| | | | | | | Presented By THE NORTHERN TRUST INSTITUTE | | | | Axios Markets | | By Emily Peck and Matt Phillips · Jul 12, 2022 | | Hello chums. It's Matt, sun-crisped and rested after a week off. And just in time! 🚨 Tomorrow's inflation report is going to be another doozy, judging by the grimace of White House officials. Stock futures are currently slumping, as the bond market prices in more Fed hiking. Today's newsletter, edited by Kate Marino, is 1,218 words, 5 minutes. | | | | | | 1 big thing: Power shift in the housing market |  Data: Redfin analysis of MLS data; Chart: Axios Visuals Elon Musk isn't alone in trying to back out of a deal. Nearly 15% of pending home sales failed to close in June, a new post-pandemic high according to an analysis of MLS data that Redfin released yesterday, Emily writes. Why it matters: This is a sign of how fast the housing market adjusted to the surge in mortgage rates that started in March — and it signals the beginning of a return to sanity from the boom, with the balance of power shifting back to homebuyers. Prices are likely to cool somewhat. - Sharp rate increases didn't just pump the brakes on the housing market, they drove it into a wall, said Taylor Marr, an economist at Redfin. But he expects the number of cancellations to come down as sellers adjust pricing to the new reality.
Zoom out: Typically, the majority of homebuyers enter into pending sales agreements with a contingency that allows them to back out of the deal if, say, the inspection comes back with issues, or something is off in the appraisal. - When the market was booming just a few months ago, a lot of buyers were waiving those contingencies. Those days are pretty much over — likely a cause for some of the uptick in cancellations.
- Deals failing to close in formerly hot metro areas in the Southwest are soaring. In Las Vegas, they were 27%. Several Florida cities are seeing cancellations near 25%, including Lakeland, Cape Coral, Jacksonville and Orlando.
Nerd out: That 14.9% national rate is perhaps even more striking because overall pending home sales fell in June — so we're looking at a bigger percentage of a smaller universe. Meanwhile, other deals have failed because fast-moving mortgage rates mean the buyers can no longer afford the home they wanted — they either didn't lock in their rate when they went into contract or their rate lock expired. - Those buyers are either walking away or, in some cases, loan underwriters will no longer approve the mortgage, Marr said.
The new home market is feeling this: Homebuilders are reporting a vastly different buying landscape, with big drops in sales and foot traffic to homes, and an increase in cancellations, according to a June survey of homebuilders from John Burns Real Estate Consulting. - "Quite a dismal traffic and sales climate," says one Phoenix builder quoted in the report. "Cancellations are extremely high."
A builder in Austin sums it up: "Sales have fallen off the cliff. We are selling 1/3 of what we sold in March and April. Buyers have no urgency and are nervous about interest rates and inflation. Constant negative outlooks being reported consistently on the news aren't helping." |     | | | | | | 2. Catch up quick | | 🇩🇪 Germany's biggest industrial union asks for an 8% raise. (AP) ⚡️ Global energy crisis has not yet peaked, IEA chief says. (Bloomberg) | | | | | | | | 3. Charted: Energy is the new tech |  Data: Credit Suisse; Chart: Baidi Wang/Axios Giant profits at energy companies are expected to be the key driver of S&P 500 earnings growth in the second quarter, Matt writes. Driving the news: We're about to start receiving a fresh flurry of corporate financial disclosures, laying out how firms did in the quarter that just ended. The big picture: The Fed's rate hikes, China's lockdowns and the energy crisis are all weighing on the economy. - Profit growth is expected to slow down a bit, but it shouldn't be particularly ugly — at least for the S&P as a whole.
- Earnings per share — the key gauge of profits on Wall Street — for S&P 500 companies are expected to be up by between 5% and 6% overall.
Yes, but: Under the hood, you can see that EPS is only heading up because of gobsmacking growth in the S&P 500's energy sector. - According to Credit Suisse analysts, EPS for the index's energy companies will be up a tidy 243% in the second quarter, compared to last year, thanks to exploding oil and gas prices.
- The kicker: Excluding energy companies, S&P profits would actually be down nearly 3%.
💭 Matt's thought bubble: Don't make too much of this. It's not unusual that companies in one booming industry contribute more than their fair share to the profit picture. (See tech firms in 2020, for instance.) - In fact, it's expected. That's why your investment portfolio should be broadly exposed to a panoply of industries.
| | | | | | | | A message from THE NORTHERN TRUST INSTITUTE | | Prices, policy and portfolios — your questions answered | | |  | | | | Protect your portfolio against inflation with answers to common investor questions. The impact: Better understand the impact of inflation and how to fortify your portfolio and wealth plan in the face of uncertainty. Get the answers you need. | | | | | | 4. How Twitter vs. Musk will end |  Data: Axios research; Chart: Erin Davis/Axios Visuals In the matter of Twitter vs. Elon Musk, there can be no winners — but the magnitude of losses involved, especially for Musk, ranges wildly depending on the outcome, Axios' Felix Salmon writes. Why it matters: If Twitter wins in Delaware court and forces Musk to buy the company for the agreed-upon $44 billion — a remedy known as specific performance — that would force the billionaire to liquidate a lot of stock he really doesn't want to sell, in order to buy a company he's soured on at a vastly overinflated price. - If Musk wins, however, or if he's allowed to walk away while paying no more than a $1 billion termination fee, then it's Twitter that will have suffered most from Musk's acquisition whimsy.
The big picture: The gap between the possible outcomes is so enormous that there's a strong incentive for both sides to come to one of two kinds of out-of-court settlement. - A cash settlement would see Musk pay significantly more than $1 billion to be released from his obligation to buy Twitter.
- A repricing would see Musk buy Twitter, but at a discount to the current $54.20 per share deal price.
It's largely up to Musk which way to go, depending on the degree to which he still thinks owning Twitter could be fun or profitable. The bottom line: None of these outcomes seems particularly likely or palatable right now. But this saga has to end with one of them. | | | | |  | | | | If you like this newsletter, your friends may, too! Refer your friends and get free Axios swag when they sign up. | | | | | | | | 5. 🎵 The '90s win |  Data: Luminate Music 360; Chart: Simran Parwani/Axios Music from the 1990s is more popular than music from any other decade right now — even current tunes, according to data that Luminate shared with Axios, Emily writes. Why it matters: Savor this moment ... a rare point of cross-generational consensus. They may not agree on bangs or jeans styles, but Gen Xers, millennials and "zoomers" (Gen Z) all appear to love '90s music. State of play: Americans born in the '90s and 2000s are listening to music from the decade they were born at higher rates than other generations listen to music from their birth decades — TikTok plays a role here. - And those born in the '60s - '80s, have increased their music consumption over the past couple of years as the pandemic drove an increase in streaming, said Rob Jonas, Luminate's CEO.
Context: The 1990s was the last pre-digital music era before Napster came along and blew up the business model. - The industry is now living off the music made in the before times, as artists' back catalogs from the '90s and earlier are seeing massive paydays, as Axios has reported.
- In the early months of 2022, audio streaming of current titles was down 3.5% year over year, according to Luminate. Meanwhile, streams of older catalogs (songs more than 18 months ago) are up 20% since last year.
💭 Emily's thought bubble: As a Gen Xer, I can say with confidence that the '90s was the last great decade for music. We had huge hits from a range of artists from Nirvana to Notorious B.I.G. to Whitney Houston. Don't @ me. | | | | | | | | A message from THE NORTHERN TRUST INSTITUTE | | Market Currents podcast: listen now | | |  | | | | Market Currents, a new podcast from the Northern Trust Institute, explores today's most hotly debated investment topics. What's in it for you: Listen as Wealth Management CIO Kate Nixon and guests use evidence to answer big market questions and provide the insight you need. Learn more. | | | | 🎧 1 thing Matt loves: Greeking Out, a National Geographic podcast offers a super-smart, accessible, family-friendly recounting of great stories from Greek mythology. The Twelve Labors of Hercules; Hades and Persephone, Arachne the Weaver, they're all there. My 5-year-old daughter loves it, which made sitting in traffic on the way home from vacation this weekend bearable. |  | | Why stop here? Let's go Pro. | | | | | | Axios thanks our partners for supporting our newsletters. If you're interested in advertising, learn more here.
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