What do factory shutdowns in China, shipping delays in Europe and reduced agricultural output in the U.S. have to do with each other? They are all being caused by severe droughts impacting the world’s largest economies. Researchers say the dry spells are partly because of seasonal weather patterns like La Niña, but are also related to consequences of land degradation and climate change.
Snapshot: The Chinese province of Sichuan just announced it would extend industrial power cuts and activate its highest emergency response, impacting a number of global manufacturers like Apple (AAPL), Foxconn (OTCPK:FXCOF), Toyota (TM) and Volkswagen (OTCPK:VWAGY). The vital Yangtze, the longest river in Asia, reached its lowest level on record for August, affecting supply of hydropower and causing widespread shortages. Tesla (TSLA) has even asked the government to help ensure its suppliers have a sufficient amount of electricity, with over a dozen of them currently not able to manufacture at full capacity.
Over in Europe, cargo ships have had to reduce their loads due to critically low levels of the Rhine. The waterway is usually occupied with vessels transporting raw materials to power plants and factories, and Italy has even declared a state of emergency along its important Po River. Separately, agricultural forecasters in the U.S. now expect farmers to lose more than 40% of the cotton crop, while many acres of farmland are being left unplanted because of water shortages. In fact, the U.S. Bureau of Reclamation has announced that states like Arizona and Nevada will have to cut their water allocations by up to 21% next year because of the increasing megadrought in the Southwest.
Go deeper: The situation could drive up energy prices as hydro and nuclear power are reduced given the lower levels of water (that cannot sufficiently cool reactors). Higher transport costs and supply chain snarls could also raise food prices, adding to inflationary forces and squeezing a global trade system that was already under pressure from the coronavirus pandemic. (48 comments)
The end of a four-week winning streak is flustering some market participants as stock index futures remain in the red this morning (see movement below). While the S&P 500 has climbed 15% since its low at the beginning of the summer, it is still 11% lower over the course of 2022. The sentiment is causing fewer investors to call a complete market bottom, though there are still plenty of believers that feel the latest setback will prove to be more of a speed bump than serious turbulence.
Quote: “We’re bumping up against the moving average and that is a really convenient place for this to pause,” said Jeff Buchbinder, chief equity strategist at LPL Financial. “Frankly, we think the market has gotten a little bit ahead of itself in the very short term and needs to digest these gains. If the S&P can break its 200-day and hold, that’s when you probably get a lot more people in this market.”
In the coming week, investors will get another chance to see if the summer rally has legs. Earnings from tech names such as Salesforce (CRM) and Nvidia (NVDA), as well as discount stores like Dollar General (DG) and Dollar Tree (DLTR), will provide the latest clues about the health of the overall economy. The release of the Personal Consumption Expenditures Price Index – the Fed’s preferred inflation gauge – and Jerome Powell’s speech at Jackson Hole on Friday are also big events on the economic calendar.
Bear trap? This stock market rally echoes bear market moves going back to the onset of the Great Depression, according to BofA Securities. The average S&P 500 gain in 43 bear market rallies of more than 10% going back to 1929 is 17.2% over 39 trading days, while in this case, it is up 17.4% in 41 days, making it a “textbook” example. This time around, 30% of the S&P’s gain is due to just four stocks – Amazon (AMZN), Apple (AAPL), Microsoft (MSFT) and Tesla (TSLA) – noted strategist Michael Hartnett, adding that another risk for bulls is that whether the “Fed knows it or not, they’re nowhere near done.” (80 comments)
Bankruptcy fears already swept over the theater chain last week, but Cineworld (OTCPK:CNNWF) has just confirmed that it is preparing to file for Chapter 11. The developments have seen shares of the company plunge heavily following disappointing ticket sales and on news that dealing with a huge debt pile would likely have a big impact on existing stockholders. Things aren’t looking better in the near future as lower ticket levels tied to a limited film slate are expected to continue until November.
Quote: “Cineworld is in discussions with many of its major stakeholders including its secured lenders and their legal and financial advisers,” the company said in a statement. “As previously announced, any deleveraging transaction would, however, result in very significant dilution of existing equity interests in Cineworld.”
In the meantime, the firm’s global theaters are “open for business as usual and continue to welcome guests and members.” While the operation includes Cineworld and Picturehouse theaters in the U.K., as well as a handful of brands in eastern Europe, more than two-thirds of its 751 locations are in the U.S. where it owns Regal Cinemas. COVID-19 and tough competition from streaming services have weighed on America’s second-biggest theater chain, which had net debt of $8.9B at the end of 2021 vs. revenues of $1.8B.
No APEs here: Cineworld’s position (a cash crunch and a film business that isn’t quite back to 2019 levels) is not dissimilar to that of top U.S. chain AMC Entertainment (NYSE:AMC), whose meme stock is down 32% YTD and off another 34% premarket (but that is mainly due to the combination with preferred equity units that begin trading today). (5 comments)
Will he, or won’t he? Speculation is swirling around whether Warren Buffett’s Berkshire Hathaway (BRK.B) will make a bid for full control of Occidental Petroleum (OXY) after receiving regulatory approval to buy 50% of the driller. The Federal Energy Regulatory Commission said its authorization was “consistent with the public interest” and subject to various conditions. Following the news, shares of Occidental closed up nearly 10% at $71.29 on Friday, which comes on the heels of a blistering 146% YTD rally that makes it the best performer in the S&P 500 this year.
Backdrop: Buffett appears to be doubling down on the oil and gas – he also has a stake in Chevron (CVX) – at a time when many in industry consider it a dead business. The moves will also help him diversify an energy portfolio that includes several utilities and electricity distributors, as well as renewable power projects. Berkshire began accumulating its Occidental stake back in April after reading through the company’s annual report. The firm’s current 20.2% stake would even rise to nearly 27% if it exercised warrants accumulated during a 2019 deal that helped finance Occidental’s purchase of Anadarko Petroleum.
“No question Buffett goes to 50% from here,” declared Bill Smead of Smead Capital Management, noting that the moves are looking more and more like 2009-10, when Buffett amassed a significant stake in Burlington Northern Santa Fe railroad before buying the entire company. Occidental’s deep spending cuts, aggressive debt repayment and cash generating capabilities – $4.2B in free cash flow in Q2 – have made the company an attractive target for Buffett, added Truist Securities’ Neal Dingmann, saying the stock is “a great sort of hedge against a lot of his other businesses to own such a high free-cash-flowing business.”
Differing views: Others feel that Buffett is unlikely to try to gain full control of the company at current prices as he is typically known as a value hunter, though he may consider making a bid for the entire driller if oil prices fall and Occidental’s stock drops significantly. (46 comments)
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