The week ahead 08/29/2022
“At this time, we actually need more oil & gas, not less… If you have a well-designed nuclear plant, you should not shut it down — especially right now.”
— Elon Musk at a Norwegian energy conference on Monday
We’ve brought this up recently and will continue to do so for good reason. As the calendar flips to September, the European energy crisis is a serious danger to global markets. The map above shows the current electricity prices throughout Europe.
Here’s what you should know:
Tough Winter Inbound: Currently, the euro and US dollar are essentially equal in value. According to last week’s Energy Information Administration (EIA) report, the cost of one megawatt hour (MWh) in the United States is about $60. In France, the market price is over $730. In Germany, it’s over $650.
There is a serious concern the many Europeans will no longer be able to afford their power bills in the coming months. There’s even a ‘strike’ campaign gaining steam, calling on citizens to not pay their utility bills.
Rationing Needed: The CEO of Shell just warned that Europe may need to ration access to energy for several years, as the crisis is likely to last more than one winter. This comes at the same time that Finland and Norway have noticed Russia wasting massive amounts of natural gas for months.
“It may well be that we have a number of winters where we have to somehow find solutions through efficiency savings, through rationing and a very, very quick buildout of alternatives…That this is going to be somehow easy, or over, I think is a fantasy that we should put aside.” — Ben van Beurden, CEO of Shell
Russia & China Have a Plan
The Nord Stream 1 pipeline is the single largest pipeline that brings Russian natural gas to Europe, via Germany. Russia recently announced unscheduled ‘maintenance work’ on the pipeline — suspending any gas flow for three days starting this Wednesday. Its all but guaranteed that this is an attempt to increase the pain on European countries as their full reliance on Russian oil has become so abundantly clear.
Just a few hours ago, Russia announced that it will launch sweeping military drills in the country’s east that will involve forces from China — a show of increasingly close defense ties between Moscow and Beijing amid tensions with the West over the Kremlin’s action in Ukraine.
The Russian Defense Ministry said that the Vostok 2022 (East 2022) exercise will be held Sept. 1-7 in various locations in Russia’s Far East and the Sea of Japan and involve more than 50,000 troops, over 5,000 weapons units — including 140 aircraft and 60 warships. This comes just a few days after Putin announced that he will increase the country’s armed forces by 137,000 people. The will bring the military’s total headcount to over 2 million.
Russia wants Ukraine and is fine with dragging out the process of victory that likely could have already taken place. China wants Taiwan and is willing to partner up with Russia if it means this is more easily accomplished.
Russia & China are becoming two peas in a pod, which is setting the stage for a more pronounced ‘East vs. West’ division.
What’s the Takeaway?
Know that if Russia ‘wins’ and China ‘wins’ — we will likely all lose pretty badly.
Russia would have a significant leg up on energy (as described above). China would have a significant leg up on semiconductors (as show below).
Hedge funds know that stocks in the energy and semiconductor categories need to remain on their radar. See below for Goldman Sachs’ most shorted stocks. 7 of the top 21 largest shorts are in semi’s. 3 of the top 5 short names are in energy. Smart money expects crazy volatility in these two industries. We’ll be digging deeper into both of them for weeks and months to come.
The Investing Week Ahead — Too Long, Didn’t Read:
⚡ As earnings season ends, we’ll focus on BroadCom, CrowdStrike, Lululemon, Okta, and SentinelOne.
⚡ Western countries that were weening off of nuclear power are sprinting back to it.
⚡ The unemployment rate will be the biggest economic market-move, ironically just before ~Labor~ Day.
Key Earnings Announcements:
As earnings season winds down — cybersecurity remains a hot topic and chips may be in trouble.
Monday (8/29): Catalent, Pinduoduo, Prospect Capital
Tuesday (8/30): Baidu, Best Buy, Big Lots, ChargePoint, Chewy, CrowdStrike, Futu, HP
Wednesday (8/31): Brown-Forman, C3.AI, Designer Brands, Five Below, MongoDB, Okta, SentinelOne, Veeva, Vera Bradley
Thursday (9/1): Broadcom, Build-a-Bear Workshop, Campbell’s, Ciena, HashiCorp, Hormel Foods, Lululemon, PagerDuty, Signet, Smartsheet, Toro
Friday (9/2): N/A — Labor Day Weekend
What We’re Watching:
CrowdStrike (CRWD) / SentinelOne (S) — As the chaos around the world ensues, cybersecurity is viewed as a need for a variety of large corporations and governments. This is an industry where demand has grown so much in the past year or so — that it’s hard to know who the true winners are. You know we love Palo Alto Networks (PANW), but this week will help us gauge if the competitors are staying up to speed. PANW makes up 4% of my portfolio, CRWD makes up 1%, and I have no position in SentinelOne.
Broadcom (AVGO) — If you look at the hedge fund shorts list above, you’ll find that AVGO has the 11th-most short positions placed against it. As the lone semiconductor leader that’s reporting today — a lot of eyes will be on this one.
Lululemon (LULU) — This morning, Jefferies reiterated its Underperform rating on LULU stock. Consensus estimates see Lululemon’s revenue growth further moderating over the coming quarters, at the same time that it’s richly priced (P/E of nearly 40). Retail plays have taken a beating in Q2, and if the Fed can truly crush demand like it now intends to — expensive clothing retailers could be in the crosshairs.
Investor Events / Global Affairs
The mission to the moon was paused, nuclear energy is sexy again out of necessity, and AMD hopes to capitalize on NVIDIA’s shortcomings.
The Most Powerful Rocket Ever Assembled… Coming Soon
The debut of NASA’s Artemis 1 was supposed to take place this morning around 8:45am. Just before that time, the launch was delayed due to an engine bleed. The purpose of the mission is to send the Space Launch System (SLS) rocket and Orion capsule on an over-one-month journey around the moon.
Stock’s involved: Aerojet Rocketdyne (AJRD), Aeva Technologies (AEVA), Amazon (AMZN), Boeing (BA), Canoo (GOEV), Cisco (CSCO), Goodyear Tire (GT), KULR Technology Group (KULR), Lockheed Martin (LMT), Northrop Grumman (NOC), Raytheon Technologies (RTX), Redwire (RDW), & Rocket Lab (RKLB)
If you feel like nerding out, see the graphic above for specifics.
As the energy crisis described at the beginning of this post continues, there’s a mad dash to embolden nuclear energy capabilities. The US, France, Japan, Belgium, and a handful of other countries had planned to let operating licenses expire for nuclear reactors and shift away from the effective energy source.
According to the WSJ, There are technical and financial obstacles to prolonging the lives of reactors. In the U.K., EDF Energy has been monitoring the appearance of cracks in graphite blocks in the reactor cores. The problem is specific to the U.K.’s main reactor design, which isn’t used anywhere else in the world. EDF Energy says the cracks cannot be repaired.
In the U.S., 13 U.S. nuclear reactors have shut since 2013, largely because the low cost of alternative fuels such as natural gas rendered nuclear energy unprofitable.
At the same time, Ukrainian nuclear plant staffs are working at gunpoint to keep the plant operational. United Nations leadership fear that the plants damage from the war with Russia could lead to a nuclear catastrophe.
“Extending nuclear plants’ lifetimes is an indispensable part of a cost-effective path to net zero by 2050…Yet decisions about how long to operate these plants threaten to erode that foundation.” — Report by the IEA
AMD Product Reveal
AMD announced a major product reveal for Tuesday, in which they’ll unveil their next-generation PC products. The company wants to be at the forefront of the new era of performance desktop PCs.
You may have noticed that hedge fund shorts chart earlier in the post had NVIDIA (NVDA) as the most bet-against stock by hedge funds. The company recently cut its guidance (again) due to weak demand for its gaming vision. AMD currently trades at a discount to NVIDIA (P/E of 38 vs. 53, respectively). It’ll be interesting to see if AMD can see relief after a brutal 2022 thus far.
Major Economic Updates:
Unemployment and housing prices are in focus this week.
Monday (8/29): N/A
Tuesday (8/30): Case-Shiller Home Price Index, Consumer Confidence Index, NY Fed President Speaks, Job Openings & Quits
Wednesday (8/31): Atlanta & Cleveland Fed Presidents Speak, ADP Job Report, Chicago Manufacturing PMI
Thursday (9/1): Construction Spending, ISM Manufacturing Index
Friday (9/2): Factory Orders, Nonfarm Payrolls, Unemployment Rate
What We’re Watching:
Jobs Report / Unemployment (August) — According to the Bureau of Labor Statistics (BLS), the unemployment rate has been pretty rock solid for months. Economists’ expectations are that it will remain at the 3.5% level for August as well. The interesting thing about the unemployment rate is that a good report may actually be bad for the market. If the Fed sees that employment levels are doing fine, but inflation is still cripplingly high — they may feel more comfortable with raising rates. It’s a lose-lose of sorts.
Home Price Index (June)— The S&P Case-Shiller Home Price Index came in with a +19.8% YoY increase in May (after revisions). Home buyers are begging that the dark colors can turn to a lighter shade as quickly as possible.
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Disclaimer: This is not financial advice or recommendation for any investment. The content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.