Morning Reads





The FDA is ordering JUUL products off the shelves in the U.S., dealing a major blow to the once high-flying company whose products have "played a disproportionate role in the rise in youth vaping." The official market denial order restricts the sale of its remaining Virginia tobacco and menthol-flavored pods, and only pertains to the commercial distribution, importation and retail sales of these products. That means no enforcement for individual consumer possession, or the use of JUUL and other vaping accessories.

Press release: "After reviewing the company's premarket tobacco product applications (PMTAs), the FDA determined that the applications lacked sufficient evidence regarding the toxicological profile of the products to demonstrate that marketing of the products would be appropriate for the protection of the public health. As with all manufacturers, JUUL had the opportunity to provide evidence demonstrating that the marketing of their products meets these standards. However, the company did not provide that evidence and instead left us with significant questions."

Marlboro owner Altria (MO) bought a 35% stake in Juul for $12.8B in late 2018 to diversify its portfolio and join forces with a company that was threatening its traditional cigarette business. Things didn't go so well, with the FDA banning flavored e-cigs in 2020, prompting JUUL's market share to tumble from 70% to 42%, and then to 36% as of March 2022. Earlier this year, Altria valued its JUUL stake at $1.6B, an eighth of its original investment, and that's before the FDA threatened its entire U.S. business (Altria shares are down more than 20% since the acquisition).

Commentary: Bank of America analyst Lisa Lewandowski expects the company to appeal the FDA decision since key competitors like British American Tobacco (BTI) and Japan Tobacco (OTCPK:JAPAY) have been granted U.S. market access. Additionally, Imperial Brands' (OTCQX:IMBBY) blu product is presently appealing a market denial order akin to the one reportedly facing JUUL. Even if filed, such legal action could get drawn out and will leave products off of store shelves for a long period of time. (86 comments)

High volume

Friday might witness one of the heaviest trading days of the year as FTSE Russell (OTCPK:LDNXF) completes the annual rebalancing of its indexes. These include market cap benchmarks like the Russell 2000 (IWM) and Russell 3000 (IWV), as well as other indexes based on investment styles, such as the Russell 1000 Growth (IWF) and Russell 1000 Value (IWD). The popular products are benchmarked to nearly $12T of investor funds, spanning those managed by hedge funds and 401(k) providers to other institutional fund managers and even retail investors. The frenzy of buying and selling saw total trading volume on the day of the 2021 reconstitution top 16B shares, making it last year's busiest trading session.

How it works? Given the volume and number of stocks involved, FTSE Russell takes some steps ahead of time to be transparent about coming movements. The process starts during "Rank Day" in May - which determines the market cap bands for a stock to be eligible for inclusion - and is followed up with preliminary lists in subsequent weeks, before the actual rebalancing occurs on the fourth Friday of June. Funds and institutional investors that track the various benchmarks are forced to scoop up or ditch stocks that are added or removed from the indexes, and it all takes place just moments before the market closes (some traders even seek to trade any price dislocations that could result from the readjustment).

"We've found that fully reconstituting the indexes annually, plus adding eligible [initial public offerings] quarterly and applying daily adjustments maintains the representative nature of the Russell U.S. Indexes while avoiding the unnecessary turnover that a more frequent rebalancing could cause," said Catherine Yoshimoto, director of product management for the Russell U.S. Indexes.

Interesting times: Popular "growth" players in tech, like Meta (META), Netflix (NFLX) and PayPal (PYPL), are set to move to the Russell 1000 Value Index, which is typically a domain reserved for companies trading at a discount to their fundamentals. That's due to the recent price drops of the stocks, which are down 50-70% YTD. Meanwhile, the energy sector is set to see a heavier weighting in Russell growth indexes, with related shares being part of one of the only industries to outperform in 2022. "Growth managers that have not had to pay attention to energy for several years, now have to pay attention to the sector," explained Steve DeSanctis, equity strategist at Jefferies.

Ready, aim, fire!

Traders pulled the trigger on Smith & Wesson (SWBI) on Thursday as shares of the firearms manufacturer went on a wild ride. The stock climbed nearly 10% following a favorable Supreme Court ruling on gun rights, but then fell back 2% AH after reporting quarterly earnings. Sales slumped 31% in FQ4 from a year ago, returning to more normalized levels of demand following the pandemic surge, though the shares pared some of the slight losses after S&W hiked its quarterly dividend by 25%.

Over in Washington: The Supreme Court struck down a restrictive century-old gun law enacted in New York, ruling that the state's system for issuing concealed-weapons permits - in which applicants must demonstrate "proper cause" and "good moral character" - violates the Second Amendment. The 6-3 decision and majority opinion authored by Justice Clarence Thomas marks the widest expansion of gun rights since 2010, when the high court applied a 2008 ruling nationwide that established individual rights of armed self-defense within the home. The latest ruling could challenge similar laws in at least eight other states and the D.C., where authorities wield significant power over issuing concealed carry permits.

"Because many people face a serious risk of lethal violence when they venture outside their homes, the Second Amendment was understood at the time of adoption to apply under those circumstances," Justice Alito wrote in a concurring opinion. "The Court's exhaustive historical survey establishes that point very clearly, and today's decision therefore holds that a State may not enforce a law, like New York's Sullivan Law, that effectively prevents its law-abiding residents from carrying a gun for this purpose." He also explicitly added that Judge Breyer's lengthy invocation of gun death statistics was irrelevant to the court's decision.

That's not all: A bipartisan package of gun safety measures passed the U.S. Senate late Thursday, weeks after mass shootings in Uvalde and Buffalo that killed more than 30 people, including 19 children. The $13B bill would toughen background checks for the youngest firearm buyers, beef up penalties on gun traffickers and close the so-called boyfriend loophole. It would also help states enact red flag laws and fund local programs related to school safety, mental health and first responder training. (94 comments)

EU candidate status

It has now been four months since Vladimir Putin sent Russian forces across the border into Ukraine, triggering the biggest conflict in Europe since the end of World War Two. Fighting continues to rage in the eastern Donbas region, where Putin laid claim to two independent proxy states in February - the Luhansk and Donetsk people's republics. Looking to avoid encirclement, Ukraine early Friday ordered its troops to withdraw from their remaining foothold in Severodonetsk, a key city of 100,000 that served as the administrative center of Ukrainian-controlled parts of Luhansk.

Snapshot: While Ukraine still holds more than a third of the Donetsk region, including the cities of Slovyansk and Kramatorsk, a capture of Severodonetsk and neighboring Lysychansk would prompt Moscow to announce the full "liberation" of at least one of the two people's republics. Putin shifted military efforts there following setbacks in seizing Kyiv, and a failed attempt to install a pro-Russian government in the Ukrainian capital. Moscow also continues to occupy most of the country's southern regions as it seeks to form a land bridge between mainland Russia and the Crimean Peninsula.

As the war drags out, Ukraine is beseeching Western nations for heavy weapons, but is also angling for stronger ties with the European Union to "preserve its freedom and unity." EU leaders last night granted "candidate status" to Ukraine and Moldova (another former Soviet state), paving the way for the two countries to potentially join the bloc. "It is a decision for freedom and democracy and puts us on the right side of history," European Parliament President Roberta Metsola said before the final decision.

Next steps: Joining the EU is a process that usually takes years, or even decades, but Ukrainian President Volodymyr Zelenskyy is hoping to fast-track the negotiations. Countries have to meet strict criteria, from economic stability and a functioning market economy to rooting out corruption and respecting human rights. The most recent nation to join the EU was Croatia in 2013, which took nine years to move from candidate status to membership upon getting approval from all 27 EU governments.

Today's Markets

In Asia, Japan +1.2%. Hong Kong +2.1%. China +0.9%. India +0.9%.
In Europe, at midday, London +1.5%. Paris +1.9%. Frankfurt +0.7%.
Futures at 6:20, Dow +0.6%. S&P +0.7%. Nasdaq +0.9%. Crude +1.3% to $105.63. Gold -0.1% to $1828. Bitcoin +0.4% to $20,804.
Ten-year Treasury Yield +3 bps to 3.10%

Today's Economic Calendar

6:15 Fed's Bullard Speech
10:00 New Home Sales
10:00 Consumer Sentiment
1:00 PM Baker-Hughes Rig Count
4:00 PM Fed's Daly Speech

Companies reporting earnings today »

What else is happening...

All 34 banks in Fed's stress test would weather a severe recession.

FedEx (FDX) fueled higher by in-line earnings and strong guidance.

Exodus: Ken Griffin's hedge fund Citadel is leaving Chicago for Florida.

Energy stocks slide as inventories highlight demand destruction worry.

Cisco (CSCO), Nike (NKE) are completely exiting the Russian market.

Freeport-McMoRan (FCX), copper miners crushed on rising recession fears.

Tesla (TSLA) partners with PG&E (PCG) on virtual power plant in California.

Netflix (NFLX) confirms talks for ad-supported service with 'all' the partners.

Intel (INTC) says Ohio expansion may be scaled back as CHIPS Act stalls.

United (UAL) cuts flights out of Newark to improve on-time performance.

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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