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Wall Street Breakfast: What Moved Markets

Sep 30, 2022


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Check out original Seeking Alpha show The Weekend Bite! This week we discuss ETFs in the energy and cyber sectors, why Tesla is a sell after Musk's attempt to buy Twitter and whether we're in a risk on or risk off market. With Michelle Culver, VP Portfolio Strategist at Global X, and David Trainer, CEO of New Constructs.

Stocks meandered lower in late trading on Thursday, deepening losses for all three of the market’s benchmark indexes in the holiday-shortened trading week. The moves came as investors focused on inflation with Treasury yields climbing higher, and back-to-back inflation reports showed prices posting record advances. On Thursday, the benchmark 10-year U.S. Treasury yield ramped up to multiyear highs, climbing 14 basis points to 2.83%. Major banks including Goldman Sachs, Morgan Stanley and Wells Fargo reported a mixed bag of first quarter earnings, sending most bank stocks lower. Earnings season will hit its stride next week, as seven Dow blue-chip names issue reports. For the week just ended, the higher yields hit tech stocks, sending the Nasdaq Composite 2.6% lower, while the SP 500 fell 2.1% and the Dow Jones finished down 0.8%.

Inflation nation

The Consumer Price Index rose by 8.5% Y/Y in March, marking the hottest pace since 1981, but inflation is also heating up on the wholesale side. Wednesday's PPI showed the costs of goods and services producers receive soar by a whopping 11.2% from a year ago, marking an all-time for the data that goes back to November 2010. While the stats should get markets nervous, as the Fed aggressively tightens monetary policy, most investors shrugged off the data with equities climbing following the two releases (before dropping off at the end of the week).

What it means? Some are pointing to the easing of core inflation, which came in much more subdued than analysts had expected in the Consumer Price Index. Others say TINA, or the 'there is no alternative' mindset that has guided stock investing since the 2008 crisis, may be harder to quit than most think, or could in fact be the best way to stay pegged to inflationary forces. There are also those who are forecasting a top to current trends as supply chains show signs of improvement, and while inflation may still remain elevated, the rate by which it is growing could decline as soon as next month.

Hike! According to the CME FedWatch Tool, the probability of the Fed raising rats by 50 basis points in May now stands at nearly 90%. "While investors might interpret the reversal of Fed policy as a bad harbinger, history shows that stock returns remain robust," Credit Suisse strategist Jonathan Golub has noted. "Over the past 4 cycles (’94, ’99, ’04, ’15), the SP 500 gained 9.5% in the twelve months prior to the first hike, and 26% over the subsequent 3 years."

Surcharges: As inflation continues to soar nationwide, Amazon ( AMZN ) is attempting to offset some of its newfound costs by passing fees on to sellers. Fuel and inflation surcharges will be tacked on to the existing ~5% fee currently leveled on U.S. third-party vendors who use the company's fulfillment services. The new costs will go into effect on April 2, adding $0.24 per unit to the services offered by FBA, or Fulfillment by Amazon. ( 11 comments )

Musk wants Twitter

Following a drama-filled two weeks, Tesla (TSLA) and SpaceX founder Elon Musk made a move to buy Twitter (NYSE:TWTR) for $54.20 per share in cash. TWTR shares initially rose on the news, climbing 12% premarket to $51.30, before closing lower at the end of the session on Thursday. The deal would value the company at about $43B and is what Musk called his "best and final offer."

Quote: "Twitter has extraordinary potential. I will unlock it," the Tesla (TSLA) CEO said in an amended 13-D filing. "I invested in Twitter as I believe in its potential to be the platform for free speech around the globe, and I believe free speech is a societal imperative for a functioning democracy. However, since making my investment I now realize the company will neither thrive nor serve this societal imperative in its current form. Twitter needs to be transformed as a private company."

Musk was expected to join the board of Twitter after disclosing a 9.2% stake in the company, but then turned down the offer, leading to speculation he could go hostile. The latest offer represents an 18% premium over Twitter's closing price on Wednesday, or a 54% premium over the day before Musk began investing in the social media company. Reports also suggest that Twitter may adopt a poison pill to prevent Musk from significantly increasing his stake.

Between the lines: The number $54.20 is notable as Musk likes to make reference to "420" - a well known time in cannabis culture. His infamous tweet to take Tesla private (which ran him afoul with the SEC) was for $420 per share. (682 comments)

Costly metaverse

Many have been critical about Apple's (AAPL) hefty 30% App Store fee, but things are looking even costlier in the metaverse. Sales of digital assets and experiences made inside Facebook parent Meta Platforms' (FB) Horizon Worlds will set sellers back around 47.5%. That's made up of the 30% fee for sales made through Meta Quest Store, and another 17.5% in Horizon platform fees.

Bigger picture: Earlier this week, the company said it was testing monetization tools for the metaverse, similar to competitors like Roblox (RBLX), which already allows creators to offer in-world purchases of virtual items. The initiative is beginning with a "handful" of creators, who can sell everything from access to a VIP section of their world to virtual items like jewelry or a special basketball. Compensation under a goal-oriented bonus program will also be available to creators that are "doing awesome work in setting up worlds," announced Vivek Sharma, Meta's VP of Horizon.

"Meta has repeatedly taken aim at Apple for charging developers a 30% commission for in-app purchases in the App Store - and have used small businesses and creators as a scapegoat at every turn," Apple spokesman Fred Sainz responded in an email. "Now - Meta seeks to charge those same creators significantly more than any other platform. [Meta's] announcement lays bare Meta's hypocrisy. It goes to show that while they seek to use Apple’s platform for free, they happily take from the creators and small businesses that use their own."

In the making: Other players are also jumping in to the development of the metaverse, or the online worlds where avatars interact, play and transact. On Monday, Epic Games - the developer of popular title Fortnite - secured $2B in new funding from Sony (SONY) and Kirkbi, the family-owned group behind the Lego franchise. Earlier this year, Microsoft (MSFT) agreed to acquire Activision Blizzard (ATVI) for $75B, with CEO Satya Nadella saying the deal would allow it to get a foothold in the "metaverse," while Google (GOOG, GOOGL), Nvidia (NVDA) and Qualcomm (QCOM) are also investing in the technology. (13 comments)

Masks are back

As COVID-19 cases rise across the country, Philadelphia is bringing back its indoor mask mandate for schools, day cares, businesses, restaurants and government buildings. Under the new rules, there will be no vaccine or testing requirements for places that serve food or drink, meaning everyone will be subject to the new order that kicks in on April 18. Most U.S. states and cities that still imposed indoor mask mandates dropped the requirements back in February and early March following new guidelines from the CDC.

Snapshot: While there was only an average of 142 daily new cases in Philly in recent days - with 44 people currently hospitalized with COVID - the city's threshold for an indoor mask mandate (known as Level 2) kicked in as new cases rose by more than 50% over 10 days. "I sincerely wish we didn't have to do this again," announced Health Commissioner Cheryl Bettigole. "But I am very worried about our vulnerable neighbors and loved ones. This is our chance to get ahead of the pandemic, to put our masks on until we have more information about the severity of this new variant."

Many in the hospitality industry are pushing back against the new restrictions, with the Pennsylvania Restaurant Lodging Association even calling the reinstated mandate "counterproductive" and taken without "input from the mitigated community." "This announcement is a major blow to thousands of small businesses and other operators in the city who were hoping this spring would be the start of recovery. Restaurant workers have suffered severe backlash when enforcing these rules in the past and, unfortunately, this time will be no different."

Response: "Our city remains open," Philly Mayor Jim Kenney said in a statement. "We can still go about our daily lives and visit the people and places we love while masking in indoor public spaces. I'm optimistic that this step will help us control the case rate." (8 comments)

Bank earnings

Shares of JPMorgan Chase (JPM) slipped 3.2% on Wednesday as the bank kicked off the Q1 earnings season, which traditionally begins with the largest U.S. lenders. The results reflected increased downside risks, like widening losses from funding spreads, adjustments for commodities exposures and markdowns of derivatives receivables from Russia-associated counterparties. The results from America's largest bank are often looked at as a bellwether for the broader economy, as well as the financial health of the average U.S. consumer.

Quote: "We remain optimistic on the economy, at least for the short term - consumer and business balance sheets remain at healthy levels - but see significant geopolitical and economic challenges ahead due to high inflation supply chain issues and the war in Ukraine," Chairman and CEO Jamie Dimon said on a conference call. A recession is far from a sure thing, he added, but "is it possible? Absolutely."

In terms of the bank's numbers, profit for Q1 came in at $8.28B, down from $14.3B a year ago, while revenue fell 5% Y/Y to $30.7B. Both numbers missed analyst expectations. There were "A LOT of moving pieces" in the results, "but the credit reserve build is the standout (and a modest negative)," wrote Vital Knowledge's Adam Crisafulli. "JPM caused a lot of consternation back in January with its 2022 expense outlook, and the credit/provision news will likely cause a bit of anxiety for the whole group." On the positive side, net interest income/net interest margin performance was solid "thanks to a more favorable rate backdrop and healthy loan demand."

Outlook: Profits are expected to decline across the entire banking industry this season. According to FactSet, banks in the SP 500 are expected to report Q1 earnings of around $27B, down 37% from a year ago. Citigroup (C), Goldman Sachs (GS), Morgan Stanley (MS) and Wells Fargo (WFC) also published quarterly earnings on Thursday, while Bank of America (BAC) will disclose its Q1 results on Monday. (24 comments)

U.S. Indices Dow -0.8% to 34,451. SP 500 -2.1% to 4,393. Nasdaq -2.6% to 13,351. Russell 2000 +0.6% to 2,006. CBOE Volatility Index +7.3% to 22.7.

SP 500 Sectors Consumer Staples +0.2%. Utilities -1.2%. Financials -1.6%. Telecom -1.2%. Healthcare -2.5%. Industrials +0.5%. Information Technology -1.4%. Materials +1.%. Energy -0.1%. Consumer Discretionary +0.8%.

World Indices London -0.7% to 7,616. France +0.6% to 6,589. Germany -0.8% to 14,164. Japan +0.4% to 27,093. China -1.3% to 3,211. Hong Kong -1.6% to 21,518. India -1.9% to 58,339.

Commodities and Bonds Crude Oil WTI +8.4% to $106.51/bbl. Gold +1.4% to $1,972.5/oz. Natural Gas +16.5% to 7.316. Ten-Year Treasury Yield +4.6% to 2.83.

Forex and Cryptos EUR/USD -0.63%. USD/JPY +1.66%. GBP/USD +0.24%. Bitcoin -4.3%. Litecoin +1.4%. Ethereum -4.9%. XRP +2.5%.

Top SP 500 Gainers Bath Body Works (BBWI) +15%. Delta Air Lines (DAL) +14%. American Airlines Group (AAL) +12%. PVH (PVH) +11%. Southwest Airlines (LUV) +10%.

Top SP 500 Losers Generac Holdings (GNRC) -15%. Catalent (CTLT) -14%. NVIDIA (NVDA) -12%. Advanced Micro Devices (AMD) -10%. Match Group (MTCH) -10%.

Where will the markets be headed next week? Current trends and ideas? Add your thoughts to the comments section.

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Wall Street Breakfast, Seeking Alpha's flagship daily business news summary, is a one-page summary that gives you a rapid overview of the day's key financial news. It's designed for easy readability on the site or by email (including on mobile devices), and is published before 7:00 AM ET every market day. Wall Street Breakfast readership of over 1.6 million includes many from the investment-banking and fund-management industries. Sign up here to receive the Wall Street Breakfast in your inbox every business day:

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