Newsletter - January 7, 2022
Oil / Commodities
- Oil is on track to a third weekly gain as the market tightened due to supply constraints across OPEC+ members following civil unrest. Futures in NY traded back up to $80 a barrel after climbing almost 6% over the past four sessions. Kazakhstan’s biggest oil producer has altered output at the Tengiz field following protests in the country, while Libyan supply has also crimped. The OPEC+ is unlikely to meet their threshold of adding 400,000 barrels a day starting February. A deep freeze in Canada and the Northern U.S. has also disrupted oil flows this week. That is coincided with shrinking American crude inventories, which have declined every week since November.
- EOG Resources, one of the U.S.’ biggest shale oil producers, is ready to ramp up output as soon as this summer if market demands it. The company plans to return to pre-COVID levels of production by mid-2022 if the conditions permit.
o https://www.bloomberg.com/news/articles/2022-01-06/shale-titan-eog-is-ready-to-boost-oil-output-if-market-wants-it?srnd=markets-vp
Tech
- Samsung’s quarterly profit climbed more than 50% after chip prices stabilized and sales of smartphones surged, reinforcing hopes the memory chip industry will emerge from its downturn this year. Samsung rivals SK Hynix and Micron Technology are weathering a cyclical downturn, helped by demand from servers as well as a widening array of products from car to home devices. Micron last month predicted record revenue for fiscal 2022 thanks to resilient demand from data centers, networking and auto customers. Investors are also monitoring Samsung’s operations in Xi’an, which have been closed as part of government restrictions imposed to curb infection spread rates. The short-term disruptions might dampen supply and lift chip prices. Analysts had projected the industry downturn to persist through 1H 2022 with double digit drops for both DRAM and NAND memory classes.
- GME plans to launch a NFT marketplace by the end of the year, sending its shares up in extended trading. The company is also working on an ongoing turnaround to focus on digital sales rather than brick-and-mortar shops. It is also discussing with partners to create a number of funds of up to $100 million each to invest in NFT content creators and gaming companies. The largest market for NFTs, OpenSea, has seen an explosion in sales this year with monthly sales volumes peaking at $3.4 billion in august, up from $96.7 million last February. For now, GME can leverage its stable base of millions of loyal gamer fans whom it can direct to its own NFT marketplace.
- Apple supplier TDK Corp. aims to double revenue from its lithium-ion battery business in five years by expanding application beyond smartphones and PCs. This includes scaling up product line up to larger packs for use in electric scooters, residential systems and cellular base stations. TDK’s largest subsidiary, Amperex Technology Limited has entered into a JV with CATL in April to develop mid-sized battery packs for e-scooters, industrial use and residential application. Expanding into new battery markets will not come at the cost of TDK’s existing small-device focus. The scale-up is essential to capturing fast growth in rechargeable battery adoption.
- The SPAC stock set to bring Donald Trump’s social media company public rallied along with other stocks tied to the former president after news his social media app is close to making its debut. The Truth Social network app is expected to be available starting February 21st according to the App Store. The DWAC stock surged 20%.
- Sonos gained in late trading after it won a U.S. trade agency ruling that will limit imports of Google products. The U.S. International Trade Commission issued the ban Thursday after affirming a judge’s findings that the devices were using Sonos’ patented inventions for home-audio systems without permission. Google has 60 days to implement pre-approved software changes to avoid the ban. The internet giant also must stop selling products that have already been imported that infringe the Sonos patents. Sonos has said its ultimate goal would be to have Google pay royalties. Sonos shares rose 5% in extended trading while Google has remained largely unchanged following the news. Google’s gadget sales which utilizes the related patents make up only a small fraction of its business, in which separate revenues are not disclosed. But Google has invested more heavily into phones and home speakers as a strategy to fortify its search and media services against threats from Apple and Amazon.
- Aircraft radar altimeters are meant to operate at frequencies between 4.2 and 4.4GHz, which should create a buffer of at least 300 MHz from levels that Verizon and AT&T will be using for 5G service in 2022. The problem is that some older altimeters may lack the latest transmission filters and pick up energy over a larger band. It may cost a few hundred million dollars to retrofit older aircrafts like mature regional planes, business jets and helicopters, which is not an insignificant amount of money but marginal compared with the $80 billion that telecom companies have paid for the C-Band.
o https://www.bloomberg.com/opinion/articles/2022-01-06/5g-moves-much-faster-than-the-aviation-industry?srnd=technology-vp
Electric Vehicles
- Rivian has closed at its lowest level since its IPO in November amid the prospect of growing competition within the EV market. The declines extend from Wednesday after Amazon announced a new partnership with Stellantis which also involves the purchase of electric delivery vans. While Amazon’s newest relationship with Stellantis is not seen as a deviation from its existing commitment to Rivian, it hurts the stock considering its high valuation that would require near-perfect execution of its growth plan. In December, the company had already revealed slower-than-expected ramp in production due to supply chain challenges. The company said it would fall a few hundred vehicles short of its full-year goal to produce 1,200 EVs in 2021. The company has acquired 71,000 reservations on the R1S and R1T to date, up from 55,400 at the end of October. Rivian also announced anew $5 billion plant in Georgia to support growth and long-term output.
- VW plans to unveil the ID.Buzz, an electric version of its iconic hippie-era microbus, on March 9th. VW plans to launch 27 new battery-powered models by the end of 2022 as part of its aggressive electrification plan.
- Honda’s JV in China will build an EV production plant in Wuhan to target the world’s largest car market to drive its EV expansion. The factory will begin operations in 2024, with annual production capacity of 120,000 vehicles. The 630,000 square feet facility will also use sustainable energy such as solar power and recycled water to reduce air pollution. Honda has committed to go all-electric by 2040, and plans to roll out 10 EVs within five years.
- Stellantis’ Chrysler will add SUVs to its line-up as it becomes fully electric by 2028. Large sedans and a fully electric minivan could also be in the works. The brand’s first EV is due 2025. Chrysler offered a glimpse of its product roadmap with an electric concept vehicle called the Chrysler Airflow at the CES Consumer Tech Show in Las Vegas Wednesday. The vehicle will deliver 350 to 400 miles of range on a single charge. The Airflow features a cockpit designed in collaboration with Foxconn, and a software system called STLA Brain, which will digitally sync the car with customers’ homes and workplaces. It will also include ADAS features. In addition to the traditional nuclear family, Chrysler aims to appeal to the younger consumer.
o https://www.bloomberg.com/news/articles/2022-01-06/minivan-pioneer-chrysler-expands-to-crossovers-with-ev-push?srnd=hyperdrive
Consumer / Retail
- P&G is the latest U.S. brand to expand its presence in the metaverse in a bid to attract new customers. The company has launched a new digital platform, BeautySPHERE, that features virtual tours of the U.K.’s Kew Gardens. P&G aims to teach consumers about the plants used in some Herbal Essences products. Other popular ad campaigns from the late 1970s have also been brought to life through BeautySPHERE to educate consumers about their products.
o https://www.bloomberg.com/news/articles/2022-01-06/p-g-targets-metaverse-in-search-for-future-potential-customers?srnd=technology-vp
China Market
- The City of Beijing and Henan province aim to expand their economies by above 5%, and 7%, respectively. That compares with pre-pandemic growth levels of 6.1% and 7% for the two regions in 2019. Beijing echoes stability as a top priority. China usually releases annual GDP target in March when the National People’s Congress meets. Economists expect the leaders to set a floor for economic growth at 5% for 2022 as the government tries to balance a desire to rein in the real-estate sector with the need for stability. With the national GDP target at about 5% representing a sizable drop from pre-pandemic growth rates of about 7%, the government might be persisting with its efforts to reduce reliance on real estate even at the cost of slower growth. Beijing projected its economy grew 8.5% in 2021, surpassing its target of above 6%.
- Tencent’s WeChat app managed remarkable growth in services from e-commerce to payments and search over the past year, defying a government crackdown that sought to tear down business barriers. Daily active users grew about 12.5% to 450 million in 2021. The app’s native search function added 200 MAUs over the past year. On Thursday, the company announced that WeChat has started accepting China’s digital yuan or e-CNY in its payment services, a major boost for the central bank-led initiative. Sales through nascent live-streaming commerce services also jumped 15x in 2021, peaking around the November Single’s Day shopping event. Live-streamed events also gained momentum.
- China’s tech stocks declined again on Wednesday as firms backed by Tencent came under pressure after it pared investment in the cohort for a second time in two weeks. Tencent-backed companies Bilibili, Meituan and JD.com were among the biggest losers. The company cut its stake in Sea Ltd. On Tuesday, selling $3 billion of shares, sparking concerns of similar actions at other firms amid Beijing’s regulatory crackdown. The company also announced plans last month to distribute more than $16 billion of JD.com’s shares as a one-time dividend. Tencent’s move is foreshadowing that the firm and its rivals may pare holdings as Beijing advocates against anti-competitive behaviour.
- Even Chinese investors are abandoning China megacap tech stocks. For the first time since 2018, shareholders from China were net sellers of Hong Kong stocks in 2H 2021. Tech was among the hardest hit in the period, led by Tencent and Meituan. Chinese investors accelerated their selling when Beijing stepped up its crackdown on the tech sector and the economy slowed further. Although Hong Kong stocks trade below book value and tech shares are 30% cheaper than their mainland peers, few traders are willing to call a bottom given an absence of a big group of would-be buyers. Uncertain policies remain the key driver for observed pullbacks.
o https://www.bloomberg.com/news/articles/2022-01-06/even-mainland-traders-are-dumping-china-mega-caps-tech-watch?srnd=technology-vp
Market Update
- U.S. futures edged higher as investor focus turned to upcoming data from the American labour market
- The U.S. benchmark was little changed after attempting to rebound from a near 2% drop Wednesday sparked by Federal Reserve meeting minutes signalling a more hawkish move by potentially raising rates earlier and faster than previously expected; the removal of pandemic-crisis-era accommodation marks a shift to volatility levels
- Investors are looking for signs that more Americans are returning to the work force and helping employers fill a near-record number of openings; Friday’s monthly jobs report from the Labour Department is currently forecast to show the U.S. added 405,000 private payrolls in December
- Oil climbed to a seven-week high on supply constraints to $79.98 a barrel
- S&P 500 futures rose 0.2%, while the S&P 500 closed little changed at 4,696.05
- Nasdaq 100 posted nominal declines of 0.04% to 15,765.36
- 10-year Treasury yield is at 1.71%
- Gold was flat at $1,791 an ounce
- Rate-induced selloff earlier this week in hyper-expensive tech shares is likely to have run its course according to Morgan Stanley. The bank had compared the latest carnage in tech to the five previous instances where rising Treasury yields sparked similar routs. In those, a basket of loftily valued tech companies tumbled a median 18% from peak to trough, which is at 15% right now for the latest episode. Hedge funds have been furiously unwinding concentrated positions in speculative software and internet names, leading to a steep drawdown observed in the past five years when rates spiked.
- Canada is experiencing inflation of about 5%, a level not seen since 2003. The BOC is now considering raising rates from 0.25% to at least 1.5% by the end of the year. However, it will be a delicate balancing act – raising rates too soon and too fast could inadvertently trigger a downturn at a time when the nation is going through another COVID spike with new lockdowns.
- A near-record number of tech stocks have plunged by some 50% in an echo of the dot-com crash. About 40% of companies on the Nasdaq Composite Index have seen half their market values diminish from their 52-week highs. Valuations are at historical highs as companies are raising billions on future promises while the Fed is signalling a tightening cycle. Tech stocks have been under pressure since the start of the year amid a bond-market selloff that has driven yields on 10-year Treasuries to 1.72%. The carnage worsened after minutes released from the Fed signalled faster and sooner rate hikes.
- U.S. top strategist Dennis DeBusschere says his single highest conviction call for 2022 is that inflation-adjusted bond yields will go up as the Federal Reserve raises rates and headwinds such as the omicron variant and pricing pressures start to fade. While higher rates might introduce risk to lofty valuations, corporate profits are expected to compensate for it and overcome a compression in PE multiples amid a strengthening economy. He predicts the S&P 500 to end this year at 5,040, with company profits growing to $225 a share, which represents a 7% gain from the index’s last close.
- Mizuho is urging investors to sell bloated U.S. bond portfolios on the risk that 10-year yields could climb to as high as 3%. Invesco Asset Management are expecting tech shares to come under more selling pressure. Fed’s December meeting minutes showed a consideration for earlier and faster rate hikes, and a runoff of its balance sheet. Equities slid around the world as a result, with high-priced tech shares absorbing the worst losses. Small cap companies could become targets for short sellers as funding stresses from higher U.S. interest rates mount, while others are aiming to buy the dip with anticipation for good growth in 2022.
o https://www.bloomberg.com/news/articles/2022-01-06/treasuries-at-3-sell-tech-traders-update-bets-on-hawkish-fed?srnd=technology-vp
Summary
- Micro observation – most growth stocks have rebounded slightly on Thursday after Wednesday’s momentous selloff
o Consumer Cyclical – Auto Manufacturers
§ Rivian continues to be the largest decliner, dropping another 3% yesterday, bringing the past week’s declines to about 15%
§ Recent news shows that competition within the EV sector is picking up fast in 2022, with both EV pure-plays and legacy automakers pushing out new models and aggressive electrification plans this year; this could cause pressure to some highly valued start-ups that require near-perfect execution on promises, guidance and growth plans to stay afloat amongst broader market declines
§ Increasing availability of EV choices will also foster greater adoption and signals that the transition is imminent and taking up shape fast. This could mean growing tailwinds for battery and charging infrastructure stocks, including MVST and EVGO in our portfolio. Meanwhile, downsides to consider include a potential supply crunch for battery materials, delays to regulatory decisions on charging price structures for EVs, and a delayed roll-out of volume public charging infrastructure.
o Broader tech observations
§ DWAC spiked 20% in late trading on news of upcoming launch of Donald Trump’s social media app in February according to Apple App store
§ Sonos spiked 5% in late trading after winning a case against Google on the latter’s infringement of its patents
§ GME jumped 30% in late trading after announcement of plans to open its own NFT market
- Macro
o Despite a slight rebound in equities on Thursday, investors continue to mull on impacts of potentially more aggressive policy tightening this year
o Upcoming release of U.S. Labour data on Friday will shed more light on whether more people are returning to the work force
- Questions to ponder:
o How can we take advantage of today’s updates on micro and macro updates?