Morning Reads


Todays Open Interest Change




While most investors are expecting an 11th-hour deal to be reached over the debt ceiling, interesting market dynamics are at play as the drama unfolds in Washington. Some triple-A corporate bonds from Microsoft (NASDAQ:MSFT) and Johnson & Johnson (NYSE:JNJ) are trading at a yield discount to Treasury bills, which are generally viewed as the most safe investment in the world. In fact, Wall Street just witnessed the busiest week of the year for investment-grade corporate bond issuance, helped by a $31B debt sale by Pfizer (NYSE:PFE) that became the fourth largest on record.

Where things stand: Following a talk on Monday evening, President Biden and House Speaker Kevin McCarthy agreed that both sides will keep negotiating on a debt limit plan to avoid default, though they didn't reach any agreement. "I believe we can still get there," McCarthy declared, though he's not considering the president's suggestion to cut the deficit by increasing taxes for the wealthy or closing tax loopholes for the pharma and oil industries. Instead, he's focused on reducing spending in the FY2024 federal budget following a reported agreement to cut unspent pandemic funding.

The chance of a default occurring is "very, very small, but not zero," explains John Mason in a new SA article that examines the probabilities. SA analyst David Lerner adds that the "scare" could be the "last best chance" to get into this rally, while Investing Group Leader Mott Capital Management writes that a deal may lead to a giant stock market liquidity drain.

What would happen if the U.S. defaults? Moody's Analytics forecasts "spiking interest rates and plunging equity prices," as well as the freezing up of short-term funding. Volatility might also send shockwaves throughout the financial system, spreading to the derivative and mortgage markets, where Treasuries are often used as collateral for securing trades and loans. The focus would then turn to the Federal Reserve and its backstop menu of options to avert a calamity, but Chair Jay Powell has repeatedly warned that "no one should assume that the Fed can protect the economy."

AI headaches

With algorithms scraping sites and social media for headlines to react to, the rise of AI photos has given investors another headache. On Monday morning, the account Bloomberg Feed (@bloombergfeed) - not associated with Bloomberg but with a blue checkmark - shared a fake image of an explosion at the Pentagon, which quickly went viral. "For all of a few minutes after the U.S. open, the S&P 500 (SP500) shed around a quarter of a percent, whilst yields on 10yr Treasuries (US10Y) moved about 4bps lower [before recovering]," Deutsche Bank's Jim Reid wrote. "Given the suggestions that the initial photo might have been AI-generated, it just shows the potential pitfalls for markets if fake news driven by AI can cause concrete movements in asset prices." (10 comments)

Water use

Under pressure of more severe cuts by the federal government, Arizona, California and Nevada have reached a deal to cut water usage from the drought-stricken Colorado River. In return, the Biden administration will compensate cities, irrigation districts, agricultural landowners and farm operators, with funding to the tune of $1.2B that will come from the Inflation Reduction Act. While the agreement will trim water usage by about 13% across the Southwest, or 3M acre-feet of water by 2026, bigger solutions will be needed in the future, especially if dry conditions intensify. SA analyst Vlad Deshkovich discusses what the Colorado River water shortages will mean for investors in the long-term, while AllianceBernstein explains that water scarcity is no longer just a problem for developing countries in desert climates. (6 comments)

Is it constitutional?

Lawsuits were expected and lawsuits have arrived. TikTok is suing Montana over its decision to ban the popular short video app across the state starting in January 2024. The suit alleges that the ban violates the First Amendment and rules governing interstate commerce, as well as laws like federal preemption. "We are challenging Montana’s unconstitutional TikTok ban to protect our business and the hundreds of thousands of TikTok users in Montana," TikTok, owned by China-based ByteDance (BDNCE), said in a statement. In other legal tech news, Meta Platforms (META) was slammed with a $1.3B fine by the EU, marking the biggest penalty ever levied by Ireland's Data Protection Commission. (7 comments)

Today's Markets

In Asia, Japan -0.4%. Hong Kong -1.3%. China -1.5%. India flat.
In Europe, at midday, London +0.3%. Paris -0.8%. Frankfurt -0.1%.
Futures at 6:30, Dow -0.1%. S&P -0.1%. Nasdaq -0.1%. Crude +0.2% to $72.21. Gold -1% to $1957.60. Bitcoin +1.8% to $27,314.
Ten-year Treasury Yield +2 bps to 3.74%

Today's Economic Calendar

Fed's Logan Speech
9:45 PMI Composite Flash
10:00 New Home Sales
10:00 Richmond Fed Mfg. Index
1:00 PM Results of $42B, 2-Year Note Auction
1:00 PM Money Supply

Companies reporting earnings today »

What else is happening...

WSB survey results: Economic data cannot be completely trusted.

St. Louis Fed's Bullard sees two more rates increases this year.

Chevron (CVX) to buy PDC Energy (PDCE) in $6.3B all-stock deal.

Losses prompt ZIM Integrated Shipping (ZIM) to scrap its dividend.

Can India become a new China for Apple (AAPL)? - Bernstein.

Walgreens (WBA) falls to slowest level in almost 11 years.

JPMorgan (JPM) cites reason that helped First Republic acquisition.

Yelp (YELP) gains on report of activist investor push for sale.

PacWest (PACW) offloads real estate loans to Kennedy-Wilson (KW).

Steve Cress, SA Head of Quant, discusses the fall of office REITs.

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.

More Posts by UPB: View All | Private Twitter Feed: Access Now! (For Diamond Members)