Tantrum in bonds & stocks, tech wreck, oil moves, CN Rail upgraded, biotech news
In case you missed it, The Globe & Mail wrote about the upcoming podcast! The very first episode comes out tomorrow morning. I will include it in tomorrow’s morning note. Very grateful for the early support, now pressure is on! I hope you will tune in. Tell your friends. More importantly, tell your parents! The over 70 crowd are my people and I don’t think they are watching my TikToks.
Tantrum: Futures are sagging this morning under the continued weight of the bond market sell-off. The yield on the US 10-year is at the highest level since October 2023. This is being driven by fears that inflation is reaccelerating and economic growth remains too robust for interest rate cuts. Of course the big question is: Can stocks continue to rally against a backdrop of higher rates? So far, the answer has been no. The US markets are in the red for 2025, while the TSX is a hair in the green (0.16%) thanks to gold and energy stocks. It is worth noting that October 2023 also marked the bottom for the S&P 500 as the bond sell-off eventually abated and stocks went on to rally more than 40% from then until now. Perhaps if the 10-year fails to breach 5% again, history will repeat itself. Although valuations are much higher this time around and there is a lot more political volatility. This week will be a crucial test for stocks. We get American producer inflation tomorrow, consumer inflation on Wednesday, and retail sales Thursday. This morning, we get the New York Fed’s 1-year inflation expectations index at 11amET. You can bet that a higher read will rattle the markets. This week is also the start of earnings season with JP Morgan, Wells Fargo, Citi, Goldman Sachs, and Blackrock slated to report Q4 earnings on Wednesday. Homebuilder KB Home reports after the bell today.
Tech wreck: Tech stocks have been a casualty of the sell-off in rates. The NASDAQ is down 5% from its most recent peak and trading at a 1.5 month low. “After a historical two-year bull market for tech stocks led by the AI Revolution we are now entering a tricky time for the tech sector,” wrote Dan Ives of Wedbush in a note to clients this morning. However, he remains bullish. “We ultimately view pullbacks like these as golden buying opportunities to own the winners in the AI Revolution,” wrote Ives. His top 10 names to buy here are Nvidia, Microsoft, Amazon, Alphabet, Salesforce, Palantir, Tesla, Apple, Oracle, and Snowflake. Citi, meanwhile, is urging cautiom when it come to buying in the tech sector. “We believe investors need to be more discerning as volatility may stay elevated,” wrote Drew Pettit of Citi. They’ve introduced a “growth-at-a-reasonable” price index for NASDAQ stocks and demonstrate that it would have outperformed in the last two years in their back tests (see chart below). There more than 70 names in their index that captures both growth and AI at a reasonable price so I won’t name them all here (but the index is CGRBTGRP Index and CGRBAIRP Index for Bloombergers). Of the Magnificent 7 they still like Nvidia, Alphabet, Meta and Amazon using their growth-at-a-reasonable price methodology. Outside those, I see names like Intel, Micron, Spotify, NetApp, Etsy, GoDaddy, and Marvell on the list.
Energized: Oil has popped to a 5-month high as the US dials up sanctions against Russia. These are being billed as the “most aggressive and ambitious sanctions” yet aimed at curbing purchases of Russian oil by India and China. India has been a key buyer of Russian crude after its invasion of Ukraine. Since oil prices bottomed in December, the price of crude is up 16%. However, Canadian energy stocks are only up 1.5% over that time. Energy investors either remain unconvinced or asleep at the wheel. We’ve got Eric Nuttal of Ninepoint coming up on In the Money with Amber Kanwar on January 23rd. He’ll no doubt tell us which. While energy investors have yet to notice the move in oil, there are other areas that could be less enthusiastic. Higher oil prices will further complicate central bankers battle against inflation. I’m also curious about how much longer airline stocks can continue to advance before higher oil prices start to take a bite.
All aboard: CN Rail is getting its third upgrade in less than a week. This morning TD joined Jefferies and JP Morgan in the upgrade parade. This comes as the railway is trading at a 14-month low and is threatening to fall to a 2.5 year low if it sells off by a few more pennies. While rival CP Rail hasn’t exactly been a home run, CN Rail’s underperformance is stark. That is the main reason TD is upgrading the stock this morning. “We are upgrading CN to BUY from Hold because it is trading at a >1x multiple-point discount vs. its peers, despite normally trading at a premium…” wrote Cherilyn Radbourne of TD. While she acknowledges the call could be early, she thinks the discount is enticing. “We believe that this discount is rightly attracting investor interest, particularly given that after a difficult 2024, CN appears well set-up for 2025, with easy prior-year comparables starting in Q2/25,” wrote Radbourne.
Drug deals: Johnson & Johnson is buying Intra-Cellular for $14.6 billion this morning. The offer represents a nearly 40% premium to where the stock closed Friday. It’s a play for a company focused on central nervous system disorders. The offer price of $132/share represents an all-time high and comes after a 43% rally in the stock over the last year. In another demonstration that biotech M&A is off to a strong start in 2025, Biogen announced an offer to buy Sage Therapeutics in a smaller $469 million deal. Biogen is offering $7.22/share which would be a 30% premium to Friday’s close. Sage is focused on developing drugs for postpartum depression. However, unlike Intra-Cellular, the stock has been in its own funk down nearly 80% over the past year. Biogen is clearly being opportunistic here. While the offer is above Friday’s close it is well below where the stock traded even a couple of months ago. Sage says it is reviewing the offer. Sticking with biotech news, Moderna is down plummeting 17% in the pre-market after cutting its sales forecast by $1 billion due to weaker Covid vaccine sales and minimal RSV vaccine sales. The stock is now trading at the lowest level since April 2020 and it is down 90% from the pandemic peak.
