Internal | July 22nd, 2024

GOOD MORNING

Here's everything you need to know this week: So… that happened. President Biden announced his decision to “stand down” from his re-election campaign on Sunday afternoon, sending the 2024 cycle in the kind of historically unprecedented chaos that we somehow all knew was coming our way. It might be worth getting up early and looking at your portfolio in the pre-market to see how equities respond to this news.

1. Kamala Time

It took President Biden about half an hour to endorse his Vice President Kamala Harris as the nominee, putting pressure on his party to anoint her as his replacement on the top of the Democratic ticket. A torrent of new polling data will be raining down tomorrow which will, in turn, have a pretty direct effect on Monday’s markets. Despite last week’s steep drop across all major indices, investors seemed pretty committed to the “Trump Trade” but with Biden stepping aside, we will venture a guess that polls will show that Former President Trump’s road back to the White House just got a lot less smoother. 

2. Tech Heat Check

After a weird/bad week for tech stocks, investors will get three good chances to take the sector's mid-year temperature. On Tuesday, all eyes will be on Alphabet’s Q2 results with many preparing to run their numbers, guidance, and comments through AI to get a clearer sense of what’s actually happening. Unfortunately for the folks in Mountain View, almost everyone will be using ChatGPT instead of Google AI. Tesla also reports Tuesday and will once again be asked if it has made enough cars, so expect Elon to pivot quickly to explaining that Tesla is an AI company now… another AI company that isn’t OpenAI.

3. Is It Baked?

Diviners of interest rate cuts (ie everyone these days) will have a very titillating 48 hours at the end of the week with GDP and initial jobless claims coming out before Thursday’s opening bell. Then, after deciding whether we’re economically growing or showing, and musing on the latest test results of the labor market’s pulse, we all get a look at The Fed’s favorite inflation measure: Core Personal Consumption Expenditures (PCE). Once that’s all factored together, Fed watchers get to do what they love best, wait for Jay Powell to issue his monotone thoughts in the coming days to see if their September rate cut is even more of a stone certainty than they already assume it is.

4. The Prime Day After Tomorrow

Amazon will reveal whether Prime Day was enough to offset the growing existential dread of consumers tightening their belts when it reports Q2 earnings on Thursday. The Everything Store had a nearly 30% joyride to kick off the year, so naturally, the expectations are sky-high. The big brains on Wall Street are laser-focused on AWS – the cash cow that never stops mooing – and whether Jeff and the gang can keep squeezing more juice from retail margins. FactSet's crystal ball says Amazon's going to flaunt earnings of $1.02 per share, which is a spicy 57% jump from the same time last year. Sales? They're slated to climb 10.6% year-over-year to a casual $148.6 billion. That’s a Prime deal.

Political and Market Sentiment

Biden’s bow out will shake up Monday’s trading after a very shaky week of Wall Street profit-taking. Suffice it to say, it’s going to be a volatile trading week. With Harris only the presumptive nominee in what looks to be a wild few weeks leading up to the Democratic National Convention kicking off on August 19, gold and silver might see a lot of interest while bond yields and prices might flip if Wall Street sees Trump’s chances getting slimmer. With crypto prices now essentially married to a Trump victory, we should get a sense of how things are going on the campaign trail from Bitcoin prices.  

Global Markets Overview

Europe: The ECB left its deposit rate unchanged at 3.75% last week. The pan-European STOXX Europe 600 Index then nosedived 2.68%, thanks in large part to the U.S. and China playing their never-ending trade tension game.

Asia: Japan's stock markets also took a US/China beating this week, with the Nikkei 225 dropping 2.7% and the broader TOPIX Index slipping 1.2%. Meanwhile, over in China, investors shrugged off lackluster economic growth in Q2, pushing the Shanghai Composite up 0.37% and the blue-chip CSI 300 up a solid 1.92%. Hong Kong, however, didn't get the memo, with the Hang Seng Index tanking 4.79%, courtesy of FactSet. We wonder what they saw that Mainland Chinese investors didn’t.

The Week Ahead

We hope you’re not one of those people who hates talking about politics because this might be a really terrible week if you are. Even though it was hardly a total shock, Biden’s announcement will reverberate throughout the week. Last week’s gentle curbstomping of tech and small caps might have created some sales pricing if investors get bullish on their perception of what might be happening. What we’re saying is, volatility. It’s gonna be volatile out there.

Let’s dive into more detail below.

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BREAKING NEWS
President Joe Biden has officially bowed out of the 2024 presidential race.

In a move that can only perceived as hostile to anyone who enjoys a quiet Sunday afternoon, Biden released a letter to Americans announcing his intention to step aside, and minutes later announced that he would be endorsing Vice President Kamala Harris as the nominee.

Yes, the first sitting president since LBJ is stepping aside in an election cycle, leaving the Democrats in a frenzied scramble to figure out their next move. Biden’s endorsement of Harris is nice for her, but the party has little meeting starting August 19th in Chicago, and there are almost certainly more fireworks between now and then. So today is the first of many for political junkies to Wall Street wonks to go insane while trying to decipher what this means for the future.

WHAT HAPPENED
“It has been the greatest honor of my life to serve as your president,” Biden wrote in the one-page letter. “And while it has been my intention to seek re-election, I believe it is in the best interest of my party and the country for me to stand down and to focus solely on fulfilling my duties as president for the remainder of my term.”

Biden's exit is not just a political bombshell; it's a market-moving event. Wall Street, always jittery about uncertainty, is now on high alert. Investors thrive on predictability, and a sudden change at the top of the political hierarchy is the very definition of the opposite. The big question on everyone's mind is who will step up to fill Biden’s shoes. Kamala Harris is the obvious frontrunner, potentially poised to make history if she secures the Democratic nomination. But the field is wide open, and you can bet that every ambitious Democrat is now eyeing the opportunity. Meanwhile, the GOP is likely already sharpening its knives, sensing an opening to capitalize on the Democrats’ disarray.

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BANKING

Charles Schwab’s HTM Horror Show Could Be CEO Walter Bettinger’s Nightmare

BREAKING NEWS
By pricking Charles Schwab's HTMs, something wicked this way comes.

Charles Schwab CEO Walt Bettinger may have heard this variation of Shakespeare's famous lines from Macbeth by Tuesday's twilight, revealing that the bank's deposits had fallen and supplemental borrowing increased.

To stretch the lines of Mr. Bettinger's strings even tighter, Schwab's Held-to-Maturity (HTM) portfolio is showing a 197% loss, almost double its Tangible Common Equity (TCE) and the highest compared to runner-up Republic First Bancorp with 186% loss.

Such substantial losses relative to TCE can undermine the corporation's financial stability and equity position, potentially affecting overall financial health and capital adequacy, a red flag for regulators.

The Weird behavior has shaken the market and investors, with SCHW down almost 17% over the last five days.

WHAT HAPPENED
When we hear, "The circumstance with our stock decline in the last few days has nothing to do with the regional banking-related issues of a year plus ago…we have put that in the rearview mirror," we get a little worried.

The quote from Charles Schwab CEO Walt Bettinger leads us down the path of history, and we find similar excerpts from CEOs and skeptics from 2008.

"When they [banks] start losing money, [they say] hey we gotta get back in the game, we gotta get the skites rolling again, hey let's create another bubble." – Gerald Selente, Economist and Trend Analyst.

Charles Schwab may not be in a bubble at all with numbers like a 17% increase from the previous year for total client funds, expenses down 1%, and interest revenue up year-over-year, but Barron's, reporting they still had an issue with cash sorting, caused some speculation as to why depositors were moving their funds from lower-yielding accounts to higher-yielding ones and its effects.

Cash sorting narrows Charles Schwab's profit margins as customers move from low to high, reducing the spread between deposit costs and loan/investment returns. Falling bank deposits (17% year-over-year to $252 billion) constrain lending capacity and force reliance on costlier funding sources. This increased supplemental borrowing raises interest expenses, further eroding profitability.

In short, no bueno, and with Charles Schwab topping the charts on the fronts of HTM Portfolio losses at 197%, with the combination of falling deposits and the Eye of Jim Cramer and other major news media outlets watching their every move, there is reason to at least humor possible liquidity issues in the future.

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1. US spot Ethereum ETFs to Launch on July 23

CBOE has confirmed that US spot Ethereum exchange-traded funds will begin trading on July 23. This marks a significant development in the cryptocurrency market, providing investors with new avenues to invest in Ethereum through traditional financial markets.

2. Market Rotation and Interest Rates Impact on Stocks

Markets saw a pullback on Friday due to declines in chip stocks and investor rotations out of Big Tech into small-cap stocks like the Russell 2000 index. The Federal Reserve’s potential interest rate decisions are also influencing market trends, highlighting the ongoing economic adjustments.

3. Nippon Steel Hires Mike Pompeo for US Steel Deal

Nippon Steel Corp. has hired former US Secretary of State Mike Pompeo as an adviser for its efforts to acquire US Steel. This move aims to navigate the complex political and regulatory landscape associated with such a significant acquisition.

4. Big Tech Stocks Under Pressure Amid Earnings Season

Technology giants face increased pressure to deliver strong earnings after the Nasdaq 100 Index experienced its worst week in three months. This slump has heightened the stakes for upcoming earnings reports, influencing investor sentiment and market performance.

5. Microsoft Hit by Crowdstrike Glitch Affecting 8.5 Million Computers

A corrupted update from cybersecurity firm Crowdstrike caused significant disruptions, crashing computers running Windows worldwide. The glitch affected various sectors, including aviation, retail, and healthcare, highlighting vulnerabilities in tech infrastructure.

6. TSMC Stock Seen as a Bargain Amidst Market Volatility

Despite recent selling pressure on chip stocks, TSMC’s strong Q2 results and positive outlook present a buying opportunity for investors. The company’s performance underscores its resilience and potential for future growth in the semiconductor industry.

7. Berkshire Hathaway Sells $1.48 Billion Bank of America Shares

Berkshire Hathaway has sold around $1.48 billion worth of Bank of America shares, according to a recent filing. This move reflects the conglomerate’s strategic adjustments in its investment portfolio amid changing market conditions.

8. Ford’s Strategic Moves in EV Market to Reduce Losses

Ford has made strategic decisions aimed at reducing losses in its electric vehicle segment and improving profitability in other areas. These moves are part of the company’s broader efforts to strengthen its position in the evolving automotive market.

9. Delta Air Lines Faces Continued Cancellations After Tech Outage

Delta Air Lines is struggling to restore operations following a tech outage caused by a faulty software update. The disruption has led to thousands of flight cancellations and delays, significantly impacting passengers and the airline’s operations.

10. Boeing Addresses Challenges with Air Force One Production

Boeing is addressing the challenges delaying the production of new Air Force One planes. The complexity of the project has pushed the delivery dates from late 2024 to 2027 and 2028, reflecting the ongoing issues in the company’s commercial jet division.

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