Morning Reads






As the war in Ukraine goes on way longer than Vladimir Putin appears to have anticipated, the Russian leader is getting increasingly aggressive. Moscow has cut off key gas supplies to Poland and Bulgaria, threatening to do the same for other "unfriendly nations" that refuse to pay for fuel in rubles. Putin also issued one of his strongest warnings to date over the West's "interference in Ukraine," as the U.S. and its allies ramp up weapons transfers, war financing and intelligence sharing.

Why Poland and Bulgaria? While there have been other countries that have insisted on paying for gas in euros (under existing contracts), the two nations represent the weakest spots on the east that are the first to get gas as it transits into Europe. The countries also happened to be among the first whose payments were due the soonest, though the strategy may also aim at dividing the European Union by targeting some nations and not others. Poland has additionally been one of the most critical nations of Russia in the Western alliance and has been one of the biggest supporters of Ukraine in terms of refugee intake, military support and weapons transfers.

At issue: The Kremlin has outlined a payment mechanism that would allow foreign buyers to convert their dollars and euros via Gazprombank, an entity that has been carefully excluded from EU sanctions. The state-controlled bank would send along rubles to energy giant Gazprom (OTCPK:OGZPY), which would prevent Western governments from "seizing payments made in foreign currency and strengthen Russia's sovereignty," according to Vladimir Putin. The EU has debated whether the scheme breaches sanctions against Moscow as some countries make arrangements to comply with the new payment system out of fear that an embargo or blockade could tip them into recession.

"Gazprom's announcement is another attempt by Russia to blackmail us with gas," European Commission President Ursula von der Leyen said in a statement. Efforts are now accelerating to replace Russian energy with new sources, like LNG imported from the U.S. and the Middle East, gas piped in from Norway and North Africa, or an upcoming pipeline from Azerbaijan. In the meantime, solidarity agreements can be signed with other EU nations for any spare gas supplies they may have, sending gas to Poland and Bulgaria via reverse flows along the Yamal-Europe pipeline or importing gas from Greece and Turkey. Dutch TTF natural gas futures, a European benchmark, rose 4.1% on Wednesday to settle at €107.43, which is well below its peak in March, but still 5x more expensive than prices a year ago.

Thought bubble: Cutting off energy to Europe is the biggest economic weapon that Putin can deploy as the Kremlin hopes to get Western nations to think twice before helping Ukraine. However, along with other moves that were intended to divide the bloc, the decision could backfire and instead strengthen the EU's resolve. Once alternate sources of energy are acquired, it could deprive Moscow of billions of dollars in revenue it previously would have earned from such transactions. Oil and gas sales account for about 40% of Russia's annual revenue and are its most lucrative source of foreign earnings. (35 comments)

User growth

Tech is up strongly this morning as Nasdaq futures advanced 2.6%, rebounding from a selloff earlier in the week powered by earnings from Facebook parent Meta Platforms (FB). Shares of the social network soared more than 16% in AH trading on Wednesday, becoming the latest tech giant to join the earnings parade down Wall Street. Up next are the quarterly results of Amazon (AMZN) and Apple (AAPL), which will complete the reports for Big Tech, or a stock group known as the MAMAA family (Twitter will also report this afternoon after agreeing to go private).

Back to Facebook: With the market locking its eyes on user growth (following last week's Netflix disaster), numbers from Facebook appeared impressive despite the slowest revenue expansion since the company went public. Daily active users rose 4% to 1.96B, topping expectations there, while monthly active users rose 3% to a generally in-line 2.94B. Family daily active people - the metric that looks across Meta's family of apps, including Instagram and WhatsApp - rose 6% to 2.87B on average for March, while family monthly active people also rose 6% to 3.64B.

Other figures were less impressive, like net income, which declined 21% to $7.5B (though expectations were for a 24% drop). Meta is also guiding Q2 revenues in a range of $28B-$30B, a bit shy of consensus for $30.69B. That's due to a "continuation of the trends impacting revenue growth in the first quarter, including softness in the back half of the first quarter that coincided with the war in Ukraine," as well as expectations that currency changes would provide a 3% headwind.

Zuckerberg speaks: "Based on the strong revenue growth that we saw in 2021, we kicked off a number of multi-year projects to accelerate some of our longer term investments, especially in our AI infrastructure (to combat TikTok), Business Platform (think Instagram marketing) and Reality Labs (AR, VR and the metaverse). These investments are gonna be important for our success and growth over time, so I continue to believe that we should see them through, but with our current business growth levels, we are now planning to slow the pace of some of our investments. We made progress this quarter across a number of key company priorities and we remain confident in the long-term opportunities and growth that our product roadmap will unlock." (175 comments)

House of cards

Archegos Capital Management founder Bill Hwang has been arrested in the U.S., a year after the collapse of his private investment firm sent shock waves across Wall Street. Hwang and his CFO were specifically charged with 11 accounts of racketeering conspiracy, market manipulation and fraud "with interrelated schemes to unlawfully manipulate the prices of publicly traded securities in Archegos's portfolio and to defraud many leading global investment banks and brokerages." Hwang was also convicted of wire fraud and insider trading charges back in 2012, when he ran Archegos's predecessor called Tiger Asia Management.

Recap: In March 2021, Archegos defaulted on margin calls from several global investment banks, including Credit Suisse (CS), Nomura (NMR), Morgan Stanley (MS) and Goldman Sachs (GS). The fund had large, concentrated positions in ViacomCBS (now merged with PARA), Tencent Music (TME), Baidu (BIDU) and other stocks, but its use of total return swaps helped hide its high exposure from the lenders. Archegos also used as many as nine banks, making it appear that different parties were behind the trading activity.

Archegos eventually accumulated leverage of as much as 1,000%, holding massive positions via derivatives instruments that do not have to be disclosed in regulatory filings like traditional equity stakes. On March 22, ViacomCBS announced a secondary stock offering that led its share price to sink, dragging down the value of Archegos' portfolio. Hwang and his team scrambled to stall banks from calling in their margin loans as the trades went sour, leaving banks with losses of $10B in the span of just 10 days.

Go deeper: The biggest source of banks' trading revenue was once client commissions, but those have narrowed over the last decade, leading their prime brokerage businesses to grow. That's where lenders provide financing for clients like hedge funds, as well as pooling trading and risk exposures to help drive profitability across their trading desks. However, banks have been struggling to handle a flood of deposits while trying to not increase their capital requirements - which can partly explain the appeal of total return swaps involving Archegos - showing that balance sheet exposures must be carefully managed by institutions and the ability to finance clients via prime brokerage does have its limits. (16 comments)

Right to repair

For anyone who has ever owned an iPhone and needed it repaired, the choices have been somewhat limiting. The options have been to either go to an Apple Store, or to a repair shop that Apple (AAPL) has given specialized tools to complete gadget fixes. That is now changing, with the launch of the company's new Self Service Repair program in the U.S. (and rollout in Europe later this year).

Snapshot: The program will initially provide individual consumers with access to "genuine Apple parts and tools" for the mobile-phone displays, batteries and cameras in the iPhone 12 and iPhone 13 lineups, and third-generation models of the iPhone SE. Apple will follow that up with parts, supplies and manuals for Mac computers using the company's M1 processor. Customers wanting to do their own repairs will need to first visit an Apple site that includes repair manuals to determine what parts they need to work on their particular devices. Tools to perform repairs can be purchased from Apple, though the company will also rent kits for $49 that can be used for one week.

Giving consumers the ability to do their own product repairs is a major change of policy for Apple. In addition to being highly secretive about its product pipeline, the company has often gone out of its way to make it as difficult as possible for people to make product repairs in their own home. Few examples of that have been more visible than Apple's use of a "pentalobe" screw that Apple has used on iPhones and Macs since 2009, and for which a screwdriver or replacement screw is close to impossible to find at any hardware store.

Under pressure: It's a big U-turn for the iPhone maker, which up until recently, was still fighting shareholder proposals in support of "right to repair." However, the Biden administration unveiled an executive action last summer, ordering the Federal Trade Commission to address "unfair anti-competitive restrictions on third-party repair or self-repair of items." Environmental advocates separately filed a shareholder resolution this past September, stating that the high costs of repairs often prompt consumers to buy new products, resulting in a buildup of electronic waste. (25 comments)

Today's Markets

In Asia, Japan +1.8%. Hong Kong +1.7%. China +0.6%. India +1.2%.
In Europe, at midday, London +0.9%. Paris +1.5%. Frankfurt +1.4%.
Futures at 6:20, Dow +1.4%. S&P +2%. Nasdaq +2.6%. Crude +0.4% to $102.40. Gold +0.1% to $1890.90. Bitcoin +1.5% to $39,613.
Ten-year Treasury Yield unchanged at 2.81%

Today's Economic Calendar

8:30 GDP Q1
8:30 Initial Jobless Claims
10:30 EIA Natural Gas Inventory
11:00 Kansas City Fed Mfg Survey
1:00 PM Results of $44B, 7-Year Note Auction
4:30 PM Fed Balance Sheet

Companies reporting earnings today »

What else is happening...

Boeing (BA) CEO Calhoun defends engineering culture after big Q1 loss.

Despite supply chain problems, Ford (F) reaffirms guidance for 2022.

Musk banned from tweets disparaging Twitter (TWTR) under new deal.

PayPal (PYPL) stock gains after Q1 earnings meet consensus.

Teladoc (TDOC) plummets on bottom line miss, revised 2022 estimates.

Spotify (SPOT) sinks all-time low after Q1 results raise margin worries.

Exxon (XOM) declares force majeure at Russia's Sakhalin-1 project.

Kraft Heinz (KHC) leverages price increases to edge past estimates.

Pinterest (PINS) sees pandemic headwinds to MAUs coming to an end.

Qualcomm (QCOM): Strong results show 'transformation' is working.

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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