>>> Barron’s Weekend Summary

Barron’s Weekend Summary: A transition to a new pandemic normal holds major implications for the U.S. economy, and particularly for the hard-hit services sector, where recovery so far has been stunted even as spending elsewhere has soared


Cover Story:
-A transition to a new pandemic normal holds major implications for the U.S. economy, and particularly for the hard-hit services sector, where recovery so far has been stunted even as spending elsewhere has soared. It’s likely to be reminiscent of the country’s first two reopenings—in summer 2020, after the initial series of lockdowns lifted, and spring 2021, after widespread vaccinations and another round of stimulus checks fueled fresh confidence among Americans. Consumer spending on services jumped 9.1% from the second to the third quarters of 2020, and 4% from the first to the second quarters of 2021.

Interview:
-Barron’s interviews economist Eswar Prasad. Prasad wrote The Future of Money: How the Digital Revolution Is Transforming Currencies and Finance, a 500-page book that has become a road map for money managers, market strategists, and others seeking to understand this new world. With a background in global trade, monetary policy, and financial regulation, including a stint as the International Monetary Fund’s top hand on China, Prasad has spent his career studying the global economic landscape.

Tech Trader:
-Tech investors just survived what could be the most tumultuous stretch of earnings we’ve ever seen. The tech megacaps— Alphabet, Amazon, Apple, Meta Platforms, and Microsoft—are some of the most widely scrutinized institutions on Earth. Investors, analysts, journalists, and legislators poke, prod, test, and study the companies down to a microscopic level. And yet this quarter, each one of them managed to surprise. Facebook parent Meta Platforms tanked the entire market on Thursday after its weak report, only to see stocks rescued a day later by Amazon’s impressive growth.

The Trader:
-The stock market had the feel of steering out of a spin after hitting an ice patch—and driving away safely. Unfortunately, the road ahead may be even more treacherous. The S&P 500 gained 1.5% this past week, its second week of gains following a disastrous start to the year, while the NASDAQ rose 2.4%, and even the Dow Jones Industrial Average, which has held up better than both, rose 1%. “That the market managed to finish higher despite some wild swings suggests that stocks may be ready to run. It’s not every week, after all, that we see the Nasdaq Composite drop 3.7% in one day, as it did this past Thursday after Meta Platforms ’disastrous earnings report, and still finish the week higher.”
-It has been an up-and-down story for the Knightscope stock since it moved from the over-the-counter market to NASDAQ —where it made its debut a week ago Thursday, at $14.44. The shares quickly fell to $6, then shot above $27 on a Monday gush of trading. Knightscope stock tumbled for the rest of the week, to a Friday close of $9.01.-

Features:
-Bitcoin has rebounded more than 3% over the last 24 hours, pushing to just below $41,700, as the crypto market appeared to regain momentum. The gains appear to have benefited at least one trader: Sen. Ted Cruz (R-Texas). A big proponent of crypto, Cruz has railed against initiatives in Congress to tax and regulate the industry. At a Senate hearing last November, he had harsh words for Democrats considering new rules for the industry.
-Tesla could be bigger than both General Motors and Ford Motor combined, by sales, in just five years — if everything plays out the way Morgan Stanley analyst Adam Jonas is thinking. It’s a provocative idea for investors to ponder — and a bit of a shocking one. Two century-old auto makers with hundreds of billions in sales eclipsed by a start-up founded less than 20 years ago doesn’t seem plausible. It really shouldn’t be. The market has already declared a victory in the electric vehicle transition. Still, the math behind that kind of market share shift and growth is something to behold.

European Trader:
-Shares in Germany’s HelloFresh, the world’s leading meal-kit delivery company are down more than 20% this year, putting it near the bottom of Frankfurt’s blue-chip DAX index. But not all pandemic stocks are equal. HelloFresh is bruised, but it’s a buy. The stock benefits from tailwinds predating Covid-19 and is undervalued by multiple metrics. HelloFresh’s business is delivering weekly meal kits to subscribers. Consisting of pre-portioned ingredients and cooking instructions, the kits offer choices across cuisines and dietary preferences. “Venison Steaks and Creamy Peppercorn Sauce” and “Zucchini Pomodoro Penne Bake” were among the recent offers.

Emerging Markets:
-The past three months have been tough for Russian stocks. The VanEck Russia ETF has dropped 27% over the past 60 days of trading, among the largest drawdowns since Covid-19 hit in 2020. While Russian stocks have rallied a bit since bottoming on Jan. 24, it seems that the likelihood of a Russian invasion of Ukraine continues to grow. Capital Alpha Partners’ Byron Callan, for instance, puts the probability of a conventional conflict between Russia and Ukraine around 70%.

Commodities:
Oil prices were rising sharply again Friday, hovering around eight-year highs on continued geopolitical fears, a wave of cold in the U.S. and concerns about the capacity of OPEC to keep to its production targets. Brent crude, the international benchmark, was up to 2% to $92.89 a barrel while West Texas Intermediate, which had passed the $90 mark Thursday, was up 2.1% to $92.1 a barrel.

Streetwise:
-This week Jack Hough opines on Cathie Wood: “Opinions on Cathie Wood run strong. ‘She knows nothing more than anyone else,’ one reader all-capped me in an email this past week. I think value investors have been waiting so long for a momentum-stock comeuppance that some are now trying to remember the moves to their end-zone dances.”

NYT : DealBook: Michael Lewis revisits ‘Liar’s Poker’

NYT : DealBook: Michael Lewis revisits ‘Liar’s Poker’

Good morning. It’s been more than 30 years since Michael Lewis wrote “Liar’s Poker,” his best-selling book about the reckless, frat-guy culture of investment banking. In today’s newsletter, Andrew talks with Mr. Lewis about how Wall Street has (and hasn’t) changed since.

In 1989, a 29-year-old Michael Lewis published the groundbreaking book “Liar’s Poker,” a telling narrative about his time as a bond salesman at Solomon Brothers in the late 1980s. More than 30 years later, it remains required reading on Wall Street.

“Liar’s Poker” launched Mr. Lewis’s writing career, leading to more than a dozen books, many about business, including “The Big Short.”

Now, Mr. Lewis, who said that until recently he hadn’t reread his original effort since it was published, is revisiting it and everything that has happened over the past three decades on Wall Street in a new podcast called “Other People’s Money,” which will be released next week. He has also recorded a new audiobook version of “Liar’s Poker.”

I’ve known Mr. Lewis for more than 15 years. He’s been a hero to me: I read “Liar’s Poker” when I first started my career as a financial journalist, and it opened up my eyes to just how much fun writing about finance could be. While I never found writing easy, I always envision him playing the keyboard like a piano, with a wide grin on his face.

This week, we spoke about the state of Wall Street and the impact of “Liar’s Poker” on its culture. The interview has been edited for clarity.

DealBook: When you wrote “Liar’s Poker,” what kind of impact did you think it would have? What did you think was going to happen to Wall Street?

I vividly thought that I was trying to describe Brigadoon. It could never survive. They were willing to pay me probably millions of dollars, but certainly hundreds of thousands, to dish out financial advice when I certainly didn’t know what you should be doing with your money. I just thought, this is impossible. It felt like the end of an era. Michael Milken was going to jail. It was like one thing after another. Society is going to get its arms around Wall Street. And this financialization business is going to stop or be slowed. I was wrong about that.

It may not have ended. But do you think it changed?

The place tolerated a range of human behavior and a range of character that corporations don’t today. The corporate culture was almost anything goes and there was a delight in that, especially for someone writing about it. There wasn’t anything quite like Solomon Brothers then. Now it’s all been kind of flattened into this gray. I think there are characters like Jamie Dimon who would have fit very comfortably on the Solomon trading floor. But I think the environment has changed.

The sound and the smell and the kind of taste of the place seems to have changed. I’ve walked onto a big hedge fund trading floor, and they’re completely silent. They’re just guys and women staring at screens and doing things with their computers. It’s such a different environment, even though maybe the underlying relationship to the rest of the society hasn’t changed.

It seemed to me that your book was an indictment of Wall Street but may have had the opposite effect. Oliver Stone’s “Wall Street” was supposed to be an indictment, too, but everybody wanted to be Gordon Gekko.

Yeah. I know. And I didn’t quite see that coming. For me, it was like just a gas to write. They were kind of funnier on the page than they were in real life. I guess I should have anticipated that mainly what a young person was going to get from this was how much fun Wall Street was.

Personally, do you have a positive or negative impression of Wall Street?

I can’t say I don’t like Wall Street people. I love some of them. But I think the system is perpetually screwed up, and I don’t quite understand why, except that people get themselves in positions of influence and they’re able to make money from a screwed up system. I think of it as morally neutral. If they’re incentivized properly, they tend to do things that are more or less in the interest of everybody else. And if they’re incentivized badly, they don’t.

As a storyteller, what do you think of today’s set of characters?

My impression is that technology has made the characters somehow a little less rich. It’s more like there’s a flatness to it that technology has encouraged. The old characters of that era were sort of smashing the aisles. They were disrupting Wall Street in all kinds of ways.

Is Robinhood a company doing that now?

I’m not sure what Robinhood upends — preserving both a fiction and the guts of a screwed up stock market without making a real dent on anything meaningful. And the fiction is that people can go into the market and systematically beat the market and you should be doing this with your money. I understand it’s fun if you’re treating it like a casino. It is not a very healthy one. I think of Vanguard as being more useful, disruptive than Robinhood, teaching people not to do that.

Do you think journalists should be trying to protect small investors? Many retail investors now say they want to take risks. They want a chance at the lottery ticket.

I never really felt the need to protect that kind of person from himself. I figured nature will take its course. The reflex of the old small investor was “how come you didn’t protect me,” right? There is maybe more of a libertarian streak in the loudest of the punters in the stock market.

And then there are characters like Elon Musk upending all sorts of things. Walter Isaacson is now apparently going to write his biography.

Look, if Elon Musk invited me to ride shotgun with him, of course I would. I just don’t think he would. I don’t think I’m the writer he has in mind.

Are you surprised the book is often required reading for new employees on Wall Street today?

No boss on Wall Street was making their employees read “Liar’s Poker” in 1990. It was like, you’re not supposed to read that. Now it’s become a kind of weird manual.

WSJ : GameStop Investors Still Await Riches From Epic Short Squeeze

GameStop Investors Still Await Riches From Epic Short Squeeze
Short-seller theories that helped drive company’s 2021 rally have gained a large following online

Ben Wehrman clocks into his job as a Tesla salesman five days a week. His real work begins when he clocks out at night.

The 27-year-old Californian often spends his evenings, coffee in hand, researching a topic that has captivated hordes of individual investors online: an alleged Wall Street conspiracy to suppress the price of GameStop Corp. GME 3.13% shares.

In December, after pulling several all-nighters, Mr. Wehrman published a nearly 16,000-word thesis on his blog. “The true depth of this collusion hasn’t made it into the public eye yet,” he wrote.


The theory: short-selling hedge funds are covering up a vast volume of bets against the stock. Believers say if individual investors continue to buy and hold GameStop, the short sellers’ wagers will eventually blow up and the small-time players who held the stock will strike it rich.

There is a long history of conspiracy theories in finance. The 1929 crash was variously blamed on banking tycoons, the Federal Reserve and the British government. For decades, gold bugs have hoarded coins in fear that the U.S. government is set to unleash hyperinflation. During the financial crisis, some investors conjectured that authorities had formed a secret “plunge-protection team” to prop up the market.

These theories often take off during market turning points when investors are grappling with widespread uncertainty. That kind of unease reigns now as the Covid-19 pandemic has unleashed investor anxiety and the Fed’s coming wind-down of easy-money policies has roiled markets.

A belief that GameStop was under attack from unscrupulous short sellers was a key part of the stock’s rally in early 2021 and hasn’t gone away. If anything, it has become more deeply embedded among some investors, as many believe financial markets are stacked against them.

Their hope is that if enough people hold on against the shorts, they can engineer the “Mother of All Short Squeezes,” or MOASS.

Official data show that total short bets against GameStop are about 15% of the company’s freely floating shares—a high but not extraordinary level of bearish wagers. And there is no evidence that short interest in GameStop is significantly higher, Wall Street executives and analysts say.

Yet, since the start of 2021, the phrases “MOASS” or “Mother of All Short Squeezes” have been mentioned more than 1.3 million times on Reddit and more than 600,000 times on Twitter, according to data through Thursday from the global media-intelligence company Meltwater. Reddit forums at the epicenter of MOASS discussions have hundreds of thousands of members.

The MOASS adherents say GameStop shares will soar to unprecedented highs—thousands or perhaps even millions of dollars per share. The theory goes that legions of small investors will hit the jackpot while losses cripple the financial elite.

Mr. Wehrman, who said he has 80% of his investment portfolio in GameStop, plans to quit his job once the squeeze occurs—to travel the world and work on his blog.

Others expect the big short squeeze to hit AMC Entertainment Holdings Inc., AMC 3.23% the movie-chain operator whose shares are also beloved by individual investors.

Antonio Martinez, a 26-year-old probation officer in Minnesota, was a newcomer to the stock market when he began buying AMC last February. Since then he has poured more than $17,000 into it. For him, the coming MOASS isn’t just about a life-changing payday—it is also about market fairness.

“Every day there’s some sort of illegal activity going on that we don’t know about,” Mr. Martinez said.

GameStop is down 31% so far this year, while AMC shares have tumbled 44%. Because he started buying into AMC well before it surged to an all-time-high last year, Mr. Martinez is still sitting on more than $4,000 of paper profits. “If it is still shorted and people are still in this, then I’m still in this,” he said.

The crux of the MOASS theory is a belief that GameStop and AMC are victims of an illegal practice called naked shorting.

In a typical short sale, a trader looking to bet against a stock must borrow shares before selling them. The goal is to buy them back at a lower price. If successful, that trader returns the borrowed shares and pockets the difference. The practice is commonplace on Wall Street.

Naked short selling, in contrast, occurs when a trader skips the first step, typically with the aid of a broker that purports to locate shares to borrow without actually doing so.

Controversy over naked shorting last flared up during the 2000s decade. The Securities and Exchange Commission tightened its rules. Naked shorting has become rare since then, according to financial-industry pros.

“Conspiracy theories are alive and well for many subjects, and naked shorting is the biggest one in the financial space,” said Ihor Dusaniwsky, managing director at S3 Partners, a technology and data analytics firm that tracks short-selling activity.

MOASS believers have parsed esoteric data, plunged deep into financial documents and interviewed experts from past battles over naked shorting. They accuse firms such as S3 of publishing misleading statistics on the level of short selling in GameStop and AMC.

Some investors are trying to accelerate the MOASS with a procedure that has lately vaulted out of obscurity to become a hot topic on GameStop and AMC forums.

Called direct registration, it effectively removes an investor’s shares from the control of brokerages who might lend them out to short sellers.

Since September, more than 100,000 people have directly registered ownership of meme-stock shares, according to Paul Conn, an executive at Computershare, the firm that oversees the process for GameStop and AMC.

Mohammad Hormozzadeh, a 31-year-old day trader in Brooklyn, N.Y., was one of those investors who directly registered shares. He expects the big short squeeze to hit GameStop later this year.

A native of Iran, he was briefly jailed by Tehran’s authorities in 2011 for antiregime activism, according to Mr. Hormozzadeh and media accounts at the time. He later came to the U.S. and earned a master’s degree in financial engineering from New York University.

Today he is a pro-GameStop activist. He owns fewer than 100 shares. Mr. Hormozzadeh frequently touts GameStop on social media and criticizes its perceived enemies. These include the mainstream media, which he considers biased against the company. Until recently his Twitter account was named Call Me Mo (ASS).

He expects that large-scale direct registration will bring on the Mother of all Short Squeezes later this year.

“The short sellers in GameStop are stuck,” he said. “They have no other option.”

>>> MS's Global Reflections

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These past few weeks have been nothing short of ‘eventful’ to say the least. While earnings season typically brings more volatility to single name stock returns, this time around has brought some of the most violent swings in recent memory. Of course, much of this has been exacerbated by the timing of investors broadly reassessing valuation and positioning against tightening financial conditions and waning Omicron headline risk. Unlike last year, the indices are finally reflecting all of the carnage and turbulence beneath the surface. Look no further than the Nasdaq 100, which yesterday recorded its worst daily decline (-4.2%) since September 2020 but still managed to end this week positive (+1.66%). So where does this leave investors and expectations going forwardas we continue to assess fundamentals throughout upcoming earnings prints?

 

Investors have been eager to ‘get ahead’ of their peers on positioning throughout earnings, seeking out any broad read-across from company-specific results. After Meta (FB) blamed TikTok competition, ad revenue headwinds and supply chain related cost increases for a wide earnings miss, the company fell -26%, erasing a staggering $230bn+ of market cap in one day. Many investors abandoned Snapchat (SNAP) in the same fashion, expecting similar headwinds and competition to lead to an earnings miss the next day for the company. Instead, a -20% WTD decline through Thursday turned into a +28% gain for Snapchat (SNAP) on the week, after the company crushed Street expectations for 4Q21 revenue and 1Q22 guidance. Amazon (AMZN) followed a similar path this week, gaining +13.5% today alone after a similar sell-off following Facebook’s earnings miss. Taken together, these massive price swings throughout the week certainly reflected plenty of overexcitement from investors racing to get ahead of the pack on earnings expectations. Patience will be the ultimate keythroughout the rest of earnings season, as it has been painfully difficult to predict some of these results as well as any commensurate responses from the market.

 

Following some eye-catching swings in equity prices throughout this week, I would have expected this market to be more friendly to stock pickers as dispersion trends lean toward single names instead of between sectors. Instead, a meaningful jump in volatility across sectors this week washed out much of the dispersion tracked by the MS QDS Team, as it is normalized for volatility. The MS QDS Team estimates single name volatility across the SPX is now in the 93rd %tile over the last 5 years, while the ratio of dispersion between vs. within sectors remains near the median (46th %tile, +3% WoW). This has been a challenge for many investors seeking out more idiosyncratic returns as stocks struggle to break out from broader macro movements. What’s been a meaningful shift in this earnings period vs. Q3 is the heightened focus on sales as investors reassess the price they’re willing to pay for growth. Andrew Pauker and the MS US Equity Strategy team highlight that price reactions to EPS beats with sales misses have underperformed -0.8% relatively. In addition to this, earnings reactions to EPS/Sales misses are also being punished severely (-2.5%) whereas beats on EPS/Sales are only up +0.8% relatively. This focus on growth, in particular a balance of both top-line and underlying earnings has been a key barometer for company-specific sentiment. Furthermore, guidance on sustainability of revenue growth with an eye for profitability by corporate management teams seem to be the key drivers of investors’ potential enthusiasm. Having one without the other does not seem to cut it right now in this environment.

 

Let’s not lose track of where we stand in the midst of what are unprecedented market conditions. The Fed’s hawkish stance on tapering and raising rates has been well telegraphed yet it remains to be seen whether this timeline could accelerate. A series of ‘hot’ inflation prints and an exceedingly strong jobs report this morning would lead many investors to pound the table on a faster tightening schedule. That said, recovering supply chains and a fragile economic recovery may lead the Fed to be more tactical. Bulls argue that markets have already priced in 5-6 rate hikes in 2022 and remain constructive on fundamentals with YoY earnings growth in Q4 at 26%. On the other hand, bears point out Q4’s earnings beat rate of 6% is the lowest level among the past 7 quarters (albeit in-line with historical levels). What’s more, consumer prices have outpaced wage growth, leading consumer confidence to near recession lows and painting a bleak outlook for consumer demand to absorb lagging supply hitting the market.

 

Looking ahead, one thing seems abundantly clear to me: markets are far from figuring this out. Bulls and bears are cautious to look too far ahead to the future, as a murky near-term outlook could leave either side ‘out to dry’ given the elevated turbulence in equity prices. That said, I lean more towards being constructive as the market figures out these ‘growing pains’ following a historic period of returns in the US. I would urge investors to have patience throughout these next few weeks of earnings prints, albeit with a heightened awareness around how expectations can set up outsized earnings reactions. There is no dearth of volatility and opportunities outside of the United States, as globally we are presented with valuations and underlying positioning that may serve as an interesting entry point for those who have been more US-centric for quite some time. The below chart says it all, as the US has outperformed international markets in 11 of the last 12 calendar years. While it is quite early in 2022, we have seen a 300+bp outperformance of international markets vs the S&P. I can see the ‘eye rolls’ from here as many know this hasn’t been a sustainable trend looking back over the past decade, but perhaps this time is different?

 

On a more personal note, as the world debates reopening I did find some solace traveling to Florida this week to see some clients. Experiencing airports and planes fully packed with people may bring anxiety to some (a la Airplane, anyone?) but joy to others as a return to complete normalcy is hopefully on the near horizon. I continue to be grateful for my good health throughout this pandemic and look forward to reconnecting with many of you in-person soon!

                                         

I continue, like many of you, to have several observations that crossed my mind this week including…

  • The market’s negative response to Facebook (FB) and PayPal (PYPL) earnings prints this week showed how dangerous these waters are this time around. I wonder which ‘captains’ will survive this quarter…The Savone Family Movie of the Week is Pirates of the Caribbean. (Too soon for the ‘Social Network’, considering that for next week…)
  • What an emotional week for NFL fans! Joe Burrow and the Bengal’s tied the largest comeback in AFC Championship history after beating the Chiefs in overtime last Sunday. The news that shocked the world came from Tom Brady, who will now focus his energy on other things outside the football field. What a pleasure it’s been to watch him dominate the game over the last 22 years!
  • After a stunning -26% decline earlier this week, Facebook lost over $230bn of market cap in an instant… That would be larger than the GDP for Peru, New Zealand and Egypt! On the other hand, Amazon gaining 13.54% today equated to over $180bn of market cap added, which is greater than the GDP of Qatar… Crazy…
  • The Super Bowl has been so important to Cincinnati that public schools announced that staff and students will have the day off February 14, the day after the Bengals play the Rams in the big game. Although my Rams-Chiefs Super Bowl prediction was only partially correct, I am going to have to revert back to the saying that defense win championships…I am confident that the Rams will take home the Lombardi Trophy this year!
  • As I look around my morning train to work, I see most people with music playing in their ears…While the streaming industry has blossomed over the last few years, it still seems that the ear continues to be under monetized… the recent pullback in Spotify (SPOT) could provide a very attractive entry point into this fast growing sector. Reach out to MS Media Analyst Ben Swinburne for his latest report on Spotify’s outlook for ’22.
  • My boys in Italy have a very important 4 days ahead, as A.S. Roma play Genoa on Saturday and a very strong Inter side on Tuesday in the Coppa Italia.
  • The stockpile of negative yielding debt has collapsed from 18trn$ to 6trn$, the lowest since 2018…
  • Earlier this week, Denmark declared Covid no longer poses a threat to society and will remove all restrictions. Although these smaller countries are more difficult to compare to the United States, it will be interesting to see the results of this decision.
  • How do you feel about private company valuations? There seems to be a big debate raging on the durability of private company valuations versus the de-rating in high growth public tech valuations. For more on this, please see here for the full report from MS European Equity Strategist Edward Stanley.
  • Does anyone remember when those Bing Search Engine commercials came out many years back? I always wondered who would dare challenge the empire that Google has managed to build. Make sure to read MS Internet Analyst Brian Nowak’s latest report on why Alphabet’s (GOOGL) will continue to march forward this year.
  • The winter Olympics start today! Although I am not a fan of skiing myself, I love watching the snowboarders go down the half pipe! Which event is your favorite to watch?

 

On the latest Covid-19 update, based on the current trajectory, MS Biotech Analyst Matthew Harrison highlights that US cases and hospitalizations have peaked and he expects a clear downward trajectory over the next few weeks. He notes that Rt (or the effective reproduction rate) of US, Italy and France is decelerating, while it is still accelerating in Germany and Norway. Internationally, he believes that Continental Europe should peak in the coming weeks; at this point he thinks we are heading into the endemic phase for COVID and expects policies to start slowly shifting globally in the coming months. The number of administered US vaccines is ~539M as of Jan 18, among which ~250M (~75% of US population) were given as the first dose. He is now also tracking booster vaccinations. The number of daily vaccinations in the US is ~0.46M, of which ~0.24M are booster vaccinations.

 

As of 2/3, USEquity L/S gross leverage rose 1% WoW to 191% (82nd %ile over the last 10 year basis) and net leverage fell back to 50% which is the lowest level we have seen since July 2020 and in the 40th %ile over the last 5 years.For the year, Noah Bramlage of our PB Strategic Content team points out that hedge funds (all strategies) have added shorts across each North American sector, led by Discretionary. Looking at just this week, he mentioned that hedge funds continued to add shorts across each sector, except for Materials). Moreover, the L/S ratio in North American equities is now down to ~1.8x which represents a ~19-month low, but is still in the 87th %-tile since 2010.

 

Across other regions, Asia fund gross leverage fell ~4% WoW to 131% and net leverage fell ~2% WoW 66%. Noah highlighted that the net exposure to China remains well-off the peak levels seen in July 2020, as the current level remains more in line with June 2019 levels.Thematically, China Internet is a space where we haven’t seen much re-engagement as HF net exposure to the US-listed China Internet only accounts for ~2.1% of global net exposure (vs. ~6.4% at the peak in April 2020). Regarding Europe, gross leverage for EU L/S funds remained flat WoW to 180% and net leverage rose ~1% WoW 44%. The team notes that that while funds have been sellers of North American equities and broader Asian equities YTD, net exposure to European equities (as a % of global net exposure) has risen to the highest level seen since June 2020, as it is now back to median levels since 2010 (47th %-tile). More specifically, EU Materials and Communication Services have been the most net bought sectors in the region YTD. 

 

Regarding performance thus far in February, the average Americas-based L/S fund is down -1.3% vs the S&P -0.9%. Keep in mind that for the year, the average global fund is down -2.9% vs. the MSCI down 5.1% and the average Americas-based L/S fund is down -5.7% vs the S&P down -6.0%. Internationally, the average Asia-based fund is now down -3.9% YTD vs the MSCI Asia Pacific down -3.5% and EU based funds have outperformed YTD as the average fund is actually up +90bps vs the Euro STOXX 600 being down -3.9%;nonetheless, for the start of February the average Europe- and Asia-based fund are both up in the ~10-20 bps range (through 2/3).

 

Noah pointed out that since November 17th the crowded longs in North America are down ~22.2% versus the S&P down only ~4.5%, which represents the most challenging crowded long alpha drawdown since 2010, in terms of both duration and magnitude; on the same time horizon, the crowded shorts in North America are down ~23.7% (over that period, on average, clients held ~2.2x more exposure to the crowded longs vs the crowded shorts). He noted that performance had recovered a bit on the back of the short 3-day rally from 1/27 - 2/1, but that the index-level (and growth particularly) underperformance the past 2 days have left the average US L/S fund down ~5.7% YTD – shouldering ~95% of the S&P 500’s downside YTD. 

 

MS Chief US Economist Ellen Zentner highlighted that data last week on GDP, trade, and inventories add to the mounting evidence that, while there is still a long way to go, we have moved past the worst in supply chain disruptions and inventories are meaningfully rebuilding. While the MSCI implies that we are just past the peak in supply chain disruptions and starting to see improvement, she believes that easing in supply chain tensions points to a softening in core goods inflation over the next 6 months. She also points to the advance goods trade report for December which continues to reflect strong domestic consumer and business demand. Regarding commentary for payroll data, nonfarm payrolls surprised substantially to the upside in January, rising 467,000 vs MS expectations for a 215,000 decline. From the data, Ellen asserted that Omicron may have had a very little imprint on the labor market at all in January; gains were broad based across sectors, with especially strong increases in leisure & hospitality, retail trade, professional & business services, and transportation & warehousing. Also noteworthy, she inferred that (1) Underlying wage pressures remain firm, with average hourly earnings up 5.7% on the year and (2) The workweek fell to 34.5 hours (a low for the workweek since April 2020), probably reflecting fewer hours worked by people missing work due to Omicron.

 

While Ellen set the stage for the supply chain dynamic from a high level, our sector analysts have pointed out their views regarding how companies in their space may be impacted MS US Autos Analyst Adam Jonas highlights there is still a long way to go in ramping up production to meet consumer demand. While December data showed the third consecutive month of inventory rebuild in the US, January 2022 data released by Motor Intelligence shows a reversal, with industry inventory units down ~51k per month. Amongst the D3 (the three largest car manufacturers in North America), only General Motors Company (GM) was able to build inventory m/m, though the build was minimal at only ~14k units. Adam’s Overweight picks for the sector include, but are not limited to, Ferrari NV (RACE), Fisker Inc (FSR), and FREYR Battery SA (FREY). Turning the page, MS IT Hardware Analyst Erik Woodring believes that channel inventory is building in PCs & Consumer Hardware alongside falling lead times, indicating a supply-demand rebalance is underway, while data from other Hardware markets shows supply challenges remain. He believes that a rebalancing of supply and demand allows vendors to work down elevated backlog, fill the channel and ship with shorter lead times. He pointed out that: (1) Logitech International SA (LOGI) reported a stronger than forecasted 12% topline beat vs. consensus in the December quarter, (2) He is cautious on Equalweight-rated HP Inc (HPQ) and Underweight-rated Logitech International SA (LOGI), and (3) OW-rated Dell Technologies Inc (DELL) is another name he is watching and remains more constructive, given better execution and its exposure to higher-end consumer PCs and data center infrastructure.

 

While last week's FOMC meeting met consensus's expectations on multiple fronts—that the FOMC will likely begin raising rates in March while tapering is scheduled to conclude in mid-March—MS Chief US Equity Strategist Mike Wilson highlights that it also reinforced the notion that markets are heading into a period of greater uncertainty from a forward guidance standpoint. He notes that every meeting is a "live" one from a rate hike standpoint, and while MS economists don't see a 50 bp hike coming in March, it is a possibility at later meetings. His work shows that tighter Fed policy brings lower returns and greater uncertainty for equities. He thinks returns are likely to be even lower during this tightening cycle (i.e., negative) because the Fed is going to be tightening into a macro and earnings growth slowdown that's about more than just omicron, in his view. Specifically Mike is focused on: (1) the spread between ISM manufacturing orders vs. inventories which is pointing to a significant slowdown in the headline PMI; (2) the Industrials sector's relative forward P/E multiple that is also predicting a similar dynamic; (3) an average of manufacturing surveys that have advanced January readings which confirms this trend; (4) MS economists' MS Business Conditions Index which notably weakened in January; and (5) recent relative weakness in earnings revisions breadth for cyclicals/economically-sensitive industries. For 4Q earnings, Mike notes that the aggregate earnings beat rate for the S&P 500 is back down to 5% (the historical norm; and lower than the prior 6 quarters) and guidance is a mixed bag especially for cyclicals where he is seeing weakness in forward looking earnings revisions. His sector recommendations include a constructive view toward Financials, Health Care, and Real Estate, meanwhile his Underweight conviction remains in Discretionary and Tech Hardware. Please consider taking a look at his Fresh Money Buy List, which includes AT&T (T), Exxon Mobil (XOM), Humana (HUM), MasterCard (MA), McDonald’s (MCD) and Mondelez (MDLZ), among others.

 

With Earnings season largely underway, MS US Strategist Andrew Pauker highlights that an aggregate earnings beat rate of 6% is the lowest of the prior 7 quarters and is back to the historical run rate of 4-6%. Large cap tech stands out from a breadth of beats standpoint with 88% of stocks thus far having beat on earnings, the highest percentage of beats of any sector. Andrew recaps that the high level narrative around stronger sales beat rates vs. history and just in-line EPS beat rates vs. history is that margins are increasingly become an issue. He points out that this is particularly prevalent among cyclical cohorts such as Industrials, Materials, Discretionary, and even Financials where margins took more of a center stage so far this earnings season. More importantly, he notes that revisions breadth over the last few weeks has declined driven by weakness in more cyclical industries - Discretionary, Materials, Semis, and Financials. He thinks the cost pressure dynamics discussed are a factor here for these cyclical groups. In terms of how 4Q21 and 1Q22 estimates are evolving, 4Q numbers are up 2-3% over the past couple of weeks amid more modest but still positive aggregate positive surprises. 1Q numbers are down slightly. Calendar full year ’22 estimates are up slightly and currently stand at $225 or 9% growth on a year-over-year basis

 

For the names from MS US Research noted with conviction into earnings, one that has reported this week is WW Grainger (GWW US) covered by MS US Electrical Equipment Analyst Josh Pokrzywinski. GWW reported adjusted EPS of $5.44 vs. MSe/Cons of $5.37/$5.24. on high near-term pricing power with inflation rapid enough to support more frequent inventory repricing. As markets progress into 2H22, Josh expects a slower PMI, more moderate inflation, and an improved supply chain which elevates smaller competitors all work against the industry. Josh maintains his Equalweight rating, but sees positive risk/reward and NT catalysts for the stock.

 

MS US Banks Analyst Betsy Graseck and Brokers & Asset Managers Analyst Mike Cyprys highlight that Banks & Diversified Financials are the only sectors that outperform the SP500 when 10yr yields rise. The team notes that stocks with the highest beta to 10yr yields include: SVB Financial (SIVB), M&B (MTB), Charles Schwab (SCHW), Huntington Bancshares (HBAN), and Bank of America (BAC). If investors are looking to avoid credit risk, the team includes: Charles Schwab (SCHW), State Street (STT), and Raymond James Financial (RJF). If investors are looking to avoid equity market risk, the team includes: M&B (MTB) and Charles Schwab (SCHW). Betsy points out that the highest beta to Fed Funds Futures stocks include: Wells Fargo (WFC)* and American Express (AXP).

 

Looking across the pond to Europe, MS Chief EU Economic Advisor Reza Moghadam highlights that it is too early for the ECB to conclude that it is behind the curve on its inflation mandate. He points to several factors that could trigger earlier policy tightening: 1) inflation expectations 2) energy prices 3) the diffusion of inflation 4) wage growth and 5) exchange rate. MS Chief European Economist Jacob Nell notes that Euro area growth is diverging, and estimates 1Q22 euro area growth to be at 0.4%. After weak activity throughout the winter, Jacob expects a robust spring rebound, as restrictions fall away, price pressures moderate, and supply issues ease more noticeably. Going into the earnings season, the limited 4Q results tracked so far point to a healthy breadth of EPS beats with a net of 29% of stocks surprising positively. MS European Equity Strategist Ross MacDonald adds Intesa Sanpaolo (ISP IM), Deutsche Post (DPW GR) and Engie (ENGI FP) to the high conviction list of stocks for this earnings season, while Rockwool (ROCKB DC) and TUI (TUI AG) have been added to the list of negative views. Please ask for the full list or to be connected with the teams.

 

For the names from MS EU Research noted with conviction into earnings, two that have reported thus far include: 1) Intesa (ISP IM) and 2) Hexagon (HEXAB SS). For Intesa, MS Research Analyst Antonio Reale’s main call into the results was on capital distribution with a potential for returning €25bn (c.50% of its market cap) to shareholders, which was well above consensus numbers. Intesa committed to distribute €22bn of capital (c. 42% of its market cap) via dividends and buybacks by 2025e, which translates into one of the highest yields in EU banks. Intesa reported higher revenues, higher distribution, and lower costs than market expectation which allowed it to target an ROTE of 13.9% by 2025e vs. MSe of c.11%. As a result, Intesa remains Antonio’s Top Pick. For Hexagon, MS Research Analyst Adam Wood notes that 4Q revenues grew 7% organically, which was c. 2% below MSe and c.1% below the street's organic growth forecast. He points out that management cited supply chain constraints as the main reason behind weaker top. Adjusted EBIT also came in c. 3% above both MSe and consensus. For those who are more sceptical of the region, Rob Cronin and the MS EU Baskets Team revisit the weak balance sheet basket (MSSTWKBS) as the market is now pricing in one hike from ECB this year. The last 6 times the iTraxx 5Y EUR Xover was these levels, the MSSTWKBS Index (weak balance sheet names) was on average 15-20% lower than today. Please reach out to be connected with Rob and the team.

 

Looking to Asia, China’s A-share sentiment experienced its largest weekly drop post September 2020, but the northbound momentum stayed strong, with US $3.5 bn net inflow last week. MS China Equity Strategist Laura Wang notes that China continues to roll out policy easing with the PBOC pledging to “open its monetary policy toolbox” after last week’s rate cuts, along with accelerating local government structure. Given the lingering uncertainties of Omicron-led lockdowns, Laura advises patience near-term at the index level and to monitor the following catalysts after the Lunar New Year: 1) sooner and bigger than expected broad policy-easing measure on fiscal and monetary front 2) rapid and sizable earnings estimate reductions at the index level 3) clearer signs of stabilization of the property market and easing of credit lines for developers and 4) fast recovery from Omicron. Laura added China Yangtze Power (600900 CH) and Qi An Xin Technology (688561 CH) and removed Shanghai Putailai New Energy (603659 CH) from the respective focus lists. Please ask for the full list to be connected with the teams.

 

On Japan, MS Chief Japan Economist Takeshi Yamaguchi highlights risks of lackluster growth in 1Q22, followed by solid rebound again in 2Q22. He thinks Japan has an underlying recovery trend after averaging out quarterly fluctuations, expecting the 20214Q GDP data to show a robust growth of +6.2% QoQ annualize. MS Japan Equity Strategist Daniel Blake updates the likelihood of companies in analysts’ coverage announcing a buyback with/after upcoming quarterly earnings. By sector, candidates are centred in Industrials and Materials. By single names, the list includes SMC (6273 JT), Nidec (6594 JT), Mabuchi Motor (6595 JT) and Nihon Kohden (6849 JT). Please ask for the full list of stocks or to be connected with the teams.

 

A busy earnings season along with a busy conference season with multiple Morgan Stanley events to highlight including the Global Energy and Power Conference (Feb 28-Mar 2), the Morgan Stanley 2022 Technology, Media, Telecom Conference (Mar 7-10), and the Sustainable Futures Conference (May 24-25) all set to take place in-person. This year’s TMT Conference returns to San Francisco and will feature over 300 companies through fireside chats, panels, and one-one-one/small group meetings. Corporates confirmed in the lineup include Airbnb (ABNB), Coinbase (COIN), Databricks (Private), Microsoft (MFST), PayPal (PYPL), & Uber (UBER)*. These conferences are always in high demand, so be sure to reach out to your sales coverage for more information. Thank you again to the MS Global Corporate Access team for such great work around the world! Please see below for all upcoming MS Conferences & Events.

 

Nevertheless, please find below a selection of this week's data points, charts and research from each region (Europe, US, LatAm, Asia, Japan, EEMEA) that I believe points to an inflection or material change for individual sectors, companies and/or the macro environment this week. I have tried to avoid the obvious beats and misses and instead highlight what I thought to be the more significant trends and inflection points.

 

Have a great weekend. Drink lots of fluids, take Vitamin C, and make sure to wash your hands!

 

#FORZA

 

Nick

 

*Included in my 2022 Global Ideas Deck. Please ask for the presentation.

 

Please see below the list of client webcasts MS is hosting over the next few days. Please note, these are widely attended events open to Morgan Stanley’s Institutional and Corporate Client base, and appropriate Morgan Stanley personnel. Webcast link information should not be forwarded or shared beyond intended recipients.

Source: Morgan Stanley US Alpha Team & Global White Phone Teams

Time (EST)

TOPIC & SPEAKERS

WEBCAST LINK

Monday, February 7, 2022

9:00 AM

Global Macro Forum: Europe - Opportunities With Rates On the Move

Here

 

MS

Andrew Sheets, Chief Cross-Asset Strategist
Graham Secker, Chief European Equity Strategist
Magdalena Stoklosa, Head of Banks Equity Research, Europe
Reza Moghadam, Chief Economic Advisor
Ben Lewis, Head of Linear Rates Trading, UK and Europe

 

10:00 AM

Steel Talk - A Chat With Mr. Fernando Espada On EU Steel Markets

RSVP to: Cassie.Kearns@ms.com

 

 

Expert

Fernando Espada, Managing Director at Tata Steel Unlimited

 

 

MS

Alain Gabriel, Head of Europe Metals and Mining
Ioannis Masvoulas, EU Metals and Mining Analyst

 

1:00 PM

MS Cross Asset Lending Securitization Call - Current State Of Personal Loans

Here

 

 

MS

James Faucette, Head of US Fintech and Payments Equity Research
Betsy Graseck,Global Head of Banks and Diversified Finance Equity Research
Jay Bacow, Co-Head of US Securitized Products
Charlie Wu, Head of US CLO Strategy
Robert Rosener, Senior US Economist
Bharat Chandrasekaran, Head of ABS Secondary Trading
Michael Mullen, Financials/REITs Sector Specialist

 

Tuesday, February 8, 2022

Morgan Stanley LatAm PropTech Day

 

10:00 AM

Expert Call On The German Heat Pump Market

RSVP to: Cassie.Kearns@ms.com

 

Expert

Dr. Martin Sabel, Secretary General of the Germany Heat Pump Association

 

MS

Pam Liu, EU Building and Construction Analyst

11:00 AM

Europe Vs. US, Why Now?

Here

 

MS

Reza Moghadam, European Economist
Graham Secker, Chief European Equity Strategist
Ross Montgomery, Quantitative & Data Strategies
Naml Lewis, Head of Asset Owner & Multi-Asset Coverage

Wednesday, February 9, 2022

Morgan Stanley Virtual Global Insights Day

Thursday, February 10, 2022

9:00 AM

Grains Market Outlook With SLC's Commodity Intelligence

Here

 

Experts

Gustavo Lunardi, Supply & Seeds Production Director
Guilherme Heiden, Market Intelligence Coordinator

 

MS

Javier Martinez, LatAM Agribusiness Research
Roberto Browne, LatAm Agribusiness Research
Vincent Andrews, US Chemicals Research
Lisa De Neve, EU Chemicals

Friday, February 11, 2022

11:00 AM

MS Cross Asset Telecom Call - Post 4Q Earnings Download

Here

 

MS

David Hamburger, US Fixed Income Telecom, Cable, and Media Analyst
Simon Flannery, Head of Telecom and Communications Infrastructure Equity Research
Sean Diffley, Internet, Media, and Telecom Equity Sales Specialist

 

11:00 AM

State Of CRE Webcast: Retail Real Estate A Broker's Perspective With NMRK

Here

 

Experts

Geoffrey Millerd, Vice Chairman, Newmark Group
Thomas Dobrowski, Vice Chairman, Newmark Group

 

MS

Richard Hill, Head of US CRE Research

Thursday,February, 17, 2022

11:00 AM

State Of CRE Webcast: Retail Real Estate Update With Gary Rappaport

Here

 

Expert

Gary Rappaport, CEO & Founder of Rappaport and Former Chairmanof ICSC

 

MS

Richard Hill, Head of US CRE Research
Kimberly Greenberger, Specialty Apparel, Footwear, and Department Store Analyst

Wednesday, February 23, 2022

Morgan Stanley Blockchain Gaming Symposium

Tuesday, March 15, 2022

10:00 PM

Australia Sustainability: Webcast With Katharine Tapley, Head Of Sustainable Finance At ANZ Banking

RSVP to: Sydcorpac@ms.com or contact your MS sales rep

Expert

Katharine Tapley, Head of Sustainable Finance at ANZ Banking

MS

Rob Koh, Australia Sustainability Research

 

 

UPCOMING CONFERENCES –

Please reach out to your sales representative if you are interested in attending any of these conferences.

Feb 7 & 10 (New York) I Chemicals, Agriculture & Packaging Corporate Access Days

Feb 28-Mar 1 (London) I EMEA HealthTech Conference

Feb 28-Mar 2 (New York) I Global Energy & Power Conference

Mar 7-10 (San Francisco) I TMT Conference

Mar 15-17 (London) I European Financials Conference

Mar 22-24 (Hong Kong) I Virtual Hong Kong Summit

May 10-12 (London) I Virtual EEMEA Conference

May 17-18 (Global) I 13th Virtual Saudi Arabia Conference

May 17-18 (Global) I 2nd Virtual MENA Conference

May 24-25 (New York) I Sustainable Futures Conference

May 24-26 (China) I 8th China Summit

Jun 1-3 (Tokyo) I 2nd Virtual Japan Summit

Jun 7-9 (India) I Virtual India Summit

Jun 8-9 (Sydney) I 4th Annual Australia Summit

Jun 16 (London) I Europe & EEMEA Property Conference

Jun 24-26 (New York) I China BEST Conference for US & EU Investors

Jun 29-30 (Singapore) I ASEAN Conference

Aug 31-Sep 1 (Beijing) I Asia TMT Conference

Sep 5-6 (London) I Asia BEST Conference for EU

Sep 7-9 (London) I Industrial CEOs Unplugged

Sep 12-15 (Cape Town) I RMB Morgan Stanley Big Five and Off Piste Investor Conferences

Sept 14-16 (New York) I Global Healthcare Conference

Sept 28-30 (Asia) I Virtual North Asia Conference

Nov 16-18 (Singapore) I 21st Asia Pacific Summit

Nov 16-18 (London) I Barcelona TMT Conference

Dec 6-7 (London) I Nasdaq

Nov 16-18 (Singapore) I 21st Asia Pacific Summit

 

The following comments are a summary of Morgan Stanley Research by Morgan Stanley Equity Sales & Trading:

 

SELECT COVID VIRUS AND TREND FOR RE-OPENING DATA POINTS

 

Global – Biotechnology – COVID-19 Outbreak Dynamics

Source: Morgan Stanley Research

Source: Morgan Stanley Research, Our World in Data, Department of Health and Human Services, JHU CSSE

 

US – Retail – Total Discretionary Retail Traffic

Source: Prodco, Morgan Stanley Research

 

MS BROAD TRENDS & INFLECTION POINTS

 

Positive

 

ìîUS – Indices – US vs International Annual Index Price Performance (Excluding Dividends Since 1980)

Annual index price performance (excluding dividends) since 1980.Highlighted are years when the MSCI World Excluding United States (MXWOU Index) outperformed either the S&P, MXNA, or RAY.

 

ìUS – Banks & Diversified Financials – Standout Stocks For Rising Rates

Source: Company Data, Morgan Stanley Research estimates
Note: 1) Analysis uses 3Q21 disclosures. 2) We use disclosed instantaneous NII impacts for: BAC, C, JPM, WFC, USB, CFG, SBNY, SIVB, FRC, STT, AXP, COF, DFS, SYF, SC. We use disclosed gradual NII impacts for: TFC, PNC, RF, KEY, MTB, HBAN, FITB, BK, NTRS, and ALLY. 3) Definition of ‘long end’ rates varies by company. 4) We estimate the NII impact from long end rates if not disclosed separately; 5) On their 4Q21 earnings call, Citi highlighted that their rate sensitivity analysis in the 10Q/10K assumes run off, predominantly in the non-US markets. When they run the analysis on a static balance sheet, which is more aligned with how peers disclose this sensitivity, Citi’s rate sensitivity increases by 2.5-3x more than their prior disclosure. We factor this higher sensitivity into the analysis above.

MS Research Analysts Betsy Graseck, Mike Cyprys, and the Banks & Retail Brokers team highlight that Banks & Diversified Financials are the only sectors that outperform the SP500 when 10yr yields rise. The team notes that stocks with the highest beta to 10yr yields include: SIVB (OW, $935 PT), MTB (EW, $185 PT), SCHW (OW, $132 PT), HBAN (EW, $18 PT), and BAC (UW, $51 PT). If investors are looking to avoid credit risk, the team includes: SCHW, STT (OW, $128 PT), and RJF (OW, $130 PT). If investors are looking to avoid equity market risk, the teamincludes: MTB and SCHW. Betsy points out that the highest beta to Fed Funds Futures stocks include: WFC (OW, $72 PT) and AXP (OW, $218 PT). Download the Complete Report

 

îGlobal - Venture Capital Valuations Around the World Are Coming Down

                                 

 

ìUS – Internet – Social Media Engagement Trends And Formula For Monetization

Source: Sensor Tower, Morgan Stanley Research

MS Research Analyst Brian Nowak continues to believe the equation "engagement + investment + innovation = monetization" is an important framework for online platforms. Brian highlights 5 key observations including: 1) Total social media time spent rose 7% Y/Y in '21 even off of the shelter-in surge, 2) Meta (OW, $395 PT) has industry leading users and minutes continue growing even through re-opening as total engagement is now ~23% above '19, 3) TikTok has 48mn DAUs spending ~87 minutes lays the foundation for big monetization ahead, 4) Snapchat’s (OW, $60 PT) total time spent is down ~14% Y/Y and why he remains constructive and what the catalyst is from here, and 5) Pinterest’s (OW, $53 PT) DAUs and time spent both in decline as the company needs to articulate which products will stabilize the base.Download the Complete Report

 

ìChina – Economics – Possibly Smaller Scale Of "Stay-Home" LNY Than In 2021

Source: Xinhua, Morgan Stanley Research

Robin Xing noted that Chinese policy makers are doubling down on credit easing while fine-tuning tech regulations and COVID strategy before Chinese New Year holiday to restore confidence. In a symposium with big tech firms last Friday, the head of the Cyberspace Administration of China (CAC) - the most powerful regulatory body in China on the internet sector - acknowledged the key role the tech giants have in promoting China’s high-quality development in capital allocation, innovation, and public services, and pledged continued support for the healthy development of the platform economy, signaling an initial change from the official criticism of big tech behavior since Dec. 2020 toward a more supportive tone. Also, the CSRC reportedly told executives of top Western banks that Beijing would focus on "achieving respectable growth" in 2022 ahead of the political reshuffle. This is in line with his view that the regulatory reset is gradually shifting toward a more institutionalized and predictable phase, focusing more on implementation than on introducing aggressive new measures. Also the National Health Commission published clearer rules on Saturday to limit overly aggressive travel restrictions by different levels of local authorities. The scale of “stay-home” LNY is likely smaller than last year, as nationwide passenger traffic has been 47%b higher than in the same period of 2021 since the start of the Spring Festival Travel period on 17 January, though still 65% lower than the pre-COVID level. Download the Complete Report

 

ìUS – Specialty Pharma – Dental Industry Initiation; Prefer Innovation, Digital, & Specialty

Source: American Dental Association, Morgan Stanley Research

MS Research Analyst Erin Wright initiates coverage of the Dental Industry with an in-line view but a positive bias based on favorable demographic trends and a continuing recovery post-pandemic. Erin estimates the dental products market is worth $26 billion, growing +low to mid-single digits annually, reflecting faster growth across specialty segments (orthodontics and implants) and digital solutions. She expects more modest +low-single digit growth across traditional consumables and equipment with increasing competition in a consolidating customer environment. Her Jan. 2022 survey of 75 US dental practitioners indicates that 4Q patient volume will likely remain subdued (-0.4%) but practitioners expect +4.9% NTM patient visit growth. These results reinforce Erin’s conviction that demand should continue to recover into 2022 as pandemic concerns abate and consumer emphasis on aesthetics increases. Erin is focused on innovation, the rising adoption of digital workflows, and specialty (clear aligners, implants). She believes companies like Align Technologies (OW, $575 PT), Envista (OW, $48 PT), and Denstply Sirona (OW, $62 PT) are best positioned from a product standpoint and can navigate the expanding presence of Dental Service Organizations, while suppliers such as Henry Schein (UW, $67 PT) and Patterson Companies (EW, $30 PT) are inherently more exposed. She notes that dental shares trade at a 10% discount to the S&P 500 vs. a 20% premium historically as lingering caution around new COVID variants and the macro environment has weighed on valuations. She thinks the group deserves to trade at a premium. While Erin believes the industry has largely adapted to the COVID environment, harsher pandemic restrictions or macroeconomic headwinds could curtail demand and would be an impetus to turn more cautious on the industry. Download the Complete Report

 

ìEurope – Communication Services – Ubisoft, US And Asian Video Games Stocks Have De-Rated By ~25%

Note: US includes Activision Blizzard (covered by Brian Nowak), Take-Two Interactive and Electronic Arts (covered by Matt Cost). Asia includes Tencent (covered by Gary Yu), NetEase (covered by Alex Poon), Nexon, Double U, NC Soft, Konami (covered by Seyon Park), and Nintendo (covered by Masahiro Ono). Source: Refinitiv, Morgan Stanley Research. Forecasts based on consensus.

Multiples for European video games developers have compressed by ~25% since the start of 2021, which MS Research Analyst Omar Sheikh thinks ignores long-term secular growth tailwinds and growing strategic value. Download the Complete Report

 

ìEurope – Consumer Staples – EU Tobacco Is Trading Near Historical Lows Vs. MSCI EU (~25% on NTM PE)

Source: Thomson Reuters consensus estimates. EU Tobacco is the simple average of BAT, IMB and SWMA valuations

With ESG headwinds unlikely to dissipate any time soon, MS Research Analyst Rashad Kawan favors companies embracing the transition to NGPs, with BAT a key opportunity. He expects buybacks and value rotation to support valuation levels in 2022. Download the Complete Report

 

ìîUS – Healthcare Services & Distribution – Identifying Opportunities Amidst Increasing Dispersion In HC Service Stocks

Source: Morgan Stanley Research, RefinitivNote: returns are weighted by market cap

MS Research Analysts Ricky Goldwasser and Craig Hettenbach highlight that the playbook for HC Services stocks during this period of heightened volatility is to stick with what's working. Ricky remains positive on key OW stocks identified in the team’s 2022 outlook including Top Pick CVS (OW, $125 PT), UNH (OW, $570 PT), CNC (OW, $109 PT), ANTM (OW, $518 PT), and MCK (OW, $292 PT). While each have idiosyncratic drivers, she notes that a common thread is they screen as value. The team highlights an unusually wide divergence in performance between stocks and sees opportunities to generate alpha within subsectors. Looking at performance between subsectors, the team notes that Pharmacy Retail (+4%) and Distributors (+3%) lead the pack, while HC disruptors have meaningfully underperformed (-32%). The team points out that this aligns with the key overriding theme in the broader market, as value is outperforming unprofitable growth. However, even within subsectors the team notes there is significant variation in stock performance. The team notes that HC Disruptor stocks have underperformed on a combination of weak fundamentals and the broad-based selloff in IPO stocks. To get a better understanding of the influence that market factors are having on stock performance, the team analyzed IPOs of HC disruptors and Software companies since 2020. They note that the correlation between sectors is 59% over this time, but has jumped to 84% since October and 93% in the month of January.Download the Complete Report

 

ìîUS – Biotechnology – MS Research Analyst Matthew Harrison significantly lowers PTs across his coverage to account for lower market multiples, but also highlights his higher conviction calls and areas where he sees relative value after the recent pull-back. He upgrades Legend ($51 PT) and Seattle Genetics ($175 PT) to OW. For Legend, his recent downgrade was based on a valuation call and with LEGN now 20% lower, he sees a good point to re-enter. He expects robust sales of cilta-cel in 2022 after approval on 2/28 and the potential positive readout of CARTITUDE-4. For Seagen, he expects continued growth in the core business and optionality from the pipeline. He also sees a valuation entry point in the name. While sentiment has tracked the volatility and significant underperformance across the industry, he does see investors positioned in three keyways. First, he notes that there is a flight to safety with large caps being relative performers on the back of the growth to value rotation. Second, he notes that investors are looking for names that are trading near cash, but could have catalysts in the next 12 months. Finally, he thinks that investors are focused on how large companies may use the downturn and their significant cash reserves to augment their pipeline, particularly Ph3 or commercial stage assets which are wholly-owned. Download the Complete Report

 

Negative

 

îEurope – Cumulative In/Outflows – >$100bn Of Outflows From Europe Vs. $1.8trn Of Inflows Elsewhere In Last Decade

 

 

Sources: EPFR, Morgan Stanley Research

Note: The EPFR data and charts displayed here must not be extracted and republished (whether internally or externally). Such use will violate the terms of Morgan Stanley's contract with EPFR which only covers named users.

 

îUS – IT Hardware – Supply Rebalance Spreading To More Hardware Segments

Source: IDC, Morgan Stanley Research

MS Research Analyst Erik Woodring and the IT Hardware team highlight that recent data from the MS Alphawise survey indicates supply-demand rebalance is extending beyond just a few pockets of hardware. The team cautions that they expect favorable near-term conditions to be followed by an order deceleration that is likely to catch investors and companies by surprise. To be clear, the team doesn’t yet see a full supply correction and believes supply/demand rebalancing will affect different markets at different times. The team notes that falling lead times and management commentary further support improving supply in technology hardware markets. In the team’s view, macro data, MS Alphawise survey results, and CIO/VAR conversations continue to support their more cautious outlook for PCs & Consumer Hardware. The team notes that early signs of China smartphone semi order cuts could be a potential yellow flag. To be clear, the team thinks a rebalancing of supply and demand is "good" for PC and consumer hardware companies in the near-term, as it allows vendors to work down elevated backlog, fill the channel, and ship with shorter lead times (i.e. lower risk of perishable demand). However, once record backlogs are worked down, channel inventory has been right sized, and accelerated orders are fulfilled, the team sees risk that moderating consumer demand and slowing (though still strong) commercial orders will create a period of weakness that could be more severe than companies currently expect. As a result, Erik is most cautious on HPQ (EW, $34 PT) and LOGI (UW, $74 PT). DELL (OW, $68 PT) is another name that Erik is watching, but he remains more constructive given better execution and its exposure to higher-end consumer PCs and data center infrastructure (where demand remains more durable). Download the Complete Report

 

îìUS – Biotech – MS Research Analyst Matthew Harrison significantly lowers PTs across his coverage to account for lower market multiples, but also highlights his higher conviction calls and areas where he sees relative value after the recent pull-back. He upgrades Legend ($51 PT) and Seattle Genetics ($175 PT) to OW. For Legend, his recent downgrade was based on a valuation call and with LEGN now 20% lower, he sees a good point to re-enter. He expects robust sales of cilta-cel in 2022 after approval on 2/28 and the potential positive readout of CARTITUDE-4. For Seagen, he expects continued growth in the core business and optionality from the pipeline. He also sees a valuation entry point in the name. While sentiment has tracked the volatility and significant underperformance across the industry, he does see investors positioned in three keyways. First, he notes that there is a flight to safety with large caps being relative performers on the back of the growth to value rotation. He points out that this has been particularly severe in SMID-cap biotech where many growth names also saw their COVID premiums decline. Second, he notes that investors are looking for names that are trading near cash, but could have catalysts in the next 12 months. Finally, he thinks that investors are focused on how large companies may use the downturn and their significant cash reserves to augment their pipeline. In particular, Matthew notes that investors are focused on Ph3 or commercial stage assets which are wholly-owned.Download the Complete Report

 

îìEurope – Materials –Top Pick Polymetal Is Down 26% Vs 2021 Avg Despite 2022 Spot FCF Being ~90% Above 2021e

Source: Datastream, Morgan Stanley Research estimates (e)

From weak trading updates, to Fed policy, to geopolitical risks, gold equities have had a difficult start to the year. But MS Research Analyst Dan Shaw argues that lowered expectations and poor sentiment leaves risk rewards looking appealing, with stocks discounting a gold price 8-17% below spot. Polymetal top pick. Download the Complete Report

 

îìLatAm – Economics – BCB Review: Aiming for Re-anchoring, at a Slower Pace

The central bank decided to hike the policy rate by 150bp, bringing it to 10.75%. In Andre Loes’s view, the statement had a neutral tone, and overall it reinforces his call of a terminal rate at 12.25% in May, as the forecast of the authority is above the ceiling of the tolerance zone assuming policy rate at 11.75%, peaking at 12%. Download the Complete Report

 

îìEurope – Consumer Staples – Russian Retail: Compelling Risk-Reward

MS Research Analyst Henrik Herbst’s analysis suggests Detsky Mir, Magnit, and Fix Price are still cheap, even assuming a fundamental scenario similar to the last Russian financial crisis in 2014-16. X5 could see relative downside. That said, Russia retailer fundamentals are likely to be substantially more resilient vs 2014-16. Download the Complete Report

 

MS SINGLE NAMES CONTENT

 

Positive

 

ìUS – Spotify Technology SA – Unique Elements Show 2022 Could Have GM Expand & Growth Accelerate; Reiterate OW

Source: Sensor Tower, Morgan Stanley Research

MS Research Analyst Ben Swinburne highlights that his OW thesis on SPOT ($300 PT) shares reflects the view that the price is underestimating the size of the global audio market, Spotify's ability to hold a leading global share (~30-35%), grow gross profits 20%+ annually, and turn that position of scale and share into substantial earnings power. Like much of long-duration growth in the market, he notes that SPOT shares have dramatically underperformed the market over the past three months. Across Media & Entertainment (M&E), Ben highlights three drivers of the growth sell-off and how they do or do not apply to SPOT: 1) Rising rates are driving down long-durations assets, 2) There is concern over continued pandemic-related hangover for businesses that benefited in 2020 and are now working through that pull forward, and 3) There is a broad macro view that decelerating fundamental growth is not priced into the market, even here. Ben expects MAU strength in 4Q given the download data which is up modestly in the US YoY and substantially internationally. He notes that the international strength is most pronounced in emerging markets, suggesting the MAU strength may not translate into Premium subscriber upside. He also points out that engagement continues to also be healthy YoY in 4Q and early '22. Ben forecasts overall advertising to grow ~30% at Spotify ex-FX in '22 and podcasting to grow from €200mm in '21 to ~€370mm in '22. He notes that investment areas could include audio books, where Spotify has made two acquisitions of late and he expects it to bring that product to Spotify in 2022. Download the Complete Report

 

ìUS –Sonos Inc – Market Undervaluing Long-Term Durability Of Ecosystem; Risk/Reward Positive

Source: Factset, Morgan Stanley Research

MS Research Analyst Erik Woodring reiterates his OW rating of SONO, with his new $45 PT (down from $49) marked to market for peer multiple compression and sees December quarter results next week as a near-term catalyst for re-rating. He highlights that concerns about near-term demand weakness are overdone given supply likely remains the gating factor. He notes that while SONO grew revenue 29% Y/Y in FY21, this came off a low FY20 base (of 5% Y/Y growth), and importantly, was constrained by supply chain shortages, which persist to this day. Erik notes that 1) his conversations with smart/connected home product distributors suggest demand KPIs remains strong into year end, and 2) high-end consumer hardware spending still shows signs of sustainability as evidenced by Apple's (OW, $210 PT) recent results. On that point, he thinks it's worth highlighting that nearly 70% of Sonos' monthly active users are iOS users. Erik understands the focus on near-term results, but he sees a need to step back and appreciate the sustainability of Sonos' growth algorithm. He sees evidence that the pandemic actually strengthened Sonos' growth funnel for years to come, and present 3 pieces of evidence to support this view: 1) Sonos has deliberately focused on new household growth to create an intensifying flywheel effect, 2) Repeat purchases drive NPS scores higher, accelerating the flywheel, and 3) Not yet reaching a product per household ceiling. With Sonos' core business undervalued at 9x EV/EBITDA, he believes future growth opportunities such as commercial/enterprise expansion and IP monetization represent even cheaper free call options than 6 months ago. Download the Complete Report

 

ìîKorea – SK Innovation Co Ltd – SKI: EV Battery Capacity

Source: Company data, Morgan Stanley Research estimates

SK Innovation posted unexpected operating losses of W47bn (vs MSe/cons W450-550bn) driven by chemical operating losses (similar to S-Oil) and widening battery losses (W310bn) in the initial ramp up stages. 2022 guidance was also mixed – positive Refining vs subdued Petchem/lubricants. On the EV battery side, the company raised annual revenue (mid-W6tn), year-end capacity (77Gwh) and capex guidance (W6.5tn) but lowered margin target (positive EBIT margin by 4Q22) in light of chip shortages + input cost inflation. Youngsuk Shin believes SK Inno will have to perform a balancing act between capacity expansion and debt levels/dividend payment. He stays EW. Download the Complete Report

 

ìîJapan – Sony Group Corp–F3/22 3Q Results: Unexpectedly Good, but Prolonged PS5 Supply Shortages a Concern

Sony share price -6% despite posting a beat and raise as the details paint a mixed picture about the outlook. On the conf call, CEO provided clarity around the recent Bungie acquisition saying that the company’s investment decision in pursuit of IP value creation remains intact and commented that the EV business – though no final decision has been made, will likely be an asset light business model entailing manufacturing partnership. On the flip side though, Sony slashed its F3/22 PS5 hardware sales volume target from 14.8mn+ initially to 11.5mn units, below MSe 13.5mn. CEO spoke of robust demand conditions on par with the previous peak level of 22.6mn units in F3/23e but the commentary around prolonged semiconductor procurement issues and disruption cloud visibility through 2H F3/23e and likely indicate the market expectation will reset toward 20mn level for F3/23e. Hardware sales slowdown theoretically should have little bearing on earnings (given lower GM), how this impacts user engagement and MAU given the high correlation with hardware sales remains to be seen. All in, solid print + guide and the management did a good job explaining the new business ambitions but this is likely offset by downward revision for PS5 sales. Stay OW. Download the Complete Report

 

ìUS – Under Armour Inc – MS Research Analyst Kimberly Greenberger upgrades UAA to OW ($24 PT) on the stock pullback and attractive 2022 setup vs. peers. She notes that UAA has pulled back 10% YTD and 25% since the November earnings report. In her view, current trading levels suggest the market 1) may have unfairly-penalized UAA’s stock for holiday weakness in specialty retail without considering its differentiated model and product exposure, and 2) may not recognize the opportunity for positive 2022 EPS revisions, which she thinks is unique in the Softlines space. Taken together, she thinks potential 1H22 outperformance vs. peers could be a catalyst for the stock, and sees a valuation re-rating opportunity into the mid- to high teens EV/EBITDA & high-20s P/E range. Download the Complete Report

 

Negative

 

îìUS – DraftKings Inc – Investor Pushback To Upgrade – MS Research Thomas Allen highlights there was significant pushback to his DKNG ($31 PT) upgrade to OW. He notes the focus was mainly on margins, with incremental questions around timing, multiples, balance sheet, and relative preference. On margins, he notes that investor concerns around margins centered on tax rate increases, marketing spend dissipating, and cost leverage. On marketing, Thomas expects spend to decrease significantly once the majority of states mature and customer retention becomes more of a focus than acquisition. On cost leverage, Thomas models DKNG's gross profit margins going from 46% in 2021 to 41% in 2022 to 54% in 2025. Thomas points out that there is still a debate in the market on what the best way to value the company is. He believes that using a multiple on 2025 EBITDA using comps' current 2025 multiples while backing it up with two DCFs is the best way. He notes that this reflects the true cash flow of the business, and his upside is driven by having a more bullish view on margins than the market. He notes that he did get investor support for his near-term downside case view that DKNG likely would not fall below 3x forward revenue. Thomas also notes that some investors were concerned about DKNG's balance sheet and the potential need to raise capital near-term. He views DKNG as the pure play on US sports betting / iGaming, with the most negative sentiment, and hence sees a greater opportunity to be a contrarian with it. Download the Complete Report

 

FT : Trigger points loom over equity markets

Trigger points loom over equity markets
After declining for 40 years, rising bond yields pose a risk for stocks

The year has not started well for equity markets. Fears of inflation and tighter monetary policy are weighing on share prices as tensions between Russia and Ukraine darken the outlook.

There is a sense that government bond yields, after declining for 40 years, might be trending upwards again. There are three reasons why this can be bad news for equities.

The first is that for asset allocators, bonds and equities are competing options. Higher yields make bonds more attractive and prompt some investors to switch out of equities. The second reason is that higher bond yields make it more difficult for the economy to grow and more expensive for companies to raise finance.

Third, equity valuations are linked to the expectation of future profits growth. To put a current value of those future profits, they must be discounted by some rate to take into account the time value of money — a dollar in 10 years’ time is worth less than a dollar today. This rate is usually the return that could be earned predictably elsewhere, typically benchmark bond yields. Lower bond yields mean a lower discount rate and thus seem to justify a higher valuation level. By contrast, higher bond yields should mean lower equity valuations.

The valuation issue is perhaps the biggest threat for the stock market since the cyclically adjusted price/earnings ratio (which compares share prices with the average of the last 10 years’ profits) on Wall Street is nearly 40, more than double the historic average. Furthermore, the valuation of tech stocks relies particularly on profits yet to be made, so they are harmed more markedly by a rise in the discount rate.

But the market damage has so far been limited. Is there a trigger point where the level of short-term bond yields leads to a more calamitous fall in share prices? History gives us some clues. The 10-year Treasury bond yield peaked at about 15.8 per cent in September 1981 before falling steadily to less than 0.6 per cent in July 2020. But that decline was punctuated by half a dozen periods when the yield surged.

In 1987, for example, the 10-year yield jumped from 7.2 per cent at the end of February to 9.6 per cent at the end of September. That was followed by “Black Monday” in October 1987 when the Dow Jones Industrial Average fell more than 22 per cent in a single day.

In the late 1990s, the yield rose from 4.4 per cent at the end of September 1998 to 6.4 per cent at the end of February 2000. Shortly afterwards, the dotcom bubble began to collapse. What about the great financial crisis of 2007-2008? The evidence is less clear. The 10-year bond yield rose from 3.4 per cent in May 2003 to 5.1 per cent in May 2006, but the first signs of stress in the financial system did not really emerge until April 2007 when the mortgage lender New Century went bust.

Making a precise call on the level of bond yields that would now be needed to cause severe trouble is made more difficult by how low they have fallen. The 10-year yield has more than doubled since the 2020 low, but that has only involved a rise of just over a percentage point. In the 1980s and 1990s, it seems to have taken increases of more than two percentage points in the yield to cause significant problems. That suggests a 10-year yield of 2.5-3 per cent would be the crucial level.

But the debate is complicated by the existence of a second trigger point built into the markets. As yields rise, they cause economic and financial damage. At some point, central banks may decide the damage is sufficient to warrant an end to monetary tightening. Indeed, even before central banks change tack, investors may anticipate them being forced into doing so. That could lead them to start buying both government bonds and equities in the hope of monetary loosening.

In the last cycle, the Federal Reserve’s benchmark fed funds rate peaked at 2.25-2.5 per cent. At the end of July 2019, the Fed cut rates citing “global developments” and “muted inflation pressures”. But inflation is now running at 7 per cent in the US and the Fed must surely continue hiking until it is brought under control.

Bulls will think that any upward shift in bond yields and interest rates will be temporary because inflation will eventually subside. It will be possible to ride out any short-term turbulence. But the bears will believe that it will be impossible for the Fed to control inflation without inflicting some serious damage on the economy and the markets.

WSJ : Rising Battery Prices Add Uncertainty to Electric-Vehicle Costs

Rising Battery Prices Add Uncertainty to Electric-Vehicle Costs
Demand for lithium outstrips supply, ending yearslong price declines

Surging prices for the metals that make up electric-vehicle batteries have ended a decadelong decline that brought the cost of EVs to within spitting distance of gasoline-powered vehicles.

With electric-vehicle sales taking off and a wave of new models hitting the market this year, the price increases could weigh on growth.

Since 2010, lithium-ion battery prices on average have tumbled 90% to about $130 per kilowatt-hour. The magic number that makes electric vehicles competitive with internal-combustion engine vehicles is roughly $100 a kilowatt-hour. Many expected the battery industry to reach that mark in 2024, a goal that is looking increasingly elusive.

Lower costs helped boost EV sales by 112% in 2021 to more than 6.3 million units world-wide from the previous year, according to Benchmark Mineral Intelligence, which tracks the global battery supply chain.

Now, prices are soaring for the key ingredients in batteries. Battery-grade cobalt prices are up 119% from Jan. 1, 2020, through mid-January 2022, nickel sulfate gained 55% and lithium carbonate rose 569%, according to Benchmark.

“What’s happening in the supply chain is casting doubt on that $100 kilowatt-hour price,” said Caspar Rawles, Benchmark’s chief data officer. “We’re hearing [about] quite significant price increases for auto makers from cell suppliers.” Some battery-cell makers that historically offered long-term fixed-price contracts have switched to variable-price deals, letting them pass on some of the costs of rising metals prices to customers, he said.

Most major U.S. and European auto makers shifted their focus to electric vehicles in the past few years, prompting a burst in demand that quickly outpaced supplies. China, which dominates the battery supply chain and has the world’s largest EV market, has also significantly increased EV production. Since it typically takes seven to 10 years to open a new mine, many battery materials could remain in short supply for years.

“You’ve got soaring demand for all these battery metals, and there’s this complete disconnect” between the mining sector and the automotive industry, said Daniel Clarke, thematic analyst at GlobalData, a data analytics group in London.

The lithium market is expected to see its biggest shortage on record in tons in 2022 amid soaring demand, labor problems and Covid-19 disruptions, according to Benchmark. EV auto makers in China have already started boosting prices, with BYD Co. raising the sticker price on some models by more than $1,000, Benchmark said.

Tesla Inc. Chief Executive Elon Musk last year said one of his biggest raw-material concerns was nickel. “So hopefully this message goes out to all mining companies,” he said on an earnings call. “Please get nickel.” Tesla has a contract to get nickel from BHP Group Ltd. , the world’s largest miner by market value.

New projects also often face protests from nearby communities, raising questions about expanded supplies. In January, Serbia revoked Rio Tinto PLC’s lithium exploration licenses following a wave of protests. Rio Tinto in a statement said it is “working through what this means for the project and our people in Serbia.”

Some factors could mitigate the demand crunch. Mining companies can expand current operations faster than they can launch new projects. Battery recycling is a growing business, providing an expanding source of supply. And new battery chemistries can offset demand for certain materials, such as cobalt and nickel.

A more-affordable battery technology championed by Tesla in China could provide some relief. Batteries that use lithium iron phosphate, or LFP, accounted for 57% of total battery production for vehicles in China last year, up from less than half the previous year, according to official Chinese figures.

The batteries use cheaper, more plentiful iron in their cathodes instead of more expensive metals such as nickel and cobalt. The drawback of the technology: They typically have a shorter range than standard lithium-ion batteries that use nickel and cobalt.

“LFP serves as a really nice relief valve on those supply chain shocks,” said Gene Berdichevsky, chief executive of battery-part maker Sila Nanotechnologies Inc. and a former Tesla employee.

The sudden burst in demand for LFP batteries last year helped push costs for lithium-ion batteries up some 10% to 20% in the later months of 2021, according to IHS Markit. And since LFP batteries use lithium as an electrolyte, they remain exposed to price pressures in the white metal.

Slack in the lithium supply was mostly used up in 2021 as inventories were drawn down, Benchmark’s Mr. Rawles said. Shortages in supplies could lead to temporary plant shutdowns at battery and auto makers, adding to costs, he said. Demand for lithium carbonate equivalent, a common metric for the refined metal used in batteries, rose about 40% in 2021 from the previous year to 491,896 metric tons, and is expected to more than double again to 1.1 million tons by 2025, according to Benchmark.

A potential solution to the lithium crunch is an alternative electrolyte. China’s Contemporary Amperex Technology Co., or CATL, the world’s biggest electric-vehicle battery maker and a Tesla supplier, last year unveiled a so-called sodium-ion battery that lowered the amount of lithium required in the cell. While the technology remains experimental, CATL said it plans to build a complete supply chain for the battery chemistry by 2023.

Scaling up a new battery technology to mass production carries technical and logistical risks, experts said. “CATL is very bullish on sodium ion, but any change in technology is a slow process,” Mr. Rawles said.

Choke points in the battery supply chain should be ironed out toward the later half of the decade as new mining projects come on line. And EV prices could continue to decline, despite higher commodity prices, amid fierce competition for market share as more auto makers join the race.

“I started building electric vehicles in 2001, I was employee 7 at Tesla, so I think in a very long arc,” Sila’s Mr. Berdichevsky said. “Ten years from now, EVs will dominate.”

Barrons : Not All Pandemic Stocks Are Equal. Why Beaten-Down HelloFresh Is a Buy

Not All Pandemic Stocks Are Equal. Why Beaten-Down HelloFresh Is a Buy.

Many stocks that benefited from trends accelerated by the onset of the Covid-19 pandemic are looking past their prime.

Peloton Interactive (ticker: PTON) was seen as the future of home workouts, but growth has stalled. Zoom Video Communications (ZM) stock isn’t much higher than when many people started working from home.

On the surface, HelloFresh (HFG.Germany) looks like a similar story. Shares in the world’s leading meal-kit delivery company are down more than 20% this year, putting it near the bottom of Frankfurt’s blue-chip DAX index. But not all pandemic stocks are equal. HelloFresh is bruised, but it’s a buy. The stock benefits from tailwinds predating Covid-19 and is undervalued by multiple metrics.

HelloFresh’s business is delivering weekly meal kits to subscribers. Consisting of preportioned ingredients and cooking instructions, the kits offer choices across cuisines and dietary preferences. “Venison Steaks and Creamy Peppercorn Sauce” and “Zucchini Pomodoro Penne Bake” were among the recent offers.

It was a winning recipe for years in a business with attractive unit economics. Founded in 2011, and now operating in 16 countries with more than 15,000 employees, HelloFresh stock rose 84% from its initial public offering in 2017 to the end of 2019, when the company posted its first annual profit on an adjusted basis.

The German company views its current total addressable market as 176 million households, including 77 million in the U.S. Its penetration into this group is just 3.5% to 4.5% but rising; revenue growth has so far outpaced penetration growth.

The global food segment is valued at 7.5 trillion euros ($8.5 trillion) by investment bank Berenberg, and HelloFresh has already beaten out scores of competitors to dominate one of this industry’s most disruptive sectors.

Now, caught up in a market rout, the shares look undervalued. HelloFresh has a market value of €9.3 billion and fetches a multiple of 35 times this year’s expected earnings, a 30% discount to its peers and below its own historical average. “HelloFresh’s valuation has strong earnings support, unlike many stocks with which it is being wrongly bracketed,” says Sarah Simon, an analyst at Berenberg.

The stock looks even cheaper by other metrics. Start-up rival Gousto raised $100 million from SoftBank just last month; applying a similar valuation multiple to HelloFresh implies a share price some 250% higher than its current level, according to Credit Suisse’s Victoria Petrova.

HelloFresh will report full-year earnings in March. Analysts surveyed by FactSet expect a record €520 million in profit, based on a preferred adjusted metric, on sales of €5.87 billion—representing almost 60% annual growth. As for guidance, the company has said it expects revenue to rise an additional 20% to 26% this year.

HelloFresh does risk spending into a future where consumer trends are more uncertain. At its capital markets day in December, the company revealed a plan to double investments in 2022 as it builds out capacity and technology. That will pinch margins, but many analysts remain confident that leadership has the right ingredients for growth.

“Since IPO, HelloFresh has defied the skeptics and delivered far more than was expected of the company,” Simon says. “Management has proved far better at predicting the future than the capital markets.”

Investors have soured on pandemic stocks, but HelloFresh offers more than just a tasting course in returns. Brokers are bullish, with an average target price on the stock implying upside approaching 60%.

Now, that’s appetizing.

Barrons : Medtronic Stock Can Gain 20% as Covid Subsides

Medtronic Stock Can Gain 20% as Covid Subsides

Not a lot has gone right for medical-device giant Medtronic recently. But this year could make investors in the normally no-drama, high-performing company feel a whole lot better.

Like the Delta variant before it, Omicron has hurt demand for hospital elective procedures—the kind that Medtronic (ticker: MDT) makes devices for—while the company has also suffered setbacks with new products and regulatory problems. Its failure to provide updates for investors on those issues at the J.P. Morgan Healthcare Conference in January resulted in downgrades from formerly bullish analysts at BTIG and Piper Sandler.

All told, Medtronic stock, at a recent $103.59, with a $139 billion market cap, has dropped 14% over the past three months, versus the S&P 500 index’s 1.4% dip over the same period.

Medtronic’s problems, however, are fixable and temporary in nature, and when they pass, the company should regain its ability to churn out steady earnings growth. In the meantime, Medtronic has a dividend that will likely keep growing. With the stock beaten down, Medtronic could be a bargain for investors seeking a stable grower in a rocky market.

The Covid-19 era has been tough on medical-device companies. Periodic waves in case counts—even pre-Omicron—have delayed back and heart surgeries, among other procedures, as hospitals have prioritized Covid care. Those pauses have reduced sales forecasts—Medtronic’s medical-surgery business accounts for 29% of its $30 billion sales—and dented their stocks.

On Nov. 23, Medtronic reported a fiscal second-quarter profit of $1.32 a share, beating forecasts of $1.29. But its $7.85 billion in sales missed expectations of $7.96 billion, and it offered below-consensus third-quarter guidance. It wasn’t the only company to struggle. Boston Scientific (BSX) missed estimates for its medical-surgical business in the September quarter when it reported sales of $917 million, below expectations of $934 million.

“The main thing is Covid,” says Needham analyst Mike Matson. “Hospitals are at capacity.”

As Omicron eases, sales are likely to snap back. Analysts expect Medtronic to grow sales by 6%, to $33.4 billion, in 2022, while earnings could rise by 14%. Stifel analyst Rick Wise says that while profit forecasts could come down a tick to start the year, the Covid-related challenge is a short-term blip. “[Improved] fundamental performance could translate to better-than-expected revenue growth, earnings performance,” he writes.

Medtronic can’t blame all its problems on Covid. On Oct. 15, the company announced that a clinical trial for a technology designed to lower blood pressure, known as renal denervation, showed inconclusive results, meaning it will have to continue running the trial, putting billions of expected annual sales at risk.

On Dec. 15, the company announced it had received a warning letter from the Food and Drug Administration regarding product-safety issues at its Northridge, Calif., plant that makes its popular MiniMed insulin pumps, sending its stock down as much as 11%. Medtronic could see a more than $100 million hit to diabetes-equipment sales in 2022, according to Morgan Stanley analyst Cecilia Furlong.

On the fiscal second-quarter conference, Medtronic CEO Geoffrey Martha said he was “confident” that the company would eventually get its renal product approved for sale. As for the FDA letter, Morgan Stanley’s Furlong sees a resolution in about a year.

In the meantime, Medtronic stock is cheap. Shares trade at 17.4 times forward earnings estimates, 14% lower than the S&P 500’s 20.3 times. Historically, Medtronic has traded at a similar multiple to the S&P 500.

Many analysts see the company’s valuation heading higher. Stifel’s Wise values the stock at 22.5 times 2022 earnings, while Citigroup analyst Joanne Wuensch has the stock trading up to 20 times. Earning a higher multiple, however, will require Medtronic’s underperforming product segments, like medical surgery, to recover. “In the short term, it’s going to be tough, but beyond 12 months, people will start to see the multiple go back up if things go right,” Needham’s Matson says.

In the meantime, Medtronic has some $10.7 billion in cash, some of which could be returned to shareholders to soften the blow if near-term profits disappoint. It has net debt of $14.9 billion—or 1.5 times earnings before interest, taxes, depreciation, and amortization, or Ebitda—making it relatively easy to make its interest payments and continue to pay its dividend, which could rise to $2.52 per share in 2022, up from $2.42 in 2021, and a 2.4% yield, according to FactSet. “The dividend is very safe” says BTIG analyst Ryan Zimmerman, citing Medtronic’s good balance sheet. He downgraded the stock to Neutral from Buy in January.

And Medtronic has enough cash left over for acquisitions. On Jan. 10, the company agreed to acquire privately held Affera, a maker of cardiac equipment for patients with atrial fibrillation, or irregular heartbeats, for $925 million. Though not everyone is a fan of the deal, it will broaden Medtronic’s product portfolio by supplementing the company’s cardiac mapping and navigation product, used in the surgical treatment of atrial fibrillation.

If all goes well, 2022 could be a bounceback year for the stock. At 20 times 2023 earnings forecasts of $6.46, the stock would be up 25%. Add in the dividend payments, and the total return would be close to 30%.

That’s a healthy gain, even if it requires a little patience.

WSJ : SpaceX’s Starlink Satellites Are Photobombing Astronomy Images, Study Says

SpaceX’s Starlink Satellites Are Photobombing Astronomy Images, Study Says
Streaks left by passing satellites mar observatories’ celestial images, potentially hinder spotting of dangerous asteroids


A streak from a Starlink satellite appears in this image of the Andromeda galaxy.
PHOTO: CALTECH OPTICAL OBSERVATORIES/IPAC

As the armada of satellites circling Earth grows, a new study shows that astronomy images are being marred by streaks of reflected sunlight left by the fast-moving objects.
SpaceX alone launched nearly 150 of its expanding fleet of Starlink telecommunications satellites in the past month.
For the study, published Jan. 14 in the Astrophysical Journal Letters, researchers examined the effects of Starlink satellites on about 300,000 images taken by an instrument at the Palomar Observatory in Southern California. Between November 2019 and September 2021, they noted a 35-fold increase in the number of corrupted images.
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The streaks may not be enough to compromise the images’ scientific value, the study authors said. But they could complicate efforts to detect potentially hazardous asteroids, said Eric Bellm, a University of Washington astronomer who wasn’t involved in the research.

“There definitely is sort of a planetary defense aspect here,” he said.
Satellites “have the potential to interfere with ground-based observations by increasing the complexity of differentiating artificial satellites from natural objects like asteroids and comets,” a National Aeronautics and Space Administration spokesman said. NASA searches for near-Earth objects such as asteroids by looking for points of light in the night sky that move with respect to stars.
Though mostly invisible to the naked eye, the satellites can also hamper amateur and professional astronomers’ observations, said astronomer Connie Walker, who wasn’t involved in the new study. She co-directs an effort by the International Astronomical Union, a nongovernmental organization, to ease impacts of so-called satellite constellations on astronomy observations.

Astronomers have been discussing the potential impacts of satellite constellations—groups of similar satellites working together in orbit—for years, said Stanford University astrophysicist Bruce Macintosh, who wasn’t involved in the new research. But the discussions have focused mostly on computer models or a limited number of corrupted images, he said.
“This paper helps anchor the models to real data and provides statistics rather than one-off images,” he said.
The study focused on Starlink satellites because they are now the largest satellite constellation in low orbit, said Przemek Mróz, a University of Warsaw astronomer and the study’s lead author. Other companies, including Amazon.com Inc. and London-based OneWeb, are developing satellite constellations.
Amazon has taken steps to reduce its satellites’ impacts on astronomical observations and is working with astronomers to better understand their concerns, a company spokesman said.
A OneWeb spokeswoman said the company was committed to reducing its satellites’ effects on observations. “We publicly provide data on where our satellites are at any given time, helping astronomers to adjust their observations and avoid any disruption,” she said.
Space Exploration Technologies Corp., the formal name for SpaceX, didn’t respond to requests for comment. “We firmly believe in the importance of a natural night sky for all of us to enjoy,” the company said in 2020, adding that it was working to understand how to curb potential problems caused by its Starlink satellites.
SpaceX uses its Falcon 9 rocket to lift Starlink internet satellites into orbit.
PHOTO: TIM SHORTT/ASSOCIATED PRESS
The potential problems posed by satellite constellations may worsen with the deployment of more satellites, according to astronomers. “Astronomy is facing a tipping-point situation of increasing interference with observations and loss of science,” Dr. Walker said.
The Federal Communications Commission has authorized 12,000 Starlink satellites as part of a plan to extend broadband Internet service to the entire planet, including remote areas. Commission filings indicate that SpaceX wants to increase the number to at least 42,000. About 1,740 Starlink satellites are active or moving to operational orbits, SpaceX Chief Executive Elon Musk tweeted on Jan. 15.
OneWeb has launched 394 satellites of its planned 648-satellite constellation. Amazon aims to put more than 3,000 satellites in orbit by 2029 as part of Project Kuiper, a plan to provide world-wide high-speed internet access. China last year said it planned to launch a network of 13,000 telecommunications satellites.

The impact that satellites have on images depends in part on the length of time astronomers use an instrument to observe a celestial object.
Streaks seen in images captured by the Palomar instrument, which typically makes 30-second observations, don’t mean that the image is ruined, said Tom Prince, a California Institute of Technology physicist and a co-author of the new study. But, he added, “that may not be true for other observatories.”
Astronomers using the W.M. Keck Observatory in Hawaii often peer at faint celestial objects for extended periods—sometimes for hours. If a satellite streaks through an extended exposure, the “data could be irrevocably damaged,” said John O’Meara, the observatory’s chief scientist.
Software can help remove satellite streaks, Dr. Bellm said, but may further corrupt image data.
Satellites also pose a challenge for radio astronomy, in which images are created with radio waves rather than light.
The signals that telecommunications satellites beam down to Earth at times have drowned out radio signals from celestial objects, said Philip Diamond, director-general of the Square Kilometer Array, a radio telescope project that began construction last year. “Signals from satellites can be millions of times stronger than the brightest radio sources in the sky,” he said.
Dr. Prince said SpaceX had “acted responsibly” by moving to mitigate potential problems caused by Starlink. The company began launching satellites equipped with visors that shield their more reflective parts in mid-2020. The new study showed that Starlink satellites with visors dropped in brightness by a factor of about five.
Amazon plans to launch a prototype satellite equipped with a sunshade by year’s end.
Dr. Macintosh called for more regulations and international agreements to limit the impact of satellites on astronomy.
SpaceX and other companies that provide satellite-enabled internet in the U.S. must obtain a license from the FCC. The agency’s rules cover possible interference to radio astronomy but don’t extend to reflected light from satellites, an FCC spokesman said.
Dr. Macintosh said he thought that “with care and cooperation and some regulation,” the potential problems posed by satellite constellations could be overcome even as more satellites go up.
“The genie isn’t going back in the bottle,” he said.

FT : Icebergs: breaking up is a shattering experience

Icebergs: breaking up is a shattering experience
Scientists fear ‘Doomsday’ Glacier collapse could drag most of West Antarctica’s ice with it

Trouble comes in all shapes and sizes. That is the case with icebergs, the hunks of ice broken off from ice shelves or glaciers. The tiniest fragments — usually about the size of a grand piano — are called growlers. Dodging them caused the oil tanker Exxon Valdez to run aground in 1989. Detecting them by eye or by radar is tricky. That makes them the most hazardous form of ice of all, according to the Canadian Coast Guard.

The iceberg that sank the Titanic was probably 20,000 times heavier than the average growler. The 1912 disaster, which caused the loss of more than 1,500 lives, catalysed the creation of the International Ice Patrol. Its monitoring work, helped by advances such as satellite image analysis, has made the north Atlantic much safer. But icebergs remain a hazard, particularly as shrinking arctic sea ice and a polar cruise boom encourage more traffic.

The real threat is found at the other end of the scale. Tabular icebergs — named after their table-like shape — can be the size of a small country. Their calving from the front edge of a floating ice shelf does not, in itself, contribute to sea-level rise. That is for the same reason that melting ice cubes do not raise the height of a liquid in a glass.


But ice shelves act as a buttress, making land-based glaciers more stable. When these shelves break up, the glacier can flow more rapidly into open water, which does lift sea levels.

Thus the concern about Antarctica’s Thwaites Glacier, which already accounts for about 4 per cent of annual global sea-level rise. Dubbed the “Doomsday Glacier” by Rolling Stone, scientists fear its collapse could drag most of West Antarctica’s ice with it. That might, over centuries, raise sea levels by as much as 10 feet.


Scientists want to drill through the ice shelf to measure the water’s warmth beneath it. But this week it emerged their investigation was being hindered by a huge broken-off chunk of the glacier. Icebergs, it seems, can be problematic in myriad ways.