Motley Fool Money
Big Banks Cash In
Fri Jul 14 2023Description
The episode covers various topics including earnings season, business efficiency, JP Morgan's financial performance, shorting stocks, market irrationality, impact of interest rates on investments, risk management in banks, company updates, and concerns about Disney's expansion.
Insights
Earnings season shows strong results for big banks
Big banks have reported strong earnings and revenue growth during the current earnings season.
Efficiency and cost-cutting strategies in focus for companies
Companies are focusing on maximizing efficiencies and cutting costs to improve margins.
Inflation moderation benefits businesses
As inflation starts to moderate, businesses may benefit from lower input costs.
Challenges faced by small to mid-sized companies
Small to mid-sized companies are facing challenges with high inventories, which could lead to lower profit margins and earnings.
JP Morgan's financial performance highlights
JP Morgan's interest income has increased significantly, but there may be elevated credit losses in the future. Competition for deposits with smaller banks may impact net interest income for regional and community banks.
Shorting stocks and market irrationality
Shorting heavily followed stocks can be risky and dangerous. It's important to consider the fundamentals of a business before shorting it. The market can remain irrational longer than expected.
Impact of interest rates on investments
Shifting interest rates have affected consumers and asset allocation. Higher rates generate reasonable bond market returns at a lower cost. Valuation process and capital allocation became difficult due to Fed's influence on fixed income markets.
Risk management issues in banking
Silicon Valley Bank failed in risk management, leading to potential regulatory impact on financial institutions. Treating depositors differently based on the size of the bank may not be desirable.
Company updates and leadership confidence
Domino's stock got a nice pop due to increased visibility and accessibility. Chipotle is testing a guacamole making robot to improve efficiency. Franklin Electric has a strong dividend track record and room for further growth. Bob Iger's contract extension indicates confidence in his leadership at Disney.
Disney's expansion and concerns
Disney is looking for external partnerships to expand distribution and engagement on ESPN. The reinstatement of dividends is a positive sign. However, there are concerns about strikes and the CEO's behavior.
Chapters
- Earnings Season and Business Efficiency
- JP Morgan's Financial Performance
- Shorting Stocks and Market Irrationality
- Impact of Interest Rates on Investments
- Risk Management and Regulatory Impact on Banks
- Company Updates and Leadership Confidence
- Disney's Expansion and Concerns
Earnings Season and Business Efficiency
00:05 - 06:40
- Earnings season has begun with big banks reporting strong results.
- Companies are focusing on maximizing efficiencies and cutting costs to improve margins.
- Inflation is starting to moderate, which could benefit businesses as input costs come down.
- Companies like McCormick and Pepsi have seen positive impacts on their margins due to lower input costs.
- Small to mid-sized companies are facing challenges with high inventories, which could lead to lower profit margins and earnings.
- Managing inventory is difficult but crucial for meeting customer demand.
- The early results from JPMorgan were better than expected, with strong earnings and revenue growth.
JP Morgan's Financial Performance
06:18 - 13:00
- JP Morgan's interest income of $21.9 billion was up 44% from a year ago.
- The provision for credit losses grew 27% from the previous quarter for JP Morgan.
- Jamie Dimon sees the US economy as resilient but acknowledges that consumers are becoming strapped.
- There may be elevated charge-offs and trouble loans in the future.
- Competition for deposits with smaller banks may impact net interest income for regional and community banks.
- Short covering may be driving the surge in beaten-up stocks like Carvana, Redfin, Coinbase, etc.
- The sustainability of these stock gains is uncertain.
Shorting Stocks and Market Irrationality
12:31 - 18:20
- Stocks have surged over the past few months, but the sustainability of these gains is questionable.
- The short interest in heavily followed companies can act as a catalyst for stock surges.
- Short sellers who bet against these stocks may have had a rough time with their portfolios.
- Shorting becomes more expensive as it becomes more obvious, and there are costs associated with it.
- There are different ways to short stocks, including option strategies that can minimize costs.
- Shorting heavily shorted names can be risky and dangerous.
- It's important to consider the fundamentals of a business before shorting it.
- If you're a serial shorter, be prepared for times when your bets don't work out.
- Fundamentally good businesses can provide long-term returns, while shorting has a limited upside.
- Evaluation is often used poorly as a reason to short growing companies like Amazon.
- The market can remain irrational longer than you can remain solvent.
Impact of Interest Rates on Investments
18:02 - 25:32
- Marketing can punish you in the short term.
- The market can remain irrational longer than you can remain solvent.
- Short-term tailwind for companies may set unrealistic expectations for recent stock buyers.
- Fundamental picture improvement is crucial when following businesses.
- Shifting interest rates have affected consumers and asset allocation.
- Interest rate policy benefits savers after a long period of low returns.
- Higher rates generate reasonable bond market returns at a lower cost.
- Interest income has become a good source of personal income for individuals with investment portfolios.
- Finding alternative bond proxies was challenging but now fixed income offers closer historical returns in portfolios.
- Fed's rate hikes are closer to the end, allowing for reduced risk and higher cash flows in portfolios.
- High-quality bonds with added duration and tax-exempt bonds offer value in this interest rate environment.
- Valuation process and capital allocation became difficult due to Fed's influence on fixed income markets.
- Consumer faith in banking has been restored after the worst of the banking crisis passed and stress tests were passed by big banks.
- Silicon Valley Bank failed due to bond portfolio issues, not credit problems or off-balance sheet derivatives.
- Most banks managed risk better than Silicon Valley Bank, although some had excess interest rate risk on their balance sheets.
Risk Management and Regulatory Impact on Banks
25:03 - 32:41
- Silicon Valley Bank failed in risk management
- Treasury Secretary Janet Yellen stated that depositors of systemically important financial institutions are safe, but others will be treated on a case-by-case basis
- The banking system has changed due to technology, allowing anyone to do business with any bank at any time
- Treating depositors differently based on the size of the bank may not be desirable
- FDIC insurance assessment from Silicon Valley Bank's failure is significant and could lead to people moving money out of regional banks
- Bigger banks pay higher rates for deposits, creating a margin problem for profitability
- The banking system is not set up to handle a large number of clients wanting their money back
- Regulatory authorities may impose additional regulations on financial institutions as a result of this situation, which could lower profitability and increase capital requirements
Company Updates and Leadership Confidence
32:24 - 38:17
- Domino's stock got a nice pop this week due to increased visibility and accessibility.
- Chipotle is testing a guacamole making robot called the auto-cado to reduce preparation time.
- Chipotle's guacamole is in high demand, with customers ordering nearly 50 million pounds per year.
- The robot will help cut down on time and improve efficiency for workers.
- Franklin Electric (F-E-L-E) is a leading manufacturer of water and fuel pumping systems.
- They have raised their dividend for the past 31 consecutive years and have room for further growth.
- Bob Iger has extended his contract as CEO of Walt Disney through 2026, indicating confidence in his leadership during the company's transition period.
Disney's Expansion and Concerns
37:58 - 38:51
- Disney is looking for external partnerships to expand distribution and engagement on ESPN.
- Disney has reinstated its dividend after a three-year suspension.
- There are concerns about writer strikes, actor strikes, and the CEO's behavior at Disney.
- The hosts are considering putting Matt's selection on their radar.