Boockvar on Midterms, Data Centers, Oil
The following is from Peter Boockvar:
A tsunami but how many will get built?/Bull case for oil/Other notables
That was not a blue wave but a tsunami to a jaw dropping extent as voters revolted against the pain of inflation, both for businesses and consumers but I’ll leave the politics from here to others because as investors and market participants we have to be dispassionate and apolitical and focus more on what the actual economic and market impacts of policy will be. As I said yesterday, from the standpoint of DC, a split government will lead to no change in really anything at the federal level over the next two years.
That said, just as oil people count barrels, the results of the Governorships will have us counting data centers and we’ll have to assume we’re going to now get less of them as was threatened on the campaign trail. I think the question from here is whether the data center industry pivots to those states that want them. The Federal Reserve needs to start counting too as it of course feeds directly into the pace of growth, inflation and the state of the stock market.
I’m going to include here what Comfort Systems said on their earnings call a few weeks ago, the provider of HVAC systems:
“So if you were a large hyperscaler and you were laying your bets on which states you wanted to do work in, where you place your bets, where you go do your work and make your commitments is going to be influenced by your perception of whether the Governor in that state wants people in that state to have jobs, right?”
For those of you (me) who went to bed when the S&P futures were down around 100, it was about 1am est when they started to rebound and I have no idea why other than maybe getting saved by AMD’s results and at least clarity on the election results, whether one is happy with them or not.
I’m going to highlight the US dollar that in response to the election results is trading at its lowest level in 5 weeks (though still in an uptrend technically) and in turn gold is rallying by 2.8%. Also helping, maybe, was the news yesterday that central bankers are very much interested in owning more of it.
Of focus today too, at 8:30am est we’ll hear details on the Treasury refunding plan in terms of maturity cadence.
DXY
With another dip in the average 30 yr mortgage rate to 7.3%, refi’s were flat after rising last week. Purchases fell 2% w/o/w after rising last week for the first time in 8 weeks.
If you’re long oil, I believe this is the bull case from here.
Very noteworthy from Saudi Aramco on the oil markets and the reasoning partly why we remain long the space:
“Since disruptions began, the global market has lost over 3 billion barrels of liquid supply. Alternative flows including export via our East-West pipeline and strategic petroleum reserve releases have narrowed the cumulative deficit to around 2 billion barrels. The remaining gap was balanced by demand management and substantial withdrawals from commercial inventories. While these actions have bought time, they are not a permanent solution.”
“The resulting market tightness is increasingly evident in physical prices. Buyers competing for immediately available barrels have driven physical prices above futures, and strong demand with constrained supplies has pushed refining margins to record levels.”
“Looking ahead, the market faces additional pressure from both seasonal and structural demand. Global product stocks are now alarmingly low, particularly for diesel, and with diesel demand expected to increase further in Q4, the market faces further pressure heading into winter. In 2027, global liquids demand is projected to expand by around 2.4 million barrels per day as demand management measures ease.”
“Beyond meeting additional demand, the market also faces the challenge of replenishing depleted inventories. More oil will be needed to rebuild inventories and fill additional storage capacity, a process which could take up to two years.”
From AMD, up this morning:
“Data center revenue growth has accelerated sequentially every quarter this year, with the segment contributing 64% of total revenue in the third quarter, up from 47% just one year ago. We expect that acceleration to continue in the fourth quarter, driven by increased demand for inference and agentic workloads and the ramp of our newest products.”
“We now expect server revenue to double y/o/y in 2027, and data center AI revenue to grow even faster than we projected 90 days ago. As a result, we expect Data Center to be more than 80% of our total revenue in 2027 and to drive the majority of our revenue and earnings growth.”
The area of weakness, “PC sell through slowed late in the quarter as higher memory and component costs weighed on demand…In 2027, we are planning for PC market unit shipments to decline by a double digit percentage.”
From Eaton, up 7% yesterday, has been a big beneficiary of the data center buildout with their electrical equipment:
“Growth in Electrical Global was even stronger with 27% organic growth and strength across all end markets. And across the business, demand is both accelerating and broadening. Our Electrical and Aerospace combined book-to-bill remained strong at 1.2…While demand is broad based across end markets, you can see here that the data center orders for the 12 months rolling are over 100% and revenues up 65% remain really strong.”
Most don’t think Expeditors International when referring to the AI data center buildout but the logistics broker said this:
“Airfreight demand remained strong during the quarter, with record global air tonnage increasing approximately 13% y/o/y, driven primarily by continued growth in South Asia, where export tonnage increased most notably.Hyperscaler demand, which also includes shipments from Tier 1 and Tier 2 suppliers supporting AI infrastructure, was a significant driver of volume growth, while air capacity remains constrained by limited fleet expansion and ongoing new aircraft delivery delays.”
From Sysco, down 9% yesterday:
“Traffic to restaurants per Black Box was down 2% in the quarter. The traffic performance for the quarter is consistent with the calendar y/o/y performance and remains a headwind for the industry. Additionally, the Cyclospora outbreak had an adverse impact on the middle of the quarter, softening traffic to restaurants and restaurant operator volume during August.”
“Sysco specifically had stronger volume performance in July and September as customers bounced back quickly after the Cyclospora traffic headwind.”
“Rising fuel costs are impacting the supply chain and end customers…inbound logistics costs have risen due to the continued increase in diesel fuel…Our team has done an excellent job of hedging fuel costs on the outbound delivery aspect of our business, but the rising cost of fuel is harmful to end consumer disposable income.”
“Lastly, food cost inflation came in lower than planned during the quarter…The deflation of food in Q1 was helpful for end consumers but create some short-term pressure on our P&L.”
With their guidance, “Based on the current outlook, we expect inflation of approximately 1% to 1.5%.” With fuel, they have customer surcharges that mitigates their own costs.
From Shopify, also down 9% yesterday:
With regards to the agentic shopping revolution and its impact on retail, “Now while the volume is still small here, adoption is growing and the early signals show that this has the potential to become a very powerful service area. Here’s what we’re seeing. AI traffic is up 2.6x y/o/y. Orders are growing even faster at 3.3x. AI channels are sending shoppers straight to product pages at 3x the rate of organic search, and shoppers are converting 64% more often.”
There was not one question about what they are seeing with consumer spending on the call but on CNBC, Harley Finkelstein, the President, basically said consumer spending is fine based on what they see.
From Yum Brands, down a touch yesterday and the owner of KFC and Taco Bell:
“From a low point in July, Taco Bell US same store sales strengthened week after week, and since the end of September, the brand has been outperforming the QSR industry on same store sales growth.”
With KFC US, “the brand continues to navigate a competitive QSR environment.”
In the fast lane of the economy, pun intended, Ferrari rallied almost 3% yesterday and said this:
“we see healthy demand across all the models and across all the geographies. There are some areas where, for example, the hybrid is preferred to ICE and vice versa, or the six cylinder to eight cylinder. But we see a healthy demand across all the models and I would say we are very pleased about the product we are able to offer our clients.”
From Booking Holdings, with mixed results and a stock down a touch premarket:
“Travel demand was resilient in the quarter, although we saw some moderation towards the end of the period. Prices increased as we saw constant currency ADRs up approximately 3% y/o/y, primarily driven by Europe but also by the US and Asia.”
“We saw a slight expansion in the booking window in Europe and at the global level, while the booking window in the US moderately contracted.”
“Looking at room night growth by booker region, Europe grew high single digits…Asia grew high single digits…US grew mid single digits.”
“Moving to our thoughts for the fourth quarter, the travel environment is mixed…Domestic travel continues to hold up, as we are seeing travelers take shorter trips and choose destinations closer to home. In October, a number of external factors have also affected demand, including disruptions to travel to and from the Middle East, the conflict’s broader indirect effects, such as elevated airfares and localized unrest in certain European cities.”
Avis Budget said something similar in their earnings release, “The third quarter demonstrated continued progress in how we manage our fleet, with third-quarter Americas utilization being the best we have had in 20 years despite a softer travel demand environment.”
Ahead of the US ISM services index, China’s private sector October services PMI fell to 50.8 from 51.6. Hong Kong’s got back above 50 at 50.2, up 1 pt. In Singapore, its PMI remained well above 50 but a bit less so at 56.7 vs 58.1.
In the Eurozone, headline inflation rose 4% y/o/y in October, up from 3.8% in September but as expected. The core rate was higher by 2.5%, the same pace seen last month and also in line. Services inflation in particular was up 3.3% y/o/y and non-energy industrial goods prices grew by 1.2% y/o/y. As there were no surprises, European bond yields are down slightly but we might get another rate hike from the ECB next month.
The final Eurozone October services PMI was 51.4 vs 53 last month with not surprisingly a 5 pt decline in French services to 46.2. The final UK services PMI rose .7 pts m/o/m to 52.8 which is the highest since February.
Eurozone CPI y/o/y
