Investors are shocked by Nikola’s president’s resignation

Stocks closed flat-ish on Friday in another lackluster week for stocks as low liquidity and an off-balance Chinese economy kept equities in check. Long maturity bond yields soared leaving many wondering what’s next for bonds… and stocks.

What do you mean “luck”? I am not sure if I am on the short list to be considered for a Fed governor position, BUT IF I WERE… These are, indeed, interesting times. The US, if not a good portion of the world’s developed economies, are under the grip of inflation. That inflation was caused by the perfect storm of the COVID pandemic, a fractured supply chain, the massive stimulus that followed, a rising stock market, and the rise of consumerism… oh, and a war in Ukraine which has essentially collared one of the largest producing regions for certain grains, raw earth elements, natural gas, crude oil, and fertilizer. At any other time, any of those individual fissures in the global economy would not have had such a devastating effect, but the confluence of all those factors simultaneously… well, that was the shock that awoke the beast of inflation that was slumbering for nearly half a century. One could say that it was “unlucky” for the reigning political establishment which included the Federal Reserve, though they are technically independent of politics.

In 2019, the Fed was doing its Fed-like things, fine-tuning rates up slowly and then down slowly. Inflation was tame and unemployment was low. The US Economy was growing, but at an anemic pace after a record period of expansion. Corporate earnings growth was struggling after exhausting the benefits of the Trump Administration’s 2017 tax package. The Fed needed to simply ply the helm with a soft but steady hand, using only small movements to keep the ship on course. Then came that rogue wave that nearly swamped the ship and the Fed went from proactive to reactive. The Fed had to keep the ship from sinking.

Let’s skip this next chapter… because we already know what happened. But here we are today with inflation still high but receding. The Fed’s grip on the helm is anything but soft. In 2022, the Fed thrust to helm’s alee and backed the sails hoping to avoid a massive storm on the horizon . The aggressive maneuver was a difficult one. Attempt to slow the massive ship while simultaneously changing course BUT NOT SLOWING too much so that the rudder loses its bite. You see, you can’t steer a ship that is not moving . You may not be a sailor, but at this point you probably know that the situation is not an easy one to get through without some casualties. But something interesting is developing.

The wind has shifted, and wouldn’t you know it, its direction is going in almost the exact direction which the Fed wants it to go . Unemployment remains low, consumer confidence remains healthy, the housing market is STILL strong, GDP is growing, corporate earnings are NOT abysmal, and bond yields are soaring. WAIT, WHAT? Bond yields are soaring? How can that be a good thing? Well, if you are a saver, higher yields are good for you. But what does that have to do with the Fed? Despite what we all may think, the Fed does not get pleasure in hiking interest rates and is not at all keen on causing a recession. So, if inflation is not quite vanquished yet, what is the Fed to do if not continue to raise interest rates and the stakes. That is where higher yields come in.

Higher yields are actually a form of monetary tightening. Recently higher yields are the result of the massive increase in bond issuance by the Treasury, necessary to pay for all that stimulus from 2020 and 2021. Political infighting nearly drained the Government’s coffers earlier this year and once the debt ceiling issue was resolved the Treasury was left with no alternative but to raise large sums of cash quickly through bond issuance. How lucky for the Fed? Fed members don’t have to lift a finger and the market is doing its bidding. Similarly in the banking sector, where banks have screwed down tightly their lending practices. That too is monetary tightening without the Fed intervening, though tighter lending restrictions are a form of policy. Finally, there is the stock market which has given up ground this month, largely due to rising bond yields and profit taking. Regardless of the reason, the Fed is always concerned about a hot stock market. More profits mean more consumption and consumer confidence, which are two big drivers of inflation. A weakened stock market is another one of those monetary tightening forces which require no effort from the Fed.

Inflation is coming down and interest rates are in the restrictive zone. The Fed’s interest policy is beginning to take hold and have an effect on inflation. Economic growth continues and unemployment remains healthy. Is it possible that the Fed can actually achieve a so-called soft landing? As luck would have it, higher bond yields and tighter monetary conditions will only increase the chances of that soft-landing. Fed members are likely to be feeling quite lucky at the moment as everything is going right for the bankers. Perhaps luck can work in both ways.

WHAT’S HAPPENING IN THE MARKET

Palo Alto Networks Inc (PANW) shares are higher by +12.17% after the company announced an earnings beat after Friday’s close. The company gave billing guidance in the current quarter and for the year that exceeded analysts' expectations, giving hope that recent fears of cybersecurity spending slowdowns are overblown. Potential average analyst target upside: +29.2%.

Nikola Corp (NKLA) shares are lower by -8.67% after the company announced the resignation of its president. The news puts Nikola on the top of this morning's negative news sentiment list. The company also announced the sale of $325 million in senior convertible notes. Potential average analyst target upside: +37.8%.

FRIDAY’S MARKETS

NEXT UP

• No economic releases today, but later this week we will get some more housing numbers, regional Fed reports, Durable Goods Orders, and University of Michigan Sentiment. We will also get some key earnings reports. Check out the attached economic and earnings calendars for details.