Good morning. Happy Friday. Happy Quad Witching Day.
The Asian/Pacific markets were mostly weak. Hong Kong, Malaysia and Indonesia did well, but Japan, India, Taiwan, Australia, Singapore and the Philippines were weak. Europe, Africa and the Middle East are down big. The UK, Denmark, France, Greece, South Africa, Finland, Norway, Spain, the Netherlands, Portugal, Austria and Sweden are down more than 1%. Futures in the States point towards a big gap down open for the cash market.
————— This is a Fantastic Time to Learn Trading —————
The dollar is unchanged. Oil is down; copper is flat. Gold is up; silver is flat. Bonds are down.
Stories/News from Seeking Alpha…
Reality check
Worries about the future of Federal Reserve policy are intensifying, fueling a substantial selloff on Wall Street on Thursday. The Dow Jones Industrial Average tumbled 764 points to log its worst day in three months, while the S&P 500 and Nasdaq dropped 2.5% and 3.3%, respectively. As mentioned on yesterday’s Wall Street Breakfast, Fed Chair Jerome Powell could not have been more clear about the long fight ahead to get back to price stability and that the central bank “will stay the course, until the job is done.”
Don’t fight the Fed! The hawkish tone is not only prevalent in the U.S. The European Central Bank and Bank of England hikes rates by a similar half a percentage point yesterday, opening up a new chapter for the world economy. Whispers of a recession have turned into screams, while the last big batch of economic data for 2022 is worrying traders as they begin to leave the office for the holidays.
U.S. retail sales were weaker-than-expected for November, pointing to a sluggish start to the holiday shopping season. The figure, which includes spending at stores, online and at restaurants, slipped 0.6% last month, compared to the 0.2% drop that economists had expected. At the same time, the Philly Fed Manufacturing Index and Empire State Manufacturing Survey both came in below expectations, with both posting a negative reading for December.
Stir the brew: Don’t forget that today is quad witching day, which refers to the simultaneous expiration of market index futures, stock futures, market index options and stock options at the end of every quarter. The event can lead to higher trading volumes and more volatility, giving speculators an opportunity for quick arbitrage opportunities from last-minute swings. This time around, $4T in options contracts are set to expire, possibly making Friday the busiest session for options traders this year, noted Rocky Fishman, head of index volatility research at Goldman Sachs. (57 comments)
National review
Securing the electric grid has been a trending topic following two shootings at substations in North Carolina on Dec. 3. The attacks damaged equipment of provider Duke Energy (NYSE:DUK) and caused more than 45,000 customers to lose power. A third attack last week saw shooters target another Duke substation in South Carolina, while at least four substations in Oregon and Washington state have been targeted since November.
Snapshot: Suspects have yet to be identified, but the site of the blackout-causing attack was enormous – around 75% of the size of a football field. This likely means whoever was responsible “knew right where to shoot to create a slow leak into the transformers, which drained the oil so that they had time to get out and get away before anyone would notice,” said Moore County Chairman Nick Picerno. Bigger transformers, which could be the size of a railroad car, are not easily replaceable, as the U.S. doesn’t produce too many of them and there are long backlogs for the devices.
The Feds are now getting involved, ordering a review of security standards for the nation’s electricity transmission network to see if additional improvements are necessary. Power transformers are highly visible and “are really vulnerable – sometimes to a drunk with a gun and an attitude,” noted Mark Christie, Commissioner of the Federal Energy Regulatory Commission. “We have a lot of incidents of that. That’s not unusual. The substations are a different ballgame.”
By the numbers: The U.S. electrical grid includes more than 50,000 substations – which transform high voltage from big power lines into lower voltages for homes and businesses – across more than 700,000 miles of transmission lines. (15 comments)
Focus on profits
The tech trade may be in the doldrums, but software company Adobe (ADBE) just notched a great fourth quarter. Net profits reached nearly $1.2B amid record cash flows from operations, with adjusted earnings coming in at $3.60 per share, beating expectations by $0.10. Revenues of $4.53B were in line with Wall Street estimates and climbed 10.1% Y/Y (great growth considering the current environment).
Bigger picture: Compared to some rival tech players that have downgraded or withdrawn their guidance, Adobe gave an upbeat outlook for its fiscal first quarter. Investors noted the developments and the company’s focus on profitability, sending the stock up as much as 6% in AH trading. “We’re not going to be immune to macroeconomic [conditions], but I like our differentiated solution and our execution,” CEO Shantanu Narayen said on an earnings call.
Adobe has come under scrutiny since September, when it said it would acquire collaboration design software company Figma for $20B, and in an interview with Seeking Alpha, Adobe’s VP of Investor Relations noted that the company’s customers and investors were now coming around to the thinking behind the deal. “We’ve had a lot of conversations, and people are starting to see how this deal strengthens us, and how we are complementary to each other,” Jonathan Vaas declared, adding that the deal was on track to close as expected in 2023 (pending an antitrust review by the U.S. and the U.K.).
Market movement: While shares were bid up following the results, Adobe faces a long road ahead. The stock is down 42% YTD, compared to the 19% decline of the benchmark S&P 500 over the same period. (46 comments)
Economics of the World Cup
The 2022 World Cup in Qatar has proved to be the most controversial to date, but many parties are cashing in on the benefits the competition has to offer. There’s been a series of upsets in the tournament this year, making for even bigger exposure when it comes to viewing numbers, and France will face off against Argentina in the final match on Sunday. Based on historical growth trends, around 1.5B people are expected to watch the championship game across the globe, representing nearly a fifth of all humans living on Earth.
Bottom line: That’s a big platform to get out your message. In terms of hard cash, host countries don’t turn a profit from the games, though it does boost their standing on the world stage and projects soft power as a good place to do business. Advertisers, on the other hand, hope to ring the register on their marketing efforts, with commercials, jerseys and stadium banners all being watched by billions of eyeballs. This year’s affiliate sponsors include Adidas (OTCQX:ADDYY), Budweiser (BUD), Coca-Cola (KO), Hyundai (OTCPK:HYMPY), McDonald’s (MCD) and Visa (V).
“If they genuinely felt strong about the matter, then they could pull out of those markets,” said Kieran Maguire of the University of Liverpool, when asked about commercial deals despite controversies surrounding Qatar’s treatment of migrant workers and the LGBT community, restriction of political expression, and claims of bribery to host the tournament. “We had the 2018 World Cup in Russia, and remember, Russia had invaded and annexed Crimea in 2014 but that didn’t stop any of the sponsors from getting involved.”
Bit of a stretch? Some claim that the country of the World Cup champion can see percentage points of GDP growth following the event due to greater international visibility. However, the connections to exports and trade are difficult to assess, and can also be impacted by external factors or trends in the global economy.
Today’s Economic Calendar
9:45 PMI Composite Flash
12:00 PM Fed’s Daly Speech
1:00 PM Baker-Hughes Rig Count
What else is happening…
California cuts payments to solar homes feeding the energy grid.
Netflix (NFLX) tumbles on report of ad refunds for viewer misses.
Trump SPAC’s (DWAC) ‘major announcement’: A digital trading card.
IPOs plunged 45% in 2022, but still 16% higher than 2019 – EY.
Russia fires more than 60 missiles into Ukraine in latest strikes.
Novavax (NVAX) sheds 34% day after announcing public stock offering.
Again! Cathie Wood buys the dip as Tesla (TSLA) hits two-year low.
Roblox (RBLX) plunges as strong dollar hits November’s bookings.
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Good morning. Happy Thursday.
The Asian/Pacific markets were mostly weak. Hong Kong, South Korea, India and Malaysia dropped more than 1%. Europe, Africa and the Middle East are down big. Denmark, Poland France, Germany Russia, South Africa, Finland, Switzerland, Hungary, Spain, the Netherlands, Italy, Austria and Sweden are down more than 1%. Futures in the States point towards a big gap down open for the cash market.
————— This is a Fantastic Time to Learn Trading —————
The dollar is up. Oil and copper are down. Gold and silver are down. Bonds are up.
Stories/News from Seeking Alpha…
A long way to go
As widely expected, the Federal Open Market Committee increased its policy rate by 50 basis points to 4.25%-4.50% on Wednesday, as it downshifted from the 75 bps hikes of its previous four meetings. While that would appear to be a win for investors, the so-called “dot plot” was more of a concern. The Fed policymakers’ median projection now sees the federal funds target range rising to 5.1% next year – a level last seen in 2007 – compared with 4.6% in the central bank’s September projection.
Quote: “We need to be honest with ourselves that there’s inflation. 12-month core inflation is 6% CPI. That’s three times our 2% target. Now it’s good to see progress, but let’s just understand we have a long ways to go to get back to price stability,” Fed Chair Jerome Powell said during a press conference. “I don’t think anyone knows whether we’re going to have a recession or not, and, if we do, whether it’s going to be a deep one or not. It’s just – it’s not knowable… The historical record cautions strongly against prematurely loosening policy. We will stay the course, until the job is done.”
All three major U.S. stock indices retreated following the announcement, erasing gains from earlier in the session. By the end of the day, the Nasdaq slipped 0.8%, and the S&P 500 and Dow fell 0.6% and 0.4%, respectively, while more losses are in store premarket. Rate hikes are tricky in the sense that monetary policymakers may not know for another year if they have tightened too much or not enough (economists call those effects long and variable lags).
Commentary: “The Federal Reserve’s decision to reduce the pace of rate hikes to 50 bps marks the beginning of the end of this rate hike cycle,” said SA contributor Ahan Vashi. “However, a reduction in pace of rate hikes is not a pivot, and the Fed’s quantitative tightening program is likely to continue for the foreseeable future. With the Fed tightening into a deeply inverted treasury yield curve, the near-term environment should be risk-off. Hence, equity markets could see increased volatility in upcoming weeks.” (217 comments)
Cashing out
Elon Musk’s Tesla (TSLA) stock selling spree is going into Ludicrous Mode despite many pledges to the contrary. The high-flying CEO sold another $3.6B worth of shares this week, during a three-day span in which Tesla hit its lowest level since late 2020. The stock is now down 60% YTD, with a market cap below the half-trillion dollar mark, as investors grow concerned over Musk’s distraction from Tesla following his $44B acquisition of Twitter.
For the last time: “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.” Well, the deal closed in October, but Musk sold another $4B worth of shares anyway (in November), and he continues to sell by the billions.
“I will make sure Tesla shareholders benefit from Twitter long-term,” Musk tweeted overnight following his latest stock sale, but criticism continues to grow about his guarantees and assurances. “My commitment to free speech extends even to not banning the account following my plane, even though that is a direct personal safety risk,” Musk promised a month ago, only to pull the plug on the account on Wednesday as Twitter updated its Private Information policy. Don’t forget that at the end of 2021, Musk cashed out 15.8M of Tesla shares, worth about $16B, to help pay a reported $11B tax bill after polling his followers.
From the SA comments section: “Looking back at the beginning of this debacle, it seems so clear now that this would end poorly for everyone, especially TSLA shareholders,” wrote user dschrenk. “Once it was known that he used TSLA stock to collateralize the loan to buy TWTR, the writing was on the wall. Any strong drop in price for TSLA itself would trigger a margin call for Elon, requiring him to sell shares in order to maintain compliance. This selling would/could be seen as bearish, causing longs to sell and bears to build short positions. This, in turn, would cause the PA of TSLA to drop further, triggering a margin call, requiring selling of shares. Rinse and repeat.” (220 comments)
Trading overhaul
The Securities and Exchange Commission just laid out four proposals that could result in the biggest changes to the way stocks are traded since 2005. Chair Gary Gensler said the adjustments would increase transparency and competition in retail stock trading, affording similar opportunities enjoyed by high-speed trading firms. The proposals range from order routing and pricing to disclosures that brokers must make to clients.
Market movement: Shares in Virtu Financial (VIRT), which handles stock trading orders for popular brokers through a payment-for-order-flow (PFOF) process, slumped 6.4% on the news on Wednesday. Related brokers also felt a squeeze like Robinhood (HOOD) -2.8%, E-Trade (MS) -2.4% and Interactive Brokers (IBKR) -1%, as well as smaller premarket losses for TD Ameritrade (SCHW), Charles Schwab (SCHW) and Cash App (SQ). Retail brokers currently route more than 90% of marketable orders of individual investors through a small group of off-exchange dealers, or wholesalers, the SEC noted in its FAQ document.
The new proposals put more pressure on firms that engage in PFOF, but don’t ban the practice outright. An order competition rule would require certain equity orders of retail investors to be subject to competition in “fair and open auctions before such orders could be executed internally by any trading center that restricts order-by-order competition.” Another proposal would seek to change certain rules to adopt variable minimum pricing increments for stock quoting and trading in the National Market System, reduce access fee caps and enhance the transparency of better priced orders.
Go deeper: Market middlemen who trade billions of shares a year base their business on selling shares for a fraction higher than they bought them, meaning the new set of regulatory requirements may weigh on their earnings (or as they say, could harm traders). “Some of the SEC’s proposed changes stand to resurrect discriminatory barriers to entry and hurt millions of retail investors,” Robinhood Deputy General Counsel Lucas Moskowitz said in a statement. “The SEC should not be playing politics with individual Americans’ ability to improve their financial lives.” (15 comments)
Running dry
Despite some recent storms in the Sierra Nevada and Central Valley, the nation’s largest water supplier has declared a drought emergency for all of Southern California. The Metropolitan Water District of SoCal supplies water to 26 agencies that provide major population centers like Los Angeles and San Diego counties, but each one of them will now have to voluntarily cut down on imported supplies. If significant rainfall doesn’t materialize this winter, mandatory water restrictions are likely to be issued in April that could impact 19M Americans.
Backdrop: Earlier this year, the water district declared a drought emergency for 7M people that mostly depend on the State Water Project, which involves a complex system of dams and reservoirs. The limits varied based on locality, but prohibited many households from irrigating their lawns more than once a week to preserve enough supplies for people to cover their basic needs. According to California estimates, outdoor and landscape watering account for half of all of the state’s urban water use, making its conservation one of the most important tools to combat the drought conditions.
“Some Southern Californians may have felt somewhat protected from these extreme conditions over the past few years. They shouldn’t anymore. We are all affected,” declared Gloria Gray, chair of the Metropolitan Water District’s Board.
Outlook: California authorities have urged people to recycle water, take shorter showers, and only run dishwashers and washing machines when full, but the messaging has fallen on deaf ears. If the drought continues, state and local water officials will have to make big investments in infrastructure, like expensive recycling and desalination technology, or risk a longer list of expanding restrictions.
Related stocks: American Water Works (NYSE:AWK), Consolidated Water (NASDAQ:CWCO), Energy Recovery (NASDAQ:ERII), Xylem (NYSE:XYL), Invesco S&P Global Water Index ETF (NYSEARCA:CGW) and Invesco Water Resources Portfolio ETF (NASDAQ:PHO). Post other ideas in the comments section.
Today’s Economic Calendar
8:30 Initial Jobless Claims
8:30 Philly Fed Business Outlook
8:30 Retail Sales
8:30 Empire State Mfg Survey
9:15 Industrial Production
10:00 Business Inventories
10:30 EIA Natural Gas Inventory
4:00 PM Treasury International Capital
4:30 PM Fed Balance Sheet
What else is happening…
Swiss central bank hikes rates to counter ‘further spread of inflation.’
Delta Air Lines (DAL) rises on stronger than expected forecasts.
Microsoft (MSFT) sets new investment in $3B silicon battery startup.
FTX lawsuits show how the U.S. can police overseas crypto exchanges.
SPAC Digital World (DWAC) gains on ‘major announcement’ by Trump.
HBO Max’s (WBD) shows find home on free ad-supported services.
Verizon (VZ) opens ‘Plus Play’ hub with Netflix (NFLX) promotion.
New ‘Buy the Dip’ ETF uses AI tech to target oversold stocks.
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Good morning. Happy Wednesday.
The Asian/Pacific markets did well. Japan, Hong Kong, South Korea, Taiwan, Australia, Malaysia and Singapore led. Europe, Africa and the Middle East mostly down. Turkey, Germany, Russia, South Africa, the Netherlands, Israel and Austria are weak. Futures in the States point towards a slight down open for the cash market.
————— This is a Fantastic Time to Learn Trading —————
The dollar is down slightly. Oil and copper are up. Gold and silver are down. Bonds are down.
Stories/News from Seeking Alpha…
Shifting gears
Fed Day has finally arrived. Investors and economists alike have set a reminder for 2 p.m. ET, when the central bank will detail its latest rate decision, and another alarm for 2:30 p.m., as Fed Chair Jerome Powell takes the podium. They’ll be watching updated interest rate and economic projections, which will largely define trading behavior and sentiment as the market heads into 2023. “The time for moderating the pace of rate increases may come as soon as the December meeting,” Powell said in his last media appearance, and it looks like that is now a reality.
Wall Street Breakfast Survey: Out of the 100 responses received following yesterday’s softer CPI print (see below), 95% are now predicting a 50 basis point rate hike, and only 5% believe the Fed will still go for 75 bps. It’s a notable change from a day earlier. Prior to the latest inflation figure, 2/3 of the 2,100 survey participants felt that the central bank was set to announce a half-point increase, compared to 1/3 that saw the Fed going through with a fifth consecutive 75 bps hike.
All in all, the Fed has cranked up its key rate by 3.75 percentage points in less than a year, from the near-zero level that had stayed in place over 2020 and 2021. The key rate, formally known as the federal funds rate, is closely watched because it influences interest rates throughout the economy. For consumers, rising interest rates make it more expensive to take out a mortgage, carry a balance on credit cards, or get a loan to buy a car. For businesses, it increases the cost of bank loans and for raising capital in the debt markets.
Outlook: Following a 50 bps hike today, Hank Smith, head of investment strategy at Haverford Trust, sees a 25 bps rate increase in February and possibly another quarter-point hike in March. Then “we’re going to have a pause and allow for the lag effects of this monetary tightening to play through,” he said in an interview with Seeking Alpha. The Fed will also be careful not to call it a pivot and “whatever the terminal rate is – whether it’s five, five and a quarter percent – it’s going to stay there for a period of time, most likely through 2023.” As for how the Fed’s policy will affect investing, Smith expects continued volatility in equity and fixed income markets given his outlook for a mild and brief recession in the middle of next year. (64 comments)
Cooler than expected
Consumers breathed a sigh of relief on Tuesday as inflation showed further signs of subsiding in November. The three major U.S. equity indexes jumped following the release, before paring much of the big gains during the session, while the 10-year Treasury yield was pushed back down to a level of 3.50%. “Make no mistake, prices are still too high,” President Biden said in a statement. “But things are getting better, headed in the right direction.”
Snapshot: The Consumer Price Index rose 7.1% Y/Y (vs. +7.3% expected and +7.7% prior) to mark the fifth straight decrease since June. It’s also the smallest annual increase in the inflation rate in more than a year, indicating that the Fed’s aggressive rate-hiking moves are filtering through the economy to reduce demand. Meanwhile, core CPI climbed 6.0% (vs. +6.1% expected and +6.3% prior), as shelter, the largest contributor to the CPI, more than offset decreases in the energy index.
“As I had been expecting, we are finally seeing a more precipitous decline in both headline and core rates of inflation, as both the monthly and annual rates are reported below expectations,” SA contributor Lawrence Fuller declared. “The declines in transportation services and medical care are encouraging, while shelter costs should follow early next year.”
More commentary: “The report suggests we’re on the road to a soft landing,” added David Russell, VP of Market Intelligence for TradeStation Group. “The Fed will keep talking tough and probably inch up the dot plot, but we seem to have turned a corner on inflation. Santa could be coming to town this year.” (369 comments)
Cancer treatments
Moderna (MRNA) was one of the most active stocks during the session on Tuesday, staging a massive rally in response to promising developments. Shares soared nearly 20% as its experimental melanoma vaccine combined with Merck (MRK) cancer treatment Keytruda cut the risk of skin cancer recurrence or death by 44%. That compared with a treatment of only Keytruda that took place in a phase 2b study called KEYNOTE-942, while preparations to launch a first phase 3 trial are already on the way.
Bigger picture: Moderna, which rose to fame and fortune on the back of its mRNA COVID-19 vaccine, has now shown that the mRNA technology is not a mere one-trick pony battling the coronavirus, but could be a disruptor in the cancer space as well. The news could continue to provide a much-needed boost for the biotech, which is still down around 16% YTD. Besides the latest vaccine known as mRNA-4157, where a phase 1 trial in multiple cohorts is ongoing as per a Nov. 3 filing – Moderna is developing three other programs within its cancer vaccines modality.
“We believe that this should work in many tumor types, not only melanoma,” CEO Stéphane Bancel declared, going as far to call the advances “Immunotherapy 2.0.”
Go deeper: Moderna and Merck are not the only ones in the race for cancer vaccines. Agenus (AGEN), Anixa Biosciences (ANIX), CureVac (CVAC), GeoVax Labs (GOVX), ImmunityBio (IBRX) and VBI Vaccines (VBIV) are all getting in the race with various technologies. Even Merck is not just exploring the mRNA space, as it works on a new investigational class of engineered circular RNA (oRNA) that include vaccines and therapeutics for infectious disease and oncology. (37 comments)
Patriot to Ukraine
Ukraine may soon get some air defense as the U.S. finalizes plans to supply the nation with its sophisticated Patriot system. It follows months of Russian missile and drone attacks on Ukraine’s power and civilian infrastructure, and many urgent requests from President Volodymyr Zelenskyy. U.S. Defense Secretary Lloyd Austin could sign the directive as soon as this week, with President Biden approving the final request.
Thought bubble: Over the past year, the U.S. has held back on supplying its most advanced weaponry to Kyiv amid concerns that the war could escalate into a wider conflict with Russia. Items like General Atomics’ MQ-1C Gray Eagle and Lockheed Martin’s (NYSE:LMT) ATACMS have been off the table, which would allow for deep attacks into Russian territory. The Patriot is more defensive in nature, however, and the Biden administration appears to have softened its stance on providing the system.
Once the ink is on the dotted line, the Patriots are expected to ship within days and the Ukrainians will be trained to use them at a U.S. Army base in Germany. Millions of civilians in Ukraine are currently living with cuts to water, electricity and heating, as temperatures plummet in the thick of winter. Due to its long-range and high-altitude capability, Kyiv hopes the Patriot can potentially shoot down Russian missiles and drones miles away from their intended targets inside of the country.
Some history: The Patriot is produced by Raytheon Technologies (NYSE:RTX), with Lockheed Martin manufacturing the missiles it fires. The system has been around for many decades, but gained prestige prior to the 1991 Gulf War, when it was overhauled to provide capabilities against tactical ballistic missiles (in addition to enemy aircraft). In total, more than 240 Patriot fire units have been delivered to 17 U.S. allied nations, which have invested significantly in improvements, enhancements and upgrades. (2 comments)
Today’s Economic Calendar
7:00 MBA Mortgage Applications
8:30 Import/Export Prices
10:00 Atlanta Fed’s Business Inflation Expectations
10:30 EIA Petroleum Inventories
2:00 PM FOMC Announcement
2:30 PM Jerome Powell Speech
What else is happening…
Bahamas judge denies bail for FTX founder Sam Bankman-Fried.
Apple (AAPL) may allow alt app stores on iPhones to meet EU rules.
Lawmakers are pushing bipartisan legislation to ban TikTok.
United Airlines (UAL) loses altitude on blockbuster aircraft deal.
U.K. inflation eases slightly in November on sliding fuel prices.
Ford (F) increases production capacity for electric F-150 truck.
Tesla (TSLA) touches 52-week low as investors decry Twitter distraction.
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Good morning. Happy Tuesday.
The Asian/Pacific markets mostly did well. Japan, Hong Kong, India, New Zealand, Indonesia and Singapore were up, while Taiwan was weak. Europe, Africa and the Middle East are doing great. Denmark, France, Turkey, Germany, South Africa, Finland, Switzerland, Norway, Hungary, the Netherlands, Italy, Israel, Sweden and Saudi Arabia are up 1% or more. Futures in the States point towards a gigantic gap up open for the cash market. S&P futures are up 100.
————— This is a Fantastic Time to Learn Trading —————
The dollar is down big. Oil and copper are up. Gold and silver are up. Bonds are up.
Stories/News from Seeking Alpha…
Famous to infamous
Sam Bankman-Fried’s fall from grace could end with some jail time. The founder and former CEO of FTX has been arrested in the Bahamas after the U.S. filed criminal charges against the once-superstar of the crypto world (and will likely request his extradition). While the charges will be unsealed later this morning, they reportedly include wire fraud, wire fraud conspiracy, securities fraud, securities fraud conspiracy and money laundering.
Interesting timing: SBF was scheduled to testify before the House Financial Services Committee today about the downfall of FTX, which was once worth some $32B before its implosion. More information is still needed, but all the clues point to sour bets made by SBF’s hedge fund, Alameda Research, which used FTX customer deposits for high-risk trades. Massive withdrawals from FTX ensued as reports surfaced about its financial health, though to date, SBF has denied any prior knowledge of the situation or lending out FTX customer deposits to fund Alameda’s activities.
Additional details may still be spilled today as John J. Ray III, the new CEO of FTX, heads before the House Financial Services Committee. “We are continuing our painstaking forensic efforts to account for all of the assets,” said Ray, who has more than 40 years of legal and restructuring experience, including overseeing Enron’s high-profile bankruptcy in 2001. “The FTX Group’s collapse appears to stem from the absolute concentration of control in the hands of a very small group of grossly inexperienced and unsophisticated individuals who failed to implement virtually any of the systems or controls that are necessary for a company that is entrusted with other people’s money or assets.”
Civil action: Besides criminal allegations, SBF is facing separate charges from the Securities and Exchange Commission for violations of securities laws. Other civil action may also be brought by the Commodity Futures Trading Commission or state banking regulators. “I had thought of myself as a model CEO, who wouldn’t become lazy or disconnected. Which made it that much more destructive when I did,” SBF wrote in his last tweet before his arrest. “I’m sorry. Hopefully people can learn from the difference between who I was and who I could have been.” (166 comments)
Has inflation peaked?
Traders don’t seem to think that the latest inflation report will come in hot this morning, and neither do economists. The Consumer Price Index is expected to cool off again in November, falling for a fifth straight month to a pace of 7.3% Y/Y, and down from a record 9.1% notched back in June. Equities climbed Monday on expectations that a softer CPI will permit the Fed to slow down the pace of its aggressive rate hikes (see the results of yesterday’s WSB survey below).
If history is any guide: Out of the ten monthly CPI readings published for 2022, only one of them hit expectations (February’s 7.9%). Eight of the other headline figures came in hotter than anticipated, while two of them were lower than consensus estimates. There were no major surprises, however, with the spread between actual prints and their forecasts reaching a maximum of 0.3%.
Keep another eye on core CPI data, which strips out volatile food and energy prices. That figure has been bouncing around more this year – with another high of 6.6% recorded just two months ago – and could be key to gauge if pressures are seeping into more parts of the economy. Notable categories to watch include rent and shelter costs, public transportation, medical services and college tuition.
Commentary: “The CPI report will likely confirm the slowdown in core inflation that was observed last month,” noted UBS economist Jonathan Pingle. “Contrary to what happened earlier this year when we got a few low inflation prints, we are not seeing high-frequency and front-month leading indicator data suggesting an inflation rebound. The move lower in inflation seems to be more persistent this time around.”
Poll Results
Wall Street Breakfast’s ‘Survey Monday’ garnered over 2,000 responses this week. 2/3 of participants expect the Fed to tap the brakes tomorrow with a 50 basis point rate hike, compared to 1/3 who see the central bank going through with its fifth 75 bps increase. Check back in after the latest CPI print is published this morning to see if anything changes. Take the survey and see the results here.
Fusion revolution
Investors will be watching an announcement from the U.S. Department of Energy at 10 a.m. ET that could shake up how we power our world. Stay tuned, but reports indicate that a major milestone has been achieved at the Lawrence Livermore Laboratory in California. It’s all based on fusion technology, which is the same process that powers the sun and stars, and could eventually lead to an unlimited source of cheap clean energy.
Snapshot: The breakthrough, known as a net energy gain (or target gain), means that more energy was produced from a fusion reaction than it consumed. Scientists produced the effect with the world’s largest laser under an approach known as magnetic confinement fusion. A tiny amount of hydrogen plasma, held in place by powerful magnets, was heated to extreme temperatures – resulting in the fusing of atomic nuclei and 20% more energy than was used in the lasers.
“If this is confirmed, we are witnessing a moment of history,” said plasma physicist Dr. Arthur Turrell. “Scientists have struggled to show that fusion can release more energy than is put in since the 1950s, and the researchers at Lawrence Livermore seem to have finally and absolutely smashed this decades-old goal.”
Outlook: While things are still in the early stages, the trick will be to make the process self-sustaining, harness enough energy to power infrastructure, and to do so continuously. Fusion also doesn’t have all the radioactive waste associated with current reactors that utilize fission, and has the potential to easily outpace other clean energy sources like solar and wind in terms of output. Fusion backers say the technology could be commercialized in a decade or more, but many are more skeptical about such a timeline, saying there’s too much hype from companies looking for government subsidies and private investment. (105 comments)
Chip on your shoulder
China is doubling down on its complaints at the World Trade Organization as a trade war with the U.S. seems to be morphing into a broader tech war. It was only a week ago that WTO panels backed Beijing by ruling against American tariffs on imported steel and aluminum, which were first implemented by the Trump administration in 2018 to protect national security. China is now pushing back against the Biden administration’s sweeping ban on chip exports, which was also flagged as a national security priority.
Backdrop: Semiconductor stocks were roiled in mid-October after new rules prohibited U.S. companies from working with Chinese chipmakers in an effort to keep some technologies from getting into the hands of the Chinese military. American semiconductor players were also banned from selling chips designed for use in artificial intelligence, high-performance computing, data centers and supercomputers unless they secured an export license. While the U.S. has said the new export restrictions were not as an effort to sideline the Chinese economy, Beijing doesn’t appear to be convinced, calling the recent actions trade protectionism.
“China’s filing of a lawsuit at the WTO is to resolve China’s concerns through legal means and is a necessary way to defend its legitimate rights and interests,” the Commerce Ministry wrote in a statement. Goldman Sachs even forecasts that the ban will shave a quarter of a percentage point off China’s economic growth in 2023, at a time when it’s already dealing with the fallout (and easing) of its zero-COVID policy.
Go deeper: Reuters reports that China is preparing a more than 1T yuan ($143B) support package for its semiconductor industry, which would include subsidies and tax credits to boost domestic chip production and research activities. The move would be a big step towards self-sufficiency that could be implemented as soon as the first quarter of 2023. It follows the CHIPS and Science Act approved by the U.S. in early August, which consists of $52B in loans, grants and other incentives, as well as billions in tax credits to support local chip manufacturing. (9 comments)
Today’s Economic Calendar
FOMC meeting begins
6:00 NFIB Small Business Optimism Index
8:30 Consumer Price Index
What else is happening…
Oracle (ORCL) Q2 results top expectations, led by cloud strength.
CoD: Microsoft (MSFT) offers Sony (SONY) rights on PlayStation Plus.
U.S. federal budget shortfall widens to $249B in November.
Weber (WEBR) soars on $3.7B buyout offer from BDT Capital.
Berkshire (BRK.B) further trims stake in EV maker BYD (OTCPK:BYDDF).
Binance halts USDC stablecoin withdrawals until it can token swap.
Thoma Bravo buys Coupa Software (COUP) for $6B despite tech slump.
Clovis (CLVS) files for bankruptcy, announces deal with Novartis (NVS).
Pfizer (PFE) projects $15B sales potential from mRNA vaccines by 2030.
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Good morning. Happy Monday. Hope you had a good weekend.
The Asian/Pacific markets leaned down. China, Hong Kong, South Korea, Taiwan and New Zealand led to the downside. Europe, Africa and the Middle East are mostly down. Poland and Turkey are up, but Denmark, France, Germany, Finland, the Netherlands, Austria, Sweden and Saudi Arabia are down. Futures in the States point towards a small up open for the cash market.
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The dollar is down slightly. Oil is up; copper is down. Gold and silver are down. Bonds are up.
Stories/News from Seeking Alpha…
Wait and see
Investors are on edge as they head into a week that will likely set the market tone for the rest of 2022 and beyond. Fed Chair Jay Powell is still warming up in the bullpen, but he’ll be coming out to pitch on Wednesday in a key game of the Monetary Series. Fastball? Changeup? As the speed of the final throw is debated, the crowd is getting antsy if it will clock in at 50 or 75 basis points – following a string of aggressive hurls during the season.
Bigger picture: FOMC policymakers may not even yet know what kind of toss in the making as it will highly depend on the latest CPI print set to be published on Tuesday. If things come in hot, the Fed could go the hawkish route and put further pressure on stocks. Things could also go the other way if inflation shows signs of responding to the hardest-hitting hiking cycle since the 1980s.
“The time for moderating the pace of rate increases may come as soon as the December meeting,” Powell said in his last media appearance before the current FOMC blackout period. “We have a broad set of thoughts about where that destination might be, but we could be wrong. We’ll have to see.”
Brace for volatility: Stock futures are starting the week in the green ahead of the FOMC meeting on Wednesday, which will include updated interest rate and economic projections. While contracts linked to the major averages are up 1% premarket, all three of the indices lost ground last week over several rocky sessions. The Dow Jones Industrial Average declined 2.8% for its worst week since September, while the S&P 500 fell 3.4% and the Nasdaq Composite slumped 4%. (20 comments)
Survey Monday
The possibility of a smaller hike has been telegraphed by Jerome Powell, but a hefty CPI print and inflation concerns could keep the Fed aggressive. By how much will the central bank hike rates this week?
· 50 basis points (too far, too fast)
· 75 basis points (fifth in a row!)
Take the survey and see the results here
We’re going to leave the poll open through Wednesday, so come back to see updated results after the CPI print tomorrow. Feel free to take the discussion to the Wall Street Breakfast comments section to talk about how the rate hike cycle is impacting the economy, markets or your investing strategies.
Yellen speaks
While a growing number of economists and CEOs predict that the U.S. will enter a recession in 2023, other market players and policymakers feel that one is not necessary to bring down inflation. Among them is U.S. Treasury Secretary Janet Yellen, who is of the view that inflation has peaked or is already in decline. She’s also hopeful that the labor market will remain healthy as the central bank continues to execute policy based on the lessons learned from the high inflation of the 1970s.
The interview: “First of all, shipping costs have come down. Delivery lags, which were very long – those have shortened. Gas prices are way down. I think we’ll see a substantial reduction in inflation in the year ahead… if there’s not an unanticipated shock,” Yellen told CBS’s 60 Minutes on Sunday.
“There are always risks of a recession. The economy remains prone to shocks, but look, we have a very healthy banking system. We have very healthy business and household. We are at or beyond full employment. And so it is not necessary for the economy to grow as rapidly as it has been growing to put people back to work.”
Track record: This past summer, Yellen, who previously served as Fed Chair under the Obama administration, admitted she “was wrong about the path inflation would take” and that it wouldn’t pose a long-term problem. “There have been unanticipated and large shocks to the economy that have boosted energy and food prices, and supply bottlenecks that have affected our economy badly,” she told CNN. “At the time I didn’t fully understand, but we recognize that now.” Will she be right this time around? (16 comments)
M&A spree
Looking for a new drug pipeline and some blockbuster treatments, Amgen (AMGN) has agreed to acquire Horizon Therapeutics (HZNP) for $116.50 per share in cash. That’ll value the Ireland-based company at nearly $27.8B on a fully diluted basis, and nearly $28.3B including debt. Horizon is a rare autoimmune and inflammatory disease-focused biotech, with revenue generators like Tepezza, Krystexxa and Uplizna that added $2B in sales for the firm in the first nine months of the year.
Backdrop: Amgen was the last of three suitors standing in an auction for Horizon that included Johnson & Johnson (JNJ) and Sanofi (SNY). All of the drugmakers are looking to replenish their pipelines, but no one is getting as aggressive as Amgen. It is facing one of the biggest portfolios of patent expirations in the industry, prompting a serious shopping spree over the past two years.
In the summer, Amgen inked a $3.7B buyout of ChemoCentryx to boost its inflammatory disease presence. Last year, the company scooped up oncology player Five Prime Therapeutics for $1.9B and antibody drug specialist Teneobio for nearly $1B, as well as smaller purchases like tissue regeneration expert Rodeo Therapeutics for $55M.
Market movement: Shares of Horizon Therapeutics soared 14% on the news, while Amgen’s stock fell 3%. The latter expects to use cash in hand and debt to finance the deal, which is expected to close in the first half of 2023 and become accretive to revenue and non-GAAP earnings per share from 2024. However, Amgen did not update 2022 or 2030 guidance as a result of the transaction.
Orion returns
NASA’s Orion space capsule landed in the Pacific Ocean on Sunday to conclude a successful mission that tested near passes above the moon’s surface. The unmanned crew module – designed to carry astronauts for future lunar missions – splashed down off the coast of San Diego at 12:40 p.m. ET. It was a scorching feat, given that the capsule came back into Earth’s atmosphere at a near 25,000 miles per hour following a near month-long journey.
Quote: “This is an extraordinary day,” NASA Administrator Bill Nelson said in an agency livestream after Orion’s return. “It’s historic because we are now going back into space, into deep space, with a new generation.”
It was exactly 50 years ago that astronauts on the last mission of NASA’s Apollo program, Apollo 17, were the last people to walk on the moon. Artemis is the agency program to bring astronauts back to the moon with an eventual goal of pushing on to Mars, exploring deep space.
Who is involved: NASA is working with a variety of publicly traded companies on the Artemis missions. Boeing (BA) built the 212-foot rocket known as the Space Launch System. Lockheed Martin (LMT) made the Orion spacecraft that circled the moon. Aerojet Rocketdyne (AJRD) manufactured engines and high-pressure tanks for the SLS rocket and Orion spacecraft, while Northrop Grumman (NOC) built the boosters that helped to lift the rocket off the launchpad at Kennedy Space Center in Florida. (19 comments)
Today’s Economic Calendar
11:30 Results of $40B, 3-Year Note Auction
12:00 PM Fed’s Bostic Speech
1:00 PM Results of $32B, 10-Year Note Auction
2:00 PM Treasury Statement
What else is happening…
Microsoft (MSFT) to acquire 4% stake in London Stock Exchange.
Rivian (RIVN) pausing talks with Mercedes-Benz on electric vans.
Carvana (CVNA) is a cautionary tale for zombie companies.
Albertsons (ACI) dividend on hold pending Washington state appeal.
Energy stocks hit as crude suffers biggest slide since April.
China, Saudi Arabia strengthen ties with big oil deals.
Home sales set to drop to lowest level since 2011 – Redfin.
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