Newsletter - February 10, 2022
Oil / Commodities
- Oil closed below $90 a barrel for a second ay as the possibility that a nuclear deal with Iran could bring relief to a tight market overshadowed a big drop in U.S. crude stockpiles. Futures in NY ended Wednesday’s session just 0.3% higher, paring earlier gains, as a flurry of diplomacy in Vienna has spurred renewed optimism of a breakthrough in the nuclear talks. A government report showed U.S. crude inventories fell to the lowest level since 2018 amid record demand, causing prices to jump shortly by 1.4% during Wednesday’s day session – U.S. crude stockpiles fell 4.76 million barrels according to the EIA report, while the four-week average for U.S. oil-product supplied, a gauge for demand, rose last week to a record high. With long-awaited supply relief expected around the corner, market sentiments are beginning to cool despite rising demand. The possibility of more Iranian oil comes as global supply has increasingly been unable to keep up with surging demand from economies emerging from the pandemic. OPEC+ is also struggling to meet its pledged output increase due to outages in Libya, while traders look to see how much the U.S. shale patch will lift output this year. meanwhile, France’s President Macron suggested the political tension over Ukraine could ease.
o https://www.bloomberg.com/news/articles/2022-02-08/oil-edges-higher-after-report-points-to-falling-u-s-stockpiles
Tech
- The biggest assembler of iPhones, Hon Hai, said component shortages that are plagued electronics production for more than a year are showing signs of easing, a potentially encouraging signal for manufacturers across industries. There will be a major improvement in parts shortages in the first quarter with overall supply constraints set to ease in the second half. A shortage of components, especially computer chips, has hurt production of everything from cars to smartphones as demand rose during the pandemic. TSMC and its peers have indicated chip supply will remain tight throughout 2022 and carmakers including Ford and Toyota have recently warned about an ongoing impact from the semiconductor crunch. Meanwhile, Hon Hai said power management chips are still in short supply. The company, which buys about $55 billion of chips a year, is striving to minimize the impact from supply chain challenges. The company expects first quarter revenues to be little changed compared with a year earlier. To outpace the omicron variant outbreak, Hon Hai has been racing to build up inventory to ensure supply security.
- Disney reported first quarter sales, earnings and streaming subscriber growth that handily beat analysts’ forecasts, giving a boost to a CEO who is finally out of the shadow of his predecessor. Earnings increased to $1.06 per share, well ahead of the 57 cent average of analysts’ estimates. Sales in the period ended January 1st increased to $21.8 billion, topping expectations. Disney’s parks generated $2.45 billion in operating income, compared with a loss a year earlier. Revenue from the resorts unit doubled from lows during the pandemic, helped by the introduction of new services such as Genie+, a system that allows guests to pay an extra fee to jump in shorter lines for rides. New subscriptions to Disney+ came in at 11.8 million, far above the 8.17 million that Wall Street had projected, with the total now approaching 130 million. Disney shares tumbled in November after the company announced subscriber numbers that fell short of consensus estimates, and Netflix’s dire outlook added to investor worries about streaming growth last month. The company said new technologies like using mobile phones for hotel check in and food ordering have reduced costs. It added that a return of live events and international customers should boost attendance going forward. Meanwhile, losses at the D2C unit widened to $593 million due to increases in programming, marketing and technology costs. Still, the subscriber additions, along with upbeat results from AT&T’s HBO Max business, are likely to ease investor concerns that the streaming business is slowing. Profit in Disney’s traditional TV units, including ESPN and ABC, fell 13% to $1.5 billion, with higher programming costs offsetting increased advertising and fees from cable TV distributors. Content sales, which includes films, reported a loss of $98 million with theatres still struggling and losses on pictures released outweighing revenue from home entertainment.
- Twilio addressed Wall Street’s concerns about its lack of profitability, removing a key shadow hanging over the software company as it ramps up competition with Salesforce.com and Adobe. The announcement that it would make money on an operating basis beginning next year, combined with a bullish sales forecast and fourth-quarter revenue that topped analysts’ estimates, sent shares almost 20% higher in extended trading Wednesday. Twilio has emerged from a dominant provider of B2C communications tools, powering messages such as the Uber notification you receive after ordering a ride, into an estimated $79 billion market for software to hep optimize customer experiences. With a slate of acquisitions to help supplement Twilio’s existing technology, the company is now positioned to compete against powerful rivals like Adobe and Salesforce. But bolstering the bottom line continues to be an issue for investors. Twilio said it expects to begin delivering non-GAAP operating profitability in 2023, signalling it will continue to thrive without the pandemic boom that helped accelerate sales as many software vendors. That outlook excludes the impact of any future acquisitions. The company is also expecting organic revenue to grow at 30% or more for the next three years. Sustained momentum in Twilio’s core business on higher usage and upsell at current customers, along with a still substantial opportunity for new logo wins could back gains of more than 30% in 2022. Still, its history of organic gains has been on a roller coaster. It increased 39% on an adjusted basis in Q4, roughly in line with the prior quarter, but still well below the high of 54% in the end of 2020. And in the current quarter, Twilio expects organic growth of as much as 34% yoy. Much of Wall Street’s optimism on Twilio’s future is centred on Segment, the customer data platform provider that Twilio purchased in 2020 for $3.2 billion. It was the company’s biggest acquisition to date and the most watched by investors. The addition of Segment is expected to enhance the bulk of Twilio’s product portfolio. It effectively functions as a repository of continually updated first-party customer information that businesses can use to improve marketing and support, with the ultimate goal of driving increased loyalty and higher sales. The timing of the deal was opportune, given Apple’s stricter data privacy restrictions and Google’s adjustment of how it uses web-tracking software. At the same time, the acquisition of Segment plunged Twilio deeper into competition with larger vendors like Adobe and Salesforce. The key difference between Twilio and its rivals is the ability for developers within businesses to more easily build customized programs on top of the company’s base tools.
- Western Digital and manufacturing partner Kioxia said that contamination of materials used in flash-memory chip production has hurt output at two factories in Japan. The two companies, whose partnership is one of the largest producers of the flash memory that provides storage in phones and computers, said they are working to get the plants back to normal operations soon. The announcement comes as another setback at a time when the global semiconductor supply chain has failed to keep up with a surge in demand, causing shortages that are hobbling industries across the economy. Flash memory is an essential component of many electronic devices, where it has replaced magnetic disks as the main storage of data. Everything from iPhones to EVs rand supercomputers relies on the chips. Analysts are estimating the situation to impact about 10% of the total market consumption in a quarter, causing flash memory prices to rise, adding fuel to the recent component price hike trend stemming from supply shortages.
- Zynga reported revenue that beat analysts’ estimates, reflecting a pickup in interest in mobile gaming as omicron forced new restrictions last year. The report comes just weeks after Zynga agreed to be acquired by Take-Two Interactive Software in a deal valued at $11 billion. Zynga’s strong mobile presence and recent $250 million acquisition of mobile game ad company Chartboost gives the company strong appeal at a time of increased attention on mobile gaming, the fastest-growing segment of the industry. The mobile games market brought in $93.2 billion in revenues in 2021, a 7.3% increase from 2020. The free-to-play business model Zynga’s games rely on promises repeatable income through in-game purchases of virtual goods.
- Uber rallied in late trading after fourth quarter revenue topped estimates and the ride-hailing giant reported the most active users in its history, easing fears about a disruption from COVID’s omicron variant. Revenues rose 83% to $5.8 billion in the period. That beat the $5.4 billion analysts had projected. The company sees mobility bouncing back from pandemic disruptions, noting gross bookings are up 25% in the most recent week from a month earlier. The shares jumped as much as 9.5% in extended trading. Like its rival Lyft, Uber’s progress toward reaching pre-pandemic ridership was thwarted by omicron, which kept people away from offices, schools and social events. The companies’ fortunes have ebbed and flowed along with COVID infection rates and restrictions, which affect demand for rides as well as meal deliveries. Lyft reported fewer riders than analysts expected in the fourth quarter, but also recorded its highest ever revenue per ride. Uber’s monthly active platform users reached an all-time high of 118 million. While Uber’s gross mobility bookings grew 67% from a year earlier to $11.3 billion, in line with analysts’ expectations, they are still about 16% lower than pre-COVID levels. The company offered a tempered forecast to account for an impact from omicron, projecting gross bookings of $25 billion to $6 billion in the first quarter. Analysts expected $27 billion. The pandemic fundamentally changed Uber’s business composition, forcing it to bolster its delivery unit when demand for rides plummeted. The company expanded offerings to include grocery, alcohol and convenience items, which have contributed to bookings in the delivery segment eclipsing mobility. The company reported its first quarter of profit on the basis of adjusted EBITDA in the previous period, reaching $25 million. A key challenge to a recovery for Lyft and Uber has been a shortage of drivers to meet customer demand. The imbalance has resulted in higher wait times and fares but that is improving according to Uber.
- British antitrust regulators have designated Amazon as a grocery retailer, subjecting the online retail giant to the same rules followed by U.K. supermarket chains such as Tesco. The Groceries Supply Code of Practice prohibits companies from making changes to supply contracts at short notice, and requires retailers to give appropriate period of notice if they no longer want to use a supplier and give reasons for ending contracts. It means that Amazon could now face a fine of as much as 1% of its U.K. revenue if it is deemed to have mistreated vendors. Amazon sells groceries online under its “Amazon Fresh” banner, as well as through a partnership with supermarket chain Wm Morrison Supermarkets. It has 15 Amazon Fresh stores and seven Whole Foods stores in Greater London, and has a minority stake in Deliveroo. To be governed by the rules, grocers must have annual sales of more than 1 billion pounds.
- Microsoft began to make the case in Washington for its purchase of game giant Activision Blizzard, laying out new data collection, competition and payment policies for its Xbox and Windows software stores that it says address regulators’ broader concerns about rival app stores. The company also pledged Wednesday to keep making COD games for Sony’s rival PS console even after its contractual commitment ends. Microsoft is commitment to be clear with regulators and the public that if the transaction is approved, they can count on Microsoft to adapt to the rules that are emerging and run the business in a responsible way. Microsoft has promised to not use any non-public data from the app store to compete with apps made by rival developers and to avoid unreasonable preferencing of its apps over others. Microsoft also said it would not require developers to use its payment system for in-app purchases, although that stipulation and a few others will not initially apply to the Xbox store. Microsoft said it plans to bring those rules to Xbox over time. The Activision acquisition would make Microsoft the third largest global gaming company. Microsoft has already made changes to lower the fees it collects on apps and last year said that app makers could use outside payment systems without paying a fee. The rule did not apply to video games though. The company had also released an earlier version of app store rules for its Microsoft Store on Windows in 2020. Microsoft and Apple have been engaged in a battle over rules that govern video game sales on the iPhone maker’s ubiquitous App Store. Microsoft stands against Apple’s close-walled rules and stands on Epic Games’ team in its court battle with Apple over app store fees.
- The plunging value of Meta Platforms brings a silver lining that exempts it from being subject to severe antitrust measures under consideration in the U.S. House. Meta Platforms was worth $599 billion on Tuesday after the stock took a tumble following its reports of slowing growth in DAUs for the first time. The decline temporarily bumped Meta Platforms out of an exclusive club of U.S. tech companies worth more than $600 billion. These companies are targeted by four antitrust bills in the U.S. House right now that would change the way the firms interact with competitors and threaten their core business models. But this week’s dip will not necessarily let Meta Platforms off the hook. The proposed legislation calls for the market cap threshold to take into account the company’s’ value at any point over the previous two years. A small rally Wednesday had already lifted Meta Platforms’ value to $629 billion. In addition to the market cap threshold, the company must have 50 million MAUs in the U.S. or 100,000 monthly business users. It must also be considered a critical trading partner – a criterion that companies have complained is too vague. A Senate companion bill was also introduced which sets a lower market cap threshold of $550 billion. an amendment adopted in January also adds consideration of an earnings criterion for non-public companies, intended to extend policies to cover firms like ByteDance. The bill would prohibit companies from giving preference to their own products over those of competitors that depend on their platforms to reach consumers.
o https://www.bloomberg.com/news/articles/2022-02-09/meta-stock-slide-puts-spotlight-on-tech-antitrust-bill-criteria?srnd=technology-vp
Electric Vehicles
- Valeo has agreed to acquire Siemens’ stake in their five-year-old EV components venture to bolster its position in the rapidly expanding EV market. The French company will acquire the 50% holding for 277 million euros in a deal that will raise its net debt by 741 million euros. The unit is expected to break even this year on a pre-tax cash flow basis and improve revenue and profit margins in the coming years. auto part makers are overhauling their operations to keep pace with an accelerating shift to EVs. Valeo and Siemens joined forces on Valeo Siemens eAutomotive GmbH in 2016 to make e-motors, axles and powertrain electronics for plug-in hybrids and fully electric vehicles. The market continues to grow strongly with annualized 17.5% growth estimated towards 2030, which would bring the market value to 92 billion euros. By the end of 2022, more than 90 EV models will be fitted with Valeo’s electric powertrain systems, motors, inverters or onboard chargers. Siemens said the sale of its stake would boost its profits by 200 million euros in the fiscal second quarter and solidify its shift away from equipment to software.
- Sales of ICE vehicles are still the overwhelming majority in the U.S. at 89% of total sales, but they are losing some market share. Hybrid plug-in and EVs accounted for 11% of total light duty vehicle sales in Q4 2021. Sales of several existing non-traditional models increased in 2021, but a large portion of the boost came from new offerings across different market segments, especially crossovers.
o https://www.bloomberg.com/news/articles/2022-02-09/evs-hybrids-make-further-inroads-in-u-s-vehicle-sales-chart?srnd=premium-asia
Consumer / Retail
- Snoop Dogg has acquired the Death Row Records brand from MNRK Music Group, a song publishing and recording company backed by PE firm Blackstone. The deal is expected to include Death Row’s entire music catalogue. During the early ‘90s, Death Row was home to several important West Coast hip hop artists, including Tupac, Dr. Dre, Shad “Lil Bow Wow” Moss, Nate Dogg and Snoop Dogg himself. Music catalogue deals have heated in the past year as mega starts have looked to cash in on their talent.
- Tickets to Sunday’s Super Bowl between the LA Rams and the Cincinnati Bengals are the most expensive on record at $7,542 on average. Even so, prices are down from an average of $8,257 per ticket on February 4th. The cost dropped after the SF 49ers, a franchise with a large and wealthy fan base, lost to the Rams in the NFC Championship game on January 30th. The current average price is more than double 2017’s end-of-season match-up and remains strong even after the winter surge of the pandemic’s omicron variant. The cheapest seats were just under $4,500 on Wednesday, the lowest sine the day the matchup was set.
- Mattel reported fourth quarter profit and sales that beat analysts’ estimates, buoyed by revenue from traditional toy brands such as Barbie and Polly Pocket. The shares rose as much as 11% in late trading. Mattel has beaten Wall Street estimates for six straight quarters leading up to Wednesday’s report. Mattel expects to keep gaining market share with its turnaround efforts. Long-term growth will be driven in part by the company’s entertainment and content strategy. The company highlighted ongoing partnerships with entertainment and video-game production companies such as Nintendo. Mattel is developing 14 films this year, alongside more dozens of TV series. The company scored a victory in January when it won back rights to the Disney Princess and Frozen product lines from Hasbro. The accord will potentially add $300 million to $400 million in annual revenue when related products go on sale beginning 2023.
o https://www.bloomberg.com/news/articles/2022-02-09/mattel-says-it-s-in-growth-mode-after-sales-beat-expectations?srnd=technology-vp
China Market
- China’s quant hedge funds are being told to curtail feels, the latest setback for an industry that is facing slower growth after outperforming global rivals last year. The Asset Management Association of China has since December been rejecting registration of products that allow managers to collect performance fees when strategies lose money. The restrictions may add to pressure on private quants’ income as asset expansion cools, stocks slump and market-beating returns become harder. Local funds with algorithm-based strategies are also facing intensifying competition as global rivals seek a bigger piece of their market. The new curbs on fees are meant to protect investors and would affect index-enhanced products, a mainstream strategy among quants. That is because some of those products link managers’ profits to so-called excess returns – gains relative to the market’s rise or fall.
o https://www.bloomberg.com/news/articles/2022-02-09/world-beating-china-quants-hit-with-fee-curbs-in-latest-blow?srnd=premium-asia
Market Update
- A higher-than-expected U.S. inflation print could push the Federal Reserve closer to considering its single largest rate hike in more than two decades. The January CPI due Thursday is one of the most important data releases before the central bank’s March meeting, which Chair Jerome Powell has signalled will kick off a series of interest rate hikes. A reading above the projected 7.2% annual advance in prices – which would be the largest since 1982 – may pressure the Fed to consider its first half-percentage point increase since 2000 instead of a typical quarter-point move. Paired with the unexpectedly strong January jobs report in which payrolls beat all estimates and wages jumped, traders are all more convinced that the Fed will be aggressive. Based on Fed funds futures, they now see a one-in-three chance of a 50 bps hike, up from one in five before the employment data. Critics have been saying the Fed has been too slow to act and is now behind the curve in tackling inflation, and a half-point move could be perceived as an admission that they are right. Excluding the volatile food and energy categories, core prices likely rose 5.9% in January from a year earlier, also the fastest in nearly four decades. Still there is a lot of ways the numbers could shake out – estimates range widely from a monthly advance of 0.2% to 0.8% in the core. Fed policy makers are projecting that inflation will moderate to 2.6% by the end of the year. but the recent broadening out of wage pressures could raise their concerns.
- Advance in U.S. stocks gathered pace as an easing in a Treasury selloff provided respite to markets whipsawed in recent weeks by concerns about tightening monetary policy
- The S7P 500 extended Tuesday’s broad-based rally, with tech stocks recovery about half of their losses this year
- Megacaps led the Nasdaq 100 higher, with dip-buying in Meta Platforms after a four-day slide that wiped out about a third of its market value
- Both S&P 500 and the Nasdaq 100 posted their biggest daily gains this month
- Disney and Uber gained in late trading after reporting results that beat analysts’ estimates
- 10-year Treasury yield retreated from levels last seen in 2019 and hit session lows around 1.91% after strong demand at auction of similar-maturity notes
- Investors continue to weigh still-robust earnings against worries about a rapid withdrawal of pandemic-era stimulus; about 76% of the 317 S7P 500 firms that have reported results beat earnings estimates with profits coming nearly 6% above projected levels
- Data this week on U.S. CPI is expected to stoke bets on more aggressive Federal Reserve lift off in March; bets on the pace of rate hikes have increased since the January Fed meeting, shifting to roughly five this year versus the three pencilled in in December
- S&P 500 rose 1.5% while the Nasdaq 100 rose 2.1%
- 10-year Treasury yield declined 2 bps to 1.94%
- WTI crude rose 0.7% to $90 a barrel
- Gold futures rose 0.3% to $1,833.50 an ounce
Summary
- Micro Observation – Stocks continued its rally on Wednesday alongside an easing in Treasury selloff that have lowered benchmark yields from levels last seen in 2019. Meta Platforms rebounded by more than 5% on Tuesday’s regular session, indicating strong dip-buying activity following a four-day decline on signs of slowing growth of active users. Upbeat results from Disney and Uber after market close Wednesday has also led to a surge in extended trading, foreshadowing a strong start to Thursday’s session. But the release of U.S. CPI data later Thursday could stir further volatility – estimates are now at 7.2% for January price increases, and anything greater than what is expected just might whipsaw the markets again.
- Macro
o Focus remains on the upcoming release of January inflation data, which is expected to remain elevated at 7.2%. This is expected to draw further urgency for the Federal Reserve to take action on reining in runaway inflation, stoking more investors’ angst across the broader equities market. Based on Fed funds futures, they now see a one-in-three chance of a 50 bps hike, up from one in five before the employment data. However, corporate earnings – especially growth forecasts – remain investors’ focus as it could be compensatory for the potential impacts of hastened withdrawal of pandemic-era stimulus.
o Oil - U.S. crude stockpiles fell 4.76 million barrels according to the EIA report released Wednesday, while the four-week average for U.S. oil-product supplied, a gauge for demand, rose last week to a record high. This has led to a brief jump in oil prices on Wednesday morning by 1.4%, but gains later paired to 0.3% as nuclear talks with Iran are showing progress. Oil steadied at around $90 a barrel, and we see a balance in supply and demand coming in soon if easing Ukraine tension and release of Iranian oil comes simultaneously.