Good morning. Happy Friday.
The Asian/Pacific markets mostly did very well. Japan, Hong Kong, South Korea and Taiwan did great while India and Indonesia were weak. Europe, Africa and the Middle East are also doing well. Denmark, Turkey, Germany, South Africa, Finland, Switzerland, Hungary, the Netherlands and Sweden are leading. Forty five minutes before the open, futures in the States point towards a down open for the cash market, thanks to the PPI number (futures were much higher prior to the news).
————— This is a Fantastic Time to Learn Trading —————
The dollar is down. Oil is up; copper is flat. Gold and silver are up. Bonds are up.
Stories/News from Seeking Alpha…
Game over?
Big Tech appears to be in for a rude awakening as the Federal Trade Commission flexes its muscles under the leadership of Lina Khan. The antitrust enforcer has voted 3-1 to block Microsoft’s (MSFT) $69B deal for game developer Activision Blizzard (ATVI), making waves across the industry. The decision is a clear sign that Khan and her team at the FTC will be more aggressive in cracking down on the biggest U.S. tech giants, who frequently grow their influence or fight off upcoming challengers via acquisition.
What are the concerns? Simply put, the FTC feels that the tie-up between Microsoft – the company behind Xbox – and one of the best known game developers could harm competition. Activision’s Call of Duty and World of Warcraft are some of the most popular gaming franchises, and turning Microsoft into the No. 3 gaming company in the world could limit rivals’ access to titles or raise prices for other gaming platforms. The FTC also said it would give the Xbox maker an unfair advantage in the new market for game subscriptions, as well as the emerging market for cloud gaming.
Microsoft has gone to great lengths in recent days and weeks to assuage the fears, like inking a deal to bring Call of Duty to Nintendo (OTCPK:NTDOY) for the next decade. A similar offer to Sony (SONY) on same-day access to the game on its PlayStation platform has so far been rebuffed, but the Xbox maker remains “committed to helping bring more games to more people – however they choose to play.” Microsoft President Brad Smith has also been spotted in Washington, meeting with lawmakers to argue that the deal would “create more opportunities for gamers and game developers.”
Go deeper: The U.S. is not the only jurisdiction where Microsoft might have to fight, as the transaction is also seeing in-depth reviews in Europe and the U.K. While the company initially took the concessions route, it now looks like it will be presenting its case in court. Prepare for a drawn-out battle that might include precedent of so-called vertical deals, whether withholding games from platforms would be profitable and whether Microsoft has made good on its past promises. The tech giant has also been in the antitrust spotlight before in a landmark DOJ suit from 1998, which saw Microsoft agree to modify some of its business practices. (89 comments)
New disclosures
The U.S. Securities and Exchange Commission has revealed new guidance that could require publicly-traded companies to disclose to investors any potential impacts from the troubled cryptocurrency market. Moreover, firms may need to share information with their investors regarding their crypto holdings, as well as their risk exposure to bankruptcies in the emerging space. Lastly, they should consider risks pertaining to a company’s liquidity position, according to the guidance.
Backdrop: The latest development comes after the once-mighty crypto exchange FTX filed for bankruptcy protection in November. Traders rushed for the exit en masse upon discovery of its multi-billion dollar balance sheet shortfall, marking its demise as the industry’s most high-profile downfall. FTX is facing a number of federal investigations, including by the SEC, while the mess sent shockwaves through the crypto ecosystem and caused high-profile crypto lender BlockFi to file for Chapter 11.
“Recent bankruptcies and financial distress among crypto asset market participants have caused widespread disruption in those markets,” the SEC’s Division of Corporation Finance wrote in a sample letter. “Companies may have disclosure obligations under the federal securities laws related to the direct or indirect impact that these events and collateral events have had or may have on their business.”
Go deeper: The crypto market downturn has been highlighted by huge drawdowns in some of the largest digital tokens by market cap, including Bitcoin (BTC-USD) dropping some 70% from its November 2021 all-time high. A handful of U.S.-listed firms have already announced their exposures to Sam Bankman-Fried’s short-lived crypto empire, namely Coinbase (COIN) and Silvergate Capital (SI). In November, SEC Chairman Gary Gensler also confirmed that crypto investors “need better protection in this space.” (2 comments)
Meet C919
After 14 years of development, the Commercial Aircraft Corporation of China, better known as COMAC, delivered its first domestically-developed passenger jet to launch customer China Eastern Airlines (NYSE:CEA). The C919, similar to the Airbus (OTCPK:EADSY) A320 and Boeing (NYSE:BA) 737 narrow-body jet families, brings China a step closer toward its ambitious goal of becoming a global civil aerospace player. The plane is expected to make its maiden commercial flight in the spring, with a trip between Shanghai and the capital Beijing, as well as hopes to quickly expand routes to other cities.
Industry response: “Congratulations to COMAC for delivering the first C919, bringing a new model to the global civil aviation market,” Boeing China wrote on its WeChat account. “We look forward to working with COMAC and other industry peers to continue working on the long-term sustainable development of the aviation industry,” Airbus added in a statement.
China’s first national passenger jet contains 164 seats, with a maximum range of 3,450 miles. The C919’s price tag also comes in at $99M, compared with costs of around $111M and $122M for similar-sized Airbus A320neos and the Boeing 737 Max family. In terms of backlog, COMAC has already booked 1,115 orders (mostly from Chinese lessors) versus the 6,200 and 3,590 order backlog for the A320neo and 737.
Outlook: Despite the emerging C919, it will take many years before COMAC becomes a serious threat to the Western aerospace duopoly. Besides finding new customers outside of China, the program is expected to produce only 25 C919s per year by 2030, which is way lower than the monthly narrow-body production rates at its rivals. The C919 also relies heavily on Western components, including engines, flight systems and other critical parts that are manufactured by companies like GE (NYSE:GE), Honeywell (NASDAQ:HON) and Safran (OTCPK:SAFRY). (15 comments)
Rare miss
Costco (COST) uncharacteristically missed earnings estimates after the bell on Thursday. Investors were eager to hear the results given the headwinds facing the economy, as well as whether spending is being diverted from discretionary items to the necessities.
Snapshot: The retailer reported $3.07 in earnings per share on $53.44B in revenue, compared to analyst expectations of $3.12 and $54.68B, respectively. The miss wasn’t seen as major, with the stock hardly moving in response, but it did suggest that many shoppers are paring back on bigger ticket items. Comparable sales from stores open at least a year also rose 7.1% during the period, marking the first time the figure has fallen below 9% over the past two years.
Other retailers have flagged weaker sales trends this past quarter, including Target (TGT) and Walmart (WMT). Costco may look to make up some of the lost profits with a membership fee hike, and CFO Richard Galanti said it wasn’t a question of if, but when. “We feel that we’re in a very strong competitive position right now and if we have to wait a few months or several months, that’s fine.”
From the SA comments section: “I see it as more about the overall change in the economy than Costco, but it’s been richly valued and vulnerable to a downturn,” wrote user zingerizer. “I am a big believer in COST despite the miss,” countered DividendLand. “On the surface one might think missing estimates is a serious problem. I think one has to dig deeper. Lack of inventory is a problem, and might be an explanation.” (28 comments)
Today’s Economic Calendar
8:30 Producer Price Index
10:00 Consumer Sentiment
10:00 Wholesale Inventories (Preliminary)
1:00 PM Baker-Hughes Rig Count
What else is happening…
Lululemon (LULU) holiday quarter guidance misses high expectations.
Broadcom (AVGO) to face European probe into VMware (VMW) deal.
Updated COVID boosters cleared for children as young as six months.
Lithium execs say mega-rally in prices could have more room to run.
Keystone pipeline (TRP) shut after 14,000-barrel oil spill in Kansas.
United Airlines (UAL) poised for major order of Boeing (BA) Dreamliners.
Meta Platforms (META) set to face antitrust trial on virtual reality tie-up.
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Good morning. Happy Thursday.
The Asian/Pacific markets were mixed. Hong Kong did great while Taiwan and Australia were weak. Europe, Africa and the Middle East are mixed. Greece, South Africa, Norway and Israel are up; Poland, the UAE, Russia and Hungary are down. Futures in the States point towards a moderate up open for the cash market.
————— This is a Fantastic Time to Learn Trading —————
The dollar is flat. Oil and copper are up. Gold and silver are up. Bonds are down.
Stories/News from Seeking Alpha…
Deeper ties
Saudi Arabia is rolling out the red carpet for Chinese President Xi Jinping, who has arrived in the country for a four-day visit. Xi’s plane was escorted by Saudi fighter jets on the way into Riyadh, while he was greeted at the airport by the capital’s governor and the Saudi foreign minister. It’s a stark contrast to when President Biden visited the country in July after previously pledging to make a “pariah” out of the Kingdom over the killing of U.S.-based columnist Jamal Khashoggi (and considered a return to the JCPOA with archrival Iran).
Bigger picture: After much debate within the administration, Biden eventually decided to visit the Saudis amid an energy crisis at home and a need to reassert American leadership in the region. Beijing is viewing the trip through much of the same lens as it expands its sphere of influence. For Saudi Arabia, China has heavily outpaced the U.S. as its largest trading partner since 2016, and while the Kingdom has historically relied on American military aid under “oil for security” policies, the times may be changing. The U.S. shale industry has eliminated the need for a lot of Middle East oil, while China has subsequently become the Saudi’s top crude customer.
“We are mindful of the influence that China is trying to grow around the world,” noted John Kirby, a spokesman for the U.S. National Security Council. “The Middle East is certainly one of those regions where they want to deepen their level of influence.”
Economically speaking: Some $30B worth of agreements are expected to be signed, including energy and infrastructure deals, and sectors that could benefit from U.S.-blacklisted firms like telecoms equipment giant Huawei Technologies. The two sides are also expected to coordinate China’s Belt and Road Initiative with Saudi Arabia’s Vision 2030 development plan, while talks on a free trade agreement between China and the Gulf Cooperation Council are entering their final stage. (9 comments)
#NYTStrike
More than 1,100 New York Times (NYT) newsroom workers and staffers are set to walk out today in a historic one-day strike following the breakdown of talks between the workers’ union and the company. Negotiations between the two sides have gone on for some time, but frustration at the union – The NewsGuild of New York – has grown over the lack of progress since its last contract with the paper expired in March 2021. It’s a notable strike as the last industrial action to hit the NYT occurred some 40 years ago.
Quote: “Today we were ready to work for as long as it took to reach a fair deal, but management walked away from the table with five hours to go,” the Guild said. “It’s official: @NYTimesGuild members are walking out for 24 hours on Thursday.”
Dozens of bargaining sessions have been held since the March 2021 expiration, but the two sides have failed to come to an agreement on “salaries, health and retirement benefits, and other issues.” Compensation is where they may be furthest apart, with the news organization offering union members a 5.5% raise upon ratification of the contract, 3% raises in 2023 and 2024, and a 4% retroactive bonus to compensate for a lack of raises since the contract expired. The union has proposed a 10% raise upon ratification, 5.5% raises in 2023 and 2024, and an 8.5% retroactive bonus.
Response: “It is disappointing that they are taking such an extreme action when we are not at an impasse,” NYT spokesperson Danielle Rhoades Ha declared. “Strikes typically happen when talks deadlock. That is not where we are today,” added Joe Kahn, executive editor of The Times. “While the company and the NewsGuild remain apart on a number of issues, we continue to trade proposals and make progress toward an agreement.” (5 comments)
Replacing the JEDI
The Pentagon has finally made a decision about upgrading its cloud infrastructure following years of delays, legal challenges and shifting priorities. Amazon Web Services (AMZN), Google (GOOG, GOOGL), Microsoft (MSFT) and Oracle (ORCL) will each get a piece of the Joint Warfighting Cloud Capability contract, which has a shared ceiling of $9B. The competition was intense to scoop up a share of the JWCC deal, which will be awarded in parts and has a total estimated completion date of June 2028.
Backdrop: The Joint Warfighting Cloud Capability succeeds an earlier contract known as the Joint Enterprise Defense Infrastructure – better known in the industry as JEDI – that sought to build a large common cloud for the entire Defense Department. Amazon Web Services was considered the frontrunner for JEDI before the DoD handed it to Microsoft in October 2018, but AWS didn’t back down. The company alleged in a lawsuit that the award was tainted by then President Trump’s animus against Jeff Bezos and related litigation threatened to delay the deal for years.
There was also a slew of objections from Oracle and Congress, prompting the Pentagon to acknowledge that advances in cloud computing and the time frame of the contract could render the scheme obsolete. The DoD eventually pulled JEDI in favor of the expanded JWCC, while seeking proposals from additional companies. JWCC is intended to offer access to unclassified, secret and top-secret data to military personnel worldwide, and serve as a backbone for modern war operations.
Outlook: Splitting the contract among several vendors is similar to how things are increasingly being done in the private sector. The multi-cloud strategy won’t concentrate the program under one provider, which would have sole responsibility for hosting some of the military’s most sensitive data, as well as preventing service disruptions and outages. (21 comments)
Driverless fleet
Locals and visiting tourists to Las Vegas can now order a self-driving Uber (UBER) for rides within the city. While the all-electric IONIQ 5 robotaxis will be dispatched with vehicle operators in the front seats – to monitor the technology and provide support – a fully driverless service is planned for 2023. Uber is partnering with Motional – a joint venture between Hyundai (OTCPK:HYMLF) and Aptiv (APTV) – on the project, which may expand to other destinations like Los Angeles in the near future.
Ahead of the curve? Following a deadly crash in Arizona and dwindling R&D funding, Uber gave up its standalone autonomous ambitions in 2020 by selling its self-driving subsidiary to Aurora Technologies. While Uber still holds a stake in the car tech startup, and CEO Dara Khosrowshahi sits on its board, the company is feeling pressure to invest in an industry which its founder once hailed as critical to the future of the firm. In September, Uber inked a 10-year agreement with Nuro on autonomous food delivery, but it’s now looking to get back into the robotaxi game as the technology gradually progresses.
“Autonomous vehicles are still a reality we can expect but it’s not going to happen overnight,” said Noah Zych, global head of autonomous mobility and delivery at Uber. “The way we look at it at Uber, it’s going to be a hybrid network with a mix of driverless cars and human drivers, for a very, very long time.”
Go deeper: New labor rules are threatening Uber’s current business model, which relies heavily on independent contractors, by classifying its gig drivers as employees. The new partnership with Motional hopes to form one of the largest autonomous vehicle networks, with the potential of reaching millions of riders.
Today’s Economic Calendar
8:30 Initial Jobless Claims
10:00 Quarterly Services Report
10:30 EIA Natural Gas Inventory
4:30 PM Fed Balance Sheet
What else is happening…
Meme no longer? GameStop (GME) logs big loss amid slowing sales.
AMC Entertainment (AMC) said no risk of imminent restructuring.
Exxon (XOM) boosts U.S. worker pay as profit reaches record high.
Peru removes president from office amid constitutional crisis.
Higher pricing at Campbell Soup (CPB) feeds earnings beat.
Rising bankruptcy risk sends Carvana (CVNA) crashing over 40%.
Theranos (THERA) president gets 13 years in prison for fraud.
Musk’s bankers look at Tesla (TSLA) margin loans to cut Twitter debt.
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Good morning. Happy Wednesday.
The Asian/Pacific markets were down across-the-board. Japan, Hong Kong, South Korea, Taiwan, Australia, Indonesia, Singapore, Thailand and the Philippines all posted solid losses. Europe, Africa and the Middle East are mostly down. Turkey, South Africa, Finland, Switzerland, Norway, the Netherlands, Israel, Sweden and Saudi Arabia are down. Futures in the States point towards a down open for the cash market.
————— This is a Fantastic Time to Learn Trading —————
The dollar is down. Oil is up; copper is unchanged. Gold and silver are up. Bonds are up.
Stories/News from Seeking Alpha…
Down to Georgia
Democratic Senator Raphael Warnock has won re-election in Georgia’s runoff election, defeating Republican challenger Herschel Walker, who had been backed by former President Donald Trump. With 99% of the estimated vote counted, Warnock notched 51.4% of the ballot, compared to 48.6% for Walker. Even before the runoff, the Georgia Senate race already become one of the most expensive congressional races of all time, with both parties shelling out around $250M on political ads in the general election alone.
Bigger picture: Warnock’s victory means that Democrats will control the Senate 51-49 starting in January, cementing a hold on the chamber they have controlled since early 2021. Last month, Democrat John Fetterman scored a victory over Republican Mehmet Oz in Pennsylvania, flipping a GOP seat and giving Democrats control of the chamber with at least a 50-50 partisan split (and a tie-breaking vote from Vice President Kamala Harris). “After a hard-fought campaign – or should I say campaigns – it is my honor to utter the four most powerful words ever spoken in a democracy: The people have spoken,” Warnock told the crowd in a victory speech.
Congressional gridlock still lies ahead, with the GOP taking control of the House of Representatives, though a clear majority for Senate Democrats could give the party more flexibility on passing legislation. It will also lessen the influence of centrist Sens. Joe Manchin and Kyrsten Sinema, who had forced the party to make big changes to tax, finance and healthcare legislation, as well as a climate framework originally called Build Back Better. Democrats will additionally have outright control of Senate committees and will no longer be bound to a power-sharing agreement with the GOP.
Commentary: “If Democrats win Georgia, then they would hold a 51-49 majority and would adjust committee ratios so Democrats would have a one-vote majority on each committee,” wrote Brian Gardner, Stifel’s chief Washington policy strategist, ahead of the vote. “That would allow Senate committees to issue subpoenas without Republican support. This is something investors will likely overlook but it could increase headline risk for some sectors such as technology (NYSEARCA:XLK) and social media (NASDAQ:SOCL), financials (NYSEARCA:XLF) and healthcare (NYSEARCA:XLV), as Senate committee chairmen would have increased flexibility to call witnesses to testify before the committees.” (19 comments)
Shoplifting trouble
Theft is becoming a big problem for retailers, especially as margins show signs of slowing in the current economic environment. According to the National Retail Federation’s Retail Security Survey, retail “shrink” is now an almost $100B problem, up from $94.5B in losses in 2021, and $90.8B in 2020. While “shrink” encompasses many types of losses like gift card fraud and inventory mismanagement, it is primarily driven by external theft, which has prompted companies to boost their budgets for loss prevention and technology.
Quote: “Theft is an issue. It’s higher than what it has historically been,” Walmart (NYSE:WMT) CEO Doug McMillon told CNBC in an interview. “We’ve got safety measures, security measures that we’ve put in place by store location. I think local law enforcement being staffed and being a good partner is part of that equation, and that’s normally how we approach it.”
Walmart has rolled out additional plexiglass cases in vulnerable locations, while locking up or partitioning off high-price items like health and beauty products. When asked about some laws in local jurisdictions that effectively decriminalize low-level offenses, McMillon said it could have repercussions if not corrected over time. “Prices will be higher, and/or stores will close. It’s really city by city, location by location.”
Bottom line: On an earnings call last month, Target (NYSE:TGT) CFO Michael Fiddelke revealed that shoplifting at company stores had jumped 50% Y/Y, resulting in more than $400M in losses for the retailer in fiscal 2022. (14 comments)
Not so easy
Stocks in China aren’t getting much love despite another easing of the country’s zero-COVID policy. The Shanghai Composite ended the session down 0.4%, while the Hang Seng Index closed 3.2% lower on Wednesday. Investors appear to be focused on trade data for November that was reported overnight, which showed exports (-8.7% Y/Y) and imports (-10.6% Y/Y) shrinking at their steepest pace since 2020.
Commentary: “Outbound shipments will receive a limited boost from the easing of [China’s] virus restrictions, which are no longer a major constraint on the ability of manufacturers to meet orders,” said Julian Evans-Pritchard, senior China Economist at Capital Economics. “Of much greater consequence will be the downturn in global demand for Chinese goods due to the reversal in pandemic-era demand and the coming global recession.”
The government has tried to respond to weakening growth by implementing a series of policy measures, like cutting the reserve requirement ratio of banks and loosening financing restrictions to save the property sector. China is also trying to play catch-up by loosening its severe COVID measures, though a full-blown relaxation of pandemic controls will take significantly more time and high-risk areas still remain subject to lockdown-like restrictions.
The latest: Asymptomatic or mild coronavirus cases will now be allowed to isolate at home rather than at hospitals or centralized quarantine facilities. Citizens also no longer need negative tests in order to travel between different parts of the country, while Beijing became the latest city to announce negative tests won’t be needed to enter public venues. “When it comes to implementation, there are a lot of inconsistencies between different departments and different regions,” noted Dan Wang, chief economist at Hang Seng China.
Missing parts
Supply chain disruptions are still very real for companies and their investors. Airbus (OTCPK:EADSY) has become the latest firm to roll back targets for 2022, saying its guidance for “around 700” commercial aircraft deliveries is now out of reach. It’s the second time the European planemaker has lowered its delivery forecast, originally predicting 720 handovers before cutting its guidance in the summer.
Bigger picture: Parts shortages have become commonplace in the aviation industry, affecting everything from small components to engines. Soaring energy costs are also squeezing suppliers, and Airbus CEO Guillaume Faury doesn’t see the problem resolving itself until the end of next year. The situation has even led the company to adjust the production-rate increase on its best-selling A320 jets to 65 units per month in 2023 and 2024, though it hopes to lift production to 75 a month by the middle of the decade.
Despite missing this year’s delivery target, Airbus said it won’t have any impact on profitability and free cash flow guidance for 2022. The stock has traded sideways for much of the last year, while rival Boeing (BA) has declined 13% over the past 52 weeks. While Boeing hasn’t given a 2022 delivery target for its commercial aircraft deliveries, analysts expect the number to come in around 470, and the U.S. planemaker should give investors the latest figures next week.
Fun fact: Boeing’s last 747 jumbo jet rolled off the production line yesterday, 53 years after first taking flight in 1969. Retiring the “Queen of the Skies” was a matter of time as the industry began to turn to smaller fuel-efficient twin-engine models, like the 777 and 787 Dreamliner. (4 comments)
Today’s Economic Calendar
7:00 MBA Mortgage Applications
8:30 Productivity and Costs
10:30 EIA Petroleum Inventories
3:00 PM Consumer Credit
What else is happening…
JPMorgan’s (JPM) Dimon: ‘Crypto is a complete sideshow, like pet rocks.’
Nordstrom (JWN) stock sinks as CEO calls out consumer strain.
Textron (TXT) $80B Army helicopter contract equals $11 a share – Jefferies.
EV disruption: Apple (AAPL) said to push self-driving car launch to 2026.
BuzzFeed (BZFD) plans to cut costs by laying off 12% of its workforce.
In the firing line: Morgan Stanley (MS) trims about 2% of global headcount.
Juul Labs (JUUL) announces settlement of more than 5,000 lawsuits.
Meta Platforms (META) plunges another 7% as investors remain concerned.
Pending merger approval: ‘Call of Duty’ set to come to Nintendo (OTCPK:NTDOY).
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Good morning. Happy Tuesday.
The Asian/Pacific markets leaned down. The Philippines did great, but South Korea, Taiwan and Indonesia were weak. Europe, Africa and the Middle East lean to the downside. Turkey and Hungary are up; Denmark, Poland, Russia, Norway, Israel, Austria, Sweden and the Czech Republic are down. Futures in the States point towards a flat open for the cash market.
————— This is a Fantastic Time to Learn Trading —————
The dollar is down. Oil is down; copper is up. Gold and silver are up. Bonds are up.
Stories/News from Seeking Alpha…
Cashing in on chips
Taiwan Semiconductor Manufacturing (NYSE:TSM) is set to make history with one of the largest foreign investments in the United States. The company will announce plans today to build its second chip plant in Arizona, increasing its investment in the state to $40B. The event will be attended by President Biden, as well as CEOs who will benefit from the increase in American chip production, like Apple’s (NASDAQ:AAPL) CEO Tim Cook, Micron’s (NASDAQ:MU) Sanjay Mehrotra and Nvidia’s (NASDAQ:NVDA) Jensen Huang.
Cutting edge: TSMC previously disclosed a $12B investment plan to build its first factory in Arizona that was slated to manufacture 5-nanometer chips (and later changed to 4-nanometers) with mass production expected in 2024. Construction on the second site that will make 3-nanometer chips (the tiniest “die shrink” available today) will start in the coming year, with production set to begin in 2026. Once the plants come online, they are expected to deliver enough chips to meet U.S. annual demand of 600K wafers per year, according to Ronnie Chatterji, White House Coordinator for CHIPS Implementation at the National Economic Council.
“It’s the foundation of our personal electronics, and also the future of quantum computing and AI,” Chatterji declared. “That’s the definition of supply chain resilience. We won’t have to rely on anyone else to make the chips we need.” Warren Buffett recently took a major position in TSMC in a bet that the world cannot do without silicon.
Go deeper: The passage of the CHIPS and Science Act in early August helped provide certainty to companies like TSMC to expand their footprint in the U.S. The bill included $52B in loans, grants and other incentives, as well as billions in tax credits to support domestic semiconductor production. Washington has been worried about reliance on microchips made in Taiwan for years, but the dependence became more apparent during the pandemic, when supply chain issues affected everything from cars and electronics to healthcare equipment and advanced weapons systems. (4 comments)
View from the top
Things aren’t looking so bright for the U.S. economy as American CEOs laid out their outlook in the latest index from the Business Roundtable. The CEO Economic Outlook Survey, which measures conditions over the next six months, declined 11 points from last quarter to 73, continuing a downward trend that has taken shape over the past year. The index even dipped below its long-run average of 84 since Q3 of 2020, though it remains above the expansion or contraction threshold of 50.
What it means: CEOs see slower hiring, softer sales and decreased capital investment in the near-term, but the economy isn’t facing a critical crisis or full-scale recession. 2023 will likely see a growth slowdown as the Fed pumps the brakes to rein in inflation, though it won’t be accompanied by widespread unemployment or systematic consequences.
“To strengthen the economy, Business Roundtable urges Congress and the Administration to undertake pro-growth policies, including restoring full and immediate expensing of American R&D investments this session and reforming the permitting system to expedite energy infrastructure projects,” said Business Roundtable CEO Joshua Bolten. “We urge U.S. policymakers to position America for the strongest economic recovery possible,” added GM (GM) CEO Mary Barra, who chairs the Business Roundtable. “Sound policy action in the short term will yield long-term economic benefits and lay a solid foundation for our growth and competitiveness.”
Other stats: 49% of the 142 Business Roundtable CEOs identified labor costs as their top cost pressure, followed by 15% who flagged material costs and 14% who mentioned supply chain disruptions. Other leading pressures were associated with energy and regulatory costs.
New lows
Another shakeup at Salesforce (CRM) is continuing to shake up the stock. Stewart Butterfield, the head of Slack, will leave the messaging and communications company that Salesforce acquired for $27B in August 2021. His departure follows another high-profile exit last week, which saw Salesforce co-CEO Bret Taylor – who is credited as the architect of the Slack deal – leave the company to return to his “entrepreneurial roots.”
Fine print: Butterfield said in a statement that his exodus had “nothing to do with Bret [Taylor’s] departure,” and that his leaving the cloud business software company had “been in the works for several months!” “As hackneyed as it might sound, I really am going to spend more time with my family (as well as work on some personal projects, focus on health and generally put time into those things which [are] harder to do when one is leading a large organization).”
Don’t forget that Gavin Patterson, Salesforce president and strategy chief, recently said he would leave the firm in January, while Mark Nelson, president and CEO of Salesforce’s Tableau product, tweeted last Thursday that it was his last day on the job.
Outlook: Executives jumping ship isn’t the only thing worrying investors. Salesforce last week reported Q3 revenue growth of 14%, marking its slowest expansion since its IPO in 2004 (and declined to provide guidance for the next fiscal year). The stock tanked on the news, which came along with Taylor’s resignation, while shares yesterday slumped another 7.3% to $134 to mark their lowest level since the pandemic selloff in March 2020. (22 comments)
New(s) threat
A bill known as the Journalism Competition and Preservation Act is gaining traction in Congress that could enable “final offer” arbitration, sometimes called “baseball arbitration,” for the remuneration of online content. Smaller publishers argue that it would level the playing field by allowing news organizations to band together for a larger share of the advertising revenue pie, though Big Tech feels quite the opposite. In fact, Facebook-owner Meta (NASDAQ:META) has even threatened to remove news content from its U.S. platform, in a case that resembles warnings seen Down Under after similar legislation passed in Australia last year.
Quote: “If Congress passes an ill-considered journalism bill as part of national security legislation, we will be forced to consider removing news from our platform altogether rather than submit to government-mandated negotiations that unfairly disregard any value we provide to news outlets through increased traffic and subscriptions,” tweeted Meta spokesperson Andy Stone.
“The Journalism Competition and Preservation Act fails to recognize the key fact: publishers and broadcasters put their content on our platform themselves because it benefits their bottom line – not the other way around. No company should be forced to pay for content users don’t want to see and that’s not creating a meaningful source of revenue. Put simply: the government creating a cartel-like entity which requires one private company to subsidize other private entities is a terrible precedent for all American businesses.”
How did things end in Australia? Facebook went through with a threat by banning news from its website in March 2021, but reversed the decision several days later by brokering a deal with the government. Among the amendments was a clause stipulating that digital platforms and news groups would be required to mediate for two months before subjecting them to mandatory arbitration. The government would also take into account existing commercial agreements and give digital platforms a month’s notice before reaching any final decision on the law’s application. (7 comments)
Poll Results
Thanks to everyone who participated in Wall Street Breakfast’s ‘Survey Monday.’ The poll garnered close to 700 responses and showed a sizable bullish outlook for oil. 73.4% of the replies see the next stop for U.S. West Texas Intermediate at $90, compared to 26.6% who think the crude oil benchmark will first hit $70.
Today’s Economic Calendar
8:30 Goods and Services Trade
What else is happening…
ISM Services Index unexpectedly turns higher in November.
Exxon (XOM) lifts base pay for CEO Woods, other top executives.
California’s Newsom proposes legislation to hit oil company profits.
SCOTUS declines Centripetal’s appeal in Cisco (CSCO) patent case.
Block (SQ) tumbles 7% as rising yields and costs hit fintechs.
Antisemitism controversy: Nike (NKE) cuts ties with Kyrie Irving.
Layoffs spreading? PepsiCo (PEP) plans to cut hundreds of jobs – WSJ.
Herbalife (HLF) tumbles 10% AH on proposed $250M private offering.
Natural gas sinks on forecasts for milder weather across the U.S.
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Good morning. Happy Monday. Hope you had a good weekend.
The Asian/Pacific markets were split. China did well, and Hong Kong was very strong. Malaysia, Indonesia and the Philippines were weak. Europe, Africa and the Middle East are split. Poland, Turkey, Russia, South Africa and the Czech Republic are up; France, Germany, Norway, Hungary and Saudi Arabia are down. Futures in the States point towards a gap down open for the cash market.
————— This is a Fantastic Time to Learn Trading —————
The dollar is down. Oil is up big; copper is up small. Gold and silver are down. Bonds are down.
Stories/News from Seeking Alpha…
Crude reality
A price cap on Russian seaborne oil came into force on Monday as the West attempts to curb revenue flows to Moscow’s war machine. After intense negotiations, G7 nations and Australia agreed to a $60 per barrel price level, with an adjustment mechanism that keeps the cap at least 5% below the market rate and allows for revisions every two months. Crude remains Russia’s economic lifeblood, especially after the country put a stop to natural gas sales to Europe (a move that was first attributed to maintenance problems and later to sanctions).
How it works: The deal allows Russian oil to be shipped to third-party countries using G7 and EU tankers, only if the cargo is bought at or below the $60 per barrel cap. The level is seen as high enough to cover production costs and encourage more output, though Ukraine’s Volodymyr Zelenskyy slammed the agreement, calling it “quite comfortable for the budget of a terrorist state.” G7 insurance companies, credit institutions and transport services will also have to observe the price ceiling, which is important as 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.
While the industry is still awaiting a complete response from Russia, the Kremlin has said it will redirect its oil supply to “market-oriented partners” even if that means it will have to cut production. A presidential decree would also prohibit loadings destined for any countries that adopt the restrictions, and ban any reference to a price cap in contracts for Russian crude or oil products. “We are working on mechanisms to prohibit the use of a price cap instrument, regardless of what level is set, because such interference could further destabilize the market,” said Russian Deputy Prime Minister Alexander Novak.
Outlook: Russia is the world’s second-largest oil exporter, meaning how the situation plays out could influence prices in the months ahead. Many analysts still say that Russia has enough of a shadow fleet to skirt the sanctions, meaning more shipments will be rerouted, which is already happening across global crude markets. While that could keep oil prices at current levels, or even depress them based on demand factors, others are more fearful about the future, saying that a drop in Russian sales or output could lead to a surge in crude and gasoline prices worldwide. (19 comments)
OPEC+ unchanged
The direction of crude oil is growing even more uncertain after OPEC+ decided on Sunday to keep its oil production target unchanged at its latest meeting. The group said there were just too many unknowns to tinker with policy at the moment, such as the G7 oil price cap, recession worries and China easing its zero-COVID policy that has battered its fuel demand. China’s Xi Jinping will also head to Saudi Arabia this Thursday to meet Saudi Crown Prince Mohammed bin Salman, which could be another pivotal moment for global energy markets (the two economies represent the world’s biggest oil importer and exporter).
Market movement: WTI crude oil futures (CL1:COM) have declined 12% over the past month, and are down 30% over the last six months, but have risen 5% over the past week – and a total of 7% YTD – to around $80 per barrel.
OPEC already slashed production by 2M barrels per day in early October, and while crude briefly topped $90 per barrel as a knee-jerk reaction, it retreated to as low as $73 just a week ago. The output cut was a blow to White House-led efforts to boost production, with the Biden administration confirming it would release additional output from Strategic Petroleum Reserve as needed and then replenish the reserve. Oil volatility is likely to continue in the sessions to come, given the unpredictability of supply and demand.
Go deeper: The next official meeting of OPEC+ is in June, but a gathering of the group’s Joint Monitoring Committee – led by Saudi Arabia and Russia – will meet in February, and can call a ministerial production meeting if there are any major shifts in the market. (84 comments)
iVersify
While China continues to loosen its COVID restrictions, one company is growing nervous about how reliant it has become on the world’s second-largest economy. The country has been a key piece of how Apple (NASDAQ:AAPL) transformed into becoming the world’s most valuable company, with a supply chain and outsourcing strategy that has been in place since the late 1990s. The tech giant is now looking elsewhere in Asia, like India and Vietnam, but challenges await and the task won’t be easy.
Backdrop: Turmoil at Apple supplier Foxconn’s (OTCPK:FXCOF) iPhone factory in the city of Zhengzhou drew attention last month as videos of worker riots were shared on social media. It’s unclear how many of the 300,000 employees at “iPhone City” were involved, but Apple has flagged “lower iPhone 14 Pro and iPhone 14 Pro Max shipments” due to prior curbs at the complex, which includes dormitory accommodations and is responsible for around 80% of global iPhone output. Besides iPhone assembly, many Apple components are made in China, with some estimating that 95% of total iPhone supply still comes from the country.
“In the past, people didn’t pay attention to concentration risks,” noted Alan Yeung, former U.S. Director of Strategic Initiatives at Foxconn. “Free trade was the norm and things were very predictable. Now we’ve entered a new world.”
Fun fact: Operating profit for Apple’s China business totaled $31B last year, which was more than the figures for each of China’s largest tech giants – Alibaba (BABA), Baidu (BIDU), Tencent (OTCPK:TCEHY) and Xiaomi (OTCPK:XIACY).
Trade dispute
Green tensions are spilling into the open ahead of a U.S.-EU ministerial meeting today of the Trade and Technology Council. The bloc claims that the Americans aren’t creating a level playing field, with much of the $370B Inflation Reduction Act going towards clean technology. The green energy subsidies and tax breaks are aimed at boosting domestic production for U.S. companies as the government plows billions into businesses involved in electric vehicle technology and the energy transition.
Quote: “The new assertive industrial policy of our competitors requires a structural answer,” declared Ursula von der Leyen, the president of the European Commission. “There is a risk that the Inflation Reduction Act could lead to unfair competition, could close markets and fragment critical supply chains. We must take action to rebalance the playing field… to improve our state aid frameworks. In other words: We need to do our homework in Europe and at the same time work with the U.S. to mitigate competitive disadvantages.”
Things are looking even more intense after the head of the European Parliament’s trade committee said that elements of Inflation Reduction Act would mean that the EU needs to file a complaint at the World Trade Organization. It’s not only about luring investors away from Europe, but also shutting out European companies that could benefit from the tax breaks and subsidies that are only available for U.S.-based businesses. Some even think that things could quickly morph into a trade war if things cannot be settled diplomatically.
More assertive policies: “We are very careful to avoid distortions in our single market, but we must also be responsive to the increasing global competition on clean tech,” von der Leyen continued. “If we see that investments in strategic sectors are leaking away from the EU, this would only undermine the single market. That is why we are now reflecting on how to simplify and adapt our state aid rules.”
Today’s Economic Calendar
9:45 PMI Composite Final
10:00 Factory Orders
10:00 ISM Service Index
12:30 PM Investor Movement Index
What else is happening…
Space industry in focus amid NASA’s Artemis I return flyby of the Moon.
Vandalism leaves many Duke Energy (DUK) customers without power.
Post-FTX: JPMorgan still sees a need for centralized crypto exchanges.
Vodafone (VOD) CEO Nick Read to step down at the end of 2022.
Elon Musk says Apple (AAPL) has ‘fully resumed’ advertising on Twitter.
Tesla (TSLA) to cut Shanghai production amid slow demand – Bloomberg.
Florida working to let Disney (DIS) avoid ‘Don’t Say Gay’ fallout – FT.
FTC rift may provide path for $69B Microsoft (MSFT)-Activision (ATVI) deal.
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