Wall Street Breakfast: Power Chords

Power chords

There’s a lot of news hitting energy markets, which in turn, is hitting prices. Reports now suggest that OPEC+ is not looking at crude production cuts, while a renewed Iranian nuclear deal could push more barrels on the market. G7 finance ministers will also meet virtually tomorrow, and are expected to endorse a plan to set a cap on the price of Russian oil and commit to finalizing its implementation.

How would the caps work? Details are still being discussed, but they would likely be implemented close to the cost of Russian production, thereby denting Moscow’s finances, but still ensuring critical energy flows. To accomplish this, Europe would restrict the availability of transport and insurance services to shippers that agree to observe the price ceiling (~95% of the world’s oil tanker fleet is covered by the International Group of P&I Clubs in London and companies based in continental Europe). Another proposal would apply similar caps on Russian gas prices, or limit the usage of U.S. financial services that could also benefit the scheme.

WTI crude fell below $90 a barrel on the news after posting a third monthly decline in August (the longest losing streak since April 2020). The sentiment has also flowed into September, with WTI futures (CL1:COM) down 2% to $87.55/bbl at the time of writing. “Energy traders anticipate a brutal period for global growth,” added Edward Moya, senior market analyst at OANDA. “China factory activity remains depressed and another eurozone record-high inflation reading has raised the prospects of much more aggressive ECB tightening that could trigger a severe recession.”

A wild card: Markets have priced in a previously announced shutdown of the Nord Stream 1 pipeline, which will be closed over the next 72 hours for maintenance work. However, if Russia prolongs the closure (it has been restricting gas supplies over the past three months), energy prices could spike once again. Many in the industry say that Vladimir Putin is “weaponizing” supplies by creating uncertainty around the limited gas flows, while leveraging his position by adding to the anxiety in Europe. (3 comments)

Washed out?

The shorts appear to be winning the recent battle at Bed Bath & Beyond (BBBY). A drubbing on Wednesday means investors can now buy the stock with the company’s famous “20% off” coupon, and things aren’t looking any better premarket, with BBBY down another 6% to the $9 level. Shares were already deflating after meme mania pushed them up to the $23 range in mid-August, but they have shaved off nearly $1B in market value over the past two weeks.

The latest: Bed Bath has unveiled a plan to reduce a third of its in-house home goods brands and cut 20% of jobs across corporate and the supply chain. It also announced commitments for more than $500M of new financing, while potentially raising capital by selling as many as 12M new shares. Following a strategic review, it will retain the buybuy BABY banner, but the company will shutter 150 “lower-producing” locations.

“While there is much work ahead, our road map is clear and we’re confident that the significant changes we’ve announced today will have a positive impact on our performance,” said interim chief executive Sue Gove, after years of competition from the likes of Target (TGT) and Amazon (AMZN).

Burning through cash: Many of Bed Bath’s efforts are aimed at steadying its balance sheet, which ended May with around $100M, compared to $1.1B a year earlier. The retailer also predicts it used up another $325M in cash during Q2, which is closer to the amount analysts forecast the company would use over two quarters. It also means the cash burn over the last half a year was north of $800M, not a great sign especially when BBBY’s market cap is now around $760M. (64 comments)

Chip restrictions

Shares of Nvidia (NVDA) are also under pressure, down 6% in early trading, after warning that U.S. export restrictions on some of its products may hurt sales. According to an 8-K filing, Washington has imposed a new license requirement for any future export to China (including Hong Kong) and Russia of the company’s A100 and H100 integrated circuits. The latter is Nvidia’s forthcoming flagship chip that was announced earlier this year.

Bigger picture: Chinese organizations are reliant on cost-effective chips from Nvidia and others to carry out advanced artificial intelligence tasks like image and speech recognition. The chips also have military applications, such as scanning satellite imagery for weapons bases or filtering communications for intelligence gathering, and the U.S. government feels the new license requirement will mitigate those risks.

If Nvidia’s customers don’t want to purchase the company’s alternative product offerings, or if the U.S. doesn’t grant licenses in a timely manner or denies licenses to significant customers, it could impact the company’s outlook for its fiscal third quarter (which includes $400M in potential sales to China). Advanced Micro Devices (AMD) also warned that it received a similar note from the U.S. government, though it doesn’t see a material impact.

Go deeper: Recent reports stated that the Biden administration was reviewing new export sanctions on China, which involved chip equipment tools that could be used for making semiconductor advancements. The Commerce Department is also trying to figure out how to ban exports of tools that are sent to factories of Semiconductor Manufacturing International Corp. (OTCQX:SMICY), or SMIC, to prevent them from creating semiconductors at the 14-nanometer node and smaller. (107 comments)

‘Superbubble’ may pop

Weeks after ‘Big Short’ investor Michael Burry said the “market silliness” is back, famed fund manager Jeremy Grantham has issued a warning to “prepare for an epic finale” to the market cycle. He argues that the current “superbubble” in asset prices hasn’t deflated yet and appears to be dangerously close to its “final act.” Some have compared Grantham and Burry to “a broken clock” that is right twice a day, especially since they have been issuing “superbubble” warnings since the pandemic began, but the two have made serious money off bubbles in Japan in the late 1980s, the dot-com era and the U.S. housing market crash in 2008.

Quote: “One of those features is the bear-market rally after the initial derating stage of the decline but before the economy has clearly begun to deteriorate, as it always has when superbubbles burst,” Grantham wrote in a fresh research note. “This, in all three previous cases, recovered over half the market’s initial losses, luring unwary investors back just in time for the market to turn down again, only more viciously, and the economy to weaken. This summer’s rally has so far perfectly fit the pattern.”

“My bet is that we’re going to have a fairly tough time of it economically and financially before this is washed through the system. What I don’t know is: Does that get out of hand like it did in the ’30s, is it pretty well contained as it was in 2000, or is it somewhere in the middle? The U.S. stock market remains very expensive and an increase in inflation like the one this year has always hurt multiples, although more slowly than normal this time. But now the fundamentals have also started to deteriorate enormously and surprisingly: Between COVID in China, war in Europe, food and energy crises, record fiscal tightening, and more, the outlook is far grimmer than could have been foreseen in January.”

Outlook: Despite the warnings, an aggressive Fed tightening cycle and worries about the economy, most American retirement savers haven’t made changes to their portfolios. Only 5% of 401(k) and 403(b) investors shifted their asset allocations during the second quarter, according to Fidelity Investments, and the majority of those investors only made one switch to more conservative assets. Set it and forget it? Don’t time the market? (84 comments)

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