Good morning. Happy Friday.
The Asian/Pacific markets were on different pages. China and Hong Kong posted big gains. South Korea and Malaysia did well; Japan was weak. Europe, Africa and the Middle East are currently up big. The UK, Poland, France, Germany, Turkey, South Africa, Finland, Norway, Hungary, the Netherlands, Italy, Austria, the Czech Republic and Sweden are up 1% or more. Futures in the States point towards a moderate gap up open for the cash market.
————— Masterclass Overview –>> here —————
The dollar is down. Oil and copper are up. Gold and silver are up. Bonds are down.
Stories/News from Seeking Alpha…
Jobs day
Market participants will get more data on the state of U.S. employment today as the Department of Labor issues its Summary of the Employment Situation, commonly known as the monthly jobs report. The number of Americans working is important because the Federal Reserve pays close attention to the figure when setting monetary policy, and has only been growing in its aggressiveness. As the central bank ratchets up interest rates in an effort to suppress demand and tame inflation, job growth has been remarkably resilient, which has kept the Fed confident in its rate-raising campaign.
By the numbers: Nonfarm payrolls are expected to increase about 200K in October, down from the 263K jobs added in September, but still a strong level of growth. The unemployment rate is forecast to tick up to 3.6% from 3.5% in September, a 50-year low, while the labor force participation rate is projected to be unchanged at 62.3%. Average hourly wages are expected to rise 0.3% from September’s $32.46, bringing the average hourly wage to $32.56 in October (on a Y/Y basis, wages would increase 4.7%, slowing from the 5.0% increase in September).
“We’re seeing many macroeconomic signs of the strength of the U.S. economy with strong labor force numbers and signs of GDP growth,” said Giacomo Santangelo, economist at employment website Monster. “As a result, the Fed will likely be further emboldened to continue their aggressive inflation fight and stay the course with their monetary contraction.”
Go deeper: Keep an eye on job growth by sector, like if leisure and hospitality held on to seasonal hires after Labor Day. Another sector to watch will be construction, with home sales likely contracting as mortgage rates surge, as well as other interest rate-sensitive industries like financial services. Hurricane Ian is also expected to have put a small dent in payrolls, with the effects of the storm sidelining some workers in mid-October. (3 comments)
Recession guaranteed
The Bank of England boosted interest rates on Thursday with the largest hike in over three decades. When the dust settled, the BoE’s Monetary Policy Committee raised its benchmark rate by 75 basis points to a 14-year high of 3% as it attempts to combat unrelenting inflation. However, the pound weakened against the dollar on the news, while U.K. government bonds sold off, as the central bank declared it would hike rates by less than the market has anticipated.
Quote: “It is a tough road ahead,” Bank of England Governor Andrew Bailey said at a news conference. “The sharp rise in energy prices has made us poorer as a nation… The rates on new fixed-term mortgages should not need to rise as they have done… Further increases in Bank Rate may be required for a sustainable return of inflation to target, albeit to a peak lower than priced into financial markets.”
In contrast to the Federal Reserve, which said this week that the “ultimate level of interest rates will be higher than previously expected,” the BoE does not have as much leverage in terms of aggressive monetary policy. An example of this is the short-term fixed-rate mortgages that are prevalent in the U.K., which will bite consumers hard if they have to keep renewing them at steeper rates. About 2M of these mortgages are set to be rolled over in 2023, so this could cause some real pain for an economy that’s already trying to deal with a government budget shortfall of around £50B.
Hard landing: Even if interest rates remain steady, the Bank of England predicted a recession, which would likely continue until the end of 2023. Things would be worse if rates were raised to a level expected by U.K. financial markets, or a peak of 5.25% late next year. That would cause the economy to contract 1.5% in 2023 and another 1% in 2024, while causing unemployment to rise to 6.5% by the end of 2025 and mark the longest U.K. recession since records began in the 1920s. (21 comments)
More pain to come?
The economic landscape is not looking better elsewhere. Tech giants are slamming the brakes on hiring and laying off workers amid higher interest rates and growing concerns over consumer spending. It’s a stark downshift following years of investment in turbocharged growth stocks, as companies go into cost-cutting drive and prepare for the worst.
Latest examples: Amazon (AMZN) is pausing new incremental hires in its corporate workforce, while Apple (AAPL) has tapped the brakes on hiring for positions that aren’t in research and development. Meanwhile, payments startup Stripe (STRIP) plans to cut more than 1,000 jobs to prepare for “leaner times,” and Lyft (LYFT) is laying off 13% of its workforce (marking the ride-sharing firm’s second round of layoffs since July). Don’t forget Twitter, which is poised to axe up to half of its workforce today after Elon Musk took the reins of the social media platform.
“Negative productivity can be hidden when everything is going great,” noted Mark Stoeckle, CEO of investment firm Adams Funds. “It is easier to protect your margins when revenues are going up, but when they are stopping or going up slower, then you have to look at where you are spending your money.”
Dire warning: “Predictions of how much stock, bond and real estate prices are likely to fall, top to bottom, and whether a mild or severe recession is likely, miss the point. The point is that an extraordinary confluence of extremes and problems have made possible a set of outcomes that would be at or beyond the boundaries of the entire post-WWII period,” hedge fund giant Elliott wrote in a letter to clients. The firm founded by Paul Singer is cautious about looking for further easing of financial conditions with a Fed pivot, saying only a severe recession can cut inflation. “The world is on the path to hyperinflation, which is the direct route to global societal collapse and civil or international strife. It is not baked, but that is the path that we are treading. Investors should not assume that they have ‘seen everything’ on account of experiencing the 1973 to 1974 bear market and oil embargo, the 1987 crash, the dot-com crash, or the 2007 to 2008 GFC.” (54 comments)
Price caps
There have been some intense negotiations in recent weeks surrounding the implementation of a price cap on Russian sea-borne crude and refined products. The move, scheduled to take effect on Dec. 5 – alongside a forthcoming round of EU sanctions – is intended to curb the flow of oil revenues to Moscow’s war machine. A careful and measured approach will need to be followed (that’s why things have taken so long), with any missteps threatening to take more energy supply offline and compound problems with inflation.
Snapshot: The U.S. and its allies hope to 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 is to limit the usage of U.S. financial services that could benefit from the scheme, but many are worried about its effectiveness, with some big Russian buyers like China and India already paying for products in currencies other than the dollar.
So far, the parties involved intend to set a price cap on Russian crude at a fixed level, rather than a floating one that moves with benchmarks like Brent and WTI. While it’s not yet clear at what level the cap will be set, U.S. officials have signaled that any price should be above $60 a barrel, or high enough to cover production costs and encourage more output. The cap will also be reviewed regularly and could be changed by the coalition, which is made up of G7 nations and Australia.
Will it work? Months of discussions show that the allies think so, but skepticism is rife elsewhere. Vladimir Putin has said that Russian companies won’t sell to countries that are backing the cap, triggering fears that the decision could further tighten global crude supply. Moscow may also skirt the plan with shadow fleets and subpar insurance, and as mentioned above, major Russian importers have given little indication they will comply with the cap. “All it’s going to do is reroute oil… and make life difficult for everyone else, which is what is happening right now anyway,” said Daniel Ahn, a former deputy chief economist at the U.S. State Department.
Today’s Economic Calendar
8:30 Non-farm payrolls
1:00 PM Baker-Hughes Rig Count
What else is happening…
Block (SQ) surges after Cash App, Square drive big Q3 beat.
PayPal (PYPL) slides on soft guidance for new active accounts.
Kellogg (K) raises outlook; worries remain over ‘severe cost pressures.’
Washington state wins court order blocking Albertsons (ACI) dividend.
Starbucks (SBUX) comparable sales tops estimates on strong pricing.
Teva Pharmaceutical (TEVA) set to replace CEO Kare Schultz.
Coinbase (COIN) results miss, but helped by higher interest income.
Twilio (TWLO) plunges as weak Q4 guidance shakes investors.
Petrobras (PBR) to pay out $8.5B in dividends, but future uncertain.
Should SpaceX (SPACE) buy Boeing (BA)? One investor says ‘yes.’
—————
Good morning. Happy Thursday.
The Asian/Pacific markets posted solid losses. Hong Kong, South Korea, Australia, New Zealand, Malaysia, Singapore and the Philippines posted the biggest losses. Europe, Africa and the Middle East are currently down big. Poland, France, Germany, Russia, Greece, South Africa, Switzerland, the Netherlands, Italy, Portugal, Israel and Sweden are down 1% or more. Futures in the States point towards a moderate gap down open for the cash market.
————— Masterclass Overview –>> here —————
The dollar is up huge. Oil is up; copper is down. Gold and silver are down. Bonds are down.
Stories/News from Seeking Alpha…
No pivot yet
Investors need some time off after a topsy-turvy year, but things may not be better at the local amusement park. Fed Chair Jay Powell took the market on another rollercoaster on Wednesday, with a series of loop-the-loops aboard a ride known as the Dove-Hawk Twister. When all was said and done, the Dow dropped 500 points, while the S&P 500 and Nasdaq slumped 2.5% and 3.6%, respectively, after initially soaring on the Fed’s announcement (that came along with a 75 bps rate hike).
Steep turns: “With the lags between policy and economic activity, there’s a lot of uncertainty, so that we note that in determining the pace of future increases will take into account the cumulative tightening of monetary policy, as well as the lags with which monetary policy affects economic activity and inflation… that’s why I’ve said at the last two press conferences that at some point it will become appropriate to slow the pace of increases. So that time is coming, and it may come as soon as the next meeting or the one after that.”
“We may ultimately move to higher levels than we thought at the time of the September meeting. The incoming data since our last meeting suggests the ultimate level of interest rates will be higher than previously expected. The risks are asymmetric. If the Fed does too much, it can cut. If it doesn’t tighten enough, then you’re in real trouble… It is very premature to be thinking about pausing… We think we have a ways to go.”
Bottom line: Powell and Co. will be watching the data and evolving market conditions before making any significant pivot. The Non-Farm Payrolls report for October is out tomorrow, followed by the Consumer Price Index on Nov. 10, and Personal Consumption Expenditures on Dec. 1. The latter is the Fed’s preferred measurement for inflation as it captures changes in consumer behavior and has a broader scope than the CPI. Global macro events will also be considered like Russia’s war against Ukraine and the effects of China’s zero-COVID policy. (78 comments)
Radical reduction
In a bid to drive down costs, Elon Musk plans to eliminate 50% of Twitter (TWTR) workforce today, which would result in nearly 3,700 layoffs, according to Bloomberg. The platform’s work-from-anywhere policy would also be rescinded, with most of the remaining employees required to report to the office. In one scenario being considered, laid-off workers will be offered 60 days’ worth of severance pay as Musk looks to gut a business for which he says he overpaid (the transaction valued Twitter at $44B).
Snapshot: A series of layoffs started as soon as Musk took over the social media company, including CEO Parag Agrawal, finance chief Ned Segal and senior legal staffers Vijaya Gadde and Sean Edgett. In the days that followed, other departures have included Chief Marketing Officer Leslie Berland, Chief Customer Officer Sarah Personette, and Jean-Philippe Maheu, vice president of global client solutions. After the layoffs were sorted, Twitter Chief Accounting Officer Robert Kaiden reportedly left the company, becoming one of the last pre-Musk C-suite executives to depart.
In recent weeks, Musk has started hinting at his staffing priorities, saying he wants to focus on the core product. “Software engineering, server operations & design will rule the roost,” he tweeted in early October. On the product side, the company will soon start charging $8-a-month for verification, which includes badges, and could go live as early as Monday. Reports suggest that users who already have a blue check will have a multi-month grace period before they will either need to pay for the badge or lose it.
Not alone: In October, Meta Platforms (META) announced that it was eliminating 15% of its staff, or approximately 12,000 employees at Facebook, to slash its headcount as global headwinds and falling ad spends pose serious problems. In August, Snap (SNAP), the maker of the ephemeral messaging app Snapchat, laid off 20% of its workforce. (26 comments)
Grain deal
Russia has agreed to return to a Turkish and U.N. brokered agreement that allowed the shipment of millions of tons of Ukrainian grain through the Black Sea. It had previously pulled out of the deal following an alleged Ukrainian drone attack in Crimea over the weekend. Moscow now says “written assurances” from Kyiv guarantee that it would not use the humanitarian maritime corridor for military purposes, so the shipments could continue unobstructed.
Market movement: Wheat futures plunged in the U.S. and Europe on Wednesday, as well as other commodities. On the Chicago Board of Trade, wheat for December delivery (W_1:COM) settled down 6.3% to $8.46 per bushel, and December corn (C_1:COM) closed off 1.5% to $6.87 a bushel. The benchmark December contract on Euronext also settled 4.6% lower to €341.25/metric ton.
There’s been some debate over how much leverage Russia’s Vladimir Putin really holds over the deal, with the grain shipments continuing on Monday and Tuesday (and a one day interruption on Wednesday). Some say that the parties involved could push ahead despite Moscow’s objections, though others feel that it would be hard to ink shipping and insurance contracts to underwrite the voyages. Whatever the case may be, Putin will likely try to gain additional leverage ahead of the deal’s original expiration date of Nov. 19, and before the upcoming G20 Summit in Bali.
Stats: Over the past two months, more than 400 ships departing Ukraine exported 9.9M metric tons of corn, wheat, sunflower products, barley, rapeseed and soy under the Black Sea Grain Initiative. (14 comments)
King Cook
What a difference one year can make. Apple (AAPL) closed out Wednesday’s session with a market capitalization of $2.307T, making it more valuable than Alphabet (GOOG, GOOGL), Amazon (AMZN) and Meta (META) combined (worth a total of $2.306T). The latter group even started 2022 worth $4.410T, compared to the valuation of the iPhone maker at $2.913T.
Free cash flow: “Take a look at last quarter. Apple FCF: $20 billion, Google FCF: $16 billion, Meta FCF: $0.3 billion, Amazon FCF: -$5 billion,” tweeted financial YouTuber Joseph Carlson, who first pointed out the comparison. “Now of course one quarter doesn’t paint the full picture. But Apple is posting massive FCF like clockwork. The others are not.”
The four companies also reported earnings last week and only Apple’s results were met with a positive market reaction. Macs selling at a record pace outweighed a slight miss on iPhone sales, while the Tim Cook-led firm beat estimates on both the top and bottom lines. Weak growth, some misses and downbeat forecasts weighed on the other tech giants, while many are worried about Meta’s experimental pivot to a digital avatar-filled universe given its lack of regard to spending as the business burns billions.
Commentary: “Perhaps it’s investor expectations, demanding perfection across complicated conglomerates,” wrote Mark Shmulik, senior internet analyst at Bernstein, following the quarterly figures last week. “Or maybe Internet mega-caps are a lot less agile than we thought and [are] either unable or unwilling to adapt to a changing operating environment. What if it’s just structural and Internet incumbents need to spend an ever-increasing amount of capital in their mature years to keep competitors at bay? All the above.” (36 comments)
Today’s Economic Calendar
7:30 Challenger Job-Cut Report
8:30 Goods and Services Trade
8:30 Initial Jobless Claims
8:30 Productivity and Costs
9:45 PMI Composite Final
10:00 Factory Orders
10:00 ISM Service Index
10:30 EIA Natural Gas Inventory
4:30 PM Fed Balance Sheet
What else is happening…
Bank of England poised for biggest rate hike in three decades.
Annual inflation in Turkey rises to new 24-year high of 85%.
Etsy (ETSY) surges on revenue beat, strong sales forecast.
Qualcomm (QCOM) takes hit with more handset weakness ahead.
Boeing (BA) updates investors on higher free cash flow.
Dividend star Devon Energy (DVN) plunges after payout cut.
Roku (ROKU) slides 16% on heavier loss, downbeat Q4 forecast.
Tesla (TSLA) shuts down its first showroom in China – Reuters.
CVS (CVS) raises guidance even as opioid charges trigger Q3 loss.
Robinhood (HOOD) gains on positive adjusted EBITDA, lower cost guidance.
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Good morning. Happy Wednesday. Happy Fed Day.
The Asian/Pacific markets were mixed. China and Hong Kong did well; Indonesia was weak. Europe, Africa and the Middle East are currently mixed and little changed. Denmark and Poland are up the most. Futures in the States point towards a down up open for the cash market.
————— Masterclass Overview –>> here —————
The dollar is down. Oil and copper are down. Gold and silver are up. Bonds are up.
Stories/News from Seeking Alpha…
The next chapter
Another jumbo rate hike from the Fed is on tap this afternoon, with the central bank likely to announce its fourth 75 basis point move of the year. The hikes have so far added 3 percentage points to the federal funds rate in 2022 (which now ranges between 3.00% to 3.25%) and an increase today would bring it close to the 4-point mark that was last delivered in 1979 and 1980. The Fed is also predicted to announce another hefty increase in December to set a new record, though many are debating whether it will signal a downshift in its aggressiveness.
Bigger picture: Traders are divided whether a 75-bps rate hike or a 50-bps boost will happen next month, so pay attention to Jay Powell’s press conference at 2:30 p.m. ET. Strong household balance sheets, which have higher savings due to the government’s pandemic relief programs, may instead lead the central bankers to stay on their current aggressive rate path, resulting in a higher terminal rate than had been previously anticipated. On the other hand, weakening labor demand, declining rents, and an earnings season that is showing signs of fragility could provide early signs that the economy is weakening, and cause the central bank to tap the brakes.
A recent Seeking Alpha survey explores whether the Fed pivot will be real this time around. About 75% of participants found that “the hawks still rule,” while only 25% feel that “smaller hikes are in view.” We want to hear what you think, with only a day left to go in the poll. Vote here!
Go deeper: Besides a bigger pace of rate hikes weighing on stock market sentiment, and hopes of monetary easing supporting valuations, the coming Fed decision will impact many key areas of the broader economy. Mortgage rates will be sensitive to any outcome, as well as car loans and credit cards, making it much more expensive or cheaper to borrow cash. However, the hikes do not have a similar impact on the supply side, an area the Fed has largely attributed to soaring gas and food costs, and which are likely to tick up again when the Consumer Price Index is reported next Thursday. (32 comments)
‘Dark clouds on the horizon’
With a mixed bag of economic data only getting more muddled, investors are looking to more specific indicators to assess the health of the overall economy. A.P. Moeller-Maersk (OTCPK:AMKBY), one of the world’s biggest shipping companies, is out with its quarterly earnings, which are widely seen as a barometer for global trade and the supply chain. The Danish firm controls about one-sixth of the world’s container shipping industry, with offices across 130 countries and more than 100K employees worldwide.
By the numbers: Earnings before interest, tax, depreciation and amortization (EBITDA) soared 60% Y/Y to $10.9B, coming in above consensus estimates of $9.8B. The “exceptional results” were driven by significantly higher ocean freight rates, as well as shipments on routes from Asia to Europe and to North America. Shares of Maersk still tumbled nearly 5% in Copenhagen as worries over shipping rates and volumes sunk the shipper’s outlook.
“It is clear that freight rates have peaked and started to normalize during the quarter, driven by both decreasing demand and easing of supply chain congestion. As anticipated all year, earnings in Ocean will come down in the coming periods,” CEO Søren Skou said in a statement. Global container demand is estimated to contract between 2% and 4% in 2022, down from a previous projection of +1% to -1%, though Maersk confirmed full-year guidance for underlying EBITDA of around $37B and a free cash flow above $24B.
Additional worries: “With the war in Ukraine, an energy crisis in Europe, high inflation, and a looming global recession there are plenty of dark clouds on the horizon. This weighs on consumer purchasing power which in turn impacts global transportation and logistics demand. While we expect a slow-down of the global economy to lead to a softer market in Ocean, we will continue to pursue the growth opportunities within our Logistics business. As a trusted partner, we are ready to support our customers in rethinking their supply chain needs through what is likely to be a period of a more volatile business environment.” (7 comments)
Heart pumps
Looking to boost growth at its medical devices unit, Johnson & Johnson (JNJ) has agreed to acquire cardiac pump maker Abiomed (ABMD) for an upfront payment of $380 per share, or a total of $16.6B (including debt and cash). An additional $35 per share will be paid if certain sales and regulatory clearance milestones are reached. Abiomed’s stock skyrocketed on the news, surging nearly 50% over the session to close at $378.82 on Tuesday.
Bigger picture: The deal comes ahead of J&J’s planned spinoff of its consumer health business, which sells Tylenol and Band-Aids, into a standalone company in 2023. It will leave J&J more focused on its two remaining divisions, pharmaceuticals and medical devices. Abiomed’s fast-growing Impella device, billed as the world’s smallest heart pump, could provide a boost to the latter unit, with the device used to treat conditions ranging from a heart attack and failure to clogged arteries.
“This acquisition is consistent with that strategy, expanding J&J med tech into high-growth markets, and accelerating revenue growth while advancing the standard of care,” CEO Joaquin Duato declared.
Go deeper: J&J is not tightly integrating Abiomed into the rest of its business, and it will operate as a separate entity within its MedTech division. The deal is expected to accelerate its near- and long-term sales growth, and will be slightly dilutive to neutral to its adjusted earnings per share in the first year due to financing impact, but the pharma giant projects the transaction will add nearly $0.05 in 2024 before becoming increasingly accretive thereafter. (28 comments)
Call me I bond
One of the most touted investments of the inflation era is in the spotlight after a profound rate reset. Series I savings bonds – better known as I bonds – have been offering some really attractive returns, especially with stocks and other bonds in the doldrums in 2022. I bond pricing is determined by a formula based on changes to the Consumer Price Index and re-adjusts every six months.
Snapshot: Those who bought I bonds from May through the end of October were awarded with an annualized rate of 9.62%. A purchase of $1,000 would have yielded $48 over six months, and that could be rolled into more I bonds over the next period to compound the return. The I bond rate reset yesterday to 6.89% – which is still a great return in the current environment – though many rushed to score more bonds before the Oct. 28 deadline.
In fact, the U.S. Department of the Treasury sold a record of $979M of Series I bonds on Friday, scooping up more I bonds in one day than was purchased during the entire three years from 2018 to 2020. Investors even opened 95,482 new accounts on Friday and ended up crashing the TreasuryDirect.gov website. They also bought more than $3B of I bonds last week and nearly $7B in October, resulting in new weekly and monthly records.
Fine print: Individuals can buy up to $10,000 of I bonds each calendar year, plus an extra $5,000 in paper bonds if they are designated as a federal tax refund. The only caveat is that buyers are locked into their purchase for a full calendar year, and if they are redeemed between one and five years, a penalty equal to three months of interest is applied. I bonds can also be gifted to others, as long as recipients have their own accounts and have not gone over their limit threshold.
Today’s Economic Calendar
Auto Sales
7:00 MBA Mortgage Applications
8:15 ADP Jobs Report
10:30 EIA Petroleum Inventories
2:00 PM FOMC Announcement
2:30 PM Jerome Powell Speech
What else is happening…
AMD’s (AMD) revenue outlook gives the chipmaker a lift.
Airbnb (ABNB) slumps on signal of slowing post-pandemic bookings.
Social media gets bump as FCC member urges TikTok ban.
CVS (CVS) and others said to reach $12B opioid settlement.
Uber (UBER): We feel tailwinds in 2023 as consumer remains strong.
SoFi (SOFI) climbs after record quarterly numbers, guidance boost.
Israel election: Netanyahu appears to edge towards victory.
Higher political ad revenues lead to strong profits at Fox (FOX).
Pfizer (PFE) raises outlook even as COVID vaccine sales drop 66%.
Energy Transfer (ET) lifts profit forecast as natgas transport surges.
Walmart (WMT) takes aim at Amazon (AMZN) with half-off subscription deal.
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Good morning. Happy Tuesday.
The Asian/Pacific markets leaned up and were not on the same page. China and Hong Kong posted huge gains. South Korea, Australia, Singapore and Thailand did well, while Malaysia and Indonesia were weak. Europe, Africa and the Middle East are currently doing great. The UK, France, Turkey, Germany, South Africa, Finland, Norway, Spain, the Netherlands, Italy, Portugal, Sweden and Austria are up more than 1%. Only Saudi Arabia is down much. Futures in the States point towards a big gap up open for the cash market.
————— Masterclass Overview –>> here —————
The dollar is down. Oil and copper are up. Gold and silver are up. Bonds are up.
Stories/News from Seeking Alpha…
Windfall tax?
BP (NYSE:BP) has become the last of the Big Oil majors to report earnings, and the quarterly report is again getting controversial. Underlying replacement cost profit, used as a proxy for net profit, came in at $8.2B in the third quarter, up from $3.3B recorded in the same period a year ago. It comes at a time when commodity prices have surged, with oil and gas prices fueling inflation, in the aftermath of the coronavirus pandemic and Russia’s invasion of Ukraine.
In the crosshairs: “Oil companies’ record profits today are not because of doing something new or innovative. Their profits are a windfall of war, a windfall for the brutal conflict that’s ravaging Ukraine and hurting tens of millions of people around the globe,” President Biden said in a statement. “My team will work with Congress to look at these options that are available to us and others. It’s time for these companies to stop war profiteering, meet their responsibilities in this country and give the American people a break and still do very well.”
Talk of a windfall tax on energy producers first circulated among progressives, like Bernie Sanders and Elizabeth Warren, but it is now gaining traction in mainstream Democratic circles. Others feel that a tax would disincentivize and reduce current production, leading to even higher prices. They say it would also hurt future hydrocarbon investment, which has been weighed down by a regulatory environment that focuses on greener technologies and fails to address supply and demand imbalances.
Turning to history: The Crude Oil Windfall Profit Tax Act of 1980 was enacted under the Carter administration, and generated some $80B in gross revenues over the next eight years before being repealed by President Reagan. U.S. crude production declined as much as 8% over the period, according to the Congressional Research Service, while Washington grew increasingly concerned that the tax had increased the nation’s dependence on imported oil. The CRS also cautions that despite the “windfall” name, it was really in excise tax, that was determined by calculating the “difference between the market price of oil… and a statutory 1979 base price that was adjusted quarterly for inflation and state severance taxes.” Better examples may be seen from the “war profiteering” levy enacted during WWI and a similar excess profits tax adopted during WWII.
How much are we talking about? Profits among the Big Oil majors totaled nearly $60B last quarter, including U.S.-based Exxon Mobil (XOM) (+191% Y/Y to $19.7B) and Chevron (CVX) (+84% to $11.2B), as well as Europe’s BP (+145% to $8.2B), Shell (SHEL) (+129% to $9.5B), Eni (E) (+161% to $3.7B) and TotalEnergies (TTE) (+43% to $6.6B). American energy giant ConocoPhillips (COP), which was often included in the list prior to spinning off its downstream operations into Phillips 66 (NYSE:PSX) a decade ago, will report earnings on Thursday. (47 comments)
Antitrust push
District Court Judge Florence Pan has blocked Penguin Random House’s proposed purchase of Simon & Schuster, siding with the U.S. Justice Department that the combination could “substantially” harm and “lessen competition” for “top-selling books.” It follows a three-week trial in August that captured the attention of the literary world, and included testimony of famed authors like acclaimed horror writer Stephen King. The $2.2B merger would have reduced the “Big Five” industry publishers from 5 to 4, along with Hachette Book Group, HarperCollins and Macmillan.
Reactions: The DOJ praised the decision, saying it “protects vital competition for books and is a victory for authors, readers, and the free exchange of ideas.” On the other side of the fence, Penguin Random House condemned the ruling, relating that it would “immediately request an expedited appeal.” The publisher had previously stated that the deal “enhance competition” by pooling its resources, as well as offering better deals to authors that’ll force other publishers to “compete harder” for titles.
The fresh antitrust court precedent could extend beyond the publishing world to other industries following recent competition setbacks for the DOJ. U.S. Sugar Corp’s $315M deal for rival Imperial was approved by antitrust enforcers, while UnitedHealth’s $13B acquisition of Change Healthcare was cleared after a government challenge. The saga is part of a broader competition crackdown by the Biden administration, which has beefed up its campaigns after the signing of an executive order on “Promoting Competition in the American Economy” in July 2021.
Outlook: While a combination with Penguin Random House is not in the cards, Simon & Schuster will still be searching for a new owner. Parent company Paramount Global (NASDAQ:PARA) doesn’t see the publisher as part of its future and even committed to divesting the firm before the Penguin Random House merger was announced in late 2020. With further consolidation in the publishing sector ruled out, Simon & Schuster would likely end up in the hands of a private equity firm. (2 comments)
China controls
China’s zero-COVID policy is on full display at Shanghai Disneyland (NYSE:DIS), with visitors temporarily barred from leaving the resort until they were tested for coronavirus. The park was locked down after a single guest tested positive for an infection – a similar event that happened in late 2021 – and follows a two-month closure during Shanghai’s lockdown earlier this year. Anyone who visited Disneyland since Oct. 27 will need to test for COVID three times over three days, while its main theme park and attached shopping street will be shuttered until further notice to comply with virus curbs.
Elsewhere: Some turmoil has erupted in the central city of Zhengzhou, particularly at the world’s largest iPhone factory. Apple-supplier Foxconn (OTCPK:FXCOF) employs about 200K people at the Zhengzhou complex, which includes dormitory accommodation for workers, but discontent has been growing following an outbreak and strict COVID controls. Foxconn said it has implemented “closed loop management,” the official term for staff living at their workplace and having no outside contact, prompting thousands to flee, with some even scaling fences of the facility to escape.
Sources told Reuters that production of the iPhone 14 (NASDAQ:AAPL) could plunge by as much as 30% in November due to tightening COVID restrictions, with Foxconn working to boost production at another factory in Shenzhen to make up for the shortfall before the holiday season. Foxconn, which produces 70% of iPhones globally, also builds the device in India, but its Zhengzhou factory assembles most of its global output.
Go deeper: Since the 20th National Party Congress last month, China’s Communist Party has only doubled down on the draconian COVID measures, which seek to eliminate outbreaks as soon as they occur despite the economic cost. Leader Xi Jinping has touted the policy as “protecting the people’s health and safety to the greatest extent possible,” while “encouraging achievements in both epidemic response and economic and social development.” (5 comments)
The blue checks
The aftermath of a contentious leveraged buyout of Twitter (TWTR) is underway after billionaire Elon Musk wrapped up a $44B leveraged buyout of the social media platform. A lengthy SEC filing on Monday confirmed a number of previously reported moves: That Musk consummated the purchase, that shares were canceled and converted into the right to receive the planned $54.20 each in cash consideration, and that Musk fired the board and became sole director.
More details: Another filing confirms that Saudi Prince Alwaleed bin Talal rolled some $1.89B in stock into Musk’s takeover, making the prince and Kingdom Holding Co. the second-largest investor in Twitter. Reports also suggest Musk is working with a small “war room” of confidants on a series of issues right now, including venture capitalist David Sacks, investor Jason Calacanis, venture capitalist and Twitter-ex Sriram Krishnan, as well as his reps Alex Spiro and Jared Birchall. Kayvon Beykpour – Twitter’s former head of product, fired by ex-CEO Parag Agrawal in May, was allegedly spotted in the building again.
In his first major product move, Musk is beginning to remake the company’s subscription offering at a substantially higher price, and tie its account verification system to subscriptions. That verified account system – Twitter’s “blue checks” next to notable names – had involved an elaborate approach to determine notable posters. Musk has now directed that it be linked to Twitter Blue, the company’s subscription service, where the price would go from about $4.99 per month to $19.99 per month. Current verified users would have 90 days to subscribe at the new higher price or lose their verification.
Will it work? Twitter’s new aggressive monetization strategy may have some ripple effects for rival social media platforms – particularly Meta Platforms (NASDAQ:META) – whose Facebook is heavily penetrated (it has just under 2B daily active users) and has its own challenges to consider for user monetization. Snap (NYSE:SNAP) is also banking on its own subscription offering called Snapchat+. The company started rolling it out at $3.99 per month in the summer, and CEO Evan Spiegel’s September memo laid out a plan to boost revenues 20%, with $350M in new revenue coming from the service. (69 comments)
Today’s Economic Calendar
FOMC meeting begins
9:45 PMI Manufacturing Index
10:00 ISM Manufacturing Index
10:00 Construction Spending
10:00 Job Openings and Labor Turnover Survey
What else is happening…
Will AMD’s (AMD) Q3 results disappoint more than prelim reports?
MLex: Microsoft (MSFT) didn’t offer remedy for Activision (ATVI) deal.
Mohamed El-Erian: Chances of a soft landing are ‘meager.’
U.S. natural gas pops 12% with colder weather on the way.
Occidental (OXY) set to build world’s largest carbon removal plant.
General Motors’ (GM) battery venture with LG faces union battle.
8th birthday: Lifetime gains at ARKK have fallen behind S&P 500.
Delta (DAL) pilots vote ‘overwhelmingly in favor’ of strike authorization.
Tesla (TSLA) talked to Glencore (OTCPK:GLCNF) about stake; Cybertruck in 2023?
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Good morning. Happy Monday. Hope you had a good weekend.
The Asian/Pacific markets were mostly strong. Japan, South Korea, India, Taiwan, Australia, New Zealand and Singapore did great, but China and Hong Kong were weak. Europe, Africa and the Middle East are currently very quiet. Poland, Turkey and Portugal are up; Israel is down. Otherwise there is minimal movement. Futures in the States point towards a moderate down open for the cash market.
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The dollar is up. Oil and copper are down. Gold and silver are down. Bonds are down.
Stories/News from Seeking Alpha…
Eye on commodities
Brazil’s Supreme Electoral Court has declared leftist Luiz Inácio Lula da Silva as the next president of the country, with 50.9% of Sunday’s vote going to the longtime leftist leader, compared to 49.1% for right-wing incumbent Jair Bolsonaro. It was somewhat of a predictable but close outcome, with Lula winning the first round of an election over a month ago, banking on a return to greater social spending due to rampant inflation. On the campaign trail, Lula positioned himself as a pro-democracy candidate by promising to rebuild ties with government institutions, while ending rising levels of poverty and attracting foreign investors to re-industrialize the economy.
Backdrop: In Lula’s first term starting in 2003, Brazil’s economy grew rapidly, mostly due to a lucrative trade partnership with China. The new cash flow was used to finance a new social welfare program called Bolsa Familia intended to help millions escape the cycle of poverty, while other reforms were passed, like increasing the minimum wage. By the end of his second term, Brazil’s GDP was the highest in its history and Lula’s approval rating soared to 83%.
Fellow Workers’ Party member Dilma Rousseff was picked as a successor in 2009, but she never proved to be as popular as Lula. Early in her administration, global demand for commodities dropped off their peaks, resulting in a recession in Brazil and criticism over how she managed the economy. She also faced corruption accusations known as “Operation Car Wash,” which ultimately cost Rousseff her job and sent Lula to jail, and prohibited the latter from participating in the 2018 election that vaulted retired military officer Bolsonaro to power.
A new “pink tide”? The political shift first described a move towards left-leaning governments in the late 1990s and early 2000s, which were bolstered by the commodities supercycle of the era. It even led Brazil to be included in the group collectively known as BRIC nations, which emerging market investors saw as attractive due to their sources of raw materials and growth expectations. In recent years, a commodities supercycle has been making a comeback, and has already witnessed landmark leftist victories in Peru, Honduras, Chile and Colombia. (5 comments)
Grain in jeopardy
Speculation had been building since the U.N. entertained an investigation into Iranian drones used by Russia, but Moscow has officially pulled out of the Black Sea Grain Initiative following an alleged Ukrainian drone attack in Crimea. The deal was inked back in July to keep commodities flowing from Ukraine by easing Russia’s naval blockade and reopening key ports. Over the past two months, nearly 400 ships exported 9.2M metric tons of corn, wheat, sunflower products, barley, rapeseed and soy under the agreement.
Market movement: Wheat futures (W_1:COM) jumped 6% overnight to $8.79 per bushel in Chicago, while corn prices (C_1:COM) rose 2.6% to $6.98/bushel.
“The coming four months of winter when shortages in fuel, fertilizer and food will be felt most acutely in Europe and in nearby areas of the Middle East and Africa is the sole window of opportunity that remains to the Kremlin to break the European Union’s resolve to support Ukraine,” said Michaël Tanchum of the Middle East Institute.
Reactions: Ukrainian Foreign Minister Dmytro Kuleba said Russia was using the attack as a “false pretext” for blocking the “grain corridor which ensures food security for millions of people.” President Biden called the move “outrageous,” saying it would increase global starvation, while Secretary of State Antony Blinken accused Moscow of weaponizing food. NATO and the EU have also asked the Kremlin to reconsider its decision. (5 comments)
Energy boom
The jaw-dropping size of Big Oil’s latest quarterly profits – nearly $31B combined by Exxon Mobil (XOM) and Chevron (CVX) – has revived calls from politicians and consumer groups to impose more taxes on the companies or restrict gasoline exports. According to Bloomberg, Exxon Mobil, Chevron, Shell (SHEL) and TotalEnergies (TTE) are even paying nearly $100B to shareholders annually in the form of buybacks and dividends while reinvesting just $80B in their core businesses this year.
Snapshot: President Biden has scolded oil companies for their high earnings and accused them of gouging motorists, while singling out Exxon after Friday’s dividend increase. “Can’t believe I have to say this, but giving profits to shareholders is not the same as bringing prices down for American families,” he tweeted. “Those excess profits are going back to their shareholders and their executives instead of going to lower prices at the pump and giving relief to the American people, who deserve it and need it.”
Senate Majority Leader Chuck Schumer has also called the earnings “unconscionable,” while Rep. Ro Khanna (D-CA) introduced legislation that would ban American gasoline exports whenever the domestic price (over the prior seven days) averages at least $3.12 a gallon. That was the average cost of gas in 2019, before the coronavirus pandemic and Russia’s war in Ukraine.
Responses: Exxon CEO Darren Woods devoted two pages of prepared remarks during the company’s earnings conference call detailing why the EU’s windfall taxes on the energy industry will raise energy prices for consumers in the long run. Chevron CFO Pierre Breber reiterated that “taxing production will just reduce it… If you raise costs on energy producers, it will decrease investment so that goes against the intent of increasing supplies and making energy more affordable.” On the other hand, Shell (SHEL) CEO Ben van Beurden said the energy industry should “embrace” the “societal reality” of higher taxes to help the struggling parts of society. (217 comments)
Battery metal cartel?
Countries that will be key in the energy transition are attempting to expand their clout, like Indonesia, which is the world’s biggest nickel producer. Jakarta has already banned nickel ore exports since 2020 to develop its domestic processing industry – which has sparked a WTO dispute with the EU – and is planning taxes on intermediate nickel product exports. Nickel and other key metals are needed for the widespread production and adoption of electric cars, as well as other “clean” technologies that rely on batteries.
Quote: “I do see the merit of creating OPEC to manage the governance of oil trade to ensure predictability for potential investors and consumers,” Indonesian Investment Minister Bahlil Lahadalia told the FT. “Indonesia is studying the possibility to form a similar governance structure with regard to the minerals we have, including nickel, cobalt and manganese.”
It may be a complicated task given the fact that the nation heavily relies on foreign investment instead of state or domestic-owned companies. Other global producers would also have to be brought on board for any potential alliance, while Indonesia is still in the early days of being able to supply battery-grade nickel. Most of its exports currently go to the stainless steel market as it builds up its processing facilities and high pressure acid leach plants.
Statistics: According to commodity consultancy CRU, Indonesia generates 38% of global refined supply of nickel, and stores a quarter of the world’s reserves of the metal.
Today’s Economic Calendar
9:45 Chicago PMI
10:30 Dallas Fed Manufacturing Survey
3:00 PM Farm Prices
What else is happening…
Goldman says the stock market boils down to one question this week.
GM (GM) temporarily stops ads on Twitter (TWTR) after Musk takeover.
Blackstone (BX), Emerson Electric (EMR) strike $14B deal – WSJ.
Monster success: Netflix’s (NFLX) ‘Dahmer’ builds on streaming lead.
Walgreens-backed VillageMD (WBA) exploring deal with Summit Health.
Weber (WEBR) investor offers to buy company at 55% discount to IPO.
Following Tesla (TSLA), Ford (F) cuts price of Mustang Mach-E in China.
Air travel demand: Durable into 2023 or destined to decline?
Inflation still dogs the economy, but consumers continue to spend.
Credit card delinquency rate inches toward prepandemic levels.
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