Wednesday Morning Reads
Wednesday Morning Reads
- An Inverted Blowup
- Fiscal Support
- Renewed Demand for Treasurys
- Added $19.5 Trillion to Global Debt
- GameStop Extends Meteoric Surge
- They Found a Way to Limit Big Tech’s Power
- Wall Street Expects Near-Record iPhone Sales
- How to Pay for College
- Let Them Vote
- WTF Happened?
- Reflexivity Everywhere
When the Federal Open Market Committee ends its two-day meeting this afternoon, Fed Chair Jerome Powell is likely to assure investors that the central bank won't taper its asset purchases anytime soon. Recently, Powell repeated his "we're not thinking about thinking about" reducing QE or raising rates as the pandemic weighs on the U.S. economy. "When it does become appropriate to discuss specific dates" for tapering asset purchases, "we will let the world know," he said on Jan. 14 in an online Q&A.
Even as the population starts to get vaccinated for COVID-19, it will be months before it reaches the point of herd immunity. "The emphasis will be on, 'we're not out of the woods yet,'" Seth Carpenter, an economist at UBS and a former Fed economist told the AP. Powell will also be careful not to repeat then-chair Ben Bernanke's comments to Congress in 2013 - that the Fed was considering reducing bond purchases - which led to the infamous "taper tantrum." Investors, caught off-guard by the comments, pushed up longer-term interest rates.
Backdrop: The Fed is currently buying $80B of Treasury bonds and $40B in mortgage-backed securities each month to keep longer-term borrowing rates low. It has said it won't curb those purchases until "substantial further progress" has been made in achieving low unemployment and an inflation target of 2% a year. And with the shift to inflation target averaging, the central bank may let inflation run over 2% for a period of time.
Outlook: Jim O'Sullivan, an economist at TD Securities, expects Powell to "stress" that the Fed won't increase rates until inflation accelerates. "We expect him to emphasize that inflation will be key to when the Fed's 'exit' (from low rates) begins," he wrote, "and most Fed officials are skeptical that a few strong quarters for growth will suddenly lead to a meaningful pickup in the trend in inflation." The FOMC issues its statement at 2:00 p.m. ET, and Powell will take the podium a half-hour later. (9 comments)
The tech sector remains lit after earnings from Microsoft (MSFT) pushed Nasdaq futures up 0.5% overnight, though contracts linked to the Dow and S&P 500 fell back 0.4% and 0.2%, respectively. Azure revenue growth was up 50%, further reversing the platform's pre-pandemic deceleration, while fiscal Q2 beats and upside guidance sent shares up nearly 4% premarket. Intelligent Cloud revenue meanwhile totaled $14.6B (+23% Y/Y), adding to the optimism over a segment investors think is critical to the company's future success.
Apple - Quarterly sales are expected to cross $100B as demand for its products and services surged with more people working from home during the pandemic. Another key metric, Services revenue, is a key part of Apple's diversification strategy and has taken on outsized importance in recent years.
Facebook - Statistics like ad revenue growth and MAUs will be in the spotlight, as well as the effects of its recent moderation efforts. Critics have said the social network has failed to police hate speech and political violence, while others say it has taken censoring too far (think President Trump's suspension and the exodus to Telegram and Signal).
Tesla - The EV maker is set to post its sixth consecutive quarterly profit (and $10B in revenue) after joining the S&P 500. Investors will size up Tesla's performance at the end of a record-breaking year, as well as early guidance for 2021 amid a push by the Biden administration toward EVs. Among other possibilities are Gigafactory announcements, self-driving news and some surprises from Elon Musk.
Stats: Tesla's market capitalization drove past Facebook earlier this month following the Senate races in Georgia. The Democrat wins put more charge in the battery packs of the electric vehicle rally on expectations of heightened industry support. Tesla's market cap is now $837B vs. Facebook's $803B, while Apple is ways ahead at $2.4T. Along with other tech giants, the companies make up a significant percentage of the S&P 500 Index, so movement can be expected there as well.
After surging over 90% yesterday back to the $150 level, GameStop (NYSE:GME) got another boost from a well-known short-seller battler - Elon Musk. It only took a one-word tweet from the master troller, "Gamestonk," to propel GME shares another 46% to $217 in after-hours trading (the stock is up 1000% since Jan. 12) The Tesla (NASDAQ:TSLA) CEO has fought with the shorts for years over the future of the EV maker, but many were forced to admit defeat last year.
Backdrop: Citron Research's Andrew Left, the famed short-seller (or infamous, according to the retail bros), has a long history of opining on Tesla, shorting shares at least as early as in 2013. Left had a big turn of heart in October 2018, when he took a long position and said "the story has become too compelling to ignore," but just before the big run-up in 2020, he announced that Musk would even short the electric car maker at this level. "This is no longer about the technology, it has become the new Wall St casino," Left declared, though TSLA has surged another 400% since then.
Stats: Tesla had long been a favorite play for shorts, who controlled about 19% of shares at the start of 2020. About two-thirds of the positions were unwound over the course of the year after recording $40.1B in losses. In fact, the losses endured by Tesla shorts were more than the short losses for the next nine companies - combined. Meanwhile short interest of GameStop has held steady at a massive 140% of the float, leading to trouble for some hedge funds. Melvin Capital has required a $2.75B cash infusion from Citadel and Point72 to help it weather the losses from its GME short position (though fresh reports from CNBC suggest it may have closed its position).
After promising not to comment on GameStop after attacks from the "angry mob" (a.k.a. the "Wall Street Bets" Reddit forum), Citron's Andrew Left doubled down on his position. "If I had never been involved in GameStop and came to this right now, would I still be short this stock? 100 percent," Left told Reuters, adding that he "created this game, based on uncovering the truths, so I can't get mad at people for taking the other side." But as the retail bro army rallies the troops, he may be left holding the short end of the stick and nursing millions in losses. Will Musk and the r/wallstreetbets subreddit have the last laugh? (134 comments)
Starbucks (SBUX) COO Rosalind Brewer is taking the helm of Walgreens Boots Alliance (WBA), making her the only Black woman to lead a Fortune 500 company. She'll take the CEO spot from Stefano Pessina, who is shifting to the role of executive chairman. Shares of Walgreens are up nearly 7% premarket on the news, a big help for a stock that's down about 5% over the past year.
The drugstore chain has struggled during the pandemic as foot traffic dropped, particularly at its Boots stores in the U.K. Earlier this month, the company said that sales were picking up, but restated guidance for low-single digit earnings growth. While Walgreens has been cutting costs in some areas, shareholders are looking for new revenue steams. Rival CVS Health (NYSE:CVS) recently acquired health insurer Aetna and opened up Minute Clinics, but Walgreens has been playing catch-up in health services. Brewer also sits on the board of Amazon (NASDAQ:AMZN), which launched its own pharmacy business in November.
Quote from Roz: "The healthcare industry is constantly evolving, and I am excited to work alongside the entire WBA team as we deliver further innovation and positively impact the lives of millions of people around the world every day. This is especially true today as the company plays a crucial role in combatting the COVID-19 pandemic."
Thought bubble: Her departure from Starbucks comes as investors and activists push for more diversity in corporate America. Regulators have even joined in the effort, while Nasdaq (NASDAQ:NDAQ) has proposed changes that would promote greater racial and gender diversity on the boards of companies listed on its exchange. Walgreens currently trades on the Nasdaq. (26 comments)
Headlines out of Davos haven't been nearly as loud this year, given that the World Economic Forum went virtual due to the pandemic. The annual event usually sees the world's political and business leaders, plus the usual smattering of celebrities, gather at the Swiss Alpine resort. Collaboration on issues like COVID vaccines, job creation and climate change is dominating the summit, which centers around seven key themes: How to Save the Planet, Fairer Economies, Tech for Good, Society and Future of Work, Better Business, Healthy Futures and Beyond Geopolitics.
On that note, South Korea warned that inequality was not only worsening within countries, but also between nations, due to the economic fallout from COVID-19. As a result, President Moon Jae-in outlined plans for a "profit-sharing system in which the government provides strong incentives to companies that have prospered during the pandemic to share their profits with their hardest-hit peers." While South Korea's policy measures have already included massive fiscal stimulus, small businesses aid, job retention support and vouchers for low-income families, Moon is pledging to do more. "More wisdom will be needed to work out the details but if these initiatives can be realized they can become a benchmark for inclusive policies to be used in overcoming future pandemics together."
Thought bubble: Diverting corporate profits into the pockets of consumers could turn off many voters, who see it as a form of socialism and too radical. "Considering they were critical to the government's policy to increase public housing, I think they may take the profit-sharing scheme in the same way," said Park Sung-min, a senior political analyst and head of Min Consulting. While mandatory regulation may face strong backlash, voluntary schemes could be on the table, such as platform companies sharing profits with mom-and-pop stores by cutting fees.
Outlook: South Korea has garnered praised from the international community for its handling of the pandemic, specifically of its mass testing and contact tracing systems that were rapidly rolled out and have been sustained over the past year. Businesses have benefited from the lack of a nationwide lockdown, as well as strong demand for the country's tech exports amid global stay-at-home trends.
What else is happening...
Biden's climate change steps lift renewables again.
Hello Bitcoin, goodbye Intel: ARK Invest outlines 5 big ideas for '21.
In Asia, Japan +0.3%. Hong Kong -0.3%. China +0.1%. India -1.9%.
In Europe, at midday, London -0.7%. Paris -1%. Frankfurt -1.6%.
Futures at 6:20, Dow -0.2%. S&P -0.4%. Nasdaq +0.5%. Crude -0.2% to $52.56. Gold -0.7% at $1837.40. Bitcoin -3.9% to $30652.
Ten-year Treasury Yield -1 bps to 1.03%
Today's Economic Calendar
7:00 MBA Mortgage Applications
8:30 Durable Goods
10:00 State Street Investor Confidence Index
10:30 EIA Petroleum Inventories
11:00 Survey of Business Uncertainty
11:30 Results of $28B, 2-Year FRN Auction
2:00 PM FOMC Announcement
2:30 PM Chairman Press Conference