Apple reports next week. The decline in demand for tech products has been well broadcast, which of course followed massive pandemic-fueled growth. Many companies have admitted that they positioned their businesses to continue growing at that same rapid fire pace, which led to overstaffing and excess spending. As demand for tech products and services has plunged, tech companies have been heavily trimming both workers and costs but many analysts still think the sector will struggle to show earnings growth for Q1. However, with expectations low, forward guidance will likely play a stronger roll in shaping investor sentiment.
One thing that could generate some new excitement for the tech sector is "artificial intelligence", or AI, with all four tech giants reporting this week )Alphabet, Amazon, Meta, and Microsoft) having some degree of their businesses now dedicated to the technology. At the same time, some Wall Street insiders are worried about the huge expense of developing AI technologies and how that might be impacting cash flow, especially with most anticipating a US recession later this year.
Other earnings highlights today include 3M, ADM, Biogen, Chipotle, Danaher, Dow, General Electric, General Motors, McDonald's, PepsiCo, Raytheon, Spotify, UPS, Verizon, and Visa. Keep in mind, even if earnings overall deliver good news this week, any rallies could be limited ahead of the Federal Reserve's policy meeting next Tuesday-Wednesday (May 2-3).
Investors mostly expect a 25 basis-point interest rate increase but the bigger question is whether the Fed will signal a pause in rate hikes going forward. Bulls believe that once that major uncertainty is removed, it could clear the way for another run higher. Bears however warn that any rallies could be interrupted by the debt ceiling fight in Washington with the deadline to a US "debt default" grows closer. It's not clear yet what that exact date might be but insiders think it could be as early as June. Turning to economic data, investors today will be digesting the Case-Shiller Home Price Index, New Home Sales, Consumer Confidence, and the Richmond Fed Manufacturing Index.
"Commercial Real Estate" Could be Heading for Something Worse than in the Great Financial Crisis: Allianz’s chief economic advisor, Mohamed El-Erian said, “the moment of truth will play out for the commercial real estate market once those loans mature and the sector is forced to adjust to the current economic climate." Billionaire investor Howard Marks, cofounder of Oaktree Capital Management, also expressed concern over the sector’s health, writing in a memo that “notable defaults on office building mortgages and other CRE loans are highly likely to occur.” Morgan Stanley’s wealth management chief investment officer, Lisa Shalett, wrote in a recent report, “More than 50% of the $2.9 trillion in commercial mortgages will need to be renegotiated in the next 24 months when new lending rates are likely to be up by +3.5% to +4.5%.” Even before the bank failures, office properties were already facing “secular headwinds,” and are expected to face more challenging times ahead. Not only are interest rates going to be a great deal higher but regional bank underwriting is going to be much more difficult. Commercial real estate lending standards were already tightening up over the past year as the Federal Reserve flipped into inflation-fighting mode. The ongoing bank troubles, however, will only exacerbate that tightening. Source YahooFinance
Americans Are Spending More on Eating Out: According to the U.S. Census Bureau, Americans are spending more money dining out than on groceries. It's interesting to see the data. It looks like about mid way through 2015 Americna consumers started spending more on eating out than at the grocery stores. Obviously, during Covid all of that flipped back to spending more on groceries at home than going out to eat, but we are again back to spending more on going out. Source Axios
Production Cut is Costing OPEC: OPEC’s share of India’s oil imports fell at the fastest pace in 2022/23 to the lowest in at least 22 years, as intake of cheaper Russian oil surged, data obtained from industry sources show, and the major producers’ share could shrink further this year. Members of the Organization of the Petroleum Exporting Countries (OPEC), mainly from the Middle East and Africa, saw their share of India’s oil market slide to 59% in the fiscal year to March 2023, from about 72% in 2021/22, a Reuters analysis of the data that dates back to 2001/02 showed. OPEC’s share shrank as India, which in the past rarely bought Russian oil due to high freight costs, is now the top oil client for Russian seaborne oil, rejected by Western nations following Moscow’s invasion of Ukraine in February 2022. The decision by OPEC and their allies, a group known as OPEC+ to cut production in May could further squeeze OPEC’s share in India, the world’s third largest oil importer, later this year if Russian supplies stay elevated. “Russian crude is already cheaper than the similar Middle Eastern grades and it seems OPEC is harming itself by a reduction in output,” said Refinitiv analyst Ehsan Ul Haq. Source Reuters
Big Pharma's "Patent Cliff" is Fast Approaching: Patents for more than 190 drugs will expire before the end of the decade, leaving sales worth as much as $236 billion at risk of a dramatic drop-off. Few will be spared the coming onslaught. The world’s ten biggest drugmakers, including Merck and Pfizer, stand to lose around 46% of their revenues, which amounted to over $500bn combined in 2021, according to ZS, a consultancy. For five of these companies, at least half of their annual revenues are at stake. Pharma bosses are spending big to plug the gaps. The industry has long turned to dealmaking as a way of compensating for the potential loss of revenue from expiring patents. Despite a dearth of mergers and acquisitions in other sectors, drugmakers are driving a wave of consolidation across the sector. Consultancy PWC estimates that the value of takeovers in the pharma and life-sciences industries could reach $275bn in 2023, up by almost three-quarters from last year. So far, the prices buyers are willing to pay have come with huge premiums. Merck is forking out $200 per share for Prometheus, a whopping 75% above the firm’s closing price just before the offer was made. Another acquisition unveiled in March will see Pfizer pay $43bn for Seagen, a loss-making cancer biotech firm. Source The Economist
M&A for Venture-Backed Startups Falls to Lowest Level in a Decade: As venture capital dealmaking moves in slow motion in the first quarter of 2023, some of the biggest and brightest are being left in limbo. Back in the good old days for Silicon Valley in 2021, unicorns, private companies worth over a billion, became more abundant and bigger than ever before. But with the IPO market largely shuttered, M&A was expected to take off in early 2023. But that hasn’t happened. With high inflation, tech companies cutting costs, and a crackdown by antitrust regulators, M&A activity across stages and sectors has nosedived—meaning yet another exit ramp is blocked off for many startups. According to PitchBook-NVCA Monitor, acquisitions of venture-backed startups saw their lowest quarterly level in a decade. And those worth the most are having serious trouble finding buyers. Currently, there are 704 active unicorns with an aggregate post-money valuation of about $2.4 trillion, according to PitchBook. Companies are largely choosing to hold off on buying even potentially profitable startups due to high inflation and pressure to cut costs. That means once high-flying unicorns could start hitting the market for cheap Source Fortune
Delta Wants to Increase Overbooking: Your next Delta Air Lines flight might come with a hard decision: taking the flight or a cash voucher instead. That's because the airline is considering increasing the rate it overbooks flights Glen Hauenstein, president of Delta Air Lines, told investors in its April earnings call. Overbooking is the practice of airlines selling more tickets than there actually are seats on a given plane for a given flight. Airlines usually use complicated algorithms that determine whether to oversell and by how much based on factors like time of day, passenger connections, what kind of traveler is usually on the flight, and more — all in order to maximize revenue on a flight. Delta already does this, but it's looking to do it even more as it looks for ways to squeeze more revenue out of every flight as it becomes better able to predict what passengers will actually show up. Source Insider
Trade Programs are Booming as More US Students Skip College: While almost every sector of higher education has fewer students registering for classes, many trade programs are thriving. Trade programs are often more affordable than a traditional four-year degree, students note, and, for many, skilled trades offer a more obvious path to a job. Mechanic and repair trade programs saw an enrollment increase of +11.5% from spring 2021 to 2022, according to the National Student Clearinghouse. In construction trades, enrollment grew +19.3%, and in culinary programs, it increased +12.7%. Meanwhile, overall enrollment declined -7.8% at public two-year colleges, and -3.4% at public four-year institutions. Since the pandemic, demand for skilled workers has picked up, and employment in many trades is expected to grow within the next decade. Source Insider
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