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Wall Street Breakfast: What Moved Markets

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Wall Street Breakfast: What Moved Markets

Stocks pushed higher Friday as the three major market benchmarks booked their best weekly percentage gains since November, after companies began reporting their fourth quarter earnings results, kicked off by several of the big banks. Bank of America, Citigroup, JP Morgan and Wells Fargo all ended higher even as some said they were expecting a mild recession. Investors initially had a subdued reaction to the numbers, focusing on a rise in expenses and provision losses, along with cautious outlooks. However, the bank stocks reversed course through the day and eventually finished higher. On the economic front, the University of Michigan consumer sentiment index climbed in January to its highest level in nine months, which followed December’s consumer price index data released Thursday showing prices declined slightly, boosting hopes that the Federal Reserve may soon slow its pace of interest rate hikes. For the week, the Nasdaq Composite surged 4.8% while the S&P 500 jumped 2.6% and the Dow Jones index added 2%.

Giving up control

Shares of Alibaba (BABA) climbed as much as 8% on Monday after founder Jack Ma eliminated his effective majority control over sister company Ant Group. The affiliate’s effort to go public fell apart back in 2020 when Ma’s criticism of Chinese regulators got both companies in hot water, scuttling what would have been the world’s largest IPO. At the time, Ant was planning a dual listing on the Shanghai and Hong Kong stock exchanges that would have raised a record $34.5B (Alibaba owns 33% of Ant).

backdrop: The 58-year-old Ma, whose estimated $34B fortune makes him one of China’s richest people, long served as a poster child for the Asian nation’s market economy. He co-founded Alibaba – essentially China’s version of Amazon (AMZN) – in his apartment in 1999 and grew it into one of the world’s largest companies. Alibaba’s mobile-payments platform Alipay is China’s answer to PayPal (PYPL), and it grew so big that Ma eventually set it and other Alibaba fintech units up as a separate company known as Ant Group.

Ma’s fortunes came crashing down days before the Ant IPO after he publicly criticized Communist China’s banking regulators during a speech. Regulators quickly canceled the Ant IPO’s Shanghai leg – reportedly on Chinese President Xi’s personal orders – and the company quickly nixed the Hong Kong IPO as well. China went on to implement a broader crackdown on tech companies, and ended up fining Alibaba a record $2.8B for alleged anti-competitive business practices.

On an upswing? Ma’s relinquishment of Ant Group control could now pave the way for regulators to lessen scrutiny of the company and other Chinese tech firms like Alibaba. It could also open the door for Ant to try to revive its IPO, which would presumably serve as a positive catalyst for BABA. Take a look at a new article from Seeking Alpha contributor Jonathan Weber, who looked at why Alibaba has already rallied more than 75% from its lows in just two months. (39 comments)

New mortgage playbook

Once one of the biggest mortgage lenders in the US, Wells Fargo (WFC) unveiled plans this week to step back from the housing market. Instead of going after the entire industry (its previous goal was a 40%-50% market share), the bank is shrinking its mortgage portfolio by restricting loans to only bank clients and minority borrowers. While the business was one of the company’s biggest profit generators over the years, things have gotten tougher amid regulatory pressure and higher interest rates.

That’s not all: Wells Fargo is shuttering its Correspondent lending business, in which the bank lends capital to other firms that sell mortgages as distinct providers. It’s a big deal, as the division accounted for nearly 40% of its mortgage volume as of Q3 2022. Wells Fargo is also reducing the size of its Servicing portfolio by selling billions of dollars worth of mortgage servicing rights to other players in the sector.

“We are making the decision to continue to reduce risk in the mortgage business by reducing its size and narrowing its focus,” said Kleber Santos, CEO of Consumer Lending. “Mortgage is an important relationship product… and we are acutely aware of Wells Fargo’s history since [the cross-selling scandal in] 2016 and the work we need to do to restore public confidence. As part of that review, we determined that our home-lending business was too large, both in terms of overall size and its scope.”

Outlook: In August, Seeking Alpha covered reports that Wells Fargo would dramatically reduce the size of its mortgage unit and would retrench from its commitment to be No. 1 in the business. It has also taken other steps to simplify its mortgage division over the past three years, like scaling back the refinancing of jumbo mortgages in 2020. As traditional banks continue to withdraw from the industry (JPMorgan (JPM) and BofA (BAC) surrendered mortgage share after the financial crisis), non-bank entities like Rocket Mortgage (RKT) and United Wholesale Mortgage (UWMC) have filled the void, although they are not as regulated and some say it could expose borrowers to additional risks. (55 comments)

Travel trouble

The operations of major US airlines including Delta (NYSE:DAL), Southwest (NYSE:LUV) and United (NASDAQ:UAL) were disrupted on Wednesday after a disruption stranded travelers across the country. When all was said and done, nearly 12,000 flights were delayed or canceled – within, into, or out of the United States. It also appeared to be the first nationwide grounding of domestic traffic in over two decades, with the last following the terrorist attacks of Sept. 11, 2001.

What happened? The Federal Aviation Administration traced the outage to a damaged database file on the computer system that generates alerts called NOTAMs, or Notice to Air Missions. Those notifications must be reviewed by pilots and airline dispatchers before takeoff, as they include details about bad weather, runway closures or nearby airspace activity. Officials also noted that the outage was not the result of a cyberattack, although a similar system interruption occurred in Canada on the same day.

Many of those systems “are old mainframe systems that are generally reliable, but they are out of date,” explained Tim Campbell, a former executive of air operations at American Airlines (NASDAQ:AAL).

Cloudy skies: The US aviation sector still struggled on Thursday, with 216 cancellations and nearly 7,000 delays, but many hope that things will clear up over the weekend. The disruption follows another turbulent period for the air travel industry, which resulted in government investigations. Over the holidays, Southwest Airlines canceled thousands of flights over the span of several days, citing problems with a legacy system that could not keep up with crew scheduling changes. Also this week, Airbus (OTCPK:EADSY) topped Boeing (BA) in the annual contest for plane deliveries for the fourth year in a row.

Getting to the core?

The major averages recorded modest gains on Thursday, extending a rally seen in the previous session, as investors bet new inflation statistics will allow the Fed to slow the pace of its interest rate hikes. The Nasdaq Composite (COMP.IND) and Dow (DJI) both roses 0.6%while the S&P 500 (SP500) finished the day 0.3% higher. Eight of the 11 S&P sectors also ended with gains, led by the greater-than-1% advances in Real Estate and Energy.

Quotes: “Market participants are now pricing in just two more 25 basis point rate hikes, which means the market believes that the Federal Reserve will soon change its outlook,” analyst Leo Nelissen told Seeking Alpha, but said that the expectations were a “dangerous game. ” Inflation is only coming down in select categories, like energy and vehicle prices, while other areas, like wages and housing, remain major issues the Fed will be forced to address to avoid a 1970s-style inflation rebound. “Any hawkish comments from the Fed or a reiteration of its outlook could be bad news for bulls.”

Specifically, the headline CPI slowed to a 6.5% annual increase in December, compared to the 7.1% seen in the previous reading. The core figure, which excludes the volatile food and energy sectors, showed a 5.7% rise, exactly matching projections. However, some “supercore” estimates, like the one that strips out things like medical insurance and airfare, still showed a 6.5% annualized pace.

What it means: As everyone talks about eggs, markets are now pricing in a 96% probability of a 25 bps hike at the end of the month, compared to the 77% chance that was seen prior to the data release, according to the CME’s FedWatch Tool. (16 comments)

No more pajamas

Less than two months back on the job, Disney (DIS) CEO Bob Iger seems to believe that the office is the Happiest Place on Earth. That’s because he told employees that they need to be back in their workplaces four days a week. The new requirement will go into effect on March 1, with staff coming in Monday through Thursday.

Quotes: “As you’ve heard me say many times, creativity is the heart and soul of who we are and what we do at Disney,” Iger wrote in an all-staff email. “In a creative business like ours, nothing can replace the ability to connect, observe, and create with peers that comes from being physically together, nor the opportunity to grow professionally by learning from leaders and mentors.”

While other companies have also been tightening return-to-office requirements, Iger’s demands fall on the heavier side of such restrictions. Most major media corporations have chosen to compel hybrid workers to come back into the office for two to three days per week, and Disney’s policy was also three days for much of the past year.

Go deeper: Iger reclaimed the CEO job from Bob Chapek in a surprise pre-Thanksgiving announcement. With a planned two-year stint, he’s set on making some profound changes including restructuring Disney’s distribution operations. A high-profile proxy fight also broke out at Disney this week as activist investor Nelson Peltz attempts to join the company’s board. (81 comments)

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