Dow Jones: 31,834 (-1.02%)
S&P 500: 3,935 (-1.65%)
Nasdaq: 11,364 (-3.18%)
Russell 2000: 1,718 (-2.48%)
Bitcoin: $29,084 (-6.88%)
Ethereum: $2,096 (-10.66%)
It looked like a good day at first… But the sweet green candlesticks this morning were quickly replaced by red tears, shooting down any hopes of a mid-week rally.
Stocks inched upwards to start the day, but gave up those gains in dramatic fashion as the market digested the April CPI data. The Nasdaq was hit the hardest as investors continued to sell out of growth and tech.
Inflation: April’s consumer price index showed an 8.3% increase YOY, higher than the 8.1% reading that Dow economists were expecting. Core CPI also came in hotter-than-expected. More on that later.
Earnings: Disney investors were rewarded with a 3% gain after-hours as DIS beat total subscriber estimates by 2.7 million. Beyond Meat, on the other hand, crashed 20% after-hours as the company reported a wider-than-expected loss (-$1.58 per share vs. -$1.01 estimate).
Crypto: Bitcoin just fell below $30,000 for the second time this week, and analysts say it should find support between $27K and $30K. The RSI on Bitcoin’s weekly chart reveals that the crypto is the most oversold it’s been since March 2020.
Now, for the top stories of the day…
Source: Heat Map & Sector Performance — Finviz.com
Elon Gets Real About Tesla and Twitter
Yesterday, Elon sat down with the Financial Times to get brutally honest about Tesla demand, his plans for Twitter, China, supply chains, and more. Here’s a breakdown of some of the major points from the interview:
Tesla may stop taking new orders. Yes, you read that right. Demand for their EVs has far surpassed what they can produce, and yesterday Elon said, “We’re actually probably going to limit [or] stop taking orders for anything beyond a certain period of time.”
Eliminating the Trump ban. If Elon’s deal to acquire Twitter goes through, permanent bans may become a thing of the past. “I do think it was not correct to ban Donald Trump…” Musk said. “I would reverse the perma-ban. … But my opinion, and Jack Dorsey, I want to be clear, shares this opinion, is that we should not have perma-bans.”
Problems overseas. Tesla’s Shanghai plant was closed due to Covid lockdowns for much of last month, but Musk thinks that the worst of the disruption is likely over. He also estimated that China could account for 25%-30% of Tesla’s business long-term.
Tesla joining the mining business? When asked about EV makers’ shortage of raw materials, Elon said it isn’t out of the question. “It’s not that we wish to buy mining companies, but if that’s the only way to accelerate the transition then we will do that,” Musk said.
A holding company is not likely to happen. Asked about combining all his companies under a parent corporation called “X,” Elon said, “They are separate objectives with different shareholder bases. I don’t see a ton of merit in combining them.”
The Latest Inflation Report: Key Takeaways
Has inflation finally peaked? The Consumer price index slowed to 8.3% YOY, just above Dow Jones estimates of an 8.1%, but below last month’s reading of 8.5%.
Core CPI: Even excluding volatile food and energy prices, core CPI still increased 6.2%, vs the expected increase of 6%, burying hopes of an inflation peak, for now.
Wages Struggling: American workers are still being undercut by high inflation, as real wages adjusted for inflation fell 0.1%, dispute a nominal increase of 0.3% in average hourly earnings. Year over year, real earnings are down 2.6%, even with hourly earnings up 5.5%.
Food & Energy: Energy has been the best performing sector by far in 2022, and it actually fell 2.7% for the month. This includes a 6.1% decrease for gas. Unfortunately, food prices continued to march on to the tune of 0.9% in April. YOY, energy is up 30.3% and food up 9.4%.
Housing: Real estate continues to hold its ground, with the shelter index up 0.5%, matching its prior two months gains. On a YOY basis, its up 5.1%.
Markets React: Markets opened the day up, but quickly reversed and headed south. Although inflation came down, it didn’t come down enough for investors to see a clear top. The fear now seems to be a plateau at higher levels could persist for some time before a meaningful drop.
The Simple (Boring) Strategy That’s Beating the Market
If you’re not already a dividend buff, there’s nothing like a volatile bear market to convince you to become one… And the Alps Sector Dividend Dogs ETF (SDOG) is certainly making a strong case for dividends in 2022.
Dogs of the S&P: SDOG has been beating the market using a twist on the old “Dogs of the Dow” investing strategy. Basically, the original theory calls for investors to only own Dow stocks with the highest dividend yields each year.
SDOG brings that strategy to the S&P 500, tracking the top 5 dividend-yielding stocks in each S&P sector (excluding real estate) at an equal weight.
- “At a high level, it’s designed to be simplistic. And it’s designed to be an easy story for investors to understand and for an adviser to tell their client,” said Paul Baiocchi, chief ETF strategist at SS&C Alps Advisors.
- SDOG currently has more than $1 billion in assets under management and is down just 0.06% year-to-date. It also offers a near-4% dividend yield and an expense ratio of 0.4%.
- The S&P 500 is down 17.96% year-to-date.
Avoiding These Sectors: A big part of SDOG’s success this year has been its lack of exposure to some of the hardest hit sectors, like tech and communication services. Instead it focuses on more ‘boring’ stocks — which investors are keeping an eye on this year as they shift away from assets that are more risky with less-consistent income.
Here are some of the fund’s top holdings, along with their dividend yields and YTD price returns:
- Valero (VLO): +56.16% YTD, Yield: 3.25%
- Conagra Brands (CAG): +4.79% YTD, Yield: 3.5%
- Kraft-Heinz (KHC): +20.37% YTD, Yield: 3.68%
- Amcor (AMCR): +5.30% YTD, Yield: 3.84%
- Philip Morris (PM): +4.83% YTD, Yield: 4.83%
- Newell Brands (NWL): -1.45% YTD, Yield: 4.22%
- International Paper (IP, not to be confused with Dunder Mifflin): +1.88% YTD, Yield: 3.88%
- Bristol-Myers Squibb (BMY): +23.06% YTD, Yield: 2.84%
- AT&T (T): +1.25% YTD, Yield: 5.71%
This Mortgage Trend From 2008 is Back…
Mortgage applications rose 5% in just one week as home buyers rush to pick up listings before rates go even higher.
But instead of getting the best fixed-rate mortgage that they can qualify for (the Graham Stephan method), more and more buyers are turning to adjustable-rate mortgages, or ARMs, to lock in a lower rate.
- The average interest rate for 30-year fixed-rate mortgages rose to 5.53% from 5.36%, and origination fees are on the rise as well.
- The rate on a 5-year ARM is just 4.47%.
Now, of course, that lower rate is only guaranteed for a specified period of time. For example, the home buyer using the 5-year ARM rate of 4.47% should expect that rate to change after that 5 year period is over. This could lead to a monthly payment increase, and makes long term home-budgeting more difficult.
But buyers don’t care right now… They just want the lower rate. “Purchase activity has now increased for two straight weeks,” said Joel Kan, an MBA economist, in a release. “More borrowers continue to utilize ARMs to combat higher rates. The share of ARMs increased to 11% of overall loans and to 19% by dollar volume.”
- At 11% of total loans, ARMs are now at their highest share of the mortgage market since March 2008.
Don’t freak out just yet, though… Poorly underwritten, interest-only ARMs with tiny teaser periods of ultra-low rates were partly to blame for the monstrous housing crash of 2008, but things have changed now.
- ARMs are now fully underwritten (approved by lenders), require a down payment, and are generally far more transparent with the starting rate than they were 14 years ago.
The Bigger Picture: Homebuyers are showing more interest in buying now before the Fed raises rates even more, but the refinancing boom we saw last year seems to be all but finished for current homeowners. Refinancing applications dropped another 2% week-over-week, and are down 72% from a year ago.
CRYPTO CRASH: This Coin Just Fell 95%
When people warn about crypto’s volatility being dangerous for investors, this is what they mean.
Terra’s LUNA token has completely collapsed in value over the past few days, falling 95% in the last 24 hours alone. Terra bulls — who have coincidentally called themselves #LUNAtics — are feeling the pain as LUNA now trades for just $1.84 at the time of writing.
Why is this happening? In short, investors are losing confidence in Terra’s ability to maintain its algorithmic stablecoin UST. Remember back on Monday when UST fell below its dollar-peg to around $0.60? Well, it got even worse.
- UST plummeted below 30 cents as the crypto market continues to go through a rough patch.
- And this is a big deal… There is currently a supply of 16 billion UST tokens in circulation and “UST has grown to be both an integral and controversial piece of the crypto ecosystem,” said David Moreno Darocas, research analyst at CryptoCompare.
A Last Ditch Effort: Terra founder Do Kwon has been active on Twitter as he tries to put out the fires that don’t seem to stop burning this week. In an attempt to rectify the disastrous situation Terra and UST are in, Kwon revealed a plan to eventually bring UST back to $1.
- The plan involves increasing minting capacity from $293 million to $1.2 billion in what some on crypto Twitter are dubbing “Kwontitative easing,” like money-printing by the Fed.
- The idea is to let “the system bleed out in the hope that it will start re-pegging back when the ‘excess’ UST supply has been worn out,” said Vijay Ayyar, head of international at crypto exchange Luno.
- Terra also plans to raise more than $1 billion in funding to prop up UST in the short-term.
Will it work? Well, no one knows for sure. And given LUNA’s great crash, it seems like the market isn’t too confident. But if it does work, this could prove to be one of the crypto market’s greatest comeback of all-time if LUNA is able to recover at least half of its past value.
Zooming Out: Bitcoin just fell below $30,000 for the second time this week following the release of April’s inflation data. But despite the recent downward spiral in the market, it seems like crypto startups and venture capitalists aren’t backing down — at least they didn’t in Q1.
- Crypto companies raised $9.2 billion from VCs globally in Q1. The U.S. accounted for 63% of those deals.
- DeFi was the winner of the quarter, with four new unicorns being crowned in the space (unicorns are startups that reach a $1 billion valuation). The U.S. is now home to 40 of the 62 crypto unicorns in the world.
Celsius (CELH): +14.79% – Celsius destroyed earnings yesterday, beating EPS by 178% and revenue by 16.73%.
Callaway Golf (ELY): +10.31% – Callaway Golf reported an EPS beat of 50.45% and revenue of 1.59%, helped by its Top Golf investment.
Electronic Arts (EA): +7.97% – EA beat on its first quester earnings and was upgraded by MoffettNathanson due to its balance sheet strength.
Unity (U): -37.05% – Unity slightly missed earnings, but the company downgraded forward revenue outlook 20% below analysts’ expectations.
Coinbase (COIN): -26.40% – Wow, Coinbase missed EPS expectations by 238% and revenue by almost 21% and got destroyed today amid crypto uncertainty.
MicroStrategy (MSTR): -25.42% – MSTR investors are beginning to get worried that MicroStrategy could face a margin call if Bitcoin drops below $21,000, it dipped below $30,000 for the first time in almost a year today.
Unity (U) – Daiwa downgraded Unity from buy to hold after the company’s earnings report yesterday. “We are still a believer in U’s long-term market potential. We are just taking a more cautious approach near to medium term.”
Coinbase (COIN) – Goldman Sachs downgraded Coinbase stock from buy to neutral saying the company has too many profitability concerns. ″… we believe COIN is unlikely to return to recent levels of proﬁtability in the near term absent a signiﬁcant increase in crypto prices or volatility.”
Electronic Arts (EA) – MoffettNathanson upgraded Electronic Arts from hold to buy saying its a good place for investors to “hide.” “As long-duration growth stories lose favor, it’s natural for investors to look to more stable places to hide. In many ways, video game stocks have already gone through most of the process.”
Quote of the Day: “It is during our darkest moments that we must focus to see the light.” –Aristotle
Fun Fact: Microsoft, Apple & Google combined are worth more than the entire Chinese stock market in 2022.