Highlights

Wall Street Breakfast

Author: bmotrader   |   Latest post: Thu, 8 Apr 2021, 9:35 AM

 

Wall Street Breakfast: It's Looking Good

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Minutes from the last Fed meeting saw FOMC members point to a brighter outlook for the economy, while agreeing to provide continued support via near-zero interest rates and large monthly bond purchases. Several of them even noted that the recent $1.9T pandemic relief package could improve the position of small businesses slammed by the pandemic, boost consumer spending and contain long-term damage to the labor market. That builds on the latest hiring surge in March, as well as an unemployment drop and business reopenings.

Similar viewpoint: The outlook was echoed by Jamie Dimon, who estimated the coming economic boom could last until 2023. In his annual letter to shareholders on Wednesday, the JPMorgan CEO said strong consumer savings, huge deficit spending, more QE, expanded vaccine distribution and a $2.3T infrastructure plan could lead to a "Goldilocks moment" of fast, sustained growth alongside inflation and interest rates that drift slowly upward. The permanent effect of that growth will depend on the "quality, effectiveness, and sustainability of the infrastructure and other government investments," he added. "Spent wisely, it will create more economic opportunity for everyone."

Investors responded in kind, as the S&P 500 notched a fresh closing high of 4,079.95 on Wednesday. Stock index futures climbed further overnight, with contracts linked to the S&P 500 up another 0.4%, and the Dow and Nasdaq ahead by 0.2% and 0.8%, respectively. Further helping sentiment was a statement from the U.S. Treasury, which said Biden's tax proposals would generate about $2.5T over 15 years in an effort to pay for eight years of infrastructure spending.

On tap: Fed Chair Jay Powell speaks at an IMF event later today, where he is likely to share his views on the global recovery and monetary policy outlook. Investors will also be tracking the latest Labor Department update on the number of Americans filing for unemployment benefits for the first time. Economists expect the downward trend to continue given the rehiring across the economy, with first-time claims totaling 680K during the week ended April 3.

Legislation - Tax compromise

President Biden is willing to negotiate on the proposed corporate tax rate increase that's intended to help pay for his $2.3T infrastructure plan. "I'm willing to listen to that," he replied when asked if he'd consider a lower corporate tax rate than the 28% plan he's proposing (the current rate is 21%). Republicans have balked at the proposed level of spending, the plan's priorities and the tax increases, while some companies like Raytheon (RTX) are forecasting a big dent to their bottom lines if the package goes through in its current form.

Responding to the concerns, Biden defended the broad scope and size of the infrastructure plan. "The idea of infrastructure has always evolved to meet the aspirations of the American people and their needs," he declared. "And it is evolving again today." Besides such traditional infrastructure projects as fixing roads and bridges, the Biden plan includes broadband networks, childcare initiatives and raising wages for health care workers.

How to pay for it? Biden said there are "many other ways we can do it... I'm willing to negotiate that." Besides a corporate tax hike, the plan would gain funding from other measures, such as boosting the global minimum tax for multinational corporations and closing so-called offshoring loopholes. "Building the infrastructure of tomorrow requires major investments today," Biden continued. "The divisions of the moment shouldn't stop us from doing the right thing for the future."

Yellen weighs in... In an op-ed piece for the Wall Street Journal, the Treasury Secretary said the Tax Cut and Jobs Act of 2017 has led to the lowest corporate tax collections level since WWII, at 1% of GDP, and the TCJA didn't even encourage companies to relocate their operations to the U.S. Other countries responded by lowering their taxes as well, resulting in a "race to the bottom," and the TCJA made the first 10% of returns earned by foreign assets tax-exempt. Moreover, the legislation allowed corporations to bring their foreign profits back to the U.S. and pay the 21% rate or keep them anywhere else in the world, "where the U.S. will charge you around half that."

M&A - Twitter went clubbing

Shares of Twitter (TWTR) closed up another 3% on Wednesday and are up another 1.7% in premarket trade, amid talk about how to monetize its live-audio offering Spaces. That wasn't all. Bloomberg headlined a report that the company considered a $4B takeover of the audio-based social network Clubhouse. While those talks are no longer ongoing, and it's unclear why they stalled, it signals that Twitter is bullish on the potential for audio as a new way for users to interact on its app.

What's Clubhouse? The invitation-only platform is barely a year old but has drawn appearances from some of the biggest names in business and Hollywood. Listeners can tune in to hear interviews, panel discussions or ask to participate in live chats. Clubhouse's early traction has been impressive, but there are a lot of questions over its longevity, and it’s being cloned by many other platforms.

In fact, Twitter's own product called Spaces (very similar to Clubhouse) has gradually been rolled out over the past few months. It's already launched on iOS and Android, and the company plans to launch a web version and open hosting abilities up to all users this month. So why would Twitter enter M&A talks? It may be looking to gain a dedicated user base with a hot name at the same time as eliminating the competition.

Funny happenings: Unrelated social media influencer firm Clubhouse Media (OTCPK:CMGR), which trades on OTC markets, climbed 15% yesterday in response to the report. Similar occurrences of mistaken identity happened earlier this year, when traders responded to an Elon Musk tweet by pushing up the price of Signal Advance (OTCPK:SIGL). In 2020, the rising popularity of Zoom Video (ZM) also triggered a sharp rise in the stock price of Zoom Technologies, which then traded under "ZOOM." The SEC later suspended trading of the wireless product distributor, partly because of the widespread confusion, and it now trades under OTC ticker "ZTNO."

Trending - Hypersonic setback

The U.S. hypersonic missile program suffered a setback this week as a crucial test of the Air Force's AGM-183A Air-launched Rapid Response Weapon (ARRW) failed to launch from a B-52 bomber. While the new Lockheed Martin (NYSE:LMT)-built booster is expected to be ready for deployment in the next few years, this test was specifically aimed at demonstrating the ability of the ARRW to achieve hypersonic speed. To date, the Air Force has conducted seven ARRW "captive-carry" flights, in which the B-52H intentionally held onto the missile from takeoff to touchdown, though the most recent trial was supposed to be the first powered test.

What are hypersonic weapons? Missiles in development, like boost-glide missiles and air-breathing missiles, are being designed to evade missile defense systems while flying at Mach 5. The objective here is to travel at such a high velocity that makes them difficult to intercept or defend against. The U.S. is focusing on conventional hypersonic weapons that are based on ships, land and air platforms, with the eventual goal of getting missiles that can travel at 20x the speed of sound. So far, there have been some components tested at speeds near that.

China and Russia first began testing hypersonic weapons in 2014 and 2016, respectively, prompting the U.S. to ramp up its testing programs. China's DF-ZF has already been tested at least nine times since then, while Russia's hypersonic glide vehicle, known as Avangard, is equipped with nuclear warheads, according to the Congressional Research Service. Moscow even announced in December 2019 that it had activated Avangard aboard two SS-19s, the intercontinental ballistic missiles from which its hypersonic vehicle is launched.

Go deeper: Last year, former acting Navy Secretary Thomas Modly said hypersonic weapons "have already changed the nature of the battlespace, much as nuclear technology did in the last century." The Pentagon's FY2021 budget reflected as such, with requests for hypersonic-related research pegged at $3.2B, up from $2.6B a year earlier. The U.S. hopes to have hypersonic missiles ready for deployment in the next several years, with hypersonic defense capability a few years later.

Cryptocurrency - NFT risk

The debate over whether NFTs will have a lasting impact on the art market is still ongoing, but headlines are still being made by the man who stoked NFT mania. Anyone trying to profit from NFTs is "taking a huge risk," Vignesh Sundaresan announced in an interview, adding that "it's even crazier than investing in crypto." Sundaresan, also known by the online moniker MetaKovan, shelled out $69M last month for JPEG ownership and a hyperlink of Beeple's Everydays: The First 5,000 Days.

Waning sentiment can be seen in recent auctions. Average prices for NFTs tracked by NonFungible.com slumped almost 70% from a peak in February through early April. B.20, a token created by MetaKovan to allow "shared ownership of an open art project," has also fallen to around $5 from $23 since he won the Christie's auction for Everydays on March 11.

Why did he do it? "It's not primarily an investment," Sundaresan declared, saying his motivation was to support the NFT artist and showcase the technology. "I had this opportunity to be part of this very important shift in how art has been perceived for centuries," he added in another recent interview. To note, Sundaresan paid 42,000 Ether (ETH-USD) for the piece of art, which was probably worth a whole lot less when he first started investing in crypto in 2013.

Long-term outlook: Sundaresan described the technology as an continuing innovation that will permit a "new patronage movement" for artists and other content creators, though the hype around the highest-priced NFTs will likely fade. "I don't think NFTs will hold the same kind of hype forever around high-value items," he added. "The market will get divided. There will be very few high-value items and an infinite number of very low-valued items."

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