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Weak Bounce Wednesday – Markets Limp into Earnings, Covid Resurges into Holiday Weekend

Welcome back Covid!  

As you can see, we are having some big infection rates on the rise again and the rate of hospitalization is very high because MOST cases of Covid are now unreported UNLESS they are serious.  Test kits are no longer free and most vaccinated people get mild cases and simply get over it like the flu and never report being sick so the majority of cases that do get reported are severe and since the severe cases tend to be among the unvaccinated – they tend to get Covid bad enough that they end up in a hospital. 

Unfortunately, Covid has great timing and always seems to swing up around our holiday weekends (after is obvious but before is just mean) and when 2 people per 1,000 have a severely infectious disease and you get a lot of people together in airports and churches and at family gatherings – well, statistics tends to take care of the rest.  

So please be sensible this holiday weekend and, for God's sake, get vaccinated if you haven't been and get a booster if you should.  You are 10 TIMES more likely to die from Covid if you catch it and are not vaccinated.  That is a  very stupid way to die, isn't it? 

Not only that but severe Covid has some very nasty long-term effects that you are also much more likely to avoid if vaccinated but one of those effects is a decrease in cognitive funcions – which then leads people to make poor decisions regaring getting vaccinated.  That's a very clever virus – making the victims too dumb to defend themselves!  

Also too dumb to defend themselves are our Leading Economorons, who still only react to things AFTER they've seen the news.  Currently, our Nation's diminishing Brain Trust is forecasting a 28% chance of a Recession in the next 12 months and 33% was as high as we've ever gotten without actually having a recession and that was 2011, when we were still recovering from the 2008/9 Recession and the Fed was lowering rates – not raising them.  

As you can see from the same Economorons CPI Forecast, in October they thought the June CPI would be 3.4% and in Jan they thought the June CPI would be 5% and now, they think it will be 7.5% despite us JUST yesterday getting an 8.5% reading and it being almost mathematically impossible to get to 7.5% by June.  Even worse, they clearly haven't even bothered to change their 2023 forecasts – as if all this ACTUAL data will magically go away next year.

Are wages going to reverse?  Clearly that's a key, underlying driver of inflation.  We can suppose the war will end as there is still hope of that and we can then assume Energy Prices will stablize but what about the Fed raising rates from 0.5% to 2.5% – won't that drive up prices or will companies just choose to make less money?  Supply Chain issues are not likely to unwind all that fast and the real food shortage from Ukraine missing a planting season will not even hit us until the fall – when the crops don't get harvested.  

And we keep forgetting – we're not getting our stimulus checks this year.  Stimulus has been 25% of our Economy for the past two years and, even this year, Biden did pass a $1.2Tn Infrastructure Bill and that is 10% of our Economy – but that won't go to the people.   What is going to the people is $100 fill-ups at the gas station – THAT they do get – and don't even think about going to a grocery store…

That's why the Government likes to measure inflation "Ex Food and Energy" – as if that's how people live their lives.  The excuse is that food and energy are volatile but even the Ex Food and Energy gague of the Core CPI was up 6.5% yesterday.  Keep in mind the Fed's stated target for Core CPI is 2% so, to say the Fed is behind the curve on this is a major understatement.  

As I mentioned yesterday, Wage Income, which grew at a blistering 10% annual rate in the last three months, fell 1.2% when adjusted for Inflation.  Last year in Q1 we had Stimulus Checks, Child Tax Credits and Forgivable Business Loans – all are gone now and have been replaced by Higher Interest Rates (30-Year Mortgages are already 5.13%) - how is Q1 going to be good?   We'll find out as companies start reporting their eanings this week and next but JP Morgan (JPM) already reported a 42% drop in Income vs last year.  

And, keep in mind, Russia is only just now starting to default on their debts – that's going to really sting the IBanks at some point.  On the Consumer side, the concern is that a lot of last year's earnings might have reflected a once-only spending spree as Consumers equipped home offices, bought exercise equipment or replaced appliances.  This could leave businesses vulnerable to the “Peloton effect,” a sudden drop off in orders as consumers conclude they have enough stuff and stop buying – which is how you get a Recession.

Private data tracked by the Federal Reserve Bank of Chicago points to a 2.9% drop in retail sales excluding vehicles in March from February, or 4.2% when adjusted for inflation. First quarter economic growth was probably close to zero.

Cambridge, Mass., Becomes 2021's Most Expensive Office SubmarketAlso, as we discussed in last week's Live Trading Webinar, a record 243 MILLION square feet of office space will be hitting the market this year as many pandemic extensions have expired.  That's 11% of all office space in America.    Government support allowed many businesses to continue to pay their rents – even when there were no employees showing up but now less people are showing up, even for fully re-opened companies so most companies don't want the same amount of space as they had before – even if they can afford to stay.  

 Many office tenants whose leases expired last year or in 2020 negotiated extensions of only a year or two, rather than renewing at the typical length of 10 years or longer, as these firms tried to determine how much less space they might need under a hybrid approach.

“I don’t think the landlords have felt the pain yet,” said Jeffrey Peck, vice chairman at commercial real-estate brokerage Savills. “Now they’re going to start feeling the pain.”

The true cost of empty officesThis is another one of those slow-moving crises that can't be stopped – it just sort of rolls up on you.  It's hard to run a profitable building when 15% of your space is vacant and essentially impossible once that number hits 20%.  2022 lease expirations are going to be 40% more than they were in 2019 and historic vacancies of 9.6% are already at 13% – it won't take much to push Commercial Landlords to the brink and they can't refinance their buildings as the rates are double what they've been for the past 10 years – quite the connundrum! 

Real-estate analytics firm Green Street estimates that hybrid work will cause a 15% drop in demand for office space. Because most building expenses are fixed, even a small drop in leasing revenue often leads to a big drop in profits and an even bigger drop in a building’s value. An economic slowdown could add further strain because office leasing is highly dependent on the economy.

Troubled loans to office building owners are also on the rise. In February, 21.2% of office loans made after the global financial crisis packaged into commercial mortgage securities were either being handled by special servicers or on watch lists, two closely watched categories that could lead to defaults, according to a Barclays report. That’s the highest level since 2010.

Watch the reports from Community Banks, who are the first to be affected as they lend to the smaller landlords, who don't usually have deep reserves to bail out struggling properties.  If their write-offs increase sharply – it is likely to be the tip of a very large iceberg the economy is heading right into.  About $1.1Tn worth of loans backed by office buildings are outstanding and about $320Bn of those loans are maturing this year and next, according to data firm Trepp Inc.

Problem loans have already started to surface. Blackstone Inc. is expected to hand back to creditors a troubled Midtown Manhattan office building with a $308 million debt load, according to people familiar with the firm’s thinking. The building’s loan was turned over to a special servicer after its main tenant, L Brands, decided not to renew its lease when it expired last month. The retailer is taking much less space in a new location, in part because it is turning to a hybrid-work strategy.

That's the danger for the larger lenders too – companies like Blackstone will just strategically abandon a building when it no longer projects profits.  

Be careful out there!  

 

 


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  1. Good Morning.



  2. Stagflation Risk Has Big Investors Sinking Billions Into Hedges


  3. The Photographer Who Captured the Brooklyn Subway Shooting


  4. GM PSW!  SRRA…..zoom zoom. 


  5. LQDA offering $5.10. Good chance to sell puts and buy a little more stock. 

    C4 smashed. Stay away.

    GLUE…watch. No options. :(

    KYMR…watch.


  6. Good morning!  

    Here is the link to today's webinar

    https://attendee.gotowebinar.com/register/2575089639962237967

    Hey Pharm!  What do you think of MRNA?  I'm sticking with them but let me know what you think going forward.  


  7. After yesterday's BS pump in the morning – you can't trust the indexes, can you?  

       

    VIX still getting rejected at 25 so far but keep an eye on it.

    No help from energy prices:

        

    Almost got to $2,000 on /GC

     

    If 100 starts acting as a floor on /DX – look out below for the rest of the World's currencies:

    Do You Understand What Happened at the End of 'Trading Places'?



  8. Price Spikes In Asia Mean the Whole World Is Now Dealing With Inflation



  9. MRNA/Phil – as I noted before, I am not sure what else they have that is compelling enough for me. They are co-testing with some of the new cancer treatments and that could work now that the virus angle is viable. It is a big but… :) ….but so was COVID. Too rich for my blood either way and the patent part is out of my understanding.


  10. I guess if it was really viable, why has PFE not bought BioNT?  That also tells me something.


  11. That's a good point.  


  12. any thoughts on oil report phil


  13. CL1:COM +1.64%Apr. 13, 2022 10:30 AM ET7 Comments

    That's a crazy headline build, 2.9Mb net build too.  We'll see how much was released from SPR at 1pm.




  14. Bed Bath & Beyond snared by ongoing supply issues




  15. Old-school homophobia is back



  16. Oil/Tommy – The report has not been actionable since now we have to see what was released from SPR and any sort of rumor about the war can move prices around independent of actual supply-demand indicators so I've lost interest as I don't like to play things I'm not at least 70% sure of – that way I'm only wrong about half the time and the rest is just good risk/reward management.


  17. thanks for oil info phil


  18. We'll look at the rest during the Webinar.

    A group of 11 investors have filed a resolution on Wednesday demanding TotalEnergies (NYSE:TTEset climate goals consistent with the 2015 Paris Agreement at its annual shareholders meeting set for May 25.

    While the shareholders represent less than 1% of TotalEnergies' market cap, their request reflects mounting pressure on oil and gas majors to step up their environmental ambitions.

    "With this shareholder resolution, we encourage the company to become the first oil and gas giant that has its targets for 2030 completely 1.5-degree aligned and be an example for others in the sector," said Bas Bijleveld, senior adviser at Dutch asset manager MN Services, which is leading the resolution initiative.

    TotalEnergies' European peers BP, Shell and Equinor all have faced investor resolutions similar to that filed at the French company.

    TotalEnergies recently outlined plans to cut methane emissions on operated facilities by 50% by 2025 and 80% by 2030 compared to 2020 levels.

    They always come out with this kind of BS before AAPL earnings:

    AAPL +1.30%Apr. 13, 2022 11:53 AM ET1 Comment

    Apple (NASDAQ:AAPL) released the latest version of the iPhone SE last month, but the new smartphone is seeing "lackluster demand," according to TF International Securities analyst Ming-Chi Kuo.

    Kuo, who has had a reputation for over a decade being an influential Apple watcher, tweeted that the delivery status of the new iPhone SE shows "in stock" on Apple's online stores in a number of countries. This is notable, given that Pegatron is making the iPhone SE and China is experiencing the worst Covid shutdown in recent memory.

    Apple (AAPL) shares rose nearly 1.5% to $169.96 in mid-day trading on Wednesday.

    In addition, Kuo tweeted that the delivery time for its high-end MacBook Pros, which are being manufactured by Quanta, have increased to 3-5 weeks following the lockdown, indicating "good demand."

    On Tuesday, Pegatron said it temporarily turned the lights off at its factories that build iPhones in Shanghai and Kunshan, China, as the Chinese government continues to impose lockdowns in an effort to stem an increase in the region's Covid case numbers.

    The iPhone SE, along with several other products and services, including Friday Night Baseball on Apple TV+, were announced last month.

    Last week, investment firm J.P. Morgan trimmed its estimates for the Apple (AAPL) iPhone, citing "limited upside" from the latest iPhone SE, lowering iPhone SE volumes to to 24 million from a prior outlook of 30 million.

    FB +0.79%Apr. 13, 2022 11:39 AM ET6 Comments

    Meta Platforms (FB +0.6%) used a February event to showcase the role of artificial intelligence in the company's future, with a nod to an eventual release of new eyeglasses tapping augmented reality (AR) – the ability to overlay information on the world a user sees around them. A new look at the company's AR roadmap shows a push to make a splash with new glasses as soon as 2024.

    CEO Mark Zuckerberg has particularly interest in the product, wanting it to be "an iPhone moment," a source tells The Verge, adding "Zuck's ego is intertwined" with the glasses.

    It's a "holy grail" device that will mark a redefinition of people's relationship with technology, akin to the rollout of smartphones, Zuckerberg says, but the demos so far haven't been based on functioning hardware or software, suggesting the reality of that vision is some years away.

    The company's roadmap – for "Project Nazare" – suggests employees are racing to deliver a first generation of the AR glasses by 2024, with work ongoing for a lighter design by 2026 and a third version by 2028.

    The first version is meant to work independently from smartphones with the help of a wireless, phone-shaped device taking on part of the computing load, according to the report. But Meta is also working on a pair of cheaper smart glasses (codenamed Hypernova) for 2024 that are meant to pair with a nearby phone for messages and notifications in a heads-up display.

    Internal sales expectations for the first version of Nazare are light, in the low tens of thousands, for a device that is likely to be more expensive than the $299 Quest VR headset. But combined with the lower-budget Hypernova project and Meta's Ray-Ban Wayfarer Stories camera glasses, Meta hopes to be selling "tens of millions" of smart glasses by the end of the decade.

    Whatever the varied outcomes in the decade ahead, Meta (FB +0.6%) will be wrestling with Apple (AAPL +1.2%), which could have its AR headset ready by later this year.

    JPM -2.60%Apr. 13, 2022 11:39 AM ET2 Comments

    • JPMorgan Chase (NYSE:JPM) stock is slipping 2.6% in late morning trading on Wednesday after the bank added to credit reserves in Q1 to reflect increased probability of downside risks and recorded losses related to widening spreads, commodities exposures and Russia-related markdowns.
    • There were "A LOT of moving pieces" to JPMorgan's Q1 results, "but the credit reserve build is the standout (and a modest negative)," wrote Vital Knowledge's Adam Crisafulli in a note to clients. "JPM caused a lot of consternation back in January with its 2022 expense outlook, and the credit/provision news today will likely cause a bit of anxiety for the whole group," he said.
    • On the positive side, net interest income/net interest margin performance was solid "thanks to a more favorable rate backdrop and healthy loan demand," Crisafulli added.
    • Core preprovision earnings of $12.1B came in $823M higher than Oppenheimer's estimate, due to $1.04B higher "core" revenue on stronger net interest income, investment banking revenue and trading revenue, said analyst Chris Kotowski.
    • "Most impressive was that FICC trading was down only 1% from what we saw as exceptionally strong levels last year. Also noteworthy is that net interest income was up 7.5% Y/Y, indicating strong underlying growth, even though the rate hike came very late in the quarter and did not add much to the result," Kotowski wrote in a note to clients.
    • Investment Banking fees were also "better than feared and were only 5% off consensus," Credit Suisse analyst Susan Roth Katzke said in a note.
    • She points to two factors weighing on the stock — its 120-basis-point decline in CET1 to 11.9% from 13.1% and its lack of specific guidance on 2022 outlook for $53B+ in net interest income, "especially in light of the changes in the forward curve since JPM gave this guide in mid-February."
    • With expectations that management will likely defer more details on guidance until its May 23 Investor Day, "we think there could be an 'air pocket' in the stock today, and see shares lagging the broad market," Roth Katzke said.
    • Evercore ISI analyst Glenn Schorr noted JPMorgan's (JPM) increase in average loans, average deposits, debit and credit card sales volume, and long-term flows in asset & wealth management as other positives for the bank.
    • Among the issues he sees are: return on tangible common equity fell to 16% from 19% in the prior quarter, investment banking fees falling 31% Y/Y, adjusted PPNR down 13% Y/Y, managed overhead ratio increased 400 bps Y/Y, and home lending originations fell 37% Y/Y.
    • With much of the stock market climbing on Wednesday, the financial sector is the second-weakest sector among the S&P 500 industry sectors. Financial Select Sector SPDR Fund (XLF) is slipping 0.3%.



  19. No new trades, we went over the LTP positions – mostly good.


  20. This "rally", by the way, is being brought to you by a Dollar sell-off.

       

    Smoke AND mirrors – what a day!


  21. Here is the link to this week's webinar

    https://youtu.be/2Kw_lq3BAj4