Morning News: May 4, 2023
Posted by Eddy Elfenbein on May 4th, 2023 at 7:01 am

Britain’s Economy Needs a Pick-Me-Up. Is the Coronation Enough?

The King’s Billions: a Tour of UK’s £17 Billion Royal Empire

China Takes the Yuan Global in Bid to Repel a Weaponized Dollar

Even as China Reopens, Security Visits Spook Foreign Businesses

Why China’s Censors Are Deleting Videos About Poverty

Born in Asia but Based in Britain, HSBC Fights to Stay in One Piece

U.S. Businessman Ajay Banga Approved to Lead World Bank

TD Bank, First Horizon Agree to Terminate $13 Billion Merger

PacWest Bank Says Considering ‘All Options’ After Its Shares Plunge More Than 50%

Nearly Half of Americans Worry Their Bank Deposits Aren’t Safe

Restaurants, Food Companies Pursue Budget-Minded Consumers as Inflation Persists

Federal Reserve Raises Rates, Signals Potential Pause

Pushback Against Powell’s Prognosis Comes Almost Immediately

Treasury Yields May Fall to 2% as Gundlach, Banks Eye Recession

Apple’s Revenue Woes Put Market-Leading Rally at Risk

J&J’s Kenvue Raises $3.8 Billion in Year’s Biggest IPO

FTC Proposes Barring Meta From Monetizing Young Users’ Data

Lina Khan: We Must Regulate A.I. Here’s How.

The US Shale Oil Capital Won’t Invest in Itself

Shell Reports $9.6 Billion Profit, Despite Falling Oil Prices

Volkswagen Posts Drop in Quarterly Profit, Says It Must Speed Up to Catch Chinese EV Market Rivals

Parking, Parking, Everywhere, but Not a Spot for Me

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Morning News: May 3, 2023
Posted by Eddy Elfenbein on May 3rd, 2023 at 7:04 am

The ‘Peace Dividend’ Is Over in Europe. Now Come the Hard Tradeoffs

Everything You Need to Know About the Debt Ceiling

What a Fed Debate 17 Years Ago Reveals About Its Rate Deliberations Now

Wall Street Is Betting the Regional Bank Crisis Isn’t Over Yet

How JPMorgan Became Banking’s Regular Rescuer

Banker Pay Surges For Those Willing to Work in Saudi Arabia

Apple Reportedly Attracted $1 Billion in Deposits Into Its New High-Yield Savings Account in Just 4 Days

Job Openings Near Two-Year Low as Layoffs Jump

How Warren Buffett Came to Refuse Progressive Orthodoxy

AI ‘Will Cause Real Damage,’ Microsoft Chief Economist Warns

The Music Industry Has an AI Problem

Tesla Resumes Orders for Popular Model 3 Long Range With a 19% Price Cut

How Elon Musk’s Net Worth Wavers Thanks to Tesla and Twitter Volatility

Carl Icahn’s Wealth Plunges $10 Billion on Hindenburg Report

Lilly Drug Slows Alzheimer’s Progression by 35% in Trial

Ford Reports $1.8 Billion Profit in Quarter

Starbucks Profits Beat on China Recovery, Shares Dive on Guidance

Bankrupt Bed Bath & Beyond Seeks Millions From Ocean Carriers

Late-Night Shows Go Dark Amid Writers Strike

To Binge or Not to Binge? Netflix, HBO Max Debate How to Release Your Favorite Shows

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CWS Market Review – May 2, 2023
Posted by Eddy Elfenbein on May 2nd, 2023 at 6:06 pm

(This is the free version of CWS Market Review. If you like what you see, then please sign up for the premium newsletter for $20 per month or $200 for the whole year. If you sign up today, you can see our two reports, “Your Handy Guide to Stock Orders” and “How Not to Get Screwed on Your Mortgage.”)

JPMorgan Chase Buys First Republic

A few weeks ago, when Silicon Valley Bank went to the great clearinghouse in the sky, one of the points I stressed is that in a banking crisis, you never know who’s next. Some folks thought the banking mess was over and that we could get on with our lives.

Not so fast. Investors were keeping a close eye on any bank that had a high percentage of uninsured assets. That naturally led them to First Republic (FRC).

That’s hardly a surprise because in many respects, FRC is quite similar to Silicon Valley Bank. It’s based in California. It catered to the tech community. It had a high percentage of uninsured deposits.

(This chart is like a real-life version of Nassim Taleb’s chart of the days in the life of a Thanksgiving turkey.)

Low rates and lots of cash funded a boom for many of these regional banks. Once interest rates turned northward, the business model unraveled. FRC tried to borrow to fill the gap, but that made the problem worse.

The FRC story is different in one key respect: it was thought to have a good chance of making it through this chaos. If you recall, several big banks, including JPMorgan, injected $30 billion into FRC to keep it running.

First Republic had a simple business model: focus on very wealthy customers and give them top-of-the-line service. Being based in San Francisco, FRC also had an important toehold in the tech world.

First Republic opened branches in wealthy neighborhoods. The bank even had a branch inside Facebook’s HQ. Under one deal, Google employees could get a $2,000 bonus by opening an FRC account. The bank gave the Zuck a $6 million mortgage with a rate of 1.05%.

With rates at 0%, all was sunny. FRC paid very low interest on deposits and used its money to fund high-end projects or to mortgage second homes. The loans rarely went bad.

What Went Wrong

The problems started when rates started going up. Rich people like money and they really like it when their money makes money. FRC had to compete or face losing customers. They chose the latter.

Let me clear something up. The real problem wasn’t interest rates going down, or rates going up. Instead, it was the jolt from rates going down, then quickly going up. These banks were caught off guard.

To give you an idea of the impact that higher rates had, in Q4 of 2022, FRC paid $428 million in interest. In Q4 of 2021, they only paid $20 million. The bank felt it was fine because it had a ton of mortgages on its books. The only problem that could possibly arise would be if it had to dump those mortgages to pay off fleeing depositors. Take a wild guess what happened.

In FRC’s Q1 earnings report, the bank confirmed that depositors had taken out $100 billion worth of deposits. That’s staggering, but the CEO was telling a different story.

Since it was losing depositors at such a fantastic rate, FRC had to turn to the Federal Reserve to borrow money. Lots of it—and not particularly cheap debt, either. Recently, FRC accounted for roughly three-fourths of all of the Fed’s lending.

Things went from bad to worse. On FRC’s earnings call, CEO Michael Roffler tried to reassure investors. That didn’t work. The bank withdrew its previous guidance, and Roffler didn’t take any questions. Bear in mind that more than two-thirds of FRC’s deposit base was uninsured.

FRC was looking for another round of capital from the big banks. The plan was that the banks would overpay for FRC’s bonds. As a result, FRC could more easily borrow money. That wasn’t exactly popular with the banks. FRC’s stock dropped in half in one day.

In the old days, you did a bank run by lining up outside the bank. Nowadays you do it with a smartphone. Same idea, just a lot faster.

Over the weekend, the regulators had seen enough, and they stopped the fight. After 38 years in business, First Republic is no more. The bank has (had) $233 billion in assets. That makes it the second-largest bank failure in U.S. history, just behind Washington Mutual in 2008.

The banking regulators in California turned FRC over to the FDIC which held an auction for FRC’s assets. The regulators wanted to see who was interested and how much they were willing to pay.

We don’t know the precise details, but the key players were JPM and PNC Bank. Bank of America reportedly pulled out. In the end, JPM was the winner. JPMorgan will pay the FDIC $10.6 billion for the remains of FRC.

There’s little doubt that JPM is getting a very good deal. Ultimately, JPMorgan Chase will get all of FRC’s deposits plus a “substantial majority of assets.” JPMorgan will get about $92 billion in deposits. The bank is also taking on $173 billion in loans and $30 billion in securities.

It doesn’t end there. The FDIC will share losses on any mortgages and commercial loans that JPM will assume. For good measure, the FDIC also threw in a $50 billion line of credit. The FDIC clearly wanted a deal done fast. The key part is that depositors will be protected, and shareholders won’t. At one point on Monday, shares of JPM were up close to 4%.

The FDIC’s insurance fund will take a $13 billion hit. SVB caused a $20 billion ding. In a statement, the FDIC said, “First Republic Bank’s 84 offices in eight states will reopen as branches of JPMorgan Chase Bank.” By the way, at the end of Q1, JPM reported total deposits of $2.4 trillion.

In February, shares of FRC were as high as $147 per share. The stock closed Friday at $3.51 per share. JPM CEO Jamie Dimon said, “This part of the crisis is over.” Dimon added, “There may be another smaller one, but this pretty much resolves them all.”

Eh, I’m not sure Jamie’s right about that. The regional bank sector got slammed again today. The Regional Bank ETF (KRE) was down more than 6% on Tuesday. Two of the big losers today were PacWest Bancorp (PACW) and Western Alliance (WAL).

Simple rule: If you’re a bank with some form of “west” in your name, today was probably a rough day.

Banking panics aren’t too dissimilar from zombie movies. You never know who’s been infected until it’s too late. Jamie Dimon said, “everyone should just take a deep breath.” You, first.

The banking mess isn’t over. There are still a number of trouble spots out there. Be very cautious about going bargain-hunting in the regional bank sector. My favorite is still Hingham Institution for Savings (HIFS), and even they’ve been knocked around.

Yesterday, the FDIC proposed increasing the limits for deposit insurance. Congress would still need to sign off on it. It’s easy to blame the fat cats until you realize that many companies keep their payrolls on deposit. When a bank goes under, some small companies may not be able to pay their workers.

There’s a faint ring of familiarity with the events of this spring and the Panic of 1907. The event at the center of that crisis was the failure of the Knickerbocker Trust Company. The trust generously funded a harebrained scheme to corner the market on United Copper.

When that didn’t work, there was a mad scramble to find out who else was exposed to the deal. Just like today, the fear was about contagion. Finally, J.P. Morgan, this time the man, not the company, decided he had seen enough. He publicly said he would stand behind several banks, and the frenzy soon ended. Just like today, the panic ended with JPMorgan.

One important postscript to the Panic of 1907 is that it led to the establishment of the Federal Reserve in 1913.

Expect the Fed to Hike Rates, But Then What?

Speaking of which, the Federal Reserve began its two-day meeting today. The Fed will release its policy statement tomorrow afternoon at 2 p.m. I’ll spare you the suspense. The Fed will almost certainly raise short-term interest rates tomorrow by 0.25%.

There’s been some news lately that suggests that the Fed may want to take a pause for a few months. For example, the most recent GDP report showed that the U.S. economy grew in real terms at an annualized rate of 1.1%. That’s not so hot. Job openings are now at their lowest level in nearly two years.

We’ve also seen better inflation numbers. The year-over-year inflation rate has gradually fallen from 9.1% last June to only 5.0% for March.

On Friday, the government released the PCE price index for March. This is important because it’s the Fed’s preferred measure of inflation. For March, the core PCE increased by 0.3%. That matched Wall Street’s estimate.

Over the last year, the core PCE has increased by 4.6%. Last June, the 12-month core PCE peaked at 7. That was a 41-year high.

On Monday, the ISM for April came in at 47.1. That’s a slight increase over the 46.3 for March. Still, it’s below 50 which indicates that the factory sector of the economy is contracting.

If the Fed hikes this week, it will be the 10th consecutive hike at 10 consecutive meetings. The latest futures prices indicate a 92% chance that the Fed will hike. That would bring the target range for the Fed funds rate to 5% to 5.25%.

After that, the futures market sees the Fed pausing for six months. In November, traders expect the Fed to start cutting rates. Traders see the Fed cutting by a full 2% in just over a year. That pretty much means that a recession is expected.

In the entire yield curve, the highest-yielding Treasuries are the ones maturing this August. That also suggests that the Fed may start lowering rates soon.

Lowering interest rates tends to be beneficial for stock market valuations like the Price/Earnings Ratio. Notice that I didn’t say stocks. That’s because the valuations tend to increase at the same time that earnings are decreasing. The P/E Ratio goes up as the E goes down.

The April jobs report will be out this Friday. Wall Street expects an increase of just 180,000 net new jobs. The report for March showed an increase of 236,000 jobs. That was the smallest increase in more than two years. The April CPI report is due out on Wednesday, May 10. If inflation and jobs come in lower than expected, we may see the Fed cutting rates by this fall.

That’s all for now. I’ll have more for you in the next issue of CWS Market Review.

– Eddy

P.S. If you want more info on our ETF, you can check out the ETF’s website.

Morning News: May 2, 2023
Posted by Eddy Elfenbein on May 2nd, 2023 at 7:06 am

Eurozone Inflation Rises as Policymakers Weigh a Rate Increase

Australia, Spooked by Inflation, Resumes Raising Interest Rates

Milken: Saudis Look to Diversify Economy Beyond Just Oil

Israeli Startups Struggle to Raise Money Amid Political Turmoil, Global Downturn

In China, It’s Time to Splurge Again, and the Luxury Industry Is Relieved

Why First Republic Bank Collapsed

‘Other Problems Might Be Lurking’: Strategist is Unconvinced by Jamie Dimon’s Bank Crisis Comments

FDIC Signals Support for Narrow Changes to Deposit Insurance

Treasury Chief Janet Yellen Says U.S. Risks Default as Soon as June 1 Without Debt Ceiling Increase

White House Close to Tapping Philip Jefferson for Fed Vice Chair, Adriana Kugler for Board

Biden Secured Trillions in Domestic Spending. Now Comes the Hard Part.

Why Is Inflation So Sticky? It Could Be Corporate Profits

Morgan Stanley Plans 3,000 More Job Cuts as Dealmaking Slumps

Elon Musk Tries to Direct AI—Again

BP Beats First-Quarter Profit Expectations but Shares Slide 5% on Slowing Buyback Program

Pfizer Stock Jumps After Sales Beat. There’s More Good News From Earnings.

Uber’s Revenue Up 29% as U.S. Ride-Hailing Business Improves

Hollywood Writers Go on Strike, Halting Production

Vice Is Said to Be Headed for Bankruptcy

How a Blackpool Gang That Couldn’t Shoot Straight Pulled Off a $24.5 Million Crypto Heist

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Morning News: May 1, 2023
Posted by Eddy Elfenbein on May 1st, 2023 at 7:04 am

Eastern Europe Is Jeopardizing an Economic Lifeline for Ukraine

Trickling Tax Revenue Complicates Debt Limit Talks

The Air Has Come Out of the Dollar

Fed Set to Raise Interest Rates to 16-Year High and Debate a Pause

Here’s What Treasury, Fed Might Do in a Debt Ceiling Crisis

Morgan Stanley’s Wilson Says Hawkish Fed Could Damp Stock Rally

JPMorgan to Acquire Failed Regional Bank First Republic

U.S. Treasury Encouraged by First Republic Resolution, Says Banking System Remains Sound

Bank Failures, Broken Markets Loom Over Milken’s Capitalist Utopia

Hedge Funds Bet Dollar to Erase Hike-Cycle Gains as Fed Peaks

Buffett Will Beat the Market as Recession Looms, Investors Say

Bitcoin on Course for Longest Streak of Monthly Gains Since 2021

‘The Godfather of A.I.’ Leaves Google and Warns of Danger Ahead

When A.I. Chatbots Hallucinate

The Building Boom Is Prolonging Market Pain

California’s Housing Crisis Leaves College Students Eager to Live in Trailers

The Subtle Strategy Behind Elon Musk’s Price Cuts at Tesla

Indeed’s Price Changes Leave Small Businesses Feeling Burned

Adidas Targets Basketball, Soccer to Drive Post-Yeezy Rebound

Writers, Seeking Pay Change for the Streaming Era, Prepare to Strike

ESPN’s Jimmy Pitaro Will Decide the Fate of Cable Television

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Morning News: April 28, 2023
Posted by Eddy Elfenbein on April 28th, 2023 at 7:04 am

China Ratchets Up Pressure on Foreign Companies

The Shining Promise and Dashed Dreams of China’s Live Shopping Craze

Socialist Wave Sends Money Flying Out of Latin America

Japan’s New Central Bank Governor Sticks to Negative Interest Rates in His First Meeting

Russian Central Bank Holds Rate at 7.5%, Keeps Future Hikes on the Table

Deutsche Bank’s Numis Deal to Reshape London Banking

First Republic Shares Gain on Reports of Potential Rescue Plans

The Eurozone Economy Shows Signs of Modest Growth

U.S. Economy Continues to Grow, but More Slowly

Higher Food Prices Bring Bigger Profits, but Consumers Start to Resist

Households Are ‘Cash-Stuffing’ to Cope With Cost-of-Living Jump

They Want to Change the World. They Would Also Like a Raise.

JPMorgan Employees Gripe About Dimon’s Return-to-Office Edict

Exxon Posts Record First-Quarter Profit as Oil Output Climbs

Amazon Jolts Investors With Talk of Cloud Growth Slowdown

Snap’s Sales Fall for First Time as a Public Company

Bed Bath & Beyond Store Closures Will Kick Off a Land Grab for Fast-Growing Retailers

DeSantis’s Miscalculation: ‘Disney Is Playing the Long Game’

World’s Richest Man Likes the View Atop Refurbished Tiffany

The Long Demise of the Stretch Limousine

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Morning News: April 27, 2023
Posted by Eddy Elfenbein on April 27th, 2023 at 7:05 am

Germany in Talks to Limit Export of Chip Chemicals to China

ASML, Europe’s Most Valuable Tech Firm, Is at the Heart of the US-China Chip War

U.S. Consulting Firm Is the Latest Target of a Chinese Crackdown

McCarthy Debt Plan Passes House, Escalating Standoff With Biden

Powell Faces Pushback Inside Fed Over Need to Cool Wage Gains

Still Going Fast, Inflation Changes Drivers

Banking Problems May Be Tip of Debt Iceberg

Deutsche Bank Plans More Job Cuts After Traders Trail Peers

First Republic Shows How Not to Bolster Confidence

At Charles Schwab, Being a Big Bank Has Become a Big Problem

JPMorgan Creates AI Model to Analyze 25 Years of Fed Speeches

Profit Margins Are Sliding for Americans Who Sell Their Homes

When Megamergers Fall Apart

As Regulators Block Tech Deals, They Increasingly Look to the Future

Kaiser Permanente to Acquire Geisinger

Elon Musk Ramps Up A.I. Efforts, Even as He Warns of Dangers

Facebook Parent Meta Platforms Sees First Sales Increase in Nearly a Year

Southwest Posts Wider-Than-Expected Loss as Toll of Holiday Crisis Stretches Into 2023

Disney Sues Ron DeSantis After Oversight Board Voids Theme-Park Agreements

Freddie Mercury Estate Sale to Auction Original Lyrics to “We Are the Champions” and More

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Morning News: April 26, 2023
Posted by Eddy Elfenbein on April 26th, 2023 at 7:05 am

India’s Population Surpasses China, Shifting Global Order

U.S. Treasury Looks to Curb ‘De-risking’ at Banks

First Republic Bank to Weigh Up to $100 Billion in Asset Sales

Quants Are ‘Out of Ammo’ for Buying Stocks, Goldman Warns

Should Investors Move To Cash Right Now?

The New Finance Rich List

Binance Faces Mounting Pressure as U.S. Crypto Crackdown Intensifies

US Supreme Court Mulls Legality of a State’s Property Tax ‘Windfall’

Home Prices Rose in February for First Time Since June

Midwest Cities Led WSJ/Realtor.com Housing Index in First Quarter

UK Blocks Microsoft’s $69 Billion Activision Deal

Microsoft Revenue Growth Stays Low as Economic Concerns Hurt Demand

Google Ad Revenue Drops for Second Straight Quarter

Google Is All About Cost Control Now

TikTok Ban in Montana Faces Speed Bump as Governor Seeks Changes

PricewaterhouseCoopers to Pour $1 Billion Into Generative AI

Musk Bets the House of Tesla on Low Prices and Razor-Thin Margins

GM Killed the Chevy Bolt — and the Dream of a Small, Affordable EV

Carvana Was Built for Low Interest Rates. Can It Survive Its $8 Billion Debt?

British American Tobacco Is Fined $635 Million for Selling Cigarettes to North Korea

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Morning News: April 25, 2023
Posted by Eddy Elfenbein on April 25th, 2023 at 7:03 am

Italy Stands Out to Moody’s as Only Country Risking Junk

Here’s How Supply Chains Are Being Reshaped for a New Era of Global Trade

Wall Street Is Finally Going to Make Money Off the Permian

Sliding Diesel Prices Signal Warning for U.S. Economy

Commerce Dept. Outlines Its Bid to Fund Cutting-Edge Chip Research

Commercial Real-Estate Woes Run Deeper Than in Past Downturns

UBS Drops as Cautious Wealth Clients Add to Takeover Challenges

First Republic Bank Lost $102 Billion in Customer Deposits

Amazon’s Satellite-Internet Ambitions Move Closer to Reality

McDonald’s Tops Sales Estimates as Customers Shrug Off Price Rises

Bud Light Suffers ‘Staggering’ 17% Sales Plunge Amid Dylan Mulvaney Controversy

G.M.’s Profits Fell 18.5 Percent in the First Quarter

Hyundai Motor Bolsters US Presence With $5 Billion EV Battery Venture

Verizon Revenue Misses Estimates and Subscribers Decline. The Stock Slips.

Bed Bath & Beyond’s Demise Creates Fresh Opportunities, Retail Landlords Say

How IKEA Chopped, Hollowed Out and Flattened Its Furniture to Cut Costs

Spotify Draws More Listeners, Including Paying Subscribers

Prince, Stevie Nicks Music Investor Bets on Bollywood

Tucker Carlson, a Source of Repeated Controversies, Is Out at Fox News

Don Lemon Ousted From CNN in Move That Left Him ‘Stunned’

Not Just a D.J., Goldman C.E.O. Also Dabbles in Luxury Real Estate

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Carrier Global to Buy Viessmann
Posted by Eddy Elfenbein on April 24th, 2023 at 1:05 pm

The Wall Street Journal is reporting that Carrier Global (CARR), one of our Buy List stocks, is in talks to buy Viessmann, a German industrial manufacturer, for $10 billion. The deal will be in cash and stock.

Viessmann is a family-owned company. Last year, it had sales of $4.4 billion.

Carrier is mostly known as an HVAC company but it has been working to diversify its business. Earlier, the company said it’s also looking to sell off its Fire & Security business.

From the WSJ:

Buying closely held Viessmann would further diversify Carrier’s operations outside of the U.S. Last year, the Florida-based maker of air conditioners and other types of heating and cooling equipment reported net sales of $20.4 billion, of which 60% came from the Americas and 23% from Europe, the Middle East and Africa, according to the company’s annual report.

We own Carrier and Otis (OTIS). Both were spun off from United Technologies.

Carrier, with a market value of $38 billion, is focused on expanding its refrigeration as well as its heating, ventilation and air-conditioning businesses. Last year, it acquired substantially all of Toshiba Corp.’s stake in the companies’ Toshiba Carrier Corp. joint venture for $900 million. TCC provides residential and light-commercial HVAC products including heat pumps.

Carrier’s Fire & Security division accounted for about 17% of the company’s sales in 2022. Demand for the division’s products, which are used across residential, commercial and industrial properties, was mixed in the most recent quarter, buffeted by slower new construction in some markets, management said on a conference call in February.

Shares of Carrier are down about 5% in today’s trading.