by tyler | May 4, 2023 | CNN, investing
First Horizon and TD Bank have called off a $13 billion deal that would have formed America’s sixth-largest bank, adding to the turmoil sweeping the country’s regional lenders.
Caught up in the worst banking crisis since 2008, First Horizon
(FHN)’s share price has plunged about 40% over the past couple months, falling well below the $25 per share that TD offered when the takeover was announced in February 2022.
The stock closed at $15.05 a share Wednesday and plunged another 40% morning trading Thursday after the deal was mutually abandoned by the banks.
First Horizon is a regional lender in the southeast United States and would have helped Canada’s TD expand south of the border. But regional banks have been losing the confidence of investors and customers since the March collapse of Silicon Valley Bank and Signature Bank.
On Monday, a third regional bank, First Republic, failed and JPMorgan purchased most of its assets. A fourth, PacWest Bank confirmed earlier Thursday that it’s looking for a financial lifeline.
First Horizon said it remains stable, cash-rich and diversified.
“While today’s announcement is unfortunate and unexpected, First Horizon will continue on its growth path operating from a position of strength and stability,” said First Horizon CEO Bryan Jordan, in a statement.
TD said in a statement that the companies called off the merger because of an unexpectedly long regulatory approval process. Without a timetable for approval, the companies began to question whether the deal would get regulators’ blessing at all. TD said the regulatory issue was for “reasons unrelated to First Horizon.”
Although TD didn’t directly cite the banking crisis or First Horizon’s crumbling market value as the reason for abandoning the purchase, CEO Bharat Masrani said in a statement that the decision provided “clarity” to its customers and shareholders.
TD will pay First Horizon a $200 million breakup fee plus $25 million in reimbursement fees.
Other regional bank stocks have tumbled in recent days after First Republic’s failure. Investors are waiting for the next shoe to drop. Early Thursday, California-based PacWest Bank said it is exploring “all strategic options” after its share price was cut in half in after-hours trading following a Bloomberg report that it was considering a sale.
PacWest’s
(PACW) stock was cut nearly in half Thursday, while Western Alliance Bank
(WAL), another regional competitor, fell by more than 20%.
As the Fed has hiked interest rates to fight inflation, the value of regional lenders’ loans and bond holdings has crumbled. Customers had been moving their money to bigger banks, leaving some regional banks without the cash they need to pay for withdrawals.
by tyler | May 3, 2023 | CNN, investing
Anheuser-Busch will report earnings Thursday, marking the first time it will face Wall Street analysts’ questions since its Bud Light brand erupted in controversy.
Sales of Bud Light have tumbled over the past month after the company delivered a custom can to Dylan Mulvaney, a transgender woman with a large Instagram following. The video went viral, with some supporting Mulvaney and the company, and others responding with anti-trans reactions and calls for a Bud Light boycott. A-B’s vague statement calling for unity similarly alienated trans advocates.
For the week ending on April 22, sales of the beer at retailers fell 21.4%, according to NIQ data given to Bump Williams Consulting. The week prior, Bud Light revenue was down 17%, even as sales of rivals Miller Lite and Coors Light increased. That prompted Beer Business Daily to write in a Monday note to subscribers that it has “never seen such a dramatic shift in national share in such a short period of time.”
But don’t expect the sales freefall to be reflected in the beer maker’s bottom line Thursday. Mulvaney published her post on April 1 — a day after A-B’s first quarter ended. It is possible, however, that senior executives might make their first substantial public comments about the incident and answer questions from analysts during the earnings call.
“Company leadership has to address sales and the biggest impact they’ve likely seen has come from recent chain retail declines in Bud Light,” Bryan Roth, an analyst for Feel Goods Company and editor of the alcohol beverage newsletter, Sightlines+, told CNN.
A-B has been generally quiet since the backlash, with just one short comment posted to Twitter on April 14 from A-B CEO Brendan Whitworth that did not directly mention the controversy. Roth said that he expects “some kind of general reference to what’s happened to the brand, but not likely addressing the controversy head on” when the company speaks with Wall Street analysts Thursday.
Bud Light sales have been declining for years, but this situation has “snowballed” and made its troubles even more pronounced, Roth said.
“Now the company has alienated some conservatives while losing an opportunity to stand by Mulvaney and show a new generation of consumers how it cares about the people younger generations admire,” Roth said. “The future for Bud Light was already less bright before this controversy and is dimmer now.”
Perhaps more troubling for A-B is that the Bud Light sales declines are having a halo effect on its other brands, indicating that drinkers are shunning the whole brand. Sales of Natural Light, Busch Light and Michelob Ultra, which growing prior to March 30, were also down for the week of April 22, according to NIQ data given to Bump Williams Consulting.
Williams told CNN that he doesn’t think A-B has “any choice in terms of commenting on the sate of their sales” and he’s concerned about how long it takes for Bud Light to recover from this “if at all.”
“My fear is that this is no longer just a Bud Light issue, it’s an entire Anheuser-Busch portfolio issue,” he said.
by tyler | May 3, 2023 | CNN, investing
The Federal Reserve is widely expected to raise its benchmark interest rate again on Wednesday, lifting it above 5% for the first time since 2006 as it works to bring down stubborn inflation.
But doing so risks sending shockwaves through the economy and markets, fanning recession fears and concerns about financial stability amid an ongoing crisis in the banking sector.
“Financial stability is subordinate to the effort to restore price stability” at the moment, Joseph Brusuelas, chief economist at RSM US, told CNN.
Step back: The Fed has swiftly raised interest rates in a bid to tame inflation, which fell to an annual rate of 5% in March but remains way above its target. Investors expect the central bank will announce another quarter-point increase today before signaling a pause.
That would allow policymakers to assess the consequences of the rate hikes enacted to date, which take time to feed through financial markets and the economy.
The consequences of higher borrowing costs have started to show. The unemployment rate stood at 3.5% in the United States in March. However, job openings that month tumbled to their lowest level since May 2021, according to data released Tuesday. Layoffs jumped by nearly 250,000 to 1.8 million — the highest level since December 2020.
So far, companies have maintained a robust pace of hiring, helping absorb laid-off workers, according to Diane Swonk, chief economist at KPMG. Yet that will change as companies find it harder to access credit, pushing firms to trim investment and costs.
The Fed has predicted the unemployment rate will rise to 4.5% this year and 4.6% next year. That level of joblessness would imply the economy is in recession, Swonk said.
“It’s stunning to me that the US economy has been as resilient as it has been,” she said. “We also know policy works with a lag, and the worst is yet to come.”
Meanwhile, investors are still coming to terms with the rapid run-up in rates, which sparked a huge sell-off in US government bonds and stocks last year.
Banks that failed to adequately prepare have been hammered. The shifting landscape paved the way for the collapse of Silicon Valley Bank in March and First Republic Bank this week.
More pain could be on the way. The commercial real estate sector, which is very sensitive to high interest rates, looks particularly vulnerable — its problems made worse by a glut of empty office buildings in the wake of the pandemic.
The Fed knows it’s pushing rates to an uncomfortable level. In many ways, that’s the point. The central bank wants to dampen Wall Street’s animal spirits and crimp demand for goods and services so inflation returns to a more manageable level and stays there.
But Sheila Bair, the former head of the US Federal Deposit Insurance Corporation, told CNN this week she’s worried about this aggressive strategy, which could pile undue stress on the banking system and the economy. She’s argued for months the Fed needs to take a time-out.
“Hitting pause doesn’t mean you’re giving up the fight,” said Bair, who led the FDIC through the Great Recession. “It just means you’re taking a breather and assessing what you’ve accomplished so far.”
JPMorgan Chase
(JPM) has once again come to the rescue of the banking system by acquiring a doomed bank. That makes Elizabeth Warren very worried.
By blessing JPMorgan’s takeover of First Republic Bank, the Democratic US senator fears federal regulators just made the “too big to fail” problem even worse.
“What happened here is because a bank was under-regulated and started to fail, the federal government has helped JPMorgan Chase get even bigger,” Warren told CNN on Tuesday in her first on-camera interview about the First Republic failure.
The backstory: JPMorgan agreed to pay the Federal Deposit Insurance Corporation $10.6 billion to buy most of First Republic after regulators shut the large regional bank. To the relief of investors and bank customers, the JPMorgan deal protects all of First Republic’s depositors.
“It may look good today while everything’s flying high, but ultimately if one of those giant banks, JPMorgan Chase, starts to stumble, the American taxpayers are the ones who will be on the line,” Warren said.
Warren thinks a different bank should have been allowed to buy First Republic.
“There were multiple bidders here and every other bidder was a lot smaller than JPMorgan Chase. My view on this is it’s important to look at the effect on competition and to try to keep a more diversified banking system,” Warren said. “Let somebody else buy this bank. Let somebody else take over those assets.”
Not over yet: Federal regulators had hoped that brokering the sale of First Republic would contain the banking crisis. That may have been wishful thinking. Shares of PacWest Bancor
(PACW)p, which is based in California, plunged 28% on Tuesday, while Arizona’s Western Alliance
(WAL) dropped 15%.
Which fast-growing tech companies are running into trouble as the economy slows and borrowing costs rise?
Not Uber, which on Tuesday reported first quarter earnings that beat Wall Street’s expectations and sent its shares soaring 12%. Its stock has climbed 48% year-to-date, versus the S&P 500’s 7% rise.
Details, details: The company brought in $8.8 billion in revenue in the first three months of the year, up 29% from the same period in 2022. That heartened investors, who cheered the signal that consumers are still spending on ride-sharing and food delivery.
“Uber is off to a strong start in 2023,” CEO Dara Khosrowshahi said. Even with higher interest rates and tighter access to funding, the company is “well positioned” to improve its competitiveness in key markets, he added.
Winning the rivalry: Lyft has not fared as well. Last month, it announced it would cut 26% of its workforce as it tries to control costs. The company recently replaced its CEO and said its founders would exit their management positions. (Lyft reports results on Thursday.)
The decision to invest in food and grocery delivery during the pandemic has become a big advantage for Uber. That business is still growing. Uber is also building it out as an advertising platform.
by tyler | May 1, 2023 | CNN, investing
The founder and CEO of Chobani, a company that quickly captured more than 20% of the US yogurt market, has a clear mission: He wants to prove that capitalism and humanitarianism feed off of each other.
Hamdi Ulukaya, a Turkish-born entrepreneur, says his company is proof that those principles work.
He has donated millions of dollars to fight food insecurity and to disaster relief efforts around the world. Chobani is also a part of the Tent Coalition for Refugees in the US, which advocates for the hiring and training of refugees across the country. As Ulukaya told potential investors in an initial public offering filing in 2021, Chobani “operates on a simple fundamental principle, that we do well by doing good.”
But questions remain about whether it’s possible to focus on the greater good while catering to shareholders who demand ever-widening profit margins.
Chobani was slated to go public in 2022 but withdrew its filing as market conditions deteriorated. In a discussion with CNN, Ulukaya said the company still has plans to go public when market conditions stabilize.
Before the Bell sat down with Ulukaya at the Global Inclusive Growth Summit in Washington DC to discuss corporate responsibility, his economic outlook and more.
This interview has been edited for length and clarity.
Before the Bell: There’s an innate idea that humanitarianism and capitalism are separate entities. How do you combine the two?
Hamdi Ulukaya: The capitalistic view is that the core purpose of business is to create value for the shareholders. But if you look at it from another dimension, and this was the prevailing view before the 1970s, the core purpose of business is to create value for all shareholders. That includes workers, your community and the world altogether.
The only way to get people on board with that perspective is to convince them that it’s good for business. When you meaningfully get involved, it becomes an enormous engine for your company. But how do you convince a company that only focuses primarily on profits to broaden its focus? That’s the biggest challenge.
The concept of greedflation has been in the news lately, that’s when companies use the cover of inflation to unnecessarily raise prices and increase their profit margins. Is it a real problem?
I make food, and I’m looking at the costs — where it was six months ago, where it was one year ago and where it is today. It’s the same perspective, that the prices are still high out there.
You do see some selfish acts and it seems like it’s all unified somehow. Of course you have to pass on some increases in prices to customers, but those inputs are coming back down and that hasn’t been reflected in the price of goods: They’re still elevated. It is troubling. I think food makers have to be very conscious that people are having a hard time affording food.
I want to believe that the employees of these companies want to do the right thing. I wonder if they’re succumbing to financial market pressures that demand they show growth and strong metrics.
Are there IPO plans on the horizon for Chobani and if so, how will you navigate pressures from shareholders to do the same?
We’ve passed $2 billion in sales and we’re growing 20% to 25% year-over-year. We don’t have any external pressure or demand to go public. There is no cash-out scenario.
That being said, we have a few reasons we want to go public. One is our 2,000 employees — they have shares and I want them to have access to that money [Ulukaya has given his employees shares of the company worth up to 10% of Chobani’s total value]. The second is we want our manufacturing to grow, product-wise and geographically. So this is not an exit. But if going public is going to fuel our journey then I welcome it.
The year we were supposed to IPO was very loud, very crowded and there were a lot of moving parts. It didn’t look good and we thought it might damage our journey so we decided to stop it. But we are OK to be in the public market. I think people understand what Chobani is all about and they understand that this is tomorrow’s brand and tomorrow’s company. I think the external conditions need to be settled, and we will reevaluate, but still I’m really open to it.
“Sell in May and go away,” says the old Wall Street adage.
But this year, it might not be so prudent to heed that piece of advice, wrote CFRA’s Sam Stovall in a recent note. Instead he recommends that investors “rotate but don’t retreat.”
What’s happening: November through April are typically the strongest six months of the year price returns for the S&P 500, said Stovall. The May through October average, meanwhile, has “historically been anemic,” he said.
The upcoming presidential cycle could elevate that trend, said Stovall.
In the year before elections, starting from 1945, he found that the market grew by an average 14.3% between November and April and rose in price 95% of the time. Stocks had a more difficult period in the six months that followed, gaining just 2% on average and rising in price 63% of the time.
Rotation is key: Stovall created a hypothetical portfolio that had an equal exposure to the consumer discretionary, industrials, materials and technology sectors between November and April — and then rotated to more defensive sectors (consumer staples and health) between May and October.
If an investor held that same portfolio between April 1990 and April 2023 they “saw higher relative returns, lower volatility, and a 70% frequency of beating its benchmark,” said Stovall.
But as always, past performance is no guarantee of future results, he added.
The Federal Reserve on Friday released a review of the events leading to Silicon Valley Bank’s collapse last month.
In the report, the Federal Reserve admits responsibility for not understanding the extent of the risk that SVB undertook, as well as failing to urge the bank to fix its problems in a timely manner.
“Regulatory standards for SVB were too low, the supervision of SVB did not work with sufficient force and urgency, and contagion from the firm’s failure posed systemic consequences not contemplated by the Federal Reserve’s tailoring framework,” the Fed report stated.
The report also recommended a re-evaluation of the Fed’s regulatory and supervisory functions.
Michael Barr, the Fed’s vice chair for supervision, said that external reviews of SVB’s collapse, including from federal lawmakers, are welcome.
by tyler | May 1, 2023 | CNN, investing
The founder and CEO of Chobani, a company that quickly captured more than 20% of the US yogurt market, has a clear mission: He wants to prove that capitalism and humanitarianism feed off of each other.
Hamdi Ulukaya, a Turkish-born entrepreneur, says his company is proof that those principles work.
He has donated millions of dollars to fight food insecurity and to disaster relief efforts around the world. Chobani is also a part of the Tent Coalition for Refugees in the US, which advocates for the hiring and training of refugees across the country. As Ulukaya told potential investors in an initial public offering filing in 2021, Chobani “operates on a simple fundamental principle, that we do well by doing good.”
But questions remain about whether it’s possible to focus on the greater good while catering to shareholders who demand ever-widening profit margins.
Chobani was slated to go public in 2022 but withdrew its filing as market conditions deteriorated. In a discussion with CNN, Ulukaya said the company still has plans to go public when market conditions stabilize.
Before the Bell sat down with Ulukaya at the Global Inclusive Growth Summit in Washington DC to discuss corporate responsibility, his economic outlook and more.
This interview has been edited for length and clarity.
Before the Bell: There’s an innate idea that humanitarianism and capitalism are separate entities. How do you combine the two?
Hamdi Ulukaya: The capitalistic view is that the core purpose of business is to create value for the shareholders. But if you look at it from another dimension, and this was the prevailing view before the 1970s, the core purpose of business is to create value for all shareholders. That includes workers, your community and the world altogether.
The only way to get people on board with that perspective is to convince them that it’s good for business. When you meaningfully get involved, it becomes an enormous engine for your company. But how do you convince a company that only focuses primarily on profits to broaden its focus? That’s the biggest challenge.
The concept of greedflation has been in the news lately, that’s when companies use the cover of inflation to unnecessarily raise prices and increase their profit margins. Is it a real problem?
I make food, and I’m looking at the costs — where it was six months ago, where it was one year ago and where it is today. It’s the same perspective, that the prices are still high out there.
You do see some selfish acts and it seems like it’s all unified somehow. Of course you have to pass on some increases in prices to customers, but those inputs are coming back down and that hasn’t been reflected in the price of goods: They’re still elevated. It is troubling. I think food makers have to be very conscious that people are having a hard time affording food.
I want to believe that the employees of these companies want to do the right thing. I wonder if they’re succumbing to financial market pressures that demand they show growth and strong metrics.
Are there IPO plans on the horizon for Chobani and if so, how will you navigate pressures from shareholders to do the same?
We’ve passed $2 billion in sales and we’re growing 20% to 25% year-over-year. We don’t have any external pressure or demand to go public. There is no cash-out scenario.
That being said, we have a few reasons we want to go public. One is our 2,000 employees — they have shares and I want them to have access to that money [Ulukaya has given his employees shares of the company worth up to 10% of Chobani’s total value]. The second is we want our manufacturing to grow, product-wise and geographically. So this is not an exit. But if going public is going to fuel our journey then I welcome it.
The year we were supposed to IPO was very loud, very crowded and there were a lot of moving parts. It didn’t look good and we thought it might damage our journey so we decided to stop it. But we are OK to be in the public market. I think people understand what Chobani is all about and they understand that this is tomorrow’s brand and tomorrow’s company. I think the external conditions need to be settled, and we will reevaluate, but still I’m really open to it.
“Sell in May and go away,” says the old Wall Street adage.
But this year, it might not be so prudent to heed that piece of advice, wrote CFRA’s Sam Stovall in a recent note. Instead he recommends that investors “rotate but don’t retreat.”
What’s happening: November through April are typically the strongest six months of the year price returns for the S&P 500, said Stovall. The May through October average, meanwhile, has “historically been anemic,” he said.
The upcoming presidential cycle could elevate that trend, said Stovall.
In the year before elections, starting from 1945, he found that the market grew by an average 14.3% between November and April and rose in price 95% of the time. Stocks had a more difficult period in the six months that followed, gaining just 2% on average and rising in price 63% of the time.
Rotation is key: Stovall created a hypothetical portfolio that had an equal exposure to the consumer discretionary, industrials, materials and technology sectors between November and April — and then rotated to more defensive sectors (consumer staples and health) between May and October.
If an investor held that same portfolio between April 1990 and April 2023 they “saw higher relative returns, lower volatility, and a 70% frequency of beating its benchmark,” said Stovall.
But as always, past performance is no guarantee of future results, he added.
The Federal Reserve on Friday released a review of the events leading to Silicon Valley Bank’s collapse last month.
In the report, the Federal Reserve admits responsibility for not understanding the extent of the risk that SVB undertook, as well as failing to urge the bank to fix its problems in a timely manner.
“Regulatory standards for SVB were too low, the supervision of SVB did not work with sufficient force and urgency, and contagion from the firm’s failure posed systemic consequences not contemplated by the Federal Reserve’s tailoring framework,” the Fed report stated.
The report also recommended a re-evaluation of the Fed’s regulatory and supervisory functions.
Michael Barr, the Fed’s vice chair for supervision, said that external reviews of SVB’s collapse, including from federal lawmakers, are welcome.
by tyler | Apr 28, 2023 | CNN, investing
Environmental, social, and governance-focused funds, which were once deemed the darlings of Wall Street, may be on the way out.
They’re currently weathering a “perfect storm of negative sentiment,” said Robert Jenkins, head of global research at Lipper, a financial data provider.
Despite the gloomy forecast, Jenkins remains optimistic. He sees this as a natural phase of the market’s evolution. A new, more efficient system is taking shape that incorporates ESG standards into the bedrock of stock valuations, he said.
ESG investing as a separate entity could be on its way out, but the approach was wrong to begin with, said Jenkins. Instead, it should be integrated into the fundamental analysis of every investor.
What’s happening: Total assets under management in ESG funds fell by about $163.2 billion globally during the first quarter of 2023 from the year before, according to data shared exclusively with CNN by Lipper.
In March alone, total assets under management in the responsible investments fund market fell by $6.8 billion.
It’s not that the funds are underperforming, either. The average overall return for these funds was 2.2% in March — outperforming the 12-month moving average return for the wider market by 2.8 percentage points.
Instead, a confluence of political, geopolitical and market events has severely damaged interest in ESG investing.
Russia’s ongoing war in Ukraine forced traders to reconsider investing in energy and weapons stocks. Increased scrutiny also played into political differences around ESG investing and opened the door to vocal critics.
Because of a partisan divide, about half the states in the United States are enacting provisions to block efforts to invest in state-run investment accounts with an ESG lens, Lipper found.
Responsible investing funds also came up against mighty economic headwinds last year. These funds’ outsized investments in tech stocks and lack of energy stocks (which was the only positive sector in 2022), led to noticeable losses last year.
Things aren’t good.
Breaking the trend: “I think ESG was overly trendy and it got caught up in itself,” said Jenkins. “I was going to conferences two to three years ago, and I remember walking out and thinking ‘these guys aren’t saying anything new or different. They’re all saying the same thing.’”
Companies jumped on to the bandwagon and greenwashing, a marketing tactic to appear environmentally conscious in investments, became prevalent. That, in turn, hurt the movement’s reputation.
Jenkins sees what’s happening now as a winnowing of the responsible investing sphere. That’s all part of the maturation process, he said. “As data and disclosures move towards more standardization, ratings and analytics adjust for biases and become more transparent and aligned,” he said.
ESG won’t be as glamorous as it was before, but it won’t be a politically explosive term either.
“It’s actually going to fade a little bit from its marquee nature, it’s just going to be a part of sound business strategy and management,” said Jenkins. “They’re just going to be put alongside all the other fundamental analytics that we’re so used to hearing about, your earnings-per-share and your GAAP accounting. ESG ratings will just become part of that toolkit for investment managers.”
The Federal Reserve has a language of its own filled with seemingly innocuous terms like “entrenched” or “data-dependent” or “gradual normalization” that actually hold enough power to turn the market on its head.
“Fed speak” refers to that purposefully ambiguous language used by officials at the central bank to communicate monetary policy decisions (in theory it’s used to avoid causing market volatility). Many reporters and analysts have made careers out of quickly deciphering that nuanced communication for investors and other interested parties.
But we may soon be out of work: A new research paper from Fed economists has found that ChatGPT and similar AI engines can do the job just fine. “The performance of GPT models surpasses that of other popular classification methods,” the paper found. “GPT models have the ability to explain why a certain sentence was labeled in a certain way” they found.
Humans remain at the helm for now — ChatGPT isn’t going to ask questions of Fed Chair Jerome Powell at his press conferences just yet. But, the Fed researchers wrote, these tools can be highly valuable “for assisting researchers and analysts in this domain.”
Mortgage rates rose for the second week in a row, after easing inflation helped rates fall for five consecutive weeks prior to last week’s rise.
But that doesn’t mean that trend of increases will continue, reports my colleague Anna Bahney.
The 30-year fixed-rate mortgage averaged 6.4% in the week ending April 27, a slight increase from 6.4% the week before, Freddie Mac data show. The 30-year fixed-rate was 5.1% a year ago.
Despite the uptick, economists expect mortgage rates to decline this year as the rate of inflation decelerates.
Mortgage rates tend to track the yield on 10-year Treasury bonds. In other words, while the Federal Reserve doesn’t actually determine interest rates on mortgages, its rate hike decisions, investors’ reactions to them and Wall Street’s predictions of what could happen have an impact on mortgage rates.
The Fed is set to meet next week. Analysts expect the bank to raise rates by a quarter point and pause and even cut rates later this year.
