Thursday Morning Reads

Thursday Morning Reads

Morning Reads

  • The lost girls of Covid.
  • Wall Street loves China more than ever.
  • The pointless parable of Elizabeth Holmes.
  • What is the Planck time?
  • Saudi Arabia lowers oil prices for Asian buyers (USO, XLE, COMDX). Bloomberg
  • Italy mandates coronavirus vaccines for anyone 50 and older (PFE, BNTX, MRNA, JNJ, AZN, NVAX). NY Times
  • Starbucks (SBUX) workers in Buffalo store walk out over safety concerns. NPR
  • WarnerMedia (T) and Viacom (VIAC) mulling sale of CW network. WSJ
  • Airlines cancel another 1000 flights (UAL, AAL, DAL, JBLU, SAVE, HA, ALK, LUV). WSJ
  • Nike (NKE) files lawsuit against Lululemon (LULU) over patent infringement. WSJ












A new era of monetary policy is starting to hit investors in the face after previously estimating that any tightening would be limited and gradual. FOMC minutes released on Wednesday showed that officials were fully on board with a faster scale back of the central bank's asset purchase program, which would give it greater flexibility to raise interest rates and could happen as soon as March. Stocks tanked on the news, with the Nasdaq ending the day down more than 3% for the worst start to a calendar year since the financial crisis (more on that below).

Excerpt: "It may become warranted to increase the federal funds rate sooner or at a faster pace than participants had earlier anticipated. Some participants also noted that it could be appropriate to begin to reduce the size of the Federal Reserve's balance sheet relatively soon after beginning to raise the federal funds rate. Some participants judged that a less accommodative future stance of policy would likely be warranted and that the Committee should convey a strong commitment to address elevated inflation pressures."

The Fed is also going to be more aggressive in reducing its nearly $9T balance sheet, and while it didn't put a timetable on a runoff (that's when it shrinks holdings by allowing bonds to mature), many are estimating the tightening could happen as soon as the summer. "Participants judged that the appropriate timing of balance sheet runoff would likely be closer to that of policy rate liftoff than in the committee's previous experience... and could warrant a potentially faster pace of policy rate normalization." Some officials even said in the minutes that they preferred to "rely more on balance sheet reduction" and "less on increases in the policy rate" to avoid flattening the yield curve.

Whoops? "Participants remarked that inflation readings had been higher and were more persistent and widespread than previously anticipated. Some participants noted that trimmed mean measures of inflation had reached decade-high levels and that the percentage of product categories with substantial price increases continued to climb. While participants generally continued to anticipate that inflation would decline significantly over the course of 2022 as supply constraints eased, almost all stated that they had revised up their forecasts of inflation for 2022 notably, and many did so for 2023 as well."

Tech gets wrecked

With the Fed ready to aggressively dial back on pandemic-era easy policy, equities took a beating, especially high multiple tech stocks. Growth shares like Alphabet (GOOGGOOGL) and Meta (FB) ended the day down around 4%, while other names did a lot worse, like Okta (OKTA) and Salesforce (CRM), which closed the session about 8% lower. Piling on the pressure was a rise in U.S. Treasury yields, with the rate on the 2-year Treasury note - the maturity most sensitive to Fed policy expectations - shooting to its highest level since the pandemic began in March 2020.

Analyst commentary: "People expected rate hikes this year, and that was talked about, but I don’t think people were expecting the Fed to already be speaking about letting the balance sheet run off, even as soon as the first rate hike,” said Chris Zaccarelli, chief investment officer for Independent Advisor Alliance. "If you ride a wave of liquidity to the upside and that liquidity starts to go away, I don't think it's terribly surprising that you're going to see a reaction," added Kathy Jones, head of fixed income at Charles Schwab.

Even before the FOMC minutes and tech carnage, a rotation was being played out in the previous four sessions. For example, Goldman Sachs' hedge fund clients scooped up shares linked to airlines, energy and industrial names that benefit from the reopening trade and an improving economy. Value and cyclicals also outperformed despite benchmark indexes moving lower, with consumer goods and retailers like Walmart (WMT) and Walgreens (WBA) finishing the session in the green.

Next steps: Traders are hedging for volatility this year amid tighter Fed policy, supply chain problems and inflationary effects on corporate earnings. As remarked in Wall Street Breakfast's What To Expect In 2022, the current landscape can create different risks and opportunities. Besides the overall equity outlook, there are also individual pockets of the market that can benefit investors, like the rotation seen over the past few sessions.

Going radioactive

Operations of all financial institutions in Kazakhstan have been suspended, including banks and the stock exchange located in Almaty, as turmoil continues to escalate in the country. Dozens of people were killed this morning and 400 were hospitalized as authorities cracked down on protesters that were said to have stormed government buildings. At least a dozen police officers also died, including one who was found beheaded, while more than 350 were injured.

Snapshot: The protests began in the country's west but quickly spread to Almaty and the capital Nur-Sultan over a worsening energy crisis and rising fuel prices. Sentiment quickly shifted into anti-government riots, feeding off resentment of three decades of rule by ex-president Nursultan Nazarbayev. While hand-chosen successor Kassym-Jomart Tokayev stripped his powerful predecessor of the role as head of the country's security council earlier in the week, that has failed to quell the demonstrators' anger, with Nazarbayev still widely seen as the main political force in the country and believed to control much of the economy.

Following an internet blackout and airport capture, Russia sent in paratroopers under the Collective Security Treaty Organization, which also includes former Soviet states like Armenia, Belarus, Kazakhstan, Kyrgyzstan and Tajikistan. Kazakh President Kassym-Jomart Tokayev had appealed for the help, blaming foreign-trained "terrorist" gangs for the violence. The move marks the second action by the Kremlin in as many years to bolster an ally facing unrest, after supporting Belarusian leader Alexander Lukashenko in 2020.

On watch: Kazakhstan has the largest proven oil reserves in the Caspian Sea region and is a big crude exporter, but perhaps more important than global energy markets, the country accounts for around 40% of global uranium production. Stocks linked to the radioactive metal are climbing on the news as the situation goes from bad to worse. Shares of Cameco (NYSE:CCJ) is up 17% since the protests began, and is up another 4% premarket, while volumes of Sprott Physical Uranium Trust (OTCPK:SRUUF) has already eclipsed prior record highs.


Retailer margins are on watch this season as longer return windows and higher shipping costs can end up costing companies a lot more than usual. The pandemic has also shifted much of traditional commerce online, and those have return rates that are two to three times higher than sales at brick-and-mortar stores, according to Pete Madden of consulting firm AlixPartners. That's not all, with inflation and higher wages incurring higher costs for retailers to process returns than were seen in the past.

Some statistics: Products worth $112B-$114B could be returned to U.S. retailers after the holiday season, up from $100B in 2020 and $95B in 2019, according to a forecast from liquidation inventory company B-Stock Solutions. UPS (NYSE:UPS) also estimates it will handle more than 60M return packages from Nov. 14 through Jan. 22, a 10% increase from the previous year.

In fact, both UPS and FedEx (NYSE:FDX) are raising their average shipping rates by 5.9% across most services in 2022, which is the first time in eight years that either company has had annual increases above 4.9%. The National Retail Federation also found that 11% of total retail sales were returned in 2020 - up from the 8.1% in 2019 - and that about 1 in 5 e-commerce sales were returned with the apparel category leading the pack.

Go deeper: Looking to cut down on costs, some companies are turning to innovation. Last year, Gap (NYSE:GPS) bought Drapr, which enables customers to quickly create 3D avatars and virtually try on clothing. Saks Fifth Avenue and others also use algorithms that help customers find the right apparel based on a size they are in a different brand. While the shift online has also triggered a "return culture," it has also promoted more transactions and a new economy. "When customers know that they can get their money back just as easily as they can spend it, they'll shop with more confidence and spend more," said Sanaz Hajizadeh of Paypal-owned Happy Returns.

Today's Markets

In Asia, Japan -2.9%. Hong Kong +0.7%. China -0.3%. India -1%.
In Europe, at midday, London -0.7%. Paris -1.3%. Frankfurt -1.3%.
Futures at 6:20, Dow +0.3%. S&P +0.1%. Nasdaq -0.3%. Crude +1.3% at $78.86. Gold -1.4% at $1799.60. Bitcoin -7.3% at $42686.
Ten-year Treasury Yield +4 bps to 1.74%

Today's Economic Calendar

Auto Sales
7:30 Challenger Job-Cut Report
8:30 Goods and Services Trade
8:30 Initial Jobless Claims
10:00 Factory Orders
10:00 ISM Service Index
10:30 EIA Natural Gas Inventory
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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