Stocks ended the week with some momentum after economic data on the inflation front came in steady on Friday. The core personal consumption expenditures price index, considered a preferred inflation gauge by the Federal Reserve, increased 0.5% from the previous month and 5.1% from a year ago. While those marks are still considered high, they met the expectations of economists. Apple (AAPL) was also a general catalyst for the market with a 7.6% jump on well-received earnings. Despite a bruising day for Amazon (AMZN) following the e-commerce giant’s guidance shocker, the Dow Jones Industrial Average ended 2.6% higher on for the session, the S&P 500 Index tacked on a 2.5% gain, and the Nasdaq Composite ended up about 2.9%. The weekly marks were good as well for the major indexes, with the Dow up 5.7%, the S&P 500 3.9% higher, and the Nasdaq showing a 2.2% gain. Except for Communication Services, all 11 S&P 500 sectors ended the week higher, led by Industrials and Utilities. Looking ahead, investors have another heavy slate of earnings reports, a crucial Federal Reserve meeting, and the October jobs report to digest. Read about some of the other major events next week that could jolt stocks in Seeking Alpha’s Catalyst Watch.
Saudi Arabia fired off a warning shot aimed at the U.S. as a high-level standoff over crude oil and supply agreements went public. Prince Abdulaziz bin Salman, the Kingdom’s oil minister, accused unnamed countries of using their emergency oil reserves to “manipulate markets rather than helping with shortages of supply.” The remarks come after the Biden administration authorized the release of another 15M barrels of crude from the U.S. Strategic Petroleum Reserve as it tries to curb elevated gasoline prices in the wake of production cuts from OPEC+.
Quote: “We, as Saudi Arabia, decided to be the maturer guys,” he told the Future Investment Initiative Forum, otherwise known as Davos in the Desert. “It is my profound duty to make it clear to the world that losing emergency stock may become painful in the months to come. Running out of capacity has a much dearer cost than what people can imagine.”
Following some rushed diplomacy ahead of his summer trip to the Middle East, President Biden finally met with Saudi Crown Prince Mohammed bin Salman after previously pledging to make a “pariah” out of the Kingdom over the killing of U.S.-based columnist Jamal Khashoggi. There was an apparent understanding that the summit and a notable fist bump would lead to additional Saudi crude production, but things seem to be going the other way despite reported assurances. Riyadh first scrapped a paltry bump to OPEC+ production of 100K bpd on Sept. 5, and a month later deepened its cuts by a whopping 2M barrels per day, or about 2% of global supply.
Where things stand: The Saudis say the cuts are an attempt at balancing the market, which is not lacking any more crude, but is rather suffering from a lack of refining capacity, a crisis in the natural gas market and too rapid of a transition to renewables that weighs on current hydrocarbon investment. The American side is still in the middle of formulating a clear policy stance, though Biden has said “there will be consequences” for U.S.-Saudi relations. The administration is particularly concerned about the Kingdom’s growing ties with Russia and China, as well as market volatility that is expected once a European oil embargo goes into effect on Dec. 5. (426 comments)
Meta Platforms (META) cratered 20% AH on Wednesday following a mixed Q3 earnings report where the company topped revenue expectations, but missed on profits and warned of near-term sales challenges. The results wiped $65B off of Meta’s market capitalization, and followed a megacap selloff prompted by the earnings of fellow tech giants (and even Snap (SNAP) last week). Serious concerns have surfaced in the advertising space, partly due to Apple’s (AAPL) privacy changes, as well as rising competition from rivals like short-form video app TikTok.
By the numbers: Meta’s revenues fell by 4%, better than expected, to land at $27.7B, while costs and expenses weighed on operating income, which tumbled by 46% to $5.6B. Meanwhile, Facebook daily active users rose 3% to 1.98B, above an expected 1.86B, and monthly active users rose 2% to 2.96B (just short of expectations for 2.97B). As for its “Family of Apps,” including Instagram and WhatsApp, family daily active people rose 4% to 2.93B, and family monthly active people rose 4% to 3.71B. Ad impressions across the family even rose 17%, but average pricing per ad fell 18%.
“While we face near-term challenges on revenue, the fundamentals are there for a return to stronger revenue growth,” CEO Mark Zuckerberg said in his typically terse initial earnings comment. “I appreciate the patience and I think that those who are patient and invest with us will end up being rewarded.”
Meta losses: Revenue from Reality Labs, the company’s metaverse unit, nearly halved to $285M in Q3, while losses were $3.7B compared with $2.6B a year ago. The company expects operating losses for the division to “grow significantly year-over-year” in 2023, but still believes that’s where its future lies. So far, Reality Labs has bled $9.4B this year and investor scrutiny will only increase over Meta’s experimental pivot to a digital avatar-filled universe. (434 comments)
Alphabet: Shares of the Google parent (GOOG, GOOGL) slumped 6.6% AH on Tuesday following results that missed expectations on both the top and bottom lines. Slowing sales growth continued as YouTube was whacked by the sharp global downturn in online advertising, with the division’s ad revenue falling for the first time since the company began reporting its financial performance in 2020. “Times like this are clarifying,” CEO Sundar Pichai declared, adding that Google is pushing to become more efficient “by realigning resources to invest in our biggest growth opportunities” and that “Q4 [employee] headcount additions will be significantly lower than Q3.” (35 comments)
Microsoft: The company behind Windows saw its stock tumble 6.7% AH following a mixed bag of results that was stained by tech rival Alphabet. Revenue from Intelligent cloud computing, including Microsoft’s (MSFT) Azure and other cloud services, was the biggest piece of the company’s revenue puzzle, and totaled $20.3B, up 20% from last year’s quarter. However, a decline in PC sales and the dollar’s strength continued to weigh on profits and growth, while the C-suite said that some rough weather could be coming in the months ahead. (30 comments)
Amazon: Shares of the retail behemoth and cloud provider plunged 12.7% AH on Thursday after posting a downbeat sales forecast and missing on revenue estimates. Amazon Web Services (AMZN) also recorded its weakest growth on record, while the company’s gloomy outlook doesn’t bode well for the holiday shopping season. “As we’ve done at similar times in our history, we’re taking actions to tighten our belt, including pausing hiring in certain businesses and winding down products and services where we believe our resources are better spent elsewhere,” said CFO Brian Olsavsky. (208 comments)
Apple: The iPhone maker was initially down 4% in after-hours trading, but managed to finish the session by eking out a slight gain. Macs selling at a record pace outweighed a slight miss on iPhone sales, while Apple (AAPL) beat estimates on both the top and bottom lines. “We reported record revenue of $90.1B, which was better than we anticipated despite stronger-than-expected foreign currency headwinds,” noted CEO Tim Cook. “We reached another record on our installed base of active devices, and across our Services, we continue to see enthusiasm and strong engagement from our subscribers.” (112 comments)
Rising Treasury yields and an aggressive Federal Reserve has sent mortgage rates soaring this year, with things doubling over the course of 2022. In fact, the 30-year fixed-rate mortgage averaged 7.08% with an average 0.8 point for the week ending Oct. 27, up from last week when it averaged 6.94% and higher than 3.14% a year ago, according to the Freddie Mac Primary Mortgage Survey. The developments are starting to cool real estate prices, with the increase in borrowing costs locking many potential customers out of the market.
Snapshot: While housing is generally one of the most volatile sectors of the economy, residential fixed investment was one of the lowlights of Thursday’s GDP report. The industry decreased at a 26.4% annual pace in Q3, its worst showing in relation to the metric since the subprime mortgage crisis in 2007.
“The 30-year fixed-rate mortgage broke seven percent for the first time since April 2002, leading to greater stagnation in the housing market,” said Sam Khater, Freddie Mac’s Chief Economist. “As inflation endures, consumers are seeing higher costs at every turn, causing further declines in consumer confidence this month. In fact, many potential homebuyers are choosing to wait and see where the housing market will end up, pushing demand and home prices further downward.”
Commentary: “With average effective mortgage rates now north of 7%, virtually all housing affordability metrics we track are now in unprecedented territory – including our favored homeownership payment/income ratio,” Raymond James analyst Buck Horne wrote in a research note last week, downgrading homebuilders like KB Home (KBH), Lennar (LEN), M.D.C. Holdings (MDC) and PulteGroup (PHM). Horne now calculates that the monthly finance for a median existing home would now be almost 42% of a median family’s gross income, topping the prior 40% record that marked the 2006 housing peak. (5 comments)
A new era at Twitter (TWTR) means new leadership and Elon Musk has been quick to update his platform bio to “Chief Twit.” The billionaire this week finally completed his $44B acquisition of the social network, which will now operate as a private company. Among those departing the firm will be CEO Parag Agrawal, CFO Ned Segal, as well as Vijaya Gadde, the head of legal policy, and Sean Edgett, who has been general counsel at Twitter since 2012 (their combined termination payouts are set to top $200M).
What’s next? “The bird is freed,” Musk wrote in his latest tweet, and reportedly brought in Tesla (TSLA) engineers to meet with Twitter product leaders to dig into details and help him understand programming code. Musk also showed up carrying in a kitchen sink to Twitter’s headquarters in San Francisco. He joked “let that sink in,” but some feel that he’s rather going to weed out everything but the kitchen sink.
“The reason I acquired Twitter is because it is important to the future of civilization to have a common digital town square, where a wide range of beliefs can be debated in a healthy manner, without resorting to violence,” he wrote. “There is currently great danger that social media will splinter into far right wing and far left wing echo chambers that generate more hate and divide our society. That said, Twitter obviously cannot become a free-for-all hellscape, where anything can be said with no consequences! In addition to adhering to the laws of the land, our platform must be warm and welcoming to all, where you can choose your desired experiences according to your preferences.”
Still gotta make money: “Fundamentally, Twitter aspires to be the most respected advertising platform in the world that strengthens your brand and grows your enterprise,” Musk continued. He has also suggested Twitter should move toward subscriptions and remove ads from Twitter Blue, a premium program that gives users additional features. More recently, Musk has indicated the need to step up product innovation in an attempt to create an “everything app” that incorporates payments, shopping and commerce. (201 comments)
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