Before the Open (Aug 29 – Sep 2)

Good morning. Happy Friday. Happy Employment Numbers Day.

The Asian/Pacific markets were mostly down. The Philippines did well, but Japan, Hong Kong, South Korea, Taiwan and Singapore were weak. Europe, Africa and the Middle East are currently up big. The UK, Denmark, Poland, France, Turkey, Germany, South Africa, Finland, Switzerland, Hungary, the Netherlands, Italy, Austria and Sweden are up 1% or more. Futures in the States point towards a moderate gap up open for the cash market.

————— VIDEO –>> Managing Trades with Technical Indicators —————

The dollar is down. Oil and copper are up. Gold and silver are up. Bonds are down.

Stories/News from Seeking Alpha…

Nonfarm payrolls

Fresh Episode! Weekend Bite, a Seeking Alpha original series. This week we’re joined by our good friend George Ball, Chairman at Sanders Morris Harris. Ball shares four stocks that he would sell puts against right now, while Kim Khan breaks down what to watch in the week ahead. Seeking Alpha also wishes our subscribers a great Labor Day Weekend! Wall Street Breakfast won’t be published with markets closed on Monday, but tune back in Tuesday.

The U.S. economy has been giving off mixed signals this year, with GDP falling for two straight quarters, while demand for workers outstrips supply. Fed Chair Jerome Powell has repeatedly called the labor market unusually strong in recent months, while his comments at Jackson Hole last Friday sent markets into a tailspin. Today’s non-farm payrolls numbers – set to be released at 8:30 a.m. ET – will be the next data point the central bank will be looking for when deciding monetary policy in September, meaning investors will be on edge for most of today’s session before heading into the holiday weekend.

Bigger picture: Economists are expecting 300K jobs were added in August, down from the larger-than-expected 528K added in the previous month, while the unemployment rate is expected to stay at a 50-year low of 3.5%. A strong jobs showing means that FOMC policymakers will likely be considering another 75-basis-point rate increase later this month as they seek to tamp down demand and control inflation while the labor market is strong. The central bank has increased its federal funds rate target range by 225 bps in its past four meetings, with 75-bp hikes at each of the last two.

“If the consensus among economists is close to correct, the number of jobs added in August will be the lowest in over a year,” remarked Mark Hamrick, senior economic analyst at Bankrate. However, he points out that hiring gains have averaged 471K per month this year, which is still strong compared to pre-pandemic levels. For example, from January 2019 to January 2020, the U.S. economy only added about 170K jobs per month.

Other items: Wages will be closely watched amid fears of inflation and a wage-price spiral, with average hourly earnings expected to rise 5.3% Y/Y. Also keep an eye on the labor force participation rate, with the figure standing at 62.1% in July – a half point lower than it was before the pandemic. Sector dynamics will also be on display as investors seek more info on the strengths and weaknesses of industries like manufacturing, leisure and hospitality, and technology. (35 comments)

A new brew

Longtime Starbucks (SBUX) CEO Howard Schultz is passing over the reins again after returning as the head of the company for the third time in April. Schultz was previously CEO from 1986 to 2000, when his specialty coffee shop called Il Giornale merged with Starbucks (and eventually went public), and from 2008 to 2017, when he succeeded Jim Donald during the financial crisis. His latest stint followed the retirement of Kevin Johnson, though it was an interim position until a new CEO was found.

The new face of Starbucks: Hailing from consumer goods giant Reckitt Benckiser (OTCPK:RBGPF), Laxman Narasimhan will join Starbucks on October 1. The 55-year-old is credited for navigating the Lysol and Durex maker through the pandemic, and revitalizing the company following a sales slump that even led to a raise in annual guidance earlier this year. His move to Starbucks will be somewhat of a long onboarding process, with Narasimhan relocating from London to the Seattle area to work closely with Schultz, before assuming the CEO role and taking the helm in April 2023.

“Laxman is a strategic and transformational leader with deep experience in building powerful consumer brands,” Schultz wrote in a letter to employees. “He is uniquely positioned to shape this work and lead the company forward with his partner-centered approach and demonstrated track record of building capabilities and driving growth in both mature and emerging markets.”

Outlook: During the six-month onboarding process, Narasimhan will specifically dive into Starbucks’ “Reinvention” program, which includes better pay for baristas and reimaging stores and the customer experience. Over the past year, more than 200 Starbucks stores in the U.S. have been unionized, with workers pushing for better benefits, wages and welfare. The cost of ingredients and labor is also surging along with inflation, while China’s zero-COVID strategy has slowed business in one of the chain’s largest overseas market. (40 comments)

Edit button

Twitter (TWTR) may be in a brawl with Elon Musk, but the platform is taking a recommendation from a poll once conducted by the billionaire. In the new test, the company is exploring giving users the ability to edit their tweets on the service.

Quote: “It’s true: Edit Tweet is being tested by our team internally,” the company declared, adding the feature will then be expanded first to customers on its Twitter Blue subscription service later in September. “Given that this is our most requested feature to date, we wanted to both update you on our progress and give you a heads up that, even if you’re not in a test group, everyone will still be able to see if a Tweet has been edited. We’re hoping that, with the availability of Edit Tweet, Tweeting will feel more approachable and less stressful.”

In its current test, users will be able to edit tweets just a few times in the 30 minutes following publication. Edited tweets will feature an icon, timestamp and label to indicate it has been modified, and viewers will be able to click through to an edit history that displays past versions to prevent misinformation.

Go deeper: Twitter Blue subscriptions are currently available in the U.S., Canada, Australia, and New Zealand. It is priced regionally based on a U.S. cost of $4.99 per month, which was raised from a previous $2.99 in July. Other features included in the service involve a customizable navigation bar, bookmark folders, an undo feature, and lists of top articles. (2 comments)

Smartphone crown

Android or iPhone? While the debate still rages on, Apple (NASDAQ:AAPL) has been steadily picking up market share in recent years, even as it presses into new horizons like advertising, health, streaming content and payments. Its iPhone business still remains a staple of the company, and has been a dominant force in the smartphone market after kicking off the mobile revolution in 2007.

Snapshot: According to fresh data from Counterpoint Research, Apple has surpassed Android (GOOGL) to account for more than half of all smartphones being used in the U.S. The iPhone has even been growing at a 5% clip over the past few years, up from 35% in 2019, 40% in 2020 and 45% in 2021. Numbers are based on the “installed base” – or the amount of smartphones currently in use – compared to other metrics like shipments or purchases, which can vary greatly from quarter to quarter. Apple even refers to its “installed base” as the first lever of its “services business” and the “engine for our company.”

“Operating systems are like religions – never significant changes. But over the past four years the flow has consistently been Android to iOS,” wrote Jeff Fieldhack, Research Director at Counterpoint. “This is a big milestone that we could see replicated in other affluent countries across the globe.”

Upcoming event: After reaching a four-and-a-half-month high during mid-August, Apple’s stock has fallen 9% over the past two weeks, dragged down by general concerns over the economy and interest rates. The late-summer swoon comes ahead of the highly anticipated launch of the iPhone 14 next Wednesday, which will be the company’s first in-person event since the pandemic began in March 2020. Can the new product cycle restart AAPL’s upward momentum and make the tech giant a buying opportunity? (11 comments)

Today’s Economic Calendar
Auto Sales
8:30 Non-farm payrolls
10:00 Factory Orders
1:00 PM Baker-Hughes Rig Count

What else is happening…

New Dallas Fed chief Lorie Logan names inflation as top target.

30-year fixed mortgage rises to 5.66%, but may average lower shortly.

Broadcom (AVGO) earnings and guidance aided by chip sales.

Lululemon (LULU) pops after dazzling on comparable sales and margins.

New earplug lawsuit seeks to block 3M (MMM) healthcare spinoff.

Cathie Wood saw largest YTD monthly outflow from ARKK in August.

Shell (SHEL) to exit Russia’s Sakhalin-2 LNG project empty-handed.

Illumina (ILMN) wins FTC antitrust case over GRAIL acquisition – WSJ.

Okta (OKTA) plunges as analysts flag challenges following ‘mixed’ Q2.

Shopify (SHOP) warns against Amazon’s (AMZN) ‘Buy with Prime’ feature.

—————

Good morning. Happy Thursday.

The Asian/Pacific markets were down big. Japan, China, Hong Kong, South Korea, India, Taiwan, Australia, Malaysia and Thailand dropped more than 1%. Europe, Africa and the Middle East are currently down big. The UK, Denmark, Poland, France, Turkey, Germany, Greece, the UAE, South Africa, Finland, Switzerland, Norway, the Netherlands, Austria, Sweden and Saudi Arabia are down more than 1%. Futures in the States point towards a moderate gap down open for the cash market.

————— VIDEO –>> Managing Trades with Technical Indicators —————

The dollar is up. Oil and copper are down. Gold and silver are down. Bonds are down.

Stories/News from Seeking Alpha…

Power chords

There’s a lot of news hitting energy markets, which in turn, is hitting prices. Reports now suggest that OPEC+ is not looking at crude production cuts, while a renewed Iranian nuclear deal could push more barrels on the market. G7 finance ministers will also meet virtually tomorrow, and are expected to endorse a plan to set a cap on the price of Russian oil and commit to finalizing its implementation.

How would the caps work? Details are still being discussed, but they would likely be implemented close to the cost of Russian production, thereby denting Moscow’s finances, but still ensuring critical energy flows. To accomplish this, Europe would restrict the availability of transport and insurance services to shippers that agree to observe the price ceiling (~95% of the world’s oil tanker fleet is covered by the International Group of P&I Clubs in London and companies based in continental Europe). Another proposal would apply similar caps on Russian gas prices, or limit the usage of U.S. financial services that could also benefit the scheme.

WTI crude fell below $90 a barrel on the news after posting a third monthly decline in August (the longest losing streak since April 2020). The sentiment has also flowed into September, with WTI futures (CL1:COM) down 2% to $87.55/bbl at the time of writing. “Energy traders anticipate a brutal period for global growth,” added Edward Moya, senior market analyst at OANDA. “China factory activity remains depressed and another eurozone record-high inflation reading has raised the prospects of much more aggressive ECB tightening that could trigger a severe recession.”

A wild card: Markets have priced in a previously announced shutdown of the Nord Stream 1 pipeline, which will be closed over the next 72 hours for maintenance work. However, if Russia prolongs the closure (it has been restricting gas supplies over the past three months), energy prices could spike once again. Many in the industry say that Vladimir Putin is “weaponizing” supplies by creating uncertainty around the limited gas flows, while leveraging his position by adding to the anxiety in Europe. (3 comments)

Washed out?

The shorts appear to be winning the recent battle at Bed Bath & Beyond (BBBY). A drubbing on Wednesday means investors can now buy the stock with the company’s famous “20% off” coupon, and things aren’t looking any better premarket, with BBBY down another 6% to the $9 level. Shares were already deflating after meme mania pushed them up to the $23 range in mid-August, but they have shaved off nearly $1B in market value over the past two weeks.

The latest: Bed Bath has unveiled a plan to reduce a third of its in-house home goods brands and cut 20% of jobs across corporate and the supply chain. It also announced commitments for more than $500M of new financing, while potentially raising capital by selling as many as 12M new shares. Following a strategic review, it will retain the buybuy BABY banner, but the company will shutter 150 “lower-producing” locations.

“While there is much work ahead, our road map is clear and we’re confident that the significant changes we’ve announced today will have a positive impact on our performance,” said interim chief executive Sue Gove, after years of competition from the likes of Target (TGT) and Amazon (AMZN).

Burning through cash: Many of Bed Bath’s efforts are aimed at steadying its balance sheet, which ended May with around $100M, compared to $1.1B a year earlier. The retailer also predicts it used up another $325M in cash during Q2, which is closer to the amount analysts forecast the company would use over two quarters. It also means the cash burn over the last half a year was north of $800M, not a great sign especially when BBBY’s market cap is now around $760M. (64 comments)

Chip restrictions

Shares of Nvidia (NVDA) are also under pressure, down 6% in early trading, after warning that U.S. export restrictions on some of its products may hurt sales. According to an 8-K filing, Washington has imposed a new license requirement for any future export to China (including Hong Kong) and Russia of the company’s A100 and H100 integrated circuits. The latter is Nvidia’s forthcoming flagship chip that was announced earlier this year.

Bigger picture: Chinese organizations are reliant on cost-effective chips from Nvidia and others to carry out advanced artificial intelligence tasks like image and speech recognition. The chips also have military applications, such as scanning satellite imagery for weapons bases or filtering communications for intelligence gathering, and the U.S. government feels the new license requirement will mitigate those risks.

If Nvidia’s customers don’t want to purchase the company’s alternative product offerings, or if the U.S. doesn’t grant licenses in a timely manner or denies licenses to significant customers, it could impact the company’s outlook for its fiscal third quarter (which includes $400M in potential sales to China). Advanced Micro Devices (AMD) also warned that it received a similar note from the U.S. government, though it doesn’t see a material impact.

Go deeper: Recent reports stated that the Biden administration was reviewing new export sanctions on China, which involved chip equipment tools that could be used for making semiconductor advancements. The Commerce Department is also trying to figure out how to ban exports of tools that are sent to factories of Semiconductor Manufacturing International Corp. (OTCQX:SMICY), or SMIC, to prevent them from creating semiconductors at the 14-nanometer node and smaller. (107 comments)

‘Superbubble’ may pop

Weeks after ‘Big Short’ investor Michael Burry said the “market silliness” is back, famed fund manager Jeremy Grantham has issued a warning to “prepare for an epic finale” to the market cycle. He argues that the current “superbubble” in asset prices hasn’t deflated yet and appears to be dangerously close to its “final act.” Some have compared Grantham and Burry to “a broken clock” that is right twice a day, especially since they have been issuing “superbubble” warnings since the pandemic began, but the two have made serious money off bubbles in Japan in the late 1980s, the dot-com era and the U.S. housing market crash in 2008.

Quote: “One of those features is the bear-market rally after the initial derating stage of the decline but before the economy has clearly begun to deteriorate, as it always has when superbubbles burst,” Grantham wrote in a fresh research note. “This, in all three previous cases, recovered over half the market’s initial losses, luring unwary investors back just in time for the market to turn down again, only more viciously, and the economy to weaken. This summer’s rally has so far perfectly fit the pattern.”

“My bet is that we’re going to have a fairly tough time of it economically and financially before this is washed through the system. What I don’t know is: Does that get out of hand like it did in the ’30s, is it pretty well contained as it was in 2000, or is it somewhere in the middle? The U.S. stock market remains very expensive and an increase in inflation like the one this year has always hurt multiples, although more slowly than normal this time. But now the fundamentals have also started to deteriorate enormously and surprisingly: Between COVID in China, war in Europe, food and energy crises, record fiscal tightening, and more, the outlook is far grimmer than could have been foreseen in January.”

Outlook: Despite the warnings, an aggressive Fed tightening cycle and worries about the economy, most American retirement savers haven’t made changes to their portfolios. Only 5% of 401(k) and 403(b) investors shifted their asset allocations during the second quarter, according to Fidelity Investments, and the majority of those investors only made one switch to more conservative assets. Set it and forget it? Don’t time the market? (84 comments)

Today’s Economic Calendar
7:30 Challenger Job-Cut Report
8:30 Initial Jobless Claims
8:30 Productivity and Costs
9:45 PMI Manufacturing Index
10:00 ISM Manufacturing Index
10:00 Construction Spending
10:30 EIA Natural Gas Inventory
3:30 PM Fed’s Bostic Speech
4:30 PM Fed Balance Sheet

What else is happening…

Pfizer (PFE), Moderna (MRNA) win FDA nod for updated COVID boosters.

Snap (SNAP) logs best trading day since May on focused restructuring.

Report: Disney (DIS) is considering an Amazon-like membership program.

DC Attorney General sues Michael Saylor, MicroStrategy (MSTR) over taxes.

Nutanix (NTNX) jumps 20% postmarket on earnings beat, bright outlook.

3M (MMM) to eliminate jobs as part of broad cost-cutting push – Bloomberg.

Toyota (TM) investing $5.6B in EV battery production in U.S. and Japan.

—————

Good morning. Happy Wednesday.

The Asian/Pacific markets were mixed. South Korea and Taiwan did well; China and the Philippines were weak. Europe, Africa and the Middle East are currently mostly down. The UK, France, the UAE, South Africa, Norway, Spain, Italy, Portugal and Saudi Arabia are down; Russia is up. Futures in the States point towards a positive open for the cash market.

————— VIDEO –>> Managing Trades with Technical Indicators —————

The dollar is up. Oil and copper are down. Gold and silver are down. Bonds are down.

Stories/News from Seeking Alpha…

An all-time high

1 in 6 Americans are smoking marijuana these days, a new high in the latest Gallup poll, which highlights how the times are rapidly changing. Only 1 in 8 Americans were toking last year, and that drops down to 7% of the population when going back to 2013. The trend has picked up as recreational use of cannabis becomes legal in nearly half of all U.S. states (with 38 states approving it for medical purposes), supported by shifting attitudes and cultural trends of the American public.

Putting it in perspective: Nearly a third of adult respondents under the age of 35 told Gallup that they smoke marijuana, while nearly half (a total of 48%) of Americans have tried pot at some point in their lifetime. That’s up from 4% of the U.S. population that took a hit during the height of the hippie movement in 1969, 24% by 1977, 33% in 1985 and 38% in 2013. Another interesting find is that regular cannabis usage has surpassed cigarette use for the first time, with only 11% of Americans saying they smoke stoges in the poll conducted in July.

“The future of marijuana use is, I would say, somewhat up in the air, but the probability is higher that its use will increase rather than decrease,” wrote Gallup Senior Scientist Dr. Frank Newport. “Those who have tried marijuana are particularly likely to say marijuana has positive effects, and the majority of Americans are not convinced that marijuana use is harmful either for its users or for society. In contrast, it should be noted, some authorities argue that marijuana is quite dangerous, particularly for young adults, and it is possible that attitudes toward its use could change if focus on the downsides of marijuana increases in the years ahead.”

Legislative front: While Congress is looking to advance cannabis legislation at the federal level, there are still some strong headwinds to the measures being pitched on Capitol Hill. In July, the Cannabis Administration and Opportunity Act was introduced in the Senate to remove marijuana from the list of Schedule I controlled substances, but there are slim odds that the bill will pass. Back in April, the House also passed the Marijuana Opportunity Reinvestment and Expungement Act – which would erase prior marijuana convictions and conduct resentencing hearings – though the measure still needs approval in the Senate. (16 comments)

Oh Snap!

In an announcement likely to come later today, Snap (SNAP) will lay off about 20% of its workforce, according to The Verge. That would mean over 1,000 job cuts out of its more than 6,400 employees. Shares fell 6% in extended trading on the news, following an 80% slump this year as the company and rivals face a broad advertising slowdown.

Snapshot (no pun intended): The messaging app has faced serious headwinds in the current business environment, even telling shareholders that it wouldn’t offer specific guidance for the current quarter. It comes after a two-year expansion driven by pandemic lockdowns, with users spending more time on social media platforms. Rising interest rates have recently weighed on the tech sector and many in the industry have turned to cost-cutting measures to combat a wider economic slowdown.

The macroeconomic conditions have prompted advertisers slash their budgets, while Apple’s (AAPL) privacy changes have also made it harder to unleash successful targeted advertising campaigns. As part of the shakeup at Snap, executives Jeremi Gorman, chief business officer, and Peter Naylor, vice president of ad sales for the Americas, are jumping ship to Netflix (NFLX).

Mass layoffs: As it slashes 20% of its workforce, the deep cuts won’t land evenly. The company is eliminating staff that work on developing mini-apps and games inside Snapchat, as well as social mapping unit Zenly – and its hardware division, which works on Snap Spectacles and the recently shelved Pixy drone. (37 comments)

#ClimateAction

G20 climate ministers are meeting in Indonesia at a time that some say is more important than ever, while others consider it more of a reality check. Developed and developing nations have been upping their use of fossil fuels over the past year, given an energy crisis that was only exacerbated by the war in Ukraine. Environment representatives are hoping to reverse that trend, with the G20 accounting for nearly 80% of the globe’s economic output and greenhouse gas emissions, as well as two-thirds of the world’s population.

Quote: “It is our responsibility to be part of the solution. We build bridges, not walls,” Indonesia’s Siti Nurbaya said before today’s gathering, warning that a failure to work together would push the planet toward “unchartered territory,” or to a point “where no future will be sustainable.”

Team USA is being represented by John Kerry, who is serving in the newly created role of Special Presidential Envoy for Climate. He’ll be pushing for “enhanced cooperation on the climate crisis and highlight the positive climate impact of the Inflation Reduction Act.”

Go deeper: The media won’t have any access to any of the closed-door meetings in Bali, but expect a joint communique later on Wednesday. Ministers will discuss ways to prevent a 1.5 degree Celsius rise in global temperatures in line with the Paris Agreement, with a specific focus on a sustainable recovery, resource mobilization, and land-based and ocean-based climate action. They’ll all search for ways that developed countries can maintain their own climate commitments, as well as climate financing for developing nations. (5 comments)

Exxon dispute

It’s not so easy to ditch your assets in Russia these days, especially if you’re an energy company. That’s because Vladimir Putin has signed a decree barring companies from “unfriendly countries” from shifting control of their operations or divesting stakes at least through the end of 2022. Moscow uses the term “unfriendly” to refer to nations that have adopted sanctions in response to its invasion of Ukraine.

Exxon’s dilemma? The Western supermajor is trying to exit the country, specifically selling its 30% stake in the Sakhalin-1 venture in Russia’s Far East. It had previously hoped to invest billions of dollars in the project, which wasn’t covered by prior sanctions, but has since declared force majeure and reduced production from 220K to 10K barrels of oil and gas per day. Exxon (XOM) has also taken hefty writedowns, posting a $3.4B accounting charge related to its Russian exit in Q1.

However, with Putin’s decree inhibiting its rights and impeding its ability to safely exit the project’s operations, Exxon is taking its fight directly to the Kremlin. The company has threatened to sue the Kremlin, in a lawsuit that could move to international courts for arbitration and financial damages. While the step looks like a long shot, the key project is difficult to manage and is located in an inhospitable climate, meaning Exxon could have some leverage if it just throws away the keys.

Commentary: Exxon could benefit from Western sanctions on Russia, “as it now has a lifetime opportunity to increase its market share in various regions across the globe at Russia’s expense,” Bohdan Kucheriavyi writes in a newly published bullish analysis on Seeking Alpha. (48 comments)

Today’s Economic Calendar
7:00 MBA Mortgage Applications
8:00 Fed’s Mester Speech
8:15 ADP Jobs Report
9:45 Chicago PMI
10:00 State Street Investor Confidence Index
10:30 EIA Petroleum Inventories
3:00 PM Farm Prices
6:00 PM Fed’s Logan Speech
6:30 PM Fed’s Bostic Speech

What else is happening…

Eurozone CPI hits another record at 9.1% as food and energy soar.

What to watch for in Bed Bath & Beyond’s (BBBY) strategy update?

HP (HPQ) plummets after missing estimates, lowers earnings outlook.

U.S. home prices rise less than expected in June – Case-Shiller Index.

Recession odds now at 60%, UBS says; BofA turns to defensives.

Russia’s Gazprom (OTCPK:OGZPY) posts record profit, will pay dividends.

Musk files amendments seeking delay of Twitter (TWTR) trial to November.

Royal Caribbean (RCL) plans to roll out Starlink on all cruises.

Trump’s Truth Social (DWAC) barred from Google Play over moderation.

Key rate will need to be restrictive ‘for some time’ – NY Fed’s Williams.

—————

Good morning. Happy Tuesday.

The Asian/Pacific markets leaned up. Japan, South Korea, India, New Zealand, Malaysia and Thailand did well; China, Hong Kong and the Philippines were weak. Europe, Africa and the Middle East are doing well overall. Denmark, France, Turkey, Germany, Finland, Switzerland, Spain, Italy, Sweden and the Czech Republic are leading to the upside. Futures in the States point towards a moderately positive open for the cash market.

————— VIDEO –>> Using the AD Line to Determine Market Conditions —————

The dollar is down. Oil and copper are down. Gold and silver are down. Bonds are up.

Stories/News from Seeking Alpha…

Revving the QT engine

As the fallout from Jackson Hole continues to ripple through markets, investors have their eyes on more drama stemming from the central bank. The Federal Reserve this week is set to raise the throttle of its quantitative tightening (QT) program by picking up the pace at which it unwinds its balance sheet. The move is a stark reversal of pandemic-era bond buying, which saw the central bank nearly double its balance sheet to nearly $9T from $4.2T over the past two years.

Bigger picture: Unlike the large rate hikes being broadcast by the Fed – which have been quick to capture investor attention – QT is a more opaque way of tightening financial conditions. Note that the central bank is not selling its Treasury holdings outright, but is rather letting them mature to shrink its balance sheet. After an initial few months at a slower pace, monthly caps for offloading Treasuries and mortgage-backed securities are set to double to $60B and $35B, respectively, compared to the peak combined rate of $50B the last time the Fed trimmed its balance sheet in 2017-2019.

The whole thing is somewhat of a complicated accounting process, involving settlement windows and redemption caps, but at a basic level, it ultimately reduces the supply of bank reserves and drains money from the financial system. Some safety valves have been implemented this time around, like the Standing Repo Facility, after chaos in the repo market prompted an early end to the last QT program in 2019. The new facility will allow primary dealers to borrow more reserves from the Fed against high-quality collateral, but some caution it might not be enough to stave off liquidity issues, and could complicate Chair Powell’s plan to raise rates and bring inflation under control.

Commentary: “I don’t think there is appreciation for QT, by markets or the Fed,” said Solomon Tadesse, head of quantitative equities strategies North America at Societe Generale. “In the end, if QE mattered, so will QT. It might not be totally symmetrical, but there will be a meaningful impact.”

Home prices

The housing market comes into focus at 9 a.m. as the S&P CoreLogic Case-Shiller National Home Price Index reveals trends for the end of the second quarter. The data for June will highlight resales of single-family homes in 20 metropolitan regions across the nation at the start of the typically hot summer buying season. Many have recently weighed in on the industry, especially as the Fed continues its aggressive rate hiking cycle, though some say the fundamentals are still intact despite current volatility.

Quote: “We still will have, even for the deals that are under contract, a very high cancellation rate. It’s just hard to put deals together because the economy is [in] a remarkably uncertain time,” noted Redfin (NASDAQ:RDFN) CEO Glenn Kelman. “In 2007, we predicted there would be a crash. We were selling homes to people who couldn’t afford them, where they couldn’t even make the first mortgage payment. And that’s just not the case. Right now, there are trillions of dollars, and people who are buying homes have great credit scores.”

Average mortgage rates reached 5.2% in Q2, according to Fannie Mae, and while that represents a major increase from the 3.2% seen in the first week of January, it’s still low by historical standards. Furthermore, mortgage rates are projected to decline next year, easing back to an average of 4.5% in 2023.

Correction? Most of the worries in the housing market center around whether the U.S. plunges into recession. In that event, Moody’s Analytics forecasts that house prices will fall between 5%-10%, and in 183 overvalued areas, properties could crash 15%-20%. It comes as sales of new single-family homes slid to their lowest level in nearly seven years in July, tumbling 12.6% to a seasonally adjusted annual rate of 511K. (2 comments)

Pakistan bailout

Trouble is brewing in Pakistan, though the nation has been able to secure some help from the International Monetary Fund. The worst monsoon rains in decades have flooded the country, with nearly a third of Pakistan underwater, countless homes washed away and crucial farmland destroyed. The flooding has even killed more than 1,000 people, and affected more than 33M – or one in seven Pakistanis – according to the National Disaster Management Authority.

Snapshot: The natural disaster has weighed on Pakistan’s economic outlook, which is already suffering from severe inflation and a political crisis. Skyrocketing prices for food and fuel saw inflation reach 45% last week, while the rupee hits record lows against the dollar and forex reserves erode. Adding to the instability, Prime Minister Shehbaz Sharif recently took over from arch-rival Imran Khan, who was ousted in April, though fresh elections must be held by the second half of next year.

The latest IMF program, one of a dozen since the 1980s, had stalled multiple times under the Khan government, which opposed unpopular loan conditions like austerity measures. However, the Washington-based institution has changed its stance in recent months, with Sharif’s government reversing energy subsidies and imposing fresh taxes. A fresh tranche of $1.1B was released late Monday, while the nation’s bailout package was increased to $6.5B.

Outlook: Many economists have warned that Sri Lanka could have been the first domino to fall in a global economic crisis set to envelop many poorly-managed developing countries. While Pakistan seems to have avoided a default threat, things could come back to bite if it fails to implement corrective policies and reforms that remain essential for economic stability. Other South Asia countries like Bangladesh and Nepal are also struggling, and any missteps could spell trouble across the emerging markets.

Airline bookings

U.S. airline sales took a sizable step back during the last week of data tracked by Bank of America, and the team thinks that if the booking softness is not reversed in the next couple of weeks, it would indicate more of an underlying demand problem and create risk to the current outlooks for Q3.

Statistics: Bookings were down -23.6% vs. the level seen in 2019 for the week ending August 21 compared to the prior week’s level of -9.3%. System volume was down 23.5% vs. 2019 and pricing edged 0.1% lower vs. the pre-pandemic level.

“We typically only see this type of weekly change around holidays, so the change is surprising,” noted BofA analyst Andrew Didora. “The only comp issue we have found is that in 2019 Hurricane Dorian was approaching the US at the end of August, which could have pulled forward some bookings.”

On watch: American Airlines (AAL), Delta (DAL), Southwest (LUV), United (UAL), JetBlue (JBLU), Spirit (SAVE), Hawaiian Holdings (HA), Alaska Air (ALK), Allegiant Travel (ALGT), Mesa Airlines (MESA), SkyWest (SKYW), Sun Country Airlines (SNCY) and Frontier Group (ULCC). (60 comments)

Today’s Economic Calendar
8:00 Fed’s Barkin Speech
9:00 S&P CoreLogic Case-Shiller Home Price Index
9:00 FHFA House Price Index
10:00 Consumer Confidence
10:00 Job Openings and Labor Turnover Survey
11:00 Fed’s Williams Speech

What else is happening…

Engine trouble: NASA cancels launch of Artemis I moon rocket.

Tesla (TSLA) aims for self-driving vehicle approval by end of 2022.

Elon Musk files subpoena of Twitter (TWTR) whistleblower.

YouTube’s (GOOGL) chief business officer to exit after 12 years.

Monetization: Meta (META) launching grocery delivery inside WhatsApp.

Trump SPAC (DWAC) continues to fall as extension vote approaches.

Goldman says buy commodities as markets overestimate recession risk.

Canada invokes treaty with U.S. to defend Enbridge’s (ENB) Line 5.

Navient (NAVI) in the spotlight amid student loan forgiveness – Credit Suisse.

Powell doesn’t understand what’s causing inflation – Johns Hopkins’ Steve Hanke.

—————

Good morning. Happy Monday. Hope you had a good weekend.

The Asian/Pacific markets were weak. Japan, Hong Kong, South Korea, India, Taiwan, Australia, New Zealand and Thailand posted relatively big losses. Europe, Africa and the Middle East are very weak. Russia is up, but Denmark, Poland, France, the UAE, Greece, South Africa, Finland, Norway, Hungary, Portugal, Austria, Sweden and the Czech Republic are down 1% or more. Futures in the States point towards a relatively big gap down open for the cash market.

————— VIDEO –>> Using the AD Line to Determine Market Conditions —————

The dollar is down. Oil is up; copper is down. Gold and silver are down. Bonds are down.

Stories/News from Seeking Alpha…

The new Volcker

The economic symposium down in Jackson Hole was about as hawkish as investors could have expected, sending markets into a tailspin on Friday. All three major averages slumped between 3%-4%, sending risk-off signals to other sectors and asset classes (Bitcoin fell below $20K for the first time since early July). Sentiment may remain dented in the week ahead, or stay at somewhat of a standstill until the release of fresh market data (home prices on Tuesday and the jobs report on Friday). U.S. stock futures: Dow -0.9%; S&P 500 -1.1%; Nasdaq -1.3%.

No doves here: Going into Jackson Hole, there were some hopes that the Fed would telegraph a “pivot” on its aggressive policy tightening, but Chair Jerome Powell shot down any such intentions. “Restoring price stability will take some time and is likely to require a sustained period of below-trend growth and softer labor market conditions,” he told the conference, adding that the road ahead would “bring some pain to households and businesses.” It’s a clear message that the central bank is willing to forego any economic gains made during the pandemic, and possibly a soft landing, in order to ensure that inflation doesn’t get out of control.

“July’s increase in the target range was the second 75-basis-point increase in as many meetings and I said then that another unusually large increase could be appropriate at our next meeting,” Powell continued. “We are now about halfway through the intermeeting period. Our decision at the September meeting will depend on the totality of the incoming data and the evolving outlook. At some point, as the stance of monetary policy tightens further, it likely will become appropriate to slow the pace of increases.”

Is Powell the new Paul Volcker? In his speech, the Chair referenced the famous inflation slayer of the 1980s, saying part of the equation in anchoring price stability was to also break the grip on inflationary expectations. As pressures become more entrenched, more people expect them to remain high, and factor them into their wage and price decisions. “A lengthy period of very restrictive monetary policy was ultimately needed to stem the high inflation in the early 1980s… after multiple failed attempts over the previous 15 years… and our aim is to avoid that outcome by acting with resolve now.” (15 comments)

To the moon!

NASA is looking to recapture some attention this morning, when its new moon rocket – known as the Space Launch System – makes its debut at the Kennedy Space Center in Cape Canaveral. The 38-story-tall rocket packs 8.8M pounds of thrust, and carries a capsule named Orion, which will go on a journey around the moon and test a new heat shield as it re-enters Earth’s atmosphere. The mission, known as Artemis I, has been nearly a decade in the making, costing a whopping $4.1B after a series of technical, legal and cost-related delays (the entire Artemis program is budgeted at $93B from 2012-2025).

Bigger picture: The goal here is to create a long-term presence on the Moon, which will provide enough momentum (and funding) for sending earthlings to Mars. If all goes well with the mission, astronauts could strap in as soon as 2024 for a loop around the moon, with NASA aiming to land two people on the lunar surface by the end of 2025. More landings would follow, in addition to a small space station that would have a lunar orbit, and by 2030, NASA hopes to have built a habitat on the moon that would be complete with rovers and hospitable infrastructure.

Compared with the space race of the 1960s, this time around, NASA’s competition is in the form of private industry. Elon Musk’s SpaceX (SPACE) is also constructing a powerful rocket called Starship, that is fully reusable, and is designed to launch people toward the moon and Mars. However, NASA also needs Starship to prove itself, as the Artemis program calls for a moon lander that will need help from Starship rockets to reach lunar orbit.

For investors: Many publicly traded companies are involved in the SLS program, including a booster built by Northrop Grumman (NOC), RS-25 engines made by Aerojet Rocketdyne (AJRD) and core/upper stages and avionics manufactured by Boeing (BA). SLS also intends to carry astronauts inside the Orion capsule built by Lockheed Martin (LMT). Smaller contractors are additionally involved with component manufacturing, such as Redwire (RDW), Aeva Technologies (AEVA) and KULR Technology Group (KULR). (68 comments)

Meta settlement

Facebook parent Meta Platforms (META) has reached an undisclosed settlement in a class-action lawsuit filed over the infamous Cambridge Analytica scandal. The episode saw the U.K. consulting firm harvest up to 87M Facebook users’ data for use in political ad campaigns. The two sides provided no details about the settlement, although some had speculated that META could face hundreds of millions of dollars in damages if it lost the suit.

Backdrop: Word broke in 2018 that Cambridge Analytica used an online quiz to collect a whole slew of personal information – not only on people who took the poll, but users’ public profiles, Web pages they had liked and more. The company allegedly used the data to help clients like the 2016 presidential campaigns of Donald Trump and Texas Republican Sen. Ted Cruz target online ads. Some suspect the company provided further info to the successful 2016 pro-Brexit campaign in Britain, though the official probe found that the company was not involved “beyond some initial inquiries.”

Facebook’s stock lost nearly $120B in market cap in the days after the scandal became public, and the company eventually paid a $5B fine to the U.S. Federal Trade Commission. The social-media giant also agreed as part of an FTC settlement to impose stronger protections on users’ data, while Zuckerberg had to testify before Congress about the scandal, and took out full-page newspaper ads to apologize to Facebook users.

Go deeper: The latest settlement comes just weeks before the plaintiffs’ lawyers expected to subject Meta CEO Mark Zuckerberg to a six-hour deposition, and former company COO Sheryl Sandberg to five hours of questioning. As for Cambridge Analytica, the firm eventually declared bankruptcy in the United States and went out of business. (17 comments)

U.S.-China audit deal

Chinese tech stocks, including Alibaba (BABA), JD.com (JD) and Baidu (BIDU), gave up their gains on Friday, and are slipping again premarket, despite an agreement to let American auditors access to New York-listed Chinese firms. The preliminary deal was signed off by the SEC, the Public Company Accounting Oversight Board (PCAOB), the China Securities Regulatory Commission and the Ministry of Finance of the People’s Republic of China. According to the PCAOB, inspectors can already be on the ground by the middle of next month to begin inspections.

Movement: The reversal appeared to be attributed to comments from Fed Chair Jay Powell, who spoke at the Jackson Hole Symposium in Wyoming, but the statement is only a first step, and U.S. regulators still remain cautious about the deal’s enforcement.

“Make no mistake. The proof will be in the pudding,” SEC Chairman Gary Gensler declared. “This agreement will be meaningful only if the PCAOB actually can inspect and investigate completely audit firms in China. If it cannot, roughly 200 China-based issuers will face prohibitions on trading of their securities in the U.S. if they continue to use those audit firms.”

Flashback: Congress passed the Holding Foreign Companies Accountable Act in 2020, which would kick foreign companies off American stock exchanges if they failed to comply with U.S. auditing standards for three years in a row. The rules also mandated that firms prove to the SEC they are not owned or controlled by an entity of a foreign government and to name any board members who are Chinese Communist Party officials. As part of the agreement, the PCAOB has “sole discretion” to select the firms, perform the audits and levy potential violations during its investigation, with no consultation or input from China. Let’s see if it happens. (67 comments)

Today’s Economic Calendar
10:30 Dallas Fed Manufacturing Survey
2:15 PM Fed’s Brainard Speech

What else is happening…

Updated COVID shots are set for U.S. rollout without human data.

Pfizer (PFE) sees $10B+ market for RSV vaccines with two-prong approach.

Ford (F) reopens Mustang Mach-E orders in the U.S. with higher pricing.

Dell (DELL) shutters Russian operations following August office closures.

Netflix (NFLX) eyes $7-$9 per month price for ad-supported video plan.

Abbott (ABT) resumes Similac baby formula production at Michigan plant.

U.S. threatens refiners on fuel exports, urges buildup of domestic stocks.

Exxon (XOM) to sell Arkansas shale gas assets to Flywheel Energy.

Consensus on bank deposits likely too high in QT environment – Evercore.

—————

Leave a Reply