Monday Morning Reads

Monday  Morning Reads





The Morning Watchlist



Reflation trade in focus

Opening lower to start the week, U.S. stock index futures are now in the green, up 0.6% in overnight trade. The move higher comes after some investors were quick to dismiss the "reflation trade," a bet on companies that do best in an environment of solid economic expansion and rapid inflation. Meanwhile, the yield on the 10-year Treasury fell another 2 bps to 1.43%, marking its lowest point since early March.

Quote: "I would tend to tilt towards the message communicated at the FOMC, rather than a sole Fed governor," said John Woods, Asia Pacific chief investment officer at Credit Suisse. "I do think the reflation story - from the fundamentals perspective - remains firmly in play. It seems to me only natural that we would anticipate moderately higher bond yields from current levels and clearly that has an impact on a whole range of risk assets. My sense is the Fed continues to focus more on the labor market than inflation - right here right now."

Credit Suisse was one of several Wall Street banks predicting the Fed would move in 2023, even before its announcement last Wednesday. It still forecasts a period of choppy sideways trade, given the volatility associated with the Fed debate, but it is also a big believer in the Fed's "transitory" theme, expecting price pressures to moderate in the coming quarters. Once that happens, concerns about yields and inflation will likely calm down. Woods also expects the U.S. to grow at "China levels" this year, with GDP expanding at a whopping 7% pace, in which it is almost inevitable for inflationary pressures to take place.

Stark warnings: Not everyone is on board with Credit Suisse's thesis. "The headwinds are building for the equity market," Moody's Analytics Mark Zandi declared, expecting a more hawkish Fed to spark a 10% to 20% pullback. 'Big Short' investor Michael Burry has also recently warned of the "mother of all crashes," with "#MainStreet losses approaching the size of countries," given the FOMO for unsustainable asset prices, meme stocks and crypto. Robert Kiyosaki, the author of Rich Dad Poor Dad, is on that train as well. "Biggest bubble in world history getting bigger," he tweeted on June 19. "Biggest crash in world history coming."

Mining crackdown deepens

The volatility in the crypto market is showing no signs of abating. At the time of writing, Bitcoin (BTC-USD) is off 7.7% to $32,641, continuing a selloff that ensued following the Fed's surprise hawkish turn last Wednesday. That means Bitcoin is down by more than half of its April peak of nearly $65,000, but has still gained over 10% YTD.

Latest bear catalyst: China has intensified its crackdown on crypto mining, with authorities in Sichuan ordering projects to close following similar developments in Inner Mongolia and Yunnan. The Sichuan southwest province hosts China's second-largest mining community, according to data compiled by the University of Cambridge, with miners shifting production there in the rainy summer season to take advantage of hydropower resources. Last month, China's State Council pledged to clamp down on Bitcoin mining as part of a series of measures to control financial risks and energy consumption.

It's big... The latest ban means that more than 90% of China's Bitcoin mining capacity (which accounts for 75% of the world's capacity) is estimated to be offline, according to the Communist Party-backed newspaper Global Times.

Go deeper: Smaller rival Ether (ETH-USD), the second-biggest cryptocurrency by market cap, dropped 7% to below $2,000 for the first time in nearly a month. Ripple (XRP-USD) also tumbled, down 6% to $0.68.

New era

Gone are the days when epidemiologists poured over COVID-19 case numbers, as well as new infections and related deaths. As a broad vaccine rollout in the U.S. has brought much of the pandemic to a heel, the focus has now turned to learning how to live with variants and what measures the population can take against them. The real test of the current immunization campaign will be whether hospitalizations and deaths stay low, which can make the virus more manageable long-term.

Next stage: Some public health officials and infectious disease experts have said there is a high likelihood that COVID-19 will become an endemic disease, meaning it'll always be present in the population - but circulating at lower rates - while others think we may have to "live with the virus forever." "It's possible we'll get to a stage of only monitoring hospitalizations," declared Jennifer Nuzzo, an epidemiologist at Johns Hopkins University's Coronavirus Resource Center, which created one of the most comprehensive platforms in the world to track the disease.

Following the vaccine rollout, comparing the prevalence of COVID to the flu (which kills around 650K people globally each year, including about 36K in the U.S.), could become an important barometer in the fall and winter. That could impact policy decisions like lockdowns and school closures, as well as other preparations generally announced before flu season. The comparison of data may also be helpful when assessing new variants of the disease, like the rapidly spreading Delta variant.

Boosters? Even if current COVID-19 vaccines are found to be less effective in stopping the transmission of future variants, they still could prevent hospitalization and death (similar to a flu vaccine that helps block severe disease). That could also afford hospitals the ability to deal with an influx of patients, or be coupled with renewed mask mandates during the cold and flu season. People may still need to get vaccinated against COVID-19 annually over the next several years, Johnson & Johnson (NYSE:JNJ) CEO Alex Gorsky predicted back in February, meaning the jabs could become like seasonal flu shots.

Travel is back

Travel has returned with a vengeance as airlines struggle to rebuild networks that were ravaged by the COVID-19 pandemic. Nearly 50M U.S. airport passengers were registered in May - up 19% from April - and so far in June, the TSA has recorded nearly 35M travelers. But that's causing some disruptions, with carriers and transportation operators struggling to keep up with the ramp up in demand, especially with the lifting of travel restrictions.

Case in point: American Airlines (NASDAQ:AAL) canceled about 120 flights on Saturday and 176 on Sunday (about 6% of its mainline operation that day). While some were called off a few days in advance, about half of those were because of "unavailable flight crews." Other reasons included maintenance and other disruptions, like inclement weather.

"The bad weather, combined with the labor shortages some of our vendors are contending with and the incredibly quick ramp up of customer demand, has led us to build in additional resilience and certainty to our operation by adjusting a fraction of our scheduled flying through mid-July," American Airlines spokeswoman Sarah Jantz said in a statement. "We made targeted changes with the goal of impacting the fewest number of customers by adjusting flights in markets where we have multiple options for re-accommodation."

Fixing the situation: The Allied Pilots Association, which represents American's roughly 15,000 pilots, said the carrier should offer more overtime in advance to cover staffing shortages. The current situation is also daunting given that American Air has taken an aggressive approach throughout much of the pandemic to fly much more than its closest competitors - United (NASDAQ:UAL) and Delta (NYSE:DAL). All the while, it has been racing to train the aviators it furloughed after the two federal coronavirus aid packages that prohibited layoffs, as well as its pilots who are due for periodic training.


Many had eyed hedge fund billionaire Bill Ackman's special-purpose acquisition company since its launch last year as the SPAC rage reached record heights. Word of a deal finally came several weeks ago as Pershing Square Tontine Holdings (NYSE:PSTH) announced an approach for Universal Music Group (UMG), the world's largest music company. The tie-up would see it take a 10% stake in the company from owner Vivendi (OTCPK:VIVHY) for $4.1B, though Ackman had more details to share about its complicated structure over the weekend.

After all is said and done, PSTH shareholders will receive publicly traded securities in three separate companies: UMG, PSTH, and SPARC. UMG will be publicly listed on Euronext Amsterdam in September 2021, with shares expected to be distributed to PSTH shareholders before year-end 2021. PSTH will meanwhile continue to seek another business combination under a unit called RemainCo, which will have $1.5B in cash and $1.4B of an unexercised forward purchase agreement. Lastly, investors will receive warrants to purchase shares in another acquisition company called Pershing Square SPARC Holdings, which will soon file a registration statement with the SEC.

Will the details help allay investor concerns? Shares of PSTH were trading firmly around the $25 level before word of the deal broke on June 3. Since then, the stock has tumbled 10%, trading at levels last seen in November 2020. Ackman was quick to highlight that UMG will be one of the largest companies on the Euronext Amsterdam exchange and will become a member of several major global indices. The statement also emphasized UMG's operating profit growth of more than 20% per annum since 2017, as well as "powerful endorsements" from investors like Tencent (OTCPK:TCEHY), which own a fifth of the company.

Pershing Square Tontine's prospectus from 2020: "We believe that our unique structure and our willingness to acquire a minority interest in a company will help facilitate the completion of a transaction on attractive terms. We are willing to accept a high degree of situational, legal, and/or capital structure complexity in a business combination if we believe that the potential for reward justifies this additional complexity, particularly if these issues can be resolved in connection with and as a result of a combination with us."

What else is happening...

Sector Watch: Tech stocks hit a crossroads after the FOMC meeting.

What banks will stand out on Thursday's stress test results?

Fed's Kashkari wants to kill the dot plot, opposes rate hikes through 2023.

CDC warns Delta variant could become dominant in U.S. this summer.

Energy transformation may 'feel like a slog' before gains - NextEra.

The red-hot housing market loses some steam in May.

Legislation may make it easier for consumers to sue health insurers.

CNH Industrial (NYSE:CNHI) to acquire Raven Industries (NASDAQ:RAVNfor $2.1B.

Out-of-home leads ongoing ad rebound, though magazines lagging.

Facebook (NASDAQ:FB) trade is crowded, but Apple (NASDAQ:AAPL) isn't - Alpha Tactics.

Today's Markets

In Asia, Japan -3.3%. Hong Kong -1%. China +0.1%. India +0.3%.
In Europe, at midday, London +0.3%. Paris +0.3%. Frankfurt +0.4%.
Futures at 6:20, Dow +0.6%. S&P +0.5%. Nasdaq +0.6%. Crude +0.6% at $71.70. Gold +0.8% at $1783.90. Bitcoin -7.7% at $32641.
Ten-year Treasury Yield -2 bps to 1.43%

Today's Economic Calendar

8:30 Chicago Fed National Activity Index

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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