Let the Games Begin | The Daily Peel | 4/17/2023

Apr 17, 2023 | Peel #441

Market Snapshot

Happy Monday, apes.

Magic is in the air again as we get back to the days of earnings on earnings on earnings. Spring has sprung, Taylor is on tour, and bank numbers are in. What a time to be alive.

In response to the early days of earnings szn coming back, markets continued their mind-numbingly boring activity to close the week. Equity markets once again sipped on some Pinot Noir for the day and finished ever so lightly in the red, with financials putting the team on its back for the day.

Thankfully, the 2-year note is keeping the party going. Yields on this thing surged to nearly 4.15% during Friday’s session in a sign that money availability is getting tighter with or without the Fed’s further assistance. The 10-year note gained at the same time, along with basically every other maturity, and, of course, the dollar got in on the hike as well.

Let’s get into it.

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Banana Bits

• Smaller lenders are confirmed to be losing deposits big time to the ginormous among them, but there’s a lot more going on under the hood
• As little as 7-weeks remain for the US Congress to get its sh*t together and do something about the debt ceiling
• Grandma Janet says what we’re all thinking, implying bank’s apparent tightening of credit conditions is kinda doing the Fed’s job for it
• In France, they burn down buildings when they can’t retire at 62 (apparently), but in the US, when no one is prepared to retire at even 65, we just smile and say, “f*ck it, we ball.”

Macro Monkey Says

Let the Games Begin

America: land of the Free, ranch dressing, and big, huge, ginormous banks that soak up dollars like SpongeBob soaks up water. Did you just hear that bald eagle caw, too?

I can’t imagine a more fun way to start a Monday morning that talking about banks’ quarterly earnings. Shake off the Sunday hangover, you scumbag, and listen up.

On Friday, approximately $668bn worth of American banks reported earnings, with JP Morgan making well over half of that, of course. Wells Fargo, Citi, and PNC got in on the fun, too, as the other major banks reported, and between these four, we’ve got a lot of takeaways.

JPMorgan Chase & Co: If utter dominance was an earnings report, it would be this. Jamie Dimon is actually sitting on the toilet waiting to use all those extra dollars lying around because, well, they gotta do something. Record-setting revenues of $38.3bn shot up 25% over the last year and led earnings to grow 52% to $4.10/sh for the same period. Wow.

Net interest income (NII), arguably the most important earnings metric for banks, skyrocketed 49% from last year as well. This comes on the back of JPow and his epic rate hiking saga while JPMorgan continues to pay its $2.4tn deposits just about 0.01% in interest. That’s the spread trade of a lifetime and is basically the whole reason the bank expects to earn record NII in fiscal ‘23.

Shares boomed 7.55% on the day, taking the lead for the S&P.

But, JPMC is essentially a microcosm of the banking sector as a whole, with the firm being one of if not the biggest players in every industry segment. Banks like Citi tend to focus more on Wall Street, while the Wells Fargos of the world lean towards Main.

Citigroup Inc: We keep telling you, “deals are back” and “M&A is back,” but most of the growth at rich people specialist Citigroup in the last quarter came from the personal banking biz. And while the firm’s results were good, it was no JPMC quarter.

3% of deposits actually left Citi, while JPM’s grew by 2% over the quarter, and divestitures that the smaller giant bank made, including its Indian consumer business, helped boost earnings for the period. Provisions for loan losses grew mildly while the firm’s outlook for the year was unchanged, despite a massive beat of last quarter’s expectations.

Shares gained 4.78% as the numbers were hype, but not nearly as bottle-poppin’ as JPMorgan’s.

Wells Fargo & Co: Wells Fargo had a very different day, unfortunately, for its shareholders, at least. Shares closed down but just barely, only by about 0.05%, but lost nearly 1.4% from the intraday high.

Like the others, net interest income got the assist from JPow, but the firm’s clinically depressed outlook for the year really watered down the punch bowl. Wells joined Citi and JPM in raising credit loss provisions, with a particular focus on loans to retail clients for things like cars, credit cards, and real estate. Loan origination volume was lower than expected but still showed healthy growth from last year.

Are you feeling an eerily similar from each of the big dawgs yet? To sum it up, the common themes include:

• Net interest incomes ballooned thanks to JPow’s rate hikes, but the big banks still don’t need to compete for deposits in such an ample reserve environment, so they were able to keep deposit interest in the dirt
• Loan origination slowed while credit loss provisions grew, both showing signs of tightening credit conditions and representative of fears for broad economic contraction
• Despite the tomfoolery at concentrated regional banks, the big banks are doing more than just fine and actually booming in this environment

Overall, it was a positive reflection of where we’ve been, showing the first quarter wasn’t as tragic for the economy, and specifically the banking sector, as an observer might have thought. The fear of slowdown remains, however, with full-year guidance outside of JPMorgan’s NII prediction holding steady despite the nearly across-the-board Q1 beats.

The fun doesn’t stop here, however, as earnings szn continues today with the likes of Schwab, State Street, and a slew of smaller banks getting in on the fun. Batton down the hatches when you can.

What's Ripe

BlackRock ($BLK) ↑ 3.07% ↑

• The company that owns literally the entire world, at least according to every 16-year old on Reddit who recently discovered the stock market, had not a good but a less-bad-than-expected quarter to get 2023 started. Let’s take a look.
• While BlackRock isn’t a bank like the above, it is considered a textbook example of a “non-bank,” which ironically is very similar to a not non-bank. Now that we’re all good and confused, we can say that despite a nearly 20% drop in GAAP profits, investors weren’t too disappointed.
• Those GAAP earnings didn’t meet the mark, but no one cared as non-GAAP (aka “adjusted”) earnings did indeed surpass analyst expectations. Administrative and portfolio management fees were down over the course of the year, thanks largely to choppy markets, but at least someone’s benefiting from the SVB sh*tshow.
• Banking failures have pushed deposits into money market funds, BlackRock’s bread and butter within the firm’s monstrous $3.3tn cash and FI platform. In short, a non-GAAP earnings beat for this non-bank was helped by the non-success of regional banks and investors wanting to hold non-deposits. You’re welcome for clearing that up.

VF Corp ($VFC) ↑ 3.02% ↑

• On the other hand, the only thing that VF Corp is non is a non-sell, at least according to Goldman Sachs.
• In other words, GS has upgraded its rating on the hipster-first retailer to a Buy from Neutral. Traders were vibing off of Goldman’s recommendation as the maker of brands like Vans and JanSport starts to heal from its mangled inventory management and moves to bring supply back in line with demand.
• Other cost-cutting initiatives will help too, but the main point, I think, is that while shares are outperforming, this is a clear sign that society will soon be underperforming if hipsters truly are set to make a return.

What's Rotten

Rivian Automotive ($RIVN) ↓ 5.89% ↓

• EV makers love to shock markets, but on Friday, these shocks were less of a lightbulb going off and far closer to electrocution.
• Following Lucid’s report of a garbage quarter that sent $LCID shares down on delivery figures of the firm’s Air sedans coming up short, Rivian shares were downgraded by Piper Sandler to reflect what those analysts see as a shortage of cash.
• Once again, Tesla’s price cuts seem to be throwing a massive wrench into the profit plans of fellow EV makers. The news out of Lucid, along with this just plain rude downgrade from PS, hit Rivian with a double whammy, playing a big role in causing shares to crash.

Boeing ($BA) ↓ 5.56% ↓

• The only product in the history of Corporate America with more issues than National Geographic is the Boeing 737 MAX…and they’re STILL trying to sell it!
• Try as they might, deliveries have once again been halted thanks to one Boeing supplier. Apparently, the installation of a few parts of the plane’s fuselage got f*cked in the manufacturing process.
• I’m no engineer, but I’m just glad someone’s paying attention. Thankfully, the problem lies in recently manufactured but not yet delivered planes, meaning the ones that are currently +30,000ft over our heads are just fine, right?

Thought Banana

Solving For X

The dreaded “Solve for X” question on your 8th-grade math tests was the absolute worst-case scenario for most of us. Elon Musk, on the other hand, appears to be nothing short of obsessed with finding this long-sought letter. Maybe that’s why he has hundreds of billions of dollars, and you’re running late already.

Finding X for most of the gentlemen apes out there is about as hard as finding one particular, alleged part of the female anatomy, if these things even exist, but Musk took another route and just decided to create his own X for himself.

But X is no longer just a variable, as evidenced by Musk naming his first website, his 4th-youngest child, and his newest company after the elusive letter. Earlier this week, documents emerged showing that Musk has incorporated a brand new AI company in the great state of Nevada called X.AI.

X.AI joins the X-Co family with the memer’s other firms, X Holdings and Twitter’s new parent company X Corp. It isn’t all too clear what is owned by what, but presuming X Holdings appears to be the grandaddy to these X-named subsidiaries isn’t a stretch at this point.

The creation of X.AI comes hot on the heels of Musk’s public beef with the fact that OpenAI is now a capped-profit company “effectively owned” by one of the world’s largest organizations, Microsoft Corp.

In a clear attempt to compete with OpenAI, the South Africa-born wild man has started to poach people from labs like the ChatGPT creator, DeepMind, and others, with the most notable being Mr. Igor Babuschkin, a lead (former) researcher at Alphabet-owned DeepMind.

It’s key to keep Elon’s feelings on AI in mind here, too. Aside from the countless callouts and rants on the risks of AI on Twitter, he and other bigshots like Vitalek Buterin recently signed this “pls stop, AI is super scary” letter from the Future of Life organization.

We can only speculate exactly wtf is going on here right now, but with Musk, even speculation usually comes up short of this guy’s hijinks.

But perhaps the coolest outcome here is an idea that Musk has already teased. The concept of a super app, such as WeChat in China, essentially rolls messaging, payments, social, and countless other features into one app is not super new in the world, but it is fairly new in the US Many expect that given Musk’s:

• Experience in payment services (X.com / PayPal),
• Ownership of Twitter (hello?), and
• Objective ballsiness

He may very well be quietly creating the American version of this inevitable behemoth.

To speculate further, legitimately, no one knows what adding a full-scale LLM like a GPT-4 competitor to a service like this could do, but odds are, it would be amazingly terrifying in some sense. Considering the fact that the guy also founded a brain-computer interface company certainly doesn’t make it much easier to sleep at night.

Anyway, f*ck it; let’s see what happens!

The big question: What is Elon Musk doing? How long will it take for the new guy on the block X.AI to catch up to the capabilities of OpenAI, Bard, and others? What other questions should we even be asking about this stuff?

Banana Brain Teaser

Friday — I am always hungry, I must always be fed. The finger I touch will soon turn red. What am I?

Fire.

Today — It’s 100 bananas off the WSO's IB Interview Course for the first 3 respondents. LFG!

In a one-story pink house, there was a pink person, a pink cat, a pink fish, a pink computer, a pink chair, a pink table, a pink telephone, a pink shower– everything was pink! What color were the stairs?

Shoot us your guesses at [email protected] with the subject line “Banana Brain Teaser” or simply click here to reply!

Wise Investor Says

“Bank earnings are highly dependent on the health of the economy. A strong economy is good for banks and their profits, while a weak economy can lead to lower earnings.” — Warren Buffett

Happy Investing,

Patrick & The Daily Peel Team

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