The Weekend Edition # 85

Busy week of GDP, earnings and overseas central bank intervention; Review: First Republic Bank; Earnings Recap; Fed Rate Decision, Apple Earnings and Job Friday next week

Welcome to another issue of the Weekend Edition. 

Thank you to all who’ve read and welcome to all the new subscribers this week!

Here’s what we cover:

• Market Recap - Busy week of GDP, earnings and overseas central bank intervention

• Review - First Republic Bank

• Earnings - Recap

• Articles of the week - Bank of Japan & Bed Bath and Beyond

• The Week Ahead - Economic & Earnings Calendar

• Closing Thoughts - Important Week ahead

Let’s dive in ⬇️

Market Recap - 24 Apr - 28 Apr, 2023 📉📈

It certainly was a busy week. We saw the S&P 500 trying to punch above its year-to-date high while the Nasdaq-100 successfully did close above its YTD high. And while we’re still seeing earnings growth decline, the surprise upbeat results in tech earnings have definitely given the market a boost, particularly Microsoft and Meta.

But under the surface all is not well and we heard people talk a lot about breadth this week, because from what we can see the equal-weighted NASDAQ has not exactly performed the same, and big tech continues to hold up the market.

In fact, if anything, we saw the recession trade being put on with gold rallying again and oil declining throughout the week. Bitcoin also gave up much of its gains falling back below the $30,000 mark.

The most interesting economic data for the week was the growth in QoQ GDP which came in at +1.1% firmly below the consensus estimate of +1.6% and far below the Q4, 2022 level of +2.6%.

As expected, inventories, which tend to be less sticky, declined but what did hold up the numbers was the boost in government spending of +4.7%. In fact, nondefense government spending increased a whopping +10.3% this quarter, after last quarter’s +10.6%.

This isn’t great news, because it just means that the government is propping up the GDP with their expansionary fiscal measures which is contrary to monetary policy tightening.

The other important data points for the week were the policies from the Bank of Japan and People’s Bank of China.

• The BOJ left their policies unchanged also as expected

• The PBoC extended its short-term cash injections into the financial system for the 11th straight day, as it looked to boost investor confidence over potential liquidity squeeze around month-end. This brings the total net injection in current cycle to CNY673B ($97B).

Both these actions increased liquidity in the system and it shouldn’t come as a surprise that the US stock market also probably benefited from this easing as it soared on Friday.

But, the major news of the week came after the market close on Friday, when it was announced that First Republic Bank was about to be put into receivership.

Macro - First Republic Bank FRC 0.00 🌎

Bloomberg reports that the FDIC is asking several banks to put in their bid for the purchase of FRC. The banks include JP Morgan, PNC Financial, US Bancorp, Bank of America and Citizens Financial Group. Even if a deal is reached by Sunday, this situation is sure to cause turbulence in the market, not to mention the Financial ETFs - XLF 0.00 KRE 0.00 KBA 0.00

There are few things to highlight here:

• No bank can survive a run on a bank. And while FRC didn’t exactly experience a “run”, there were plenty of news and views circulating for people to lose faith in the bank and pull out their deposits.

• The major issue had become the deposit flight, particularly after Silicon Valley Bank. Furthermore, the bank couldn’t attract and hold on to deposits because they just could afford to pay higher rates. So, people took their deposits to other banks and to money market funds that pay higher rates.

• The reason they couldn’t afford to pay higher rates is because over 60% of their loans are real estate and housing loans that have very long tenors over 15 years.

First Republic 10K December 2022

• Most importantly, over 80% of their loans have some form of fixed rate. 45% are hybrid rates which are fixed for up to 10 year and 37% are fixed throughout the life of the loan. Given that the bulk of these loans were taken out before the Fed hiked aggressively, they have been fixed at very low rates.

First Republic 10K December 2022

These are important points to remember because it just shows that looking at the regular ratios and numbers don’t always tell you the full story. While the issues at Silicon Valley Bank were because of an entirely different set of issues, First Republic has their own problems. And what’s more interesting is just like SVB, FRC’s “ratios” still look okay.

This should be a lesson in analyzing financial statements carefully, learning from the right people and really trying to understand what’s going on before one invests in any company or ETF for that matter.

Earnings - Highlights 📝

Here’s the FactSet Summary for the Week:

The earnings decline last week was -6.2% so this week, we’re quite a significant improvement to -3.7%. The overall earnings decline is still projected to -6.7% according to FactSet. However, stock reactions to earnings haven’t exactly been proportional to their beats or misses. ⤵

Articles of the Week 📖

The Demise of Bed Bath and Beyond

An Old Beginning

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The Week Ahead 📅

Earnings Calendar

Economic Calendar in Eastern Time

Closing Thoughts - Important week ahead

Not only do we have to contend with the fallout of First Republic Bank on Monday, but we also have the Fed rate announcement on Wednesday. This comes right after a major bank collapse and the whole market will be watching what the Fed does. We then have Apple earnings on Thursday after the close, which may yet another market moving even. And finally, we have employment data being released on Friday.

We start May with a very eventful week. And then we also have the issue of seasonality that revolves around the mantra of “Sell in May and go away”. According to statistics, this doesn’t really hold true any longer but, with all the events we’ve got going on, there may be several negative catalysts that eventually, make this come true.

Here’s wishing you safe investing.

Please take a moment to share and subscribe, if you found this newsletter useful.

Sincerely yours,

Ayesha Tariq, CFA

There’s always a story behind the numbers.

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None of the above is Investment Advice. I may or may not have positions in any of the stocks or asset classes mentioned. I have no affiliation with any of the companies other than explicitly mentioned.

Full disclaimer: https://ayeshatariq.substack.com/about

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