Monday Morning Reads
- Ethereum Breaks Past $3,000
- U.S. Household Income Surged
- Wealth Gaps Are Bigger
- Fourth Stimulus Check?
- Albuquerque Is Winning the Streaming Wars
- Fall of a High-Flying Tech CEO
- Owning a Car vs. Leasing a Car
- The U.S. Stock Market SHOULD Be In a Bubble
- The Sports Memorabilia Boom
Enthusiasm for stocks couldn't be higher, with individual investors holding more equities than ever before, fueled by a blowout earnings season, the prospect of an economic recovery and extra savings like stimulus checks. Stockholdings among U.S. households even rose to 41% of their total financial assets in April, the highest level on record, according to data from JPMorgan and the Federal Reserve. That kind of optimism has led the S&P 500 to hit 25 records this year alone, while logging its third straight month of gains in April by adding more than 5% to the index.
Sell in May and go away? The investment strategy posits that equities tend to underperform in the six months through October, so investors should convert to cash at the start of May and then buy into a dip later in the fall. "With stocks at record highs, some investors may be tempted to follow the old adage," UBS wrote in a research note. “In the U.S., a stay invested strategy has tended to outperform, particularly in recent years. Market composition, with the U.S. market more tilted towards growth stocks, partly explains the outperformance."
Others, like billionaire investor Leon Cooperman, have "an eye on the exit." The self-described "fully invested bear" is worried about market valuations and thinks "we should recognize were pulling demand forward and the longer-term outlook is not particularly favorable." He also expects an upcoming rise in taxes and inflation, which may force the central bank to signal action before the end of 2022.
Starting the new month: U.S. stock index futures climbed overnight, with the Dow up 0.6%, and the S&P 500 and Nasdaq ahead by 0.4% and 0.2%, respectively. The Manufacturing PMI and ISM Manufacturing data for April will be released this morning, shedding light on the economic situation before Friday's big non-farm payrolls report. Investors will also be watching the next batch of corporate earnings, including Q1 results today from Enterprise Products Partners (EPD), ON Semiconductor (ON), Realty Income (O) and Omega Healthcare (OHI).
A high-profile legal battle set to begin today between Apple (NASDAQ:AAPL) and Fortnite creator Epic Games will determine how a "market should be classified in the digital age." It's one of the biggest cases brought against Apple since the company was founded in 1976, and the consequences could be huge. A verdict could see developers no longer having to do app "checkouts" with Apple, or having to pay a 30% "app tax" to the tech giant, which would dent its fastest-growing Services business segment.
Backdrop: The legal fight started last year when Epic created its own direct payment method within Fortnite, circumventing fees paid for App Store purchases. Apple then issued a warning to Epic regarding the workaround, but the latter refused to remove it, and Apple kicked the developer off its platform. A lawsuit then emerged, which is finally seeing its day in court. Executives testifying at the trial will include Epic CEO Tim Sweeney and Apple CEO Tim Cook, though neither side wanted a jury trial, leaving the decision to U.S. District Judge Yvonne Gonzalez Rogers.
Epic's argument: With over 1B users across the globe, the iPhone market - is itself a market. Meaning, developers can only reach this massive demographic via the App Store. Apple is essentially "forcing" them to use its mechanism (to have the app downloaded) and its app payment system (to have people pay for purchases).
Apple's defense: The company feels it built an ecosystem where app developers of all sizes formed multi-million or even billion dollar businesses over the last decade. Anyone that doesn't want to pay the 30% commission is asking for a free ride in a market it created, which it updates and maintains via new features and security details.
Apple seems to have the edge in terms of legal precedent, but the tech giant ended the week with an antitrust warning from the EU, which said Apple "abused its dominant position for the distribution of music streaming apps through its App Store." That decision, which followed a complaint from Spotify (SPOT), was preliminary and Apple will have time to respond. But if the finding holds in the final decision, Apple could face a fine of up to 10% of its annual revenue and be forced to make changes to its App Store business model.
Continuing to set fresh record highs, ether (ETH-USD) climbed above $3,000 on Sunday for the first time in history, and was last changing hands at $3,097.87, up 6.1% over the last 24 hours. Only a year ago, it traded for around $208, an increase of 1,359%, and this year alone, the crypto is up 310%. Adding to the gains... Ether surged 25% over the past week and the digital asset now has a market cap of about $350B, according to CoinMarketCap.com.
What's driving recent demand? Crypto analysts are pointing to a broader awareness of ether's smart contract platforms, which are powering the landscape for NFTs, Web 3.0 apps and decentralized finance (DeFi). In fact, the amount of capital locked in DeFi protocols just crossed $68B, which is up thousands of percent compared to the beginning of the year. Last week, the European Investment Bank even announced that it had issued €100M in two-year notes, using the ethereum blockchain for the first time.
"Flippening" has also re-entered the crypto conversation - a term that refers to the belief that ether's market cap might soon top that of bitcoin (BTC-USD). Many bitcoin believers maintain that is outside the realm of possibility, though daily transaction count on Ethereum's blockchain has increased by 22% to 1.376M this year. Market research firm Fundstrat further wrote in a recent research note that ether could hit above $10K by the end of this year, driven by a crypto narrative that's shifting to ethereum from bitcoin, but it also expects the latter to reach $100K before 2022.
Outlook: While the Ether and Bitcoin have not de-coupled yet, correlations between the two are shrinking. Ether has quadrupled so far this year, while Bitcoin hasn't even doubled, and the ratio between the currencies recently climbed to 0.052, the highest level since mid-2018. However, Bitcoin and Ethereum are still looked at as the reserve assets of DeFi (can earn interest on them or borrow against them), which creates leverage in the system and connects the two currencies.
Pressure is building on the U.S. and other Western governments to suspend intellectual property restrictions on COVID-19 vaccines as an explosion of coronavirus cases rocks India and other nations. Some 60 developing countries, led by India and South Africa, are drafting a new proposal to waive WTO rules, known as TRIPS (Trade-Related Aspects of Intellectual Property Rights), which could allow a significant increase in vaccine production worldwide. The new proposal will be put to the organization in the next few days and would echo an effort back in the 1990s that lifted patents on AIDS medications.
"We have to evaluate whether it's more effective to manufacture here and provide supply to the world, or the IP waiver is an option," White House press secretary Jen Psaki said last week. President Biden hasn't yet made a decision on whether the U.S. will support the waiver - which is backed by more than 100 members of Congress and 170 former world leaders and Nobel Laureates - or to push for other means to speed up immunization in developing nations.
The case against a suspension: A number of large pharma companies, including vaccine developers Pfizer (NYSE:PFE), Johnson & Johnson (NYSE:JNJ) and AstraZeneca (NASDAQ:AZN), say waiving IP rights wouldn't solve supply problems in the short term because contract producers lack familiarity with the new technology behind the shots (which isn't shielded by patents). Obstacles to scaling up production also include the need to train technicians, source scarce ingredients and sensitive biological components. Quality checks are another concern, with a limited number of manufacturers capable of large-scale vaccine production.
The case for a suspension: Proponents of the waiver proposal say there are more than a dozen drugmakers in developing countries that could be equipped to produce the shots and have passed quality checks by the WHO and the FDA. It would allow the nations to make their own copies of the vaccines without fear of being sued for IP infringements. The U.S. government owns patents related to the vaccines because some of the technology behind the shots were developed at American government labs.
Outlook: While Pfizer and Moderna (NASDAQ:MRNA) have been known to drive a hard bargain when negotiating vaccine contracts, AstraZeneca and Johnson & Johnson have pledged to provide their jabs on a not-for-profit basis until the pandemic is over. Future profits for vaccines may also depend on how often or for how long seasonal boosters will be required. Given the number of vaccines in development, competition could keep a lid on costs, though if some shots prove more effective than others, profits could skew largely in favor of the successful vaccine makers.
"The U.S. economy was resurrected in an extraordinarily effective way" when the Federal Reserve took actions last year in response to the pandemic-induced recession, Warren Buffett said during Berkshire Hathaway's (BRK.A, BRK.B) virtual annual meeting. The Fed "moved with speed" and demonstrated that they would do "whatever it takes" to restore bond market trading, which had frozen early in the pandemic. About 85% of the economy is now running in "super high gear."
Energy: Asked about whether climate change rhetoric has become too irrational regarding investments in fossil fuel companies, Buffett said "people on both extremes are a little nuts." "I would hate to have all the hydrocarbons banned in three years - it wouldn't work... but I do think the world is moving away from them too," he added. Buffett still has "no compunction in the least about owning Chevron (CVX)."
Tech: Mega-cap tech stock valuations are not "crazy," he declared, outlining that Berkshire's sale of some Apple (AAPL) shares last year "was probably a mistake" and "Charlie in his usual way let me know it was a mistake." Charlie Munger is Buffett's 97-year-old business partner and vice chairman of Berkshire.
SPACs: "It's a killer," Buffett said. "When the competition is playing with other people's money... they're going to beat us... We're not going to have much luck as long as this continues." He also likened the SPAC craze to gambling. "It's shameful what's going on. It's not just stupid, it's shameful," added Munger.
Taxes: Buffett declined to speak about what he feels about the proposed federal tax changes - saying it's not appropriate to express his views at Berkshire's annual meeting - though he's not worried about the possibility of higher corporate taxes. Buffett also said he voted for Biden in the presidential election.
Robinhood: "I'm looking forward to reading the S-1 [IPO prospectus]," Buffett said. "It's become a very significant part of the 'casino' part" of the market. There's nothing illegal about it, there's nothing immoral. But I don't think you build a society around it," he added. Munger took a stronger stance, calling the gamification "deeply wrong."
Crypto: Buffett declined to comment on bitcoin (BTC-USD), but Munger let it rip: "Of course, I hate bitcoin's success... it's creating a financial product out of thin air. I don't welcome currency that is so useful to kidnappers and extortionists."
Portfolio advice: "You couldn't help but do well if you had a diversified group of equities. There's a lot more to picking out stocks" than figuring out which industry is going to have a bright future, Buffett added. He then pointed out that in the 1930s there were more than 2,000 auto manufacturers in the U.S. "In 2009, there were three left and two went bankrupt."
What else is happening...
Big payday for Elon Musk after unlocking ludicrous stock award.
U.S. cannabis stocks to enjoy further upside - Barron's.
Electoral setback for ruling party as COVID-19 surges in India.
In Asia, Japan closed. Hong Kong -1.4%. China closed. India -0.1%.
In Europe, at midday, London closed. Paris flat. Frankfurt +0.3%.
Futures at 6:20, Dow +0.6%. S&P +0.4%. Nasdaq +0.2%. Crude -0.4% to $63.30. Gold +0.6% at $1777.40. Bitcoin +3.3% to $58640.
Ten-year Treasury Yield +1 bps to 1.64%
Today's Economic Calendar