📉 Chinese Banks Are Dropping like Flies

MARKET UPDATE

Good Morning Investor! Wells Fargo ($WFC) stumbled harder than a newborn giraffe this earnings week, failing to join the conga line of success led by its banking buddies. The stock took a nosedive, dropping 6% on Friday. On the flip side of the financial seesaw, Enphase Energy ($ENPH) decided to thumb its nose at the naysayers. Despite being given a lowered price target by an analyst at Barclays, Enphase's shares rose almost 7%.

TODAY’S BIG HEADLINES

Banks Send Shockwaves Through Wall Street

Chinese Banks Are Dropping like Flies

Customers Have Fallen Out of Love with Apple’s Vision Pro Headset

FINTECH & BANKING

Banks Send Shockwaves Through Wall Street⚡

When Banks Make it Rain: Last week, JPMorgan Chase ($JPM) and Citigroup ($C) kicked off earnings season with results that left analysts' jaws on the floor and their calculators smoking. As it turns out, higher interest rates are benefitting financial institutions across the economy like a steroid injection for the money world. JP Morgan revealed that its net interest income – the fancy term for the difference between what it makes on loans and pays to savers – was 4% higher last quarter than the same time last year. It's like they've discovered financial alchemy!

• JP's Banking division didn't just bring home the bacon; they brought home the whole pig farm, generating 50% more revenue and effectively doubling what analysts had been expecting.

• Put all the pieces together, and JP's revenue for the quarter was 20% higher than last year, boosting their profits by 25% compared to 2023.

Banking on Success: The bar has now been set higher than a giraffe's ears for the banking sector this earnings season. However, the odds are ever in their favor, with high interest rates acting like a financial Red Bull, energizing the income they generate from loans of any kind. Citigroup also managed to knock expectations out of the park in a manner that would make Aaron Judge tip his cap and nod approvingly.

• It seems analysts who were bullish on banks focused on "capital markets" are now doing their happy dance. The prediction for this group was that they would increase their profit by 23% this quarter from the same time last year.

Passed with Flying Colors: Banks have had their financial resilience tested over the past month, with unemployment shooting up faster than a startled cat, stocks dropping like they're playing limbo, and commercial real estate crumbling like a stale cookie, you'd think the banks would be sweating. But no! The conclusion: these financial fortresses seem to have more than enough cash to weather any storm

BANKING & MACROECONOMICS

Chinese Banks Are Dropping like Flies📉

The Great Wall of Worry: Just last week, a whopping 40 Chinese banks have collapsed faster than a house of cards in a wind tunnel. This appears to be a worsening crisis for the Chinese banking sector, despite the country's promising GDP growth. Banks, it seems, have a tendency to behave like dominos - when one falls, it's only a matter of time before the rest follow suit.

• This financial domino effect is eerily reminiscent of what we saw in the US last year. Signature Bank closed its doors in the wake of Silicon Valley Bank's failure, and before you could say "economic meltdown," First Republic Bank joined the party. In total, five banks failed in 2023, proving that misery really does love company. Fun Fact: dominoes were invented in China

When Piggy Banks Break: Bank failures can happen for a whole host of reasons, a sudden run on deposits leaving banks without necessary liquidity, assets that lose value rapidly or a significant number of bad loans that age about as well as milk left out in the sun, eroding capital reserves, or severe economic downturns that end up reducing asset values. The concerning thing is, in China, there are currently a whopping 3,800 financial institutions teetering on the edge of fiscal oblivion.

• These institutions hold a jaw-dropping $7.5 trillion in assets, representing 13% of the banking system. For context, the entire GDP of China in 2022 was $17.96 trillion. That's like having 13% of your body weight hanging by a thread.

• Despite China's GDP growth strutting its stuff at 4.5% in the first quarter and 6.3% in the second, these bank failures are happening at a pace and scale that almost becomes a self-fulfilling prophecy.

When Real Estate Dreams Become Nightmares: The largest driver of these collapses appears to be the downfall of Chinese real estate developers. These banks lent significant amounts of money to developers during China's unprecedented construction boom, exposing themselves to property market crises like a sunbather forgetting sunscreen on a scorching day.

• Worryingly, many of these banks have disclosed that up to 40% of their books now consist of non-performing loans.

MEGA CAPS & TECH

Customers Have Fallen Out of Love with Apple’s Vision Pro Headset💔

Already Forgotten, the iFlop Pro?: It seems the device that was supposed to be Apple's ($AAPL) most revolutionary piece of tech since sliced iPhones has already fallen from grace.

• As the novelty wears off, sales have plummeted by 75% since last quarter, with even early adopters returning the device due to its weight and lack of content. Experts forecast sales to continue their downward spiral over the coming year, much like the hopes and dreams of Apple's VR team.

A Hard Sell at This Price: Analysts had previously agreed that Apple would sell at least 700,000 headsets in its first year. This figure has since been revised down to just 400,000. Despite Apple stuffing the product with more premium tech than a billionaire's man cave, would-be customers just don't seem to see the value in it yet.

• This trajectory for Apple's latest device is nothing new. In fact, it's giving off more shades of Google's failed Google Glass venture than a paint store's color wheel. That $1,500 flop from a decade ago is looking less like a cautionary tale and more like a prophecy.

• Meanwhile, Meta's ($META) Quest has found its footing at a more wallet-friendly price, with the company believed to have sold 20 million Quest 2 headsets. That's about as fast as the Xbox Series X is believed to have sold.

Watch & Learn: Apple has certainly noticed this market response, probably with the same expression as someone who's just realized they've been walking around all day with their fly open. Many are expecting the tech giant to return with a similar offering to prevent Meta from running away with the market for years to come. Despite its name, Apple’s vision for this launch fell short.

MORE NEWS

Additional market-moving events🌎

AMD acquires AI startup: Advanced Micro Devices ($AMD) is purchasing Finnish AI company Silo AI for $665M to enhance its AI chip capabilities and compete with industry leader NVIDIA. (Reuters)

Robotaxis Delayed: Tesla reportedly delays highly anticipated robotaxi event, stock tanks. (Axios)

AI buyout: Japanese conglomerate SoftBank (SFTBY) has acquired British AI chip firm Graphcore, valued in 2020 at $2.6B, for a reported $500M. (BBC)

E.U. slams X: The E.U. accused X (TWTR) of breaching online content rules by utilizing so-called "dark patterns" to mislead users. The company may face a fine of up to 6% of its global revenue. (CNBC)

OUR PICKS

Our selections performance👾

On Monday the 11th of March, we released our “two superperformers” stock picks which we believe will provide significant outperformance compared to the S&P 500. Then on the 12th of June we released our next stock selection.

Here’s how the three stocks have performed since:

• Evolution AB: 1,164.50 SEK (📉-11.30%)

• Hims & Hers Health: $21.65 (📈+49.90%)

• PayPal: $60.24 (📉-5.05%)

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