Good morning. Happy Friday.
The Asian/Pacific markets huge gains. Japan, China, Hong Kong, South Korea, India, Taiwan, Australia, Malaysia, Indonesia, Singapore, Thailand and the Philippines all participated. Europe, Africa and the Middle East, which were open during US hours yesterday, currently lean up, but there aren’t many big winners. Turkey, South Africa, Hungary and the Netherlands are leading. Denmark is weak. Futures in the States point towards a moderate gap up open for the cash market.
————— VIDEO: The Bullish Case – Reasons to be Optimistic —————
The dollar is down. Oil and copper are up. Gold is up; silver is down. Bonds are down.
Stories/News from Seeking Alpha…
Euphoria sweeps markets
“Explosive,” “shock” and “relief” are some of the adjectives being used to describe the rally on Thursday as stocks recorded their best session since the early days of the pandemic in 2020. When all was said and done, the Dow Jones Industrial Average and S&P 500 closed out the session up 3.7% and 5.5%, respectively, while the tech-heavy Nasdaq Composite Index skyrocketed 7.4%. U.S. government bond yields also recorded their steepest one-day decline in more than a decade, with the rate on the 10-year Treasury falling 32 basis points to 3.82%.
Driving the sentiment: Core and headline consumer inflation were weaker than expected in October, fueled by a decline in used car and truck prices, cheaper airfare and health insurance costs. The U.S. Labor Department reported a 0.3% month-over-month rise in October’s core Consumer Price Index, compared to forecasts for 0.5%, marking the softest reading since September 2021 for core CPI (it came in at 6.3% on an annualized basis). The headline CPI figure, which factors in volatile food and energy prices, climbed 7.7% from a year earlier vs. expectations of 8.0% and compared to an 8.2% clip seen in the previous month.
The moderation in prices could give the Fed more breathing room in terms of slowing down the pace of its aggressive rate hikes. Some Fed officials even hinted to a downshift following the data, like Dallas Fed President Lorie Logan, who said “while I believe it may soon be appropriate to slow the pace of rate increases so we can better assess how financial and economic conditions are evolving, I also believe a slower pace should not be taken to represent easier policy.” According to the CME’s FedWatch Tool, markets are now pricing in an 80.6% probability of a 50-basis-point hike rather than a 75-point one at the central bank’s policy meeting next month.
Don’t get too excited: “A rally like this is of course very dramatic to say the least, but you have them all the time in a bear market,” famed investor Carl Icahn told CNBC in an interview. “We keep our portfolio hedged. I am still very, quite bearish on what is going to happen. I think the Fed has to keep raising and if it doesn’t then it’s going to be worse in the future anyway.” (239 comments)
Crypto empire in ruins
One of the biggest stories of the week has been the collapse of FTX International, or what some in the market are calling a “Lehman Brothers” moment for the crypto industry. Once valued at $32B and the third-largest crypto exchange by trading volume, FTX is having an insolvency crisis, prompting regulators from the Bahamas to Japan to freeze what’s left of its operations. It’s a moment of irony for the firm led by Sam Bankman-Fried, which itself served as a white knight this past summer to rescue several crypto players including BlockFi, Voyager Digital and Celsius.
The apology: “I’m sorry. That’s the biggest thing,” SBF wrote in a thread spanning over 20 tweets. “The full story here is one I’m still fleshing out every detail of, but as a very high level, I f—-d up twice [regarding leverage and liquidity]. A poor internal labeling of bank-related accounts meant that I was substantially off on my sense of users’ margin. I thought it was way lower. Because, of course, when it rains, it pours. We saw roughly $5B of withdrawals on Sunday – the largest by a huge margin.”
Sister trading house Alameda Research is “winding down trading,” though SBF noted that the end of his crypto empire does not impact “FTX US, the US-based exchange that accepts Americans.” While consumers can get their funds out for now, the crisis is weighing heavily on the sector, with Bitcoin (BTC-USD) falling to the $15,000 level before paring some of those losses. “For a period of time after this, which could be months, investors will be hesitant to come back into the market for fear that there’s another shoe to drop,” noted Matthew Hougan, chief investment officer at Bitwise Asset Management.
Course of action: “My #1 priority – by far – is doing right by users. To take responsibility, and do what I can,” SBF continued. “So, right now, we’re spending the week doing everything we can to raise liquidity. I can’t make any promises about that. But I’m going to try. And give anything I have to if that will make it work. There are a number of players who we are in talks with, LOIs, term sheets, etc. We’ll see how that ends up. Every penny of that – and of the existing collateral – will go straight to users, unless or until we’ve done right by them.” (17 comments)
Cancelation may be canceled
Texas District Court Judge Mark Pittman has blocked President Biden’s student loan forgiveness plan, which would have provided borrowers the ability to wipe away $10,000 apiece from their outstanding balance. Pell Grant recipients, who display exceptional financial need, would’ve seen an additional $10,000 in debt forgiven. About 26M eligible undergraduate and graduate borrowers have already signed up to the program, which Biden unveiled back in August after months of deliberations inside the administration.
Bigger picture: The ruling is the latest hiccup in a plan that was intended to roll out and move at “full speed ahead.” Last month, the states of Arkansas, Iowa, Kansas, Missouri, Nebraska and South Carolina sued to overturn the program, prompting the 8th U.S. Circuit Court of Appeals to issue a stay on the matter. Despite things being held up, the White House has encouraged borrowers to continue applying for relief as the order did not prevent the review of applications.
“In this country, we are not ruled by an all-powerful executive with a pen and a phone. Instead, we are ruled by a Constitution that provides for three distinct and independent branches of government,” wrote Judge Pittman, adding that the program was an “unconstitutional exercise of Congress’s legislative power.”
Go deeper: The concept of student debt cancellation, even if it would pass through Congress, has divided the country. Some say it would benefit borrowers at a time of high inflation, while others have flagged it as another potential contributor to higher prices, or an unfair measure for those that chose not to go to college because of the cost, don’t have loans or already paid them off. The non-partisan Congressional Budget Office in September pegged the cost of the entire cancellation program at $430B, which would eliminate nearly a quarter of America’s $1.6T in outstanding student debt. Related stocks include Sallie Mae (NASDAQ:SLM), Navient (NASDAQ:NAVI) and Nelnet (NYSE:NNI). (8 comments)
Could Twitter go bankrupt?
Elon Musk didn’t rule out that possibility at an emergency all-hands meeting on Thursday. “The economic picture ahead is dire,” he told staffers, adding that the company had “net negative cash flow of several billion dollars” (though he didn’t specify over which time frame). Musk also clarified that his recent sales of Tesla stock (TSLA), worth nearly $4B, were done in order to “save” Twitter.
Other happenings: The latest bombshell came along with additional resignations of key Twitter leadership. Yoel Roth was among the few executives left on the platform’s Trust & Safety team, while VP of Sales Robin Wheeler recently stepped up to manage relations with concerned advertisers. Musk also told staff the days of free food and other perks at the office were over, and ended employees’ ability to work remotely unless he personally approved it.
The fresh exits came just a day before Twitter was due to submit a key compliance report to the Federal Trade Commission, which is enforcing a settlement inked back in May. An internal letter from a Twitter lawyer visible to all employees warned that Musk was putting the company at risk for billions of dollars in fines for non-compliance. Given the prior departures of the compliance execs, Twitter’s legal department is reportedly asking its engineers to “self-certify” compliance with the FTC’s dictates and other privacy laws.
Response: “We are tracking recent developments at Twitter with deep concern,” said Douglas Farrar, Director of Public Affairs at the Federal Trade Commission. “No CEO or company is above the law, and companies must follow our consent decrees. Our revised consent order gives us new tools to ensure compliance, and we are prepared to use them.” (354 comments)
Today’s Economic Calendar
10:00 Consumer Sentiment
1:00 PM Baker-Hughes Rig Count
What else is happening…
Coinbase (COIN) CEO: Why would investors put money into FTX now?
3M (MMM), DuPont (DD) sued by California over toxic ‘forever chemicals.’
Blue Apron (APRN) stock plummets over 30% on dilution fears.
Tattooed Chef (TTCF) sinks amid slashed outlook and inflation pressures.
Juul gets a lifeline to avoid bankruptcy, plans to cut 30% of workforce.
Taiwan Semiconductor (TSM) surges as October sales rise 56%.
Videogame sales fell 5% in Q3, with content and mobile declining.
WeWork (WE) to exit 40 underperforming locations in the U.S.
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Good morning. Happy Thursday.
The Asian/Pacific markets did poorly. Japan, China, Hong Kong, South Korea, India, Taiwan, Indonesia and the Philippines were very weak. Europe, Africa and the Middle East are currently doing great. The UK, Denmark, Poland, France, Turkey, Germany, Russia, Switzerland, the Netherlands, Italy, Israel, Austria and Sweden are up 1% or more. Hungary and Saudi Arabia are down. Futures in the States point towards a gigantic gap up open for the cash market.
VIDEO: The Bullish Case – Reasons to be Optimistic
The dollar is down. Oil and copper are up. Gold and silver are up. Bonds are up.
Stories/News from Seeking Alpha…
Inflation update
With inflation being the Federal Reserve’s biggest worry, October’s Consumer Price Index has the potential to rattle markets again today. The headline number, released at 8:30 a.m. ET, is expected to increase 8% Y/Y, compared to 8.2% in September. Meanwhile, core CPI, which strips out the volatile prices of food and energy, is forecast to rise 6.5% Y/Y vs. the 6.6% pace seen in the previous month.
Snapshot: Recent data shows just how far the cost of goods and services has climbed above the Fed’s target of 2%. In an effort to rein in the rising prices, the central bank has ratcheted up its key policy rate by 375 basis points since March to 3.75%-4.0%, exceeding the previous cycle’s peak of 2.25%-2.5% in December 2018. A fifth consecutive 75 bps rate hike is also on the table at the Fed’s meeting next month, especially if today’s figures come in higher than expected.
Pay particular attention to interest-sensitive sectors in the CPI report as higher borrowing costs make consumers and businesses more cautious about making purchases. Shelter is again expected to be the primary driver of October’s core reading, with housing making up nearly a third of the basket for consumer price inflation. Gasoline prices are also predicted to put upward pressure on the headline figure, as well as higher airfare and auto rental prices, though medical care costs may have declined.
Commentary: “It isn’t just the ongoing pace of increase that is troublesome but the pervasiveness of surging prices across various spending categories that has scarred household budgets,” said Greg McBride, Chief Financial Analyst at Bankrate.com. “Despite a half-dozen interest rate hikes by the Federal Reserve, any broad-based, significant, and sustained easing of inflation pressures remains elusive.” (34 comments)
Another White Knight?
Just a day after Binance founder Changpeng “CZ” Zhao announced he would bail out Sam Bankman-Fried’s “SBF” FTX.com, CZ has backed out of the agreement due to fund mishandling and regulatory issues. It’s no surprise, given the fact that the agreement was non-binding, while Binance said the deal was pending due diligence and didn’t announce any takeover terms. The two have also been long-time rivals, leading some to speculate that CZ may have just been taking a jab at SBF on his way to the top of the cryptoverse, or checking out the internal state of the rival exchange as concerns bubble about the health of the overall sector.
What’s next? Sam Bankman-Fried has told investors that FTX would need to file for bankruptcy without a cash injection. The crypto exchange faces a shortfall of up to $8B and needs $4B to remain solvent, and is attempting to raise rescue financing in the form of debt, equity, or a combination of the two (what about crypto?). The De-Fi label is also not stopping the Feds from getting involved, with U.S. Justice Department reportedly looking into the liquidity crisis that sparked FTX’s collapse and the SEC analyzing a space Chairman Gary Gensler has previously described as the Wild West.
Some say that the cratering crypto environment is spilling over to tech and broader markets, with a correlation between the industries described as shady, real and triggering much of the speculative investment that has occurred over the past few years. A “cascade of margin calls” is likely underway in the rest of the crypto ecosystem, according to J.P. Morgan’s Nikolaos Panigirtzoglou, while “the number of entities with stronger balance sheets able to rescue those with low capital and high leverage is shrinking.” That could ultimately push the price of Bitcoin (BTC-USD) down to the $13,000 level.
New rescue strategy? “Further to my announcement to stand behind all Tron token (TRX-USD), (BTT-USD), #JST, #SUN, (HT-USD) holders on #FTX, we are putting together a solution together with #FTX to initiate a pathway forward,” tweeted Justin Sun, the founder of the Tron cryptocurrency network. “The ongoing liquidity crunch, despite short term in nature, is harmful to the industry development and investors alike. My team has been working around the clock to avert further deterioration. I have faith that the situation is manageable following the wholistic approach together with our partners. Stay tuned.” (17 comments)
Meta layoffs
The firing of 13% of Meta Platforms’ (META) workforce has also brought the tech and economic outlook back into the spotlight. In addition to the layoffs, the company is extending a hiring freeze through the first quarter of 2023, and will “roll out more cost-cutting changes” in the coming months. Shares of Meta climbed 5% on Wednesday in response to the news, but remain off 70% YTD amid worries over the platform’s pivot to the metaverse and reckless spending.
Quote: “I know there must be just a range of different emotions. I want to say up front that I take full responsibility for this decision,” Zuckerberg said on a video call after announcing the layoffs. “I’m the founder and CEO, I’m responsible for the health of our company, for our direction, and for deciding how we execute that, including things like this, and this was ultimately my call.”
“And it was one of the hardest calls that I’ve had to make in the 18 years of running the company. And a lot of why it’s hard is, obviously, it has a big impact on your lives, but also for our mission. We’re losing people who… you’ve really put your heart and soul into this place. No matter what team you may have worked on, each of you played a role in contributing to the products that billions of people use to connect every day.”
Outlook: Meta kept its Q4 revenue guidance of $30B to $32.5B unchanged, which is in line with analysts’ consensus estimates of about $31.6B. The 2022 and 2023 expense forecasts provided on the Q3 earnings conference call also factored in the financial impact of the layoffs. Going forward, investors will be keeping an eye on moderating growth and operating margins, as well as additional weakening in the company’s core advertising business. (74 comments)
Tale of two fuels
An interesting dynamic is playing out in fuel markets, especially as inflation remains on the radar. While gasoline prices have come down from the records notched in June, diesel prices have remained uncomfortably high, contributing to additional price pressures and shipping costs. In fact, on a year-over-year basis, gas prices are up 11% and diesel has soared 47%, to $3.80 and $5.36, respectively.
Quote: “The economic impact is insidious because everything moves across the country powered by diesel,” said Tom Kloza, co-founder of the Oil Price Information Service. “It’s an inflation accelerant, and the consumer ultimately has to pay for it.”
Not only does diesel power trucks and trains, but also tractors and construction equipment. That translates into profound inputs for the economy and affects the cost of nearly every product. Many of those fees are now getting tacked on as fuel surcharges, while some market watchers are even worrying about potential inventory shortages.
Demand for diesel: American refineries tend to do maintenance at this time of year, but it’s coinciding with an industry that is at max capacity. Some refineries have never come back online after COVID-19 and analysts even link the shortages to closures that took place before the pandemic (or the lack of investment). Some factors are also seasonal, like increased demand during the agricultural planting and harvesting seasons, while a ban on Russian imports – and the U.S. exporting lucrative diesel products abroad – aren’t helping the situation.
Today’s Economic Calendar
2:00 Fed’s Waller Speech
8:30 Consumer Price Index
8:30 Initial Jobless Claims
9:00 Fed’s Harker Speech
10:30 EIA Natural Gas Inventory
1:30 PM Fed’s George Speech
2:00 PM Treasury Statement
4:30 PM Fed Balance Sheet
6:35 PM Fed’s Williams Speech
What else is happening…
Trump SPAC (DWAC) drops 20% as ‘Red Wave’ doesn’t happen.
Beyond Meat (BYND) misses expectations amid weakening demand.
Rivian (RIVN) recoups some losses after holding production guidance.
Europe moves toward deal for €6B satellite Internet system – Reuters.
Roblox (RBLX) plunges as mixed Q3, weak EBITDA spooks investors.
Wix.com (WIX) reports Q3 beat, raises revenue outlook for FY22.
Marriott (MAR) unveils new apartment-style renting business.
Bumble (BMBL) plummets as revenue results and forecast stumble.
AstraZeneca (AZN) boosted by sales of cancer drugs and EPS outlook.
DraftKings (DKNG) declines as voters reject sports betting propositions.
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Good morning. Happy Wednesday.
The Asian/Pacific markets were mixed. Japan, China, Hong Kong and the Philippines did poorly; South Korea , Taiwan and Singapore did well. Europe, Africa and the Middle East currently lean down. South Africa is up, but Denmark, Germany, Russia, Hungary, the Netherlands, Austria and Saudi Arabia are down. Futures in the States point towards a negative open for the cash market.
————— Masterclass Overview —————
The dollar is up. Oil and copper are down. Gold and silver are down. Bonds are down.
Stories/News from Seeking Alpha…
Crypto collapse
The crypto world was rocked yesterday as one of the biggest names in the biz agreed to buy its rival. While Binance is still doing its due diligence for FTX.com, the deal would be more of a bailout even if it goes through. There are still a load of questions swirling around, but the shockwaves from the event sent Bitcoin (BTC-USD) down by more than 10% to the $17,000 level and will likely have more consequences in the weeks and months to come.
What happened? Valued at $32B back in January, Sam Bankman-Fried’s FTX received funding from the likes of BlackRock, SoftBank, Temasek, Tiger Global and the Ontario Teachers’ Pension Plan. However, under the surface, recent questions swirled about the balance sheet of sister trading house Alameda Research, resulting in an FTX liquidity crunch as customers pulled $6B worth of withdrawals over the past 72 hours. It’s a stunning reversal of fortunes for one of the most popular exchanges in the industry, given the fact that FTX and Alameda bailed out several crypto players themselves this past summer, including BlockFi, Voyager Digital and Celsius.
Flagging the apparent issues was Binance CEO Changpeng “CZ” Zhao, who said on Sunday that the rival exchange would liquidate its holdings of FTX’s token called FTT (FTT-USD) due to unspecified “recent revelations.” On Monday, Sam Bankman-Fried “SBF” dubbed the tweets “false rumors” and said that FTX was “fine,” but apparently the exchange had too many of its assets wrapped up in FTT token. “Unfortunately, I don’t have a perfect answer for you, because the details are still being hashed out,” SBF wrote in a reported email to investors. “I’m sorry I didn’t do better, and am going to do what I can to protect customer assets, and your investment.”
Outlook: Is CZ’s move aimed at propping up the crypto industry? Countering broader concerns about the asset class? Just a jab at SBF? Binance’s agreement to buy FTX is non-binding, but in traditional crypto thought, it may want to consolidate during the crypto winter before things warm up again. In any event, there is a lot of explaining that’ll be done in the coming days, which is likely to trigger another call from regulators who have been disturbed about the lack of guardrails in the freewheeling cryptoverse. (9 comments)
#Midterms
In a U.S. midterm election where very few seats were changing hands, the first key narrative shift came well after midnight, with Democrat John Fetterman projected by numerous decision desks to win a Pennsylvania Senate seat – the first seat in that chamber forecast to change party hands. With the Senate coming into election day deadlocked at 50 seats for each party, the flip made it increasingly likely that not only would Republicans take control of the Senate as they hoped, but that the Democrats might end up increasing their majority.
No red wave: That may depend on final results in Georgia, Arizona, Nevada and Wisconsin. Fetterman’s win leaves 48 Senate seats in Democratic hands compared to 47 for the GOP. Over in the House, early projections saw Republicans picking up a few dozen seats, and while they’re still likely to take control of the chamber, it appears they might do so with a slim majority similar to that of the Democrats coming into the day – perhaps 225 vs. a needed 218 seats. NBC’s decision desk sees it much closer: 220 GOP seats to the Democrat’s 215, or when all is said and done, a five-vote margin.
“Obviously we don’t have 100% reporting in on anything yet, but it doesn’t look like anything we have seen so far has spooked markets at all,” said Randy Frederick, Managing Director of Trading and Derivatives at Charles Schwab.
Outlook: Stocks have generally performed well in the one-year period after a midterm election dating back to 1950, according to LPL strategists Barry Gilbert and Jeffrey Buchbinder, with nearly identical figures under Democratic and Republican presidents. However, this time around the government is contending with soaring inflation, an energy crisis and a worsening backdrop for the economy. The Federal Reserve is also showing no sign of taking its foot off the rate hike accelerator, and its aggressive monetary policy will likely be more important to markets than who ends up in control of Congress. (64 comments)
Another sale
Thought it was over? Guess again. Elon Musk is continuing his Tesla (TSLA) stock selling spree, cashing out another 19.5M shares worth $4B between Friday and Tuesday. Shares of the EV maker have fallen by more than 11% over those three sessions, leading Musk’s net worth to drop below $200B. Musk’s latest sales also mean he now owns just around 14% of Tesla, which has been supplanted by Berkshire Hathaway (BRK.B) as the fifth-largest company in the S&P 500 Index.
The last time, I promise: “No further TSLA sales planned after today,” Elon Musk tweeted on April 28, implying that was the last financing needed to take over Twitter. The billionaire made a similar pledge in August, as he offloaded another 7.9M shares worth around $6.9B, saying it was “important to avoid an emergency sale of Tesla stock in the (hopefully unlikely) event that Twitter forces this deal to close and some equity partners don’t come through.” The deal did close, but Musk continues to sell… by the billions.
Don’t forget that at the end of 2021, Musk also sold about 15.8M of Tesla shares, worth about $16B, to help pay a reported $11B tax bill after polling his followers.
Go deeper: Musk wrote on Friday that Twitter had suffered “a massive drop in revenue due to activist groups pressuring advertisers” and was “losing over $4M/day.” Some of the cash he’s getting his hands on could be used to shore up the company amid reports that the debt Twitter took on could mean it’s paying more than $1B in additional annual interest payments. Musk arranged to finance the $44B Twitter purchase with around $13B of bank debt, as well as $7B of equity commitments from other investors and partners, meaning he is on the hook for more than $22B of the purchase price (he already owns a 9.6% Twitter stake worth $4B, and needs an additional $2.5B for closing costs). (72 comments)
House of Mouse
Shares of Disney (DIS) slipped 6.8% AH to $93.10 on Tuesday following a fiscal fourth quarter where it missed revenue and profit expectations. Stellar revenue results from its “Parks, Experiences and Products” division (+36% Y/Y to $7.4B) were weighed down by sales on its “Media and Entertainment” side (-3% Y/Y to $12.7B). CFO Christine McCarthy also dented expectations for the new fiscal year, predicting revenue growth of less than 10% (compared to 22% in fiscal 2022).
Bigger concerns: Looking to counter investor worries over direct-to-consumer sales, the House of Mouse highlighted revenue and earnings forecasts for Disney+. It said that the streaming service would achieve profitability in fiscal 2024, while a series of price hikes in December and an ad-supported tier would likely boost its financial metrics. Operating losses will improve by about $200M next quarter and will be even lower in the fiscal second quarter of 2023.
“We are actively evaluating our cost base currently, and we are looking for meaningful efficiencies,” McCarthy announced on the earnings call. “Some of those are going to provide some near-term savings and others are going to drive longer term structural benefits.”
By the numbers: Investors put a big focus on streaming subscriber figures following a 10% drop in domestic average revenue per user (ARPU) to $6.10. While the company talked about “peak losses” and tacked on another 12M Disney+ users – topping Netflix (NFLX) with a total count of 235M subscribers (including Hulu, ESPN+ and Disney+) – it didn’t appear to be enough to turn around the stock. Net operating losses in the “Direct-to-Consumer” segment more than doubled Y/Y to $1.5B, up from $630M a year earlier, while many of the forecasts Disney made were under the assumption that “we do not see a meaningful shift in the economic climate.” (40 comments)
Today’s Economic Calendar
3:00 Fed’s Williams Speech
7:00 MBA Mortgage Applications
10:00 Wholesale Inventories (Preliminary)
10:30 EIA Petroleum Inventories
11:00 Fed’s Barkin Speech
1:00 PM Results of $35B, 10-Year Bond Auction
What else is happening…
Zuckerberg says he’s ‘accountable’ for Meta’s (META) 11,000 layoffs.
Salesforce (CRM) reportedly cuts hundreds of jobs, more may be coming.
Lucid (LCID) slumps on weak Q3 results and capital raise.
AMC (AMC) beat estimates, adjusted EBITDA loss widens.
DuPont (DD) rallies as Q3 beat shows toughness in difficult markets.
Levi’s (LEVI) ropes in Kohl’s (KSS) top boss to be eventual CEO.
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Good morning. Happy Tuesday.
The Asian/Pacific markets were mixed. Japan, South Korea and Taiwan did well; China, Hong Kong and Indonesia were weak. Europe, Africa and the Middle East are currently mixed and mostly quiet. Denmark, Turkey, Finland and Sweden are up; Hungary, Israel and Saudi Arabia are down. Futures in the States point towards a positive open for the cash market.
————— Masterclass Overview –>> here —————
The dollar is down. Oil is down; copper is up. Gold and silver are down. Bonds are up.
Stories/News from Seeking Alpha…
Midterms and the markets
It’s Election Day in the United States, and while conventional wisdom has some strong ideas about how the midterms will play out, increasing uncertainty around polling (and a contentious electorate) suggest that anything might happen. Midterm elections typically go against the party of the president – and if that holds, and Republicans take over even just the House, it effectively would mean a sidelining of the vast majority of President Biden’s agenda. That’s not always bad for securities markets, where “gridlock” has often been perceived as “status quo” – or, more specifically, the lack of any broad or shocking changes on tap that tend to spook traders and spur market declines.
Snapshot: While the issues at stake in the election’s various races are numerous – including gun control, abortion and immigration – investors will be focused on a few that have risen to the fore, notably the broader economic slowdown and this year’s historic inflation. While party polarization seems to be at historic highs, when it comes to business and investing, there are areas where Democrats and Republicans are closer together than others. Examples of this are where the two parties agree on infrastructure spending, real estate, construction and utilities.
Meanwhile, ESG investing (Environmental, Social and Governance) is indirectly on the ballot, as Republicans increasingly tap the issue as a political talking point. If the GOP makes a strong showing, you can expect the pressure on ESG to increase. Conversely, funds like the “anti-ESG” God Bless America ETF (YALL) launched last month, with a focus on screening out companies it considers activist. Clean energy subsidies aren’t as contentious as other issues, so it may be unlikely that President Biden’s signature achievement on climate legislation will be unwound. Oil may be another matter, with a windfall tax on Big Oil essentially dead if Republicans gain power.
Technology is another area where the parties have diverged more in recent years, though perhaps more on style. Both have argued for more regulation on the industry, but for different reasons. The Biden administration has been concerned with concentrated power and antitrust action against the tech giants, including Meta Platforms (META), Alphabet (GOOG, GOOGL) and Amazon (AMZN), while Republicans have targeted social media on speech-related issues, and say they won’t back some currently stalled antitrust bills – which could be a boon for those giants currently in the crosshairs.
Outlook: One thing important for election observers to remember: It’s extremely unlikely we’ll know the results of every race during election night, as many areas with mail-in ballots will likely need more time to count them (particularly in states that disallow counting mail-in votes until Election Day arrives, including Pennsylvania and Wisconsin). Control of the extremely close Senate may depend on such factors as automatic recounts, as well as another Georgia run-off that could delay knowing the answer into December. Following the election night’s news will be Thursday’s CPI report, where new data on inflation might amplify the impact of any Tuesday ballot-related effect on markets. (35 comments)
No brakes
A steep selloff at online used-car dealer Carvana (CVNA) is showing no signs of letting up, with shares tumbling over 50% over the past two sessions to $7.39. Volume on the highly-shorted auto retail stock reached 52M shares on Monday despite a trading halt for volatility (and compared to a historical volume average of 23M). Shares reached a high of $376 back in August 2021, meaning the stock is now off 98% from that level, with a market cap of only $1.6B.
What happened? A weak earnings report rattled investors on Friday, as Carvana posted a loss of $2.67 per share and a 2.7% drop in revenue from the prior year to $3.39B. The loss per share was $0.50 larger than anticipated, while the sales figure was $300M short of the analyst consensus. Total retail units sold in the quarter fell to 102,570, a decrease of 8% from the prior year.
There are bigger concerns about the waning macro backdrop amid recession fears. It’s also less affordable for people to buy a used car right now due to rising rates and inflation, while Carvana battles depreciation headwinds as it attempts to sell vehicles it purchased at record highs for a profit. Questions also surround Carvana’s debt load, especially after it scooped up ADESA’s wholesale vehicle auction business for $2.2B earlier this year.
Commentary: “While the company is continuing to pursue cost cutting actions, we believe a deterioration in the used car market combined with a volatile interest rate/funding environment (bonds trading at 20% yield) add material risk to the outlook,” Morgan Stanley’s Adam Jonas wrote in a research note. “Secured borrowing capacity may be available but we believe equity holders also face significant risk of dilution, driving a wide range of outcomes. As such, we feel it is prudent to remove our rating and price target, establishing a 12-month base case range of $1 to $40 (bull case $70/share, bear case $0.10/share).” (51 comments)
Crypto rescue
What would you do with $1B worth of Bitcoin (BTC-USD)? The U.S. Department of Justice is in the middle of figuring that out following its second-largest crypto seizure in history. It’s a story that’s been running for nearly a year, but was only publicly revealed, following a guilty plea by James Zhong of Gainesville, Georgia.
Flashback: Zhong conducted his heist on the infamous dark web marketplace called the Silk Road that was shut down by the FBI in 2013. As the story goes, he created nine fraudulent accounts, funding each with between 200 and 2,000 Bitcoin, but then tricked the withdrawal-processing system by triggering over 140 transactions in quick succession. In the end, Zhong received over 50,000 Bitcoins into his accounts, which were then transferred into a variety of wallet addresses all under his control.
In a 2021 search of Zhong’s premises, IRS Criminal Investigation agents recovered the Bitcoins (worth $3.3B at the time), which were located in an underground floor safe and on a single-board computer that was hidden in a popcorn tin. Zhong, who is 32 years old, then pled guilty to one count of wire fraud, which carries a maximum sentence of 20 years in prison. He’s scheduled to be sentenced on Feb. 22, 2023.
Go deeper: “For almost 10 years, the whereabouts of this massive chunk of missing Bitcoin had ballooned into an over $3.3B mystery,” U.S. Attorney Damian Williams said in a statement. The government is now seeking the forfeiture of the seized Bitcoin, which marks another high-profile example of authorities’ ability to trace crypto thefts. In February, the Department of Justice arrested a couple who allegedly conspired to launder $4.5B of cryptocurrency stolen during the 2016 Bitfinex hack. (13 comments)
Digital levies?
Talk of a Digital Service Tax (DST) is back on the table amid fears that an agreement to implement a Global Minimum Tax (GMT) will fail to get implemented. Last year, a group of 140 nations agreed to an effective levy of 15% on major multinationals regardless of where they are based, making it less advantageous to relocate operations to countries with lower tax rates. For example, an online company that has no physical presence in a country, but has significant sales there via digital advertising, would be obligated to pay some taxes to the government of that nation.
Fine print: President Biden and Treasury Secretary Janet Yellen are on board with the Global Minimum Tax, but they face challenges in getting the agreement through Congress. The changes could require the Senate to alter existing tax treaties, which would take a two-thirds vote and at least some GOP support. Republicans have already expressed opposition to any rise in taxes, especially in the current economic environment, while some lawmakers have condemned the idea of ceding taxing authority to other governments.
“I really am not able to say whether we are going to wait for six more months or nine more months, but I believe the longer these negotiations will take, the less of a chance of actually reaching an agreement,” said Zbynek Stanjura, finance minister of the Czech Republic, whose country holds the rotating EU presidency. “If we are not able to reach an agreement mid or long term, then Europe will go back to talks about digital tax.”
Outlook: Any unilateral return to a Digital Service Tax is likely to spark trade tensions with the U.S. at a time when the sides could least afford it. Under the EU’s previous plan, tech giants like Apple (AAPL), Google (GOOG, GOOGL), Meta (META) and Amazon (AMZN) would face a series of separate digital taxes from multiple countries – for marketplace services and online advertising – that would be based on a threshold of annual revenues. Many caution that this would make doing business less internationally competitive than a GMT, complicate matters by paying different taxes in every country, and may even be passed on to small businesses and local consumers that use their platforms.
Today’s Economic Calendar
6:00 NFIB Small Business Optimism Index
1:00 PM Results of $40B, 3-Year Note Auction
What else is happening…
Berkshire (BRK.B) a net buyer of stocks in Q3 to the tune of $3.7B.
Disappointing numbers from Lyft (LYFT) slam brakes on the stock.
Tyson Foods (TSN) CFO arrested less than six weeks into the post.
Activision (ATVI) says $69B sale to Microsoft (MSFT) remains on track.
Fear of ‘fast decelerating growth’ leads to Palantir (PLTR) selloff.
Trump SPAC (DWAC) soars as ex-president hints he’ll run again.
Amazon (AMZN) expands use of Rivian (RIVN) zero-emission vehicles.
Blue Apron (APRN) slides to all-time low after pulling revenue guidance.
Take-Two Interactive (TTWO) cuts bookings view below expectations.
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Good morning. Happy Monday. Hope you had a good weekend.
The Asian/Pacific markets did well. Japan, Hong Kong, South Korea, Taiwan and the Philippines rallied more than 1%. Europe, Africa and the Middle East are currently doing well. Poland, Turkey, the UAE, Russia, Finland, Hungary, Italy, Austria and Sweden are up 1% or more. Futures in the States point towards a positive open for the cash market.
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The dollar is down. Oil is down; copper is up. Gold is up; silver is down. Bonds are mixed.
Stories/News from Seeking Alpha…
#COP27
U.N. climate talks in the Egyptian resort of Sharm el-Sheikh, known as COP27, get underway this week, with many of the parties looking for concrete pledges to combat the damaging effects of climate change. It’s a trend that’s been seen since the 2015 Paris Agreement to curb warming at 1.5 degrees Celsius above pre-industrial levels, where progress is yet to be made despite many workshops, summits and conferences. “Moving from negotiations and pledges to an era of implementation is a priority,” said COP27 President Sameh Shoukry, adding that now was the time to put the money on the table.
Snapshot: Greenhouse gases like carbon dioxide, methane and nitrous oxide reached new record highs in 2021, while increasing temperatures, a loss of biodiversity and extreme weather events like floods and hurricanes are said to be growing in intensity. It doesn’t help that the globe is dealing with an energy crisis at the same time that fossil fuel manufacturing usage is being outsourced to developing nations, where deregulation of environmental protections has been used to advance their economies. This can even be seen among countries that are powering the green revolution, like nickel smelting for EV batteries, with further criticism being leveled at the sustainable commitments of some of the world’s most profitable companies.
Backlash against Coca-Cola (NYSE:KO), one of the planet’s biggest users of plastic, erupted as soon as the multinational announced that it would sponsor the COP27. While the company has pointed to its signing of a global treaty meant to tackle plastic waste through a “holistic, circular economy approach,” as well as plans to collect and recycle a bottle or can for every one it sells by 2030, many say the policies are misleading and fall way short. Coca-Cola currently produces 120B single-use bottles per year, resulting in 3.3M tons of plastic packaging (its plastic use even rose by 8.1% between 2019 and 2021).
Go deeper: Greenwashing claims aren’t limited to corporations. At a U.N. climate summit 13 years ago in Copenhagen, rich nations promised to hand developing countries $100B each year by 2020 to help them adapt to climate change, though that hasn’t materialized yet (last year’s COP26 pushed the target to 2023). The negotiations ultimately boil down to questions of fairness and trust, as well as accountability and enforcement mechanisms that will ensure the money will be spent appropriately. On tap this year are also talks centering around climate reparations, or “loss and damage” payments, to countries that cannot afford to defend themselves against climate risks. (3 comments)
Mass layoffs
A lot of disruption is going on in the tech space, with knock-on effects being seen across the whole industry. An example of this is the recent advertising debacle witnessed during Snap’s (NYSE:SNAP) earnings, which foreshadowed the stock plunges of Big Tech the following week. While it is no longer publicly traded, the fact that Twitter axed half of its workforce on Friday could inform investors in other social media platforms of what might be coming in the not-so-distant future.
Case in point: Meta Platforms (NASDAQ:META) is planning to begin large-scale layoffs this week, according to the Wall Street Journal. The firings are expected to impact “many thousands of employees” of the company’s more than 87,000-strong workforce, with Meta even telling staff to cancel non-essential travel. Shares of META have tumbled 35% over the past month and more than 70% YTD amid intensive spending on the metaverse and threats to the firm’s core social-media business (free cash flow tumbled 98% in Q3).
What is still to be seen is if any of the big editorial changes at Twitter will end up impacting Facebook, Instagram, Messenger or WhatsApp. So far, Chief Twit Elon Musk appears to be making a lot of rules on the fly, and a tweetstorm over the weekend pointed to additional adjustments in the making. “Previously, we issued a warning before suspension, but now that we are rolling out widespread verification, there will be no warning,” “any name change at all will cause temporary loss of verified checkmark” and “going forward, any Twitter handles engaging in impersonation without clearly specifying ‘parody’ will be permanently suspended.”
Too far, too fast? Bloomberg reported that Twitter is reaching out to dozens of employees who lost their jobs and asking them to return. Some of those who are being asked to come back were “laid off by mistake,” while others “were let go before management realized that their work and experience may be necessary to build the new features Musk envisions.” The NYT also suggested that Twitter would delay its $8/month model – for blue check verification marks, less ads, the ability to post longer videos and priority ranking for quality content – until after the midterm elections. Will Meta eventually go subscription? (6 comments)
Blow from zero-COVID
Talk of an iPhone production disruption has been swirling since last week, but the company just made it official. “We now expect lower iPhone 14 Pro and iPhone 14 Pro Max shipments than we previously anticipated and customers will experience longer wait times to receive their new products,” Apple (AAPL) said in a statement. “COVID-19 restrictions have temporarily impacted the primary iPhone 14 Pro and iPhone 14 Pro Max assembly facility located in Zhengzhou, China. The facility is currently operating at significantly reduced capacity.”
Snapshot: The Zhengzhou campus of Apple supplier Foxconn (OTCPK:FXCOF), better known as iPhone City, employs around 200,000 people and even includes dormitory accommodations for workers. The company is working to boost production at another factory in Shenzhen to make up for the shortfall before the holiday season, but China’s zero-COVID policy may also hamper output elsewhere. Foxconn, which produces 70% of iPhones globally, also builds the device in India, but its Zhengzhou factory assembles the majority of its global output.
“As we have done throughout the COVID-19 pandemic, we are prioritizing the health and safety of the workers in our supply chain,” Apple declared, adding that there was continued demand for iPhones. AAPL was the only stock to rally following Big Tech earnings in late October, but shares slumped 10% over the past five sessions to record their worst weekly performance since March 2020.
Commentary: “Although Apple earnings were only a week ago, supply shortages at the high end of the market and recent COVID lockdowns in China impacting a Foxconn plant could negatively impact iPhone units in the December quarter,” UBS analyst David Vogt wrote before Apple’s press release. “While we believe iPhone demand tends to not be perishable, a slippage of a couple of million units is possible below our 86M forecast.” (81 comments)
Margin headwinds
Broader market earnings will go nowhere next year, according to the latest forecast from Goldman Sachs. Strategist David Kostin said S&P 500 (SP500) margins have inflected downward, and as a result, he is trimming the S&P EPS forecast for 2023 to 0% growth from 3%.
Quote: “Following a weak Q3 earnings season in which S&P 500 net margins declined year/year for the first time since the pandemic, we lower our EPS forecasts for 2022 (to $224 from $226), 2023 (to $224 from $234) and 2024 (to $237 from $243),” he wrote in a research note. “The revised estimates reflect annual growth of 7%, 0%, and 5%, respectively. We model sales and margins separately, given the nuanced impact of various macro factors on each variable. But economic growth is the primary driver of EPS growth.”
Goldman still expects a year-end S&P 500 target of 3600 (-5%) in 2022 and 4000 (+6%) in 2023, given a notable exception to the downturn in the energy industry. “The backdrop of high oil prices and capex discipline has provided an earnings tailwind to energy firms. Net margins during the first three quarters of the year equaled 14%, the highest level on record.”
Other risks: “In a [moderate] recession, we expect S&P 500 EPS would fall by 11% to $200. Our economists assign a 35% probability of recession in the next 12 months and note that a recession would likely be mild given the lack of major financial imbalances in the economy. However, many equity investors believe a recession will begin at some point during 2023. A deeper or more prolonged recession poses downside risk to our recession scenario EPS. Revisions to bottom-up 2023 EPS estimates have been particularly sharp this year, but we see room for further cuts.” (73 comments)
Today’s Economic Calendar
12:30 PM Investor Movement Index
3:00 PM Consumer Credit
3:40 PM Fed’s Mester Speech
6:00 PM Fed’s Barkin Speech
What else is happening…
Home prices fall for third straight month in September – Black Knight.
Berkshire (BRK.B) Q3 earnings slip from Q2 on Hurricane Ian, railroads.
‘Dahmer’ continues to dominate as latest hit for Netflix (NFLX).
Pulling shoe line, Nike (NKE) suspends relationship with Kyrie Irving.
Off-patent drugs make up 91% of prescriptions, but only 18% of spending.
Exxon (XOM) expected to lose $2B on sale of California oil properties.
Philip Morris (PM) said to win Elliott’s support for Swedish Match takeover.
Over one-third of U.S. small businesses are unable to pay full rent.
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