Mixed Markets | The Daily Peel | 5/17/22

Market Snapshot

After six consecutive negative weeks, Monday morning’s futures pointed towards slight losses on Wall Street. WTI Crude is back above $113 per barrel, and Satoshis had a significant retreat yesterday. The 10-year yield gave away almost 5 bps.

Markets were generally mixed; the Dow was our only winner, gaining a whopping 0.08%. The S&P and Nasdaq were down 0.39% and 1.20%, respectively.

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For today’s Banana Brain Teaser, we will discount our WSO Mentors service by 20 bananas for a 1-hour session for the first 15 respondents with the correct answer.

Let’s get into it.

Banana Bits

Apparently, there is more than a little evidence that a recession is already here
Technoking still trolling? Could he really get a 12th-hour discount?
Our hearts go out to the victims of this weekend’s violence in Buffalo
Sometimes the difference between success and failure is some good advice
California struck down legislation requiring corporate diversity

Banana Brain Teaser

The answer to yesterday’s Brain Teaser was “incorrectly.”

For today’s BBT, we will discount our WSO Mentors service by 20 bananas for a 1-hour session for the first 15 respondents with the correct answer. Here’s today’s BBT:

What is always out in front but can never be seen or touched?

Shoot us your guesses at [email protected] with the subject line "Banana Brain Teaser" or simply click here to reply!

Macro Monkey Says

Militarization — The pen, at times, is indeed mightier than the sword.

But proponents of State Department-led diplomacy know that the sanctions against Russia, Iran, North Korea, and other state actors have legitimate teeth.

Russia’s recent incursion into Ukraine has led to some interesting outcomes.

Sure, we witnessed the largest and most steadfast coalition of the West against an outside nation. It was yuge; everyone got in on it, and even in spite of cost imposition on themselves in the form of rising energy prices, the Continent stood together against Russia.

We also have heard whispers of increased EU and NATO membership amongst remaining nation states in Europe. There’s something to be said about Article V protections, just like there’s something to be said about being a nuclear power in today’s day and age.

At the same time, existing NATO members are finally saying things that would make this country’s former orange president happy: pledging at least 2% of their GDP towards defense spending, if not more.

This is good news for the collective defense, and I’d consider it great news for European theater’s collective deterrence.

That being said, even though you can’t put a price on deterrence, you can put a price on weapon buying. If these rumors come to fruition, the Boeings, Raytheons, Lockheed Martins, L3Harris’s, etc., of the world are going to pop, and in a hurry.

If you thought that the US was sending an exorbitant amount of aid to Ukraine, imagine if NATO member-states started to sign outsized deals with weapons makers in the near term. Big time deals = Big time profits for the major defense prime contractors.

In the face of threats from Russia about NATO expansion, an escalation of rhetoric might slow the political conversations surrounding treaty expansion; but at the same time, it might expedite deal room conversations surrounding sales of weapons to foreign partners.

If you’re like us here at WSO, you’ve been shocked at the outcomes of several geopolitical events in 2022. If we make predictions, we’re guaranteed to be wrong, so let’s see how this unfolds.

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What's Ripe

Energy ($XLE) — Paying $5/gal to fill my tank hurts my wallet… until I remember that I’m long energy. Seeing names like $OXY and $NRG rip higher is a nice consolation prize.

As WTI gained more than 3% yesterday, the $XLE was up 2.64%. Not a bad day for energy stocks on a relatively boring day.

Seagen ($SGEN) — Usually, when a company cleans house on its leadership, the stock ends up getting its clock cleaned shortly thereafter.

Not today. Seagen axed its all-powerful CEO, Chairman, and President Clay Siegall yesterday, announcing a further investigation into his conduct. On the news, shares of $SGEN climbed 5.09%.

What's Rotten

Datadog ($DDOG) — Here’s another company that had a decent quarter in terms of both top and bottom lines.

However, the stock has taken a beating based on investor sentiment following their earnings call. Datadog has slowly slid more than 25% over the last 30 days. Yesterday alone, $DDOG was down over 10.72%.

Atlassian Corp PLC ($TEAM) — Atlassian is another software company focused on growth. They had a decent quarter in their reporting three weeks ago, but since then, their stock has only disappointed the bulls.

Shares of $TEAM are down over 31% in the last month, and they retreated 6.30% yesterday. Apparently, CRM tools did not have a good day yesterday.

Thought Banana

Keepin’ on keepin’ on — It would appear that markets don’t really know what to make of things lately.

Most of you probably only have exposure to equities or maybe crypto, and you’ve experienced the recent roller-coaster days and weeks in the markets of late.

However, that’s not where the excitement ends. Bond markets have been in tumult for weeks.

High-yield or junk bonds are typically where lower-rated companies turn to raise cash. Rising rates and sliding investor sentiment have finally started to squeeze the markets where these riskier bonds trade.

Corporations are struggling with the same fundamental problems that you and I are: their rents are rising in the form of increased expenses for leases; prices are going up on their inputs and supplies; and now, they are losing the pricing power to raise prices to combat inflation.

This hits the least healthy companies first. It’s a fact of life: if you don’t have market share, good cash flows, and a healthy balance sheet, you might run into trouble and in a hurry.

The soft landing euphemism still holds. Can Daddy JPow help steer us towards one as this tightening cycle continues?

But a soft landing doesn’t mean $hit for stock prices. Asset values could take a 25-50% haircut, but as long as we aren’t led blindly into a steep recession, some would consider that the Fed has done its job successfully.

It’s finally time to stop beating around the bush. A recession is quite likely, given the current data and their associated trends.

Figuring out your strategy during a recession is your own business. I can’t tell you what to do. It’s just worth it not to get caught with your pants down if one arrives.

Good luck keepin’ on keepin’ on, Apes.

Wise Investor Says

“Every time you have one of these recessions, there are always groups who say it is different this time. We won’t get out of this one.” — Peter Lynch

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