🎙️ Roller Coaster Stock

💰 What’s in your wallet?

That’s Capital One’s slogan, but JPMorgan data has an answer. The findings: While U.S. households still hold about 10% to 15% more cash in their savings accounts than before the pandemic, the median account balance has fallen steadily over the past two years.

As our Chart of the Day shows, the trend is true across all income brackets.

— Matthew

Here’s the rundown:

Today, we'll discuss the three biggest stories in markets:

• The latest with Morgan Stanley & big banks’ earnings

• Behind the stock market’s most volatile company: Carvana

• Why investors are bailing on the popular ARK Fund

All this, and more, in just 5 minutes to read.

CHART OF THE DAY

IN THE NEWS

🏆 Morgan Stanley Beats Estimates On Record Wealth Management Revenue (Reuters)

Morgan Stanley has joined the club.

JPMorgan Chase, Citigroup, and Wells Fargo posted second-quarter earnings beats early this week, and Morgan Stanley has followed suit.

• In its second-quarter report, the bank confirmed surpassing profit estimates as the growth in its wealth management business countered a decline in trading revenue.

The company reported earnings of $1.24 per share on revenue of $13.46 billion. Despite a 14% profit drop, the company's shares surged over 6%.

Although lower market prices caused some fees to dip from a year ago, second-quarter wealth management revenue rose 16% to $6.66 billion on higher interest income. Additionally, the unit attracted nearly $90 billion in new assets.

On Wall Street: The bank's Wall Street division had a tougher time, with the institutional securities business seeing an 8% revenue decline to $5.65 billion due to lower revenue from trading.

• However, Investment banking revenue, derived from bankers’ efforts to help companies raise money or merge/acquire other businesses, remained relatively stable. Revenue stood at $1.08 billion, mirroring figures from last year.
  

• But investment banking revenue is way down from pandemic highs, with higher interest rates suppressing deal activity (from which bankers earn fees.)

CEO James Gorman noted: "We ended the quarter overall in a better place, with a better tone. While we may not be quite at the end of rate increases, I believe we are very close to it.”

Why it matters:

The wealth management unit played a key role in offsetting the decline in trading revenues due to reduced market volatility, validating the thinking that it’s a better business to be in.

• Like many other banks, Morgan Stanley has focused on the more profitable wealth management business.
  

• “The firm delivered solid results in a challenging market environment,” Gorman stated. “The quarter started with macroeconomic uncertainties and subdued client activity but ended with a more constructive tone.”

Of course, layoffs help (and can hurt) profits, too. Morgan Stanley's earnings were impacted by $300 million in severance costs after laying off 3,000 employees, but that money and more will presumably be recouped by reduced salary costs going forward.

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🎢 The Stock Market’s Most Volatile Company: Carvana (Bloomberg)

Names like Tesla, Microsoft, and Nvidia get all the attention, but none are 2023’s best-performing stock. They’re not even close.

Who is? Carvana. It’s quite a reversal since just eight months ago Yahoo Finance declared Carvana as the Worst Company of 2022 after its stock collapsed 97%.

Fortunes can change quickly in investing, and Carvana has put that to full display, rising 1,100% this year.

• The online used-car dealer has delivered incredible returns to its true believers after many investors left the company for dead after its abysmal 2022.
  

• Its stock jumped over 43% today on news that the company had reached a deal to restructure its debt while also reporting second-quarter revenues that beat analysts’ expectations.

Since 2020, Carvana’s stock has been on a roller coaster. But the company’s stock trades at a fraction of its pandemic peak, and the business remains unprofitable.

• A super volatile stock wouldn’t always be major market news, but for Carvana, some investors see it as a sign that speculative euphoria, similar to what we saw in 2021, is creeping back into markets.

What’s happening: When the Federal Reserve began hiking interest rates last year, high-risk growth stocks — usually unprofitable companies with the potential for dramatic growth — fell out of favor with investors.

• Higher interest rates enable investors to earn reasonable returns on safer bets, like earning 4-5% in money market funds or high-yield savings accounts instead.

Why it matters:

High-risk growth stocks are seemingly back in vogue as the economy continues to defy recession predictions. And so is another theme from the pandemic: Betting on companies with high short interest.

How it works: Generally, to “short” a stock, one borrows shares in a company, say Carvana, from someone else and sells those shares now and collects the cash.

The hope is to buy back the shares after the stock’s price has fallen to a lower price, allowing the short seller to return the borrowed shares and pocket the difference between what the shares sold for and how much they were bought back for.

It’s similar to the Gamestop drama of 2021. So many investors had bet against the near-bankrupt company’s stock that when some good news finally sent the stock higher, many who had shorted the stock were forced to close out those positions.

• To do that, they had to buy back the shares they had sold short sooner than planned, adding to the stock’s rally and forcing even more short sellers to buy back the stock.

Too short: With about 48% of Carvana’s free float (shares available for trading) being held short, there are, or at least were, huge bets the company’s stock couldn’t keep rallying. But today’s rally likely forced many investors to exit those positions in a “short squeeze.”

MORE HEADLINES

🤖 Apple stock pops on report it’s developing its own equivalent of ChatGPT

😵‍💫 Goldman Sachs misses big on earnings, profits fall 58%

🚗 Individual investors have loaded up on Tesla ahead of earnings

🎰 What do if you win the lottery

❌ Investors Are Bailing On the Popular ARK Fund (WSJ)

Carvana’s on a hot streak. The once popular ARK fund? Not so much.

Cathie Wood made ARK famous for its pandemic rally. It was once the most actively managed ETF, but the fund has shrunk from a peak of about $30 billion to roughly $9 billion in assets under management (AUM).

The cause: Investment losses, mostly, as the fund cratered from its 2021 high.

• While Wood’s flagship fund has rallied over 50% this year amid the tech boom of 2023, investors are getting out of ARK, pulling about $717 million from the fund over the past 12 months.

It starkly contrasts the fund’s early years, when it consistently drew investor cash since launching in 2014. The fund, known by its ticker symbol ARKK, became an investor darling with its huge bets on unprofitable but “disruptive” technology companies. It had an inflow of $6.5 billion in the first quarter of 2021 alone. But that’s when its share price peaked.

The Federal Reserve’s fastest interest-rate hiking campaign in decades crushed the valuations of the tech sector in 2022, particularly unprofitable growth companies that attract investors when rates are low and returns on safer investments are minimal. ARKK shares plunged 67% in 2022.

Many investors held on through the turmoil are now exiting.

• “You have a whole group of people who got in somewhere near the top and are sitting on horrific losses,” said one money manager. “I think some of those people have said, ‘I’m never getting back to even; this is probably the best I’m going to do, and it’s time to get out.’”

In an interview with The Wall Street Journal, Wood said the outflows have been minor.

• “We have been astonished at our asset retention since February of ‘21. It’s a very small number as a percentage of assets, which suggests that it’s far more likely to be people who are taking some profits than some exodus of people who have stayed in the fund through a prolonged down period.”

Why it matters:

ARKK is on a tear this year, thanks largely to a surge in the price of Tesla. Yet ARKK shares are still about 70% below the all-time high.

Its top holdings are Tesla, Coinbase, Roku, Zoom, and Block. Only Tesla and Zoom were profitable in 2022. And while those companies have done better in 2023, most of the year’s tech gains this year have come from more mature, profitable companies such as Apple, Microsoft, Nvidia, and Amazon.

Despite Carvana illustrating a newfound appetite for risky and unprofitable companies, other investors have less interest and patience for companies that aren’t expected to turn a profit for years.

• Said one analyst: “A lot of the stocks the ETF holds won’t have big cash flows until way out in the future, and it’s a more challenging environment for that with rates expected to be higher for longer.”

See you next time!

That's it for today on We Study Markets!

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