Friday Morning Reads

Friday Morning Reads

Morning Reads









As it looks to keep up with global financial innovation, and preserve dollar supremacy, the Federal Reserve has finally released a long-awaited paper discussing the pros and cons of a potential U.S. central bank digital currency (CBDC). While the 40-page document doesn't take a stance on any specific policy, it will open the discussion between the central bank and stakeholders, as well as solicit public comment. Some upsides include faster and safer payment options, though risks like privacy protection and financial stability would have to be addressed.

How do CBDCs differ from electronic cash? When you deposit money into a bank account, the commercial entity takes responsibility for the sum. The cash is then held in electronic form and can be used across a variety of platforms, but it's limited to the bank's ledger. Companies like Venmo can even track electronic transactions on their own internal ledger system, but the money is still being held and tracked by a commercial bank provider. In the case of CBDCs, the government is the counterparty and takes liability for the money, while the ledger that's being used (known as the rails) can be a very different structure than a commercial institution.

Definitions first... While there are many descriptions of "digital currencies," they are broadly broken down into three categories: CBDCs, cryptocurrency and stablecoins. Check out the other two types below:

Decentralized crypto: These are unregulated offerings like Bitcoin (BTC-USD), Ethereum (ETH-USD) and Dogecoin (DOGE-USD). Since they are issued by a network, and not any central authority or government, they are often volatile, but can also be exchanged for goods or services like traditional currencies. Cryptos often use distributed ledger technology (like blockchain) that can confirm valid tokens and log transactions.

Stablecoins: These also use distributed ledger technology, but they attach the value of tokens to something that already exists. By pegging the asset to the dollar, a basket of currencies, or commodities like gold, these currencies are more grounded and reduce volatility. The most famous example of this is Meta Platforms' (FB) Diem project, formerly known as Libra, which has had a tough time getting off the ground due to regulatory and technological hurdles.

Netflix nervousness

Fears of a Netflix (NASDAQ:NFLX) slowdown sent shares cratering 20% AH on Thursday, erasing $45B of market value as investors prepare for a new phase of slower growth. While the streaming giant beat on both the top and bottom lines, and reported 8.28M global paid net subscriber additions in Q4, its guidance is what really hit sentiment. Netflix expects to add just 2.5M subs this quarter, short of the 3.98M it added in Q1 of 2021, and far below the nearly 7M expected by analysts. It would also mark the slowest start to a new year for the company in at least a decade.

Struggles: "Consumers have always had many choices when it comes to their entertainment time - competition that has only intensified over the last 24 months as entertainment companies all around the world develop their own streaming offering," Netflix said in a statement. "While this added competition may be affecting our marginal growth some, we continue to grow in every country and region in which these new streaming alternatives have launched."

In the past, Netflix has also said services like Disney+ (DIS), HBO Max (T), Paramount+ (VIAC) and Peacock (CMCSA) "wouldn't materially affect growth," but that appears to be no longer the case. Netflix subscribers had widely been expected to stabilize after the appearance of some hit content toward the end of 2021, including heavily watched films Red Notice and Don't Look Up, as well as new seasons of OzarkBridgerton and Stranger Things. The lower first-quarter guidance, though, "reflects a more back-end weighted content slate" for Q1, with Bridgerton Season 2 and original film The Adam Project launching in March.

Outlook: "It's definitely frustrating for us, the current slower growth," co-CEO Reed Hastings announced during a post-earnings interview. "It's a dynamic market for sure, it may not be as steady as people think about it in terms of we're gonna add X number every quarter, every month, every week, but there’s no question that's the direction the business is going in," added co-CEO Ted Sarandos. Netflix additionally announced price increases last week, with the monthly cost for its U.S. basic plan rising by $1 to $9.99, and standard and premium plans climbing to $15.49 and $19.99 (from $13.99 and $17.99).

Largest chip factory

Seeking to restore its edge in chipmaking technology, Intel (NASDAQ:INTC) has announced a whopping $20B investment for a massive new manufacturing facility near Columbus, Ohio. The company will build at least two semiconductor fabrication plants, or fabs, on the 1,000-acre site, though it has the option to eventually expand it to 2,000 acres and up to eight fabs. Construction will begin this year and the plant should be operational by 2025.

Quote: "Our expectation is that this becomes the largest silicon manufacturing location on the planet," Intel CEO Pat Gelsinger told Time magazine. "We helped to establish the Silicon Valley. Now we're going to do the Silicon Heartland."

The investment plans come as the U.S. pushes to increase domestic manufacturing of semiconductors. Entire industries like auto manufacturing have been crippled over the past two years due to shortages, prompting the Senate to pass the $52B CHIPS for America Act in June (though it still needs to make its way through the House). In fact, the share of chips made in the U.S. has fallen to 12%, from 37% in 1990, according to the Semiconductor Industry Association.

Go deeper: It'll be tough restarting the chip manufacturing drive in America, where it costs 30% more to build and operate a fab over 10 years than it does in Taiwan, South Korea or Singapore. Moreover, Intel's chips made in U.S. will initially be sent to Asia for assembly, packaging and testing, though it hopes to bring everything back to the U.S. if the CHIPS for America Act gets funded. "My objective would be sand to product to services, all on American soil," Gelsinger declared, adding that the sand used to make semiconductors comes from the U.S. South.

Other efforts: Intel previously announced a $20B investment to build two fabs in Arizona, Taiwan Semiconductor Manufacturing (NYSE:TSM) also earmarked $12B to build a semiconductor plant in the state and Samsung (OTC:SSNLF) is dishing out $17B for a chip plant in Texas. Micron Technology (NASDAQ:MU) and Texas Instruments (NASDAQ:TXN) have also recently unveiled investment plans, while GlobalFoundries (NASDAQ:GFS) is building a smaller fab in upstate New York.

Peloton problems

Things don't appear to be getting better for the Nasdaq, which fell deeper into correction territory on Thursday, and is now down nearly 5% this week alone. Shaky earnings from Netflix (NFLX) and troubling developments from Peloton (PTON) didn't help sentiment, as investors look towards tighter Fed policy and surging Treasury yields. The selloff hasn't spared cryptocurrencies, which tend to trade in line with speculative tech stocks, with Bitcoin (BTC-USD) stumbling 8% overnight to $38,767.

What happened to Peloton? The once-celebrated pandemic favorite is temporarily halting production of its connected fitness products due to slowing demand. There has also been chatter over the past few weeks that the company was likely to cut back on supply of bikes and treadmills to control costs. Shares of Peloton plunged on the news, falling 24% to $24.22, and below its $29 IPO price.

It was only a year ago that the stock hit an all-time intraday high of $171.09 on Jan. 14, 2021. At the time, Peloton was reporting triple-digit revenue growth and seeing record-low levels of churn among subscribers. Since then, shares have slumped and exchange officials even plan to remove the fitness equipment maker from the Nasdaq 100 Index next week.

Analyst commentary: Macquarie's focus on Peloton has been on how the company evolved over the last few years to a "highly-scaled, global, community-based, recognized luxury brand, wellness platform, media platform, and logistics platform," which it says all still holds true. However, the latest development resets some of the thinking. "Now we see the story in a deeper hole, with the Street potentially turning its focus not to the growth ahead, but first more towards how churn levels evolve, engagement through the NA winter and Omicron (which should benefit indoor activities/ engagement), and then assessing if best to just net COVID-era sales out of pre-COVID estimates for TAM and growth for a clearer picture going forward."

Today's Markets

In Asia, Japan -0.9%. Hong Kong +0.1%. China -0.9%. India -0.7%.
In Europe, at midday, London -0.8%. Paris -1.4%. Frankfurt -1.6%.
Futures at 6:20, Dow -0.1%. S&P -0.2%. Nasdaq -0.7%. Crude -1.5% at $84.26. Gold -0.5% at $1834.40. Bitcoin -8% to $38767.
Ten-year Treasury Yield -4 bps to 1.79%

Today's Economic Calendar

10:00 Leading Indicators
1:00 PM Baker-Hughes Rig Count

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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