Big banks "unofficially" kicked off earnings season on Friday with mixed results. JPMorgan and Bank of America delivered profit beats while Wells Fargo and Citigroup both fell short of analyst expectations.
Notably, banks reported bigger-than-expected increases in loan loss provisions, which is money that lenders set aside to to cover loans that might go bad. That reflects a general consensus that the US economy is at risk of slipping into recession later this year which could obviously mean higher default rates for banks.
JPMorgan Chase CEO Jamie Dimon said in the bank’s earnings statement that although the economy is still strong and that consumers and businesses are spending and healthy, “we still do not know the ultimate effect of the headwinds coming from geopolitical tensions including the war in Ukraine, the vulnerable state of energy and food supplies, persistent inflation that is eroding purchasing power and has pushed interest rates higher.”
Bears believe companies' earnings results in the days and weeks ahead will carry similar warnings. They also warn that disappointing forward guidance might exacerbate ongoing fears of a prolonged "earnings recession" as companies still face a difficult environment ahead.
One big area of concern is the impact that "deflation" might have on corporate profits. Many companies - including consumer goods companies, rental and real estate groups, car companies, etc. - have been able to offset rising operating expenses and keep margins elevated by boosting prices. But sky-high prices and changing shopping trends have hit consumer demand and already led to pockets of rapid deflation for things like clothing, exercise gear, cars, and electronics, just to name a few.
These declines have been accompanied by falling costs for many raw materials and shipping, but labor costs - the largest expense for most companies - look set to stay elevated with employers still trying to fill over 10 million jobs.
Meaning companies now need to navigate a disinflationary pricing environment amid still-elevated labor costs. If this dynamic stays in place, the result could be even more downward pressure on profit margins in the quarters ahead.
Today, Goldman Sachs and Morgan Stanley will cap off Wall Street bank earnings. Interactive Brokers, Pinnacle Financial, and United Airlines also report results today.
Other key results this week will include Alcoa, Charles Schwab, Discover, JB Hunt, Kinder Morgan, and Prologis on Wednesday; American Airlines, Concentrix, Fastenal, Neflix, and Procter & Gamble on Thursday; and Ally Financial, Ericsson, Schlumberger, and State Street on Friday.
The only US economic data due today is Empire State Manufacturing. Investors this week are also anxious to see results for the Producer Price Index and Retail Sales tomorrow, as well as Housing Starts on Thursday and Existing Home Sales on Friday.
Additionally, investors will have a lot of "Fed speak" to digest this week with several US central bank officials set to deliver remarks, including Fed Vice Chair Lael Brainard on Thursday.
China Report Slower Growth and First Demographic Downturn in Over 60 Years: China is reopening faster than many had anticipated and we are starting to see an uptick in oil and energy demand. The trade will be watching closely this week to see if China starts to more eagerly purchase other commodities. Bears point to disappointing economic data released overnight that showed China’s economy grew by just 3% in 2022, badly missing Beijing’s official growth target of 5.5%, which was already the lowest in decades.
Other than in 2020 at the beginning of the pandemic, when full-year GDP expanded 2.2%, growth was the weakest since 1976.
At the same time, China’s population fell last year for the first time in decades, a historic shift that is expected to have long-term consequences for the domestic and global economies. The world’s most populous country has long been a crucial source of labour and consumption, fuelling growth in China and the world.
Overnight, the National Bureau of Statistics announced that China’s total population fell by -850,000 in 2022 to 1.41 billion, the first decline in 60 years.
The decline officially began last year, with deaths outstripping births, but some demographers argue that the trend likely started before then. Abundant labor has been the fuel that has driven China’s rapid growth for more than four decades.
Analysts largely agree that the country’s social welfare and medical infrastructure is ill-prepared for an aging population. Source: The Financial Times
Credit Card Interest Rates Hit Record High: Costs for Americans to finance their purchases on credit cards just touched the highest level on record, according to government data stretching back to the early 1970s. With prices rising, Americans have been putting more on credit cards, and they're paying out the nose for the privilege, as the Federal Reserve's most recent report on costs of consumer credit showed average interest rates on bank-issued credit cards touching 19.1% in the fourth quarter, beating the previous record high of 18.9%, set in the first quarter of 1985.
While it might seem like an indicator that households are under serious financial stress, most other readings on the health of American households seem more or less fine.
Delinquencies on credit cards, while rising, are quite low. Household debt as a share of gross domestic product is also pretty low and most importantly, unemployment is low, at 3.5% in December. Source: Axios
U.S. Set Gambling Record In 2022 at +$54.9 Billion: Americans gambled away a record-breaking amount of money in 2022 with the nation’s casinos and mobile gaming apps ringing up a record $54.93 billion in revenue during the first 11 months of 2022. With one month still being tallied, 2022 has already smashed the $53.04 billion record by 13.5%, according to data collected from state regulators by the American Gaming Association. Across the country’s 33 commercial gaming jurisdictions, 30 reported year-over-year revenue growth over the same period in 2021, with slot machines and tables generating the most revenue out of any other form of gambling. Slots and table games across the U.S. generated $43,79 billion, a 6.7% increase over the same 11-month period in 2021. Sports bettors wagered $83.13 billion from January through the end of November. Sportsbooks only generated $6.56 billion off those wagers, but it’s a 65.4% increase over the same period in 2021. Source: Forbes.
Cooling Global Demand is Complicating China's Economic Rebound: The export boom that carried China’s economy through much of the Covid-19 pandemic has lost momentum, adding urgency for Beijing to seek growth drivers elsewhere as the global economy struggles. The decline for Chinese exports got steeper in the final month of 2022, falling -9.9% from a year earlier, compared with an -8.7% drop in November, according to data from China’s customs bureau. The decline marked the biggest dip since February 2020, when a nationwide lockdown brought economic activity to a halt.
For all of 2022, shipments from China rose +7% from a year earlier to $3.6 trillion, while imports edged up +1.1% to $2.7 trillion. The full-year growth figures for both exports and imports were much smaller than the double-digit percentage gains in 2021, signaling that the export boom that helped China weather the pain of the pandemic is now nearing its end.
The country’s reopening may lift goods imports in 2023, as an expected revival of business activity and support for property developers could fuel China’s demand for oil and other commodities.
But the bigger question is how Western consumers’ appetite for made-in-China goods will hold up. Manufacturers across China are already feeling the chill. An index measuring new export orders fell to its lowest level in eight months last December, according to China’s official manufacturing purchasing managers index. Source: The Wall Street Journal.
San Francisco's Largest Landlord Defaults on Massive Loan: Veritas, San Francisco’s largest and most controversial landlord, is scrambling to raise capital after defaulting on a $448 million loan. Last week, the Fitch Ratings reported that the property owner was in default on a $448 million loan, which is secured by a portfolio of 1,734 rent-controlled units in 62 buildings across San Francisco. The default shows the challenges that San Francisco real estate owners will grapple with as loans become due. Many properties — office buildings, hotels and apartments — were financed with 10-year loans in 2013, which means that debt needs to be paid back this year, according to John Manning, a veteran real estate financing executive with Marcus & Millichap.
But with office buildings empty, rents down and apartment complexes riddled with vacancies, investors will likely increasingly not have the cash flow to pay off the maturing loans. Meanwhile the combination of current high interest rates and San Francisco’s slow recovery is making it hard to borrow or find new capital partners willing to invest.
The Veritas predicament comes as more commercial mortgage-backed security loans, known a s CMBS, are in default. After reaching a post-COVID-19 trough of 2.92% in September 2022, the CMBS delinquency rate has inched up for three consecutive months, revealing levels above 3% for the first time since July 2022. Source: Trepp, San Francisco Chronicle)
Where Will Europe Get Its Diesel Once Russian Ban Kicks In: Seaborne deliveries of diesel from the European Union’s single biggest external supplier will be all but banned in less than three weeks. The EU imported about 220 million barrels of diesel-type product from Russia last year, according to Vortexa Ltd. data compiled by Bloomberg. From Feb. 5, almost all those imports will be banned in an attempt to punish Moscow for the war in Ukraine. The question now is, who will step in to fill the gap? Some progress has already been made, partly thanks to increases from Saudi Arabia and India. The most obvious place where Europe can get more diesel is the Middle East and Abu Dhabi National Oil Co. has also already agreed a deal to supply Germany. India and the US, both long-term suppliers to the EU, have also stepped up shipments in recent weeks. US refiners are forecast to produce a record volume of distillates this year, a category of fuel that includes the diesel used in trucks and automobiles. But the most important potential resupplier, albeit indirectly, may turn out to be China. Shipments of diesel out of China have dramatically increased in recent months. While only a fraction of those cargoes sail all the way to Europe, they increase regional supplies. That then frees up barrels from other producers which can, in theory, head to Europe. Source: Bloomberg.
Regulatory Threat to Tech is Growing: With a divided Congress now in charge, the near-term prospects for legislation regulating the technology giants looks uncertain at best. But there are still major legal and regulatory events coming this year for the tech sector. Paul Gallant, policy analyst at Cowen Washington Research Group, says even without major moves from Congress, 2023 is shaping up as a year in which the government will have a big impact on tech. Some of the key stories and questions to watch include two court cases the Supreme Court will hear in in late February that could trigger changes in Section 230, which protects social-media platforms from legal liability over user content. The stage is also set for Federal Trade Commission Chairwoman Lina Khan to flex her regulatory might, with Amazon possibly being in her sights Source Barrons
Goldman Lost $1.2 Billion in Just Nine Months in Newest Unit: Three months after Goldman Sachs Group Inc. carved out a new division to house what’s left of its once-ambitious foray on Main Street, it’s giving shareholders a clearer look at those financials. The collection of businesses — including Goldman’s Apple Card — now packaged into the segment dubbed Platform Solutions racked up more than -$1.2 billion in pretax losses in last year’s first nine months, with the drop accelerating every quarter. That tally, disclosed in a regulatory filing Friday, is meant to help shareholders and analysts prepare to track Platform Solutions’ evolution once Goldman begins breaking out its performance in quarterly reports, starting today (Tuesday). But it also shines new light on how much the expansion has been dragging down the New York-based firm’s bottom line. From the start of 2020 through the end of September, Platform Solutions’ pretax losses piled up to $3 billion, the filing shows. When the latest quarter’s figures get added to it next week, that cumulative loss will approach $4 billion in the three-year span and $2 billion for the year, driven by loan-loss provisions, people with knowledge of the matter said.
Electric Vehicles are Killing the Car Dealership As We Know It: Electric cars are changing the way we shop for and purchase vehicles, and dealerships are scrambling to adapt. When Elon Musk's Tesla started selling its cars through stores rather than dealerships a decade ago, the industry was skeptical of the move. The dealership model, in which retailers buy from automakers and sell vehicles to consumers, has been protected for nearly a century by robust franchise laws. It's how you sold cars in America. Tesla spent years beating back these laws, with some success. Startups like Rivian and Lucid have mimicked the model, selling without dealer networks in place after Tesla set the precedent for EV buying. Then, car shopping in the pandemic and a prolonged chip shortage that strained inventory trained more buyers to order vehicles from the factory and wait rather than driving off the lot that day in a new set of wheels. This has led car manufacturers and dealers alike to operate on lower volumes and do more build-to-order business. Source Insider
Investors Wiped Out of Millions on Unregulated Private Offerings: Over the past two years, bonds have lost almost 15% and stocks have barely gained 5%, whipsawing investors along the way. That’s what markets do. As a result, financial firms are pile-driving their clients into assets that have no market. Over the past two years, investors bought an astonishing $878.9 billion in so-called Regulation D private offerings of debt and equity that don’t trade, according to SLCG Economic Consulting, a research firm in McLean, Va. Many of these other corporate offerings come directly from tiny issuers or through dodgy brokers and financial advisers. And, to be blunt, they are often dreck. The investments sometimes end up worthless, and egregious conflicts of interest are rife among those selling them. Private placements of debt, equity and other assets don’t move in sync with public markets—and, because they don’t trade, their reported prices fluctuate much less. The fatal flaw: You can’t always sell when you want to, and often you can’t sell at all. Source WSJ
The Biggest Global Risks of 2023: The profile of risks facing the world is evolving constantly. Events like last year’s invasion of Ukraine can send shockwaves through the system, radically shifting perceptions of what the biggest risks facing humanity are. The graphic below summarizes findings from the Global Risks Report, an annual publication produced by the World Economic Forum (WEF). It provides an overview of the most pressing global risks that the world is facing, as identified by experts and decision-makers. These risks are grouped into five general categories: economic, environmental, geopolitical, societal, and technological. In the lower–middle portion of the chart are the risks that could have serious impacts—such as attacks involving nuclear or biological weapons—but that were highlighted by fewer experts. Over in the top-right quadrant of the chart are the risks that a number of experts mentioned, and that are causing a strain on society. Not surprisingly, the top risks are related to issues that impact a wide variety of people, such as the rising cost of living and inflation. When staples like food and energy become more expensive, this can fuel unrest and political instability—particularly in countries that already had simmering discontent. WEF points out that increases in fuel prices alone led to protests in an estimated 92 countries.
1 17 2022
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