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Your Quiver | Thursday, March 23, 2023

CIO | Nadine Terman @SolsteinCapital details what she's seeing in global financial markets.

Me Too

yesterday here in the US. Inflation prints in the UK are still hot, so the two central banks appear to be on the same trajectory-try to keep inflation under control while appeasing investors concerned about the banking system. Comments by Powell yesterday suggest at least one more hike this year, and then a pause—but no decrease in rates in 2023. The bond market is betting differently—the expected 3-mo UST rate in 18 months’ time declined to 134 bps under the current rate. Swaps traders see a 50% chance that the Fed won’t raise rates again this year. So, obviously there is a disconnect between Powell’s statement and investors’ expectations.

Yellen Her Heart Out

Oh, Janet. She ruled out “blanket protections” for all bank deposits after protecting SVB clients without Congressional approval. Nadine Terman points out that Powell was walking his tightrope yesterday fairly successfully until Yellen blew a huge gust of wind at that rope. To note, 93% of SVB deposits were uninsured. Now we hear that the gov of the BoE told Parliament yesterday that he warned the SF Fed about SVB over the past two years. Sounds like the start of legal discovery.

Block and Tackle

Short-seller Hindenburg is out with claims that Block facilitates fraud and inflates key metrics. They say that Block’s Cash App enables criminal activity, management ignores concerns around that, and the company inflates its transacting userbase figures. The firm asserts that Block disregarded key anti-money laundering and know your customer laws and took advantage of government payments during the pandemic with its actions.

More Bread Sticks, Please

Darden Restaurants (parent of chains like Olive Garden, LongHorn Steakhouse and The Capital Grille) announced same store sales growth of 11.7% and raised its 2023 guidance again. Management credited its lower pricing strategies to attract higher sales and traffic.

Does Not Bode Wells

The SEC issued Coinbase a Wells notice, warning the company of potential US securities law violations. The focus is on staking service Coinbase Earn, Coinbase Prime and Coinbase Wallet.

Power Play

Sounds like traders at firms such as Vitol VPI, Uniper and SEE played some games with UK customers. They would announce an electricity shut-off was coming (sometimes within just a few hours before busy evening periods) and then offer power from their plants via a side market at up to 4x the prices. An analysis of 100mm records showed that firms earned more than 525mm pounds in inflated revenue from 2018-2022, with 90% occurring in the past two years. Basically, they shut off their generators and then filled the gap with high priced energy.

EV Losses

Ford reported that it lost over $2bn in adjusted EBIT in 2022 in its EV business, and it expects that loss to rise to $3bn this year as the company invests in new models and factories. The company is switching its reporting from regional to per business unit. Management is doing a “teach-in” today at the NYSE to try to convince investors that it could earn a profit on EVs by 2026.

Add One More to the List

Accenture expects to cut 19k jobs in the next year and a half (2.5% of its employee base). Last mo McKinsey announced a 2k job cut. KPMG laid off 700 people. So, it’s not just the tech firms slimming down.

TikTok Troubles

Today’s tech telenovela takes place in Congress, with TikTok’s CEO under fire. While many of our representatives in Washington want to cut the company off at its knees, a total ban will be challenging, because of those pesky 1st Amendment rights…and the app’s popularity with current young and potential future young voters. The person most excited about today? Zuckerberg, because he’s not in the hot seat.

Never the Best Strategy

I get why Schwab’s CEO is out trying to reassure clients and investors that it is sound….but talking about a worst case scenario is never the best strategy, because that’s where people will focus. Bettinger told the WSJ that Schwab could keep on chugging if 100% of its bank’s deposits ran off, without having to sell securities. He pointed to collecting interest on bonds, borrowing from the FHLB, issuing CDs and other potential solutions to make that happen. Schwab had >$11bn in unrealized losses on its hold-to-maturity bond portfolio at year-end, exceeding its tangible common equity of $6bn. Luckily, most deposits are on the brokerage side, not the bank, and they stayed within Schwab-just shifted to money market funds and other higher yielding instruments, as Nadine Terman of Solstein Capital has mentioned before.