Barron’s Weekend Summary: Policy makers in China are pulling out all the stops and get its 1.4B people spending more
Cover Story:
-Policy makers in China are pulling out the stops to revive the economy and get its 1.4B people spending more, after three hard years of stringent Covid restrictions and harsh crackdowns on technology and other industries. Beijing has completely reversed its zero-Covid policy and has begun loosening regulations on business. Up next: more stimulus to stabilize the residential property market. “Domestically, all the switches that can be switched on have been moved toward growth, and there’s a lot of momentum behind it,” says David Semple, manager of the fund.
Interview:
-No interview this week
Tech Trader:
-Microsoft delivered the stock market a truck full of lemons this past week. Investors chose to see a tanker filled with lemonade. It’s a positive sign ahead of the most important week for fourth-quarter tech earnings. In 2022, tech stocks were crushed, as the Federal Reserve aggressively lifted interest rates. A month into 2023, the Fed seems closer to the end of its tightening cycle than the beginning, but only now are we seeing those higher rates begin to slow demand for tech goods. The result is that corporate earnings for the next few quarters could be ugly. If 2022 was all about reduced price/earnings multiples as rates ratcheted higher, 2023 will be all about reduced “E,” as demand contracts. This coming week many important tech players will report, including Meta Platforms, Apple, Alphabet, and Amazon.com. The results should shed new light on the ad market and consumer spending trends. And they will provide fresh insights into the most important trend in enterprise technology: cloud computing.
The Trader:
-Expect Fed Chairman Jerome Powell to remind investors of interest rates the central bank hikes them this coming week. There’s no big secret about what’s been driving the recent rally. Inflation has been falling, and the market is betting that the Fed will see enough improvement to stop hiking interest rates in the near future. That would be good news, of course, because investors’ big fear is that the central bank will tighten right into a recession. It’s all very encouraging, but there’s a Fed announcement coming Wednesday, and there’s a good chance the central bank will feel the need to push back against the bulls’ expectations. It won’t be with the Federal Open Market Committee’s rate hike; there’s a near certainty of a quarter-point increase in the federal-funds rate.
-Despite a strong start to 2023, the sector hasn’t really budged over the past two months. The iShares Expanded Tech-Software Sector ETF, which counts names like Microsoft, Salesforce, and ServiceNow as top holdings, has returned just 1% since Nov. 25. The stocks have been held back by concerns that customers will cut IT spending as the economy weakens and sales slow, with Microsoft’s disappointing guidance this week highlighting these worries.
Workday stock may be a bright spot amid the software slump. Shares of the company, which provides cloud applications for companies to manage their data, have gained 17% over the past two months, buoyed by strong earnings in November. That report showed that sales still grew quickly even in an uncertain corporate spending environment, and the strength is likely to continue into 2023.
Features:
-On Thursday, Bed Bath & Beyond
admitted what many industry analysts have suspected for quite some time—the company is quickly running out of cash and can’t pay off its sizable debt.
There’s likely more pain—and narrowing options—ahead for the retailer. In a delayed quarterly filing with the Securities and Exchange Commission on Thursday, the retailer said its lenders were calling back their loans after the company failed to prepay an advance on a credit facility, triggering events of default. An event of default is a pre-defined circumstance that allows lenders to demand full repayment of the outstanding loan before it’s due, as well as seize any collateral if the company is unable to pay the debt.
“I am convinced that Bed Bath & Beyond is teetering on the brink of bankruptcy,” said Daniel Gielchinsky, partner at DGIM law. “I am convinced that Bed Bath & Beyond is teetering on the brink of bankruptcy,” said Daniel Gielchinsky, partner at DGIM law.
-The Federal Reserve’s preferred measure of inflation cooled again, the latest sign that an era of red-hot prices is coming to an end and that the central bank may soon shift to a less aggressive stance on monetary policy.
That would be good for stocks, but a recession would be decidedly negative. And the data also added to concern that one could be on the way.
The core personal-consumption expenditures price index, also known as the core PCE deflator, rose 4.4% on an annual basis in December from 4.7% in November, in line with expectations of economists surveyed by FactSet. The headline PCE deflator, which includes food and energy prices, declined to 5% last month from 5.5% in the period prior, further evidence of cooling inflation.
European Trader:
-Investors weary of the past and rough year for US stocks in 2022, might wonder about the chance for better overseas. Germany—the world’s third-biggest economy, known as the powerhouse of Europe—might be one place to look. The country’s DAXDAX index of blue-chip stocks lost 12% last year. Not great, but still better than the S&P 500 index’s nearly 20% drop.
Deutsche Telekom, Germany’s flagship telecommunications company, splits the difference between betting on the US economy and exposure to overseas stock markets. It’s a big German company that makes most of its revenue in the U.S. through T-Mobile, the mobile-phone operator of which it owns just under half. T-Mobile was a Barron’s stock pick in August. Deutsche Telekom has a presence in more than 50 countries, and its shares have gained almost 30% in the past year.
Emerging Markets:
-India, the soon-to-be most populous nation, has increased its imports of Russian crude oil 33-fold since the Russian invasion of Ukraine began last February, to more than one million barrels a day. It’s getting a bargain. Russia’s Urals crude blend is selling at around a 30% discount to global benchmark Brent, $22 on every barrel at today’s price, says Hunter Kornfeind, an oil market analyst at Rapidan Energy Group. That spread was more like 5% before the war.
That’s not all. India imports nearly 90% of its crude oil but is rich in refining capacity. Refiners are gobbling cheap Russian crude for re-export as diesel fuel and other products, at healthy mark-ups. Demand for this trade should leap on Feb. 5, when the European Union adds an embargo on importing Russian refined products to the one it slapped on Russian crude in December. “India could become the de facto refinery for Europe,” says Venkat Pasupuleti, co-portfolio manager for India at Dalton Investments. And one of the biggest oil-products exporters happens to be India’s largest publicly traded company, Reliance Industries
Commodities:
-The European Union will ban imports of Russian oil products early next month, in a move to further punish Russia for its invasion of Ukraine, but one that could lead to tighter global supplies and higher prices for products such as diesel. The ban on Russian oil products is likely to have a bigger impact than the EU ban on Russian seaborne oil and the Group of Seven price cap on Russian oil, says Tom Kloza, global head of energy analysis at the Oil Price Information Service, or OPIS, a Dow Jones company. The EU banned imports of Russian seaborne crude oil from Dec. 5, and plans to ban imports of certain Russian petroleum products from Feb. 5.
Streetwise:
-The Superbowl, television’s biggest draw, is just three weeks away, as Jack Hough reminds us. But millions of households have cut their cable subscriptions. Thus they’ll soon turn to Google with queries like “how to stream Super Bowl 2023.” This year, the answers are confusing and dissatisfying. But some of the same answers serve as useful streaming stock recommendations from Hough. Last year, streaming the Super Bowl was easy. NBC carried it, and cable cord-cutter streamers could turn to its corporate cousin, Peacock, which aired the game on its $9.99 a month premium tier. But this year, the Super Bowl is playing on Fox, which plays Switzerland in the streaming wars.
Recall that Fox sold the bulk of its TV and movie assets to Walt Disney in 2019 for $71.3B. What’s left of the company includes the Fox broadcast network and this year’s Super Bowl, but not enough to easily fill out a mass-market streaming platform, and management doesn’t seem interested for now. Fox and Barron’s parent News Corp used to be part of the same company, and have overlapping ownership. So, cord-cutters who are looking to stream the Super Bowl on the equivalent of Peacock or Paramount+ won’t find it. Instead, they’ll be directed to services like Hulu+ Live TV, YouTube TV, Sling TV, and fuboTV. Those are technically part of streaming, too, but they’re really live channel bundles that pay for the networks they carry. Two companies poised to benefit from all users are Netflix and Disney, because of their global scale. The others have it worse. Former broadcasters who are now building streaming businesses don’t have rich international histories, and their programming tends to be more oriented toward a US. prime-time audience. Expect consolidation says Wolfe Research entertainment analyst Peter Supino. Paramount Global is the likeliest target for its strong growth but weak cash flow in streaming, and Warner Bros. Discovery is the likeliest buyer because it lacks Paramount’s scale in sports.