Wall Street Breakfast: What Moved Markets

- Stocks capped their worst week in nearly two years with another round of intense choppy trading on Friday, sending the S&P 500 tumbling below its 200-day moving average, a level of support that had held up since May 2020. Both the S&P and Dow closed out their third straight week of losses, down 5.7% and 4.6% respectively, while the Nasdaq Composite plunged 2.7% Friday and 7.6% for the week, its worst weekly decline since March 2020. Netflix was the first major tech stock to report fourth quarter earnings, and shares plunged 22% Friday after the streaming giant posted slower subscriber growth and guided for lower than expected revenues in the current quarter. Other Nasdaq stalwarts such as Amazon, Meta Platforms and Tesla fell more than 4%, with Apple and Tesla on deck to report earnings next week. The major losses in growth names have pushed the Nasdaq further in correction territory, down more than 14% since its November high, as rising interest rates pressure technology stocks by making their lofty valuations look less attractive.

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Top News Shutterstock Stocks capped their worst week in nearly two years with another round of intense choppy trading on Friday, sending the S&P 500 tumbling below its 200-day moving average, a level of support that had held up since May 2020. Both the S&P and Dow closed out their third straight week of losses, down 5.7% and 4.6% respectively, while the Nasdaq Composite plunged 2.7% Friday and 7.6% for the week, its worst weekly decline since March 2020. Netflix was the first major tech stock to report fourth quarter earnings, and shares plunged 22% Friday after the streaming giant posted slower subscriber growth and guided for lower than expected revenues in the current quarter. Other Nasdaq stalwarts such as Amazon, Meta Platforms and Tesla fell more than 4%, with Apple and Tesla on deck to report earnings next week. The major losses in growth names have pushed the Nasdaq further in correction territory, down more than 14% since its November high, as rising interest rates pressure technology stocks by making their lofty valuations look less attractive.       Aviation 5G friction For the third time in two months, AT&T (NYSE:T) and Verizon (NYSE:VZ) delayed the implementation of their 5G networks around key U.S. airports. It's a big decision for the companies, which spent nearly $70B on C-band spectrum rights, though they didn't provide details on zone size adjustments or how long the suspension might last. While the FAA worries that new cellular frequencies could endanger aircraft by throwing off radio altimeter readings, the FCC and other regulators around the world feel otherwise. Quote: "We recognize the economic importance of expanding 5G, and we appreciate the wireless companies working with us to protect the flying public and the country's supply chain," said Transportation Secretary Pete Buttigieg. Airlines are still scrambling to retool their schedules as the FAA begins updating its guidance on which airports and aircraft models will be affected by the latest changes (the regulator had previously issued nearly 1,500 notices of 5G restrictions). AT&T and Verizon previously agreed to buffer zones around 50 airports to reduce interference risks, as well as other steps to cut potential interference for six months. However, airlines not only feel that the precautionary measures could be limiting, but could also render aircraft models unusable, like some Boeing (NYSE:BA) 777s. Go deeper: "The U.S. made all possible spectrum available on a licensed basis to telecom operators," said Vivekanand Subbaraman of Ambit Capital. "Other countries have not done that. That's why it's turning out to be a U.S.-specific issue." There is a lot riding on the American rollout of 5G networks, especially with other nations getting a head start on the technology. The Chamber of Commerce even sees 5G as vital for U.S. economic growth over the next few years, and if consumers start feeling there are problems with the technology, it could be a major setback. (89 comments)       Featured Webinar: The Great Inverse Bubble After three years of extraordinary gains in the stock market, there's lots of chatter about a bubble in high-valuation growth stocks. But Louis Stevens and the team at Beating the Market believe the best is yet to come for a small group of companies forming what he calls "inverse bubbles". These stocks are set to disrupt a host of key industries, handing them the chance of seeing significant gains over the next few years. Join us for this special webinar, where Louis will reveal his research and present two stocks worth putting on your watchlist right away. Save your spot » M&A Microsoft goes gaming Everybody is still talking about Microsoft's (MSFT) $69B acquisition of Call of Duty maker Activision Blizzard (ATVI), which would be the biggest deal in its history and more than 2.5x what it paid for LinkedIn five years ago. It would also make Microsoft the world's No. 3 gaming company by revenue - if regulators permit it - and result in the tech industry's largest-ever takeover (topping Dell's (DELL) $67B purchase of EMC in 2016). Activision Blizzard closed the session on Tuesday up 26% on the news, while Microsoft slipped back 2% in typical M&A fashion. By the numbers: Despite the record price tag, Microsoft has added $1T in market cap in the last year alone, so the deal would represent only a small piece of the company's valuation. Before the announcement, Activision Blizzard shares were also off 40% from their February 2021 peak, resulting in an attractive price point to scoop up the video game developer. On top of all this, Microsoft has cash of $130B on its balance sheet, allowing it to fund the deal without needing to raise any debt or issuing stock. There are several reasons Microsoft is blowing $69B on a future in gaming. It already has a subscription-based game business for Xbox and PC called Game Pass (with 25M subscribers) and is developing a cloud gaming service. Activision could also fill its presence in mobile gaming via popular game studio King, which is the maker of Candy Crush. Many are also touting the deal as a way for Microsoft to get into the Metaverse as global tech giants stake their claims to a virtual future. Warning label: The purchase of Activision will come with some baggage as the game developer faces many claims of sexual misconduct and discrimination. Reports suggest that several dozen employees have already "exited" the company and 44 have been disciplined in response to the allegations. Microsoft will have to clean up the "frat boy" culture over the next year, with current CEO Bobby Kotick (who has been tied to the reports) scheduled to leave his role once the deal closes. (106 comments)       On The Move Tech correction Technology stocks officially entered correction territory after Wednesday's late Wall Street selloff. The tech and growth focused Nasdaq 100 (NDX) (NASDAQ:QQQ) fell more than 1% during the session, bringing the decline from its high to 10.2%. The S&P Info Tech sector (NYSEARCA:XLK) is also down 10% from its high, with key component Apple (NASDAQ:AAPL) falling below its 50-day moving average for the first time since October. By comparison, the S&P 500 (SP500) (NYSEARCA:SPY) is down 6%, despite some recent weakness in cyclical sectors. Bubble or wall? The market's reliance on tech stocks and other megacaps for broader gains has brought comparisons to the 2000 Dot-com Bubble. If these high-valuation stocks buckle, lower-weighted sectors will have a very tough time picking up the slack. Morgan Stanley says there's also concern about stocks under the surface, comparing the valuation of the median S&P 500 stock today to that of the Tech Bubble. But ARK Invest's Cathie Wood, whose active funds have been hit hard by this selloff in higher-multiple names, says the bubble lies in value stocks. "In our view, the wall of worry built on the back of high multiple stocks bodes well for equities in the innovation space," Wood declared in ARK's Q4 report. "The strongest bull markets do climb a wall of worry, a fact that those making comparisons to the tech and telecom bubble seem to forget. No wall of worry existed or tested the equity market in 1999. This time around, the wall of worry has scaled to enormous heights."

Getting real: One of the biggest factors putting selling pressure on tech stocks is the rapid rise in real yields seen since the start of the year. The real 10-year Treasury yield (NYSEARCA:TIP) as measured by the inflation-protected securities now sits at -0.64%, 40 basis points higher from where it closed out 2021. The correlation between Nasdaq 100 performance and the change in the 10-year real yield is -0.5, "about as low as it's gotten in this post-COVID recession period," noted Mike Wilson, chief equity strategist at Morgan Stanley. "In other words, changes in yields are currently a significant explainer of NDX returns." (123 comments)

     

Earnings

Netflix nervousness

Fears of a Netflix (NASDAQ:NFLX) slowdown sent shares cratering 20% AH on Thursday, erasing $45B of market value as investors prepare for a new phase of slower growth. While the streaming giant beat on both the top and bottom lines, and reported 8.28M global paid net subscriber additions in Q4, its guidance is what really hit sentiment. Netflix expects to add just 2.5M subs this quarter, short of the 3.98M it added in Q1 of 2021, and far below the nearly 7M expected by analysts. It would also mark the slowest start to a new year for the company in at least a decade.

Struggles: "Consumers have always had many choices when it comes to their entertainment time - competition that has only intensified over the last 24 months as entertainment companies all around the world develop their own streaming offering," Netflix said in a statement. "While this added competition may be affecting our marginal growth some, we continue to grow in every country and region in which these new streaming alternatives have launched."

In the past, Netflix has also said services like Disney+ (DIS), HBO Max (T), Paramount+ (VIAC) and Peacock (CMCSA) "wouldn't materially affect growth," but that appears to be no longer the case. Netflix subscribers had widely been expected to stabilize after the appearance of some hit content toward the end of 2021, including heavily watched films Red Notice and Don't Look Up, as well as new seasons of Ozark, Bridgerton and Stranger Things. The lower first-quarter guidance, though, "reflects a more back-end weighted content slate" for Q1, with Bridgerton Season 2 and original film The Adam Project launching in March.

Outlook: "It's definitely frustrating for us, the current slower growth," co-CEO Reed Hastings announced during a post-earnings interview. "It's a dynamic market for sure, it may not be as steady as people think about it in terms of we're gonna add X number every quarter, every month, every week, but there's no question that's the direction the business is going in," added co-CEO Ted Sarandos. Netflix additionally announced price increases last week, with the monthly cost for its U.S. basic plan rising by $1 to $9.99, and standard and premium plans climbing to $15.49 and $19.99 (from $13.99 and $17.99). (149 comments)

     

Financials

Digital dollar

As it looks to keep up with global financial innovation, and preserve dollar supremacy, the Federal Reserve finally released a long-awaited paper discussing the pros and cons of a potential U.S. central bank digital currency (CBDC). While the 40-page document doesn't take a stance on any specific policy, it will open the discussion between the central bank and stakeholders, as well as solicit public comment. Some upsides include faster and safer payment options, though risks like privacy protection and financial stability would have to be addressed.

How do CBDCs differ from electronic cash? When you deposit money into a bank account, the commercial entity takes responsibility for the sum. The cash is then held in electronic form and can be used across a variety of platforms, but it's limited to the bank's ledger. Companies like Venmo can even track electronic transactions on their own internal ledger system, but the money is still being held and tracked by a commercial bank provider. In the case of CBDCs, the government is the counterparty and takes liability for the money, while the ledger that's being used (known as the rails) can be a very different structure than a commercial institution.

Definitions first... While there are many descriptions of "digital currencies," they are broadly broken down into three categories: CBDCs, cryptocurrency and stablecoins. Check out the other two types below:

Decentralized crypto: These are unregulated offerings like Bitcoin (BTC-USD), Ethereum (ETH-USD) and Dogecoin (DOGE-USD). Since they are issued by a network, and not any central authority or government, they are often volatile, but can also be exchanged for goods or services like traditional currencies. Cryptos often use distributed ledger technology (like blockchain) that can confirm valid tokens and log transactions.

Stablecoins: These also use distributed ledger technology, but they attach the value of tokens to something that already exists. By pegging the asset to the dollar, a basket of currencies, or commodities like gold, these currencies are more grounded and reduce volatility. The most famous example of this is Meta Platforms' (FB) Diem project, formerly known as Libra, which has had a tough time getting off the ground due to regulatory and technological hurdles.

     

U.S. Indices
Dow -4.6% to 34,265. S&P 500 -5.7% to 4,398. Nasdaq -7.6% to 13,769. Russell 2000 -7.6% to 1,998. CBOE Volatility Index +50.3% to 28.85.

S&P 500 Sectors
Consumer Staples -1.5%. Utilities -0.6%. Financials -4.5%. Telecom -3.3%. Healthcare -2.4%. Industrials -3.5%. Information Technology -5.1%. Materials -2.9%. Energy -1.2%. Consumer Discretionary -5.6%.

World Indices
London -0.7% to 7,494. France -1.% to 7,069. Germany -1.8% to 15,604. Japan -2.1% to 27,522. China +0.% to 3,523. Hong Kong +2.4% to 24,966. India -3.6% to 59,037.

Commodities and Bonds
Crude Oil WTI +1.2% to $84.84/bbl. Gold +1.1% to $1,835.9/oz. Natural Gas -7.1% to 3.961. Ten-Year Treasury Yield +0.% to 128.23.

Forex and Cryptos
EUR/USD -0.61%. USD/JPY -0.45%. GBP/USD -0.87%. Bitcoin -14.1%. Litecoin -19.4%. Ethereum -20.4%. XRP -16.9%.

Top S&P 500 Gainers
Activision Blizzard (NASDAQ:ATVI) +27%. Las Vegas Sands (NYSE:LVS) +16%. Citrix Systems (NASDAQ:CTXS) +7%. Take-Two Interactive Software (NASDAQ:TTWO) +6%. Electronic Arts (NASDAQ:EA) +6%.

Top S&P 500 Losers
Moderna (NASDAQ:MRNA) -24%. Netflix (NASDAQ:NFLX) -23%. SVB Financial Group (NASDAQ:SIVB) -18%. Ford Motor (NYSE:F) -17%. Nucor (NYSE:NUE) -17%.

Where will the markets be headed next week? Current trends and ideas? Add your thoughts to the comments section.

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