Wall Street Breakfast: What Moved Markets

Stocks clinched their fourth straight winning week with strong gains Friday after the monthly report from the University of Michigan showed a surge in consumer confidence, marking the second consecutive gain for the index since its June low. The upbeat data, coupled with a better than expected reading of the consumer price index earlier in the week, had some traders feeling euphoric that the worst inflation had passed and that the Federal Reserve might raise its main interest rate by just half a percentage point in September, after two consecutive three-quarter-point increases. Meanwhile, the bond market continues to take a pessimistic view of the economic outlook, with the spread between the two-year and 10-year yields deeply inverted at negative 41 basis points. The S&P 500 and Nasdaq gained for the fourth week in a row, up 3.2% and 3.1% respectively, while the Dow jumped 2.9% for the week.

Inflation Reduction Act

After more than 15 hours of amendments and a “vote-a-rama” session that stretched into Sunday afternoon, the U.S. Senate narrowly passed the Inflation Reduction Act. The measure – which aims to cut government deficits and consumer medical bills while boosting climate spending – passed by a margin of 51-50, with Vice President Kamala Harris casting the tie-breaking vote. It also somewhat embodies earlier incarnations of the Build Back Better plan, albeit with a price tag of around $430B (in place of $3.5T, and a revised version of $2.2T).

Healthcare policies: The measure will cap Medicare recipients’ out-of-pocket prescription-drug costs at $2,000 a year, while Obamacare subsidies will reduce 13M Americans’ annual medical-insurance premiums by $800. The measure also grants Medicare the ability for the first time to negotiate some bulk discounts with drug companies for pharmaceuticals – something many private companies currently do. Meanwhile, the $35 insulin cap for Medicare beneficiaries remains in place, but GOP lawmakers were successful in removing the provision from the private market, which could have impacts for top insulin makers Eli Lilly (LLY), Novo Nordisk (NVO) and Sanofi (SNY).

Tax legislation: The bill will impose a 15% corporate minimum tax on large corporations – some of which report significant profits but pay little or nothing in income taxes due to credits and deductions – such as Amazon (AMZN), Nike (NKE) and FedEx (FDX). It would also impose a new 1% tax on corporate stock buybacks, though plans to tax the wealthy were removed, as well as taxing “carried interest” payments of private equity fund managers. $80B of funding was still earmarked to the Internal Revenue Service, with the aim at improving customer service, increasing the number of audits and modernizing technology.

Climate investment: Incentives like a $4,000 tax credit for the purchase of used EVs, and $7,500 for new ones, will drive up interest in companies like Tesla (TSLA) and Ford (F) that are assembling vehicles in the U.S. The new credits would apply to trucks, vans and SUVs priced under $80,000 and cars up to $55,000 (only families with adjusted gross incomes of up to $300,000 would be eligible). There are also energy rebates for heat pumps, rooftop solar, electric HVAC and water heaters, as the U.S. aims to lower carbon emissions by around 40% by 2030. (447 comments)

Revisiting memeland

All aboard! Just don’t be the last one to get off the rocketship. Traders this week continued to buy up tickets to memeland, sending in fairies to circle the usual darlings.

To the moon: Bed Bath & Beyond (NASDAQ:BBBY) popped 40% on Monday as a record 120.5M shares changed hands, after gaining 30% in the previous session. GameStop (GME) was also halted for exchange for volatility, while AMC Entertainment extended another big rally. Further outsized gains were recorded by Express (EXPR), Overstock.com (OSTK), HEXO Corp. (HEXO), Vroom (VRM), Waitr Holdings (WTRH), Wayfair (W) and CarLotz (LOTZ).

The latest catalyst appeared to sprout out of the astounding rise and fall of AMTD Digital (HKD), which surged 32,000% since going public on July 15. The offbeat Hong Kong-based fintech priced its IPO at $7.80, and while it topped out at $2,540 last week, the movement was enough to remind the WallStreetBets crowd of skyrocketing moves. AMC (AMC) also announced plans last week to issue a special dividend via preferred equity units that will trade under ticker symbol “APE,” which is an online moniker for enthusiastic meme traders. Don’t forget the recent rebound on Wall Street that has infused some risk back into the market, while heavy short interest has set the stage for a meme comeback (more than half of Bed Bath shares available for trading are now currently sold short).

Go deeper: A lot of the meme names that are now seeing a resurgence are still down heavily since the initial fever of January 2021. Some still swear by the technicals, which have created countless day trading channels and messaging platforms, while others are quick to point to the eye-popping fortunes being posted online – but don’t forget the whopping losses that get far less coverage. As an outgrowth of the YOLO trade, meming is partly a strategy (short squeeze), partly a gamble (remember binary options?) and partly a middle finger to Wall Street (little guy vs. the suits), which has been compounded by the gamification of stock apps and access to commission-free trading. (17 comments)

Markets celebrate

Wall Street saw a stampede of buyers on Wednesday, as signs of cooling inflation sent the major averages soaring. The Dow Jones Industrial Average added more than 500 points, while the S&P 500 rose more than 2%, with all 11 sectors of the benchmark index finishing higher. The tech-heavy Nasdaq Composite also soared, bringing its recent gains to over 20% to enter bull market territory, while adding to the two-month recovery for financial markets.

The data: The rate of annual CPI inflation fell to 8.5% in July, from 9.1% in the previous month. Core CPI rose 0.3%, less than forecast, dropping to 5.9% on an annual pace. Traders now see a 43.5% chance the central bank will hike rate by 75 basis points in September (compared with 68% before the CPI numbers), according to the CME Group’s FedWatch tool, while a 50 basis point hike is shown as a 56.5% probability.

Going deeper into the figures, not everything was so rosy. Grocery prices rose 13% in July from a year ago, marking the fastest pace of inflation since 1979, while dining-out shot up as well. Shelter costs, which make up about one-third of the CPI weighting, also continued their ascent, up 5.7% over the past 12 months. However, gasoline eased down 7.7% in July from the prior month, while used-car prices, airline fares and apparel dropped on a month-to-month basis.

Commentary: “The number is a huge relief because anything that keeps the Fed from doing more damage is a positive for all of us,” explained Bryce Doty, portfolio manager at Sit Investment Associates. “One month doesn’t necessarily make a trend but we are certainly encouraged that inflation is moving in the right direction,” noted Jack Ablin, chief investment officer at Cresset Capital. (176 comments)

Disney edges Netflix

The magic returned to Disney (DIS) on Wednesday as a vacationer surge back into parks led to a third-quarter earnings upside surprise. Shares climbed nearly 7% to $120 in post-market trading, with revenue for Disney Parks, Experiences and Products jumping 70% to $7.4B and operating income surging to $2.2B. Tech innovations like reservation systems played a role in the parks’ outperformance, while confidence appeared to return after a bruising few months triggered by the “Don’t Say Gay” tussle between Disney (DIS) and Florida’s legislature.

Conference call: CEO Bob Chapek said all of the company’s theme parks are now open, and visits are strong, but cruise ships and international visitors have some recovery ahead. “Even while the average daily attendance at our domestic parks across the first three quarters of this fiscal year was slightly below 2019, we have delivered significantly higher revenue and operating income over that same time period,” added CFO Christine McCarthy. “This approach also provides flexibility with levers we can adjust if demand were to shift.”

Over in streaming, the House of Mouse beat estimates by tacking on another 14.4M users during the quarter for a total of 152.2M Disney+ subscribers (or 221M total streaming subs when factoring in ESPN+ and Hulu). At those numbers, Disney would have a larger base than its closest competitor Netflix (NFLX), though it continues to bleed cash. Disney’s streaming operation lost $1.1B during FQ3, more than triple its loss of $293M a year earlier.

Oh, boy! Growth expectations were cut after Disney failed to renew cricket rights for the popular Indian Premier League. Subscriber forecasts for 2024 now range between 215M-245M, down from 230M-260M, prompting the company to unveil a new U.S. pricing structure to make its streaming business profitable. Starting Dec. 8., Disney+ with commercials will cost $7.99 per month – which is currently the price of Disney+ without ads – while the monthly membership of ad-free Disney+ will rise 38% to $10.99. (75 comments)

Crisis on the Rhine

An economic slowdown in Germany is now more likely than ever as fresh troubles on the Rhine River pose a headache for shipping and heavy industry. Levels at Kaub, a key point on the waterway west of Frankfurt, were poised to breach 40 centimeters (15.75 inches) on Friday, and will continue to dwindle in navigability in the coming days. Below that marker, it’s not economical for many barges to transit the river, which is used to ship everything from oil & gas and coal to chemicals and grain.

What happened? Weeks of dry weather have weighed on Europe’s major waterway, with shallow depths preventing barges from loading their full volumes. The effects could ripple through the continent for months, just as the region is on the brink of recession from the war in Ukraine and untamed inflation. Economists estimate the Rhine disruption could knock half a percentage point off Germany’s growth this year, adding to the significant price pressures seen across many Western European countries.

“We’re expecting this situation to continue towards the end of the year,” noted Toril Bosoni, head of the IEA’s oil market division, adding that conditions could be more precarious for landlocked countries in central and eastern Europe that normally get energy deliveries via the Rhine.

Making preparations: Chemical maker BASF (OTCQX:BASFY) hasn’t ruled out production cuts as it placed orders for shallow-water barges and uses more rail to transport goods. Utility Uniper (OTC:UNPPY) warned that it cannot bring enough coal by train to run its plants at full capacity for an extended period of time, threatening output at Germany’s coal-fired power stations. Crisis teams at Thyssenkrupp (OTCPK:TKAMY) are also meeting daily as the steelmaker uses ships with lower drafts to keep up supplies. (14 comments)

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