Tag: Wall Street

Wall Street Week Ahead: Homebuilders poised for gains but face interest-rate fears

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Some investors are betting on shares of homebuilders to outperform U.S. stocks at large, but with interest rates expected to rise they may have to wait several months before those bets pay off.

The U.S. economy looks ideal for homebuilding stocks to benefit. The unemployment rate has fallen to its lowest level in more than 17 years and consumer confidence is near the highest levels in 17 years, according to the Conference Board.

And demand for housing in an already tight market is being supported by the many millennials seeking to purchase their first home, several investors said.

The U.S. Commerce Department’s data on April housing starts will be released on Wednesday, followed by data on new-home sales on May 23.

But other factors could raise costs for home buyers, potentially hampering home sales. A sharp rise this year in U.S. Treasury yields reflects increasing worries about inflation and fears that the Federal Reserve will raise interest rates more aggressively than has been expected.

The yield on the 10-year Treasury note is used as the benchmark for mortgage interest rates; higher rates increase mortgage costs for home buyers.

“The continued rally in yields is a potential red flag,” said Jared Woodard, an investment strategist at Bank of America Merrill Lynch in New York.

The 10-year Treasury yield has briefly exceeded the 3 percent mark, the highest level since January 2014 and more than 50 basis points higher than where it started the year.

The S&P Composite 1500 Homebuilding index has lagged the broader market, falling 16.9 percent from its Jan. 22 peak, which is more than three times the percentage decline of the S&P 500 from its high that month. In 2017, the homebuilding index soared 74.8 percent from the previous year.

Other factors also cast a cloud on the housing market. Last year’s federal tax overhaul put a cap on deductions for state and local and property taxes and lowered the amount of mortgage interest that is deductible, all of which results in higher costs for many homeowners.

Homebuilders have also pointed to rising costs for materials and labor in their earnings calls, though so far they have had little impact on their margins.

“The factors indicate that there may be some headwinds going forward,” said Michael Cuggino, president and portfolio manager of Permanent Portfolio Funds in San Francisco, which owns shares of Lennar Corp, the largest U.S. homebuilder by market capitalization.

Shares of the five largest U.S. homebuilders by market capitalization jumped on April 4, when Lennar reported robust quarterly sales and raised its forecast for the year. Lennar’s shares climbed 10 percent that day, and PulteGroup Inc, D.R. Horton Inc, Toll Brothers Inc and NVR Inc rose between 4.1 percent and 6.4 percent.

The stocks have given up much of those gains since then, even though homebuilders have continued to deliver upbeat results. Lennar shares have tumbled 13.7 percent. D.R. Horton, NVR and Toll Brothers are down 3.9 percent, 3.3 percent and 3 percent, respectively. Only PulteGroup has added to its April 4 gains, rising 1.8 percent.

Homebuilders that sell units at multiple price points, from starter homes to luxury properties, and are active throughout the United States are best positioned to withstand investors’ skittishness over interest rates, Cuggino said.

Next up to report is Toll Brothers, which focuses on the luxury market and is scheduled to release its quarterly earnings on May 22.

Still, some investors say this year’s industry underperformance looks like a normal response to the 2017 run-up.

Though housing starts have risen, hitting 1.319 million units in March, demand among home buyers has outpaced the limited housing supply in part because of the many millennials are entering the market.

“This is just a pause,” said Brian Macauley, co-portfolio manager of the Hennessy Focus Fund in Arlington, Virginia, which owns shares of NVR. “As fundamentals come through, the stocks will behave better.”

Signs of worries about affordability among home buyers, such as a move toward smaller homes or an uptick in adjustable-rate mortgages, have not yet emerged, said Jack Micenko, an analyst at Susquehanna Financial Group in New York.

Low earnings multiples could also draw investors’ attention. The 12-month forward price-to-earnings ratio for the S&P 500 Homebuilding index, which comprises just Lennar, PulteGroup and D.R. Horton, has fallen to 9.5 from 13.7 at the end of 2017. The price-to-earnings ratio for the S&P 500 is 16, down from 18.5 at the end of 2017.

“If (homebuilders) have solid orders and growth and hold their margins, they could work from here,” said Jonathan Woloshin, head of Americas equities and real estate at the chief investment office of UBS Global Wealth Management in New York. “There are some very attractive valuations out there.”

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

3 Mins Read

Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Asia stocks rise as crude oil extends rally on Iran worries

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Asian stocks rose on Thursday, with energy shares leading the way as crude oil prices bolted higher after US President Donald Trump’s decision to pull out of a nuclear deal with Iran.

MSCI’s broadest index of Asia-Pacific shares outside Japan added 0.2 percent, while Japan’s Nikkei climbed 0.5 percent.

Elsewhere in Asia, a stunning election upset in Malaysia by the opposition sent ringgit forwards sliding more than 2 percent in offshore trade and the cost to insure against a Malaysian debt default rose.

Moody’s ratings agency said the country was now in uncharted territory after an alliance of opposition parties led by former prime minister Mahathir Mohamad shocked the ruling coalition.

“The surprise win by Mahathir’s coalition party is likely to see an increase in policy uncertainty at least in the short term with market volatility likely to be higher,” said Sian Fenner, lead Asian economist at Oxford Economics.

Special public holidays were declared for Thursday and Friday following the elections.

But, highlighting investor worries, the US-traded iShares MSCI Malaysia ETF plunged 6 percent overnight to a one-year low.

Overnight, the Dow gained 0.75 percent and the S&P 500 climbed nearly 1 percent, with the S&P energy index rallying 2 percent.

Energy shares soared as crude oil prices reached 3-1/2-year highs, with investors betting the US withdrawal from a nuclear agreement with Iran would increase tensions in the Middle East and curtail oil supply.

Rising oil prices in turn pushed up US Treasury yields by fanning inflation concerns. The 10-year Treasury note yield rose to a two-week high above the 3 percent threshold before pulling back a little to 2.996 percent.

Shored up by higher yields, the dollar climbed to a 4-1/2-month high of 93.416 against a basket of six major currencies overnight. The dollar index was last at 93.130.

The New Zealand dollar retreated to a five-month low of $0.6930 after the Reserve Bank of New Zealand (RBNZ) wrongfooted hawks by keeping interest rates steady and saying the next move might be a cut or a hike.

“The RBNZ surprised markets with a slight dovish shift. It kept the official cash rate (OCR) on hold, as was widely expected, but notably allowed for the OCR to move ‘up or down’, rather than simply on hold – a slightly dovish development in our view,” said Imre Speizer, economist at Westpac.

The euro crawled back to $1.1849 after slipping overnight to $1.1823, its lowest since late December. The dollar stretched its overnight rally to trade at 109.855 yen.

In commodities, US crude futures were up 0.4 percent at $71.44 a barrel after going as high a $71.50, the highest since November 2014.

Oil prices rose about 3 percent on Wednesday.

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

3 Mins Read

Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Asian shares firm slightly in early trade

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Oil prices stood near their highest since late 2014 on Tuesday, ahead of an announcement by US President Donald Trump on whether he would withdraw from a landmark nuclear deal with Iran, which fuelled concerns about crude supply.

Asian shares firmed slightly in early trade with technology stocks resilient after generally upbeat earnings despite weakness in the global smartphone market and concerns about more regulation.

US West Texas Intermediate (WTI) crude futures on Monday rose above $70 for the first time since November 2014, having gained more than 18 percent from this year’s low touched in February.

Oil prices later pared some of those gains as traders took profit after Trump confirmed in a tweet that he would announce his decision on the nuclear deal at 1800 GMT on Tuesday.

“The oil market has priced in the high likelihood of Trump withdrawing from the nuclear deal with Iran. If he is going to impose sanctions similar to those the US had in 2012, that would likely to cause a shortage in oil,” said Tatsufumi Okoshi, senior commodity economist at Nomura Securities.

In addition, falls in Venezuelan oil production due to problems at the country’s oil company PDVSA also added to the rally.

US crude futures last traded at $70.04 per barrel, down 1.0 percent from Monday’s settlement price.

Global benchmark Brent crude futures stood at $75.62 per barrel, down 0.7 percent, having risen as high as $76.34 on Monday.

While caution on Trump’s statement kept many investors on edge, Asian shares made small gains, led by technology firms.

MSCI’s broadest index of Asia-Pacific shares outside Japan gained 0.2 percent, with information technology shares rising 0.4 percent. Japan’s Nikkei was almost flat.

On Wall Street on Monday, the S&P 500 gained 0.35 percent, boosted by Apple’s sixth straight day of gains.

In currency markets, the dollar broadly held firm on the prospect of solid US economic growth, helped partly by Trump’s tax cuts and spending, pointed to further rises in US interest rates down the road.

That prompted investors to buy back dollars they had sold earlier this year on worries about Trump’s protectionist trade policies.

The euro hit a four-month low of $1.1897 on Monday and last stood at $1.1924.

Against the yen, the dollar stood little changed at 109.07 yen , off its three-month high of 110.05 yen.

The combination of higher oil prices, a strong dollar and higher US rates is risky for some emerging market assets as it could significantly worsen their trade balance and also encourage investors to shift funds to higher-yielding US assets.

JPMorgan’s emerging market bond index hit the lowest level in more than a year.

The Indian rupee hit a 15-month low while the Indonesian rupiah hit its lowest level in 2-1/2 years on Monday.

The divergence between developed and emerging markets was also visible in equity prices. Brazil’s Bovespa hit three-month lows while Germany’s Dax hit three-month highs and Italian shares hit 8-1/2-year highs.

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

3 Mins Read

Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Why Wall Street is concerned about Tesla

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Elon Musk’s track record for technological feats as chief of SpaceX has turned skeptics into believers in everything from his quest to open space travel to Mars to his desire to build a tunnel for high-speed travel between New York and Washington. As Tesla’s CEO, his ambitious vision for electric cars has also earned him a faithful following.

But now Wall Street is taking a more practical tone, increasingly questioning Musk’s assertions of when the company can turn profitable. Tesla may ultimately be forced to sell new shares of its stock or take on more debt to bolster diminishing cash.

Shares in the electric car company slumped 5.5 percent Thursday, a day after it reported its first-quarter results and Musk’s remarks during an analyst conference call that left many investors scratching their heads.

The stock recouped some of its losses Friday, closing up 3.4 percent at $294.09. Tesla shares are still up more than fourfold over the last five years. The S&P 500 has risen about 65 percent in the same period.

Concerns, however, remain. Here’s a look at some of the more pressing ones that Wall Street has laid out for the former darling of the investment world.

CASH BURN

Tesla is not turning a profit, which means it has to use cash to pay the bills. The big question from investors: Does Tesla have enough?

Tesla went through nearly $400 million during the first three months of the year to make its cars, pay its sales staff and cover the other costs of running its business. Another $656 million went to spending on equipment, facilities and other capital projects, for a total of slightly more than $1 billion.

Analysts call this situation “negative free cash flow,” and it helped cut Tesla’s cash balance to $2.7 billion at the end of March. If the company keeps burning through its cash at the same pace, it could run out within a year and be forced to sell more of its stock or borrow money.

Tesla says it won’t come to that. The company expects to take in more cash than it spends in the second half of this year. Some of that will likely be due to planned spending cuts on machinery, equipment and other capital expenses.

DEBT

Reining in spending will help, but Tesla still faces hefty debt payments over the next 12 months.

The company has to pay back $1.3 billion in debt that comes due later this year and in early 2019. And to do so, while covering its expenses, it will have to raise or borrow $2 billion, according to Moody’s analyst Bruce Clark.

Tesla’s spending and reliance on debt also has analysts at Morningstar concerned.

Last month, Morningstar Equity Strategist David Whiston wrote that it’s “nearly guaranteed” that Tesla will have to raise more cash.

“But if the capital markets close to them, then the recent plunge in the stock price will look trivial compared with what will happen then,” Whiston wrote.

PRODUCTION ISSUES

Tesla expects it will become profitable later this year. But that hinges on a big “if.” To do so, Tesla has to ramp up production of its Model 3 electric car to 5,000 units a week. The company says it may reach that level in about two months. Just prior to a planned shutdown in mid-April, Tesla was producing Model 3s at a rate of more than 2,000 a week.

To get there, Tesla will need to smooth out problems it’s encountered as it tries to make the production more automated, a process that it calls the “machine that builds the machine.”

Tesla acknowledged on Wednesday that it was overly ambitious in its efforts and that it “made a mistake by adding too much automation too quickly.” One example Musk gave was of a machine that placed fiberglass mats on top of battery packs. The company found that human hands are better than machines at picking up these pieces of fiberglass, which Musk said look like “fluff.”

In response, Tesla stopped using the “flufferbot” and dialed back automation in other areas, bring back some human workers. That raises costs, reducing how much profit Tesla can wring out of the cars.

INVESTOR CONFIDENCE

A big part of Tesla’s share price is investors’ faith in Musk.

They’ve poured dollars into Tesla stock on the belief that the CEO, who previously helped nurture PayPal and whose other company, SpaceX, launches rockets and spacecraft, can revolutionize the auto industry.

But some of that investor confidence may have been shaken following Musk’s behavior on a conference call with Wall Street analysts on Wednesday.

At one point, as analysts peppered Tesla executives with the usual litany of questions about the company’s operations, Musk dismissed the queries, saying “boring boneheaded questions are not cool.” He later cut off the “dry” questions from analysts, saying “they’re killing me.” He then went instead to a self-described “finance nerd” who runs a YouTube channel and was asking questions on behalf of retail investors.

Wall Street did not take too kindly to the remarks.

“Investor feedback is that the performance shook confidence, which we’d argue is an important piece of the Tesla story,” RBC Capital Markets analyst Joseph Spak wrote in a report.

Morgan Stanley analyst Adam Jonas called it “arguably the most unusual call I have experienced in 20 years.”

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

3 Mins Read

Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Asia shares shackled by trade tensions, dollar stays firm

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Asian shares were subdued on Thursday ahead of anxiously-awaited Sino-US trade talks, while the US dollar consolidated recent bumper gains after the Federal Reserve reaffirmed the outlook for more rate hikes this year.

Reports the Trump administration is considering executive action to restrict some Chinese companies’ ability to sell telecoms equipment in the United States could unsettle investors.

Talks between US Treasury Secretary Steven Mnuchin and Chinese Vice Premier Liu He are due to kick off later on Thursday, but a breakthrough deal is viewed as highly unlikely.

MSCI’s broadest index of Asia-Pacific shares outside Japan was all but flat, while South Korean stocks eased 0.31 percent.

Japan’s Nikkei was closed for a holiday, while E-Mini futures for the S&P 500 barely budged.

Wall Street had wobbled on Wednesday as potential US restrictions on Chinese telecom companies reinforced investor concerns about worsening trade relations.

The Dow ended down 0.72 percent, while the S&P 500 also lost 0.72 percent and the Nasdaq 0.42 percent.

The Fed policy meeting ended with no change as expected while the central bank expressed confidence a recent rise in inflation to near target would be sustained, leaving it on track to raise borrowing costs in June.

“The statement carried only modest changes in wording, but they were meaningful nonetheless, highlighting that the Fed is optimistic on the outlook and intent on continuing to raise rates at a gradual pace,” said Westpac analyst Elliot Clarke.

Yet the Fed also emphasised the inflation target was “symmetric”, suggesting it was not inclined to speed up its tightening plans.

“The Fed sees little reason to be concerned with inflation marginally above its 2.0 percent target, particularly after such a long period of underperformance.”

Westpac, like the market, expects two more hikes this year.

The statement was not quite as hawkish as some had wagered on and caused a dip in the dollar, but the move was brief as rates were still clearly heading higher while those in Europe and Japan lagged far behind.

The euro was the biggest loser dropping to a 15-week trough at $1.1936. It was last pinned at $1.1950 and threatening the low for the year so far at $1.1915.

The dollar also scored a three-month peak on the yen at 110.05, before edging back to 109.82. Against a basket of currencies, the dollar index touched the highest since late December at 92.834 and was last at 92.742.

In the Treasury market, yields dipped slightly as a quarterly refunding program of $73 billion came in short of expectations, reducing the pressure on prices from the torrent of supply.

Oil prices slipped with the market cautious ahead of the May 12 deadline for the US to ratify the Iran nuclear deal.

Reuters reported President Donald Trump has all but decided to withdraw from the 2015 Iran nuclear accord but exactly how he will do so remains unclear.

Brent crude futures fell 34 cents to $73.00 a barrel, while US crude dropped 33 cents to $67.60.

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

3 Mins Read

Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Asia shares hit by tech warning, oil holds near highs

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Asian shares slipped on Friday as a warning on smartphone demand from the world’s largest contract chipmaker slugged the tech sector, while lofty oil prices stirred inflation fears and undermined sovereign bonds.

Apple led the way after Taiwan Semiconductor Manufacturing cut its revenue target to the low end of forecasts and blamed softer demand for smartphones.

“The big story for the APAC region today will be fallout from TSMC’s miss, which will weigh heavily on the tech sector, with first order impacts on the Semis and Samsung Electronics/ Galaxy supply chain,” analysts at JPMorgan said in a note to clients.

“The miss appears largely to have been due to Apple iPhones, and so may also weigh on the Apple supply chain.”

Stocks in South Korea took an early 0.4 percent dip with the tech sector losing 1.6 percent. Japan’s Nikkei fell 0.5 percent with tech down 0.9 percent.

MSCI’s broadest index of Asia-Pacific shares outside Japan shed 0.4 percent, again led by a 0.7 percent drop in technology.

Wall Street had also been hit by weak result from tobacco company Philip Morris, which sent its shares down as much as 17.7 percent and dragged on the S&P 500.

The Dow ended down 0.34 percent, while the S&P 500 lost 0.57 percent and the Nasdaq 0.78 percent.

Oil prices edged back a touch after hitting their highest since late 2014 on drawdowns in global supply and as Saudi Arabia looks to push prices higher. [O/R]

Brent crude futures were steady in early trade at $73.78 a barrel, while U.S. crude eased 5 cents to $68.24.

A global oil glut has been virtually eliminated, according to a joint OPEC and non-OPEC technical panel, two sources familiar with the matter said, thanks in part to an OPEC-led supply cut deal in place since January 2017.

Analysts at CBA noted market measures of inflation expectations had spiked higher this week as oil prices surged, with some hitting highs not seen since mid-2014.

That in turn pressured fixed-income debt with yields on 10-year Treasuries jumping to a one-month top at 2.93 percent. Yields are up 10 basis points in just two days, the sharpest move since early February.

In currency markets, the main mover was sterling which dived late Thursday when Bank of England Governor Mark Carney cooled expectations for an interest rate hike in May, pointing out there were “other meetings” this year.

Sterling dropped more than a cent to $1.4085, leaving it a long way from the week peak of $1.4373.

The sudden retreat in sterling helped support the U.S. dollar more broadly and the dollar index was steady at 89.940.

The euro also eased back a touch to $1.2346, while the dollar remained tightly bound on the yen at 107.41 yen, still short of recent peaks at 107.78.

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

3 Mins Read

Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow