Pen and calendar on a wooden table

US mortgage hits 20-year high

8th October – 14th October 2022 | Another week in the markets

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Source: MarketWatch

Hello Saturday,

This week the US mortgage rate hits a 20-year high, inflation data for September shows a 0.4% increase, and banks report third-quarter earnings. 

  • Netflix to launch its ad-supported plan for $6.99 in November, a strategic price lesser than its competitors, in a bid to increase revenue 
  • US banks report a mixed bag of third-quarter earnings, with banks like JPMorgan Chase beating revenue estimates and others seeing a sharp decline in profits
  • Amazon’s October Prime Day event falls flat as customers spend 40% less this time around as compared to July’s event
  • Kroger announces deal to buy its rival Albertsons at $24.6 billion to form a supermarket titan 
  • With Russia’s recent threats to use nuclear weapons, the US may find it tricky to differentiate the country’s annual nuclear drills from an actual attack 

Taking stock | Ad-breaks and chill | Show me the money (please) | Sub-prime day | Grosser grocer | Crying wolf? | Invest wisely

Taking stock

Wall Street ended a volatile week sharply lower as investors worried about interest rates in light of inflation data. S&P and Nasdaq fell 1.55% and 3.11%, respectively, for the week, while the Dow was up 1.15%. Thursday saw a historic turnaround rally after stocks opened sharply lower as investors weighed the inflation report. Yet, all three major indices reversed course and ended the day with sharp gains. This marked S&P’s fifth-largest intraday reversal from a low and the fourth-largest for Nasdaq.

Ad-breaks and chill

Netflix will launch their ad-supported plan for $6.99 per month starting 3rd November in the US. This “basic with ads” plan will include 3 to 4 minutes of ads per hour that will play before and during the content. This launch comes after the company resisted the idea for years. However, with losing subscribers, slowing growth, and increased competition from other streaming platforms, the ad-supported plan is set to launch in several countries next month, including Canada, Australia, Japan, South Korea, Brazil, France, and Germany.

Netflix’s ad-supported plan is competitively priced and is less expensive than both ad-supported Disney+ and HBO Max, which are at $7.99 and $9.99 per month, respectively. The company has priced this plan to ensure that any subscriber who switches to the ad-supported plan from the ad-free plan will have a neutral to a positive impact on the company’s revenue. 

Time for some quick math. Each ad will be about 15 seconds long, which would mean about 16 ads per hour, adding up to 4 minutes of ads. If Netflix charges advertisers even $0.10 for every ad viewed, it will equate to $1.60 in ad revenue per hour of content consumed by a subscriber. Since the ad-supported plan is about $6 less than their standard plan, a subscriber would have to watch about four hours a month for it to be a profitable switch for Netflix. And since the average Netflix user watches over 30 minutes of content every day, this new ad-supported plan should turn out to be great for the company’s revenue. 

Show me the money (please)

US banks kicked off the third-quarter earnings session on Friday before the bell. JPMorgan Chase & Co. reported revenue that beat estimates and its shares rose 2.4% in premarket trading. On the other hand, Morgan Stanley saw its shares slip 3% as it reported a 30% slump in its third-quarter profit. The investment bank’s core business is underwriting, which has been negatively impacted owing to a global slowdown in dealmaking. Wells Fargo reported a 31% decline in profit and a $2 billion operating loss owing to its fake accounts scandal. CitiGroup’s revenue topped expectations but reported a 25% decline in year-over-year net income.

In an environment of tight monetary policy and surging inflation, investors look to big banks’ earnings for clarity. But this mixed bag of earnings from the four biggest US banks didn’t quite help give direction to the markets. 

Sub-prime day

Amazon’s Prime Day, a 48-hour event offering thousands of discounts across all product categories, held this week on Tuesday and Wednesday, failed to give the company the kind of revenue boost and media buzz as previous Prime Day events. The company has not revealed its revenue from this Prime Day event. But here’s what its sales have been like for previous Prime Days, including the one held in July earlier this year:

A graph on Amazon's Prime day sales

According to a report by Klover, households spent 40% less during this event as compared to the previous Prime Day held in July this year. The average order price also dropped to $46.68 from July Prime Day’s $60.29. Given the surging inflation and slowing online spending growth, retailers this year are more focused on driving early holiday sales. According to Adobe Inc., online spending in the US in November and December will grow just 2.5% this year, a sharp drop from last year’s 8.6%. 

Grosser grocer

On Friday, Kroger, US’s largest supermarket operator, said it will acquire its rival Albertsons in a $24.6 billion deal. Albertsons shares jumped 11% while Kroger’s fell about 2% after this announcement. The merged company would have a market value of about $47 billion, making this the biggest merger that the retail space has seen in recent years. This merger would also give both supermarket operators a lot more buying power which would make it easier for them to compete with Walmart, which is the country’s top grocer by revenue. Currently, it’s estimated that about 25% of all grocery spends in the US are at Walmart, about 8% at Kroger, and 5% at Albertsons. 

Crying wolf?

Around this time of the year, Russia tends to carry out large-scale drills of its nuclear forces. This year, however, with President Putin threatening to use them in light of its invasion of Ukraine, it will be challenging for the US to differentiate between what’s just an exercise and what’s an attack. This year Russia’s annual nuclear exercises will include live missile launches, which the country considers routine in what it calls its Grom drills. 

Invest wisely 

As the train wreck continues, investors with the classic 60/40 portfolios – 60% in stocks and 40% in fixed-income securities – are facing the worst returns in over 100 years. Given the way the global economy has been this year with record-high inflation, rates shock, recession threats, and geopolitical instability, the 60/40 rule of diversification is no longer useful. Instead, you have to look at diversification in a new light. Diversifying across asset classes like equity, debt, and commodities needs to be accompanied with diversifying across geographies and regular rebalancing. With the help of the Appreciate App, not only can you easily access the US market but also get AI-based recommendations for strategic asset allocation. Download the app today!

Warm regards,
Another week
in the markets

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