Russian President Vladimir Putin chairs a meeting with members of the Security Council at the Novo-Ogaryovo state residence outside Moscow, Russia November 25, 2022.
Alexander Shcherbak | Sputnik | Reuters
VanEck is liquidating its Russia-centric exchange-traded funds after the ongoing war in Europe has effectively severed the Russian market from Western investors.
Russia ETFs plunged after the country’s army invaded Ukraine. Moscow’s stock market was closed temporarily, and ongoing sanctions mean that major stocks like Gazprom still cannot be traded in the West, creating liquidity concerns for the funds.
“The Funds’ inability to buy, sell, and take or make delivery of Russian securities has made it impossible to manage the Funds consistent with their investment objectives. The Funds will not engage in any business or investment activities except for the purposes of winding up their affairs,” VanEck said in a release Wednesday evening.
The firm has suspended redemptions of the funds, pursuant to an order from the Securities and Exchange Commission, while it liquidates the positions. VanEck said it plans to distribute any proceeds from the liquidation to investors on roughly Jan. 12, 2023.
The RSX fund had more than $1.3 billion in assets under management at the beginning of 2022, according to FactSet.
VanEck’s move follows similar announcements by Franklin Templeton last week and BlackRock in August about their Russia ETFs.
Cal-Maine Foods — Cal-Maine shares shed 15% after reporting earnings that fell short of Wall Street’s expectations even as the egg producer reported record sales. The company said the avian flu outbreak limited supply and pushed prices up.
Lockheed Martin — The defense contractor’s stock rose nearly 1% following news that its Sikorsky unit is contesting a U.S. Army helicopter contract awarded to Textron. It said proposals for the $1.3 billion contract were not evaluated fairly. Textron shares were last up 1.9%.
Tesla — Tesla shares gained more than 7% after selling off during the previous sessions and 37% this month. The stock’s headed for one of its worst months, quarters and years ever.
Apple — The iPhone maker’s stock rose more than 3% after hitting its lowest level since June 2021 earlier in the week.
General Electric — Shares rose 1.7% amid news that General Electric’s health-care spinoff will join the S&P 500 when it starts trading separately on Jan. 4. GE Healthcare will replace Vornado Realty Trust, set to join the S&P MidCap 400.
ImmunoGen — Shares added 6.2% after the biotechnology company announced CFO Susan Altschuller would not return from her time off. Renee Lentini, the vice president and chief accounting officer, was named interim CFO. The stock initially dropped in premarket trading.
Partygoers with unicorn masks at the Hometown Hangover Cure party in Austin, Texas.
Harriet Taylor | CNBC
Bill Harris, former PayPal CEO and veteran entrepreneur, strode onto a Las Vegas stage in late October to declare that his latest startup would help solve Americans’ broken relationship with their finances.
“People struggle with money,” Harris told CNBC at the time. “We’re trying to bring money into the digital age, to redesign the experience so people can have better control over their money.”
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But less than a month after the launch of Nirvana Money, which combined a digital bank account with a credit card, Harris abruptly shuttered the Miami-based company and laid off dozens of workers. Surging interest rates and a “recessionary environment” were to blame, he said.
The reversal is a sign of more carnage to come for the fintech world.
Many fintech companies — particularly those dealing directly with retail borrowers — will be forced to shut down or sell themselves next year as startups run out of funding, according to investors, founders and investment bankers. Others will accept funding at steep valuation haircuts or onerous terms, which extends the runway but comes with its own risks, they said.
Top-tier startups that have three to four years of funding can ride out the storm, according to Point72 Ventures partner Pete Casella. Other private companies with a reasonable path to profitability will typically get funding from existing investors. The rest will begin to run out of money in 2023, he said.
“What ultimately happens is you get into a death spiral,” Casella said. “You can’t get funded and all your best employees start jumping ship because their equity is underwater.”
Thousands of startups were created after the 2008 financial crisis as investors plowed billions of dollars into private companies, encouraging founders to attempt to disrupt an entrenched and unpopular industry. In a low interest rate environment, investors sought yield beyond public companies, and traditional venture capitalists began competing with new arrivals from hedge funds, sovereign wealth and family offices.
The movement shifted into overdrive during the Covid pandemic as years of digital adoption happened in months and central banks flooded the world with money, making companies like Robinhood, Chime and Stripe familiar names with huge valuations. The frenzy peaked in 2021, when fintech companies raised more than $130 billion and minted more than 100 new unicorns, or companies with at least $1 billion in valuation.
“20% of all VC dollars went into fintech in 2021,” said Stuart Sopp, founder and CEO of digital bank Current. “You just can’t put that much capital behind something in such a short time without crazy stuff happening.”
The flood of money led to copycat companies getting funded anytime a successful niche was identified, from app-based checking accounts known as neobanks to buy now, pay later entrants. Companies relied on shaky metrics like user growth to raise money at eye-watering valuations, and investors who hesitated on a startup’s round risked missing out as companies doubled and tripled in value within months.
The thinking: Reel users in with a marketing blitz and then figure out how to make money from them later.
“We overfunded fintech, no question,” said one founder-turned-VC who declined to be identified speaking candidly. “We don’t need 150 different neobanks, we don’t need 10 different banking-as-a-service providers. And I’ve invested in both” categories, he said.
The first cracks began to appear in September 2021, when the shares of PayPal, Block and other public fintechs began a long decline. At their peak, the two companies were worth more than the vast majority of financial incumbents. PayPal’s market capitalization was second only to that of JPMorgan Chase. The specter of higher interest rates and the end of a decade-plus-long era of cheap money was enough to deflate their stocks.
Many private companies created in recent years, especially those lending money to consumers and small businesses, had one central assumption: low interest rates forever, according to TSVC partner Spencer Greene. That assumption met the Federal Reserve’s most aggressive rate-hiking cycle in decades this year.
“Most fintechs have been losing money for their entire existence, but with the promise of ‘We’re going to pull it off and become profitable,’” Greene said. “That’s the standard startup model; it was true for Tesla and Amazon. But many of them will never be profitable because they were based on faulty assumptions.”
Even companies that previously raised large amounts of money are struggling now if they are deemed unlikely to become profitable, said Greene.
“We saw a company that raised $20 million that couldn’t even get a $300,000 bridge loan because their investors told them `We are no longer investing a dime.’” Greene said. “It was unbelievable.”
All along the private company life cycle, from embryonic startups to pre-IPO companies, the market has reset lower by at least 30% to 50%, according to investors. That follows the decline in public company shares and a few notable private examples, like the 85% discount that Swedish fintech lender Klarna took in a July fundraising.
Now, as the investment community exhibits a newfound discipline and “tourist” investors are flushed out, the emphasis is on companies that can demonstrate a clear path toward profitability. That is in addition to the previous requirements of high growth in a large addressable market and software-like gross margins, according to veteran fintech investment banker Tommaso Zanobini of Moelis.
“The real test is, does the company have a trajectory where their cash flow needs are shrinking that gets you there in six or nine months?” Zanobini said. “It’s not, trust me, we’ll be there in a year.”
As a result, startups are laying off workers and pulling back on marketing to extend their runway. Many founders are holding out hope that the funding environment improves next year, although that is looking increasingly unlikely.
As the economy slows further into an expected recession, companies that lend to consumers and small businesses will suffer significantly higher losses for the first time. Even profitable legacy players like Goldman Sachs couldn’t stomach the losses required to create a scaled digital player, pulling back on its fintech ambitions.
“If loss ratios are increasing in a rate increasing environment on the industry side, it’s really dangerous because your economics on loans can get really out of whack,” said Justin Overdorff of Lightspeed Venture Partners.
Now, investors and founders are playing a game of trying to determine who will survive the coming downturn. Direct-to-consumer fintechs are generally in the weakest position, several venture investors said.
“There’s a high correlation between companies that had bad unit economics and consumer businesses that got very large and very famous,” said Point72’s Casella.
Many of the country’s neobanks “are just not going to survive,” said Pegah Ebrahimi, managing partner of FPV Ventures and a former Morgan Stanley executive. “Everyone thought of them as new banks that would have tech multiples, but they are still banks at the end of the day.”
Beyond neobanks, most companies that raised money in 2020 and 2021 at nosebleed valuations of 20 to 50 times revenue are in a predicament, according to Oded Zehavi, CEO of Mesh Payments. Even if a company like that doubles revenue from its last round, it will likely have to raise fresh funds at a deep discount, which can be “devastating” for a startup, he said.
“The boom led to some really surreal investments with valuations that cannot be justified, maybe ever,” Zehavi said. “All of these companies across the world are going to struggle, and they will need to be acquired or shut down in 2023.”
As in previous down cycles, however, there is opportunity. Stronger players will snap up weaker ones through acquisition and emerge from the downturn in a stronger position, where they will enjoy less competition and lower costs for talent and expenses, including marketing.
“The competitive landscape shifts the most during periods of fear, uncertainty and doubt,” said Kelly Rodriques, CEO of Forge, a trading venue for private company stock. “This is when the bold and the well capitalized will gain.”
While sellers of private shares have generally been willing to accept bigger valuation discounts as the year went on, the bid-ask spread is still too wide, with many buyers holding out for lower prices, Rodriques said. The logjam could break next year as sellers become more realistic about pricing, he said.
Bill Harris, co-founder and CEO of Personal Capital
Source: Personal Capital.
Eventually, incumbents and well-financed startups will benefit, either by purchasing fintechs outright to accelerate their own development, or picking off their talent as startup workers return to banks and asset managers.
Though he didn’t let on during an October interview that Nirvana Money would soon be among those to shutter, Harris agreed that the cycle was turning on fintech companies.
But Harris — founder of nine fintech companies and PayPal’s first CEO — insisted that the best startups would survive and ultimately thrive. The opportunities to disrupt traditional players are too large to ignore, he said.
“Through good times and bad, great products win,” Harris said. “The best of the existing solutions will come out stronger and new products that are fundamentally better will win as well.”
China’s latest move to roll back its zero-Covid policy by scrapping quarantine restrictions for international travelers is the last leg of recovery we’ve been waiting for to help bolster Club holdings that have been weighed down by three years of stringent pandemic rules. Club names with significant China exposure were trading higher on the news Tuesday. Casino giant Wynn Resorts (WYNN) climbed more than 5%, cosmetics firm Estee Lauder (EL) rose more than 3% and industrial giant Honeywell (HON) ticked up 0.54% in midday trading. Wynn’s 2 properties in the special administrative region of Macao, China, had generated roughly 70% of the company’s total revenue pre-Covid-19. Estee Lauder relies on China for more than a third of total sales. And Honeywell, whose diverse range of industrial products include airplane cockpits and engines, is a significant supplier to what had been one of the fastest-growing passenger air markets in the world. Both Wynn and Estee Lauder are down more than 30% year-to-date, while Honeywell has risen more than 3% this year. Chinese authorities have dramatically scaled back draconian Covid restrictions over the past month that all but shut down the world’s second-largest economy since the onset of the pandemic in early 2020. On Monday, Beijing said international travelers will no longer need to quarantine upon arrival in the mainland from Jan. 8. That comes days after Macao lifted quarantine restrictions for visitors. The Club take China’s latest move to reopen its economy should be a catalyst for multiple Club holdings. While there are concerns that 2023 will be a down year for corporate earnings at large, companies with significant operations in China will likely have a different story to tell. For Estee Lauder, a leader in luxury skin care, makeup and fragrances, China represents a key driver of growth. The lifting of quarantine restrictions should lead to more duty-free airport sales for the cosmetics giant, especially in the touristy Hainan region, known as the Hawaii of China. Estee Lauder, like Club holding Starbucks (SBUX), is also poised to benefit from China abandoning strict lockdowns to combat Covid outbreaks, allowing more consumers to regularly shop in person. Relaxed quarantine restrictions should also boost the aerospace industry, which still hasn’t fully recovered from the pandemic. An uptick in international flights would be a tailwind to Honeywell, whose aerospace segment is one of its higher revenue- and margin performers. Wynn, meanwhile, is a large beneficiary of China’s reopening news given its outsized exposure to the country through its Macao casinos. This should allow Wynn to improve its earnings and execute on growth in the region. (Jim Cramer’s Charitable Trust is long EL, WYNN, HON, SBUX. 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 use their smartphones to take photographs outside The Wynn Macau casino resort, operated by Wynn Resorts Ltd., in Macao, China, on Tuesday, Jan. 30, 2018.
Billy H.C. Kwok | Bloomberg | Getty Images
China’s latest move to roll back its zero-Covid policy by scrapping quarantine restrictions for international travelers is the last leg of recovery we’ve been waiting for to help bolster Club holdings that have been weighed down by three years of stringent pandemic rules.
Biogen — The biotech stock declined fell slightly after Biogen’s Japanese partner, Eisai, said a third person has died during a trial of their experimental Alzheimer’s treatment, confirming Reuters reports.
Carnival, Norwegian Cruise Line — Cruise line operators declined as fears of a recession weighed on consumer discretionary stocks, which was one of three worst-performing sectors in the S&P 500. Shares of Carnival were down more than 4%, while Norwegian Cruise Line was down more than 2%.
Tesla — Shares of the electric vehicle maker declined 2% after CEO Elon Musk said that he would hold off on selling any more Tesla stock for the next 18 to 24 months. Over the past year, Musk sold roughly $39 billion in shares.
3M Company — 3M shed 1.6% after a U.S. judge barred the company from shifting liability to a subsidiary for injuries suffered by military members from allegedly defective earplugs. The judge said 3M deserved the “harshest penalty” for its “bad faith” attempts to transfer liability, Reuters reported.
Nutanix — Shares of Nutanix fell more than 5% after Dealreporter reported that Hewlett Packard Enterprise has halted talks to acquire the cloud computing company. Hewlett Packard confirmed in a statement to CNBC that “there are currently no discussions with Nutanix.”
Mission Produce — Shares of the avocado producer dropped more than 14% after the company reported financial results for its most recent quarter. It posted lower-than-expected profit and revenue as the rise in volume was not enough to offset a plunge in the prices of avocados.
— CNBC’s Tanaya Macheel and Michelle Fox contributed reporting.
Check out the companies making headlines before the bell:
Tesla (TSLA) – Tesla CEO Elon Musk said he would refrain from selling any more Tesla stock for 18 to 24 months. Musk has sold about $39 billion in stock over the past year, amid his $44 billion deal to buy Twitter. Tesla gained 1.2% in the premarket.
Nutanix (NTNX) – Nutanix tumbled 16.6% in the premarket following a report that Hewlett Packard Enterprise (HPE) has ended talks to acquire the cloud computing company.
Meta Platforms (META) – Meta and users of its Facebook platform settled a privacy class action lawsuit, with Meta agreeing to pay $725 million. The suit stemmed from the 2018 revelation that data firm Cambridge Analytica had collected information from tens of millions of Facebook users.
Mission Produce (AVO) – The avocado producer reported lower-than-expected profit and revenue as the rise in volume was not enough to offset a plunge in avocado prices. Mission Produce slumped 13.7% in premarket trading.
3M (MMM) – 3M was barred by a judge from shifting liability to a subsidiary in a case involving combat earplugs. The case stems from injuries suffered by members of the military who used the allegedly defective earplugs.
Toro (TTC) – The lawn care and outdoor products company was upgraded to outperform from market perform at Raymond James, which set a price target of $130 compared with yesterday’s close of $111.15 per share. Toro also reported better-than-expected quarterly earnings earlier this week. The stock added 1% in premarket action.
Biogen (BIIB) – Biogen’s Japanese partner Eisai has confirmed to Reuters reports of a third death in a trial of their experimental Alzheimer’s treatment and said the cause is being investigated.
Oilfield services stocks – Halliburton (HAL) gained 1.4% in the premarket, with Schlumberger (SLB) up 1.3% and Baker Hughes (BKR) rising 1%. The gains come as the price for crude rises more than 2% in early trading.
Every weekday the CNBC Investing Club with Jim Cramer holds a “Morning Meeting” livestream at 10:20 a.m. ET. Here’s a recap of Wednesday’s key moments. Santa Claus rally may be here early ‘Buy things that nobody wants’ We still like Starbucks Alphabet’s smart play for NFL package 1. Santa Claus rally may be here early Stocks bounced Wednesday, as all three major U.S. stock indexes rose more than 1.5%. While it’s been a down month for Wall Street, quarterly reports from Nike (NKE) and FedEx (FDX) boosted sentiment Wednesday and sparked optimism that earnings may not be so bad after all. Wednesday’s move comes after stocks broke a four-day losing streak Tuesday and may rekindle hope about a so-called Santa Claus rally . The Santa Claus rally refers to the seasonally strong period covering the final five trading days in a year and the first two in January. 2. ‘Buy things that nobody wants’ The Club made four purchases Wednesday, including in two holdings that declined considerably so far in December: Salesforce (CRM), which is down more than 17% month to date, and Devon Energy (DVN), which has declined over 10% in the same period. “Sometimes you want to buy things that nobody wants,” Jim said during the “Morning Meeting.” Here’s a full recap of our trades Wednesday. 3. We still like Starbucks We still see upside ahead of Starbucks (SBUX) as the coffee chain stands to benefit from China’s economic reopening. That view differs from Jefferies Group, which downgraded the Club holding on Wednesday. The firm took its rating to hold from buy, saying risk/reward for the stock looks “balanced” after climbing 40% from its 52-week low in May. “I regard this as a quizzical downgrade,” Jim said. 4. Alphabet’s smart play for NFL package Club holding Alphabet (GOOGL) is well-positioned to elevate the NFL Sunday Ticket package and bring out some untapped potential at YouTube. According to recent media reports, including from CNBC, the tech giant is in advanced talks with the NFL to bring the league’s Sunday Ticket package to Google’s YouTube. Sunday Ticket is a premium package that allows subscribers to view out-of-market games that otherwise aren’t watchable on local broadcast networks. DirecTV has long held the rights to Sunday Ticket. (Jim Cramer’s Charitable Trust is long CRM, DVN, SBUX and GOOGL. 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.
The U.S. government’s consumer watchdog agency announced Tuesday that it ordered Wells Fargo (WFC) to pay $3.7 billion in connection with the bank’s previous wrongdoing, a sizable penalty but one that represents progress toward eventually removing a dark regulatory cloud that’s been hanging over the bank for years. The settlement stems from a host of customer abuses in key Wells Fargo product lines including auto loans and mortgages, as well as illegal surprise overdraft fees and bank account freezes, according to the Consumer Financial Protection Bureau (CFPB). Wells Fargo will pay a $1.7 billion civil penalty and more than $2 billion to the “over 16 million affected consumer accounts,” the CFPB said. Wells Fargo has already paid out some of that $2 billion, the bank told Jim Cramer. Wells Fargo has long made clear it was being investigated by the CFPB, so Tuesday’s announcement wasn’t a complete shock. However, the magnitude of the penalty had not been known until now. Shares of Wells Fargo dropped roughly 2% to just under $41 each. At one point shortly after Tuesday’s open on Wall Street, the stock had traded modestly higher. “This is a situation where it just seems endless,” Jim said Tuesday morning on CNBC, referring to the many investigations, consent orders and fines that Wells Fargo has faced in recent years. “The question is, ‘How far does this put them along in terms of all the other things they’ve done? This is the big one,” he added. When the news hit Tuesday morning, there was a lot of confusion around the numbers. Technically, the bank was ordered to pay $3.7 billion. However, Wells Fargo had already reserved, or set aside, more than half of that. Jim’s follow-up conversations with the bank indicate that when it’s all said and done, the total figure to move on from these issues could be even larger, closer to $5.5 billion. Big picture, we think this is incrementally positive for Wells Fargo as CEO Charlie Scharf works to clean up the bank and satisfy regulators’ demands following scandal-ridden years under previous management. Scharf became CEO in October 2019 , and he’s overseen the end of numerous consent orders implemented by regulators, including the CFPB and Office of the Comptroller of the Currency. Following Tuesday’s CFPB action, Wells Fargo said Tuesday it expects to record a $3.5 billion operating losses expense in the fourth quarter, including the “incremental costs of the CFPB civil penalty and related customer remediation as well as amounts related to outstanding litigation matters and other customer remediation.” The Club took a stake in Wells Fargo in January 2021, knowing it would take time for all these regulatory issues to be resolved, including the most burdensome one: a Federal Reserve-imposed asset cap of $1.95 trillion. Wells Fargo is a turnaround story. Implemented in 2018 after years of scandals, the asset cap hampers the bank’s ability to issue new loans. It’s impossible to know exactly when it will be lifted. Some think it could happen in late 2023. In any case, that’s why developments like Tuesday — which put other regulatory overhangs in the rearview mirror — are beneficial in the grand scheme of things. “While we do not see today’s action as having a direct read-through to the asset cap and its potential removal, we would take today’s announcement as a sign of positive progress on moving toward that ultimate goal,” analysts at Jefferies wrote Tuesday. Bottom line For the Club, we think Wells Fargo looks attractive at these levels, and we have a 1 rating on the stock. The bank continues to work on reducing expenses across its businesses through improved efficiency, which is good for profitability. Additionally, Wells Fargo’s large customer deposit base allows the bank to grow earnings as interest rates rise. While recessions typically aren’t good for banks, we don’t see the U.S. economy taking that severe of a downturn next year. We’re encouraged that Wells Fargo’s credit quality remained strong, as of its third-quarter results , which were released back in October. This bolsters our conviction in the name, combined with the aforementioned steps to grow earnings and the step-by-step clearing of regulatory overhangs. (Jim Cramer’s Charitable Trust is long WFC. 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.
Wells Fargo
Rick Wilking | Reuters
The U.S. government’s consumer watchdog agency announced Tuesday that it ordered Wells Fargo (WFC) to pay $3.7 billion in connection with the bank’s previous wrongdoing, a sizable penalty but one that represents progress toward eventually removing a dark regulatory cloud that’s been hanging over the bank for years.
Charles Scharf, chief executive officer of Wells Fargo & Co., listens during a House Financial Services Committee hearing in Washington, D.C., U.S., on Tuesday, March 10, 2020.
Andrew Harrer | Bloomberg | Getty Images
Wells Fargo agreed to a $3.7 billion settlement with the Consumer Financial Protection Bureau over customer abuses tied to bank accounts, mortgages and auto loans, the regulator said Tuesday.
The bank was ordered to pay a $1.7 billion civil penalty and “more than $2 billion in redress to consumers,” the CFPB said in a statement. In a separate statement, the San Francisco-based company said that many of the “required actions” tied to the settlement were already done.
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“The bank’s illegal conduct led to billions of dollars in financial harm to its customers and, for thousands of customers, the loss of their vehicles and homes,” the agency said in its release. “Consumers were illegally assessed fees and interest charges on auto and mortgage loans, had their cars wrongly repossessed, and had payments to auto and mortgage loans misapplied by the bank.”
The resolution lifts one overhang for the bank, which has been led by CEO Charlie Scharf since October 2019. In October, the bank set aside $2 billion for legal, regulatory and customer remediation matters, igniting speculation that a settlement was nearing.
But other regulatory hurdles remain: Wells Fargo is still operating under consent orders tied to its 2016 fake accounts scandal, including one from the Fed that caps its asset growth.
Furthermore, the bank said that fourth-quarter expenses would include a $3.5 billion operating loss, or $2.8 billion after taxes, from the incremental costs of the CFPB civil penalty and customer remediation efforts, as well as other legal matters. The bank is still expected to post an overall profit when it reports results in mid January, according to a person with knowledge of the matter.
Shares of the bank rose 1.2% in early trading.
“This far-reaching agreement is an important milestone in our work to transform the operating practices at Wells Fargo and to put these issues behind us,” Scharf said in his statement. “We and our regulators have identified a series of unacceptable practices that we have been working systematically to change and provide customer remediation where warranted.”
CFPB Director Rohit Chopra said Wells Fargo’s “rinse-repeat cycle of violating the law” hurt millions of American families and that the settlement was an “important initial step for accountability” for the bank.
This story is developing. Please check back for updates.
Craig Jelinek, chief executive officer of Club holding Costco (COST), said Monday he sees a more-vigilant consumer this holiday shopping season and potentially beyond. However, he also said inflation is generally trending in the right direction, a development that’s good for the U.S. economy over the long term. “Overall, it’s probably not one of the most exciting Christmases I’ve ever dealt with, and I think that has a lot to do with the consumer being careful going into next year,” Jelinek said in a CNBC interview. We tend to look to Costco as a barometer for the economy since it sells such a wide variety of goods and services to its nearly 121 million cardholders. Bottom line Jelinek painted a mixed picture Monday, sounding more cautious on the consumer than some may have expected — especially when it comes to purchasing bigger-ticket items like furniture, high-end TVs and jewelry. At the same time, the retail CEO had mostly favorable things to say on inflation easing and sales in some categories including its private-label Kirkland Signature brand. We left the interview believing our cautious stance on retail stocks remains justified. Costco is one of just two in our portfolio along with TJX Companies (TJX), an off-price retailer that benefits from the industry’s inventory glut and bargain-seeking shoppers. TJX is the company behind the T.J. Maxx, Marshalls and HomeGoods stores. Costco similarly benefits as more consumers want a reprieve from an inflationary environment, so they turn to a company with a proven value-oriented ethos. “We’re the price police,” Jelinek told CNBC, saying Costco is “absolutely” trying to negotiate with its suppliers to roll back increases that were implemented during the pandemic. “You pay to shop with us. Our job is to lower prices,” he said. Costco members believe it makes good on that promise — U.S. and Canada membership renewal rates were 92.5% at the end of its fiscal first quarter, and worldwide renewal rates stood at 90.4%. While these numbers support our investment in Costco long-term, we do not ignore the economic realities and potential for a slowdown in comparable sales growth, an important metric in the retail industry. This is why we booked some profits in the name earlier this month , before Costco released mixed fiscal Q1 numbers. What Jelinek said Monday also reinforces that belief. Down the road, the potential for a special dividend and membership-fee hike remains on the horizon, representing positive catalysts that would boost the stock. But in the near term, a more measured outlook on COST shares is in order. Consumer behavior Jelinek highlighted a number of stronger areas for Costco, including its Kirkland-branded products across a number of categories. “Kirkland Signature continues to grow market share on everything that we sell. … We put it on everything from alcohol to luggage, and it continues to take market share as we continue to figure out how to lower prices in that brand,” the CEO said. “Our food [and] sundry business, our fresh business, our travel business, continues to be strong,” Jelinek added. This is notable because together food and sundries was Costco’s largest merchandise category by sales in fiscal 2022, accounting for 38.4% of the company’s $222.73 billion in overall revenue. It includes freezer, deli, liquor and dry grocery items. Fresh foods was about 13% of total sales. In electronics, Jelinek said sales of video game consoles like Sony’s PlayStation are “relatively strong” during the holiday season. “Apple is still strong, although there can be some issues getting product at the moment, particularly phones,” Jelinek added, backing up prior reporting on the iPhone maker’s Covid-related supply challenges in China. Apple (AAPL) is also a Club holding. Sales of TVs are actually up on a unit basis, he said, but not in dollar terms, which may lend credence to the view that consumers are being more cautious. “Some of the real higher-end TVs we don’t see selling at this point,” he said. Furniture is another formerly strong area where sales have moderated to be “relatively flat,” Jelinek said. Looking ahead to next year, Jelinek said Costco is taking stock of the economic uncertainty and factoring that into its merchandising plans. “I think we’re being very careful in terms of what we buy in jewelry, televisions and probably furniture — and maybe relatively careful next year on what’s going to happen in apparel.” Inflation Jelinek offered up a detailed look at how price pressures are trending on key items — some easing, some worsening. But overall, “I think you’ll balance it out,” he said. “I see, in my opinion, particularly of just supply and demand, you’re going to start to see prices start to slowly start to come down after the first of the year.” For example, Jelinek said a considerable decline in the cost of shipping containers should provide deflationary pressures for goods made in Asia and exported elsewhere. This includes furniture, he said. On a more granular level, he said egg prices are up due to a bird flu outbreak in the U.S. — and for other reasons, chemicals that go into detergents “seem to be going up a little bit.” He added, “Some of the paper goods are starting to go up because of the cost of paper.” Jelinek mentioned a number of places where inflation is trending downward — lumber, certain products made with resin, and “even meat prices.” Labor costs may remain a bit more sticky, though, he added. (Jim Cramer’s Charitable Trust is long COST, AAPL and TJX. 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.
A shopper wearing a protective mask looks at a television for sale inside a Costco store in San Francisco, California, on Wednesday, March 3, 2021.
David Paul Morris | Bloomberg | Getty Images
Craig Jelinek, chief executive officer of Club holding Costco (COST), said Monday he sees a more-vigilant consumer this holiday shopping season and potentially beyond. However, he also said inflation is generally trending in the right direction, a development that’s good for the U.S. economy over the long term.
David Solomon, chief executive officer of Goldman Sachs Group Inc., during a Bloomberg Television at the Goldman Sachs Financial Services Conference in New York, US, on Tuesday, Dec. 6, 2022.
Michael Nagle | Bloomberg | Getty Images
Goldman Sachs, the storied investment bank, plans on cutting up to 8% of its employees as it girds for a tougher environment next year, according to a person with knowledge of the situation.
The layoffs will impact every division of the bank and will likely happen in January, according to the person, who declined to be identified speaking about personnel decisions.
That’s ahead of an upcoming conference for Goldman shareholders in which management is expected to present performance targets. The New York-based investment bank typically pays bonuses in January, and its possible the layoffs could be a way to preserve bonus dollars for remaining employees.
The bank’s planning is ongoing, and the round could be smaller than that, the person added. But that means as many as about 4,000 employees could be impacted, as reported by Semafor earlier Friday. Goldman had been in hiring mode previously: the firm had 49,100 workers as of September 30, which is 14% more than a year earlier.
Goldman CEO David Solomon indicated that he was looking to rein in expenses at a conference for financial firms last week.
“We continue to see headwinds on our expense lines, particularly in the near term,” Solomon said. “We’ve set in motion certain expense mitigation plans, but it will take some time to realize the benefits. Ultimately, we will remain nimble and we will size the firm to reflect the opportunity set.”
This story is developing. Please check back for updates.
Here are Wall Street’s biggest calls on Friday: Wedbush reiterates Carvana as underperform Wedbush said in a note that bankruptcy is a possibility for Carvana. “Near-term bankruptcy is not out of the question, but is less likely than other near-term outcomes given the liquidity timeline and the Garcias’ (largest shareholder Ernie Garcia II and CEO Ernie Garcia III) 47% equity ownership position and 90% equity voting rights position.” Evercore ISI names Apple as a top pick in 2023 Evercore said it sees 2023 as a “moonshot” year for Apple. “We see AAPL ramping up various moonshot projects that start to become material – be that AR/VR deployments (H1:23?), advertising business becomes more material and AAPL Pay starts to gain further scale.” Evercore ISI names BlackRock as a top pick Evercore says BlackRock will be a key beneficiary of a deteriorating macro in 2023. “Our base case is for a tough & choppy equity backdrop given inflation, Fed rate moves, QT & a potential recession; as well as allocations & flows into fixed income strategies, the continuation of the ongoing active-to-passive trend & alts continuing to grow.” Goldman Sachs upgrades Delta to buy from neutral Goldman resumed coverage of Delta and upgraded the stock adding that it sees “recovery tailwinds” remaining heading into 2023. “In this environment, we favor stocks with idiosyncratic earnings drivers, relatively more recovery tailwinds remaining, or characteristics that reduce downside risk. Read more about this call here. Needham reiterates Disney as hold Needham lowered its estimates on shares of Disney and said it sees rising direct-to-consumer losses. “In DTC, we lower our 1Q23 estimates as we expect price increases and ad tier introduction to impact results later in FY23, and we lower our rev estimate by 3% to $5.4B (up 16% y/y), and maintain our operating incoming Loss estimate of $1.2B.” DA Davidson initiates Cyberark as buy DA Davidson said Cyberark is a “clear market leader.” “Security spend remains highly defensible, demand remains robust, & security vendors continue to fair better than most other SaaS players.” JPMorgan upgrades Meta to overweight from neutral JPMorgan said it sees “increased cost discipline” for the social media giant. “However, heading into 2023, we believe some of these top and bottom line pressures will ease, and most importantly, Meta is showing encouraging signs of increasing cost discipline, we believe with more to come.” Read more about this call here. JPMorgan reiterates Amazon as overweight JPMorgan lowered its price target on the stock to $130 per share from $145, but said it’s standing by Amazon shares. “We recognize the elevated cloud concerns and macro uncertainty over the next few months, but we believe there is still significant secular shift toward e-commerce & cloud ahead, and AMZN should also benefit from easing retail comps into 2023.” Read more about this call here. Wells Fargo downgrades Prudential to underweight from equal weight Wells downgraded the insurance company mainly on valuation. “Our call is primarily one of relative value, as PRU’s valuation has expanded relative to MET vs. historical levels.” MKM names Walmart a top 2023 pick MKM said it sees further share gains for Walmart in 2023. ” Walmart is gaining share against grocery peers, but discretionary categories have been soft. Strong price gaps, an increased focus on price, and an increasingly value-seeking consumer should lead to continued market share gains for Walmart.” JPMorgan names Eli Lilly a top 2023 pick JPMorgan said Eli Lilly is “best-in-class.” “BioPharma fundamentals remain healthy, but our focus is shifting to individual names following the 2022 rally.” Canaccord names Yeti and Traeger top 2023 picks Canaccord says Yeti should hold up well in a recessionary environment. The company is a maker of mainly outdoor products. The firm also says it likes Traeger in 2023 and that the grill company should return to growth in 2023. ” YETI Holdings (YETI : BUY, $58 PT): We believe the core YETI consumer should hold up relatively better in a recession as it skews a bit higher end. Traeger (COOK : BUY, $6 PT): 2023 won’t look great as the industry works through channel inventories in H1, but this should be well understood, and we expect material growth to resume in 2H23.” Credit Suisse initiates Datadog as outperform Credit Suisse said in its initiation of Datadog that the cloud-scale applications has a “track record of delivering market defining products.” “Next generation product and business model levered to hyperscaler growth, category leader. Move into security doubles their TAM.” Deutsche Bank names Charles Schwab a top 2023 pick Deutsche said it sees robust earnings growth for the financial services company in 2023. “Overall, amid what we think may be a very volatile year in markets that could end with a strong rebound, we have the highest conviction on the earnings growth outlook for stock price appreciation for Charles Schwab followed by the alternative asset managers.” Bank of America names Nvidia a top 2023 pick Bank of America named Nvidia a top pick for 2023 and said a “soft landing could drive hard takeoff in chips stocks.” “Bumpy start likely to 2023, as stocks digest Q4 gains and are exposed to softer consumer demand in PCs/smartphones/autos/cloud services. However, estimate cuts likely in last innings and anticipation of 2H recovery could drive SOX gains from Q2.” Morgan Stanley downgrades New York Times to equal weight from overweight Morgan Stanley said in its downgrade of New York Times that it sees growing macro ad headwinds. “Recent underperformance in net adds lowers our confidence in capturing the long-term opportunity. In addition, growing macro headwinds to advertising revenues put 2023 expectations at risk. Morgan Stanley names Prologis a top 2023 pick Morgan Stanley said the logistics real estate investment trust company is undervalued for 2023. “Industrials have pulled back and we see undervalued growth in Top Pick PLD’ s (OW) operating segments.” Citi reiterates DraftKings as buy Citi says it sees a “compelling” risk/reward for shares of DraftKings. “We remain optimistic and are buyers at current levels. We continue to view the company’s risk-reward as compelling and maintain our Buy rating and $24 target price.” JPMorgan names O’Reilly and AutoZone as top 2023 picks JPMorgan said auto parts stocks like O’Reilly and AutoZone are the best way to play a soft and hard landing. “In our view, autoparts remains the best way to straddle a hard and soft landing (inflation firm through the cycle, most rational industry, counter-cyclical and cyclical demand patterns) while our staples retailers seem like a much tougher 12-month setup in both scenarios.” Deutsche Bank initiates Shockwave Medical as buy Deutsche said the medical device company is a “compelling” growth story. “We regard Shockwave Medical as among the most compelling growth stories across medtech over the next few years.”
The Federal Reserve on Wednesday raised its benchmark interest rate to the highest level in 15 years, indicating the fight against inflation is not over despite some promising signs lately.
Keeping with expectations, the rate-setting Federal Open Market Committee voted to boost the overnight borrowing rate half a percentage point, taking it to a targeted range between 4.25% and 4.5%. The increase broke a string of four straight three-quarter point hikes, the most aggressive policy moves since the early 1980s.
Along with the increase came an indication that officials expect to keep rates higher through next year, with no reductions until 2024. The expected “terminal rate,” or point where officials expect to end the rate hikes, was put at 5.1%, according to the FOMC’s “dot plot” of individual members’ expectations.
Investors initially reacted negatively to the expectation that rates may stay higher for longer, and stocks gave up earlier gains. During a news conference, Chairman Jerome Powell said it was important to keep up the fight against inflation so that the expectation of higher prices does not become entrenched.
“Inflation data received so far for October and November show a welcome reduction in the monthly pace of price increases,” the chair said at his post-meeting news conference. “But it will take substantially more evidence to have confidence that inflation is on a sustained downward” path.
The new level marks the highest the fed funds rate has been since December 2007, just ahead of the global financial crisis and as the Fed was loosening policy aggressively to combat what would turn into the worst economic downturn since the Great Depression.
This time around, the Fed is raising rates into what is expected to be a moribund economy in 2023.
Members penciled in increases for the funds rate until it hits a median level of 5.1% next year, equivalent to a target range of 5%-5.25. At that point, officials are likely to pause to allow the impact of monetary policy tightening to make its way through the economy.
The consensus then pointed to a full percentage point worth of rate cuts in 2024, taking the funds rate to 4.1% by the end of that year. That is followed by another percentage point of cuts in 2025 to a rate of 3.1%, before the benchmark settles into a longer-run neutral level of 2.5%.
However, there was a fairly wide dispersion in the outlook for future years, indicating that members are uncertain about what is ahead for an economy dealing with the worst inflation it has seen since the early 1980s.
The newest dot plot featured multiple members seeing rates heading considerably higher than the median point for 2023 and 2024. For 2023, seven of the 19 committee members – voters and nonvoters included – saw rates rising above 5.25%. Similarly, there were seven members who saw rates higher than the median 4.1% in 2024.
The FOMC policy statement, approved unanimously, was virtually unchanged from November’s meeting. Some observers had expected the Fed to alter language that it sees “ongoing increases” ahead to something less committal, but that phrase remained in the statement.
Fed officials believe raising rates helps take money out the economy, reducing demand and ultimately pulling prices lower after inflation spiked to its highest level in more than 40 years.
The FOMC lowered its growth targets for 2023, putting expected GDP gains at just 0.5%, barely above what would be considered a recession. The GDP outlook for this year also was put at 0.5%. In the September projections, the committee expected 0.2% growth this year and 1.2% next.
The committee also raised its median estimate for its favored core inflation measure to 4.8% for 2022, up 0.3 percentage point from the September outlook. Members slightly lowered their unemployment rate outlook for this year and bumped it a bit higher for the ensuing years.
The rate hike follows consecutive reports showing progress in the inflation fight.
The Labor Department reported Tuesday that the consumer price index rose just 0.1% in November, a smaller increase than expected as the 12-month rate dropped to 7.1%. Excluding food and energy, the core CPI rate was at 6%. Both measures were the lowest since December 2021. A level the Fed puts more weight on, the core personal consumption expenditures price index, fell to a 5% annual rate in October.
However, all of those readings remain well above the Fed’s 2% target. Officials have stressed the need to see consistent declines in inflation and have warned against relying too much on trends over just a few months.
Powell said the recent news was welcome but he still sees services inflation as too high.
“There’s an expectation really that the services inflation will not move down so quickly, so we’ll have to stay at it,” he said. “We may have to raise rates higher to get where we want to go.”
Central bankers still feel they have leeway to raise rates, as hiring remains strong and consumers, who drive about two-thirds of all U.S. economic activity, are continuing to spend.
Inflation came about from a convergence of at least three factors: Outsized demand for goods during the pandemic that created severe supply chain issues, Russia’s invasion of Ukraine that coincided with a spike in energy prices, and trillions in monetary and fiscal stimulus that created a glut of dollars looking for a place to go.
After spending much of 2021 dismissing the price increases as “transitory,” the Fed started raising interest rates in March of this year, first tentatively and then more aggressively, with the previous four increases in 0.75 percentage point increments. Prior to this year, the Fed had not raised rates more than a quarter point at a time in 22 years.
The Fed also has been engaged in “quantitative tightening,” a process in which it is allowing proceeds from maturing bonds to roll off its balance sheet each month rather than reinvesting them.
A capped total of $95 billion is being allowed to run off each month, resulting in a $332 billion decline in the balance sheet since early June. The balance sheet now stands at $8.63 trillion.
To build a fire — but not destroy the market by doing so. That’s the goal right now. It’s not as easy as in the famous Jack London short story (“To Build a Fire”) where, in the end, the survivors profit rather than freeze to death in their sleep. In the early part of this decade, we saw the rise of Robinhood (HOOD) and the distribution of investments from the serious to the ephemeral. These days, Robinhood has the appearance of one gigantic bonfire of young people’s money. The gamification concept was real and the exodus of investors was noisy — culminating with the ridiculous self-immolation of GameStop (GME), AMC Entertainment (AMC) and the meme stocks. Those who fought this trend abandoned Twitter, hired bodyguards and tried to hide from the angry mob that was attempting to will stocks higher by savaging the sellers. No tinder from these clowns. Then there was the much larger-than-expected romp to crypto. The people who bought it somehow ensconced their brains into something they didn’t understand. As a result, they overran their brains and outsourced them to others who claimed to know more than they did. You had to oppose a phalanx of vociferous, self-promoting scoundrels and their fintech allies in government and venture capital — all of whom should feel shame, but shame eludes them. They will not accept their intellectual disgrace, and instead, continue to argue that it was all about blockchain and DeFi (decentralized finance). They want to explain to you why they got it right and you got it wrong, even as they lost everything and you were safe keeping your cash at JPMorgan. I wish I had a hubris scale, something like a gigantic thermometer that could measure these arrogant promoters and give them the hook when they contend that they are smarter than you for believing in something with a best-use case as untraceable ransom money. But this era is running out. It’s going to be done with a fight, of course, as we see its representatives defend themselves with specious arguments that sound so self-serving and outright phony that even neutral minds are repelled and rebelling. The money furnace that was Robinhood burns blandly compared to the napalm of crypto. The interests that defended crypto can’t go quietly because they will empty the coffers of their crypto banks and cause waves of bankruptcies; the $34 billion that we know of that was destroyed by Sam Bankman-Fried — the disgraced former boss of failed crypto exchange FTX — pretty much propped up everything. We keep getting stung by the alleged due diligence done by so many who should have known better, with only a couple of institutions writing their investments to nothing, along with their explanations, or lack thereof. Here’s the problem: If it all goes away — crypto and all the institutions supporting it — the money that’s left won’t help push equity prices higher. It was once a magnet to a couple of trillion dollars. Now I wonder if there’s $400 billion to the entire edifice. The whole thing reminds me of a line from the film “Beau Geste,” when two of the main characters are under attack: “You’ll do your duty better dead than you ever did alive.” The biggest guns are most likely liquidating as they talk, the duplicitous cads. They will tell us that we are fools not to believe in blockchain as if somehow that is dispositive to something other than lies and blunders. My point is this: The crypto con and the Robinhood dollar conflagration can’t produce enough money to buoy stocks. There’s not enough left in these embers to do anything but marvel at how much there used to be and how little bankruptcy produces. No matter how many hearings, we will never know the full culpability behind those in Congress and those in the Securities and Exchange Commission who opposed SEC Chairman Gary Gensler. He came on CNBC specifically to warn us of made-up coins and institutions that give you too high a return compared to cash in a real bank. Self-serving cryptocurrency players have been critical of the SEC. They want to school Gensler and let him know he can only go so far before running into all the well-endowed entities and their secret paid supporters. The horror! The horror! So where else will the money come from? Unlike the chimerical trillions that vanished into thin crypto air, the fuel will come from four stocks that have a combined total of $6 trillion to donate: Apple (AAPL), Microsoft (MSFT), Alphabet (GOOGL) and Amazon (AMZN). There is simply too much money in these names to take us higher, or at least how high we can go after the Federal Reserve’s next meeting this week. But I think some of that investor money will be transferred into the stocks of companies that have the most voracious buybacks. Those are the companies without enough stock available to handle all the money that will flood in. Money in those four stocks will be pulled out, kicking and screaming, until the valuations become earthly — better than Meta Platforms (META) and more like the S & P as they are revealed to be mortal. Not until then can the rally start in earnest. Can these valuations be played out? It’s happening as you read this. Of course, there’s one other enemy to the advance and it’s a powerful one: The 4.5% yield from 2-year Treasurys is outrageously bountiful in a market where anything north of 4% in equities is likely tied to plummeting oil. However, we cling to the oils, betting that they can maintain their well above market prices when Russia can’t produce its endless reserves and China goes voracious upon reopening. I think we will win. Bottom line We will hold Apple, Microsoft, Alphabet and Amazon, even as we’ve trimmed them higher. Their spiral down to earth, however, will be painful. If we hadn’t sold some, it would be getting late in the game. But I suspect there’s more pain to come. Why take it? Because these companies still have value, even though it won’t surface until the selling’s done and we don’t know when that will occur. It’s too dangerous now to depart, although Apple could see $120 and Microsoft a 10-point decline. Amazon and Alphabet control their own destinies through headcount reductions. The good news? The selling could end after the Fed meeting. The bad news: If it does, there will not be enough rocket fuel. The big four need to shed a trillion minimum to power things higher. I think it will happen in time. Which would mean a brutal week until the transfer begins to be made. Hold on to what you have, but get ready to be lifted by the stocks with the strongest buybacks. That’s where the accumulation will matter the most. (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.
Satya Nadella, chief executive officer of Microsoft Corp., during the company’s Ignite Spotlight event in Seoul, South Korea, on Tuesday, Nov. 15, 2022. Nadella gave a keynote speech at an event hosted by the company’s Korean unit.
SeongJoon Cho | Bloomberg | Getty Images
To build a fire — but not destroy the market by doing so.
That’s the goal right now. It’s not as easy as in the famous Jack London short story (“To Build a Fire”) where, in the end, the survivors profit rather than freeze to death in their sleep.
In the early part of this decade, we saw the rise of Robinhood (HOOD) and the distribution of investments from the serious to the ephemeral. These days, Robinhood has the appearance of one gigantic bonfire of young people’s money. The gamification concept was real and the exodus of investors was noisy — culminating with the ridiculous self-immolation of GameStop (GME), AMC Entertainment (AMC) and the meme stocks. Those who fought this trend abandoned Twitter, hired bodyguards and tried to hide from the angry mob that was attempting to will stocks higher by savaging the sellers. No tinder from these clowns.
U.S. prosecutor Marshall Miller (C), William Nardini (R) and Kristin Mace attend a news conference in Rome February 11, 2014.
Tony Gentile | Reuters
Banks and other corporations that proactively report possible employee crimes to the government instead of waiting to be discovered will get more lenient terms, according to a Justice Department official.
The DOJ recently overhauled its approach to corporate criminal enforcement to incentivize companies to root out and disclose their misdeeds, Marshall Miller, a principal associate deputy attorney general, said Tuesday at a banking conference in Maryland.
“When misconduct occurs, we want companies to step up,” Miller told the bank attorneys and compliance managers in attendance. “When companies do, they can expect to fare better in a clear and predictable way.”
Banks, at the nexus of trillions of dollars of flows around the world daily, have a relatively high burden for enforcing anti-money laundering and other legal and regulatory requirements.
But they have a lengthy track record of failures, often due to unscrupulous employees or bad practices.
The industry has paid more than $200 billion in fines since the 2008 financial crisis, mostly tied to its role in the mortgage meltdown, according to a 2018 tally from KBW. Traders and bankers have also been blamed for manipulating benchmark rates, currencies and precious metal markets, stealing billions of dollars from developing nations, and laundering money for drug lords and dictators.
The carrot that Justice officials are dangling before the corporate world includes a promise that companies that promptly self-report misconduct won’t be forced to enter a guilty plea, “absent aggravating factors,” Miller said. They will also avoid being assigned in-house watchdogs called monitors if they fully cooperate and bootstrap internal compliance programs, he said.
The first incentive carries extra weight for financial firms because guilty pleas can cause catastrophic issues for the highly regulated entities; they could lose business licenses or the ability to manage client funds unless they’ve negotiated regulatory carveouts.
“The message every corporation should hear is that the best way to avoid a guilty plea — for some companies, the only way to do so — is by immediately self-reporting and cooperating when misconduct is discovered,” Miller said.
Officials have generally sought to avoid inadvertently triggering the collapse of companies with enforcement actions after the 2002 indictment of accounting firm Arthur Andersen led to 28,000 job losses.
But that has meant that over the past decade, banks and other companies typically entered deferred prosecution agreements or other arrangements, coupled with fines, when misdeeds are found. For instance, JPMorgan Chase entered DPAs for its role in the Bernie Madoff pyramid scheme and a precious metals trading scandal, among other mishaps.
Even in cases where problems aren’t immediately found, the Justice Department gives credit for managers who volunteer information to the authorities, Miller said. He cited the recent conviction of Uber‘s ex-chief security officer for obstruction of justice as an example of their current methods.
“When Uber’s new CEO came on board and learned of the CSO’s conduct, the company made the decision to self-disclose all the facts regarding the cyber incident and the CSO’s obstructive conduct to the government,” he said. The move resulted in a deferred prosecution agreement.
Companies will also be looked at favorably for creating compensation programs that allow for the clawback of bonuses, he said.
The department-wide shift in its approach comes after a year-long review of its processes, Miller said.
Miller also rattled off a list of recent cryptocurrency-related enforcement actions and hinted that the agency was looking at potential manipulation of digital asset markets. The recent collapse of FTX has led to questions about whether founder Sam Bankman-Fried will face criminal charges.
“The department is closely tracking the extreme volatility in the digital assets market over the past year,” he said, adding a well-known quote attributed to Berkshire Hathaway‘s Warren Buffett about discovering misdeeds or foolish risk-taking “when the tide goes out.”
“For now, all I’ll say is those who have been swimming naked have a lot to be concerned about, because the department is taking note,” Miller said.
Many shoppers say they plan to spend less this Black Friday as the cost-of-living crisis bites.
Richard Baker | In Pictures | Getty Images
American consumers are tapping the brakes on spending as the Federal Reserve’s interest rate increases reverberate throughout the economy, according to the CEOs of two of the largest American banks.
After two years of pandemic-fueled, double-digit growth in Bank of America card volume, “the rate of growth is slowing,” CEO Brian Moynihan said Tuesday at a financial conference. While retail payments surged 11% so far this year to nearly $4 trillion, that increase obscures a slowdown that began in recent weeks: November spending rose just 5%, he said.
It was a similar story at rival Wells Fargo, according to CEO Charlie Scharf, who cited shrinking growth in credit-card spending and roughly flat debit card transaction volumes.
The bank leaders, with their bird’s eye view of the U.S. economy, are providing evidence that the Fed’s campaign to subdue inflation by raising borrowing costs is beginning to impact consumer behavior. Fortified by pandemic stimulus checks, wage gains and low unemployment, American consumers have supported the economy, but that appears to be changing. That will have implications for corporate profits as businesses navigate 2023.
“There is a slowdown happening, there’s no question about it,” Scharf said. “We are expecting a fairly weak economy throughout the entire year, and hopeful that it’ll be somewhat mild relative to what it could possibly be.”
Both CEOs said they expect a recession in 2023. Bank of America’s Moynihan said he expects three quarters of negative growth next year followed by a slight uptick in the fourth quarter.
Charles Scharf, CEO of Wells Fargo, Brian Moynihan, CEO of Bank of America, and Jamie Dimon, CEO of JPMorgan Chase, are sworn in during the Senate Banking, Housing, and Urban Affairs Committee hearing titled Annual Oversight of the Nations Largest Banks, in Hart Building on Thursday, September 22, 2022.
Tom Williams | Cq-roll Call, Inc. | Getty Images
But, in a divergence that has implications for the coming months, the downturn isn’t being felt equally across retail customers and businesses so far, according to the Wells Fargo CEO.
“We have seen certainly more stress on the lower-end consumer than on the upper end,” Scharf said. In terms of the companies served by Wells Fargo, “there are some that are doing quite well and there’s some that are struggling.”
Airlines, cruise providers and other experience or entertainment-based industries are faring better than those involved in durable goods, he said. That sentiment was echoed by Moynihan, who cited strong travel spending.
“People bought a lot of goods, exercised a lot of the freedom they had in discretionary spend over the last couple of years, and those purchases are slowing,” Scharf said. “You’re seeing significant shifts to things like travel and restaurants and entertainment and some of the things that people want to do.”
The slowdown is the “intended outcome” that’s desired by the Fed as it seeks to tame inflation, Moynihan noted.
But the central bank has a tricky balancing act to pull off: raising rates enough to slow the economy, while hopefully avoiding a harsh downturn. Many market forecasters expect the Fed’s benchmark rate to hit about 5% next year, though some think higher rates will be needed.
“You’re starting to see that [slowdown] take hold,” Moynihan said. “The real question will be how soon they have to stabilize that in order to avoid more damage; that’s the question that’s on the table.”
Brian Moynihan, chief executive officer of Bank of America Corp., speaks during a Bloomberg Television interview at the Goldman Sachs Financial Services Conference in New York, on Tuesday, Dec. 6, 2022.
But in recent years, his firm has taken a different approach to managing its workforce. It raised the minimum wage paid to staff, gave them cash and stock bonuses and improved benefits.
While rivals including Goldman Sachs and Morgan Stanley cut workers recently ahead of a possible economic downturn in 2023, Moynihan and his CFO have said they don’t see the need for layoffs. That doesn’t mean the company’s head count won’t shrink, however, as the bank seeks to cut expenses amid the revenue pressures faced by the industry.
“We don’t lay off people, but we have an ability to reshape our headcount pretty quickly just by the turnover that occurs,” Moynihan said Tuesday during a financial conference.
In other words, Moynihan will allow positions to go unfilled as employees voluntarily depart, moving people around and retraining them as needed, he said.
The company’s head count has bounced between roughly 205,000 and 215,000 in recent years, Moynihan said. The bank had 213,270 employees as of Sept. 30, about 3,900 more than the year earlier.
“We’re up to about 215,000 [employees]; we need to run that back down,” he added.
Organizations as large as Bank of America are constantly losing and hiring employees, a churn that adds to expenses. The attrition rate in the industry is typically at least 10% annually, but can be several times higher in more difficult, lower-paid positions such as those in branches and call centers, or in highly competitive areas such as technology, according to an industry consultant.
Moynihan has used technology — from consolidating back-end processes to offering updated mobile apps — to help reduce noncustomer-facing employees. He expects to continue to do that next year, although strong wage inflation makes the job harder, he said.
“It is tedious and hard work and it’s harder when you have the inflationary aspects of what we’re all facing,” he said.
James Gorman, chief executive officer of Morgan Stanley, speaks during a Bloomberg Television interview on day three of the World Economic Forum (WEF) in Davos, Switzerland, on Thursday, Jan. 24, 2019.
Simon Dawson | Bloomberg | Getty Images
Morgan Stanley cut about 2% of its staff on Tuesday, according to people with knowledge of the layoffs.
The moves, reported first by CNBC, impacted about 1,600 of the company’s 81,567 employees and touched nearly every corner of the global investment bank, said the people, who declined to be identified speaking about terminations.
Morgan Stanley is following rival Goldman Sachs and other firms including Citigroup and Barclays in reinstating a Wall Street ritual that had been put on hold during the pandemic: the annual culling of underperformers. Banks typically trim 1% to 5% of those it deems its weakest workers before bonuses are paid, leaving more money for remaining employees.
The industry paused the practice in 2020 after the pandemic sparked a two-year boom in deals activity; deals largely screeched to a halt this year amid the Federal Reserve’s aggressing rate increases, however. The last firm-wide reduction in force, or RIF, at Morgan Stanley was in 2019.
At the New York-based firm, known for its massive wealth management division and top-tier trading and advisory operations, financial advisors are one of the few categories of workers exempt from the cuts, according to the people. That’s probably because they generate revenue by managing client assets.
CEO James Gorman told Reuters last week that the bank was gearing up for “modest cuts,” but declined to cite specific timing or the magnitude of the dismissals.
“Some people are going to be let go,” Gorman said. “In most businesses, that’s what you do after many years of growth.”
This story is developing. Please check back for updates.
