Monday Morning Reads
- Positive view on Graham Holdings (GHC). Barron's
- Positives views on CCL, MAR, DAL. Barron's
- Positive view on Amazon (AMZN). Barron's
- Positive views on MU, AMKR, QRVO, SWKS, INTC, QCOM, AMAT, LRCX, NVDA, MCHP, IIVI, NXPI, KLAC, ON, AVGO. Barron's
- Thousands flights were cancelled over the weekend amid weather and staffing issues related to Omicron (UAL, AAL, DAL, LUV, JBLU, SAVE, ALK, HA). NY Times
- AT&T (T) and Verizon (VZ) refuse to delay 5G despite requests (TMUS). Bloomberg
- New York's housing market will likely be strong in 2022 (AVB, EQR, ESS). NY Times
- Goldman Sachs (GS) will ask employees to work from home until at least January 18. Bloomberg
- CES conference begins today (XLK). WSJ
- OPEC+ is expected to proceed with production increase in February (USO, XLE, COMDX, XOM, CVX, BP. RDS.A, OXY, COP). Reuters
- Israel will begin offering fourth coronavirus vaccine to people over 60 (PFE, BNTX, MRNA, JNJ, NVAX, AZN). Bloomberg
- NYC Mayor Eric Adams says he might mandate that city workers get coronavirus booster shots (MRNA, PFE, BNTX, JNJ). NY Times
- Cloth masks might not be enough to stop Omicron spread (MMM, APT). WSJ
U.S. stock index futures are starting the year with some more champagne as contracts linked to the Dow and S&P 500 rose 0.6% overnight, while the Nasdaq climbed 0.7%. It follows a strong 2021 for each of the indices despite fears of inflation, tighter monetary policy, business disruptions and new COVID-19 variants. Investors seemed to focus on the bright spots of the macroeconomic picture instead, such as increased consumer spending, hiring ramp-ups and solid corporate earnings growth.
Snapshot: The S&P 500 rose 27% in 2021, hitting 70 all-time highs in the interim. That's the most new records for the benchmark index since the 77 it set in 1954. For the first time in history, all the sectors of the S&P 500 also posted double-digit gains last year, but some are wondering if the strong returns will continue, especially with the index now trading at 26x earnings.
For a full breakdown of risks and opportunities going into the coming year, see Wall Street Breakfast: What To Watch In 2022. The edition covers inflation fears, central bank policy, economic growth, the supply chain and stock returns. The Wall Street guard is also weighing in on equity valuations for 2022, with differing opinions among analysts.
Breakdown: "Marginally less accommodative monetary policies may weigh on equity valuations. As a result, we expect returns on the asset class to be more muted in 2022. Over the medium term, though, we believe a focus on quality growth companies still makes sense. Coming into a period of sub-par returns, active management and skillful stock selection will be key." - Barclays
"Our positive base case and the prospect of real yields remaining in negative territory leave us particularly bullish on equity markets, especially in the first half. We expect to see some compression of price/earnings ratio multiples for the S&P 500 as rates rise. However, strong earnings growth could still translate into about a 10% total return, in our view." - BNP Paribas
"While we acknowledge that absolute equity valuations are elevated, this is true for all major asset classes relative to history. We expect global earnings to grow 8% in 2022; this should support a reasonably strong year for equity markets overall and our targets in each region imply about an 11% total return in global equities." - Goldman Sachs
"The core of our cautious 2022 view on the S&P 500 is our belief that during a mid-cycle transition, price-earnings ratios typically compress. The median S&P 500 stock has corrected 15% from its 52-week high. However, the index is down only 3.5%. What's keeping the index aloft is that the 15 largest companies now account for 40% of the index’s market capitalization. Consider rebalancing portfolios: U.S. equities versus non-U.S.; growth versus value; cyclicals versus defensives; mega-cap versus small- and mid-cap stocks; and active versus passive management." - Morgan Stanley
The new year brings new changes, and some of them can be seismic. The London Interbank Offered Rate, which has underpinned the pricing derivatives and loans - ranging from mortgages and student loans to business funding and credit cards - is ending a role it had held for about four decades. Banks have spent around $10B preparing for Libor's demise, according to an estimate by management consultancy Oliver Wyman, which may not be that much given that the rate is tied to $265T worth of contracts globally.
Quote: "It's one of the biggest transitions in financial markets in decades," said Dixit Joshi, group treasurer of Deutsche Bank. "This is a milestone for the regulators since the great financial crisis about lessons learned."
Libor was set each day by collecting estimates from a series of global banks on the interest rates they would charge for different loan maturities. It was also calculated across five of the biggest global currencies and quickly became the default standard interest rate at the local and international levels. However, over the last decade, Libor has been fraught with scandals and calamities, such as the role it played in worsening the 2008 financial crisis, as well as the big bank manipulation scheme - and collusion - that surfaced in 2012.
Go deeper: The Secured Overnight Financing Rate (SOFR) will be the main replacement for Libor in the U.S. The SOFR benchmark, which is based on the rates U.S. financial institutions pay each other for overnight loans, is said to be more accurate and secure around pricing. As for existing loans, Overnight Libor, 1-month, 3-month, 6-month, and 12-month USD maturities will continue to be published through June 2023.
How will Tesla (NASDAQ:TSLA) fare in 2021? Well, before the first trading day of the year, the latest blowout numbers from the company sent its stock up 7% premarket to $1,130. The high-flying EV maker set records for both production and delivery in 2021, topping its own annual estimates. "This was a 'trophy case' quarter for Musk & Co. with massive momentum moving into 2022," tweeted Wedbush analyst Daniel Ives, while Musk added, "Let's make the roaring 20's happen!"
By the numbers: Tesla delivered more than 308K vehicles in Q4, which is 40K more than the average Wall Street estimate. It also delivered more than 936K vehicles over the entire 2021, which is almost double 2020's totals. In terms of output, about 306K new vehicles rolled off its production lines in Q4, or 68K more than the preceding three months, notching a new record for volume in the final quarter.
The numbers are even all the more impressive given the supply chain problems that have roiled the auto industry during the pandemic. Tesla was able to scale vehicle deliveries by ramping up production at its first overseas factory in Shanghai, leaning on in-house software engineering, as well as making changes to the cars it produces in Fremont, California (e.g. removing radar sensors from Model 3 and Model Y vehicles in North America). With Giga Berlin and Giga Texas due to start increasing production this year, Wall Street is predicting another leap in sales, with deliveries expected to reach 1.42M in 2022.
Outlook: It's not just a significant milestone for Tesla, but for the entire electric vehicle industry as a whole. Demand for EVs is getting stronger, and while Tesla is leading the pack - with an edge in scale, margins and technology - competition may be in the rear-view mirror. In some areas, like pickup trucks, Tesla is also lagging rivals. The company will get its Cybertruck on the road after other competitors, like Rivian's (NASDAQ:RIVN) R1T and Ford's (NYSE:F) electric F-150 Lightning, though it remains to be seen if those challengers will be able to scale their production.
Many Americans are dreaming about road trips these days as air travel appears to be only getting worse. More than 2,600 U.S. flights were canceled on Sunday due to inclement weather and the Omicron variant, which is causing severe staffing shortages among crews. That's on top of the 2,700 cancellations on Saturday, with delays seen for the majority of flights that managed to take off over the weekend.
Staggering statistic: U.S. carriers like United Airlines (NASDAQ:UAL), American (NASDAQ:AAL), Delta (NYSE:DAL), JetBlue (NASDAQ:JBLU), SkyWest (NASDAQ:SKYW), Alaska Airlines (NYSE:ALK) and others have canceled more than 10,000 combined flights since Dec. 23, which is among the busiest days for travel due to the holiday season.
Cabin crews, pilots and support staff have been reluctant to work overtime during the holidays despite offers of financial incentives. According to some airline unions, many also fear contracting COVID-19 during the peak travel season or don't want to deal with unruly passengers. In recent months, many flight attendants have unexpectedly had to take on additional roles, like cop or conflict resolution negotiator, with disorderly behavior plaguing many planes.
Taking steps: Looking to deal with the shortages, United Airlines is now offering its pilots triple pay to pick up trips for most of January. Pilots were already offered three-and-a-half times their pay for flying open trips between Dec. 30 and Jan. 3, but the latest offer is good for the next month. United flight attendants are also getting extra pay for picking up trips, though other airlines haven't had much success in raising crew compensation to avoid holiday flight disruptions.
In Asia, Japan closed. Hong Kong -0.5%. China closed. India +1.6%.
In Europe, at midday, London closed. Paris +1.2%. Frankfurt +1%.
Futures at 6:20, Dow +0.6%. S&P +0.6%. Nasdaq +0.7%. Crude +1% at $75.98. Gold -0.1% at $1826.70. Bitcoin flat at $47301.
Ten-year Treasury Yield +4 bps at 1.54%
Today's Economic Calendar
Israel to offer fourth COVID vaccine to people over 60s, medical staff.
Strong numbers... Chinese automaker BYD (OTCPK:BYDDF) posts EV deliveries.
With focus on renewables, Germany shuts three of six remaining nuclear power plants.