Archive for May, 2023

• Morning News: May 9, 2023
  Eddy Elfenbein, May 9th, 2023 at 7:03 am

  EU Targets Eight Chinese Companies in Russia Sanctions Push

  Russia’s Oil Flows Reach New High as Output Cuts Fail to Show

  Falling Oil Prices Cause Saudi Aramco’s Profit to Slip 19 Percent

  The Most Valuable U.S. Power Company Is Making a Huge Bet on Hydrogen

  China’s Shrinking Imports, Slower Exports Growth Darken Economic Outlook

  China Finally Has a Rival as the World’s Factory Floor

  Factory Boom in U.S. Boosts Sales of Excavators, Steel and Trucks

  Biden and McCarthy to Discuss Debt Limit as a Possible Default Looms

  Powell Faces Lowest Public Confidence for Fed Chairman on Record, Gallup Says

  Brain Drain Threatens the F.D.I.C. and Its Efforts to Regulate Banks

  Regional Banks Will Cut Bonuses While Big Firms Raise Incentive Pay

  High-Tech Banks Grapple With a Rise in Old-Fashioned Crime: Check Fraud

  Vanguard’s Trillion-Dollar Man Leads a Fixed-Income Revolution

  Palantir Stock Soars 21%, Says Demand for AI Unprecedented

  IBM Takes Another Shot at Watson as A.I. Boom Picks Up Steam

  Financial Stability Experts at the Fed Turn a Wary Eye on Commercial Real Estate

  Tempur Sealy to Buy Mattress Firm for About $4 Billion

  Obscure Swiss Watchmaker Leaps to Patek-Like Fame With One-Year Wait Lists

  A Crisis Over Child Care Is Holding Back Companies and Blue-Collar Workers

  Goldman to Pay $215 Million to End Case on Underpaying Women

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• Morning News: May 8, 2023
  Eddy Elfenbein, May 8th, 2023 at 7:05 am

  In New World of Trade Diplomacy, Free Trade and Tariffs Take a Back Seat

  Standard Chartered CEO Says Big U.S. Recession Unlikely

  Powell’s Bet Against Recession Looks Good — Minus the Credit Crunch and a DC Standoff

  Why On Earth Would You Fight ‘Inflation’ With Higher Interest Rates?

  Yellen Says No Good Alternative to Congress Lifting Debt Cap

  Investors Flock to Safety Plays, but Stock ‘FOMO’ Lingers

  Chinese Bank Stocks Soar, Adding $166 Billion in Trading Frenzy

  PacWest Leads Rally in Regional Banks After Slashing Dividend

  Bank Turmoil Is Paving the Way for Even Bigger ‘Shadow Banks’

  Bain Capital Seeks to Raise $4 Billion for New Global Special Situations Fund

  Binance Restarts Withdrawals of Bitcoin After Second Halt

  U.S. Sanctions Drive Chinese Firms to Advance AI Without Latest Chips

  Occidental Drops After Buffett Said Not Seeking Full Control

  Buffett and Munger on Success, Toxicity and Elon Musk

  Tech Workers Aren’t as Rich as They Used to Be

  Why Airfares, Hotels and Cars are Getting So Expensive for Americans

  Biden to Propose Airline Rule to Compensate Passengers for Delays, Cancellations

  Corporate Giants Buy Up Primary Care Practices at Rapid Pace

  US Hedge Fund Manager Wagner to Acquire Birmingham City Stake

  Liz Holmes Wants You to Forget About Elizabeth

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• Morning News: May 5, 2023
  Eddy Elfenbein, May 5th, 2023 at 7:04 am

  Russia’s Next Standoff With the West Lies in the Resource-Rich Arctic

  The Real Oil Market Shows $20-a-Barrel Price Collapse Is Excessive

  Warren Buffett Has Been Betting Big on Oil. It’s Time to Find Out Why

  Warren Buffett’s Formula for Success: One Good Decision Every Five Years

  European Central Bank Raises Rates Again, and Isn’t Ready to Quit

  Wonks ‘Socialize’ Differently

  JPMorgan Sees Investors Moving to Gold, Tech Amid Recession Risk

  Bitcoin Is Near a Key Level. How Jobs Data Could Spur a New Rally.

  Smaller Banks Are Scrambling as Share Prices Plunge

  PacWest Leads Regional Bank Rebound After Bruising Rout

  Job Market Is Expected to Show More Cooling in April

  The Bearer of Bad News

  Apple Finds Strength in India as Overall Sales Fall for Second Straight Quarter

  Adidas Gains as First Turnaround Steps Trump Yeezy Overhang

  Warner Bros Posts Surprise Streaming Profit as Cable Struggles

  Paramount Shares Drop 28% as Streaming Costs Mount

  The Simple Secret to the ‘Super Mario’ Animation Studio’s Success

  Will the UAE Legalize Gambling? Wynn’s Ambitions Reflect Growing Optimism

  Celebrity Weight Loss Company Announces Very Bad News

  BMW Warns That Older Models Are Too Dangerous to Drive Due to Airbag Recall

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• Morning News: May 4, 2023
  Eddy Elfenbein, 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
  Eddy Elfenbein, 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
  Eddy Elfenbein, 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
  Eddy Elfenbein, 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
  Eddy Elfenbein, 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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