David Solomon, Chairman & CEO of Goldman Sachs, speaking on Squawk Box at the WEF in Davos, Switzerland on Jan. 23rd, 2023.
Adam Galica | CNBC
Goldman Sachs CEO David Solomon said Tuesday that the odds the U.S. economy can avoid a deep recession this year seem to have improved.
While Solomon cautioned that uncertainty is high, in particular because of inflation and growing tensions between China and the U.S., business leaders seemed to be more optimistic than last year, he told investors at a Credit Suisse conference in Miami.
“I think it’s going to be, you know, a twisty, turn-y kind of road to navigate through this and get to the other side, but I think the chance of a softer landing feels better now than it felt six to nine months ago,” Solomon said.
Markets have rallied this year as inflation moderated and job growth remains strong, feeding investors’ hope that the economy can stick the elusive soft landing with, at worst, a shallow recession. As a result, capital markets activity has improved from a difficult 2022 that saw a steep drop in IPOs and debt and equity issuance.
“Clearly the market has a sense that we’re putting inflation in the rearview mirror,” Solomon said.
The CEO spoke before the release of Labor Department data showing that the consumer price index rose 0.5% in January, which translated to an annual gain of 6.4%.
Although Solomon said inflation was still a deterrent to growth and corporate investment, he cited improving sentiment among other CEOs as the basis of his measured optimism. New York-based Goldman is one of the world’s top advisors when it comes to mergers and tapping capital markets.
“Consensus has shifted to be a little bit more dovish in the CEO community, that we can navigate through this in the United States with a softer economic landing,” he said.
The American consumer has been “much more resilient than people expected” so far, he added.
During the wide-ranging interview conducted by Credit Suisse analyst Susan Roth Katzke, Solomon said that Goldman has a “much tighter hiring plan” this year after laying off about 3,200 workers last month.
While Solomon said he’s open to making acquisitions, especially in the asset and wealth management sector, the bar is very high to making a deal.
The CEO is scheduled to address investors again on Feb. 28 at the bank’s second-ever investor day. The last one was in early 2020.
A closer shot of Ukraine President Volodymyr Zelenskyy and the Ministry of Economy (MoE) meeting with senior members of J.P. Morgan.
Coutesy: JP Morgan Summit
Ukraine’s government signed an agreement with JPMorgan Chase to help advise the war-afflicted country on its economy and future rebuilding efforts.
Ukraine’s Ministry of Economy signed a memorandum of understanding with a group of executives from the New York-based bank on Thursday aimed at rebuilding and developing the country, according to a statement from President Volodymyr Zelenskyy.
One year into its conflict with Russia, which invaded in February 2022, Ukraine’s government is laying the groundwork to help rebuild the country. The invasion has cost thousands of civilian lives and set off Europe’s largest refugee crisis since the Second World War. It also ignited a corporate exodus from Russia, and has helped galvanize support for Ukraine.
JPMorgan will tap its debt capital markets operations, payments, and commercial banking and infrastructure investing expertise to help the country stabilize its economy and credit rating, manage its funds, and advance its digital adoption, according to a person with knowledge of the agreement.
Of particular importance is advising the nation on efforts to raise private funds to help it rebuild and invest for future growth in areas including renewable energy, agriculture and technology.
“The full resources of JPMorgan Chase are available to Ukraine as it charts its post-conflict path to growth,” CEO Jamie Dimon said in a statement.
Dimon added JPMorgan was proud of its support for Ukraine and was committed to its people. The bank led a $20 billion debt restructuring for the country last year and has committed millions of dollars in support for its refugees.
Rt. Hon. Tony Blair, Former Prime Minister Great Britain and Condoleezza Rice, 66th U.S. Secretary of State conducted a discussion with Ukraine President Volodymyr Zelensky @ annual JPMorgan Summit held Feb 10.
Courtesy: JP Morgan Summit
On Friday, Zelenskyy spoke via teleconference with guests of JPMorgan’s annual wealth management summit in Miami after the agreement was signed. The discussion was moderated by ex-U.K. Prime Minister Tony Blair and former Secretary of State Condoleezza Rice.
How do we figure out free cash flow and how can we tell if a company can continue to pay its dividend. -David E. This is a great question and fortunately a pretty straightforward one to answer using some quick and simple math. Free cash flow is a popular metric for analysts and investors because it shows how much money a company can give back to shareholders. However, it is not actually a GAAP metric — “generally accepted accounting principles” — which means companies don’t have to disclose the figure and also don’t always agree on exactly how to define it. Generally, free cash flow is defined as operating cash flow minus capital expenditures or cash used for the purchases of plant, property and equipment (PP & E). Companies that don’t follow GAAP might report this as a line item in their quarterly and annual reports. Some, like Alphabet (GOOGL), report GAAP numbers but also provide a non-GAAP free-cash-flow calculation. For those that don’t provide it, you need to calculate the metric. First find operating cash flow (OCF) and PP & E , which are both in the cash flow statement ; OCF is its own line, PP & E is under “investing cash flows.” Then subtract the cash related to PP & E from OCF. Take Apple, a Club holding that uses GAAP and therefore doesn’t break out free cash flow. Operating cash flow for the quarter ended Dec. 31, 2022 was $34.005 billion and payments for the acquisition of property, plant and equipment were $3.787 billion, resulting in a free cash flow of $30.218 billion (34.005-3.787=30.218). Why free cash flow is important For starters, free cash flow is a more conservative metric than operating cash flow, given that it takes into account the cash associated with PP & E — money that can’t be used to pay shareholders through buybacks or dividends. Companies need ongoing investments in PP & E — Amazon improving its delivery system or Microsoft putting money into its cloud infrastructure — but removing those costs from OCF gives a much clearer picture of the cash left over for investors. Secondly, free cash flow can help determine the quality of a company’s earnings. There are many perfectly legal, GAAP-approved ways to calculate an earnings number, based on management’s classification of certain items or simply how it goes about realizing revenue. But free cash flow is cash: you either received it or you didn’t. And cash is king. If the earnings are backed by cash received, they are viewed as higher quality than non-cash-backed earnings. Lastly — and this brings us to the second part of the David’s question — free cash flow can be compared to other financial obligations requiring cash to determine if those obligations can be met. There may be cash on the balance sheet, but if cash outflows exceed cash inflows (in this case defined as free-cash-flow generation), that cash balance is going to decline over time and eventually run out. Without a reversal, it will take the company out as well. One such obligation would be the dividend. A company can cut its dividend without any legal consequences, but it will certainly matter to those invested in the stock for dividend income. Therefore, a study of the company’s ability to keep paying the dividend is crucial. The math is once again straightforward: If the free cash inflow exceeds the cash dividend outflow, it is considered sustainable. The greater the surplus, the stronger the margin of safety. You can’t glean this from one earnings report. Instead, a look at the annual financial releases going back a few years will show the volatility of cash flows over time (and help smooth out the quarter-to-quarter volatility). There may be periods in which the dividend payment exceeds free cash flow. That’s ok so long as it isn’t a recurring thing; cash on the balance sheet can serve as a temporary buffer. Consider the last 10 years of dividends, OCF and FCF on a per-share basis for Procter & Gamble (PG), according to data from FactSet. With the exception of fiscal year 2013 (FY 2013) and fiscal year 2015, free cash flow consistently outpaces dividends payments. Moreover, given the nature of Procter & Gamble products — household staples that require consistent replenishment — and status as an industry leader, we’re confident it can keep generating cash flows into the foreseeable future. We also included the company’s per-share OCF. It’s always good to think about dividend sustainability in a few ways. With OCF, it’s possible the company could delay or cut back on some investments (PP & E) to free up more cash for pressing obligations, like paying a dividend. Many analysts will cite the dividend payout ratio as a means of determining a dividend’s sustainability. The formula is simple: divide the dividend payout by net income (or earnings if you are doing it on a per-share basis). If the result exceeds 100%, indicating that the dividend is greater than net income, the dividend is considered unsustainable. After all, you can’t keep paying out more than you take in. If it’s less than 100% it’s considered sustainable. The dividend payout ratio is certainly a metric worth considering. However, earnings backed by cash are higher quality. So in addition to calculating the dividend payout ratio, consider the extent to which the earnings are backed by cash. A company can’t pay out its dividend in IOUs, which may be a large component of net income depending on the company. Those IOUs would be logged in the accounts receivables portion of the balance sheet, instead of as cash. One final consideration is the concept of variable dividends. Many of our holdings offer up a fixed-plus-variable dividend, with the variable portion tied directly to free cash flow. For example, a company will state it intends to pay out some portion of free cash flow via dividends and/or buybacks. With this framework, we again see the importance of free cash flow and its sustainability since the variable portion of the dividend will fluctuate with the cash flow. Energy companies often use fixed-plus-variable dividends, since their cash flows will fluctuate with the swings in the price of crude oil. Have a question or topic you would like to see us discuss in our next white paper? E-mail us at cnbcinvestingclub@cnbc.com or tweet me @ZevFima . (See here for a full list of the stocks in Jim Cramer’s Charitable Trust.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
Pampers Diapers, which are manufactured by Procter & Gamble, are displayed in an Associated Supermarket in New York.
Ramin Talai | Bloomberg | Getty Images
How do we figure out free cash flow and how can we tell if a company can continue to pay its dividend.
Traders work on the floor of the New York Stock Exchange on Wall Street in New York City.
Angela Weiss | Afp | Getty Images
Wall Street just pulled off its biggest IPO in four months, giving bankers hope that the market for newly-listed company shares is stirring to life.
The solar technology firm Nextracker raised $638 million by selling about 15% more shares than expected, sources told CNBC Wednesday.
The listing, which began trading Thursday, shows that the stock market’s rebound this year is reviving appetite for new companies from mutual fund and hedge fund managers, said Michael Wise, JPMorgan Chase‘s vice chairman for equity capital markets.
Wall Street’s so-called IPO window, which allows companies to readily tap investors for new stock, has been mostly shut for the past year. Proceeds from public listings plunged 94% last year to the lowest level since 1990 as the Federal Reserve raised interest rates. The upheaval removed a key generator of fees for investment banks in 2022, leading to industrywide layoffs, and forced private companies to cut workers in a bid to “extend their runway.”
Private companies extend their runway by stretching budgets — usually by cutting expenses, like employees— to avoid raising capital or going public until market conditions improve.
“The window seems like it’s cracked open right now,” Wise told CNBC in a phone interview. “The strong market performance since the beginning of this year has investors and issuers back and engaged; many companies are now going through pre-IPO, testing-the-waters processes.”
On the heels of the Nextracker listing, other renewable energy firms are planning to list in the U.S., including Tel Aviv-based Enlight, according to bankers. New York-based JPMorgan is lead advisor on both of those deals.
Morgan Stanley is also seeing a “higher degree of investor engagement regarding bringing IPOs to market” than during most of last year, according to Andrew Wetenhall, Morgan Stanley’s co-head of equity capital markets in the Americas.
Morgan Stanley, JPMorgan and Goldman Sachs are three of the top advisors on public listings globally, according to Dealogic data.
But the market isn’t open to just anyone. Investors have soured on the prospects of unprofitable companies, and many tech listings from 2020 and 2021 are still underwater.
In-favor sectors now include green energy, thanks in part to the Inflation Reduction Act; biotech companies with promising drug trials; retail brands that have held up well in the current environment; and parts of the financial sector like insurance, bankers said.
The common theme is that newly-listed companies need to be profitable, in sectors that are doing well or at least aren’t especially sensitive to rising interest rates.
“This market is opening, it is not wide open,” Wetenhall said. “The parties that should bring their deals in this environment probably have a set of features that fit the current investor sentiment.”
A bigger test of the market is coming as Johnson & Johnson has filed to take its Kenvue consumer health unit public, continuing a trend of IPOs led by spinoffs. That’s because Kenvue’s implied market capitalization is north of $50 billion, and investors have been eager for larger listings, according to a banker. That listing could happen as early as April, another banker said.
Waiting in the wings are other companies, ranging from delivery giant Instacart, payments processor Stripe, Fortnite owner Epic games, sports clothing retailer Fanatics and digital banking provider Chime.
Instacart’s listing could happen as soon as midyear, according to a banker with knowledge of the situation. With Stripe, however, management may pursue options to remain private for longer, this banker said.
A broader return to IPO listings will likely come in the second half of the year at the earliest, especially for most tech and fintech names, which are still generally out of favor.
“Tech has been very quiet,” said a different banker who declined to be identified, speaking frankly. “I think it’s going to take a while for that to recover.”
The solar technology company Nextracker priced its initial public offering just above its stated $20 to $23 per share range, people with knowledge of the transaction told CNBC.
The order book for Fremont, California-based Nextracker was “well subscribed,” meaning demand allowed the company to exceed expectations on pricing, sources who declined to be identified speaking about the process told CNBC earlier Wednesday.
The IPO is expected to raise about $638 million by selling 26.6 million shares at $24 each, which is well above the $535 million upper limit the company said it was seeking in a filing last week. That is also before the so-called greenshoe option that allows bankers to sell more stock, the people said.
The development is a good sign for the moribund IPO market. Proceeds from public listings fell 94% last year after the Federal Reserve began its most aggressive rate-increasing campaign in decades. Investors soured on the shares of unprofitable tech companies in particular, many of which are still underwater after listing in 2020 and 2021.
The Nextracker IPO is arguably the first meaningful public listing this year as it is set to be the biggest U.S. IPO since autonomous driving firm Mobileye raised $990 million in October.
Nextracker will begin trading on the Nasdaq exchange Thursday morning under the symbol NXT, according to one of the people.
The company, which was a subsidiary of manufacturer Flex, sells hardware and software that enables solar panels to follow the movement of the sun, improving the output of solar power plants.
JPMorgan Chase was lead advisor on the transaction, according to a regulatory filing.
U.S. Treasury yields rose Friday after jobs data came in much better than expected.
The 10-year Treasury yield was up more than 12 basis points at 3.526%. The 2-year Treasury was up roughly 20 basis points to 4.299%.
Yields and prices move in opposite directions and one basis point equals 0.01%.
Nonfarm payrolls increased by 517,000 for January, notably above the 187,000 additions estimated by Dow Jones. The unemployment rate fell to 3.4%, lower than the 3.6% expected by Dow Jones.
The data underscored the stickiness of the labor market. The Fed has been trying to cool the economy through monetary policy measures, including interest rate hikes. At the conclusion of its latest meeting on Wednesday, the central bank increased rates by 25 basis points, but also said it was starting to see a slight slowdown of inflation.
Charlie Munger at the Berkshire Hathaway press conference, April 30, 2022.
CNBC
Berkshire Hathaway Vice Chairman Charlie Munger urged the U.S. government to ban cryptocurrencies like China, saying a lack of regulation enabled wretched excess and a gambling mentality.
“A cryptocurrency is not a currency, not a commodity, and not a security,” the 99-year-old Munger said in an op-ed published in the Wall Street Journal Wednesday evening.
“Instead, it’s a gambling contract with a nearly 100% edge for the house, entered into in a country where gambling contracts are traditionally regulated only by states that compete in laxity,” Munger said. “Obviously the U.S. should now enact a new federal law that prevents this from happening.”
Munger, along with his business partner Warren Buffett, have been longtime cryptocurrency skeptics, arguing that they are not tangible or productive assets. Munger’s latest comments came as the crypto industry was plagued with problems from failed projects to a liquidity crunch, exacerbated by the fall of FTX, once one of the world’s largest exchanges.
The cryptocurrency market lost more than $2 trillion in value last year. The price of bitcoin, the world’ largest cryptocurrency, plunged 65% in 2022 and it has rebounded about 40% to trade around $23,824, according to Coin Metrics.
The renowned investor said in recent years, privately owned companies have issued thousands of new cryptocurrencies, and they have become publicly traded without any governmental pre-approval of disclosures. Some has been sold to a promoter for almost nothing, after which the public buys in at much higher prices without fully understanding the “pre-dilution in favor of the promoter,” Munger said.
Munger listed two “interesting precedents” that may guide the U.S. into sound action. Firstly, China has strictly prohibited services offering trading, order matching, token issuance and derivatives for virtual currencies. Secondly, from the early 1700s, the English Parliament banned all public trading in new common stocks and kept this ban in place for about 100 years, Munger said.
“What should the U.S. do after a ban of cryptocurrencies is in place? Well, one more action might make sense: Thank the Chinese communist leader for his splendid example of uncommon sense,” Munger said.
DoubleLine Capital CEO Jeffrey Gundlach said he sees one additional rate hike from the Federal Reserve before the central bank ends its tightening cycle.
“I think one more,” Gundlach said Wednesday on CNBC’s “Closing Bell: Overtime.” “I think it’s tough to make the statement ‘ongoing increases’ with an ‘s’ at the end of the word ‘increase’ and do zero unless you had very substantial change in economic conditions.”
The Fed on Wednesday raised its benchmark interest rate by a quarter percentage point, taking its target range to 4.5%-4.75%, the highest since October 2007. The Fed’s statement included language noting that the central bank still sees the need for “ongoing increases in the target range.”
The so-called bond king said Fed Chairman Jerome Powell had a “clarifying” statement at the press conference Wednesday, saying the real yields are positive across the curve. Gundlach said he was referring to the Treasury Inflation-Protected Securities (TIPS), whose yields have stopped their ascent.
“He’s looking at the TIPS market, which had a huge increase in yields last year. That was a major headwind for risk assets in the stock market,” Gundlach said. “They’ve stopped going up and I have a feeling that real yields are going to not go up in the first part of this year. So that keeps a little bit of runway, I think.”
Stocks staged a big comeback in January, led by beaten-down technology names. The S&P 500 rallied 6.2% in January, notching its best start of the year since 2019. The tech-heavy Nasdaq Composite jumped 10.7% last month for its best monthly performance since July.
In Powell’s press conference, the Fed chief said the central bank could conduct a few more rate hikes to bring inflation down to its target.
“We’ve raised rates four and a half percentage points, and we’re talking about a couple of more rate hikes to get to that level we think is appropriately restrictive,” Powell said. “Why do we think that’s probably necessary? We think because inflation is still running very hot.”
Asked if Gundlach sees the Fed cutting rates this year, he said it’s a coin flip, depending on the incoming inflation data.
“I kind of think that they’ll cut rates in the second half of the year, but I’m not really committed to that idea firmly at all,” Gundlach said.
The widely followed investor also said he believes the odds for a recession this year have decreased, but they are still above 50%.
This nascent bull market started with the peak in interest rates and the dollar back in the fall and then broadened to include bank and semiconductor stocks in 2023. Is it fragile? Is it alchemy? Is it real? We’ll know after we see the quarterly earnings this week from the likes of Club holdings Apple (AAPL), Meta Platforms (META) Alphabet (GOOGL) and Amazon (AMZN), as well as what the Federal Reserve decides at its two-day meeting ending Wednesday and what the monthly nonfarm payroll numbers show Friday. I’m not as concerned as I would normally be though because the critics right now feel like poor picadors to me who would never catch a bull, let alone a matador who would put an end to things. Here’s why: Much if not most of the investing public and the money managers entrusted with their assets stopped believing in this market a long time ago when the Fed let things get out of control for a year because it feared a resurgent Covid. Public health was none of its business but it became its business and it did the best it could do. The revulsion that managers and investors feel started with the free money that then-President Donald Trump gave out, which somehow, got invested in a lot junk. That started a brutal pace of illegitimacy. It was followed up with the wrath of tech and the trillionaire sell-off of FANG and Friends, one that ultimately led to the end of FANG. That’s right we created FANG a decade ago this week on “Mad Money,” and it was a really good call — until it wasn’t. Facebook, now Meta, peaked ages ago and seems almost unimportant. Amazon got so bloated during the pandemic that it must be rightsized or its earnings won’t entitle it to be a growth stock. Netflix (NFLX) was the best of the lot, but your money turned into a pillar of salt if you looked at it at any time since November 2021, the month of the tech-heavy Nasdaq ‘s record high. You could say that about all of the FANG and friends names, including Google, now Alphabet. Apple held up a little longer and didn’t peak until early January 2022 along with the broader market. Oh, and why not include Tesla (TLSA) in the bunch; it deserved its trillionaire-cursed fate. Microsoft (MSFT) and Tesla reported and they appear to be non-events, which is rather incredible when you consider that Microsoft’s forecast came down quite a bit because of the Azure cloud nonetheless, the putative gem of its web services business, and Tesla actually lowered the price of its vehicles, something never thought possible. When Amy Hood, CFO of Club holding Microsoft, dropped the hammer during the post-earnings conference call it looked over. When Elon Musk succumbed to competition, it looked dead. Yet, take a look: Both had excellent weeks. It didn’t matter. It could be the same for Alphabet, Amazon, Apple and Meta this week. That’s important. However, far more important is the lassitude with which we accepted these numbers. There was, indeed, an instant tsunami of selling after Hood dropped Microsoft’s bomb. Tesla’s stock had been going down for months. Other than the media did anyone care? The world is so worn out of fear for these, and the ennui for FANG and friends has transcended fear and gloom. We just don’t care anymore. The Fed? It could surprise us with a 50-basis-points interest rate hike this week. That would be poorly received initially but even that could be swallowed IF accompanied by a simple “done for now” statement. It’s worth noting that the market has over 98% odds on a 25-basis-point increase, according to the CME’s FedWatch tool . There’s even a slim contingent that sees a chance of no action. The nonfarm payroll report? We need to see decent wage-price stabilization — and given the layoffs we have seen — if we don’t get one, we will simply say it’s a matter of time. I know that these words sound like a derisking of the market. But that would be so wrong it’s painful. A decade after FANG what matters is everything else: the ascendancy of American businesses as a whole and all of those broadening bull markets. For example, Boeing (BA) rallied despite the FAA outage, and web stocks rallied despite Azure’s softness. Housing stocks held in because the demand for housing is demographically based and mortgage rates have stabilized, thanks to the inverted yield curve in the bond market, where short-duration rates are higher than longer-dated ones. The prices of new homes have been lowered, but that’s key to the hopefully receding inflation outlook. The key to the strength of this past week’s market was, of all things, Dow stock American Express (AXP). Much to the puzzlement of people who run big swaths of money, Amex’s strength came from millennial users. They are spending on travel and leisure and, most importantly, dinners out. But who can blame them. They are still remembering when they could do nothing during Covid. Plus, they love the points and the service. The Amexes, not the sideshow fintechs created by insane venture capitalists, are the winners. The stability of a market that’s based, in part, on the assumption of a JPMorgan (JPM) or an American Express or even a Boeing rallying on earnings, seems tidal to me. They stand for the broadening of it all, and the fact that it came after a huge overbought condition. That matters. When you study the S & P Oscillator, as I have, you get these confirmative moves when you experience further elevation as the Oscillator returns to the mean. That’s what’s happening as we consider the market to be far bigger than any group of a half-dozen stocks. No one company is important: The asset class prevails. It didn’t even matter that the incompetence of the men who run the machine surfaced again. The market is too strong for their stupidity — and the lack of actual names who were, well, stupid is a welcome sign. In short, we are experiencing the market’s liberation from FANG and friends. Even a miss by Apple can be explained away by the results of the pernicious, Orwellian-style release of people into a country, China, that had told you that Covid was a death sentence and the U.S. vaccines were worthless. You conquer that cynical belief system of the Communist Party with purchases of sneakers from Nike (NKE) and perfumes from Club holding Estee Lauder (EL), a la the lunar new year. You then have a pretty forgiving stance for Apple’s numbers. Undoubtedly, we have to get some bankruptcies soon, preferably by ne’er-do-well retailers and venture capital-backed fintechs and enterprise software firms and those who put money up for them. We need to rein in spending more so that the Fed can begin its period of peace having conquered those who kept paying up for the same thing. We are almost to the point, though not yet, where you can afford to job-hop. Thanks to Chipotle Mexican Grill (CMG) for announcing you need 15,000 people just when we thought the Fed was finishing its work. I guess that’s what burrito season brings us. Can we at least wait for the Super Bowl to be played? Yes, I am painting — without the help of ChatGPT, or its Nvidia (NVDA)-based backbone — a return to the era of no single company having real impact on the entire market, and no one move by the Fed doing so, either. The stalemate in Washington over the debt ceiling has led to the seemingly annual talk about a disastrous default that has always, to this point, been averted. The Fed may go with a completely against consensus 50 and say we aren’t done, stay tuned. We might even have misses among all the majors, but I am portraying a bull that just doesn’t care. It’s a bull that’s based on, not a lack of alternatives, which had been the case for three years, but a plethora of index fund money that follows the surges of whatever moves the needle collectively. You can boil all of this down to the suddenly hackneyed word, resiliency, as in the market is resilient in the face of its broad nature. We wait for the shortfall pronouncements from Apple, Amazon and Alphabet and move on NOT FROM THE STOCK MARKET but to OTHER STOCKS more representative of a resurgent America buoyed by its natural resources, its post-Covid strength, and its central bank that preserves purchasing power . We have the Russians, the Chinese and the Europeans to thank for that sanguine stance. The anticipation of what’s left of the FANG reporting season is simply prurient at this point and not dispositive. The drama is media created but ignored by 401(K) contributions and earmarked pension benefits that are actually being fulfilled. Sound too Panglossian? How about a hard-won battle with the narrowness of the bear that we have suffered from, not even seeming to acknowledge its beginning when the Fed went for preservation not profligacy back in the fall of 2021. The lack of credit to Fed Chairman Jerome Powell and company is astounding to me. But once a doofus always a doofus, from his lack of massive Treasury sales to his crazy cadence of rigor in 2022. Yes, I am shredding the cynicism and heralding the new bull market, one that’s not ignorant of what ails things, but is benignly rotational. The obsession with FANG a decade after its birth is over and that means more money for the rest of the 500 companies in the S & P 500 benchmark index. That’s something the media fails to acknowledge and that will be on display writ large next week. My take? Ignore the sirens of a Circe in Bear uniform. That now unheralded cohort and its despoiled fellow travelers didn’t even make the playoffs, let alone the two conference championships. This is a week we will get through and any decline will be regarded as a clarion call to get in — repulsed only by cynical market prognosticators who insist on being the sound and the fury signifying nothing as the bulls trample on and leave their underinvested legions to starve the once over-served steers. (Jim Cramer’s Charitable Trust is long AAPL, META, GOOGL, AMZN, MSFT, EL, NVDA. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
Jim Cramer at NYSE with bull. June 30, 2022.
Virginia Sherwood | CNBC
This nascent bull market started with the peak in interest rates and the dollar back in the fall and then broadened to include bank and semiconductor stocks in 2023. Is it fragile? Is it alchemy? Is it real? We’ll know after we see the quarterly earnings this week from the likes of Club holdings Apple (AAPL), Meta Platforms (META) Alphabet (GOOGL) and Amazon (AMZN), as well as what the Federal Reserve decides at its two-day meeting ending Wednesday and what the monthly nonfarm payroll numbers show Friday.
When Advanced Micro Devices (AMD) reports quarterly earnings next week, the Club holding’s results should not look nearly as bad as longtime rival Intel ‘s (INTC) dismal numbers. AMD’s quarter is unlikely to be perfect and may even be underwhelming in some areas. The semiconductor market — especially on the personal computer side where both AMD and Intel operate — remains challenged overall. But the magnitude of the Intel’s disappointment stems from many company-specific factors, including lost market share to chip peers such as AMD. It’s an important distinction that Friday’s stock moves seem to reflect. Intel shares fell more than 7%, to under $28 apiece. Meanwhile, AMD shook off minor losses early in the session to climb more than 1% to roughly $76 per share. What the Club thinks To be sure, we are relatively cautious on AMD and believe investors should wait before buying additional shares as reflected by our 2 rating . But this was the case before Intel’s worse-than-feared earnings were released after the closing bell Thursday. Before turning more bullish, we want clarity on when AMD’s margins will no longer be squeezed by an inventory glut. This multi-quarter, industrywide problem will likely show up in the fourth-quarter results AMD is scheduled to release after Tuesday’s close. The company’s forward guidance should offer an indication on when the margin pressure will ease. At the same time, the big picture is clear. AMD has taken the upper hand in its rivalry against Intel. Under CEO Lisa Su, the chip designer has built a track record of consistent execution and developed technology that’s superior to Intel. It’s put AMD in position to be one of the leaders of the semiconductor industry’s eventual recovery. AMD INTC 5Y mountain Advanced Micro Devices (AMD) vs. Intel (INTC) stock performance over the past 5 years What Wall Street says about Intel Intel failed to meet analysts’ already-low expectations on both fourth-quarter results and guidance, leading to a cascade of critical Wall Street research notes. “We have written the phrase ‘Worst earnings report in our history of covering this company’ on more than one occasion over the last couple of years. But this time we REALLY mean it,” wrote Stacy Rasgon, the noted semiconductor analyst at Bernstein. In the three months ended Dec. 31, Intel earned an adjusted 10 cents per share, compared with an EPS estimate of 20 cents, according to Refinitiv. Revenue fell 32% year over year to $14.04 billion, missing expectations of $14.45 billion. The company’s first-quarter forecast was even worse in the minds of analysts. Intel guided to or an adjusted loss of 15 cents per share in the first quarter, when analysts expected earnings of 24 cents, according to Refinitiv. The chipmaker’s first-quarter sales estimate of between $10.5 billion and $11.5 billion was far below the $13.93 billion consensus estimate. “While we were braced for a weaker number, and had cut estimates in our preview, the magnitude of the weaker guidance was quite surprising to both us and to investors that we talked to,” analysts at Morgan Stanley wrote in a note to clients. Multiple analysts also raised concerns about the sustainability of Intel’s dividend at current levels due to the significant amount of cash flow the company is burning. In 2022, Intel paid out $6 billion in dividends to shareholders. On Thursday’s post-earnings call, Intel’s finance chief, David Zinsner, said the company was “committed to maintaining a competitive dividend. AMD does not pay a dividend. Implications for AMD Morgan Stanley said it believes Intel’s results are “cautious” for peers, especially AMD. “To some degree, we do think that Intel’s inventory position is higher at customers than peers, and share loss in servers is a factor for them. But this clearly indicates even weaker conditions than we were expecting,” the analysts said. “We remain enthused for the year to play out for AMD, and we like the stock longer term -but there is no getting around that this is an anxiety inducing report for them.” Bank of America sees Intel’s results as “only incrementally negative” for AMD, partially because the analysts believe AMD’s inventory correction in the second half of the year was larger than Intel’s. This led the analysts to lower their expectations for AMD’s first-quarter PC sales already, lowering the risk of a major guidance disappointment like with Intel. Analysts at investment bank Cowen said they expect Intel to continue losing market share to AMD in key parts of the data center and server chip market. AMD’s multiyear push into that lucrative market is central to the Club’s investment case. “As Intel itself proved for [over a decade], unseating a well-executing incumbent is difficult,” the analysts wrote. (Jim Cramer’s Charitable Trust is long AMD. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
Intel Foundry Services will manufacture multiple chips for MediaTek for a range of smart edge devices, the two companies said on Monday.
Fabian Bimmer | Reuters
When Advanced Micro Devices (AMD) reports quarterly earnings next week, the Club holding’s results should not look nearly as bad as longtime rival Intel‘s (INTC) dismal numbers.
David Solomon, Chairman & CEO of Goldman Sachs, speaking on Squawk Box at the WEF in Davos, Switzerland on Jan. 23rd, 2023.
Adam Galica | CNBC
Goldman Sachs CEO David Solomon will get a $25 million compensation package for his work last year, the bank said Friday in a regulatory filing.
The package includes a $2 million base salary and variable compensation of $23 million, New York-based Goldman said in the filing. Most of Solomon’s bonus — 70%, or $16.1 million — is in the form of restricted shares tied to performance metrics, while the rest is paid in cash, the bank said.
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Solomon’s pay, while large, is about 29% lower than the $35 million he was granted for his 2021 performance. Similarly, Goldman’s full-year earnings fell by 48% to $11.3 billion amid sharp declines in investment banking and asset management revenue, the company said last week.
While the bank was primarily hit by industrywide slowdowns in capital markets activity as the Federal Reserve raised interest rates, Solomon also faced his own set of issues. Goldman was forced to scale back its ambitions in consumer finance and lay off nearly 4,000 workers in two rounds of terminations in recent months.
With all the major investment and money center banks having now reported fiscal fourth-quarter earnings, we compiled the results to compare how our Club holdings, Wells Fargo (WFC) and Morgan Stanley (MS), stand up against the competitors. Investment banking Morgan Stanley has certainly been the place to be among investment banks, not Goldman Sachs (GS). Both reported last week on Jan. 17. The key driver of the stark contrast comes largely in non-interest income. The former was able to really lean in and harvest management’s efforts to move deeper into asset and wealth management, while the latter struggled with the build-out of its consumer-facing offering. Goldman Sachs missed expectations on both the top and bottom lines. The Dow stock sank more than 6% the day it reported, compared to Morgan Stanley, which jumped nearly 6% on an EPS and revenue beats. While marking return on average tangible common equity (ROTCE) as a miss, Morgan Stanley’s ROTCE was 13.1%, excluding one-time integration-related costs. It was much more in line with expectations than what we saw from Goldman Sachs. We think this demonstrates why Morgan Stanley’s stock warrants a premium of 13x forward earnings estimates versus Goldman Sachs’ 9.8x multiple. The intense focus on diversified fee-based revenue also serves as justification for that premium compared to where Morgan Stanley’s stock has historically been valued. Its five-year average is 10.7x. Bottom line As we noted in our earnings analysis on Jan. 17 , Morgan Stanley is firing on all cylinders and in a position to continue generating strong shareholder returns due to its more resilient fee-based revenue streams and strong capital position. Goldman Sachs, on the other hand, deserves to be in the penalty box. Goldman has only gained a fraction of a percent year to date. Morgan Stanley shares have jumped 13% in 2023. MS GS YTD mountain Morgan Stanley (MS) YTD stock performance vs. Goldman Sachs (GS) Money-center banks For Q4, JPMorgan Chase (JPM) had the cleanest results. Second place was a tossup between Wells Fargo and Bank of America (BAC). The former’s net interest margin (NIM) was quite impressive, whereas the latter really put up a great show on ROTCE. We also like to see strong non-interest income, which we feel went to BofA. In terms of which stock we like more based on these numbers, we would have to stick with Wells Fargo over Bank of America because we ultimately believe it provides a better risk/reward profile. While the efficiency ratio from Wells Fargo is pretty horrendous and the bank’s ROTCE is nothing compared to BofA, we loved that NIM — a line item that fueled a net interest income (NII) surge over the year-ago period. It’s worth noting both the efficiency ratio and ROTCE at Wells Fargo offer a ton of room for improvement as management addresses legacy issues, meets goals set by regulatory bodies, and works toward the removal of its asset cap. However, therein lies the opportunity — not something we say lightly as we can’t stand when someone sees bad results and postures a they-can’t-get-any-worse attitude. In the case of Wells Fargo, we are seeing real improvements in the business and notable catalysts that we don’t see in the others. JPMorgan was clearly the best in Q4 and that’s why it trades at a premium to the group on both a tangible book value (TBV) and on 2023 earnings estimates. Bank of America comes in second, while Wells Fargo is cheaper than both. Though Citi group does trade below TBV, which you may be inclined to view as a great opportunity, this name has consistently traded at a discount in recent years because it doesn’t generate strong returns off its book as indicated by the lowest ROTCE of the group. We view that as red flag. While Wells Fargo’s ROTCE is nothing to write home about, it has been held down by its asset cap and a bloated expense structure, which management is aggressively working to reduce. On the fourth quarter conference call, management reiterated their confidence in achieving a 15% ROTCE as they work toward the removal of the asset cap and address expenses. As noted in our earnings analysis last week on Jan. 13, if we were to adjust for a $3.3 billion operating loss related to litigation, regulatory, and customer remediation matters, $1 billion of equity security impairments, $353 million in severance expenses, and $510 million in discrete tax benefits, ROTCE would have been closer to 16%. That’s a bit above the long-term goal as NII was higher than management’s long-term expectations due to interest rates, funding balances as well as mix and pricing. As the Wells Fargo’s ROTCE increases, we would expect to see its stock’s multiple expand to a level more in line with Bank of America. Wells Fargo price-to-earnings ratio stands at 9.1x forward earnings estimates, while BofA trades at 9.6x. WFC BAC YTD mountain Wells Fargo (WFC) YTD performance vs. Bank of America (BAC) Bottom line So, again, taking valuation into account, along with the fact that Wells Fargo has clear-cut areas catalysts as milestones are met and the asset cap is hopefully lifted, we think WFC is the place to be as far as its four large money center rivals are concerned. (Jim Cramer’s Charitable Trust is long WFC and MS. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
People walk past a Wells Fargo bank on 14th Street on December 20, 2022 in New York City.
Michael M. Santiago | Getty Images
With all the major investment and money center banks having now reported fiscal fourth-quarter earnings, we compiled the results to compare how our Club holdings, Wells Fargo (WFC) and Morgan Stanley (MS), stand up against the competitors.
Energy giant Chevron announced a $75 billion stock buyback program and a dividend hike on Wednesday evening.
Shares of Chevron were up more than 2% in extended trading.
The buyback program will become effective on April 1, with no set expiration date, the company said in a press release. The dividend hike increases Chevron’s per share payout to $1.51 from $1.42, and that will be distributed on March 10.
Chevron’s market cap was roughly $350 billion as of Wednesday’s market close, meaning that the buyback would represent more than 20% of the company’s stock at current prices.
This buyback plan follows a $25 billion plan enacted in 2019. The old plan will be terminated at the end of March. For the third quarter of 2022 — the most recent quarter that Chevron has reported — the company repurchased $3.75 billion of shares.
The new buyback plan comes after a massive year for energy stocks, as a reopened U.S. economy and Russia’s invasion of Ukraine combined to drive oil and gas prices hire in 2022. Chevron reported more than $12 billion of free cash flow and $11 billion of net income in the third quarter alone.
The financial success of energy companies has led to criticism from politicians, including U.S. President Joe Biden, who threatened higher taxes on energy companies last year for their “war profiteering.”
Chevron CEO Mike Wirth told CNBC in December that the company was “in contact” with the Biden administration on a variety of issues.
“Our goal of stable markets and prices that are affordable for the economy is something we share. How we get there, sometimes we have different ideas,” Wirth said on “Squawk Box.”
This is breaking news. Please check back for updates.
The Spotify logo hangs on the facade of the New York Stock Exchange with U.S. and a Swiss flag as the company lists its stock with a direct listing in New York, April 3, 2018.
Lucas Jackson | Reuters
Coming off a week that was packed with corporate earnings and economic updates, it is still difficult to determine whether a recession can be avoided this year.
Investing in such a stressful environment can be tricky. To help with the process, here are five stocks chosen by Wall Street’s top analysts, according to TipRanks, a platform that ranks analysts based on their past performances.
Ahead of Apple’s (AAPL) December quarter results, due out on Feb. 2, investors are fairly aware of the challenges that the company faced during the period. From production disruptions in the iPhone manufacturing facility at Zhengzhou in China to higher costs, Apple’s first quarter of fiscal 2023 has endured all. Needless to say, the company expects a quarter-over-quarter growth deceleration.
Nonetheless, Monness Crespi Hardt analyst Brian White expects the results to be in line with, or marginally above, Street expectations. The analyst believes gains in Services, iPad and Wearables, Home & Accessories revenue could be a saving grace.
Looking ahead, White sees pent-up demand for iPhones come into play in the forthcoming quarters, once Apple overcomes the production snags. (See Apple Stock Investors’ sentiments on TipRanks)
The analyst feels that the expensive valuation of approximately 27 times his calendar 2023 earnings estimate for Apple is justified.
“This P/E target is above Apple’s historical average in recent years; however, we believe the successful creation of a strong services business has provided the market with more confidence in the company’s long-term business model,” said White, reiterating a buy rating and $174 price target.
White holds the 67th position among almost 8,300 analysts followed on TipRanks. His ratings have been profitable 63% of the time and each rating has generated a 17.7% average return.
Audio streaming subscription service Spotify (SPOT) is also among the recent favorites of Brian White.
“Spotify is riding a favorable long-term trend, enhancing its platform, tapping into a large digital ad market, and expanding its audio offerings,” said White, reiterating a buy rating and $115 price target.
The analyst does acknowledge some challenges that await Spotify this year but remains optimistic about its margin improvement plans and several favorable industry developments. While it may be tough to attract new premium subscribers, while facing continued pressure from a lower digital ad spending environment, Spotify should benefit from ad-supported monthly active users (MAUs) this year. (See Spotify Stock Chart on TipRanks)
White is particularly upbeat about the waning mobile app store monopolies, after the European Union passed the Digital Markets Act last year. The act will be imposed from May 2023. One of the benefits for Spotify will be the ability to promote its cheaper subscription offers. Now, it can make the offers available outside Apple’s iPhone app. (This had been a challenge, as Apple previously would allow it to only promote its subscriptions through iPhone app.)
CVS Health (CVS), which operates a large retail pharmacy chain, has been on Tigress Financial Partners analyst Ivan Feinseth‘s list in recent weeks. The analyst reiterated a buy rating and a $130 price target on the stock.
The company’s “consumer-centric integrated model” as well as its increasing focus on primary care should help make health care more affordable and accessible for customers, according to Feinseth. CVS bought primary health-care provider Caravan Health as part of this focus. Moreover, the impending acquisition of Signify Health “adds to its home health services and provider enablement capabilities.”
The analyst also believes that the ongoing expansion of CVS’s new store format, MinuteClinics and HealthHUBs, will increase customer engagement and thus, continue to be a key growth catalyst. (See CVS Health Blogger Opinions & Sentiment on TipRanks)
Feinseth is also confident that CVS’s merger with managed healthcare company Aetna back in 2018 created a health-care mammoth. Now, it is well positioned to capitalize on the changing dynamics of the health-care market, as consumers gain more control over their health-care service expenditures.
Feinseth’s convictions can be trusted, given his 208th position among nearly 8,300 analysts in the TipRanks database. Apart from this, his track record of 62% profitable ratings, with each rating delivering 11.8% average returns, is also worth considering.
Fast food hamburger chain operator Shake Shack (SHAK) has been doing well both domestically and overseas on the back of its fast-casual business concept. BTIG analyst Peter Saleh has a unique take on the company.
“Shake Shack is the preeminent concept within the better burger category and the rare restaurant chain whose awareness and brand recognition exceed its actual size and sales base,” said Saleh, who reiterated a buy rating on the stock with a $60 price target. (See Shake Shack Hedge Fund Trading Activity on TipRanks)
On the downside, the analyst points out that the expansion of services outside New York has weakened Shake Shack’s margin profile by generating low returns per unit and exposing the company to greater sales volatility. However, margins seem to have bottomed, and the analyst expects profitability to gain momentum over the next 12-18 months. A combination of higher menu prices and deflation of commodity costs are expected to push restaurant margins up to mid-teen levels.
In its preliminary fourth-quarter results, management at Shake Shack mentioned that it plans to tighten its hands with general and administrative expenses this year, considering the macroeconomic uncertainty. This “should prove reassuring for investors given the heightened G&A growth (over 30%) of the past two years.”
Saleh has a success rate of 64% and each of his ratings has returned 11.7% on average. The analyst is also placed 431st among more than 8,000 analysts on TipRanks.
Despite last year’s challenges, IT distributor and solutions aggregator TD Synnex (SNX) has benefited from a steady IT spending environment amid the consistently high digital transformation across industries. The company recently posted its fiscal fourth-quarter results last week, where earnings beat consensus estimates and the dividend was hiked.
Following the results, Barrington Research analyst Vincent Colicchio dug into the results and noted that rapid growth in advanced solutions and high-growth technologies were major positives. Even though the analyst reduced his fiscal 2023 earnings forecast due to an expected rise in interest expense, he remained bullish on SNX’s efforts to achieve cost synergies by the end of the current fiscal year. (See TD Synnex Dividend Date & History on TipRanks)
Looking forward, the analyst sees a largely upward trend in growth, albeit a few hiccups. “The key growth driver in the first half of fiscal 2023 should be advanced solutions and high-growth technologies and in the second half should be PCs and peripherals and high-growth technologies. We expect Hyve Solutions revenue growth to slow in fiscal 2023 and slightly rebound in fiscal 2024 versus fiscal 2022 growth,” observed Colicchio, reiterating a buy rating and raising the price target to $130 from $98 for the next 12 months.
Importantly, Colicchio ranks 297th among almost 8,300 analysts on TipRanks, with a success rate of 61%. Each of his ratings has delivered 13% returns on average.
Several banks are reportedly working on a digital wallet that links with debit and credit cards to compete with Apple Pay and PayPal.
According to the Wall Street Journal, the digital wallet would be operated by Early Warning Services, a joint venture from several banks that also runs Zelle. The major banks involved include Wells Fargo, JPMorgan Chase and Bank of America, according to the report.
The new wallet would initially be launched with Visa and Mastercard already on board, according to the report.
The move could be seen as an effort to slow Apple‘s push into consumer banking, as the tech giant already offers a branded credit card and is exploring other products for their famously loyal customer base.
Shares of PayPal, which has digital payments as its core business, slipped about 1.5% in premarket trading.
The report follows a mixed earnings season for big banks, with several CEOs including Bank of America’s Brian Moynihan warning that the U.S. was likely to see a mild recession. Bank stocks have struggled over the past year even as interest rates have risen, as fears of a recession and a slower investment banking environment have offset gains in net interest income.
U.S. Treasury yields were little changed Monday as investors mulled the Federal Reserve’s next interest rate decision and considered the outlook for the broader economy.
As of 5:27 a.m. ET, the yield on the benchmark 10-year Treasury was up just 1 basis point at 3.497%. The 2-year Treasury yield was flat at 4.185%.
Yields and prices move in opposite directions. One basis point is equivalent to 0.01%.
Investors weighed future monetary policy decisions as uncertainty over whether the Fed would hike interest rates by 25 or 50 basis points at its next meeting on Jan. 31 and Feb. 1 continued.
In recent weeks Fed speakers have hinted that they would consider slowing rate increases to 25 basis points. Some, including Fed Governor Christopher Waller, have said outright that they would favor a smaller increase.
It comes as both wholesale and consumer inflation figures for December declined on a monthly basis.
Many investors are hoping for the central bank to slow, or completely pause, rate hikes this year. The pace of rate increases announced by the Fed in its battle against high inflation has sparked concerns about a possible recession.
No key economic data is expected on Monday. As the week continues, investors will be following S&P Global’s purchasing managers’ index report on Tuesday, as well as GDP figures on Thursday and the personal consumption expenditure price index on Friday.
The latter is one of the Fed’s favored inflation gauges and could therefore inform the central bank’s next policy moves.
Federal Reserve Governor Christopher Waller said Friday he favors a quarter percentage point interest rate increase at the next meeting, as he waits for more evidence that inflation is heading in the right direction.
Confirming market expectations, the central bank official said during a Council on Foreign Relations event in New York that the Fed can dial down on the size of its rate hikes.
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But he also said it’s not time to declare victory on inflation, comparing monetary policy to an airplane that soared higher quickly and now is ready for a gradual descent.
“And in keeping with this logic and based on the data in hand at this moment, there appears to be little turbulence ahead, so I currently favor a 25-basis point increase at the FOMC’s next meeting at the end of this month,” Waller said in prepared remarks. “Beyond that, we still have a considerable way to go toward our 2 percent inflation goal, and I expect to support continued tightening of monetary policy.”
He did not specify how high he sees rates heading, and was scheduled to participate in a question-and-answer session following the 1 p.m. ET speech.
Christopher Waller, U.S. President Donald Trump’s nominee for governor of the Federal Reserve, listens during a Senate Banking Committee confirmation hearing in Washington, D.C., on Thursday, Feb. 13, 2020.
Andrew Harrer | Bloomberg | Getty Images
Other officials, such as Philadelphia Fed President Patrick Harker, have pointed to a 0.25 percentage point increase at the Jan. 31-Feb. 1 FOMC meeting, but Waller is the highest-ranking member to be that explicit.
While the market and the Fed appear to be on the same page with where rates go in the short term, there is divergence further out.
Central bankers largely have said they see rates holding at a high level through the end of the year, while markets see a peak in the summer then a reduction shortly thereafter.
Waller said the divergence is largely about perception for where inflation is going to go.
“The market has a a very optimistic view that inflation is just going to melt away. The immaculate disinflation is going to occur,” he told CNBC’s Steve Liesman during a question-and-answer session after the speech. “We have a different view. Inflation’s not just going to miraculously melt away. It’s going to be a slower, harder slog to get inflation down and therefore we have to keep rates higher for longer and not start cutting rates by the end of the year.”
Waller was generally upbeat on the economy, noting that activity has slowed in some key areas such as manufacturing, wage growth and consumer spending. He emphasized the Fed’s goal is not to “halt economic activity,” but rather to bring it back into balance so inflation can start to fall.
In recent months, inflation gauges such as the consumer price index and the Fed’s preferred core personal consumption expenditures price index have come off their peaks of last summer. But he noted that while headline CPI declined 0.1%, the index excluding food and energy still rose 0.3% and “is still too close to where it was a year ago.”
“So, while it is possible to take a month or three months of data and paint a rosy picture, I caution against doing so,” he said. “The shorter the trend, the larger the grain of salt when swallowing a story about the future.”
But Waller did say he still sees a “soft landing” as possible for the economy, scenario that would see “progress on inflation without seriously damaging the labor market.”
“So far, we have managed to do so, and I remain optimistic that this progress can continue,” he said.
Morgan Stanley ‘s (MS) multiyear transformation plan has been a success, CEO James Gorman said with pride Thursday — and, as shareholders, we see no reason to disagree. “We’ve steadily de-risked parts of the business that got us in trouble during the [Great Financial Crisis], and we obviously made a major push in building up wealth and asset management, and it worked,” Gorman said in a CNBC interview from the World Economic Forum in Davos, Switzerland. “We’re delighted with where we got to.” The Club is delighted, too, even if the market hasn’t always shared our conviction in the shift Gorman has engineered since taking over the Wall Street bank in 2010. Under Gorman’s leadership, Morgan Stanley has pivoted toward the more stable revenues associated with wealth and asset management, which decreases its reliance on the often volatile investment banking and trading businesses. This strategy attracted us to the stock nearly two years ago, believing that it would boost Morgan Stanley’s valuation over time — because, in general, investors put a premium on steady sales streams. MS 6M mountain Morgan Stanley’s stock performance over the past six months. Morgan Stanley’s strong quarterly results earlier this week validated our ownership yet again. Those fourth-quarter numbers also came on the same morning its longtime Wall Street rival, Goldman Sachs (GS), reported a sizable earnings miss due, in part, to its expansion into consumer banking . While declining to comment Thursday on his competitor, Gorman happily outlined what he views as the benefits of Morgan Stanley’s transformation. “We needed to build a business where, if the world got tough again — which we just saw last year an example of it — we would be just fine. And the way to do that is to build businesses that are stable; it doesn’t matter what the market conditions are,” Gorman said. “Listen, every person who is buying a stock, there’s somebody else selling it. Everybody who is buying a bond is taking money out of cash. … There’s constant movement of money. Our job is to be in the middle.” Acquisitions were a big part of how Morgan Stanley maneuvered its way into the middle of that money flow. The bank took full control of wealth manager Smith Barney a decade ago. More recently, it purchased brokerage E-Trade and investment management firm Eaton Vance . Valued at roughly $20 billion in total, those acquisitions closed in October 2020 and March 2021, respectively. The deals were “aggressive,” Gorman acknowledged. “We were told consistently when we bought Smith Barney then E-Trade, then Eaton Vance, we overpaid on all of them. My response was, ‘You’re right.’ But it doesn’t matter,” Gorman told CNBC. “We now own the business. It doesn’t matter plus or minus a billion dollars. What matters is over a 10-year period what you can do with that business.” We now own the business. It doesn’t matter plus or minus a billion dollars. What matters is over a 10-year period what you can do with that business. Morgan Stanley CEO James Gorman Economic outlook Gorman was also asked about his thoughts on the global economy, inflation and the Federal Reserve. His outlook was relatively optimistic at a time when consensus expectations are for a U.S. recession, albeit a mild one. Gorman said he thinks 2023 will be an improvement compared with 2022, which was filled with slumping stock markets and elevated price pressures that prompted a very aggressive interest rate-hiking campaign from the Federal Reserve. “I think it’ll be better. I really do,” Gorman said. While it’s unclear what the Fed will do with rates in the coming months, Gorman said that one favorable development, at least, is that U.S. inflation has already peaked. Recent government data has supported Gorman’s contention, with price pressures cooling for both consumers and wholesale producers . Another positive is what’s happening economically in China, Gorman said. While the CEO said Beijing’s decision to relax strict Covid controls is important, he put more emphasis on an adoption of growth-oriented economic policies and a thawing of U.S.-China tensions. He pointed to the meeting this week between U.S. Treasury Secretary Janet Yellen and Chinese Vice Premier Liu He as evidence. Elsewhere across banking, JPMorgan (JPM) CEO Jamie Dimon told CNBC earlier Thursday he believes the Fed may need to rise interest rates above its current projections because, he thinks, “there’s a lot of underlying inflation, which won’t go away so quick.” The Club’s take Despite widespread recession fears since last year, the Club has maintained its belief in Morgan Stanley. The transformation plan that Gorman touted throughout Thursday’s interview showed why we not only stayed invested but bulked up our position at lower levels as the stock sold off early last year. As of right now, we’ve got a 2 rating on Morgan Stanley, meaning we’d wait for a pullback before buying more shares. The stock has gained more than 10% already in 2023 — helped in large part by a nearly 6% advance Tuesday as investors cheered the bank’s earnings report. We can certainly afford to be patient while we wait for investment banking revenues to bounce back from a multi-quarter slump. Morgan Stanley shares carry a roughly 3.3% dividend yield, and it bought back $1.7 billion worth of stock in the fourth quarter. The firm appears to be positioned to continue repurchasing stock because in June its board authorized a multiyear, $20 billion buyback program . (Jim Cramer’s Charitable Trust is long MS . See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
James Gorman, Chairman & CEO of Morgan Stanley, speaking on Squawk Box at the WEF in Davos, Switzerland on Jan. 19th, 2023..
Adam Galica | CNBC
Morgan Stanley‘s (MS) multiyear transformation plan has been a success, CEO James Gorman said with pride Thursday — and, as shareholders, we see no reason to disagree.
JPMorgan Chase CEO Jamie Dimon believes interest rates could go higher than what the Federal Reserve currently projects as inflation remains stubbornly elevated.
“I actually think rates are probably going to go higher than 5% … because I think there’s a lot of underlying inflation, which won’t go away so quick,” Dimon said Thursday on CNBC’s “Squawk Box” from the World Economic Forum in Davos, Switzerland.
To battle soaring prices, the Fed has raised its benchmark interest rate to a targeted range between 4.25% and 4.5%, the highest level in 15 years. The anticipated “terminal rate,” or point where officials expect to end the rate hikes, was set at 5.1% at its December meeting.
The consumer price index, which measures the cost of a broad basket of goods and services, rose 6.5% in December from a year ago, marking the smallest annual increase since October 2021.
Dimon said the recent easing of inflation comes from temporary factors such as a pullback in oil prices and a slowdown in China due to the Covid pandemic.
Jamie Dimon, President, CEO & Chairman of JP Morgan Chase, speaking on Squawk Box at the WEF in Davos, Switzerland on Jan. 19th, 2023.
Adam Galica | CNBC
“We’ve had the benefit of China’s slowing down, the benefit of oil prices dropping a little bit,” Dimon said. “I think oil gas prices probably go up the next 10 years … China isn’t going to be deflationary anymore.”
The series of aggressive rate hikes have fueled worries of a recession in the U.S. Central bankers still feel they have leeway to raise rates as the labor market and the consumer remain strong.
The JPMorgan chief said if the U.S. suffers a mild recession, interest rates will rise to 6%. He added that it’s hard for anyone to predict economic downturns.
“I know there are going to be recessions, ups and downs. I really don’t spend that much time worrying about it. I do worry that poor public policy damages American growth,” Dimon said.
DAVOS, Switzerland – The finance and tech CEOs gathering at the World Economic Forum this week expressed measured optimism about the economy in 2023 — but at least one major risk looms for markets, they said.
The resilient U.S. economy, a mild European winter and China’s reopening have given investors and forecasters hope that a severe recession can be avoided, Citigroup CEO Jane Fraser told CNBC’s Sara Eisen on Tuesday.
“All in all, the year has started off better than everyone expected,” Fraser said. “Everyone’s converging now in the states more around a mild, manageable recessionary scenario, driven by the strength that we’ve got in the labor markets.”
The U.S. economy has slowed since the Federal Reserve began raising interest rates last year, sowing fears that a recession was unavoidable.
In the early weeks of 2023, investors have begun to hope that moderating inflation and strong employment figures could result in a so-called soft landing. But budding optimism at the annual meeting of billionaires, heads of state and business leaders in the Swiss Alps collided with a fresh threat, on top of existing concerns including the Ukraine war and global climate change.
The world’s largest economy risks defaulting on its debt for the first time in modern history this summer as politicians wrangle over raising the country’s debt limit, currently capped at $31.4 trillion. The U.S. is expected to reach its debt limit Thursday, Treasury Secretary Janet Yellen said last week. After that, the Treasury will find ways to fund their debt obligations until at least early June, Yellen said.
That sets up a standoff in Congress in the weeks ahead. Republicans and Democrats will engage in brinkmanship over political goals. The last time a potential default risk surfaced was in 2011, when lawmakers averted disaster after markets convulsed and the U.S. had its credit rating downgraded.
“I don’t think anybody knows what would happen if they really went further than what happened in 2011,” the CEO of a Wall Street bank said on the sidelines of the conference. “That’s why it’s scary.”
The CEO, who declined to be identified speaking candidly, said he had just met a group of U.S. lawmakers worried about the coming impasse.
“It would affect markets and it would be a drag on economic activity because of the uncertainty,” he said. “It would be really bad for us.”
But coming to a deal to increase the U.S. debt limit won’t be easy in a political environment that’s grown even more polarized in the past decade.
Addressing the debt ceiling “is going to be hard,” said Salesforce CEO Marc Benioff on Wednesday. House Speaker Kevin McCarthy, R-Calif., has “got to handle it, but he’s got a lot of issues,” he said.
The newly elected McCarthy is in a bind. While conservative members of his caucus insist they do not want the country to default on its debt, McCarthy is under pressure to demand deep spending cuts. McCarthy has suggested that he won’t support raising the debt ceiling without a compromise on spending.
The situation is a “mess” with at least one possible solution: Congress could pass a “clean debt limit,” according to Peter Orszag, CEO of financial advisory at Lazard. That refers to a borrowing increase without spending cuts.
McCarthy, however, would likely not survive as speaker if he agreed to that, Orszag said.
Another top Wall Street CEO said he planned to push lawmakers at Davos to focus more on spending cuts rather than the debt ceiling.
The worries contrast with early signs this month that formerly frozen markets have begun to awaken. For instance, debt issuance has been “incredibly strong” in January so far, according to Fraser.
It’s too early to say whether those signs are a harbinger of better times for investment banks and the wider economy, she said.
