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» » What the Banks Stock Rally Says About Wall Street - The New York Times

What the Banks Stock Rally Says About Wall Street - The New York Times

A strong batch of earnings have propelled bank stocks in recent days, but investors remain more cautious on the outlook of Goldman Sachs and Morgan Stanley.

Dialing back ambitions.
Mike Blake/Reuters

Much of the attention on Goldman Sachs’s earnings on Tuesday focused on the Wall Street firm’s reorganization, which de-emphasizes traditionally profitable, if volatile, businesses like M.&A. advice and elevates steadier operations like asset and wealth management. (It also splits up Goldman’s struggling consumer-lending unit.)

But yesterday’s results also highlight a split in big banks’ fortunes. Goldman and Morgan Stanley, which rely more on traditional Wall Street businesses, suffered from a slowdown in high-finance activities like deals and I.P.O.s that led to drops in revenue. By comparison, lenders like Bank of America, JPMorgan Chase and Wells Fargo that rely on Main Street for more of their business reported sales gains.

Not surprisingly, the latter group has outperformed the former as investors have broadly acquired bank stocks. Over the past five days, financials is the leading S&P 500 sector, up 6.4 percent, according to Fidelity.

The exception to the Main Street theme, of course, was Goldman, which has struggled for over a year to get its Marcus division to hit the lofty expectations set by its C.E.O., David Solomon.

On Tuesday’s earnings call, Solomon acknowledged that his strategy of making consumer banking a central business pillar had hit a rough patch. “There’s no question that the aspirations probably got, and were communicated in a way that were broader than where we’re now choosing to go,” he told analysts. “We are making it clear that we’re going back on some of that.”

Fed officials are likely to raise rates by three-quarters of a point next month. Plans for another big increase came after more signs of persistently high inflation, suggesting a need to keep cooling the economy. One small upside to inflation: Many Americans will probably pay less in taxes next year.

The U.S. will release more oil to blunt gasoline price increases. President Biden is expected to announce today that the Energy Department will release 15 million more barrels from the Strategic Petroleum Reserve. The move comes as the price of Brent crude oil dropped below $90 a barrel yesterday, for the first time in two weeks.

Netflix breaks a streak of losing subscribers. The streaming giant added 2.4 million new customers in the third quarter, allaying investor fears that the company couldn’t grow much more. The news sent Netflix shares up sharply in after-hours trading.

Workers at an Amazon warehouse near Albany, N.Y., reject unionization. Employees voted two-to-one against organizing, dealing another blow to the upstart Amazon Labor Union. The group has now lost two elections since winning a vote to organize a Staten Island warehouse in April.

Hong Kong introduces a $3.8 billion plan to stem an executive exodus. John Lee, the city’s leader, said there would be new visa and tax concessions for investors and businesses. The measures are the latest effort to revive Hong Kong after at least 140,000 workers left the city amid the pandemic and a sweeping political crackdown in the past two years.

Tesla reports its earnings after the market closes on Wednesday, and investors are in a foul mood. The company’s stock hit a 52-week low last week as Tesla bulls fret over whether its billionaire C.E.O., Elon Musk, will be forced to sell a trunkload of shares by the end of the month to finance his bid to buy Twitter.

Here’s why the Twitter financing question continues to hang over Tesla’s share price:

Musk has lined up $12.5 billion from banks, and he’s on the hook for the roughly $33 billion in equity financing that hasn’t been accounted for. He’s already sold about $15.5 billion in Tesla stock to cover some of that gap. And investors, largely his Silicon Valley friends, have offered to chip in $7.1 billion — or at least that was the case in the spring, when Musk was trying to rustle up outside funds to close the Twitter deal. Assuming nobody from that contingent has dropped out, Musk would still be short about $9 billion.

Bringing in new investors may be difficult, given how drastically the market has dropped since the spring — and Musk’s own antics haven’t done him any favors. The Tesla boss had been talking with Twitter investors, including its co-founder Jack Dorsey, about rolling over their stakes to help fund the acquisition, but that option is also probably out for the same reasons.

Meanwhile, Tesla short sellers have returned, said Ihor Dusaniwsky, managing director at S3 Partners, a data provider. In the 30-day period through Oct. 10, he said, Tesla shares fell 25.6 percent while the short interest grew by about 14 percent. “We saw 8.63 million shares of new short TSLA selling” in that period, he added.

Turbulent periods for the markets aren’t usually regarded as the best times for activist investors, the hedge funds that buy stakes in companies with the aim of forcing changes in corporate strategy, like selling businesses or doing stock buybacks.

But based on the packed crowd at the 13D Monitor Active-Passive Investor Summit in New York City on Tuesday — where the lines for coffee and macarons were scores deep with hedge fund executives, investment bankers and corporate lawyers — the business of activism is hotter than it has been in years. “I had to come late to the conference because I was so busy,” Darren Novak, JPMorgan Chase’s head of shareholder engagement and M&A capital markets for Europe, the Middle East and Africa, told DealBook.

Big-name activists are taking on corporate giants again. Third Point’s Dan Loeb disclosed in an investor letter that he had bought a stake in the consumer products giant Colgate-Palmolive, with an eye to persuading it to spin out its pet food business. And Starboard’s Jeff Smith publicly took aim at Salesforce at the conference, declaring that the company had a “subpar mix of growth and profitability.”

Activist investors are seizing their moment. While volatile markets are often seen as bad for the kinds of moves that these hedge funds recommend, attendees at the conference see a plethora of undervalued companies to push. They’re also benefiting from a securities rule change that requires companies to adopt universal proxy cards, making it easier for hedge funds to propose directors for shareholders to vote on.

“Periods of rising tides hide a lot of problems,” said Caitlin McSherry, director of investment stewardship at Neuberger Berman. “When the tides go out, you start to see more problematic situations expose themselves. And we are looking to take advantage of those situations.”

— Breon Peace, the U.S. attorney in Brooklyn, on the French cement company Lafarge secretly giving payouts to ISIS militants in northern Syria. Lafarge agreed yesterday to pay $778 million to settle the U.S. government’s case.

As Washington debates how to regulate crypto markets, a number of states aren’t waiting around for federal policymakers to act. Eleven states and the District of Columbia have taken action against the failed lender Voyager Digital, and about 40 states have sued Celsius Networks, the bankrupt crypto lender, led by Texas and Vermont.

Texas is a crypto mining haven, and investors are still showing lots of interest in the sector. “I’m blown away by the last two years and how markets are changing,” Joe Rotunda, director of enforcement at the Texas Securities Board, told DealBook. But he said states are being forced to lead enforcement efforts in crypto to protect investors. “The S.E.C. is nowhere to be found,” Rotunda said.

Rotunda launched an investigation of the crypto exchange FTX and its founder Sam Bankman-Fried, accusing it of selling unregistered securities to consumers; he is unsure if the S.E.C. is investigating the company too. (The S.E.C. declined to comment, and FTX did not respond to a request for comment.) Texas also asked a federal bankruptcy court in New York last week to block the $1.4 billion sale of Voyager to FTX, pending its investigation of the exchange and Bankman-Fried. What is certain, Rotunda said, is that the nation’s top securities cop has been following the states’ lead.

States drove the BlockFi legal deal. A case in point, Rotunda says, is the $100 million settlement that the crypto lending platform BlockFi agreed to pay the S.E.C. this year.

BlockFi offered products similar to those that are under scrutiny at FTX, and the states agreed that any resolution should require the company to register with the S.E.C. Under that deal, $50 million of the settlement was to go to 32 states.

Rotunda said it was the states that contacted the commission to join the enforcement actions and reach a settlement: “That case happened because of states. This would normally be handled by a national regulator.”

Deals

  • Meta, Facebook’s parent company, will sell the GIF platform Giphy to comply with a British antitrust regulator’s order. (NYT)

  • The Brazilian cosmetics company Natura is weighing a spinoff of its Aesop brand after having lost $12 billion in market capitalization since last summer. (Bloomberg)

  • The carmakers Renault and Nissan are said to be near a deal to reshape their alliance. (Bloomberg)

  • KKR plans to invest more in Japan, taking advantage of a cheaper yen and lower company valuations. (FT)

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