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What we’re looking at next week, including Wells Fargo . earnings


The Wells Fargo sign on May 5, 2021 in New York City.

Bill Tompkins | Michael Ochs Archives | beautiful pictures

(This article was first sent to members of the CNBC Investment Club with Jim Cramer. To get real-time updates in your inbox, Sign up here.)

The market started to shake to start the new year. While the major indexes posted weekly losses, the economically sensitive Dow Jones Industrial Average is a relative better, as investors have positioned themselves for the year the Federal Reserve expects. ​will raise interest rates and reduce the size of its balance sheet. Along with a growing focus on rising rates, the tech-heavy Nasdaq Composite Index is a relative laggard, now down more than 7% from its all-time high reached in November.

Ultimately, we’re not surprised by this move and believe it fits with our view that by 2022, you want to own shares of companies that “make up” while avoiding “stocks.” story”, i.e. a high-flying, longer-duration concept name with little to no earnings power.

Remember, stocks are valued based on future earnings and cash flows. We create present value for companies by estimating previous numbers and then discounting them to today using the discounted cash flow (DCF) model. When interest rates are essentially zero, the discount rate (the denominator in the DCF model) is minimal and so investors can speculate and look into the future as far as they like – because the in the future is essentially the same as today. But as rates rise, the discount rate (or the rate of return an investor requires for the risk they are taking on owning the stock) must increase. An increase in the denominator means a decrease in the present value of future earnings and cash flows. The further away those earnings are, the less they are worth today at a higher rate each time.

An example of how a rising exchange rate affects pricing:

To illustrate this better, let’s look at an example of how a higher discount rate affects future earnings.

Company A is a high-tech stock (think about something in the EV space that has gone public through SPAC or an enterprise software company) with promise of the future but no earnings potential. today, making it a longer-term asset in the equities scene. Company B is a value cyclical name, like a large-cap financial or industrial institution. These companies are generally considered short-term assets.

Company A is expected to generate $10 in earnings per share by 2027 (five years from now), while Company B is expected to earn $10 per share at the end of 2022. The increased rate means that Company A’s earnings are discounted back to their present full five years at a higher current rate, while Company B only has to be discounted back one year at a higher rate than that.

As rates go up, the impact of discounting up to now has an increasingly larger impact as you have to do it for many years. This causes investors to look for shorter-term assets like Company B rather than stocks like Company A. In the end, both A and B will generate $10 in income. However, the present value of $10 of company B’s earnings becomes more and more valuable relative to company A as the exchange rate rises.

That’s why we want to own shares of companies that make real profits today. The closer those returns are to the present time, the less likely the rate of increase will be to affect their present value, making them more attractive than the high returns whose intrinsic value is. Their current decreases as the ratio is higher.

Here’s a quick look at some of the broader market measures we’d like to keep an eye on: The US Dollar Index has eased back slightly but remains just below 96. Gold is flat for the week, trading at $1,800. WTI crude oil price rose to 70 USD/barrel. And yields on 10-year Treasuries had a strong week ahead of hawkish Fed minutes and falling unemployment. The 10-year yield is currently around 1.77%, the highest level since January 2020.

No portfolio companies were reported this week.

In addition to earnings, we received several important macroeconomic updates:

Monday

Tuesday

Manufacturing ISM: 58.7% vs. 60.0% estimate

Wednesday

ADP Employment Survey: 807,000 vs. 375,000 estimate

Thursday

Initial unemployment claims: +207,000 vs. estimate +195,000
-4-week moving average: 204,500 (+4,750 from last week)
-Orders shipped: +1.6% last month vs. 1.5% month estimate
– Main capital goods orders: unchanged from last month
-ISM Services: 62.0% vs. 67.0% estimate

What we are looking at ahead:

Earnings season kicks off next week as banks prepare to report. In the portfolio we will hear from Wells Fargo (WFC) on friday, before the opening bell. Other reports we’ll be looking at include:

Monday

Open: AZZ (AZZ), Commerce Metal (CMC), Tilray (TLRY)
Close: Accolade (ACCD)

Tuesday

Open: Albertsons (ACI), TD Synnex (SNX)
Close:

Wednesday

Open: Jefferies (JEF), Shaw Comms (SJR)
Close: KB Homepage (KBH)

Thursday

Open: Delta (DAL), Taiwan Semi (TSM)
Close:

Friday

Open: BlackRock (BLK), Citigroup (C), Bank of the First Republic (FRC), JPMorgan Chase (JPM)
Close:

On the macroeconomic front, in addition to tracking the geopolitical sector as well as the following releases (all time ET):

MONDAY

10:00 SA M/M Wholesale Inventory (Finally)

TUESDAY

06:00 Small Business Index NFIB

WEDNESDAY

08:30 Consumer Price Index (CPI)
08:30 Hourly Earnings SA M/M (Finally)
08:30 Hourly Earning Y / Y (Finally)
08:30 SA Average Workweek (Final)
14:00 NSA Treasury Budget

THURSDAY

08:30 Continue Unemployment Claim SA
08:30 Initial request SA
08:30 Producer Price Index (PPI)

FRIDAY

08:30 Export Price Index NSA M / USA
08:30 Import Price Index NSA M / USA
08:30 Retail
09:15 NSA Capacity Usage
09:15 Industrial production SA M / USA
09:15 Production Production M / USA
10:00 Enterprise Inventory SA M / USA
10:00 Michigan Sentiment NSA (Preliminary)

The CNBC Investment Club is now the official home of the My Charity Foundation. It’s where you can see every move we make to our portfolio and get insight into my markets before anyone else. The charity and my articles are no longer affiliated with Action Alerts Plus in any way.

As a subscriber to the CNBC Investment Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trading alert before buying or selling a stock in his charity portfolio. If Jim had talked about a stock on CNBC TV, he would have waited 72 hours after issuing a trading warning before taking a trade. See here for investment disclaimer.

(Jim Cramer’s Charity is WFC long.)

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