Wall Street Breakfast

Author: bmotrader   |   Latest post: Wed, 3 Mar 2021, 9:17 AM


Powell On The Hill

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Get ready for Fed Chair Jerome Powell's semiannual monetary policy testimony before Congress, which will take on additional importance this time around as investors size up the recent run-up in bond yields. Powell will answer questions from the Senate Banking Committee today and appear before the House Financial Services Committee tomorrow. He's expected to reaffirm his commitment to an ultra-easy monetary policy, as well as the need for more fiscal stimulus, to support the economy as it emerges from the COVID-19 pandemic.

Backdrop: The Fed has run historically loose policy over the past year, lowering its benchmark borrowing rate to near zero and buying at least $120B of bonds each month (about 7% of GDP on an annualized basis). That's on top of a series of lending and liquidity programs implemented to battle the coronavirus crisis, while Congress has approved trillions of dollars in fiscal stimulus and could pass another $1.9T bill by the end of week. All the stimulus measures have helped boost expectations of faster U.S. growth and inflation, recently driving up government bond yields, particularly further out on the curve.

While the 2-year is unchanged for 2021, the 5-year has risen a quarter percentage point to 0.61%. The benchmark 10-year note has seen its yield jump 44 basis points to 1.37%, an area where it hasn't been since before the pandemic, while the 30-year rate has climbed 54 bps to 2.19%. ECB President Christine Lagarde even flagged the movement on Monday, saying she is "closely monitoring the evolution of longer-term nominal bond yields."

Balancing act: A series of disappointing weekly jobless claims and recent monthly jobs reports have pointed to a U.S. labor market that's still under considerable strain due to the pandemic. That may lead Powell to emphasize robust stimulus measures, which would be typically embraced by investors, but some are now painting the Fed's situation as caught between a rock and a hard place. If bond yields continue to rise in response, the Fed might be forced to tighten policy too quickly, while a complacent Fed could pose overheating risks that may destabilize the economy over the longer term.

Stocks - Nasdaq set to continue losing streak

The tech sector looks poised for another down day, fueled by fears about inflation and rising long-term interest rates. That could lower the present value of future earnings and undercut arguments for elevated valuations of high-growth tech stocks. The Nasdaq slumped 2.5% on Monday, while future contracts linked to the index fell another 1.5% overnight. In fact, the Nasdaq 100 has dropped 4.2% over the last five days, the longest consecutive streak of losses since Oct. 19.

Bigger picture: The rout weighed on some of best plays of 2020 as Peloton (PTON) plunged 10% on Monday, while DocuSign (DOCU) and Tesla (TSLA) tumbled 8.2% and 8.6%, respectively. The stay-at-home trade that boosted much of the tech sector may also be on the back foot given hopes of a return-to-normal due to a broader vaccine rollout. That's seeing more money flow into cyclicals, reflecting pent-up expectations for a reopening of the economy.

"Just because long-term rates are ultra-low on an historical basis, we do not believe that they will have to rise as far as most pundits think they do before they impact the stock market," Matt Maley, chief market strategist at Miller Tabak, wrote in a note. Others think the retreat is a bit overblown. "Definitely, yields are the big thing," said Randy Frederick, vice president of trading and derivatives at Schwab Center for financial research, but "when you are a tad off record highs, inflation scares or a storm could cause a pullback."

Other movement: Elsewhere, Bitcoin (BTC-USD) retreated below $50,000 after Treasury Secretary Janet Yellen called the crypto an "extremely inefficient way of conducting transactions." She also warned about its use in illicit activity and sounded the alarm about its impact on the environment (given the levels of electricity needed to produce new coins). That would be in contrast to a sovereign digital currency, for which Yellen signaled the Biden administration's support, as well as research into the viability of a digital dollar.

Media - News Down Under

Facebook (FB) has reached an agreement with the Australian government that will restore news pages in the country after the latter proposed amendments to a controversial media bill. The original law, if passed, would leave digital platforms on the hook for news content displayed in search results or feeds, meaning they would have to shell out cash to local media outlets and publishers for linking to their content. Google (GOOG, GOOGL) already agreed to pay for news, but Facebook appears to have held out for a better arrangement.

Under the amendments to the proposed bill, the Australian government will take into account commercial agreements that digital platforms have already made with local news media businesses before deciding if the code applies to the tech giants. The government will also give digital platforms one month's notice before reaching the final decision and would also include a two-month mediation period that grants the two sides more time to negotiate commercial deals before forcing them into final-offer arbitration.

Quote: "As a result of these changes, we can now work to further our investment in public interest journalism and restore news on Facebook for Australians in the coming days," Facebook regional managing director William Easton declared.

Go deeper: Microsoft (MSFT), which has previously pitched Bing after Google threatened its search engine Down Under, is joining EU publishers pushing for paid content laws. It's proposing regulations that "mandate payment" for news content by "gatekeepers that have dominant market power," which is a shot at Google and Facebook. The coalition would also support a form of arbitration and is looking at Australia's pending news payment legislation for guidance.

Mega SPAC deal could create Tesla rival

In the latest SPAC deal on the Street, electric vehicle maker Lucid Motors plans to go public at an $11.75B combined equity valuation and $24B pro-forma equity value through a reverse merger with Churchill Capital Corp IV (NYSE:CCIV). The latter is a blank-check company started by veteran investment banker Michael Klein.

Investors had eagerly awaited a possible Lucid/CCIV deal given that Lucid competes with Wall Street darling Tesla (NASDAQ:TSLA), whose stock has risen some 600% over the past 11 months. Former Tesla executive Bernard Tse co-founded Lucid in 2007. CCIV shares are off 35% premarket to $37 following news of the deal, after climbing as much as 279% intraday in recent weeks to $64.86 (from a $17.11 low on Jan. 21). Tesla is down another 6% to $670/share after touching $900 back in January.

What they're saying: Seeking Alpha contributors are giving Lucid mixed reviews. Columnist Long Term Tips recently called it "the best available investment in an EV manufacturer," while contributor Jaberwock Research described the automaker as "an interesting company, but not at the price that investors are paying right now."

Outlook: Lucid is set to deliver its first vehicle, a luxury sedan called the Air, this spring. The company sees the Air as a catalyst for a lineup of future all-electric vehicles, including an SUV starting production in early 2023 and more affordable vehicles down the line. The deal with Churchill Capital will also generate about $4.4B in cash for expansion plans for Lucid, including its current factory in Arizona.

Cherokee name change?

The principal chief of the Cherokee Nation wants Jeep to stop using the tribe’s name on its SUVs, and even held a video call with representatives from Stellantis (NYSE:STLA), the parent company of the Jeep brand since a merger of Fiat Chrysler and Peugeot. He was left with the impression that the representatives were of good faith and wanted to understand the concerns, but no commitments were made regarding the Jeep Cherokee name.

"Financial incentives, things of that nature, to me, don't remedy the underlying problem," Chuck Hoskin Jr. declared. "I think we're in a day and age in this country where it's time for both corporations and team sports to retire the use of Native American names, images and mascots from their products, team jerseys and sports in general. "I'm sure this comes from a place that is well-intended, but it does not honor us by having our name plastered on the side of a car."

Response from Jeep: "Our vehicle names have been carefully chosen and nurtured over the years to honor and celebrate Native American people for their nobility, prowess, and pride. We are, more than ever, committed to a respectful and open dialogue with Cherokee Nation Principal Chief Chuck Hoskin, Jr."

Some history: Jeep first used the Cherokee name in a 1974 two-door wagon, with one trim called Cherokee Chief. It has since built vehicles called Cherokee continuously, although from 2002 through 2013 the cars were known as the Liberty in North America. The Grand Cherokee is Jeep's best-selling vehicle, and the Cherokee is its third-biggest selling model (the two made up more than 40% of Jeep's total annual sales in 2020).

The criticism isn't limited to the auto industry. In fact, several companies and sports teams have stopped using brand names and logos that used ethnic stereotypes and caricatures over the past year. Those include Aunt Jemima, Uncle Ben's, Land O'Lakes and Eskimo Pie, as well as reviews of Mrs. Butterworth's and Cream of Wheat. Sports teams like the MLB's Cleveland Indians and the NFL's Washington Redskins also dropped Native American imagery and names from their franchises.

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