Complete Intelligence

Categories
Podcasts

[BFM Market Watch] Is The Market Behaving Rationally?

This podcast was first and originally published on the BFM: The Business Station podcast with link here: https://www.bfm.my/podcast/morning-run/market-watch/us-markets-meta-chevron-fed-rate-hikes-equities-market-rally

The CEO of Complete Intelligence, Tony Nash, spoke about the recent financial events in the market. In regards to Meta, Tony mentioned that the worst for Meta’s share price is over, but job cuts are still to come. Although Meta beat revenue estimates, ad impressions rose by 20%, but the price per impression fell by 22%. Tony also discussed the recent Fed interest rate hike by 25 bips, which was expected and the market welcomed it. Tony says there are likely to be at least two more rate hikes before the current tightening cycle is over. He also mentions that the market is excited but will take a closer look at the statement once they have a better understanding.

Tony also mentioned that there is some irrationality in the market because corporate earnings have been disappointing, but investors are bought off by the stock buybacks. The oil companies, Chevron and Exxon, made windfall profits due to cheap oil and fat refining margins. The refineries were operating at 94% capacity and have crack spreads and refining margins way above normal. The oil and gas companies have not invested in infrastructure since 2014, due to governments and media bullying over ESG and cost. The only option for them is to return the profits to shareholders through stock buybacks.

Transcript

BFM

This is a podcast from BFM 89.9, the business station. BFM 89.9. Good morning. You are listening to the morning run. I’m Shazana Mokhtar with Wong Shou Ning and Chong Tjen San. It is 7:05 A. M. On Thursday the 2 February. We were off yesterday because of Federal Territories Day, but we are back to bring you through the rest of the week. In half an hour, we’re going to discuss the probability of a Trump 2024 presidential run. But as always, let’s kick start the morning with a recap on how global markets closed overnight.

BFM

All US markets ended higher as the market shared the Fed’s 25 basis point rate increase. The dollar was up marginally by 0.2%, S&P 500 up by 1%, and the Nasdaq was up by 2%. Asian markets, they were all in the green. The Nikkie was up by 0.1%. Hang Seng was up by 1%, Shanghai Composite up by 0.9%. The Straits Times Index, it was up by 0.4%. But the FBMKLC, it was closed for Federal Territory Day

BFM

As mentioned and for some insights into what’s moving markets this morning, we’re going to be speaking to Tony Nash, CEO of Complete Intelligence. Good morning, Tony. Thanks as always for joining us. Now, markets rallied on the back of the Fed, raising interest rates by 25 bips. But before we get into that, I would want to talk about some of the corporate earnings that we saw overnight, namely coming from Meta. The markets were also quite happy with what came up there, up 18% in after hours trading on the back of better than expected sales, do you think this is the worst over for Meta?

Tony

I do think the worst in terms of share price is over. I don’t think their job cuts are over. I think they’re learning how to operate in this environment. So the last two to three years has been pretty easy for a tech company as people were kind of trapped inside and didn’t really have a lot to do. They looked for things online and ad revenue was great for Meta and ad driven companies, but what we saw in there, although they beat revenue estimates, they beat their guide by almost 3%. They announced a $40 billion share buyback, all that’s great news. And the stocks up almost 20% after hours. But keynote in their earnings release, Ad Impressions rose by 20%. Remember, they’re an ad driven business. Ad Impressions rose by 23%, but price per Impression fell by 22%. So they’re not able to push price. They’ve had to drop their price and raise their volume, which is the opposite of what we’re seeing with a lot of retailers and other firms in the US where they can actually push price in light of and accept lower volumes at higher prices.

BFM

And Tony, as expected, the Fed raise rates by 25 bips. Was this in line with what you were expecting, and are we close to the end of the current tightening cycle?

Tony

Yeah, you know, I think pretty much everyone expected 25. There was a slight chance of 50, but everyone pretty much expected 25. The market welcomed it very happily, and they’re still thinking there’s only one rate rise left. But Chair Powell made it very clear that there are a couple of more rate hikes to get to that level we think is “appropriately restrictive.” Those are his words. So we’re looking for at least two more rate hikes before this is over. And the Fed is also going likely to accelerate their quantitative tightening. Okay? So that’s taking assets off of their balance sheet, which is basically hoovering up the money supply in the US. So the market will get tighter. And do we think we’re at the end? We don’t think we’re at the end. The interest rates aren’t the only tool they can use. So the market’s very excited right now, almost a relief. But I think as they look through his statement in detail, I think they’ll take a second look at expectations.

BFM

So let’s build on that. Tony, so you’re basically saying that because when I look at how markets have performed on a year to date basis, S&P up 7.5%, NASDAQ up 12%, this very much on the back of the Fed, going from a hawk to a dove. Do you think that there is some irrationality there?

Tony

I do, actually, because, you know, if you look at corporate earnings announced so far, they’re very disappointing. And so investors are expecting easy conditions to return so that underwhelming earnings are acceptable. So what did Facebook have to do? Their EPS underwhelmed by like 55%. Okay. They had to issue $40 billion in stock buybacks. So investors are basically bought off, and that’s why the stock is rising. But many other people reporting are not seeing the sales that they expected or didn’t see the sales they expected in Q4. And their costs, meaning the cost of employees and raw materials, these sorts of things. Cost of employees are up. Raw materials are down slightly, definitely year on year, but certainly quarter on quarter, they’re down slightly. But earnings are not what people had hoped for. And that’s the real problem we’re seeing in market. So the earnings picture is not reflecting the valuation picture.

BFM

Okay, so that may be the general picture, but if we zoom into oil companies or the two largest US oil companies, Chevron and Exxon, they made more money in 2022 than ever before, posting record earnings in their latest results. How are these windfall profits achieved? And I guess how sustainable is this going into the new year?

Tony

They were largely achieved on the back of cheap oil through the SPR releases and very fat refining margins. So we’ve had refineries in the US operating at about 94% capacity, which is way over what they’re designed for. And we have crack spreads and refining margins way above what is normal. So those refineries are booking profits at a record pace. And so what do they do? If you’re an oil and gas company and the government keeps bullying you over ESG and Cost, and media keeps bullying you over ESG and Cost, oil and gas companies have not invested in infrastructure in upstream or midstream since at least 2014. So if they invest in that, they’re going to be punished. So what do they do? They return it to shareholders. So you have a $75 billion buyback, because that’s really the only option they have. Otherwise, they’re going to get punished by governments, they’re going to get punished by media, and they’re going to get punished by investors. So they have to do this.

BFM

Okay, but let’s talk about OPEC Plus because there was a meeting, and I want to talk about oil prices, because the OPEC Plus Committee has recommended keeping crude production steady as the oil market awaits clarity. What does this then mean for prices? If I look at WTI, currently $77 a barrel, down 4.5%. What’s your view, Tony?

Tony

Well, I think OPEC is taking a lot of the excitement in markets for the past couple of months has been China opening. Ever since December, right? China is going to open and save us all. And that also hit crude markets. People looking at crude prices and going, oh, gosh, China is going to open. We’re going to see jet fuel and gasoline, petrol and other fuels consumption rise dramatically. Well, the opening has been slower than people expected in December, and it’s still not happening at the pace that many Westerners expected. And so I think OPEC is looking at crude consumption and draws from storage and saying, we just need to hold off on raising our level of production. We’re in a good zone with the price right now. We don’t see a dramatic impact. We expect recessions in the west, and we expect China to come back online slowly. So we’re not going to increase production right now. And so I think that’s the prudent thing to do. If I’m an oil producer, that’s what I’m doing, because I want demand to lead production increases. I want to see that people are going to use what I’m going to pull out of the ground, and I want to see pricing pressure before I agree to drill more.

BFM

Yeah, but, Tony, at the same time, what’s interesting to me is the US. Now, during the summer season, President Biden released its reserves, right? Because pump prices were just really very high. Doesn’t this change the equation? If I’m American now, wouldn’t I want to rebuild my reserves at this current level?

Tony

Well, yes and no. The SPR release was really done to get prices down for the US Midterm Elections. That’s really all it was about. Now the SPR is depleted dramatically, so the buying that will have to happen to refill the SPR will put upward pressure on prices. So I think we have to be really careful. If China is, let’s say in March, they start to come aggressively back online and the US starts buying to refill the SPR in Q2, then that’s an accelerator for crude prices in Q2and Q3. Right. So will Biden then beg OPEC again to raise their output? Maybe. China has already forward bought a lot of its crude supply. So if the US is going to choose to refill the SPR at elevated prices, it’s really not the brightest move.

BFM

Tony, thanks very much for speaking to us. That was Tony Nash, CEO of Complete Intelligence, giving us his take on some of the trends that he sees moving markets, commenting there on the earnings report of Apple, if not Apple, I’m sorry, Meta. That just came overnight. Apple is to come. So we’re going to be watching out for that before the week ends.

BFM

Let’s turn our attention, though, to what’s happening over in India, where the Adani saga has really taken attention by storm. Gautam, Adani’s flagship firm, called off its 2.5 billion US dollar share sale in a dramatic reversal yesterday as a route sparked by US short seller Hindenburg. Research criticism wiped out more than $80 billion off the value of the Indian tycoon stocks.

BFM

And the plunge accelerated after Bloomberg News reported credit Suisse Group AG has stopped accepting bonds of Adani’s Group of companies as collateral for margin loans. Adani Enterprises was offering shares to investors at $38 to $40 a share, but the stock closed yesterday at $26.13, which is 31% below the bottom price of the pricing range.

BFM

I think let’s take a bit of a step back, right, in terms of how important Adani is to the Indian economy in its way. They are like one of the major producers of energy, and then we’re talking about cement. They are such a huge conglomerate and their fortunes have been really tied to the rise of Nadira Modi. Right. Because the two, the Adani and Modi, are supposedly very close. And so when Adani came back with this 413 page objection, the allegations are all untrue. He also Adani took the step of saying that you’re attacking India as a nation. And then Hindenburg said, look, this has nothing to do with nationalism. Right. You’re just a company where we are not comfortable with your numbers. And then it’s this back and forth. And what was amazing was the share sale was almost going to happen. And the economists reported this is allegedly that the five largest and richest families in India were going to bail this company out by participating in the share sale, but now it’s not happening.

BFM

That’s right. I mean, that came as a big surprise, the fact that they managed to get buyers who were willing to buy these shares at such a high price compared to what the market was having. So, as mentioned, you said, Jensen, they would be buying it at a loss. But yeah, Adani said that the company’s board felt that going ahead with this share issue would not be morally correct because of that big gap in what the prices are being sold for now.

BFM

Yeah, but it was really amazing. You will never get a scenario similar in, let’s say, in America, where the richest families bail out another rich family. Right. So that’s what the economists point out, that doing business in India is very, very different. But the share price, of course, down 45% on a year to date basis.

BFM

I really wonder what they can do to build up to the levels that they were before. I mean, maybe it’s not going to happen again. So something to watch, for sure. This has taken everyone, really by surprise. The twists and turns in the saga at 718 in the morning. We’re going to take a quick break and we’ll come back with more top stories in the newspapers and portals this morning. Stay tuned to BFM 89.9.

BFM

You have been listening to a podcast from BFM 89.9, the business station. For more stories of the same kind, download the BFM app.

Categories
Podcasts

The Dow – Exxon out, Salesforce in

Dow Jones index booted out energy giant ExxonMobil and replaced it with Salesforce. What does it mean to the world economy? Will Tesla be added to the S&P 500 next? The Phase One deal trade went smoothly between China and the US — will conflict like in tech be resolved? And with the recent optimism on COVID-19 vaccines, will transport and hospitality recover and how soon? Our CEO and founder Tony Nash joins the BFM 89.9 team in Malaysia to share his outlooks on these issues and more on the global economy.

 

This podcast first appeared and originally published at https://www.bfm.my/podcast/morning-run/market-watch/the-dow-exxon-out-salesforce-in on August 26, 2020.

 

BFM Description

 

Phase 1 US-China trade discussions, Salesforce displaces Exxon in the Dow Jones, Tesla’s fundamentals, and is it time to buy airlines? Tony also gets into his expectations from the Federal Reserve out of Jackson Hole this week.

 

Produced by: Mike Gong

 

Presented by: Roshan Kanesan, Noelle Lim

 

Show Notes

 

Noelle: The S&P 500 and the NASDAQ notched fresh highs. Facebook rallied after unveiling a series of tools designed to expand shopping on its social media platforms.

 

Roshan: The S&P was up 4%, The Nasdaq was up 0.8%. Only the Dow was down. It was down 0.2% and that’s the first day decline for the first time in four days. We take a look at Facebook was up a 3.5% actually overnight in Asia. The Nikkei was up 1.4%, Shanghai was down 0.4%,. Hong Kong was 1.3% and Singapore was up 0.8%. Malaysia, on the other hand, closed down 0.9% yesterday. So let’s take a look at how it open up later today.

 

But right now, we’re taking a look at global markets with Tony Nash, CEO of Complete Intelligence. Tony, thanks for taking the time to speak with us this morning. Discussions between the U.S. and China on their Phase One Deal, a trade deal went smoothly even as other tensions cement in the background. Is this a sign that other disputes, such as the tech conflict, can be worked out between the two nations?

 

Tony: I’m not necessarily sure it means the tech conflict can be worked out. I think it’s possible, but I think it’s more of a sign of the floods that happened in China and the ag supply needs that China has as a result of flooded crop land in China over the summer. There’s been something like $21 billion of economic damage done as a result of the floods. If you look at China’s commitments for US corn, soybeans, soy was up last week. They’re all up more than 100% on last year.

 

Noelle: Looking at the markets, Dow Jones Industrial Average, Exxon was booted out. Is this the beginning of the end for big oil majors or will energy companies catch a second wind as demand recovers?

 

Tony: I live in the town where ExxonMobil is headquartered, and I just don’t see an environment where ExxonMobil necessarily comes back into things like the Dow. Crude oil for the rest of the year, we see it, gradually grinding higher. In 2021, we see some supply issues which would push prices higher. But we’re not necessarily seeing equities like ExxonMobil all that appealing. ExxonMobil’s equity performance over the last four or five years has been terrible. You can’t really blame the Dow and the S&P for booting them out.

 

Roshan: Tony, let’s take a look at the whole replaced Exxon on the Dow Jones — Salesforce. Their stock rose about 3.5% overnight. Now, what’s your outlook on Salesforce?

 

Tony: Salesforce is a very interesting company. There are some client concerns about cost and kind of the necessity of sticking with Salesforce for so many activities. But I think as a shareholder, it’s positive. And the capability that Salesforce has is very good. So it seems like an appropriate add to the index.

 

Noelle: Do you think Tesla is likely to be added to the S&P 500?

 

Tony: It’s possible. I was just looking at the the PE ratio for Tesla. It’s over a thousand. It’s 1,047. You’re typically looking at maybe 15 to 20 or something like that, maybe expanding a bit more. It’s 1,047. Is it possible that Tesla started? Yes, but I think the volatility risk there is quite high. Just since August 11th, Tesla has gained about $700 per share. I think it’s great when it rises. Will it fall? I don’t know. I’m not necessarily calling that. But the volatility risk there is quite high for these indexes that like to be pretty stable industrial gauges.

 

Roshan: I think with those gains, no one wants to bet against Tesla at this point and or even chart the stock at this point. That’s why we’re talking about transport. This sort of airline shares seem to be trending upwards on the last few days based on news positive news around COVID-19 vaccines and treatments. But is it too early to be bullish in the transport sector?

 

Tony: It depends on how bullish you are. I see people saying that within four to six to eight months, there’s an expectation that things will be closer to normal. And I think part of the bullishness is people wanting to get in. There is not necessarily belief that monetary policy like central banks will reel in and will reduce their balance sheet. With this much money in the system and potentially more, it’s possible that, airlines might be something interesting as we get closer to normalization. Assuming that happens, I’m positive about that. Business in the States is slowly normalizing. Kids are slowly going back to school. The normal school year starts about this time. In some states like where I live, kids are going back to physical school, which is kind of a big change from the last six months. So we’re slowly starting to see normalization. And I’m optimistic about things like travel and hospitality.

 

Noelle: All eyes will probably be on what the Fed will cover on Thursday. What do you expect to be in their statements?

 

Tony: I hate to say this because everyone says that we’re kind of in uncharted territory. Right? It’s very cliche by now, but we are in danger of the US economy slowing. We’ve seen some of the initial excitement we saw in July and early August start to slow with jobs. The jobs numbers last week were over a million again. And so I think the Fed is worried because employment is one of their mandates.

 

We may see additional aggressive intervention by the Fed to make sure that the economy continues to come back. I think they have to be careful because it is an election year and they don’t want to be seen as being political. But I think the economic reality is that they have to. I think both the Fed and the Treasury, there are programs in the States like the Paycheck Protection Program, which helps small businesses get through the worst days of kind of COVID and that’s run out. And I think a lot of small businesses are really in trouble now because we haven’t seen things normalized. I think the Fed will come back with a bit more. I think the Treasury, once Congress is back in session, Treasury will come back with a bit more as well, support for individuals and for small businesses.

 

Roshan: All right, Tony, thank you so much for your time this morning. That was Tony Nash, CEO of Complete Intelligence, giving us his view on the inclusion of a Salesforce into the Dow Jones, among other things. Interesting times. I mean, Exxon, I think the Dow Jones is a price weighted index. So it does work differently from the S&P 500. But it is a milestone, right? It is. It is something to note the fact that Salesforce also is a very enterprise driven solution.

 

So that’s an interesting addition there. But Tesla. Tesla has been a very interesting stock to watch. I think it was what I was listening to a podcast yesterday about how even the shorts that still used to be a favorite among short sellers. And they’ve just I mean, if you are short seller of Tesla earlier this year, you would be deeply, deeply in the red at this point.

 

Noelle: Yeah. So I think that a lot of questions are whether it should be included in the S&P 500. Granted, the value of his stock has risen really significantly. I think questions about the quality of earnings, whether they can be sustained, you know, if the share price to frothy. So these are some questions that the committee will still need to confront. And I guess like what you know, what Tony’s saying at S&P 500 Committee, they will look for stability, right? They wouldn’t want to keep kicking out the stock in and out. So, yeah. So maybe, OK, set up. The Tesla may not be added.

 

Roshan: And of course, we’re all paying attention to what’s going to happen in Jackson Hole this weekend on the virtual Jackson Hole.