Catalyst Watch Podcast: SLOOS, CPI, Disney Earnings Preview

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Catalyst watch for the week of May 7. Seeking Alpha Managing News Editor Kim Khan says CPI is next week but another report is taking the spotlight, SLOOS. Seeking Alpha Associate News Editor Kevin Curran gives investors a preview of what to expect when Disney (NYSE:DIS) reports earnings. Hot topic: Non-farm payrolls, regional banks, and the Federal Reserve all in one week.

Julie Morgan: So Kim, I know we had something major happened this morning. We’re actually recording this on Friday, May 5. But we’re gonna get to that there’s something else that you wrote an article about in it’s called SLOOS. Tell me what is that about?

Kim Khan: Yes, SLOOS, isn’t it a big word? And I mean, if we were doing this show, and you would tell us before, and you told me, Oh, CPI is coming out, but that won’t be the most important thing next week, I would not have believed you. But it’s true. There’s something more important for the market now, and that is the SLOOS report.

SLOOS stands for the senior loan officer opinion survey. And it’s carried out by the Fed, its surveys, about 100 banks across the US both domestic and international, and surveys the opinions of sentiments of loan officers on how they are with lending.

And if they’re tightening lending, and conditions and raising standards and tightening credit. And it’s a quarterly report. And not many people ever cared about it. But then suddenly, this past week, Jay Powell came out and started talking about tighter credit conditions, all through his q&a.

And the big thing about the Soleus report that sets it aside from other data is the Fed gets to see it before the market does. So Jay Powell was talking about tighter credit conditions, having already seen this quarterly report, which is released next Monday, and the market will get to see it then.

So there’s a lot of anticipation on what this actually says. I mean, if you look at the trends, it’s been steadily showing tighter and tighter credit conditions, tighter, higher lending standards, and just tougher to get credit from banks.

And you know, that’s tough. If you’re a consumer, it’s tough for the economy. But it’s good news for the Fed because it does a lot of the heavy lifting for it that interest rates also do in combating inflation. So there’s going to be pretty much all eyes on that on Monday. And they should see a big market reaction to something that not many people have talked about before.

Julie Morgan: And you know, what’s interesting, I, when I first read that article that you wrote, I saw in bold print, actually, that’s where my eyes went to first, that you put in bold print that the FOMC sees this report before the public.

Kim Khan: Yeah. And it’s, it’s, it’s something that doesn’t happen very often. I mean, there’s always a sense that the FOMC knows more than the market does. On a data front, but not too much more. They certainly know a lot more about day-to-day banking conditions, though.

And you know, the New York Fed can get information from any of the major banks that want deposits on lending standards. And this report gives the FOMC a real insight into how things are going. It only goes quarterly so it only goes through March. So it won’t even have what everyone would consider even tighter lending standards going through what we’ve seen in April, certainly.

So it also gives the Fed some cover if it shows that because then they can say okay, yes, we will want it’s justifying a pause. You know, this other part of the economy is tightening financial conditions, the monetary policy is getting more restrictive, so we can take a break and see what the impact is down the road.

Julie Morgan: So the SLOOS report is important, we should still pay attention to CPI. Right?

Kim Khan: Absolutely. Because, you know, CPI can turn things right around. And you know, that’s one of these. We’ve had this kind of new uncharted territory when people think the Fed is done. So all of a sudden, you know, the good news is bad news narrative is good news is good news.

And bad news is bad news. But what we’ve always known is high inflation is bad news. And so high inflation is bad news for the economy. It’s bad news for recession expectations, and it’s certainly bad news, if you want the Fed to stop.

Julie Morgan: Now let’s turn to earnings. Kevin, what do you have?

Kevin Curran: Yeah, so it’s a slower pace of earnings, but it certainly isn’t slow by any means. There are a lot of reports due in the next week from the pharmaceutical sector for example, including BioNTech, Decatur pharmaceutical Teva, Mallinckrodt, and a couple of others.

We have some EV names like Lucid, Rivian, and Fisker, as well as some popular tech names like Airbnb and PayPal, as well as Roblox joined by Tyson Foods, which is a more traditional consumer staples provider.

But I think the key to the week is really going to be the reports from Fox and Disney. The former having just concluded a pretty expensive litigation and the ladder now continuing its fight with the state of Florida that’s clearly going to be a focus for the earnings call beyond its efforts in streaming entertainment, and parks, etc.

Julie Morgan: So what are you expecting to hear from Disney?

Kevin Curran: Well, cost cutting is kind of one of the major things that we’re looking at yet, they’re laying off 1000s of workers, they just had another round recently that cut about 4000 jobs. It’s not unusual to hear companies tightening in their belt as of late. But that’s a pretty significant figure.

And we’ll be curious to see what that looks like in terms of the bottom line for the company moving forward in a more profit-focused rather than growth-focused trend that they had been in with their streaming business. Also, I’m curious to hear what they think about the writers strike.

Obviously, Disney has an enormous backlog of content, and they’re not, you know, desperate for anything new to come out, necessarily. But a writer’s strike has a big effect on entertainment-focused business, like Disney.

And then, of course, as I, as I mentioned, before, the battle with the state of Florida over the status of their special district. So, it’ll be interesting to see what they say on that. Because, you know, certainly the words that they’ve said in past earnings calls and initiatives have gotten them into this mess that they’re in because of what they term as backlash from the state of Florida over their comments with regard to certain bills passed by the state.

And it’d be interesting to see if they touch on it, or if they avoid it in order to not necessarily put their foot in their mouth.

Julie Morgan: As far as streaming is concerned, you know, and the writers strike, that’s one of the major issues that the writers have is streaming and also AI.

Kevin Curran: Yeah, and the streaming thing is also going to be interesting from the perspective of you know, Netflix was pretty solid, and attorneys report early in the earning season. I mean, it feels like forever ago, but the more recent ones have been pretty auspicious.

I mean, we saw at Paramount and Warner Brothers Discovery both have pretty downbeat report. So, it’ll be interesting to see if Disney is, you know, pulling away, and perhaps capitalizing on some of the struggles of other competitors in the space or if, you know, perhaps it’s just a broader tightening of the belt among consumers and not necessarily spending as much on these types of packages that are now beginning to look more like a cable package than just an individual streaming subscription.

Kim Khan: Just wanted to say about the writers strike, it’s also kind of interesting, I think they were does definitely have a good point on how much they should be paid and whether it should be commensurately increased, based on the new avenues of cash and streaming, but streaming isn’t particularly successful.

Now, for a lot of companies. I mean, you know, if you look at HBO Max, it’s having some trouble, you know, Disney plus has, you know, gone from like a huge boom to struggling a little more. And so, you’ve got this kind of massive funnel that needs tons of content.

So, it needs writers, but then you’ve also got both difficulty and really monetizing that to a level that the companies want. So it’s a little catch 22 situation there. And I know you mentioned AI. You know, one of the things about and noticed about the writers’ strike is that of course, the writers have some of the best picket line signs I’ve seen.

And my favorite one was one that just simply said that chat GPT does not have childhood trauma is basically implying that they can’t write comedy.

Julie Morgan: I saw that one too. That was interesting. Yeah. Let’s switch gears a bit and talk about what happened all this week. Now, there’s a lot of stuff that happened this week. I mean, we have the jobs numbers. I alluded to that at the top of the show. We also have what happened with regional banks. Tell me how are you guys putting all of this together?

Kim Khan: Well, to start with the jobs numbers, it was interesting to see how the markets reacted in kind of uncharted territory. If you’re kind of pricing in that the Fed is done, which the Fed Funds Futures are doing right now. And so, then you kind of are focusing on whether, you know, a strong labor market can bring you about a soft landing.

That was kind of a bit of a push and pull this time, because while the headline number was really strong on non-farm payrolls, the revisions, the past few months, were sharply downward. So that was a bit of a wash.

But you didn’t see the jobless rate fall to 3.4%, its lowest it’s been since 1969. And nobody can really say that the Labour Party market isn’t resilient. It’s going to change the Feds mind in any way. It’s going to be still worried about the labor market being a bit too strong.

Kevin Curran: Yeah, I mean, and just to add to Kim’s point, I kind of look at it from the vantage point of what does it mean for the Fed? And I think that’s kind of what we were alluding to earlier with the good news is bad news in the sense that if we have a hotter jobs number, like we saw, at least with the headline numbers, not taking into account or revisions to prior numbers, that it was kind of bad news when we were looking at it that, you know, maybe the Fed won’t slow down as quickly as we had hoped.

And certainly, as we would have hoped, with the fragility that we’re seeing in the banking sector. So, you know, this, this really makes a lot of the reports that we mentioned in the conversation earlier with the CPI as well as the SLOOS next week, crucial because there’s so many moving parts Let’s hear that are working against each other with a hot labor market, or a tight labor market, I should say, at a low unemployment rate, working against a fragile banking system that doesn’t really want to see many more rate increases.

So, it makes every little piece of data that much more critical. And it’ll be interesting to see what they do, I do think they have to pause, at least, I’m not sure that they’re willing to move towards a cut later in the year.

But it’s interesting to watch the Fed indicators kind of swing wildly back and forth based upon each of these small reports that might otherwise have been put in the rearview mirror and pointed to the more significant reports that we typically look at like a CPI, rather than just all the minor reports along the way.

Kim Khan: Yeah, if you want to look at something that is actually bad news is bad news for the stock market right now. I think it’s the regional banks, which really just talked about, that could be seen as good news in a way, like if the more regional banks go bust, the Fed definitely is forced to pause.

But we’ve got to say, look, have pauses already priced in. And cuts are priced in starting in July, and definitely in September. So, the market has its view. And so banks, you know, going Buster, gated are getting picked up for pennies on the dollar is going to shake market confidence.

And the interesting thing we saw this week is that, you know, banks are no longer free, the smaller banks are no longer free to go out and find their own kind of white knights and, and do their own deals.

Because if it leaks out, as it did, with a Western alliance, a report from the FT that said they were speaking about doing a deal, which I would say Western alliance vehemently denied, and said, you know, they might consider legal action against the FT because their stock plunged 70% on that report. And FDA has retracted it, but right now it’s it’s kind of up in the air on whether they’re speaking to anyone or not.

But it’s hard to get a deal done with someone and get to have any leverage. You’re trying to sell yourself for a certain stock price. And then suddenly, the report goes out and the sellers pile in. And all of a sudden, you know, your stocks are already at a bargain basement price.

Kevin Curran: Yeah. And we saw the same as PacWest. And then, of course, First Horizon’s deal with TD fell apart. So definitely is not exactly the most steady environment for M&A.

Julie Morgan: Let’s move on from here. Final thing that we’re going to talk about very briefly is, you know, yesterday, we were supposed to record this yesterday on Star Wars Day. And I kind of missed that to be honest with you. So what did you do in honor of Star Wars Day?

Kim Khan: Well, yeah, belated May the Fourth be with you to everyone listening and seeing Julian Kevin. I actually went to a Star Wars-themed cocktail bar last night, so I actually hung out with real super nerds and had drinks based on lightsaber colors.

Julie Morgan: No, you didn’t. Are you serious?

Kim Khan: Yeah, I had the Instagram photos to prove it. Oh, wow.

Julie Morgan: Yes, I need proof. Kevin, did you do anything?

Kevin Curran: Not really. I mean, I’m not this metropolitan lad that Kim is but so we had to kill some rabbits to make some food, so I’ll pretend that I made lightsaber noises while dispatching some rabbits.

Julie Morgan: Well, I just sat around wishing that they’d come out with season two of Obi-Wan Kenobi. I’m just saying.

Kim Khan: Yeah, I rewatched season one last night.

Julie Morgan: Good times. Anything else you want to add?

Kim Khan: I’m just gonna say, if you’re looking to bet on the Kentucky Derby tomorrow or Saturday when this goes out? You could take a semi-long shot at Derma Sotogake. Japanese horses never won the Derby. But Japanese horses have been dominating in some of the recent races. It’s worth a shot in my opinion.

Kevin Curran: Yeah, and I think last year was one of the biggest long shots ever. I’m trying to remember the name of the horse last year, but yeah, Rich Strike was 80 to 1 in 2022 so Rich Strike was last year 80 to 1, the second biggest shot ever after Donerail in 1913. So there’s a bit of trivia for you.

So, you know, maybe you can take the long shot and if you’d bet a small amount of money you would’ve won 80 to 1, those are some damn good odds.

Kim Khan: My wife won the longest-ever long shot to win the Belmont, 75 to 1, Sarava, and that was back in the early 2000s.

Kevin Curran: Nice I was at the American Pharoah’s win of the Triple Crown in 2015, I think it was. That’s my highlight of horse racing attendance.

Kim Khan: That’s epic!

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