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[5 minutes to read] Plus: Banksâ secret weapon against losses
By Matthew Gutierrez and Shawn OâMalley
âDonât advertiseâŚif someone is going to try and blackmail me with advertising? Blackmail me with money? Go f*** yourself.â
After a string of scandals lately, at the DealBook Summit on Wednesday, Elon Musk made headlines again with a clear message to advertisers threatening to flee X over antisemitism allegations.
Watch the clip here for more context (obviously, explicit content warning.)
At the same summit, JPMorganâs CEO, Jamie Dimon, also made news by outlining his support for GOP presidential candidate Nikki Haley to an audience of Wall Street bigwigs, asking for their âhelpâ đ°
â Matthew & Shawn
Hereâs todayâs rundown:
POP QUIZ
Today, we'll discuss the three biggest stories in markets:
Banksâ secret weapon against losses
Goldman and Apple break up
How McDonaldâs overhauled its biggest item
All this, and more, in just 5 minutes to read.
IN THE NEWS
đŹ How Cheap Deposit Rates Bail Out Banks
Are banks in trouble? Depends on who you ask and which banks youâre talking about.
Since March, banks have been top of mind for many investors after a mini-crisis saw a few familiar names go under, like Silicon Valley Bank and First Republic.
Without diving too into the weeds, one of the issues at hand structurally for banks is many had a) bought a lot of bonds in 2020 & 2021 and b) those bonds lost a lot of value on paper when, thanks to the Fed, interest rates began rising in 2022
You can see below the estimated losses across the banking system from declining bond values over the past year and a half, represented by the combined value of held-to-maturity securities â where banks donât have to report paper losses â and available-for-sale securities â bonds they do have to report losses on.
As Nicholas Dunbar of the FT writes, âbehind all this is a story of deposits, in particular the $4.2 trillion worth of ânon-interest-bearingâ deposits in the U.S. banking system.â These are deposits from individuals and businesses that earn essentially no interest, which, like all bank deposits, act as a form of funding for banks, allowing them to make loans.
If banks had to pay the roughly 5% rates common on U.S. Treasury bonds for that financing to depositors, that translates to an additional $90 billion per year in interest costs across the banking system.
Why it matters:
As Dunbar puts it, âCustomers accepting this (zero or low interest on deposits) is the secret behind banksâ ability to maintain underwater securities portfolios.â
By not paying some customers anything close to market rates on their deposits, banks nationwide have enjoyed cheap financing that helps offset the sting of big losses in their bond investments.
Who are these folks content earning nothing? Bank of America suggests that a chunk of these funds come from checking accounts, where many accept low-to-zero interest in exchange for fewer fees and convenient service.
Not so fast: Of course, the opportunity costs of earning negligible interest as a depositor have increased, and with that, âbanks have lost a lot of non-interest deposits in the past year or so, as depositors steadily hunt for better returns for their deposits.â
So, folks have increasingly pulled money from bank accounts earning nothing in pursuit of higher yields on their cash elsewhere.
Banks must rely more on customer deposits at costlier rates to support their businesses, which might prompt some to answer our initial question by saying, âYes, banks are in trouble.â
But, banksâ losses on their bond investments have decreased as bond prices have rallied this past month over the prospect of the Fed halting rate hikes.
To what extent these opposing forces for banksâ financial health (costlier deposits â bad for banks, and rallying bond prices â good for most banksâ balance sheets) offset each other going forward will provide greater clarity on the state of the banking system entering 2024.
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đł Apple and Goldman Sachs to End Credit Card Partnership
Sometimes, true love isnât meant to be. And sometimes, what we thought was true love wasnât. Either way, Apple and Goldman Sachsâs corporate relationship is ending, symbolically finalizing Goldmanâs retreat from consumer banking.
That is, its efforts to transition from just being an investment bank, focusing on things like advising companies on mergers & acquisitions, and instead taking deposits from the public.
To be or not to be: A big part of that push was a partnership with Apple, where Goldman would underwrite credit card loans to folks hoping to earn 3% cashback when financing Apple product purchases.
But the arrangement was troubled from the beginning. Apple first promoted the card as not being from a bank, which reportedly irritated Goldman execs.
And Apple supposedly wanted almost everyone to be approved for their credit cards, pushing Goldman to lend money unprofitably to people unlikely to pay off their balances (or accrued interest.)
All at once: Another issue came from Appleâs classic focus on streamlined simplicity for users â it wanted everyoneâs statements to come due at the beginning of each month.
The problem, though, is that banks usually space out these due dates; maybe your bill is due on the 15th, and someone elseâs on the 20th, and so on, spreading out influxes of inevitable customer support questions about their balances.
Goldmanâs customer support systems were apparently overwhelmed with questions at the start of each month.
Why it matters:
Apple is now giving Goldman a chance to exit the credit-card partnership over the next 12-15 months. This also includes the high-yield savings accounts Apple has offered through Goldman.
If youâre an Apple card user or have an Apple savings account, don't worry; someone else will almost certainly take this over.
Right now, that âsomeoneâ looks like American Express, but Synchrony Financial has also thrown its name into the ring.
MORE HEADLINES
đś Blackstone acquires pet care company Rover for $2.3 billion in cash deal
đ§ Spotifyâs most-streamed artists of 2023
đ The college degrees of the worldâs wealthiest people
đ U.S. home prices hit yet another record high in September
đ Iconic, controversial former Secretary of State Henry Kissinger dies at 100
âˇď¸ Salt Lake City likely to host 2034 Winter Olympics for 1st time since â02
đ McDonaldâs Overhauls Its Biggest Item
You canât get more traditional than a hamburger with fries at McDonaldâs, one of the worldâs most iconic companies.
Yet McDonaldâs has overhauled its signature offering, including the Big Mac, which will now have a more uniform sear, special sauce, fresher lettuce, cheese, and pickles. Even the bun is changing to a buttery brioche.
Higher quality, less junk: McDonaldâs has made over 50 tweaks to its burgers as it tries to upgrade its core menu amid heightened competition in the burger market, notably Five Guys and Shake Shack.
In other words, McDonaldâs is trying to make its burger a bit healthier â and tastier. Unsurprisingly, prices will increase as a result.
âWe can do it quick, fast and safe, but it doesnât necessarily taste great. So, we want to incorporate quality into where weâre at,â McDonaldâs senior director of global menu strategy told The Wall Street Journal.
McDonaldâs benefited from the Covid-19 pandemic, like many quick-service restaurants and drive-thru chains. The Chicago-based food giant is still growing: U.S. same-store sales jumped 10.3% last year, much better than Burger King (2.2%) and Wendyâs (3.9%).
In 2022, McDonaldâs posted $6.2 billion in profit in an enormous U.S. burger market (roughly $136 billion in annual sales).
But McDonaldâs recently placed just 13th among chains whose customers called their burgers âdesirable.â Only 28% of Americans surveyed said they âcravedâ a McDonaldâs burger, while White Castle (72%) and Burger King (52%) led the list.
Why it matters:
Sales for higher-end, fast-casual chains Smashburger, Five Guys, Red Robin, and Shake Shack are growing much faster than McDonaldâs, a $200 billion giant founded in 1955.
Burgers are everything: Burgers accounted for roughly 40% of U.S. fast-food sales last year. About two-thirds of Americans eat burgers at fast-food restaurants at least every month.
As Burger Kingâs president put it, the hamburger is âeverythingâ to the company.
McDonaldâs tested its new burgers in Australia and will bring the revamped recipe to its 13,460 locations across America, its biggest market.
Study the past: As a kid, McDonaldâs menu strategy director recalls eating delicious McDonaldâs burgers. Itâs a nostalgic flavor he wants to bring back.
âSometimes you have to look to the past to understand where you are going in the future,â he said.
QUICK POLL
How often do you dine out to eat? |
Yesterday, we asked: Was Charlie Munger an inspiring investor to you?
â Many left wonderful comments about Charlie, calling him, âOne of the top 5 most influential investors ever. It's not about his returns, it's about his clear explanations of ideas and willingness to share. â
â Spoken like Charlie himself, one reader said, âThe world needs beacons reminding us to not be stupid.â
â Another stated, "He was just a master at telling uncomfortable truths and simplified complex concepts like no other.â
â And lastly: âI never met Charlie directly but have read and listened to him for 40 years. If some of it stuck, I'm a better person.â
TRIVIA ANSWER
See you next time!
That's it for today on We Study Markets!
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