Another UK Prime Minister Resigns And Banks See Benefits As Earnings Season Kicks Off

TL;DR

• UK Prime Minister Liz Truss has resigned amid economic turmoil created by her economic plan
• Earnings season has kicked off with the banks benefiting from higher interest rates
• The mess in Europe is making the U.S. look like potentially a nice place for investors to be
• Top weekly and monthly trades

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Major events that could affect your portfolio

If Saturday Night Live was a UK show, they’d be struggling to come up with material for the current state of the government and politics in general. Not through lack of material, but simply because real life is throwing up more ridiculousness than even the most imaginative comedy sketch could hope for.

This week, Prime Minister Liz Truss resigned from her position after her “mini-budget” tanked the British Pound and crashed the bond markets, forcing the Bank of England to provide emergency support to stop pension funds collapsing.

She lasted just 44 days in office, making her the shortest serving Prime Minister ever. She took the record from George Canning in 1827, who only vacated the position because he died.

After just two weeks in charge The Economist (now famously) pointed out that Truss had managed to blow up the government in a period of time that was “roughly the shelf life of a lettuce.” The meme kept rolling, with UK newspaper The Daily Star setting up a YouTube Livestream of a photo of Truss next to a real lettuce, to see which would last longer.

The lettuce won.

The situation is comical but behind the memes is a serious failing in the UK political system which is likely to have long term consequences for the economy. UK government bond yields remain high and whoever becomes the new Prime Minister will be facing higher borrowing costs and a clear message that unfunded tax cuts or spending will not be tolerated by the market.

There’s an opportunity there for investors, which we’ll get to soon.

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Back in the US and earnings season is in full swing. The banks have been the big early winners with Bank of America, Goldman Sachs, JP Morgan Chase and Wells Fargo all beating analyst estimates. They’re one of the few sectors which will benefit from rising interest rates due to what’s known as ‘net interest.’

Net interest is effectively just the differential between the interest being paid to savers and the interest being charged to borrowers. At times when interest rates are very low, the margins on this differential become very slim. As the headline rate gets higher, banks can keep a wider spread while still increasing the level of interest being paid to savers.

Bank of America, for example, saw their net interest increase by 24% in Q3 to hit $13.8 billion.

Other big names announcing earnings this week have been Netflix and Tesla. Netflix bounced back strongly after losing subscribers for the past two consecutive quarters, adding 2.4 million new accounts in Q3.

They also announced imminent plans to open up their new ad-supported tier in 12 countries, in a partnership with Microsoft. This will bring down the cost of the lowest tier plan, but will include adverts for the first time. The second major revenue generating project was also confirmed, with a crackdown on password sharing being put in place and lower cost ‘sub-accounts’ able to be added instead.

Tesla CEO Elon Musk shrugged off analysts’ concerns about demand despite the company slightly missing their revenue target. Always one to keep things interesting, he also said that he believes Tesla could become worth more than Apple and Saudi Aramco combined.

This week’s top theme from Q.ai

With all of the craziness happening in the UK and Europe, as well as the broadly positive start to earnings season in the U.S., there’s a clear investment opportunity on the rise. We identified this a while ago and it’s becoming more and more compelling as time goes on.

The U.S. stock market has been hit particularly hard so far in 2022. The S&P 500 is down -23.57% year to date at the time of writing, while the UK’s FTSE 100 is down just -8.17%.

Even so, right now the economic outlook for the U.S. looks stronger than many other countries. It’s not likely to be all smooth sailing though. An outright long position could work, but if markets trend down or sideways it might not.

What we’ve done to take advantage of this gap is create a pair trade which goes long on the U.S. and short on Western Europe, Japan, Hong Kong and Australia. The U.S. Outperformance Kit automatically rebalances this trade each week and aims to generate returns for investors as the valuation gap between the U.S. and these other countries moves closer together.

It means that even if the overall market doesn’t perform that great, investors can still profit as long as the U.S. performs better than the rest.

Top trade ideas

Here are some of the best ideas our AI systems are recommending for the next week and month.

Graftech International (EAF) – The industrial manufacturer is one of our Top Buys for next week with an A rating in our Quality Value factor. Gross profit is up 48.2% in the 12 months to the end of June.

First Solar (FSLR) – The solar company is one of our Top Shorts for next week with our AI rating them an F in Low Momentum Volatility and Growth. Earnings per share are down -121.27% over the past 12 months.

Radiant Logistics (RLGT) – The global logistics company is one of our Top Buys for next month with an A rating in our Quality Value factor and a B in Technicals and Growth. Revenue was up 47.50% in the 12 months to the end of March.

Twitter (TWTR) – The social media platform is one of our Top Shorts for next month with our AI rating them a F in Quality Value and Growth and a D in Low Momentum Volatility. Earnings per share are down -62.82% over the past 12 months.

Our AI’s Top ETF trade for the next month is to invest in energy and natural resources and short healthcare and the stock market overall. Top Buys are the Vanguard Energy ETF, the iShares North American Natural Resources ETF and the SPDR S&P Oil & Gas Exploration and Production ETF. Top Shorts are the InvescoIVZ
DWA Healthcare Momentum ETF and the Vanguard Total Stock Market ETF.

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