Bond traders are wagering that the longer-term trajectory for interest rates will be lower even if the Federal Reserve is still actively boosting its policy rate in anticipation of a US recession in 2019. The Fed’s current overnight benchmark range for long-term Treasury rates is currently 3.75% to 4%, and there is still one more percentage point of central bank rate hikes priced in for the upcoming months. The options market has also shown activity, which may indicate that some investors are hedging against the possibility that policy rates could eventually decrease by half from their current level.
Investors have been buying bonds instead of waiting for clear economic proof that this year’s frantic monetary tightening will result in recessionary conditions in 2023; this position has been supported, among others, by Pacific Investment Management Co.
Gregory Faranello, head of US rates trading and strategy at AmeriVet Securities, stated that the Federal Reserve’s policy is dynamic and that it continues to indicate that rates will rise. But the market behaves as though the Fed’s endgame is one that it is more at ease with.
This week, demand for longer-term Treasuries pushed the rates on 10- and 30-year notes to the lower limit of the Fed’s overnight range. The most dramatic yield curve inversion in four decades has intensified as a result of front-end rates remaining largely stable; this is a closely studied sign of probable future economic suffering.
Although the Fed views the recession indicator as a component of the problem, Faranello said, “the recession indicator story is robust.”
The US economy, and the labor market in particular, has demonstrated itself to be rather resilient thus far in the face of Fed rate rises intended to try to limit rising and presumably persistent inflation. Investors will therefore be closely watching the monthly jobs report this upcoming Friday for any hints of a slowdown or whether it may open the door for the Fed to alter its current course of action.
They will be closely examining the statements made by Fed Chair Jerome Powell and his colleagues, who will appear in public for the final time next week before entering the normal blackout period prior to the Fed’s policy meeting on December 13–14. Officials have been adamant in repeating the necessity for policy rates to rise above present levels, even if minutes of their most recent meeting indicated that they’re likely to decrease the pace of tightening soon.
Given that expectations of a gradual slowing of policy tightening from here amid a perception that inflation has peaked and job growth is slowing, Fed jawboning may prove less effective than the tone of data at this stage of the cycle.
As traders negotiate a number of important data in the upcoming week, not just the employment report, there may be some turbulence for Treasuries due to the extent of current bullishness in the long end of the bond market and the depth of the yield curve inversion. The ISM manufacturing index is expected to decline, which may help wagers on a recession, and the personal income and spending data will reveal how things are changing for personal consumer expenditure, the Fed’s favored inflation indicator. Additionally scheduled for distribution are statistics on the number of open positions.
According to swap-market projections, the effective fed funds rate will increase to almost 5% by the middle of next year before declining by more than 0.5 percentage points by the beginning of 2024. The week’s trading in Secured Overnight Financing Rate futures, however, have been centered on the possibility of a decrease to 3% or even 2% by the end of 2023 or early 2024. However, some are banking on a considerably sharper reverse.
Despite this, not everyone agrees with the consensus on the bond market on the Fed, the economy, and, of course, the inevitable return of low inflation in 2019. The 10-year will continue to trade around 4% through 2024, according to Goldman Sachs Group Inc., which stated this week that hopes for rate cuts next year have been crushed by the economy’s failure to enter a recession and the high level of inflation.
However, that is not the primary viewpoint. Market pricing indicates that many investors are increasingly shifting their attention away from the prospect of constant Fed rises and toward a potential economic slowdown, even if the Fed itself has not yet changed its policy.
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TSMC to Continue Pushing in 2023
Still has momentum.
We still issue a buy rating on the Taiwan Semiconductor Manufacturing Company (NYSE: TSM). Our optimistic outlook on TSMC is based on our belief that the firm is better positioned to outperform now, as the semiconductor industry slowly but steadily improves and the company accounts for lower demand in FY2023. TSMC’s fourth-quarter earnings reports were mixed; the company beat profitability projections but fell short on sales. Despite this, the stock climbed roughly 5% when earnings were released. We believe TSM is attempting to counteract reduced end-market demand and inventory corrections, which have hurt sales and lowered forecasts for the upcoming quarter. It is likely that a bottom in TSM and the semi-space in 1H23, followed by a significant recovery in the year’s second half.
We feel that TSM’s stock is a good entry place before the semi-space rebounds. Since our last post on TSMC in late October, the company has already gained 41%, surpassing the SOX index, which has gained only 21%. The graph below depicts our rating history for TSMC.
We urge that investors disregard the market hype surrounding fears of a Chinese invasion of Taiwan and instead focus on the company’s industry-first approach. We believe that TSMC is best positioned to benefit from chip demand once the semiconductor market recovers. Furthermore, we anticipate the company will have the additional power to raise ASP in the second half of 2023. We recommend that investors purchase the stock at current levels in order to benefit from TSM’s rising growth trend in 2023.
The leading pure foundry space allows for ASP gains.
We favor TSMC’s position in the foundry industry, with a 60% market share in 4Q22, and expect it to boost ASP on advanced nodes. We predict TSMC’s market share will expand significantly in 2022 as a result of the increased manufacture of smaller, more sophisticated 5nm wafers. Nanometer size is at the heart of technical developments in the semiconductor industry and, by extension, the world. To be more specific, nanoscale size refers to the distance between transistors on a chip; the smaller the chip, the more advanced and high-performing it is. Our positive outlook on TSM is predicated on our expectation that the company’s growth would be driven by increased adoption of advanced nodes, which are gradually accounting for a larger portion of TSMC’s revenue by technology. TSM has also begun the manufacture of 3nm processors for Apple (AAPL), sustaining Moore’s Law and looking ahead to next-generation technologies.
We anticipate that the rising global adoption of advanced nodes to meet the surging demand for semiconductors will fuel TSMC’s medium- to long-term growth. As a result, we anticipate that TSMC’s position will allow it to improve ASP on advanced nodes in 2H23, owing to the fact that it retains big semi-players as top clients, including Nvidia (NVDA), Advanced Micro Devices (AMD), and AAPL, among others.
Headwinds still persist
TSMC is not immune to the demand slowdown caused by macroeconomic headwinds, as seen by a dip in 1H23 followed by a fast recovery in 2H23. In Thursday’s results call, TSMC CEO C.C. Wei clarified, stating he anticipates 2023 to be a “slight growth year.” We expect TSMC will face inventory corrections in 1H23 as a result of the deteriorating chip-demand environment. We estimate CAPEX reduction in TSMC during 2023, largely as major client AAPL forecasts reduced demand despite weaker consumer spending. TSMC management warned that revenue would fall by roughly 5% in 1Q23, and that annual spending would be reduced. TSMC announced a CAPEX of $36.3B in 2022 and expects CAPEX to be $32-36B in 2023. We are not concerned by TSMC’s lower 1Q23 prediction because we believe the firm is de-risking guidance due to the challenging macro environment.
Despite the macroeconomic challenges, we expect TSMC to continue growing its foundry operations outside of Taiwan in order to mitigate the risks of geographically concentrating manufacturing on the disputed Island. We believe TSMC will play a larger role in the global shift to manufacturing chips in the United States after the CHIPS Act is implemented in 2022. The business intends to more than increase its investment in US foundries to $40 billion by 2026, establishing the US as a hub for advanced chip manufacturing. We estimate that it will take three to four years for US semiconductor companies Intel (INTC) and TSMC to meaningfully produce chips on US territory. Nonetheless, we anticipate that TSMC’s US fabs will be a long-term growth driver.
We predict TSMC stock to rise in the second half of 2019 as the semiconductor sector recovers from a 15-month slump. We anticipate that product introductions and expanded manufacturing of 5nm wafers will help the semiconductor industry recover.
We feel TSMC is a value investment since it is selling at a discount to its peer group average. The company is trading at 14.4x C2023 P/E, compared to the peer group average of 21.9x. The company is currently selling at 0.2x EV/C2023 Sales, compared to the peer group average of 4.8x. We believe TSMC stock offers an appealing entry point at current levels, and that investors who purchase the stock now will be well rewarded in 2023.
What should be done with the stock?
We remain optimistic about TSMC. We believe the stock is reacting to lower chip demand in 2023. While we expect the stock to remain volatile in 1H23 as the semiconductor space bottoms, we believe TSMC will benefit from demand tailwinds as the semi-space recovers in 2H23. We also anticipate that TSMC’s growth will be fueled by higher 5nm production and the company’s capacity to boost ASP on advanced nodes in 2H23. We feel the stock offers a good entry point at the current price and propose that investors acquire it.
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Solana is Coming Back to Life With a Massive Surge
It’s a true comeback: the triumphant return of Solana that many experts and industry insiders had written off after the bankruptcy of Sam Bankman-Fried’s FTX on November 11.
They predicted that SOL would not be able to withstand the earthquake symbolized by the collapse of the FTX cryptocurrency exchange and its sister company Alameda Research, a hedge fund that also serves as a trading platform for institutional investors.
In the crypto world, FTX and Alameda were the major corporations representing the Bankman-Fried crypto empire, abbreviated SBF.
Solana did, in fact, have intimate ties to Bankman-Fried. Sol, also known as “Sam coin,” is a token produced by the Solana Blockchain that enables the development of decentralized finance or DeFi projects that provide financial services such as loans, mortgages, financial products, and so on.
The coin is linked to an on-chain crypto exchange dubbed project Serum, which was founded by Bankman-Fried, who resigned on November 11 when his enterprise declared bankruptcy.
Serum is one of the infrastructure’s pillars, as it is the protocol and ecosystem that enables Solana DeFi’s fast speed and low transaction cost. It provides an on-chain central limit order book and matching engine, allowing institutional and retail investors to share liquidity and use strong trading features.
It allows developers the freedom to create trading applications without limitations, as it is not tied to any specific assets. This allows them to utilize Serum’s liquidity and ecosystem advantages in their trading application.
As if to prove Cassandra correct, Sol prices plunged by 73% between the onset of FTX’s issues on November 6 and December 31.
They finished the year at $9.96, down from $32.72 on November 5.
SOL has increased by 79%.
However, as quickly as they fell, so did the prices of Sol. According to monitoring firm CoinGecko, they are up 79% in the last seven days. Sol is currently knocking on the doors of the top ten cryptocurrencies in terms of market value. Before the club’s demise, the token belonged to it.
Prices are currently trading at $23.39, a 134% increase from the beginning of the year.
After a statement of support from Vitalik Buterin, one of the most important voices in the crypto world, sentiment toward Solana shifted.
“Some clever people tell me there is a sincere brilliant developer community in Solana, and now that the nasty opportunistic money people have been washed out, the chain has a bright future,” Buterin, one of the co-founders of Ethereum, the most powerful crypto platform, wrote on Twitter on December 29.
“Hard for me to know from the outside,” he said, “but I hope the neighborhood gets a fair shot to grow.”
According to numerous industry sources, the resurrection of SOL is also attributable to an increase in demand for decentralized financial projects. The Solana blockchain enables developers to create decentralized apps, or dApps, at a low cost and provides fast transaction execution.
Its scalability, speed, and affordability make it an appealing alternative for DeFi initiatives that require significant volumes of transactions to be processed rapidly and at a cheap cost.
“While traders are cheering the return of Bitcoin (back over $21,000), and Ethereum (back over $1,550), #Solana is the real star as the weekend begins,” said Santiment, an on-chain analytics business. “$SOL has gained +22% in the last two hours alone, fuelled by liquidated shorts.”
According to Santiment, the significant comeback in Sol prices is the result of a “short squeeze,” which is a fast increase in the price of an asset caused by investors who bet against the product, being forced to purchase it in order to limit their losses.
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Is Alibaba Now Poised to Rally?
After reaching record lows not seen since 2016, 2022 was merciless for Alibaba Group Holding (NYSE: BABA). This comes as no surprise given all of the recent China-related news. A zero-COVID policy has stifled output and demand, while antitrust laws from the ruling party have targeted its tech companies. The continued supply chain and labor constraints haven’t helped matters either. Was 2022 always a difficult year with such headwinds?
Maybe, but things are starting to turn around, and it appears that the bulls have returned. Major tailwinds are expected to carry Alibaba into 2023. Let’s look at a few of them.
For openers, analysts have identified numerous stocks as poised for a comeback bounce in the coming year. Alibaba is one of the most recent example. On Monday, Morgan Stanley named the e-commerce behemoth their favorite in the tech sector. According to Gary Yu and his team, investors have “underappreciated Alibaba’s leverage to a Chinese consumption rebound.” This is mostly owing to its retail success in areas such as consumer products.
Yu also anticipates an improvement in China’s regulatory environment, which will go a long way toward reversing the selling pressure that has brought shares down as much as 80% from their 2020 highs. But it isn’t all. Founder Jack Ma recently announced his intention to step down as CEO and pass over the reigns to someone else.
With his name now being disassociated with Alibaba, one more risk and possible headwind has been removed.
Along with the bullish outlook, Morgan Stanley reiterated its Outperform rating and set a $150 price objective for Alibaba shares. This indicates a 30% upside from current levels based on where they closed on Wednesday. Shares are already up almost 100% from their lows in October, so this outlook, simply adds gasoline to the belief that a significant recovery rally is in the works.
Additional tailwinds exist in the shape of the zero-COVID policy being reversed, which will finally allow the Chinese economy to recuperate after living in constant dread of a lockdown. This comes after widespread rallies caused the government to cave, which is unusual in China.
Alibaba’s Risk Factors
There are risks, the most visible of which are geopolitical tensions. When compared to a decade ago, the United States and China are no longer on good terms. The conflict in Ukraine and escalating tensions with Taiwan have not helped the relationship.
This has filtered down to corporations, with the United States refusing to transfer semiconductor chips to China for fear that they may be used against them in the future. Chinese retaliation is not ruled out and would almost certainly aggravate the situation.
Furthermore, the delisting risk that has dogged Alibaba and its counterparts in recent years has not materialized as many bears predicted. It still exists, but the longer Alibaba remains on the good side of US auditors, the more likely its shares will become a permanent fixture on the New York Stock Exchange.
Indeed, there was news on this front as recently as the last week of December, when it was reported that numerous US-listed Chinese companies had abandoned intentions to list in Hong Kong. This approach was positioned as their backup option for remaining listed outside of China if the US followed through on the threat of delisting.
Still, this is the beast from the east, Alibaba. While shares have been heavily discounted in recent years, a specter of their former self remains, as indicated by the stock’s doubling in value in less than three months.
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