Stocks plunged Friday after the latest government data showed a hot U.S. labor market that likely ends any doubt that the Federal Reserve will maintain its aggressive policy of raising interest rates. Nonfarm payrolls increased 263,000 in September after a 315,000 gain in August, and the unemployment rate unexpectedly dropped to 3.5%, matching a 50-year low. Among individual stocks on Friday, Credit Suisse soared 13% after launching a surprise $3 billion bond buyback, but Advanced Micro Devices plunged 14%, its biggest daily loss in two-and-a-half years, after preliminary third quarter sales missed projections by more than $1 billion. Friday’s market losses trimmed the gains for what started out as a big comeback week for stocks, with the Dow Jones rising 2% for the week, the S&P advancing 1.5%, and the Nasdaq adding 0.7%. Read Seeking Alpha’s Catalyst Watch for a preview of next week’s big events.
Not to be outdone by the new U.K. government and its reversal on tax cuts, Elon Musk stunned Wall Street with a bigger U-turn, reviving his original bid for Twitter (TWTR) at $54.20 per share. Musk’s move came just days before his scheduled deposition in the Delaware trial over the deal and after the release of texts leading up to the original offer. Investors can only speculate as to Musk’s motives, but whether they think he caved to avoid awkward questions about deleted texts, saw no chance of victory in Delaware, strategically delayed to shore up funding or something else, the $44B deal looks tentatively back on.
Bigger picture: As the week progressed, Twitter’s trial to force Elon Musk to go through with the agreement was paused until the end of the month to allow both sides to wrap up the deal. “If the transaction does not close by 5 p.m. on Oct. 28, 2022, the parties are instructed to contact me by email that evening to obtain November 2022 trial dates,” wrote Chancellor Kathaleen McCormick of Delaware’s Court of Chancery. Media reports and filings now suggest that the issues in contention are “debt financing conditions,” as well as “existing litigation,” “contractual obligations” and fears of further “mischief and delay.”
For his part, Musk sounded somewhat happy to be the acquirer of Twitter again, taking to the platform with his first substantial comment since the dramatic developments. “Buying Twitter is an accelerant to creating X, the everything app,” he tweeted, referring to a previous idea for creating something of a Twitter rival using his currently inactive X.com Internet domain.
Everything app: Responding to a user who suggested it would be easier to start X from scratch, Musk said “Twitter probably accelerates X by 3 to 5 years, but I could be wrong” – reiterating a point of view he expressed in August. (179 comments)
America’s national debt topped $31T for the first time, according to fresh figures from the Treasury Department on Tuesday. The record amount of red ink and gloomy fiscal milestone are adding to worries about the economic health of the country, which is grappling with red-hot inflation and a higher interest rate environment. Other factors like an aging population, elevated healthcare and defense costs, and a tax system that doesn’t bring in enough revenue to cover spending are also worrying as the federal government kicks the can down the road.
Quote: “So many of the concerns we’ve had about our growing debt path are starting to show themselves as we both grow our debt and grow our rates of interest,” said Michael Peterson, CEO of the Peterson Foundation, which promotes deficit reduction. “Too many people were complacent about our debt path in part because rates were so low.”
Long gone are the days of austerity conversations, the Tea Party movements or the balanced budget talk that made some political brownie points. Instead, many of the discussions today have shifted to whether the passing of more mega spending bills would be a net positive or negative for the overall economy. In fact, the U.S. has returned to the record debt-to-GDP ratio last seen in the aftermath of World War II, leaving the nation with a debt burden so large that it would need to spend an amount larger than the entire annual economy in order to pay it off (the debt-to-GDP percentage totaled 121% in Q2).
How much is too much? There’s no magic number or level for when a government’s debt begins to hurt its economy, but conventional thought said that as long as interest rates stayed low, the country could handle a much heavier debt load than was once thought possible (and even use those conditions to remain competitive on the international stage). However, the federal debt cannot grow faster than the economy indefinitely, especially as higher rates make servicing the debt more costly. Both the prior and current White House administrations have contended that trillions were needed to be spent fighting the COVID pandemic and a recession, but only time will tell if that just postponed the inevitable. (35 comments)
No outsized moves were seen in crude markets on Wednesday after OPEC+ slashed production by a whopping 2M barrels per day from November. That’s because traders had been pricing in the cut since Sunday, sending up WTI crude futures (CL1:COM) from $79 to $86 over the course of the week, before contracts at $87/bbl following the gathering in Vienna. Analysts also noted that the 2M headline figure will really translate into just over 1M barrels per day, or ~1% of actual global supply, given that many OPEC nations are currently producing well below their individual quota levels.
Snapshot: The bigger deal is that Saudi Arabia and Russia are not only willing to work together to prop up crude markets, but they are deepening their ties despite the war in Ukraine. The cut is a big win for Moscow, which has already lost about 1M bpd of production due to sanctions from the conflict, and faces an EU oil embargo starting in December. It’s also a blow to U.S. efforts of re-engaging with Saudi Arabia after President Biden labeled the country a “pariah” and refused to talk with Crown Prince Mohammed bin Salman for years following the killing of U.S.-based columnist Jamal Khashoggi.
Biden even undertook a trip to Riyadh in the summer after U.S. gasoline hit $5/gallon, promising at the time that the Kingdom would “take additional steps” to increase oil supply. While the sentiment took hold and prices at the pump came down, there are fresh fears over what an increase could mean for the U.S. economy, especially with gas costs already climbing over the past week (due to Midwest refinery problems and West Coast maintenance). For its part, OPEC+ painted the decision as a “preemptive” move against a slowdown in global demand, as well as not repeating the mistakes of central banks who took too long to respond to inflation.
Statement from the White House: “The President is disappointed by the shortsighted decision by OPEC+ to cut production quotas while the global economy is dealing with the continued negative impact of Putin’s invasion of Ukraine,” National Security Advisor Jake Sullivan declared. Biden will also consult with Congress on ways to “reduce OPEC’s control” over energy prices (signing of NOPEC legislation?) and continue to direct Strategic Petroleum Reserves releases “to protect American consumers and promote energy security.” Meanwhile, new reports suggest that the administration is preparing to scale down sanctions on Venezuela, which would allow Chevron (CVX) to resume pumping oil and reopen exports to American and European markets. (317 comments)
Major cannabis companies all closed markedly higher on Thursday as they appeared to be beneficiaries of comments made by President Biden in regards to a review of marijuana as a Schedule I substance. 38 U.S. states have already legalized pot either medically or recreationally, but it is still illegal in some states and at the federal level. Biden’s comments come just a month before the midterm election, and as the Senate contends with the significant marijuana reform measure – the Cannabis Administration and Opportunity Act.
Market movement: Tilray Brands (TLRY) soared 31% during the session, while Canopy Growth (CGC) added 22% on the day. The ascent of Canadian producers was joined by U.S. multi-state operators like Curaleaf (OTCPK:CURLF) and Trulieve Cannabis (OTCQX:TCNNF), but keep in mind that the sector can see outsized losses just as fast as it tacked on gains.
President Biden also pardoned 6,500 individuals convicted of “simple marijuana possession,” which will apply to federal offenders and those charged in the District of Columbia. “We classify marijuana at the same level as heroin – and more serious than fentanyl. It makes no sense,” he said in a statement. “Too many lives have been upended because of our failed approach to marijuana. It’s time that we right these wrongs.”
Outlook: 1 in 6 Americans are smoking marijuana these days, according to a Gallup poll from the summer, which highlights how the times are rapidly changing. However, annual arrests for marijuana possession still reportedly account for around half of all drug arrests in the U.S. According to cannabis market research firm BDSA, legal weed sales nationwide are expected to increase 7% Y/Y to $27B in 2022, despite an inflationary environment and recession concerns that have dampened consumer spending. (57 comments)
The nuclear rhetoric is growing louder as Ukraine continues to make serious battlefield advances. The country’s forces have regained control of thousands of square miles of territory since the beginning of September, especially in the areas recently “annexed” by Russia. The developments are pushing Vladimir Putin into a difficult corner, where he must decide how to paint the war as a victory and means for negotiation, or double down on a strategy of increasingly dark destruction.
Quote: “For the first time since the Cuban Missile Crisis, we have a direct threat to the use of nuclear weapons, if in fact things continue down the path they’ve been going,” President Biden declared. “I don’t think there’s any such thing as the ability to easily (use) a tactical nuclear weapon and not end up with Armageddon.” When ordering a partial mobilization on Sept. 21, Putin pledged to defend Russia’s territorial integrity with “all the means [of destruction] at our disposal,” adding that the threat was “not a bluff.”
“I’m trying to figure out: what is Putin’s off-ramp? Where does he find a way out?” Biden continued. “Where does he find himself in a position that he does not only lose face, but lose significant power within Russia?”
Nuke risk: As the threats and warnings increase, the U.S. Department of Health and Human Services shelled out $290M on Amgen’s (NASDAQ:AMGN) drug called Nplate, which is used to treat acute radiation sickness in the event of a nuclear emergency. The HHS said it wasn’t in “response to the situation in Ukraine,” but was rather part of “ongoing work for radiological security,” and adds to its stockpile of Leukine which has been in place since 2013. Closer to the front, Ukraine’s capital of Kyiv is stocking evacuation centers with potassium iodine pills, which can help prevent radiation absorption.
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