Good morning contrarians! Welcome to the Daily Contrarian, our morning look at events likely to move markets. It is Thursday, Oct. 17. The Bottom Line segment of today’s podcast starts at (3:23) followed by Stocks on the Contrarian Radar©️ feat $ASML for listeners who want to skip ahead.
State of Play
Stocks advanced yesterday with small caps leading the charge (Russell 2000 +1.7%). Taiwan Semiconductor Manufacturing ($TSM ) just reported earnings that trounced estimates and that stock is rising in the pre-market. As we eye our board of indicators for signs of direction at 0645, things are pretty quiet outside of the TSM-fueled tech sector:
* Stock index futures are gaining ground led by tech. The Nasdaq is up 0.8% with S&P 500 futures up 0.4%;
* Commodities are mixed. WTI crude oil is unchanged trading around $70.50/barrel whilst copper is down 1%;
* Bonds are unchanged. The 2-year yields 3.95% whilst the 10-year yields 4.04%;
* Cryptos aren’t doing anything. Bitcoin is down 0.9% to trade below $67,000.
Earnings
Taiwan Semiconductor Manufacturing ($TSM ) as mentioned reported positive earnings. Demand for all things AI was strong and management raised guidance.
Netflix ($NFLX ) reports after the close.
Economic Data
US retail sales are out at 0830. The US being the key destination for global goods, this is potentially a pretty big deal. Usually a drop in retail sales is precipitated by a rise in unemployment. This set-up does not exist at present as the unemployment rate is 4.1%, which is pretty close to full employment.
Nevertheless, this figure is worth watching. If it deviates much from forecasts there should be a market reaction, perhaps even a violent one. The expectation is for an increase of 0.3% month-over-month, an improvement over the 0.1% recorded last month. If you strip out automobiles and look at the core retail sales figure, that is expected to increase 0.1% MoM, identical to last month.
On the topic of unemployment, we also get initial jobless claims at 0830. This figure did print hot last week, at 258,000, which was its highest level in months. This week it is expected to come in at 241,000, closer to the four-week average of 231,000.
The European Central Bank decides on interest rate policy at 0815. The ECB is expected to cut its key policy rate to 3.40% from 3.65%. This is mostly the domain of currency traders, but if there is a deviation the market will almost certainly react.
Industrial production is out at 0915. Economists who were surveyed expect a slight decline, of 0.1% MoM, after recording an increase of 0.8% last month.
The Bottom Line
TSM earnings should light a fire under the AI sector, which will drive tech higher. That should help other risk assets regardless of what happens with the economic data — possible caveat if the economic data is very bad. Then that could trump TSM earnings and risk assets could sell off.
If so that may be a buying opportunity simply because what TSM says about the AI economy on a quarterly basis is a bigger deal than what economic data points say on a monthly (retail sales) or weekly (jobless claims) basis.
Stocks on the Contrarian Radar©️
ASML Holding ($ASML ), which famously leaked its own earnings on Tuesday, dropped another 6% yesterday after reporting actual earnings. ASML is now below where it was at the start of the year.
The company lowered sales forecasts, initially leading to concerns for other chipmakers including some of our Big 7 (which does not include ASML) as discussed yesterday, though this has since reversed for most. But is it a buying opportunity for ASML? The company apparently has a near-monopoly on advanced lithography systems. Its customers are mostly other semiconductor manufacturers — so there is good reason these stocks usually trade in lockstep.
From a valuation perspective, ASML trades at north of 30x forward earnings, which is actually cheap for a growth stock. The price/sales and price/cashflow multiples (10x and 35x, respectively) are far less appetizing however.
Another cause for concern is that China accounted for 40% of ASML sales last year. That has caused issues before. It’s a bit of a ‘black box’ how much business China will be able to supply in the quarters and years ahead. Investors hate uncertainty more than they hate bad news so that goes a long way toward justifying the sell-off.
TSM earnings should certainly help ASML. Still, for all the aforementioned reasons The Contrarian is sitting firmly on the sidelines for this one.
Housekeeping
* Obviously this is not investment advice (duh). Do your own research, make your own decisions.
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