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The Week Ahead – 25 Jul 2022: Europe is a mess. What’s next?

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We had a big week, with a lot going on globally. The president’s got COVID. Europe raised rates to zero, and so on and so forth.

First, we talked about Europe. It’s a mess, everyone knows that, but we talked through some opportunities there.

Next, we talked about aluminum. Industrial metals have been really interesting on the downside of late, but Tracy found something around aluminum that is really interesting.

And then we talked about tech, about Snap’s earnings, and what that could mean for other tech earnings coming up.

Key themes:

  1. Europe is a mess. What’s next?
  2. Aluminum supply shock
  3. Tech SNA(P)FU
  4. What’s ahead for next week?

This is the 27th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.

Follow The Week Ahead experts on Twitter:

Tony: https://twitter.com/TonyNashNerd
Sam: https://twitter.com/samuelrines
Albert: https://twitter.com/amlivemon/
Tracy: https://twitter.com/chigrl/

Time Stamps

0:00 Start
0:50 95% on markets forecasts using CI Futures
1:44 Key themes for the week
2:34 What’s happening in Europe and what are some opportunities there?
6:37 Why did the European equity indices in the wake of the ECB meeting?
8:32 What can the ECB do moving forward?
9:40 Metals: what’s going to happen in the aluminum markets?
13:14 Will we switch back to goods in September?
16:50 Snapchat’s earnings and other earnings of tech equities.
21:06 Ad inventory element to tech earnings
23:16 Is there an opportunity for Meta to buy something like Snapchat.
24:21 The week ahead: Fed meeting next week

Listen to the podcast version on Spotify here:

Transcript

TN: Hi, everybody. Welcome to The Week Ahead. My name is Tony Nash. Today we have Albert, Tracy, and we have Sam doing a remote from his car because the Texas power grid can’t handle his house. So thanks, guys, for joining us. Before we get started, if you could please like and subscribe to the channel. When we’re done, and while we’re talking, please make comments, ask us questions. We get back to you during the week, and we really want to hear from you.

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We had a big week, a lot going on globally. The president’s got COVID. Europe raised rates to zero, and so on and so forth. First, we’re going to talk about Europe. It’s a mess, everyone knows that, but we want to try to find some opportunities there. Next, we want to talk about aluminum. Industrial metals have been really interesting, I guess, on the downside of late, but Tracy found something around aluminum that is really interesting. And then we’re going to talk about tech, about Snap’s earnings and what that could mean for other tech earnings coming up.

So first, let’s talk about Europe. Albert, you retweeted this tweet from HedgeEye earlier this week, talking about the 50 basis point rise by the ECB, and we’ve talked about it for months about the problems that Europe has if they raise. The problems they have if they don’t raise. And it was kind of a middle ground that they did. What are your thoughts on what’s happening in Europe, and are there opportunities there?

AM: Are there opportunities? Yeah, of course there are opportunities everywhere, Tony. You just got to be able to sit there and sift through the wreckage of what Europe is at the moment. Their economy is struggling. The 50 basis point rate hike, I kind of like, shrug it off. Surprise they actually did 50, but I kind of shrug it off. Their biggest problem is the dollar being elevated at the moment. It kind of helps them in the manufacturing sector for exports. But realistically, without China importing their products, what are they going to accomplish in the coming, like, two, three months? Probably nothing.

Aside from Europe speaking about the dollar being up, I’m kind of looking at Brazil and India’s next problem places.

TN: Okay.

SR: Yeah. And to that point, Albert, it’s a really interesting one, given it really doesn’t matter if you have great export markets if you can’t actually make anything.

AM: Yeah, I mean, the Europeans right now can’t make anything. They’ve got a labor problem worse than the United States at the moment. They have kind of COVID crazy policies still lingering. As soon as the tourist industry dies down a little bit for tourist season, they’ll probably come back in full force. So, I mean, it’s kind of a gloomy outlook for the Europeans at the moment.

SR: Power prices for the manufacturing engine in Germany.

AM: Yeah.

SR: If you’re not manufacturing anything, good luck selling something.

AM: Yes. I mean, even the stuff that they are manufacturing is going to be an inflated price that the world is not going to be able to even buy at the moment. They got food prices to deal with, not let alone energy prices. But didn’t European?

TS: It was a mixed message. No. Right. Yes. On one hand, they said, we’re raising rates to zero, meaning they’re not going to charge you anymore.

TN: Right.

TS: They don’t have negative rates. But on the other hand, they’re talking about bond buying program that they don’t want. They actually said, this is going to be kind of untransparent bond buying, which is fine.

SR: But that’s important and actually kind of a good thing, if you think about it.

TN: But the BOJ did right. The BOJ did that in 2014, 15, 16, where they bought up all the government debt and it just disappeared. And so is this a way for the ECB to disappear a bunch of government debt within the Eurozone?

SR: That’s what QE is.

AM: Yeah, of course. That’s like a standard thing, especially specifically for the Europeans. They love to hide debt and reissue it elsewhere, longer dated and whatnot. They love to kick the can down the road because they know that the United States is going to bail them out anyways at some point.

TN: Sam?

SR: Yeah, it’s exactly what they’re going to do. In my opinion, it’s kind of brilliant because in a way, you don’t want everyone to know how much Italian debt you’re buying, and they’re going to buy Italian debt, they’re going to buy Greek debt. And then, believe it or not, if we continue to have these kind of problems in Germany, guess what? Germany is probably going to be a huge beneficiary of the debt buying program. So it might be the first time in a long time that we don’t hear Germany complaining about it.

TN: Right. So I just want to be clear, they’re not hiding that they’re actually buying it to retire it. Right.

AM: Tomato, tomato.

SR: They’re not necessarily directly retiring it. They’re just buying it and holding it to maturity.

TN: Exactly right. Which is exactly what the BOJ did in Japan five years ago and they continue to do, actually. Okay, very good. So one last question on that. Why did European equity indices rise in the wake of the ECB meeting? Was it because of this debt issuing?

AM: I think..

TN: was distracted by Tracy. Was it because of the debt program?

AM: Yeah, the non transparent bond buying, and seems like the ECB is going to try to keep the market at least elevated, but, I mean, it was crushed so much that bottom feeders just started to come in in my opinion.

The only companies in the European Union right now that I would even think about are the ones that have ADRs in the US that have more revenue based in the US than anything else.

TS: I think what got them excited is because you saw a spike up in the Euro temporarily, so people started buying into the equity market. However, that’s going to be very short lived, I think still we are going to see inflows to the US market from all of these other markets, but there’s really no other place to go right now.

TN: Right.

SR: There’s also the problem of markets are forward looking and it’s so bad in Europe and it’s all priced in that at some point you get a mechanism where it’s not as bad as it could have been. And that to a large degree, looks to be what’s going on right now.

You’ve got the Euro almost at par. You’ve got an economy that is absolutely in the toilet. Everyone knows that. And it’s all priced into the equities. So if you begin to see a bright light at the end of the tunnel, there’s the potential for a significant rally there that could be kind of face ripping.

TN: Oh, yeah, great. Yes. So the position that the ECB’s in, what can they do going forward? Do they continue raising at small increments or are they kind of one or two and done? What possibilities do they have?

AM: I think they’re only one and two and done. I don’t think they can really keep raising rates like the United States right now. That would decimate them.

TN: Okay.

SR: 100%. One or two and done. And by the way, that kind of lines up with where the US is probably going to be done.

TN: So let me ask you one final question on this. If you’re an American company and you have a vendor in Europe and you’re paying Euros, would you long those contracts, get them locked in and euro prices as long as you can right now, do you think the Euro at Parity is a short-term anomaly?

AM: I think it is, yeah.

SR: Yes. And by the way, you can’t no European companies that dumb. That’s worth doing busines.

TN: I think you overestimate. Okay, that’s good. That’s good. Okay, perfect. Great.

Let’s move on to metals. Tracy, you posted a great graphic on and had a great discussion about aluminum and some aluminum factories that are shutting down largely because of power prices. Can you help us understand that situation and help us understand what’s going to happen in aluminum markets?

TS: Yeah, I mean, if we sort of look at the aluminum markets right now, the big thing is that because of the power crisis in the EU, right, we’ve seen almost 50% of their smelter market come offline because they just can’t afford it anymore. We’ve also actually seen this drift to the United States. We just had Alcoa shut down one of their lines in Indiana. So this is a global phenomenon.

The problem is that we’re short of aluminum by a lot. Because if we look at this energy transition, and I think I stated, particularly if we were looking at because the drivetrains are so heavy, you need a lot more aluminum to produce these vehicles, we’re looking at a deficit.

We’re already in a deficit. We’ve seen a 30% pullback in this market. We’re in a deficit. We’re going to be headed to worst deficit in H2 of ’22 and into 2023. And actually, if we look forward all the way until 2025, what I’m thinking is this pullback in the market has been a little bit overextended, over recession fears. Right. Huge pullback in the metals markets. Huge pullback and slightly pullback in the energy markets. But really, if we’re looking at these based on industrial metals, especially ones that are particular to energy transition, I think this move is a little bit overdone right now. I think there are opportunities to be had because we are looking at structural supply deficits across many of these metals, aluminum in particular.

AM: You know it’s interesting. It’s interesting. That just came to my thought of Tracy talking is utilities have given up every gain that they’ve had for the year, come right back down. Even some of the wheat and commodities just came down. Unbelievable. Dollars surge, futures crushed. It’s stunning. But I believe, just like Tracy says, I believe it’s all oversold at the moment.

TS: It actually is. Even if we take in a scenario where DM markets go into somewhat of a recession, we’re still in a structural supply deficit. So even if we’re in a recession and that takes a particular amount of demand out of the market, we’re still at a deficit.

TN: Okay. So I want to be careful with recession and not to kind of push back on you, Tracy.

TS: I’m just saying because everybody’s throwing that word around right now.

TN: So we can have a slowdown without having a recession, right?

TS: Correct. Absolutely. And I wouldn’t say that we’re necessarily in a recession, but things could get a lot worse in Europe or whatever. But even with taking that demand out of the picture, if we look at it as in we do have a recession in the market. “If”. Right.

TN: Right. So Sam has written quite a bit about the kind of switch to services over the summer from goods and Sam, do you see us switching back to goods, say, in September, October, from service says is that kind of a pretty dramatic switch from one to the other?

SR: No.

TN: Okay, so what happens? We switched. Goes to services over the summer, does that end what happens there? Because I’m curious.

SR: Yeah. No, you continue to have services be the dominant factor, and the services tended precovid to be the dominant factor.

TS: We talked about this a few weeks ago.

SR: Exactly. It’s one of those where goods probably don’t fall off a cliff because at some point you do have to have a comeback outside of the US. In goods. So that’s somewhat of a tail end. You have a reopening in China, you have a reopening in Europe, you have some sort of resolution to the Ukrainian conflict. You begin to have some tailwinds for Goods, but it’s simply not what I would say is kind of back to the coveted, like, goods model that was goods driven, everything was great, blah, blah, blah. No, it really does look like it’s kind of a summer of party, summer of vacation, summer of get out there. We didn’t have vacations in 20 20, 20 21. We’re going to go in 2022, and we’re going to go back. That appears to be the case, and it appears to be playing out. The question is, does that continue as kids go back to school? Probably not. Does it continue as people go back to work in the office? Probably not.

In the fall, you get kind of the current trajectory in Goods, which is back to normal somewhere around a 1% growth rate, and in services back to normal one to 2% growth rate, maybe a little bit more. It’s not a bad thing, but it’s certainly not the boom in goods that we saw over the past year and a half and the boom that we’ve seen services over the last six months.

AM: No, I was thinking about what Sam is saying. There’s a risk here because if the Fed pivots a little bit too early, which everyone thinks they will, and then goods start coming back online and demand still elevated, we could have another inflationary event going into 2023.

It’s like you make policy mistakes and the economy is still red hot at the moment in all sectors. As much as they want to try.

TN: To cover, it’s not red hot because people use the recession word all the time.

AM: Why?

SR: The only pushback I’ll give there is that I would say the interesting thing is that goods come back online in a pretty big way, and if you just have steady state current consumption levels, it’s not a boom. Right. It’s still going to be deflationary or disinflationary on the margin. If you don’t have a surge in the demand for goods, and it’s hard to see where you’re going to have that demand surge for goods in an elevated services environment. Right. So that could actually be the fault signal that makes the Fed back off as we go into the back half of the year.

TN: Interesting. Fantastic. Okay, great. Speaking of signals, let’s look at tech for a minute. Sam, you have the most mysterious newsletter in the US. And newsletter today talk about snaps earnings. And I put a snapshot of your newsletter on the screen looking at average revenue per user for Snap. Can you talk us through some of that? Some of the earnings work for, say, Snap and Twitter? What does that mean for tech generally?

SR: Yeah, it’s interesting. We all kind of know that tech, particularly smaller tech, the startup VC type act companies have been struggling, right? You’ve seen Layoffs, you’ve even seen the big guys. Microsoft, you’ve seen Meta, you’ve seen parts of salesforce have hiring freezes. So we know that there’s been a little bit of underlying problems with the overall tech world in terms of employment.

There are only two ways that you can really solve the problem of slowing revenue growth if you want to drop money to the bottom line, whether it’s or earnings. And that is you can lay people off and you can cut advertising spent. And so Snap and Twitter are kind of, what?

TN: PG and E? Travel and expenditure as well. Travel expenses.

SR: Well, yeah, travel and expenditures. We’ll get there because I hit that later on the night. Perfect. As you know.\

TN: Yeah.

SR: The problem with Snap and Twitter is basically what you saw was great user growth, right? Better user growth than I think anybody really was anticipating. The only issue was that they didn’t monetize it. There was nobody really backing up on the advertising front. Right. We all know that Peloton and all those guys were cutting back on ad spend, carvana basically bankrupt crap company. These guys were cutting back on ad spend, and they were the big marginal drivers of growth for those platforms.

So when you cut back on people in ads, you begin to actually be able to drop something potentially to the bottom line, or at least survive a downturn in VC spent. That played through with Snap and Twitter in a marvelous way. But then to your point on travel and entertainment, you get to the earnings of American Express, which is a great way of getting kind of a peek at upper middle and upper class spending and business spend. And those could not have been better earnings. I mean, if you’re telling me that the consumer is in a recession, it is the bottom half of the spectrum that’s in a recession, if anyone is in a recession. Those were massive earnings numbers, massive spend numbers on a year over year basis. The chart that I sent out was of the spend by bracket of age, and millennials and Gen Z are the biggest spending boost.

AM: Luxury items still are unbelievably hot right now. All the earnings are just beating all estimates.

SR: But it’s the pivot. It’s the pivot, right. Peloton all that crap that we had in Silicon Valley that was overvalued, that everybody bought and everybody thought was cool, everybody bought it. They’re already done with it. You don’t need to buy three peloton bikes, right? It’s the problem with keurig. We all remember the whole Green Mountain coffee thing. It’s the same problem, right? Once you buy it, you don’t have to buy five Turks. You don’t have to buy five Pelotons.

The ability to monetize that over time is something that I think people kind of get a little iffy with. That’s really what I think is smacking right now, and it’s smacking in a pretty real way, and it’s not going anywhere anytime soon.

TN: Okay, so we also have new ad inventory coming online in a big way with Netflix, right. So can you talk about that side of the ad inventory element a little bit?

SR: Sure. You have a ton of ad inventory, right? If you want traditional media, you can go to traditional media. NBC, CBS, whatever. If you want online, you have Facebook, you have Instagram, all part of Meta. You have TikTok. You have snapchat. We can go down the list forever.

Netflix is basically trying to save their business with the greatest dumb quote in their earnings release where they said, our great content is going to have a premium CPM. The way that we measure advertising reps, they’re amazing content. Are you kidding me? No, I mean, they’re going to be competing with Twitter and Snapchat, which is the bottom of the barrel in terms of advertising revenue.

TS: Took that model and extrapolated on it. Right. So now you have maybe they were the first, but now you have everybody else doing it, especially very independent media. Right. That is starting to gain traction.

TN: Exactly. Things like plumbing and that sort of thing. And Hulu’s done that really well as well, inserted advertisements. So the only thing worse than new Netflix content is new Disney Plus content.

SR: Unless you have kids, it’s a lifesaver.

TN: Yeah, it may be a lifesaver, but the old content is good. The new content.

AM: I don’t know, the content on Disney nowadays is kid friendly. Okay.

SR: I didn’t say it was kid friendly. I said it was a lifesaver.

TN: Yeah, but you’re right. I mean, there’s a huge amount of ad inventory and they will be competing with Netflix. They are already competing with Hulu, those sorts of guys. Is there an opportunity for somebody like Meta to buy someone like Snapchat? Would they want to do that?

SR: They tried years ago to buy Snapchat. And why would you like…

TS: Why would you buy it?

SR: Yeah, I mean, that’s the key. And I think that it’s the reason why you can have a 30 plus percent down day and call it a company that has something interesting and something that nobody’s done before. Because I’m sorry, it’s only fans, but without subscription revenue.

TS: They have no real model to make money. That’s the problem. Without subscription, no solid revenue model.

AM: I’d buy an only fans IPO all day long.

TS: I wasn’t talking about only fans, I was talking about Snapchat. No idea about ole fans. Never been on there.

TN: All right, guys, very good. Now let’s just segue to the week ahead. What are you guys looking for in the week ahead? We’ve got the fed meeting next week, right? So that’s going to be all the talk all week long. So what’s going to happen there?

AM: I think they try to get us to the bull bear line of 40 20 or 40 30 in that range and linger us there until the Fed meeting. I think Jerome Powell is pretty much his last chance to be hawkish, because I don’t think there’s not another meeting until September at that point, like, the Fed already are talking about pivoting by then. So this is probably their last chance to be real orkish.

TN: Okay. No, go ahead. Sorry.

TS: I think as far as the energy market that’s concerned, we’ll probably see oil, gas pretty much sideways for the week, just as we have been seeing. And I think I’m very interested in the metals complex the first time in a very long time. So I think we might see a slow kind of interest in that market next week.

TN: Interesting.

SR: I think it’s going to be interesting to see how the market interprets the feds forward view, honestly. We all know they’re going 75. It’s already there. It’s already priced in. I think it’s going to be very interesting to see how the fed begins to look out to September and beyond, and the market is going to begin to really price that in. And so you could see some pretty big whipsaws in the dollar. You can see some pretty big whipsaws on the long end of the curve. And equities in general, I think equities could see the most volatile week, even though it’s the most predictable Fed raise in a couple of meetings, I think you could see some incredible volatility and some really interesting outcomes.

TN: Yes. Very good. I can’t wait to watch. Guys, thanks very much for your time. Have a great weekend. And have a great weekend. Thank you.

TS, AM: Bye. Thanks.

TN: Okay. I forgot to put you on mute. I apologize, Ready?