🔬More of the Sahm?: The Cool New Recession Indicator
"The only way to do great work is to love what you do." - Steve Jobs
"Do not wait to strike till the iron is hot; but make it hot by striking."
- William Butler Yeats
Negligible day for the big US markets with the S&P 500 -0.004% and the Nasdaq +0.2%. Welcome respite after the volatility of the last two weeks.
3 of 11 sectors closed higher, led by Tech (+0.9%) and Energy (+0.5%).
Geopolitical tensions rising over the weekend (Iran posed for retaliatory attack on Israel; Ukraine into Kursk) fueled a modest flight to safety as gold and hard defensives outperformed.
Notable companies:
Starbucks (SBUX) [+2.6%]: Reports of activist Starboard Value taking a stake to boost stock price.
monday.com (MNDY) [+14.6%]: Q2 EPS and revenue beat; Q3 revenue and OI in line; FY24 revenue, OI, and FCF guidance raised; revenue up 34% Y/Y with progress on operational efficiencies.
KeyCorp (KEY) [+9.1%]: Scotiabank acquiring 14.9% equity at $17.17 per share, a 17.5% premium to Friday's close.
Street Stories
More of the Sahm?
July unemployment was released last week, which showed the unemployment rate hitting 4.3% and triggering the Sahm Rule. The new metric is Wall Street’s latest fad indicator in guessing at the likelihood of an impending recession.
So what is it? And should you care?
The indicator shares the name of it’s inventor, economist Claudia Sahm, and states that a recession will follow anytime the three-month average unemployment rate rises by more than a half a percent from its lowest point in the twelve month period prior.
As you can see above, the 3-month average unemployment hit 4.1% in July and the lowest level in the last 12-months was last July at 3.5%. Since 0.6% (4.1% - 3.5%) is greater than 0.5% the Sahm Rule has been triggered.
So is this worth caring about? Well, as you can see below it does have a decent track record of calling recessions. Although, it has had a couple false positives (1969, 2001). 2001 is notable - you know, the popping of the Tech Bubble - which has a lot of similarities with today (overstretched Tech valuations sparking market contraction and spooking investors).
It’s also worth noting that with unemployment at 4.3%, this is the lowest level that the Sahm Rule has ever been triggered (2001 is second lowest at 4.6%). Unemployment obviously can’t stay at record lows forever so perhaps we should factor that into this oversimplified one-factor model.
That is to say were not exactly in the middle of the Great Depression here…
Keeping it simple is a good rule of thumb for financial markets, and the Sahm rule has some very straightforward logic behind it: As unemployment grows, the consumer weakens, and the economy slows. This logic has held true for many recessions in the past and for this reason the Sahm rule has a fantastic track record.
However, while the job market is cooling off a bit, the economy is still very near to its full employment levels. Layoffs remain on the lower end and Thursday showed weekly jobless claims coming in below both the previous week’s figure and Wall Street’s consensus estimates at just 233k new fillings.
It is also worth understanding that the sharp rise in July’s unemployment figure was largely attributable to new entrants in the job market. In fact, they have accounted for about 40% of the increase in the unemployed since April of last year.
More importantly, when it comes to forecasting recessions, the best economist known to man is the yield curve. Its inversion has preceded all but two of the contractionary periods within the United States and it has remained inverted since July of 2022 - a record breaking 2 years!
Now that’s an indicator!
It’s hard to guess whether or not this rate cutting environment will result in a soft landing or a body slam, but it’s probably too early to make these distinctions as the economy still seems to be trucking along just fine.
So just chill.✋✌️🫠
Joke Of The Day
I don’t have a solution, but I do admire the problem.
Hot Headlines
Reuters / S&P and Moody's downgrade JetBlue following $3 billion debt raise, tanking shares. The discount airline’s share fell 21% after S&P downgraded JetBlue's ratings from "B" to "B-", citing concerns about its financial health.
CNBC / SpaceX repeatedly polluted waters in Texas this year, regulators found. The violations could threaten SpaceX’s ambitions to increase Starship launches from its Starbase facility in South Texas.
CNBC / Starbucks and activist Elliott met last week to discuss settlement. Elliot can make things difficult for incumbent management, but it looks like Starbucks is playing ball.
Yahoo Finance / US Colleges’ debt strains mount in one of worst years since 2009. Many American universities are struggling to keep their doors open at higher and higher rates. Stronger (high tuition) institutions are having record years but the ones with the weaker brands are riddled with debt.
Axios / White House: U.S. intelligence indicates Iran could attack Israel within days. The situation in the Middle East continues to escalate, driving energy prices across the board.
MSN / Navy SEALs dropped in on a nuclear-powered submarine in the Pacific, drilling for a higher-end fight. Speculation suggests that this is to prepare for a potential Chinese or Russian conflict.
Trivia
Today’s trivia is on the legendary trader Jess Livermore.
1. What was Jesse Livermore famously known as?
A) The Boy Wonder
B) The Stock Market King
C) The Wolf of Wall Street
D) The Great Bear of Wall Street
2. What is Jesse Livermore most famous for predicting?
A) The Great Depression
B) The Dot-com Bubble
C) The 2008 Financial Crisis
D) The Flash Crash of 2010
3. What was the title of the book that was loosely based on Jesse Livermore's life?
A) "The Intelligent Investor"
B) "Reminiscences of a Stock Operator"
C) "The Art of Speculation"
D) "Market Wizards"
4. Which trading strategy is Jesse Livermore most associated with?
A) Day trading
B) Buy and hold
C) Short selling
D) Value investing
(answers at bottom)
Market Movers
Winners!
monday.com (MNDY) [+14.6%]: Q2 EPS and revenue beat; Q3 revenue and OI in line; FY24 revenue, OI, and FCF guidance raised; revenue up 34% Y/Y with progress on operational efficiencies.
Barrick Gold (GOLD) [+9.1%]: Q2 EPS and FCF beat; FY24 capex guidance less than expected; restarted buyback program, acquiring USD 50M shares; reiterated 2024 production guidance.
KeyCorp (KEY) [+9.1%]: Scotiabank acquiring 14.9% equity at $17.17 per share, a 17.5% premium to Friday's close.
Borr Drilling (BORR) [+6%]: Preliminary Q2 revenue and income ahead of expectations; positive impacts from a terminated contract, improved jack-up fleet operations, and changes in Mexico.
Coherent (COHR) [+5.3%]: Upgraded to buy from neutral at Bank of America; expects growth from AI optical transceiver market; positive on CEO Anderson's improvements and balance sheet deleveraging.
Robinhood Markets (HOOD) [+3.5%]: Upgraded to overweight from neutral at Piper Sandler; expects increased trading activity, margin loan growth, and benefits from index options and futures trading rollout.
Starbucks (SBUX) [+2.6%]: Reports of activist Starboard Value taking a stake to boost stock price.
Take-Two Interactive (TTWO) [+1.7%]: Upgraded to buy from hold at HSBC; improving mobile game outlook and confidence in revenue guidance as GTA6 release nears.
Losers!
B. Riley Financial (RILY) [-51.9%]: Faces widening SEC probe over risk disclosures; investigating interactions between founder Riley and former Franchise Group CEO Kahn; preannounced Q2 net loss of $435-$475M, or $14-15 a share, due to losses from Franchise Group investment and Vintage Capital loan; suspended dividend.
JetBlue Airways (JBLU) [-20.7%]: Announced private offering of $400M convertible senior notes due 2029; proceeds to repurchase existing 0.50% senior convertible notes due 2026.
Fortrea Holdings (FTRE) [-20.4%]: Q2 EPS and revenue missed; FY24 revenue guidance lowered; weak revenue due to lower pass-through and service-fee revenues; impacted by lower net new business in H1 of 2024.
Hawaiian Electric (HE) [-14.5%]: Q2 earnings missed though revenue slightly better; warned no financing plan for ~$1.7B Maui settlement; announced "going concern" risk but believes sufficient liquidity runway; suspended dividend.
EchoStar (SATS) [-7.5%]: Downgraded to underweight from neutral at JPMorgan; cited elevated leverage and increased spending as it expands wireless business.
Hillenbrand (HI) [-6.6%]: Downgraded to neutral from buy at DA Davidson; ongoing softness in mid-sized project bookings within APS and sluggishness in MTS cited.
Pilgrim's Pride (PPC) [-2%]: Downgraded to market perform from outperform at BMO Capital; valuation concerns after shares nearly doubled; less compelling investment case at current levels, though strong margin environment remains positive.
Qualcomm (QCOM) [-1%]: Downgraded to peer perform from outperform at Wolfe Research; Apple's modem expected to impact, supplying for iPhones outside US in iPhone 18.
Market Update
Trivia Answers
1. D) Livermore was famously known as "The Great Bear of Wall Street."
2. A) Jesse Livermore is most famous for predicting the Great Depression.
3. B) "Reminiscences of a Stock Operator" is the book loosely based on Jesse Livermore's life.
4. C) Livermore is most associated with the strategy of short selling.
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Great write-up, as always!