Good morning. Happy Friday.
The Asian/Pacific markets leaned down. Japan and Malaysia closed up; China, South Korea, India, Australia and New Zealand were weak. Europe, Africa and the Middle East are mostly down. The UK, Denmark, Poland, France, Russian, Hungary, Spain, Italy and Portugal are down. Futures in the States point towards an up open for the cash market, which is well off the overnight lows.
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The dollar is up. Oil is up; copper is down. Gold and silver are down. Bonds are up. Bitcoin is down.
Stories/News from Seeking Alpha…
Next stop?
Bonds on Thursday got battered by another jump in inflation, which sped up to 7.5% in January to mark a fresh four-decade record, or the highest pace seen since the early 1980s. That led the benchmark 10-year Treasury yield to cross the 2% level, ending the session 6 bps higher, while the two-year yield jumped the most since 2009. While yields are still low by historical standards, the speed of the recent Treasury movement is highlighting a meaningful shift for borrowing costs across the economy, or an input that investors use to value stocks and other assets. It was only a month ago that the 10-year yield was hovering around 1.5%.
Bigger picture: For those doubting recent signals from the Fed, it’s pretty clear that the hawkish monetary era has arrived. St. Louis Fed Chair James Bullard, a voter on the FOMC this year, said he now favors a half-point interest rate hike in March, the first increase of that magnitude since 2000. While he is on the more hawkish side of the central bank, other policymakers have also expressed urgency about rate increases and reducing the size of the Fed’s balance sheet, which could put further upward pressure on yields.
In fact, Fed-funds futures now point to a more than 70% chance the Fed will raise short-term rates from their current level (near zero) to at least 1.75% by the end of the year, according to data from CME Group. That was up from a 22% probability on Wednesday and 1% a month ago. Economists also keep lifting the pace of their forecasts, with Goldman Sachs (joining Bank of America) in raising rate hike expectations to seven times for 2022, up from five projected earlier.
Outlook: Equities, especially tech and growth stocks, came under pressure after the explosive inflation data, and many are warning that the recent volatility could rise across all asset classes in case of a policy mistake (acting too late, too strong, or not strong enough). However, should the rate hikes successfully put a lid on price pressures this year, early losses could be followed by strong gains for equities. In terms of the 10-year Treasury yield, the rate is likely to settle into a range between 2% and 2.5%, according to strategists at Morningstar and Neuberger Berman.
Accurate proxy?
With the rate of inflation grabbing so many headlines since the pandemic, it’s worth taking a deeper look into how the Consumer Price Index is aggregated. Primarily, the index provides a gauge for how much people are paying for goods and services. These can include transportation, food, rent, clothing, haircuts and medical care (80,000 items are included in the report).
To start: The CPI reflects the spending patterns of two population groups: Urban wage earners and clerical workers (CPI-W), as well as all urban consumers (CPI-U). The all urban consumer group represents around 93% of the total U.S. population, and is based on the expenditures of almost all residents of urban or metropolitan areas, including professionals, the self-employed, the unemployed, the poor and retired people. The gauge, though, doesn’t include the spending of those people living in rural non-metropolitan areas, farming families, people in the military, and those in institutions, such as prisons and mental hospitals.
Each month, data is collected in 75 urban areas across the country from about 6,000 housing units and 22,000 retail locations (such as department stores, supermarkets and hospitals). Taxes directly associated with the purchases are also included in the data. Price changes for the various items in each location are aggregated using weights, which represent their importance in the spending of the appropriate population group.
Getting critical: The statistical methodology used to calculate the CPI has undergone many revisions over the years, such as measuring the cost of goods vs. the cost of living. With January’s CPI report, the weightings of the indexes have changed. They’re now based on consumer spending patterns across 2019 and 2020, replacing the weights based on spending in the two previous years, and since consumer spending patterns shifted significantly towards goods and away from services in 2020 due to the pandemic, that will affect this year’s CPI readings.
‘Freedom Convoy’
A third border crossing between the U.S.-Canada was blockaded by truckers on Thursday, building on the “Freedom Convoy” movement that has been protesting vaccine mandates and other coronavirus restrictions. The Emerson crossing between Manitoba and North Dakota was shut down in both directions, in addition to the Coutts crossing linking the province of Alberta with Montana, as well as the critical Ambassador Bridge connecting Windsor, Ontario, to Detroit.
Crisis deepens: Homeland Security Secretary Alejandro Mayorkas and Transportation Secretary Pete Buttigieg have phoned their Canadian counterparts about the situation, urging them to use federal powers to resolve the standoff. Windsor Mayor Drew Dilkens also made a plea for a court injunction, citing economic damage, while Canadian officials successfully asked a court to freeze millions of dollars in donations through crowd-funding site GiveSendGo after cutting off a similar effort on GoFundMe. Meanwhile, the Detroit International Bridge Company, which owns the Ambassador Bridge, pushed Canada to end the protest by rescinding the vaccine mandate or removing the vehicles so trade can resume.
The demonstrations have already disrupted production lines and even shut down the plants of nearby automakers like Ford (NYSE:F), GM (NYSE:GM), Stellantis (NYSE:STLA), Toyota (NYSE:TM) and Honda (NYSE:HMC). “We hope this situation is resolved quickly because it could have widespread impact on all automakers in the U.S. and Canada,” a Ford spokesman declared. Putting it in perspective, the Ambassador Bridge is the busiest international land-border crossing in North America, responsible for 30% of about $600B in annual two-way trade between the U.S. and Canada.
Things could get worse: In a bulletin to local and state law enforcement agencies, the Department of Homeland Security said it has received reports that truckers are planning to “potentially block roads in major metropolitan cities.” A convoy could begin in Southern California as early as this weekend, possibly disrupting traffic around the Super Bowl, and reach Washington in March in time for the State of the Union address. North of the border, demonstrations are going into their third week in Ottawa, where truckers have clogged up traffic and paralyzed the Canadian capital.
10 inflationary reactions
Market turmoil: “I expect that we’ll see a return of the volatility that was prevalent for most of the month of January in the wake of this [CPI] report,” said Brian Price, head of investment management at Commonwealth Financial Network. “Investors may want to buckle up as it could be a rough ride for risk assets until inflationary data starts to abate, and I expect that it will, as we move through the year.”
It’s everywhere: “What started as pandemic-specific inflation has now broadened out across many, many categories both on the goods side of the economy and on the services side,” explained Kathy Bostjancic, chief U.S. financial economist at Oxford Economics. “It reflects supply constraints both in the goods market and the labor market but it also is a function of still strong demand, particularly from U.S. consumers.”
Consumer sentiment: “This survey is really showing that there’s a lot of financial anxiety that’s caused by inflation, market volatility and just that uncertainty coming out of the pandemic and the impact that it has had on everyone in their everyday lives,” added Celeste Revelli, director of financial planning at eMoney.
Hard on the wallet: “A lot of people are hurting because of high inflation. The average U.S. household is spending an additional $276 a month – that’s a big burden,” estimated Ryan Sweet, a senior economist at Moody’s Analytics. “It really hammers home the point of ‘what is the cost of inflation?'”
Wage-price spiral: “If consumers and workers start believing that inflation is not going to be transitory they’re going to start demanding higher wages and higher inflation becomes embedded in the system,” declared John Briggs, head of strategy for Americas at NatWest Markets.
Let it play out: “I certainly can relate to how people are feeling. I am somewhat optimistic though,” announced Dr. Michael Greiner, economist at Oakland University. “While we’re seeing a jump the amount of the jump is actually decreasing. Over the long-term this is really going to be a short term problem.”
The White House: “According to Nobel laureates, 14 of them that contacted me, and a number of corporate leaders, it ought to be able to start to taper off as we go through this year,” President Biden said in an interview. “In the meantime, I’m going to do everything in my power to deal with the big points that are impacting most people in their homes.”
Supply chain: “While we’re hopeful prices will begin to decline in the coming months, prices at grocery stores and restaurants may take longer to adjust downward,” noted Jonathan Silver, CEO of Affinity Solutions, which tracks consumer purchasing habits. “We’re unlikely to see a full correction in the supply chain until later this year or even 2023.”
Policy error? “The first error occurred on Nov. 30, when the Fed finally retired ‘transitory,'” pointed out Mohamed El-Erian, chief economic adviser at Allianz. “Now, the policy error would be to slam on the brakes because they didn’t take their foot off the accelerator early enough.”
Forex watch: “If the Fed is to step hard on the monetary brakes, we would certainly favor the dollar against the low yielders backed by central bankers who have firmly placed themselves in the dovish camp,” said Chris Turner, global head of markets at ING.
Today’s Economic Calendar
10:00 Consumer Sentiment
1:00 PM Baker-Hughes Rig Count
What else is happening…
Twitter (NYSE:TWTR) loses steam as inflation weighs on investors’ minds.
Affirm (NASDAQ:AFRM) tanks after Q2 loss; guidance sees more losses ahead.
Zillow (ZG) surges as Q4 Offers revenue surges over 1,000% Y/Y.
CDC plans COVID vaccine rollout for younger kids by Feb. 21.
Strong pricing leads to Coca-Cola (KO) earnings topper.
PepsiCo (PEP) rides strong organic sales to offset cost pressures.
Black Rifle Coffee (NYSE:BRCC) soars in first day following de-SPAC.
Kellogg (NYSE:K) powers through inflation, bottlenecks and a labor strike.
Unilever (NYSE:UL) warns surging costs will weigh on profit margins.
Official OPEC stats for January are out and are worse than expected.
Astra Space (ASTR) plunges to Earth after NASA mission failure.
—————
Good morning. Happy Thursday.
The Asian/Pacific markets mostly did well. Japan, Hong Kong, South Korea, India, Taiwan and Malaysia led. Europe, Africa and the Middle East lean down. The UAE and Saudi Arabia are up; Denmark, Poland, Finland, Hungary, the Netherlands and Portugal are down. Futures in the States point towards a big gap down open for the cash market.
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The dollar is up. Oil and cooper are up. Gold is down; silver is up. Bonds are down. Bitcoin is down.
Stories/News from Seeking Alpha…
Inflation nation
Get ready for a move above 7%. The latest CPI data is out today, with economists expecting the figure to have soared 7.3% in January, from a four-decade record notched in December. It’ll be another important gauge for the market as investors seek more information on pace and level of coming Fed rate hikes that are due to start in March. As of the last count, estimates on Wall Street ranged from three rate increases all the way to seven for 2022, with the federal funds rate projected to end the year anywhere from 1.25% to 2.00%.
How will traders take it? “I can only hope for a ‘no gasp’ week in terms of the data. U.S. CPI is expected to be significantly hotter than the previous month, so I don’t expect any real rattling of markets unless it comes in above expectations,” said Kristina Hooper, chief global market strategist at Invesco. Meanwhile, the yield on the 10-year Treasury keeps climbing, notching a 2.5-year high this week at a level of 1.95%.
High inflation has already lifted costs on almost everything, ranging from groceries and gas to cars and rent, so it will be interesting to keep an eye on sub-sectors of the Consumer Price Index. Core CPI – which excludes food and energy – and is the Fed’s preferred gauge of inflation, is forecast to rise 5.9% Y/Y vs; a pace of 5.5% in December. Looking to respond to the price pressures, the central bank has backed away from its “transitory” forecast that it had held for much of last year, signaling rate increases, the end of pandemic-era bond-buying and a reduction in the size of its balance sheet.
Earnings transcripts: Corporate America can’t stop talking about inflation either. In fact, words like “supply chains,” “logistics” and “inflation” appeared on 71% of Q4 earnings calls, up from 39.2% from the prior year. “This is a reversal from expectations at the beginning of the pandemic, where companies expected a fall in economic activity and an extended recession,” noted supply chain researcher Panjiva, a unit of S&P Global Market Intelligence.
Disney gets an A+
The magic returned to Disney (DIS) late Wednesday as several upside surprises gave a much-needed boost to beaten-down shares. The stock rose as much as 10% in after-hours trading, with the Mouse House tacking on another 11.8M Disney+ subscribers (vs. 7M consensus) to reach 129.8M paying users at the end of the holiday quarter. “We are more confident than ever in this platform,” CEO Bob Chapek announced on an earnings call with investors.
More content: Company executives also reiterated plans to spend $33B on new content this fiscal year as a key driver for new subscriptions in the U.S. and internationally. The investment includes $11B on sports and sports rights, as well as $22B on entertainment, with hits like Star Wars series The Book of Boba Fett, and two new Marvel titles, Eternals and Hawkeye. “We are not nearly tapped out in each of our major franchises,” Chapek added on the call.
“These results speak volumes for Disney’s storied brands and its ability to rise above the competition in an increasingly crowded digital media market,” noted media analyst Paul Verna with Insider Intelligence.
Don’t forget the parks: The company saw all-time-high revenue at its “theme parks, experiences and consumer products” division, which doubled over the prior year to reach $7.2B and exceeded pre-pandemic levels. Visitors flocked to its attractions across the U.S., Europe and Asia, while profit margins in part rose because of lower spending on labor due to two new park navigation apps: Genie+ and Lightning Lane. Attendance trends were also up double digits (vs. Q4) at Disneyland and Walt Disney World, and per-capita spending was up 40% Y/Y, amid higher outlays on food, beverages and merchandise.
That happened fast
Ford (NYSE:F), Toyota (NYSE:TM) and Chrysler-maker Stellantis (NYSE:STLA) have all halted production near Detroit, the historic heart of the U.S. auto sector, in response to the latest “Freedom Convoy” protests. Truckers have shut inbound Canada traffic on the critical Ambassador Bridge since Monday night, while another border crossing, connecting the province of Alberta with Montana, has been closed in both directions since late Tuesday. Tensions arose several weeks ago when trucker vaccine mandates kicked in north of the border on Jan. 15, while an American ban followed shortly thereafter.
Economic damage: “I think it’s important for everyone in Canada and the United States to understand what the impact of this blockage is – potential impact – on workers, on the supply chain, and that is where we’re most focused,” White House Press Secretary Jen Psaki said during her latest briefing. “We’re also looking to track potential disruptions to U.S. agricultural exports from Michigan into Canada.”
There was also a response from the Canadian side, with more than two-thirds of the $600B in goods traded annually between the two countries transported by road. “If there were to be prolonged blockages at key entry points into Canada that could start to have a measurable impact on economic activity,” Bank of Canada Governor Tiff Macklem declared, calling for a swift resolution. “We’ve already got a strained global supply chain. We don’t need this.”
Could the protests boost rail transport stocks like Canadian Pacific (NYSE:CP), Genesee & Wyoming (NYSE:BIP), CSX (NASDAQ:CSX) and Expeditors International (NASDAQ:EXPD)?
Growing weary: As the highly infectious Omicron variant begins to ease, copycat protests are now spreading to Australia, New Zealand and France. Truckers in the U.S. are even planning similar demonstrations, heaping pressure on authorities to ease up on pandemic restrictions. New York and Illinois just ended mask mandates in most indoor public settings, while New Jersey, Connecticut, Delaware and Massachusetts are lifting the restrictions for schools. Some provinces in Canada – Alberta, Saskatchewan and Quebec – have also dropped COVID measures since the start of the “Freedom Convoy,” but have denied any connection to the demonstrations.
Trading on the Hill
Should members of Congress be allowed to trade stocks? That debate has been playing out on Capitol Hill over the last several weeks after news of Nancy Pelosi’s (and her husband’s) large bets on the equity market. The House speaker purchased millions of dollars in call options focused on tech and media names, like Google (GOOG, GOOGL), Roblox (NYSE:RBLX) and Disney (NYSE:DIS), though she is now taking a 180-degree turn on the issue following building momentum in both parties.
Flashback: Pelosi defended the trades in early December, saying the U.S. was a “free market economy” and lawmakers “should be able to participate in that.” Her position then softened in January, saying, “I’m okay with that,” if lawmakers want to tighten restrictions on trading. Now, Pelosi is moving to limit stock trading on Capitol Hill, greenlighted a plan and a bill that could come “pretty soon.”
Members of Congress have a lot of privileged and classified information that could move stock prices (think back to the beginning of the pandemic), as well as financial incentives from companies that routinely lobby Congress. Those decisions could also play a role in how much a given stock is worth, and Congress sought to counteract that in 2012 by passing a bill known as the STOCK Act. While the legislation requires lawmakers to disclose trades within 45 days, many say it doesn’t do enough to prevent insider trading and conflicts of interest.
Current proposals: One idea would ban lawmakers and senior staff from buying and selling individual stocks, while another would institute an outright ban on trading. Meanwhile, a measure proposed by freshman Sens. Jon Ossoff (D-Ga) and Mark Kelly (D-Ariz) would require stocks to be put into a blind trust within 120 days of the bill being enacted. The legislation, dubbed the Ban Congressional Stock Trading Act, would apply to all sitting (and incoming) members of Congress, their spouses and their dependent children.
Today’s Economic Calendar
8:30 Initial Jobless Claims
8:30 Consumer Price Index
10:30 EIA Natural Gas Inventory
1:00 PM Results of $23B, 30-Year Note Auction
2:00 PM Treasury Statement
4:30 PM Fed Balance Sheet
7:00 PM Fed’s Barkin Speech
What else is happening…
Rumble SPAC (NASDAQ:CFVI) sinks after Rogan rejects $100M podcast offer.
Lord of the Rings, Hobbit media rights going on block – Variety.
Peloton (NASDAQ:PTON) bulls hang tough after new look from company.
CVS (NYSE:CVS) posts weak forecast for COVID vaccine business in 2022.
Uber (NYSE:UBER) pops as core business rebounds following Omicron surge.
Tesla (NASDAQ:TSLA) accused of racial discrimination in California lawsuit.
GE (NYSE:GE) offloads Steam Power’s nuclear power activities.
Twilio (NYSE:TWLO) rockets higher on strong revenues and guidance.
Restaurant stocks rally on sector earnings, rollback of pandemic rules.
—————
Good morning. Happy Wednesday.
The Asian/Pacific markets posted solid gains. Japan, China, Hong Kong, South Korea, India, Taiwan, Australia, New Zealand, Malaysia, India and Thailand were all up big. Europe, Africa and the Middle East are doing great. The UK, Denmark, France, Turkey, Germany, the UAE, Russia, Greece, South Africa, Finland, Switzerland, Spain, the Netherlands, Italy, Portugal, Israel, Austria and Sweden are all up big. Futures in the States point towards a big gap up open for the cash market.
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The dollar is down. Oil is flat; copper is up. Gold is flat; silver is down. Bonds are up. Bitcoin is up.
Stories/News from Seeking Alpha…
Disney magic?
Today’s earnings from Disney (DIS) could give it a chance to regain some momentum, with the stock off 30% since its all-time high of $202 seen a year ago. The post-pandemic traffic recovery at its theme parks segment has been slow to pick up over the past few quarters, while its hedge on streaming has seen a slowdown in subscribers. The company still continues to spend big on its content slate, including sports, assigning a budget of as much as $33B for fiscal 2022.
By the numbers: The consensus EPS estimate is $0.63 (+96.9% Y/Y), while the consensus revenue estimate is $20.96B (+29% Y/Y). Disney+ streaming subscribers are anticipated to grow by about 7M on a Q/Q basis, compared to the just 2.1M new subscribers brought on during the prior quarter (which sent the stock down 7% on Nov. 10). The company is also expected to see its theme parks, experiences and consumer business grow sales by 72% to reach $6.2B as mobility picked up at live events and locations globally.
Meanwhile, streaming rival Netflix (NFLX) cratered 20% a couple of weeks ago, after reporting new subscriber additions that narrowly missed forecasts (8.28M vs. 8.5M) and publishing soft guidance for the coming quarter. That could set a tough bar for Disney, with a continued slowdown likely to impact investor sentiment. The House of Mouse ended FY 2021 with just over 118M subscribers to Disney+ and is targeting a total of 230M-260M by the end of FY24.
On watch: An earnings call will follow the Q4 results, which will be released after the market’s closing bell at 4:00 p.m. Another item to watch will be the Q&A session with CEO Bob Chapek, CFO Christine McCarthy and Wall Street analysts. There is also a slew of other reports on today’s calendar, including earnings from CVS Health (CVS), Mattel (MAT), MGM Resorts (MGM) and Uber Technologies (UBER).
Super Crypto
Crypto companies are set to take a big part in Super Bowl LVI, with the ability to advertise on the largest stage in the world. In recent times, watching commercials has turned into somewhat of a similar tradition as the game itself, with many firms shelling out up to $7M for a 30-second slot. Some are even calling it the “Crypto Bowl,” a play on the “Dot-Com Bowl” in 2000, when early, speculative internet companies sought to gain mainstream acceptance (remember the Pets.com liquidation?).
Snapshot: New crypto brands like Coinbase (NASDAQ:COIN) and Crypto.com are not the only ones getting in on the action. Old timers, like Budweiser (NYSE:BUD), are also throwing their hat in the ring, running an online NFT contest during the big game. Others will make a point of exploring blockchain technologies, while an ad from crypto exchange FTX features a trading spoof on now-retired quarterback Tom Brady. “I’ve missed out on a lot, but I’m not going to miss out on this,” reads another FTX commercial called “The Dust Bowl,” which warns viewers to get into the sector while they still can.
Elsewhere, the U.S. has seized about $3.6B in Bitcoin (BTC-USD) stolen during a 2016 hack of the Bitfinex currency exchange – the largest financial confiscation to date. Ilya Lichtenstein and his wife Heather Morgan were arrested for the alleged conspiracy, and were accused of conspiring to launder 119,754 Bitcoins (BTC-USD) that were stolen from the platform. Using fictitious identities, the couple deposited stolen funds into accounts at a number of virtual currency exchanges and darknet markets, and then withdrew the capital in a practice known as “chain-hopping.”
What’s the fair value of Bitcoin? Around $38,000, or 13% below the current trading price, according to JPMorgan analysts led by Nikolaos Panigirtzoglou. The estimate is based on Bitcoin (BTC-USD) being about four times as volatile as gold, though JPMorgan’s long-term theoretical target – which would mirror the total amount of gold held privately for investment purposes – suggests the crypto could potentially reach $150,000. “The biggest challenge for Bitcoin going forward is its volatility and the boom and bust cycles that hinder further institutional adoption,” the strategists added in the research note.
Tap to Pay
Following several reports, Apple (AAPL) has officially unveiled a new iPhone feature called “Tap to Pay” that will let small businesses take payments directly from their devices. The new method will work by tapping phones together or via contactless credit cards, without the need for additional hardware. Stripe will be the first payment platform to offer the service, including Shopify’s (SHOP) Point-of-Sale app this spring, with additional platforms and apps to come later this year.
Bigger picture: The move puts Apple in direct competition with Block (SQ) and other fintech companies like PayPal (PYPL), Verifone (PAY) and Ingenico. Apple was quick to note that it won’t be able to access what is being bought or who is purchasing it. The tech giant also said payment data is encrypted and protected by the same technology that makes Apple Pay private and secure.
“In collaboration with payment platforms, app developers, and payment networks, we’re making it easier than ever for businesses of all sizes – from solopreneurs to large retailers – to seamlessly accept contactless payments and continue to grow their business,” said Jennifer Bailey, Vice President of Apple Pay and Apple Wallet.
Push into payments: Apple already introduced the Apple Card in the U.S. in 2019, as well as installment plans on the credit card later that year. The Apple Cash card also offers digital peer-to-peer payments, and a “buy now, pay later” option for Apple Pay is reportedly in the works.
Protests spread
Demonstrations against vaccine mandates, or a movement that started as the “Freedom Convoy” in Ottawa, has made a landing in the U.S. Pickup trucks, cars and trailers shut down traffic on the Ambassador Bridge all day Tuesday, blocking a critical corridor that connects downtown Detroit with Windsor, Ontario. Another group of truckers blocked access to the Coutts border crossing in western Canada, connecting the province of Alberta with Montana.
Snapshot: The Ambassador Bridge is the busiest international land-border crossing in North America, responsible for 30% of about $600B in annual two-way trade between Canada and the U.S. Tensions began several weeks ago when trucker vaccine mandates kicked in north of the border on Jan. 15, while an American ban followed shortly thereafter.
“We of course support, as you know, the right to freedom of speech and protest,” White House Press Secretary Jen Psaki told reporters. “While we do see some of this congestion due to protests, it is clear that these disruptions have broadened in scope beyond the vaccine requirement implementation.”
Outlook: Ford (NYSE:F) and Stellantis (NYSE:STLA), which have auto parts and assembly plants in Windsor, said they have yet to see impacts from the blockade, but are paying close attention to developments. However, some are warning of further disruptions, which can undermine a supply chain that is still reeling from the pandemic. “Basically if there’s a shutdown of transportation routes, the auto industry comes to a screeching halt in about two days,” declared Robert Wildeboer, executive chairman of Canadian auto parts maker Martinrea International (OTCPK:MRETF).
Today’s Markets
7:00 MBA Mortgage Applications
10:00 Wholesale Inventories (Preliminary)
10:30 EIA Petroleum Inventories
10:30 Fed’s Bowman Speech
12:00 PM Fed’s Mester: U.S. Economic Outlook and Monetary Policy
1:00 PM Results of $37B, 10-Year Bond Auction
What else is happening…
Meta (FB) slides for fourth day, company now under $600B market cap.
Alphabet’s (NASDAQ:GOOGL) split decision bodes well for shares – BofA.
Chipotle (NYSE:CMG) rallies on comp sales beat, new store openings.
Vaccine makers dragged lower on Pfizer’s (NYSE:PFE) soft 2022 guidance.
J&J (NYSE:JNJ) shuts down production at sole COVID vaccine plant – NYT.
Lyft (NASDAQ:LYFT) taps brakes on active rider outlook.
Harley-Davidson (NYSE:HOG) hogs the spotlight with revved-up earnings.
Korean air taxi deal sends Joby Aviation (NYSE:JOBY) soaring.
Microsoft (MSFT) looking to buy cyber firm Mandiant (MNDT) – Bloomberg.
Three charts explaining what has happened to SaaS stocks; is a bottom close?
—————
Good morning. Happy Tuesday.
The Asian/Pacific markets were mixed. Australia and Singapore did well; Hong Kong was weak. Europe, Africa and the Middle East are mostly doing well. Poland, Turkey, the UAE, Russia, South Africa, Hungary, Spain, Austria and the Czech Republic are up; Denmark and Norway are down. Futures in the States point towards a down open for the cash market.
————— VIDEO: What Happened to the Best Stocks from the 90’s —————
The dollar is up. Oil and copper are down. Gold is up; silver is. Bonds are down. Bitcoin is down.
Stories/News from Seeking Alpha…
Chance your arm
It’s official. Nvidia’s (NASDAQ:NVDA) planned acquisition of Arm Ltd. (ARMHF) from SoftBank (OTCPK:SFTBY) has been terminated due to “significant regulatory challenges.” Nvidia had been seeking a tie-up with the processor designer since September 2020, and with the transaction valued at “$40B in cash and stock” at the time (and $80B currently), it would have been the chip sector’s largest deal on record. Arm was founded in 1990, and was an independent company until 2016, when SoftBank bought it for $32B.
Backdrop: Nvidia’s purchase faced scrutiny from the moment it was announced. The deal would have given one of the biggest semiconductor companies control over designs that rival firms rely on to develop their own competing chips. The Federal Trade Commission ended up suing on antitrust grounds, while the U.K.’s competition regulator announced an investigation into the sale. Clients like Microsoft (NASDAQ:MSFT) and Qualcomm (NASDAQ:QCOM) also feared that Nvidia could one-up its business over those who don’t have a substitute for Arm technology.
As for Softbank, the company will make some money from the transaction getting called off. A breakup fee of $1.25B will be recorded as profit in Q4, while semiconductor industry veteran Rene Haas will replace Simon Segars as Arm’s new chief executive. Following the collapsed deal, SoftBank is planning to take Arm public, with an IPO expected to happen in the fiscal year ending March 2023.
More on Nvidia: The company became the seventh-largest U.S. firm yesterday after surpassing Meta Platforms (FB) for the first time (the Facebook parent has lost $267B in market cap since earnings last week). Putting that in perspective, Nvidia was the 15th-largest American company as of a year ago and the 50th largest as of two years ago. Despite a valuation of $618B, it may have more room to run, with Wells Fargo writing a note on Monday outlining that Nvidia’s Ampere GPU architecture was still “early in its cycle.”
Unmet pledges
Officials in Washington are losing patience with China, which continues to fail to meet its purchase commitments under the “Phase 1” trade deal signed during the Trump administration. Specifically, Beijing had promised to buy an extra $200B worth of U.S. agriculture, energy and manufactured products over 2017 levels (in the two years through the end of 2021). The concerns even go beyond the purchase agreements, according to U.S. Trade Representative Katherine Tai, and include China’s state-centered industrial policy.
Trade data: Economists will get a fresh read of that information today, with the U.S. likely to report a record trade deficit of $83B for December. Be on the lookout for a specific number from China, though data through November showed that China’s imports from the U.S. amounted to less than 60% of its pledges. The U.S. has meanwhile maintained tariffs on more than $300B of annual Chinese exports, but analysts differ to whether those are in fact leverage, or are hurting the U.S. more than China.
Remember, tariffs are mainly paid by American companies and consumers. Chinese exporters also haven’t had to lower prices to keep their goods competitive, and in fact, have seen a boon from the pandemic as pent-up demand and savings saw a large appetite for Chinese-made goods. So what to do? Raising tariffs would be controversial at a time when the U.S. is seeing its highest inflation in decades, while cutting the duties would risk accusations that the administration is going soft on China ahead of mid-term election campaigns (hence, the duties have been “maintained”).
Indo-Pacific Economic Framework: Looking for a new strategy, the Biden administration is readying its first broad economic policy for the Asia-Pacific. The framework is expected to be unveiled “within weeks” and will look to fill a hole left by the 2017 departure from the Trans-Pacific Partnership. While the deal isn’t expected to try to return the U.S. to TPP measures, like tariff cuts and other traditional market-opening tools, it could include other trade provisions, standards and benefits to counter Beijing’s growing influence in the region.
Budget deal
Aviation stocks are still heading higher as a “return to normalcy” trade lifts sector sentiment, with an extra boost from a budget carrier merger. Frontier Airlines (ULCC) has agreed to buy Spirit Airlines (SAVE) in a $2.9B cash-and-stock deal, marking the first airline combination since 2016. It would also create the fifth-largest U.S. airline and tighten competition against traditional carriers.
Antitrust angle: The key question surrounding the deal is will it be able to receive U.S. regulatory approval especially under a Biden administration that has pushed for more scrutiny of corporate takeovers. Lockheed Martin’s (LMT) planned purchase of Aerojet (AJRD) was blocked late last month, while the U.S. Department of Justice is trying to disrupt American Airlines’s (AAL) domestic alliance with JetBlue (JBLU).
“This is a completely different thing, where you’ve got two low-cost leaders getting together to figure out ways to drive more growth,” Spirit CEO Ted Christie told CNBC. “This is the type of transaction the administration should in fact support,” added Frontier Chairman Bill Franke. “Even at the end of the day, even on combination these two airlines will control less than 10% of the market. It’s not an overpowering event and it takes place inside a market where 80% of the airline markets are controlled by four other airlines.”
Other stats: 1) The airlines would have 1,000 daily flights to 145 destinations in 19 countries, 2) Their fleets include more than 280 jets made up of models from the Airbus A320 family, 3) Spirit has a market share of 5% in the U.S., while Frontier has 3.5%.
Still cycling
Investors are definitely getting a workout with the continuous flow of Peloton (PTON) news. Off the back of rumored buyout, the WSJ reported overnight that co-founder John Foley is stepping down as CEO, while the company overhauls its board and cuts costs with a wave of layoffs. The announcement comes ahead of Peloton’s Q4 earnings report, which will be released later today after the bell.
What’s happening? Barry McCarthy, the former chief financial officer of Spotify (SPOT) and Netflix (NFLX), will succeed Foley as CEO and will join the company’s board. President William Lynch is also stepping down from his executive role but will remain on the board with several other director shakeups. Peloton will cut a further 2,800 jobs, impacting 20% of corporate positions, but it won’t affect its instructor roster or content slate.
The latest moves are aimed at coping with the drop-off in demand and widening losses. Peloton sees them cutting roughly $800M in annual costs and reducing capital expenditures by roughly $150M this year. It’s already announced it will wind down the development of its Peloton Output Park, the $400M factory it was building in Ohio, and slash its delivery teams and amount of warehouse space.
Market movement: PTON shares are down 4% premarket after rising nearly 21% yesterday on takeover news. Over the last year, the stock has plunged 80% to a market cap of approximately $10B.
Today’s Economic Calendar
6:00 NFIB Small Business Optimism Index
8:30 Goods and Services Trade
8:55 Redbook Chain Store Sales
1:00 PM Results of $58B, 3-Year Note Auction
What else is happening…
All eyes on Pfizer (NYSE:PFE) earnings amid bolstered vaccine forecast.
Animal study suggests Omicron-specific COVID booster not needed.
Report: Trump SPAC’s (NASDAQ:DWAC) TRUTH Social platform could be delayed.
Facebook parent Meta (NASDAQ:FB) drops another 5%; down 30% in 3 sessions.
Thiel exiting Meta (FB) board, will reportedly focus on political work.
First acquisition: Bumble (NASDAQ:BMBL) buys popular gen Z dating app Fruitz.
Warner Bros. (NYSE:T) sued by partner over Matrix’s HBO Max release.
Nord Stream 2 could be no more if Russia invades Ukraine – Biden.
Tesla (NASDAQ:TSLA) gets subpoena from SEC over Musk’s tweet settlement.
Cathie Wood aims to capitalize on illiquid markets, private companies.
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Good morning. Happy Monday. Hope you had a great weekend.
The Asian/Pacific markets leaned up. China, Hong Kong, Taiwan, Indonesia and Singapore did well; Japan, South Korea and India were weak. Europe, Africa and the Middle East are split and little changed. The UK, Turkey, South Africa and Finland are up; Greece and Italy are down. Futures in the States point towards a flat open for the cash market.
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The dollar is up slightly. Oil and copper are down. Gold and silver are up. Bonds are up. Bitcoin is up.
Stories/News from Seeking Alpha…
Take another ride?
Peloton Interactive (PTON) will be one of the most closely watched stocks this week with M&A speculation ramping up following a deep selloff over the last few months. Reports of a buyout sent shares of the exercise equipment maker up 23% premarket to regain the $30 level, with several companies said to be on the lookout for a fitness bargain. They include Apple, (AAPL), Disney (DIS), Nike (NKE), and Amazon (AMZN), who could use Peloton’s nearly 3M paid subscriptions as an opportunity to cross-sell from their own customer base.
Analyst commentary: In an early breakdown on the development, Wedbush Securities’ Dan Ives reasons that Apple acquiring Peloton would be a major strategic coup, as well as catalyze the company’s aggressive health and fitness initiatives over the coming years. Ives and his team estimate a Peloton acquisition would go off in the $12B to $15B range – depending on the timing and competitive process. He also notes that this wouldn’t be a big reach for Apple, given its approximately $200B in cash and a strong free cash flow anticipated for 2022.
“On the offensive front, Apple through its Fitness+ subscription service and Apple Watch strategy would be able to leverage the Peloton services and flywheel to significantly bulk up its healthcare initiatives which have been a key strategic linchpin for [Tim] Cook.”
Note: Activist investor Blackwells Capital sent a letter to Peloton’s board in January making the case the company should fire CEO John Foley and explore a sale.
Post-payrolls
What happened on Friday? Well, the jobs report gave another surprise, or sowed more distrust in economic forecasters. Non-farm payrolls came in at 467K, compared to the average consensus of 150K, with many predicting a figure much worse than that. In the days prior, the Biden administration also sought to assuage the public against a weak figure due to the surge in Omicron cases during the data period, when millions were calling out sick, quarantining or caring for others.
Response: “Our country is taking everything that COVID has to throw at us, and we’ve come back stronger,” President Biden said in remarks at the White House following the report. “If you can’t remember another year when so many people went to work in this country, there’s a reason. It never happened.”
Stocks powered higher on the news on Friday, though futures inched lower overnight, as traders were quick to price in an aggressive rate hike to cool an overheating economy. Wage growth soared 5.7% in January from a year earlier, nearly double the average of about 3% before the pandemic hit, while payrolls for prior months were revised up by a cumulative 709K. Markets are even pricing in a one-in-three chance the Fed might hike by a full 50 bps in March, with the federal fund rates reaching 1.5% by the end of the year.
“The report not only indicated that payrolls were way more than anyone could have imagined, but there was exceptional strength in earnings which has to add growing concern among Fed officials about upward pressure on inflation,” declared Kevin Cummins, chief U.S. economist at NatWest Markets.
Thought bubble: The latest non-farm payrolls could suggest that labor shortages might ease across the U.S. in 2022, though the figure does not reflect the entire picture of the jobs landscape. Several other indicators help give clarity to the numbers like the unemployment rate, wage growth, the labor force participation rate and JOLTS. Big revisions to the report have also increased during the pandemic, with a significant amount of the 145K businesses the Labor Department relies on not reporting data in a timely fashion (or at all). As a result, the agency has had to guess payroll size, leading to elevated margins of error and tougher policy decisions.
No-fly list
Looking to deter aggressive flight behavior that has surged during the pandemic, Delta Air Lines (NYSE:DAL) is asking the U.S. Department of Justice to put convicted unruly travelers on a national “no-fly” list. The decision would “help prevent future incidents and serve as a strong symbol of the consequences of not complying with crew member instructions on commercial aircraft,” CEO Ed Bastian wrote in a letter to Attorney General Merrick Garland. The request also comes as carriers like Southwest (NYSE:LUV) look to resume alcohol sales aboard flights later this month.
Flashback: Delta already reached out to other airlines in September about sharing “internal lists of unruly passengers” to further protect airline employees across the industry. “A list of banned customers doesn’t work as well if that customer can fly with another airline,” Kristen Manion Taylor, Delta’s senior vice president of in-flight service, wrote at the time. However, airlines’ banned passenger lists are separate from the federal no-fly list, which is managed by the FBI’s Terrorist Screening Center.
With an increasing number of disruptive incidents taking place in the skies (and on the tarmac), the FAA also signed a “zero tolerance” order last year against unruly travelers. Under the stricter policy, the agency said it would not address cases with warnings or counseling, but would rather immediately pursue legal enforcement action against any passengers who assault, threaten, intimidate or interfere with airline crew members.
By the numbers: In 2021, the FAA recorded nearly 6,000 cases of disorderly and disruptive behavior, 72% of them related to disputes over mask compliance (enforcement actions were initiated in 350 of those cases). So far this year, the FAA logged 323 reports of unruly passengers.
State of emergency
The so-called “Freedom Convoy” that has paralyzed downtown Ottawa continues to make waves, with the Canadian capital declaring a state of emergency due to the lack of police resources to address the situation. The protests were initially set off by vaccine mandates for truckers crossing the border from the U.S., but have since morphed into a broader movement against vaccine mandates and COVID-19 restrictions. Truckers converged on Ottawa 10 days ago, with tractors and trailers snarling traffic, and disrupting business in nearby residential neighborhoods.
Quote: “We’re in the midst of a serious emergency, the most serious emergency our city has ever faced,” Ottawa Mayor Jim Watson said in an interview. “Clearly, we are outnumbered and we are losing this battle. This has to be reversed, we have to get our city back. Declaring a state of emergency reflects the serious danger and threat to the safety and security of residents posed by the ongoing demonstrations and highlights the need for support from other jurisdictions and levels of government.”
While the order gives the city more flexibility to procure equipment for “front line workers,” beyond its symbolic value, it doesn’t give police or the city any new legal powers. Canadian Prime Minister Justin Trudeau has also ruled out using the military to disband the protests, though crowdfunding site GoFundMe shut down one of their sources of revenue, citing unlawful activity. Police have also made a few arrests, but have issued hundreds of tickets, and horns continued to blare through the city’s core over the weekend.
Go deeper: The protesters are the latest cohort to tap into pandemic exhaustion, frustrated over months of lockdowns and restrictions. It comes as many countries open up across the globe despite a high number of infections, including the U.K., the Netherlands, Denmark, Sweden and Norway. In recent weeks, the nations have scrapped vaccine passports, as well as mandatory isolation, mask-wearing and limits on gatherings, as they move toward “living with the virus” policies.
Today’s Economic Calendar
12:30 PM Investor Movement Index
3:00 PM Consumer Credit
Meta (NASDAQ:FB) spent $20B on Q4 buybacks – for nothing.
New York smashes sports betting record for single month action.
Top Unilever (NYSE:UL) shareholders call for chairman changes.
China markets jump 2% after returning from Lunar New Year holiday.
Again… Losses burn strong among cannabis multi-state operators.
Texas power grid passes biggest test since disastrous freeze in 2021.
Sen. Ted Cruz buys up to $50,000 in Bitcoin (BTC-USD).
Chevron (NYSE:CVX) seeks more control of Venezuela operations.
Nvidia (NVDA), AMD (AMD) highlight BofA’s covered call options plays.
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