Wall Street Breakfast: What Moved Markets

The stock market finished the first week of May with modest losses that masked a turbulent performance that saw the Dow Jones Average post both its best and worst days since 2020. The three major indexes started the week with three straight positive sessions, then plunged in a sharp selloff after investors decided the Federal Reserve’s implied policy tightening cycle ahead was still very hawkish, even as Chairman Jerome Powell took 75-basis point rate hikes off the table. Investors remain nervous about the Fed’s ability to tighten financial conditions to combat inflation at 40-year highs without knocking the economy into a recession. The Dow Jones Average lost only 0.2% for the week but it was still the sixth straight declining week for the index, while the S&P 500 also fell 0.2% and the tech-heavy Nasdaq Composite slumped 1.5%, closing nearly 25% below its record high from last November

No to crypto

Just a month after Peter Thiel called Warren Buffett the “enemy No. 1” of Bitcoin (BTC-USD), describing him as a “sociopathic grandpa from Omaha,” Buffett doubled down on his outlook of the popular crypto at Berkshire Hathaway’s (BRK.A, BRK.B) annual shareholder meeting. “Nobody wants their windpipe stepped on and I don’t blame them. I don’t like people to step on my windpipe, but I will say this,” declared Buffett, who has previously referred to Bitcoin as “probably rat poison squared.”

Quote: “If you said… for a 1% interest in all the farmland in the United States, pay our group $25B, I’ll write you a check this afternoon. For $25B, I now own 1% of the farmland. If you tell me you own 1% of all the apartment houses in the United States and you want another $25B, I’ll write you a check, it’s very simple. Now if you told me you own all of the Bitcoin in the world and you offered it to me for $25 I wouldn’t take it because what would I do with it? I’d have to sell it back to you one way or another. It isn’t going to do anything. The apartments are going to produce rental and the farms are going to produce food. That explains the difference between productive assets and something that depends on the next guy paying you more than the last guy got.”

“Assets, to have value, have to deliver something to somebody. And there’s only one currency that’s accepted. You can come up with all kinds of things – we can put up Berkshire coins… but in the end, this is money,” he announced, holding up a dollar bill. “Anyone that thinks the United States government is going to change the way they let Berkshire money replace theirs is out of their minds. Whether it goes up or down in the next year, or five or 10 years, I don’t know. But the one thing I’m pretty sure of is that it doesn’t multiply, it doesn’t produce anything. It’s got a magic to it and people have attached magic to lots of things.”

Charlie Munger chimes in: “In my life, I try and avoid things that are stupid, and evil, and make me look bad in comparison to somebody else – and Bitcoin does all three. In the first place, it’s stupid because it’s very likely to go to zero. In the second place, it’s evil because it undermines the Federal Reserve system that we desperately need to maintain its integrity and government control… and third, it makes us look foolish compared to the Communist leader in China. He was smart enough to ban bitcoin in China, and with all of our presumed advantages in civilization, we are a lot dumber than the Communist leader in China.” (395 comments)

Overturned?

In a rare breach of tradition and secrecy, the U.S. Supreme Court voted to strike down the landmark Roe v. Wade decision, according to a leaked initial draft majority opinion that was later confirmed. Once a public ruling is released, federal protection of abortion rights would come to an end, allowing each state to decide on the legality of abortion and procedures (at least 22 states already have laws on the books in the event the case is overturned). The high court is expected to announce its final decision within the next two months, though deliberations on controversial cases have been fluid in the past and multiple drafts or vote-trading could occur before then.

Some history: Roe v. Wade effectively legalized abortion across the United States in 1973 by striking down a Texas law that only permitted abortion for the purpose of saving a woman’s life. The majority opinion at the time declared that a woman’s right to privacy under the 14th Amendment superseded a state’s right to ban abortion and the court set different rules for each trimester. In the years since, Roe has been modified but not overturned, like in the 1992 case of Planned Parenthood v. Casey. In that decision, the court said that restrictions are “unconstitutional” if they place an “undue burden” on a woman, and quickly became the new standard by which new abortion cases were judged.

“Roe was egregiously wrong from the start. Its reasoning was exceptionally weak, and the decision has had damaging consequences. And far from bringing about a national settlement of the abortion issue, Roe and Casey have enflamed debate and deepened division,” Justice Samuel Alito wrote in the initial draft majority opinion. “Roe expressed the ‘feel[ing]’ that the Fourteenth Amendment was the provision that did the work, but its message seemed to be that the abortion right could be found somewhere in the Constitution and that specifying its exact location was not of paramount importance. The Constitution makes no reference to abortion, and no such right is implicitly protected by any constitutional provision.”

Is Corporate America getting involved? You bet, and it has the potential to make bigger waves than the “Don’t Say Gay” tussle between Disney (DIS) and Florida’s legislature. In 2019, Netflix (NFLX) threatened to pull projects from film and TV hub Georgia over its court-challenged law that would ban abortions as early as six weeks into pregnancy, while Amazon (AMZN) just promised to reimburse employees with $4,000 if they have to travel for procedures like abortions. Other companies also put up money after Texas’s Heartbeat Act went into effect last year, with Match Group (MTCH), Yelp (YELP) and Apple (AAPL) promising to help pay for out-of-state abortions, and Lyft (LYFT) and Uber (UBER) pledging legal defense funds for drivers sued under the new law. (601 comments)

Oil import ban

The European Commission, the executive arm of the EU, unveiled new sanctions on Russian energy, including a phase-out of crude oil imports within six months and refined products by the end of the year. Brent oil futures (CO1:COM) climbed as much as 5% after the news on Wednesday, while WTI crude futures (CL1:COM) advanced 4% to over $108/bbl. The EU also proposed that Sberbank, Russia’s largest financial institution, and two other major banks be disconnected from the SWIFT international payment system, while “three big Russian state-owned broadcasters will be barred from EU airwaves.”

Quote: “Let us be clear: it will not be easy,” European Commission President Ursula von der Leyen said during a speech at the European Parliament. “Thus we maximize the pressure on Russia, while at the same time – and this is important – we minimize the collateral damage to us and our partners around the globe… because to help Ukraine we have to make sure that our economy remains strong.”

The sanctions are aimed at denting one of Russia’s most important sources of foreign earnings, but lucrative gas sales will stay intact for now. Moscow could also find other buyers looking to take advantage of the substantial discounts on its crude, like India and Turkey. “It might be just a game of musical chairs,” declared Viktor Katona, an oil analyst at Kpler, while Rystad Energy even sees the Kremlin’s total oil revenue rising 45% to $180B in 2022 as a rise in fuel prices counters any decline in production.

Exemptions: Von der Leyen didn’t disclose any exclusions during her speech, but EU officials have privately confirmed that the commission’s proposal includes flexibility for Slovakia and Hungary, which are both highly dependent on Russian energy. Additional time will be given to the two countries to phase out crude imports, likely until the end of 2023. While around 25% of Europe’s oil is imported from Russia, there are big differences in the level of reliance among member nations (usually those closer to the Russian border are more dependent on its energy network). (65 comments)

Buckle up!

Market optimism continues to evaporate as headline after headline continues to roil investing sentiment. While there have been some relief rallies in recent sessions, or what some dub capitulation trades or a dead cat bounce, those have done little to affect the overall equity trade which has turned sour since the start of 2022. In its biggest one-day loss in two years, the benchmark S&P 500 Index plunged 3.6% on Thursday, the Dow lost 1,063 points and the tech-heavy Nasdaq closed the session down 5%.

Dose of bad news: First it was inflation and high oil prices, followed by the war in Ukraine. Then it was COVID lockdowns in China that triggered more fears about the supply chain. Lackluster guidance from earnings season didn’t help the situation, while Powell’s comments of “additional 50 basis point increases at the next couple of meetings” are still reverberating through the investing community. Thursday’s sharp selloff saw the CBOE Volatility Index, a fear gauge known as the VIX, advance nearly 8 points to as high as 33.15, far above its long-term median of 17.63.

Markets were temporarily supported by comments from Jerome Powell revealed that the central bank wasn’t considering even bigger increases like 75 bps hikes (a move it hasn’t done since ’94), but “clearly, investors had second thoughts about the so-called ‘dovish hike’ from the Fed,” said Rob Carnell, economist at ING. There is an increased probability of “rate hikes coming thick and fast, but little if any prospect of a turn in inflation any time soon.” The flight to safety also did not materialize this time around (except for the dollar perhaps), with everything from gold to U.S. Treasuries joining the selloff on Wall Street.

Dimming the outlook: Powell is attempting to engineer a soft landing – in which interest rates are raised just enough that it doesn’t cause a recession – but those risks are piling up. On Thursday, the Bank of England raised rates to the highest level since the financial crisis and warned that the economy will slide into recession, essentially admitting that a downturn would be needed to bring down price pressures. Other Western nations, like the U.S., are also set to continue their policy tightening cycles over the course of 2022, making it exceptionally hard to achieve both growth and low inflation and spelling further pain for the economy. (20 comments)

‘Work from anywhere’

Many tech firms and other companies embraced remote work during the pandemic, only to wean off the model in favor of a hybrid approach or a return to the office once the initial waves of COVID-19 subsided. Not Airbnb (NASDAQ:ABNB). The home rental provider that changed the way people travel announced a policy this week that will allow its employees to live and work from anywhere, calling it the “predominant way companies will work in 10 years from now.” The plan:

1. You can work from home or the office – whatever works best for you.

2. You can move anywhere in the country, like from San Francisco to Nashville, and your compensation won’t change.

3. You have the flexibility to live and work in 170 countries for up to 90 days a year in each location.

4. We’ll meet up regularly for team gatherings. Most employees will connect in person every quarter for about a week at a time (some more frequently).

5. To pull this off, we’ll operate off of a multi-year roadmap with two major product releases a year, which will keep us working in a highly coordinated way.

Quote: “We had the most productive two-year period in our company’s history – all while working remotely,” explained CEO Brian Chesky. “Two decades ago, Silicon Valley startups popularized open floor plans and on-site perks. Today’s startups have embraced flexibility and remote work.” Companies will also be at a “significant disadvantage if they limit their talent pool to a commuting radius around their offices. The best people live everywhere.”

Human connection? “The most meaningful connections happen in person. Zoom is great for maintaining relationships, but it’s not the best way to deepen them. And some creative work is best done in the same room. The right solution should combine the efficiency of Zoom with the meaningful human connection that happens when people come together. Our design attempts to combine the best of both worlds.” (6 comments)