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Monday, January 10, 2022
We have learned a few important things early on in 2022.
First, this may truly be the year of the NFT (non-fungible tokens) after rising out of nowhere in 2021. The market ferociously boosted the valuation of dying retailer GameStop late last week on speculation it would make a full-throated attempt at an NFT marketplace. Meantime, NFT platform OpenSea just raised $300 million at a $13.3 billion valuation as our sister publication TechCrunch details. The company just brought on veteran CFO Brian Roberts (who left Lyft during its early public company life), another sign it sees a long runway for growth in the next five years which may lead to an IPO.
Another learning is that economist calls of peak inflation by the first half of the year appear pre-mature. That was one takeaway — at least for me — from earnings reports last week from Bed Bath and Beyond, Constellation Brands and Conagra Brands.
Peep this hot take on inflation from Conagra’s veteran CFO Dave Marberger on Yahoo Finance Live:
“For the second quarter our inflation was up 16.5%. I have been in this industry a long time. I have never seen inflation like that. We are seeing cost increases across our materials areas. We buy a lot of animal proteins. Those costs in the quarter were up 70%. We are also seeing inflation in the transportation and logistics markets.”
Marberger said the company — maker of Slim Jims and frozen food — has implemented another round of price increases.
And that brings me to the final lesson for you today.
We have learned the market really, really, really hates that the Federal Reserve will be jacking up interest rates this year. FAANG [Meta (formerly Facebook), Apple, Amazon, Netflix and Google] stocks are under severe pressure as Treasury yields have climbed higher. Software stocks have been slammed, too.
The question you need to be asking yourself at the moment is does the market hate Fed rate hikes enough? Looked at another way, has the market properly accounted for the Fed moving faster with rate hikes to get inflation under control? I would argue stocks haven’t priced in any rate hikes from the Fed this year or the end of quantitative easing. But obviously that is one person’s view and is of course up for debate.
Because dear friends, all of this is likely to be the next major hurdle for stocks — a more heavy handed Fed than the market thinks.
Here are a couple thoughts on this beginning to circulate Wall Street:
“If the Phillips curve has in fact steepened and the labor market is structurally tighter than it’s been in decades, then it will take more than 7 hikes to bring inflation back to 2% within the next 5 years.” — Jefferies chief financial economist Aneta Markowska. No clue what the Phillips curve is? Here you go.
“Our economists updated their Fed call to include a March liftoff with a total four hikes this year. They also brought forward the timing of the balance sheet runoff announcement to July. The updated views support our argument for higher rates in 2022, mainly that a) the market is not pricing enough policy tightening and will need to move more in line with the Fed’s projections, and b) low term premium is an artifact of the ultra easy central bank policy of yesteryear, and it should quickly self-correct once the accommodations are unwound.” — Deutsche Bank’s Steven Zeng
“And even though we may not yet be there, attaining something close to the Fed’s definition of maximum employment is now within our sights, and the mitigation of the latest COVID wave and improvement in labor supply should in time get us there. Still, none of these factors obscure the fact that the Fed continues to run behind the curve on policy normalization, and one of the more significant questions for markets over the next couple months will be how quickly, and precisely how, policy makers decide to catch up to conditions. Unfortunately, waiting to act has placed the Fed in an awkward position, where policy normalization now may appear a bit clumsy and difficult for markets to interpret, so watch for greater volatility as this process unfolds.” — BlackRock’s chief investment officer of global fixed income Rick Rieder
“We believe Fed officials are coming to the same conclusion that the labor market is very tight, making it a tough sell to hold off on the first hike until June, our prior call. We now see liftoff in March, followed by a quarterly pace of hikes thereafter.” — JPMorgan chief U.S. economist Michael Feroli
On those dour notes, have a wonderful day. Happy trading!
Odds and ends
Stocks to watch: Colonel Sanders — aka the king of 11 herbs and spices — probably didn’t see this day coming when the first KFC franchise opened in 1952. Today, the fried chicken joint will launch nationwide plant-based chicken from Beyond Meat for a limited-time. As Yahoo Finance’s Alexandra Canal reports, this is not the first time the pair have teamed up. This is a very important launch for Beyond Meat, which has seen its stock fall 43% in the past year amid pandemic-related challenges. If the launch goes well, restaurant analyst Peter Saleh at BTIG estimates KFC could be a major sales tailwind for Beyond Meat. Yours truly and Julie Hyman will be talking with Beyond Meat’s founder and CEO Ethan Brown and KFC U.S. president Kevin Hochman on Yahoo Finance Live this morning. The now virtual J.P. Morgan Health Care Conference (arguably the most important investing banking conference each year besides Goldman’s tech confab) kicks off today, and our senior health care reporter Anjalee Khemlani has it all covered for you. Anjalee will have two market-moving interviews this morning: Pfizer CEO Albert Bourla and Moderna CEO Stephane Bancel. Pfizer shares are up 31% in the past three months, compared to a 30% drop for Moderna (here’s what top biotech analyst Hartaj Singh recently told us about Moderna’s stock slide).
Earnings season: I can’t decide what I am more excited about — sinking my teeth into some Beyond Meat KFC chicken later on today or the start of earnings season. Although it’s a close race, the checkered flag goes to earnings — I love hundreds of earnings reports jammed down my throat essentially over the course of five days. The more intense, the better. All of this fun kicks off this Friday, with earnings from BlackRock, Citigroup, JPMorgan and Wells Fargo hitting the wires. Expectations are high on banks as the rise in yields to kick off 2022 conjures up excitement over net profit margins while investment banking fees are seen staying strong. The KBW Bank ETF is up 10.2% in the first five trading days of the year compared to a 2.1% decline for the S&P 500. That said, expectations are also running hot for earnings season overall. Analysts estimate 15% year-over-year sales growth for S&P 500 companies in the fourth quarter and 20% earnings per share improvement. One element that bears watching this earnings season: how stocks react to slowing sequential growth. Sales and earnings in the third quarter for S&P 500 companies increased 17% and 39%, respectively.
Stats to watch: Far be it from me to pass up great stats that could be easily shared on Twitter, so in the spirit of earnings season here are a few from FactSet that should get you thinking if stock valuations need to come in further to reflect the realities of the pandemic on companies (namely, inflation). Ninety-three S&P 500 companies have issued earnings guidance for the fourth quarter. Of these companies, 56 have released negative earnings guidance and 37 have disclosed positive earnings guidance. More S&P 500 companies are issuing negative earnings guidance than positive earnings guidance for a quarter for the first time since the second quarter of 2020. Already we have witnessed two quarterly duds this month: retailer Bed Bath & Beyond and Slim Jim maker Conagra Brands. On the latter, Conagra’s CFO Dave Marberger told me the company continues to deal with DOUBLE-DIGIT percentage inflation. Insane.
The bond market: The 10-year Treasury yield surged to 1.76% by the end of last week, up from 1.52% at the end 2021 (the largest five-day increase since September 2019, says Deutsche Bank). Huge move in five days time, something that brought a warning on risk assets from bond king Jeffrey Gundlach. I think David Kostin, Goldman Sachs chief U.S. equity strategist, put it perfectly in a new note on why you may want to take your cue from the bond market right now if you invest in stocks: “We have previously shown that the speed of rate moves matters for equity returns. Equities typically struggle when the 5-day or 1-month change in nominal or real rates is greater than 2 standard deviations. The magnitude of the recent yield backup qualifies as a 2+ standard deviation event in both cases.”
Other business news: Just when it seemed FedEx was turning the corner operationally, whack. “The explosive surge of the COVID-19 Omicron variant has caused a temporary shortage of available crew members and operational staff in the FedEx Express air network. Additionally, severe winter weather across the country has placed a strain on operations,” FedEx said in a release. One company definitely not turning any corner is Royal Caribbean. Reuters’ reports the cruise line operator is pausing cruises due to Omicron. Business Insider profiled Chris Ronzio, CEO of software company Trainual. Ronzio is reportedly paying workers $5,000 to quit in a clever tactic to retain top talent. Meanwhile, The Wall Street Journal dives into the pressured stock price of mortgage leader Rocket Companies. As a sidebar, here’s what Rocket Companies CEO Jay Farner recently told Yahoo Finance. I like where Barron’s Avi Salzman is going with this analysis on Robinhood. With the stock down 50% from its July IPO price and new exec hires in the mix, Salzman contends Robinhood may be a turnaround play this year.