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Well, it finally happened. An independent rating agency served notice to US Government officials and politicians that their reckless deficit spending programs are not immune to debt downgrades. We expect Moody’s and S&P to jump on the band wagon, but they will wait an appropriate amount of time to avoid hints of copying. Stock and bond markets sold off on the news and ended the Summer rally rather abruptly. Now, before you hit the sell key, it should be noted the US economy continues to hum along. The ISM Service Index stands at 52.7, Factory orders rose 2.3% and Nonfarm Payrolls (jobs) added another 187,000 jobs. When you factor in some monster earnings from dozens of companies including Caterpillar, Amgen and Amazon, Toyota, Stanley Black and Decker, Caesars Entertainment, Paramount and Addidas, it is easy to see the US Consumer is still consuming despite a 500bp increase in interest rates.

On the other hand, the Federal Reserve’s resolve to bring inflation down to their 2% target cannot be denied and Wall Street is gradually coming around to the notion that interest rates will stay higher for longer and it looks like the effects are starting to show up on the earnings statement of corporations large and small. Take Wall Street’s cyber security darling Fortinet. They have been growing at breakneck speed with incredible numbers but broke the cardinal rule (don’t disappoint the analysts) and guided lower for the next quarter. The stock plummeted 24% today.

Likewise, PayPal missed on a couple of metrics and the stock tumbled 15% following analyst’s downgrades. Same story with Etsy, the online marketplace for knickknacks, used clothing and musical instruments. Their second quarter numbers beat on most metrics but like Fortinet, revised their third quarter outlook downwards. Stock down 18% this week. And last but not least, Apple, the stock you short at your own peril. The stock sold off nearly 5% today as total sales fell year over year and management guided lower for the 4^th quarter due in part to slowing economic growth. The point we are trying to make is higher interest rates are steadily eroding corporate profits which means quality matters going forward.

Now before we hand the kudos to Mr. Powell, we think he may be reaching for a bottle of antacids if the ongoing labor activities flare up like they did in the 1970s’. One only has to look at the pay increases at UPS covering 340,000 workers followed by the UAW asking for a 46% wage increase over the next four years. Between that and the already slim margins on Electric vehicles means the car makers could see 2008 all over again. Corporate profits could drop faster than a Mike Tyson opponent. So slowing growth and rising costs… stagflation anyone?

Turning to Canada, you can thank OPEC for providing some lift to our energy stocks after stating they will extend their production cuts through September and indicated further cuts should oil prices not recover. Personally, we think they want to see crude back to the $100 level which means more pain at the gas pump, driving even more consumers towards EV’s and lower dollars in the consumer’s wallet. On the other hand, Canadian oil companies should resume their upward climb. We noted yet another private company acquiring a public company and taking themselves public at the same time. Ka-ching! Speaking of ka-ching, Magna and Enbridge reported better numbers and Barrick gold is restarting its Porgera gold mind later this year.

Meanwhile, Tiff Macklem may also be reaching for a bottle of Tum’s as well especially since we lost 6400 jobs in July sending the UI rate to 5.5%. We think he might wait on another rate hike pending more solid economic stats.

Next week a boat load of earnings along with the latest US inflation stats that could help or hinder bond markets.

Stay safe and Happy trading.

Steve Bokor and the Ocean Wealth Team.

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