Morning Reads






JetBlue (NASDAQ:JBLU) is launching a hostile takeover attempt for discount carrier Spirit Airlines (NYSE:SAVE) after the latter rejected its $3.6B offer in favor of an existing deal with Frontier Airlines (NASDAQ:ULCC). The move will see JetBlue appeal directly to Spirit's shareholders by launching a $30 tender offer for their shares, but it would be willing to pay its initial bid of $33 if Spirit comes back to the negotiating table and provides key data that has been requested. SAVE is up 18% to $20/share on the news in premarket trading.

Bigger picture: Both companies have previously accused each other of acting in bad faith, which has held up the discussions. "I have wondered whether blocking our deal with Frontier is, in fact, their goal," Spirit CEO Ted Christie announced on the company's earnings call several weeks back, saying he can't imagine getting regulatory approval for the deal when JetBlue faces antitrust scrutiny over an agreement with American Airlines and overlaps in cities like Orlando and Fort Lauderdale. In response, JetBlue has called the concerns a "smokescreen" and pointed to historical relationships between top brass at Spirit and Frontier Airlines.

The tug of war comes amid a drive to consolidate in the budget airline sector. Any deal which would create the fifth-largest U.S. carrier after United Airlines (UAL), Delta (DAL), American (AAL) and Southwest (LUV). JetBlue also attempted to buy Virgin America in 2016, but lost a contest to Alaska Air Group (ALK).

Go deeper: A serious pilot shortage in the U.S. is prompting many airlines to clamber for solutions, and M&A may be one such answer. The COVID pandemic intensified the situation by slowing training and hiring, as well as triggering a wave of early retirements. Other ideas being considered are raising the mandatory airline pilot retirement age to 67, relaxing training programs, or reducing flight-hour requirements before joining a domestic carrier. (1 comment)

Recession risk

In some research notes that made waves over the weekend, Goldman Sachs (GS) lowered its market forecast for the year, but that baseline assumes no recession. The equity strategy team led by Jan Hatzius cut its end-2022 target for the S&P 500 (SP500) to 4,300 from 4,700, noting investors have been "mauled" since the Jan. 3 peak for the index. However, if there is a recession, it would push the S&P down to 3,600, which would be an 11% drop from current levels.

Commentary: "Our economists assign a 35% probability of recession in the next two years," added strategist David Kostin. "However, if by year-end the economy is poised to enter a recession in 2023, a combination of reduced EPS estimates and a wider yield gap would drive a lower index level. If the Fed is forced to hike by more than our economists expect and real rates rise to 1%, similar to the peak reached during the last cycle in 2018, our macro model suggests that higher rates will more than offset the lower yield gap. In this scenario, the forward P/E would equal 16x, the lowest level since 2020."

Lloyd Blankfein, former CEO and senior chairman at Goldman Sachs, had more to say on the subject, during an interview on CBS's Face the Nation. The likelihood of a U.S. downturn is a "very, very high risk factor," but a recession is "not baked in the cake" and the Fed has "very powerful tools" to narrowly avoid it. "If I were running a big company, I would be very prepared for it. If I were a consumer, I'd be prepared for it," he continued.

Still not done: With equity "valuations now more attractive, equity markets so oversold and rates potentially stabilizing below 3%, stocks appear to have begun another material bear market rally," according to Morgan Stanley's (MS) Mike Wilson. "After that, were main confident that lower prices are still ahead. In S&P 500 terms, we think that level is close to 3,400, which is where both valuation and technical support lie." The bear market will last until either valuations fall to 14-15x "that discount the kind of earnings cuts we envision, or earnings estimates get cut." (178 comments)

NATO expansion

Joining Finland in its recent quest to join NATO, Sweden has broken a nearly 200-year policy of military neutrality formed in the aftermath of the Napoleonic Wars. The governing Social Democratic Party intends to approve its application to join the alliance today, but would express reservations against the deployment of nuclear weapons and foreign bases on their soil. Meanwhile, Russia has warned that Finland and Sweden would face consequences for their decisions, "both of a military-technical and other nature," and even cut off all electricity exports to Finland in response (those accounted for about 10% of the country's consumption in April).

Quote: "The issue at hand is whether military nonalignment will keep serving us well?" Swedish Prime Minister Magdalena Andersson declared. "Europe, Sweden and the Swedish public are living a new and dangerous reality. We're now facing a fundamentally changed security environment in Europe."

Public opinion was strongly against joining NATO until the Russian invasion on Ukraine on Feb. 24, when support for membership flipped almost overnight. As mentioned last week, the military buildup is likely to be another boon for stocks like Lockheed Martin (NYSE:LMT) and Northrop Grumman (NYSE:NOC), which have had a phenomenal year on the back of the increases in defense spending. All current 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.

Wild card: Turkey, which has been a NATO member since 1952, has raised concerns about the two countries joining the alliance, alleging they support the Kurdistan Workers' Party, or PKK, which Ankara considers terrorists. Turkey particularly accuses Sweden of not doing enough to crack down on PKK financing and recruitment in the country, and condemns the meetings of politicians with representatives of PKK-linked Syrian Kurdish militants that are fighting in Syria. While the grievances could complicate and delay the accession process, Finland and Sweden's applications are still expected to get over the finish line, albeit with possible concessions that may be wrung out of NATO allies. (10 comments)

Lockdown fallout

Fresh figures out of China show how its zero-COVID policy is weighing on the country as coronavirus controls continue to bite its economy. Retail sales fell 11.1% on year in April, manufacturing slid by 4.6%, industrial output dropped 2.9%, while fixed-asset investment rose 6.8% in the January-April period (slowing from a 9.3% pace in the prior quarter). Meanwhile, the unemployment rate across China's 31 largest cities climbed to a new high of 6.7% in April as hundreds of millions of people remained under full or partial lockdowns.

Commentary: "Although COVID case numbers have declined markedly from the peak in mid-April, the unwinding of lockdowns has been extremely slow, due partly to the caution among local government officials," noted Ting Lu, chief economist of China at Nomura. "Therefore, we believe local lockdowns will still severely impact the production-end of the economy in May and view a quick turnaround as all but impossible."

The Chinese government might be thinking along similar lines as it preps a series of measures to stabilize the economy. Over the weekend, the PBOC cut mortgage base rates for new lending to first-time buyers from 4.6% to 4.4% to support one of the nation's most important economic drivers. A liquidity crisis that continues to plague China's highly leveraged real estate developers has triggered a wider property slowdown, with the ailing housing market spelling trouble for domestic growth.

Coming to an end: The strict lockdowns and containment measures can't last forever, especially when risking increasing backlash among the population. COVID-hit Shanghai just announced a gradual reopening of businesses such as shopping malls and hair salons following a drop in case numbers in the Chinese financial and manufacturing hub. That could give some hope to Chinese investors, as well as those concerned about the deep ramifications for the global supply chain. (4 comments)

Today's Markets

In Asia, Japan +0.5%. Hong Kong +0.3%. China -0.3%. India +0.3%.
In Europe, at midday, London flat. Paris -0.3%. Frankfurt -0.6%.
Futures at 6:20, Dow -0.1%. S&P -0.3%. Nasdaq -0.5%. Crude -0.3% to $110.12. Gold -0.3% to $1802.70. Bitcoin +0.9% to $29,910.
Ten-year Treasury Yield unchanged at 2.93%

Today's Economic Calendar

8:30 Empire State Mfg Survey
8:55 Fed's Williams Speech
4:00 PM Treasury International Capital

Companies reporting earnings today »

What else is happening...

Elon Musk says Twitter (TWTR) accused him of violating NDA.

Ford (F) sells another 7M shares of EV maker Rivian (RIVN).

McDonald's (MCD) starts the process of selling its Russian business.

Soaring oil prices see Saudi Aramco (ARMCO) post record profits.

Big Oil wins shareholder support as energy crisis exceeds climate crisis.

Why does AMD (AMD) keep gaining share over Intel (INTC)?

Pfizer (PFE) to delay EU vaccine deliveries as bloc seeks updated COVID shots.

Videogame sales fall 8% in April, though consoles rebound.

India suspends wheat exports, citing threats to food security.

Bitcoin 'not immune' from stock market volatility - Morgan Stanley.

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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