Wall Street Breakfast: King Dollar

king dollar

Check out the original Seeking Alpha show The bite of the weekend! This week we discuss recession warnings, what this earnings season means for the market and the macroeconomic implications of Russia’s continued invasion of Ukraine.

The greenback is at its highest level in two decades, climb another 1% Thursday at just under 104 in the U.S. dollar index, marking its highest level since 2002. The gauge measures the strength of the U.S. currency against a basket of other developed world currencies, including the euro , the yen, the Canadian dollar and the pound sterling. In fact, the greenback has advanced 7% year-to-date, outpacing many assets from stocks and bonds to gold and bitcoin.

Remark: “It’s clearly a world where the US dollar is king,” said Mingze Wu, Singapore forex trader at StoneX Group. “The dollar will continue to strengthen globally as long as the rest of the world does not follow the corresponding interest rate hikes.” The greenback is also getting a safe haven offer with Treasuries amid concerns about economic growth and a possible recession.

Speaking of growth, GDP in the United States shrank for the first time since the pandemic, contracting by 1.4% in the first quarter (vs +1.1% consensus and +6.9% in Q4). The surprise was exacerbated by a growing trade deficit reflecting supply chain issues, as well as falling private investment in inventory and falling government stimulus spending. The Fed is still likely to raise rates by 50 basis points next week amid strong domestic demand, although Treasury Secretary Janet Yellen has warned of further “significant negative shocks” that “will likely continue to mount.” challenge the economy”.

Growth vs inflation: Strength of the dollar is also the result of weaker comparative currencies. The euro has been in retreat due to the war in Ukraine, China’s severe COVID restrictions have led to a weaker yuan, and Japan’s enlargement policy and trade gap have dragged the yen down this year. “We’ve had two decades of the benefits of low inflation, but now central banks are trying to regain their inflation-fighting credibility,” noted Jordan Rochester, currency strategist at Nomura. “But the ECB is facing stagflation and will struggle to stay with the Fed, and the BOJ isn’t even coming to the party. With lower exposure to China and lower exposure to Ukraine, states States stand out as resilient.”

Technology industry

The tale of two tech giants hit the markets after Thursday’s close as Amazon (AMZN) and Apple (AAPL) announced their first-quarter results. Traders were unimpressed with the results (perhaps even spooked by them), sending shares of Amazon and Apple down 9% and 2.2%, respectively, in after-hours trading. Reports are also weighing on the Nasdaq after a big recovery session on Thursday, with futures pointing 1% less in front of the open. The tech-heavy index is even on course for its worst month since March 2020, down 9.5% before the last trading session in April.

Amazon: The e-commerce giant recorded its weakest ever revenue growth, registering only a 7.3% year-on-year expansion due to a drop in online shopping, inflation and blockchain problems. supply. Along with a $7.6 billion writedown of its stake in Rivian, the results led to the company’s first quarterly loss since 2015, with $3.8 billion in red ink (compared to a profit of 8.1 billion a year ago). One bright spot was the company’s cloud business, Amazon Web Services, although looking ahead, Amazon said it expects second-quarter revenue in the range of $116 billion to $121 billion. billion (vs. consensus of $125.1 billion) and CEO Andy Jassy commented on “unusual growth and challenges”. ”

Apple: The iPhone maker first got a boost after a sharp drop in profits, before CFO Luca Maestri announced supply chain issues could cost $4-8 billion in revenue in the third fiscal quarter. CEO Tim Cook also noted that Apple may recover some lost demand due to the lockdowns, but some could be lost forever. The Cupertino, Calif.-based company has consistently earned $1.52/share on $97.28 billion in revenue, bolstered iPhone strength and hit an all-time high in services, leading it increase its dividend by 5% and increase its buyback by $90 billion.

Remark: “Everyone is universally bearish [on Big tech stocks]”Said Brent Bracelin, technical analyst at Piper Sandler. “Usually when you have all the investors on one side of the boat, that’s usually when the boat turns around. There are probably more risks for the next two quarters around slight changes in the numbers, taking into account these growing global risks. But sentimentally, it’s hard to see how things can get more bearish from here.” (169 comments)

In smoke

A third of all cigarettes sold in the United States could be pulled from store shelves, under a nationwide ban proposed by the Biden administration. The measure, which targets menthol stoges and flavored cigars, would be the largest federal government action to reduce cigarette consumption since the FDA took regulatory control of the tobacco industry in 2009. “We know that the majority of smokers want to quit,” FDA Commissioner Dr. Robert Califf said. “Banning menthol in cigarettes will give them a better chance.”

Exceptions: The ban will not affect menthol e-cigarettes, while case-by-case exemptions could be applied to certain products such as heated tobacco devices or very low nicotine cigarettes.

The ban on menthol cigarettes would still target a product with more than $20 billion in annual sales in the United States. On guard are British American Tobacco (BTI), which owns Newport, the No. 1 menthol cigarette brand in the United States (along with Camel Crush), and Marlboro maker Altria (MO), which is the No. 2 seller of menthol cigarettes. About 12.5% ​​of adults in the United States, or 30.8 million people, were cigarette smokers in 2020, according to the CDC.

Go further: It would take at least two years for the final legislation to take effect, with the FDA needing public comment on the proposed rules and time to review them. Big tobacco companies have also indicated they may sue, which may push back the ban later. “We strongly believe there are more effective ways to reduce tobacco harm than banning menthol in cigarettes,” said Kingsley Wheaton, chief marketing officer at British American Tobacco. “The ban, at least historically, hasn’t worked,” added Altria CEO Billy Gifford. (142 comments)

Musk sells

In a series of SEC filings released last night, it was revealed that Elon Musk sold nearly $4 billion worth of Tesla (NASDAQ:TSLA) stock to fund his $44 billion deal to the privatization of Twitter (NYSE:TWTR). The sales took place on Tuesday and Wednesday, with blocks of shares selling at prices between $872 and $999 per share. “No further TSLA sales are expected after today,” Musk tweeted after the filings were made public (the 4.4 million shares sold equal 2.6% of his stake in Tesla).

Larger image: Musk promised to contribute $21 billion in equity for the Twitter deal, with the rest of the money coming from investment banks (after convincing them that Twitter was producing enough cash to pay off the debt). $13 billion in loans will be secured against Twitter, along with a $12.5 billion margin loan tied to his Tesla stock, making Musk the most indebted CEO in America. Since banks need a bigger cushion to borrow against high-beta stocks like Tesla, Musk will have to pledge about $65 billion in Tesla stock — about a quarter of his current total — for the loan, in more of the existing facilities.

“The pledging of shares by executives is considered a significant risk to corporate governance,” said Jun Frank, managing director of ISS Corporate Solutions. “If an executive with a large pledged ownership position fails to meet the margin call, it could lead to the sale of those shares, which can trigger a sharp drop in the share price. This exposes the shareholders at significant price risk due to an executive’s personal financing decisions.”

In terms of Tesla: Shares have already slipped 15% this week as investors fret over Musk’s stock sales and how much time he can allocate to Tesla while involved in Twitter operations and running SpaceX. At the end of last year, Musk also sold around 15.8 million shares of Tesla, worth around $16 billion, giving up 10% of his stake in the electric vehicle maker to help pay an $11 billion tax bill. News of ‘more Tesla sales’ helps stock rally this morning, with shares up 4% to $913 in premarket transactions. (35 comments)

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