The Weekend Edition # 83

Mixed Market; Tough to Trade; Earnings - Financial and United Health

April 16, 2023

Welcome to another issue of the Weekend Edition. 

Thank you to all who’ve read and welcome to all the new subscribers this week!

Here’s what we cover:

  • Market Recap - Mixed Market

  • Earnings - Financials and United Health

  • Articles of the Week - Small may not be beautiful & Q1 Earnings Season

  • The Week Ahead - Economic & Earnings Calendar

  • Closing Thoughts - Tough Market

Let’s dive in ⬇️

Market Recap - 10 Apr - 14 Apr, 2023 📉📈

Yet another choppy week. We had economic data, Fed Speakers and of course, the start to earnings season rounding off the week.

It would seem that the market continues to be in limbo, partly driven by 0DTE options activities. On Wednesday, we received the CPI data that came in cooler than expected sparking off a sharp rally, only to be reversed throughout the day.

On Thursday, we got cooler than expected PPI data and that sparked off another rally, this time not reversing as much. Friday brought retail sales data which fell by -1%, far more than expected, and the market couldn’t seem to catch a bid, despite JP Morgan rallying over 7% on earnings.

Over in commodities land, we’re still oil hold up quite well and even though Gold slipped a little bit over the week, the price remains above $2000. Agri commodities are catching a bit of bid because of drought pressures coming from Argentina.

But, demand in general is waning and even with the production cut by OPEC, higher prices are not likely to last. Last week, the Chinese government ordered a cap on steel production to keep prices from falling too low. There’s definitely a slump in construction and this obviously doesn’t bode well for the industrial metals.

Earnings - JP Morgan and United Health 📝

Here’s the FactSet Summary for the Week:

Financials

Once again JP Morgan proved why it remains the world’s top bank posting a significant increase in revenues and earnings. However, Net charge-off’s did increase by about $260million during the quarter, bringing the full year total to $1.1B. They posted $868 million of net investment securities losses, under Corporate Banking. They also showed their deposits decrease by 8%.

Loans were up by 8% and Card Spending was up actually across the board for all the banks that reported. Unfortunately, people are relying more credit cards - which are high interest products and more prone to delinquencies. With SNAP payments coming off, it’s no surprise that people are spending more on credit cards.

Blackrock is the only company that posted a decline in EPS and Revenues. Their revenues decline by -18% and net income decline -19%.

United Health

Contributions to Growth (apart from the Medicare Advantage Program)

United Health Group saw revenue growth of +15% year-on-year overall. While the company cited the increase in people served, a major driver of revenue remains their Optum offering, which increased revenues 25% year-on-year.

The Optum offering is their total healthcare management solution which comprises Optum Care, Optum Financial, Optum Health and Optum Rx. While revenues of Optum contribute only about 43% of the total, the offering is quickly gaining ground. Optum Health increased their revenue per consumer served by 34% YoY and has been their primary offering to meet patient needs across at-home, digital and in-clinic settings. Optum Rx, their pharmacy offering is not far behind, growing +15% YoY.

Raised Outlook

UNH raised their full year outlook by 10 cents on the lower and higher end to $23.25 a share and $23.75 a share. The improved outlook is driven by:

  • Recent Medicaid contract awards in Indiana & Texas

  • Serving more people under their Medicare Advantage offerings

  • Increase in backlog growth under Optum Insight by 35% to $30.7 billion

Overall, the drag from the pandemic era has started to alleviate and as the situation normalizes more people are going in for usual healthcare treatments, such as routine surgeries and treatments. This should provide a positive outlook on more people served and further use of benefit plans.

Shares of United Health declined after the conference call as the market sees some problems ahead with regard to:

  • Changes to the Medicare Advantage plan that needs to be phased in over the next 3 years. The Inflation Reduction Act also proposes new guideline whereby it will be more difficult for drug companies to raise prices. Phamaceutical manufacturers are front-running this, and increasing prices ahead of the changes.

  • The pharmaceuticals coverage now where CMS has proposed reduced cost-sharing for insulin and eliminated cost-sharing for recommended, preventive vaccines, as well as the elimination of cost-sharing for Part D prescription drugs. This will mean that UNH has higher cost burden for their pharmaceutical coverage, if they have not negotiated appropriate rates with the pharmaceutical manufacturers.

  • The redetermination of Medicaid coverage. Medicaid is the program for people on limited income.  During the pandemic, the US declared a state of healthcare emergency and this allowed a lot of people to be enrolled in the Medicaid program even if they were not eligible for it. Now, UNH will have to these beneficiaries through a redetermination process to see if they are still eligible for coverage. If they are not, they will be referred to other health insurance providers. So, a concern for investors is also that they will plan beneficiaries and therefore, revenues may decline.

Articles of the Week 📖

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The Week Ahead 📅

Earnings Calendar 

Economic Calendar in Eastern Time

Closing Thoughts - Tough Market

Trading this market has become challenging. Not only because of the options activity but, because there seems to be too much noise at the moment. We have Fed speakers, financial media and of course, all sizes of market participants, trying to anticipate the Fed’s move and therefore, causing even more confusion.

Markets have no clear sector leadership and it’s getting tougher to understand what’s driving the overall direction.

And now, we’re in earnings season and of course, we see volatility rising with this as people place bets on whether companies will beat or miss, gap up or gap down.

It’s been a difficult environment to navigate and the coming week will be even more challenging as we have a number of major companies reporting, including of course, many of the regional banks.

Before I go, let me wish all those who are celebrating, a very Happy Eid next week!

Here’s wishing you safe investing.

Please take a moment to share and subscribe, if you found this newsletter useful.

Sincerely yours,

Ayesha Tariq, CFA

There’s always a story behind the numbers.

None of the above is Investment Advice. I may or may not have positions in any of the stocks or asset classes mentioned. I have no affiliation with any of the companies other than explicitly mentioned.

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