Good morning. Concerns about economic conditions are behind the weakness seen this morning in the futures markets, but at the same time Non Farm Payrolls seem still "too good" (and way above yesterday's ADP print) for the Fed to dial back its tightening efforts.
RH put out a downside guidance and sees Q2 revenues declining by 1-3%, and we recommend to read what Gary Friedman has to say about the economy (see end of post).
Also, weaker-than-expected retail sales out of Germany, and higher-than-expected inflation out of South Korea are among the focal points, but the story of the day probably is Elon Musk's remark that he has a "super bad feeling" about the economy and that he needs to cut about 10 percent of its staff.
Gamma Discussion
On Thursday investors were reducing puts at lower strikes, especially at 3700, which gives the SPX more room to fall, if sentiment deteriorates further, as dealer hedge new puts by selling futures in a short gamma environment. Take a look at the left tail of the curve in the chart below and how it changed relative to yesterday.
Support can be identified at 4050 and 4000, while 4200 is the main upside target.
--- RH earnings call below ---
Steven Zaccone -- Citi -- Analyst
Great. Thanks for taking my question. And I appreciate the shout out for the Italian lineage on the call. So I wanted to ask about the guidance change for the year.
So could you just comment a bit more on maybe the softening of demand you've seen as of late, you gave such great color the last time you reported. So what are you really seeing in the business to guide 2Q revenue to be flattish and then take the second half of the year down? And I guess I'm curious, how much of it is a reduction in demand versus maybe a delay in some of these new initiatives?
Gary Friedman -- Chairman and Chief Executive Officer
And yes. I don't know how much more color I have. I mean, the demand slowed at the beginning of the war, softened further as the next couple of months and most of the narrative, I think, is out there. I think we -- we're guiding it as we see it today.
How do we -- how does this all unfold? I don't think anybody really knows right now. It's the first time anybody has seen inflation like this in 42 years, right? So I don't know if, how many people on this call were adults 42 years ago. Not a lot, right? Not adults that had a lot of wisdom, at least I like to say. So the people that really had wisdom 42 years ago are 80, 90, or 100 years old.
So just not a lot of those people still highly active in decision-making roles. I guess like we have a President that at least you might have been old enough to kind of know what's going on, but it doesn't seem like they know what to do. Janet Yellen finally did come out and say I was wrong. I mean, everybody is giving her all this credit for the Mea culpa like what took so long? Like how clear did it have to be to kind of admit you were wrong, right? Like how long ago did inflation go from 2% to 4%, 4% to 7.4% and then 8.5%.
And you have to ask yourself like, where is inflation really today? I've had a chance to interact a dinner down in Woodside with some really interesting small group of people from mostly North America, but also someone who runs one of the biggest companies in the world out of China. And one of the biggest venture capitalists, cryptocurrency experts, so on and so forth. And we all got to ask several questions at the end of the night before we're wrapping up, I asked, OK, no one's getting at here without saying what's going on right now. What do you think is happening? What's going on with this economy.
And my sense is and it was the same way I was lucky enough to attend the Wonder Conference that Jeffrey Casterberg put on not too long ago, that had 150 people from around the world that I think a lot of people don't know exactly where we're at. I think that if you look at what's happening, you say we've got we've got really high inflation. Is it going to come down? Is it done? If you ask me to tell you what the consensus of the people I talk to business leaders and people who run big portfolios of businesses and so on and so forth, where they're venture capital or not. They say inflation is running much higher than the stated numbers and we would concur with that.
We know that the Fed has to raise interest rates. We know when interest rates rise, it usually leads to a recession. It surely is not good for the housing market. Anybody thinks that rising interest rates is a good thing for the housing market hasn't been alive long enough.
And so you've got rising interest rates. You have the government starting to -- they've been doing quantitative easing we're going to tighten. That's not good for the -- to the debt markets. The cost of money is just going to go way up everywhere, right? So -- and there's a lot of things about -- did we have a multiple contractions and are we in somewhat of an earnings recession based off the highs and where did it go from here? So none of us know.
None of us have a crystal ball. We can just look at the best data that we can get our hands on and try to make the best predictions and forecasts that we can. But it's a time to remain highly -- I believe, highly flexible and it's like -- we like to say inside the company prefer piece it planned for work. And how do you prepare yourself for almost anything and everything that could happen in a market like this.
And part of our strategy was to raise capital, be prepared, have our balance sheet prepared. We want to be able to protect the business model. We want to be able to capitalize in an environment that might get volatile. Look, if all of a sudden for some reason, more accurately, they figure out how to fixed inflation without raising interest rates too high, and there are some magic bullets in the economy that change things.
So we paid a little bit of interest expense. All the term loan debt we have is repayable. So we don't spend the money. We haven't spent any money.
We've got the money, we're paying for optionality right now. So we think our guidance is our best view of the future today, but it's a very uncertain future today. Very uncertain future. And I'd say doubly uncertain for anybody in the home business because we're on the other side of COVID, we're up against big numbers like everybody else.
You've got rising interest rates. You've got -- you're coming off a super-hot kind of a couple of years in home prices and home sales. And even though there's low inventory, it doesn't matter if there's low inventory, if you have low demand. And so a lot of people moved over the last few years.
I don't think that there's going to be anywhere near the amount of movement in America than there was. We went through a historic amount of movement, especially the migration from cities to suburbs, which was very good for our business and our industry, right? People may be moving from a 1,500 square foot apartment to a 3,000 square foot home, 4,000 square foot home. It needs a lot more furniture. Are they moving back? I mean, they might be.
Are they buying new furniture again? I don't know. I mean -- but I don't think a lot of people are necessarily moving back. I don't think there's a whole lot of people moving. I know there's been people who have cited reports that were on Google and stuff.
That's a Lending Tree report. And that was from January 11, by the way. It's not very fresh data. If you want to put your confidence in reports from January 11 that are posted on Google by LendingTree, good luck.
I don't think there's going to be a lot of movement, and I don't think there's going to be as much activity. So what do you have to do in a market like that? You have to be really fresh and new. And that's what we are. I mean, we are going to be the most exciting thing in maybe the most uncertain market that we've seen in 10 or 15 years.
So I like how we're positioned no matter what happens. So I hate to say I'm indifferent. But at a big picture level, I'm indifferent. Our long-term strategy is unbelievable.
What we're going to do over the next several years is the world's never seen before. And we're doing it with the best model in our industry by roughly 50%. So for people that have a long-term view, there's not a better place to park your money. For people that are generally around the short term, like, I don't know, I don't invest in our sector.
There's a lot of hate if -- it's just it's going to be very uncertain, I think, for at least throughout this year, at least until the government figures out what to do with inflation and how high do interest rates have to go. If you go back in the '70s and '80s, I remember buying it -- my team will crack up, I'm going to say this, actually, I remember buying a water bed when I was in college. And I was paying -- I've got $145 water bed, and I was paying 26% interest, right? Credit cards had like 28% or 32% interest. I think by the time I paid off that water bed, it was like $1,000, right, few years later.
So our interest rates, the federal funds rate is going to go back to 20%. I don't think so. Is it going to stay under 4% or 5%? I don't think so. So I think we've got a long ways to go in raising interest rates to fight inflation.
And I think you just have to be prepared for anything right now.
RH put out a downside guidance and sees Q2 revenues declining by 1-3%, and we recommend to read what Gary Friedman has to say about the economy (see end of post).
Also, weaker-than-expected retail sales out of Germany, and higher-than-expected inflation out of South Korea are among the focal points, but the story of the day probably is Elon Musk's remark that he has a "super bad feeling" about the economy and that he needs to cut about 10 percent of its staff.
Gamma Discussion
On Thursday investors were reducing puts at lower strikes, especially at 3700, which gives the SPX more room to fall, if sentiment deteriorates further, as dealer hedge new puts by selling futures in a short gamma environment. Take a look at the left tail of the curve in the chart below and how it changed relative to yesterday.
Support can be identified at 4050 and 4000, while 4200 is the main upside target.
--- RH earnings call below ---
Steven Zaccone -- Citi -- Analyst
Great. Thanks for taking my question. And I appreciate the shout out for the Italian lineage on the call. So I wanted to ask about the guidance change for the year.
So could you just comment a bit more on maybe the softening of demand you've seen as of late, you gave such great color the last time you reported. So what are you really seeing in the business to guide 2Q revenue to be flattish and then take the second half of the year down? And I guess I'm curious, how much of it is a reduction in demand versus maybe a delay in some of these new initiatives?
Gary Friedman -- Chairman and Chief Executive Officer
And yes. I don't know how much more color I have. I mean, the demand slowed at the beginning of the war, softened further as the next couple of months and most of the narrative, I think, is out there. I think we -- we're guiding it as we see it today.
How do we -- how does this all unfold? I don't think anybody really knows right now. It's the first time anybody has seen inflation like this in 42 years, right? So I don't know if, how many people on this call were adults 42 years ago. Not a lot, right? Not adults that had a lot of wisdom, at least I like to say. So the people that really had wisdom 42 years ago are 80, 90, or 100 years old.
So just not a lot of those people still highly active in decision-making roles. I guess like we have a President that at least you might have been old enough to kind of know what's going on, but it doesn't seem like they know what to do. Janet Yellen finally did come out and say I was wrong. I mean, everybody is giving her all this credit for the Mea culpa like what took so long? Like how clear did it have to be to kind of admit you were wrong, right? Like how long ago did inflation go from 2% to 4%, 4% to 7.4% and then 8.5%.
And you have to ask yourself like, where is inflation really today? I've had a chance to interact a dinner down in Woodside with some really interesting small group of people from mostly North America, but also someone who runs one of the biggest companies in the world out of China. And one of the biggest venture capitalists, cryptocurrency experts, so on and so forth. And we all got to ask several questions at the end of the night before we're wrapping up, I asked, OK, no one's getting at here without saying what's going on right now. What do you think is happening? What's going on with this economy.
And my sense is and it was the same way I was lucky enough to attend the Wonder Conference that Jeffrey Casterberg put on not too long ago, that had 150 people from around the world that I think a lot of people don't know exactly where we're at. I think that if you look at what's happening, you say we've got we've got really high inflation. Is it going to come down? Is it done? If you ask me to tell you what the consensus of the people I talk to business leaders and people who run big portfolios of businesses and so on and so forth, where they're venture capital or not. They say inflation is running much higher than the stated numbers and we would concur with that.
We know that the Fed has to raise interest rates. We know when interest rates rise, it usually leads to a recession. It surely is not good for the housing market. Anybody thinks that rising interest rates is a good thing for the housing market hasn't been alive long enough.
And so you've got rising interest rates. You have the government starting to -- they've been doing quantitative easing we're going to tighten. That's not good for the -- to the debt markets. The cost of money is just going to go way up everywhere, right? So -- and there's a lot of things about -- did we have a multiple contractions and are we in somewhat of an earnings recession based off the highs and where did it go from here? So none of us know.
None of us have a crystal ball. We can just look at the best data that we can get our hands on and try to make the best predictions and forecasts that we can. But it's a time to remain highly -- I believe, highly flexible and it's like -- we like to say inside the company prefer piece it planned for work. And how do you prepare yourself for almost anything and everything that could happen in a market like this.
And part of our strategy was to raise capital, be prepared, have our balance sheet prepared. We want to be able to protect the business model. We want to be able to capitalize in an environment that might get volatile. Look, if all of a sudden for some reason, more accurately, they figure out how to fixed inflation without raising interest rates too high, and there are some magic bullets in the economy that change things.
So we paid a little bit of interest expense. All the term loan debt we have is repayable. So we don't spend the money. We haven't spent any money.
We've got the money, we're paying for optionality right now. So we think our guidance is our best view of the future today, but it's a very uncertain future today. Very uncertain future. And I'd say doubly uncertain for anybody in the home business because we're on the other side of COVID, we're up against big numbers like everybody else.
You've got rising interest rates. You've got -- you're coming off a super-hot kind of a couple of years in home prices and home sales. And even though there's low inventory, it doesn't matter if there's low inventory, if you have low demand. And so a lot of people moved over the last few years.
I don't think that there's going to be anywhere near the amount of movement in America than there was. We went through a historic amount of movement, especially the migration from cities to suburbs, which was very good for our business and our industry, right? People may be moving from a 1,500 square foot apartment to a 3,000 square foot home, 4,000 square foot home. It needs a lot more furniture. Are they moving back? I mean, they might be.
Are they buying new furniture again? I don't know. I mean -- but I don't think a lot of people are necessarily moving back. I don't think there's a whole lot of people moving. I know there's been people who have cited reports that were on Google and stuff.
That's a Lending Tree report. And that was from January 11, by the way. It's not very fresh data. If you want to put your confidence in reports from January 11 that are posted on Google by LendingTree, good luck.
I don't think there's going to be a lot of movement, and I don't think there's going to be as much activity. So what do you have to do in a market like that? You have to be really fresh and new. And that's what we are. I mean, we are going to be the most exciting thing in maybe the most uncertain market that we've seen in 10 or 15 years.
So I like how we're positioned no matter what happens. So I hate to say I'm indifferent. But at a big picture level, I'm indifferent. Our long-term strategy is unbelievable.
What we're going to do over the next several years is the world's never seen before. And we're doing it with the best model in our industry by roughly 50%. So for people that have a long-term view, there's not a better place to park your money. For people that are generally around the short term, like, I don't know, I don't invest in our sector.
There's a lot of hate if -- it's just it's going to be very uncertain, I think, for at least throughout this year, at least until the government figures out what to do with inflation and how high do interest rates have to go. If you go back in the '70s and '80s, I remember buying it -- my team will crack up, I'm going to say this, actually, I remember buying a water bed when I was in college. And I was paying -- I've got $145 water bed, and I was paying 26% interest, right? Credit cards had like 28% or 32% interest. I think by the time I paid off that water bed, it was like $1,000, right, few years later.
So our interest rates, the federal funds rate is going to go back to 20%. I don't think so. Is it going to stay under 4% or 5%? I don't think so. So I think we've got a long ways to go in raising interest rates to fight inflation.
And I think you just have to be prepared for anything right now.
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.