The News Radar

Timely links to external news and articles, usually valuation related, with occasional commentary. Most recent items shown below - for more, check the archive in the sidebar.

Tuesday, 26 July 2022
Myth of ‘Free’ Checking Costs Consumers Over $8 Billion a Year

Many Americans enjoy free checking accounts on the backs of the fees paid by poor people. Customers who pay overdraft fees again and again—who typically have no more than a few hundred dollars in the bank—are responsible for over half the profits from mass-market consumer checking accounts at the biggest US lenders.

For their part, bank executives see it differently, saying that customers who never make good on their overdrafts force them to write off millions of dollars. The fees, they argue, enable them to shoulder the costs and offer a lifeline to customers.

It is trivially easy for a bank to just disallow NSF charges, and they routinly do it when it serves their interest. But if they can instead bleed people dry with fees, they will. Wells Fargo, in particular, has proven time and again to be a leech on the American consumer.

Great article, with terrific graphics.

Why the Fed May Soon Need Treasury Help

When the Fed announces a higher target range for the federal-funds rate (currently 1.5% to 1.75%), it implements its decision by raising what it pays both on reserve balances (currently 1.65%) and on reverse repurchase agreements (currently 1.55%). Money to pay for these interest expenses comes out of the Fed’s interest earnings on its own portfolio.

The tricky situation the Fed now faces is that its own net interest income—$116.8 billion in 2021, of which 93% was remitted to the Treasury—will soon be exhausted by the higher interest rates it intends to pay on those combined cash funds. A target federal-funds range of 3.25% to 3.5% by year-end would have the Fed shelling out more than $195 billion annually to maintain both reserves and reverse repurchase agreements at current levels. The Treasury will have to advance funds to cover the gap.

Sunday, 24 July 2022
Weak Earnings Reports Aren’t Fazing Investors After Brutal Year for Stocks

So far this reporting season, shares of companies in the S&P 500 that have missed Wall Street’s earnings expectations have slipped 0.1% on average in the two days before their report through the two days after, according to FactSet. That compares with the five-year average of a 2.4% decline.

Tesla’s Bitcoin Dump Leaves Accounting Mystery in Its Wake

Tesla Inc. made waves this week when it announced that it had dumped the bulk of its Bitcoin stash. Selling 75% of its cryptocurrency gave the company a one-time cash infusion, Elon Musk’s electric car company said, but the battered value of its remaining Bitcoin also dinged profits.

Exactly how crypto helped and hurt Tesla’s bottom line is difficult to disentangle, however, based on what it told the public on earnings day. Current accounting rules—or lack thereof—play a big role.


“I’m anxious to see the actual filings—to see if they disclose the date that they sold, the price that they sold at,” said Aaron Jacob, head of accounting solutions at TaxBit, a cryptocurrency software company. “They may not disclose any of that.”

Tesla isn’t compelled to do so. No part of US generally accepted accounting principles spells out how companies must account for cryptocurrency or other digital assets, nor do they mandate the type of information companies must reveal in their footnote disclosures.

These kinds of gaps in reporting standards seem like exceptionally ripe territory for earnings manipulation, which is generally aligned with lower long-term value.

Tesla in February 2021 announced that it had bought $1.5 billion worth of crypto and that it would accept Bitcoin as payment for cars. Two months later, it sold 10% of its stake, generating $101 million from the sale. CEO Musk has touted the value of Bitcoin and cryptocurrency in general.

“This should not be taken as some verdict on Bitcoin,” Musk told analysts on Wednesday. “It’s just that we were concerned about overall liquidity of the company given the Covid shutdowns in China.”

It is absolute malpractice on the part of corp FP&A and Treasury to invest cash long-term and then need to pull it a year later due to highly-foreseeable liquidity issues. To have invested that cash into the most volitile possible asset class is unthinkable. This should have been sitting in a money market fund. Shareholders would riot about this at any other company.

Wednesday, 20 July 2022
More Than 100 Million Americans Face Dangerous Heat Wave

More than 100 million Americans were in the path of a dangerous heat wave Wednesday, from the West to the Northeast, officials said.

The temperature was forecast to break the triple digits in states across the country, from California to Texas to New York, shattering records in some places, according to the National Weather Service.

July has been a relentlessly hot month in Europe, too, where a record-breaking heat wave has been blamed for hundreds of deaths across the continent. The heat and a drought fueled wildfires across swaths of Southern Europe, forcing thousands of people to evacuate their homes.

What do you think will happen to global economies and corporate valuations as this inevitably gets worse? Do mass evacuations, property destruction, infrastructure destructions, and natural resource destruction raise valuations?

Microsoft Cuts Many Open Job Listings in Weakening Economy

Microsoft Corp. is eliminating many open jobs, including in its Azure cloud business and its security software unit, as the economy continues to weaken.

I'd put this one down in the "we're not at the bottom, yet" column...

Monday, 18 July 2022
Sen. Joe Manchin Balks at Global Minimum Tax

The Biden administration’s international tax agenda suffered a setback when Sen. Joe Manchin rejected a 15% minimum tax on multinational companies this past week, dimming prospects of turning last year’s global tax agreement into reality.

Now the administration must try to urge other countries to go first and hope that momentum, pressure and the potential for lost revenue can compel a future Congress to act.

Last October’s deal had two key pieces. One, the minimum tax, would put a 15% floor under corporate tax rates. It was designed to help countries raise revenue and prevent companies from shifting profits into low-tax jurisdictions. It was designed to be optional but with mechanisms that encourage nations to join once a critical mass of countries have implemented the tax. That is the part that Mr. Manchin blocked this past week.

Global tax inconsistencies are such a drain on productivity, and hurt medium sized companies the most (though, multinational mega-corps would surely love to pare down their multi-thousand-headcount tax departments, I'm sure). This deal is a real opportunity to make progress on this front.

As Fed Tightens, Economists Worry It Will Go Too Far

Economists increasingly expect the Federal Reserve, in its efforts to push down inflation, to raise rates enough to trigger a recession, with many worrying the central bank will go too far.

Economists surveyed by The Wall Street Journal now put the chance of a recession sometime in the next 12 months at 49% in July, on average, up from 44% a month ago and just 18% in January.


There are hints that higher rates are already starting to bite. In addition to falling home sales, the two-year Treasury yield has risen above the 10-year Treasury yield, what economists call a yield-curve inversion. Yield-curve inversions signal that investors expect higher interest rates in the short run to lead to declining economic activity and future rate cuts—and historically have preceded recessions by 12 to 18 months. However, Mr. Berson cautions that downturns occur only after other short-term rates (such as the federal-funds rate) also rise above longer-term rates, and that hasn’t occurred yet.

Recessions are bad, and a lot of people get hurt during them. But at this point the alternative to a recession may be quite a bit worse...

Sunday, 17 July 2022
Wall Street Set for New ETF Gold Rush as Single-Stock Era Begins

The booming world of exchange-traded funds is about to get even more crowded after the very first single-equity ETFs launched Thursday

The eight products from AXS Investments look like the start of a coming invasion of amped-up strategies that will seek to enhance or invert the performance of volatile companies.

“We’re gonna see the floodgate absolutely open with new product launches in this arena,” said Nate Geraci, president of The ETF Store, an advisory firm. “So I think we’re gonna see ETF issuers blanket the market with all varieties of these ETFs: leverage, inverse, options overlays, you name it.”

Commissioner Crenshaw warned about putting the ETFs in the hands of retail traders in particular, saying that it would be challenging for investment advisers to recommend the products while honoring their fiduciary duties.

This is like the moment where you can see a car accident is about to happen. These things are going to be absolutly poisenous for retail traders, but a lot of them are going to eat this up.

Thursday, 14 July 2022
Commodities Never Belonged in Your Portfolio

If investors get in at a peak chasing fad portfolio construction techniques, the returns can be much worse.

The Bloomberg Commodities Index is a good illustration. On a spot basis, it is up 351% in the past two decades, a respectable 7.8% compound annual growth rate that’s just slightly behind the S&P 500 Index’s 9.3%. But that’s not what investors earn when they invest through financial instruments because it doesn’t account for the cost of rolling such futures contracts. Among other things, there’s a sizable cost associated with storing barrels of crude oil, tanks of natural gas and bushels of wheat. In part because of these additional costs, the total return version of the same index — based on financial instruments that track the commodities — is up only 50% in the same period (a meager 2% compound annual growth rate).

Chasing fads pretty much everywhere and always results in lower performance over the long term than a simple diversified buy-and-hold strategy.

Fed Could Weigh Historic 100 Basis-Point Hike After Inflation Scorcher

Investors bet that the Fed is more likely than not to raise interest rates by 100 basis points when it meets July 26-27, which would be the largest increase since the Fed started directly using overnight interest rates to conduct monetary policy in the early 1990s. Americans are furious over high prices, and critics blame the Fed for its initial slow response.

Rip off the bandaid.

Wednesday, 6 July 2022
Wall Street Says a Recession Is Coming. Consumers Say It's Already Here

Goldman Sachs Group Inc. economists put the risk of such a slump in the US in the next year at 30%. A Bloomberg Economics model sees a 38% chance in the same period, with the risks building beyond that time frame. But for many it already feels like it’s here. More than one-third of Americans believe the economy is now in a recession, according to a poll last month by CivicScience.

The worries among small business owners, consumers and others are illustrated by so-called Misery Indexes, which blend unemployment and inflation rates. The gauge for the US is already 12.2%, similar to levels witnessed at the start of the pandemic and in the wake of the 2008 financial crisis, according to Bloomberg Economics.

Yield curve is still surprisingly neutral on recession odds - but at some point once there are X many "Are we in a recession?" headlines, the answer itself seems moot.