Good morning. Happy Friday.
The Asian/Pacific markets were mostly down. China did well, but Japan, South Korea, India, Taiwan, Australia, Malaysia and the Philippines dropped more than 1%. Europe, Africa and the Middle East are down a lot. The UK, Denmark, France, Germany, Greece, Finland, Switzerland, Norway, Hungary, Spain, the Netherlands, Italy, Portugal, Israel, Austria and the Czech Republic are down big. Futures in the States point towards a moderate gap down open for the cash market.
————— VIDEO: How Flooding the Economy with Money Backfires —————
The dollar is up. Oil is up; copper is down. Gold and silver are down. Bonds are down. Bitcoin is down.
Stories/News from Seeking Alpha…
CPI time
The next big test for the markets arrives at 8:30 a.m. ET as the Bureau of Labor Statistics discloses its latest print on U.S. inflation. Traders already got nervous in the previous session, with the Nasdaq plunging nearly 3% and the Dow posting a decline of more than 600 points. “There’s a bit more chatter, call it whisper numbers, for the Consumer Price Index being a little north of expectations,” said Liz Ann Sonders, chief investment strategist at Charles Schwab.
Snapshot: The consensus estimate among economists predicts an 8.3% increase for the main CPI number, which would match last month’s figure, but mark a slight slowdown from the record 8.5% seen in March. Market sentiment could get dented if today’s reading comes in higher than 8.3%, but may also get bolstered if it matches expectations or shows slower gains. Wall Street would take that as a sign of a peak in price pressures, with the Fed needing to be less aggressive in its tightening cycle later this year.
A fair dose of pessimism is still out there as soaring energy prices show no sign of abating and price tags continue to be marked up at the supermarket. Last month, the services sector also accounted for about 40% of inflation, which will be harder to reverse and risks becoming more embedded in the U.S. economy. Core CPI, which excludes volatile food and energy, could provide some more clarity on that front and is expected to cool further to 5.9% Y/Y in May (from a prior 6.2%).
Commentary: “I said last month that we needed to see headline CPI drop below 8%,” KPMG senior economist Tim Mahedy wrote in a note. “This makes another 50 bps hike in September increasingly likely… and the Fed pushing rates above neutral in the fourth quarter. We’re running out of time, and there are a lot of reasons to think that inflation will ease, but it will be more gradual than the Fed would like.” (31 comments)
Recession talk
The national average price at the pump has surpassed $5.00 per gallon, according to GasBuddy, an industry consultant that surveys prices at more than 150K stations nationwide. The average from AAA is also likely to reach that level this weekend, with prices standing at $4.986 per gallon as of early Friday. For energy investors, the supply-demand imbalance appears most acute in the refining sector, where names like Valero (VLO), HF Sinclair (DINO) and Par Pacific (PARR) stand to benefit from record margins, while integrated producers like Exxon (XOM), BP (BP) and Chevron (CVX) are better equipped to manage a refining bottleneck than upstream peers.
Recession worries: It’s unclear where the breaking point is, but gasoline underpins much of the economy, from transport and travel to production and construction. It also guides a significant amount of consumer behavior, as well as inflation expectations, which can have even more damaging consequences on the economic outlook. Many see trouble in store if fuel prices continue to rise, or stay at elevated levels for an extended period of time, though Treasury Secretary Janet Yellen said Thursday that “there’s nothing to suggest that a recession is in the works” after admitting last week that she was wrong about the trajectory of inflation.
Rule of 10? There’s a theory out there that the U.S. economy generally runs into trouble when interest rates (the cost of money, which everyone uses) together with energy prices (the cost of energy, which everyone uses) reaches double digits. To calculate the indicator, the average rate on the 30-year fixed-rate mortgage (5.23% as of Thursday) is added to the prices at the pump (now averaging $5). The rule was coined by Strategas chief economist Don Rissmiller in 2011, when the U.S. was still recovering from the global financial crisis.
Outlook: “The economy is definitely on thin ice here, but I don’t think we’re there yet,” said Mark Zandi, chief economist at Moody’s Analytics. “If we get to $5.50 or $6 [gasoline], that would be consistent with $150 for a barrel of oil. I think then, we’re done. We’re in for a recession. It would be too much to bear. I think we could digest $120 [oil] if we don’t stay there too long.” (11 comments)
DocuTumble
DocuSign (DOCU) went deep into the red in after-hours trading on Thursday as the stock cratered as much as 26% to $64 following weaker-than-expected Q1 results. EPS fell well short of estimates for $0.46, though revenue topped projections at $588.7M (+25.5% Y/Y). Before adjustments, the electronic-signature tech company also reported a net loss that widened to $27.4M for the quarter, compared with a loss of $8.4M in the period a year ago.
Bigger picture: As the investors continue to worry about the economy, there has been a shift away from a focus on growth to profitability. DocuSign put up some strong growth early on in the pandemic, given the increase in online transactions, but business has slowed in recent quarters and the company is attempting to fix its go-to-market challenges. Earlier this week, DocuSign announced an expansion of its partnership with Microsoft (MSFT), but it doesn’t look like that will be enough for investors.
Full-year revenue guidance was maintained at $2.47B-$2.48B on the top line, but the mid-point of that range slightly missed consensus estimates. Revisions could also happen in the future, though DocuSign CEO Dan Springer is confident about the outlook. “With over a billion users worldwide, the proven value of our products, and the significant opportunity we have ahead of us, we’re confident in our ability to successfully navigate the challenges of a dynamic global environment.”
From the SA comments section: “Did Cathie [Wood] buy the dip?,” asked Yuji__0. “This stock can fall another 50% and will be still overvalued,” commented ddca48. “Might get interesting in the low $40s and a PE in the 20a,” added khansfman09, while scorpionblue speculated about a merger. “Is this better than $dbx? maybe they should merge, the kings of sbc. docudropsign.” User donzoab is taking the other side of the argument, saying it’s too early to point to doomsday. “Docu will be fine. Over time this cycle will reverse… I have no idea what the bottom is, but from here and lower, it’s a strong buy.” (74 comments)
Open-bathroom policy
The battle over the Starbucks (NASDAQ:SBUX) bathroom has resurfaced following comments from longtime CEO Howard Schultz, who returned to the helm of the company back in April. “We have to harden our stores and provide safety for our people,” he told The New York Times DealBook D.C. Policy Forum, attributing the U-turn to security issues. “I don’t know if we can keep our bathrooms open.”
Backdrop: The company announced its open-bathroom policy in 2018 in response to an incident in which two Black men were arrested at a Starbucks in Philadelphia. The pair were reported to the police by an employee after they were denied use of the store’s bathroom and were asked to leave because they hadn’t made a purchase. When they did not comply, the store manager called the police, saying the men were trespassing, and a viral video of the incident went on to make national news and prompt outrage against Starbucks.
In response, the coffee chain apologized for the event and closed all of its U.S. stores for a day for staff to attend an anti-bias training. Schultz, who was executive chairman at the time, influenced the decision to open “restrooms, cafes and patios” to all customers regardless of whether they made a purchase. “We don’t want to become a public bathroom, but we’re going to make the right decision 100% of the time and give people the key, because we don’t want anyone at Starbucks to feel as if we are not giving access to you to the bathroom because you are ‘less than.'”
Outlook: Starbucks is dealing with other sensitive workplace situations as of late, like a union drive that is strengthening across the country. “We can’t ignore what is happening in the country as it relates to companies throughout the country being assaulted, in many ways, by the threat of unionization,” Schultz told baristas on his first day back as Starbucks CEO in April. Shares of the company have fallen with the broader market this year, tumbling 32% YTD. (24 comments)
Today’s Economic Calendar
8:30 Consumer Price Index
10:00 Consumer Sentiment
10:00 Quarterly Services Report
1:00 PM Baker-Hughes Rig Count
2:00 PM Treasury Statement
What else is happening…
Facebook parent now trading under META, unfriending FB symbol.
JetBlue (JBLU) and American (AAL) will head to trial in fight to save alliance.
Famed investor Druckenmiller says current bear market has a ‘ways to run.’
Wells Fargo (WFC) responds to NYT article on federal criminal probe.
Disney (DIS) fires top TV executive as board backs CEO Chapek.
Tesla (TSLA) Autopilot safety probe is expanded to 830,000 vehicles.
It’s official: DiDi Global (DIDI) to delist from NYSE on June 10.
Alibaba (BABA) drops as China regulator denies revived Ant IPO report.
Meta (META) backs off AR glasses as unit looks to cut costs – The Information.
Advanced Micro Devices (AMD) details strategy to drive next phase of growth.
—————
Good morning. Happy Thursday.
The Asian/Pacific markets were mostly down. India did well, but China, Hong Kong, Australia and Malaysia were weak. Europe, Africa and the Middle East are down a lot. The UK, Denmark, France, Turkey, Germany, Russia, South Africa, Finland, Switzerland, Spain, the Netherlands, Italy and Israel are down big. Futures in the States point towards a down open for the cash market.
————— VIDEO: How Flooding the Economy with Money Backfires —————
The dollar is down. Oil and copper are down. Gold and silver are down. Bonds are down. Bitcoin is unchanged.
Stories/News from Seeking Alpha…
Leaving sub-zero
The ECB’s Governing Council meets today to decide on monetary policy, with the market expecting the central bank to end its net asset purchase program in June to set the stage for a rate increase in July. Translation: Until that asset purchase program ends, there’s little chance of a rate hike. Last week’s higher-than-expected Eurozone Consumer Price Index (at 8.1%) is also increasing pressure on the ECB to tamp down inflation, fearing that if it doesn’t act now, things can quickly get out of control.
Bigger picture: “The key will be President Christine Lagarde’s press conference and any clues around the likelihood of a 50-basis-point interest rate increase in July instead of 25 bps,” Franklin Templeton’s European trading desk wrote in a note. The ECB’s policy rate is currently at -0.5% and analysts are pricing in almost 1.25% of rate hikes by the end of the year. That would be a big U-turn for Europe, which has been mired in eight years of negative interest rates.
Recall that as recently as January 2022, Lagarde wasn’t mentioning the potential for rate increases and was defending the ECB’s slow pace in removing accommodation compared to the rapid hiking cycle of the U.S. Federal Reserve. Today’s projections are also likely to show that inflation won’t drop below the ECB’s 2% target through 2024, making officials even more nervous about tackling price pressures. The central bank was hesitant to remove stimulus as it assessed the fallout from the war in Ukraine, but it may no longer have a choice to avert further damage to the bloc’s economy.
On watch: Investors will also be paying close attention to European bonds for repercussions from the winding down of the asset purchase program. The ECB has already purchased €4.9T of bonds, more than half the €8.8T of the assets that now sit on its balance sheet. In looking at industry sectors, higher bond yields and avoiding a recession should help banks, according to eToro strategist Ben Laidler, while a restrained hiking cycle that still supports financial conditions would help indebted industries like utilities. (4 comments)
Buy Now, Pay Later
Apple (NASDAQ:AAPL) unveiled a BNPL service during its Worldwide Developers Conference on Monday, but more details are emerging on how the business will be run. The “Pay Later” program will operate out of a wholly-owned subsidiary called Apple Financing LLC, which has the necessary state lending licenses to offer the feature. The new service will turn Apple into somewhat of a bank (though it doesn’t have a charter) as it makes financial services a deeper part of its ecosystem.
How it works: Users will be able to split the cost of an Apple Pay purchase into four equal payments, spread over six weeks, with zero interest and no fees. The plan will be available everywhere Apple Pay is accepted – in app and online – while upcoming payments can be tracked via the Apple Wallet. If loans aren’t repaid, Apple will no longer extend credit to those users, though the company said it won’t report the missed payments to credit bureaus.
“Pay Later” will compete against similar offerings from Affirm (AFRM), Klarna (KLAR) and PayPal (PYPL), where it will earn interchange fees and valuable data from each transaction. Official BIN sponsor Goldman Sachs (GS) will give access to Mastercard’s (MA) network, providing the ability to issue payment credentials directly. In the past, Apple has worked with Goldman to issue the Apple Card in the U.S., while partnering with Barclays (BCS) in the U.K. to offer financing for purchases of its devices.
iBank? Under the new program, Apple will handle credit checks, underwriting and lending, but is likely to continue to use licensed partners for its financial operations in the near future. Getting and maintaining a banking license would be a big headache for the company and may see it stray too far from its mission statement. To note, banking in general is a relatively low-margin business and Apple would be subject to severe regulations and reporting requirements, which could be considered a big risk for the tech giant. (9 comments)
‘Nowhere near peak’
The energy sector (XLE) clung to gains Wednesday and ended as the only winner in the S&P 500, with WTI crude oil rising to a 13-week high and settling above $122 a barrel. The gains follow U.S. government data that showed gasoline stockpiles declining for the tenth straight week, U.S. crude inventories rising unexpectedly and crude in the Strategic Petroleum Reserve falling by a record amount. As inflated prices continue to be seen at the pump, shares of Exxon Mobil (XOM) notched an all-time high for the first time since 2014, while Chevron (CVX) and Valero (VLO) posted similar records.
No top in sight: “If we continue consuming with the pace of consumption we have, we are nowhere near the peak, because China is not back yet,” UAE Energy Minister Suhail Al-Mazrouei told an energy conference in Jordan. “China will come with more consumption.”
While OPEC+ last week agreed to open the taps a little faster over the summer, it’s a drop in the bucket in terms of output. In the past, the group has also struggled to hit its production targets, with Al-Mazrouei warning that without significant investment across the globe, OPEC+ would not be able to guarantee sufficient supplies. “We’re lagging by almost 2.6M barrels a day and that’s a lot.”
Go deeper: Of the 23 nations in the OPEC+ alliance, only the Saudis and the UAE have some spare production capacity, but even with that, it will be tough to offset a supply gap created by the sanctions on Russia. “With the exception of two-three members, all are maxed out,” added OPEC Secretary-General Mohammad Barkindo. “The world needs to come to terms with this brutal fact.” (148 comments)
Gun control
In response to recent mass shootings in Buffalo, New York, and Uvalde, Texas, the U.S. House of Representatives has passed a wide-ranging gun control bill by a mostly party-line vote of 223-204. The measure, called the Protecting Our Kids Act, followed emotional pleas for Congressional action at a hearing of the House Oversight and Reform Committee on Wednesday. According to the CDC, the leading cause of death among children and teens ages one through 18 is firearms (there were 3,219 such deaths in 2020, followed by motor vehicle traffic deaths, of which there were 2,882).
Among the proposals: a) Raising the age limit for purchasing a semi-automatic rifle or shotgun from 18 to 21, b) Prohibiting the sale of magazines with a capacity of more than 15 rounds, c) Setting federal standards for the safe storage of firearms, d) Imposing as many as five years in prison if a child accesses an unsecured gun and kills or hurts someone, e) Stronger laws against straw purchases or gun trafficking, and f) Building on executive actions by banning “bump stocks” and “ghost guns” that are assembled without serial numbers.
The continuous cycle of mass shootings in the U.S. has rarely prompted Congress to act against gun violence and this time is no different. The new bill has almost no chance of becoming law in the Senate, which is conducting its own discussions focused on improving school security, red flag laws, mental health programs and enhanced background checks. Support from 10 Republicans will be needed to get any bill signed into law, as is required for most legislation in the evenly divided Senate.
Sides of the aisle: “We can’t save every life, but my God, shouldn’t we try? America we hear you and today in the House we are taking the action you are demanding,” said Rep. Veronica Escobar (D-TX). “The answer is not to destroy the Second Amendment, but that is exactly where the Democrats want to go,” responded Rep. Jim Jordan (R-OH). Another exchange… “A person under 21 cannot buy a Budweiser. We should not let a person under 21 buy an AR-15 weapon of war,” related Rep. Ted Lieu (D-CA). “This is unconstitutional and it’s immoral. We’re telling 18, 19 and 20-year-olds to register for the draft. You can go die for your country. We expect you to defend us, but we’re not going to give you the tools to defend yourself and your family,” countered Rep. Thomas Massie (R-KY). (3 comments)
Today’s Economic Calendar
8:30 Initial Jobless Claims
10:30 EIA Natural Gas Inventory
1:00 PM Results of $19B, 30-Year Note Auction
4:30 PM Fed Balance Sheet
What else is happening…
Undercutting PFOF: SEC considers routing retail stock orders to auctions.
Twitter (TWTR) offers Musk data ‘firehose,’ shareholder vote by August
Abbott (ABT) alerted to baby formula shortage months earlier – WSJ.
Netflix (NFLX) buying Roku (ROKU)? Some say idea is ‘absurd.’
Spotify (SPOT) lays out innovation and growth plans at Investor Day.
Housing sitch: Interest rate rise sees mortgage demand hit 22-year low.
Volkswagen (OTCPK:VWAGY) aims to open new EV factories in the U.S.
ZIM Shipping (ZIM) sinks as concerns mount over freight rates.
Why did Alibaba (BABA) rise 15% on Wednesday? It’s all in the games.
Hasbro (HAS) looks ahead after winning board battle with Alta Fox.
—————
Good morning. Happy Wednesday.
The Asian/Pacific markets are mostly up. Japan, China, Hong Kong, Taiwan and Indonesia did great. Europe, Africa and the Middle East are currently mostly down. Denmark, Poland, France, Turkey, Germany, Switzerland and the Netherlands are down; Russia is up. Futures in the States point towards a down open for the cash market.
————— VIDEO: How Flooding the Economy with Money Backfires —————
The dollar is up. Oil is up; copper is down. Gold is up; silver is down. Bonds are down. Bitcoin is down.
Stories/News from Seeking Alpha…
Universal charging
Europeans will soon be able to have one charger for all of their gadgets, in a world first that may spread elsewhere. The standardization follows EU agreement on a single charging port for phones, tablets, e-readers, cameras, videogame consoles and speakers under legislation that will take effect by fall 2024. USB-C connectors won out as the shared feature across those devices, with the ports already supported by a network of over 700 companies and most Android-based platforms.
Bigger picture: Brussels said the move will save consumers around €250M per year and a whole lot of added stress. It will prevent “more than 1,000 tons of electronic waste per year, in addition to an annual reduction of 200 kilos of CO2, which is the equivalent of 10M smartphones,” Internal Market Commissioner Thierry Breton declared. “It will also allow new technologies, such as wireless charging, to emerge and to mature without letting innovation become a source of market fragmentation and consumer inconvenience.”
Still using Lightning charging cables, Apple (NASDAQ:AAPL) is not likely to be happy about the ruling, arguing in the past that the standardized move will stifle innovation. However, there could be a silver lining, with the decision potentially persuading consumers to upgrade to a new phone sooner. “Existing consumers can still use the Lightning cable, but maybe there would be less purchases of older products on third-party platforms,” explained CFRA Research analyst Angelo Zino.
Some history: Apple switched from a 30-pin charging connector to its compact Lightning in 2012, which was a groundbreaking technology at the time (USB-C was only finalized in 2014). However, Apple did embrace some USB-C technology starting in 2015, when it began including the ports on its iPads and Macs, but kept Lightning on other devices and more importantly its iPhone. As it tries to maintain control over its revenue streams and design, will Apple create a specialized iPhone for Europe or change all of its smartphones globally? Wireless charging? (45 comments)
That ’70s Show?
Fears of stagflation continue to surface as multiple entities caution about rocky upcoming months or even years ahead. The latest warning came from the World Bank, which downgraded its estimate for 2022 global growth to 2.9%, from a forecast of 4.1% back in January. Among the factors were surge in energy and food prices, the toll from war in Ukraine and COVID-19 pandemic, as well as a push by central banks to speedily raise rates from rock-bottom levels. The OECD overnight also slashed its GDP growth estimate to 3% for 2022, marking a 1.5 percentage point decrease from its last projection issued in December.
Quote: “For many countries, recession will be hard to avoid,” said World Bank President David Malpass. “Markets look forward, so it is urgent to encourage production and avoid trade restrictions.” The institution also warned of a “protracted period of feeble growth and elevated inflation with potentially harmful consequences for middle- and low-income economies alike.”
Stagflation, the combination of stagnant economic growth and high inflation, triggers memories of the 1970s, when an oil price shock and sluggish economy led to a so-called double-dip recession by the early 1980s. The current juncture resembles the era in several key aspects, according to the World Bank, given prospects for weakening growth and vulnerabilities, as well as persistent supply-side disturbances that were preceded by a protracted period of highly accommodative monetary policy. Things are also different this time around due to a strong dollar, robust bank balance sheets and clear mandates for price stability.
Outlook: Many high-profile names have issued warnings about the economy in recent weeks. JPMorgan’s Jamie Dimon referred to it as a “hurricane” on the horizon, Tesla’s Elon Musk said he had a “super bad feeling” and BlackRock’s Larry Fink predicted that the spikes in inflation will “last for years.” The Atlanta Fed’s GDPNow tracker also shows the U.S. economy on the brink of recession, pointing to an annualized gain of just 0.9% in Q2, down from an estimated 1.3% increase less than a week ago. (6 comments)
Stock trades
The SEC is reportedly considering some changes to stock-market rules that would make trading firms directly compete to execute trades from retail investors. No announcement has been made yet, and the details are still being worked out, but Chairman Gary Gensler could outline some of the plans today at Piper Sandler Global Exchange Conference. Closely watching the speech are online brokers like Robinhood (HOOD), TD Ameritrade (SCHW) and E*TRADE (MS), as well as the New York Stock Exchange (ICE) and Nasdaq (NDAQ).
Backdrop: The news comes about a year after SEC Gary Gensler said the agency staff would review best execution requirements- which require brokers to process customers’ orders at prices advantageous to the customer. Specifically, payment for order flow (PFOF), where brokers farm out retail orders to firms like Virtu Financial (VIRT) and Citadel Securities in exchange for a fee. The scrutiny of the industry grew out of the trading frenzy surrounding GameStop (GME) and other meme stocks in early 2021, triggering discussion over execution quality and price performance.
Online brokers contend that PFOF, which allows commission-free trading, has opened up investing to millions of young people, including women and minorities who hadn’t previously invested in the markets. “The current market structure has resulted in tighter spreads, greater transparency, and meaningfully reduced costs,” a Citadel Securities spokesperson told Bloomberg. Opponents disagree, saying PFOF includes hidden fees that investors are paying without knowledge and it also gives huge trading firms data on where the market is heading.
Proposals? Gensler may outline a requirement that retail orders be sent to a type of auction to improve execution transparency, lower access fees and allow exchanges to quote shares in increments under one cent. He could also call for improvements to execution rules, which permit brokers to find the best possible terms for their customers. “Efforts to modernize the best execution requirements will be met with some degree of conceptual support, but this issue carries slightly more political and operational baggage than the tick size and access fee proposals,” noted BTIG analyst Isaac Boltansky. (25 comments)
Clearing inventory
Retail earnings have been incredibly scattershot in May and June, with winners and losers seeing wildly differing share reactions and revealing important insights on specific subsectors. One of the biggest losers has been Target (TGT), whose share price has tumbled 30% since reporting Q1 results on May 18. Earnings came in far from the bullseye after higher costs whacked profitability, but the company had another surprise in store for investors after slashing guidance on Tuesday.
Financial front: Target now sees its operating margin rate falling to a range of around 2.0% for Q2 vs. the ~5.3% estimate projected in late May (and 6.5% consensus). That’s a drastic drop, though it does hope to jump back to around 6.0% in the latter half of the year. The company also continues to expect full-year revenue growth in the low- to mid-single digit range.
The biggest issue facing Target has been its selection of inventory, which grew 43% Y/Y in the latest quarter. Consumers have been shifting away from higher-margin goods such as kitchen appliances and TVs to basics like food and toiletries, as discretionary spending takes a hit from the current inflationary environment. “We did not anticipate the rapid shifts we’ve seen over the last 60 days,” CEO Brian Cornell said back in May, adding that challenges would persist as Target continues to set prices based on “value and affordability.”
Call to action: The retailer announced a series of steps to “right-size” its inventory for the balance of the year, like additional markdowns and order cancellations. The action plan also includes incremental holding capacity near U.S. ports to add flexibility and speed in the portions of the supply chain most affected by external volatility. Other retailers with way too much inventory include Walmart (WMT), which saw a 33% Y/Y increase in merchandise last quarter, and Kohl’s (KSS), whose stash of goods rose by 40%. (72 comments)
Today’s Economic Calendar
7:00 MBA Mortgage Applications
10:00 Wholesale Inventories (Preliminary)
10:30 EIA Petroleum Inventories
1:00 PM Results of $33B, 10-Year Note Auction
What else is happening…
Exxon (XOM) surges within a dollar of its all-time closing high.
U.S. reportedly seeking funds to purchase enriched uranium.
Novavax (NVAX) COVID vaccine endorsed by FDA advisory panel.
Apple (AAPL) seals deal for Brad Pitt Formula 1 movie – Hollywood Reporter.
Why did GameStop (GME) rally on Tuesday? Retail traders strike back.
Starlink (STRLK) IPO likely won’t take place for at least three years.
Musk’s efforts for new Twitter (TWTR) financing said to be on hold.
J.M. Smucker (SJM) jumps to the upside despite soft guidance.
ISS recommends Spirit (SAVE) holders vote against Frontier (ULCC) deal.
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Good morning. Happy Tuesday.
The Asian/Pacific markets are mostly down. Hong Kong, South Korea, India, Taiwan, Australia, New Zealand, Malaysia and Thailand all posted moderate losses. Europe, Africa and the Middle East are currently mostly down. Denmark and the Czech Republic are up, but Poland, France, Germany, South Africa, Finland, Hungary, the Netherlands, Italy, Israel and Saudi Arabia are down notably. Futures in the States point towards a moderate gap down open for the cash market.
————— Masterclass Overview –>> here —————
The dollar is up. Oil and copper are down. Gold is up; silver is down. Bonds are up. Bitcoin is down.
Stories/News from Seeking Alpha…
Twitter endgame
Things are getting chaotic in the Elon Musk-Twitter (NYSE:TWTR) saga after the billionaire warned that he could walk away from the $44B acquisition if the platform does not provide detailed information on spam and fake accounts. “This is a clear material breach of Twitter’s obligations,” Musk’s lawyers wrote in a letter, adding that the company was “actively resisting and thwarting his information rights.” In the past, Twitter CEO Parag Agrawal has said he “doesn’t believe that this specific [bot] estimation can be performed externally, given the critical need to use both public and private information (which we can’t share).”
Snapshot: It’s even more interesting as Elon Musk didn’t want to do any extensive due diligence when abruptly announcing the deal back in April. At the time, he wanted to complete the acquisition as soon as possible, but then slammed the brakes over the bots issue, which is not the first time the topic has surfaced. While Musk has agreed to pay $54.20 per share for Twitter, the company’s stock price is now trading at $39.56, which is significantly lower than where things stood even several weeks ago. “It’s fairly obvious that Musk has buyer’s remorse and he is trying whatever to get a reduction in price, and I think he may succeed,” said Dennis Dick, a prop trader at Bright Trading.
From a legal perspective, the only way Musk could abandon the deal is a refusal from the banks to provide financing or regulators block the transaction. Lawyers for the Tesla (TSLA) CEO may be trying to link the bots issue to his ability to secure financing, allowing him to walk away by paying a $1B breakup fee (Texas on Monday opened a separate investigation into Twitter’s alleged fake accounts based on the state’s Deceptive Trade Practices Act). However, Twitter’s disclaimers used in its projections on spam accounts and a “specific performance” clause could give it protection against potential lawsuits, and Musk would have to prove that he was willfully misled (which is a high legal threshold).
Outlook: Twitter intends to enforce the merger pact on the agreed-upon terms, but could renegotiate if it sees a protracted legal battle or maneuvering for Musk to wiggle out of a deal. If that were to happen, Twitter shares could sink even further, making it a bigger acquisition target for other buyers at a cheaper price. Twitter shareholders are not the only ones watching the show as Tesla investors also have an indirect financial interest in the outcome of the corporate drama. (38 comments)
Amazon split
Shares of Amazon (AMZN) jumped as much as 6% in early trading on Monday, and ended the session up 2% at $125, following a rare 20-for-1 stock split that went into effect. The last time the company split its shares was before the dot-com bubble in 1999, and since then, the stock has returned over 3,000%. Alphabet (GOOGL), Apple (AAPL) and Tesla (TSLA) have also turned to splits recently, with the trend making somewhat of a comeback during the COVID-19 pandemic.
What it means: While Amazon’s decision doesn’t affect any fundamentals, it does make the stock (or options contracts) more affordable for retail investors or those that don’t want such a holding to be a large portion of their portfolios. A lower price can also mean the stock will be eligible for inclusion in the price-weighted Dow Jones Industrial Average. Amazon previously alluded to the benefits of the move on its worker purchase program, saying “this split would give our employees more flexibility in how they manage their equity in Amazon.”
“Evidence suggests that stock-split events drive additional participation from retail investors, especially in securities with larger market capitalization,” according to a recent analysis by the Chicago Board Options Exchange. “Volume in mega-cap equities initially spiked 342% the week immediately after the split,” but demand could moderate over the next six months, suggesting the pop in retail popularity may be short-lived.
Go deeper: Alongside the split, Amazon will pursue a $10B share buyback program, which is the largest repurchase authorization in the company’s history. It replaces the $5B approval that was established in 2016, though only $2.12B was spent on that effort thus far. Amazon didn’t buy back any stock in 2019, 2020 or 2021, but has repurchased 500K shares for $1.3B in 2022. (60 comments)
Student loans
Fresh reports suggest that President Biden is likely to announce his plans on student loan forgiveness in July or August, which is closer to the expiration of the latest pause on federal student debt payments. At issue appears to be whether the motion could provide a boost or detriment ahead of November’s midterm elections. Some economists warn that student debt cancellation could exacerbate price pressures at a time of record inflation, and it could be flagged as a contributor to higher prices. A backlash could also be seen from voters who chose not to go to college because of the cost, don’t have loans or already paid them off.
Bigger picture: Sources told the Wall Street Journal that Biden has “nonetheless warmed to the idea in recent months as advocates inside and outside the administration made impassioned pleas for him to take action.” While he has gone on record saying he doesn’t believe a president has the authority to cancel student debt unilaterally, Biden would support Congress passing a bill to cancel $10K in debt for each borrower that makes less than about $125,000 a year. He has already ruled out a proposal backed by Massachusetts Sen. Elizabeth Warren and other progressives that would forgive up to $50K in debt per student borrower.
Any cancellation would come at a time when the U.S. unemployment rate has fallen to 3.6%, and is even less among college graduates with a bachelor’s degree, with the rate tumbling to 2.1% in February. The Education Department has also canceled around $25B in student loans since Biden took office, but that has only impacted borrowers defrauded by for-profit schools, disabled students and those enrolled in public service loan forgiveness programs. In terms of the student loan moratorium, the extensions have hit financial companies, with shares of SoFi Technologies (SOFI) plunging back in April after cutting its 2022 guidance. Other related stocks include Sallie Mae (SLM), Navient (NAVI) and Nelnet (NNI).
Some history: The student loan moratorium began in March 2020, when former President Trump signed the CARES Act into law, pausing payments through September 2020 and eliminating interest rates for about 42M borrowers. Trump later took executive action to extend the deferral period through January 2021, while Biden signed another order when he came into office, continuing it through Sept. 30 and then eventually Jan. 31, 2022. At the time, the Education Department said that it would be the “final extension,” but the administration has since extended the date twice until Aug. 31, 2022, citing threats to Americans’ financial stability. (100 comments)
A new framework
A long-awaited bipartisan crypto bill has finally emerged as U.S. Senators Cynthia Lummis (R-WY) and Kirsten Gillibrand (D-NY) unveiled their Responsible Financial Innovation Act. The measure aims to create “regulatory clarity for agencies charged with supervising digital asset markets, provide a strong, tailored regulatory framework for stablecoins, and integrate digital assets into our existing tax and banking laws.” Up until now, there were only narrow pieces of legislation that sought to address the crypto landscape, like the recent push for stablecoin rules by Senator Pat Toomey (R-PA).
The basics: The Commodity Futures Trading Commission would be granted oversight of spot markets for cryptocurrencies like Bitcoin (BTC-USD) and Ethereum (ETH-USD), helping to address investor protection in an area that critics say is rife with manipulation. On the other side of the fence, the Securities and Exchange Commission would maintain its oversight of digital assets that give investors a right to “profits, liquidation preferences or other financial interests in a business entity.” Companies that raise funds through digital asset sales would also be required to file certain disclosure with the SEC.
The new bill is likely to set off a frenzy among crypto exchanges, lobbyists and industry groups, pitting those that feel it will advance the space by establishing regulatory clarity and those that consider it is more of a centralized crackdown. Other provisions in the bill would cover reporting to the IRS, like shielding consumers from a capital gains tax on crypto transactions worth less than $200. It would also give legal clarity on how to handle customer holdings, promote an industry “sandbox” to test new products and permit miners to avoid paying income taxes until they turn new assets into cash.
Timeline: “It’s important step in the process toward comprehensive cryptocurrency legislation, but there is still no expectation that the bill will be passed this year,” said Owen Tedford, senior research analyst at Beacon Policy Advisors. “The bill is very likely to resurface even if control of the Senate changes. It is best to see this as one step on a winding road, but these discussions now will influence the shape of any future bill.” (3 comments)
Today’s Economic Calendar
8:30 Goods and Services Trade
1:00 PM Results of $44B, 3-Year Note Auction
3:00 PM Consumer Credit
What else is happening…
Apple’s (AAPL) WWDC: New MacBooks already seen as becoming a hit.
JetBlue (JBLU) submits improved offer for Spirit (SAVE) before shareholder vote.
Paramount’s (PARA) ‘Top Gun’ sequel soars again to hold box-office lead.
Risk of recession ‘picking up,’ but no reason to be alarmed yet – AllianceBernstein.
U.K. Prime Minister Boris Johnson survives no-confidence vote.
DiDi Global (DIDI) surges 24% as Beijing looks to end cybersecurity probe.
Kohl’s (KSS) enters exclusive talks for $60/share sale to Franchise Group.
U.S. has thrown away 82M COVID-19 vaccine doses – NBC News.
Rivian (RIVN) highlights backlog, investments in shareholder letter.
Down in a hole: BuzzFeed (BZFD) slides 41% as lockup period expires.
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Good morning. Happy Monday. Hope you had a good weekend.
The Asian/Pacific markets leaned up. China and Hong Kong did well; Indonesia was weak. Several markets were closed. Europe, Africa and the Middle East are currently doing well. The UK, Poland, France, Turkey, Germany, Finland, Spain, the Netherlands, Italy and Saudi Arabia up 1% or more. Onl Russia is down much. Futures in the States point towards a relatively big gap up open for the cash market.
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The dollar is down. Oil and copper are down small amounts. Gold and silver are up. Bonds are down. Bitcoin is up.
Stories/News from Seeking Alpha…
A new reality
Apple (AAPL) is slated to kick off its annual Worldwide Developers Conference at 1:00 p.m. in New York and expectations are that it will be a jam-packed affair, with a number of software updates and perhaps one or two surprises. While WWDC never commands as much of a spotlight as Apple’s annual iPhone event, new software features and policies can have profound effects, especially as investors grow concerned about traditional hardware sales. Parts shortages, factory shutdowns and supply chain issues remain headwinds for the company, which may need to highlight its high-growth services category to keep shareholders excited.
By the numbers: Analysts expect iPhone revenue to rise 6.2% this fiscal year after soaring 39% in 2021. That compares to services sales that could jump nearly 17% to $80B in 2022.
Wedbush Securities analyst Dan Ives, who has an outperform rating and $200-a-share price target on Apple’s stock, noted that iOS 16 updates, some of which include changes to the lock screen, messaging and health features, are likely to capture significant interest, as are changes to the Apple Watch. However, Ives said a new NFL-centric update to its Apple TV+ streaming service might be the update that gets outsized attention. Apple has recently dipped its toe into sports broadcasting with two exclusive MLB Friday Night Baseball games on Apple TV+ each week, and Ives said the allure of adding NFL football to its offerings may be too good to pass up.
Surprises? Apple has used past WWDCs to show off new augmented reality and virtual reality technologies for its various operating systems and it’s expected at the very least to do that, according to Ives, who pointed out the strategy is “laying the breadcrumbs” for “the highly anticipated” headset. Some believe Apple may even introduce it at the event, but not show off any high-level detail, while others expect it will be shown off and launched in 2023. It’s also possible that Apple could introduce new MacBook Air laptops as it has done at several other WWDCs in the past. (17 comments)
Taser drones
Following the massacre in Uvalde, Texas, which killed 19 elementary school children and two teachers, Congress has sought to act to help prevent similar tragedies from happening in the future. Corporate America is also attempting to come up with some solutions, with Taser developer Axon (NASDAQ:AXON) proposing a drone loaded with electric stun guns that could be used in active shooter situations. The drone would be stationed in school hallways and move into rooms via special vents, with first-responders operating the device from about 40 feet away. AXON shares even rose 6% following the announcement on Thursday.
Snapshot: Axon’s artificial intelligence ethics board, a group of experts in technology, policing and privacy, initially expressed reservations about the idea, which quickly spiraled into outright condemnation. In fact, nine members out of the 12-member panel just announced they would resign in a rare public rebuke. Among the concerns was that the system could be used in circumstances beyond shootings or over-policed communities of color. It could also undermine privacy through surveillance, become more lethal if other weapons were added or would require a drone in every single classroom in America.
The new product idea had been circulating at Axon since at least 2019, though it was restricted to computer-generated art renderings and mockups. Usually, the ethics board would debate controversial topics, such as facial recognition, before any such announcements, but they only got the school drone proposal just days before its public disclosure. “Sometimes the company takes our advice and sometimes it doesn’t,” said Barry Friedman, an NYU law professor who sits on the Axon AI Ethics Board. “What’s important is that happens after thoughtful discussion and coordination. That was thrown out the window here.”
Damage control: “I want to be explicit: I announced a potential delivery date a few years out as an expression of what could be possible; it is not an actual launch timeline,” Axon CEO Rick Smith said in a statement. “Our announcement was intended to initiate a conversation on this as a potential solution, and it did lead to considerable public discussion that has provided us with a deeper appreciation of the complex and important considerations relating to this matter. I acknowledge that our passion for finding new solutions to stop mass shootings led us to move quickly, however, in light of feedback, we are pausing work on this project and refocusing to further engage with key constituencies to fully explore the best path forward.” (1 comment)
#BabyFormulaShortage
Abbott (ABT) has restarted production of baby formula at its Sturgis, Michigan, facility that had been shut down for months over contamination concerns that were linked to the possible deaths of at least two infants. The plant is initially producing EleCare and other specialty formulas, but is working to restart production of Similac as soon as possible. In terms of statistics, Abbott’s factory produces about one-fifth of all infant formula in the U.S., leaving many shelves empty when it issued a recall and paused operations in February.
Bigger picture: It will take at least three weeks before new formula from the plant begins showing up on store shelves, though FDA Commissioner Robert Califf recently told lawmakers that it could be about two months before formula supplies return to normal levels. Nearly a quarter of formula products remain out of stock in U.S. stores as of last week, according to market research firm IRI. To deal with the shortage, the federal government has been importing formula from overseas under a mission called Operation Fly Formula.
“We understand the urgent need for formula and our top priority is getting high-quality, safe formula into the hands of families across America,” an Abbott spokesperson said in a statement. “We will ramp production as quickly as we can while meeting all requirements.”
As mentioned previously on WSB: The past two years have shown the downsides of globalization as the COVID pandemic and geopolitical threats upended the supply chain. On the other hand, there are also risks associated with protectionism, like in the case of U.S. baby formula, of which 98% is produced domestically by a trio of companies: Abbott, Gerber (OTCPK:NSRGY) and Mead Johnson (OTCPK:RBGLY). Import duties and restrictions have eliminated competition from Canada and Europe, while nearly two-thirds of all formula is purchased through federally-funded WIC, which only does business with these three domestic manufacturers. (11 comments)
Tariff talk
As the White House struggles to get inflation under control, the Biden administration may make some moves on the tariff front to help ease the price pressures. Over the weekend, Commerce Secretary Gina Raimondo said the lifting of Trump-era duties on China could be a good idea and is currently under consideration. Many economists have found that Chinese exporters generally didn’t lower prices to keep their goods competitive – meaning U.S. importers passed the duties on to American consumers – though others say the decision would not target inflation at its core (with tariffs being around since 2018) and would reward an authoritarian government.
Quote: “It depends on what we’re talking about, and what kinds of products,” Raimondo told CNN’s State of the Union. “For example, steel and aluminum – we’ve decided to keep some of those tariffs because we need to protect American workers and we need to protect our steel industry. That’s a matter of national security. There are other products – household goods, bicycles, etc. – that it may make sense.”
More waivers are set to be announced today as the U.S. declares a 24-month tariff exemption for solar panels from Cambodia, Malaysia, Thailand and Vietnam. The action would allay concerns for companies that have held billions of dollars in reserves to pay the potential duties, while invoking the Defense Production Act to drive U.S. manufacturing of solar panels in the future. A long-running investigation by the Commerce Department has sought to determine whether the imports from the Southeast Asian countries circumvented tariffs on goods made in China, but it froze significant imports and stalled U.S. projects that could be driving climate efforts in the interim.
New record highs: The national average price for a gallon of gas reached $4.85 on Sunday, according to AAA, doubling from the $2.40 level seen when President Biden took office on Jan. 20, 2021. “We can’t take immediate action that I’m aware of yet to figure out how we’re bringing down the prices of gasoline back to $3 a gallon,” he said last week, “but we can compensate by providing for other necessary costs for families by bringing those down.” The administration has pinned the blame of inflated gas costs on price-gouging corporations and Russia’s war in Ukraine, while Republicans have pointed to Biden’s green policies and advocacy for a clean energy economy. (23 comments)
Today’s Economic Calendar
12:30 PM Investor Movement Index
What else is happening…
Stock futures rally, but trading could stay choppy into Friday CPI.
Icahn said to drop proxy battle with Kroger (KR) over pig treatment.
No new refineries likely to ever be built again in the U.S. – Chevron (CVX).
Advanced Micro Devices (AMD) inks deal to supply NIO (NIO) with chips.
Grubhub co-founder has eyed Just Eat Takeaway’s (OTC:JTKWY) U.S. arm.
Battery metal costs, shortages could add years to pursuit of cheaper EVs.
U.S. mortgage holders saw record $1.2T boost in tappable equity in Q1.
Putin warns West on supplies as Russia hits Kyiv with missiles.
Fed won’t stop raising rates until payrolls turn negative – BofA.
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