Good morning. Happy Friday. Last trading day of the year.
The Asian/Pacific markets were mixed and quiet. China and Hong Kong moved up; India moved down. Europe, Africa and the Middle East are currently mostly down. Turkey, Russia and Greece are up; the UK, France, Germany, South Africa, Finland, Switzerland, Norway, Spain, the Netherlands, Italy, Portugal and Sweden are down. Futures in the States point towards a moderate gap down open for the cash market.
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The dollar is up a small amount. Oil and copper are down. Gold is up; silver is down. Bonds are down.
Stories/News from Seeking Alpha…
Looking back at 2022
Enjoy another recap of Wall Street Breakfast’s hottest headlines and top stories from the second half of 2022. We also want to give a shoutout, and a thank you, to all of our subscribers for your thoughtful feedback, comments and for opening the newsletter in your inbox each morning. WSB readership grew by over 1 million subscribers this past year, broadening our community to 3.4 million strong! Wishing everyone a Happy New Year, and be on the lookout next week for a special edition covering the 2023 investing outlook.
July
Inflation nation: The Consumer Price Index peaked at an annual clip of 9.1%, marking the fastest pace of inflation in four decades. At the time, the central bank said it didn’t want to risk more entrenched expectations, and continued to hike rates by 75 basis points (there was even talk of a 100 bps increase at one point). “These rate hikes have been large and they have come quickly, and it’s likely that their full effect has not been felt by the economy,” Fed Chair Jay Powell declared at the monthly FOMC meeting.
Oil for security: With an energy crisis playing out at home, President Biden traveled to Saudi Arabia to reassert America’s presence in the Middle East. The trip was a big policy U-turn for Biden, who has previously labeled the Kingdom a “pariah” and refused to talk with Crown Prince Mohammed bin Salman in the aftermath of the killing of U.S.-based columnist Jamal Khashoggi. There was an apparent understanding that the summit and a notable fist bump would lead to additional Saudi crude production, but Riyadh later scrapped a paltry boost to OPEC+ production, and even deepened its cuts by a whopping 2M barrels per day, or about 2% of global supply.
The housing story: The overheated U.S. housing market started to cool down in what some in the industry called a real estate shakeout. Sales of previously owned homes fell 5.4% M/M in June to 5.12M units, according to the National Association of Realtors, and were 14.2% lower when compared to the same month a year ago. At those levels, sales fell to their slowest pace since June 2020, when buying activity dropped briefly at the start of coronavirus pandemic.
Revolving door: Things got crazy over in the U.K. as Boris Johnson stepped down from his role as U.K. prime minister. It followed increasing pressure to resign after a series of scandals, including “Partygate” and allegations of misleading the public over the appointment of former deputy chief whip Chris Pincher. A disastrous mini-budget from Liz Truss sent the pound to near parity with the U.S. dollar, and she was only in office for 44 days before Rishi Sunak took the reins on 10 Downing Street.
August
Inflation Reduction Act: After more than 15 hours of amendments and a “vote-a-rama” session that stretched over an entire weekend, the U.S. Senate narrowly passed the Inflation Reduction Act. The measure – which aimed to cut government deficits and consumer medical bills while boosting climate spending – gave President Biden a legislative achievement ahead of midterm elections, and another win for his economic agenda after Congress pulled through on the Chips for America Act. The bill somewhat embodied earlier incarnations of the Build Back Better plan, albeit with a price tag of around $430B (in place of $3.5T, and a revised version of $2.2T).
The Office: While Apple (AAPL) attempted to get its employees back to the office, other companies gave up on their brick-and-mortar institutions. Lyft (LYFT) said it would rent out nearly half of its office spaces in New York City, Nashville, San Francisco and Seattle, as it doubled down on a “fully flexible” work policy. In fact, the average workplace occupancy rate in the top-10 U.S. metro areas hit 43.5% in July, down from over 95% before the pandemic began, according to Kastle Systems, which collects daily data on how many workers swipe into office buildings.
Dire straits: Taiwanese leader Tsai Ing-wen greeted U.S. House Speaker Nancy Pelosi at the presidential office in a high-stakes visit that enraged Beijing. Pelosi reaffirmed a pledge that the U.S. wouldn’t abandon Taiwan, saying solidarity was more important than ever in a “world [that] faces a choice between autocracy and democracy.” The two also discussed deepening economic cooperation and supply chain resilience, while the White House sought to distance itself from the visit and emphasized that the trip does not signal a change in its ‘One China’ policy. Beijing responded with live-fire military drills and sanctions on Taiwan.
Revving the QT engine: Fallout from the economic symposium in Jackson Hole dented a summer rally for the markets, while investors had their eyes on more drama stemming from the central bank. The Federal Reserve began to raise the throttle of its quantitative tightening program by picking up the pace at which it unwinds its balance sheet. The move was a stark reversal of pandemic-era bond buying, which saw the central bank nearly double its balance sheet to nearly $9T from $4.2T over the past two years.
September
Energy shocks: European energy ministers convened in Brussels as an energy crisis deepened across the bloc ahead of the winter. A toolbox of measures was created that included government support, price caps and windfall revenues, while rationing and trading suspensions were also discussed. Elsewhere, EU member states rushed to complete an eighth round of sanctions as Vladimir Putin announced a “partial mobilization” that conscripted as many as 300,000 troops, while Russia stopped pumping gas through Nord Stream 1, before the pipeline system reported extensive damage that authorities classified as an act of sabotage.
The Merge: The crypto community celebrated a big milestone for the Ethereum blockchain, which transitioned from the proof-of-work (PoW) consensus mechanism to a proof-of-stake (PoS) model. The move aimed to reduce the power needed to secure Ethereum by around 99.95%, easing the concerns of those worried about the environmental impacts of crypto (Ethereum currently emits as much carbon as Singapore and its total energy consumption is similar to the Netherlands). ETH (ETH-USD) issuance also decreased (a.k.a. Triple Halving), while industry players further decentralized the network by securing Ethereum at home, taking some control away from the institutions and sophisticated miners.
‘Working on the Railroad’: Railway unions finally came to a tentative labor agreement that would avert a damaging strike, which was set to cost the U.S. economy an estimated $2B per day. The Association of American Railroads said the deal would give rail employees a 24% wage increase during the five-year period from 2020 through 2024, as well as an immediate payout that averages around $11,000, but the contract was later rejected by staff due to sick-leave policies. Congress acted quickly to bind rail companies and their employees to the previous settlement to “avoid the impending, devastating economic consequences for workers, families, and communities across the country.”
Downsizing: The slowdown in tech went on full display after Facebook parent Meta Platforms (META) announced plans to reduce headcount for the first time ever. The social network went on to shed 11,000 jobs, or about 13% of its staff, amid an advertising slump that was exacerbated by Apple’s (AAPL) iOS privacy changes. Meta is also waiting for its big investments in virtual reality (Oculus), the metaverse (Horizon Worlds) and short-form video (Reels) to bear fruit, as growth peaks across Facebook, Instagram and WhatsApp. With macroeconomic headwinds present elsewhere in the sector, “tech layoffs” materialized into one of the big themes of 2022.
October
Brace for impact: The cleanup from Hurricane Ian wasn’t pretty, and it was the worst of what became one of the costliest Atlantic hurricane seasons on record. Floridians were urged to evacuate before Ian crashed into Cayo Costa as a Category 4 hurricane, with storm surges reaching as high as 18 feet in some coastal areas and wind speeds of up to 155 mph. It ultimately led to 157 fatalities, 146 of which were in Florida, as well as extensive infrastructure and property losses, with insured damages valued at $50B-$65B.
‘Bird is freed’: A new era at Twitter (TWTR) translated into new leadership and Elon Musk was quick to update his platform bio to “Chief Twit.” The billionaire finally completed his $44B acquisition of the social network, prompting an executive exodus and departure of rank and file employees. Musk has since pledged to step down from the top role, is attempting to move towards subscriptions to make money, and triggered continuous drama from his abrupt policy changes. On his first day after the takeover, Musk showed up by carrying a kitchen sink into Twitter’s San Francisco headquarters, joking “let that sink in.”
Lighting up: While they couldn’t sustain the gains, traders bid up major cannabis companies following comments made by President Biden in regards to a review of marijuana as a Schedule I substance. 38 U.S. states have already legalized pot either medically or recreationally, but it is still illegal in some states and at the federal level. Biden also pardoned 6,500 individuals convicted of “simple marijuana possession,” noting that it doesn’t make sense that pot is classified at the same level as heroin. 1 in 6 Americans are currently smoking marijuana, according to a Gallup poll from the summer, which highlights how the times are rapidly changing.
Grain deal: Russia agreed to return to a Turkish and U.N. brokered agreement that allowed the shipment of millions of tons of Ukrainian grain through the Black Sea. It had previously pulled out of the deal following an alleged Ukrainian drone attack in Crimea, but said “written assurances” from Kyiv guaranteed the humanitarian maritime corridor would not be used for military purposes. Wheat and corn futures, as well as other commodities, went on a wild ride in response to the developments, with Ukraine being traditionally referred to as the “Breadbasket of Europe.”
November
#Midterms: No red wave materialized in a key U.S. midterm election that saw Democrats eventually score a 51-49 seat majority in the Senate (following Raphael Warnock’s victory in Georgia). Congressional gridlock still lies ahead, with the GOP taking control of the House of Representatives. A clear majority for Senate Democrats could still give the party more flexibility on passing legislation by lessening the influence of centrist Sens. Joe Manchin and Kyrsten Sinema, while Democrats will have outright control of Senate committees and won’t be bound to a power-sharing agreement with the GOP.
Crypto collapse: One of the biggest stories of the month (and perhaps the year) was the meltdown of FTX International, or what some in the market called a “Lehman Brothers” moment for the crypto industry. Once valued at $32B and the third-largest crypto exchange by trading volume, FTX froze withdrawals amid an $8B shortfall following a complete failure of corporate controls that shook the unregulated crypto industry. 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. SBF is now awaiting trial in U.S. after being extradited from the Bahamas.
NATO membership: At a two-day summit in the Romanian capital of Bucharest, the North Atlantic Treaty Organization doubled down on a vow to make Ukraine a member of the military alliance. It was 14 years ago (in the same city) that foreign ministers first pledged that Kyiv would eventually become a constituent, and they still “firmly stand behind our commitment.” Russian missile and drone attacks have continued to target civilian infrastructure across the country, with strikes that have heavily damaged Ukraine’s power, water and energy infrastructure.
Zero-COVID: Three years after the first COVID-19 case was reported in Wuhan, China began letting up on its strict coronavirus stance as discontent spread across the country. Policies changed rapidly within weeks, with targeted lockdowns, testing, quarantine requirements and travel restrictions all being tossed out the window by the government. With emergency rooms and hospitals overrun, economists are trying to assess how the rapid easing will impact the world’s second-largest economy, while the globe worries about the virus’ untracked spread and possible new variants.
December
Meet C919: The Commercial Aircraft Corporation of China, better known as COMAC, delivered its first domestically-developed passenger jet to launch customer China Eastern Airlines (CEA). The C919, similar to the Airbus (OTCPK:EADSY) A320 and Boeing (BA) 737 narrow-body jet families, brings China a step closer toward its ambitious goal of becoming a global civil aerospace player. The plane, which underwent 14 years of development, is expected to make its maiden commercial flight in the spring, with a trip between Shanghai and the capital Beijing.
Cashing in on chips: Taiwan Semiconductor Manufacturing (TSM) made history with one of the largest foreign investments in the United States. The company announced plans for a second chip plant in Arizona (increasing its investment in the state to $40B), which would deliver enough chips to meet U.S. annual demand of 600K wafers per year. “It’s the foundation of our personal electronics, and also the future of quantum computing and AI,” said Ronnie Chatterji, White House Coordinator for CHIPS Implementation at the National Economic Council. “That’s the definition of supply chain resilience. We won’t have to rely on anyone else to make the chips we need.”
Fusion revolution: The U.S. Department of Energy revealed a major scientific breakthrough, known as a net energy gain (or target gain), that could shake up how we power our world. The major milestone was achieved at the Lawrence Livermore Laboratory in California, where scientists used the world’s largest laser to produce an effect 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.
Bitter cold: Travel was upended from coast to coast over the Christmas holiday weekend, as snow, wind and subfreezing temperatures enveloped much of the country. That derailed the plans for many a flyer, as well as the operations of airlines that saw planes freeze overnight and airports run out of space for de-icing. No one appeared to be hit as hard as Southwest Airlines (LUV), whose scheduling systems went down for nearly a week as travelers complained of unanswered calls to customer service to rebook flights and retrieve baggage (it also sparked an investigation by the U.S. Department of Transportation).
Today’s Economic Calendar
9:45 Chicago PMI
1:00 PM Baker-Hughes Rig Count
3:00 PM Farm Prices
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Good morning. Happy Thursday.
The Asian/Pacific markets were mostly weak. Malaysia and Thailand did well, but Japan, China, Hong Kong, South Korea, Australia and Singapore posted losses. Europe, Africa and the Middle East are currently doing well. Denmark, Poland, France, Turkey, Germany, Russia, Spain, Italy and Sweden are leading, while South Africa is down. Futures in the States point towards a moderate gap up open for the cash market.
————— Masterclass Overview –>> here —————
The dollar is down. Oil and copper are down. Gold and silver are up. Bonds are mixed.
Stories/News from Seeking Alpha…
January
$3T club: The first trading day of 2022 resulted in a historic day for the U.S. stock market as Apple (AAPL) became the first company in history to reach a valuation of $3T. The tech giant crossed the market cap milestone in afternoon trading, with shares climbing nearly 3% to $182.88 apiece. Lifting investor confidence was the belief that Apple will keep launching best-selling products as it explores new markets like self-driving electric cars and augmented-reality glasses, though sentiment soured not too long after as tech got wrecked.
End of easy money: Just a day later, a new era of monetary policy hit investors in the face following previous estimates that any tightening would be limited and gradual. FOMC minutes showed that officials were fully on board with a faster scale back of the central bank’s asset purchase program, which would give it greater flexibility to raise interest rates (that commenced in March). Stocks tanked on the news, with the Nasdaq ending the day down more than 3% for the worst start to a calendar year since the financial crisis.
New era of transplants? In a last-ditch effort to save his life, doctors at the University of Maryland Medical Center transplanted a genetically modified pig heart into patient David Bennett, a 57-year-old handyman from Maryland. He died two months after the highly experimental procedure, but the medical community hopes the xenotransplantation surgery will one day pave the way for endless supply of organs. Several biotech companies were involved with the endeavor, including United Therapeutics (UTHR) and Kiniksa Pharmaceuticals (KNSA).
Game over? Microsoft (MSFT) made headlines by announcing the $69B acquisition of Call of Duty maker Activision Blizzard (ATVI), which would be the biggest deal in its history and more than 2.5x what it paid for LinkedIn five years ago. It would also make Microsoft the world’s No. 3 gaming company by revenue and result in the tech industry’s largest-ever takeover (topping Dell’s (DELL) $67B purchase of EMC in 2016). The FTC later sued to block the deal in December, so prepare for a drawn-out legal battle that might include precedent of so-called vertical deals, whether withholding games from platforms would be profitable and if Microsoft has made good on its past promises.
February
Free speech vs. misinformation: Spotify (SPOT) went into damage control mode as listeners, creators and shareholders found themselves on different sides of the fence on what to do about controversial content on its platform. The straw that broke the camel’s back was a podcast featuring mRNA virologist Dr. Robert Malone on the show of popular host Joe Rogan, who signed a reported $100M deal with Spotify back in 2020. Citing “vaccine misinformation,” Neil Young, Joni Mitchell and Nils Lofgren pulled their music from Spotify in response, while calls to boycott the platform grew on social media. Spotify eventually included a disclaimer to any podcast episode that addresses COVID-19 to pacify both sides of the debate.
$30T and counting: America’s national debt topped $30T for the first time, marking a record amount of red ink (the figure hit $31T in November). The gloomy fiscal milestone added to worries about the long-term economic health of the country, as it grapples with red-hot inflation and a higher interest rate environment – and can make servicing the debt even more challenging. Other factors like an aging population, elevated healthcare costs, and a tax system that doesn’t bring in enough revenue to cover spending are also worrying as the federal government kicks the can down the road.
Freedom convoys: Border crossings between the U.S.-Canada were blockaded by truckers, building on the “Freedom Convoy” movement protesting vaccine mandates and other coronavirus restrictions. Tensions began when Canadian trucker vaccine mandates kicked in on Jan. 15, but spilled over into the U.S. after an American ban followed shortly thereafter. The demonstrations disrupted production lines and supply chains, and even shut down the plants of automakers like Ford (F), General Motors (GM) and Stellantis (STLA).
It’s war: Financial markets went on a roller-coaster ride on Feb. 24 as traders monitored the latest happenings in Ukraine. Russia used air, land and naval forces for an invasion that shocked the world, and while Western intelligence officials warned that Kyiv would fall to Russian forces in just days, the Ukrainians are still holding strong in what became one of the biggest developments of the year. WTI crude oil surged to $130 a barrel for the first time since 2008, before dropping back to trade near the $90 level, while U.S. gasoline prices started to ascend rapidly to eventually hit an average of $5.00 per gallon nationwide.
March
Sanctions smackdown: Financial fallout from the crisis in Ukraine escalated rapidly, along with an intensification of violence and battles throughout the country. Western sanctions sent the ruble into a nosedive, with the currency tumbling 30% to an all-time low versus the dollar, before recovering. Russia’s central bank more than doubled its key interest rate to 20%, freed local bank reserves to boost liquidity and banned Russian residents and companies from transferring foreign currency abroad. Meanwhile, the Moscow Exchange closed for nearly a month to shield stocks from a brutal selloff.
Nickel crisis: Things also got crazy in commodity markets as prices went into overdrive. The London Metal Exchange was forced to suspend all trading in its nickel contracts (LN1:COM), as the cost of LME three-month nickel – the key pricing benchmark for the global physical supply chain – shot up to $101,365 a ton, up from $30,000 just sessions earlier. China’s Tsingshan Holding Group, the world’s biggest producer of nickel used in stainless steel and EV batteries, made a sour nickel bet by building up a massive short position, only to face an influx of margin calls and $8B in paper losses.
Fast exit: Western food diplomacy was one of the first things that flourished in Russia after the Iron Curtain fell in 1989. In fact, the following year’s opening of the first McDonald’s (MCD) in Moscow’s Pushkin Square came to “symbolize the entire opening of the USSR to the West,” according to Marc Carena, former managing director of the company’s Russian operations. Three decades of investment in the country came to an abrupt end following the invasion of Ukraine, with the Golden Arches becoming the most prominent company to close (and then sell) all of its locations in Russia. It followed millions of dollars in foreign direct investment, with a network of 850 restaurants and 62,000 employees.
Recession risk: The yield on the 2-year Treasury briefly exceeded the 10-year for the first time in three years, in a warning sign that the coming Fed rate hikes would trigger a recession. A technical recession did eventually occur in the summer, but employment stayed intact and U.S. GDP grew again in Q3 (many are still wondering if a deeper recession is in store for 2023). The 10-year Treasury went on to hit highs of over 4.20% in October, while the spread on the 2s10y even reached 80 basis points at one point as the yield curve inversion deepened throughout the year.
April
Tapping more reserves: The White House announced plans to release around 180M barrels of oil from the Strategic Petroleum Reserve, in what became the largest release from stockpile since it was created in 1975. The decision saw 1M barrels released daily over the course of six months, but analysts are still debating the benefits and whether it was responsible for putting a dent in inflationary. Two other mega releases of 30M and 50M barrels were coordinated in the previous six months, while the Biden administration later announced plans to refill the SPR at between $67-72 per barrel, after reserves fell to their lowest level since 1984.
Tweetstorm: Bringing the social-media activist (and troll) inside the company fold, Twitter (TWTR) appointed Elon Musk to its board following a drama-filled fest that continued throughout the year. The announcement followed weeks of discussions between Musk, Twitter CEO Parag Agrawal and independent board chair Bret Taylor, as top brass learned that the Tesla (TSLA) CEO was accumulating a 9.2% stake in the platform. Musk eventually made a $44B offer for the company, which he was forced to abide by despite many attempts to wiggle out of the deal. Who will be Twitter’s CEO in 2023?
Taking flight: The first commercial drone deliveries in the U.S. hit the skies as Alphabet’s (GOOG, GOOGL) Wing unleashed its aircraft over the suburban towns of Frisco and Little Elm, which are located just north of Dallas, Texas. If successful, the service could revolutionize how goods are currently transported around cities. Walmart (WMT) also rolled out a drone delivery program for items like diapers and dinner ingredients, while Amazon Prime Air (AMZN) joined the pack in December.
King dollar: The greenback reached its highest level in two decades, outpacing many assets from stocks and bonds to gold and bitcoin. Strength in the dollar was seen as the world stayed far behind matching the Fed in interest rate hikes, as well as concerns about economic growth and weaker comparative currencies. The euro remained on the back foot due to the war in Ukraine, China’s severe COVID restrictions led to a weaker yuan, and Japan’s widening policy and trade gap sent the yen into freefall this year.
May
Overturned: In a rare breach of tradition and secrecy, the U.S. Supreme Court voted to strike down the landmark Roe v. Wade decision, according to a leaked initial draft majority opinion that was later confirmed. Corporate America got involved, with Amazon (AMZN), Apple (AAPL) and others promising to reimburse employees if they travel out-of-state for abortions. Companies like Levi’s (LEVI) and Yelp (YELP) even called on business leaders to take a stand against the ruling, while Live Nation (LYV) said it would cover bail expenses if any of its employees were arrested for protesting peacefully.
Formula shortage: The White House announced a raft of measures to alleviate a baby formula shortage after President Biden spoke with the CEOs of Walmart (WMT), Target (TGT), Reckitt (OTCPK:RBGLY) and Gerber (OTCPK:NSRGY) to explore ways to tackle the crisis. Things worsened after Abbott Nutrition (ABT), the nation’s largest baby formula manufacturer, shuttered its production facility in Sturgis, Michigan, following reports of contaminated formula that was linked to the deaths of at least two infants. Many stores even implemented quotas on how much formula one person can buy at a time, while pediatricians recommended not to dilute formula (which could be harmful to the kidneys) or switching to other brands.
Crypto trouble: Cracks started appearing in the crypto market as stablecoin TerraUSD (UST-USD) lost its dollar peg and sister token Luna (LUNA-USD) crashed to $0. The not so stable “stablecoin” was a DeFi harbinger of things to come, with Celsius, one of the largest crypto lending platforms, pausing all withdrawals a few weeks later due to “extreme market conditions.” Don’t forget the bankruptcies of crypto hedge fund Three Arrows Capital and crypto lender Voyager Digital.
NATO expansion: Joining Finland in its recent quest to join NATO, Sweden broke a nearly 200-year policy of military neutrality formed in the aftermath of the Napoleonic Wars. The governing Social Democratic Party approved an application to join the alliance, but expressed reservations against the deployment of nuclear weapons and foreign bases on their soil. The European Commission, the executive arm of the EU, also unveiled new sanctions on Russian energy, including a phase-out of crude oil imports within six months and refined products by the end of the year.
June
Go big or go home: 75 basis points became the new 50 basis points as Jay Powell and Co. started to show their aggressive side. In what was unthinkable just months earlier, the Federal Reserve hiked rates by a whopping three-quarters of a percentage point for the first time since 1994, and went on to do so again at three of its next policy meetings. By the end of the year, the Fed Funds Rate soared to a range of 4.25%-4.50%, while Powell vowed to “stay the course [on countering inflation], until the job is done.”
Up in smoke: The FDA ordered JUUL products off the shelves in the U.S., dealing a major blow to the once high-flying company whose products “played a disproportionate role in the rise in youth vaping.” Marlboro owner Altria (MO) bought a 35% stake in Juul for $12.8B in late 2018 to diversify its portfolio and to join forces with a company that was threatening its traditional cigarette business. Things didn’t go so well, with the FDA banning flavored e-cigs in 2020, prompting JUUL’s market share to tumble from 70% to 42%, and then to 36% as of March 2022. Altria most recently valued its JUUL stake at $1.6B, an eighth of its original investment, and that was before the FDA threatened its entire U.S. business.
Discretionary spending: Retailers were caught off guard as spending habits of Americans changed rapidly in an unrelenting inflationary environment. Consumers shifted away from higher-margin goods such as kitchen appliances and TVs to basics like food and toiletries, and emphasized a focus on value and affordability. In response, companies like Target (TGT) announced a series of steps to “right-size” inventory for the balance of the year, such as additional markdowns and order cancellations, but its stock remained under pressure as higher costs whacked profitability.
Forced default: Russia defaulted on its foreign debt for the first time since the Bolshevik Revolution after a 30-day grace period to disburse two Eurobond interest payments expired. It was a largely symbolic move given that the Kremlin had enough money to pay off the debt, but was barred from doing so because of the heavy Western sanctions leveled on the government. The U.S. Treasury Department effectively blocked Moscow from making the payments after letting a sanctions loophole expire that had previously allowed it to transfer cash to debtholders via American banks.
Stay tuned… A recap of the second half of 2022 comes tomorrow.
Today’s Economic Calendar
8:30 Initial Jobless Claims
10:30 EIA Natural Gas Inventory
11:00 EIA Petroleum Inventories
1:00 PM Results of $35B, 7-Year Note Auction
4:30 PM Fed Balance Sheet
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Good morning. Happy Wednesday.
The Asian/Pacific markets were mixed buy a few countries posted big losses. Hong Kong did great, but China, South Korea, Taiwan and Indonesia were weak. Europe, Africa and the Middle East are currently mixed and little changed. The UK, South Africa and Saudi Arabia are up; Turkey and Russia are down. Futures in the States point towards a flat open for the cash market.
————— Masterclass Overview –>> here —————
The dollar is down slightly. Oil is down; copper is up. Gold and silver are down. Bonds are up.
Stories/News from Seeking Alpha…
Tesla in tatters
Tesla (TSLA) has slid out of the list of the top 10 U.S. companies by market cap after logging its seventh straight decline on Tuesday. Shares plunged over 11% to under $110, bringing the YTD losses for the company led by Elon Musk to nearly 73%. Weighing on the electric vehicle maker were reports of another production pause in Shanghai, as well as an adverse delivery outlook from rival Nio (NIO), but when looking deeper into it, a bubble may simply be deflating.
Don’t fight the Fed: All the Big Tech giants, which Tesla is often compared to, have been battered this year as the central bank implemented a series of severe interest rate hikes to counter inflationary pressures. Meta Platforms (META) is down 65% YTD, while Alphabet (GOOGL), Amazon (AMZN), Apple (AAPL) and Microsoft (MSFT) are off between 30-50% in 2022. Many have warned that these players traded at higher than normal multiples even in during the cheap money era, but then again, the doubters have been proven wrong time and time again. Will the next stretch be different?
Not helping the Tesla situation is Elon Musk’s distraction at Twitter, global economic uncertainty, and rising competition from traditional ICE producers and EV makers alike. Musk has also been selling Tesla stock in big chunks despite pledges to the contrary, while promises of Full Self-Driving mode have failed to materialize. Tesla has also been expanding its discounts, raising questions about demand, especially as prices of used Teslas fall faster than those of other carmakers.
Time for another split? Tesla has seen around $720B of shareholder value vaporize this year, becoming the largest contributor to the S&P 500’s decline in 2022. Shares are down 44% in December alone, and have plunged over 70% YTD, which is more than double the decline of the Nasdaq Composite. Tesla has traded under $30 for most of its 12 years on public markets (on a split-adjusted basis), and only soared to $100, $200, $300 and then $400 in the last few years of pandemic stimulus trading euphoria. (322 comments)
Cap and ban
Russia has responded to the G7’s attempt to cap gains from its oil revenues, with a new decree signed by Russian President Vladimir Putin. The motion, takes effect between Feb. 1 and July 1, will ban contracts that “directly or indirectly” comply with the $60 price ceiling levied by Ukraine’s Western allies.
Fine print: Putin is allowed to carve out exemptions by “granting special permission” in certain circumstances. The decree also falls short of heavier potential countermeasures, like setting a minimum price differential or barring certain countries from purchases.
Meanwhile, Russia’s flagship crude, known as the Urals blend, is trading below the $60-a-barrel threshold set by the EU and G7, meaning the cap has yet to apply and most business can proceed without restrictions. Moscow has separately offered large discounts for the main importers of its oil, India and China, which haven’t signed up to the sanctions. Many analysts also note that Russia has enough of a shadow fleet to skirt the sanctions, meaning more shipments will be rerouted, which is already happening across the global crude industry.
Market reaction: While headlines were quick to flag a potential disruption, investors are not banking on one – yet. WTI crude futures (CL1:COM) have been unchanged over the last 24 hours at $79 per barrel, while Brent crude (CO1:COM) continues to hover around $84. The bigger story appears to be the full reopening of China and how that oil demand will impact the global economy. (7 comments)
Travel alert
As China reopens its borders with the world, some nations are considering fresh restrictions. A surge in cases across China has raised new questions about transparency, especially after Beijing said it would no longer report daily data on infections and deaths. Chinese hospitals and funeral homes are also under intense pressure from the scale of the current outbreak as a zero-COVID policy that was in place for nearly three years comes to an abrupt end.
Snapshot: India and Japan are now requiring a negative COVID test for travelers from mainland China, while Malaysia has put in place additional tracking and surveillance measures. The U.S. is now weighing similar steps and may announce a series of coronavirus precautions for travelers. Many Chinese are now rushing to book international trips after Beijing on Tuesday lifted its restrictions on reentering the country from abroad.
Health experts are concerned that the virus’ untracked spread, and lack of viral genomic sequence data, could trigger a dangerous or super-contagious new variant. Without proper identification, it would be increasingly difficult to take prompt measures to reduce the spread. Economically speaking, it also has the potential to roil the global logistics network once more, which could have knock-on effects on inflation and economic activity.
Response from China: “The current COVID situation in the world continues to call for a science-based response approach and joint effort to ensure safe cross-border travel, keep global industrial and supply chains stable, and restore world economic growth,” declared Wang Wenbin, spokesman for China’s foreign ministry.
Growing tensions
Trouble is brewing in Europe again, but not only on the border of Ukraine and Russia. A flare-up in the Balkans is threatening the stability of the continent, with the epicenter of the conflict taking place in northern Kosovo. The republic’s ethnic Serb minority and ethnic Albanian majority are making headlines, but this time around, the crisis seems more dangerous than usual, and could have economic repercussions.
Backdrop: Things escalated over the last few weeks over new license plate requirements. The government in Pristina required ethnic Serbs to hand in their Serbian-issued vehicle license plates and replace them with “Republic of Kosovo” plates. Not many made the swap before the deadline, as a struggle played out over sovereignty and identity. With plans to impose fines on the holdouts, ethnic Serbs from all of Kosovo’s national institutions resigned in a mass resignation.
Historical commitments failed to bring any compromise, and Serbs residing in the north erected roadblocks and barricades that essentially divided the area. Things didn’t get any better after Kosovo accused Serbia of backing Russia by sparking the unrest to distract attention from the war in Ukraine. Kosovo also closed its largest border crossing with Serbia today after protesters erected roadblocks on the Serbian side.
Go deeper: Serbian President Aleksandar Vucic has said his army is at its “highest level of combat readiness” and will take “all measures to protect our people and preserve Serbia.” Albanian-majority Kosovo declared independence from Serbia in 2008 – following a war in the late 1990s that saw NATO intervene to protect ethnic Albanian citizens – though remaining Serbs there remain loyal to Serbia, which refuses to accept Kosovo’s secession.
Today’s Economic Calendar
10:00 Pending Home Sales
10:00 Richmond Fed Mfg.
10:00 State Street Investor Confidence Index
11:00 Survey of Business Uncertainty
11:30 Results of $22B, 2-Year FRN Auction
1:00 PM Results of $43B, 5-Year Note Auction
What else is happening…
Four straight months: U.S. home prices continued their decline in October.
AMC Entertainment (AMC) CEO mentions freezing executive pay.
Southwest Airlines (LUV) to operate reduced schedule after cancellations.
Taiwan Semiconductor (TSM) may celebrate 3nm mass production soon.
Nvidia (NVDA) leads semiconductors lower in final trading week of 2022.
Amazon (AMZN) is looking to sell extra space on its cargo planes.
Novavax (NVAX) COVID shot lags effectiveness in first study of its kind.
YouTube (GOOGL) needs 2.3M subs to break even on NFL Sunday Ticket.
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Good morning. Happy Tuesday. Hope you had a good, long weekend.
The Asian/Pacific markets did well. Japan, China, South Korea, India, Indonesia and Taiwan posted gains. Several markets were closed. Europe, Africa and the Middle East currently lean to the upside but are mostly little changed. France, Germany, Israel, Sweden and Saudi Arabia are leading; Hungary is down. Futures in the States point towards a mixed open for the cash market.
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The dollar is down. Oil and copper are up. Gold and silver are up. Bonds are down.
Stories/News from Seeking Alpha…
Bitter cold
Travel was upended from coast to coast over the Christmas holiday weekend, as snow, wind and subfreezing temperatures enveloped much of the country. That derailed the plans for many a flyer, as well as the operations of airlines that saw planes freeze overnight and airports run out of space for de-icing. No one appeared to be hit as hard as Southwest Airlines (NYSE:LUV), however, with travelers complaining of long lines to rebook flights and retrieve baggage, as well as unanswered calls to customer service. LUV -4% premarket to $34.60/share.
What happened? Southwest embarked on a major expansion to new cities during the pandemic, but that left it vulnerable to disruptions when things went wrong. As opposed to flying around central hubs, Southwest planes zig-zag across the country, making it tougher to reserve pilots and flight crews when its systems can’t keep up with scheduling changes. The airline has even ramped up staffing above 2019 levels, and said it would restore its quarterly dividend early next year, but it has more work to do to settle the skies.
Calling it the “largest scale event that I’ve ever seen,” Southwest CEO Bob Jordan extended his “heartfelt apologies” following the extreme winter weather. The airline canceled 2,893 flights on Monday, or 70% of scheduled flights, after scrapping 48% of them on Sunday and canceling a total of more than 8,000 flights since Thursday. About 60% of the carrier’s planned schedule for today was also scrubbed, and more are on tap for tomorrow, despite improving conditions and warming temperatures.
Under investigation: “The U.S. Department of Transportation is concerned by Southwest Airlines’ disproportionate and unacceptable rate of cancellations and delays as well as the failure to properly support customers experiencing a cancellation or delay,” according to a press statement. “USDOT will closely examine whether cancellations were controllable and whether Southwest is complying with its customer service plan as well as all other pertinent DOT rules.” (3 comments)
End of zero-COVID
After a hard and difficult 2022, traders are keeping their eyes on the chimney to see if the so-called Santa Claus rally will take shape this year. The seasonally bullish trend typically sees equities rise over the last five trading sessions of December and the first two trading days of January. U.S. stocks rose mildly on Friday, and are turning higher premarket, as some optimism returns following fresh developments on the global stage.
Snapshot: China is dropping its quarantine requirements for inbound visitors, further easing its strict COVID controls three years after the onset of the pandemic. China’s central health authority has also stopped publishing daily data on infections and deaths, as it downgraded the seriousness of COVID-19 to a “Class B” infectious disease, which requires more basic treatment and prevention. To minimize the impacts on the world’s second-largest economy, some Chinese cities have said people could return to work even if they had mild symptoms.
“Most Chinese cities could recover from the first wave of the latest COVID-19 outbreak by January… this would be faster than people have expected,” noted Chaoping Zhu, global market strategist at J.P. Morgan Asset Management.
Grim investing: In the meantime, the initial shockwave of infections is leading to overrun emergency rooms and hospitals, while crematoriums are filling up as the zero-COVID stance is completely abandoned. Shares of Fu Shou Yuan International Group (OTC:FSHUF), China’s biggest cemetery and funeral service operator, soared another 22% in Hong Kong on Friday, taking its gains over the last two months to nearly 80%. (1 comment)
In time for Christmas
It ain’t a sleigh and reindeer, but Amazon (NASDAQ:AMZN) on Friday began deliveries using Prime Air drones in Lockeford, California, and College Station, Texas. Amazon hopes to use feedback from the service to improve its operations, and eventually scale the program nationwide. To fly delivery drones in the U.S., companies have to be approved by the FAA, and the retail behemoth is one of only several firms that has received Part 135 certification.
How it works? Once onboarded, customers can see Prime Air-eligible items on Amazon. They place their order as they normally would and receive an estimated arrival time with a status tracker. For these deliveries, the drone will fly to the designated delivery location, descend to the customer’s backyard, and hover at a safe height. It will then release the package and rise back up to altitude.
“Our aim is to safely introduce our drones to the skies,” commented Natalie Banke, spokesperson at Prime Air. “We are starting in these communities and will gradually expand deliveries to more customers over time.”
The competition: Alphabet’s (GOOG, GOOGL) Wing launched commercial service just north of Dallas in April, and hopes to soon press the button on wide-scale deployment. Walmart’s (NYSE:WMT) drone delivery program is also available to households in Dallas, Orlando, Phoenix and Tampa, making it possible for customers to get diapers or dinner ingredients delivered in 30 minutes or less. Meanwhile, Uber Eats (NYSE:UBER) has promised to ratchet up drone delivery operations in the near future, but until now, the technology has been mainly focused on small-scale trials. (4 comments)
The housing story
While there’s not much economic data out this week, real estate watchers will be eyeing the housing market for some updates. The S&P CoreLogic Case-Shiller National Home Price Index is set to be published today at 9 a.m. ET, and will likely show the third straight month of price declines. The Pending Home Sales Index for November will also be released tomorrow following its sharpest drop on record the previous month.
Bigger picture: Activity in the property sector has been heavily influenced by the Fed’s aggressive rate hiking cycle. The 30-year fixed-rate mortgage even jumped to as high as 7% in the fall, and while it recently eased back to 6.3%, monthly mortgage payments are soaring. According to the Mortgage Bankers Association, home payments at the median U.S. price are up 43% YTD.
“Coming out of the pandemic, rates were very low, people wanted to buy houses, they wanted to get out of the cities and buy houses in the suburbs because of COVID,” Fed Chair Jerome Powell said in a speech last month. “So you really had a housing bubble, you had housing prices going up to very unsustainable levels and overheating and that kind of thing. Now the housing market will go through the other side of that and hopefully come out in a better place between supply and demand.”
Outlook: While it may be a near-term detriment for investors, a cooling housing market is just what the Fed wants in terms of lowering inflation and economic activity. However, if things go too far, a hard landing could be in store in 2023 as the U.S. plunges into recession. In that event, Moody’s Analytics forecasts that house prices will fall between 5%-10%, and in 183 overvalued areas, properties could crash 15%-20%.
Today’s Economic Calendar
8:30 International Trade in Goods (Advance)
8:30 Retail Inventories (Advance)
8:30 Wholesale Inventories (Advance)
9:00 S&P CoreLogic Case-Shiller Home Price Index
9:00 FHFA House Price Index
10:30 Dallas Fed Manufacturing Survey
1:00 PM Results of $42B, 2-Year Note Auction
1:00 PM Money Supply
What else is happening…
Holiday retail sales up 7.6% as deals lure consumers – Mastercard.
Disney’s (DIS) ‘Avatar’ sequel sails to 2nd week atop the box office.
Another substation attack leaves thousands without power in WA.
Tesla (TSLA) halts production in Shanghai as part of year-end break.
Nio (NIO) CEO warns of sales challenges in first half of 2023.
Crypto deposit outflows at banks a cause for concern – S&P Global.
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