Morning Reads

Morning Reads





The Elon Musk-Twitter (NYSE:TWTR) saga kicked into high gear this weekend after the world's richest man decided to pull the plug on his $44B acquisition. Stepping away from the deal will not be easy, with both sides lining up their legal teams as they prepare for battle. Twitter (TWTR) has hired merger law firm heavyweight Wachtell, Lipton, Rosen & Katz, while Musk has brought in Quinn Emanuel Urquhart & Sullivan, which successfully led his defense against the "pedo guy" defamation suit in 2019 and is part of an ongoing shareholder case over his "go-private" tweet a year earlier.

Fine print: At issue is Elon's belief that Twitter (TWTR) hasn't done enough to address the matter of fake, spam or bot accounts on its platform. In a filing with the SEC, representatives for Musk said that despite what it claimed, Twitter (TWTR) "appears to have made false and misleading representations upon which Mr. Musk relied when entering into the merger agreement." With regards to Elon's requests for clarity around the bot issue, Twitter (TWTR) has "rejected them for reasons that appear to be unjustified, and sometimes claimed to comply while giving Mr. Musk incomplete or unusable information [that less than 5% of its total user accounts were spam]."

"This is a disaster scenario for Twitter and its board," noted Wedbush Securities analyst Dan Ives. "Now, the company will battle Musk in an elongated court battle to recoup the deal and/or the breakup fee of $1B, at a minimum." Twitter (TWTR) shares slumped another 7% in premarket trade on Monday to around $34, or 37% lower than the $54.20 per share price of Musk's original buyout agreement in April.

Questions remain: While things head to the courtroom, there is bound to be many settlement talks that take place in the background. Will Musk shoot to get a lower price for the deal based on a "material adverse effect"? Walk away by only paying a termination fee or damages? And how much hardball will Twitter be willing to play to uphold "specific-performance" clauses, which forces Musk to close the deal with every closing condition including financing of the transaction? (18 comments)

Market direction

Investors are strapping on their seatbelts as they prepare for some wild trading in the week ahead. Volatility is likely to reign high due to a confluence of economic indicators, which include retail sales and a consumer price index that may show a print greater than 9%. Earnings season for Q2 will also begin, with companies likely to show elevated input costs and slower consumer spending that could weigh on outlooks going into the second half of 2022.

Quote: "It's going to be a pretty bifurcated earnings season," said Keith Lerner, chief market strategist at Truist Advisory Services. "It's going to be a story of who doesn't have that pricing power, and there's going to be more differentiation."

A strong jobs report on Friday calmed some jitters that the economy might have already tipped into recession, but at the same time, it raised expectations that the Fed could press ahead with aggressive rate hikes to tame inflation. It's a circular methodology to gauge the coming economic landscape, meaning earnings season will likely play an outsized role in shaping investing sentiment. If traders see serious threats to corporate profits, it could lead to a further downturn for a market that has already slid into bear territory, though others say those estimates have already been taken into account - or at least make up some of the equation.

Commentary: "The market has been anticipating this for a really long time. From here on out, it's really dealing with inflation and what the companies are doing to work around it," wrote Anna Rathbun, chief investment officer at CBIZ Investment Advisory Services. "Markets had priced in already a fair amount of this earnings slowdown, but they've not priced in an earnings recession," added Kara Murphy, chief investment officer of Kestra Holdings. "We're not at a point where we could say the market is cheap."

Nord Stream goes offline

Energy concerns in Europe are getting grimmer by the day, with an emboldened Russia in a position to squeeze the bloc over its heavy sanctions and support for Ukraine. Moscow supplies the EU with 40% of the natural gas imports, and in countries like Germany, that figure is as high as 60%. Natural gas is used for heating and cooking for consumers, as well as electricity and power generation for heavy industry.

The latest: Russia has slashed capacity to Germany via Nord Stream 1 by 40% over the past week, just as the country was attempting to fill up its storage before wintertime. The cuts were caused by sanctions questions over a turbine that was being serviced in Canada, but another disruption will hit the important pipeline over the next 10 days (with annual maintenance work taking place from July 11 through July 21). Germany and other EU countries are fearful that the Kremlin could extend the shutdown due to the war in Ukraine, or might even turn off the taps for good.

"Based on the pattern we've seen, it would not be very surprising now if some small, technical detail is found and then they could say 'now we can't turn it on any more,'" according to German Economy Minister Robert Habeck. The country has already raised the alarm in its emergency gas plan, and the next level would see the government ration consumption and assume control of the entire nation's distribution network. Germany has also reopened several coal-fired power stations to shore up supply, with Dutch TTF natural gas futures, a European benchmark, rising more than 400% over the past year.

Outlook: There are other big natural gas pipelines running from Russia to Europe, but flows have been gradually declining due to squabbles over ruble payments and reported interference by Russian forces. Some European countries are now looking to Norway for additional supplies, while southern nations are eyeing Azeri gas from the Trans Adriatic Pipeline to Italy and the Trans-Anatolian Natural Gas Pipeline via Turkey. Other ideas include boosting LNG imports, or increasing power generation from nuclear, hydropower, renewables or coal. (6 comments)

'Uber Files'

Uber (NYSE:UBER) is under fire following a massive trove of files that were leaked to The Guardian and shared with the International Consortium of Investigative Journalists. The stash consists of more than 124,000 records, including 83,000 emails and thousands of sensitive texts and documents that were exchanged between 2013 and 2017. According to the outlets, it shows how the ride-hailing app courted top politicians, and how far it went to avoid justice as it sought to establish itself in nearly 30 countries.

Snapshot: The company knowingly set up a "kill switch" to thwart regulators by cutting access to Uber servers and blocking authorities from grabbing evidence during raids. The switch was used in Canada, Belgium, Hungary, India, Romania and the Netherlands, and at least three times in France. Uber also channeled profits through Bermuda and other offshore tax havens, then "sought to deflect attention from its tax liabilities by helping authorities collect taxes from its drivers."

Meanwhile, many undisclosed meetings with high-level politicians were conducted to ask for favors. Uber recruited many former aides to President Barack Obama to drop probes, change policies on workers' rights, draft new taxi laws and even relax background checks on drivers. Over in France, the company weighed portraying violence against its drivers as a way to gain public sympathy, and found an ally in then-economy minister Emmanuel Macron, who told controversial founder Travis Kalanick that he would reform laws in the firm's favor.

Response: Calling it "one of the most infamous reckonings in the history of corporate America," Uber spokeswoman Jill Hazelbaker acknowledged past "mistakes" and "missteps," but said the firm has since transformed into a new entity. "When we say Uber is a different company today, we mean it literally: 90% of current Uber employees joined after Dara [Khosrowshahi] became CEO," she wrote in a statement. "We have not and will not make excuses for past behavior that is clearly not in line with our present values." (8 comments)

Today's Markets

In Asia, Japan +1.1%. Hong Kong -2.8%. China -1.3%. India -0.2%.
In Europe, at midday, London -0.6%. Paris -0.7%. Frankfurt -0.8%.
Futures at 6:20, Dow -0.5%. S&P -0.6%. Nasdaq -0.8%. Crude -2.3% to $102.30. Gold -0.5% to $1734. Bitcoin -3.7% to $20,538.
Ten-year Treasury Yield -3 bps to 3.07%

Today's Economic Calendar

1:00 PM Results of $43B, 3-Year Note Auction
2:00 PM Fed's Williams Speech

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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