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Wall Street Breakfast: Another Rescue?

Mar 14, 2023Mar 14, 2023

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Another rescue?

The next few days are expected to be crucial for the fate of First Republic Bank (FRC), as the White House, Federal Reserve and Treasury are evaluating plans to save the troubled regional lender under an "open bank" rescue. One scenario under consideration is to create a special purpose entity, with the big banks that earlier supported First Republic with $30B in deposits purchasing its underwater loans on its balance sheet above where they would be marked. If this occurs, First Republic may go out and raise new equity. More restructuring: The lender is also considering divesting $50B-$100B of long-dated securities and mortgages as part of a larger restructuring plan. Any sales would help address the bank's asset-liability mismatch. First Republic may offer warrants or preferred equity as an incentive to buy assets above their market value. The bank is striving to strengthen its balance sheet to avert a takeover by regulators and to allow for a possible capital raise. It has been working on cutting costs, with plans to reduce its workforce by 20%-25% in Q2 and condense corporate office space. First Republic, which has been struggling with customers fleeing the bank, reported net deposit outflows of $72 billion during its first quarter, despite support from 11 of the biggest lenders in the U.S. SA commentary: SA contributor Eugenio Catone noted that in just three months, First Republic's deposit structure has completely changed. "Despite continued Fed support, I don't see how FRC can recover. Even if it does, to believe that the stock price will return close to the levels of three months ago is totally misplaced," he warned. Investing Group leader Stone Fox Capital believes First Republic's stock won't rally until the bank's flawed business model is fixed. (102 comments)

Big Tech beats

Alphabet (GOOG) (GOOGL) rose 4% after hours yesterday as its first-quarter earnings cleared Street expectations as a result of strong performance in its search and cloud businesses. Alphabet posted $69.8B in revenues, up 3% year-over-year and up 6% in constant currency, while EPS was $1.17. The company also expanded its stock buyback plan by an additional $70B. Investing Group leader Jonathan Weber believes Alphabet's pressured margins could improve once cost-cutting efforts pay off in Q2 and beyond. However, prior to the earnings, Danil Sereda raised concerns over increased competition, tightening credit conditions and the resulting weakening of its customer base. In other news, Microsoft (MSFT) also surged 9% yesterday as its third-quarter results surpassed estimates, indicating growing strength in its AI and cloud businesses. The software giant earned $2.45 a share, on revenue of $52.9B, compared to a profit of $2.22 a share, on $49.4B in sales in the year-ago period. Investing Group leader Livy Investment Research believes MSFT shares remain well positioned for further upside potential, buoyed by expectations for a stronger second half. However, Ahan Vashi believes the risk/reward on offer is highly unfavorable. (120 comments)

All things equal

The Big Tech earnings bonanza this week shines a light on how much influence a handful of stocks have on the broader market. Just four names reporting this week account for 14% of the S&P 500 (SP500) (SPY) (VOO) (IVV), as Deutsche Bank notes. And there may be a case for avoiding that kind of huge weighting, given the performance of the Invesco S&P 500 Equal Weight ETF (RSP). It's up nearly 470% in the 20 years since its inception. Note that the ETF contains an equal weight of each of the S&P 500 (SP500) holdings within the fund. Read more to see how it matches up against the major S&P-indexed ETFs. (30 comments)

Targeting drugmakers

Sens. Bernie Sanders (I-Vt.) and Bill Cassidy (R-La.) said yesterday that a bipartisan deal has been reached to advance legislation that will lower prescription drug prices and reform pharmacy benefit managers. The Senate Committee on Health, Education, Labor and Pensions will hold a markup on four bills on May 2. The pieces of legislation are: S.1067, Ensuring Timely Access to Generics Act of 2023; S.1114, Expanding Access to Low-Cost Generics Act of 2023; S.1214, Retaining Access and Restoring Exclusivity Act; and the Pharmacy Benefit Manager Reform Act. S.1067 is designed to stop pharma companies filing petitions to delay generics from hitting the market, while S.1114 makes changes to the 180-day exclusivity for generic filers that are the first to challenge a brand-name drug's patents and meet regulatory requirements. The RARE Act seeks to clarify a law following a 2021 court decision. Last month, Sens. Maggie Hassan (D-N.H.) and Mike Braun (R-Ind.) reintroduced legislation aimed at ending a loophole that at least one pharma company has used to block competition. (46 comments)

Today's Markets

In Asia, Japan -0.7%. Hong Kong +0.7%. China flat. India +0.3%.In Europe, at midday, London -0.3%. Paris -0.9%. Frankfurt -0.6%.Futures at 6:30, Dow -0.02%. S&P +0.3%. Nasdaq +1.2%. Crude +0.4% to $77.39. Gold +0.2% to $2,009.20. Bitcoin +5.7% to $28,863.Ten-year Treasury Yield +1 bp to 3.41%

Today's Economic Calendar

7:00 MBA Mortgage Applications8:30 Durable Goods8:30 International Trade in Goods (Advance)8:30 Retail Inventories (Advance)8:30 Wholesale Inventories (Advance)10:00 State Street Investor Confidence Index10:30 EIA Petroleum Inventories11:00 Survey of Business Uncertainty11:30 Results of $24B, 2-Year FRN Auction1:00 PM Results of $43B, 5-Year Note AuctionCompanies reporting earnings today »

What else is happening...

Bipartisan bill set to block children under 13 from accessing social media.Alibaba (BABA) leads Chinese tech losses as senators call for cloud sanctions.McDonald's (MCD) shares reach all-time high as consumers lap up higher prices.Chipotle (CMG) climbs 4% after comparable sales sizzle in Q1, margins improve. GSK (GSK) revenue dragged by lower COVID product sales, FY outlook affirmed.Visa (V) Q2 revenue and earnings top consensus amid strong cross-border volume.PacWest (PACW) jumps 14% as Q1 earnings beat expectations, deposits stabilize.Enphase Energy (ENPH) plunges 15% after guiding Q2 revenue below consensus.SQM (SQM), Albemarle (ALB) hold talks on Chile's lithium nationalization plan. President Joe Biden touts construction jobs as re-election bid kicks off.

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Listen on the go! A daily podcast of Wall Street Breakfast will be available by 8:00 a.m. on Seeking Alpha, iTunes, Stitcher and Spotify. Another rescue? Big Tech beats All things equal Targeting drugmakers