16 January 2023
Happy Blue Monday*! Thrilled to be here. You?
US large-cap S&P 500 closed 0.4% UP ▲ Tech-heavy Nasdaq Composite closed 0.71% UP ▲ Pan European STOXX Europe 600 closed 0.52% UP ▲ HK’s Hang Seng Index closed 1.04% UP ▲ Japan’s Nikkei 225 closed 1.25% DOWN 🔻
📊 In the Markets
Banking on a recessionTesla cuts prices in more markets. EV price war aheadOne more stripe and it’s not Adidas anymoreYou blinked. Bitcoin traded over US$21k over the weekend
Treasury default would wipe us all out… forget the US govt shutdown
📖 MoneyFitt Explains
🎓 The US Debt Ceiling
📊 In the Markets
Banking on a recession
US markets kept trading up on Friday with continued positive sentiment following the good (but entirely expected) inflation print on Thursday, along with OK results from the giant banks that traditionally kick off the earnings reporting season.
Bank of America, Citigroup, JPMorgan and Wells Fargo all traded higher into the close even with the CEOs pretty downbeat and several saying they expect a mild recession in the US as their “base case.” As a result, they are raising their provisions against future losses. As we wrote last Wednesday: “Reserves are not actual losses made on loans that don’t get repaid, as many will in a recession, but money set aside as provisions in good times ahead of an expected increase in defaults.”
JPMorgan, the largest of them, reported US$20 billion in net interest income in the fourth quarter of 2022 alone, 48% higher than in the previous year, but forecast only US$74 billion for the entire 2023 on the basis of having to compete more for deposits (in other words, they’d have to pay their depositors more going forward, having, like its peers, raised interest paid to depositors a lot more slowly than what it charged its loan customers in 2022. Because that’s what banks do.) Bank of America, Citi and Wells Fargo also enjoyed bumper net interest income growth of 29%, 23% and 45%. (Wells “Corporate Recidivist” Fargo, of course, saw net earnings slashed by half on billions in fines and repayments.)
One more stripe and it’s not Adidas anymore
Luxury New York label Thom Browne, whose designs often feature four parallel, horizontal stripes on a sleeve or a sock, won a US$7.8 million copyright battle against German sportswear giant Adidas in a NY court. The ruling was on the basis that stripes are a common design and that nobody in their right mind would confuse the two given the totally different target markets (long-sleeved polo shirts with a bunny on it for US$350) and that little of Thom Browne’s clothing was sportswear (though increasing.)
A strong brand image and identity can have value to consumers and therefore, through pricing, should generate higher margins and financial value to the company owning the brand. The brand is an “intangible asset” (in that it has no physical substance) for the company that owns it, and therefore worth defending. Unfortunately, there is no universally accepted method for determining brand value, though there are three main ways, a) the cost approach (estimating the cost of creating or acquiring the brand) b) the market approach (valued against a comparable brand) and c) the income approach (present value of future cash flows.)
According to Kantar BrandZ’s 2022 Most Valuable Global Brands, Apple is the world’s most valuable brand at US$947 bn, followed by Google at US$820 bn. In Apparel, Nike ranked #1 with a brand value of US$110 bn.
Tesla cuts prices in more markets. EV price war ahead
Echoing its price cuts in China the week earlier, Tesla slashed cut prices in the US and major European markets without warning, drawing frustration (though not showroom protests) from loyal and excited buyers who had just bought from them… some of whom were suckered in by a recent discount of $3,750.
The US price cuts, announced late Thursday on its top-selling Model 3 sedan and Model Y crossover SUV, were between 6% and 20%, bringing the basic version of its Model Y down to US$53k from US$66k, according to Reuters.
The cuts come as part of a push from CEO Elon Musk to qualify some models for US (and French) tax credits as well as to increase sales in the face of weakening demand after several disappointing quarters. The cuts in China, the second in a month, were met with angry (and futile) protests from recent buyers demanding refunds but did lead to a lengthening waiting list.
But it also raises the prospect of a price war that could hurt smaller competitors like Lucid, Fisker and Rivian let alone even smaller ones like Lordstown, Faraday and Canoo… but may play into the hands of legacy carmakers like GM, Ford, Mercedes Toyota and others.
For existing customers, the drop in new car prices means a hit to the once-impressive resale values and may suck away marginal demand as premium second-hand pricing had been an attraction while prices were being continually jacked up during the pandemic.
Elsewhere, Tesla was reported by Bloomberg as delaying plans to expand its Shanghai factory, which was part of a strategy to more than double its production capacity in China, on Starlink / data-related concerns. Meanwhile, Musk himself will face trial on Tuesday over alleged market manipulation with his August 2018 tweet that he had sufficient funding to take Tesla private. (On Friday, the judge refused to transfer the proceedings to Texas, where Musk has Tesla’s HQ.)
You blinked. Bitcoin traded over US$21k over the weekend
Bitcoin popped above $21,000 for the first time since November on Saturday (crypto trades 24/7.) That’s up about a quarter from the range it was trading in from mid-November till the first week of January.
Admittedly, it’s still under half of where it was this day in 2022 and below a third of its Nov-21 peak, but it’s a big move, attributed to activity in the crypto futures market.
Traders have pointed to a “risk-on” market (meaning higher-risk assets like equities and crypto are bought at the expense of more defensive assets like bonds and cash) following the release of data on Thursday indicating a cooldown in inflation (though stock markets have rallied only modestly, given that the numbers came in exactly bang in line with expectations.)
“Blue Monday”, the third Monday in January, was calculated by Cardiff University psychologist Cliff Arnall in 2005 to be the saddest and most depressing 24 hours in the calendar, based on analysis of data such as consumer surveys, divorce filings and weather reports.
US Treasury default would wipe us all out… forget the US govt shutdown
In a letter to the US Congress on Friday, Treasury Secretary Janet Yellen said the US will reach its US$31.4tn debt ceiling 🎓 on Thursday this week, after which the Treasury would take “certain extraordinary measures to prevent the United States from defaulting on its obligations” like pausing contributions to federal workers’ retirement funds. “It is unlikely that cash and extraordinary measures will be exhausted before early June,” she added.
She asked new House Speaker Kevin McCarthy to either suspend or increase the debt limit for the US to keep borrowing and paying its bills, which, given the hairy process of his appointment sets the stage for a repeat of the bizarre (to non-Americans) spectacle of endless “horse trading” against the prospect of government shutdowns as seen in 2018/19, 2018, 2013, 1995/96, 1990…
The debt ceiling is the amount that the US Treasury can borrow to pay the bills that have become due on the total amount of outstanding borrowings by the US Federal government accumulated over its entire history. The Federal government needs to borrow money to pay its bills when its ongoing operations can’t be funded by revenues like taxes alone and when this happens, the US Treasury creates and sells securities, which are the debt owed by the Federal government. These are “Treasuries.”
A mini-explainer on why we care about the US debt ceiling:
The US Treasury market is considered to be one of the most liquid and stable markets in the world, making it an important benchmark for other financial markets. It’s the core building block for almost all asset valuations worldwide.Treasuries serve as a benchmark for valuing other fixed-income securities, such as bonds issued by corporations and municipalities and Treasury yields are often used as a reference rate for setting interest rates on loans and other financial products, such as mortgages and student loans.The US Treasury market serves as a benchmark for determining the risk-free rate, which is the rate of return on an investment with no credit risk. This rate is used as a benchmark for valuing other investments, including equities.
If the Republican-controlled House can’t (or doesn’t want to) reach an agreement with the Democrat President and Senate by the time the cash runs out, a US debt default will be a real if remote possibility, and which would be eerily similar to summer 2011, when President Obama and Senate Democrats faced a new, Tea Party-fueled Republican House majority which was demanding deep spending cuts in exchange for agreeing to lift the ceiling. That impasse sent stock market volatility through the roof and triggered the first and (so far) only US credit rating downgrade.
📖 MoneyFitt Explains
🎓 The US Debt Ceiling
The debt ceiling is a limit set by the US Congress on the amount of debt the federal government can incur. The debt ceiling does not control or limit the ability of the Federal Government to run deficits or incur new debt, it only limits the ability to pay off already incurred debt. – (Denmark is the only other Western country with a debt ceiling, but it’s currently much higher than needed.)The debt ceiling is separate from the Federal budget and appropriations process, which sets spending levels for the government. It is regularly raised by Congress to allow the government to borrow more money to finance its operations, such as paying for military expenses, entitlement programs like Social Security and Medicare, and interest on existing debt. The debt ceiling is said to have been raised over 100 times since its inception in 1917.In recent years, the debt ceiling has become a point of political contention, with some members of Congress refusing to raise it unless certain policy demands are met. If the debt ceiling is not raised, the government would not be able to borrow any more money and would only be able to spend what it takes in through taxes and other revenue. This could lead to a government shutdown or a default on its debt obligations, both of which could have severe US and global economic consequences.
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