Morning Reads

Morning Reads







Midterms and the markets

It's Election Day in the United States, and while conventional wisdom has some strong ideas about how the midterms will play out, increasing uncertainty around polling (and a contentious electorate) suggest that anything might happen. Midterm elections typically go against the party of the president - and if that holds, and Republicans take over even just the House, it effectively would mean a sidelining of the vast majority of President Biden's agenda. That's not always bad for securities markets, where "gridlock" has often been perceived as "status quo" - or, more specifically, the lack of any broad or shocking changes on tap that tend to spook traders and spur market declines.

Snapshot: While the issues at stake in the election's various races are numerous - including gun control, abortion and immigration - investors will be focused on a few that have risen to the fore, notably the broader economic slowdown and this year's historic inflation. While party polarization seems to be at historic highs, when it comes to business and investing, there are areas where Democrats and Republicans are closer together than others. Examples of this are where the two parties agree on infrastructure spending, real estate, construction and utilities.

Meanwhile, ESG investing (Environmental, Social and Governance) is indirectly on the ballot, as Republicans increasingly tap the issue as a political talking point. If the GOP makes a strong showing, you can expect the pressure on ESG to increase. Conversely, funds like the "anti-ESG" God Bless America ETF (YALL) launched last month, with a focus on screening out companies it considers activist. Clean energy subsidies aren't as contentious as other issues, so it may be unlikely that President Biden's signature achievement on climate legislation will be unwound. Oil may be another matter, with a windfall tax on Big Oil essentially dead if Republicans gain power.

Technology is another area where the parties have diverged more in recent years, though perhaps more on style. Both have argued for more regulation on the industry, but for different reasons. The Biden administration has been concerned with concentrated power and antitrust action against the tech giants, including Meta Platforms (META), Alphabet (GOOGGOOGL) and Amazon (AMZN), while Republicans have targeted social media on speech-related issues, and say they won't back some currently stalled antitrust bills - which could be a boon for those giants currently in the crosshairs.

Outlook: One thing important for election observers to remember: It's extremely unlikely we'll know the results of every race during election night, as many areas with mail-in ballots will likely need more time to count them (particularly in states that disallow counting mail-in votes until Election Day arrives, including Pennsylvania and Wisconsin). Control of the extremely close Senate may depend on such factors as automatic recounts, as well as another Georgia run-off that could delay knowing the answer into December. Following the election night's news will be Thursday's CPI report, where new data on inflation might amplify the impact of any Tuesday ballot-related effect on markets. (35 comments)

No brakes

A steep selloff at online used-car dealer Carvana (CVNA) is showing no signs of letting up, with shares tumbling over 50% over the past two sessions to $7.39. Volume on the highly-shorted auto retail stock reached 52M shares on Monday despite a trading halt for volatility (and compared to a historical volume average of 23M). Shares reached a high of $376 back in August 2021, meaning the stock is now off 98% from that level, with a market cap of only $1.6B.

What happened? A weak earnings report rattled investors on Friday, as Carvana posted a loss of $2.67 per share and a 2.7% drop in revenue from the prior year to $3.39B. The loss per share was $0.50 larger than anticipated, while the sales figure was $300M short of the analyst consensus. Total retail units sold in the quarter fell to 102,570, a decrease of 8% from the prior year.

There are bigger concerns about the waning macro backdrop amid recession fears. It's also less affordable for people to buy a used car right now due to rising rates and inflation, while Carvana battles depreciation headwinds as it attempts to sell vehicles it purchased at record highs for a profit. Questions also surround Carvana's debt load, especially after it scooped up ADESA's wholesale vehicle auction business for $2.2B earlier this year.

Commentary: "While the company is continuing to pursue cost cutting actions, we believe a deterioration in the used car market combined with a volatile interest rate/funding environment (bonds trading at 20% yield) add material risk to the outlook," Morgan Stanley's Adam Jonas wrote in a research note. "Secured borrowing capacity may be available but we believe equity holders also face significant risk of dilution, driving a wide range of outcomes. As such, we feel it is prudent to remove our rating and price target, establishing a 12-month base case range of $1 to $40 (bull case $70/share, bear case $0.10/share)." (51 comments)

Crypto rescue

What would you do with $1B worth of Bitcoin (BTC-USD)? The U.S. Department of Justice is in the middle of figuring that out following its second-largest crypto seizure in history. It's a story that's been running for nearly a year, but was only publicly revealed, following a guilty plea by James Zhong of Gainesville, Georgia.

Flashback: Zhong conducted his heist on the infamous dark web marketplace called the Silk Road that was shut down by the FBI in 2013. As the story goes, he created nine fraudulent accounts, funding each with between 200 and 2,000 Bitcoin, but then tricked the withdrawal-processing system by triggering over 140 transactions in quick succession. In the end, Zhong received over 50,000 Bitcoins into his accounts, which were then transferred into a variety of wallet addresses all under his control.

In a 2021 search of Zhong's premises, IRS Criminal Investigation agents recovered the Bitcoins (worth $3.3B at the time), which were located in an underground floor safe and on a single-board computer that was hidden in a popcorn tin. Zhong, who is 32 years old, then pled guilty to one count of wire fraud, which carries a maximum sentence of 20 years in prison. He's scheduled to be sentenced on Feb. 22, 2023.

Go deeper: "For almost 10 years, the whereabouts of this massive chunk of missing Bitcoin had ballooned into an over $3.3B mystery," U.S. Attorney Damian Williams said in a statement. The government is now seeking the forfeiture of the seized Bitcoin, which marks another high-profile example of authorities' ability to trace crypto thefts. In February, the Department of Justice arrested a couple who allegedly conspired to launder $4.5B of cryptocurrency stolen during the 2016 Bitfinex hack. (13 comments)

Digital levies?

Talk of a Digital Service Tax (DST) is back on the table amid fears that an agreement to implement a Global Minimum Tax (GMT) will fail to get implemented. Last year, a group of 140 nations agreed to an effective levy of 15% on major multinationals regardless of where they are based, making it less advantageous to relocate operations to countries with lower tax rates. For example, an online company that has no physical presence in a country, but has significant sales there via digital advertising, would be obligated to pay some taxes to the government of that nation.

Fine print: President Biden and Treasury Secretary Janet Yellen are on board with the Global Minimum Tax, but they face challenges in getting the agreement through Congress. The changes could require the Senate to alter existing tax treaties, which would take a two-thirds vote and at least some GOP support. Republicans have already expressed opposition to any rise in taxes, especially in the current economic environment, while some lawmakers have condemned the idea of ceding taxing authority to other governments.

"I really am not able to say whether we are going to wait for six more months or nine more months, but I believe the longer these negotiations will take, the less of a chance of actually reaching an agreement," said Zbynek Stanjura, finance minister of the Czech Republic, whose country holds the rotating EU presidency. "If we are not able to reach an agreement mid or long term, then Europe will go back to talks about digital tax."

Outlook: Any unilateral return to a Digital Service Tax is likely to spark trade tensions with the U.S. at a time when the sides could least afford it. Under the EU's previous plan, tech giants like Apple (AAPL), Google (GOOGGOOGL), Meta (META) and Amazon (AMZN) would face a series of separate digital taxes from multiple countries - for marketplace services and online advertising - that would be based on a threshold of annual revenues. Many caution that this would make doing business less internationally competitive than a GMT, complicate matters by paying different taxes in every country, and may even be passed on to small businesses and local consumers that use their platforms.

In Asia, Japan +1.3%. Hong Kong -0.2%. China -0.4%. India closed.
In Europe, at midday, London -0.1%. Paris -0.1%. Frankfurt +0.3%.
Futures at 6:30, Dow +0.1%. S&P +0.1%. Nasdaq +0.3%. Crude -1.3% to $90.59. Gold -0.4% to $1673.20. Bitcoin -5.2% to $19,673.
Ten-year Treasury Yield unchanged at 4.20%

Today's Economic Calendar

6:00 NFIB Small Business Optimism Index
1:00 PM Results of $40B, 3-Year Note Auction

Companies reporting earnings today »

What else is happening...

Berkshire (BRK.B) a net buyer of stocks in Q3 to the tune of $3.7B.

Disappointing numbers from Lyft (LYFT) slam brakes on the stock.

Tyson Foods (TSN) CFO arrested less than six weeks into the post.

Activision (ATVI) says $69B sale to Microsoft (MSFTremains on track.

Fear of 'fast decelerating growth' leads to Palantir (PLTRselloff.

Trump SPAC (DWAC) soars as ex-president hints he'll run again.

Amazon (AMZN) expands use of Rivian (RIVNzero-emission vehicles.

Blue Apron (APRN) slides to all-time low after pulling revenue guidance.

Take-Two Interactive (TTWO) cuts bookings view below expectations

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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