Bacotgus: Is the Omicron variant already hurting the economy?: Morning Brief

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A random walk down Wall Street could unearth a lot right about now.

I was walking back from a power lunch (remember those?) late last week in my former stomping grounds of Wall Street and Broadway. I reached Broadway and got swept into a makeshift COVID-19 testing line (see picture below).

My first thoughts:

Dang this is a long line, haven't seen these in a while.
Just the fact these people are waiting in line for a test hints lost productivity for businesses.
I need to get the hell off this line.

On my way home, I passed three CityMD health clinics. Long lines were outside. I thought the same things as above, and made notes on my iPhone. I then got a call saying an event I was supposed to go to that night was nixed due to Omicron concerns. I made note of that, too, in my trusty iPhone.

This past weekend, I visited the malls for a few last minute gifts. Things seemed oddly quiet for the final shopping week before Christmas, and less vibrant compared to Black Friday weekend (trust me on this, I have been doing it long enough, you just get vibes from malls on key buying periods like the holidays). Best Buy also seemed meh inside.

On Sunday, I checked out the restaurant reservation data supplied each day from OpenTable (see below). Hardly encouraging.

Demand at restaurants looks to be weakening, again.

I then went out to get gas in my car and groceries. A new sign at the checkout said the grocer is having problems getting paper goods. Where have we heard that before?

All of this is anecdotal evidence of the Omicron variant beginning to take its toll on the U.S. economy. I totally get it, and don't expect you to sell all your stocks and hide out in cash because of stuff I saw over the course of a week.

But what my experience should remind you is that incoming economic data could begin to show the latest variant is starting to weigh on the economic recovery to an extent not priced into stocks. You should be on the lookout for these signs, especially considering how stupidly bullish the Street remains on equities into 2022 as if everything is great in the world.

Check out these insane stats from FactSet senior earnings analyst John Butters:

"Overall, there are 10,785 ratings on stocks in the S&P 500. Of these 10,785 ratings, 56.8% are Buy ratings, 37.2% are Hold ratings, and 6.0% are Sell ratings. It is interesting to note that even with a 24% price increase since the end of last year (December 31, 2020), analysts are more optimistic on S&P 500 stocks today compared to December 31, 2020, based on the percentages of Buy ratings. On December 31 (2020), 53.7% of ratings on S&P 500 stocks were Buy ratings compared to 56.8% today. Nine sectors have a higher percentage Buy ratings now compared to December 31 (2020), led by the Real Estate (to 54% from 47%) and Materials (to 56% from 50%) sectors. Two sectors have a lower percentage of Buy ratings now compared to December 31 (2020): Consumer Staples (to 42% from 46%) and Utilities (to 49% from 51%)."

Stay safe out there. Keep your eyes open. And as always, Happy trading!

Odds and ends

Welcome to public markets, Zegna: I'm looking forward to welcoming Zegna CEO Gildo Zegna on Yahoo Finance Live to discuss the company's market debut on the New York Stock Exchange. Gildo has led Zegna since 1997, and is the grandson of the company's founder — so I suspect he will share some fascinating insights into the 111-year-old fashion brand. Similar to last weekend ahead of the Getty Images IPO (more on its IPO from CEO Craig Peters here), I spent this weekend diving into all things Zegna. Couple things I like: (1) Controlled distribution globally to protect margins and brand integrity; (2) Outsized exposure to historically strong China luxury market (51% of sales from Asia Pacific); (3) Zegna family will have a 66% controlling stake in the company (they know what they are doing, if they didn't they wouldn't be around for 111 years); (4) Company is growing sales and profits this year; (5) Damn strong brand — you think of luxury, you think of Zegna; (6) Clear line of sight to at least a couple hundred basis points of operating margin improvement by 2023; (7) ESG-focused brand.

Bottom line, expect a lot of Buy rating initiations by sell-side analysts on Zegna in a few weeks. The company is merging with a SPAC Investindustrial. Its ticker symbol will be ZGN.

Important data releases: Mark your calendar, the final reading on December consumer sentiment from the University of Michigan is on Dec. 23. MKM Partners chief economist and strategist Michael Darda explains the rising importance of this report (and initial jobless claims, out the same day): "With policymakers starting to panic over rising case counts due to the Omicron variant as we move into the holidays, our best bet aside from tracking the financial markets is to watch the evolution of weekly confidence (up four out of the last six weeks) and first-time jobless claims (holding in at multi-decade lows). It likely remains too soon to expect to see any fallout from either household hesitation and/or the imposition of public restrictions and, given the ongoing rebound that occurred through the Delta wave, we may not."

Popular big-cap tech stocks: The FAANG complex (Facebook/Meta; Amazon; Apple; Netflix; Google) had a rough go of it last week as investors wound down positions amid the hawkish Federal Reserve interest rate pivot. The NYSE FANG+ Index — which tracks these high growth tech stocks that shudder at the thought of higher interest rates — fell 4.5% last week. The index tested its 200-day moving average on Friday before bouncing a touch, notes NYSE senior market strategist Michael Reinking. My read: Don't fight the market on these names. The FAANGs could come back into favor early January as fund managers look to buy up perceived bargains.

Should you buy a new car now? Here's a sobering assessment on the outlook for new and used car pricing by Jan Hatzius, Goldman Sachs' chief economist, in a weekend note to clients. "Despite recent appreciation, prices of new cars remain unsustainably low relative to used models, suggesting more inflation in the pipeline. Comparing top-selling new models to Kelley Blue Book values, we find that used models from two years ago are currently selling for ~10% more than their 2022 counterparts — despite the latter’s better technology and zero mileage. The emergence of the Omicron variant represents an additional source of upside risk. Past lockdown activity in both China and Malaysia lowered U.S. chip supply."

Added Hatzius, "We expect further increases in new and used car prices during the first quarter of 2022. Our updated baseline assumes new car prices peak in Q2 (vs. Q1 previously) and used car prices peak in Q1 (vs. December 2021 previously)." If you are buying what Hatzius is pitching here (and think delayed return to office plans will support a new wave in car sales, similar to mid-2020 pandemic times), then the plays are Carvana and AutoNation. Carvana has put up impressive results throughout the pandemic, and it's probably not justified that the stock is down 39% from its 52-week high on Aug. 10. As for AutoNation, it has been a financial beast throughout the pandemic — delivering very strong quarters and plowing a ton of money into buying back its stock. AutoNation's stock is down 14% from its 52-week high on Oct. 25.

Other business news: Nice work by the Bloomberg team with this look into why GM CEO Mary Barra booted her one-time rival for the top job last week. The FT just dropped an in-depth profile of incoming New York City Mayor Eric Adams. His to-do list is plenty full, as the FT discusses. Perhaps some relief is on the way for supply chains, Yahoo Finance's Dani Romero reports. Who doesn't want to start their week getting updated on the latest Britney Spears drama. The New York Times followed the money on Spears, and runs down why her business manager may have did Brit dirty. "Picking stocks in an attempt to beat market averages is an incredibly challenging and sometimes money-losing effort," says TKer founder Sam Ro (and former author of this newsletter). Give his latest piece for Yahoo Finance a read.

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

What to watch today

Economy

Earnings

Pre-market

Post-market

4:00 p.m. ET: Micron (MU) is expected to report adjusted earnings of $2.12 per share on revenue of $7.68 billion
4:15 p.m. ET: Nike (NKE) is expected to report adjusted earnings of 63 cents per share on revenue of $11.26 billion

Politics