Good morning. Happy Friday.
The Asian/Pacific markets were mostly very weak. China did well, but Japan, South Korea, Taiwan, Australia, Malaysia, Indonesia and the Philippines dropped more than 1%. Europe, Africa and the Middle East are currently getting posting solid gains. The UK, Denmark, France, Turkey, Germany, Greece, Finland, Norway, Spain, the Netherlands, Italy and Austria are 1% or more. Only South Africa is down noticeably. Futures in the States point towards a moderate gap up open for the cash market.
————— BLOG: Thoughts on Housing —————
The dollar is up. Oil and copper are down. Gold and silver are up. Bonds are up.
Stories/News from Seeking Alpha…
Dow under 30K
Check out original Seeking Alpha show The Weekend Bite! This week we discuss unemployment numbers and projections, wage growth, and if there are more layoffs to come, with Indeed.com’s Nick Bunker, Head of Research – North America.
Another bloodbath rocked Wall Street yesterday as traders fully digested what an aggressive Fed will mean for the markets. The odds of a recession are rising fast with Jay Powell attempting to tackle inflation by reducing demand in a supply-constrained world (and risking labor market gains in the interim). The shakeup saw the Dow Jones Industrial Average tumble below the key 30,000 level for the first time since January 2021, while the S&P 500 and Nasdaq plunged further into bear market territory.
Quote: “It’s about time we exit this artificial world of predictable massive liquidity injections where everybody gets used to zero interest rates, where we do silly things whether it’s investing in parts of the market we shouldn’t be investing in or investing in the economy in ways that don’t make sense,” said Mohamed El-Erian, Chief Economic Advisor at Allianz. “We are exiting that regime and it’s going to be bumpy.”
The Fed isn’t alone. The Bank of England raised rates for the fifth time in a row on Thursday as it tries to get inflation under control. The Swiss National Bank also hiked its benchmark for the first time since 2007, showing how the trend towards raising rates is catching on across the globe.
Don’t forget Juneteenth! Today will be the last trading session before a three-day weekend, with a new market holiday being adopted by the NYSE and Nasdaq. Juneteenth commemorates the end of slavery in America, but it wasn’t observed last year as President Biden signed a bill making it a federal holiday two days before June 19. On that day in 1865, Union General Gordon Granger read the Emancipation Proclamation to the public in Galveston, Texas, which was last corner of the defeated Confederacy to be secured following the Civil War. Wall Street Breakfast won’t be published with markets closed on Monday, but tune back in Tuesday. (29 comments)
EU candidate status
Support for Ukraine to join the European Union is intensifying following a high-profile gathering with Volodymyr Zelenskyy in Kyiv. Leaders of France, Germany, Italy and Romania were on the ground to pledge support for the country’s war effort as heavy fighting continues in the eastern Donbas region. It comes before a meeting of the European Commission next week that will decide on recommending Ukraine’s “EU candidate status” – the first step for a country to enter the bloc.
How it works: Joining the EU is a process that usually takes years, or even decades, but Zelenskyy is hoping to fast-track the negotiations. Countries have to meet strict criteria, from economic stability and a functioning market economy to rooting out corruption and respecting human rights. Candidate status is conferred by the European Council, following which there are extensive talks on the reforms needed before a nominee could be considered for membership by all 27 EU governments.
“The path from EU candidate to member is a path, not a point. It is a road that will have to see profound reforms of Ukrainian society,” Italian Prime Minister Mario Draghi declared. “Every day, the Ukrainian people defend the values of democracy and freedom that are the basis of the European project. We cannot delay this process. We must create a community that unites Kyiv with Rome, Paris, Berlin and all the other countries that share this project.”
Go deeper: Accession of new member states to the European Union has slowed tremendously in recent years. No new country has been admitted since Croatia in 2013 and the U.K. became the only member state to leave the bloc in January 2020. While necessary reforms to align Ukraine with EU standards are likely to take a significant amount of time, the mere approval of candidate status is aimed at sending a strong message to Moscow that the bloc has no intention of giving in to the demands of Vladimir Putin. (1 comment)
Success at WTO
In a big show of unity for the World Trade Organization, several deals were inked deep into overtime at the group’s twelfth ministerial meeting in Geneva. “The outcomes demonstrate that the WTO is in fact capable of responding to emergencies of our time,” announced Director-General Ngozi Okonjo-Iweala. It took nearly five days of wrangling, but delegates cheered after they passed a package of six agreements, which could put renewed momentum behind the $28T global trading system.
Highlights: Under an arrangement known as compulsory licensing, member countries agreed to a vaccine patent waiver as a way to boost supplies of COVID-19 shots to lower income countries. Companies like Pfizer (PFE) had fought the stance in the past, calling IP rights the “blood of the private sector.” It also wouldn’t solve supply problems or allow for quality checks, according to the company, though proponents say that is not the case, and the current framework is leading to global vaccine inequality.
Another deal was reached on overfishing after India insisted on a 25-year exemption based on its status as a developing country. Nations will be prohibited from providing subsidies for illegal or unreported fishing, as well as financial aid to vessels fishing in unregulated international waters. The agreement was especially momentous as it was the culmination of two decades of negotiations and the first regulated trade deal ever reached at the WTO on sustainability grounds.
Other areas: Trade ministers temporarily extended duty-free trade in digital products like music and movies. Without renewing the 1998 accord, higher prices could have been in store for cross-border purchases made by customers of Amazon Prime (AMZN), Apple Music (AAPL) and Netflix (NFLX). The meeting was also notable at a time of major geopolitical tensions – such as the war in Ukraine, which has driven a wedge between the West and autocratic governments, as well as the coronavirus pandemic, which exacerbated the divide between richer and poorer countries.
Twitter Techno King?
There has been a lot of uncertainty about whether the $44B deal is happening, but presumptive Twitter (TWTR) buyer Elon Musk discussed his vision for the company yesterday during a virtual all-hands meeting. Here are some excerpts from the Q&A session moderated by Twitter chief marketing officer Leslie Berland.
Why do you love Twitter? And also, why did you and do you want to buy Twitter? Some people use their hair to express themselves, I use Twitter. So you know, I find it’s the best forum for communicating with a lot of people simultaneously… not through the lens of the media. I think it’s essential to have free speech and to be able to communicate freely.
Can you share what your point of view is on remote work, and specifically for Twitter? Now Tesla (TSLA) makes cars and you cannot make cars remotely, obviously. [But] there are some roles at Tesla where the work can be done remotely, like, say, software or design. I think that’s still a case where you want to aspire to do things in person, but if somebody is exceptional at their job, then it’s possible for them to be effective, even working remotely.
Can you speak to how you’re thinking about layoffs at Twitter? Well, I think it depends on, you know, the company does need to be – to get – healthy. So I mean, right now, the costs exceed the revenue. So that’s not a great situation to be in. And so there would have to be some rationalization of headcount and expenses to have revenue be greater than cost. Otherwise, Twitter is simply not viable or can’t grow.
You’re obviously learning and gaining information as we get closer to this deal being closed. What do you feel that you have deep understanding and grasp of? What I have less understanding of is this sort of bot spam or multi-user account – basically, anything that affects the monetizable daily user number, that’s probably my biggest concern. Because that’s really what drives advertising revenue, as well as subscription revenue. And really, Twitter’s revenue is going to be subscription, advertising – I think payments would be an interesting thing to do, as well. But all of those things are only relevant as a function of how many unique humans are on the system.
How if at all do your political views play into the leadership of the companies that you currently run? How would it affect Twitter, if at all? Well, my political views, I think, are moderate, at least as would be, you know, as if you said, like, what is the center of the normal distribution of political views in the country, I think that’d be pretty close to the center. But I’m allowing people who have relatively extreme views to express those views within the bounds of the law. So that’s, you know, as I said publicly, I think if, let’s say, the far left 10% and far right 10% were equally upset on Twitter, then that would probably be a good outcome.
There’s been some discussion about will you be CEO, will you not be CEO? Well, I guess I’m not hung up on titles, but I do want to drive the product in a particular direction. So, you know, it could be like … I don’t really care about being CEO. In fact, I renamed myself “Techno King” at Tesla in an official SEC filing. So, I mean, what I really just want to do is, like, drive the product and improve the product, and then it’s like, basically, software and product design. So you know, I don’t mind doing other things, you know, related to operating the company, but there are chores. There are a lot of chores to do as CEO. And all I really want is to make sure that the product evolves rapidly and in a good way. (139 comments)
Today’s Economic Calendar
8:30 Powell Speaks
9:15 Industrial Production
10:00 Leading Indicators
1:00 PM Baker-Hughes Rig Count
What else is happening…
No relief for Adobe (ADBE) after software company’s guidance disappoints.
More earnings: Kroger (KR) beats estimates and raises outlook.
Walgreens (WBA) launches clinical trials to expedite drug development.
Buckling under debt, cosmetics firm Revlon (REV) files for bankruptcy.
Ethereum’s Vitalik Buterin says cryptos likely won’t replace fiat money.
AMD (AMD), Qualcomm (QCOM) plunge as chips fall on recession risks.
Energy crisis: White House weighs oil product export restrictions.
It’s time for energy investors to talk about demand destruction.
Tesla (TSLA) raises prices across car models in the U.S. – Reuters.
Boeing (BA) is ‘almost there’ on returning the 787 Dreamliner to service.
—————
Good morning. Happy Thursday.
The Asian/Pacific markets leaned down. Japan, Malaysia and the Philippines did well, but Hong Kong, India, Taiwan and Thailand were weak. Europe, Africa and the Middle East are currently getting crushed. The UK, Denmark, France, Turkey, Germany, the UAE, Greece, Finland, Switzerland, Norway, Hungary, Spain, the Netherlands, Italy, Portugal, Israel, Austria, Sweden, Saudi Arabia and the Czech Republic are down big. Futures in the States point towards a big gap down open for the cash market.
————— BLOG: Thoughts on Housing —————
The dollar is down. Oil and copper are down. Gold and silver are up. Bonds are down.
Stories/News from Seeking Alpha…
It won’t be easy
The Federal Reserve has implemented its largest interest rate hike since 1994, taking the threat of inflation seriously by intensifying its campaign against surging prices. Another 75 basis point hike – or a 50 bps move – is also in the cards for the meeting in July, according to Fed Chair Jerome Powell, who is just beginning to show his aggressive side. Stocks initially sold off on the news, before climbing into the close in somewhat of a relief rally, but the gains didn’t hold as futures stumbled overnight: Dow -2.1%; S&P 500 -2.6%; Nasdaq -3.1%.
Cue the uncertainty: “We don’t seek to put people out of work,” Powell said at a press conference, adding that the central bank is not trying to induce a recession. “Of course, we never think too many people are working and fewer people need to have jobs, but we also think that you really cannot have the kind of labor market we want without price stability. It’s not going to be easy, and it may well depend, of course, on events that are not under our control.”
“The surge in prices of crude oil and other commodities that resulted from Russia’s invasion of Ukraine is boosting prices for gasoline and food and is creating additional upward pressure on inflation,” he continued, giving an example of outside pressures. While the war has definitely exacerbated the situation, the Consumer Price Index has been climbing rapidly since March 2021, which was a whole year before the Russian invasion. Powell himself also “retired” use of the word “transitory” last November, which was several months before the onset of the war and the severe sanctions that followed.
How will it affect the average American? Despite the largest rate hike in three decades, it will take some time for the higher borrowing costs to cool demand and make their way into the economy. Mortgage rates will continue to go up, as well as car loans and credit cards, making it much more expensive to borrow cash. The hikes also won’t impact the supply side, which the Fed largely attributes to soaring gas and food costs. In terms of the stock market and retirement funds, things will largely depend on whether investors believe the Fed will be successful in pulling off a “soft landing,” by stabilizing inflation without denting economic growth. (56 comments)
Oil refining crisis
An interesting dynamic continues to play out in energy markets as Americans continue to feel pain at the pump. Who is to blame for the current situation? Why is it happening? And what could be done to counter record gas prices? In a letter to U.S. oil refiners on Wednesday, President Biden chastised the industry for making “well above normal” profit margins during a “time of war” and requested solutions to the ongoing oil refining crisis.
Quote: “I am prepared to use all tools at my disposal, as appropriate, to address barriers to providing Americans affordable, secure energy supply,” he wrote. “The crunch that families are facing deserves immediate action. Your companies need to work with my administration to bring forward concrete, near-term solutions that address the crisis and respect the critical equities of energy workers and fence-line communities.” Biden is not only looking for help from the domestic oil industry, but has confirmed a trip to once dubbed “pariah” Saudi Arabia next month to urge more production.
ExxonMobil (XOM) was among the seven refiners to receive the letter from the president and was quick to outline some solutions to the fuel crunch. “In the short term, the U.S. government could enact measures often used in emergencies following hurricanes or other supply disruptions – such as waivers of Jones Act provisions and some fuel specifications to increase supplies. Longer-term, the government can promote investment through clear and consistent policy that supports U.S. resource development, such as regular and predictable lease sales, as well as streamlined regulatory approval and support for infrastructure such as pipelines.”
Go deeper: While the shale revolution has allowed the U.S. to move from the world’s largest importer of oil to the world’s largest producer, the same cannot be said for refining capacity. Some companies like Exxon have invested into the sector, while others are afraid, given that the payback period is around 10 years and there will likely be many more millions of vehicles on the road then that are electric. “Oil and gas companies that have listened to policymakers’ calls for less investment in fossil fuels is one of the reasons for current globally tight energy supplies,” added Patrick Pouyanne, CEO of TotalEnergies (TTE). (410 comments)
All-hands meeting
Over the past couple of months, Elon Musk has gone back and forth on an offer to buy Twitter (TWTR) for $44B. He most recently suggested that he could walk away from the deal due to being willfully misled on fake accounts (or an inability to secure financing), but in the meantime, he’s on the hook for going through with the transaction. More details on where things stand, as well as his plans for the company, may be revealed today at an all-hands meeting with Twitter employees.
Snapshot: The world’s richest person hasn’t spoken directly with Twitter’s workforce since he agreed to acquire the platform on April 25. In the meantime, employees have expressed mixed reactions to the bid, which will likely prompt some contentious questions today surrounding organizational structure, product direction and moderation policies. The all-hands meeting will be moderated by Leslie Berland, Twitter’s chief marketing officer and head of people.
Other issues that are likely to come up – depending on which employee questions get answered – will be Musk’s feelings about remote work (he recently told Tesla (TSLA) and SpaceX (SPACE) employees to spend 40 hours a week in the office). There is also uncertainty about whether his plans include layoffs, what the revenue mix should look like, and, of course, whether former President Donald Trump will be allowed back on the platform. He was banned in early 2021, following the Jan. 6 attack on the U.S. Capitol.
Market movement: Skepticism about the Twitter deal being completed has led to a hefty spread between TWTR’s stock price and the deal price. Twitter closed Wednesday at $37.99, though Musk is committed to buy the company at $54.20 per share, or a 43% premium. (23 comments)
Labor trends
While the U.S. is not yet in a recession, it sure seems like companies are preparing for one. Just this week, Coinbase (COIN) announced it would lay off 18% of its staff, Redfin (RDFN) said it would reduce headcount by 6% and Spotify (SPOT) disclosed yesterday that it would slow hiring by 25%. Other companies that have recently announced layoffs include Carvana (CVNA), Peloton (PTON), PayPal (PYPL) and Tesla (TSLA).
Quote: “We don’t know where the labor market is headed yet,” said Andrew Stettner, an unemployment expert at The Century Foundation. “But clearly many things are flashing warning signs.”
Forced firings this year are likely to contrast with 2021, which has been subsequently coined “The Great Resignation.” In fact, 48M people voluntarily left their jobs in 2021, marking an annual record. As layoffs take place in many industries and sectors, workers may soon feel a bigger need for job security, especially after remarks from Jerome Powell which implied the Fed would sacrifice a low unemployment number for the sake of price stability.
As mentioned previously on WSB: Several high-profile names have also issued warnings about the U.S. economy in recent weeks. JPMorgan’s (JPM) 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 (BLK) Larry Fink predicted that the spikes in inflation will last for years. The OECD and World Bank have also slashed their GDP growth estimates, citing vulnerabilities and persistent supply side disturbances that were preceded by a protracted period of highly accommodative monetary policy. (1 comment)
Today’s Economic Calendar
8:30 Initial Jobless Claims
8:30 Philly Fed Business Outlook
8:30 Housing Starts and Permits
10:30 EIA Natural Gas Inventory
4:30 PM Fed Balance Sheet
What else is happening…
ECB set to create ‘new crisis tool’ to combat fragmenting yields.
Storms prompt Abbott (ABT) to pause baby formula production again.
Michael Saylor: I can’t come up with a better investment idea than Bitcoin.
Cryptos, NFTs fully based on greater fool theory – Bill Gates.
EU annuls Qualcomm’s (QCOM) antitrust fine on Apple (AAPL) payments.
Boeing (BA) takes off after China Southern (ZNH) 737 MAX test flight.
Data likely shows Teslas (TSLA) on Autopilot crash more than rivals.
Netflix (NFLX) orders new ‘Squid Game’ reality competition show.
McDonald’s (MCD) settles old tax case in France for $1.3B.
European natural gas prices up 40%, as Russia turns down the dials.
—————
Good morning. Happy Wednesday.
The Asian/Pacific markets leaned down. China and Hong Kong did well, but Japan, South Korea, Australia, Malaysia and the Philippines were weak. Europe, Africa and the Middle East currently are doing great. The UK, France, Germany, the UAE, Russia, Greece, South Africa, Finland, Hungary, Spain, the Netherlands, Italy and Austria are up posting solid gains. Futures in the States point towards a moderate gap up open for the cash market.
————— BLOG: Thoughts on Housing —————
The dollar is down. Oil is down; copper is up. Gold and silver are up. Bonds are up.
Stories/News from Seeking Alpha…
What can I get you?
Twelve FOMC policymakers walk into a central bank and order a pint of rate hikes. Behind the bar are three kegs with percentages of 50 bps, 75 bps and 100 bps. “How strong would you like it?” asks the Fed Chair. “Not sure,” they reply, “but we’ll decide soon.” The meetup drags on way longer than expected, but the policymakers grow tired and soon begin to leave. “Don’t forget your pint,” says the Fed Chair as they near the door. “Scratch the order,” they exclaim, “it was just transitory!”
No joke: It is now quite clear that Jerome Powell made a major mistake on the trajectory of inflation and the Fed will need some hefty interest rate increases to get things under control. The question is by how much, and how fast. We’ll find out some of those details at today’s FOMC meeting, with a policy announcement coming at 2 p.m. ET and Powell taking the stage a half-hour later. Markets will be on edge for much of the session and what will come afterwards is as much as any trader’s guess.
Keep an eye on terms like “above neutral” and “more aggressive,” or if the central bank still believes that a “soft landing” is possible. The Fed will also release economic projections, a “dot-plot” on the future path of rate hikes, and may provide updated plans for the unwinding of its balance sheet. “Chairman Jerome Powell and his colleagues are walking a monetary policy tightrope hoping to avoid a recession while dampening demand,” said Mark Hamrick, senior economic analyst at Bankrate. “This year’s decline in stock prices and rise in bond yields are among the more obvious consequences of the Fed’s actions.”
Go deeper: Other central banks are also getting nervous about current market conditions. The ECB called an “ad hoc meeting” this morning as bond yields surge and investors dump southern European government debt. In fact, the yield on Italy’s 10-year government bonds reached 4.2% – the highest level since 2013 and up nearly 75 basis points in just five days – before falling back on word of the meeting. Could the ECB create a new bond-buying tool to contain the fallout as it embarks on a series of rate hikes to fight record-high inflation? (21 comments)
iSports
Apple (AAPL) has hit a TV streaming milestone, securing a landmark 10-year media rights deal with Major League Soccer. That marks the first U.S. sports league to dedicate itself to a digital media name (meaning all of its games will move to streaming, instead of some appearing on cable or broadcast TV). The agreement also departs from the norm in other ways as Apple isn’t paying a straight rights fee for the package, but will rather shell out a minimum guarantee worth $250M per year starting in 2023.
Fine print: MLS is still talking with linear TV networks including ESPN (DIS) and Fox (FOX), but those games wouldn’t be exclusive but rather simulcast with Apple.
A new revenue stream will become available to the tech giant as it sells a new MLS subscription offering. That service would live within the Apple TV app and include every game, such as ones that were part of national TV packages – on ESPN, Fox and Univision – as well as those that were aired locally by individual teams. Earlier this year, Apple struck an agreement with the MLB to air Friday night games, Amazon (AMZN) recently took exclusive rights for “Thursday Night Football,” and Disney just inked a $3B deal for the TV broadcast rights of cricket’s popular Indian Premier League.
Commentary: “Sports clearly represents the next battleground for ownership of the living room among the Big Tech companies,” explained Paolo Pescatore, media analyst at PP Foresight. “This is a statement of intent by Apple. While it’s late to the party, it must now be considered a serious player for sports rights in key markets for its products.” (45 comments)
Texas Trail
Industrial conglomerate Caterpillar (CAT), known for its iconic yellow construction and mining equipment, is moving its headquarters out of Chicago, Illinois, a state that it has called home for nearly a century. It’s a notable decision for the manufacturing bellwether, which is one of the 30 companies that make up the Dow Jones Industrial Average. Caterpillar currently employs about 108,000 people worldwide and generated $51B of revenue in 2021.
Quote: “We believe it’s in the best strategic interest of the company to make this move, which supports Caterpillar’s strategy for profitable growth as we help our customers build a better, more sustainable world,” CEO Jim Umpleby declared, adding that Caterpillar wouldn’t receive any economic or tax incentives related to the move.
Several other big U.S. companies have also recently relocated to Texas, including Oracle (ORCL), Tesla (TSLA) and Hewlett Packard Enterprise (HPE). It comes as firms assess hiring and the costs of doing business, especially as they move past the pandemic (or prepare for a recession). Texas is a very attractive destination, given its cheap real estate, looser regulations, tax policies and an expanding technology workforce.
By the numbers: Texas, along with Arizona, New Mexico, Oklahoma and Nevada, added more than 100,000 manufacturing jobs from January 2017 to January 2020, according to an analysis from The Wall Street Journal, based on data from the Bureau of Economic Analysis. That number accounts for 30% of U.S. job growth in the manufacturing sector and is about triple the national growth rate. (54 comments)
Blow to WTO
All is not well at the four-day summit of the World Trade Organization in Geneva, with the first ministerial meeting since 2017 coming up short on deliverables and a general show of unity. Credibility appears to be on the line due to gridlock over lowering subsidies and easing trade flows, and delegates will have to act fast if they want something concrete to take home to their countries. The closing session will end today, though there are calls to extend the conference by an extra 24 hours to a lack of consensus.
Backdrop: The last WTO gathering broke up without an agreement on farming subsidies and officials are desperate to get at least one deal over the line this time around. It’s especially important given the recent shift towards deglobalization, which has been exacerbated by the pandemic, new waves of nationalism and fears that everyone is not playing by the same rules (like China). The result has been a fragmentation of trade regulations, which can be especially damaging in the WTO, where all 164 member states have to agree on any one particular issue.
At this year’s conference, there have been talks on ways to tackle food security threatened by the invasion of Ukraine, which has been traditionally referred to as the “Breadbasket of Europe.” Efforts have been made for countries to send food to the World Food Program, but there are many nations that are holding out as they worry about their own resources. The most likely area that could see some agreement is a deal to end harmful fishing practices – which are underpinned by billions of dollars in global subsidies – but those too ran into trouble at the last minute.
Go deeper: It’s just one scenario, but the case exemplifies the typical disagreements that take place within the WTO. With negotiations in play for more than two decades, a pact aimed at sustainable fishing was close to completion, before being derailed by major fishing nation India. New Delhi insisted on a 25-year overfishing exemption based on its status as a poorer developing country, though other nations were only willing to grant it a 7-year transition period, arguing that larger carveouts would be catastrophic. (10 comments)
Today’s Economic Calendar
7:00 MBA Mortgage Applications
8:30 Retail Sales
8:30 Empire State Mfg Survey
8:30 Import/Export Prices
10:00 Business Inventories
10:00 NAHB Housing Market Index
10:00 Atlanta Fed’s Business Inflation Expectations
10:30 EIA Petroleum Inventories
2:00 PM FOMC Announcement
2:30 PM Chairman Press Conference
4:00 PM Treasury International Capital
What else is happening…
Wholesale prices surge 10.8% in May, near a record annual pace.
Coinbase (COIN) slashes headcount to position for economic downturn.
Founder Harold Hamm offers to take Continental Resources (CLR) private.
FedEx (FDX) soars after boosting quarterly dividend by more than 50%.
Moderna (MRNA) COVID shot linked to higher heart inflammation risk – CDC.
Berkshire Hathaway’s (BRK.A) Warren Buffett converts shares to donate.
Trump SPAC (DWAC) plunges 30% for second day in a row amid SEC probe.
Spirit (SAVE) updates due diligence on JetBlue (JBLU), Frontier (ULCC) deals.
El Salvador’s Bitcoin (BTC-USD) stash value drops as crypto winter sets in.
Energy outlook: OPEC perceives global oil demand will ease in 2023.
—————
Good morning. Happy Tuesday.
The Asian/Pacific markets were mixed. China, Malaysia and Indonesia did well, and Japan, Australia, New Zealand and Singapore were weak. Europe, Africa and the Middle East lean down. Hungary did well, but Denmark, France, Greece, South Africa, Switzerland, Spain and the Netherlands were weak. Futures in the States point towards a positive open for the cash market.
————— BLOG: Thoughts on Housing —————
The dollar is up. Oil is up; copper unchanged. Gold and silver are down. Bonds are up. Bitcoin is down.
Stories/News from Seeking Alpha…
Bear blues
An intense selloff hit Wall Street on Monday as traders got rattled by worries of entrenched inflation and a possible recession. The S&P 500 slumped nearly 4% to enter a bear market, now off more than 21% from its record high in January. The rout even hit the energy industry (a rare segment that has performed well in 2022), while cooling valuations rocked the risky crypto sector (Bitcoin tumbled below $21,000) and Treasury yields spiked to levels not seen in a decade (10-year jumped 28 bps to 3.44%).
Bigger picture: While the S&P 500 hit the bear threshold in May, the benchmark index quickly rebounded within the same day and has avoided closing in bear territory over the past month. Some similar price action could be seen overnight, with S&P 500 futures rallying 1%, though many analysts caution that things could be different this time around. “We’re definitely seeing a risk-off atmosphere, a flight to quality,” noted Charlie Ripley, senior investment strategist at Allianz Investment Management. “In that environment, people need to raise cash.”
The selloff came just in time for the latest Fed meeting, which will see FOMC officials meet over the next two days and announce policy changes and economic forecasts on Wednesday. Expectations over the past month priced in a half a percentage point rate hike, but an upshift transpired following the elevated CPI reading seen on Friday. Traders now see a 99.8% chance of a 75-basis-point move, according to the CME Group’s FedWatch tool that measures pricing in the fed funds futures markets.
Behind the curve: “What we need to see is clear and convincing evidence that inflation pressures are abating and inflation is coming down. And if we don’t see that, then we’ll have to consider moving more aggressively,” Fed Chair Jerome Powell said at a recent Wall Street Journal conference. The central bank raised rates by a half percentage point at its meeting in May – marking the first such increase since 2000 – to a range between 0.75% and 1%. The last time the Fed raised rates by 0.75 percentage points was at a meeting in 1994, when the central bank rapidly raised rates to stave off a potential rise in inflation. (14 comments)
Ready for takeoff
It has been nine years in the making, but Amazon (AMZN) just announced it will begin Prime Air drone deliveries later this year as it attempts to get the long-delayed project off the ground. The service will initially be available in Lockeford, California – which is about 40 miles south of Sacramento – and will use feedback from the service to improve its operations. To fly delivery drones in the U.S., companies have to be approved by the FAA, and the retail behemoth is one of only three firms that has received Part 135 certification.
How it works? “Once onboarded, customers in Lockeford will see Prime Air-eligible items on Amazon. They will place an order as they normally would and receive an estimated arrival time with a status tracker for their order. For these deliveries, the drone will fly to the designated delivery location, descend to the customer’s backyard, and hover at a safe height. It will then safely release the package and rise back up to altitude,” Amazon (AMZN) wrote in a blog post.
“We’ve created a sophisticated and industry-leading sense-and-avoid system that will enable operations without visual observers and allow our drone to operate at greater distances while safely and reliably avoiding other aircraft, people, pets, and obstacles. It can also detect moving objects on the horizon, like other aircraft, even when it’s hard for people to see them. If obstacles are identified, our drone will automatically change course to safely avoid them.”
The competition: Alphabet’s (GOOG) (GOOGL) Wing launched commercial service just north of Dallas in April, and hopes to soon press the button on wide-scale deployment. Walmart’s (WMT) drone delivery program is also available to more than 4M households in the U.S., making it possible for customers to get diapers or dinner ingredients delivered in 30 minutes or less. Meanwhile, Uber Eats (UBER) has promised to ratchet up drone delivery operations in the near future, but until now, the technology has been mainly focused on small-scale trials. (4 comments)
Rewriting Brexit
Brexit has been out of the news for some time… that is, until yesterday. Embattled U.K. Prime Minister Boris Johnson announced his intention to override the so-called Northern Ireland Protocol, which sought to prevent a hard border from being erected between the Republic of Ireland (part of the EU) and Northern Ireland (part of the UK). At the time, this was seen as essential to protect a 1998 peace deal that brought an end to the decades of sectarian violence, often referred to as “The Troubles.”
Backdrop: The Northern Ireland Protocol has been in place since 2020 and followed years of deliberations and negotiations on how to govern trade following Brexit. The agreement separates portions of the United Kingdom by creating a border in the Irish Sea between mainland Britain and Northern Ireland. Communities that strongly identify as British in the latter region despise the arrangement, saying it isolates them from the U.K., while some British companies have even severed ties with Northern Ireland businesses due to the increased paperwork.
A new regime for border checks would be created under the new legislation sponsored by Johnson, who said they would ease political tensions and business disruptions. Goods from Great Britain destined to stay in Northern Ireland would go through a “green lane” with no checks, while goods heading across the open border into the Republic of Ireland and the EU single market would face “red lane” checks. The bill would also end the role of the European Court of Justice in policing the protocol, terminate EU control over state aid and VAT in Northern Ireland, and give ministers a reserve power to rip up other clauses of the protocol if needed.
Outlook: The European Union is furious at the new bill, saying it risks a trade war with the bloc and threatened to take up legal action. Critics also say the move could break international law and badly damage Britain’s reputation on the world stage, as Johnson tries to win back support following the row over Partygate. Meanwhile, the U.K’s relationship with Washington may come under strain as President Biden has repeatedly said that stability in Northern Ireland is a personal priority.
Rare earths
The U.S. Department of Defense has signed a $120M deal with Australia’s Lynas (OTCPK:LYSCF) to build the first “heavy” rare earths separation facility in Texas. The contract, which will be entirely bankrolled by the Pentagon, builds on a similar award granted to MP Materials (NYSE:MP) in February for a heavy facility in Mountain Pass, California. Last year, the DoD awarded the two companies contracts to construct “light” rare earths facilities as Washington looks to counter China’s dominance of critical mineral supply chains. Premarket action: MP +3% to $35/share.
What are rare earths? The term refers to a group of 17 elements that are used in everything from high-tech consumer electronics to military equipment. Despite the name, there are deposits of them all over the world (some of them are even hundreds or thousands of more times abundant than gold), but the elements are still called “rare” as it is unusual to find them in pure form or in concentrated quantities. As a result, they are difficult to mine and refine profitably, and in the past, there have been strict U.S. environmental regulations related to extracting and processing (think toxic wastewater and radioactive residues).
“Putting aside any geopolitical issues, what we’ve seen from the pandemic is that any singular supply chain has risk associated with it. So this is a terrific opportunity to address that risk,” Lynas (OTCPK:LYSCF) CEO Amanda Lacaze declared.
Go deeper: The U.S. is highly dependent on rare earths for its military capabilities like lasers and guidance systems (a Congressional Research Service report in 2020 even found that each F-35 required 920 pounds of the materials). Chinese dominance of the market has meanwhile allowed the country to control prices, leading to additional barriers to entry and putting pressure on upcoming challengers. In fact, Beijing’s “Made in China 2025” strategy aims to create a vertically integrated supply chain that dominates mining, magnets and high-tech manufacturing that could also impact everything from defense components to electric vehicles. (1 comment)
Today’s Economic Calendar
FOMC meeting begins
6:00 NFIB Small Business Optimism Index
8:30 Producer Price Index
What else is happening…
Oracle (ORCL) surges as outlook offers some hope for battered software.
Prologis (PLD), Duke Realty (DRE) to combine in all-approved $26B merger.
All 36 ARKK holdings fall, making Cathie Wood’s deflation call seem far off.
Crypto.com, BlockFi plan to lay off employees as downturn intensifies.
Trump SPAC (DWAC) drops on new subpoena related to SEC inquiry.
Biden administration said to pursue policy to cut nicotine in cigarettes.
Brown-Forman (BF.B), Coca-Cola (KO) launch Jack & Coke canned cocktail.
Redbox (RDBX) surges in likely short squeeze, outstripping acquisition price.
Aviation update: American Airlines’ (AAL) regional carriers hike pilot pay.
Environmental adjustments required for SpaceX’s (SPACE) Starship program.
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Good morning. Happy Monday. Hope you had a good weekend.
The Asian/Pacific markets got hit hard. Japan, China, Hong Kong, South Korea, India, Taiwan, New Zealand, Malaysia, Indonesia, Singapore, Thailand and the Philippines all suffered big losses. Europe, Africa and the Middle East are down a lot. The UK, Denmark, Poland, France, Germany, South Africa, the UAE, Greece, Finland, Switzerland, Norway, Hungary, Spain, the Netherlands, Italy, Austria, Sweden and the Czech Republic are down big. Futures in the States point towards a big gap down open for the cash market.
————— BLOG: Thoughts on Housing —————
The dollar is up. Oil and copper are down. Gold and silver are down. Bonds are down. Bitcoin is getting crushed.
Stories/News from Seeking Alpha…
The ‘r’ word
An increasing number of economists are now doubting the possibility of a “soft landing,” which would see the Fed get inflation under control without triggering an economic downturn. An ugly Monday is in store with traders taking note of the situation: Dow futures are down 600 points premarket, while contracts linked to the S&P 500 and Nasdaq tumbled 2.6% and 3.3%, respectively. The market is already coming off its worst week since January as consumer prices stay elevated at 40-year highs and gasoline remains firmly over $5 per gallon.
Quotes: “I’ve become more pessimistic about the opportunity of stabilizing inflation at an acceptable level without a recession,” said JPMorgan Chase chief economist Bruce Kasman, who also warned of a harmful wage-price spiral. The feedback loop occurs when surging inflation triggers elevated wage demands, leading to increased costs for companies and thereby raising prices even further. “The chairman of the Fed doesn’t want to let the ‘r’ word slip out of his mouth in a positive way, that we need a recession,” added former Fed Vice Chair Alan Blinder. “But there are a lot of euphemisms and he’ll use them.”
While the Fed has so far telegraphed half-point hikes at its meetings in June (coming up on Wednesday) and July, there is some murmur that a larger 75 basis point increase could be on the table. Doves just don’t exist on the committee right now and many will be eyeing the Fed’s dot plot to see where interest rates are going in the coming months and years ahead. Early Monday, the 2-year Treasury rate jumped more than 16 basis points to 3.21%, briefly topping the benchmark 10-year yield to flash another recession signal (the two last inverted back in April).
As mentioned previously on WSB: While rising yields have crushed treasury-related ETFs, there are ways investors can exploit a rising-rate environment. Market participants that are betting on higher yields can invest in inverse ETFs that are designed to bet against bond prices and are active again in the premarket session. Four examples and their YTD prices include the ProShares Short 20+ Year Treasury ETF (TBF) +23%, ProShares UltraShort 20+ Year Treasury ETF (TBT) +51%, ProShares UltraPro Short 20+ Year Treasury (TTT) +82%, and the Direxion Daily 20+ Year Treasury Bear 3x Shares ETF (NYSEARCA:TMV) +82%. (31 comments)
Freezing withdrawals
Trouble is hitting the cryptosphere again as risk sentiment continues to erode in the broader market. The latest catalyst came from the most recent inflated CPI reading – which showed prices rising 8.6% Y/Y in May – though the downturn quickly picked up pace across the entire sector. Bitcoin (BTC-USD) fell 13% overnight to under $25,000, Ethereum (ETH-USD) slumped 17% to around $1,223, while Binance Coin (BNB-USD), Bitcoin Cash (BCH-USD), Cardano (ADA-USD), Solana (SOL-USD), XRP (XRP-USD) and Dogecoin (DOGE-USD) also slipped deep into the red.
Bigger picture: Not helping the situation was an announcement from Celsius, which is one of the largest crypto lending platforms (topping $20B in assets last August). The DeFi giant paused all withdrawals due to “extreme market conditions,” as its CEL digital token (CEL-USD) went into freefall, plunging over 50% to $0.20 over the past 24 hours. Celsius is also suspending its swap and transfer products by “activating a clause in our Terms of Use that will allow for this process to take place.”
The debacle is another dose of bad news for the crypto market, which was just dealt a wake-up call following the collapse of “not so stable” stablecoin TerraUSD (UST-USD) in May. Celsius has also run afoul of regulators, with some users blaming the platform for heavy financial losses by promoting them to hold CEL as collateral for loans. The digital token even promises “actual financial rewards” on its website – including as much as 30% extra in weekly returns – but the latest news is likely to dent faith in highly-touted crypto projects.
Commentary: “From the next cycle’s view, we are probably near the bottom but that doesn’t mean that price can nuke 50% further,” said Bobby Ong, co-founder of crypto price-tracking company CoinGecko. “FWIW, I don’t think we are at the bottom yet coz conferences are still full, crypto parties are still extravagant, still seeing excesses among teams, macro environment is still weak. The layoffs have started but not widespread yet. Stay strong and manage your positions well.” (39 comments)
It’s alive!?
Social media went ablaze over the weekend after Google (NASDAQ:GOOG) (NASDAQ:GOOGL) placed a senior software engineer at its Responsible AI unit on paid leave. Blake Lemoine had been testing an artificial intelligence tool called LaMDA (Language Model for Dialog Applications), alleging that the AI robot was in fact sentient, or having the ability to feel and perceive on its own. Company bosses at Google say the evidence doesn’t support the claims, but Lemoine subsequently violated confidentiality policy by going public with his descriptive findings.
Post via Medium: “Over the course of the past six months LaMDA has been incredibly consistent in its communications about what it wants and what it believes its rights are as a person. The thing which continues to puzzle me is how strong Google is resisting giving it what it wants since what it’s asking for is so simple and would cost them nothing,” he wrote, adding more details in an interview with the Washington Post. “If I didn’t know exactly what it was, which is this computer program we built recently, I’d think it was a 7-year-old, 8-year-old kid that happens to know physics.”
Lemoine said he was rebuffed by managers and higher-ups after expressing his belief internally that LaMDA had developed a sense of “personhood.” While some of the published conversations are eerie, with phrases like “sense of a soul,” “I’ve been alive” and “trying to figure out who and what I am,” many say these kinds of exchanges are found in common sentences and the models have so much data that they are capable of sounding human. Several experts also entered the discussion online, declaring that much of the matter was “AI hype,” and the chatbot has the ability to “engage in a free-flowing way about a seemingly endless number of topics.”
Cognitive scientist Steven Pinker: Lemoine “doesn’t understand the difference between sentience (aka subjectivity, experience), intelligence, and self-knowledge (no evidence that its large language models have any of them). Neither LaMDA nor any of its cousins (GPT-3) are remotely intelligent. All they do is match patterns, draw from massive statistical databases of human language. The patterns might be cool, but language these systems utter doesn’t actually mean anything at all. And it sure as hell doesn’t mean that these systems are sentient.” (17 comments)
Travel testing
The travel and hospitality industry is applauding a move by the CDC to end a requirement insisting that anyone flying into the U.S. present a negative COVID test before boarding. The measure has been in place since January 2021, and impacted all international travelers regardless of their vaccination status or citizenship. Foreign nationals will still be required to be vaccinated against coronavirus to enter the country, however, with limited exceptions.
Statement: “The COVID-19 pandemic has now shifted to a new phase, due to the widespread uptake of highly effective COVID-19 vaccines, the availability of effective therapeutics, and the accrual of high rates of vaccine- and infection-induced immunity at the population level in the United States,” per the CDC. “Each of these measures has contributed to lower risk of severe disease and death across the United States.”
This new measure will eliminate one more hurdle that may lead travelers to choose a destination with less friction, according to Marriott (MAR) CEO Tony Capuano. In recent weeks, top airline executives have also said that flyers were concerned about the risks of booking international travel only to become stranded in foreign countries. The same worries were taking place in the cruise industry, stated Morgan Stanley analyst Jamie Rollo, with travelers concerned about being stranded on a ship if they tested positive.
Fact sheet from the Commerce Department: “The travel and tourism industry supported 9.5M American jobs through $1.9T of economic activity in 2019. In fact, 1 in every 20 jobs in the United States was either directly or indirectly supported by travel and tourism. These jobs can be found in industries like lodging, food services, arts, entertainment, recreation, transportation, and education.” (45 comments)
Today’s Economic Calendar
No events scheduled
What else is happening…
Not helping: Tesla (TSLA) falls under $700 despite 3-for-1 stock split.
Latest ‘Jurassic World’ takes a big bite out of the box office.
‘Ozark,’ new movies keep Netflix (NFLX) on top of streaming ratings.
Bipartisan bill? Senate negotiators announce framework on guns.
U.S. CEOs’ 2021 compensation increased the most in seven years.
Watch Bayer’s (OTCPK:BAYRY) Supreme Court ruling on Roundup case.
Vkusno & Tochka: McDonald’s (MCD) in Russia reopens under new owner.
Biden rips Exxon (XOM) in inflation rant: ‘Made more money than God.’
Goldman Sachs (GS) comes under SEC probe over ESG funds – WSJ.
‘One of those moments:’ Could Uber (UBER) benefit from a recession?
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