Wall Street Breakfast: What Moved Markets

Despite an inconclusive jobs report that contributed to choppy trading early in the session, stocks finished Friday with modest gains. The advance allowed the major US equity averages to break a four-session losing streak, which was fueled by the Federal Reserve’s refusal earlier this week to make a definitive pivot from its ultra-hawkish stance. For the full week the major averages finished lower, with the Dow shedding 1.4%, the S&P off 3.4% and the Nasdaq clipping 5.7%. The tone was set when Federal Reserve Chair Jerome Powell warned that the ultimate level of interest rates will be higher than expected and China reopening hopes faded. The 10-year Treasury yield (US10Y) ended the week at 4.18% and the 2-year yield (US2Y) stood at 4.67%. Looking ahead, the CPI report and US election loom next week as big events. Read about some of the other major events in Seeking Alpha’s Catalyst Watch.

Windfall tax?

BP (NYSE:BP) became the last of the Big Oil majors to report earnings this week, and the quarterly results quickly got controversial. Underlying replacement cost profit, used as a proxy for net profit, came in at $8.2B in the third quarter, up from $3.3B recorded in the same period a year ago. The report came at a time when commodity prices have surged, with oil and gas prices fueling inflation, in the aftermath of the coronavirus pandemic and Russia’s invasion of Ukraine.

In the crosshairs: “Oil companies’ record profits today are not because of doing something new or innovative. Their profits are a windfall of war, a windfall for the brutal conflict that’s ravaging Ukraine and hurting tens of millions of people around the globe,” President Biden said in a statement. “My team will work with Congress to look at these options that are available to us and others. It’s time for these companies to stop war profiteering, meet their responsibilities in this country and give the American people a break and still do very well.”

Talk of a windfall tax on energy producers first circulated among progressives, like Bernie Sanders and Elizabeth Warren, but it is now gaining traction in mainstream Democratic circles. Others feel that a tax would disincentivize and reduce current production, leading to even higher prices. They say it would also hurt future hydrocarbon investment, which has been weighed down by a regulatory environment that focuses on greener technologies and fails to address supply and demand imbalances.

Turning to history: The Crude Oil Windfall Profit Tax Act of 1980 was enacted under the Carter administration, and generated some $80B in gross revenues over the next eight years before being repealed by President Reagan. US crude production declined as much as 8% over the period, according to the Congressional Research Service, while Washington grew increasingly concerned that the tax had increased the nation’s dependence on imported oil. The CRS also cautions that despite the “windfall” name, it was really in excise tax, that was determined by calculating the “difference between the market price of oil… and a statutory 1979 base price that was adjusted quarterly for inflation and state severance taxes.” Better examples may be seen from the “war profiteering” levy enacted during WWI and a similar excess profits tax adopted during WWII.

How much are we talking about? Profits among the Big Oil majors totaled nearly $60B last quarter, including US-based Exxon Mobil (XOM) (+191% Y/Y to $19.7B) and Chevron (CVX) (+84% to $11.2B), as well as Europe’s BP (+145% to $8.2B), Shell (SHEL) (+129% to $9.5B), Eni (E) (+161% to $3.7B) and TotalEnergies (TTE) (+43% to $6.6B). American energy giant ConocoPhillips (COP), which was often included in the list prior to spinning off its downstream operations into Phillips 66 (NYSE:PSX) a decade ago, reported net income on Thursday that nearly doubled to $4.5BY/Y. (256 comments)

heart pumps

Looking to boost growth at its medical devices unit, Johnson & Johnson (JNJ) agreed to acquire cardiac pump maker Abiomed (ABMD) for an upfront payment of $380 per share, or a total of $16.6B (including debt and cash). An additional $35 per share will be paid if certain sales and regulatory clearance milestones are reached. Abiomed’s stock skyrocketed on the news, surgency nearly 50% over the session to close at $378.82 on Tuesday.

Bigger picture: The deal comes ahead of J&J’s planned spinoff of its consumer health business, which sells Tylenol and Band-Aids, into a standalone company in 2023. It will leave J&J more focused on its two remaining divisions, pharmaceuticals and medical devices. Abiomed’s fast-growing Impella device, billed as the world’s smallest heart pump, could provide a boost to the latter unit, with the device used to treat conditions ranging from a heart attack and failure to clogged arteries.

“This acquisition is consistent with that strategy, expanding J&J med tech into high-growth markets, and accelerating revenue growth while advancing the standard of care,” CEO Joaquin Duato declared.

go deeper: J&J is not tightly integrating Abiomed into the rest of its business, and it will operate as a separate entity within its MedTech division. The deal is expected to accelerate its near- and long-term sales growth, and will be slightly dilutive to neutral to its adjusted earnings per share in the first year due to financing impact, but the pharma giant projects the transaction will add nearly $0.05 in 2024 before becoming increasingly accretive thereafter. (28 comments)

No pivot yet

Investors need some time off after a topsy-turvy year, but things may not be better at the local amusement park. Fed Chair Jay Powell took the market on another rollercoaster on Wednesday, with a series of loop-the-loops aboard a ride known as the Dove-Hawk Twister. When all was said and done, the Dow dropped 500 pointswhile the S&P 500 and Nasdaq slumped 2.5% and 3.6%respectively, after initially soaring on the Fed’s announcement (that came along with a 75 bps rate hike).

Steep turns: “With the lags between policy and economic activity, there’s a lot of uncertainty, so that we note that in determining the pace of future increases will take into account the cumulative tightening of monetary policy, as well as the lags with which monetary policy affects economic activity and inflation… that’s why I’ve said at the last two press conferences that at some point it will become appropriate to slow the pace of increases. the one after that.”

“We may ultimately move to higher levels than we thought at the time of the September meeting. The incoming data since our last meeting suggests the ultimate level of interest rates will be higher than previously expected. The risks are asymmetric. If the Fed does too much, it can cut. If it doesn’t tighten enough, then you’re in real trouble… It is very premature to be thinking about pausing… We think we have a ways to go.”

Bottom line: Powell and Co. will be watching the data and evolving market conditions before making any significant pivot. The Non-Farm Payrolls report for October was released Friday, and will be followed by the Consumer Price Index on Nov. 10, and Personal Consumption Expenditures on Dec. 10 1. The latter is the Fed’s preferred measurement for inflation as it captures changes in consumer behavior and has a broader scope than the CPI. Global macro events will also be considered like Russia’s war against Ukraine and the effects of China’s zero-COVID policy. (101 comments)

King Cook

What a difference one year can make. Apple (AAPL) closed out Wednesday’s session with a market capitalization of $2,307T, making it more valuable than Alphabet (GOOG, GOOGL), Amazon (AMZN) and Meta (META) combined (worth a total of $2,306T). The latter group even started 2022 worth $4,410T, compared to the valuation of the iPhone maker at $2.913T.

Free cash flow: “Take a look at last quarter. Apple FCF: $20 billion, Google FCF: $16 billion, Meta FCF: $0.3 billion, Amazon FCF: -$5 billion,” tweeted financial YouTuber Joseph Carlson, who first pointed out the comparison. “Now of course one quarter doesn’t paint the full picture. But Apple is posting massive FCF like clockwork. The others are not.”

The four companies also reported earnings last week and only Apple’s results were met with a positive market reaction. Macs selling at a record pace outweighed a slight miss on iPhone sales, while the Tim Cook-led firm beat estimates on both the top and bottom lines. Weak growth, some misses and downbeat forecasts weighed on the other tech giants, while many are worried about Meta’s experimental pivot to a digital avatar-filled universe given its lack of regard to spending as the business burns billions.

Commentary: “Perhaps it’s investor expectations, demanding perfection across complicated conglomerates,” wrote Mark Shmulik, senior internet analyst at Bernstein, following the quarterly figures last week. “Or maybe Internet mega-caps are a lot less agile than we thought and [are] either unable or unwilling to adapt to a changing operating environment. What if it’s just structural and Internet incumbents need to spend an ever-increasing amount of capital in their mature years to keep competitors at bay? All the above.” (204 comments)

grain deal

Russia agreed to return to a Turkish and UN brokered agreement that allowed the shipment of millions of tons of Ukrainian grain through the Black Sea. It had previously pulled out of the deal following an alleged Ukrainian drone attack in Crimea last Saturday. Moscow said “written assurances” from Kyiv guaranteed that it would not use the humanitarian maritime corridor for military purposes, so the shipments could continue unobstructed.

market movement: Wheat futures plunged into the US and Europe on Wednesday, as well as other commodities. On the Chicago Board of Trade, wheat for December delivery (W_1:COM) settled down 6.3% to $8.46 per bushel, and December corn (C_1:COM) closed off 1.5% to $6.87 a bushel. The benchmark December contract on Euronext also settled 4.6% lower to €341.25/metric ton.

There’s been some debate about how much leverage Russia’s Vladimir Putin really holds over the deal, with the grain shipments continuing on Monday and Tuesday (and a one day interruption on Wednesday). Some say that the parties involved could push ahead despite Moscow’s objections, though others feel that it would be hard to ink shipping and insurance contracts to underwrite the voyages. Whatever the case may be, Putin will likely try to gain additional leverage ahead of the deal’s original expiration date of Nov. 19, and before the upcoming G20 Summit in Bali.

stats: Under the Black Sea Grain Initiative, more than 400 ships departing Ukraine exported 9.9M metric tons of corn, wheat, sunflower products, barley, rapeseed and soy over the past two months. (17 comments)

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