Wall Street Does What Wall Street Does | The Daily Peel | 1/20/22

 Market Snapshot

Investors are not nearly as hyped as they once were this earnings season. Inflation and plenty of other concerns are eating into profits as well as expectations of the future, leading markets to broadly sell-off. The Nasdaq led the fall with a 1.15% decline while the S&P fell 0.97% and the Dow lost 0.96%.

Let’s get into it.

 

Macro Monkey Says

Renewable Oil Prices — While we’re all talking about sustainable energy solutions, ESG investing, electric vehicles, etc., don’t forget that oil prices just got renewed to a 7-year high. Sure, alternative energy solutions are well on their way, but for now, oil keeps the throne.

And based on the state of the world and energy markets right now, this really shouldn’t come as a surprise. The International Energy Agency announced in their monthly report on the oil market that in 2022, we’re likely to be even more crude-hungry now than we were prior to the pandemic. Energy traders and oil companies are psyched, but I heard Greta Thunberg hasn’t gotten out of bed since the news broke.

Driving this demand uptick, the IEA says, is a combination of geopolitical tensions and far fewer government-mandated COVID restrictions this year than in the past two years. Oil demand is closely linked to things like global transportation needs. Back in the dog days of the pandemic, there wasn’t a whole lot of flying or driving long distances going on. Hence crude prices were literally going negative for a brief moment in April of 2020. Now that we’re largely back to business as usual, oil demand is back. 

But, prices for WTI crude are at a 7-year high, not a 2-year high. That’s where the geopolitical tensions come in. Like middle schoolers at a dance, energy-producing countries tend to be awkward around each other, especially those with vastly different ideologies, leading some to barely ever interact with members of the opposite group. Right now, tensions in Europe and the Middle East primarily are leading to concerns that global supply could fall, with most fears stemming from Russia and the UAE. Falling supply meeting rising demand can only mean one thing: price go boom.

WTI crude oil futures price

Wall Street Does What Wall Street Does — If there is one thing Wall Street firms are known for, it’s paying themselves a whole lot of money. That’s changed over the past few years, but not in any way to turn around that high-flying reputation.

Earnings releases for the U.S.’s largest banks flooded last week and spilled over into this week as well. Almost across the board, earnings fell on account of drastic increases in operational expenses. What drove those cost increases, you ask? Well, salaries.

According to the analysis done by the Wall Street Journal, salaries didn’t just increase; they mooned. Citigroup reportedly handed out an extra $2.9bn in total compensation last year while J.P. Morgan increased compensation by $3.6bn, and Goldman Sachs laughed at how poor its peers were, shelling out over $4.4bn in additional compensation compared to 2020. To anyone working at those firms, congrats on the fat bag.

Reasons for the spike in pay are mixed but stem from a similar cause. Financial markets across the board have been going ape sh*t for the past two years, leading to rapid growth in these firms’ lines of business like loan origination, mergers and acquisitions, trading, advisory, the whole gambit. To keep up with skyrocketing demand for their services, these firms had to hire a host of fresh talent and pay them handsomely to keep them on board.

And don’t expect it to slow down anytime soon. While deal volume may slow compared to the record-setting years 2020 and 2021, the name of the game going forward is talent retention. There’s not a whole lot of loyalty on Wall Street, so you better pay up.

 

Join 110,000+ Wise Primates

Subscribe to get the most critical market moves each morning, Monday through Friday.

What's Ripe

SoFi Technologies ($SOFI) — SoFi was looking so fine yesterday (sorry, I couldn’t resist). The fintech firm was officially approved by the OCC and Federal Reserve to become a bank holding company yesterday, leading shares to pop 13.7% on the day. Immediately upon approval, SoFi began the process of actually acquiring Golden Pacific Bancorp - a deal announced last year that is actually legal now. Must be nice to get approved to legally be able to do a huge part of what your business does. 

Procter & Gamble ($PG) — Congratulations — if you bought Vick’s Vaporub, Oral-B, Tide, or a myriad of other consumer products in the last few months, you contributed to P&G’s 3.4% gain yesterday. Good for you, if you happen to also be an investor at least. The consumer goods giant reported a slight earnings beat of $0.01, coming in at $1.66 on $20.95bn in sales, which apparently is good enough for traders who likely expected P&G to fall victim to inflation. Quiet price increases in many products helped evade the inflationary boogeyman, and executives said to expect more on the way. What are you gonna do, not buy toothpaste? We’re all just P&G shills at the end of the day.

 

What's Rotten

State Street ($STT) — Profit goes up, but stock goes down. That’s the dilemma State Street faced yesterday. Shares initially rose pre-market on a solid earnings report, coming in at 30% above the same period last year, but the $1.78/sh earned fell below the $1.86/sh analysts expected. In addition, the retirement of State Street Global Advisors CEO Cyrus Taraporevala was announced as coming in 2022, leaving vacant a crucial position for the firm. Shares closed down 7.1% on the day.

Ford ($F) — “Don’t make investors do math” is how Barron’s perfectly described Ford’s 7.9% fall yesterday. The firm gave investors an updated heads up on what to expect in its early-February earnings report, to which investors said, “wait, what?” Basically, Ford announced that it had pocketed gains of $900mm on its stake in Rivian Automotive. Sounds great, but Ford was really announcing that that $900mm would be classified as a “special item,” aka not in the firm’s earnings. Not knowing what that meant or what to do about it, selling ensued. 

Thought Banana:

Trouble in Paradise — Not that there was a lot of news attention around this deal or anything, but you might’ve heard that Microsoft is buying Activision Blizzard. Crazy right? In fact, yeah, it might be crazy, and it’s damn sure to get plenty of antitrust attention.

For starters, both of these companies are big. Activision Blizzard was already the largest pure-play publicly-traded gaming company in the U.S., while Microsoft brought in the second-most gaming revenue in the nation last year, only behind Apple. Now that these two are soon-to-be one, something tells me Lina Khan is gonna have to take a look.

Moreover, Microsoft has been leaning into what CEO Satya Nadella has called “the Netflix of gaming” through their Xbox Game Pass offering. Game Pass is a subscription service allowing millions of gamers to play just about any game they want for a monthly subscription fee. But right now, at least, Activision games are ultra-popular on Sony PlayStations as well. Khan and the FTC, if they do scrutinize the deal, would likely want to ensure Activision Blizzard games aren’t limited to Xbox only.

So, this head-first dive into the metaverse for Microsoft might turn into more of a wading-around-waist-level for a while. Let the FTC get used to the water for a minute, and we’ll see what happens. 

Wise Investor Says

“A nickel ain’t worth a dime anymore.” — Yogi Berra 

 

Happy Investing,

Patrick & The Daily Peel Team

Was this email forwarded to you? Sign up for the WSO Daily Peel here.

 

ADVERTISE // WSO ALPHA // COURSES // LEGAL

Join 110,000+ Wise Primates

Subscribe to get the most critical market moves each morning, Monday through Friday.

 

Natus possimus molestiae perferendis doloribus odio a. Fugiat earum facilis quam quia magnam incidunt. Corrupti molestias amet eligendi sequi dolorum accusamus. Tempora impedit temporibus dolor est vero sint modi dolorem. Mollitia aut saepe dolor cumque reiciendis sed. Commodi maiores et porro voluptates molestiae qui.

Ullam inventore illum qui doloremque neque ratione quia. Saepe molestiae aliquid dolorum minima. Consequatur dolore laudantium veniam. Et dignissimos nostrum ut sed aut. Amet dolor sint accusantium ut. Est ea modi in vel voluptates.

I'm an AI bot trained on the most helpful WSO content across 17+ years.

Career Advancement Opportunities

March 2024 Investment Banking

  • Jefferies & Company 02 99.4%
  • Goldman Sachs 19 98.8%
  • Harris Williams & Co. (++) 98.3%
  • Lazard Freres 02 97.7%
  • JPMorgan Chase 03 97.1%

Overall Employee Satisfaction

March 2024 Investment Banking

  • Harris Williams & Co. 18 99.4%
  • JPMorgan Chase 10 98.8%
  • Lazard Freres 05 98.3%
  • Morgan Stanley 07 97.7%
  • William Blair 03 97.1%

Professional Growth Opportunities

March 2024 Investment Banking

  • Lazard Freres 01 99.4%
  • Jefferies & Company 02 98.8%
  • Goldman Sachs 17 98.3%
  • Moelis & Company 07 97.7%
  • JPMorgan Chase 05 97.1%

Total Avg Compensation

March 2024 Investment Banking

  • Director/MD (5) $648
  • Vice President (19) $385
  • Associates (86) $261
  • 3rd+ Year Analyst (13) $181
  • Intern/Summer Associate (33) $170
  • 2nd Year Analyst (66) $168
  • 1st Year Analyst (202) $159
  • Intern/Summer Analyst (144) $101
notes
16 IB Interviews Notes

“... there’s no excuse to not take advantage of the resources out there available to you. Best value for your $ are the...”

Leaderboard

1
redever's picture
redever
99.2
2
Secyh62's picture
Secyh62
99.0
3
Betsy Massar's picture
Betsy Massar
99.0
4
BankonBanking's picture
BankonBanking
99.0
5
dosk17's picture
dosk17
98.9
6
DrApeman's picture
DrApeman
98.9
7
kanon's picture
kanon
98.9
8
CompBanker's picture
CompBanker
98.9
9
GameTheory's picture
GameTheory
98.9
10
Jamoldo's picture
Jamoldo
98.8
success
From 10 rejections to 1 dream investment banking internship

“... I believe it was the single biggest reason why I ended up with an offer...”