Following up on yesterday's e-mail, it's good to see that Elon Musk tweeted this, however mealy-mouthed:

5) This tweet made me laugh out loud – there's some truth that short sellers have this mindset!

Best regards,

Whitney

P.S. I welcome your feedback at WTDfeedback@empirefinancialresearch.com.