May 22, 2023

META gets an expensive moving violation ticket from the EU

Stocks traded lower, held back by debt ceiling discussion during which parties stopped – discussing. Fed-speak is all over the map causing some to rethink the coin-toss investment strategy.

Dancing on the ceiling. Politics and even policy aside, every day, and professional investors are shaking their heads this morning. People living in the US and foreign investors invested in US companies probably take for granted that the US is the largest economy in the world. When financial, Wall Street types talk about the “risk free” rate, they are talking about US Treasury instruments. On Wall Street, we are very careful not to mislead investors into thinking that ANYTHING is guaranteed… other than death and taxes. However, our compliance officers allow us a little leeway when it comes to bonds issued by the US Treasury (with the necessary disclosures that nothing is guaranteed, of course). When the Treasury issues a bill, note, or bond, it does not offer any collateral, unlike the rest of us who must offer our homes, cars, boats, whatever if we wish to borrow money. I know that there are exceptions, but an uncollateralized loan represents a big risk for the lender, so they are likely to demand a higher interest rate from you. That is basic lending 101, but that does not apply to sovereign borrowers.

You see, the US Treasury borrows money from bondholders and those bondholders will happily lend money to the US based on only one thing: its full faith and credit. Why? Because, in theory, the US Government can never run out of money. In theory, as we were taught in business school, the government can simply just raise taxes to pay its bills, and for the richest country on planet earth, there is no lack of private dollars to tax. If you believe that theory, stay with me. Even if the government can simply raise more taxes to pay its bills, that clearly can’t happen overnight. So, what does a government do to cover its current cash requirements? It simply borrows money to carry it through the temporary dry period until it can collect more taxes. Kind of like a payday loan. Because it is the US Government borrowing the money, lenders trust that they will get their principal and interest, so the government pays very low interest. At the moment, the Treasury finds itself in a tricky bind. Congress has been given the power to control the debt ceiling to keep things from getting out of hand. Not that things are getting out of hand, but the Treasury needs a payday loan really badly at the moment, but it can only take that loan if Congress raises the debt ceiling. This gives politicians a tremendous amount of leverage over ALL OF US. Being in a position of negotiation power can be a very positive thing if used properly. Now, let us assume that politicians on both sides are actually trying to achieve positive things with that position of power. That said, Janet Yellen, the person in charge of the US’s checking account has told us that some time between June 1^st and June 15^th, she won't be able to write any more checks and that it would be impossible to even pay interest or principal payments to some bond holders if Congress does not approve some sort of relief on the debt ceiling.

So, here we are on May 22^nd, with a little more than a week until June 1^st… you know, D-Day, if you are unlucky enough to hold a treasury bond which matures beyond that day… and maybe COUNTING ON GETTING YOUR MONEY BACK. There is an urban legend out there about how the US has never defaulted on a loan. Well, my friends, that legend is… FALSE. It has happened. Calm down, I can explain. There are 4 notable events, 3 of which are technical in nature, and it is not clear if the US violated its commitment. However, there was 1 pivotal event in which the US could not pay its obligation. That happened in 1862. The Government defaulted on its demand notes due to the extreme financial conditions of financing the civil war. But don’t worry, the Treasury solved that problem by issuing its first greenbacks. They were called greenbacks because they were printed on green paper. Yes folks, the government simply just printed more paper money. See where this is going? It solved the problem at the time, however, as we can now see, we have been printing paper ever since. Now, I am sure that both sides of Congress would like to minimize this paper printing thing, however solving that problem a week prior to a potential default may not be the best time to do it. A default at this juncture would be… um, not at all good for our favorite, interest rate sensitive growth stocks, the US Government, or for anything issued by the Treasury, which relies on its good name, full-faith, and credit.

WHAT’S SHAKIN’ THIS MORNIN’ ☀⛅

Meta Platforms Inc (META) shares are lower by -1.29% in the premarket after the EU decided to fine the company $1.3 billion for mishandling personal information. Hmm, that is one interesting way of raising money… just sayin’. In the past 30 days, 74% of analysts have raised their targets 43 up , 0 down, 13 unchanged, and 2 dropped. Potential average analyst target upside: +11.1%.

Micron Technology Inc (MU) shares are lower by -4.80% in the premarket after Chinese regulators banned the purchase of chips from the memory chip maker, citing security concerns. This represents another front in the battle between mega-powers US and China which are choosing the chip industry as their battleground. Micron will announce earnings late next month. Dividend yield: 0.67%. Potential average analyst target upside: +2.1%.

FRIDAY’S MARKETS

Stocks traded lower after negotiators walked out of debt ceiling discussions on Friday. The S&P500 slipped by -0.14%, the Dow Jones Industrial Average declined by -0.33%, the Nasdaq Composite Index fell by -0.24%, and the Russell 2000 Index dropped by -0.62%. Bonds fell and 10-year Treasury Note yields gained +2 basis points to 3.67%. Cryptos added +0.49% and Bitcoin gained +0.42%.

NEXT UP

No numbers today, but the week ahead will feature more earnings, housing numbers, regional Fed reports, flash PMIs, GDP, Personal Income, Personal Spending, PCE Deflator, FOMC Minutes, Durable Goods Orders, and University of Michigan Sentiment. Check out the attached earnings and economic calendars for details.