Morning Reads






Investors were already nervous after Walmart (WMT) raised the earnings alarm on Tuesday, but those fears were compounded yesterday as Target (TGTupped the threat level by a few notches. Shares of the discount chain slumped 25% as Q1 results came in far from the bullseye, hammering the entire retail sector from Costco (COST) and Dollar Tree (DLTR) to merchandise haulers like Saia (SAIA) and Old Dominion Freight Line (ODFL). Things then spiraled into a broad market selloff, with the Dow Jones plunging almost 1,200 points, and the S&P 500 and tech-heavy Nasdaq tumbling 4% and 4.7%, respectively.

What happened? The big earnings miss (and halving of profits) at Target was driven by a shift away from higher-margin goods such as kitchen appliances and TVs to basics like food and toiletries. Margins felt pressure from the consumer pullback as shoppers got selective about spending on goods. In fact, operating margins were reported to be 5.3% during the quarter, falling heavily from the 9.8% seen in same period last year and below the company's long-term goal of 8%.

Elevated fuel and freight costs also dented profits, with expenditures on those items now forecast to be "$1B higher this year" than Target management had previously estimated. Not expecting the swift change in consumer sentiment, the company further stocked up on too many discretionary categories, leading to a higher level of markdowns as quarterly inventory grew 43% Y/Y. "We did not anticipate the rapid shifts we've seen over the last 60 days," CEO Brian Cornell declared, adding that Target would "have some of the same challenges in the second quarter" as it continues to set prices based on "value and affordability."

Inflation nation: "Retailers are starting to reveal the impact of eroding consumer purchasing power," explained Paul Christopher, head of global market strategy at Wells Fargo Investment Institute, which has predicted a recession around year-end into early 2023. "The consumer's ability to spend is eroding at a faster pace than it was a month or two ago. We think that pace is going to accelerate further." (163 comments)

Blood in the streets

The market selloff (or bubble) is showing no sign of abating (or deflating) as U.S. stock index futures continue to stumble. Contracts linked to the Dow (DJI) and S&P 500 (SP500) fell another 1.6% overnight, while the Nasdaq (COMP.IND) slid an additional 2%. Worries are particularly intensifying with the S&P 500 benchmark index on the brink of a bear market, down more than 18% from the all-time high reached last November.

Commentary: "The other day we were down 19.9 on the S&P and about 27 on the Nasdaq," legendary fund manager Jeremy Grantham told CNBC. "I would say that at minimum we are likely to do twice that and if we are unlucky, which is quite possible, we will do three legs like that and it may take a couple of years, as it did 2000. This bubble superficially looks very much like 2000, focused on U.S. tech, led by Nasdaq going to incredible highs."

"We should be in a recession, mild or severe, is the question," he continued. "But we should be in some sort of recession fairly quickly and profit margins, from a real peak, have a long way that they can decline. I think this kind of 2000 bubble that we had is dangerously likely to morph into the 1970s, where inflation is always a part of the background discussion and where growth rate starts to dwindle away." Note that while Grantham's resume includes predictions of the market crashes in 2000 and 2007, the permabear has been predicting epic crashes for much of the last decade, leading some to reference the famous saying "even a broken clock is right twice a day."

Next moves? Forecasts for market direction through the end of 2022 span the gamut, but all agree that the Fed will have to fight off stagflation fears before things can turn around. "What's clear to me is that there is no market put, and I think we're all waking up to that fact now... we're going to be meaningfully lower this year in stocks before we find a bottom," said Guggenheim Partners Global Chief Investment Officer Scott Minerd. "We can climb out of this hole," countered Marko Kolanovic, co-head of global research at J.P. Morgan. "There will be no recession this year, some summer increase in consumer activity on the back of reopening, China increasing monetary and fiscal measures." (37 comments)

Tesla trouble

As the market continues to crater, many of the once-loved names on Wall Street are getting hammered, like tech darling and retail favorite Tesla (NASDAQ:TSLA). Sliding another 2.8% to $690/share in premarket trade - following a 7% plunge on Wednesday - the EV and clean energy pioneer is off 45% over the past six months. With sentiment souring, many key players are weighing in, which comes in addition to those fearful of Elon Musk's devoted energies toward the chaotic $44B takeover of Twitter (TWTR).

Not helping the situation: S&P Dow Jones Indices gave Tesla the boot during the annual rebalancing of its S&P 500 ESG Index. "While Tesla may be playing its part in taking fuel-powered cars off the road, it has fallen behind its peers when examined through a wider ESG lens," commented Margaret Dorn, head of ESG indices, North America. "A few of the factors related to Tesla's (lack of) low carbon strategy and codes of business conduct... A Media and Stakeholder Analysis identified two separate events centered around claims of racial discrimination and poor working conditions at Tesla's Fremont factory, as well as its handling of the NHTSA investigation after multiple deaths and injuries were linked to its autopilot vehicles."

"Ridiculous," tweeted Tesla bull and once-disruptive fund manager Cathie Wood, while Elon Musk had his own fair share to say on his upcoming privately-owned social media platform. "A clear case of wacktivism. Exxon is rated top ten best in world for environment, social & governance (ESG) by S&P 500, while Tesla didn't make the list! ESG is a scam. It has been weaponized by phony social justice warriors."

Do something! Billionaire Leo Koguan, who claims to be the third largest individual shareholder of Tesla, is calling on the company to support its stock price via a buyback as shares continue to tumble. "Tesla must announce immediately and buy back $5B of Tesla shares from its free cash flow this year and $10B from its free cash flow next year, without affecting its existing $18B cash reserves with ZERO debt. Fremont, Shanghai, Austin and Berlin money printing machines are running in full speed, Tesla can invest in FSD, bot and factories while buying back its undervalued stocks. Shock and wake up few braindead analysts to their senses. Tesla is a Phoenix rising from the ashes." (35 comments)

Operation Fly Formula

The baby formula shortage continues to make headlines after President Biden invoked the 1950 Defense Production Act in an effort to increase supply. The order will mandate manufacturers to "direct needed resources to infant formula manufacturers before any other customer who may have ordered that good." The president is also allowing Defense Department air cargo contracts to fly in baby formula from overseas that meets U.S. health and safety standards.

Backdrop: Abbott Nutrition (NYSE:ABT), the nation's largest baby formula manufacturer, shuttered its production facility in Sturgis, Michigan, in February following reports of contaminated formula that was linked to the deaths of at least two infants. The FDA reached an agreement with Abbott to reopen the factory on Monday, though it will take about two weeks to restart production and up to eight weeks for formula to arrive in stores across the country. Recent reports out of Memphis stated that two young children were even hospitalized after their parents couldn't find the specific formula they needed (both kids have short-bowel syndrome).

Last night, the U.S. House passed a $28M emergency funding bill for the FDA to address the formula shortage and provide tighter oversight of the industry, though the fate of the legislation in the Senate isn't yet clear. Meanwhile, Sen. Ron Wyden (D-Ore.), chairman of the Senate Finance Committee, has launched an investigation into the tax and stock buyback practices of Abbott (ABT), which may have spent additional funds on repurchases instead of factory improvements. Later today, FDA Commissioner Robert Califf will appear before a subcommittee of the House Appropriations Committee to answer questions regarding the nation's baby formula shortage.

Thought bubble: The last two years have shown the downsides of globalization as the COVID pandemic and geopolitical threats upended the supply chain. On the other hand, there are also risks associated with protectionism, like in the case of U.S. baby formula, of which 98% is produced domestically by a trio of companies: Abbott (ABT), Gerber (OTCPK:NSRGY) and Mead Johnson (OTCPK:RBGLY). Import duties and restrictions have eliminated competition from Canada and Europe, while nearly two-thirds of all formula is purchased through federally-funded WIC, which only does business with these three domestic manufacturers.

Today's Markets

In Asia, Japan -1.9%. Hong Kong -2.5%. China +0.4%. India -2.5%.
In Europe, at midday, London -2.5%. Paris -2.2%. Frankfurt -2.1%.
Futures at 6:20, Dow -1.6%. S&P -1.6%. Nasdaq -1.9%. Crude -2.4% to $104.52. Gold +0.7% to $1827.70. Bitcoin -3.1% to $29,031.
Ten-year Treasury Yield -6 bps to 2.82%

Today's Economic Calendar

8:30 Initial Jobless Claims
8:30 Philly Fed Business Outlook
10:00 Fed's Barr Speech
10:00 Existing Home Sales
10:00 E-Commerce Retail Sales
10:00 Leading Indicators
10:30 EIA Natural Gas Inventory
4:00 PM Fed's Kashkari 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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