Wednesday Morning Reads

Wednesday Morning Reads



Options -



Premium Morning Watchlist


Over the last 24 hours, the odds of an interest rate hike in New Zealand went from 100%, to 60% and eventually to no increase at all - following the discovery of a single coronavirus case linked to the Delta variant. The 25 bps hike anticipated by analysts would have signaled a milestone of sorts, with New Zealand becoming the first advanced economy in the world to lift rates since the pandemic. All of that came crashing down after a 58-year-old man in Auckland tested positive for COVID, triggering a Level 4 lockdown (can only leave home for essential services) and marking the country's first case in six months.

Background: New Zealand has implemented a "go hard, go early" strategy under Prime Minister Jacinda Ardern, with tough lockdowns and international borders remaining largely closed. Containment success has helped Ardern secure a second term in office, but her popularity recently took a hit due to a delayed vaccine rollout and rising costs (the country is heavily reliant on an immigrant workforce). Only about 20% of New Zealand's 5M people have been fully vaccinated, the slowest among OECD nations, leaving it vulnerable to another outbreak.

"Today's decision was made in the context of the Government's imposition of Level 4 COVID restrictions on activity across New Zealand," read a statement from the RBNZ. "The need to reinstate COVID-19 containment measures in some regions highlights the serious health and economic risks posed by the virus... and is a stark example of how unpredictable and disruptive the virus is proving to be."

Echoing the sentiment? "The COVID pandemic is still casting a shadow on economic activity. It is still very much with us. We can't, you know, we can't declare victory yet on that," Fed Chair Jerome Powell said at a virtual event on Tuesday. "We don't have a strong sense of how that might work out [with the Delta variant]. So we'll just be monitoring it." The commentary reflects just how sensitive monetary policy can be to coronavirus variants or change rapidly given predictions for a more sluggish economic recovery. (9 comments)

Laying cables

Under the sea... Facebook (NASDAQ:FB) and Google (GOOGGOOGL) are backing two new underwater projects - one in Africa and the other in Asia. The latest collaboration will give the Silicon Valley giants more control of the internet infrastructure that supports their businesses and meet the growing demand for broadband access and 5G wireless connectivity. More than 400 commercially operated submarine cables currently lie on the ocean floor, carrying data as pulses of light within thin optical fibers.

2Africa project: The effort in this region is part of a push to connect the approximately 3.5B people who are still without internet around the world. Facebook's user growth in developed markets like the U.S. and Europe is also slowing, giving it an advantage in Africa, which has an average mobile internet user rate of around 26% (compared to a world average of 51%). The project's plan calls for 35 landings across 26 countries, with the goal of building an underwater ring of fiber optic cables around Africa that would begin operating in 2023.

Apricot: Facebook and Google will also participate in a 7,500-mile-long underwater cable system in Asia that would connect Japan, Taiwan, Guam, the Philippines, Indonesia and Singapore. The initiative is scheduled to go live in 2024 and "will deliver much-needed internet capacity, redundancy, and reliability to expand connections in the Asia-Pacific region," said Facebook engineering manager Nico Roehrich.

Background: Silicon Valley has made a number of recent infrastructure moves into the subsea cable industry. In June, Google announced a new high-speed underwater cable between the U.S. and Argentina, dubbed Firmina, while Facebook and Amazon (AMZN) last week requested approval from the U.S. government for a new undersea data cable between the Philippines and California. In fact, Google now has investments in 18 subsea cables, with global investments in the underwater projects forecast to exceed $2B a year for the next several years.

It's a big business: Telecom operators own many of these cables, charging fees to companies that use them to transfer data. "If you build your own cable, and you own your capacity, you don't have to pay anybody," said Alan Mauldin, an analyst at telecom market research firm TeleGeography. The objective is similar to Amazon's air cargo fleet, which the e-commerce giant started in 2015 to reduce its transportation costs and reliance on third parties.


Tapering talk

Stocks slipped on Tuesday following a drop in retail sales, which fell 1.1% in June, driven largely by a slump in car sales. Earnings reports from Home Depot (HD) and Walmart (WMT) didn't help investing sentiment either amid flattening revenue growth and slowing e-commerce trends. The retail bonanza continues this morning with earnings from Target (TGT), Lowe's (LOW) and TJX Companies (TJX).

Fed minutes: Not a day goes by that there isn't some action, with the catalyst today being the Fed's most recent policy meeting. The minutes may show discussions about tapering monthly bond purchases, or just how divided FOMC officials are on the debate. Yesterday, Fed Chair Jerome Powell said the pandemic is "still casting a shadow on economic activity," and stock futures wavered around the flatline overnight as investors continued to size up the market.

The bulls: "We remain bullish on stocks (particularly cyclicals/value) thanks to a strong earnings season, signs of receding risk from the Delta variant and normalization of bond-equity correlation," wrote analysts at J.P. Morgan.

The bears: "The stock market is way overdue for a correction," said Jim Paulsen, chief investment strategist at Leuthold Group. "COVID cases continue to spike higher darkening economic reopenings, consumer data shockingly has collapsed recently - including consumer confidence last Friday and retail sales and homebuilders' sentiment. Several stocks have also stopped reacting positively to good earnings, inflation reports remain hot and Federal Reserve taper talk is everywhere."

Wood vs. Burry

It was only two days ago that Michael Burry, famously known for his role in The Big Shortrevealed that he made a big bet against Cathie Wood's ARK Innovation ETF (ARKK). The fund sits on over $22.5B in assets under management and a five-year return of 467%, but has been under fire recently. Since ARKK peaked back on Feb. 16, the ETF has steadily drifted down 27% and bled away outflows totaling $531.94M over the past three months.

The bet came in a 13F filing, which showed Burry's Scion Asset Management purchasing 2,355 put contracts on ARKK during the second quarter, representing a bet against 235,500 shares of the ETF. The filing also indicated that Scion held the put position as of at least June 30, though Burry won't have to report what he did with the stake until next quarter. The put contracts are a bet that ARKK will fall. They'll rise in value if the ETF's price drops.

Wood's response: "To his credit, Michael Burry made a great call based on fundamentals and recognized the calamity brewing in the housing/mortgage market. I do not believe that he understands the fundamentals that are creating explosive growth and investment opportunities in the innovation space."

From the SA comments section: "After his (Michael Burry) initial prediction on Tesla failed to materialize, Burry tried again in January 2021. Last month, Burry used Twitter to predict another 'mother of all crashes.' Burry who? Hollywood? He was correct 2 out of 20, better than his sheep," writes Legacy Legends. "Gee, it's too bad that four whole weeks have passed since Burry's predictions and they have not come to pass," responds Pompano Frog. "This guy is a genius. He has statistical work that measures the level of speculation going on and its correlation to future market movement. We have been through these cycles many times before." (92 comments)

Today's Markets

In Asia, Japan +0.6%. Hong Kong +0.5%. China +1.1%. India -0.3%.
In Europe, at midday, London -0.4%. Paris -0.4%. Frankfurt -0.2%.
Futures at 6:20, Dow -0.2%. S&P -0.1%. Nasdaq flat. Crude +0.7% at $67.02. Gold +0.1% at $1790. Bitcoin -3.2% at $45491.
Ten-year Treasury Yield flat at 1.27%

Today's Economic Calendar

7:00 MBA Mortgage Applications
8:30 Housing Starts
10:30 EIA Petroleum Inventories
1:00 PM Results of $17B, 20-Year Bond Auction
2:00 PM FOMC Minutes

Companies reporting earnings today »

What else is happening...

TSA extends mask mandate for U.S. transportation to mid-January.

Black swan preparation: Palantir (NYSE:PLTR) buys $50M in gold bars.

Walmart's (NYSE:WMT) powerhouse quarter fails to move the stock.

Home Depot (NYSE:HD) slips after comparable sales miss in Q2.

Tilray (NASDAQ:TLRY) scoops up MedMen debt, betting on U.S. legalization.

PG&E (NYSE:PCG) warns of preemptive power shutoff for wildfire season.

Texas Governor Greg Abbott tests positive for coronavirus.

Delta variant is linked to higher risk of hospitalizations - WHO.

Upcoming Apple (NASDAQ:AAPL) event ramps up new iPhone speculation.

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)