Archive for July, 2022

• The Market Breaks Its Losing Streak
  Eddy Elfenbein, July 15th, 2022 at 1:32 pm

  After five down days in a row, the stock market is having a nice rebound today. The S&P 500 is currently up over 1.6% as I write this.

  As you might expect, the High Beta and riskier stocks are leading the charge. Some of the most defensive stocks like Hershey (HSY) and Church & Dwight (CHD) are down slightly today.

  But the big winner today is Citigroup (C). Its shares are up over 12% thanks to a surprisingly strong earnings report. For Q1, the bank earned $2.19 per share. Wall Street had been expecting just $1.68 per share. That’s still a drop from the $2.85 per share the bank made in last year’s Q1.

  Wells Fargo (WFC) is also having a good day. The shares are up about 6% after the bank reported earnings of 82 cents per share. That was a two-cent beat. A year ago, WFC reported earnings of $1.38 per share.

  This morning, we got the retail sales report for June, and it was as expected. Retail sales rose by 1%. The Street had been expecting 0.9%. Excluding cars, the increase was also 1%. Wall Street was looking for 0.7%.

• Morning News: July 15, 2022
  Eddy Elfenbein, July 15th, 2022 at 7:02 am

  China’s Surveillance State Hits Rare Resistance From Its Own Subjects

  China’s Economy Hits a Slump as Covid Policy Takes a Toll

  Euro Slips Below Dollar as Europe’s Economic Fortunes Slump

  ECB Bond Aid Plan’s Fault Lines Exposed by Italy’s Political Crisis

  Germany Hopes to Outrace a Russian Gas Cutoff and Bone Cold Winter

  Energy Was the Only Bright Spot in the Stock Market’s Gloom

  Manchin Crushes Biden’s Hopes for Revival of Economic Agenda

  A Truly Massive Interest Rate Hike Is Now on the Table

  People Have Money but Feel Glum—What Does That Mean for the Economy?

  How to Get In on the Electric Vehicle Boom

  Wall Street Texting Habit Sticks Banks With Rare $1 Billion Bill

  Retail Sales Expected to Have Risen Amid Higher Inflation

  Amazon Has Been Slashing Private-Label Selection Amid Weak Sales

  Wave of Airline Flight Delays This Year Mostly Self-Inflicted

  Tech Workers Long Got What They Wanted. That’s Over.

  Would You Pay $40 a Month to Have Strangers Watch You Work?

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• Morning News: July 14, 2022
  Eddy Elfenbein, July 14th, 2022 at 7:04 am

  Inflation Soared in June, Pinching Consumers and Challenging Policymakers

  Dollar Gauge Hits Record High, Surpassing Pandemic Panic Peak

  ‘Don’t Fight It’: Hedge Funds, Wall Street Double Down on Dollar

  Hot Inflation Report Puts Pressure on Federal Reserve

  How to Invest When Inflation Is Bad and a Recession May Loom

  Beware Wishful Thinking About Inflation and Recession

  Why A 2022 Recession Would Be Unlike Any Other

  The Housing Shortage Isn’t Just a Coastal Crisis Anymore

  China Convenes Banks on Mortgage Boycott Roiling Markets

  U.S. Electric Car Sales Climb Sharply Despite Shortages

  Panasonic is Building the World’s Largest EV Battery Factory in Kansas

  Russia Warns that G7 Attempt to Cap Oil Price Risks Higher Prices

  Gas Prices, a Big Inflation Factor, Are Coming Down Sharply

  ConocoPhillips to Acquire 30% Stake in Sempra’s Port Arthur LNG Project

  Delta Predicts Travel Rebound Will Stretch Past Summer

  JPMorgan Chase Says Second-Quarter Profit Fell 28% After Building Reserves for Bad Loans

  Crypto Lender Celsius Files for Bankruptcy After Cash Crunch

  Netflix With Ads Is Coming

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• Inflation Rose Over 9% Over the Last Year
  Eddy Elfenbein, July 13th, 2022 at 9:06 am

  The June CPI report is out and it’s another strong one. Over the past 12 months ending in June, consumer prices rose by 9.06%. Wall Street had been expecting an increase of 8.8%.

  The core rate rose by 5.92%. Wall Street was looking for an increase of 5.7%.

  Over the last month, headline inflation rose by 1.3% while core inflation was up by 0.7%.

  Energy prices surged 7.5% on the month and were up 41.6% on a 12-month basis. The food index increased 1%, while shelter costs, which make up about one-third of the CPI rose 0.6% for the month and were up 5.6% annually. This was the sixth straight month that food at home rose at least 1%.

  Rental costs 0.8% in June, the largest monthly increase since April 1986, according to the BLS.

  (…)

  Much of inflation rise came from gasoline prices, which increased 11.2% on the month and just shy of 60% for the 12-month period. Electricity costs rose 1.7% and 13.7%, respectively. New and used vehicle prices posted respective gains of 0.7% and 1.6%.

  Medical care costs increased 0.7% on the month, propelled by a 1.9% increase in dental services, the largest monthly change ever recorded for that sector in data that goes back to 1995.

  Airline fares were one of the few areas seeing a decline, falling 1.8% in June though still up 34.1% from a year ago. The meat, poultry, fish and eggs category also fell 0.4% for the month but is up 11.7% on an annual basis.

  The S&P 500 looks to open down 1.76%.

• Morning News: July 13, 2022
  Eddy Elfenbein, 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
  Eddy Elfenbein, 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
  Eddy Elfenbein, 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
  Eddy Elfenbein, 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
  Eddy Elfenbein, 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
  Eddy Elfenbein, 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.