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Wall Street Breakfast: What Moved Markets

Apr. 02, 2022 10:23 AM ETAAPL, GOOGL, AMZN, TSLA, HTZ, HOOD, SCHW7 Comments
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The stock market eked out slight gains on Friday while the U.S. yield curve extended its recent flattening, after another strong employment report signaled that the Federal Reserve is likely to raise rates at least six more times this year. Investors appeared to largely shake off a recession signal from the bond market that was triggered when the two-year and 10-year Treasury yields inverted for the first time since 2019. Crude oil posted its biggest weekly loss in more than 10 years after the Biden administration ordered an unprecedented release of U.S. strategic reserves in an effort to tame surging prices at the pump. For the week, the S&P 500 squeaked out a slight gain while the Dow Jones edged slightly lower and the Nasdaq gained 0.6%, after the three benchmarks indexes closed the first negative quarter for stocks in two years.

Megacap splits

Apple (AAPL), Alphabet (GOOGL) and Amazon (AMZN) did it... Now, Tesla (TSLA) is doing it (again). Just two years after the electric vehicle maker divided its stock in a 5-for-1 split, it's seeking board and shareholder approval for a similar resolution. This time around, Tesla hopes to increase the number of authorized shares in order to enable a stock split, though it didn't disclose the ratio or potential timing (GameStop also tried to get in on the action this week).

Snapshot: Splitting a stock does not affect underlying fundamentals, but it could attract more investors by making shares more affordable for retail investors or those that don't want such a holding to be a large portion of their portfolios. In fact, BofA Global Research notes that splits are "historically bullish" for companies, with their shares marking average returns of 25% one year later versus 9% for the overall market. Tesla surged 8% on Monday, adding over $100B to its market cap, and is up 128% since the split in 2020, which boosted its valuation above the $1T level.

Tesla picked up general momentum recently with the opening of plants in Austin and Berlin, which are expected to put it on a path for an annualized production run rate of 2M vehicles by the end of the year. The company has also not seen the same level of supply chain disruption as some peers as it navigates its journey in the post-pandemic world. Meanwhile, Hertz (HTZ) has added Tesla's Model Y SUV to its electric vehicle rental fleet last week, according to a posting on the car rental firm's website.

For the haters: News of the split came as the company temporarily suspended production at Giga Shanghai due to COVID lockdown measures, while Elon Musk tweeted he "supposedly" tested positive for the virus but with almost no symptoms. Moreover, Tesla AI Chief Andrej Karpathy just embarked on a fourth-month sabbatical as the company attempts to achieve full self-driving capability and produce a humanoid robot prototype. "This [stock split] could further fuel the bubble in Tesla's stock that has been brewing over the past two years," said David Trainer, CEO of investment research firm New Constructs. (253 comments)

Recession risk

The yield on the 2-year Treasury briefly exceeded the 10-year on Tuesday for the first time since 2019, in a warning sign that coming Fed rate hikes may trigger a recession. The inversion happened at a level of about 2.39%, but only lasted several minutes before things returned to a 5 basis point spread (another episode happened later on Thursday). A short-lived inversion also occurred in the summer of 2019 amid the trade war with China, and while that was followed by the COVID downturn of 2020, the last persistent inversion of the Treasury curve occurred in 2006-2007.

What it means: Yield curves typically slope upward, so when short-term yields return more than longer-dated ones, it suggests there is reason to worry about the long-term outlook. It can also signal that the high levels of short-term yields are unlikely to be sustained as economic growth slows, which can have an impact on a range of asset prices. "Historically, a recession has not happened without an inversion," explained Ben Emons, global macro strategist with Medley Global Advisors. "So likely, it will be a predictor of a future recession. Timing, however, is unknown. It could take up to two years."

A series of inversions besides the closely-watched 2s/10s proxy have recently occurred as traders price in more and more rate hikes. 20-year yields topped 30-year yields last October, while the gap between 5-year and 30-year yields turned upside down on Monday. As the Fed embarks on a cycle of quantitative tightening, there are fears that it will reduce consumer spending and business activity as the central bank battles the highest inflation rates in a generation.

False alarm? "There's reason to believe that this time around, yield curve inversion may not be as good of an indicator as it has been in the past, particularly given the enormous amount of quantitative easing undertaken by global central banks," said Erin Browne, a fund manager at PIMCO. Moreover, Fed Chair Jerome Powell announced last week that he's paying more attention to the first 18 months of the yield curve rather than anything that goes on afterwards. The inversion could also be more of a blip than a lasting trend, and in fact, the curve steepened again towards the end of the week. (65 comments)

Trading 24/7

Shares of Robinhood (HOOD) spiked 24% on Tuesday as the company increased its extended trading session by four hours. Two hours were added to each side of its prior trading window, meaning customers will now be able to trade from 7:00 a.m. to 8:00 p.m. ET. Popular brokerages like TD Ameritrade (SCHW) already offer those hours, while other trading apps like Webull even feature a trading session that starts at 4 a.m. ET.

Bigger picture: The effort is part of Robinhood's vision to enable 24/7 investing, and will likely mean more trading volumes (and profits) for the company. It can also be advantageous to traders that employ momentum strategies or catalyst-driven trading. For example, outsized price movements during earnings season are typically seen before the opening bell or right after the close, when companies disclose their quarterly results.

"Our customers often tell us they're working or preoccupied during regular market hours, limiting their ability to invest on their own schedule or evaluate and react to important market news," Robinhood wrote in a blog post. "In fact, we’ve seen a community of Robinhood early birds and night owls who log in exclusively outside of regular market hours."

What happened until now? Crypto trades around the clock, and futures almost do as well, but when it comes to the U.S. stock market, many have felt that better price discovery happens when most Americans are awake. A shift to 24/7 trading would also make the lives of market makers, exchanges, brokers and financial professionals more complicated, and in many ways, they dictate the resources in the current trading environment. However, Robinhood has disrupted the market once before with commission-free trading, and it may now have the opportunity to do so again. (21 comments)

Tax the rich

President Biden this week laid out a $5.79T budget plan for the fiscal year starting Oct. 1, including a 20% minimum tax rate on U.S. households worth more than $100M, or the top 0.01% of Americans. Company executives would also be required to hold on to shares they receive for several years after a stock buyback, while the corporate tax rate would be raised from the current 21% to 28%. In 2020, there were fifty Fortune 500 companies that made profits of over $50B, but they didn't pay anything in federal taxes.

Quote: "For most Americans, the last few years have been very hard, stretching them to the breaking point, while billionaires and large corporations got richer than ever," Biden said in a statement. "Right now, billionaires pay an average of 8% on their total income, while a firefighter and a teacher pay double that tax rate. That's not right, that's not fair."

Billionaires make most of their money from capital gains, which are taxed at a lower rate than the paychecks that the majority of American workers bring home. The ultra-wealthy also rack up huge fortunes without ever selling their assets - or what is called unrealized capital gains - which aren't presently subject to income taxes. The new proposal would expand the tax code's definition of "income" by taxing unrealized capital gains, which could mean hefty tax bills for some of America's most prominent billionaires.

Examples: The ten richest people in the U.S., including Tesla's (TSLA) Elon Musk and Amazon's (AMZN) Jeff Bezos, would pay up to $215B in taxes on unrealized stock gains (they currently pay next to nothing). Last year, Musk slammed a similar proposal from Senate Finance Committee Chair Ron Wyden, tweeting, "eventually they run out of other people's money and then they come for you." The Biden administration further hopes Congress will enact a Global Minimum Tax, which was agreed to by 130 countries last year to "combat multinational companies from shipping jobs and recording profits overseas to avoid paying taxes at home." (438 comments)

Tapping more reserves

The White House on Thursday announced plans to release around 180M barrels of oil from the Strategic Petroleum Reserve, in what be the largest release from stockpile since it was created in 1975. WTI crude futures (CL1:COM) tumbled under $100 for its biggest weekly loss in two years, while Brent futures (CO1:COM) fell under $105 on the news. The SPR decision would see 1M barrels released daily over the course of six months, but analysts are still debating the benefits and whether it would put a dent in the inflationary forces seen in the current environment.

Commentary: "Stocks of strategic oil have a limit and flows of commercial oil do not. Flows that stop are a bigger problem than strategic stocks can solve over time," said Kevin Book, energy policy analyst at ClearView Energy Partners. "Historically, SPR releases have temporarily sent oil prices lower and are then followed by higher prices as the market prices in insufficient supply," added Josh Young, chief investment officer at Bison Interests. "It is likely that oil prices rise after an initial temporary pullback, and that the SPR may have to be refilled at even higher prices."

President Biden also called on Congress to pass "use it or lose it" legislation with regards to drilling on public land. Penalties would be applied to "make companies pay fees on wells from their leases that they haven’t used in years and on acres of public lands that they are hoarding without producing." According to data from AAA, the national average for a gallon of gas currently stands at $4.23 per gallon, down a penny from a week earlier, but up from $2.87 one year ago.

Some history: Washington has released oil from the SPR roughly two dozen times, but most of them have been on a small scale (around 1M barrels) and in the wake of local disasters or emergencies. Over the past six months, however, the Biden administration has coordinated two mega releases of 30M and 50M barrels, while the latest 180M would be a third. Prior to these, big drawdowns from the SPR were a rare event, only coming after supply disruptions during the Libyan civil war in 2011 and Hurricane Katrina in 2005. The SPR currently holds 568.3M barrels of oil, its lowest level since May 2002. (149 comments)

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Comments (7)

Branden is drowning in his failed left green energy and is grasping at straws and deflecting blame, going after the really rich just might drive his biggest cintributers away, the desperation is peaking with his peteroleum reserve gimmik, and its clear to see that branden and the administration does not want Ukrain to win the war but prolong it that is why he is slow walking military aid to the ukraianians the result is a flattend country instesd if having the might to drive the russians out the russians can stay atound to flatten the buildings and kill the people. branden is an ugly guy
value1m profile picture
Dont miss BBIG dividend and ssqueeze!

Ben Gee profile picture
If the rich do not pay tax, the poor surely can not pay.
@Ben Gee People who don't pay a tax, and worse see it as a source of income, always favor the tax and they always favor raising it on everybody else. The only fair tax is a flat tax with no deductibles; everybody pays it and there are no freeloaders.
@Ben Gee
obviously you do not know the tax situation in america yes the rich do pay their fair share taxes hows it going in canada
Ben Gee profile picture
@john boy Canadians pay a bigger part of their income than Americans.
But we get healthcare.
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