Berkshire Hathaway’s big mystery stock wager could be revealed soon

Warren Buffett tours the grounds at the Berkshire Hathaway Annual Shareholders Meeting in Omaha Nebraska.

David A. Grogan | CNBC

Berkshire Hathaway, led by legendary investor Warren Buffett, has been making a confidential wager on the financial industry since the third quarter of last year.

The identity of the stock — or stocks — that Berkshire has been snapping up could be revealed Saturday at the company’s annual shareholder meeting in Omaha, Nebraska.

That’s because unless Berkshire has been granted confidential treatment on the investment for a third quarter in a row, the stake will be disclosed in filings later this month. So the 93-year-old Berkshire CEO may decide to explain his rationale to the thousands of investors flocking to the gathering.

The bet, shrouded in mystery, has captivated Berkshire investors since it first appeared in disclosures late last year. At a time when Buffett has been a net seller of stocks and lamented a dearth of opportunities capable of “truly moving the needle at Berkshire,” he has apparently found something he likes — and in the financial realm no less.

That’s an area he has dialed back on in recent years over concerns about rising loan defaults. High interest rates have taken a toll on some financial players like regional U.S. banks, while making the yield on Berkshire’s cash pile in instruments like T-bills suddenly attractive.

“When you are the GOAT of investing, people are interested in what you think is good,” said Glenview Trust Co. Chief Investment Officer Bill Stone, using an acronym for greatest of all time. “What makes it even more exciting is that banks are in his circle of competence.”

Under Buffett, Berkshire has trounced the S&P 500 over nearly six decades with a 19.8% compounded annual gain, compared with the 10.2% yearly rise of the index.

Coverage note: The annual meeting will be exclusively broadcast on CNBC and livestreamed on CNBC.com. Our special coverage will begin Saturday at 9:30 a.m. ET.

Veiled bets

Berkshire requested anonymity for the trades because if the stock was known before the conglomerate finished building its position, others would plow into the stock as well, driving up the price, according to David Kass, a finance professor at the University of Maryland.

Buffett is said to control roughly 90% of Berkshire’s massive stock portfolio, leaving his deputies Todd Combs and Ted Weschler the rest, Kass said.

While investment disclosures give no clue as to what the stock could be, Stone, Kass and other Buffett watchers believe it is a multibillion-dollar wager on a financial name.

That’s because the cost basis of banks, insurers and finance stocks owned by the company jumped by $3.59 billion in the second half of last year, the only category to increase, according to separate Berkshire filings.

At the same time, Berkshire exited financial names by dumping insurers Markel and Globe Life, leading investors to estimate that the wager could be as large as $4 billion or $5 billion through the end of 2023. It’s unknown whether that bet was on one company or spread over multiple firms in an industry.

Schwab or Morgan Stanley?

If it were a classic Buffett bet — a big stake in a single company —  that stock would have to be a large one, with perhaps a $100 billion market capitalization. Holdings of at least 5% in publicly traded American companies trigger disclosure requirements.

Investors have been speculating for months about what the stock could be. Finance covers all manner of companies, from retail lenders to Wall Street brokers, payments companies and various sectors of insurance.

Charles Schwab or Morgan Stanley could fit the bill, according to James Shanahan, an Edward Jones analyst who covers banks and Berkshire Hathaway.

“Schwab was beaten down during the regional banking crisis last year, they had an issue where retail investors were trading out of cash into higher-yielding investments,” Shanahan said. “Nobody wanted to own that name last year, so Buffett could’ve bought as much as he wanted.”

Other names that have been circulated — JPMorgan Chase or BlackRock, for example, are possible, but may make less sense given valuations or business mix. Truist and other higher-quality regional banks might also fit Buffett’s parameters, as well as insurer AIG, Shanahan said, though their market capitalizations are smaller.

More from Berkshire Hathaway’s Annual Meeting

Buffett & banks

Berkshire has owned financial names for decades, and Buffett has stepped in to inject capital — and confidence — into the industry on multiple occasions.

Buffett served as CEO of a scandal-stricken Salomon Brothers in the early 1990s to help turn the company around. He pumped $5 billion into Goldman Sachs in 2008 and another $5 billion into Bank of America in 2011, ultimately becoming the latter’s largest shareholder.

But after loading up on lenders in 2018, from universal banks like JPMorgan to regional lenders like PNC Financial and U.S. Bank, he deeply pared his exposure to the sector in 2020 on concerns that the coronavirus pandemic would punish the industry.

Since then, he and his deputies have mostly avoided adding to his finance stakes, besides modest positions in Citigroup and Capital One.

‘Fear is contagious’

Last May, Buffett told shareholders to expect more turbulence in banking. He said Berkshire could deploy more capital in the industry, if needed.

“The situation in banking is very similar to what it’s always been in banking, which is that fear is contagious,” Buffett said. “Historically, sometimes the fear was justified, sometimes it wasn’t.”

Wherever he placed his bet, the move will be seen as a boost to the company, perhaps even the sector, given Buffett’s track record of identifying value.

It’s unclear how long regulators will allow Berkshire to shield its moves.

“I’m hopeful he’ll reveal the name and talk about the strategy behind it,” Shanahan said. “The SEC’s patience can wear out, at some point it’ll look like Berkshire’s getting favorable treatment.”

— CNBC’s Yun Li contributed to this report.

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Bitcoin, AI and Magnificent 7: The emerging ETF trends as industry gathers for big conference

Over two thousand attendees are descending on the Fontainebleau Hotel in Miami Beach for the annual Exchange ETF conference. To entice participants, the organizers rented out the entire LIV Nightclub Miami at the hotel for a Super Bowl party Sunday night.

While much of the conference is an excuse to party among the ETF industry reps and the Registered Investment Advisors  (RIAs) that are the main attendees, the industry needs a lot of advice.

The Good news: still lots of money coming in, but the industry is maturing

The ETF juggernaut continues to rake in money, now with north of $8 trillion in assets under management.  Indexing/passive investing, the main impetus behind ETFs 30 years ago, continues to bring in new adherents as smarter investors, including the younger ones that have begun investing since the pandemic, come to understand the difficulty of outperforming the market.

The bad news is much of the easy money has already been made as the industry is now reaching middle aged. Just about every type of index fund that can be thought of is already in existence. 

To grow, the ETF industry has to expand the offerings of active management and devise new ways to entice investors.  

Actively managed strategies did well in 2023, accounting for about a quarter of all inflows.  Covered call strategies like the JPMorgan Equity Premium Income ETF (JEPI), which offered protection during a downturn, raked in money.  But with the broad markets hitting new highs, it’s not clear if investors will continue to pour money into covered call strategies that, by definition, underperform in rising markets.

Fortunately, the industry has proven very skilled at capturing whatever investing zeitgeist is in the air.  That can range from the silly (pot ETFs when there was no real pot industry) to ideas that have had some real staying power.

Six or seven years ago, it was thematic tech ETFs like cybersecurity or electric vehicles that pulled in investors. 

The big topics in 2024:  Bitcoin, AI, Magnificent 7 alternatives

In 2024, the industry is betting that the new crop of bitcoin ETFs will pull in billions.  Bitcoin for grandma?  We’ll see.

Besides bitcoin, the big topics here in Miami Beach are 1) A.I/ and what it’s going to do for financial advisors and investors, and 2) how to get clients to think about equity allocation beyond the Magnificent 7.

Notably absent is China investing.

Bitcoin for grandma?  Financial advisors are divided on whether to jump in

Ten spot bitcoin ETFs have successfully launched.  The heads of three of those, Matt Hougan, chief investment officer at Bitwise, Steve Kurz, global head of asset management at Galaxy and David LaValle, global head of ETFs at Grayscale, will lead a panel offering advice to financial advisors, who seem divided on how to proceed.

Ric Edelman, the founder of Edelman Financial Engines, the #1 RIA in the country and currently the head of the Digital Assets Council of Financial Professionals (DACFP), will also be present. 

Edelman has long been a bitcoin bull. He recently estimates bitcoin’s price will reach $150,000 within two years (about three times its current price), and has estimated that Independent RIAs, who collectively manage $8 trillion, could invest 2.5% of their assets under management in crypto in the next two to three years, which would translate into over $154 billion.

Inflows into bitcoin ETFs to date have been modest, but bitcoin ETFs are being viewed by some advisors as the first true bridge between traditional finance and the crypto community. 

But many advisors are torn about recommending them, not just because of the large number of competing products, but because of the legal minefields that still exist around bitcoin, specifically around SEC Chair Gary Gensler’s warning that any financial advisor recommending bitcoin would have to be mindful of “suitability” requirements for clients.

For many, those suitability requirements, along with the high volatility, continuing charges of manipulation, and the doubt about bitcoin as a true asset class will be enough to keep them away. 

The bitcoin ecosystem is in going into overdrive to convince the RIA community otherwise.

 Artificial intelligence: What can it do for the investing community?

Thematic tech investing (cybersecurity, robotics, cloud computing, electric vehicles, social media, etc.) has waxed and waned in the last decade, but there is no doubt Artificial Intelligence ETFs (IRBT, ROBT, BOTZ)  has recaptured some interest.  The problem is defining what an AI investment looks like and which companies are exposed to AI.

But the impact is already being felt by the financial advisory community.

Jason Pereira, senior partner & financial Planner, Woodgate Financial, is speaking on how financial advisors are using artificial intelligence.  There are amazing AI tools that financial advisors can now use.  Pereira describes how it is now possible to generate financial podcasts with just snippets of your own voice.  Just plug in a text, and it can generate a whole podcast without ever saying the actual words.  How to generate text?  In theory, you could go to Chat GPT and say, for example, “Write 500 words about current issues in 401(k)s,” and rewrite it slightly for a specific audience.

In a world where a million people can now generate a podcast on financial advice, how do you maintain value?  Much of the lower skilled tasks (data analysis) will quickly become commodified, but Pereira believes a very big difference will quickly emerge between volume and quality.

Equity Allocation Beyond the Magnificent Seven

Financial advisors are beset by clients urging them to throw money at the Magnificent 7.  Roundhill’s new Magnificent 7 ETF (MAGS) has pulled in big money in the last few months, now north of $100 million in assets under management.

Since the end of last year, there have been enormous inflows into technology ETFs (Apple, Microsoft, NVIDIA), and modest inflows into communications (Meta and Alphabet) and consumer discretionary (Amazon).  Most everything else has languished, with particular outflows in energy, health care, and materials. 

Advisors are eager for advice on how to talk to clients about the concentration risks involved in investing solely in big-cap tech and how to allocate for the long haul. 

Alex Zweber, managing director investment strategy at Parametric and Eric Veiel, head of global investments and CIO at T. Rowe Price are leading a panel on alternative approaches that have had some success recently, including ETFs that invest in option overlays, but also on quality and momentum investing in general, which overlaps but is broader than simply investing in the Magnificent 7.

Stop talking about numbers and returns and start offering “human-centric” advice

Talk to any financial advisor for more than a few minutes, and they will likely tell you how difficult it is dealing with some clients who are convinced they should put all their money into NVIDIA, or Bolivian tin mines, or who have investing ADHD and want to throw all their money in one investment one day, then pull it out the next.

Brian Portnoy and Neil Bage, co-founders of Shaping Wealth, are leading one of the early panels on how financial advisors can move away from an emphasis on numbers and more toward engaging with their clients on a more personal and emotional level.

Sounds touchy-feely, but competition for clients has become intense, and there is a new field emerging on how to provide financial advice that is less centered on numbers (assets under management, fees, quarterly statements), and more centered on developing the investor’s understanding of behavioral finance and emotional intelligence. 

Under this style of investment advice, often called “human-centric” or “human-first” advice, more time may be spent discussing behavioral biases that lead to investing mistakes than on stock market minutiae. This may help the clients develop behaviors that, for example, are better suited to longer term investing (less trading, less market timing).  

Advocates of this approach believe this is a much better way to engage and keep clients for the long term.

What’s missing? China

For years, a panel on international investing, and specifically emerging markets/China investing, was a staple at ETF conferences.

Not anymore.  Notably absent is any discussion of international investing, but particularly China, where political risk is now perceived to be so high that investors are fleeing China and China ETFs. 

Indeed, investing “ex-China” is a bit of a thing.

The iShares Emerging Markets ex-China ETF (EMXC) launched with little fanfare in 2017 and had almost no assets under management for several years.  That changed in late 2022, when China ETFs began a long slow descent, and inflows exploded into EMXC from investors who still wanted emerging market exposure, just not to China.

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GPT and other AI models can’t analyze an SEC filing, researchers find

Patronus AI co-founders Anand Kannappan and Rebecca Qian

Patronus AI

Large language models, similar to the one at the heart of ChatGPT, frequently fail to answer questions derived from Securities and Exchange Commission filings, researchers from a startup called Patronus AI found.

Even the best-performing artificial intelligence model configuration they tested, OpenAI’s GPT-4-Turbo, when armed with the ability to read nearly an entire filing alongside the question, only got 79% of answers right on Patronus AI’s new test, the company’s founders told CNBC.

Oftentimes, the so-called large language models would refuse to answer, or would “hallucinate” figures and facts that weren’t in the SEC filings.

“That type of performance rate is just absolutely unacceptable,” Patronus AI co-founder Anand Kannappan said. “It has to be much much higher for it to really work in an automated and production-ready way.”

The findings highlight some of the challenges facing AI models as big companies, especially in regulated industries like finance, seek to incorporate cutting-edge technology into their operations, whether for customer service or research.

The ability to extract important numbers quickly and perform analysis on financial narratives has been seen as one of the most promising applications for chatbots since ChatGPT was released late last year. SEC filings are filled with important data, and if a bot could accurately summarize them or quickly answer questions about what’s in them, it could give the user a leg up in the competitive financial industry.

In the past year, Bloomberg LP developed its own AI model for financial data, business school professors researched whether ChatGPT can parse financial headlines, and JPMorgan is working on an AI-powered automated investing tool, CNBC previously reported. Generative AI could boost the banking industry by trillions of dollars per year, a recent McKinsey forecast said.

But GPT’s entry into the industry hasn’t been smooth. When Microsoft first launched its Bing Chat using OpenAI’s GPT, one of its primary examples was using the chatbot to quickly summarize an earnings press release. Observers quickly realized that the numbers in Microsoft’s example were off, and some numbers were entirely made up.

‘Vibe checks’

Part of the challenge when incorporating LLMs into actual products, say the Patronus AI co-founders, is that LLMs are nondeterministic — they’re not guaranteed to produce the same output every time for the same input. That means that companies will need to do more rigorous testing to make sure they’re operating correctly, not going off-topic, and providing reliable results.

The founders met at Facebook parent company Meta, where they worked on AI problems related to understanding how models come up with their answers and making them more “responsible.” They founded Patronus AI, which has received seed funding from Lightspeed Venture Partners, to automate LLM testing with software, so companies can feel comfortable that their AI bots won’t surprise customers or workers with off-topic or wrong answers.

“Right now evaluation is largely manual. It feels like just testing by inspection,” Patronus AI co-founder Rebecca Qian said. “One company told us it was ‘vibe checks.'”

Patronus AI worked to write a set of more than 10,000 questions and answers drawn from SEC filings from major publicly traded companies, which it calls FinanceBench. The dataset includes the correct answers, and also where exactly in any given filing to find them. Not all of the answers can be pulled directly from the text, and some questions require light math or reasoning.

Qian and Kannappan say it’s a test that gives a “minimum performance standard” for language AI in the financial sector.

Here’s some examples of questions in the dataset, provided by Patronus AI:

  • Has CVS Health paid dividends to common shareholders in Q2 of FY2022?
  • Did AMD report customer concentration in FY22?
  • What is Coca Cola’s FY2021 COGS % margin? Calculate what was asked by utilizing the line items clearly shown in the income statement.

How the AI models did on the test

Patronus AI tested four language models: OpenAI’s GPT-4 and GPT-4-Turbo, Anthropic’s Claude 2 and Meta’s Llama 2, using a subset of 150 of the questions it had produced.

It also tested different configurations and prompts, such as one setting where the OpenAI models were given the exact relevant source text in the question, which it called “Oracle” mode. In other tests, the models were told where the underlying SEC documents would be stored, or given “long context,” which meant including nearly an entire SEC filing alongside the question in the prompt.

GPT-4-Turbo failed at the startup’s “closed book” test, where it wasn’t given access to any SEC source document. It failed to answer 88% of the 150 questions it was asked, and only produced a correct answer 14 times.

It was able to improve significantly when given access to the underlying filings. In “Oracle” mode, where it was pointed to the exact text for the answer, GPT-4-Turbo answered the question correctly 85% of the time, but still produced an incorrect answer 15% of the time.

But that’s an unrealistic test because it requires human input to find the exact pertinent place in the filing — the exact task that many hope that language models can address.

Llama 2, an open-source AI model developed by Meta, had some of the worst “hallucinations,” producing wrong answers as much as 70% of the time, and correct answers only 19% of the time, when given access to an array of underlying documents.

Anthropic’s Claude 2 performed well when given “long context,” where nearly the entire relevant SEC filing was included along with the question. It could answer 75% of the questions it was posed, gave the wrong answer for 21%, and failed to answer only 3%. GPT-4-Turbo also did well with long context, answering 79% of the questions correctly, and giving the wrong answer for 17% of them.

After running the tests, the co-founders were surprised about how poorly the models did — even when they were pointed to where the answers were.

“One surprising thing was just how often models refused to answer,” said Qian. “The refusal rate is really high, even when the answer is within the context and a human would be able to answer it.”

Even when the models performed well, though, they just weren’t good enough, Patronus AI found.

“There just is no margin for error that’s acceptable, because, especially in regulated industries, even if the model gets the answer wrong 1 out of 20 times, that’s still not high enough accuracy,” Qian said.

But the Patronus AI co-founders believe there’s huge potential for language models like GPT to help people in the finance industry — whether that’s analysts, or investors — if AI continues to improve.

“We definitely think that the results can be pretty promising,” said Kannappan. “Models will continue to get better over time. We’re very hopeful that in the long term, a lot of this can be automated. But today, you will definitely need to have at least a human in the loop to help support and guide whatever workflow you have.”

An OpenAI representative pointed to the company’s usage guidelines, which prohibit offering tailored financial advice using an OpenAI model without a qualified person reviewing the information, and require anyone using an OpenAI model in the financial industry to provide a disclaimer informing them that AI is being used and its limitations. OpenAI’s usage policies also say that OpenAI’s models are not fine-tuned to provide financial advice.

Meta did not immediately return a request for comment, and Anthropic didn’t immediately have a comment.

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As the market enters correction territory, don’t blame the American consumer

An Amazon.com Inc worker prepares an order in which the buyer asked for an item to be gift wrapped at a fulfillment center in Shakopee, Minnesota, U.S., November 12, 2020.

Amazon.com Inc | Reuters

The initial third-quarter report on gross domestic product showed consumer spending zooming higher by 4% percent a year, after inflation, the best in almost two years. September’s retail sales report showed spending climbing almost twice as fast as the average for the last year. And yet, bears like hedge-fund trader Bill Ackman argue that a recession is coming as soon as this quarter and the market has entered correction territory.

For an economy that rises or falls on the state of the consumer, third-quarter earnings data supports a view of spending that remains mostly good. S&P 500 consumer-discretionary companies that have reported through Oct. 25 saw an average profit gain of 15%, according to CFRA — the biggest revenue gain of the stock market’s 11 sectors.

“People are kind of scratching their heads and saying, ‘The consumer is holding up better than expected,'” said CFRA Research strategist Sam Stovall said. “Consumers are employed. They continue to buy goods as well as pursue experiences. And they don’t seem worried about debt levels.” 

How is this possible with interest rates on everything from credit cards to cars and homes soaring?

It’s the anecdotes from bellwether companies across key industries that tell the real story: Delta Air Lines and United Airlines sharing how their most expensive seats are selling fastest. Homeowners using high-interest-rate-fighting mortgage buydowns. Amazon saying it’s hiring 250,000 seasonal workers. A Thursday report from Deckers Outdoor blew some minds — in what has been a tepid clothing sales environment — by disclosing that embedded in a 79% profit gain that sent shares up 19% was sales of Uggs, a mature line anchored by fuzzy boots, rising 28%.

The picture they paint largely matches the economic data — generally positive, but with some warts. Here is some of the key evidence from from the biggest company earnings reports across the market that help explain how companies and the American consumer are making the best of a tough rate environment.

How homebuilders are solving for mortgages rates

No industry is more central to the market’s notion that the consumer is falling from the sky than housing, because the number of existing home sales have dropped almost 40% from Covid-era peaks. But while Coldwell Banker owner Anywhere Real Estate saw profit fall by half, news from builders of new homes has been pretty good.

Most consumers have mortgages below 5%, but for new homebuyers, one reason that rates are not biting quite as sharply as they should is that builders have figured out ways around the 8% interest rates that are bedeviling existing home sellers. That helps explains why new home sales are up this year. Homebuilders are dipping into money that previously paid for other incentives to pay for offering mortgages at 5.75% rather than the 8% level other mortgages have hit. At PulteGroup, the nation’s third-biggest builder, that helped drive an 8% third-quarter profit jump and 43% climb in new home orders for delivery later, much better than the government-reported 4.5% gain in new home sales year-to-date.

“What we’ve done is simply redistribute incentives we’ve historically offered toward cabinets and countertops, and redirected those to interest rate incentives,” PulteGroup CEO Ryan Marshall said. “And that has been the most powerful thing.”

The mechanics are complex, but work out to this: Pulte sets aside about $35,000 for incentives to get each home to sell, or about 6% of its price, the company said on its earnings conference call. Part of that is paying for a mortgage buydown. About 80% to 85% of buyers are taking advantage of the buydown offer. But many are splitting the funds, mixing a smaller rate buydown and keeping some goodies for the house, the company said.

Wells Fargo economist Jackie Benson said in a report that builders may struggle to keep this strategy going if mortgage rates stay near 8%, but new-home prices have dropped 12% in the last year. In her view, incentives plus bigger price cuts than most existing homes’ owners will offer is giving builders an edge. 

At auto companies, price cuts are in, and more are coming

Car sales picked up notably in September, rising 24% year-over-year, more than twice the year-to-date gain in unit sales. But they were below expectations at electric-vehicle leader Tesla, which blamed high interest rates, and at Ford

“I just can’t emphasize this enough, that for the vast majority of people buying a car it’s about the monthly payment,” Tesla CEO Elon Musk said on its earnings call. “And as interest rates rise, the proportion of that monthly payment that is interest increases.” 

Maybe, but that’s not what’s happening at General Motors, even if investor reaction to good numbers at GM was muted because of the strike by the United Auto Workers union. 

GM tops Q3 expectations but pulls full-year guidance due to mounting UAW strike costs

GM beat earnings expectations by 40 cents a share, but shares fell 3% because of investor worries about the strike, which forced GM to withdraw its fourth-quarter earnings forecast on Oct. 24. Ford, which settled with the UAW on Oct. 25, said the next day it had a “mixed” quarter, as profit missed Wall Street targets due to the strike. Consumers came through, as unit sales rose 7.7% for the quarter, with truck and EV sales both up 15%. GM CEO Mary Barra said on GM’s analyst call that the company gained market share, posting a 21% gain in unit sales despite offering incentives below the industry average.

“While we hear reports out there in the macro that consumer sentiment might be weakening, etc., we haven’t seen that in demand for our vehicles,” GM CFO Paul Jacobson told analysts. But Ford CFO John Lawler said car prices need to decline by about $1,800 to be as affordable as they were before Covid. “We think it’s going to happen over 12 to 18 months,” he said. 

Tesla’s turnaround plan turns on continuing to lower its cost of producing cars, which came down by about $2,000 per vehicle in last year, the company said. Along with federal tax credits for electric vehicles, a Model Y crossover can be had for about $36,490, or as little as $31,500 in states with local tax incentives for EVs. That’s way below the average for all cars, which Cox Automotive puts at more than $50,000. But Musk says some consumers still aren’t convincible. .

“When you look at the price reductions we’ve made in, say, the Model Y, and you compare that to how much people’s monthly payment has risen due to interest rates, the price of the Model Y is almost unchanged,” Musk said. “They can’t afford it.”

Most banks say the consumer still has cash, but not Discover

To know how consumers are doing, ask the banks, which disclose consumer balances quarterly. To know if they’re confident, ask the credit card companies (often the same companies) how much they are spending. 

In most cases, financial services firms say consumers are doing well.

At Bank of America, consumer balances are still about one-third higher than before Covid, CEO Brian Moynihan said on the company’s conference call. At JPMorgan Chase, balances have eroded 3% in the last year, but consumer loan delinquencies declined during the quarter, the company said.

“Where am I seeing softness in [consumer] credit?” said chief financial officer Jeremy Barnum, repeating an analyst’s question on the earnings call. “I think the answer to that is actually nowhere.”

Among credit card companies, the “resilient” is still the main story. MasterCard, in fact, used that word or “resilience” eight times to describe U.S. consumers in its Oct. 26 call.

“I mean, the reality is, unemployment levels are [near] all-time record lows,” MasterCard chief financial officer Sachin Mehra said.

At American Express, which saw U.S. consumer spending rise 9%, the mild surprise was the company’s disclosure that young consumers are adding Amex cards faster than any other group. Millennials and Gen Zers saw their U.S. spending via Amex rise 18%, the company said.

“Guess they’re not bothered by the resumption of student loan payments,” Stovall said.

Consumer data is more positive than sentiment, says Bankrate's Ted Rossman

The major fly in the ointment came from Discover Financial Services, one of the few banks to make big additions to its loan loss reserves for consumer debt, driving a 33% drop in profit as Discover’s loan chargeoffs doubled.  

Despite the fact that U.S. household debt burdens are almost exactly the same as in late 2019, and declined during the quarter, according to government data, Discover chief financial officer John Greene said on its call, “Our macro assumptions reflect a relatively strong labor market but also consumer headwinds from a declining savings rate and increasing debt burdens.”

At airlines, still no sign of a travel recession

It’s good to be Delta Air Lines right now, sitting on a 59% third-quarter profit gain driven by the most expensive products on their virtual shelves: First-class seats and international vacations. Also good to be United, where higher-margin international travel rose almost 25% and the company is planning to add seven first-class seats per departure by 2027. Not so good to be discounter Spirit, which saw shares fall after reporting a $157 million loss.

“With the market continuing to seemingly will a travel recession into existence despite evidence to the contrary from daily [government] data and our consumer surveys, Delta’s third-quarter beat and solid fourth-quarter guide and commentary should finally put the group at ease about a consumer “cliff,” allow them to unfasten their seatbelts and walk about the cabin,” Morgan Stanley analyst Ravi Shanker said in a note to clients.

One tangible impact: United is adding 20 planes this quarter, though it is pushing 12 more deliveries into 2024, while Spirit said it’s delaying plane deliveries, and focusing on its proposed merger with JetBlue and cost-cutting to regain competitiveness as soft demand for its product persists into the holiday season.

As has been the case throughout much of 2023, richer consumers — who contribute the greater share of spending — are doing better than moderate-income families, Sundaram said.

The goods recession is for real

Whirlpool, Ethan Allen and mattress maker Sleep Number all saw their stocks tumble after reporting bad earnings, all of them experiencing sales struggles consistent with the macro data.

This follows a trend now well-entrenched in the economy: people stocked up on hard goods, especially for the house, during the pandemic, when they were stuck at home more. All three companies saw shares surge during Covid, and growth has slacked off since as they found their markets at least partly saturated and consumers moved spending to travel and other services.

“All of the stimulus money went to the furniture industry,” Sundaram said, exaggerating for effect. “Now they’ve been falling apart for the last year.”

Ethan Allen sales dropped 24%, as the company said a flood in a Vermont factory and softer demand were among the causes. At Whirlpool, which said in second-quarter earnings that it was moving to make up slowing sales to consumers by selling more appliances to home builders, “discretionary purchases have been even softer than anticipated, as a result of increased mortgage rates and low consumer confidence,” CEO Marc Bitzer said during Thursday’s earnings call. Its shares fell more than 20%. 

Amazon’s $1.3 billion holiday hiring spree

Amazon is making its biggest-ever commitment to holiday hiring, spending $1.3 billion to add the workers, mostly in fulfillment centers. 

That’s possible because Amazon has reorganized its warehouse network to speed up deliveries and lower costs, sparking 11% sales gains the last two quarters as consumers turn to the online giant for more everyday repeat purchases. Amazon also tends to serve a more affluent consumer who is proving more resilient in the face of interest rate hikes and inflation than audiences for Target or dollar stores, according to CFRA retailing analyst Arun Sundaram said.

“Their retail sales are performing really well,” Sundaram said. “There’s still headwinds affecting discretionary sales, but everyday essentials are doing really well.

All of this sets the stage for a high-stakes holiday season.

PNC still thinks there will be a recession in early 2024, thanks partly to the Federal Reserve’ rate hikes, and thinks investors will focus on sales of goods looking for more signs of weakness. “There’s a lot of strength for the late innings” of an expansion, said PNC Asset Management chief investment officer Amanda Agati.

Sundaram, whose firm has predicted that interest rates will soon drop as inflation wanes, thinks retailers are in better shape, with stronger supply chains that will allow strategic discounting more than last year to pump sales. The Uggs sales outperformance was attributed to improved supply chains and shorter shipping times as the lingering effects of the pandemic recede.

“Though there are headwinds for the consumer, there’s a chance for a decent holiday season,” he said, albeit one hampered still by the inflation of the last two years. “The 2022 holiday season may have been the low point.” 

Deloitte predicts soft holiday sales

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What a stressed commercial real estate market means for these exposed bank stocks

Collin Madden, founding partner of GEM Real Estate Partners, walks through empty office space in a building they own that is up for sale in the South Lake Union neighborhood in Seattle, Washington, May 14, 2021.

Karen Ducey | Reuters

Banks are facing mounting uncertainty as the commercial real estate (CRE) sector continues to struggle. But, tailwinds in our financial names should help safeguard their bottom lines.

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