MORNING READS
- $300 Billion World Cup Is Headed for an Epic Comedown
- Swiss Central Bank Slows Rate Hiking With Half-Point Move
- Britain’s Inflation Rate Dips From a Four-Decade High to 10.7 Percent
- BOE Raises Key Rate a Half Point to 3.5%, Highest Since 2008
- This Is the World’s Biggest Stock Winner of 2022 With 1,600% Gain
- The Federal Reserve Signals More to Come Even as It Slows Rate Increases
- Jerome Powell’s Grim Inflation Outlook Is at Odds With Markets
- Why Inflation Took Off in 2022—and What Happens Next
- One of World’s Richest Families Is Building an Investment Firm
- How A Sprawling Hospital Chain Ignited Its Own Staffing Crisis
- Twitter Suspends Accounts Sharing Live Locations, Including the Tracker of Elon Musk’s Private Jet
- Jack Dorsey Says Twitter Has Too Much Power
- ‘FinTwit’ Influencers Face Charges in $100 Million Scheme
- Musk Cashes Out Another $3.6 Billion in Tesla Stock
- FTX Executive Ryan Salame Tipped Off Bahamian Regulators to Possible Fraud
- Goldman Sachs May Slash Bonuses for 3,000 Investment Bankers by 40%
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As widely expected, the Federal Open Market Committee increased its policy rate by 50 basis points to 4.25%-4.50% on Wednesday, as it downshifted from the 75 bps hikes of its previous four meetings. While that would appear to be a win for investors, the so-called "dot plot" was more of a concern. The Fed policymakers' median projection now sees the federal funds target range rising to 5.1% next year - a level last seen in 2007 - compared with 4.6% in the central bank's September projection.
Quote: "We need to be honest with ourselves that there's inflation. 12-month core inflation is 6% CPI. That's three times our 2% target. Now it's good to see progress, but let's just understand we have a long ways to go to get back to price stability," Fed Chair Jerome Powell said during a press conference. "I don’t think anyone knows whether we’re going to have a recession or not, and, if we do, whether it’s going to be a deep one or not. It’s just - it’s not knowable... The historical record cautions strongly against prematurely loosening policy. We will stay the course, until the job is done."
All three major U.S. stock indices retreated following the announcement, erasing gains from earlier in the session. By the end of the day, the Nasdaq slipped 0.8%, and the S&P 500 and Dow fell 0.6% and 0.4%, respectively, while more losses are in store premarket. Rate hikes are tricky in the sense that monetary policymakers may not know for another year if they have tightened too much or not enough (economists call those effects long and variable lags).
Commentary: "The Federal Reserve's decision to reduce the pace of rate hikes to 50 bps marks the beginning of the end of this rate hike cycle," said SA contributor Ahan Vashi. "However, a reduction in pace of rate hikes is not a pivot, and the Fed's quantitative tightening program is likely to continue for the foreseeable future. With the Fed tightening into a deeply inverted treasury yield curve, the near-term environment should be risk-off. Hence, equity markets could see increased volatility in upcoming weeks." (217 comments)
Elon Musk's Tesla (TSLA) stock selling spree is going into Ludicrous Mode despite many pledges to the contrary. The high-flying CEO sold another $3.6B worth of shares this week, during a three-day span in which Tesla hit its lowest level since late 2020. The stock is now down 60% YTD, with a market cap below the half-trillion dollar mark, as investors grow concerned over Musk's distraction from Tesla following his $44B acquisition of Twitter.
For the last time: "No further TSLA sales planned after today," Elon Musk tweeted on April 28, implying that was the last financing needed to take over Twitter. The billionaire made a similar pledge in August, as he offloaded another 7.9M shares worth around $6.9B, saying it was "important to avoid an emergency sale of Tesla stock in the (hopefully unlikely) event that Twitter forces this deal to close and some equity partners don't come through." Well, the deal closed in October, but Musk sold another $4B worth of shares anyway (in November), and he continues to sell by the billions.
"I will make sure Tesla shareholders benefit from Twitter long-term," Musk tweeted overnight following his latest stock sale, but criticism continues to grow about his guarantees and assurances. "My commitment to free speech extends even to not banning the account following my plane, even though that is a direct personal safety risk," Musk promised a month ago, only to pull the plug on the account on Wednesday as Twitter updated its Private Information policy. Don't forget that at the end of 2021, Musk cashed out 15.8M of Tesla shares, worth about $16B, to help pay a reported $11B tax bill after polling his followers.
From the SA comments section: "Looking back at the beginning of this debacle, it seems so clear now that this would end poorly for everyone, especially TSLA shareholders," wrote user dschrenk. "Once it was known that he used TSLA stock to collateralize the loan to buy TWTR, the writing was on the wall. Any strong drop in price for TSLA itself would trigger a margin call for Elon, requiring him to sell shares in order to maintain compliance. This selling would/could be seen as bearish, causing longs to sell and bears to build short positions. This, in turn, would cause the PA of TSLA to drop further, triggering a margin call, requiring selling of shares. Rinse and repeat." (220 comments)
The Securities and Exchange Commission just laid out four proposals that could result in the biggest changes to the way stocks are traded since 2005. Chair Gary Gensler said the adjustments would increase transparency and competition in retail stock trading, affording similar opportunities enjoyed by high-speed trading firms. The proposals range from order routing and pricing to disclosures that brokers must make to clients.
Market movement: Shares in Virtu Financial (VIRT), which handles stock trading orders for popular brokers through a payment-for-order-flow (PFOF) process, slumped 6.4% on the news on Wednesday. Related brokers also felt a squeeze like Robinhood (HOOD) -2.8%, E-Trade (MS) -2.4% and Interactive Brokers (IBKR) -1%, as well as smaller premarket losses for TD Ameritrade (SCHW), Charles Schwab (SCHW) and Cash App (SQ). Retail brokers currently route more than 90% of marketable orders of individual investors through a small group of off-exchange dealers, or wholesalers, the SEC noted in its FAQ document.
The new proposals put more pressure on firms that engage in PFOF, but don't ban the practice outright. An order competition rule would require certain equity orders of retail investors to be subject to competition in "fair and open auctions before such orders could be executed internally by any trading center that restricts order-by-order competition." Another proposal would seek to change certain rules to adopt variable minimum pricing increments for stock quoting and trading in the National Market System, reduce access fee caps and enhance the transparency of better priced orders.
Go deeper: Market middlemen who trade billions of shares a year base their business on selling shares for a fraction higher than they bought them, meaning the new set of regulatory requirements may weigh on their earnings (or as they say, could harm traders). "Some of the SEC's proposed changes stand to resurrect discriminatory barriers to entry and hurt millions of retail investors," Robinhood Deputy General Counsel Lucas Moskowitz said in a statement. "The SEC should not be playing politics with individual Americans' ability to improve their financial lives." (15 comments)
Despite some recent storms in the Sierra Nevada and Central Valley, the nation's largest water supplier has declared a drought emergency for all of Southern California. The Metropolitan Water District of SoCal supplies water to 26 agencies that provide major population centers like Los Angeles and San Diego counties, but each one of them will now have to voluntarily cut down on imported supplies. If significant rainfall doesn't materialize this winter, mandatory water restrictions are likely to be issued in April that could impact 19M Americans.
Backdrop: Earlier this year, the water district declared a drought emergency for 7M people that mostly depend on the State Water Project, which involves a complex system of dams and reservoirs. The limits varied based on locality, but prohibited many households from irrigating their lawns more than once a week to preserve enough supplies for people to cover their basic needs. According to California estimates, outdoor and landscape watering account for half of all of the state's urban water use, making its conservation one of the most important tools to combat the drought conditions.
"Some Southern Californians may have felt somewhat protected from these extreme conditions over the past few years. They shouldn't anymore. We are all affected," declared Gloria Gray, chair of the Metropolitan Water District's Board.
Outlook: California authorities have urged people to recycle water, take shorter showers, and only run dishwashers and washing machines when full, but the messaging has fallen on deaf ears. If the drought continues, state and local water officials will have to make big investments in infrastructure, like expensive recycling and desalination technology, or risk a longer list of expanding restrictions.
Related stocks: American Water Works (NYSE:AWK), Consolidated Water (NASDAQ:CWCO), Energy Recovery (NASDAQ:ERII), Xylem (NYSE:XYL), Invesco S&P Global Water Index ETF (NYSEARCA:CGW) and Invesco Water Resources Portfolio ETF (NASDAQ:PHO). Post other ideas in the comments section.
Today's Markets
In Asia, Japan -0.4%. Hong Kong -1.6%. China -0.3%. India -1.4%.
In Europe, at midday, London -0.5%. Paris -1.3%. Frankfurt -1.2%.
Futures at 6:30, Dow -0.8%. S&P -1.1%. Nasdaq -1.4%. Crude -0.1% to $77.17. Gold -1.8% to $1786.50. Bitcoin -0.8% to $17,673.
Ten-year Treasury Yield -2 bps to 3.48%
Today's Economic Calendar
8:30 Initial Jobless Claims
8:30 Philly Fed Business Outlook
8:30 Retail Sales
8:30 Empire State Mfg Survey
9:15 Industrial Production
10:00 Business Inventories
10:30 EIA Natural Gas Inventory
4:00 PM Treasury International Capital
4:30 PM Fed Balance Sheet
Companies reporting earnings today »
What else is happening...
Swiss central bank hikes rates to counter 'further spread of inflation.'
Delta Air Lines (DAL) rises on stronger than expected forecasts.
Microsoft (MSFT) sets new investment in $3B silicon battery startup.
FTX lawsuits show how the U.S. can police overseas crypto exchanges.
SPAC Digital World (DWAC) gains on 'major announcement' by Trump.
HBO Max's (WBD) shows find home on free ad-supported services.
Verizon (VZ) opens 'Plus Play' hub with Netflix (NFLX) promotion.
New 'Buy the Dip' ETF uses AI tech to target oversold stocks.