Barron's Weekend Summary: Merck's market value lost $30B by lunchtime and ended the day down 10%
Cover:
-Merck's market value lost $30B by lunchtime on July 30 and ended the day down 10%, largely due to a decrease in demand for its HPV vaccine, Gardasil, in China. This selloff is a warning for Merck investors, as big pharma companies rely on the success of a few big drugs. However, Merck is also facing the largest patent expiration in the industry's history, with Keytruda, a groundbreaking medicine approved ten years ago by the FDA. Keytruda, which turned the body's immune system against cancer cells, has revolutionized how doctors treat cancer. Merck sponsored hundreds of human studies, showing that Keytruda worked far better than existing treatments. Today, countless patients owe years of their lives to Keytruda, and the FDA has expanded its approval to cover new cancers and indications.
Interview:
A recent client note by geopolitical strategist Marko Papic warned investors that a Trump victory could lead to a "bond riot" as investors sell off U.S. debt in anticipation of higher inflation and deficit-driven growth. Papic, a chief strategist at BCA Research, a Montreal-based firm that advises clients on macroeconomics, politics, and investment strategy, has been closely watching the contest between former President Donald Trump and President Joe Biden and Vice President Kamala Harris. His often-contrarian and always-entertaining calls on how investors should think about the former and would-be future president have cost him friends, but he is not bothered. Papic is a keen reader of global political currents and has been closely watching the contest between Trump and Biden.
Tech Trader:
-Intel has reported a series of negative news, including 15,000 job cuts, a suspension of its dividend, and a disappointing outlook. The company reported adjusted earnings per share of 2 cents for its June quarter, compared to Wall Street's estimate of 10 cents. Revenue came in at $12.8B, compared to a $12.9B estimate. Intel also issued a worse-than-expected guidance, expecting $12.5B to $13.5B in revenue for the current quarter, way below the consensus call of $14.4B. This implies an 8% decline in revenue from a year ago. Wall Street's reaction was violent, with Intel shares finishing down 26%, the stock's worst day since 1985. Shares were off 42% on the year heading into Thursday's report, compared to a 14% rise for the iShares Semiconductor exchange-traded fund, SOXX. Intel CEO Pat Gelsinger said that the company has hit key milestones in its transformation toward becoming a foundry on par with Taiwan Semiconductor Manufacturing.
The Trader:
-The Dow plunged 852 points on Friday, while the S&P fell 1.8%, and the Nasdaq dropped 2.4%, putting it in correction territory. Investors went from hoping the Federal Reserve would gradually start cutting interest rates in September to begging for big rate cuts now. On Friday, traders began to wager that the Fed will announce a 50-basis-point cut in September, with Fed-funds futures suggesting a 71.5% chance that rates will drop by that much. The last two times the Fed made cuts of greater than 25 basis points were at the start of Covid-19 and during the 2008-09 financial crisis.
-The shift from gasoline-powered cars to electric ones in America will require significant changes and be expensive in the short term. PJM, a grid operator overseeing electricity connections in 13 states and Washington D.C. is waving billions of dollars in cash to companies producing electricity to convince them to build more power plants to meet the surging demand from electric vehicles, AI data centers, domestic factories, and other electricity users. Data centers powering artificial intelligence are expected to consume more of the nation's electricity, growing from 3% of the load in 2022 to possibly 9% by the end of the decade. The PJM area includes Virginia, home to more data centers than anywhere else on earth. In the short term, the biggest beneficiaries will be companies that already own nuclear and natural-gas plants, as well as some that produce natural gas needed for those plants. Natural-gas producers like Pittsburgh-based EQT should also benefit as natural-gas plants are likely to stay in service longer to benefit from higher PJM payments. Traditional utilities like Richmond-based Dominion Energy will also benefit from rising prices, but their upside is limited by their business structure, as state regulators decide how much of their costs they can pass on to consumers and what they can keep as profit.
Features:
-Vice President Kamala Harris is expected to announce her running mate next week as she campaigned through seven battleground states. The Democratic presidential nominee has vetted around a dozen candidates for the vice presidential position. Betting markets have Pennsylvania Gov. Josh Shapiro, Kentucky Gov. Andy Beshear, Arizona Sen. Mark Kelly, and Minnesota Gov. Tim Walz as favorites. Shapiro, who comes from a swing state critical to Harris's and Trump's election chances, is considered the front-runner. The vice president has disclosed a multimillion-dollar portfolio, but little is known about their personal finances.
-Vice President Kamala Harris' shift on fracking, a controversial process used to extract oil and gas from shale, aligns with the Obama and Biden administrations' recognition of the importance of US energy production in the economy and foreign policy. During her 2020 presidential campaign, Harris pledged to end fracking, which has made the US the world's largest oil and gas producer and major energy exporter. However, her campaign now signals her no longer opposing fracking. Instead, Harris is likely to highlight the differences between herself and President Trump on climate issues and her support for renewable and green energy. Harris was a supporter of the Green New Deal, which failed to win Congress approval and was part of the 2022 climate-focused Inflation Reduction Act. For investors, traditional energy holdings should remain attractive, but they might be more attractive under Harris if her policies cause oil prices to rise. Strategas Research believes that a Harris administration would be beneficial for integrated oil and gas companies due to higher commodity prices. However, Dan Pickering, chief investment officer at Pickering Energy Partners, expects Trump's policies to be beneficial for oil companies, as decarbonization efforts would slow and there would be an easier regulatory and tax environment.
Europe:
-Wall Street Journal reporter Evan Gershkovich has been released as part of a prisoner swap between the US and Russia, marking the largest deal of its kind between the East and West since the Cold War. The White House confirmed the release of former US Marine Paul Whelan, journalist Alsu Kurmasheva, Pulitzer Prize-winning columnist Vladimir Kara-Murza, and several political dissidents. The swap took place at an airport in Ankara, Turkey. The family of Gershkovich expressed relief and joy at the news, expressing gratitude to President Biden, Secretary Blinken, Jake Sullivan, Chancellor Scholz, and every US or foreign government official who helped get Evan released. The individuals were on a flight back to the U.S. and are expected to land Thursday night. Gershkovich was sentenced to 16 years in a Russian penal colony last month on charges of espionage, which both he and the U.S. deny.
Emerging Markets:
-Venezuelan President Nicolas Maduro has announced that he has won 51.2% of the vote for a third term, against opposition-backed rival Edmundo Gonzalez. However, Maduro's views are not widely believed, with Brazilian President Luiz Inácio Lula da Silva and Latin American neighbors demanding transparency, credibility, and legitimacy of the election result. The views that matter most are in Washington, which will take cue from Gonzalez and the power behind his campaign, Maria Corina Machado. Machado declared that Maduro's departure is irreversible but refrained from stoking spontaneous street protests after the vote. Instead, Machado and Gonzalez are focusing on access to ballots for a full count and building diplomatic support. The opposition is taking a responsible attitude, and calling people into the streets would be risky. Maduro's high road is unlikely to budge him from power, as he wiped out 80% of Venezuela's GDP over the following seven years.
Commodities:
-No update
Streetwise:
-JetBlue Airways, based in Queens, New York, has an activist investor, a new CEO, and a 12% stock price jump following its announcement of its turnaround plans. The company offers over 100 destinations across the US, with a few in Europe and plenty in the Caribbean and Latin America. New York is the largest US market, and capacity is constrained due to lack of acreage, airspace, and air-traffic controllers. This limits price wars but also makes for high delay rates. JetBlue gained popularity over its 25-year history by offering premium perks on all-economy flights, such as free Wi-Fi, seat-back entertainment, and extra legroom. However, seating is less egalitarian, with some seats branded Even More Space. A review last year found that these perks often cost too much compared to competitors, indicating JetBlue's pricing power on some of its posh routes.