Morning Reads






Role reversal

It already happened once during the intraday session on Monday, but Saudi Aramco (ARMCO) has officially topped Apple (NASDAQ:AAPL) as the world's most valuable company. The state-owned energy giant closed the session yesterday with a market capitalization of $2.43T, while the iPhone maker ended the day valued at $2.37T. In fact, it's a trend that has accelerated this year, with the energy sector buoyed by a surge in oil prices following an inflation surge that has curbed demand for high-flying tech stocks (Aramco shares are up 30% YTD, while Apple's stock has slid 20% since the start of the year).

Commentary: "While Apple's stock has held up better than most peers, it is still subject to the great tech multiple compression, which has been witnessed as a result of central bank tightening and ramping inflation," explained Neil Campling of Mirabaud Securities. "Investors will now worry if consumers' belt tightening will lead to lower appetite to buy the ultimate consumer accessory, the iPhone."

Some say the correlation is not exactly identical since Aramco's float is less than 2%, compared to the 84% of Apple shares that are held by the public. Others point out that Aramco only trades on the Saudi Stock Exchange, known as Tadawul, making the connection somewhat of an apples (no pun intended) to oranges comparison. Saudi Aramco is also the only non-American company in the top 10 market cap rankings, and if U.S. investors want to scoop up shares they face limited choices, such as buying into the iShares MSCI Saudi Arabia ETF (NYSEARCA:KSA) that has Aramco as 5% of its holdings.

Go deeper: For the past two years, investors have been laser-focused on "pandemic winners" in the technology sector. However, a historic collapse in energy investment during the coronavirus crisis has led to shortages of oil, gas, coal and refining capacity, leading some to believe the energy sector could be the next "pandemic winner." In addition, the Saudis, who are one of the world's top crude exporters, have been under pressure to raise output following Russia's invasion of Ukraine and subsequent sanctions against Vladimir Putin's regime. (5 comments)

Inflation nation

Tech stocks got hammered again on Wednesday after the closely-watched Consumer Price Index soared 8.3% in April, which was more than the 8.1% estimate and close to the highest level in more than 40 years. Furthermore, core CPI (excluding food and energy) was higher than expected, rising 6.2%, while shelter costs - which account for one-third of the CPI - advanced at their fastest pace since 1991. There was also a big jump in underlying services inflation, which has been climbing in recent months, suggesting that price pressures are becoming more entrenched in the economy.

Quote: "We're starting to see energy pull back a little bit, but it's not enough," said Kathy Jones, chief fixed income strategist at Charles Schwab. "The markets were hoping for a better number and it's not good enough to rule out more Fed tightening."

Some even think that deep-rooted inflation could prompt a 75 basis point move from the central bank, though Fed Chair Jerome Powell has set the bar quite high for such an increase. The likelihood is for 50 bps boosts at coming meetings until the price pressures display a real peak and make their way out of the economy. Meanwhile, the 10-year Treasury yield climbed back above 3% following the release of the CPI report, but then eased back below the threshold.

More commentary: "With the annual rate ticking down from 8.5% to 8.3%, it can be tempting to say we've seen the peak, but we've also been head-faked before as was the case last August," declared Greg McBride, chief financial analyst at Bankrate. (244 comments)

House of Mouse

Shares of Disney (DIS) initially moved higher after the bell on Wednesday, but then extended a selloff seen in the prior session by falling 2.6% to $102.40 in AH trading. The new 52-week low saw investors focus on the company's top and bottom line misses, as well as widening losses at its direct-to-consumer segment. Operating losses for Disney's streaming business, which also includes ESPN+ and Hulu, tripled to $877M from a year ago, driven by higher programming and production expenses.

On the bright side: The House of Mouse reported 7.9M new Disney+ subs to reach 137.7M subscribers, avoiding a slowdown that has recently plagued streaming rival Netflix (NFLX). CEO Bob Chapek also affirmed the "very achievable" targets of signing up between 230M-260M subscribers to Disney+ by September 2024, and having the streaming video-on-demand business achieve profitability before then. A slate of big-budget productions will additionally be released in the coming months, like Black Panther and Avatar sequels, Toy Story prequel Lightyear, and a new Star Wars franchise series called Obi-Wan Kenobi.

"To get their streaming business to scale, at least the way they've built it, they need to expand the aperture of the service beyond Disney-branded content," wrote Morgan Stanley analyst Ben Swinburne. "They're spending significantly less than Netflix is. There’s an opportunity for them to spend more efficiently on content, and lean on this strong library of familiar IP that they have, but they just have to go out and prove it."

More magic: A strong rebound was seen at Disney's parks, experiences and products segment, with revenue more than doubling to $6.7B during the quarter. Operating profit of nearly $1.8B, which was close to pre-pandemic levels, beat analyst estimates by 18% and compared to a year-ago loss of $406M. With regards to the legal tussle down in Florida... Disney leadership wasn't asked any questions on the conference call after the state's legislature repealed special tax privileges related to the district that houses the Walt Disney World theme park. (104 comments)

Defense spending

Finland's President Sauli Niinisto and Prime Minister Sanna Marin have announced that the country should apply to join NATO "without delay," forgoing a decades-long policy of military neutrality following Russia's war in Ukraine. That position is sure to be seen as an escalation by Russia, which shares an 830-mile border with Finland (and would double the amount of "land borders" it shares with NATO territories). The Finnish government is set to debate the NATO application over the weekend, while parliament is expected to give its final approval as early as Monday.

Upping the rhetoric: Overnight, European Commission President Ursula von der Leyen warned that Russia was the "most direct threat to the world order with the barbaric war against Ukraine." She also cited Moscow's "worrying pact" with China and "their call for new, and very much arbitrary, international relations." Meanwhile, G7 nation Japan voiced its agreement at the EU-Japan summit in Tokyo, with Prime Minister Fumio Kishida saying the situation "must not be tolerated."

"The pumping of Ukraine by NATO countries with weapons, the training of its troops to use Western equipment, the dispatch of mercenaries and the conduct of exercises by the countries of the alliance near our borders increase the likelihood of a direct and open conflict between NATO and Russia instead of their 'war by proxy,'" responded Dmitry Medvedev, Deputy Chairman of Russia's Security Council (he also served as Russia's president from 2008 to 2012). "Such a conflict always has the risk of turning into a full-fledged nuclear war. This will be a catastrophic scenario for everyone."

Outlook: Sweden is also anticipated to make a decision on joining NATO this weekend, with the alliance expected to take an expedited track to approve their membership. All 30 NATO nations have agreed to spend at least 2% of their GDPs on defense by 2025, and while only a third of those members have met the threshold, the latest developments should accelerate a drive for achieving their targets. The buildup is also likely to be another boon for defense stocks like Lockheed Martin (NYSE:LMT) and Northrop Grumman (NYSE:NOC), which have had a phenomenal year on the back of the increases in military spending. (52 comments)

Today's Markets

In Asia, Japan -1.8%. Hong Kong -2.2%. China -0.1%. India -2.3%.
In Europe, at midday, London -2.4%. Paris -2.4%. Frankfurt -2.4%.
Futures at 6:20, Dow -0.5%. S&P -0.7%. Nasdaq -1.1%. Crude -2.3% to $103.24. Gold -0.2% to $1849.30. Bitcoin -10.6% to $27,960.
Ten-year Treasury Yield -8 bps to 2.83%

Today's Economic Calendar

8:30 Initial Jobless Claims
8:30 Producer Price Index
10:30 EIA Natural Gas Inventory
1:00 PM Results of $22B, 30-Year Note Auction
4:00 PM Fed's Daly Speech
4:30 PM Fed Balance Sheet

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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