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SIX things you need to know this week in 60 seconds.
Powell: Fed needs “compelling evidence”
Kellogg split
Buybacks on the horizon for US banks
A potential solution to surging oil prices
Just because you can, doesn’t mean you should
Targeting young consumers?
1. MACROPowell: Fed needs “compelling evidence”
Doves like Senator Elizabeth Warren are warning that continued aggressive monetary policy could tip the country into a recession.
This week J-Pow reiterated that the Fed was “strongly committed” to higher rates—which he thinks the economy is well-positioned to handle—until “compelling evidence” of cooling inflation emerges.
He also admitted that surging food and gas prices were not something the central bank had the ability to reign in.
The Fed chair acknowledged a recession is “certainly a possibility” but pointed to “favorable” economic conditions—perhaps he missed the consumer sentiment reports, declining home sales, plummeting GDP forecasts, signs of a decelerating job market, and falling inflation-adjusted wages?
GRIT’S TAKE: Original projections called for a target range of 1.5-1.75% for interest rates. That number is up to 3.4% after last week’s meeting.
GRIT’S ACTION: Dollar-cost averaging into the S&P.
Under the Radar
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2. DEALSKellogg split
For decades the name of the game in the food industry has been growth by acquisition and building scale.
Kellogg is attempting to navigate the tricky grocery industry—which has been pummeled by surging costs in ingredients, packaging, labor, and fuel—by mixing things up and splitting up its businesses to create more agile and focused companies.
The conglomerate will be divided into 3 companies—snack, cereal, and plant-based foods—and will allow Kellogg to focus on its biggest and fastest-growing business (snacks) which was responsible for 80% ($11.4B) of sales last year.
The split might hurt Kellogg in the short term as it’ll lose some previously-shared resources and hamper its purchasing power, but should help it adapt to shifts in consumer trends more effectively.
GRIT’S TAKE: Kellogg has also indicated it’s considering selling its plant-based unit outright.
GRIT’S ACTION: A good example here of a defensive stock thriving (relatively speaking) in this environment at around +7% YTD.
3. STOCK MARKETBuybacks on the horizon for US banks
It won’t be a repeat of 2021 (when a backlog of buybacks were unleashed after Covid), but US banking giants are expected to return $80B to shareholders via dividends and share repurchases this year.
That is once they’ve passed the Fed’s stress tests, of course.
This year’s “severely adverse scenario” involves a severe global recession, heightened stress in commercial real estate and corporate debt markets, declines in real estate prices, and a whole lot of FUD (Fear, Noise & Uncertainty).
The hypothetical includes a 10% peak US unemployment rate, a 3% drop in real GDP, a 55% drop in equities (almost halfway there!), and a sharp decline in inflation to 1.25% (LOL!).
JPMorgan, Bank of America, and Wells Fargo are poised to lead the way in returning value to investors at $18.9B, $15.5B, and $15.3B, respectively.
GRIT’S TAKE: Last year dividend payouts rose by nearly 50% but slowing economic growth in the face of historic inflation and geopolitical uncertainty means buybacks will be more moderate this time around.
GRIT’S ACTION: I’ve been adding to financial stocks in my portfolio.
4. COMMODITIES A potential solution to surging oil prices
Given Covid lockdowns and weak demand, Chinese refineries are currently operating at around 70% utilization.
Incent China’s refined product export quotas, for example, are down 40% YoY.
Earlier this month though, China issued 4.5 million tonnes of quotas for refined fuel exports which would bring the total quota for the year up to 17.5 million tonnes.
This is still lower than the 29.5 million tonnes assigned in 2021, but it could bring refineries capacity up to 85% which would help cool off hot oil prices.
GRIT’S TAKE: The quotas will mostly include transportation fuels diesel, gasoline, and aviation fuel.
GRIT’S ACTION: Wasn’t chasing before, definitely not chasing now.
5. CRYPTOJust because you can, doesn’t mean you should
Back in October, “Big Short” investor Michael Burry wondered aloud about betting against Bitcoin and tweeted “Ok, I haven’t done this before, how do you short a cryptocurrency?”
There is now a simple answer: ProShares Short Bitcoin Strategy ETF ($BITI), which launched this week and delivers the reverse performance of an index of Bitcoin futures.
With an expense ratio of 0.95% (same as ProShares’ long Bitcoin fund, $BITO) BITI is designed for short-term investors as the returns effectively reset daily.
Meanwhile, short-sellers of crypto-related stocks have been posting hefty returns averaging 130%. For comparison, bets against the auto and software sectors are averaging returns of ~50%.
The most shorted stocks by amount and percentage of float are Coinbase (~$1.38B) and MicroStrategy (~27%), respectively.
GRIT’S TAKE: Now, I’m not saying the inverse will happen here, but Bitcoin did top less than a month after ProShares launched its long Bitcoin ETF…
GRIT’S ACTION: Long Bitcoin & Ethereum and doing due diligence on altcoins—become a paid subscriber of GRIT Crypto to get our monthly report next week!
6. ENTERTAINMENTTargeting young consumers?
“If you want to reach Gen Z consumers, it’s got to be part of your portfolio”
- Chris Brandt, Chipotle (Chief Marketing Officer)
Five-year-old TikTok is becoming the go-to avenue for both big and small brands targeting Gen Z, Millennials, and influencers.
The virality of the social media platforms’ short-form videos has sprouted copycats across big tech with brands like Google (Shorts) and Meta (Reels) rolling out similar products.
With more than 1 billion monthly active users, the price to market with TikTok is rising along with its success, but according to marketing agency Havas Edge, the cost of reaching 1k people is still only about 50% that of YouTube or Instagram.
As more companies seek to make impressions on younger consumers, TikTok is estimated to generate as much as $12B this year which would triple last year’s total (and triple Snap’s ad revenue).
GRIT’S TAKE: Apple’s new mobile ad-tracking feature introduced last year forced companies to diversify ad spending across different platforms which hurt big tech but actually benefited TikTok.
GRIT’S ACTION: Follow me on TikTok for market insights and memes (sans dance moves)!
*SOURCES
1. CNBC
2. WSJ
3. Bloomberg
4. Reuters
5. Bloomberg, 2
6. WSJ
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