by tyler | Jun 6, 2023 | CNN, investing
“Sell in May and go away” — shorthand for the idea that US stocks rise more between November and April than over the summer — is one of the most oft-repeated adages on Wall Street.
But Main Street isn’t listening.
New data from TD Ameritrade shows that retail investors shrugged off US debt ceiling uncertainty and recessionary fears last month as they increased their exposure to markets.
What’s happening: May was a mixed month for US stocks. The debt ceiling debate and the possibility of a US default unnerved investors and ruffled markets. Economic data beat expectations and inflation remained sticky, boosting fears that the Federal Reserve would raise interest rates once again. On top of that, regional banking worries were revived when First Republic Bank failed at the beginning of the month.
The Nasdaq Composite managed to gain 5.8% on the back of a boom in AI stocks and strong tech earnings, but the S&P 500 was essentially flat and the Dow ended May 3.5% lower.
Still, retail investors increased their exposure to stocks last month and were the most bullish they’ve been in a year, according to the TD Ameritrade Investor Movement Index for May. That index aggregates Main Street investor positions and activity to measure how they’re positioned in the market.
On the final day of May, retail investors alone had a net flow into equities of $1.48 billion, the highest in about three months, according to VandaTrack Research, a financial data company
Main Street takes a risk: Retail investors likely saw economic turmoil as an opportunity to buy market dips, Alex Coffey, senior trading strategist at TD Ameritrade, told CNN. “They were opportunistic about scooping up shares of regional banks,” he said.
Retail investors also piled out of AI and tech stocks as the sectors surged in May, opting instead to put their money into riskier bets. “The big takeaway to me was that while there was all this fear bubbling up, our clients saw this as an opportunity to rotate out of names that were doing really well and into names that had some bad news in May or that were struggling — companies like PayPal
(PYPL)and Disney
(DIS), and even Tesla
(TSLA),” said Coffey
Retail investors are often seen as trend chasers, buying into stocks after they surge upward, but that’s no longer the case, he said. Empowered by platforms that allow them to trade quickly and cheaply, new access to market information and still armed with half a trillion dollars in pandemic-era savings, retail investors are making moves on their own instead of following the so-called smart money of institutional investors.
“These investors are a lot more contrarian than people think,” added Coffey.
But these trades are risky and while an institutional investor might lose their job for making a big mistake, a Main Street trader could lose their shirt.
The world’s largest crypto exchange is in trouble.
The US Securities and Exchange Commission filed a 136-page complaint against Binance and its CEO Changpeng Zhao on Monday where they accused the company of misleading its clients, mishandling billions of dollars and running an illegal exchange.
“Through 13 charges, we allege that Zhao and Binance entities engaged in an extensive web of deception, conflicts of interest, lack of disclosure, and calculated evasion of the law,” said SEC Chair Gary Gensler.
A spokesperson for Binance said the company takes the SEC’s allegations seriously, but it believes the agency’s accusations are “unjustified.”
“We respectfully disagree with the SEC’s allegations that Binance operated as an unregistered securities exchange or illegally offered and sold securities,” the company said in a statement. “Because of our size and global name recognition, Binance has found itself an easy target caught in the middle of a US regulatory tug-of-war.”
But the SEC says that Binance was well aware of this rule breaking. The SEC complaint included a pretty damning remark from Binance’s chief compliance officer, who told a colleague in 2018: “We are operating as a fking unlicensed securities exchange in the USA bro.”
That doesn’t sound good, bro.
Economic uncertainty abounds, but people are still flying high.
Global airlines could make about $10 billion in profit this year as they benefit from a post-pandemic travel boom, forecasts the International Air Transport Association (IATA).
IATA on Monday more than doubled its 2023 profit forecast for the global airline industry, reports my colleague Hanna Ziady.
Airlines are expected to make $9.8 billion in net profit in 2023, up from a December forecast of $4.7 billion.
Stronger profitability was supported by cargo revenues, China’s reopening and lower jet fuel prices, IATA’s director general Willie Walsh said in a statement.
The industry’s main lobby group expects 4.35 billion people to travel by air this year, marking nearly a full return to pre-pandemic numbers. About 4.5 billion passengers flew in 2019.
But it isn’t all smooth skies ahead. Profit margins remain “wafer thin,” Walsh added. “Repairing damaged balance sheets and providing investors with sustainable returns on their capital will continue to be a challenge for many airlines,” he added.
Walsh pointed out that airlines would net just $2.25 per passenger.
by tyler | Jun 6, 2023 | CNN, investing
Wall Street’s top regulator is confronting some of the biggest names in crypto over their alleged violations of US securities laws, in a regulatory crackdown that is already roiling the digital asset industry.
On Tuesday, the US Securities and Exchange Commission sued Coinbase, America’s largest crypto exchange, for allegedly acting as an unregistered broker. That complaint landed just 24 hours after filing a similar suit against overseas rival Binance.
“Coinbase has never registered with the SEC as a broker, national securities exchange, or clearing agency, thus evading the disclosure regime that Congress has established for our securities markets,” the SEC alleged in a complaint filed Tuesday in federal court.
“All the while, Coinbase has earned billions of dollars in revenues by, among other things, collecting transaction fees from investors whom Coinbase has deprived of the disclosures and protections that registration entails and thus exposed to significant risk.”
Coinbase did not immediately respond to a request for comment from CNN.
Shares of Coinbase tumbled 16% in premarket trading.
After the SEC filed charges Monday against Binance, the world’s largest crypto exchange, investors pulled around $790 million from the platform and its US affiliate, data firm Nansen said Tuesday.
Binance saw net outflows of $778.6 million of crypto tokens on the ethereum blockchain, with its US affiliate, Binance.US, registering net outflows of $13 million, Nansen tweeted.
This is a developing news story. It will be updated.
by tyler | Jun 5, 2023 | CNN, investing
The past month’s economic data has highlighted the persistent, sticky nature of inflation and the resilient strength of the labor market in the United States.
Economists say that could mean more rate hikes from the Federal Reserve are coming, but investors appear sanguine.
May saw payrolls increase by almost double the average monthly gain in the 10 years before the pandemic, while the Federal Reserve’s preferred inflation gauge bounced higher in April. Spending also remains strong.
In this good-is-bad economy, strong employment and higher wages mean higher inflation as companies pass on increased labor costs by raising the price of goods.
That makes it more difficult for the data-dependent Federal Reserve to justify a pause to interest rate hikes at its June meeting.
But while investors would typically worry that a strong jobs report could fuel further rate increases, Wall Street is still betting on a Fed pivot around the turn of the year.
Investors are pricing in an 80% chance of a pause in June and a 40% chance of rate cuts by December, according to CME’s FedWatch. By January, 2024, the odds of a cut rise above 60%.
So are markets overoptimistic?
Before the Bell spoke with Seema Shah, chief global strategist of Principal Asset Management, about the divergence between Wall Street, the economy and the Fed.
This interview has been edited for length and clarity.
Before the Bell: Do Friday’s employment numbers make it more difficult for the Federal Reserve to justify a pause in rate hikes at their June policy meeting?
Seema Shah: June is tough to call at the moment. The headline figures for the labor market are really strong but the unemployment rate rose and wage growth has slowed. If policymakers are looking for a caveat, and it seems like Powell wants to pause in June, this will give them a perfect excuse.
Still, a lot of the data focused on the labor market is showing some very strong resilience. And you throw that in with the high inflation numbers that have been coming out recently and there’s a clear picture of economic strength. There are segments of the economy like manufacturing which are struggling, but other parts, like services, are still very strong. And as long as the labor market in particular is adding jobs at this level, it’s very difficult to see a scenario where inflation can come even close to a 2% level. Even getting it below 3% is going to be very difficult this year. So I think there’s a very strong case to be made that there will be another hike in the next two meetings.
Some investors are still betting on a rate cut this year. How realistic do you think that is given recent data?
It seems incredibly unrealistic. The labor market is typically the most lagging indicator within a slowdown. It’s usually the last to fall and when it falls, it typically spirals fairly quickly. I think that’s what a lot of people are hanging their hat on: In the fourth quarter of 2023 you’re going to see a very sudden deterioration in the labor market. Maybe that is possible. But at this stage it’s incredibly unlikely that there will be enough weakness in the labor market to push inflation down suddenly. Our view is that there won’t be any rate cuts this year. The market just needs to price that out.
Why do you think that inflation seems so impervious to the Fed’s rate hikes?
It has been very strange and certainly our own expectations were that the labor market would deteriorate more than it has. It’s a surprise to everyone out there.
The surge in labor demand was so strong post-pandemic and that is still sticking, and if you look across the service sector — if you go into a restaurant or a hotel or a retail shop — it’s very evident that there’s still a lack of labor supply at this stage. So even as you start to see labor demand dropping that won’t necessarily imply job losses, so you need to see more weakness than typical for employers to start getting rid of jobs.
But this is a bit of a rolling slowdown, you have seen some sectors struggling and some sectors doing really well. So in some sectors, you are hearing about job losses, but it’s just not a blanket situation, and certainly the service side is just so strong.
The strength of the consumer is also still there — they still have about half a trillion dollars left in excess savings. So you have a strong consumer and strong labor market essentially supporting each other for the time being.
Are investors and the Fed aligned on where rate hikes should go?
There is a lot to be said about the lagged impact of rate hikes, and for the Fed to take the time to digest what the impact is, but they are getting to the point where a policy error is very easy to make. As you move towards the end of the cycle, there’s going to be a ton of market volatility around expectations for rates, and I think the Fed will be looking through a lot of that market noise. Markets are still pricing in rate cuts this year and that has to be priced out.
One of the key criticisms of the Fed over the last two years has been communication. And Fed speakers gave such a clear indication of what they wanted to do in June last week ahead of an important jobs report, which was slightly bizarre. It’s a dangerous policy to prepare the market and give forward guidance when you’re very data dependent.
Americans are very good at spending money.
The strength of the US consumer is a prime reason that the country’s economy remained afloat as the Federal Reserve hiked interest rates 14 times and as geopolitical tensions envelop Europe, Asia and the Americas.
The resiliency of shoppers has also taken the economy safely through a banking and debt ceiling crisis.
But that might not be the case for much longer, Bank of America CEO Brian Moynihan told CBS’ “Face the Nation” on Sunday.
Americans “were earning more money and they were spending it, what you’re seeing is that’s dipping down,” he said.
Moynihan said the Fed’s tightening policies has “had its effects.” Consumer spending for Bank of America customers is slowing down year-to-date.
“That level is more consistent with a 2% growth economy and a 2% inflation economy, not a 4% inflation level economy,” Moynihan added.
Saudi Arabia announced Sunday that it would cut oil production by another 1 million barrels per day for at least a month starting in July. The decision is part of an effort by the OPEC+ group of producers to increase oil prices.
What’s happening: Oil has had a rough year. Global prices have fallen as demand sputtered in the United States and China — the two largest economies in the world.
After spiking above $130 a barrel in March 2022, Brent crude oil prices, the global benchmark, have nearly been cut in half, report my colleagues Mark Thompson and Michelle Toh. Brent is down about 11% since the start of the year.
That’s bad news for Saudi Arabia, which possesses about 17% of the world’s proven petroleum reserves and is in the middle of an extraordinarily expensive endeavor to transform its economy through its Vision 2030 program.
“This is a Saudi lollipop,” Prince Abdulaziz bin Salman, the kingdom’s energy minister, was quoted by Reuters as telling a news conference about the cuts. “We wanted to ice the cake. We always want to add suspense. We don’t want people to try to predict what we do.”
The plan appears to be working, at least for now. Brent crude increased 1.8% to $76 per barrel. WTI, the US benchmark, rose 2.4% to $73.50 per barrel.
by tyler | Jun 2, 2023 | CNN, investing
Payment apps like PayPal and Venmo might be convenient, but they’re not banks — and a federal financial services watchdog is worried that too many consumers are treating them as such.
Some consumers are using services like PayPal, Venmo, Cash App and Apple Pay for direct deposit of paychecks, or simply storing lots of cash in them. But the Consumer Financial Protection Bureau wants people to know they don’t have the same protections as a bank or credit union.
CFPB Director Rohit Chopra warned in a Thursday statement that payment services like PayPal, Venmo, Cash App and Apple Pay “are increasingly used as substitutes for a traditional bank or credit union account but lack the same protections to ensure that funds are safe.”
More than three-quarters of US adults have used at least one payment app, the agency said.
The watchdog released the comments in the wake of high profile bank failures like Silicon Valley Bank and Signature Bank. Their customers were made whole because account holders at federally insured financial institutions are guaranteed to get back up to $250,000 per account if the bank fails. (In the case of those two banks, the FDIC even abolished the limit, covering all deposits.)
Payment apps, however, are not federally insured on the institution level. If one of those companies were to go under, then, customers could lose their funds.
There are billions of dollars at risk for consumers as a result of payment apps encouraging customers to store funds rather than just make transactions, said the CFPB in its report. These apps are also not immune to the same type of panic-based bank run that closed down Silicon Valley Bank and others recently, the agency added.
PayPal Holdings
(PYPL), which owns both PayPal and Venmo, did not reply to a request for comment Friday. Neither did rival Block
(SQ), which owns Cash App as well as payment system Square.
But industry trade group the Financial Technology Association, which represents both firms, defended the safety of the funds.
“Tens of millions of American consumers and small businesses rely on payment apps to better spend, manage, and send their money. These accounts are safe and transparent,” the group said in the statement. “FTA members provide clear and easy-to-understand terms in all their products and prioritize consumer protection every step of the way.”
Some money held in certain types of payment app accounts — PayPal Savings, for example — are indeed deposited in FDIC-member banks and thus would be protected. But much of the funds are held by the services themselves, without federal insurance.
The CFPB did not provide an estimate of how much money is held in payment apps, although it did say that transaction volume across all US service providers was estimated at approximately $893 billion across all of 2022 and may reach nearly $1.6 trillion by 2027.
The agency also noted the payment apps make money by investing funds their customers store on the apps, similar to how banks invest their customers deposits. But unlike insured bank deposits, those stored funds would be at risk if the payment apps’ investments lose value — which itself could spark a run on the the deposits, the CFPB said.
The agency also made reference to last year’s failure of crypto currency platform FTX, which left customers unable to access hundreds of millions of dollars worth of their assets, leaving them to become creditors in the bankruptcy cases.
“If a nonbank payment app was to go bankrupt as a result of these risks, customers may not be the only creditors with claims on the company’s remaining assets,” said the CFPB. “Even if consumers do not ultimately lose any funds, they may face significant delays in accessing their funds while the bankruptcy process unfolds.”
by tyler | Jun 2, 2023 | CNN, investing
Netflix shareholders voted on Thursday to reject multi-million dollar pay packages for the company’s top executives including for co-CEOs Ted Sarandos and Greg Peters.
The vote, which is non-binding, comes amid a strong bounceback for a company that lost more than half its value in 2022 as people started to venture out after years of pandemic isolation. Last year, consumers turned their back on price increases for streaming services like Netflix, and investors began to criticize the company for paying through the nose for content while customers were leaving. But Netflix’s stock has rebounded 36% so far this year as shareholders believe the streaming sell-off may have been overdone.
Still, the vote took place just days after the Writers Guild of America encouraged investors to vote the packages down, saying in a letter that a vote would be inappropriate as Hollywood writers enter their fifth week of striking for better working conditions and larger contracts.
“While investors have long taken issue with Netflix’s executive pay, the compensation structure is more egregious against the backdrop of the strike,” wrote WGA West president Meredith Stiehm in the letter to the company’s shareholders.
If Netflix can afford to spend an estimated $166 million on executive compensation, she wrote, it should also be able to pay the estimated $68 million that writers are seeking in their contract negotiations.
The Writers Guild of America has targeted high executive compensation as a key issue in its ongoing bargaining tactics. The union sent a similar letter about pay proposals to NBCUniversal parent Comcast
(CMCSA), which will hold its annual shareholder meeting next week.
Netflix’s proposed executive pay packages for 2023 included up to $40 million for Sarandos, including base salary, a performance bonus and stock options. Peters could receive up to $34.6 million.
Reed Hastings, who stepped down as Netflix
(NFLX) CEO in January and now serves as the company’s executive chairman, would bring home about $3 million for the year.
Other Netflix executives are expecting big payouts in 2023. According to the proposal, Netflix CFO Spencer Neumann would receive $14 million, chief legal officer David Hyman would get $11 million and chief communications officer Rachel Whetstone is on track to receive $6.5 million.
The median Netflix employee made $218,400 in 2022, according to a Securities and Exchange Commission filing. That would make the ratio of CEO pay to median employee pay 234 to 1.
Netflix’s board, meanwhile, is able to disregard the results of this “say on pay” vote and approve executive compensation plans in spite of shareholder wishes. The board has already unanimously recommended voting for the pay packages.
Last year, just 27% of Netflix shareholders approved of 2022 executive compensation packages. The final tally from this year’s meeting has yet to be released.
by tyler | Jun 2, 2023 | CNN, investing
The faucets at the US Department of the Treasury are set to turn back on after nearly five months of frozen pipes.
In a vote on Thursday evening, the Senate approved a measure to suspend the nation’s debt limit through January 1, 2025. President Joe Biden is expected to swiftly sign the bill into law to avert the United States’ first-ever default on its debt.
Since the debt ceiling was breached in mid-January, the Treasury Department has not been able to borrow more money. To pay its bills on time, Treasury has undergone a series of extraordinary measures to buy it more time in hopes that Congress takes action to suspend or raise the debt limit.
These measures included selling existing investments and suspending reinvestments of the Civil Service Retirement and Disability Fund and the Postal Service Retiree Health Benefits Fund. Doing so helped the Treasury free up billions of dollars to delay a potential default.
Now, Treasury will try to quickly get back to business as usual. To do that, the Treasury will need to raise cash. Fast.
By law, the Treasury Department is obligated to make any funds that were affected by the extraordinary measures whole. It is also required to pay interest on the lapse in funding.
One way it hopes to grow its cash balance is by auctioning off $15 billion worth of one-day cash management bills on Friday.
These bills mature in a relatively short time frame, ranging from a few days to a year, according to the Treasury Department. They’re used to help manage the Treasury’s short-term financing needs.
Unlike Treasury bill auctions that occur on a weekly and monthly basis, cash management bill auctions are irregular, though not uncommon. For instance, last year the Treasury held more than 30 cash management bill auctions.
It is, however, quite unusual for the department to auction debt that matures in just one day. Over the past 25 years, the Treasury has held just six one-day cash management bill auctions.
In addition to Friday’s auction, a Thursday auction saw $25 billion of three-day cash management bills yielding 6.15%. That exceeds the yields at which almost all other Treasury bills are trading, underscoring the premium investors are demanding to buy the government’s debt.
The Treasury is tentatively issuing an additional $123 billion in longer-term bills on June 8. Ahead of the Senate’s vote, the Treasury said it was “conditional on enactment of the debt limit suspension because Treasury forecasts insufficient headroom under the current debt limit to issue securities in these amounts on June 8.”
Translation: The Treasury had been hedging its bets so that it is not on the hook to make interest payments on time to bill holders in the event that the debt ceiling deal wasn’t signed to law in time to avert default. Now that the Senate has passed the bill and Biden has said he’d sign it, Treasury is set to announce more borrowing initiatives.
It will need them, because the United States has some big bills coming due soon: Treasury makes interest payments around the 15th day and on the last day of the month, and the Congressional Budget Office had said there was significant risk Treasury would exhaust all of its resources by June 15 if a debt ceiling suspension hadn’t been passed.
Although Treasury is expected to get an infusion of cash from tax payments due June 15, it will owe interest payments that day, too — mid-month interest payments are usually around $3 billion, CBO said. End-of-month payments have ranged from $10 billion to $16 billion over the past six months.
But the Treasury’s immediate cash demands could throw a wrench into the stock market, which for the most part has ignored the risks of default.
That’s because the Treasury will likely have to continue to pay high-interest rates on its debt to raise cash. In turn, investors may opt to buy more Treasury bills instead of stocks, potentially sucking some liquidity out of the market.
