Wall Street Breakfast: SOTU

Feb. 07, 2023 7:15 AM ET148 Comments
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The economy will be a big theme in President Biden's State of the Union address tonight, which is set to be broadcast from Capitol Hill starting at 9 p.m. ET. He'll take the podium as inflation shows signs of slowing, as well as a blowout jobs report that put the unemployment rate at its lowest level since 1969. GDP growth has also beat expectations, but remains under pressure amid concerns about a recession, while the current debt ceiling battle also threatens to derail any economic progress and the broader financial markets.

Counteroffer: According to the White House, Biden will call for "reducing the deficit through additional reforms to ensure the ultra-wealthy and largest corporations pay their fair share." He'll specifically renew proposals like enacting a tax on billionaires' unrealized investment gains, as well as quadrupling the 1% excise levy on corporate stock buybacks, which was passed as part of the Inflation Reduction Act of 2022. Many of those plans are likely to be dead on arrival, given prior opposition from moderate Democrats and with the GOP in control of the U.S. House following November's midterm elections.

"While [the] 1% [buyback tax] may not sound like much, it adds up," wrote SA Marketplace author High Yield Investor. "This is especially true considering the fact that buybacks have become a more and more popular method of returning cash to shareholders in recent years. To the degree that the new stock buyback tax actually deters stock buybacks, capital allocators are likely to instead use the money to reduce debt and/or increase dividend payouts - both of these uses of cash would be beneficial to dividend stock investors."

Not the only speech to watch: Fed Chair Jerome Powell will speak at the Economic Club of Washington today for the first time since his FOMC decision-day presser. It'll be interesting to hear the remarks, especially regarding how the central bank views Friday's blockbuster jobs report and what that will mean for monetary policy going forward. Yesterday, Treasury Secretary Janet Yellen told ABC's Good Morning America that "you don't have a recession when you have 500K jobs and the lowest unemployment rate in more than 50 years."

Landing strip

The jobs report threw a wrench into the accepted Fed path, reviving the debate over recession prospects and inflation stickiness. Opinion across Wall Street is divided. J.P. Morgan’s Marko Kolanovic argues that Goldilocks is all wet and an equity air pocket is coming, while ABP Invest sees just a 10% chance of a hard recession. Deutsche Bank’s chart shows why the jobless rate may not be a good predictor and Goldman sees a big equity haircut in the event of a hard landing. (36 comments)

More M&A

Shares of Oak Street Health (OSH) are up 35% in premarket trading following reports that CVS Health (CVS) would acquire the company for $10.5B. If the deal goes through, it would give CVS access to a bigger footprint of primary care doctors, with a large network of clinics focused on seniors. It will also push the company deeper into the direct provision of healthcare after the $8B buyout of Signify Health (SGFY) in September. "CVS can be a winner, but they need to keep making acquisitions. Multiple acquisitions every year," wrote SA Premium user Insouciant Investor. "If you aren't on board then sell your shares now because it's not going to change for many years." Join the discussion, which also explores CVS rival UnitedHealth (UNH), in the comments section.

AI competition

"In the spirit of an internal hackathon," Google (GOOG, GOOGL) will need all employees to test its chatbot, Bard A.I., as it looks to catch up in the artificial intelligence space. The chatbot will be powered by Language Model for Dialogue Applications, or LaMDA, which gained notoriety last year when a former Google engineer claimed it was sentient. Microsoft (MSFT), which has made a "multi-billion dollar investment" in OpenAI, has already started to integrate ChatGPT into products including its Azure cloud service. China is also getting in on the action, with Baidu (BIDU) confirming reports overnight that it will complete internal testing and launch the "Ernie Bot" in March. (31 comments)

Today's Markets

In Asia, Japan flat. Hong Kong +0.4%. China +0.3%. India -0.4%.
In Europe, at midday, London +0.5%. Paris flat. Frankfurt -0.2%.
Futures at 6:30, Dow -0.1%. S&P flat. Nasdaq +0.2%. Crude +1.6% to $75.27. Gold flat at $1879.90. Bitcoin +0.5% to $22,984.
Ten-year Treasury Yield +1 bps to 3.64%

Today's Economic Calendar

8:30 Goods and Services Trade
12:40 PM Jerome Powell Speech
1:00 PM Results of $40B, 3-Year Note Auction
2:00 PM Fed's Barr Speech
3:00 PM Consumer Credit

Companies reporting earnings today »

What else is happening...

WSB poll results: Are personal finances looking better in 2023?

Australia has hiked rates 9 times straight and more are coming.

BP (BP) ups dividend after joining Big Oil earnings bonanza.

Occidental (OXY) says buybacks take priority over production growth.

62% of Netflix (NFLX) password-sharing users would stop using service.

Pinterest (PINS) slips as revenues miss, guidance comes in light.

Teva (TEVA) follows AbbVie (ABBV) to leave top pharma industry group.

Boeing (BA) set to cut 2,000 white-collar jobs in finance and HR.

Lockheed Martin (LMT) double-upgraded to Outperform at Credit Suisse.

Concerns: U.K. may oppose Microsoft (MSFT)-Activision (ATVI) deal.

Bed Bath (BBBY) pares monster gain after convertible stock deal.

Top stock picks for 2023 from BofA - tech, media and telecom.

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