Friday Morning Reads

Friday Morning Reads





The Federal Reserve is examining its ethics rules for financial holdings after two Fed presidents came under fire for some of their recent transactions. Those dealings were widely panned for the potential conflict of interest at a time when the Fed is already in the spotlight over unprecedented pandemic market interventions that critics say led to elevated stock prices and benefited richer Americans. The appearance of self-dealing could also prove problematic for an institution tasked with oversight of U.S. employment, inflation, interest rates and liquidity markets.

Backdrop: Last week, disclosures filed by the Fed's 12 regional presidents revealed some had actively traded stocks in 2020 that may have been susceptible to rising Treasury yields due to their high valuations. Robert Kaplan, a Fed voting member on rates last year, made several million-dollar-plus stock trades, while Eric Rosengren faced scrutiny over equity transactions tied to real estate, an industry he had been commenting on and was impacted by the pandemic (other presidents also held million-dollar financial positions). Since then, Kaplan and Rosengren have said they would offload all their stocks, but Senator Elizabeth Warren pushed further, saying regional Fed banks should adopt rules that would prevent their leaders from any trading activity.

"Fed Chairman Jay Powell has directed staff to take a fresh and comprehensive look at the rules to identify ways to tighten those standards and will make changes as appropriate to the Fed's code of conduct," said a spokesman from the central bank. "The trust of the American people is essential for the Federal Reserve to effectively carry out our important mission."

The pandemic and subsequent recession amplified the Fed's power in 2020, giving it a leading role in the U.S. economic recovery. It also magnified the Fed's influence in financial markets as the central bank cut its short-term benchmark interest rate to zero in March 2020, and moved deeper into its purchases of corporate debt, even buying bonds of industry stalwarts like Apple (AAPL), Verizon (VZ), Visa (V) and Home Depot (HD). It has since purchased trillions of dollars in Treasurys and MBSs to hold down longer-term rates, which has made stocks a more attractive investment.

How far will it go? Under current rules, Fed officials cannot invest in banks since many of them are supervised by the Fed. They are also prohibited from making trades during the 10-day blackout period before each FOMC meeting and are not supposed to hold a security for less than 30 days. The Fed's overall structure is also complex, with the 12 regional banks chartered as private organizations, but are overseen by the Fed's Board of Governors in Washington. While regional banks have their own codes of conduct, they are largely identical to the rules that govern the Fed's board, which have similar guidelines on investing and trading as other government agencies. (7 comments)

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500-mile club

Sending shares of the startup automaker up 6% on Thursday, the EPA awarded Lucid Motors' (LCID) Air Dream Edition with an official rating of 520 miles of range on a single charge. At that level, the EV would beat Tesla's (TSLA) Model S Long Range by more than 100 miles, the previous record for how far a car could go on a single charge. Lucid is still feeling the investor love this morning, with the stock up another 5% premarket to $22.34.

Thought bubble: The electric car industry is still in its infancy and how far an EV can go before they have to be plugged is a crucial factor for any vehicle's success. A battery can take hours to be fully charged, depending on the car and charger.

"Crucially, this landmark has been achieved by Lucid’s world-leading in-house EV technology, not by simply installing an oversize battery pack," said Lucid CEO Peter Rawlinson, a former Tesla engineer. He credits aerodynamics, motor efficiency and other components for being the first to the 500-mile club.

Outlook: Tesla is still one of the market leaders in EVs, producing around two-thirds of electric vehicles sold in the U.S. Lucid's cars also occupy a luxury niche, with the Air Dream Edition starting at $169K before federal and state incentives. Lucid hopes to eventually offer more affordable versions of the Air, like one that will sell for about $77K, and the company is also working on an SUV. (96 comments)

Macau meltdown

The latest crackdown in China is still making headlines, with Macau now in the regulatory crosshairs of the CCP. The largest gambling market in the world has historically operated as a special administrative region, meaning it was at least an arm's length away from Beijing. But the area known for casino gambling is also plagued with money laundering and loan-sharking, triggering a fresh look from the Chinese government.

Market movement: Casino stocks like Wynn Resorts (WYNN), Melco Resorts & Entertainment (MLCO), Las Vegas Sands (LVS) and MGM Resorts (MGM) suffered big losses on Wednesday and Thursday on word of increased government supervision. Any step in that direction could also raise concerns on how the gaming license renewal process will shake out. The latest development adds to existing concerns about Macau's pandemic recovery on the heels of a COVID-19 outbreak in Fujian.

Look to Vegas? "We have a favorable view of the LV Strip, as we envision a strong recovery there, with near-term leisure/transient demand bridging the gap to a return of convention/group business starting in 2H21 and picking up steam into 2022-2023. For LV Strip stocks (MGMCZR), we could envision today's solid leisure/transient demand combining with a gradual group recovery to drive a prolonged beat/raise cycle into 2023," Wells Fargo wrote in a research note. J.P. Morgan also said it prefers domestic regional/Las Vegas Locals casino operators like Boyd Gaming (BYD) and Red Rock Resorts (RRR) in the near term for their positive fundamental profile, growth trajectory, strong free cash flow, and potentially increased capital return. (37 comments)

Supply chain troubles

Supply chain issues have been roiling the globe since the coronavirus pandemic began last year and retailers are still facing challenges with volatile production, COVID business restrictions and shortages of numerous goods. A great example of this can be seen in Vietnam, where many manufacturers had moved production during the trade war years of the Trump era to diversify and avoid tariffs. However, Vietnamese authorities this week announced an extension of restrictions in Ho Chi Minh City, the country's business hub and COVID outbreak epicenter, sending shockwaves down the supply chain.

Snapshot: Factory shutdowns in Vietnam led Wall Street research firm BTIG to downgrade Nike (NYSE:NKE) shares last week, while high-end furniture chain RH (NYSE:RH) had to delay the launch of its contemporary furniture collection until next spring. Some companies have even gone as far as to announce they are bringing production back to China, like footwear producer Designer Brands (NYSE:DBI), which said six years of supply chain work was undone in six days. "When you think about the amount of effort everyone was putting into getting out of China, and now one of the only places where you can get the goods is China," CEO Roger Rawlins declared. "It really is crazy, the roller coaster everyone has been on here."

Commodity prices and trading have also been a hot topic given the constraints seen in Vietnam. The nation is the No.2 coffee producer in the world, but is battling its worst COVID outbreak since the start of the pandemic. In August, Vietnamese coffee exports fell 8.7% from July to 111,697 tons, continuing a downward trend seen since January. As a result, benchmark arabica coffee futures (KC1:COM) have jumped by nearly 47% this year, a price that has also been affected by waves of frost and drought in No.1 producer Brazil. Coffee prices could stay "relatively high" through 2022 due to the constrained supply, according to Fitch Solutions.

Future supply chain? In a twist of irony, China formally applied to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership on Thursday. The initial 11-nation Asia-Pacific trade pact (originally known as TPP) was crafted under the Obama administration to "let America, not China, lead the way on global trade." President Trump pulled out of the deal in 2017, calling it a "job killer," while President Biden has said the pact needs to be renegotiated before he would consider joining CPTPP.

Today's Markets

In Asia, Japan +0.6%. Hong Kong +1%. China +0.2%. India -0.2%.
In Europe, at midday, London -0.2%. Paris -0.2%. Frankfurt -0.2%.
Futures at 6:20, Dow -0.2%. S&P -0.3%. Nasdaq -0.3%. Crude -0.9% at $71.94. Gold +0.4% at $1764. Bitcoin -0.8% at $47485.
Ten-year Treasury Yield unchanged at 1.34%

Today's Economic Calendar

10:00 Consumer Sentiment
1:00 PM Baker-Hughes Rig Count

Companies reporting earnings today »

What else is happening...

Invesco (IVZ) in merger talks with State Street (STTasset management biz.

AMD (AMD) eyes making chips based on Arm architecture.

Seattle to require COVID vaccinations, testing for indoor activities.

Newly published study on COVID-19 boosters reignites benefits debate.

Big Oil called by House panel to testify on climate disinformation.

Gold sinks in metal's sharpest daily drop in nearly six weeks.

GM (GM) extends Bolt production halt due to battery pack shortage.

Sports betting revenue could soar to $40B if all states get on board.

U.S. miners blast proposal in Congress to set royalties on federal lands.

Evercore finds favorites in surprisingly strong retail sales report.

Known to most as Uranium Pinto Beans, Jason has more than 15 years under his belt of trading stocks, options and currencies. His expertise primarily lies in chart analysis, and he has a strong eye for undervalued stock. Because he’s got the ability to identify great risk/reward trades he usually enjoys taking the path less traveled and reaping the benefits from the adventure.

He is a co-founder of Option Millionaires, and he is best known for his weekly webinars with Scott, as well as his high level training webinars and charts found in the forums.

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