The Weekend Edition # 26

Welcome to another issue of the Weekend Edition. 

Thank you to all who’ve read and subscribed to the newsletter this week!

This week we cover:

• Market Recap and Economic Data

• Earnings - What do JP Morgan & Wells Fargo results tell us about the Economy?

• Around the Markets - The JP Morgan Healthcare Conference Takeaways

• The Week Ahead - Event Calendar

• Closing Thoughts

Let’s dive in ⬇️

Market Recap - Jan 10 - Jan 14, 2022

Another tough week in the market and I have a feeling out market recaps are going to follow this ugly pattern for a while. With the Fed talking more aggressive rate hikes and a possibility of quantitative tightening by the end of the year, the market is headed for a firm pull back if not a correction.

As a reminder, 10% down is a pull back, 10-20% down is a correction, over 20% is a bear market. The Russell 2000 Small Cap Index has already headed into “correction” territory and I wouldn’t be surprised if the Nasdaq Comp follows.

There are many who suggest that the market has already priced in the news of the rate hikes but, I don’t think so. I think we may still see further downside in the market, at least to the point of a correction. Rate hikes on their own don’t signal a disaster but couple that with tightening, and you just may have a problem.

This is based on what history tells us. When liquidity tightens and rates go up, the market declines because there’s less buying power and valuations come under pressure particularly in high beta stocks. Of course, all of this will depend on how inflation and other economic data unfold in the next few weeks.

Meanwhile, inflation still remains persistent and is driving up commodities. Energy was the best performing sector of the week, rising over 5%.

Economic Indicators Round-up

Inflation Data

The inflation data that came out this week was mixed and the market didn’t see much of a reaction to it. In fact energy prices had come down during December and this was a positive sign. Most of the data was within the consensus range and this could be a sign that we’re seeing inflation peaking. If that is the case, we may see a different perspective from the Fed in tightening measures and rate hikes.

Retail and Consumer Sentiment

Month on Month Retail numbers were down for December: -1.9% (Dec) vs. 0.2% (Nov) for Retail Sales and -2.5% (Dec) vs. -0.1% (Nov) for Retail Sales Ex-Auto & Gas. Consumer Sentiment was down to 68.8 vs 70.6 for the previous month and 5-year inflation expectations rose to 3.1% from 2.9% in December. Inflation is definitely depressing consumer spending & demand, not to mention sentiment.

Earnings of the Week

The Banks usually mark the official opening of earnings season but this week we had a few more interesting ones as well. I explore the Bank earnings below to look at what they’re telling us about the state of the economy.

The Banks and the Economy - JP Morgan (JPM) & Wells Fargo (WFC)

My key takeaway from the Banks’ earnings results is that consumers are cautious and not really taking chances even in an environment of historically low rates.

Both banks showed a YoY increase in consumer banking deposits: 12% increase for WFC and 20% increase for JPM. Even with the low rates, individuals are still putting money into their bank accounts.

Average loans were also down for individual consumers:

• Home Loans were down 26% YoY at JPM and down 8% YoY at WFC

• Card and Auto Loans were down 9% YoY at JPM but up 3% up on Cards and 17% up on Auto at WFC.

While home loans have decreased across the board, cards and auto still show mixed numbers. The increased prices of homes may be deterring consumers from taking out home loans. Auto prices are also up and while we see that at JPM, we are not seeing that effect at WFC as yet.

Another consideration is uncertainty. It would seem consumers would rather keep their wealth in cash than make any big purchases at this time.

Borrowing activity is still strong among larger corporates however, as both banks reported an increase in Corporate Lending - JPM +28% YoY; WFC +22% YoY.

Investment Banking did very well and it’s no surprise. This is something we’ve been hearing for the past year with record M&A deal flows and earnings. At JPM gross IB revenue was up 50% YoY ; at WFC IB revenue was up 33% YoY.

Overall Results:

JPM

• Q4 GAAP EPS of $3.33 beats by $0.33 but revenue was a miss by $520M at $29.26B, -3% YoY.

• $0.47 was added to their EPS from net credit releases of $1.8B firmwide.

• Excluding credit release ROTCE was 17% with BVPS up 8% to $88.07.

• CET1 Capital Ratio was 13.8% with SLR at 5.4%

• Non interest expense of $17.9 billion up 11% YoY largely on higher compensation; reported overhead ratio of 61%

WFC

• Q4 GAAP EPS of $1.38 beats by $0.25. Revenue of $20.86B (+12.8% YoY) beats by $2.25B.

• $0.17 was added to their EPS from net credit releases of $875M firmwide and another $0.18 per share ($943M net) was added from the sale of their Corporate Trust Business

• ROTCE was 15.3% (from 8% a year ago) with a CET1 ratio of 11.4%

• Noninterest expense decreased 11% YoY 

JPM’s stock price was down after earnings. The market didn’t take the Revenue miss and increased Expenses too well.

Around the Markets

The 40th Annual JP Morgan Healthcare Conference took place this week. There’s always so much to learn from these conferences.

A major theme throughout the conference was the focus on whole healthcare rather than depending on the current fragmented system where people have to coordinate their own physician visits.

A major part of getting to such a system is the technology and omnichannel platforms that allow for network effects. Companies are more & more relying on technology, AI and data to engage patients for prevention, management and care, rather than cure.

• Working with Startups is still very much a theme for healthcare. Centene (CNC) is using its 29 health plans to test relationships with startups. 

• Teledoc (TDOC) says consumers now expect virtual care to be provided holistically and to be similar to digital experiences in the rest of their lives. They are using Telehealth as an entry pathway to chronic care management. 

• Babylon (BBLN) - the new SPAC that teamed up with Palantir (PLTR)- discussed their model of moving away from a fee-for-service model and instead continuously monitor patients and collect data to manage care. They foresee this as a way to decrease severity of disease & avoid emergencies and hospitalizations.

• United Health (UNH) also discussed their Telehealth platform - NavigateNOW - which is a $0 co-pay plan, with unlimited chat and offering same-day appointments.

• And finally, Moderna (MRNA) is trying to address the global supply chain issue by working with Canada & Australia to set up in-country vaccine manufacturing. They are also looking at a $500M facility in Africa but, the country hasn’t been selected yet. 

The Week Ahead

Earnings

The US Market is closed on Monday for MLK Day.

After that we have a busy week with a full set of earnings ahead of us. Fincredible has been kind enough to send me their calendar to use. If you haven’t tried it, Fincredible is a great website where you listen to conference calls live or listen to the replays with transcripts. It’s certainly helped make life much easier!

Economic Data - Housing Data (keep an eye on homebuilders ITB, XHB, NAIL)

• Wed Jan 19, 2022 - Housing Starts and Building Permits

• Thu Jan 20, 2022 - Existing home sales

Closing Thoughts

In my earlier newsletters, I was very bullish based on the fact that the Fed was taking quite a dovish stance. This week’s testimony from Fed Chair Powell and Vice Chair Brainard gives me the sense that curbing inflation will mean stricter measures and the Fed is willing to do what it takes.

While they’ve left room for the possibility that asset sales will be a final resort, the size of the Fed’s current balance tells me they may have to employ this measure alongside rate hikes if they are to maintain a balance should inflation persist well into 2022.

While I’m still not bearish about the market, I do believe we need to be ready for the possibility of a proper correction, i.e, drawdown of over 10%, if the Fed decides to pull out all the stops.

If that really is the case, it will be even more of an opportunity either for people with the right stock picking skills or for traders who know how to manage their risks, but timing the bottom is not an option.

Here’s wishing you a happy weekend and safe investing. 

Sincerely yours,

Ayesha Tariq, CFA

@ayeshatariq

There’s always a story behind the numbers

None of the above is Investment Advice and all views are personal. I may or may not have positions in any of the stocks mentioned. I have a position in $UNH, $PLTR and $FAS which includes $JPM and $WFC as of the date of publication. I have no affiliation with any of the companies that are mentioned.