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Less Jobs, More Inflation: Stocks Puke, Oil Soars, Yield Curve Steepens

Less jobs, slower Services and Manufacturing sector growth, sticky prices (ISM), and surging gasoline costs (thank you OPEC) - Bidenomics smells more like stagflation.

'Hope' has been in charge of macro data recently with 'soft' survey data surging back in its mean-reverting manner as 'hard' real data has been fading (led down by industrial, personal finance, and housing data)...

Source: Bloomberg

After a bloodbath in bond-land this week, today's ugly jobs data sparked a bond-buying-panic (the belly outperformed today 5Y -15bps), sending yields at the shorter-end of the curve lower on the week (-10bps), though the long-end was still up around 20bps on the week...

 

Source: Bloomberg

No-one should be surprised by this purge in yields...

Rate-hike expectations tumbled...

Source: Bloomberg

On the stock side, AMZN and AAPL were the big movers (the former surging most since Nov as the latter tumbled by the most this year)...

 

Overall, they lost around $30 billion in market cap today...

Source: Bloomberg

That weighed on Nasdaq which was the week's worst performer - its worst week since March. The Dow managed a bounce today - perfectly tagging unch for the week - before it all fell apart...

It seems Goldman's Scott Rubner was on to something when he warned "fade the green" as stocks bounced this morning.

Options traders aggressively faded the bounce post-payrolls in stocks then they piled on as the S&P broke 4500...

Source: SpotGamma

The S&P plunged to 3-week lows...

None of which should have been a surprise given our warning.

'Most Shorted' stocks tumbled on the week - the first losing week in the last six...

Source: Bloomberg

VIX (and VVIX) were both higher on the week with significant volatility...

Source: Bloomberg

Back to bonds, the yield curve surged this week (2s30s steeper for the 9th straight day). Outside of the SVB collapse, the last two weeks have seen the biggest curve-steepening since April 2022...

Source: Bloomberg

Yields reversed at key resistance levels from last November (or March's SVB collapse)...

Source: Bloomberg

The dollar rallied for the 3rd straight week, though today's dovishness took some of the lipstick off. The reversal in the USD happened right at the pre-Payrolls dump level from July...

Source: Bloomberg

Crypto continues to tread water with BTC hovering around $29k (after tagging $30k intraday during the week)

Source: Bloomberg

Gold rallied on the day as the dollar sank but overall was lower for the second week in a row. Today's post-payrolls jump echoed last month's...

Oil prices surged to $83 (WTI) today after the OPEC+ panel's recc and are up for the sixth straight week (longest streak since June 2022)...

...with WTI at its highest since November...

Source: Bloomberg

Which is a very bad thing for those who believed The Fed has beaten inflation - Pump prices are about to explode...

Source: Bloomberg

And this time Biden is out of options with the SPR... maybe time for another fist-bump?

Finally, you are here...

Source: Bloomberg

And, as Goldman notes, companies that are beating consensus ests by >1SD are only outperforming the S&P 500 by +70bps on the trading session directly following earnings. Typically beats outperform the S&P 500 by over 100bps.

In other words, it's all priced-in.

Tyler Durden Fri, 08/04/2023 - 16:00
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US Navy Sailors Caught Spying For China Accused Of Handing Over Indo-Pacific Exercise Secrets

Two US Navy sailors have been arrested for passing classified or sensitive material to China, including military details on wartime exercises and strategic operations.

Jinchao Wei, a 22-year-old sailor, was arrested on espionage-related charges, specifically conspiracy to provide national defense information to Chinese officials. He is attached to the San Diego-based USS Essex, an amphibious assault ship which is known to operate in the Pacific region, and even waters off Southeast Asia.

In a separate but similar case, 26-year old Wenhen Zhao was also charged over allegations he handed off sensitive US military videos and photos to Chinese intelligence. The DOJ specified the timeframe for the alleged espionage happened between August 2021 through this May (and possibly beyond). The two sailors, especially Zhao, allegedly provided material exposing classified information related to large-scale US Navy exercise in the Indo-Pacific region.

USS Essex, DoD/US Navy image

It is as yet unclear if the two cases are directly related, or whether they were in contact with the same Chinese intelligence officer. 

According to some of the specifics, "The DOJ alleges that Wei communicated with the Chinese intelligence officer, providing him with manuals and photos of amphibious ships, such as Essex and other big deck amphibious warships. Wei was paid for the information."

USNI News writes further that "According to the indictment, filed July 19, the Chinese intelligence officer reached out to Wei and started a handler/asset relationship."

The DOJ says it has evidence that at one point, Wei confided to another sailor that the Chinese intelligence officer had contacted him, and that he'd been asked to spy for China

Wei has been charged under the Espionage Act, which is rare, as it involves criminally aiding a foreign government. The Chinese appeared to be after closely guarded secrets on US defense tech and operations in the South China Sea and elsewhere, per more from USNI:

The Chinese intelligence officer asked for specific items, including information on the Navy and Marine F-35 Lightning II Joint Strike Fighter “lightning carrier” concept, as well as other amphibious combat concepts. The majority of the requests focused on amphibs, with the intelligence officer also asking for the number of Marines that would be involved in international maritime exercises.

Over the course of several months, Wei also sent numerous technical and mechanical manuals that contained information about the systems on naval ships. Wei provided information on the repairs and mechanical problems that affected ship deployment as requested, according to the indictment.

And crucially...

Zhao allegedly sent the intelligence officer controlled operational plans for a large scale exercise in the Indo-Pacific region, which included naval movements that were marked CUI (controlled unclassified information) or FOUO (for official use only). 

Without doubt, all of this is likely part of stepped-up Chinese intelligence efforts to gain a strategic edge in any potential future clash over Taiwan. Beijing has drastically increased its PLA navy and air force activities near the self-ruled island. 

The two espionage cases further suggests this could be the tip of the iceberg. How many more spies does China have embedded in the US military? 

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"We're Going To Take Over": Chicago Residents Threaten To "Deal With" Influx Of Disruptive Illegals

Enraged residents of a Chicago suburb sounded off over the disruptive behaviors of illegal migrants who were dropped off at a local shelter.

"I would ask you all to go out there – go out there at night, in the middle of the night – and see what goes on," one woman said during a meeting with city leaders.

Locals say the illegals are loitering, partying late at night, littering, engaging in prostitution and there's been at least one fight between locals and migrants, CBS News reports.

"It got a little heated," said Chicago Deputy Police Chief Stephen Chung, adding "Objects got thrown."

According to residents, they're out of tolerance for asylum-seekers, and feel unsafe.

"They disrespect us, they rob us, they harass us," said another women.

Chicago neighborhood sounds off about migrants making them feel unsafe. (CBS2 Chicago/YouTube/Screenshot)

"Let me say this – they've got one more time to deal with it, because otherwise, next time they deal with it, they're going to deal with it from the streets. We're going to take over," said one man.

Much of residents' anger was directed at city officials in attendance – including Ald. Jeanette Taylor (20th), Chicago Deputy Police Chief Stephen Chung, and Department of Family & Support Services Commissioner Brandie Knazze.

At one point, police had to intervene, breaking up a quarrel during public comments.

"It absolutely is a problem," Taylor said at the meeting.

Taylor said she has now seen some of those problems firsthand.

"The people who are keeping up the trouble are the people who are kicked out of the damn shelter," she said. -NBC News

City officials promised residents that they're working on solutions to improve the situation for the neighborhood, and that there will be consequences for those caught breaking the law.

"We need to get a handle on it now," said Taylor. "and because the city never had a real plan, it's been an opportunity. [Mayor Brandon Johnson] hasn't been in office 90 days yet, so they're working as hard as they can and as much as they can to put a plan together for everybody."

Residents aren't buying it.

Meanwhile in NYC...

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Trump Pleads Not Guilty To Charges In 2020 Election Case

Authored by Janice Hisle via The Epoch Times,

Former President Trump has pleaded not guilty to a third set of criminal charges.

Wearing his trademark blue suit, white shirt, and red tie, Mr. Trump, 77, appeared before Magistrate Judge Moxila Upadhyaya in the U.S. District Court for the District of Columbia, in the nation's capital.

Flanked by his attorneys, John Lauro on his left and Todd Blanche on his right, Mr. Trump sat at the defense table with a serious expression, and occasionally looked at Special Counsel Jack Smith, the prosecutor who brought the charges against him.

A 45-page indictment, filed Aug. 1 by Mr. Smith, charges Mr. Trump with criminal conspiracies to defraud the United States, obstruct the certification of votes for Mr. Biden on Jan. 6, 2021, and conspiracy against citizens' right to vote.

Mr. Trump cracked a brief smile after he was sworn in; he listened and nodded as the judge spoke, reading aloud the charges and penalties he faces. He looked at the judge and listened intently.

The former president rose to his feet and stood while Mr. Lauro went to a podium and began talking, saying that he waived the reading of the full indictment. Asked what his pleading was, Mr. Trump then responded, "not guilty."

Unlike many other Jan. 6 defendants, Trump will not be detained under an agreement between the government and his lawyers. But, under the agreement, he is prevented from discussing the case.

Prosecutors were ordered to file a brief within seven days to suggest a trial date and predict how long the trial might take.

Assistant U.S. Attorney Thomas Windom said the government would be seeking a “speedy trial.”

The Judge replied that the trial will be “fair.”

But Mr. Lauro objected to the proposal of a speedy trial calling it “absurd.” He pointed out that the government had three years to investigate and accumulate information. Likewise, Mr. Trump's lawyers need time to prepare a proper defense, he said.

Mr. Lauro also expressed concern over the possibility of "massive" amounts of information to digest, including electronic data, printed documents, and "exculpatory" information.

Mr. Windom said the government is prepared to produce a “substantial” amount of discovery material.

The next hearing date is scheduled at 10 a.m. on Aug. 28 before Judge Tanya Chutkan, who's been assigned to oversee the case. Mr. Trump has been allowed to waive his appearance at this hearing.

Press members gather at the E. Barrett Prettyman federal courthouse in Washington on Aug. 3, 2023. (Madalina Vasiliu/The Epoch Times)

Indictment

Mr. Trump's attorneys argue that the indictment is an attack on the former president's political speech, which is protected by the Constitution. They also argue the charges will be defeated because, unlike Mr. Smith's allegations that Mr. Trump "knowingly" spread "false claims" about the election, the former president held a genuine belief in the veracity of those claims.

Reporters, security personnel, and attorneys filled the courtroom where Mr. Trump, his attorneys, and prosecutors listened as the judge followed standard procedures, with the judge reading the charges aloud and attorneys making brief remarks before the judge accepted Mr. Trump's denial of the charges and set the next hearing date.

Mr. Trump's appearance, which lasted 27 minutes, was historic, considering his status as a former president and current presidential candidate who alleges that the current president's administration is overseeing two federal prosecutions against him.

Mr. Trump alleges that Democrat Joe Biden's Department of Justice (DOJ) is "weaponized" against him for political reasons. But Mr. Biden denies directing specific DOJ actions against Mr. Trump. Based on current opinion polls, the two men appear slated for a rematch in 2024. Mr. Trump has never conceded Mr. Biden's 2020 election victory and has maintained that the election was "stolen." His attempts to challenge or overturn the election are now viewed as criminal conduct in a four-count indictment.

Members of the public were excluded from the courtroom. Only a few took advantage of the opportunity to view the proceedings via closed-circuit monitors in overflow rooms.

Pro-Trump protesters gather around the E. Barrett Prettyman federal courthouse in Washington on Aug. 3, 2023. (Madalina Vasiliu/The Epoch Times)

Venue

Considering that 92 percent of votes cast in the District of Columbia in 2020 went to Mr. Biden, Mr. Trump's lawyers have already said they would be attempting to have the trial moved to more hospitable political territory, such as Virginia.

Some of Mr. Trump's supporters have also raised concerns that, because of her past record, Judge Chutkan might be inclined to deal harshly with Mr. Trump, although judges are pledged to decide cases impartially.

She was an appointee of Democrat President Barack Obama and handed down harsh prison sentences to other defendants charged in connection with the events of Jan. 6, 2021. Ms. Chutkan met or exceeded prosecutors' sentencing recommendations in those cases.

She also has had past dealings with Mr. Trump, and has ruled against him in multiple cases.

In 2021, she rejected Mr. Trump’s claims that executive privilege should have exempted Jan. 6-related White House documents from disclosure. In that case, she wrote that Mr. Trump's arguments seemed to be based on "the notion that his executive power 'exists in perpetuity' ... but presidents are not kings, and Plaintiff is not President."

Defense

Trump's attorney John Lauro, in an interview with The Epoch Times' Jan Jekielek on Aug. 2, said there's somewhat of a silver lining to this case against Mr. Trump: "This is the first time when there'll be a full airing of all of the issues in the 2020 election."

Further, Mr. Lauro said his client was focused on getting the truth, not blocking it, and he believed in the veracity of his claims that the election was stolen.

By disclosing six unnamed, uncharged "co-conspirators" in the indictment, Mr. Smith appeared to be attempting to discourage them from testifying on Mr. Trump's behalf, Mr. Lauro said, because those people will likely fear they could be indicted.

Based on descriptions and context, five of the six co-conspirators can be identified.

They are believed to be former New York City Mayor Rudy Giuliani, who formerly served as Mr. Trump's attorney; lawyers John Eastman, Sidney Powell, and Kenneth Cheseboro, and Jeffrey Clark, a former DOJ civil attorney.

Mr. Lauro asserts that Mr. Trump's lawyers were not engaged in illegal conduct when they advised him about his challenges to the election. They were rendering legal advice, he said, and did not believe they were doing anything unlawful.

Look Ahead America (LAA),  a nonpartisan organization that has been tracking the Jan. 6  cases, added Mr. Trump's name to its database listing "over 1,000 politically persecuted Americans targeted for protesting the results of the 2020 general election."

According to LAA, "the overwhelming majority of those arrested and imprisoned were for nonviolent charges, and nobody to date has been charged with insurrection," despite mainstream news media's frequent use of that term.

In addition to the Washington charges, Mr. Trump faces dozens of document-mishandling charges under state laws in New York and federal laws in Florida. He has pleaded not guilty in those cases and claims that all of the charges are intended to thwart his third bid for the presidency.

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Amazon Soars After Smashing Expectations On AWS Strength, Guides Higher

With three out of five FAAMG stocks - which of course is now known as GAMMA ever since Facebook's ignominious rebranding to Meta (at least until the company changes its name to MetAI... or Twitter) - having already reported mostly solid results helping send the S&P to new 52 weeks highs just a few days ago (until the recent blow out in yields dented sentiment) investors are keenly looking to Amazon and Apple earnings after the close today to round out the picture for the resurgent market generals which could set the tone for the rest of 2023... or at least until the jobs report tomorrow morning.

As previewed earlier, Amazon is expected to post sales of $131.6 billion, up 9% from 2022, and EBIT of $5 billion (Amazon's own guidance is for revenue of $127-133b, EBIT of $2.0-5.5b). Investors will be focused on the AWS revenue which is expected to rise 10% to $21.7BN (bar a bit lower post MSFT Azure print) as well as commentary on July vs June growth, the Backlog, and, of course, A.I. contribution. Attention will also be directed to continued improvements in Retail Margins (e.g. beat high-end of EBIT guide).

Why is so much attention focused on AWS? Well, cost cuts by big corporate clients who are laying off workers or trying to optimize their technology spending after IT bills surged during the pandemic. There’s also the chance that cloud computing – invented in its modern form by AWS – is maturing. Many of the companies likely to unplug their servers and data centers in favor of rented computing power already have, the thinking goes.

Demand for applications related to generative artificial intelligence may ride to the rescue and boost AWS at some point, but chief rival Microsoft seems to think demand will ramp up slowly. Expect executives to face questions about this on the analyst call.

As a reminder, the last time Amazon reported earnings, the stock reacted pretty violently. Shares rose at first, on what looked like a decent quarter. Then, on the analyst call, CFO Brian Olsavsky said Amazon Web Services’ growth rate had slowed by 5 percentage points in 2Q.

Well, it doesn't look like the weakness stuck because moments ago Amazon reported results which blew away expectations, from the top to the bottom line, while also guiding well above sellside estimates. Here is what Amazon just reported:

  • Q2 EPS 65c, up sharply from a 20c loss YoY, and smashing estimates of $0.35
  • Q2 Net sales $134.38 billion, +11% y/y, beating estimates of $131.63 billion
    • Online stores net sales $52.97 billion, +4.2% y/y, beating estimates of $52.45 billion
    • Physical Stores net sales $5.02 billion, +6.4% y/y, beating estimates of $4.96 billion
    • Third-Party Seller Services net sales $32.33 billion, +18% y/y, beating estimates of $31.2 billion
    • Subscription Services net sales $9.89 billion, +14% y/y, beating estimates of $9.79 billion
    • North America net sales $82.55 billion, +11% y/y, beating estimates of $79.68 billion
    • International net sales $29.70 billion, +9.7% y/y, beating estimates of $29.25 billion
    • Third- party seller services net sales excluding F/X +18% vs. +13% y/y, beating estimates of +15%
    • Subscription services net sales excluding F/X +14% vs. +14% y/y, missing estimates +14.5%
    • AWS net sales $22.14 billion, +12% y/y, beating estimates of $21.71 billion
    • Amazon Web Services net sales excluding F/X +12% vs. +33% y/y, beating estimates +9.48
  • Operating income $7.68 billion vs. $3.32 billion y/y, smashing estimates of $4.72 billion
    • Operating margin 5.7% vs. 2.7% y/y, beating estimates of 3.46%
    • North America operating margin +3.9% vs. -0.8% y/y, beating estimates of +2.03%
    • International operating margin -3% vs. -6.5% y/y, beating estimates of -6.4%
  • Fulfillment expense $21.31 billion, +4.7% y/y, missing estimates of $19.01 billion
  • Seller unit mix 60% vs. 57% y/y, beating estimates of 58.3%

But while Amazon's earnings were stellar, it was its Q3 guidance that was truly blowout:

  • The company sees net sales between $138.0 billion and $143.0 billion, or to grow between 9% and 13% compared with third quarter 2022; this is well above consensus estimates of $138.3BN
  • Sees operating income between $5.5 billion and $8.5 billion, compared with $2.5 billion in third quarter 2022. and also beating consensus estimates of $5.41 billion.

Commenting on the quarter, CEO Andy Jassy not only patted himself on the back, but also discussed AI as well, saying that “we continued lowering our cost to serve in our fulfillment network, while also providing Prime customers with the fastest delivery speeds we’ve ever recorded. Our AWS growth stabilized as customers started shifting from cost optimization to new workload deployment, and AWS has continued to add to its meaningful leadership position in the cloud with a slew of generative AI releases that make it much easier and more cost-effective for companies to train and run models (Trainium and Inferentia chips), customize Large Language Models to build generative AI applications and agents (Bedrock), and write code much more efficiently with CodeWhisperer. We’re also continuing to see strong demand for our advertising services as the team keeps innovating for brands, including the ramp up for Thursday Night Football with the ability for advertisers to tailor their spots by audience and create interactive experiences for consumers. We remain excited about what lies ahead for customers and the company.”

More importantly, Jassy is showing investors he can boost sales while also keeping a lid on costs simultaneously. The results are a good vindication of the cost-cutting measures he initiated last year.

Digging into the numbers we find that operating margins soared to 5.7%, more than double the year ago number, and smashing consensus esttimates of 3.46%. So much for that earnings recession.

While the market was clearly happy with the overall profit margin, it also appeared quite happy with the profit margin breakdown where the AWS profit margin rebounded from the lowest since 2017. At the same time, international operating margin remained negative, with US online sales generated a surprisingly strong 3.89% profit margin, the highest since Q2 2021.

While some analysts expected Amazon Web Services growth to sink into the single digits - a significant slowdown for a business that was growing by more than 30% a year ago - that hasn’t happened and AWS sales beat expectations at $22.1 billion, up 12% from 2022. Operating income, $5.3 billion, exceeded analyst estimates, too. The big question here is whether AWS growth rates have bottomed out and whether management expects any acceleration in the second half of the year.

Besides AWS performance this quarter, the market was also focused the company's revenue forecast, which came in the very solid range of $138-$143BN (midline at $140.5BN), beating the $138.3BN expected. This would put the annual growth rate at 10.5%, just below this quarter's 10.8%.

What is notable here is that revenue grew faster than costs for a second consecutive quarter, which hasn’t happened since the company was still riding the pandemic’s online shopping boom in early 2021. As Bloomberg notes, signs of Amazon’s cost cuts are all over these results. Overall operating expenses climbed by 7%, the slowest growth since at least 2017. Sales and marketing costs rose just 6.5%, after years of hovering closer to 35%.

And speaking of cost cuts, Amazon’s headcount shrank by 4,000 people during the quarter. That’s a pretty modest decline for a company that employs 1.46 million workers, but it’s a third consecutive quarterly cut. That kind of consistent employee reduction hadn’t happened at Amazon since the company struggled through the Dotcom bust in 2001.

Also worth noting, Amazon said its Amazon Business unit, which lets commercial customers order office supplies and other items similar to household shopping, now has 6 million customers on track to spend about $35 billion a year.

Oh, and for those wondering, the phrase “generative AI” appears 12 times in the Amazon’s earnings release. Amazon also has 9 bullet point paragraphs explaining the work they did in AI in the quarter.

While it was self-evident thanks to the across the board beat and stellar guidance, Bloomberg Intelligence senior analyst Poonam Goyal said that Amazon’s report “looks good on all fronts" and added that "what caught by surprise was AWS, where sales came in ahead of expectations.”

The market agreed, and in kneejerk response to the stellar results and guidance, AMZN stock has spiked, surging about 6% after hours, and roughly where the option market straddle expected it to go:

And yet, beware the earnings call: last quarter we saw a similar spike higher only to see the stock tumble during the call when the company revealed surprising contemporaneous AWS weakness.

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