☀️☕️ BNPL = Billion$ Non-Performing Loans? (Klarna)

Happy Wednesday, Happy MARCH!

Market Roundup 📊 01-Mar-23

US large-cap S&P 500 closed 0.3% DOWN 🔻
Tech-heavy Nasdaq Composite closed 0.1% DOWN 🔻
Pan European STOXX Europe 600 closed 0.24% DOWN 🔻
HK’s Hang Seng Index closed 0.79% DOWN 🔻
Japan’s Nikkei 225 closed 0.08% UP ▲

— The MoneyFitt Morning (@MoneyFitt)
Mar 1, 2023

📝 Focus

BNPL = Billion$ Non-Performing Loans? (Klarna)

📊 In the Markets

All good fun, then Zuck got AI. (Meta)

Euro inflation on the rise! (France & Spain)

📖 MoneyFitt Explains

🎓️ Bonds and Yields

📝 Focus

BNPL = Billion$ Non-Performing Loans? (Klarna)

Well, not quite, but Klarna, the privately held Swedish “buy now, pay later” eCommerce payment platform, made a loss of US$1 billion (SKr10.4bn), nearly half again as much as it lost in the previous year. But in the fourth quarter, it more than halved its net losses to SKr1.9bn after credit losses of SKr1.4bn (BNPL loans gone bad, basically. See more in The MFM from mid-Feb.)

► Klarna hopes to turn a profit by summer, though it could still lose money for the year (it last made a profit during 2018, but not for the full year.)

VCs seeing a BNPL company walking past in 2021 – Image credit: Our Gang / WBD via Tenor

► The company was valued at US$46 billion in 2021 (as pandemic online shopping boomed) based on the price per new share that venture capital funds led by SoftBank’s Vision Fund II invested more than $600mn at. After burning through almost all of it, investors (including renowned VC Sequoia Capital) bought $800mn more new shares at a valuation 85% lower at just $6.7bn in July 2022. Over the years, Klarna has received investments of $4.5bn.

“Not charging fees feels consumer-friendly, but we’re worried it drives the wrong behaviour… Our data now shows that a total absence of late fees actually leads to less favourable outcomes for customers”

Alex Marsh, head of Klarna UK (keeping a straight face.)

► Perhaps cynically attempting to please authorities breathing down their necks for luring millions of vulnerable consumers into another debt trap, Klarna is now proposing late fees in the UK of £5 in order to not encourage bad spending habits (really!) As it has done elsewhere, Klarna plans no more than two late fees per order, totalling no more than 25% of the original purchase. (BNPL users take note: Klarna now shares information for both on-time and missed payments to credit agencies.)

📊 In the Markets

With an after-lunch, food coma slide, US stocks closed the day down and closed out February down for the month (S&P500 -2.6% and NASDAQ -1.1%) as investors chewed over the idea that maybe it was a mistake not believing that the Fed would do exactly what the Fed had been saying they’d do (keep interest rates higher for longer to wipe out excess inflation.)

Europe looked much the same for the day, and also reflected similar feelings about the ECB, the Fed’s European counterpart, and whether or not it would do the higher-for-longer thing that it too had been saying for months on end (though actually, Europe still ended the month up 1.8%.) (More below.)

Target Corp ($TGT) posted a surprise rise in holiday-quarter sales (the three months to the end of January), helped by massive discounting. This pulled in hordes of bargain-hunting shoppers and helped clear inventories of pandemic favourites that the company had totally over-ordered.

► Target’s sales at +0.7% were better than the -1.5% Wall Street’s Finest had feared. But of course, that came at the cost of slimmer margins, meaning the profits per dollar of sales.

► Reflecting what fellow consumer bellwethers Walmart and Home Depot recently guided, the outlook for 2023 was pretty subdued. Surging prices over the last year have crushed demand for non-essentials and Target sells much less food than Walmart.

Spending too much on heavily discounted non-essentials is like free money! – Image credit: Target via Tenor

Tesla ($TSLA) sales in China rose last week, but at a much slower pace, as the bump from a series of price cuts in its second-largest market wears off and the age of the product line starts to show in an increasingly competitive market.

► Its market share dipped to 9% from 10% a year earlier, while home-grown (and Berkshire Hathaway part-owned) BYD’s surged to 37% from 27%. (BYD tripled production and sales to nearly 2 million vehicles last year.)

► Making things worse, China warned Elon Musk, the CEO of Tesla, against “biting the hand that feeds it” (loosely translated) by sharing the US Department of Energy’s “low-confidence” assessment that the Covid pandemic originated from a leak in a Wuhan lab.

All good fun, then Zuck got AI

Facebook and Instagram owner $META has been pouring millions into AI to overhaul its advertising tech in response to Apple’s privacy changes almost two years ago. (Meta reported it lost about US$10 billion in sales in the nine months after Apple rolled out its App Tracking Transparency, which forces apps to get permission to track users and serve them personalised ads.)

► Meta launched an offering in August called Advantage+ using machine learning and artificial intelligence to automatically generate multiple permutations of ads, run tests of potential ads, and automatically select the most effective, with automatically altered text and images.

► Going forward, Meta will use generative AI (the tech underlying OpenAI’s ChatGPT) in its ads to rapidly tweak text and images in campaigns based on user responses at ever faster rates.

► And if you can still sleep (nothing to do with Meta… yet): Human brain organoid computing. Johns Hopkins University in Baltimore published a detailed road map to what they call “organoid intelligence” using arrays of brain organoids — tiny three-dimensional neural structures grown from human stem cells and trained by machine learning on big data for super-fast biocomputing.

This definitely won’t happen (will it?) – Image credit: Tenor

Euro inflation is on the rise!

France and Spain, the 2nd and 4th biggest economies in the Eurozone, saw inflation higher than expected. Bloc-wide inflation data will be released on Thursday, worrying traders they may show prices reaccelerating. This sent European government bond prices down and bond yields up 🎓, on doubts over how quickly the European Central Bank will stop raising interest rates. The ECB has already committed a further 0.50% hike on March 16, taking the benchmark to 3%. Only last July, European interest rates were MINUS 0.5%.

Sacré bleu, l’inflation! – Image credit: The Simpsons / Fox via Tenor

► France had been quite the Euro hero in the battle with inflation, having moved early to freeze gas prices for its consumers, sparing the country from the worst knock-on effects. But in February, consumer prices rose 7.2% on the year before, on increases in food and services prices. Compared to the month before, February prices were up 0.9% from a reading of 0.4% in January. (12 months in a row of 0.9% month-on-month increases gets you to over 11%.) French core inflation, which actually includes processed foods, rose from 5.6% to 5.8%.

► Spain hadn’t been so hot in controlling inflation early on, but saw an earlier and sharper decline than much of Europe. But instead of dropping further to 5.5% as expected, February inflation accelerated to 6.1% from 5.9% in January. Worse still, underlying inflation, excluding energy and fresh food, hit a record high of 7.7%.

📖 MoneyFitt Explains

🎓️ Bonds and Yields

When you lend somebody money, you expect some kind of compensation for it, usually in the form of interest, reflecting

(a) what you could get if you had done something else with it, like lending to somebody else, shoving it in a bank or investing, and

(b) the likelihood of getting your money back at all at the end of the arranged loan period.

Well, a bond is the same thing – when a company or a government wants to borrow some money other than from a bank, they issue bonds.

Bonds come with a “coupon”, a promise to pay a certain amount of money to the bondholder on a regular basis for the life of the bond (known as “maturity”) including to any new owners of that bond.

Bonds are usually issued at 100% of the face value (the amount borrowed), so the interest rate you get if you buy it at issue is pretty simple. The main thing to remember is whatever the price of the bond, the coupon remains the same.

So if the bond price goes up, the yield, the interest rate you actually get at the new price, will be lower, since it’s the same size coupon divided by a larger number (yield = coupon / price.) If the bond price goes down, the yield will go up (same coupon divided by a smaller number.)

If something happens to change how buyers feel about (a) and/or (b) above, then the price they will pay for the bond will change… and so will the yield.

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