The battle for Twitter

Stocks closed just below the breakeven yesterday in a volatile session. The war raged on, yields continued to climb, earnings were mixed, and inflation still looms, making for a sullen investor mood.

Bitter pill.  No, I am not going to write about the poison pill adopted by Twitter’s board of directors to thwart Elon Musk’s takeover threats. Ok, maybe a line or two…for your edification. When is the last time you heard about a poison pill? You probably can’t remember because it is not common and has not been since back in the 1980s when corporate raiders commonly sailed through the alleyways of Wall Street seeking takeover victims, armed with high yield debt. Remember now? If you don’t, let me remind you that a poison pill is a defense strategy to enable a company to defend against an unwanted takeover. The most common is called a flip-in which allows existing shareholders to purchase company shares at a discount (which means instant profit) if an acquirer accumulates an ownership stake beyond a given threshold. As existing shareholders buy the discounted stock, the hostile buyer’s stake becomes diluted, thus dodging, or certainly making a hostile takeover more difficult. Twitter’s board enabled a similar provision last Friday, so it is safe to say that they are not interested in Musk’s very public bid for control. Now you are in the know, so let’s move on to the other bitter pill I want you to know about.

The bond market has been a bit of a thorn in the side of investors. For many years leading up to the pandemic, treasury yields have been paltry, sending many would-be investors into riskier, but potentially higher yielding dividend stocks and even growth stocks which don’t pay dividends but offer significant upside. Bonds however remain a mainstay of most portfolios allowing asset managers to diversify volatility risk, which has worked out well. Recently however, sharp rises in yields that have come in response to inflation and Fed policy moves have investors reeling. Those higher yields have also caused pain for growth stocks, another mainstay of most diversified portfolios. We end up with sessions where both bonds and stocks go down leaving investors with no shelter. In the waning days of March, the yield curve between 2-year and 10-year treasuries inverted. That occurs when investors believe that the Fed will raise short-term interest rates so fast that the economy will falter. The curve inversion, therefore, only added to the already growing concern of a potential recession. Ok, here is the good news, if you could call it that. The yield curve steepened quite quickly in the days following the inversion. That means that investors are becoming less concerned that the Fed will stall the economy. The rise in longer-maturity yields increased drawdowns for bond investors…and growth stock investors, but it is a sign that things will be better in the longer run. In other words, this dislocated market is simply a phase. Now, to be clear, there are caveats to that theory. Chief amongst them is the reality the Fed has all but announced that it will begin to sell bonds as early as this month which will, by simple market mechanics alone, put pressure on bonds causing longer maturity yields to rise. Recent rises in bond yields may, therefore, be the market factoring quantitative tightening in.  As all of this plays out over the next few months, it is important to remember that, even though it seems that things are moving quite quickly from bust to boom to bust, this is very normal in a historic sense. In other words, there will be another boom once we get through this period of bust. It is simply the bitter pill that needs to be tolerated to guarantee our longer-term health.  Stay focused on your long-term investment strategy.

WHAT’S SHAKIN’

Johnson & Johnson (JNJ) shares are lower by -2.61% in the pre-market after the company announced that it had beat EPS expectations by +3.21% while missing Revenue targets by -1.00%. Further, the company announced that it would no longer track its COVID vaccine due to demand uncertainties. The company also lowered full-year EPS and Sales guidance, which is likely the cause for the pre-market decline. Dividend yield: 2.54%.  Potential average analyst target upside: +5.2%.

Signature Bank / New York (SBNY) shares are higher by +3.90% in the pre-market after the company announced that it had beaten EPS and Sales estimates by 23.10% and +0.55% respectively. In the past month, 29% of analysts have modified their price targets, 0 up, 5 down, 11 unchanged, and 1 dropped. Dividend yield: 0.84%. Potential average analyst target upside: +53.8%.

ALSO, THIS MORNING: Haliburton (HAL) and Silvergate (SI), and Citizen’s Financial (CFG) all beat on EPS and Sales. 

YESTERDAY’S MARKETS

Stock slipped slightly as treasury yields rose, and Fed speak became aggressive. The S&P500 fell by -0.02%, the Dow Jones Industrial Average slipped by -0.11%, the Nasdaq Composite Index declined by -0.14%, the Russell 2000 Index gave up -0.74%, and the S&P500 ESG Index gained +0.05%. Bonds fell and 10-year Treasury Note yields climbed by +3 basis points to 2.85%.  Cryptos gained +1.04% and Bitcoin climbed by +0.99%.

NXT UP

• Housing Starts (March) are expected to have fallen by -1.6% after gaining by +6.8% in February.
• Building Permits (March) may have declined by -2.4% after falling by -1.6% in the prior month.
• After the bell earnings announcements expected: Netflix, IBM, Omnicom, and First Horizon.