Wednesday Morning Reads
- Inflation Unexpectedly Hits Record, Pressuring ECB
- Japanese Banks Sound Caution for Earnings As Omicron Highlights Bad Loan Risks
- Why Are Oil Prices So High and Will They Stay That Way?
- A Normal Supply Chain? It’s ‘Unlikely’ in 2022.
- Warehouse Space Is the Latest Thing Being Hoarded
- Consumers Are Pivoting
- Biggest Bonus Payday in Decade
- Elevated at End of Last Year
- Alphabet Stock Split
- Google Vanquished a Rival in Prague
- GM Earnings Rose Sharply in 2021
- Where Olympic Sponsor
- Cathie Wood’s True Believers
- A Year On
- Why Is Matt Damon Shilling for Crypto?
Google parent Alphabet (GOOG, GOOGL) reported a set of blockbuster earnings late Tuesday, but perhaps the more notable news was a rare 20-for-1 stock split that added to the wave of investor enthusiasm. It's only the second time the company has split its shares since going public in 2004, and while it doesn't really affect the fundamentals, the move will make the stock more affordable or easier to execute some options contracts. Shares of Alphabet soared over 10% premarket to regain $3,000 - a level last seen in November - though the split still needs to be approved at a shareholder meeting in July.
More on those results: Earnings rose by a third to $30.69 a share (compared to $22.30 per share a year ago), while revenue of $75B (32% Y/Y) came in more than $3.5B ahead of analyst expectations. The majority of sales came from Google advertising, which includes search, YouTube and the Google network, showing the resilience of advertising despite the pandemic. It also comes in the face of lawsuits and proposing legislation to curtail the tech giant's dominance, and antitrust lawsuits against its ad technology.
Besides advertising, CEO Sundar Pichai said that Alphabet's focus for 2022 will be on "evolving our knowledge and information productivity" and that investments in areas such as artificial intelligence "will be key" throughout the year. "We're deeply investing in AI, and applying that across the company, but particularly in the area of search," he said on an earnings call. Pichai also made his first public comment on Web 3.0, discussing the blockchain space and how the firm can add value to the development of the technology.
Earnings help: There were worries of a further market selloff last month as a bout of volatility plagued equities. Some strong Q4 reports may help counter that sentiment, especially as traders continue the ride through the Big Tech earnings week. Meta Platforms (FB), formerly known as Facebook, as well as Amazon (AMZN), will publish results in the coming sessions, and Nasdaq futures are pointing solidly in the green - with a 1.7% gain - ahead of the open.
America's national debt has topped $30T for the first time, according to the latest figures from the Treasury Department. The record amount of red ink and gloomy fiscal milestone are adding to worries about the long-term economic health of the country, which is grappling with red-hot inflation and a higher interest rate environment, which can make servicing the debt even more challenging. Other factors like an aging population, elevated healthcare costs, and a tax system that doesn't bring in enough revenue to cover spending are also worrying as the federal government kicks the can down the road.
Quote: "COVID exacerbated the problem. We had an emergency situation that required trillions in spending, but the structural problems we face fiscally existed long before the pandemic," said Michael Peterson, CEO of the Peterson Foundation, which promotes deficit reduction. "Our current fiscal posture is a result of many years of fiscal irresponsibility from both parties. The polarization of our government and, to some extent, our population, makes implementing solutions more difficult. If we don't get our fiscal house in order, all these other concerns like climate, inequality and national security will be made more difficult."
Long gone are the days of austerity conversations, the Tea Party movements or the balanced budget talk that made some political brownie points. Instead, discussions today have shifted to whether the passing of more trillion-dollar spending bills would be a net positive or negative for the overall U.S. economy. In fact, the U.S. has already returned to the record debt-to-GDP ratio last seen in the aftermath of World War II, leaving the nation with a debt burden so large that it would need to spend an amount larger than the entire annual economy in order to pay it off (the debt-to-GDP percentage totaled 125% in 2022).
How much is too much? There's no magic number or level for when a government's debt begins to hurt its economy. As long as interest rates stay relatively low and the U.S. can borrow cheaply, the country can handle a much heavier debt load than was once thought possible (and can even use those conditions to remain competitive on the international stage). However, the federal debt cannot grow faster than the economy indefinitely. Once confidence erodes in Treasuries or the dollar's reserve currency status is threatened, borrowing can get more expensive and servicing that debt would cancel any budgetary forecasts that were made in a previous lending environment.
WTI crude oil prices are continuing to advance at a rapid pace, climbing 8% over the last week and 18% since the start of the year. In fact, the energy industry is sitting at the top of the S&P's sector standings, with a 23% gain YTD compared to a 5.4% loss in the broader S&P 500. Oil and gas stocks also posted their best month in nearly a year in January, with crude prices at their highest level since October 2014 and analysts forecasting $100/bbl oil sooner or later.
Next catalyst? The 25th meeting of OPEC+ will convene today, which is typically held in the first week of each month. Officials will review member conformity of output commitments and look to adjust future production in relation to market forecasts for 2022. The group produces over 40% of global crude supply and has faced recent pressure from top consumers like the U.S. to pump more as demand recovers from the pandemic.
"While there is a consensus expectation that the group will maintain status quo and extend gradual production increases [of 400K barrels a day] through March, any comments around their longer-term view can trigger large swings in the market," explained Robbie Fraser of Schneider Electric. "Similarly, the actual production levels of different members relative to their target should be especially scrutinized in the coming months. Ultimately OPEC+ could again be challenged by individual members cheating [versus] quotas, something that is typically a major issue that the group has largely avoided during this round of cuts."
Also on watch: A report prepared by the OPEC+ Joint Technical Committee on Tuesday noted a number of risks that continue to linger over the oil market, including central bank policy to counter inflation, restraints on oil production capacity from underinvestment and geopolitical risks. Analysts are particularly eyeing Ukraine, where fears of a Russian invasion are growing as the country amasses more than 100,000 troops near the border. Russia is one of the world's largest oil and gas exporters, and a supply suspension, energy sanctions or retaliatory measures could quickly spiral out of control.
India is the latest major economy to embrace a CBDC, or central bank digital currency, announcing plans to launch a digital rupee starting in April. Not too many other details were given, like how it would work or look like, but it will be introduced "using blockchain and other technologies." As of December 2021, there were 87 countries - representing more than 90% of global GDP - exploring a CBDC, compared to only 35 countries in May 2020 (nine nations have fully launched a digital currency to date).
Quote: "Introduction of a central bank digital currency will give a boost, a big boost to the digital economy," Finance Minister Nirmala Sitharaman declared as she delivered the country's annual budget. "Digital currency will also lead to a more efficient and cheaper currency management system."
That's not all. India announced it would move swiftly toward legalizing and regulating decentralized crypto, with plans to impose a 30% tax on income from cryptocurrencies and non-fungible tokens. While the step will go some of the way in legitimizing the industry, it would put digital assets in the highest tax band, and losses from a sale could not be offset against other income. Recall in November when the Indian government released a string of bills to ensure regulation for digital asset trading, in addition to banning the use of cryptos as a means of payment.
Outlook: While the U.S. just published a long-awaited paper discussing the pros and cons of a potential CBDC, it remains far behind major economies in the release of a digital currency. China has taken the lead on that front and has been working on a digital version of the yuan since 2014. The country is even planning on promoting the digital renminbi at the upcoming Olympics in Beijing, where athletes and visiting spectators can use it to pay for food, transportation and other shopping needs.
In Asia, Japan +1.7%. Hong Kong closed. China closed. India +1.3%.
In Europe, at midday, London +0.8%. Paris +0.6%. Frankfurt +0.5%.
Futures at 6:20, Dow +0.2%. S&P +0.9%. Nasdaq +1.7%. Crude +0.2% $88.39. Gold +0.1% at $1802.70. Bitcoin +0.6% to $38,520.
Ten-year Treasury Yield -2 bps to 1.78%
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World's largest ETF sees most outflows in its nearly 30-year history.