Morning News: July 13, 2022
Posted by Eddy Elfenbein on July 13th, 2022 at 7:04 am

Europe’s Economies Show Resilience as Fresh Energy Threat Looms

Dollar Looks Like a Winner as Markets Brace for Even Faster Inflation

Gold Steadies Near Nine-Month Low Ahead of US Inflation Report

U.S. Inflation Seen Reaching a New Four-Decade High

Fed’s Inflation Dashboard Puts More Weight on Volatile Energy, Food Prices

The Era of Expensive Oil Is Here to Stay

A Quarter of Americans Say Their Next Car Will Be an EV

Manchin, Playing to the Home Crowd, Is Fighting Electric Cars to the End

US Says Will Back Miners to Stop China’s Weaponization of Battery Metals

Twitter Lawyers Say They Can Prevail Over Musk in Just Four Days

It’s Officially Too Hot for Crypto Mining in Texas

How Three Arrows Capital Blew Up and Set Off a Crypto Contagion

Google Tells Staff to Act ‘More Entrepreneurial.’ Translation: Work Harder, or Else

Delta Sees ‘Meaningful’ Full-Year Profit on Resilient Consumer Demand

Spirit Airlines Plans to Delay Frontier Deal Vote to July 27

Targeted by Beijing, One Chinese Tutoring Company Reinvents Itself With Live Streams Selling Groceries

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CWS Market Review – July 12, 2022
Posted by Eddy Elfenbein on July 12th, 2022 at 7:24 pm

(This is the free version of CWS Market Review. If you like what you see, then please sign up for the premium newsletter for $20 per month or $200 for the whole year. If you sign up today, you can see our two reports, “Your Handy Guide to Stock Orders” and “How Not to Get Screwed on Your Mortgage.”)

Earnings Season Is Here

Earnings season is finally here. This morning, Pepsi (PEP) kicked off Q2 earnings season when it reported profits of $1.86 per share. That was 12 cents better than estimates. I hope this a positive omen for the rest of earnings season. Overall, we’re looking at about 5% earnings growth for this season. That’s not bad.

Like a lot of defensive stocks, shares of Pepsi haven’t been doing especially well, but they look very good when compared with the rest of the market. After all, folks generally don’t cut back on their Doritos budget just because the economy gets a little weak.

I don’t think what a soda/snack food company has to say is particularly indicative of the overall economy. However, I noticed how well Pepsi is managing itself in an inflationary environment. So far, Pepsi has been able to pass along price increases to consumers. Much of that is probably due to Pepsi’s brand name, but I don’t think many other companies are in such a position.

But it’s not just the name. Pepsi also noted that it’s working hard to cut costs internally to ensure its prices remain competitive. In fact, Pepsi has been able to increase its margins slightly this year. That says a lot about the efficiency of their operations. Pepsi also raised its revenue guidance this year. This is the second quarter in a row that Pepsi has increased its revenue guidance.

How Inflation Distorts Earnings

A big part of the increase in revenues is due to passing along higher costs. When looking at a company, we want to make sure it’s increasing its sales volume as well.

I bring these issues up because the issue of inflation is a unique challenge to business and to us as investors as well. To give you an example, let’s say you run a manufacturing company. Your company buys its raw materials at Time X. It processes its parts at Time Y. It then sells its finished goods at Time Z.

The distance between those three time points can be quite large, and if inflation is high enough, it will distort your actual profitability. Initially, inflation can give you the illusion of efficiency even when that’s not the case.

Investors should understand that not all earnings are the same, and inflation exacts a heavy toll on asset-heavy businesses. Companies with high assets relative to their profits tend to report ersatz earnings.

Inflation also benefits the borrower at the expense of the lender. The cost of inflation falls heavily on lower-income consumers and people on a fixed-income. Inflation is almost like putting a magnet near a company—it messes up all the normal readings.

Tomorrow we’ll get the CPI report for June, and it will probably be another unduly large one. The White House even conceded that it will be “highly elevated.” The CPI is heavily influenced by the rental market and those numbers could distort the actual rate of inflation. We also know that the rate of inflation falls heavier on low-income folks. For tomorrow, Wall Street expects the 12-month inflation rate to hit 8.8%. That would be another 40-year record.

Unfortunately, the Federal Reserve doesn’t have a strong track record of fighting inflation without severely harming the economy. I don’t want to speak too soon, but there may be some early indications that inflation could be cooling off. Gasoline prices, for example, have started to ease. The price for oil fell 8% on Tuesday.

The prices for other commodities like copper are also down. Copper is known to be a bellwether for other commodities. It’s down so much that it’s hurting the national economy. The Chilean peso is down over 15% in the last month.

Check out the slide in copper:

That’s not the only currency that’s getting knocked around. Earlier today, the U.S. dollar and euro reached parity for the first time since December 2002. The eurozone faces a severe energy crisis as Russia is threatening to further reduce its energy supplies. This could be an expensive winter for many German families.

The early part of earnings season is usually dominated by the big banks. JPMorgan (JPM) and Morgan Stanley (MS) are due to report on Thursday, followed by Wells Fargo (WFC), Citigroup (C), Bank of New York Mellon (BK) and BlackRock (BLK) on Friday.

Overall, the financial sector has been pretty weak this year. In February, the S&P 500 Financial Index ETF (XLF) got to $41 per share. Recently, it’s dipped below $31 per share. Not surprisingly, earnings are under pressure as well. For Q2, the financial sector is expected to see an earnings drop of 22% compared with last year’s Q2.

Our Buy List stocks will start reporting next week. Abbott Labs (ABT) is due to report on July 20. Wall Street currently expects earnings of $1.11 per share. The next day, Danaher (DHR) will report. The consensus on Wall Street is for earnings of $2.36 per share. I’m expecting earnings beats from both.

I write a lot about the yield curve, and one of the reasons is that financial stocks tend to have a close relationship with the spread between different maturities. Financial stocks have been lagging as the spread between the 2- and 10-year Treasuries reached its lowest point in 15 years.

On Tuesday, the 2/10 Spread got to -0.12%. I should caution you that an inverted yield curve can precede a recession by several months. I’ll give you an example. Near the turn of the millennium, we had a fairly mild recession, and the 2/10 served as an early warning sign, but it took some time. The 2/10 Spread turned negative in February 2000. The recession didn’t officially begin for more than a year. During the financial crisis, the 2/10 Spread went negative two full years before the economy started to wobble. The 2/10 Spread is good but not very timely.

Why does the 2/10 Spread seem to work? That’s hard to say, but it’s probably because the two-year yield is the best indicator of Fed policy while the 10-year yield is a good indicator for economic growth. It’s the intersection of these two that can be so important.

Musk Dumps Twitter

If you think the stock market is having a tough year, be glad you aren’t an investor in the crypto hedge fund, Three Arrows Capital. The fund went kablooey last month. This was a knock-on effect of the stablecoin, TerraUSD, also going kablooey.

That’s a common story in these kinds of things. It’s one thing when a single firm goes under, but soon you learn who was also exposed to that firm. Already, one digital asset broker had to file for bankruptcy because Three Arrows couldn’t pay them. Everything gets so interconnected that you’re never sure who is tied to what.

The Three Arrows Capital story gets more interesting as the founders have apparently disappeared. Or maybe not. No one’s really sure at this point. In court papers, the creditors allege that the founders aren’t cooperating and that their whereabouts are unknown.

Not so fast. Today, one of the founders dramatically reemerged—or at least his Twitter account did—and he denounced the creditors as baiting. In March, Three Arrows was managing $10 billion. Now it’s all gone.

I can’t leave without giving you an update on Elon Musk and Twitter. Shares of Twitter (TWTR) dropped 11% on Monday after Elon Musk called the merger deal off. It’s hard to say this was a huge surprise since shares of TWTR have drifted pretty far from Musk’s offer price of $52.20 per share.

After the market closed, Twitter officially said it’s suing Musk to force him to go along with the agreed-upon deal. Hmm. I’m skeptical such a legal case can win. That is, forcing Musk to buy a company he doesn’t want to own even though he signed an agreement.

Musk claims that Twitter hasn’t been honest about its spam and bot problem. This strikes me as a highly convenient and timely excuse. Everyone knows about Twitter’s bot problem.

I’m still surprised that Twitter took Musk’s offer so seriously. The price was certainly good but it’s highly speculative to think Musk would have stayed with it.

There’s also a $1 billion termination fee in play. According to the agreement, either side would have to pay if it backed off. My guess is that Musk will eventually pay a watered-down fee to Twitter. I know Twitter will argue its case that the buyout must continue, but I doubt a judge would sign off on that.

I’ll quote myself from this newsletter from last month:

I think it’s clear that Musk wants out of the deal and he’s using this as a convenient excuse. This is speculation on my part, but I suspect that Twitter employed an investment banker to give them an honest assessment of Twitter’s true value, and the answer they provided was very low. As a result, Twitter saw Musk’s offer as a great deal. Bear in mind that Musk has said that “having a public platform that is maximally trusted and broadly inclusive is extremely important to the future of civilization.”

I think Musk enjoyed the fun of making the Twitter execs and employees nervous. He’s got a 12-digit fortune, so why not have some fun? Plus, he has a valid point that Twitter’s banning policies seem arbitrary.

If both sides take the matter to court, then it may not turn out well for Musk. According to the deal, Twitter is allowed to sue and force the acquisition. That is, assuming Musk’s financing remains in place.

You’ll notice that there tends to be a big difference between what Musk tweets and what his lawyers say in official documents submitted to the SEC.

This deal isn’t going to happen and Twitter shareholders will lose out. On the plus side, a small number of lawyers were very well-paid.

Adding to the drama is that Twitter will report earnings later this month. Or rather, the lack thereof. No matter how you look at the issue, you can never get away from the fact that Twitter simply isn’t that profitable.

Wall Street expects Twitter to report earnings of 15 cents per share. That’s down from 20 cents per share for last year’s Q2.

There’s even a conspiracy theory that Musk engineered all this so he could sell off his Tesla (TSLA) stock without drawing too many questions. Interesting theory, but call me a doubter.

That’s all for now. I’ll have more for you in the next issue of CWS Market Review.

– Eddy

P.S. I’m going to be a guest on AlphaNooner this Thursday at noon ET. You can see it live at the AdvisorShares twitter feed. Please join us!

Morning News: July 12, 2022
Posted by Eddy Elfenbein on July 12th, 2022 at 7:03 am

Battered Euro Edges Ever Closer to Parity as Dollar Runs Rampant

U.S. Seeks to Fix WTO’s Broken Trade Dispute Process

Worst of Global Energy Crisis May Still Be Ahead, IEA Says

Gas Station Owners, Blamed When Prices Rose, Face Risks as Prices Fall

The Obnoxious Contradiction Inherent In Lockdowns and Rate Hikes

Fresh US Inflation Peak to Keep Fed on Aggressive Rate Path

Fed’s George Concerned About Effect of Aggressive Rate Rises on Economy

Relief Eludes Many Renters as Fed Raises Interest Rates

How Elon Musk Damaged Twitter and Left It Worse Off

What Is Delaware’s Court of Chancery and Its Role in Elon Musk’s Twitter Deal?

Largest-Ever SPAC Will Return $4 Billion to Investors After Failing to Complete A Deal

Peloton Will Stop Building Its Own Bikes and Treadmills as Part of Turnaround

Restaurants Face an Extortion Threat: A Bad Rating on Google

Why So Many Children of Immigrants Rise to the Top

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Shares of Twitter Are Down as Musk Backs Out
Posted by Eddy Elfenbein on July 11th, 2022 at 9:59 am

Shares of Twitter are down about 7% this morning after Elon Musk called the merger deal off. It’s hard to say this was a huge surprise since shares of TWTR have drifted pretty far from Musk’s offer price of $52.20 per share.

Twitter plans to sue to get the deal done. I’m skeptical such a legal case can win. That is, Musk is forced to buy a company he doesn’t want even though he signed an agreement. Also, not surprisingly, shares of Tesla were up this morning.

Musk claims that Twitter hasn’t been honest about its spam and bot problem. This strikes me as a highly convenient and timely excuse. Everyone knows about Twitter’s bot problem.

I’m still a little surprised that Twitter took Musk’s offer so seriously. My guess is that their bankers told them that Twitter simply isn’t worth that much and they should eagerly take such a generous offer. It’s hard for me to disagree with that logic, except for the variable of Elon Musk.

There’s also a $1 billion termination fee in play. According to the agreement, either side would have to pay if it backed off. My guess is that Musk will eventually pay a watered-down fee to Twitter.

Adding to the drama is that Twitter will report earnings later this month. Or rather, lack thereof. No matter how you look at the issue, you can never get away from the fact that Twitter simply isn’t that profitable.

Morning News: July 11, 2022
Posted by Eddy Elfenbein on July 11th, 2022 at 7:06 am

Global Tax Talks Hit Another Delay

China’s Economy Stumbles in the Fog of Covid War

Indian Shares Pare Losses to End Flat After Reports of Export Tax on Steel Ending

Chile Currency Plunge, Inflation Rattle Latin America’s Copper King

Europe’s Rush to Buy Africa’s Natural Gas Draws Cries of Hypocrisy

In a Time of Conflict, Ukraine Entrepreneurs Make War Their Business

For the Fed, Easing Too Soon Risks Repeat of Stop-and-Go 1970s

Those Predicting a ‘Fed-Induced Recession’ Misunderstand the Meaning of Recession

The Fight Over Truth Also Has a Red State, Blue State Divide

Some Surprising Good News: Bookstores Are Booming and Becoming More Diverse

Twitter Shares Sink, With Legal Battle Ahead as Elon Musk Walks Away

Twitter Didn’t Seek a Sale. Now Elon Musk Doesn’t Want to Buy. Cue Strange Legal Drama

Baby-Formula Production Has Restarted at Abbott’s Michigan Plant

Airline Pilots Seek Big Raises, and Broader Changes

Tyson Foods Works to Fix Its Chicken Operations as Orders Pile Up

Nobody Likes Self-Checkout. Here’s Why It’s Everywhere

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June Jobs Report
Posted by Eddy Elfenbein on July 8th, 2022 at 9:02 am

The jobs report is out. For June, the U.S. economy created 372,000 net new jobs. Wall Street had been expecting a gain of 250,000.

The unemployment rate stayed at 3.6%.

The jobs number for April was revised lower by 68,000 and the May number was lowered by 74,000.

Here are some details. Private payrolls increased by 381,000. Average hourly earnings increased by 0.3%. Over the last year, earnings are up 5.1%.

The U-6 rate fell to 6.7% which is a new cycle low.

By sector, education and health services led job creation, with 96,000 hires, while professional and business services added 74,000 positions. Other contributors included leisure and hospitality (67,000), Health care (57,000), and transportation and warehousing (36,000).

Other sectors showing strong gains included manufacturing (29,000), information (25,000) and social assistance (21,000). Government jobs fell by 9,000.

There was some disparity in the numbers: The headline figure for job creation under the BLS’ establishment survey was strong. But the survey of households showed a decline of 315,000, leaving the total jobs count 755,000 shy of its February 2020 pre-pandemic level.

Morning News: July 8, 2022
Posted by Eddy Elfenbein on July 8th, 2022 at 7:01 am

Food Insecurity Hits Rich Countries as Inflation Makes Basics Unaffordable for Many

Two Fed Officials Endorse Another 0.75-Point Rate Increase

These Measures Reflect a Slowing Economy

Hiring Slowed in June From Robust Pace, Economists Estimate

Historic Cascade of Defaults Is Coming for Emerging Markets

Investors Anxious About a Recession Look to U.S. Companies for Guidance

There’s a Low-Risk Way for Investors to Earn 9.62% Returns Right Now

‘I’m Done With Crypto’: Voyager Bankruptcy Rocks True Believers

The Elon Musk-Twitter Bot Spat Masks His Real Issue Over $44 Billion Deal

Tesla China Shipments Soar to Record as Plant Fires Back Up

Even in Death, Internet Explorer Lives On in South Korea

How Wish Built (and Fumbled) a Dollar Store for the Internet

GameStop Tumbles on CFO’s Firing, Reports of Job Cuts

Officials Balked at a Drug Company’s Tax Shelter. Auditors Approved It Anyway.

Theranos’s Ramesh Balwani Found Guilty of Fraud

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Morning News: July 7, 2022
Posted by Eddy Elfenbein on July 7th, 2022 at 4:44 am

America’s Gridlocked Democracy Struggles to Meet China Challenge

Europe, Facing Energy Shortages, Moves to Shore Up Providers

US, Allies Discuss Capping Russian Oil at $40-$60 a Barrel to Cut War Revenue

Shell Says Fuel-Refining Margins Could Add $1 Billion to Quarterly Earnings

Inflation Fears Drove Larger Fed Rate Increase in June

Fed Moves Toward Another Big Rate Increase as Inflation Lingers

Fed Sees ‘More Restrictive’ Rates Possible If Inflation Persists

Tycoon Whose Bet Broke the Nickel Market Walks Away a Billionaire

The SEC Alone Can’t Police Billionaire CEOs Like Elon Musk

The Jobs Market Still Favors Workers, Despite Fears of an Economic Slowdown

Roaring US Rental Market Shows Early Signs of Slowing Down

Start-Up Funding Falls the Most It Has Since 2019

Electric Truck Maker Rivian’s Stock Surges as Deliveries More Than Triple

Officials Balked at a Drug Company’s Tax Shelter. Auditors Approved It Anyway.

Merck Is in Advanced Talks to Buy Seagen for Roughly $40 Billion or More

Heads of FBI, MI5 Issue Joint Warning on Chinese Spying

Defrauded Students to Get Easier Path to Debt Forgiveness Under New Biden Plan

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The Fed Releases the Minutes from the June Meeting
Posted by Eddy Elfenbein on July 6th, 2022 at 2:22 pm

The Federal Reserve just released the minutes from its last meeting. At that meeting, the Fed decided to raise interest rates by 0.75%.

In the minutes, the Fed acknowledged the need to raise rates at the next meeting, which is later this month, by either 0.5% or 0.75%.

The June meeting was interesting because the Fed was leaning towards a 0.50% hike. After the CPI report, the Fed changed its mind to 0.75%.

In the United States, near-term policy rate expectations shifted markedly toward the end of the period, particularly after the release of the May consumer price index (CPI) report. Ahead of the release of the report, market expectations reflected a broad consensus that there would be 50 basis point rate increases at both the June and July FOMC meetings. After the release of the higher-than-expected inflation data, policy-sensitive rates pointed instead to a considerable probability of 75 basis point moves at both the June and July meetings. The market-implied path of the federal funds rate moved higher at longer horizons as well. Market participants noted elevated uncertainty about the economic and monetary policy outlook.

For now, traders have high expectations for a 50-point increase in September.

There Are More than 11 Million Job Openings
Posted by Eddy Elfenbein on July 6th, 2022 at 11:23 am

The stock market is flat to down slightly this morning, but energy is down big. The S&P 500 Energy Index is off by more than 4%.

The price for oil is still under pressure. Yesterday, oil closed below $100 per barrel. Oil is down another $3 today. Outside that, there’s a mild bias towards defensive stocks today.

This morning, we got the JOLTS report which is job openings and labor turnover. According to the government, there were 11.25 million job openings in May. That’s down from 11.68 million for April. That latter figure was revised higher.

The number of job openings still leads unemployment by a nearly 2-to-1 ratio. There are now 5.95 million unemployed. The number of quits fell to 4.27 million. There are 440,000 fewer Americans at work now than there were in February 2020.

Also this morning, the ISM Services Index fell to a two-year low. The reading for June was 55.3. That still signals an expansion, but a weakening one.

At 2 p.m. ET we’ll get the minutes from the last Fed meeting. This is when the Fed decided to hike rates by 0.75%.

Here’s a look at the price for copper. It’s dropped sharply over the last month. Some analysts like to follow copper because it’s historically lined up well with economic expansions and recessions.