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Stocks Roar Higher On Bank Earnings, Economy!

One of the funny things about the stock market is that every time one person buys, another sells,
and both think they are astute. William A. Feather

When I was a student, one of the favorite places to go to eat was an Italian deli. Today, there is a deli chain in Las Vegas called Capriati’s that makes fabulous sandwiches. I don’t eat there very much, but my daughter loves the place. Personally, a nice Italian sub with some chips and a cold beverage makes for a great lunch. All over the world, deli’s are businesses which can have durability if they do a great job of making scrumptious food and taking care of customers. There are many which have been around for generations at one location. Others have grown into quite large enterprises, like Jimmy John’s, which was bought by a private equity company in 2019. At the time, it had over 2 billion in sales. The topic leads us to the little deli which has the investment world suddenly paying attention to it’s existence, courtesy of billionaire investor David Einhorn. So what did Mr. Einhorn say which brought this entity into focus?

In his annual shareholder letter to Greelight Capital investors, Mr. Einhorn commented that stocks can do funny things. As it pertains to deli’s, there is a publicly traded company called Hometown International (symbol HWIN). Last year it did a little less than 36 thousand in sales. The year before, even fewer. Currently, based on the market price, it is worth over one hundred million dollars. With more than a little sarcasm, Mr. Einhorn remarked the pastrami must be “amazing.” In this specific circumstance, Einhorn highlights what makes investing in the stock market interesting. On the surface, one would surmise that one hundred million dollars is probably not an accurate representation of the earnings power of Hometown International. It is possible that the real estate value of the Deli is quite substantial, though one could easily run through the neighborhood comparisons to find out. Maybe the company is developing an interesting product line which it will manufacture at scale? Personally, I would not be a buyer of HWIN at the current market price. More importantly, if you believe this is an extreme example of how there are specific situations where market prices don’t represent the realistic value of a business (way too high in this case), you could also come to a similar conclusion but in reverse. Yes, that would mean the market price of a business is way too low, and the stock could be a bargain. Einhorn used the deli example as a way to exacerbate his main point, which is that regulators of existing financial markets are very much abdicating their responsibility. He mentions Elan Musk and his free pass, along with VC superstar Chamath Palihapitiya as well. If you were to add Dave Portnoy’s recent rant about the lunacy of doge-coin hitting 30 cents, again, it calls into question the role of the financial regulators. With markets hitting new highs daily, there certainly are plenty of assets trading with rich valuations. In the defense of regulators, the SPAC craze has suddenly gotten cold. The SEC is now looking at how warrants of the SPAC’s are accounted for, as well as the projections SPAC sponsors are making on their road shows. It appears that too often, a company with five million in revenues today is projecting 5 billion in revenues three years from now. Just like that, snap, five billion in three years. Hmm, maybe those sponsors have been eating some pastrami from Hometown International?

In the markets this week, the largest banks all posted big earnings beats, helped by the release of accumulated reserves. Chase, Goldman, Wells, Citi, and Bank of America were all part of the party. Coinbase went public at a valuation of nearly 100 billion dollars, almost on par with some of the largest investment and commercial banks in the globe. On the macro front, jobless claims came in at the lowest numbers since the start of the Covid crisis last year. Nice to see and I hope it continues. In the energy area, a draw down of inventory helped oil prices firm. Many believe oil prices will be the data point to watch in terms of inflation expectations. The inflation issue is linked to what happens with interest rates. Interest rates are the discounting mechanism for all assets. All are linked, kind of like mustard, and rye bread with a good pastrami sandwich. Sorry had to get it in there. Next week the earnings parade continues with heavyweights like Coke, JNJ, Abbott Labs, Netflix, Travelers, Verizon and others. On that note, thank you for reading the blog this week, and if you have any questions about investing, please email me at information@y-hc.com.

Yale Bock, Y H & C Investments, its clients, and the family of Yale Bock have positions in the securities mentioned in the blog,  Investing in securities involves risk and the potential loss of ones principal.  Past performance is no guarantee of future results.  All investment decisions should be considered with respect to ones risk tolerance, return objectives, liquidity needs, tax considerations, and one’s overall financial situation.  The fact that Yale Bock has earned the right to use the CFA designation does not mean Y H & C Investments will outperform broad market indexes.

Markets Move Higher On Reopening Optimism!

“Borrow at three, lend at six, be on the golf course by three.”

Banking is a notoriously challenging business, but over the last few decades, the largest banks have increasingly gained market share from smaller competitors. The largest banks, called money centers, have a wide variety of business lines which make them less dependent on traditional retail banking. Retail banking revolves around taking deposits from customers, and then either lending out 90% of those deposits at higher interest rates, or investing in assets which generate income, like Treasury notes or bonds. Banks often borrow sums against the value of those deposits to make more money with the loans that are underwritten. Commercial banking is linked to retail banking, with bank lending going to commercial entities, think businesses and real estate owners or developers. Investment banking is a different business line, involving the underwriting of stocks and bonds, currencies, and commodities (along with options on those assets). They also provide advice to businesses on mergers and acquisitions, or helping hedge funds raise money and invest, called prime brokerage. Over the last fifty years, banks have increasingly added other business lines like payments for debit and credit cards, mortgage lending, auto lending, and asset management. You can see there are a wide range of business activities a bank can have. The one constant with banking is it is potentially a very profitable business, but risk management is the highest priority. Over the last few weeks, as the financial world learned about the blow up at Archegos, the bread crumbs get followed to the banks which financed it’s actions. Let us turn to two entities, Credit Suisse and JP Morgan Chase.

Credit Suisse is one of the largest banks in Europe and does a large amount of business in Asia. It’s primary two lines of business are wealth management and investment banking. Over the last five years, it showed improved performance but the last year has seen multiple errors in risk management wipe out a great deal of capital, along with it’s highly valued Swiss banking reputation. Over the last five days, the head of it’s investment bank and it’s chief risk manager got shown the door only six months after they replaced their predecessors. The Archegos scandal will cost the bank a cool billion for the quarter, only a few short days after revealing a supply chain financing problem as well. From a competitive standpoint, I am sure the leadership at UBS is taking a good hard look at the issues at Credit Suisse to see how they could potentially capitalize. There are probably five other large banking entities doing the same thing. One of them, without question, is JP Morgan Chase. JP Morgan turned down business from Archegos, while Credit Suisse did not. Enough said. Let’s delve a little closer into JP Morgan Chase, shall we?

It is run by the legendary banker and leader, Jamie Dimon. Mr. Dimon released his annual shareholder letter last week, and for any business person, I would highly recommend reading it. Chase is number one or two in every business line, and will generate nearly fifty billion dollars of operating profit on over one hundred and twenty billion dollars of revenue. It is the most profitable bank in the United States and has the highest market value of any bank in the world. Yet, it’s leader emphasized in the letter that banks will be threatened by fin tech companies like Amazon, Google, and Facebook, among others. He discusses a wide variety of business and competitive issues, along with societal challenges and political dysfunction. More importantly, he comes up with ways to attempt solve the problems. In hindsight, one of the great opportunities I missed out on that was right in my wheelhouse was when Mr. Dimon became the CEO at Bank One. I was well aware of how good a leader he is, and did not pull trigger when he took over that entity. Live and learn, and the important lesson I learned is when you know how high quality a leader is and have the chance to invest with them at the ground floor, you are making a big mistake if you do not.

Elsewhere, JNJ had to cut back production of it’s Covid vaccine because of supply chain issues. It could potentially be a setback for the country and world in terms of how long it will take to vaccinate the majority of our citizens. Here in Las Vegas and other parts of the United States, optimism about the recovery seems to be accelerating, at least from my perspective. Las Vegas seems as busy as it ever was and we are only at fifty percent capacity at the hotels. The Caesars CEO made comments emphasizing the hotel chain’s strong bookings here in Vegas. The next few months will be important in terms of maintaining the vaccination progress, and the emerging strains bear continued monitoring, but hopefully there is a good chance by the end of the year the United States will be starting to move past the Covid virus. Next week, the largest banks will be reporting their earnings, and you can bet the investment community will be watching their risk management comments quite closely.

Thank you for reading the blog this week, and if you have any questions about investing, please email me at information@y-hc.com.

Yale Bock, Y H & C Investments, its clients, and the family of Yale Bock have positions in the securities mentioned in the blog,  Investing in securities involves risk and the potential loss of ones principal.  Past performance is no guarantee of future results.  All investment decisions should be considered with respect to ones risk tolerance, return objectives, liquidity needs, tax considerations, and one’s overall financial situation.  The fact that Yale Bock has earned the right to use the CFA designation does not mean Y H & C Investments will outperform broad market indexes.

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