“We believe suboptimal staffing of their Ground and Express sorting facilities was a source of inefficiency, in addition to cost pressure from per hour cost inflation,” the note stated.
Wages have risen as the US economy has begun to recover from the depths of the pandemic. Even though unemployment remains above 5%, more than 10 million jobs are unfilled.
The company announced on Thursday that it intends to hire an additional 90,000 workers for the holidays. FedEx is scheduled to release its fiscal first-quarter results after the markets close on Tuesday.
According to UBS, some of FedEx’s problems were likely temporary, such as the start-up costs for a new hub in California, but it was unclear when earnings would recover.
“Visibility to the path forward on margin performance is limited at this time because it is unclear how much of the 1Q issues will remain as a headwind going forward,” the note said.
Why and what to buy
Cramer was reacting to a Reuters headline about the White House warning that not increasing the US government’s ability to pay interest on prior spending could cause a recession on “Squawk on the Street.”
“I did a study on this, and you had to buy every time some high official said this was going to cause a recession,” Cramer explained. “I just got the buy signal from the president” on any market repercussions from the “game of chicken” that will take place before the debt ceiling is eventually raised, the “Mad Money” host added.
It’s not “Rebel Without a Cause,” Cramer said, referring to the classic 1955 James Dean film in which one of the teen drivers drove off a cliff on a dare.
Last week, Treasury Secretary Janet Yellen warned House Speaker Nancy Pelosi, D-Calif., that the mere threat of a U.S. default could have serious consequences. Yellen, a former Federal Reserve chair, reiterated that lawmakers have until the end of October to exhaust Treasury’s extensive efforts to avoid a historic default.
Senate Republican Leader Mitch McConnell, R-Ky., has stated that Democrats, who control both the House and Senate by a slim margin, should raise the debt ceiling on their own.
Raising the debt ceiling does not allow for additional federal government spending. Instead, it allows the Treasury Department to continue paying for debt incurred as a result of money already spent by the government. It’s similar to how people pay off their credit card bills from the previous month.
Top shorted stocks
According to Bespoke Investment Group, only one of the top ten Russell 3,000 stocks with the highest short interest as a percentage of float is in the black for the year. Only eight of the top 25 of these stocks have seen positive returns in 2021, and six have seen their share prices cut in half. (Float refers to the number of shares that are available for trading.)
A short squeeze occurs when hedge funds are forced to repurchase stock that they borrowed and bet against in order to reduce their losses.
However, Bespoke data shows that the so-called Reddit army is not blowing up most short bets in the long run, as most of the heavily-shorted names are in the red.
“We have seen some aggressive short squeezes over the course of 2021, resulting in turmoil for certain financial institutions and millions of dollars in profits for some retail traders,” Bespoke told clients.
Reneo Pharma is down more than 37% since its initial public offering in April, and Relay Therapeutics is down more than 22% this year.
Lordstown Motors, a popular Reddit user, is the list’s biggest loser. The electric vehicle manufacturer has more than 33% of its float shares sold short and is down nearly 70% in 2021.
Big 5 Sporting Goods is the only company in the top ten that is profitable this year. With nearly 38 percent of its float sold short, the athletic retailer is up more than 180 percent in 2021.
Virgin Galactic downgraded
Virgin announced on Friday that a supplier had raised the possibility of a problem with a flight-control component, and that the planned flight with the Italian air force would be postponed until mid-October.
“We expected a lull in operations following the Branson flight, but things are moving slower than we had hoped,” the note said.
Walton also pushed back the arrival date of the company’s delta generation of ships from 2023 to 2024, which could have a significant impact on Virgin’s finances.
“The Delta class ship will pave the way for VG flight operations to meet sales, profit, and cash earnings targets, ultimately determining long-term business viability. Unfortunately, the current spaceship class turn-time limitations bind Virgin Galactic to very low rate operations,” according to the note.
Even as private space flight has become a reality, shares of Virgin Galactic have been volatile this year.
Look for “patterns”
The new strategy is to sell the open. In the S&P500, the close has been lower than the open in seven of the last eight sessions. There is clearly some tactical caution among institutions, as well as concern about seasonality, the Federal Reserve, and the impact of the summer slowdown on Q3/Q4 earnings.
Is this pattern, however, too obvious to continue? Is it a win for the optimists that all of this intraday slippage has resulted in a drop of less than 2% in the S&P500 so far?
This is also happening during the now-famous options-expiration-week vortex. As previously stated, the S&P500 has been weak in recent months until around the 19th of the month (near expiration), when it has then rebounded. Complicated options flows and dealer-hedging activity are part of the story (which I believe is becoming overstated/self-fulfilling, but is a real thing in the absence of major macro/earnings drivers).
Cooler-than-expected CPI print – particularly the core number – provides relief to investors concerned about inflation and the Fed’s proximity to a rate hike. Treasury yields have also fallen and the yield curve has flattened, making it a growth-over-cyclicals day for the time being.
CPI is consistent with the idea of a “transitory inflation surge,” but it suffers from several reopening-specific categories (used cars, airline tickets, etc.). The real question is where inflation will settle in the long run – near 2%, maybe 3%?
There was most likely no significant driver of the Fed’s taper decision. I believe the Fed is eager to get started, seeing little macroeconomic support from asset purchases and content to separate it from its rate-setting policies. The market is probably fine with this, though a “growth scare” in the coming weeks could make it appear as if the market is afraid of the taper itself.
The Bank of America monthly fund manager survey mostly confirms what the market has been telling us for the past few weeks, but a significant drop in global-growth expectations was not accompanied by a significant reduction in equity exposure. The last week may have seen a convergence of mood and portfolio. Still supports the notion that expectations have been reset lower, which is a net positive for the market in the short term.
Semis are bouncy, a bright spot among quasi-cyclicals, but they are now diverging from traditional industrials (semi index vs. equal-weight industrials):
On product launch days, Apple shares tend to be stuck, slightly lower. It is hovering near the old highs of $150. AAPL, in my opinion, has already been revalued in the direction of the other dominant tech platforms as primarily a free cash flow and predictability machine. Any “credit” due to its shift to software/services/consistent phone upgrades has already been largely granted by the market. Here is its free cash flow yield in comparison to GOOGL and NDX:
Overall market breadth began strong but has since shifted to the downside. The slipping VIX, small index moves, and the passing of the CPI catalyst are insufficient to support a VIX near 20.
Investors are getting worried
“The first third of the month has been flat since 1983 and has a more negative bias when only looking at the last ten years. The second third of the month, on the other hand, takes on a more positive tone, with the S&P500 peaking near the middle of the month before selling off again in the final ten days of the month and finishing near the month’s lows,” Bespoke said in a client note.
According to Bespoke’s data, the S&P500 usually peaks around the 17th of the month.
This year, that day is Friday, which also happens to be the expiration date for stock options, index options, stock futures, and index futures — a quarterly event known variously as “quadruple witching” or “triple witching.”
Many theories exist regarding how this convergence of options activity, which can result in high trading volume, affects markets. However, according to the Stock Trader’s Almanac, a drop in stocks ahead of the event usually means more weakness the following week.
“Down weeks tend to follow down [Triple Witching Weeks], which is an intriguing pattern. According to the almanac, “of 39 down TWWs since 1991, 27 subsequent weeks were also down.”
According to LPL chief market strategist Ryan Detrick, it is unclear why the market softens in the final days of September, but it could be related to professional investors adjusting their portfolios before the end of the quarter.
“What I believe makes sense is that many hedge funds end their fiscal year in September, so there can be a lot of late-year hedge fund movement… It’s also the end of the quarter, before the fourth,” Detrick explained. So you kind of layer those two things together, and that could be one of the reasons we’ve seen a lot of weakness in the second half of September.”
He also mentioned that investor apprehension about October, which has historically seen some dramatic market declines despite being a positive month on average, could be a factor.
These factors, combined with the recent stock market decline, have prompted to issue a warning about a negative intraday trading pattern that has emerged in the last two weeks: when the stock market opens higher, traders looking to sell take advantage, and the market fades later in the day.
“I believe they are simply attempting to get ahead of what has historically been a very difficult time for the market over the last 20 years.” People are drawn in by the momentum, and as a result, they lose money. “We need to be a little more cautious,” Cramer said on “Squawk Box” on Wednesday, referring to the September back half weakness that began around the 17th.
The cryptocurrency formed a “golden cross” on Tuesday, which occurs when the 50-day moving average crosses through and above the 200-day moving average. Traders and analysts look for it as a sign that a market trend is about to turn positive. The inverse, known as the death cross, would indicate a bearish shift.
Bitcoin’s price had been rising since the end of July, but it plummeted last week as El Salvador adopted it as legal tender and overleveraged traders liquidated billions of dollars in bitcoin positions. That day, the price dropped from $52,000 to around $46,000.
Nonetheless, the price of bitcoin has risen by 6% this week and is up 24% in three months, indicating a possible shift in the long-term trend.
While a golden cross is generally regarded as a positive signal in chart analysis, past performance cannot be used to forecast future results. According to TradingView, this is bitcoin’s seventh golden cross in its 13-year history. In a memo to clients on Wednesday, Fundstrat noted that the last three golden cross events were followed by price changes of 600 percent, -2 percent, and 132 percent.
Nonetheless, Fundstrat remains bullish on bitcoin for the rest of the year, and it is a buyer of both bitcoin and ether “into any near-term selling,” according to the note. In addition to the golden cross, that viewpoint takes into account a variety of fundamental metrics, technical indicators, and macro forces at work.
Katie Stockton of Fairlead Strategies said that she is bullish on bitcoin in the short and long term, “but not because of the golden cross.” “This is not necessarily a bad thing, but it is a lagging indicator of the July turnaround, and it is not always the best timing device.”
We anticipate that the bounce will continue within the context of the uptrend, with room to reach the high from earlier this month ($52.9K). A risk-on environment favors ether and other altcoins over bitcoin.”
According to Coin Metrics, bitcoin was slightly lower on Thursday, while ether gained 1.4 percent.
The oil patch
After years of avoiding energy stocks, investors have been flocking to them this year, along with other cyclicals.
For several years, shareholders have demanded frugality from producers, and analysts say the industry is committed to deferring new wells until OPEC-plus has returned production to previous levels and demand is comfortably back above 100 million barrels per day. That is not expected until around the middle of next year.
That is, as oil prices rise above $70 per barrel, oil companies are not putting money back into the ground to drill for more crude. Instead, there is a better chance that more of it will be distributed to shareholders.
“Debt is no longer an issue. They will generate significantly more free cash flow. The question for energy companies right now is, “What am I going to do with all of my free cash flow?” Tudor, Pickering, Holt and Co.’s managing director of capital solutions, Michael Bradley, said. “They pay variable dividends as well as special dividends.”
Companies are keeping an eye on the difference between $70 oil and their own stocks, which are based on a $50 oil price, according to Bradley. “There will be more share buybacks,” he predicted. “I think a lot of companies didn’t want to go the buyback route because a lot of them got burned on that front, so they were really going with variable dividends and special dividends. What we’re hearing right now is that it’s all of the above. You will have a significant amount of free cash flow next year.”
Investors concerned about ESG values, or environmental, social, and governance criteria, rejected energy companies that profited from fossil fuels prior to the pandemic. Energy stocks were already under pressure to sell. Then, in March 2020, the pandemic crippled the global economy, destroying demand and sending oil prices soaring.
At the same time, investors were concerned about an energy transition in the United States, with the Biden administration aggressively pursuing more renewable fuels in response to the Trump administration’s pro-big oil stance.
However, with the global economy improving, oil has made a comeback, as have oil and gas companies. Thursday, West Texas Intermediate crude oil futures were at $72.20 per barrel, and natural gas was at $5.25 per million British thermal units, the highest level since 2014.
The sector gained 3.8 percent on Wednesday, with every company closing higher.
“At some point, you’re going to sit there and say, on average, the free cash flow yields on these things are 12 to 15%.
I don’t believe there are any additional sellers in these names. “The question is, when do you have these guys who sold say, maybe this isn’t such a bad thing?” Bradley asked.
“Everyone in the energy industry who had an overly leveraged balance sheet spent the pandemic repairing their balance sheet,” said Rob Thummel, senior portfolio manager at TortoiseEcofin.
“Pioneer and EOG are unique in that they have almost no net debt,” he continued.
In response to shareholder pressure, the energy industry is focusing much more on reducing its carbon footprint.
According to Thummel, all companies are making changes, but the majors are leading the way in shifting their energy portfolios to reflect the transition to renewable and cleaner energy.
“I believe that global decarbonization is a megatrend. It will not go away. It is something that the entire world is doing, and it is beneficial to all businesses. So, how do you navigate the world when you’re a big carbon emitter? “These companies want to participate by embracing ways to reduce carbon emissions… and the most important one right now is to stop flaring,” he explained. Many businesses are working to reduce methane emissions and gas flaring at wells.
Energy companies have been working hard to become more appealing to ESG investors.
“They might not make the first screen, but they might make the second screen – who is making the most dramatic improvement in their ESG principles,” Thummel said.
To reduce its carbon footprint, EQT, for example, is focusing on responsibly sourced natural gas. Other companies, such as Occidental Petroleum, are researching carbon sequestration. Cheniere is collaborating with Pioneer and others to identify the carbon intensity of its liquefied natural gas shipments.
Driven by the shareholders
Investors have compelled energy companies to improve their balance sheets and, in some cases, the environment.
One of the more high-profile efforts has been hedge fund Engine No. 1′s successful bid for ExxonMobil board seats. The company has spoken with executives from other energy companies, including Chevron.
“You could argue that Exxon’s Engine 1 efforts have filtered down to Exxon’s primary competitors. Chevron, Conoco Phillips, Royal Dutch Shell, and BP have already made strides,” he said.
be spent on reducing the carbon intensity of its own operations. The company intends to increase its production of renewable fuels, hydrogen, and carbon capture.
Chevron also stated that it expects to generate $25 billion in cash flow over the next five years, in excess of dividends and capital expenditures.
“There is a lot of cash flow coming out of the energy sector that should end up in the hands of shareholders in the next couple of years,” Thummel said.
Dividend yields in a volatile September
During periods of volatility, stocks that pay large and consistent dividends can be a great source of income for investors. With the S&P500 up more than 18% year to date, it’s difficult to predict what the final months of 2021 will bring.
Goldman chose a few buy-rated stocks that it believes will deliver strong dividend growth. According to the bank’s estimates, the names are expected to grow at least 5% annually from 2019 to 2022. This will put the stocks on track for a dividend yield of 2% or higher by 2022.
Furthermore, these stocks have a solid expected dividend cover in 2022.
If the dividend cover is greater than one, it indicates that the company’s earnings are sufficient to pay dividends to shareholders.
The dividend yield of Procter & Gamble, which is on the list, is 2.4 percent. The dividend yield of the consumer goods company is expected to reach 2.7 percent by 2022. The company’s dividend coverage ratio is estimated to be 1.6x.
Take a look at the other stocks available here:
Bank of America and JPMorgan Chase were also included on Goldman’s list. Bank of America has a dividend yield of 2.1 percent, which is expected to rise to 2.3 percent by next year.
Meanwhile, JPMorgan has a hefty dividend yield of 2.3 percent, which Goldman forecasts will increase to 2.8 percent in 2022. According to Goldman, Bank of America has a dividend cover of 3.2x, while JPMorgan has a dividend cover of 2.6x.
Home improvement retailer Home Depot made the bank’s list as well, with a dividend yield of 2.0 percent. x.
Air Products & Chemicals has a dividend yield of 2.2 percent, with a potential dividend yield of 2.4 percent by 2022. The company’s dividend cover ratio is 1.6x.