Hello Voornaam,
Welcome to another Ingham Analytics weekly research summary, highlighting pertinent local and international financial newsflow, recent notes that we have published, and what has been among some of the most read notes in the past few weeks or months.
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As a reminder, we are not all South Africa focused. The JSE has become a shrinking goldfish bowl with fewer opportunities with each passing year. We span the globe. The research effort is spearheaded by Mark and Andrew with contributions and assistance from other professionals.
Mark, the MD, is an industry veteran bringing a powerful combination of analysis and international asset management skills to the business. He also serves as the Chief Investment Officer of a prominent Family Office with interests around the world. Andrew is one of the top traders and financial markets educationalists in South Africa with a wealth of international experience valued by clients locally and overseas.
We strive to help the traders and investors who absorb our research navigate extreme volatility. Volatility can bring opportunity, but it also springs beartraps for the unwary - we've had a few of those in our time. The notes are punchy, in plain English, and have a high conviction call to action. There is both a macro and micro approach. Getting some small spreadsheet detail right is hardly helpful if the forest around you is burning down.
As a value add we run webinars that are bespoke to the needs of our customer. Andrew too does generalist and specialist practically orientated courses for both retail investors and employees of financial institutions, such as commercial banks and even central banks.
We live in a time of market turbulence, more so than the global financial crisis over a decade ago. Stock, bond, commodity, and foreign exchange market shocks are sudden and chaotic. This has been precipitated by a rolling health crisis, not initially a financial one, but it does have dramatic economic effects due to the closure of whole economies - even in wartime that rarely happens.
Last week we checked in on Berkshire Hathaway, Tech mania, and gold. If you missed that and are interested, please send us a message via the Contact Us section of the website and we'll send you a mail with the content. In this edition, we're checking in on US banking and the entertainment phenomenon that is Netflix.
The big newsflow this week for those interested in US banking are the Q2 results from Bank of America, Citigroup, JP Morgan Chase, and Wells Fargo whilst entertainment enthusiasts will have been interested in what Netflix had to say in their Q2 results released on Thursday - and no doubt the large intraday share price movements.
The impact of COVID-19 was evident in both Netflix and the banks' results.
It was the US financial sector that precipitated the GFC but this time regulatory oversight is far stiffer and balance sheets healthier. European banks are troublesome, largely due to EU issues but that is a story for another day. But the US banks, and indeed Australian and New Zealand banks, are in better shape.
Bank of America set aside $5.12bn on top of the $4.76bn last quarter. This is the second-largest US bank by assets with a big local customer base so it is especially sensitive to the state of the economy. JPMorgan Chase, Citi, and Wells Fargo all put away $28bn in provisions Q2 so that makes $33bn in Q2 for the four of them.
$33bn seems like a lot but these big four US "money center" banks but despite credit loss provisions being higher in nominal terms than 2008, this is not 2008 - balance sheets are way stronger and capital adequacy ratios higher. Capital adequacy as measured by Basel III tier 1 is 12.4% for JP Morgan, 11.5% for Citi, 11.4% for Bank of America, and 10.9% for Wells Fargo - whilst the lowest it is 1.9% above the regulatory minimum of 9%.
Whilst we are lukewarm on banks in general, and avoid the big four in South Africa, if we had to pick one of the US four it would be JP Morgan. We believe it to be the stronger of the US high street banks. JP Morgan is still paying a quarterly dividend which will give you a gross annual yield of 3.6%.
Based to 100: JP Morgan Chase, Wells Fargo, Bank of America and Citigroup based to 100 year-to-date
In the US, JP Morgan also has a large capital markets operation, which Wells Fargo does not. Capital markets business has benefitted from market turbulence, but investors should recall that it is transient. For the quarter, JP Morgan total market revenue grew 79% with fixed income up 99% and equity markets up 38%.
What is interesting about these US bank results is deposits. Customers all put more cash in the bank. At JP Morgan deposits were up 20%.
These US banking results came out after our note issued 14 July entitled "US data provides a chink of light in COVID-19 gloom." In that note, we said that there is good news on US real economy if one digs. During March through May 2020, personal consumer spending dropped by $1.36 trillion year-over-year. Disposable personal income was up $1.36 trillion year-over-year. Personal savings increased by $2.76 trillion from a year earlier, which is roughly the drop in spending added to the increase in disposable personal income.
There has never previously been a near $1.4 trillion yearly fall in consumer spending alongside a $2.8 trillion yearly rise in personal savings. The US savings rate hit 23.5%. The personal savings rate has gone from 8% in March through May 2019 to 23% in March through May 2020.
We also noted that In May, car sales in America were up 41.8% and then 5.7% in June, a 13m units annualized pace of sales for cars and light trucks.
Car sales are durables and so are homes. The May index of pending sales of US existing homes was 44% up from April. US mortgage applications for the purchase of a home also point to bouncy home sales for June and July. June's average index of mortgage applications from potential homebuyers was up 21% from May and up 16% from June 2019 to a new record high. A homebuyer mortgage applications index for the week-ended 3 July was up 5.3% from the previous week to a new high for all weekly readings since September 2011. The 3 July homebuyer mortgage applications index was up 18% from a year earlier.
Data also point to an increase in the lumber futures contract in the US - which means more house building.
Our conclusion is that when US businesses get back up and running in the US this phenomenal rise in personal savings is likely to help fund a rise in consumer spending. With the US economy still the engine room of world consumption, there are seeds in these numbers that are encouraging for a bounce-back and thus implications for the world in general.
Netflix is one of our preferred "Tech" stocks and despite the pullback on Friday has given a 50% ytd return.
NFLX share price in USD
The Q2 numbers need to be seen in the context of what we observed in Q1 too. There is an element of "stealing" subscribers from the future in Q1 (especially the last two weeks of Q1) and Q2 (paid memberships up 10.1m). COVID-19 is a factor here, including production scheduling, and the question is how much will be retained in future. Non-GAAP EBITDA in Q2 increased by 78% to $1,488.8m off a 25% rise in revenue to $6,148m whilst free cash flow exceeded $1bn.
The share price of Netflix can react quite markedly to subscriber expectation hits and misses, which is largely nonsense in the short term as you can't extrapolate a longer-term pattern from quarterly ups and downs. Management don't run Netflix for the next set of results, they are here for the long run.
Traders in Netflix stocks fixate on subscriber numbers and we see algorithmic trading kick in after-hours on the day Netflix results are released so bear this in mind if you're in the market to buy or sell NFLX.
Traders do take out straddles (put and call) on this stock but this is for volatility, not momentum one way or another. Netflix options implied a 12% move in either direction on Friday, higher than normal - that means the because the stock closed $523 on Thursday, Netflix would have to close on Friday higher than $586 or lower than $460 for the buyer of a straddle to make money. After-hours trading aligned with that but when the dust settled on Friday the stock closed out at $493.
This week we also issued "(I)n (M)y (F)ace.....and yours", a pun in the title on the International Monetary Fund and what that institution could play - or not play - at a time when South Africa is perilously close to imminent bankruptcy - a debt trap - of its own making. Not palatable but we don't shirk from calling a spade a spade.
Finally, in "Rating retreat" issued on 9 July, we concluded with the recommendation "for those interested in having a stake in the banking sector Capitec is one to consider, provided you have the right risk appetite and take a modest position in relation to your total portfolio. Rand cost averaging is our way to go". The stock price was R800 when we issued the note. On Friday, it closed at R861, at which level new money will have to wait.
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