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What we are watching next week, including Wells Fargo earnings

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Wells Fargo signage on May 5th, 2021 in New York City.

Bill Tompkins | Michael Ochs Archives | Getty Images

(This article was sent first to members of the CNBC Investing Club with Jim Cramer. To get the real-time updates in your inbox, subscribe here.)

Markets got off to a shaky start to kick off the new year. While the major indexes posted weekly losses, the economically sensitive Dow Jones Industrial Average was the relative outperformer, as investors positioned themselves for a year in which the Federal Reserve is expected to raise rates and reduce the size of its balance sheet. In line with the increased focus on rising rates, the tech-heavy Nasdaq Composite was the relative laggard, now more than 7% off the all-time high reached in November.

Ultimately, we are not that surprised by the action and believe it to be in line with our view that in 2022 you want to own the stocks of companies that “do stuff and make things” while avoiding the “story stocks,” i.e., the high-flying, longer-duration, concept names with little-to-no earnings power.

Remember, stocks are valued on future earnings and cash flows. We generate a present value for companies by estimating these outyear numbers and then discounting them to the present day using a discounted cash flow (DCF) model. When rates are at essentially zero, the discount rate (the denominator in a DCF model) is minimal and as a result, investors can speculate and look out into the future as far as they want — because the value in the future is essentially the same as today’s. But when rates rise, the discount rate (or the rate of return investors require for the risk they are taking on by owning equities) must increase. That increased denominator means that the present value of future earnings and cash flows declines. The further out those earnings are, the less they are worth today with every tick higher in rates.

An example of how rising rates impact valuations:

To better illustrate this, let’s consider an example of how a higher discount rate impacts future earnings.

Company A is a high-flying tech stock (think something in the EV space that came public via SPAC or an enterprise software company) with a promise about the future but no earnings power today, making it a longer duration asset in the context of stocks. Company B is a value cyclical name, like a large-cap financial or industrial. These companies are traditionally thought of as short-duration assets.

Company A is expected to generate $10 of earnings per share in 2027 (five years from now), while Company B is expected to make $10 per share by the end of 2022. An increase in rates means that Company A’s earnings are discounted back to the present five full years at a now higher rate, while Company B’s must only be discounted back one year at that higher rate.

When rates are on the rise, the impact of discounting to the present day has a larger and larger effect the more years you have to do it. This causes investors to seek out shorter duration assets like Company B over stocks like Company A. Ultimately,  A and B will both generate $10 in earnings. However, the present value of company B’s $10 in earnings is worth increasingly more relative to company A’s as rates rise.

That is why we want to own the stocks of companies that generate real profits today. The closer those profits are to the present day, the less impact rising rates have on their present values, making those earnings more attractive compared with those of the high-fliers that see their present-day intrinsic values drop on higher rates.

Here is a quick look at some of the broader market measures we like to keep an eye on: The U.S. dollar index pulled back slightly but remains just below the 96 level. Gold was about flat on the week, trading at around the $1,800 level. WTI crude prices strengthened to the upper $70s-per-barrel region. And the yield on the 10-year Treasury note had a strong week in response to the Fed’s hawkish minutes and decline in the unemployment rate. The 10-year yield now sits at around 1.77%, the highest levels since January 2020. 

No portfolio companies reported this week.

In addition to earnings, we received several key macroeconomic updates:

Monday

Tuesday

ISM Manufacturing58.7% vs. 60.0% estimate

Wednesday

ADP Employment Survey: 807,000 vs. 375,000 estimate

Thursday

Initial Jobless Claims: +207,000 vs. +195,000 estimate
-Four-week moving average: 204,500 (+4,750 vs prior week)
-Factory Orders: +1.6% MoM vs. 1.5% MoM estimate
– Core Capital Goods Orders: unchanged MoM
-ISM Services: 62.0% vs. 67.0% estimate

What we are watching ahead:

Earnings season kick off next week as the banks are set to report. Within the portfolio, we will hear from Wells Fargo (WFC) on Friday, before the opening bell. Other reports we will be watching include:

Monday

Open: AZZ (AZZ)Commercial Metals (CMC)Tilray (TLRY)
Close: Accolade (ACCD)

Tuesday

Open: Albertsons (ACI)TD Synnex (SNX)
Close:

Wednesday

Open: Jefferies (JEF)Shaw Comms (SJR)
Close: KB Home (KBH)

Thursday

Open: Delta (DAL)Taiwan Semi (TSM)
Close: 

Friday

Open: BlackRock (BLK)Citigroup (C)First Republic Bank (FRC)JPMorgan Chase (JPM)
Close:

On the macroeconomic front, in addition to keeping an eye on the geopolitical sphere as well as for the following releases (all times ET):

MONDAY          

10:00 Wholesale Inventories SA M/M (Final)

TUESDAY

06:00 NFIB Small Business Index

WEDNESDAY

08:30 Consumer Price Index (CPI)
08:30 Hourly Earnings SA M/M (Final)
08:30 Hourly Earnings Y/Y (Final)
08:30 Average Workweek SA (Final)
14:00 Treasury Budget NSA

THURSDAY

08:30 Continuing Jobless Claims SA
08:30 Initial Claims SA
08:30 Produce Price Index (PPI)

FRIDAY

08:30 Export Price Index NSA M/M
08:30 Import Price Index NSA M/M
08:30 Retail Sales
09:15 Capacity Utilization NSA
09:15 Industrial Production SA M/M
09:15 Manufacturing Production M/M
10:00 Business Inventories SA M/M
10:00 Michigan Sentiment NSA (Preliminary) 

The CNBC Investing Club is now the official home to my Charitable Trust. It’s the place where you can see every move we make for the portfolio and get my market insight before anyone else. The Charitable Trust and my writings are no longer affiliated with Action Alerts Plus in any way.

 As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. See here for the investing disclaimer.

 (Jim Cramer’s Charitable Trust is long WFC.)

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Teladoc Tumbled 38% After Big First-Quarter Loss. Is It Just a Pandemic Play?

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After pandemic drop, Canada’s detention of immigrants rises again By Reuters

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© Reuters. FILE PHOTO: Two closed Canadian border checkpoints are seen after it was announced that the border would close to “non-essential traffic” to combat the spread of novel coronavirus disease (COVID-19) at the U.S.-Canada border crossing at the Thousand Isla

By Anna Mehler Paperny

TORONTO (Reuters) – Canada is locking up more people in immigration detention without charge after the numbers fell during the pandemic, government data obtained by Reuters shows.

Authorities cite an overall rise in foreign travelers amid easing restrictions but lawyers say their detained clients came to Canada years ago.

Canada held 206 people in immigration detention as of March 1, 2022 – a 28% increase compared with March 1 of the previous year. Immigration detainees have not been charged with crimes in Canada and 68% of detainees as of March 1 were locked up because Canada Border Services Agency (CBSA) fears they are “unlikely to appear” at an immigration hearing, according to the data.

The rise puts Canada at odds with Amnesty International and other human rights groups that have urged Ottawa to end its use of indefinite immigration detention, noting CBSA has used factors such as a person’s mental illness as reason to detain them.

A CBSA spokesperson told Reuters that “when the number of entries (to Canada) goes up, an increase in detention is to be expected.” CBSA has said in the past it uses detention as a last resort.

A lawyer told Reuters her detained clients have been in Canada for years.

In the United Kingdom, too, immigration detention levels rose last year after dropping earlier in the pandemic, according to government statistics. Unlike Canada, the United States and Australia, European Union member states have limits on immigration detention and those limits cannot exceed six months.

The rise in detentions puts people at risk of contracting COVID-19 in harsh congregate settings, refugee lawyers say.

Julia Sande, Human Rights Law and Policy Campaigner with Amnesty, called the increase in detentions “disappointing but not surprising,” although she was reluctant to draw conclusions from limited data.

The number of immigration detainees in Canada dropped early in the pandemic, from a daily average of 301 in the fourth quarter (January through March) of 2019-20 to 126 in the first quarter (April through June) of 2020-21.

FEW NO-SHOWS AS DETENTIONS DROPPED

Detaining fewer people did not result in a significant increase in no-shows at immigration hearings – the most common reason for detention, according to Immigration and Refugee Board data.

The average number of no-shows as a percentage of admissibility hearings was about 5.5% in 2021, according to that data, compared to about 5.9% in 2019.

No-shows rose as high as 16% in October 2020, but a spokesperson for the Immigration and Refugee Board said this was due to people not receiving notifications when their hearings resumed after a pause in the pandemic.

Refugee lawyer Andrew Brouwer said the decline in detention earlier in the pandemic shows Canada does not need to lock up as many non-citizens.

“We didn’t see a bunch of no-shows. We didn’t see the sky fall … It for sure shows that the system can operate without throwing people in jail,” Brouwer said.

He added that detainees face harsh pandemic conditions in provincial jails – including extended lockdowns, sometimes with three people in a cell for 23 hours a day.

Refugee lawyer Swathi Sekhar said CBSA officials and the Immigration and Refugee Board members reviewing detentions took the risk of COVID-19 into account when deciding whether someone should be detained earlier in the pandemic but are doing so less now.

“Their position is that COVID is not a factor that should weigh in favor of release,” she said.

“We also see very, very perverse findings … [decision-makers] outright saying that individuals are going to be safer in jail.”

The Immigration and Refugee Board did not immediately respond to a Reuters request for comment.

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Nasdaq futures rise as market attempts comeback from April sell-off, Meta shares soar

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Stock futures rose in overnight trading as the market shook off the April sell-off and investors reacted positively to earnings from Meta Platforms.

Futures on the Dow Jones Industrial Average added 70 points or 0.2%. S&P 500 futures gained 0.7% and Nasdaq 100 futures jumped 1.2%.

The moves came as shares of Meta surged more than 18% after hours following a beat on earnings but a miss on revenue, a sign that investors may see signs of relief in the beaten-up tech sector. Shares were down 48% on the year heading into the results.

Meanwhile, shares of Qualcomm gained 5.6% in extended trading on the back of strong earnings while PayPal rose 5% despite issuing weak guidance for the second quarter.

“I think a lot of people want to believe that earnings are going to pull us out of this, but earnings are not what got us into this,” SoFi’s Liz Young told CNBC’s “Closing Bell: Overtime” on Wednesday. “… But the reality is there are so many macro headwinds still in front of us in the next 60 days that the market is just hard to impress.”

The after-hour activity followed a volatile regular trading session that saw the Nasdaq Composite stoop to its lowest level in 2022, as stocks looked to bounce back from a tech-led April sell-off. The index is down more than 12% since the start of April.

In Wednesday’s regular trading, the tech-heavy Nasdaq ended at 12,488.93, after rising to 1.7% at session highs. The Dow Jones Industrial Average rose 61.75 points, or 0.2%, to 33,301.93 propped up by gains from Visa and Microsoft, while the S&P 500 added 0.2% to 4,183.96.

Investors await big tech earnings on Thursday from Apple, Amazon and Twitter, along with results from Robinhood. Jobless claims are also due out Thursday.

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