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All I can say is Oops. I am of course referring to one of the trillion dollar mega caps aka Amazon. Analysts were expecting a modest profit, but with unforeseen supply disruptions and rising labor costs (unions are making inroads to the estimated 1.1 million employees) plus a write down or mark to market devaluation of its Rivian shares (you may recall Rivian’s debut on the stock market that was priced at $78, opened at $106.75 and peaked at $179 one week later) which has fallen to $31, no one should have been really surprised. Then again, the house the Bezos built certainly has the capabilities to eek out a profit, quarter after quarter after quarter. They just have to navigate growing labor unrest, increasing fuel costs and rising operational costs (you practically need to be a forensic accountant to dig through their financial statements, but they spent $14 billion in technology and content up $2 billion year over year), but given their dominance and market share, I would not bet against them.

However, when you consider the composition of the Nasdaq 100, you can understand that oversized weights of the top companies can have dramatically negative impacts on market returns. Apple is 12.8%, Microsoft is 10.6% and Amazon is 7%. When those three stocks all go down at the same time, the whole index will likely swoon as well. This brings up an inherent weakness in how indexes are managed. Outside of Pepsi and Costco, the top 10 Nasdaq 100 stocks are all technology related businesses. I should point out positions 11 to 15 are Broadcom, Cisco, Comcast, Adobe and Intel (Intel btw, reported a miss today as well.) But enough of technology.

Today’s sell off was not restricted to technology. Chevron and Exxon Mobile both reported billions in profits just not enough to satisfy the analysts and those stocks sold off too. Unfortunately, investor’s nerves will be tested next week as the Federal Reserve is expected to notch up short term interest rates by 50 bp on Wednesday. You may recall last week, rumours started to circulate of a 75 bp point increase, even though Mr. Powell all but confirmed a steady 1/2% increase. Talk about fickle. This is what happens at market tops when there is too much liquidity sloshing through markets and day traders oscillate from bullish to bearish and back again.

The bond market will be no better. The ten-year bond yield broke above 2.9%, driven in part by the 2-year yield moving up to 2.73%. If it breaks 3% again, then we will need to keep an eye on commodities. Higher bond yields will drive the value of the US Dollar up even more (it has gone straight up since Russia invaded Ukraine), which will handicap commodities priced in US dollars. Gold for example hit $2003 oz. on the 18th and today it opened at $1895. That pales in comparison to natural gas. The April low was $5.50 and the high topped $8.27 (also on April 18th). It closed today at $7.35 which means its raining money for those companies that did not need to hedge their production from last year. For the last three years, bankers have been hammering away at energy companies with debt heavy balance sheets to sell their product using forward contracts to lock in prices that guaranteed a portion of their future cash flow. To put that in perspective, one year ago natural gas prices were around $2.75. Now for those companies with sound balance sheets and the flexibility to wait for higher prices, they have reaped Midas like profits. Think Paramount, Tourmaline and little Kelt Exploration.

In addition to the interest rate decision, keep an eye on the all important jobs data on Friday. In between we get a slew of corporate earnings but with a bias towards consumer and pharma stocks like Starbucks, Restaurants Brands (aka Timmy’s and Burger King), Marriott, Pfizer and Moderna. In Canada keep an eye on Loblaw, Shopify and Bombardier.

Happy trading and stay safe.

Cheers,
Steve

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