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‘Mega bullish signal’ or ‘real breakdown?’ 5 things to know in Bitcoin this week

A bullish reversal into the new week rapidly gains attention, but sober analysts predict that this is just another relief bounce.
Bitcoin…

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A bullish reversal into the new week rapidly gains attention, but sober analysts predict that this is just another relief bounce.

Bitcoin (BTC) is bouncing back this week as a sudden surge challenges weekly highs.

In what should provide some desperately needed confidence to bulls, BTC/USD is back at weekly highs on May 30, gaining several percent overnight.

In contrast to recent weekly closes, the May 29 candle managed to limit the downside and reverse course immediately as the new week began.

Nonetheless, Bitcoin has now sealed nine red weekly candles in a row, something never seen before in its history.

Just how bearish is the largest cryptocurrency going into June? The macroenvironment remains troubled, while retail interest is nowhere to be seen and calls for a deeper capitulation remain.

That said, should it continue its latest strength, Bitcoin still stands a chance of breaking out of its current trading corridor.

Cointelegraph takes a look at the factors primed to move the market in the coming days.

Can Bitcoin avoid 10 weeks of red?

Thanks to an unexpected but welcome U-turn overnight into May 30, Bitcoin is breaking with tradition this week.

Asian trading provided the backdrop to some solid gains, with both Japan’s Nikkei and Hong Kong’s Hang Seng index up over 2% at the time of writing. The trigger came from news that China is planning to relax some of its latest COVID-19 restrictions and open up the economy.

Bitcoin, nonetheless, outperformed equities prior to European trading getting underway.

After an initial red hourly candle following the weekly close, BTC/USD abruptly rose from $29,300 to current levels nearing $30,700, data from Cointelegraph Markets Pro and TradingView shows.

BTC/USD 1-week candle chart (Bitstamp). Source: TradingView

While caution remains thanks to the weekly close still being red, Bitcoin could end its nine-week losing streak this week as long as next week’s closing price is at least $29,500.

For some, the overnight action alone has been enough to get noticeably more positive on the near-term outlook.

“Bitcoin on the verge of a mega bullish signal,” Jordan Lindsey, founder of JCL Capital,told Twitter followers:

“IMO not a time to be greedy looking for bottom ticks.”

Trader Crypto Tony noted that Bitcoin is still in a familiar trading range and should clear some key levels before being considered to have a firm trajectory. For him, this is $31,000, now not so far away.

Others focused on the idea of current gains being just another relief bounce and that Bitcoin should return lower afterward.

Popular trading account TMV Crypto, meanwhile, flagged the overnight lows as key support to hold going forward.

“Not sure if we should be very bullish here on BTC + ETH,” fellow trader and analyst Crypto Ed added in a Twitter thread posted on May 30.

He pointed to thin weekend volumes supporting the bounce, suggesting that higher levels did not have the bid interest required to cement themselves as new support yet.

“Saw some on my feed going short, which was understandable when seeing the weakness in the charts,” he continued:

“Once again a great example to be cautious over the weekend. Too often you get played on thin order books hence I prefer to not open new positions over the weekend.”

A CME futures gap left from May 27 at $29,000, meanwhile, provides a further bearish target.

CME Bitcoin futures 1-hour candle chart. Source: TradingView

Analyst: Stocks rebound is “bear market rally”

With United States markets closed for a public holiday on May 30, it will be up to Europe and Asia to dictate the day’s mood.

And, with the World Economic Forum behind them, crypto hodlers may be able to breathe a small sigh of relief going into the new month, prior to another U.S. Federal Reserve meeting in mid-June.

Asian stocks’ return to form after eight weeks of losses formed the major macro focus on the day.

After failing to take advantage of a similar rally in the U.S. last week, Bitcoin now appears to be capitalizing on the mood, which commentators nonetheless warn is likely not an indicator of an overall trend reversal.

Monetary tightening from the Fed and other central banks has not only got stock traders down but has ignited talk of a major recession as the price economies pay.

“We are in the middle of a bear market rally,” Mahjabeen Zaman, head of investment specialists at Citigroup Australia, told Bloomberg:

“I think the market is going to be trading rangebound trying to figure out how soon is that recession coming or how quickly is inflation going down.”

The tightening is due to become real this week. June 1 is thought to be when the Fed begins reducing its balance sheet, currently at a record high of $8.9 trillion.

The European Central Bank (ECB) will halt its asset purchases later in the year, it revealed last week.

May 31 will further see consumer price index (CPI) data released for the Eurozone, ahead of similar data for the U.S. on June 10.

“Stock Investors watching for signs of stability,” markets commentator Holger Zschaepitz wrote on May 28 alongside the CBOE Volatility Index:

“Wall St’s fear gauge, investors’ sentiment & bond spreads are tracked for clues on where the market might go next. But only one of the 5 sentiment indicators suggests that the worst is over in the markets.”
CBOE Volatility Index. Source: Holger Zschaepitz/ Twitter

Dollar strength tags one-month lows

Coming to test support levels throughout the past week has been the strength of the U.S. dollar.

After surging to levels not seen since December 2002, the U.S. dollar index (DXY) is finally coming back down to Earth and even challenging its year uptrend.

This may still act as a silver lining for risk assets should the trend continue, as inverse correlation has worked in Bitcoin’s favor in particular in the past.

“This could just be the start of the bull run of 2022!” an emboldened Crypto Rover argued, uploading a comparative chart showing the Bitcoin-DXY inverse correlation and how it played out in past years.

Bitcoin vs. DXY annotated chart. Source: Crypto Rover/ Twitter

Crypto Ed, however, is not convinced that the good times will be back, courtesy of ongoing dollar weakness.

“DXY is printing a reversal pattern, a falling wedge. Another reason for not being too enthusiastic for BTC,” a further tweet added.

Nonetheless, at 101.49, DXY was at its lowest since April 25.

U.S. dollar index (DXY) 1-day candle chart. Source: TradingView

Bitcoin nearing a “cyclic bottom”

Not everyone is bearish among Bitcoin analysts, and one of them, CryptoQuant CEO Ki Young Ju, has the data to prove why.

Uploading the latest readings from Bitcoin’s realized cap distribution, Ki argued that, in fact, BTC/USD is currently at a similar stage to March 2020.

Realized cap reflects the price at which each Bitcoin last moved, and can be broken down into age bands.

These, in turn, show the proportion of the BTC supply that makes up its realized cap which last moved a certain length of time ago.

Right now, 62% of the realized cap involves unspent transaction outputs (UTXOs) from six months ago or longer.

For Ki, this signifies floor territory for BTC price, as has been the case historically — and most significantly during the March 2020 COVID-19 crash.

“$BTC is getting close to the cyclic bottom,” he summarized:

“Now UTXOs over 6 months old take 62% of the realized cap. In the 2020 March great sell-off, this indicator reached 62% as well.”
Bitcoin realized cap UTXO bands vs. BTC/USD chart. Source: Ki Young Ju/ Twitter

CryptoQuant previously reported on UTXO data as it relates to the size of Bitcoin investor holdings, but drew more conservative conclusions.

Last week, it appeared that the largest Bitcoin whales were still distributing their holdings on-chain, while smaller whales could likely be propping up the market and preventing a March 2020-style cascade.

Sentiment hints at “long term buying opportunity”

It takes a lot of bullish price action to shift sentiment into the green in the current environment.

Related: Top 5 cryptocurrencies to watch this week: BTC, ETH, XTZ, KCS, AAVE

This goes for both Bitcoin and crypto more widely, as investors have endured over six months of what has been practically unchecked downside.

This remains the case this week — despite the overnight move up, sentiment remains firmly in the “extreme fear” zone across Bitcoin and altcoins.

The Crypto Fear & Greed Index is at just 10/100 as of May 30, a score which has accompanied generational price bottoms in previous years.

Crypto Fear & Greed Index (screenshot). Source: Alternative.me

May 2022 has been a particularly harsh period for sentiment, with Fear & Greed hitting just 8/100 earlier in the month — a level rarely seen and which last appeared in March 2020.

“Fear & Greed Index back down to 10 today,” Philip Swift, creator of on-chain analytics platform LookIntoBitcoin, responded:

“We have spent three weeks in Extreme Fear now with just sideways price action. Potential bottom forming?”

Commentator and analyst Scott Melker, known as the Wolf of All Streets, added that regardless of what might come next, sentiment revealed a “long term buying opportunity.”

“People are still becoming more fearful,” part of a Twitter post read.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph.com. Every investment and trading move involves risk, you should conduct your own research when making a decision.

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Government

JOLTs jolted: Did the Fed break the labour market?

In the Bureau of Labor Statistics (BLS) August release of the Job Openings and Labor Turnover Survey (JOLTS) report, the number of job openings, a measure…

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In the Bureau of Labor Statistics (BLS) August release of the Job Openings and Labor Turnover Survey (JOLTS) report, the number of job openings, a measure of demand for labour, fell to 10.1 million. This was short of market estimates of 11 million and lower than last month’s level of 11.2 million.

It also marked the fifth consecutive month of decreases in job openings this year, while the August unemployment rate had ticked higher to 3.7%, near a five-decade low.

In the latest numbers, the total job openings were the lowest reported since June 2021, while incredibly, the decline in vacancies of 1.1 million was the sharpest in two decades save for the extraordinary circumstances in April 2020. 

Healthcare services, other services and retail saw the deepest declines in job openings of 236,000, 183,000, and 143,000, respectively.

With total jobs in some of these sectors settling below pre-pandemic levels, the Fed’s push for higher borrowing costs may finally be restricting demand for workers in these areas.

The levels of hires, quits and layoffs (collectively known as separations) were little changed from July.

The quits rate (a percentage of total employment in the month), a proxy for confidence in the market was steady at 2.8%.

Source: US BLS

From a bird’s eye view, 1.7 openings were available for each unemployed person, cooling from 2.0 in the month prior but still above the historic average. 

The market still appears favourable for workers but seems to have begun showing signs of fatigue.

Ian Shepherdson, Economist at Pantheon Macroeconomics noted that it was too soon to suggest if a new trend had started to emerge, and said,

…this is the first official indicator to point unambiguously, if not necessarily reliably, to a clear slowing in labour demand.

Nick Bunker, Head of Economic Research at Indeed, also stated,

The heat of the labour market is slowly coming down to a slow boil as demand for hiring new workers fades.

Ironically, equities surged as investors pinned their hopes on weakness in headline jobs numbers being the sign of breakage the Fed needed to pull back on its tightening.

Kristen Bitterly, Citi Global Wealth’s head of North American investments added,

(In the past, in) 8 out of the 10 bear markets, we have seen bounces off the lows of 10%…and not just one but several, this is very common in this type of environment.

The worst may be yet to come

As for the health of the economy, after much seesawing in its projections, which swung between 0.3% as recently as September 27 and as high as 2.7% just a couple of weeks earlier, the Atlanta Fed GDPNow estimate was finalized at a sharply rebounding 2.3% for Q3, earlier in the week.

Rod Von Lipsey, Managing Director, UBS Private Wealth Management was optimistic and stated,

…looking for a stronger fourth quarter, and traditionally, the fourth quarter is a good part of the year for stocks.

As I reported in a piece last week, a crucial consideration that has been brought up many a time is the unknown around policy lags.

Cathie Wood, Ark Invest CEO and CIO noted that the Fed has increased rates an incredible 13-fold in a span of just a few months, which is in stark contrast to the rate doubling engineered by Governor Volcker over the span of a decade.

Pedro da Costa, a veteran Fed reporter and previously a fellow at the Peterson Institute for International Economics, emphasized that once the Fed tightens policy, there is no way to know when this may be fully transmitted to the economy, which could lie anywhere between 6 to 18 months.

The JOLTs report reflects August data while the Fed has continued to tighten. This raises the probability that the Fed may have already done too much, and the environment may be primed to send the jobs market into a tailspin.

Several recent indicators suggest that the labour market is getting ready for a significant deceleration.

For instance, new orders contracted aggressively to 47.1. Although still expansionary, ISM manufacturing data fell sharply to 50.9 global, factory employment plummeted to 48.7, global PMI receded into contractionary territory at 49.8, its lowest level since June 2020 while durable goods declined 0.2%.

Moreover, transpacific shipping rates, a leading indicator absolutely crashed, falling 75% Y-o-Y on weaker demand and overbought inventories.

Steven van Metre, a certified financial planner and frequent collaborator at Eurodollar University, argued

“…the next thing to go is the job market.“

A recent study by KPMG which collated opinions of over 400 CEOs and business leaders at top US companies, found that a startling 91% of respondents expect a recession within the next 12 months. Only 34% of these think that it would be “mild and short.”

More than half of the CEOs interviewed are looking to slash jobs and cut headcount.

Similarly, a report by Marcum LLP in collaboration with Hofstra University found that 90% of surveyed CEOs were fearful of a recession in the near future.

It also found that over a quarter of company heads had already begun layoffs or planned to do so in the next twelve months.

Simply put, American enterprises are not buying the Fed’s soft-landing plans.

A slew of mass layoffs amid overwhelming inventories and a weak consumer impulse will result in a rapid decline in price pressures, exacerbating the threat of too much tightening.

Upcoming data

On Friday, the markets will be focused on the BLS’s non-farm payrolls data. Economists anticipate a comparatively small addition of jobs, likely to be near 250,000, which would mark the smallest monthly increase this year.

In a world where interest rates are still rising, demand is giving way, the prevailing sentiment is weak and companies are burdened by excessive inventories, can job cuts be far behind?

The post JOLTs jolted: Did the Fed break the labour market? appeared first on Invezz.

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Economics

Dollar Slump Halted as Stocks and Bonds Retreat

Overview: Hopes that the global tightening cycle is entering its last phase supplied the fodder for a continued dramatic rally in equities and bonds….

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Overview: Hopes that the global tightening cycle is entering its last phase supplied the fodder for a continued dramatic rally in equities and bonds. The euro traded at par for the first time in two weeks, while sterling reached almost $1.1490, its highest since September 15. The US 10-year yield has fallen by 45 bp in the past five sessions. Yet, the scar tissue from the last bear market rally is still fresh and US equity futures are lower after the S&P 500 had its best two days since 2020. Europe’s Stoxx 600, which has gained more than 5% its three-day rally is more around 0.9% lower in late morning turnover. The large Asia-Pacific bourses advanced, led by a nearly 6% rally in Hong Kong as it returned from holiday. Similarly, the bond market, which rallied with stocks, has sold off. The US 10-year yield is up around seven basis points to 3.70%, while European yields are 7-14 bp higher. Peripheral premiums are also widening. The dollar is firmer against most G10 currencies, with the New Zealand dollar holding its own after the central bank delivered was seems to be a hawkish 50 bp hike. Emerging market currencies are mostly lower, including Poland where the central bank is expected to deliver a 25 bp hike shortly. After rising to $1730 yesterday, gold is offered and could ease back toward $1700 near-term. December WTI is consolidating after rallying around 8.5% earlier this week as the OPEC+ decision is awaited. Speculation over a large nominal cut helped lift prices. US and European natural gas prices are softer today. Iron ore is extended yesterday’s gains, while December copper is paring yesterday’s 2.35% gain. December wheat is off for a third session, and if sustained, would be the longest losing streak since mid-August.  

Asia Pacific

The Reserve Bank of New Zealand quickly laid to rest ideas that the Reserve Bank of Australia's decision to hike only a quarter of a point yesterday instead of a half-point was representative of a broader development. It told us nothing about anything outside of Australia. The RBNZ delivered the expected 50 bp increase and acknowledged it had considered a 75 bp move. In addition, it signaled further tightening would be delivered. It meets next on November 23, and the market has more than an 85% chance of another 50 bp hike discounted.

Both Australia and Japan's final service and composite PMI were revised higher in the final reading. Japan's service PMI was tweaked to 52.2 from 51.9. It was 49.5 in August. Similarly, the composite is at 51.0, up from 50.9 flash reading and 49.4 in August. In Australia, the service and composite PMI were at 50.2 in August. The flash estimate put it at 50.4 and 50.8, respectively. The final reading is 50.6 and 50.9 for the service and composite PMI.

Softer US yields weighed on the dollar against the yen. On Monday, it briefly traded above JPY145. Today, it traded at a seven-day low, slightly above JPY143.50. US yields are firmer, and the greenback has recovered and traded above JPY144.50 in early European turnover. The intraday momentum indicators are getting stretched, and the JPY144.75 area may cap it today. The Australian dollar traded to almost $.06550 yesterday but has struggled to sustain upticks over $0.6520 today. Initial support is seen in the $0.6450-60 area. Trade figures are out tomorrow. The New Zealand dollar initially rose to slightly through $0.5800 on the back of the hike but has succumbed to the greenback's strength. It returned little changed levels around $0.5730 before finding a bid in Europe. The US dollar reached CNH7.2675 last week and finished last week near CNH7.1420. It fell to almost CNH7.01 today and bounced smartly. A near-term low look to be in place, a modest dollar recovery seems likely. 

Europe

UK Prime Minister Truss will speak at the Tory Party Conference as the North American session gets under way. We argued that calling retaining the 45% highest marginal tax rate a "U-turn" was an exaggeration and misreading of the new government. It was the most controversial part of the mini budget apparently among the Tory MPs. This was a strategic retreat and a small price to pay for the other 98% of Kwarteng's announcement. Bringing forward the November 23 "medium-term fiscal plan" (still to be confirmed with specifics) is more about process than substance. The fact that she seems to be considering not making good her Tory predecessor pledge to link welfare payments to inflation suggests she has not been chastened by the cold bath reception to her government's first actions. However, on another front, Truss is changing her stance. As Foreign Secretary she drafted legislation that overrode the Northern Ireland Protocol unilaterally. In a more profound shift, she has abandoned the legislation and UK-EU talks resumed this week Truss is hopeful for a deal in the spring. Lastly, we note that the UK service and composite PMI were revised to show smaller deterioration from August. The service PMI is at 50 not 49.2 as the flash estimate had it. It was at 50.9 previously. The composite remains below 50 at 49.1, but the preliminary estimate had it at 48.4 from 49.6 in August. 

Germany's announcement of the weekend of a 200 bln euro off-budget "defensive shield" has spurred more rancor in Europe. Not all countries have the fiscal space of Germany. Two EC Commissioners called for an EU budget response. They seem to look at the 1.8 trillion-euro joint debt program (Next Generation fund) as precedent. This is, of course, the issue. During the pandemic, some suggested this was a key breakthrough for fiscal union, a congenital birth defect of EMU. However, this is exactly what the fight is about. If there is no joint action, the net result will likely be more fragmentation of the internal markets. Still, the creditor nations will resist, and Germany's Finance Minister Linder was first out of the shoot. While claiming to be open to other measures, Linder argued that challenge now is from supply shock, not demand. On the other hand, the European Parliament mandated that all mobile phones, tablets, and cameras are equipped with USB-C charge by the end of 2024. The costs savings is estimated to be around 250 mln euros a year. No fiscal union, partial banking, and monetary union, but a charger union.

The final PMI disappointed in the eurozone. The Big 4 preliminary readings were revised lower, suggesting conditions deteriorated further since the flash estimates. It was small change, but the direction was uniform. On the aggregate level, the service PMI was revised lower to 48.8 from 48.9 and 49.8 in August. The composite reading eased to 48.1 from 48.2 preliminary estimate and 48.9 in August. Italy and Spain, for which there is no flash report, were both weaker than expected, further below the 50 boom/bust level. France was the only one of these four that had a composite reading above 50 and improved from August. Separately, France reported a dramatic 2.4% rise in the August industrial output. The median forecast in Bloomberg's survey was for an unchanged report. Lastly, we note that Germany's August trade surplus was a quarter of the size that economists (median in the Bloomberg survey) expected at 1.2 bln euros instead of 4.7 bln. Adding insult to injury, the July balance was revised to 3.4 bln euros from 5.4 bln.

The euro stalled near $1.00 yesterday, the highest level since September 20. However, it has come back better offered today and fell slightly below $0.9925 in early European activity. Initial support is seen around $0.9900 and then $0.9840-50. The euro finished last week slightly above $0.9800. We suspect that market may consolidate broadly now ahead of Friday's US jobs report. The euro's gains seem more a function of short covering than bottom picking. Sterling edged a little closer to $1.15 but could not push through and has been setback to about $1.1380. The intraday momentum indicators allow for a bit more slippage and the next support area is around $1.1350.

America

Fed Chair Powell has explained that for inflation, one number, the PCE deflator best captures the price pressures. However, he says, the labor market has many dimensions and no one number does it justice. Weekly initial jobless claims fell to five-month lows in late September. On the other hand, the ISM manufacturing employment index fell below the 50 boom/bust level for the fourth month in the past five. The JOLTS report showed the labor market easing, with job openings falling by nearly a million to its lowest level in 14 months. Yet, despite the talk about the Reserve Bank of Australia's smaller cut as some kind of tell of Fed policy (eye roll) and the drop in JOLTS, the fact of the matter is that the market view of the trajectory of Fed policy has not changed. Specifically, the probability of a 75 bp hike is almost 77% at yesterday's settlement, which is the most since last Monday. The terminal rate is still seen in 

Attention may turn to the ADP report due today but recall that they have changed their model and explicitly said that it is not meant to forecast the national figures. Those are due Friday. Also, along with the ADP data, the US reports the August trade figures today. We are concerned that the US trade deficit will deteriorate again and note that dollar is at extreme levels of valuation on the OECD's purchasing power parity model. That may be a 2023 story. What counts for GDP, of course, is the real trade balance, and in July it was at its lowest level since last October. Despite the strong dollar, US goods exports reached a record in July. Imports fell to a five-month low, which, at least in part, seems to reflect the difficult in many consumer businesses in managing inventories. The final PMI reading is unlikely to draw much attention. The preliminary reading had the composite rising for the first time in six months but still below the 50 at 49.3. The ISM services offer new information. The risk seems to be on the downside of the median forecast for 56.0 from 56.9.

Yesterday, we mistakenly said that would report is August building permits and trade figure, but they are out today. Permits, which likely fell for the third straight month, as the tighter monetary policy bits. The combination of slowing world growth and softer commodity prices warns the best of the positive terms-of-trade shock is behind it. The trade surplus is expected to fall for the second consecutive month. Even before the RBA delivered the 25 bp rate hike, the market had been downgrading the probability of a half-point move from the Bank of Canada. Last Thursday, the swaps market had it as a 92% chance. At the close Monday, it had been downgraded to a little less 72%. Yesterday, it slipped slightly below 65%. Further softening appears to be taking place today, even after the RBNZ's 50 bp hike. The odds have slipped below 50% in the swaps market.

After finishing last week slightly above CAD1.38, the US dollar has been sold to nearly CAD1.35 yesterday. No follow-through selling has been seen and the greenback was bid back to CAD1.3585. The Canadian dollar has fallen out of favor today as US equity index futures are paring gains after two strong advances. There may be scope for CAD1.3630 today if the sale of US equities resumes. The greenback has found a base around MXN19.95. The risk-off mod can lift it back toward MXN20.10-15. Look for the dollar to also recover more against the Brazilian real after bouncing off the BRL5.11 area yesterday.

 


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Economics

An Auto Parts Winner in a Greener Future

Investors Alley
An Auto Parts Winner in a Greener Future
The global auto industry is in an all-out drive toward a cleaner and greener future.However, for…

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Investors Alley
An Auto Parts Winner in a Greener Future

The global auto industry is in an all-out drive toward a cleaner and greener future.However, for some suppliers to the auto industry, it has not been a pleasurable joyride.

Instead, current conditions are more like driving on a icy, treacherous mountain road in the middle of a blizzard. Only the most skilled drivers will make it to the bottom of the metaphorical mountain intact.

Tough Sledding for Auto Suppliers

Most auto suppliers are already feeling a squeeze due to rising energy prices and rampant inflation in other parts of the supply chain. They have little choice but to shoulder most of the extra costs of making their components sustainable to help the automakers meet their environmental targets.

And make no mistake: the carmakers are pushing their suppliers hard. For example, Reuters reports that BMW expects all of its battery and many of its steel and aluminum providers to produce materials made using renewable energy, while Volvo Car is targeting 25% recyclable plastic in its cars by 2025.

Consequently, many suppliers to the automobile industry are making large investments to “green” their companies, doing everything from developing recyclable parts to using renewable energy.

Simultaneously, many of these same firms have little leeway to raise the prices they’re charging automakers, which are themselves focused on reducing costs. Automakers are spending tens of billions of dollars to shift their focus to producing electric vehicles.

This difficult situation faced by the auto parts industry was summed up nicely by Joe McCabe, CEO of the research firm AutoForecast Solutions, who told Reuters: “We use the term disruptive all the time, but it’s much more than just disruptive. We’re going to see a real big shakeout the next five, 10 years in the auto supply chain.”

In other words, the auto industry’s move to a greener future, alongside the supply-chain problems that began during the pandemic and soaring costs, has killed the profit margins for auto parts suppliers and created a perfect storm for the industry.

It is likely that only the strongest and shrewdest companies will survive this extinction event in the sector. The rest will go the way of the dinosaur.

One company that I believe will survive is TE Connectivity (TEL). It is able to pass along price increases to its customers, and it pays a dividend, too.

TE Connectivity

TE Connectivity is an American-Swiss technology company that designs and manufactures connectors and sensors able to withstand harsh environments for a number of industries. These industries include automotive, industrial equipment, communications, aerospace and defense, medical, energy, and consumer electronics.

Going green is costly for even the biggest suppliers, and TE Connectivity certainly isn’t immune. But it is a bit ahead of the curve, having launched its own sustainability drive in 2020. The company is presently working on recyclable products with automakers including Volkswagen, Volvo and BMW.

Of course, TE Connectivity continues to face supply chain challenges—but it seems to be navigating the headwinds well, as indicated by its continued price increases to customers that aid the company in offsetting inflationary pressures.

And the long-term thesis of growth that stems from increased vehicle electrification is holding up well, as management reaffirmed in its latest quarterly earnings results. Management expects electric vehicle production to be up more than 30% for the year, while the total automotive production environment is expected to remain flat.

The company’s third-quarter sales grew 7% year over year, and 2% sequentially, to $4.1 billion. Organic growth could be seen across all business segments.

Some of TE Connectivity’s other businesses, outside of automotive, did extremely well. Two of the largest growth areas were in the industrial equipment and data and devices end markets. Both grew at 27% on a year-over-year basis.

The industrial equipment segment saw continued benefits from increased factory automation applications, while the data and devices segment achieved its outperformance thanks to market share gains in artificial intelligence applications and high-speed cloud content growth.

TE Connects to the Future

The company’s balance sheet is sound, with very low net debt to EBITDA. That allows it to return an appropriate amount of capital to shareholders.

Management’s goal is to return two-thirds of free cash flow to shareholders, of which one third will fund the firm’s dividend (current yield is 2%) and the other third will be used for opportunistic share repurchases. However, this goal is often exceeded when management doesn’t find value-accretive deals for its cash.

TE Connectivity has raised its cash dividend every year since 2010. Over the past five years, the company has returned an average of more than 80% of its free cash flow to shareholders.

TE Connectivity has maintained a leading share of the global connector market for the last decade,

thanks to its dominance in the automotive connector market, from which it derives nearly 50% of its revenue. I do not expect the company to lose its dominant position. Morningstar reports: “While the firm’s entire business benefits from trends toward efficiency and connectivity, these are especially notable in cars, where shifts toward electric and autonomous vehicles provide lucrative opportunities.”

Just like other tech-related stocks this year, current market conditions have hit TE Connectivity, with a drop of 29%. It is a buy anywhere up to $120 per share.

The most ‘perfect’ dividend stock I’ve ever found

It’s raised its dividend 37.5% on average, could be acquired, benefits from rising interest rates, trading at massive discount, and pays an 8% yield. This is my top pick for income during a rough market.Click here for details.

 

An Auto Parts Winner in a Greener Future
Tony Daltorio

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