🐍 Once Bitten, Twice Shy

Happy Sunday to everyone on The Street. This past week the world lost former Prime Minister of Japan, Shinzo Abe. While in office, Abe's approach to kickstart economic growth and increase wages included loose monetary policy, fiscal stimulus, and structural reforms. This comprehensive plan was known as Abe's "three arrows" strategy.

The timing of Abe's death is notable given that one of the most prominent Asian-based crypto hedge funds recently fell into liquidation, marking one of the most high-profile casualties of the latest so-called “crypto winter.” Its name was 3AC, or Three Arrows Capital.

Before we hop into the stories this week, here are the results from last week's polls:

• Are you bullish or bearish on Cadre? 66% of you are BULLISH, 34% of you are BEARISH.

• Are you bullish or bearish on Starbucks? 55% of you are BULLISH, 45% of you are BEARISH.

• Are you bullish or bearish on CarMax? 40% of you are BULLISH, 60% of you are BEARISH.

Without further ado, here's what we have on tap this week: the USD, Microsoft & Activision, and More Reshoring.

Review

US stocks oscillated between gains and losses on the final day of the week as investors parsed through the stronger-than-expected June jobs report.

Nonfarm payrolls increased 372,000 last month, which was better than the 250,000 estimate from Dow Jones. The latest reading continues an upbeat trend for the US labor market so far this year and will likely keep the Federal Reserve on track for another 75-basis point hike later this month.

Healthcare consumer staple stocks including Centene Corp., Moderna, and UnitedHealth outperformed on Friday. PepsiCo popped and Costco climbed as well.

Treasury yields also advanced after the jobs data was published. This may have put downward pressure on growth names that are sensitive to rising rates. PayPal and Match.com, for example, saw their shares stumble.

Commodities-related companies also had a poor showing on Friday. Shares of Freeport-McMoRan, a mining stock fell, as well as railroad companies like Union Pacific and Norfolk Southern.

Later this week, key inflation data is on the way, and some Wall Street veterans predict that will bring a fresh round of volatility to stocks.

In company-specific news, Twitter announced it will lay off 30% of its talent acquisition team. WD-40 cited macroeconomic pressures and announced that its margins shrank during its fiscal third quarter.

On the flip side, Taiwan Semiconductor Manufacturing Co., the world’s largest contract chipmaker, reported quarterly revenue figures that were better than initial projections. Analysts say this shows that electronics demand is still robust despite some fears of a slowdown.

Ahead of this week’s Amazon Prime Day, Walmart said it won't be holding its own competing sales event, citing existing discounts and markdowns. In the past, the big-box retailer has thrown an event during the same period.

Last but not least, Elon Musk said he wants to end his $44 billion deal to buy Twitter, according to a letter sent by a lawyer on his behalf to the company’s chief legal officer Friday.

For the week, the Nasdaq closed up 4.6%, while the S&P 500 gained 1.9%. The Dow lagged but still gained about 0.8%.

Preview

3-year inflation expectations for June are due tomorrow. In May, the figure came in at 3.9%. Over the next 12 months, however, the outlook for price increases jumped to 6.6%, tying March for the highest rate on record.

The NFIB small-business index for June will be published Tuesday. Small business confidence fell in May largely due to inflation as well as a tight labor market that's driving up wages.

Speaking of inflation, the June CPI, or Consumer Price Index, is due Wednesday. In May inflation rose 8.6% year-over-year, the largest increase since December 1981. Core inflation, which strips out food and energy, jumped 6% during the last reading and was also higher than expected. The Beige Book and Federal Budget will be released in the afternoon.

On Thursday, the June Producer Price Index (PPI) will be published, outlining price increases from the perspective of manufacturers. Wholesale prices rose 10.8% in May on an annual basis and 0.8% on a monthly basis. Initial and continuing jobless claims will also be released.

Friday wraps the week up with retail sales for June and the preliminary University of Michigan consumer sentiment index for July. Combined, the two data points will paint a picture of how American consumers are feeling in the face of record inflation and a tight labor market. The Empire State Manufacturing Survey for July, industrial production index for June, and business inventories for May will also be published.

On the earnings front, PriceSmart (PSMT) is up on Monday, PepsiCo (PEP) reports on Tuesday, and Delta Air Lines (DAL) is due on Wednesday. JPMorgan Chase & Co. (JPM) and BlackRock (BLK) will wrap up the week on Thursday and Friday, respectively. Fears of a recession have weighed on bank stocks as Wall Street worries about companies tied to broad economic growth. Investors will want to know more about how executives at JPM and BLK view the outlook for the second half of the year.

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Greenback Gain May Cause Multinationals Pain 

Currency Crunch 

A stronger dollar and rising interest rates may help tame inflation that's running at a 40-year high, but for companies with international exposure, the greenback's gain can sometimes lead to unwanted pain.

Since the start of the year, the dollar is up 9.5%. That increase eats away at the earnings of US companies doing business overseas. It's already causing some firms including Microsoft (MSFT) to warn the strong dollar could negatively impact quarterly profits. The tech giant, which generates half its sales internationally, cut its profit and sales targets for the fourth quarter because of the dollar’s strength. 

Chip Makers in the Crosshairs 

Microsoft isn’t the only one in the crosshairs. Nvidia (NVDA), Estee Lauder (EL), Las Vegas Sands (LVS), and Newmont Mining (NEM) are among the companies that could also take a hit. 

Take chip maker Nvidia for example. It is a favorite on Wall Street, poised for growth in several areas as the economy becomes increasingly more digital. It also derives 84% of its sales from outside the US which means profits could suffer as it converts sales from local currencies to dollars. Texas Instruments (TXN), another semiconductor player, gets 90% of its revenue from outside the US. 

Las Vegas Sands is a Gamble 

On the consumer-facing side, there’s Estee Lauder, which generates roughly 79% of its revenue internationally. Business is already suffering from lockdowns in China so a strong dollar acts as an additional headwind.

Las Vegas Sands is another company that’s taking a hit from COVID restrictions. Right now, 100% of its sales are international, which puts it in a precarious position. Newmont is right behind Las Vegas Sands with 99% of its sales outside the US. 

The strong dollar is a byproduct of the Fed’s attempts to cool inflation but it's a double edge sword for companies with big international exposure. Investors would be wise to analyze what percentage of sales are foreign when thinking about adding new names to their portfolios.

Which stock below do you think will perform the worst over the next 12 months?

A Game Worth Playing

Upside Potential in Activision Stock 

Microsoft’s (MSFT) $69 billion acquisition of Activision (ATVI) is far from a done deal but that may not matter to investors looking to play the game. Since Microsoft announced its acquisition in January it's been going through a regulatory review by the Federal Trade Commission. The takeover also faces a competition probe in the UK now as well. 

While regulatory reviews aren't ideal, they aren't the end of the world. However, with Lina Khan at the helm of the FTC, this acquisition is under more scrutiny. Khan is not a big tech superfan and has long called for more reviews before approving deals of this magnitude. The 33-year-old (yes, she was born in 1989) could flex her muscles which has led to uncertainty and thus put downward pressure on the stock. 

Antitrust Concerns Overblown

To some, the antitrust concerns are overblown and as a result, present an entry point for investors. If the FTC is worried about the impact the deal will have on labor competition, it may be a moot point. The Communications Workers of America, which was initially against the deal, is now in favor of it. Having their support should appease regulators. 

As for worries Microsoft would keep Activision titles off rival game consoles, namely Sony PlayStation, that’s not likely to happen. Microsoft said it would honor deals Activision has in place. It also doesn’t want to jeopardize sales and limit access to the games. 

It's All Upside if Deal Goes Through 

As it stands, investors are giving the deal a 50-50 chance of approval. The stock is trading around $78 per share, well below the $95 per share Microsoft is paying for Activision. Shares are up from before the deal was announced. If the transaction goes through some analysts, including Wedbush’s Michael Pachter, think shares will trade near the deal price. 

Microsoft is covering its bases on the labor and competition fronts, increasing the odds of the deal being approved. For investors seeking a little arbitrage risk, Activision may be a way to level up. 

Are you bullish or bearish on Activision?

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More Reshoring

Two Years After COVID Companies Are Still Leaving China 

Once bitten, twice shy couldn’t be a more accurate way to describe how America's manufacturers are feeling. Two years after COVID-19 brought the global supply chain to a standstill, prompting many companies to shift operations back home, large firms are still staying away from China. 

Spooked by recent lockdowns in China, multinationals are accelerating plans to bring manufacturing back to the US, or at least somewhat closer to home. References to so-called onshoring, reshoring, or nearshoring among CEOs, are up more than 1000% since the pandemic hit, according to an analysis by Bloomberg.

Meanwhile, the construction of new US-based manufacturing plants has soared 116% year-over-year in 2022. From Arizona to Arkansas massive plants to make everything from semiconductors to aluminum and steel are being erected. 

Believe it or Not, Bringing it Back Can be Cheaper 

For some manufacturers, bringing operations back to US shores can be cheaper than producing goods in China. That’s particularly true for bigger items, say a dishwasher. The shipping costs in that particular instance can easily outweigh the increased amount companies pay for labor in the US.

The aim is to keep labor costs down, which is made easier thanks to automation. These days factories require fewer workers to manufacture parts and products. 

There are also geopolitical concerns, heightened by the war in Ukraine, that are prompting CEOs to keep an eye closer to home. Russia’s invasion of its neighbor reminded CEOs that something similar could happen between China and Taiwan. 

Is Made-in-America Built-to-Last? 

As of January, 90% of C-suite executives polled by UBS said they were moving manufacturing out of China or were gearing up to do so. Nonetheless, this shift to Made-in-America is still in its early days and there are risks that could slow it down. The strength of the US dollar (as we mentioned above) is a big one. As its value rises compared to the yuan, yen, pound, and euro, it becomes more expensive to make goods stateside. That may force multinationals to reconsider. 

For now, with the supply chain still a mess and COVID-19 lockdowns continuing in China, the US is becoming a hub of manufacturing again. Whether it's built-to-last remains to be seen.

Are you bullish or bearish on the concept of "reshoring" or bringing more manufacturing back to America?

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