Warner Bros Plot Twist, Block to Ax 4,000, Nvidia Down

Thick is the Skin

Knocked down, I've been down before

Yet, still we bare the load

If I would want it anymore

I just might explode

All your heroes have died

And left you to rise from the ashes

And live for today

- Sabo, Solinger, Varone, Bolan-Southworth, Mulvehill (Skid Row), 2003

Friday, Fri-Yay!

Already? You've made it this far. Just drop and start pushing. Give me what you've got, you guardians of all that is pure. Can't do push-ups? Do something else, but don't just sit there looking at this computer screen. I want to hear your guttural roar from here. Let me know that you live. Let me know that you care. Let me know that yes, you will fight for something, today. The weekend beckons, but the contest for February is not yet over. Wade... into that abyss. Show no fear. Fear is but for the wicked, and my friends.... the wicked shall tremble before us. So, let it be done. Always faithful.

"I am not afraid... I was born to do this."

- Joan of Arc (1412-1431)

Winners & Losers?

Readers may recall way back when this absurd battle for Warner Bros Discovery  (WBD)  began, I wrote that whoever wins this fight will be the real loser. I just did not see what had become of Warner Bros Discovery as worth what Paramount Skydance  (PSKY)  and Netflix  (NFLX)  were willing to pay for it. Well, we'll find out because it finally happened on Thursday evening.

Paramount Skydance made a superior $31 per share cash bid for Warner Bros Discovery and Netflix walked away from the deal as it no longer found the deal "financially attractive." Who is the winner? Overnight, I now see Netflix trading more than 7% higher as this potential monkey is off of their back. But I also see that Paramount is trading more than 9% higher. Can both of them actually be winners here?

The oddity is this. WBD is trading with a $28 handle, down more than 2% since the closing bell on Thursday, despite the $31 bid ($108 billion overall) that comes with the $2.8 billion breakup fee that WBD now owes Netflix. Paramount has also agreed to pay a $7 billion breakup fee should somehow fr regulatory reasons, this deal does not go through to completion.

So, why is WBD trading well below what seems like a certain $31 per share? I am a little surprised by this. It is not all that uncommon for there to develop a merger related arbitrage gap due to the uncertainty that surrounds any deal until that deal closes.

That said, given the relationship between Pres. Trump and the Ellison family, one would think the regulatory risk around this deal to be somewhat diminished from what might have transpired had Netflix won the auction. WBD shareholders will vote on the deal on March 20.

Just beware... Paramount is relying on using more than $50 billion worth of new debt to finance the cash bid. That's a lot and the market must feel that there is risk connected to actually closing given that level of debt, especially for a company with a BB+ (junk) credit rating at S&P Global.

Exactly What We've Discussed

On Thursday evening, Block  (XYZ) , the fintech company led by co-founder and CEO Jack Dorsey, announced that it will cut its workforce nearly in half, laying off more than 4,000 employees. Unlike other companies that have downplayed the impacts of agentic AI when announcing layoffs, Dorsey, who left his post as CEO of Twitter in 2021, embraced the concept.

With an entire economy now on pins and needles when it comes to the potential for agentic AI to impact demand for labor, Dorsey wrote, "Intelligence tools have changed what it means to build and run a company. We're already seeing it internally. Dorsey went on... "A significantly smaller team, using the tools we're building, can do more and do it better. And intelligence tool capabilities are compounding faster every week."

This makes Dorsey one of the first business leaders to openly embrace AI as a replacement for human labor. Amazon  (AMZN)  has laid off about 30,000 people since October. At that time, CEO Andy Jassy inferred that technological progress would reduce Amazon's white-collar payroll but was far more cautious in his presentation.

In January, Amazon, along with United Parcel Service  (UPS) , Dow  (DOW) , Nike  (NKE) , and Home Depot  (HD)  all announced coming rounds of layoffs that would total roughly 52,000 jobs. How much of that is AI-related? How many other companies, to include non-tech firms, are yet to make announcements? Margins will rise as the costs associated with labor dwindle, but at some point, as the Citrini Research paper points out, the consumer as an aggregate, weakens. Perhaps substantially.

Marketplace

On Thursday, the major U.S. equity indexes took a step backward. Nvidia  (NVDA)  had posted one of the greatest quarters in corporate history the night prior and provided strong guidance to no avail. The stock gave up 5.5% in a "sell the news" event that turned into a sharp rotation out of semiconductors as an industry and into some of the more cyclical groups.

The Nasdaq Composite surrendered 1.18% on Thursday as the S&P 500 gave back 0.54%. The rest of the market really was not that weak. The Dow Transports added 2.14% as the KBW Banks gained 1.14%. All of the small- and mid-cap indexes closed in the green as well. Treasury debt securities were in demand as well. The U.S. Ten-Year Note paid just 4.01% at day's end and pays just 3.99% as I work on this morning note.

Breadth

Five of the 11 S&P sector SPDR exchange-traded funds ended the regular trading session in the win column on Thursday, led by the Financials  (XLF)  and the Industrials  (XLI) . Technology  (XLK)  led the losers, but even that sector was split in performance in a way that would make Charles Dickens proud.

Within tech, the Philadelphia Semiconductor Index lost 3.19%. The Dow Jones U.S. Semiconductor Index was hit even harder, giving up 4.22%, led lower by, of course, Nvidia, but joined by equipment provider Applied Materials  (AMAT)  and Lam Research  (LRCX)  in the carnage. Interestingly, the Dow Jones U.S. Software Index gained 1.18% for the day.

Now for a real surprise on a "down" day. Winners beat losers by a three-to-two margin at the NYSE and by a smidgen at the Nasdaq. Advancing volume took a 63.9% share of composite NYSE-listed trade for the day and a 52.7% share of composite Nasdaq-listed activity as well.

In addition, aggregate trading volume expanded by 10.5% on a day-over-day basis across NYSE-listings and by 7.2% across Nasdaq-listings. Aggregate trade was also higher across the membership of the S&P 500. Simply put, if one could look at market breadth first and not yet have seen headline performance, one might very well assume that Thursday had been a green candle day.

Discussed on Thursday

For those who follow me but did not follow me all the way to Doug's Diary on Thursday. Taiwan Semiconductor  (TSM)  apexed at $390 on Wednesday, taking out our $377 target price (that I gave you in mid-January), but was damaged in the Thursday beatdown that hit the industry. Remember, we always act at target prices.

TSM simply hit resistance at the upper trendline of my Pitchfork model on Wednesday. I am not overly concerned about this name. The demand for the foundry business is currently insatiable. On Thursday, I revised up to $445 from $377 for the balance of my long position.

Economics 

(All Times Eastern)

08:30 - PPI (Jan): Expecting 0.3% m/m, Last 0.5% m/m.

08:30 - Core PPI (Jan): Expecting 0.3% m/m, Last 0.7% m/m.

08:30 - PPI (Jan): Expecting 2.9% y/y, Last 3.0% y/y.

08:30 - Core PPI (Jan): Expecting 3.3% y/y, Last 3.3% y/y.

09:45 - Chicago PMI (Feb): Expecting 52.5, Last 54.0.

10:00 - Construction Spending (Nov & Dec): Last 0.5% m/m.

1:00 p.m. - Baker Hughes Total Rig Count (Weekly): Last 551.

1:00 p.m. - Baker Hughes Oil Rig Count (Weekly): Last 409.

The Fed 

(All Times Eastern)

No public appearances scheduled.

Today's Earnings Highlights 

(Consensus EPS Expectations)

No significant quarterly earnings scheduled.

At the time of publication, Guilfoyle was long AMZN, NVDA, TSM equity.