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Wall Street Breakfast: Dire Straits

Aug. 02, 2022 7:36 AM ET133 Comments
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Dire straits

U.S. House Speaker Nancy Pelosi is expected to land in Taiwan at 10:20 a.m. ET, defying Chinese authorities who have warned of consequences if the trip takes place. The White House has sought to distance itself from the visit, saying it cannot control another branch of government, but it is yet another headache for the administration, which already faces a midnight court deadline to defend $350B of Trump-era tariffs on China. While the U.S. has emphasized the trip does not signal a change in its 'One China' policy, Beijing has warned that its militarily will "never sit idly by" and "whoever plays with fire will get burnt."

Backdrop: The last high-ranking U.S. official to visit Taiwan was then-speaker Newt Gingrich in 1997, which occurred in the aftermath of the Third Taiwan Strait Crisis and the island's first democratic presidential election in 1996. At the time, the Clinton administration responded to the Chinese military buildup in the Fujian province by sailing all of its most powerful weapons through the Strait of Taiwan and staging the biggest display of American military might in Asia since the Vietnam War. China backed down in response, but a lot has changed in recent decades with a more powerful Chinese military and a new zeal to "reunite" Taiwan with the mainland under President Xi Jinping.

Rising risk aversion prompted markets to slide overnight in the Asia-Pacific, with some of the sharpest falls seen in Hong Kong (-2.4%), China (-2.3%) and Taiwan (-1.6%). U.S. stock index futures are also in the red, while the unease was most apparent in U.S. Treasuries as the 10-year yield slipped as much as 9 basis points to 2.51%. Taiwan Semiconductor Manufacturing (NYSE:TSM) - which is the island's flagship company and the world's largest manufacturer of semiconductor chips - will also be on the radar during the session as analysts debate the repercussions from Pelosi's visit.

Best case scenario: The saber-rattling continues and the armed responses are restricted to military flexing. Chinese warplanes could fly close to Taiwan's air defense identification zone, or naval activities could be conducted near the median line that divides the strait. Reactive measures could also be limited to the test-firing of missiles into the sea, while economic retaliation is on the table.

Worst case scenario: President Xi cannot afford to look weak amid slowing growth and a deflating property bubble, and it is indeed dangerous when autocrats feel that they are beginning to lose power. The People's Liberation Army could send warplanes over Taiwan, prompting the island to decide whether to shoot them down. America and its allies in the region would likely be drawn into the conflict militarily, sparking further global turmoil following the U.S. withdrawal from Afghanistan and Russia's invasion of Ukraine. (29 comments)

Energized profits

Earnings from the oil majors continue to roll in after Chevron (CVX), Eni (E), ExxonMobil (XOM), Shell (SHEL) and TotalEnergies (TTE) posted a combined $60B in profit for the second quarter. BP (BP) today also announced an underlying Q2 profit of $8.5B, more than three times the number seen a year ago and its highest quarterly profit in 14 years. Similar bumper results are expected on Thursday from ConocoPhillips (COP), which will be the last supermajor to report quarterly numbers.

What's happening? High commodity prices from the war in Ukraine and strong refining margins due to growing demand are helping propel soaring returns for the world's largest energy companies. In fact, BP raised its dividend by 10% following the latest results, and said it was committed to buying back $3.5B of shares in Q3 after completing $2.5B of repurchases last quarter. Capital discipline was also displayed, with net debt falling to $23B, down from $33B in the year-ago period.

"Today's results show that BP continues to perform while transforming," CEO Bernard Looney said in a statement. "We do this by providing the oil and gas the world needs today, while at the same time investing to accelerate the energy transition." While investors should be happy with the outsized profits, consumers are not as ecstatic about the rising energy prices, and the topic has become a political flashpoint. In May, BP announced over $20B of planned U.K. investments, but the attempt failed to head off calls for a windfall tax (similar discussions are taking place among progressive lawmakers in the U.S).

Going into August: The S&P 500 Energy Sector is the only one to record significant performance for 2022. The component has risen 39% since January, with the next closest competitor being Utilities, which is up only 3% YTD. The other nine sectors - which span Technology and Consumer Staples to Financials and Real Estate - are all negative for the year. (8 comments)

Flying chaos

Besides long queues and lost luggage, the travel situation doesn't appear to be getting better anytime soon. Carriers have been trying to recoup the severe losses suffered over the past few years by making as much money as the can from soaring demand as they come out of the pandemic. The problem is that airline and airport staff have not returned to pre-COVID levels, a pilot shortage is exacerbating the issue, while any wrinkles in one division can cause knock-on effects or meltdowns in other areas of the entire flying operation.

Time to act: British Airways has suspended ticket sales for short-haul flights from London Heathrow over the next week, in a move that is likely to push up ticket prices and add to record U.K. inflation. The British flag carrier already announced it would cancel 10,300 flights through September, in response to the airport imposing a cap of no more than 100K departing passengers per day. The news also comes a week after International Airlines Group (OTCPK:ICAGY), BA's parent, revealed that it had returned to profit for the first time since the pandemic, but warned of "acute" challenges in scaling up performance.

"We've decided to take responsible action and limit the available fares on some Heathrow services to help maximize rebooking options for existing customers, given the restrictions imposed on us and the ongoing challenges facing the entire aviation industry," said a BA spokeswoman.

Will the same happen in the U.S.? This past Sunday, 17 major U.S. airports saw at least 20% of their flights depart late. The worst of the troubles were seen at Charlotte Douglas in North Carolina and at Harry Reid International Airport in Las Vegas, where 38% and 32% of all flights were delayed, respectively.

Publishing battle

The latest high-profile antitrust lawsuit has hit the courtroom as the U.S. Justice Department attempts to stop Penguin Random House from buying rival publisher Simon & Schuster. The $2.2B merger would reduce the "Big Five" industry publishers from 5 to 4, along with Hachette Book Group, Harper Collins and MacMillan. The suit is also part of a broader competition crackdown by the Biden administration, which has beefed up its campaigns following the signing of an executive order on "Promoting Competition in the American Economy" in July 2021.

The arguments: The DOJ maintains that the transaction will hurt industry competition and cut authors advances by "diminishing overall output, creativity, and diversity among books published." Simply put, Penguin believes the complete opposite. It thinks the deal will "enhance competition" by pooling its resources, as well as offering better deals to authors that'll force other publishers to "compete harder" for titles.

The trial is taking place in federal district court in Washington, D.C., and is anticipated to last two to three weeks, with a final ruling expected in November. Among those slated to testify on behalf of the DOJ are famed author Stephen King, whose books have been published by Simon & Schuster, as well as other literary agents like Pulitzer Prize-winning journalist Charles Duhigg.

Outlook: If the combination is approved, it could trigger further consolidation in the publishing sector, but if the deal is blocked, Simon & Schuster parent Paramount Global (NASDAQ:PARA) would likely offload the publisher to a private equity firm. Paramount has already committed to divesting the company, which is what triggered the merger with Penguin Random House in the first place.

Today's Markets

In Asia, Japan -1.4%. Hong Kong -2.4%. China -2.3%. India -0.3%.
In Europe, at midday, London -0.2%. Paris -0.6%. Frankfurt -0.8%.
Futures at 6:20, Dow -0.5%. S&P -0.8%. Nasdaq -1%. Crude -0.5% to $93.38. Gold +0.1% to $1790.20. Bitcoin -2.3% to $22,755.
Ten-year Treasury Yield -5 bps to 2.55%

Today's Economic Calendar

9:00 Fed's Evans Speech
10:00 Job Openings and Labor Turnover Survey

Companies reporting earnings today »

What else is happening...

Monkeypox plays rally as New York calls outbreak a public emergency.

Oracle (ORCL) to start laying off U.S. employees - The Information.

Pinterest (PINS) surges 21% after Elliott Management offers backing.

Twitter (TWTR) issues flood of doc requests to Musk associates - WaPo.

Devon Energy (DVN) lifts production guidance, raises dividend 22%.

Is Occidental Petroleum (OXY) set for another earnings beat in Q2?

Apollo-led (APO) group in advanced talks to buy Atlas Air (AAWW).

Nikola (NKLA) buys battery maker Romeo Power in all-stock deal.

SEC charges 11 people in 'massive' crypto pyramid, Ponzi scheme.

Amgen (AMGN) is fighting the IRS over a $10.7B tax bill - WSJ.

This article was written by

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Comments (133)

Nancy Pelosi came out of the Baltimore Mob and Biden is with the Irish Mob in Boston including Whitey Bulger's brother Billy and his son named after him. Frank "the Irishman" Sheeran stuck Joe Biden in the Senate in 1972-Delaware Teamsters which he proudly told all the Teamsters in Las Vegas at their convention. Geez! What can we expect? Pelosi is just boosting more for "defense" spending is all going over there because China makes everything for Walmart and everyone else. The politicians instigated the whole Ukraine mess to make more too. Then we have the "vaccines" with Dr. Fauci on the board of Pfizer and the highest paid person in the US "government"? Americans are asleep and that's the way they want us, dumb sheep to be fleeced.
"...dangerous when autocrats feel that they are beginning to lose power" - Astonishing and frightening that in this day and age, two single persons are able to affect, to such an extent, not only the global economies, but also to endanger the entire human race - and indeed the planet itself.
MicroStrategy racks up $1 billion loss, says CEO will leave.

Should of stuck to your knitting instead of sinking the company with a mega investment in an imaginary Ponzi scheme scam. CEO should be sued to return all bonuses paid for fake profits in last two years.
@Phil Dumfee what type of company is micro strategy
@john boy used to be a software company
What a downturn the last hour of trading today, as the DOW really went reversal crazy.
Still waiting patiently for a prolonged downturn though, as it could be this month of August, which typically is a top month for the Market mmm-hmmm guess we'll soon know.
Still selling and taking profits bit by bit on certain stocks as they increase in pps during the up days. Cash reserve looking better for that eventual buying opportunity coming forth imo.
Best regards and see y'all tomorrow, maybe.

@SuperNovavax The worst scenario for the financial industry and most feared is a prolonged period of flatness.
bananawhopper profile picture
@SuperNovavax Selling into this period of market strength makes perfect sense. That's exactly what I am doing as prices recover bit by bit for some of my stocks.

The economic conditions at play today make a future downturn more or less inevitable. Anecdotal evidence I am observing in my local areas is a high degree of pain being experienced by restaurants due to lower traffic. One owner told me today that her business is being pinched by inflation in their food supply costs while patron traffic is slowing due to having to increase meal prices. Her summary was: NO MONEY. People, she said have no money to spend on dining out.

Another franchised restaurant closed two stores in my local market recently. Many remaining restaurants have never fully reopened for seated dining since Covid. They lack staff and cannot afford the overhead. Inflation is a killer. It can and will take down the economy if not crushed.

I agree with the Treasury secretary who has laughed out loud at the idea voiced by the Fed chief Powell that a 2.5% interest rate level is neutral. Even if it is neutral, which I agree it is not even close to the neutral level, it is nowhere near enough to crush the inflation rate. So if inflation isn't crushed VERY SOON.....not just reduced a tiny bit but CRUSHED....the economy is destined to take a hit that depresses business earnings and stock prices. The Fed has already made several increases in interest rates during the past 4 months. By another 2 months we will be 6 months in on the Feds program of trying to front load and quickly tamp down inflation. So by September, 6 months in, we will know whether or not the Fed is going to get inflation under control FAST or be relegated to a long, slow, and painful fight against inflation that stretches well into 2023. Wait for it.....a downturn will happen fairly soon.

When? Ok, here's my prediction. The market will slide mostly sideways until the September Fed meeting at which data will force at least a 0.5% increase, if not another 0.75%. The exuberant investment crowd is hoping for a 0.25% increase at most. The sobering truth that inflation is still running much higher than the Fed's 2% target necessitating continuing of sizeable interest rate increases will at that point convince investors yet another downward repricing of stocks will be necessary. Either the Fed will get inflation tamped down after 6 months of trying hard or it won't. I'm betting the inflation numbers will still be at least in the 6% to 7% range, or up to 5% above the 2% target rate come September.

Thus I predict another dark October downturn. Time will tell us how accurate that projection is. Go ahead, mark it down and beat me up if I am wrong!
02 Aug. 2022
I Nio is delisted I will just switch to the Shanghai exchange and continue from their, it's not as if those Asians will stop trading and investing in it. Save us the uncertainty and get it over with.
Gold down due to geopolitical tensions. Makes sense. It's an inflation hedge too.
@Phil Dumfee ah, but a very nice gain this past month indeed, as one down day irrelevant imo as I'm holding for the future rewards as the Global financial meltdown gets more attention. Can't keep ignoring the red flag warning signs forever, as in the housing market crash currently in progress.
Precious metals are a nice safer bet going forth imho.

@Phil Dumfee Gold has not an been an inflation hedge for more than 50 years.
@Bill345 why does everyone on CNBC and on Seeking Alpha say it's an inflation hedge. Are they just talking out their ash? Real estate is an inflation hedge too and crypto.
alpha your dvn yield is wrong its not 4% but closer to 10% yield 6 devided by 61 = .098% .
It appears that the games played in the Bond Market are near over, as the yield on the 10yr note is climbing back to normal market value near 3.5% - 4.50%.

With US inflation at 9.1% based on the June 2022 CPI, we see wages, rent, energy and food prices remaining higher for longer.....

European energy prices will remain elevated for longer and crush their economy to a halt...deep deep recession .....?

CNBC folks (MM / Hosts) keep talking about commodities prices being down and that ends the inflation talk....single minded thinking vs 3 dimensional chest ....chez?

Bloomberg business NEWS has been right to be cautious (bearish) on the equity markets (love "Bloomberg Real Yield" program)....!

Bloomberg business NEWS focus has been on the bond markets and how it impacts equities and the economy !

Buckle Up !
@Maverick 2021 how is 3.5-4.5% the "normal market value" on 10yr t. Its not.... Its just a magic number you made up that guides your portfolio into mal investment
Can't believe anything coming out of the mouths from these American economists, as they spew the doom and gloom concerning Russia's economy, they're stating that Russia faces 'economic oblivion' despite claims of from Russia on short - term resilience lol smh.
These so-called economists can't even agree what a recession is or get it right concerning the U.S economy and the direction it is heading. Russia is in far better shape than the U.S is currently imho.

@SuperNovavax US has 225 Billion barrels of oil immediately recoverable and the largest deposits of shale in the world at 2.175 Trillion barrels... Russia is third world. Imho no.
bananawhopper profile picture
@SuperNovavax Many people make a career out of telling people whatever misinformation or fake news they feel they can get the public to believe. If they succeed in convincing people to accept what they say as truth, then it no longer matters what the truth really is. And thus we have politicians, news media, economists, and many others spouting anything they please.

Unfortunately, they often find a very gullible audience who are mentally predisposed to believe what they want to believe. If they are against gun control, for example, no amount of factual data about guns, crime, or related issues is going to change their minds. Similarly if they dislike Russia, they are going to reject any positive statements about Russia, preferring to only believe negatives information.

Given the nature of how Russia conceals its true conditions, it is difficult to fully know verifiable facts. For some things, Russia is indeed suffering economic distress. But for others, clearly they are not suffering at all.

Russia is not likely facing economic oblivion any time soon. But then Russia is also not enjoying an era of new prosperity either. The truth is likely somewhere in the middle.
@Pascaleon0 so whats your point
Fueled by higher inflation and interest rates, household debt top $16+ trillion for the first time in America. Not a very good sign going forth folks, as the inflationary prices and higher interest rates cause more destructive economic pressures and pain throughout.
Jobs hiring is tapering throughout also, and big layoffs have been enacted by many companies, adding to the economic stress.
So, in short, the state of Americas economy isn't looking great going forth.

@SuperNovavax to me 16 tril. is just A NUMBER what should the nmber br and i dont see how you can accurately get ahold of the entire nations debt statements .
Eponymous One profile picture
@john boy A good part of that debt no doubt is all the money held on account for savers that they are owed by the big FDIC insured banks to main street depositors especially as well as all that spare liquidity especially sovereign sources flooding the depositries at the window here especially with the repatriation of all those dollars previously held by friends and allies abroad seeking safe haven just in case once again gee I guess all those deposits are owed by somebody lol what did they call that back in second grade double entry bookkeeping maybe
@Eponymous One but how can the govt. get axcess to banking info
LOL; on www.zerohedge.com I saw some tweets mentioning Taiwan Straight of Strait
Ishi Kenjo profile picture
Windfall tax Nancy Pelosi. How is it she can outinvest Warren Buffett without being corrupt! Surely she is using tactics that put Martha Stewart in a not so fancy orange jumper. Congress should not be allowed to invest in individual stocks...just broad market.
deercreekvols profile picture
Wondering if $RIG will be included in the daily "Hot Stocks" segment. The stock is up over 22% on the day.

Dire Straits? To be honest, I was hoping for a discussion on the band. Sultans of Swing, Walk of Life, Money for Nothing, Twisting by the Pool. All could have been worked into updates on stocks and politics this morning.

Hot off the press- Robinhood’s crypto division was fined $30 million for “significant failures” in areas of anti-money laundering and cybersecurity regulations. NYDFS (New York State Department of Financial Services) alleged that Robinhood Crypto’s anti-money laundering and cybersecurity program was inadequately staffed and did not have sufficient resources to address risks. Believe it or not, $HOOD is up fractionally on the day.

Hackers drained almost $200 million in cryptocurrency from Nomad, a tool that lets users swap tokens from one blockchain to another, in yet another attack highlighting weaknesses in the decentralized finance space. Nomad plans to reimburse users who lost tokens in the attack. The company, which markets itself as a “secure cross-chain messaging” service. Nomad may want to change their marketing approach.

@deercreekvols Don't forget in light of oil prices/profits one of my favorites: Heavy Fuel.
deercreekvols profile picture

Yes! Very easily could work that title in on any day.
Pelosi should get off the plane and get in front of a camera to very publicly rip a paper map of China and Taiwan in half, separating the two. She likes to rip up papers in a dramatic way, and the symbolism of this would be immense.

Oh, and as the war started stocks would probably fall about 10% today - need to stay on topic..
@mobyss the Pope used to kiss the ground when he got off the plane. Nancy would do well to adopt that practice.
"never sit idly by" and "whoever plays with fire will get burnt."
Vague innuendo.
Pelosi moves markets. Monkeypox emergency declared in California.
deercreekvols profile picture
Futures down on a trip to Taiwan. No shades required. I've seen the futures and I can't afford it.

Monkeypox emergency in NYC makes the headlines for the second straight day. Same story as yesterday.

Twitter back in the news and that means that Elon Musk is there too. This ends the two day streak of no Elon Musk updates. A flood of documents issued by Twitter to Musk associates. It is a legal case after all.

Gas & Oil sector has been very, very good to me/us. Diversification matters.

Devon Energy increases dividend. Dividend payers are good.

Have a feeling that we have not seen the last crypto pyramid Ponzi scheme. Might be some big fish to be caught if the SEC would use a bigger boat.

Trending News yesterday that Ark Invest broke an eight-month losing streak by posting some green numbers for July. Eight months and the media, Seeking Alpha included, treats the CEO with kid gloves. Eight months of losing clients money and somehow AUMs increased in July. There is help available for those who have gambling problems.

49 straight days of dropping gas prices. That has to be some sort of record. Heading to the local gas station today to fill gas cans for mowing. Last time it cost me over $50 to fill the two cans. Shell gasoline. I like supporting the stocks that I own. Might head down the road to the Exxon station, another stock to support. Prices are the same at both.

More later as the day progresses.

Have a great day everyone.
It is a Top profile picture
"Gas & Oil sector has been very, very good to me/us. Diversification matters."

But how is your overall portfolio? Is your whole portfolio in the red for this year?
deercreekvols profile picture
@It is a Top

Portfolios are fine- not in the red for the year.

Balance is important. Never too heavy in any one sector.

@deercreekvols "49 straight days of dropping gas prices"

Enjoy while we all can, as it won't last.
New report out, but you won't hear it from the fake mainstream media, is that our U.S strategic oil reserves are the lowest they've ever been, that after our leader in charge so even more oil from our U.S reserves.
This is a security risk that needs immediate attention imo.
This isn't right mmm-hmmm.

China has so much influence over global digital networks, that stone cold capitalists, have found themselves making completely idiotic moves, and WSB editors are terrified to even see posts that accurately reflect their weakness.

How is it possible to lose money?
Heroesbleed profile picture
America needs to utilize every resource we have to ensure plentiful and cheap energy; coal, natural gas, oil and uranium. All of it in whatever combination is necessary.

Agree with all of the above, and I actually add in wind and solar, where they make sense economically and technologically. Forcing round pegs into square holes in regard to wind and solar is a losing proposition.
Heroesbleed profile picture
@zyman Okay, granted. But what should be completely discarded is the forced genuflection at the altar of the Solar-Wind god.
Ben Gee profile picture
@zyman China is building hundreds reversible hydro stations to compliment wind and solar plants. When electricity is in low demand, water is pumped upstream to store. When demand is high, water is use to produce electricity.
And the collapse of the service industry continues under our flawed synthetic capitalism. Why work for garbage pay to be treated like garbage by customers? It's not like it's paying the bills anymore.
@DanielGannon1 Why work at all? Find something to leech on.
@DanielGannon1 The option is to sit in a hot parking lot waiting for USDA to send out the National Guard once a week with free food. I drive through a county every week in Indiana and see migrants out in a hot corn field tasseling corn, then into a small town very there is a parking lot full of nice cars and locals waiting for a National Guard semi full of food. Service isn't very good in the county.
@blasted Some of the small towns in that county are now predominantly Hispanic but that's not who is in that parking lot. They have a lot of small manufactures located there.
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