The U.S. Credit Situation

The Federal Reserve just dropped its latest Consumer Credit report. May 8, 2024 | Peel #705 Silver Banana goes to... [CapLinked. ]() In this issue of the Peel: - 💳 The Federal Reserve just dropped its latest Consumer Credit report. - 🏦 Turns out making big banks bigger also makes them more profitable… - 🛢 Can you guess which sector has the highest EPS estimates growth? Market Snapshot 📸 = Banana Bits 🍌 - Please consider donating to [this fundraiser]() for the family of former Green Beret and BofA associate Leo Lukenas, who tragically passed just days ago. Any amount is appreciated and will greatly benefit Leo’s family. De Oppresso Liber. - The IPO pop is over, but the earnings pop is [just starting for Reddit](=) - TikTok is fighting back, suing the U.S. over the [recent ban]( - Surprise, surprise—[our Palantir take]() was spot on as [shares tumbled yesterday following earnings]() Swipe Right on Caplinked: Your Perfect Match Still stuck with your old VDR? Time to ditch your current shitty relationship and swipe right on Caplinked. Think of it as the badass dating app for your deal-making game. Say 'hell yes' to deals that close faster than your ex can text back. Caplinked isn’t just another pretty face; it's got the brains too—unmatched security, slick interface, and the kind of performance that makes every transaction a victory lap. Ready to stop messing around with the rest and get serious with the best? [Upgrade to Caplinked.]() It’s time to fall hard for your VDR again. Macro Monkey Says 🐒 Credit Where Credit Is (Un)Due Usually, we reserve our recommendations for the wise apes subscribed to WSO Alpha. But today, we’re ready to give our first official rec certified by The Daily Peel. When presented with a “beg, borrow, or steal” type of situation, always choose to steal. After all, a police chase is a lot more fun than dealing with JPow’s rate hikes. Luckily, Americans are starting to agree. Borrowing rates have skyrocketed faster than a college student’s ego after accepting an offer from Goldman, but in March, that trend finally took a breather. Let’s get into it. The Numbers Yesterday, the Federal Reserve released its latest Consumer Credit report, indicating that total borrowing growth slowed considerably in March to just a 1.5% annualized rate. That translates to total credit growth of $6.3bn for the period, less than half of the growth experienced in the prior two months of this year. Sure, there is certainly volatility at play, but the overall trend is clear—it may have taken a while, but U.S. consumers are once again responding to the Fed’s interest rate hikes. Economists had guesstimated that borrowing would grow ~$14.8bn in March, but a dramatic slowdown in credit card borrowing proved them wrong and proved these rising delinquencies right. Credit card borrowing dominates, but doesn’t make up the entirety, of revolving credit facilities. That said, the data suggests that total borrowing made on credit cards grew just 0.1% in March, coming off of a 9.7% jump in February. That’s the slowest growth in credit card borrowing since April 2021, back when we thought there still might be a chance that Kanye is a sane, rational person (damn I miss the old Kanye…). Although credit borrowing growth wasn’t straight from the go in March, consumers did still chop up their souls to register 2% growth in non-revolving borrowing facilities, which primarily encompass student and auto loans. That was a slight acceleration from the 1.4% nonrevolving borrowing growth seen in February but still remains outside of sh*t-your-pants territory. [Source](=) Even without the above data, it’s clear that this is a demand-driven issue. Banks love lending at higher rates to take on wider spreads, and as we can see above, “credit availability” is the second least concerning economic factor among U.S. small business owners. Plus, checking back to BofA’s March Consumer Checkpoint, we can see that the third month of 2024 also coincided with 1) an uptick in income growth primarily among low-and-middle income consumer and 2) a larger-than-expected decline in savings. [Source]( It’s never this simple, but the short-term data and trends seem to suggest consumers are tapping into their checking and savings accounts more than throwing it on their credit cards with a damn 22.5% interest rate. Tax refund season could also be a factor here, given the 5% growth in the average refund size seen in 2024. Most consumers indicated they’d save or invest their refund, but the chart below shows that “Shop” had the greatest spike from 2023. [Source]( The Takeaway? It’s hard to take anything meaningful away from a data series on such a short time frame, but the trend seen in the lower highs of the first chart above is pretty damn good evidence that consumers are getting off their credit card highs. Paradoxically, the introduction of high rates can actually increase credit card borrowing in the short term as banks use low/no APR periods to hook consumers onto certain cards, then hit them with high rates after the promotional period. The scary part is that economists had ascribed much of the resilient spending of U.S. consumers to increased credit card borrowing, so this could be the canary in a coal mine that spending is on the decline. That would pair well with the narrative of slowing hiring, slowing wages, and depleted excess savings. Be on the lookout later this week for BofA’s next Consumer Checkpoint and, next week, the latest inflation data for April via the CPI and PPI. Times and economic conditions are a-changin’ from the post-pandemic era, but just remember, if you can’t afford it, you can always steal it. What's Ripe 🤩 Crocs (CROX) 📈7.8% - We all know the phrase “pull yourself up by the bootstraps”, but on Tuesday, your portfolio could’ve pulled itself up by the Crocs strap. Q1 earnings were solid. - Weak guidance for the HeyDude brand pulled shares lower premarket, but it was off to the races at the open given the strong beat across the board. - EPS of $3.02/sh on sales of $938mn beat by 34% and 7.7%. So, the shoes might give your girlfriend the ick, but the stock gives your PM a fat bonus. UBS Group AG (UBS) 📈7.0% - Marrying your cousin generally doesn’t lead to great outcomes unless you’re a multinational Swiss bank, apparently. UBS is back to profitability. - Banking for billionaires is a good business, with UBS’s wealth management unit exploding 28% higher, largely thanks to $27.4bn in net new assets. - Their merger with Credit Suisse is still ongoing, but the hard part appears over. The firm was even able to increase its CET1 ratio to 14.8% while beating across the board. What's Rotten 🤮 Disney (DIS) 📉9.5% - Maybe that Peltz guy was onto something? Just weeks after winning a heated proxy battle, shareholders may have realized their execs could use the help. - The Mouse House swung to a loss of $0.01/sh, or $20mn, in Q1 thanks to a $2bn charge from impairments to the firm’s Star India sports media business. - Disney+ subs grew by 6mn to 117.6mn, but this unit remains at an operational loss. Meanwhile, the ARPU for U.S. and Canada subs fell 1.84%. - Total revenue grew 1% for the year, so like most of their recent movies, this report was a huge disappointment almost across the board. Tesla (TSLA) 📉3.8% - Begging Warren Buffett to [buy your stock]() is a bold strategy, to say the least, but with sales in China this weak, we don’t blame ‘em for trying anything. - The China Passenger Car Association reported that sales fell 30% monthly and 18% annually, hurting consumer sentiment in China and abroad. - Smaller EV maker Lucid also dropped some weak *ss quarterly earning numbers of their own, hurting the whole sector. Thought Banana 🤔 Getting Cute in Q2 It can be hard to stay optimistic as an analyst, where your job is to find literally every problem that could possibly go wrong with every single thing you analyze. So, it’s no surprise that analysts tend to get more pessimistic as earnings szn approaches. According to Factset data, in the first month of a new quarter, collective EPS estimates for the S&P 500 in that quarter declines by an average of 1.8%. But, Q2 2024 is (apparently) no ordinary quarter. Let’s check in on those depressed analysts and their current estimates. The Numbers [Source]() Here, we can see that analysts grew slightly more optimistic in April. During that first month of Q2, estimates of the collective S&P 500 EPS increased 0.7%, the first increase since Q4’21. Q4’21 also happened to lead to the ~20% decline the S&P 500 saw in the following 12 months of 2022, but there’s a little bit more to the story than that. Increased EPS estimates can stem from an effectively infinite amount of sources, one of which could potentially be over-optimism/euphoria. Following 5 quarters in a row of growing estimates (and growing earnings), that could’ve been the driver of the increase back then. But these days, optimism as a narrative is about as common on Wall Street as an actual good human being. [Source](=) Breaking it down, we can see that the sector concentration of increased EPS estimates lends itself more to the theory that there is an actual reason beyond general market euphoria for the increased estimates. The energy sector’s EPS estimate increased by nearly 4x compared to the next highest sector, Communications (a.k.a. Meta and Alphabet). Much of the increased optimism stems from underlying increased optimism from management and executive teams, whose tone of cautious positivity seem to have caught an early bid from analysts. Oil prices have remained stagnant to lower in the period, but natty gas prices are up 134% in the past few weeks alone, likely playing a role in the sector’s optimism due to higher prices leading to increased margins. [Source](=) Who Cares? Any time we see optimism jump seemingly out of the blue, this should be cause for alarm. It doesn’t mean to sell your whole portfolio, but it does mean you should probably find out why optimism is spiking. This time around, the increased optimism seems justified—or at least, more justified than that of late 2021. As always, we’ll see. 💭 The Big Question 💭: Do rising natty gas prices justify this much of an increase to EPS estimates? What else could be a driver here? What’s the longer-term perspective? Banana Brain Teaser 💡 Previous 🗓 If the range of the six numbers 4, 3, 14, 7, 10, and x is 12, what is the difference between the greatest possible value of x and the least possible value of x? Answer: 13 Today 🕐 What number is 108 more than two-thirds of itself? Send your guesses to vyomesh@wallstreetoasis.com Wise Investor Says 🤓 “The person who starts out simply with the idea of getting rich won't succeed; you must have a larger ambition.” — John D. Rockefeller How Would You Rate Today's Peel? 😁[All the bananas](=) 😐[Meh](=) 😩[Rotten AF]( Happy Investing, David, Vyom, Jasper & Patrick [ADVERTISE]() // [WSO ALPHA](=) // [ACADEMY]( // [COURSES]() // [LEGAL]() [Unsubscribe]( IB Oasis Corp. 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