A daily market update from FS Insight — what you need to know ahead of opening bell

“I’m a dope. Not a run-of-the-mill dope, the world’s champ.” — Ralph Kramden, The Honeymooners

First news

• Court of Chancery judge forfeits chance to ever go to Mars, rules Musk can’t have free Tesla billions for the asking
• Companies dealing in everything from washing machines to fruit reel from Red Sea crisis as the world braces for U.S. response to Iran’s latest attack.

Overnight

• Treasury Reveals Debt Issuance Strategy for Next Three Months Today. link
• Japan’s Factory Output Rebounds, Supporting Economic Recovery. link
• Saudis Resume U.S. Defense Talks After Pause Forced By Hamas War. link
• U.S. F-16 Jet Fighter Crashes off South Korea; Pilot Rescued. link
• Samsung Fourth-Quarter Earnings, Call: TOPLive Transcript. link
• Iran Vows to Retaliate Against Any Attack as U.S. Readies Response. link

MARKET LEVELS

MORNING INSIGHT

Good morning!

January is on track for a gain, solidifying the idea of 2024 as a positive year (>92% probability) and suggesting our 5,200 target might be low.

This week is a critical one, given the Treasury announcements, FOMC, critical macro, and the heaviest week of 4Q23 EPS season. Yet arguably the singular most important data point this week will be Wed’s S&P 500 close – and this needs to be above 4,769. At the moment, the S&P 500 is on track for >+3% YTD gain.

Click HERE for more.

TECHNICAL

We’ve discussed some of the issues of the fact that this recent rally has been dominated by Large-cap performance, specifically by NVDA 3.79% , MSFT 1.51%  gains thus far in 2024. 

Specifically, the divergence between Large-cap and Small-cap performance is a bit troubling on this recent move back to new all-time highs for SPX and QQQ. Furthermore, breadth data has largely been waning since mid-December, and has not dramatically improved over the past week. Additionally, cycles, which had indicated a possible turn lower into February, have not acted as planned, despite some definite evidence of a few sectors having stalled out, namely Industrials, Consumer Discretionary, and Healthcare. As had been discussed, this period leading into end of January has some time-based relationships to prior lows made in late October as well as former peaks from late July 2023, and this window has not really passed. Finally, Treasury yields and the US Dollar have been trending higher since late December, and the correlation between Treasuries and SPX has shown some minor decoupling in recent weeks. 

FactSet data projects NVDA, AMZN, META, and GOOGL could also lead S&P 500 earnings growth for the first quarter of 2024, with estimated year-over-year earnings growth of 79.9%. In comparison, the other 496 companies of the S&P 500 are projected to report a +0.3% rise for the same period.

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CRYPTO

Jupiter Wealth Effect

In today’s Crypto Comments video, we discuss GBTC outflows slowing, an uptick in ETF net inflows, tomorrow’s Jupiter airdrop, and potential outcomes of the QRA and FOMC.

Click HERE for more.

FIRST NEWS

Used to Yes-men, Tycoon Hears a ‘No!’ On Tuesday, in a big victory for the Tesla shareholder who sued to block what was to be Elon Musk’s biggest pay package of anything by far on Earth this year (board-approved in 2018), the Delaware Court of Chancery annulled Elon Musk’s $56 billion Tesla pay award.

Judge Kathaleen McCormick’s decision pointed to the fact that all the directors at the time the pay package was approved had ties to Musk, which is why the Tesla board never thought to discuss whether the pay plan, granting what are now 303 million stock options, was absolutely necessary. After all, Musk already owned a big stake in the company and hadn’t said he would leave Tesla if he didn’t get the pay award.

Recently, after selling a large stake in Tesla to finance his purchase of Twitter, thus voluntarily whittling his stake down to 13%, Musk claimed in a post on X that a 25% stake in Tesla was necessary to keep him interested. Now he was saying he would leave Tesla if he didn’t get his way with pay. (Although a fan of doggerel, Musk used different phrasing.) After all, between SpaceX, Neuralink, The Boring Company, and Twitter, he’s got so, so many brainchildren upon which to expend his energy and attention. (If the pay package were allowed to stand, exercising the options would have taken his stake to 20.6%.)

It’s ‘father knows best’ or ‘father knows ye not’!

This is somewhat akin to Musk, who is father to 10 human children, telling one of them that, what with fierce competition from nine siblings, s/he would need to show Musk père extreme filial piety, including prostration at the mere mention of Father, kowtowing before every communal meal, and fresh panegyrics composed in Dad’s honor and sung in falsetto at sunrise – or risk losing paternal interest – the ridiculous proposal rubberstamped by a council of aunts and uncles.  

Next, Tesla’s board, now featuring several independent directors, will likely meet to discuss whether to devise a new pay package for Musk to compensate him for the past few years. This time, one would hope the body will actually debate whether such a pay package is necessary. [The Information, Reuters]

Whirlpool, Others Find Themselves in Maelstrom. Whirlpool Corp. said on Tuesday that its European business would start feeling the impact of the Red Sea crisis. Attacks from Houthi terrorists have disrupted global trade as more ships take the safer route around southern Africa, adding ten to 15 days to transit times. “That brings uncertainty more in European supply chain,” Whirlpool CEO Marc Bitzer said on a post-earnings call with analysts, without offering details on the timeline. Shares of the home appliance maker fell 6.6% for the day on Tuesday.

As the crisis in the Red Sea starts to impact their European business, retailers are increasingly hit with costs in time, fuel, and spoilage, especially for shipments of fresh food. Exporters in southern European countries – Italy, Greece, Cyprus – are particularly affected, with many struggling to get perishables to foreign markets on time, imperiling goods worth billions of euros.

If thwarted exports end up being dumped on the E.U. market, prices may plummet and more serious consequences ensue. Inflows of Ukrainian grain have already caused protests across central and eastern Europe. From tea and coffee to grains and meat, if the disruption continues, it will eat into the wider food economy.

Being feckless can be reckless

All this is happening against the background of fear of escalating conflicts, as the U.S. has systematically stopped its allies from confronting threats, cutting off support for Saudi Arabia’s military campaign against the Iran-backed Houthis in Yemen in 2021 and removing them from its list of terrorist organizations. (They were recently returned to that list – years late and billions of dollars lost to disrupted Red Sea trade short.)

Over many years, Iran’s proxies have been given confidence that America would always step in and prevent their defeat with the aim of maintaining an academic idea of a regional balance of power. The recent en masse withdrawal of U.S. forces from the Middle East emboldened Iran and left a diplomatic vacuum power-projectors have been only too glad to fill: China signed a twenty-five-year oil-for-technology-and-arms deal with Iran and negotiated a Saudi-Iranian thaw; Russia started a purchasing program of many thousands of Iranian-built drones and missiles, to be used in a campaign to bomb Ukraine into submission.

Iran then supported the Houthis’ efforts to close the strategically and commercially vital Bab al-Mandeb straits, thus revisiting the OPEC precedent of the 1973 Yom Kippur War, i.e. economically pressuring the U.S. and the West to abandon Israel. The U.S., joined by a handful of others, responded – we have covered the exploits of valiant destroyer USS Carney and her colleagues – with multiple missile strikes against Houthi firing positions, but not against Iran. Iran’s as-yet non-fatal rocket and drone assaults on U.S. bases were given a pass while the U.S. refused to formally blame Tehran for its role in destabilizing much of the region. If not for Hamas’ brutal October 7 attack on Israel – supported, and possibly planned by Iran as a way to scuttle the evolution of the Abraham Accords to include Saudi Arabia – the $6 billion promised to Iran by President Biden and currently parked in Qatar (another sponsor of terrorism) would already be quite literally weaponized, i.e. turned into weapons for Tehran, Hezbollah, and fellow travelers.

After an Iranian drone killed three Jordan-based U.S. soldiers on Monday, much ink is being spilled on how political pressure is building on President Biden to strike Iran. Some are asking what attacking Iran would net the U.S. – unless it’s prepared for an all-out war. One not-so-contrarian answer could be that, by not attacking Iran, the U.S. is actually greatly increasing the chances of war. Rather than strike an Iranian proxy, as it has done with the Houthis, the Pentagon could theoretically go to the source in more than one way and destroy the Iranian factory where the drone that killed the three American soldiers was made – the same factory that very likely made the drones now killing Ukrainians. WSJ, Yahoo Finance, Politico.eu. Hat tip to Michael Oren.