Tag: news

Authored by Charles Hugh Smith via OfTwoMinds blog,

No federal bailout or stimulus can reverse these three dynamics, and no amount of legerdemain can replace the spending of the top 10%.

Few of those anxiously seeking a rebound in consumer spending take into account the top 10% of households account for almost 50% of consumption, and that top 10% skews heavily to the older, wealthier top tier whose free-spending ways have been built on the enormous wealth effect as their stocks, bonds and real estate assets have soared in value over the past 12 years.

The top 10% has largely escaped the significant financial hits cutting a swath through the bottom 90%, but that’s about to change. Few of the top 10% have seen their pensions cut, their portfolios of stocks and bonds shredded, their home value in free-fall or their managerial / technocrat position eliminated. Most are watching the financial devastation from the security of owning 85% of the nation’s assets, and from positions in the protected-class with access to federal money, either directly or indirectly.

Three factors could materially suppress the future consumption of those responsible for 50% of all consumer spending.

1. Age-related caution about exposure to the virus. Not only are many of the top 10% older, many of these households are caring for parents in their 70s, 80s or 90s. Given the heightened risks for these demographics, is it really worth it to go into crowds for entertainment? The short answer is no. Furthermore, these older, wealthier households have been there and done that— foregoing cruises, air travel, fine dining, live music, etc. is not that much of a sacrifice, as they’ve enjoyed all these niceties for decades.

2. As corporate revenues and profits continue sliding, the managerial / tech class will start getting culled. All sorts of positions that looked “essential” before the pandemic are suddenly on the chopping block.

3. The wealth effect is about to reverse as the Everything Bubble finally pops. With the Nasdaq at record highs, bonds rising in value as yields plummet and the real estate market bubbling along on 3% mortgage rates, such a reversal is widely viewed as “impossible.” Of course it is–until it isn’t. All bubbles pop.

All the bright spots of consumption fueled by top 10% spending–rising sales of second homes, RVs, home remodeling, etc.–are based on the incomes and wealth of the top 10% never materially declining. But how realistic is it to reckon a rotten-to-the-core economy dominated by greedy monopolies and cartels and looted by financier skims that is finally in an inevitable free-fall would magically leave the top 10% untouched?

How realistic is it to reckon that the Everything Bubble would magically continue inflating forever when history is conclusive that all bubbles pop?

No federal bailout or stimulus can reverse these three dynamics, and no amount of legerdemain can replace the spending of the top 10%.

*  *  *

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Will You Be Richer or Poorer?: Profit, Power, and AI in a Traumatized World ($13)

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*  *  *

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Just when we thought the woke PC madness of 2020 couldn’t get anymore absurd, a local incident out of Michigan is so astoundingly stupid that even the AP reported on it with a tone that aptly captures the inanity:

Owners of a Michigan bed and breakfast have removed a Norwegian flag outside of their business after being accused of promoting racism from people who think that it is a Confederate flag.

Kjersten and Greg Offenecker, owners of The Nordic Pineapple, hung the flag opposite of the American flag after they moved into the Civil War-era mansion in 2018, the Lansing State Journal reported. They took both flags down last week.

“This flag is so often mistaken for the Confederate flag and people are often offended by it before they realize that they are mistaken,” Kjersten Offenbecker, owner of The Nordic Pineapple bed and breakfast, wrote on Facebook last week. She said she was forced to “find a less conspicuous place” for the flag after what amounts to constant harassment over it.

The Nordic-themed business reported receiving “at least a dozen hateful emails,” and a constant barrage of verbal attacks for the Norwegian flag, which merely happens to be red, with a blue and white cross. It had long flown beside the American flag over the boutique hotel’s front steps.

“We love being members of the St. Johns community and are heartbroken to have had to make this decision,” Offenbecker said.

Perhaps she’s more heartbroken about how absolutely stupid people are? It appears so…

“It bugs me as far as the stupidity of people,” Greg Offenbecker remarked. “Even if the flag is blowing in the wind or laying limp, there are no stars on it. They look nothing alike.”

“I don’t see it because I grew up with the Norwegian Flag,” Kjersten Offenbecker said. “To me, they are two distinct flags.”

The AP reports the couple, obviously of Norwegian heritage, have two Black children which they previously adopted.

Yet the whole flag kerfuffle has resulted in repeat accusations that they are ‘racist’.

It’s 2020 and though many have high hopes of preserving the Republic, we’re more clearly fast descending into an Idiocracy.

Heading into the current, Q3 quarter – typically one of Apple’s slowest of the year – Wall Street was expecting Apple to report revenue of $52.2 billion, or another slight decline from last year, even though Apple didn’t provide guidance for the quarter and is unlikely to do so again until the coronavirus pandemic ends. Despite the slowdown, AAPL shares rallied a whopping 43% from April through June, Apple’s best quarterly performance in eight years (during what is typically its slowest quarter). As Bloomberg notes, analysts cited everything from the iPhone maker’s App Store revenue growth, the potential of its wearable products, stock buybacks and the potential of its services business as helping outweigh the impact of the coronavirus. The biggest driver of optimism is the release a 5G iPhone, expected later this year. At the same time, while looking at the current quarter, analysts were expecting a continuation of recent trends, including a sizable dip in iPhone sales, at revenue of over $21.3 billion, but a jump in services, with revenue of $13.12 billion.

So with that in mind, moments ago AAPL joined the rest of the megatech sector in reporting absolutely blockbuster results largely boosted by the record stimulus – in both the US and across the world – which included:

• Revenue growth of a huge 11%, amid expectations of a decline
• iPhone sales were up, on projections of a decline
• All other categories – Mac, iPad, Wearables, Services – grew

And while Apple didn’t give a forecast again, it did announce a 4 for 1 stock split, clearly anticipating further gains.

Here are the Q3 details:

• Revenue of $59.7 billion, smashing estimates of  $52.3 billion
• EPS of $2.58, also shaprly above the estimate of $2.07
• iPhone revenue grew 1.7% to $26.4 billion.
• Services grew 15% to $13.2 billion.
• Mac sales were up 21% at $7 billion.
• iPad revenue grew 31% to $6.6 billion
• Wearables, home and accessories jumped 17% to $6.5 billion, est $6.09

Did Americans use their stimulus checks to buy iPhones and Apple watches? It sure seems that way. Only it wasn’t just America: Apple sales were up in every region with the Americas contributing the most.

For the first time in two years, sales rose Y/Y across all regions:

And while this was supposed to be a slow quarter for AAPL, it was anything but:

Just as remarkable is that contrary to expectations of a decline in unit sales, everything from iPhones, to iPads to Macs saw higher revenues Y/Y, as locked down consumers snapped up new iPhones, iPads and Mac computers to stay connected during the pandemic.

There were a few blemishes, including a rare sequential decline in Service revenue, which dipped to $13.156BN from $13.348BN last quarter.

Services dipped from a record 22.9% of total revenue last quarter to 22.0%, still up from 21.3% a year ago:

Discussing the quarter, CEO Tim Cook said:

It was broad-based quarter in terms of our growth. iPhone did better than what we had expected. We saw a slow first three weeks of April where the Covid-19 impact was particularly bad. And then when the lockdowns and point of sales began to come back some, we saw a marked improvement in May and June, more than we had estimated.”

A few more bullet points from the Bloomberg TV interview:

• Pandemic “likely” helped results for Mac and iPad due to work from home and remote learning
• “Digital services had a really strong performance with record revenues on the App Store, Apple Music, Video, and Cloud Services.”
• “Advertising and AppleCare were impacted by reduced economic activity and the store closures”
• iPhone and wearables “likely” were hurt due to the store closures.
• Store closures “weigh” on results and he expects it to continue to.
• “We’re not giving guidance because of the uncertainty.”

And some details on the stock split:

“Each Apple shareholder of record at the close of business on August 24, 2020 will receive three additional shares for every share held on the record date, and trading will begin on a split-adjusted basis on August 31, 2020.”

One thing that won’t get prominent notice is Apple’s net cash (excluding total debt), which after hitting a record of $163BN in Dec 2017 has shrunk in half to $81BN, the lowest level in 9 years.

Joining most other tech companies, Apple said that its U.S. employees won’t return to the office until early 2021; earlier in the week Google said that its employees will stay home until next July.

In any case, looking at the market verdict, investors are clearly delighted and just like the other gigatech companies, Apple stock is soaring, and after exploding above $400, has taken out its previous all time high.

Heading into today’s earnings call juggernaut which sees almost $5 trillion in market cap report among just 4 companies (AAPL $1.7TN, $1.2TN, GOOGL $1TN, AMZN FB $670BN) Amazon had emerged as the one FAAMG stock that was viewed as the cleanest clean shirt among the uber-mega-cap techs (unlike Facebook and Google it has no risky ad exposure; unlike Apple it has no risky China exposure) and despite a drop in its consensus earnings estimates…

… the stock has soared 60% in 2020 hitting a new all time high, and a record market cap of $1.5 trillion, more than $300 billion higher than where it was during its last, Q1 earnings calls (which was a disappointment due to the company’s forecast of shrinking profits) on expectations that the online retailer would be the biggest beneficiary of the transformation in US society to one where most work from home and just order random stuff online while conventional retailers rush to file for bankruptcy.

Which is not to say that the other megatechs have done poorly, on the contrary, the Nasdaq has rallied more than 50% from the depths of the market rout in March and is trading near a record high, thanks almost entirely just to five stocks, among which all the four companies reporting today including Apple, Amazon, Facebook and Alphabet, which are also among the top 5 heaviest-weighted stocks in the S&P 500. Needless to say, an outsized move in any or all of the four would tilt the whole market.

Here, a quick reminder: last quarter, Amazon said the current quarter would come with a multi-billion footnote: while under normal circumstances, Amazon would be expected to reap a second-quarter operating profit of something like $4 billion, instead the company projected a surge in covid-linked costs such as logistical changes, more staff in warehouses, as well as measures to keep them and their corporate peers safe, which would offset the profit. As a result, Amazon forecast an operating income range of $1.5 billion to a $1.5 billion loss, which however clearly did not adversely impact the stock (except for a brief period of a few hours after last earnings were reported).

So was all this optimism – and staggering stock price surge – justified? Well, apparently yes and bigly so because the company not only smashed earnings expectations, but also reported net sales for the second quarter that beat the highest analyst estimate.

• Q2 Revenue of $88.9BN, Exp. $81.24BN
• Q2 EPS of a whopping $10.30 vs exp. $1.51
• Q2 EBIT of $5.843BN vs exp. $420MM
• Q2 AWS revenue of $10.81BN, a small miss of expectations of $11.01BN, up 31%
• As noted above, Amazon said it spent over $4BN on incremental Covid-19 costs

In other words, Amazon smashed both top and bottom line expectations, despite a small miss on AWS expectations. But it was Amazon’s superb forecast that stoked investors, sending the stock soaring after hours:

• Amazon sees 3Q Net Sales $87.0B to $93.0B, both well above the exp. $86.51B

• Operating income is expected to be between $2.0 billion and $5.0 billion, compared with $3.2 billion in third quarter 2019. This guidance assumes more than $2.0 billion of costs related to COVID-19.

As shown in the chart below…

… projected Q3 revenue growth of  28.6% (taking the midline) was clearly just as impressive and indicates the company does not expect any headwinds on the topline.

There was more good news in the company’s profit margin which rose sequentially to 6.6%, the second highest in recent history.

Some other headlines from the report:

• Created Over 175,000 New Jobs Since March
• Invested Over $9B in Capital Projects
• Increased Grocery Delivery Capacity by Over 160%
• Online Grocery Sales Tripled in 2Q vs Period Last Year
• 3Q Oper Income View Assumes Over $2B Covid-19 Costs
• Third-Party Sales Grew Faster Than First-Party Sales

As usual AWS was the primary source of profit, and with $3.357 BN in operating income (up from $2.121 BN a year ago) or 57.5% of the company’s total operating income of $5.843. Meanwhile, the international division finally appears to have stopped burning cash, and after generating $22.7BN in sales, it resulted in its first profit in years, to the tune of $345MM in Q2.

To summarize, AWS revenue growth continues to slow modestly:

•     Q1 2018: 48%
•     Q2 2018: 49%
•     Q3 2018: 46%
•     Q4 2018: 46%
•     Q1 2019: 42%
•     Q2 2019: 37%
•     Q3 2019: 35%
•     Q4 2019: 34%
•     Q1 2020: 33%
•     Q2 2020: 28.9%

However, offsetting this is that after declining for a year, AWS operating margins posted a rebound for a second consecutive quarter:

•     Q1 2018: 25.7%
•     Q2 2018: 26.9%
•     Q3 2018: 31.1%
•     Q4 2018: 29.3%
•     Q1 2019: 28.9%
•     Q2 2019: 25.3%
•     Q3 2019: 25.1%
•     Q4 2019: 26.1%
•     Q1 2020: 30.1%
•     Q2 2020: 31.0%

Meanwhile, Amazon’s North America segment margins rebounded from 2.84%, the lowest in three years, to 3.86%.

Commenting on the results, Jeff Bezos said that this was another highly unusual quarter:

“This was another highly unusual quarter, and I couldn’t be more proud of and grateful to our employees around the globe.”

“As expected, we spent over $4 billion on incremental COVID-19-related costs in the quarter to help keep employees safe and deliver products to customers in this time of high demand—purchasing personal protective equipment, increasing cleaning of our facilities, following new safety process paths, adding new backup family care benefits, and paying a special thank you bonus of over $500 million to front-line employees and delivery partners. We’ve created over 175,000 new jobs since March and are in the process of bringing 125,000 of these employees into regular, full-time positions. And third-party sales again grew faster this quarter than Amazon’s first-party sales. Lastly, even in this unpredictable time, we injected significant money into the economy this quarter, investing over $9 billion in capital projects, including fulfillment, transportation, and AWS.”

And speaking of employees, Amazon now has a record 876.8K workers.

Needless to say, with blowout earnings and stellar guidance, the stock is surging after hours, and was approaching it all time high.

Heading into earnings tonight, Facebook had been making plenty of headlines on twitter as an increasing number of virtue-signalers claim they are boycotting ad spend on the social media network (and not merely cutting costs amid COVID).

“We’re glad to be able to provide small businesses the tools they need to grow and be successful online during these challenging times,” said Mark Zuckerberg, Facebook founder and CEO.

“And we’re proud that people can rely on our services to stay connected when they can’t always be together in person.”

There appears to be zero impact from the ad-boycott (though the boycott didn’t technically start until July 1, the first day of the third quarter, so it’s unlikely there’s any impact visible in these numbers) as Facebook smashed the ball out of the park, beating on every major metric:

• *FACEBOOK 2Q EPS $1.80, EST. $1.39

• *FACEBOOK 2Q REV. $18.69B, EST. $17.31B (+11% YoY – its lowest since the IPO)

• *FACEBOOK 2Q AD REV. $18.32B, EST. $16.92B

• *FACEBOOK 2Q MONTHLY ACTIVE USERS 2.70B, EST. 2.63B (+12% YoY)

• *FACEBOOK 2Q DAILY ACTIVE USERS 1.79B, EST. 1.74B (+13% YoY)

We do note that Free Cash Flow fell significantly…

Looking ahead, Facebook sees DAUs and MAUs “flat to slightly down QoQ,” and ad revenue for Q3 in line with July (which given the boycott may mean weaker) and expects FY20 CapEx at the high of the $14-16bn range.

“In the first three weeks of July, our year-over-year ad revenue growth rate was approximately in-line with our second quarter 2020 year-over-year ad revenue growth rate of 10%. We expect our full quarter year-over-year ad revenue growth rate for the third quarter of 2020 will be roughly similar to this July performance.”

This sent FB shares up almost 9% after hours to a new record high…

Facebook outlines several factors contributing to its outlook, including:

• First, continued macroeconomic uncertainty, including the pace of recovery and the prospects for additional economic stimulus;

• Second, our expectation that some of the recent surge in community engagement will normalize as regions reopen;

• Third, the impact from certain advertisers pausing spend on our platforms related to the current boycott, which is reflected in our July trends; and

• Lastly, headwinds related to ad targeting and measurement, including the impact of regulation, such as the California Consumer Privacy Act, as well as headwinds from expected changes to mobile operating platforms, which we anticipate will be increasingly significant as the year progresses.

Finally, we note that Facebook’s headcount was 52,534 as of June 30, 2020, an increase of 32% year-over-year.

A re-weakening in jobless claims data (confirming no v-shaped recovery), a record-breaking collapse in GDP and consumption (admittedly backward-looking) and Trump tweet hinting at election delays all spoiled the party early on in US equity land but around 1030ET ‘someone’ decided this mini-dip was for buying and everything surged ahead of tonight’s mega earnings data. Only Nasdaq managed gains on the day, however with The Dow the biggest laggard…

Look at The Nasdaq… isn’t it pretty!!!

The bounce appeared to be triggered by a technical test by The Dow of its 200DMA and 50DMA…

The Fed better be ready to do some more buying…

Source: Bloomberg

FANG Stocks rallied intraday ahead of tonight’s earnings, bouncing off unch for the week…

Source: Bloomberg

The Dollar continued its pattern of gains in Asia and weakness in Europe and US sessions…

Source: Bloomberg

Breaking down below a critical uptrend line…

Source: Bloomberg

Gold and Silver were spooked briefly higher on Trump’s tweet but retreated to end the day – unusually – lower…

Treasuries were bid with the long-end outperforming (30Y -4bps, 2Y -1bps), 10Y is outperforming on the week…

Source: Bloomberg

Pushing the entire yield curve to record low yields…

Source: Bloomberg

As Stocks remain near record highs…

Source: Bloomberg

With 10Y back at the spike lows from the very worst of the market collapse in March…

Source: Bloomberg

Yield curve has flattened significantly since The Fed statement…

Source: Bloomberg

And before we leave ratesville, we note that the Dec 2021 Fed Funds futures is implying a -3bps rate… easing since The Fed yesterday…

Source: Bloomberg

Cryptos were mixed today with Ethereum and Litecoin best but still a big week…

Source: Bloomberg

Ethereum tested back up to $330 intraday…

Source: Bloomberg

The energy complex was hit today with WTI slammed back below $40 to a $38 handle intraday (before panic-buying lifted it back)…

And Nattie tumbling hard…

And finally, ahead of tonight’s earnings-pocalypse, a quick look at the big tech names vs their consensus EPS…

Source: Bloomberg

Notice any similarities?

Via AlMasdarNews.com,

A Hebrew-language channel stated on Wednesday night that the Israeli army expects an attack by Hezbollah during the Islamic Eid Al-Adha holiday.

The Israeli Broadcasting Corporation, Kann, reported that Israel fears a “second attack” by Hezbollah in the next 48 hours, that is, during the celebration of Eid al-Adha.

The news channel reported that, based on this expectation, the Israeli army has strengthened its forces in the north near the Lebanese and Syrian borders, deploying advanced missile systems, special rockets and intelligence-gathering capabilities, for fear of a reaction from Hezbollah, after one of its members was killed in an airstrike on July 20th in Damascus.

The Israel-based news channel quoted a “Lebanese diplomat in Beirut” – whom they did not name – as saying that Hezbollah does not want a comprehensive escalation with Israel, but that it is looking for a real retaliation.

It is noteworthy that the strengthening of the Israeli forces in the northern region comes in light of the tensions along the Israeli-Lebanese border.

המתיחות בצפון | בישראל חוששים מפיגוע נוסף של חיזבאללה שייצא לפועל בתוך 48 שעות. צה”ל מתגבר עוד יותר את הכוחות בצפון במערכי אש מיוחדים, רקטות מיוחדות ויכולות איסוף מודיעין”. הדיווח של @moyshis ב-#חדשותהערב pic.twitter.com/pUPjUTVHAp

— כאן חדשות (@kann_news) July 28, 2020

Hezbollah previously denied the Israeli army’s claims about their forces attempting a ‘sabotage’ operation in the occupied Sheba’a Farms region near the Syrian and Israeli borders.

MLB’s hopes to press ahead with its season following the Marlins outbreak may have just been dashed. As it turns out, the Marlins apparently spread the virus to at least two Phillies personnel, the team admitted Thursday. The infections were detected during Thursday’s round of tests, but both a coach and a staff member who were found to be infected had been tested Wednesday, and passed. Neither were experiencing symptoms as of Thursday.

The two cases forced the team to cancel all activity at Citizens Bank Park “until further notice,” which will likely lead to more game cancellations for the league.

pic.twitter.com/gn4KitN4vu

— Philadelphia Phillies (@Phillies) July 30, 2020

As CNBC reported earlier, the outbreak at the MLB is a blow to companies within the sports world like the TV networks and media and advertising companies that depend on the games, along with the new gaming stocks that allow speculators to gamble on the games.

In another example of how doctors can come to two completely different conclusions based on the same body of evidence, Dr. David Ho, a world renowned infectious disease doctor, told CNBC’s Meg Tirrell that the prospect of sports succeeding without a bubble “are not good” – pointing to “what we are seeing with MLB” as an example. Dr. Ho, as it turns out, is an advisor to the NBA, which is using a bubble.

Others pointed out that the MLB has had a minuscule COVID-19 positivity rate in recent weeks. MLB conducted 42,000 tests with about .03% positive, if one sets aside the Marlins’ players.

Even though no players have been found to be positive, the Phillies were not going to play until Saturday at the earliest as they awaited test results. Now, a plannbed series against the Blue Jays has been postponed, according to Toronto manager Charlie Montoyo.

The last time the team played was Sunday, when they hosted the Marlins. Since then, 17 Marlins players and 2 coaches have tested positive for the virus, and the team has had to cancel a handful of games.

A Phillies series this week that was to be played against the Yankees was postponed out of caution.

Additionally, the news sent shares of DraftKings down more than 1.5%, extending a decline triggered by the first positive tests from the Marlins, as worries about the future of the 60 game season grow.