Wall Street Breakfast: What Moved Markets
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Wall Street Breakfast: What Moved Markets
Listen on the go! A daily podcast of Wall Street Breakfast will be available this morning on Seeking Alpha, iTunes, Stitcher and Spotify.
The S&P 500 on Friday posted another week of hefty losses, falling 3.29% for the five-day session. The benchmark index has now posted a three-week losing streak after a four-week run of gains. The markets are closed on Monday for the Labor Day holiday. Muted investor sentiment carried on from last week after the U.S. Federal Reserve Chair at the Jackson Hole symposium indicated that policymakers were committed to raising rates in order to combat inflation. A trend of good-news-is-bad-news trading also weighed on the S&P 500, as economic data released during the week supported the case for a hawkish Fed. Investors digested job openings data that exceeded consensus expectations, a retooled ADP report that showed less-than-expected jobs were added in August, jobless claims figures, a stronger-than-expected ISM manufacturing PMI readout and an unexpected increase in the unemployment rate. The S&P 500 along with the broader market also took a hit from semiconductor stocks which fell after the U.S. prohibited Nvidia from selling some of its products to China. Oil prices ended the week higher on expectations that OPEC+ will discuss output cuts at a meeting next week. Brent crude futures settled at $93.02 a barrel, while U.S. West Texas Intermediate crude futures settled at $86.87 a barrel. Read Seeking Alpha's Catalyst Watch for a preview of some the big events scheduled for the week ahead.
As the fallout from Jackson Hole rippled through markets this week, investors had their eyes on more drama stemming from the central bank. The Federal Reserve began to raise the throttle of its quantitative tightening (QT) program by picking up the pace at which it unwinds its balance sheet. The move is a stark reversal of pandemic-era bond buying, which saw the central bank nearly double its balance sheet to nearly $9T from $4.2T over the past two years.
Bigger picture: Unlike the large rate hikes being broadcast by the Fed - which have been quick to capture investor attention - QT is a more opaque way of tightening financial conditions. Note that the central bank is not selling its Treasury holdings outright, but is rather letting them mature to shrink its balance sheet. After an initial few months at a slower pace, monthly caps for offloading Treasuries and mortgage-backed securities are set to double to $60B and $35B, respectively, compared to the peak combined rate of $50B the last time the Fed trimmed its balance sheet in 2017-2019.
The whole thing is somewhat of a complicated accounting process, involving settlement windows and redemption caps, but at a basic level, it ultimately reduces the supply of bank reserves and drains money from the financial system. Some safety valves have been implemented this time around, like the Standing Repo Facility, after chaos in the repo market prompted an early end to the last QT program in 2019. The new facility will allow primary dealers to borrow more reserves from the Fed against high-quality collateral, but some caution it might not be enough to stave off liquidity issues, and could complicate Chair Powell's plan to raise rates and bring inflation under control.
Commentary: "I don't think there is appreciation for QT, by markets or the Fed," said Solomon Tadesse, head of quantitative equities strategies North America at Societe Generale. "In the end, if QE mattered, so will QT. It might not be totally symmetrical, but there will be a meaningful impact." (9 comments)
Weeks after 'Big Short' investor Michael Burry said the "market silliness" is back, famed fund manager Jeremy Grantham issued a warning to "prepare for an epic finale" to the market cycle. He argued that the current "superbubble" in asset prices hasn't deflated yet and appears to be dangerously close to its "final act." Some have compared Grantham and Burry to "a broken clock" that is right twice a day, especially since they have been issuing "superbubble" warnings since the pandemic began, but the two have made serious money off bubbles in Japan in the late 1980s, the dot-com era and the U.S. housing market crash in 2008.
Quote: "One of those features is the bear-market rally after the initial derating stage of the decline but before the economy has clearly begun to deteriorate, as it always has when superbubbles burst," Grantham wrote in the fresh research note. "This, in all three previous cases, recovered over half the market's initial losses, luring unwary investors back just in time for the market to turn down again, only more viciously, and the economy to weaken. This summer's rally has so far perfectly fit the pattern."
"My bet is that we're going to have a fairly tough time of it economically and financially before this is washed through the system. What I don't know is: Does that get out of hand like it did in the '30s, is it pretty well contained as it was in 2000, or is it somewhere in the middle? The U.S. stock market remains very expensive and an increase in inflation like the one this year has always hurt multiples, although more slowly than normal this time. But now the fundamentals have also started to deteriorate enormously and surprisingly: Between COVID in China, war in Europe, food and energy crises, record fiscal tightening, and more, the outlook is far grimmer than could have been foreseen in January."
Outlook: Despite the warnings, an aggressive Fed tightening cycle and worries about the economy, most American retirement savers haven't made changes to their portfolios. Only 5% of 401(k) and 403(b) investors shifted their asset allocations during the second quarter, according to Fidelity Investments, and the majority of those investors only made one switch to more conservative assets. Set it and forget it? Don't time the market? (167 comments)
1 in 6 Americans are smoking marijuana these days, a new high in the latest Gallup poll, which painted how the times are rapidly changing. Only 1 in 8 Americans were toking last year, and that drops down to 7% of the population when going back to 2013. The trend has picked up as recreational use of cannabis becomes legal in nearly half of all U.S. states (with 38 states approving it for medical purposes), supported by shifting attitudes and cultural trends of the American public.
Putting it in perspective: Nearly a third of adult respondents under the age of 35 told Gallup that they smoke marijuana, while nearly half (a total of 48%) of Americans have tried pot at some point in their lifetime. That's up from 4% of the U.S. population that took a hit during the height of the hippie movement in 1969, 24% by 1977, 33% in 1985 and 38% in 2013. Another interesting find is that regular cannabis usage has surpassed cigarette use for the first time, with only 11% of Americans saying they smoke stoges in the poll conducted in July.
"The future of marijuana use is, I would say, somewhat up in the air, but the probability is higher that its use will increase rather than decrease," wrote Gallup Senior Scientist Dr. Frank Newport. "Those who have tried marijuana are particularly likely to say marijuana has positive effects, and the majority of Americans are not convinced that marijuana use is harmful either for its users or for society. In contrast, it should be noted, some authorities argue that marijuana is quite dangerous, particularly for young adults, and it is possible that attitudes toward its use could change if focus on the downsides of marijuana increases in the years ahead."
Legislative front: While Congress is looking to advance cannabis legislation at the federal level, there are still some strong headwinds to the measures being pitched on Capitol Hill. In July, the Cannabis Administration and Opportunity Act was introduced in the Senate to remove marijuana from the list of Schedule I controlled substances, but there are slim odds that the bill will pass. Back in April, the House also passed the Marijuana Opportunity Reinvestment and Expungement Act - which would erase prior marijuana convictions and conduct resentencing hearings - though the measure still needs approval in the Senate. (431 comments)
The shorts appear to be winning the recent battle at Bed Bath & Beyond (BBBY). A drubbing on Wednesday means investors can now buy the stock with the company's famous "20% off" coupon, and things didn't fare better the rest of week, with BBBY sliding to the $8 level. Shares were already deflating after meme mania pushed them up to the $23 range in mid-August, but they have shaved off nearly $1B in market value over the past two weeks.
The latest: Bed Bath unveiled a plan to reduce a third of its in-house home goods brands and cut 20% of jobs across corporate and the supply chain. It also announced commitments for more than $500M of new financing, while potentially raising capital by selling as many as 12M new shares. Following a strategic review, it will retain the buybuy BABY banner, but the company will shutter 150 "lower-producing" locations.
"While there is much work ahead, our road map is clear and we're confident that the significant changes we’ve announced today will have a positive impact on our performance,” said interim chief executive Sue Gove, after years of competition from the likes of Target (TGT) and Amazon (AMZN).
Burning through cash: Many of Bed Bath's efforts are aimed at steadying its balance sheet, which ended May with around $100M, compared to $1.1B a year earlier. The retailer also predicts it used up another $325M in cash during Q2, which is closer to the amount analysts forecast the company would use over two quarters. It also means the cash burn over the last half a year was north of $800M, not a great sign especially when BBBY's market cap is now around $760M. (76 comments)
Longtime Starbucks (SBUX) CEO Howard Schultz is passing over the reins again after returning as the head of the company for the third time in April. Schultz was previously CEO from 1986 to 2000, when his specialty coffee shop called Il Giornale merged with Starbucks (and eventually went public), and from 2008 to 2017, when he succeeded Jim Donald during the financial crisis. His latest stint followed the retirement of Kevin Johnson, though it was an interim position until a new CEO was found.
The new face of Starbucks: Hailing from consumer goods giant Reckitt Benckiser (OTCPK:RBGPF), Laxman Narasimhan will join Starbucks on October 1. The 55-year-old is credited for navigating the Lysol and Durex maker through the pandemic, and revitalizing the company following a sales slump that even led to a raise in annual guidance earlier this year. His move to Starbucks will be somewhat of a long onboarding process, with Narasimhan relocating from London to the Seattle area to work closely with Schultz, before assuming the CEO role and taking the helm in April 2023.
"Laxman is a strategic and transformational leader with deep experience in building powerful consumer brands," Schultz wrote in a letter to employees. "He is uniquely positioned to shape this work and lead the company forward with his partner-centered approach and demonstrated track record of building capabilities and driving growth in both mature and emerging markets."
Outlook: During the six-month onboarding process, Narasimhan will specifically dive into Starbucks' "Reinvention" program, which includes better pay for baristas and reimaging stores and the customer experience. Over the past year, more than 200 Starbucks stores in the U.S. have been unionized, with workers pushing for better benefits, wages and welfare. The cost of ingredients and labor is also surging along with inflation, while China's zero-COVID strategy has slowed business in one of the chain's largest overseas market. (44 comments)
U.S. Indices
Dow -3.% to 31,318. S&P 500 -3.3% to 3,924. Nasdaq -4.2% to 11,631. Russell 2000 -4.8% to 1,808. CBOE Volatility Index -0.4% to 25.47.
S&P 500 Sectors
Consumer Staples -2.4%. Utilities -1.6%. Financials -2.5%. Telecom -2.4%. Healthcare -1.8%. Industrials -3.6%. Information Technology -5.%. Materials -5.%. Energy -3.3%. Consumer Discretionary -2.7%.
World Indices
London -2.% to 7,281. France -1.7% to 6,168. Germany +0.6% to 13,050. Japan -3.5% to 27,651. China -1.5% to 3,186. Hong Kong -3.6% to 19,452. India -0.1% to 58,803.
Commodities and Bonds
Crude Oil WTI -6.2% to $87.25/bbl. Gold -1.6% to $1,722.6/oz. Natural Gas -4.2% to 8.902. Ten-Year Bond Yield -0.2 bps to 3.195.
Forex and Cryptos
EUR/USD -0.06%. USD/JPY +1.96%. GBP/USD -1.99%. Bitcoin -0.5%. Litecoin +15.6%. Ethereum +4.9%. XRP -1.8%.
Top S&P 500 Gainers
DXC Technology (DXC) +13%. Cardinal Health (CAH) +5%. Bath & Body Works (BBWI) +4%. Ulta Beauty (ULTA) +3%. Dollar General (DG) +3%.
Top S&P 500 Losers
NVIDIA (NVDA) -16%. PVH (PVH) -15%. Seagate Technology Holdings (STX) -12%. Catalent (CTLT) -12%. Freeport-McMoRan (FCX) -12%.
Where will the markets be headed next week? Current trends and ideas? Add your thoughts to the comments section.
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Comments (6)
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2. Probably anybody in the market needs to smoke some marijuana with everything getting whacked including bonds. Too bad cannabis companies cannot make money like regular drug dealers, maybe paying CEOs that don't know how to make money too much and or getting high on their own supply.
3. Apes should learn their lesson, don't buy doo doo just because other apes are buying doo doo. BBBY will gladly sell more and more stock to dumb apes so it has more cash to burn and stay afloat in the bathtub, management will always get paid no matter what.
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