JPow Shocks The Market

In this issue of the Peel:

• ?? Q2 bank earnings are in. Let’s see who the winners are
• ?? Match Group rises on a new romance while Reddit gets downgraded
• ?? It’s always dangerous when markets are “100% certain"

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Market Snapshot ??

Banana Bits ??

• 3 interest rate cuts by year-end are now becoming the consensus
• UnitedHealth had a solid earnings day despite leaking everyone’s medical history to the world in a hack earlier this year
• IMF makes us wonder if they skipped Macro 101 class with this forecast
• Lina Khan is back to bullying her crush, Amazon, over a proposed acquisition of an AI startup

Macro Monkey Says ??

Bank Earnings

If there’s one thing banks are particularly good at, it’s making you wait.

Whether it’s in line at the teller, waiting for your (very rare) gambling profits to hit, or, in this case, waiting for them to drop their earnings reports.?

Finally, we have all the Q2 data from the firms I’m sure most of you would kill to work for. So, let’s get into it.

J.P. Morgan (JPM, -1.21%)

The Death Star of banking was first out the gate last Friday, falling 1.21% on the day of release.

Jamie Dimon & Co. beat on the top and bottom line, reporting $4.26/sh on $50.99bn in revenue vs estimates for $4.19/sh on $49.87bn.

Investment banking fees roared back to life like an analyst after managing to secure 8 hours of interrupted sleep, blowing up 52% compared to Q2’23.?

Trading revenues jumped 21% in equities and 5% on the fixed-income side.

However, the Street was more focused on the surprise in provisions for credit losses, allocating $3.05bn here instead of the $2.78bn expected, indicating the firm has less confidence in borrowers.?

Net interest income growth of 4% also disappointed, contributing to the day’s losses.

Source

Wells Fargo (WFC, -6.02%)

Usually the worst at adhering to regulations and not scamming customers, Wells Fargo was also the worst performer in response to its Q2 earnings.

America’s 3rd largest consumer bank beat on the top and bottom lines, delivering $1.33/sh on $20.69bn in revenue vs estimates for $1.29/sh on $20.29bn.?

Despite the beat, net income still fell slightly compared to last year.?

That was primarily attributable to an idiosyncratic 9% decline in net interest income, suggesting poor management of funding costs in the era of high rates.

Net margins and average loan balances fell, particularly within their Corporate & Investment Banking division, down 3% annually.

Compared to its older brother, JPMorgan, the San Francisco-based bank’s report was far uglier. We can even see this manifested physically in the stark architectural differences between the HQs of two of the country’s largest banks. Take a look.

Citigroup (C, -1.81%)

The smallest of the bunch, Citigroup, remains amid CEO Jane Fraser’s company-wide overhaul. But that didn’t stop them from beating in Q2.?

Citi reported earning $1.52/sh on $20.14bn in revenue against estimates for $1.39/sh on $20.07bn.

If you thought JPMorgan’s IB fee growth of 52% was impressive, wait until you hear that Citi grew this segment even quicker, increasing 60% vs Q2’23.

Citi’s IB fees are still ~37% of JPMorgan’s at just $853mn, but it’s a good sign of early success for Fraser’s turnaround.

A rebound in trading activity was the biggest contributor to the beat. Equities trading revenue surged 37% to $1.5bn while fixed income slipped 3% to $3.6bn… because bond math is hard.

Still, total revenue grew 4% while net income grew 10%, displaying solid management of operational leverage.

Goldman Sachs (GS, +2.57%)

CEO David “DJ D-Sol” Solomon proved his ability to stay as gold as PonyBoy for the quarter while still finding time to DJ Memorial Day weekend parties in the Hamptons.

Goldman saw revenue of $12.73bn, the fastest growth of the bunch at 17% YoY. Earnings beat expectations, too, at $8.62/sh, surging 150% compared to last year.

Trading, advisory, and asset & wealth management revenues were all on fire, with fixed-income trading revenue growing 17%, investment banking fees up 21%, and asset & wealth management carrying the team on a 27% annual increase

Source

Meanwhile, Goldman slashed its provision for credit losses by 54%, showing increased confidence in borrowers heading into an expected “lower for sooner” rate environment.

Despite trying to stay gold, the company earned the silver medal in performance on the day of the earnings drop. The gold medal went to…?

Bank of America (BAC, +5.35%)

The second largest consumer bank in the U.S. joined the rest of the gang in beating the top and bottom line, delivering $0.83/sh on $25.54bn vs estimates for $0.80/sh on $25.22bn.

Net income still fell a not-so-nice 6.9% to an equally not-so-nice $6.9bn. Revenue grew by 1%.?

BofA’s 29% increase in IB fees normally seems great, but compared to Citi and JPMorgan, it was just sad.

But asset management fees jumped a big 14% to $3.37bn, the biggest contributor to yesterday’s rise.

Source

Morgan Stanley (MS, +0.84%)

Finally, we’re almost done, so let’s finish it off with the bank whose CEO abandoned them at the start of the year.

Morgan Stanley beat estimates for revenue and earnings as well, meaning these banks went 6/6 on beats, almost like they gamed the system or something.?

The Wall Street bank delivered $1.82/sh on $15.02bn in revenue vs expectations for $1.65/sh on $14.3bn.

That represents 12% revenue growth and a massive 41% jump in profits compared to 2023.

The firm’s wealth management business sh*t the bed with revenue growth of just 2% on a horrific 17% decline in interest income.

However, their overexposure to Wall Street helped this quarter, with Equity trading revenue up 17% and fixed income up 16%, more than compensating for other declines.

The Takeaway?

With a relatively easy comp of Q2’23, in the aftermath of the SVB debacle, banks grew revenue and profits well for the year.

Trading and asset & wealth management revenues were the biggest upside contributors for the quarter.

Wealth management is seen as a key sector of growth within financial services, so it’s no surprise to see the big players within that sector performing the best. The market’s constant all-time highs so far this year have been the biggest driver of that success.?

Going forward, investors will be keen to observe how banks manage funding costs and loan originations in the coming era of lower rates.

Usually, higher rates are good for banks as they increase the spread between deposit costs and lending rates. But that hasn’t been the case this cycle due to demand destruction and deposit flight to higher-yielding assets like money market funds.?

Stay tuned.

What's Ripe ??

Match Group (MTCH) ??7.5%

• Now that ~50% of relationships in the U.S. are started online, the industry’s top player is finally beginning its own romance with Starboard Value.
• The hedge fund disclosed a 6.5% stake in Match. Starboard CEO Jeff Smith wants to “improve” Tinder and Hinge as he ostensibly wasn’t getting any matches.
• The “improvements” alluded to weren’t very specific, but Tinder alone accounts for ~50% of Match’s revenue, so any changes carry major implications.

State Street (STT) ??7.5%

• This assman (asset manager) hasn’t performed this well since Massachusetts Governor John Hancock (yes, that John Hancock) issued their charter in 1792.
• The world’s 5th largest assman beat on EPS by 6.97% and revenue by 1.35%. AUC and AUM hit all-time highs at $44.3tn and $4.4tn, respectively.
• Interest income jumped 6.4%, while fee revenue grew 1.5% on an 11% hike to the cost of management fees.

What's Rotten ??

Charles Schwab (SCHW) ??10.2%

• As if seeing our (basically nonexistent) losses in WSO Alpha on Schwab wasn’t bad enough, now we have to watch ourselves lose in Schwab on Schwab.
• The assman (a.k.a., asset manager, obviously) beat on sales and EPS, but just barely. Net income fell 3% annually, but fundamentals weren’t that bad.
• Core net new assets grew 17%, Managed Investing Solutions inflows boomed 56%, client assets receiving advice grew 16%, and brokerage accounts grew 4%.
• However, the firm’s AFS bond portfolio fell another $40bn. Schwab planned a balance sheet restructuring that will take away from other shareholder-friendly activities, like buybacks.

Reddit (RDDT) ??3.5%

• After Jim Cramer told us all to “Buy, Buy, Buy” Reddit on Monday, we should’ve seen this coming. Just a day after Cramer’s call, the stock is tanking.
• Loop Capital downgraded the social media/porn site to a Hold on valuation concerns but kept its $75/sh price target.
• Plus, 82% of outstanding Reddit shares are subject to a lockup that expires Aug 9th, clearing the way for more insider sales.

Thought Banana ??

Dancin’ In September

We can’t even be 100% certain we’re not living in a simulation, but markets recently became 100% certain about something else.

Powell’s cutting rates in September. At least, that’s what the market is saying after the Fed Chair’s continued comments this week.

Let’s get into it.

What Happened?

Speaking at what sounds like the biggest gathering of nerds in America outside of Silicon Valley, the Economic Club in Washington D.C., Powell said basically the same thing he’s been saying for a few weeks now.

However, there was one line that might seem innocuous at first, but is the entire reason I’m writing about this now.?

“... if you wait until inflation gets all the way down to 2%, you’ve probably waited too long because the tightening that you’re doing, or the level of tightness that you have, is still having effects which will probably drive inflation below 2%.”

Boom. Mic drop. JPow confirms that the Fed is not going to sit on its hands and wait for a 2% inflation print before cutting rates.

Source ?

That one comment caused the above chart. Here, we can see that markets are pricing in 100% odds of at least one 25bp cut by the end of the FOMC’s September meeting.

Markets see 90.5% odds of just one 25bp cut, 9.3% odds of two 25bp cuts or one 50bp cut by then, and the same odds of my parents becoming proud of me for 75bps worth of cuts by September at just 0.2%.

The Takeaway?

It’s priced in now, so, if JPow and the FOMC for any reason don’t cut by then, expect a forecast of falling stock brokers by October.

Homebuilder and other high-rate exposed stocks shot up on the news, with the Home Construction ETF ITB up 5.9% on the session.

Within the WSO Alpha portfolio, Builders FirstSource and Zillow were our #1 and #3 performers of the day, up 8% and 4.6%, respectively. See for yourself here .

The Big Question: Which bunker are you running to if the Fed doesn’t cut by September? Will the Fed use the July meeting to set up rate cuts, or just start the slashing then?

Banana Brain Teaser ??

Previous ??

How many prime numbers between 1 and 100 are factors of 7,150??

Answer: Four factors?

Today ??

Of the 300 subjects who participated in an experiment using virtual-reality therapy to reduce their fear of heights, 40 percent experienced sweaty palms, 30 percent experienced vomiting, and 75 percent experienced dizziness. If all of the subjects experienced at least one of these effects and 35 percent of the subjects experienced exactly two of these effects, how many of the subjects experienced only one of these effects?

Send your guesses to [email protected]

Wise Investor Says ??

“If investors expect the Fed to stabilize the economy, this will be built into stock prices long before the Fed even begins to take its stabilizing actions.” — Jeremy Siegel

How Would You Rate Today's Peel??

??All the bananas ? ? ? ? ? ? ? ? ? ? ? ? ???Meh ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ??Rotten AF

Happy Investing,

David, Vyom, Jasper & Patrick