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SIX things you need to know this week in 60 seconds.
What inflation?
Saudi Aramco eyes IPO for trading arm
Weathering the storm
Gas prices: arm, leg
Unprecedented bullishness
Will they/won’t they?
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1. MACRO
What inflation?
If you thought consumers were going to let the highest inflation levels in four decades get in the way of their spending—think again!
And don’t let the lowest consumer sentiment in over 10 years fool you either: retail sales rose for the 4th consecutive month in April.
The 0.9% increase showed that the shift from goods to services is becoming more pronounced as Covid fears subside and people get out more.
The positive retail sales report was accompanied by a stronger-than-expected rise in industrial production for April at 1.1%—also the 4th consecutive month of positive readings for this measure.
GRIT’S TAKE: With domestic demand strong, industrial production rising, and a historically tight labor market, there’s a path for the Fed to get more aggressive if inflation doesn’t subside soon.
GRIT’S ACTION: Dollar cost averaging buying core positions like $RY.
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2. DEALS
Saudi Aramco eyes IPO for trading arm
To squeeze more revenue out of every barrel, big oil companies have been adding trading arms to their operations.
With oil prices surging, many energy companies in the Middle East have been taking advantage of excellent trading results by listing these assets.
In what could turn out to be one of the year’s biggest listings, Saudia Aramco (which recently de-throned Apple as the world's most valuable company) is considering an IPO for 30% of its trading arm, Aramco Trading Co.
The entire unit could potentially be worth more than $30B.
Established in 2011, Aramco Trading started with refined products, blending components, bulk petrochemicals, and polyolefins, and now trades everything from crude to LNG.
GRIT’S TAKE: Saudi Aramco already has several listed subsidiaries and is also considering listing Luberef, its refining company.
GRIT’S ACTION: Not buying energy.
3. STOCK MARKET
Weathering the storm
This week’s earnings were revealing. They showed us how customers are weathering inflation and which companies have been able to balance high costs, supply chain issues, inventory levels, and unusually cool weather.
Despite beating on the top line, both Walmart and Target saw profits shrink as elevated fuel prices, rising labor costs, and a shift in shopping behavior proved too unpredictable to manage.
Shoppers are also spending less on the big-ticket items they splurged on in the stimulus era.
This hurt retailers like Lowe’s who saw fewer consumers taking on DIY projects.
Others, like Home Depot, reported less sensitivity to rising prices than expected. Lowe’s rival rode sales to professionals to its strongest first-quarter sales on record.
GRIT’S TAKE: Revenue guidance remains more or less stable, but investors will be keeping a close eye on margins to determine which companies are weathering the storm.
GRIT’S ACTION: I own Home Depot and thought quarter & guidance were great.
4. COMMODITIES
Gas prices: arm, leg
Robust domestic demand in the US has the Brent-WTI spread in negative territory.
Crude oil and distillate inventory levels remain very low.
Gasoline demand has picked up while storage continues ticking down.
Gasoline inventories are dropping at a faster pace than they usually do this time of the year.
What do you get when you combine all these factors?
The average price for a gallon of gas has topped $4 in every US state for the first time ever!
GRIT’S TAKE: While gas as a percentage of disposable income is only slightly above average (because of rising wages), the average US household is expected to spend ~$450 more (inflation-adjusted) on gas in 2022 than they did last year.
GRIT’S ACTION: Not buying energy.
5. CRYPTO
Unprecedented bullishness
“Be fearful when others are greedy. Be greedy when others are fearful.”
– Institutional investors on Bitcoin (probably)
While Terra’s unraveling was causing devastating ripple effects throughout the crypto-verse, institutions funneled $299M into Bitcoin funds last week, good for the largest inflow since October 2021 and the 19th biggest since records began in 2015.
It’s an unprecedented level of bullishness for such an extreme period of volatility.
Ethereum, on the other hand, saw 2.6% of assets under management in Ethereum-based funds evaporate during the same time ($27M), possibly in relation to concerns surrounding “the merge”.
Total YTD outflows for Ethereum total $236M.
Interestingly, one of its main competitors, Solana, has seen substantial inflows of $103M for the year.
GRIT’S TAKE: On a related note: the deadline for SEC’s decision on whether or not it will allow Grayscale to convert its Bitcoin trust into a spot ETF is July 6.
GRIT’S ACTION: Long Bitcoin & Ethereum, will be adding on the DIP soon. Subscribe to our crypto newsletter to never miss an investment I make!
6. ENTERTAINMENT
Will they/won’t they?
The saga continues…could Elon be getting cold feet?
This week the billionaire troll extraordinaire put another wrinkle in the hottest deal of the year after raising concerns over the number of bots on Twitter.
Musk—who waved detailed due diligence on the deal—ballparks the number of fake accounts on the platform at 20% (4x more than the 5% the company claims) and insists he cannot move forward until this issue is clarified.
Some speculate that this is Elon ducking for the exit but walking away from the deal isn’t so easy. Here are three scenarios in which Elon could get away with paying the $1B breakup fee and getting out:
1. Regulators try to block the deal
2. Debt financing falls through
3. Musk can demonstrate Twitter has significantly changed for the worse since the deal was agreed upon (aka “material adverse effect”)
GRIT’S TAKE: Twitter has stated that it intends to enforce the merger agreement at the agreed-upon price of $54.20.
GRIT’S ACTION: I wouldn’t touch Twitter … I tell you exactly why HERE at 13:18:
How’s WallStreetBets feeling this morning?
*SOURCES
1. WSJ
2. Bloomberg
5. Decrypt
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