Wall Street Breakfast: What Moved Markets

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Wall Street Breakfast

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Stocks plunged Friday as Federal Reserve Chairman Jerome Powell gave a brief and blunt message that the Fed plans to keep raising interest rates. During his Jackson Hole speech, Powell said that the Fed will continue raising interest rates and hold them at a higher level until it is confident inflation is under control. He noted that reaching an estimate of the longer-run neutral rate is not a place to pause or stop. "Restoring price stability will likely require maintaining a restrictive policy stance for some time. The historical record cautions strongly against prematurely loosening policy," he warned. Looking ahead, Powell said the June FOMC projections suggest rates would rise to just below 4% through the end of 2023 and that historical accounts warned against loosening policy too soon. Powell's path of pain sparked a 1,000-point drop in the Dow Jones average, and the percentage losses were even steeper on the S&P 500 and Nasdaq Composite. Earlier, data showed consumer spending edged up slightly in July, but inflation eased considerably, which gave investors hope that the Fed might see room to trim ita aggressive rate hikes. The Treasury yield curve inversion increased as two-year rates, which are more sensitive to imminent policy decisions, rose alongside the dollar. For the week, the S&P 500 fell 4%, giving up all its gains for the month of August, the Dow Jones lost 4.2%, and the tech-heavy Nasdaq slid 4.4%.

Planet of the APEs

Shares of AMC Entertainment (AMC) plunged on Monday as a dividend in the form of one AMC Preferred Equity (APE) unit per AMC share arrived in holders' accounts. While the company vowed that it wasn't a dilution, and technically it wasn't a stock split, when taken as a whole, it seemed to weigh on investor holdings. At the close, core theater chain AMC tumbled 42% to $10.46, while APE fell to $5.86, down 12% from premarket quotes. That adds up to around $16 when combined, compared to the $18.02 prior close for AMC alone (things didn't look much better in subsequent sessions).

Bigger picture: The special dividend is in line with CEO Adam Aron's marketing strategy of catering to the retail crowd who call themselves "Apes" (previous benefits included free popcorn and exclusive screenings). The new stock also creates a sort of backdoor to issue more APE shares whenever AMC desires, which could fund acquisitions, raise capital or pay down debt. As a result, whatever price fundamentals were left have gone out the window, making the stock even more subject to the whims of retail investors or bigger players that want to join the party. A similar dynamic played out with Bed Bath & Beyond (BBBY) last week, as meme mania sent the retail favorite on a wild ride before activist investor Ryan Cohen dumped his entire stake.

Some are suggesting that rapid sentiment shifts have also been behind the market rally this summer. The benchmark S&P 500 (SP500) soared 15% over two months, only to snap the winning streak last week and slump over 2% on Monday. Many have pegged the jitters on a fresh hawkish tone that may come at Jackson Hole, but renewed bearish bets that come after a serious short covering streak (and over $2T worth of options that expired on Friday) could make up a bigger part of the equation. "That's been the problem the last several months in this market," said Benjamin Dunn, president of Alpha Theory Advisors. "It's nothing but positioning, almost nothing fundamental."

By the numbers: According to calculations by Greg Boutle, head of U.S. equity and derivatives strategy at BNP Paribas, net short positions against S&P 500 futures by hedge funds even reached a record $107B last week. In another example, short sales by Goldman Sachs' hedge fund clients overtook long buys by a ratio of 3-to-1, leading to the largest increase in gross trading activity since the market low on June 16. (25 comments)

The Office

While Apple (AAPL) looks to get its employees back to the office, other companies are giving up on their brick-and-mortar institutions. Lyft (LYFT) said Tuesday that it will rent out nearly half of its office spaces in New York City, Nashville, San Francisco and Seattle, as it doubles down on its "fully flexible" work policy. The ride-hailing firm feels the strategy "strikes the right balance between trust and choice" for its 4,000 employees, "helping us do our best work while attracting and retaining top talent."

Bigger picture: Lyft intends to sublease about 44% of its combined 615K square feet to other businesses, hoping to cut costs as staff continue to work from home. Software giant Salesforce (CRM) and business review site Yelp (YELP) are among other companies that have also said they plan to sell or rent out parts of their offices. Not everyone is on board the trend, however, with Google (GOOGL) announcing recent plans to spend $1B buying real estate in the West End of London, and shell out another $7B on offices and data centers in the U.S.

"Many of our team members opted to work remotely after we shifted to a flexible workplace strategy," declared Lyft VP Rachel Goldstein. "As a result, we have identified a significant amount of office space that isn't being utilized the way it previously was."

Statistic: The average workplace occupancy rate in the top-10 U.S. metro areas is currently 43.5%, down from over 95% before the pandemic began, according to Kastle Systems, which collects daily data on how many workers swipe into office buildings. (7 comments)

Forgive the students

The White House made a long-awaited announcement on student loan forgiveness on Wednesday, announcing a plan to cancel up to $10K of debt per borrower for individuals who earn less than $125K per year. Pell Grant recipients will get up to $20K of loans forgiven that are held by the U.S. Department of Education. The Biden administration also proposed an income-driven repayment plan that protects more low-income borrowers from making outlays and caps monthly installments for undergraduate loans at 5% of a borrower's discretionary income.

Market movement: SoFi Technologies (SOFI) rose 8% on the news, with the plan providing more clarity on the fintech's outlook. In April, SOFI plunged after the lender cut its guidance to reflect the extended student loan moratorium. With student loan repayments frozen since the pandemic began, borrowers had no incentive to refinance their student loans, which has been a large part of the firm's business.

The latest cancellation would come at a time when the U.S. unemployment rate has fallen to 3.5%, and is even less among college graduates with a bachelor's degree, with the rate averaging 2.9% in July. The Education Department has also canceled around $25B in student loans since Biden took office, but that has only impacted borrowers defrauded by for-profit schools, disabled students and those enrolled in public service loan forgiveness programs.

Thought bubble: Wednesday's announcement appeared to have been delayed a number of times over whether the motion could provide a boost or detriment ahead of November's midterm elections. Some economists warn that student debt cancellation could exacerbate price pressures at a time of record inflation, and it could be flagged as a contributor to higher prices. A backlash could also be seen from voters who chose not to go to college because of the cost, don't have loans or already paid them off. (691 comments)

The EV age

California's Air Resources Board on Thursday voted to ban the sale of new gasoline cars by 2035, while setting interim targets to phase the vehicles off the road. The decision will have major ramifications for the auto industry given California's massive economy, which would rank as the world's fifth largest if it were a sovereign nation. In the past, more than a dozen other U.S. states have also opted to use stricter emission standards set by California under a federal waiver of the Clean Air Act (which was revoked by President Trump, only to be restored by President Biden).

Details: The rules would focus on sales of new models - not used vehicles - by setting interim quotas. Starting in 2026, 35% of new passenger cars, SUVs and small pickup trucks sold in California would have to be zero-emission vehicles. The measure would then increase each year, reaching 51% of all new car sales in 2028, 68% in 2030 and 100% in 2035 (only 20% of zero-emission cars sold could be plug-in hybrids).

The order comes shortly after the signing of the Inflation Reduction Act, which involves tens of billions of dollars for spending on the electric vehicle transition. Provisions include new tax credits aimed at incentivizing EV sales, as well as benefits for carmakers shifting production to the U.S. to shore up the domestic supply chain. Last year, the Biden administration also issued stricter nationwide tailpipe for new vehicles and SUVs made through 2026.

Can the auto industry hack it? "Despite this positive trend, California's EV sale mandates are still very aggressive - even in California with decades of supportive EV policies - and will be extremely challenging," said John Bozzella, CEO of the Alliance for Automotive Innovation. "That's just a fact." The state's objectives depend on many factors, such as "inflation, charging and fuel infrastructure, supply chains, labor, critical mineral availability and pricing, and the ongoing semiconductor shortage." (538 comments)

Satellite service

Hinting to a technology alliance earlier this week, Elon Musk announced a new venture that will involve a partnership with U.S. telecom company T-Mobile (NASDAQ:TMUS). The plan aims to eliminate "dead zones" by using large antennae on SpaceX's (SPACE) second generation of Starlink (STRLK) satellites to transmit directly to consumer cell phones. Most current smartphones will work with the new service, which is expected to be included for free on T-Mobile's most popular monthly plans.

Specifics: "This won't have the kind of bandwidth a Starlink terminal will have, but this will enable texting, it will enable images and if there aren't too many people in the cell zone, you can even potentially have a little bit of video," according to Musk. "We will no longer read about these tragedies that happened where people got lost and if only they could have called for help they'd be okay."

Hurdles remain as the FCC still needs to sign off on SpaceX's use of T-Mobile's wireless spectrum. Musk is also known to tout grandiose visions way before a project can be rolled out to the market, like Tesla's (TSLA) network of autonomous taxis, timelines of the Semi and Cyber trucks, installing 1,000 solar roofs per week, mass transit tunnels, etc. This time around, texting services in the beta phase of the Starlink/T-Mobile plan are only expected to roll out by the end of next year, and much can happen before then.

Outlook: Whether or not the cell service gets off the ground, Starlink is handily outpacing its rivals. Facebook (META) abandoned plans for its Aquila solar-powered internet drones in 2018, while Alphabet (GOOGL) pulled the pin on internet balloon project Loon last year. The future definitely seems to belong to low-Earth-orbiting satellites, though Amazon's (AMZN) Project Kuiper is mostly on paper and competitor OneWeb has only launched 218 satellites (compared to the 3,000 that are currently supporting the Starlink network). AST SpaceMobile (ASTS) is also building a global cellular broadband network in space, but its first scheduled launch will only happen in September. (10 comments)

U.S. Indices
Dow -4.2% to 32,283. S&P 500 -4.% to 4,058. Nasdaq -4.4% to 12,142. Russell 2000 -2.9% to 1,900. CBOE Volatility Index +24.1% to 25.56.

S&P 500 Sectors
Consumer Staples -3.5%. Utilities -2.6%. Financials -5.5%. Telecom -6.6%. Healthcare -4.1%. Industrials -4.2%. Information Technology -7.3%. Materials -2.5%. Energy +4.3%. Consumer Discretionary -5.8%.

World Indices
London -1.6% to 7,427. France -3.4% to 6,274. Germany -4.2% to 12,971. Japan -1.% to 28,641. China -0.7% to 3,236. Hong Kong +2.% to 20,170. India -1.4% to 58,834.

Commodities and Bonds
Crude Oil WTI +2.4% to $92.97/bbl. Gold -0.7% to $1,750.8/oz. Natural Gas -0.2% to 9.32. Ten-Year Bond Yield -0.2 bps to 3.03.

Forex and Cryptos
EUR/USD -0.7%. USD/JPY +0.45%. GBP/USD -0.73%. Bitcoin -4.7%. Litecoin -2.7%. Ethereum -5.1%. XRP -0.4%.

Top S&P 500 Gainers
The Mosaic Company (MOS) +15%. CF Industries Holdings (CF) +14%. APA (APA) +11%. Marathon Oil (MRO) +7%. Hess (HES) +7%.

Top S&P 500 Losers
Dollar Tree (DLTR) -15%. Advance Auto Parts (AAP) -11%. 3M Company (MMM) -9%. Adobe (ADBE) -9%. Salesforce (CRM) -9%.

Where will the markets be headed next week? Current trends and ideas? Add your thoughts to the comments section.

This article was written by

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Wall Street Breakfast, Seeking Alpha's flagship daily business news summary, is a one-page summary that gives you a rapid overview of the day's key financial news. It's designed for easy readability on the site or by email (including on mobile devices), and is published before 7:00 AM ET every market day. Wall Street Breakfast readership of over 1.6 million includes many from the investment-banking and fund-management industries. Sign up here to receive the Wall Street Breakfast in your inbox every business day: http://seekingalpha.com/account/email_preferences

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