0.25 or 0.50? These are the numbers getting everyone’s knickers in a twist. The numerical obsession with interest rates is tied to the fact that stocks like low interest rates. The next FOMC meeting is in a few weeks’ time starting 31st January and Federal Reserve Governor Christopher Waller said last Friday “there appears to be little turbulence ahead, so I currently favor a 25-basis point increase at the FOMC’s next meeting.” And it’s not just Waller. Philadelphia Fed President Patrick Harker said in his view “hikes of 25 basis points will be appropriate going forward”. The expectation has been set.
Machine learns like lightening, very very frightening
Google and Alphabet CEO Sundar Pichai is frightened of future internet users turning to AI rather than using its search engine. It’s clear why: Sridhar Ramaswamy from Google’s ad team between 2013 and 2018, said that ChatGPT could prevent ChatGPT users from clicking on links with ads. Ads that generated approximately $208 billion dollars (81% of 2021 revenue). The recent lawsuit filed against Google by a coalition of 8 US states and the Department of Justice accusing them of ‘destroying competition in the ad tech industry’, may prove to be an untimely distraction. The demo version of Google Search with AI chatbot that Google promised by the firm later this year can’t come soon enough for shareholders.
Google needs a lawyer
The US Department of Justice along with eight states is suing Google. But before we get into that, let’s remind ourselves about the staggering worldwide backlash against Google’s dominance: a $2.73 billion fine by the EC in 2017, a $4.3 billion fine by the EU in 2018, a $1.49 billion fine by the EC once again – all for antitrust issues. Historical fines for Google in the US have been nowhere near these figures. This time around, the lawsuit is seeking to divest its advertising businesses as a way of opening up competition in the ad space. Are we about to see the US admonish one of its own corporate children?
Microsoft’s layoffs cost it a packet
Microsoft earned $2.32 per share. The market was expecting $2.29. All good in the hood. Microsoft said it recorded a charge of $1.2 billion for the quarter, $800 million of which related to the job cuts. Oh, there’s also a slowdown in its cloud and business software divisions for 2023 according to the company. “During the pandemic, there was rapid acceleration. I think we’re going to go through a phase today where there is some amount of normalization in demand,” Chief Executive Officer Satya Nadella. Microsoft earnings are important because it’s seen as an example of the wider tech sector, which also happens to have a major influence on the tech-heavy S&P 500. Its slowdown in December coupled with an acknowledgment of a general slowdown in PC sales forecasted for 2023 looks as though the recession is starting to influence forward earnings “In our commercial business we expect business trends that we saw at the end of December to continue” – Amy Hood, Cheif Financial Officer, Microsoft.
UK government likes debt
From £16.7 billion in December 2021, to £27.4 billion in December 2022, the UK government hits record borrowing. Way above expectations of £17.8 billion. Inflation, household energy bills assistance, student loans, and April’s national insurance policy reversal is to blame. A significant proportion of student loans will never be repaid and the government is forced to recognise this under new accounting rules adding to the indebtedness.
Recession in the UK
Two data points: 1) the S&P global CIPS UK flash composite purchasing managers’ index saw the ‘sharpest drop in business activity for two years’. January data highlighted a sustained downturn in UK private sector business activity. The overall rate of decline accelerated to its fastest for two years. “Weaker than expected PMI numbers in January underscore the risk of the UK slipping into recession”, Chris Williamson, chief business economist at S&P Global Market Intelligence. 2) Anna Leach, CBI Deputy Chief Economist, said: there are signs that demand is easing too, with order books weakening sharply, spare capacity in the manufacturing sector rising and the share of firms citing the strength of sales or orders as a potential constraint on output rising to its highest in almost two years.” If the patient is the UK economy, it’s like two doctors coming to more or less the same conclusion.
Boeing’s flying low
A $663 million loss for the fourth quarter and a $5 billion loss for the full year with a loss per share of £1.75 v expected earnings per share of 26 cents. It’s the sixth quarterly loss in a row. “While we have made meaningful progress, challenges remain and we have more work ahead to drive stability in our operations and within the supply chain,” Chief Executive Officer Dave Calhoun. Boeing is betting on a full re-opening in China and the easing of supply-chain issues that slowed the production of aircraft, especially jet engines. As an old-school value investor, I can’t help thinking back to the massive losses Warren Buffett suffered when he went full ham on airline stocks only to sustain huge losses. No thanks.
Tesla’s earnings turn south
You’ll see the headlines: record revenue at Tesla. What you won’t see, at least not as clearly, are earnings of $1.19 per share v $2.52 in the same quarter last year. Or that gross margins are the lowest in five years and operating cash flow is down 29% from last year. Tesla has already begun well-publicised price cuts on its vehicles which helped ramp up orders. Musk is upbeat about Tesla and thinks he can make up to 2 million vehicles this year which he says will all be sold if they can make them fast enough. ‘Twitter is actually an incredibly powerful tool for driving demand for Tesla’ Musk responded when asked if his political rants hurt the firm. He even had the gall to encourage other automakers to make use of Twitter for marketing their own brands. Elon is a well-received businessman here at Wealth Accumulated.
US Fourth quarter GDP down
A weakening housing market and a slowdown in corporate spending reduced fourth quarter GDP to 2.9% from 3.2% in the third quarter. Consumer spending (68% of GDP) increased 2.1%, fuelled largely by consumer debt, even as retail sales declined in December by 1.1%. Are consumers maxed out? Most commentators believe a recession is coming, albeit a mild one despite these numbers.
Earnings per share shot up 20% for the firm this week to 100.9p at the half-year stage. The company owns the most enviable portfolio of drinks brands in the world. Baileys, Johnnie Walker, Guinness, Smirnoff, and a suite of Scotch Whiskeys to name a few. Price rises for its products and an increase in consumers drinking its premium brands helped to boost revenue. It, like a lot of the large caps that sell to China, is betting on increased revenue in 2023 when China re-opens.
Just 10 cents per share and a $664 million net loss in the fourth quarter of 2022. Intel is predicting a net loss of $15 cents per share in the first quarter of 2023. Intel elected not to give full-year guidance for 2023 but did indicate $11 billion in sales in the March quarter, a 40% year-over-year decline. Their customers have a deluge of chips already and need to work through their supply before buying Intel chips again, at least that’s what analysts are saying.
Chevron pumps profits
Putin’s invasion of Ukraine has prompted what will no doubt be eye-watering earnings from the energy sector. Chevron made a record $36.5 billion profit for 2022, more than double the previous year. The $75 billion share buyback program it announced has President Biden calling it a ‘slap in the face’ for Americans coping with the ravages of flooding in California.
Rolls Royce is a burning platform
The CEO of Rolls Royce, Tufan Erginbilgic gave his employees an analogy: when an oil platform in the North Sea is on fire, you need to jump into the volatile and freezing water to survive. That’s what he meant when referring to the firm as a ‘burning platform’. Covid was dismissed as no more than an excuse for what he called the firm’s chronic underperformance. He will likely announce a brutal restructuring following up his tough words with tough action.