Would you like to ride in my beautiful balloon?
Would you like to glide in my beautiful balloon?
We could float among the stars together, you and I

For we can fly, we can fly
Up, up and away
My beautiful, my beautiful balloon

The world's a nicer place in my beautiful balloon
It wears a nicer face in my beautiful balloon
We can sing a song and sail along the silver sky

-The Fifth Dimension

It has been a heck of a start to 2023. In fact, one that has defied analysts, strategists, bears, and even common sense. This is one reason I’m not a believer in the so-called efficiency thesis or notion that all the information is public, and therefore, built into the stock market. It’s erratic and inefficient.

But it might be ready to take off after closing above key moving averages. The S&P 500 has to close above 4,100.

2023 Breadth Surge

The most compelling aspect of the first two weeks of trading was the market breadth thrust. The turn of the calendar literally flipped the script, and the market immediately shifted into the exact opposite mode than it was mired in throughout 2022.

Family Affair

The broadness of the move higher is what stands out. At the close on Friday, 87% of the S&P 500 was above their respective 20-day moving average. In recent years, this has only happened twice:

• July 2009
• April 2020

Those were pretty good times to get into the market as a long-term investor. I realize a couple of so-called market breadth thrusts came up short of sparking sustained moves last year, but this is very compelling.

Heat Map

There was lots of green on the screen Friday, with mega-caps edging higher, but other names also taking the spotlight.

My great concern for safe havens last year was how expensive they became on a relative basis. On the other hand, Financials (XLF) had the best week considering some big names posted results -more XLF’s post results today.

Earnings Season: Week Two

Earnings estimates are coming down fast, although not fast enough for market purists. And many say that is why the market will crumble, not the Federal Reserve. But only once in the past four years has quarterly results come below the consensus: it was the first quarter of 2020 (1Q20) when the nation was abruptly shut down. Still, earnings surprises have been dwindling for the past two years.

Down Earnings = Not Down Market

It sounds scary, but big yearly declines in earnings haven’t been a death sentence for stocks. The S&P 500 has managed to rally on declines as great as 22%, although declines north of 30% have been too much of a hurdle for stocks to overcome.

Key Earnings Releases

Goldman Sachs (GS)

The company has beaten the consensus in four of the last five releases, and each time, shares rallied an average 6.9% over the following week. The lone miss saw the shares down 9.9% a week later.

GS	Consensus	Change
Revenue	$10.91 billion	-13.7%
Earnings	$5.77	-46.7%

Morgan Stanley (MS)

The company has a spotty track record on earnings, yet the stock rallied five quarters in a row for an average gain the week after posting results of 5.7%. But last time out, the stock was down 3.4% a week later after only beating the consensus by a penny.

MS	Consensus	Change
Revenue	$12.60 billion	-12.9%
Earnings	$1.31	-36.94%

Portfolio Approach

We added a new position in Consumer Discretionary last Friday in the Hotline Model Portfolio

Today’s Session

Mixed bag on Wall Street bank earnings.  Morgan Stanley beat consensus but numbers down a bunch from year ago.

MS

• EPS $1.31; consensus $1.28
• Revenues $12.74 billion; consensus $12.53 billion
• FICC Trading $1.41 billion; consensus $1.69 billion
• IB Equity $227 million; consensus $204 million
• IB Debt $314 million; consensus $317 million
• TBV/Share $40.06; consensus $40.45

Goldman on the other hand a monster miss and major spike in loan loss provision. The company has already laid off four thousand workers so many the street saw this coming but this is supposed to be the premier bank on the street.

GS

• EPS $3.32; consensus $5.78 
• Revenues $10.59 billion; consensus $10.69 billion
• GM FICC $2.68 billion; consensus $2.39 billion
• GM Equities $2.07 billion; consensus $2.18 billion
• IB Equity $183 million; consensus $232 million
• TBV/Share $279.66; consensus $287.75 

State of Economy

Empire Fed Manufacturing report swooned to -32.9, the lowest read since May 2020 and before the pandemic the lowest since 2009.

Business activity contracted sharply in New York State, according to firms responding to the January 2023 Empire State Manufacturing Survey. The headline general business conditions index fell twenty-two points to -32.9. New orders and shipments declined substantially. Delivery times held steady, and inventories edged higher. Employment growth stalled, and the average workweek shortened. Input price increases slowed considerably, and selling price increases also moderated. Looking ahead, firms expect little improvement in business conditions over the next six months.

Interestingly, the market began to catch a bid after this release – as it certainly screams to the Fed “slow down.”

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