Good morning. Happy Friday.
The Asian/Pacific markets leaned down. South Korea, India and Taiwan did well, but China, Hong Kong, Australia, New Zealand, Indonesia and the Philippines were weak. Europe, Africa and the Middle East are doing well. The UK, Denmark, Germany, Russia, Finland, Hungary, Spain, the Netherlands, Italy, Portugal, Austria and Czech Republic are leading while Sweden is down. Futures in the States point towards a positive for the cash market.
————— BLOG: Stan Weinstein’s Stage Analysis —————
The dollar is down. Oil is up; copper is down. Gold is down; silver is down. Bonds are up.
Stories/News from Seeking Alpha…
Oil for security
New Episode Drop: Weekend Bite, a Seeking Alpha original series. We are joined by Andrea Bevis (Managing Director, UBS Private Wealth Management) and Victoria Scholar (Head of Investment, Interactive Investor) to discuss how capital markets continue to change for the better, the dollar is enjoying its Roarin’ 20s, and the kick off of earnings season. Also, Kim Khan shares what to watch for in Netflix earnings.
After spending a few days in Israel to reassert America’s presence in the Middle East, President Biden on Friday will become the first U.S. leader to fly directly from Tel Aviv to Saudi Arabia. On the itinerary is somewhat of a resetting of relations, including energy security, Israeli-Saudi ties and establishing a cohesive regional front to counter Iran. The trip will be a big policy U-turn for Biden, who has previously labeled the Kingdom a “pariah” and refused to talk with Crown Prince Mohammed bin Salman in the aftermath of the killing of U.S.-based columnist Jamal Khashoggi.
What’s in it for the Saudis? Riyadh is looking for ironclad security guarantees, especially after Biden ended U.S. support for offensive operations in Yemen. He ordered the removal of Patriot missile batteries and other advanced military systems in 2021, even as the kingdom was being hit by rocket attacks from Iranian-backed Houthi rebels. Arms transfers from China to the Saudis have also expanded by nearly 400% over the past four years, with the U.S. continuing to refuse to sell drones to the Kingdom.
What’s in it for the U.S.? WTI crude oil (CL1:COM) tumbled below $91 on Thursday – erasing all the gains seen in the wake of Russia’s invasion of Ukraine – though U.S. gasoline prices remain expensive at the pump, averaging $4.58 per gallon nationwide. Biden is set to ask Saudi Arabia to pump even more, in the latest effort to tame high energy prices that are weighing on the economy. According to the International Energy Agency, the Saudis and UAE are the only two producers with significant spare capacity, holding just under 3M barrels a day of idle output between them (about 3% of global demand).
Outlook: “The world has never witnessed such a major energy crisis in terms of its depth and its complexity,” IEA Executive Director Fatih Birol warned at an energy forum in Sydney earlier this week. “We might not have seen the worst of it yet. This is affecting the entire world.” (21 comments)
Bank earnings
Q2 results from JPMorgan Chase (JPM) and Morgan Stanley (MS) on Thursday did not set a good tone for earnings season. Both stocks slid following lower-than-expected earnings, triggering pain for bank shares across the board. With fears that the U.S. could tip into recession, investors also watched what bank executives had to say about the state of the economy as much as figures surrounding the lenders’ balance sheets.
Financial bellwether: JPMorgan posted a worse-than-expected 28% fall in quarterly profit as global investment banking fees slid in a “challenging macro environment.” The division is coming off the SPAC boom, as well as IPOs and other dealmaking that rocketed higher in 2021. The bank additionally set aside another $428M to cover possible future loan losses, playing some defense in case things go sour.
On the upside, JPMorgan reported its best earnings from lending in over a decade, benefiting from the rising interest rate environment. It also sounded positive on the U.S. consumer and commercial landscape, with cash balances and defaults holding up well, and spending on Chase credit cards even rising 21% from a year ago. The bank even raised its net interest income guidance for 2022 despite “waning consumer confidence and high inflation. “
Go deeper: JPMorgan temporarily suspended its share buyback program as it builds more capital to meet tougher requirements from the Fed. CEO Jamie Dimon didn’t mince words on the matter, unleashing a series of critiques about the central bank’s annual exercise. “We don’t agree with the stress test,” he declared. “It’s inconsistent. It’s not transparent. It’s too volatile. It’s basically capricious.” Bank earnings continue to flow in this morning, with Wells Fargo (WFC) and Citigroup (C) set to report Q2 results. (30 comments)
Private label
Amazon (AMZN) is reducing the number of items it sells under its own brands by well over half, and the company has discussed the possibility of exiting the private-label business entirely. Disappointing sales for many of the items has led the online retail behemoth to scale back certain household brands, but the broader move is aimed at alleviating regulatory pressure, according to the WSJ. In recent years, U.S. lawmakers and the European Commission have blamed Amazon for giving advantages to its own brands at the expense of products sold by millions of other vendors on its site.
Backdrop: Amazon’s private-label business began in 2009 with consumer electronics, but quickly expanded into other categories. As of 2020, the collection encompassed 243,000 products across 45 different brands that range from home goods to clothing (think Amazon Basics, Solimo, Goodthreads, etc.). Amazon maintains that its house brands only account for about 1% of its retail sales, and that it competes fairly and in a way that benefits its customers.
The review was initiated by Dave Clark, a longtime Amazon executive who took over as head of its global consumer business in January 2021, but left the company last month. Following the analysis, Clark pushed the team to focus on bestselling commodity goods, along the lines of Target’s (TGT) “Up & Up” or Walmart’s (WMT) “Great Value” brands, rather than the extensive range of current items. The latest report also comes after the retail giant announced that members purchased more than 300M items worldwide during Prime Day 2022, making it the single biggest event in its history.
Response from Amazon: “We never seriously considered closing our private label business and we continue to invest in this area, just as our many retail competitors have done for decades and continue to do today.” (3 comments)
China slowdown
Bucking a trend across most of global equities, Chinese stocks have rallied since the beginning of May as severe COVID-19 lockdowns came to an end. Some of that optimism may be running out, however, as cracks appear in the world’s second-largest economy. Data on Friday revealed a country that narrowly avoided a contraction in the second quarter, while investors continue to be rattled by the latest developments in China’s real estate sector. Shanghai -1.6% to 3,228.
Snapshot: Gross domestic product for Q2 grew at a tepid 0.4% Y/Y, missing forecasts of a 1.0% gain and marking a sharp slowdown from the 4.8% growth notched in Q1. It was also the worst showing for China since it began the data series in 1992, barring a 6.9% contraction in the quarter after the pandemic began in Wuhan. Analysts now say the official growth target of around 5.5% for 2022 will be hard to attain without ditching its strict zero-COVID strategy, which can have knock-on effects for countries across the globe (especially those highly dependent on Chinese commodities and manufacturing).
“China’s economy has stood on the edge of falling into stagflation, although the worst is over as of the May-June period. You can rule out the possibility of a recession, or two straight quarters of contraction,” noted Toru Nishihama, chief economist at the Dai-ichi Life Research Institute. “Given the tame growth, China’s government is likely to deploy economic stimulus measures from now on to rev up its flagging growth, but hurdles are high for PBOC to cut interest rates further as it would fan inflation which has been kept relatively low at present.”
Additional worries: Things continue to look shaky in China’s capital-starved property sector, which makes up nearly a quarter of GDP by some estimates. A growing number of homebuyers across the country are halting mortgage payments until developers resume construction of unfinished apartments, with the strike (and fears of hefty writedowns) weighing heavily on bank stocks. Home prices growth in June stalled on a monthly basis, while property investment contracted for a fourth straight month and sales slumped by another massive 18.3%.
Today’s Economic Calendar
8:30 Retail Sales
8:30 Empire State Mfg Survey
8:30 Import/Export Prices
8:45 Fed’s Bostic Speech
9:15 Industrial Production
10:00 Business Inventories
10:00 Consumer Sentiment
1:00 PM Baker-Hughes Rig Count
What else is happening…
After inflation data, retail sales could lead to larger rate hike in July.
BofA slashes S&P 500 target, sees only a fifth of market bottom signs.
Uncertainty grips Italy as president rejects Mario Draghi’s resignation.
Starbucks (SBUX) may close more stores to protect employees.
Pinterest (PINS) spikes 16% after report of Elliott Management stake.
Facing JUUL ban, Altria (MO) is said to have raised cigarette prices.
Stripe (STRIP) internal valuation said to be cut by 28% to $74B.
TikTok, YouTube (GOOGL) rise in Q2 usage, Instagram (FB) declines.
Novavax (NVAX) tanks amid severe allergic risk from COVID vaccine.
Report: DOJ likely to reject Google’s (GOOGL) offer of ad-tech split.
—————
Good morning. Happy Thursday.
The Asian/Pacific markets leaned up. Japan, Taiwan, New Zealand, Australia, Malaysia and Indonesia posted gains; Singapore and Thailand were weak. Europe, Africa and the Middle East are very weak. The UK, Poland, France, Germany, Greece, South Africa, Finland, Norway, Spain, the Netherlands, Italy, Portugal, Austria, Sweden and Saudi Arabia are down 1% or more. The UAE and Hungary are up. Futures in the States point towards a big down for the cash market.
————— BLOG: Stan Weinstein’s Stage Analysis —————
The dollar is down. Oil and copper are down. Gold and silver are down. Bonds are down.
Stories/News from Seeking Alpha…
Earnings evaluation
The second-quarter earnings season is officially underway as investors prepare for a slew of results that could define market direction over the course of the summer. The big banks are up first in typical fashion, with JPMorgan Chase (JPM) and Morgan Stanley (MS) releasing their Q2 results before the bell. In the background is a bear market that is constantly growling louder and it will likely take some broad-based beats and exceptionally rosy outlooks to get the bull bellowing again.
Financial picture: Keep an eye on investment bank revenues amid sluggish M&A and underwriting, as well as reduced EPS estimates from a decline in capital markets activity. Trading revenue could soften the blow, but could also disappoint given current market conditions. Another area to take note of are updates on the lending front due to the Fed’s increasingly aggressive rate hike cycle. While higher rates are good for net interest income, they’re bad for business lending as the increased cost of capital tamps down demand.
“For now, the largest banks are likely to confirm low credit risk to credit cards, commercial and industrial loans, commercial real estate, and trading/counterparty losses,” wrote CFRA analyst Kenneth Leon. That will change if the U.S. hits a recession later this year or in 2023, with consumers depleting personal savings as rising costs reduce discretionary income.
Outlook: While many analysts have been lowering their Q2 estimates in recent months, earnings among S&P 500 companies are still expected to have risen 4.3% Y/Y (though it would mark the slowest pace of growth since the fourth quarter of 2020). According to FactSet, the S&P 500’s expected net profit margin for Q2 is also expected to come in at 12.4%, which is above the five-year average and slightly higher than the previous quarter. “I’m absolutely gobsmacked that margins are expected to be as high as they are,” declared Hans Olsen, chief investment officer at Fiduciary Trust. “It’s just this notion of hope over reality.” (6 comments)
Inflation nation
The Federal Reserve is waking up this morning a little bruised around the face as a black eye inflation report underscored the now-infamous “transitory” forecast from Jay Powell and Co. The Consumer Price Index surged by an annual 9.1% in June, marking the fastest pace in four decades and risking more entrenched expectations. The central bank is not the only one in the spotlight, with President Biden telling reporters last December (when inflation was at 6.8%) that it was “the peak of the crisis” and “you’ll see it change sooner than – quicker than – more rapidly than it will take than most people think.”
Snapshot: While core inflation, which excludes volatile categories like groceries and gas, fell under 6% for the first time since January, things look more troubling when diving into the details. The figure climbed 0.7% from the previous month – which is the most rapid clip seen over the past year – and suggests that the inflation issue goes well beyond the supply chain and energy prices (e.g. rents rose at the fastest pace since 1986). Financial markets whipsawed following the data, while the U.S. dollar index climbed to the highest level since the early 2000s as investors priced in even more aggressive monetary policy.
The Fed’s Beige Book, which is a summary of current market conditions, was also published on Wednesday, but didn’t provide a better picture of the economic backdrop. Several of the central bank’s 12 regional districts reported growing signs of a slowdown in demand, five districts recorded an increased risk of recession, and the remaining four districts saw economic growth that either slowed or declined. That could translate into a so-called “hard landing,” especially after the 2y10y yield curve steepened yesterday to a nearly 12.4 basis point gap.
Full percentage point? Many Fed officials have already cemented expectations for a 75 basis point increase later this month, but the latest inflation report is putting 100 bps on the table (Canada hiked by a similar amount on Wednesday). In fact, the CME Group’s FedWatch tool now puts a 75% probability for a full percentage point hike on July 27, with another three-quarters of a percentage point coming in September. “Everything is in play,” Atlanta Fed President Raphael Bostic told reporters, while Cleveland Fed President Loretta Mester added that “we don’t have to make a decision today.” (790 comments)
Autopilot departure
It’s hard for Elon Musk to stay out of the headlines, but his AI leader at Tesla (TSLA) just left the company. Andrej Karpathy, who was instrumental in developing the Autopilot driver-assistance feature, had been on sabbatical since March, when Musk stated he would be taking an approximately four-month break for unspecified reasons. It’s set to be a big loss for the Autopilot team, which already experienced 229 layoffs after the recent shuttering of Tesla’s office in San Mateo, California.
Quote: “It’s been a great pleasure to help Tesla towards its goals over the last 5 years and a difficult decision to part ways,” Karpathy wrote on Twitter. “In that time, Autopilot graduated from lane keeping to city streets and I look forward to seeing the exceptionally strong Autopilot team continue that momentum.”
While Tesla’s driver assistance technology made big strides during Karpathy’s tenure, it has fallen way short of the promises made by Musk. The current feature helps with tasks like maintaining a safe distance from other cars on the highway, but an expanded Full Self-Driving hopes to provide greater functionality, like the ability to automatically steer on city streets. For years, Musk has also touted ambitious timeframes for the company’s much-vaunted robotaxis (most recently promised for 2024), but the vehicle technology has yet to be fully delivered.
Go deeper: Tesla’s Autopilot has come under fire in recent months and is currently under regulatory scrutiny. The National Highway Traffic Safety Administration is investigating a series of accidents involving unexpected braking in Autopilot mode. (60 comments)
Celsius bankruptcy
While temperatures may be rising outside, things are getting colder in the cryptoverse. “Crypto winter” is a phrase that’s being tossed around the sector, with cryptocurrencies losing $2T in market value since the height of a massive rally in 2021. The latest casualty was seen late Wednesday, as Celsius Network, one of the world’s largest crypto lenders, filed for Chapter 11 bankruptcy, listing between $1B-$10B in assets and more than 100K creditors.
Backdrop: Nearly a month ago, Celsius froze all of its customer assets by pausing withdrawals from the network, as well as swaps and transfers on the platform. Its DeFi business model drew in depositors with high interest rates and access to loans rarely offered by traditional banks, claiming its risks were small and promising outsized returns. That was until a sharp selloff hammered the volatile crypto market, which Celsius coined “extreme market conditions,” just hours after lashing out at investors that had raised concerns over withdrawals.
It’s a broader symptom of what is going on in the industry, or better yet, what has gone on. The crypto market has been flooded with debt thanks to decentralized lending schemes, with the leverage exacerbated by investors looking for yield (compared to previous cycles that were largely based on crypto derivatives). Unsecured or undercollateralized lending also proved fatal for Three Arrows Capital and Voyager Digital, while the inability to meet margin calls has led to further contagion.
Next dominoes to fall? “Given it is such a crowded market, and that exchanges rely to some extent on economies of scale, the current environment is likely to highlight further casualties,” said James Butterfill, head of research at CoinShares. “We have seen examples of potential stress where miners have allegedly not paid their electricity bills, potentially alluding to cash flow issues. This is likely why we are seeing some miners sell their holdings.” (14 comments)
Today’s Economic Calendar
8:30 Initial Jobless Claims
8:30 Producer Price Index
10:30 EIA Natural Gas Inventory
4:30 PM Fed Balance Sheet
What else is happening…
Novavax (NVAX) COVID vaccine wins emergency use authorization.
Anti-ESG fund called ‘God Bless America ETF’ is coming to market.
Chevron (CVX) CEO says recent oil price decline may be short-lived.
U.S. Air Force successfully tested Lockheed (LMT) hypersonic missile.
Delta CEO: Airline industry ‘pushed too hard’ after the pandemic.
Netflix (NFLX) picks Microsoft (MSFT) as global ad sales partner.
Berkshire (BRK.B) nears 20% stake in OXY after new purchases.
Unity (U) slumps after announcing $4.4B ironSource videogame deal.
Panasonic (OTCPK:PCRFY) picks Kansas for new $4B EV battery factory.
Uber (UBER) sued by more than 500 women over sexual assault.
—————
Good morning. Happy Wednesday.
The Asian/Pacific markets leaned down. China, South Korea and Taiwan moved up; Hong Kong, India, Malaysia, Indonesia, Singapore, Thailand and the Philippines were weak. Europe, Africa and the Middle East are mostly down big. The UK, Denmark, France, Turkey, Germany, Russia, South Africa, Finland, Switzerland, Norway, Spain, the Netherlands, Italy, Portugal, Sweden and Saudi Arabia are down 1% or more. Futures in the States point towards a big down open for the cash market.
————— Masterclass Overview –>> here —————
The dollar is up. Oil and copper are down. Gold and silver are down. Bonds are down.
Stories/News from Seeking Alpha…
Black eye CPI?
The White House appears to be preparing the nation for a red-hot inflation report this morning as the Bureau of Labor Statistics releases its latest Consumer Price Index. The headline figure is expected to show an annual gain of 8.8% for June, which would mark the strongest figure in 41 years. Core CPI, excluding food and energy, is forecast to decline for the third month in a row – from 6% to around 5.7% – though the slight dip is not expected to meaningfully change a Federal Reserve keen on hiking interest rates aggressively.
Snapshot: As inflation becomes one of the top priorities for Americans, especially ahead of midterm elections, Biden administration officials held a briefing for reporters to “provide context” for the upcoming CPI report. It “will largely not reflect the substantial declines in gas prices we’ve seen since the middle of June,” because that data “captures the average price over the course of a month,” said National Economic Council Director Brian Deese and Council of Economic Advisers Chair Cecilia Rouse. Headline inflation has been “heavily driven” by Russia’s ongoing war in Ukraine, but “our economy created 372,000 jobs in June, in line with the monthly average in the rest of the second quarter.”
“Simply put: This is not what a recession usually looks like,” they wrote in an accompanying memo. “While risks are elevated, the strength of the labor market – in addition to other factors like strong household balance sheets – puts the U.S. economy in a better position than many other countries to transition from an historic recovery to lower inflation and stable and steady growth. The best thing Congress can do to improve our chances of accelerating price normalization and successfully transitioning to stable, steady growth is to pass legislation that lowers costs for families – from prescription drugs to utility costs – while reducing the federal budget deficit, in addition to passing the Bipartisan Innovation Act.”
Path of monetary policy? “I think the question later this year is what if this is just a near-term peak and not the absolute peak?” said Michael Gapen, head of U.S. economics at Bank of America. “We think it is unlikely that June CPI will be the first in the string of softer inflation prints that Fed officials focused on observing before shifting away from a very hawkish policy stance,” added Citi economist Veronica Clark. “Over the coming months, however, there are some downside risks to CPI from softer goods prices and for cars in particular. Details of monthly CPI prints could become increasingly important for signs that underlying inflationary pressures in services is slowing.” (55 comments)
Market reaction
Stock traders are angling in on how to trade the CPI report, while longer-term investors are adjusting price targets on where to buy back into equities. Factors include what the central bank will make of the figures, and whether sentiment will turn in favor of a soft or hard landing for the economy. Under the microscope are also sub-sectors of the CPI report, including shelter costs and medical care, though analysts still hold very different pictures on where the market is headed.
Risk rally: “We believe analyst bias and an asymmetric payoff structure is building a consensus that will be difficult to exceed,” wrote Wells Fargo’s Chris Harvey. “Supporting our view that the market likely will embrace a ‘peak-inflation’ view is the trend in breakevens (across maturities) falling significantly since June 10, with 2yr breakevens tightening over 100bps. Notably, 5yr and 10yr breakevens are back to levels observed a year ago. Commodity prices have also been trending down, with crude oil off $12 (10%) since June 10.”
Trouble ahead: “The investors we speak to are generally well-hedged, expecting economic conditions to deteriorate further,” wrote Anand Omprakash, head of derivatives and quantitative strategy at Elevation Securities. Many are concerned that Fed’s recent aggressive actions could tip the economy into a full-scale recession, while a surging dollar could weigh on corporate earnings. “The days of ‘buy the dip,’ I think, are largely behind us,” declared Neil Desai, portfolio manager at Putnam Investments. “We’re definitely more cautious.”
How is the CPI calculated? The measure uses a “basket of goods” approach that aims to compare costs of various consumer goods and services. These can include transportation, food, haircuts, rent, tuition and clothes (80,000 items are included in the report). Each month, data collectors from the Bureau of Labor Statistics call, visit, or check the websites of thousands of retail stores, professional offices and other establishments to assess nationwide price information. Specialists then examine the data for accuracy and make statistical adjustments based on any given item’s value. (38 comments)
Prepare for battle
Claiming that Elon Musk has engaged in “bad faith” efforts, Twitter (TWTR) has filed suit against him in an effort to keep the Tesla (TSLA) CEO from walking away from a deal to acquire the social media giant. The case was filed in the Delaware Chancery Court, and explicitly targets Musk’s X Holdings I and X Holdings II corporations, which were formed in April for the “express purpose” of arranging and financing the acquisition. On Friday, Musk said he was terminating the $44B purchase, largely due to disagreements with Twitter over the percentage of its accounts that are either fake, spam or originate from bots.
The case: In its suit, Twitter reasons that it has fully cooperated with Musk’s requests for information about fake accounts, the deal is still in effect, and it asked the court to order “defendants to specifically consummate the closing in accordance with the terms of the agreement.” The company also said Musk engaged in an exit strategy that “is a model of hypocrisy” and called into question his concerns about spam bots on the site. To support this argument, Twitter revealed that when Musk first announced the acquisition deal, he “raised a clarion call to ‘defeat the spam bots.'”
More excerpts: Twitter argues that when “the market declined” and the price of the deal became less attractive to Musk, he then “shifted in narrative, suddenly demanding ‘verification’ that spam was not a serious problem, and claiming a burning need to conduct ‘diligence’ he had expressly forsworn.” “Musk apparently believes that he – unlike every other party subject to Delaware contract law – is free to change his mind, trash the company, disrupt its operations, destroy stockholder value, and walk away,” according to the suit. Twitter is hoping for a quick end to the saga, seeking a four-day trial in September, while Musk had only four words to tweet on the matter: “Oh the irony lol.”
Watching out for shareholders? Elon’s original deal set a price of $54.20 a share, but as he brought up concerns about bots and fake accounts, Twitter’s stock price began to fall, and speculation grew that Musk might have been trying to acquire the company for less than its original $44B price tag. By the time stock market closed yesterday, TWTR shares had fallen to $34.06. The company mentioned these details in its suit, blasting Musk for refusing “to honor his obligations to Twitter and its stockholders because the deal he signed no longer serves his personal interests.” (43 comments)
Motivation that moves you
In an effort to cut costs and simplify its operations, Peloton (PTON) is ending its in-house manufacturing. Instead, the firm will rely entirely on outsourcing production of its high-end bikes and treadmills to Taiwan-based Rexon Industrial and other manufacturing partners. The new strategy is one of the first big decisions pursued by new CEO Barry McCarthy, who came aboard in February to stabilize the company’s finances and unwind some of the big bets co-founder John Foley made during his tenure.
Quote: “Today we take another significant step in simplifying our supply chain and variablizing our cost structure – a key priority for us,” McCarthy said in a statement. “We believe that this along with other initiatives will enable us to continue reducing the cash burden on the business and increase our flexibility.”
Outsourcing will allow Peloton to ramp up and down capacity based on demand, as well as simplify its supply chain. The company was a pandemic darling that took off during the stay-at-home boom, but growth sputtered last year as gyms and fitness centers began to reopen. Peloton was also left with millions of dollars in excess inventory, a similar trend experienced by many retailers in the post-COVID economy.
Go deeper: Shares of PTON have collapsed 92% over the past year to $9, but the latest executive decision sent shares of the exercise equipment maker up about 4% on Tuesday. McCarthy has also slashed headcount, upped monthly subscription fees, cut prices of Peloton hardware and implemented a leasing program that could lower the cost of ownership. (8 comments)
Today’s Economic Calendar
7:00 MBA Mortgage Applications
8:30 Consumer Price Index
10:00 Atlanta Fed’s Business Inflation Expectations
10:30 EIA Petroleum Inventories
1:00 PM Results of $19B, 30-Year Note Auction
2:00 PM Fed’s Beige Book
2:00 PM Treasury Statement
What else is happening…
Founders of bankrupt crypto firm Three Arrows Capital go missing.
New profit guidance sends American Airlines (AAL) soaring 10%.
Boeing (BA) deliveries reach highest monthly level since 2019.
Cathie Wood: ‘We believe the Fed has been making a mistake.’
Oil supply tightness looks set to worsen, recession or not.
PepsiCo (PEP) attempts to protect margins with cost cuts, price hikes.
Endo (ENDP) weighs bankruptcy filing without opioid settlement – WSJ.
Warner Bros. (WBD) may restart HBO Max deal with Amazon (AMZN).
More than 400 U.S. solar companies seek Senate action on budget bill.
—————
Good morning. Happy Tuesday.
The Asian/Pacific markets suffered big losses, Japan, China, Hong Kong, South Korea, India and Taiwan dropped more than 1%. Europe, Africa and the Middle East are currently weak. The UK, Poland, Germany, Russia, Hungary, Spain, the Netherlands, Italy and Austria are down the most. Futures in the States point towards a down open for the cash market.
————— Masterclass Overview –>> here —————
The dollar is up. Oil and copper are down. Gold is flat; silver is down. Bonds are up.
Stories/News from Seeking Alpha…
Parity in view
Things are likely to be more affordable for American tourists visiting Europe this summer, with the exchange rate between the euro and the dollar now about equal. It’s the first time since 2002 (in the early years of the euro’s existence) that the ratio came close to 1:1, with the currency hitting 1.0005 vs. the greenback early this morning. Many analysts now forecast the euro to hit parity today or in the coming sessions, which may make for some cheap vacations, but could come at a cost of global economic stability.
What’s happening? Looking to tame inflation, the Fed is on track to continue hiking interest rates by 75 bps per meeting, in comparison to the ECB, which is still hesitant to get too aggressive. EU recession fears are more pronounced than they are in the U.S., especially given the grim energy outlook and the shutting of the Nord Stream 1 pipeline for annual maintenance. Similar to the situation in Europe, ultra-dovish policies in Japan are keeping the yen under pressure, leading to a strong wave of constant dollar buying in the forex markets. The yen and the euro are by far the most traded currencies against the dollar, so when both are weak, it makes it harder for anything else to rival the greenback.
“I really wouldn’t say [the euro at] 0.95 [against the dollar] would be unreasonable,” noted George Saravelos, global head of FX research for Deutsche Bank. “Even if this [Nord Stream] gas returns in terms of full flow after the maintenance period, the [risk] premium is unlikely to go away.” European policymakers have also historically welcomed a weaker currency to stimulate growth by making exports more competitive, but it can exacerbate the inflation issue as it drives up price gains by making imports more expensive.
Outlook: The Bank of Japan wants to ride things out by sticking to its yield curve control policies, hoping that the current levels of inflation aren’t sustainable due to hiccups in the post-COVID recovery. Over in Europe, the ECB is now entertaining the thought of raising rates, but is fearful about what that would mean for peripheral yields in member states like Italy. Meanwhile, Friday’s strong jobs report in the U.S. indicates that the Fed won’t be scared about getting too aggressive, keeping pressure on the euro and yen and sending many investors towards the safe-haven dollar. (42 comments)
Spending trends
Retail is on the radar as Amazon (AMZN) gears up for Prime Day, with the two-day shopping bonanza taking place over the next 48 hours. However, the event is not generating as much buzz in comparison to recent years as consumers shift their spending habits due to higher price tags. Amazon has even started to plan for a second “Prime” event in the fall, suggesting the retailer may already be looking beyond its annual Prime Day to boost sales and draw new members into its discount club.
Bigger picture: It’s far from doom and gloom, as many shoppers hope to score discounts on consumer staples to lessen the impacts of inflation. JPMorgan expects the July 12-13 event to generate $3.8B in incremental revenue for the company, which would be a 7% increase from the level a year ago (total Prime Day revenue is forecast to be up 5% to $5.6B). The firm is also bullish on Amazon’s logistics side of the business, but said the overall macro backdrop and impact on consumer demand cannot be ignored.
Gap (GPS) CEO Sonia Syngal echoed a similar outlook upon announcing her resignation on Monday, citing “margin headwinds” in the coming quarter. Syngal has tried to revive the flagship Gap brand and Old Navy by cutting costs and introducing more inclusive sizing, but ended Q1 with 34% more inventory compared to the previous year. Inflationary costs of raw materials, as well as transportation and freight, haven’t helped the situation that has plagued many a retailer in recent months.
On the luxury front: Falling high-end watch prices could point to worrisome prospects for retailers LVMH (OTCPK:LVMHF) and Cartier parent Richemont (OTCPK:CFRHF) going into the second half of 2022. According to WatchCharts, resale prices for luxury watches (which some people buy as investments) have tumbled about 15% on average in the past two months. Top-of-the-line Rolex and Patek Philippe have headlined the declines, with tags on some of the flashiest models like the Audemars Piguet Royal Oak plummeting more than 30% since the spring. (27 comments)
OTC-BCP
Perrigo’s (PRGO) HRA Pharma unit just submitted an application to the FDA to allow its birth control pill to be sold over-the-counter in America. If approved, the product, called Opill, would be the first BCP that doesn’t require a prescription. According to the drugmaker, the timing of the application was unrelated to the recent overturning of Roe v. Wade, which has set up many legal and political battles over women’s reproductive health.
Quote: “For a product that has been available for the last 50 years, that has been used safely by millions of women, we thought it was time to make it more available,” said HRA’s chief strategy officer Frederique Welgryn. “Moving a safe and effective prescription birth control pill to OTC will help even more women and people access contraception without facing unnecessary barriers.”
Hormone-based pills, which generally contain progestin plus estrogen, have been the most common form of birth control in the U.S. since the 1960s. The capsules have always required a prescription – so doctors can screen for conditions that raise the risk of rare blood clots – but HRA hopes to convince the FDA that women can safely conduct the screenings themselves. Current FDA data shows that for every 10,000 women taking the pills annually, three to nine will suffer a blood clot, compared to one to five clots among the same amount of women who aren’t taking birth control.
Go deeper: BCPs are currently available without prescription in over 100 countries worldwide. HRA even won approval last year to sell the first prescription-less birth control pill in the U.K.
#SriLankaEconomicCrisis
For the past two decades, Sri Lanka had been one of the fastest growing South-Asian countries, and was even touted as a model for a developing economy. However, pictures this week of protestors overrunning the presidential compound, and swimming in the residence pool, show just how far the tide has turned. While President Gotabaya Rajapaksa just announced that he will step down, a political vacuum and the lack of any real reforms means a rescue from the IMF could be thrown into disarray.
Backdrop: Tourism helped prop up Sri Lanka’s economic growth and supply of foreign currency over the past decade, but the 2019 Easter bombings sent its most lucrative industry into a tailspin. Things never fully recovered and COVID-19 was of no further help to the island nation of 22M people. Rajapaksa was elected during this period of economic stagnation, but analysts say his expanding power and financial mismanagement weakened public finances (some examples include populist tax cuts and a ban on chemical fertilizers).
While anti-government protesters angry over shortages of food, gas, medicine and basic goods demanded Rajapaksa step down, he instead invoked emergency powers in an attempt to maintain control. In a span of just two years, Sri Lanka’s foreign currency reserves went from $9.2B to just $50M, which is not enough to even cover one day of the country’s imports. Daily rolling blackouts are also shutting down businesses and many are fearful of a return to chaos not seen since the three-decade civil war from 1983 to 2009.
Contagion? Sri Lanka could be the first domino to fall in a global economic crisis set to envelop many poorly-managed developing countries. Pakistan is having major problems with its debt, as well as a number of African and Latin nations, spelling trouble across the emerging markets. “With the low-income countries, debt risks and debt crises are not hypothetical,” World Bank Chief Economist Carmen Reinhart declared. “We’re pretty much already there.”
Today’s Economic Calendar
6:00 NFIB Small Business Optimism Index
12:30 PM Fed’s Barkin Speech
1:00 PM Results of $33B, 10-Year Bond Auction
Companies reporting earnings today »
What else is happening…
Northrop-built (NOC) Webb Space Telescope reveals first full-color image.
Reports: Binance provided service for Iranian traders despite sanctions.
GameStop (GME) launches NFT marketplace as it hunts for growth.
Energy news: U.K. lawmakers pass windfall tax on oil and gas producers.
Valero (VAL), Marathon Petroleum (MARA) largest buyers in SPR sale.
Rivian Automotive (RIVN) said to be eying hundreds of jobs cuts.
Ukraine conflict escalates as Iran set to deliver armed drones to Russia.
Alibaba (BABA) tumbles as China fines e-commerce giant over disclosures.
Goldman screens stocks most and least vulnerable to recession pressures.
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Good morning. Happy Monday. Hope you had a great weekend.
The Asian/Pacific markets were mostly weak. Japan did well, but China, Hong Kong, Taiwan and Australia were weak. Europe, Africa and the Middle East are currently weak. Norway is up, but Poland, France, Germany, Greece, Russia, South Africa, Finland, Hungary and Sweden are down 1% or more. Futures in the States point towards a flat open for the cash market.
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The dollar is up. Oil is up; copper is down. Gold and silver are up small amounts. Bonds are down.
Stories/News from Seeking Alpha…
See you in court!
The Elon Musk-Twitter (NYSE:TWTR) saga kicked into high gear this weekend after the world’s richest man decided to pull the plug on his $44B acquisition. Stepping away from the deal will not be easy, with both sides lining up their legal teams as they prepare for battle. Twitter (TWTR) has hired merger law firm heavyweight Wachtell, Lipton, Rosen & Katz, while Musk has brought in Quinn Emanuel Urquhart & Sullivan, which successfully led his defense against the “pedo guy” defamation suit in 2019 and is part of an ongoing shareholder case over his “go-private” tweet a year earlier.
Fine print: At issue is Elon’s belief that Twitter (TWTR) hasn’t done enough to address the matter of fake, spam or bot accounts on its platform. In a filing with the SEC, representatives for Musk said that despite what it claimed, Twitter (TWTR) “appears to have made false and misleading representations upon which Mr. Musk relied when entering into the merger agreement.” With regards to Elon’s requests for clarity around the bot issue, Twitter (TWTR) has “rejected them for reasons that appear to be unjustified, and sometimes claimed to comply while giving Mr. Musk incomplete or unusable information [that less than 5% of its total user accounts were spam].”
“This is a disaster scenario for Twitter and its board,” noted Wedbush Securities analyst Dan Ives. “Now, the company will battle Musk in an elongated court battle to recoup the deal and/or the breakup fee of $1B, at a minimum.” Twitter (TWTR) shares slumped another 7% in premarket trade on Monday to around $34, or 37% lower than the $54.20 per share price of Musk’s original buyout agreement in April.
Questions remain: While things head to the courtroom, there is bound to be many settlement talks that take place in the background. Will Musk shoot to get a lower price for the deal based on a “material adverse effect”? Walk away by only paying a termination fee or damages? And how much hardball will Twitter be willing to play to uphold “specific-performance” clauses, which forces Musk to close the deal with every closing condition including financing of the transaction? (18 comments)
Market direction
Investors are strapping on their seatbelts as they prepare for some wild trading in the week ahead. Volatility is likely to reign high due to a confluence of economic indicators, which include retail sales and a consumer price index that may show a print greater than 9%. Earnings season for Q2 will also begin, with companies likely to show elevated input costs and slower consumer spending that could weigh on outlooks going into the second half of 2022.
Quote: “It’s going to be a pretty bifurcated earnings season,” said Keith Lerner, chief market strategist at Truist Advisory Services. “It’s going to be a story of who doesn’t have that pricing power, and there’s going to be more differentiation.”
A strong jobs report on Friday calmed some jitters that the economy might have already tipped into recession, but at the same time, it raised expectations that the Fed could press ahead with aggressive rate hikes to tame inflation. It’s a circular methodology to gauge the coming economic landscape, meaning earnings season will likely play an outsized role in shaping investing sentiment. If traders see serious threats to corporate profits, it could lead to a further downturn for a market that has already slid into bear territory, though others say those estimates have already been taken into account – or at least make up some of the equation.
Commentary: “The market has been anticipating this for a really long time. From here on out, it’s really dealing with inflation and what the companies are doing to work around it,” wrote Anna Rathbun, chief investment officer at CBIZ Investment Advisory Services. “Markets had priced in already a fair amount of this earnings slowdown, but they’ve not priced in an earnings recession,” added Kara Murphy, chief investment officer of Kestra Holdings. “We’re not at a point where we could say the market is cheap.”
Nord Stream goes offline
Energy concerns in Europe are getting grimmer by the day, with an emboldened Russia in a position to squeeze the bloc over its heavy sanctions and support for Ukraine. Moscow supplies the EU with 40% of the natural gas imports, and in countries like Germany, that figure is as high as 60%. Natural gas is used for heating and cooking for consumers, as well as electricity and power generation for heavy industry.
The latest: Russia has slashed capacity to Germany via Nord Stream 1 by 40% over the past week, just as the country was attempting to fill up its storage before wintertime. The cuts were caused by sanctions questions over a turbine that was being serviced in Canada, but another disruption will hit the important pipeline over the next 10 days (with annual maintenance work taking place from July 11 through July 21). Germany and other EU countries are fearful that the Kremlin could extend the shutdown due to the war in Ukraine, or might even turn off the taps for good.
“Based on the pattern we’ve seen, it would not be very surprising now if some small, technical detail is found and then they could say ‘now we can’t turn it on any more,'” according to German Economy Minister Robert Habeck. The country has already raised the alarm in its emergency gas plan, and the next level would see the government ration consumption and assume control of the entire nation’s distribution network. Germany has also reopened several coal-fired power stations to shore up supply, with Dutch TTF natural gas futures, a European benchmark, rising more than 400% over the past year.
Outlook: There are other big natural gas pipelines running from Russia to Europe, but flows have been gradually declining due to squabbles over ruble payments and reported interference by Russian forces. Some European countries are now looking to Norway for additional supplies, while southern nations are eyeing Azeri gas from the Trans Adriatic Pipeline to Italy and the Trans-Anatolian Natural Gas Pipeline via Turkey. Other ideas include boosting LNG imports, or increasing power generation from nuclear, hydropower, renewables or coal. (6 comments)
‘Uber Files’
Uber (NYSE:UBER) is under fire following a massive trove of files that were leaked to The Guardian and shared with the International Consortium of Investigative Journalists. The stash consists of more than 124,000 records, including 83,000 emails and thousands of sensitive texts and documents that were exchanged between 2013 and 2017. According to the outlets, it shows how the ride-hailing app courted top politicians, and how far it went to avoid justice as it sought to establish itself in nearly 30 countries.
Snapshot: The company knowingly set up a “kill switch” to thwart regulators by cutting access to Uber servers and blocking authorities from grabbing evidence during raids. The switch was used in Canada, Belgium, Hungary, India, Romania and the Netherlands, and at least three times in France. Uber also channeled profits through Bermuda and other offshore tax havens, then “sought to deflect attention from its tax liabilities by helping authorities collect taxes from its drivers.”
Meanwhile, many undisclosed meetings with high-level politicians were conducted to ask for favors. Uber recruited many former aides to President Barack Obama to drop probes, change policies on workers’ rights, draft new taxi laws and even relax background checks on drivers. Over in France, the company weighed portraying violence against its drivers as a way to gain public sympathy, and found an ally in then-economy minister Emmanuel Macron, who told controversial founder Travis Kalanick that he would reform laws in the firm’s favor.
Response: Calling it “one of the most infamous reckonings in the history of corporate America,” Uber spokeswoman Jill Hazelbaker acknowledged past “mistakes” and “missteps,” but said the firm has since transformed into a new entity. “When we say Uber is a different company today, we mean it literally: 90% of current Uber employees joined after Dara [Khosrowshahi] became CEO,” she wrote in a statement. “We have not and will not make excuses for past behavior that is clearly not in line with our present values.” (8 comments)
Today’s Economic Calendar
1:00 PM Results of $43B, 3-Year Note Auction
2:00 PM Fed’s Williams Speech
Companies reporting earnings today »
What else is happening…
Macau shuts casinos for a week amid unrelenting coronavirus policy.
Oracle (ORCL) eyes ‘thousands’ of layoffs; could happen as soon as August.
Netflix’s (NFLX) ‘Stranger Things’ keeps swamping streaming ratings.
Antitrust bill targeting tech giants may not exit Senate before summer recess.
Luxury brand Tom Ford said to be exploring sale – Bloomberg.
Abbott (ABT) baby formula plant resumes operations after flooding.
Temporary relief? U.S. pump prices post biggest one-day drop since ’08.
Pfizer (PFE) COVID-19 shot granted full FDA approval for adolescents.
Fall campaign: Composition of next COVID boosters raises questions.
Celsius Network said to hire new lawyers for restructuring advice.
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