The decision by Moody’s Investors Service to place the debt of six major banks–including State Street and Bank of New York Mellon–under review for a downgrade is puzzling.
It comes a full five months after a few regional lenders collapsed. Silicon Valley Bank and Signature Bank were brought down by depositors fleeing for higher-interest rates elsewhere and the declining value of the government-bond assets they were holding.
For them, it was a failure of term management–making sure the duration of the assets on the books wasn’t too far removed from the time scale of the liabilities the banks had.
Since then, other banks have managed to fend off speculative attacks and regulators have reiterated many times that the sector looks healthy. After all, banks tend to be more profitable when interest rates rise because it increases their margins on loans, other things being equal.
So Moody’s intervention on Monday evening feels like a meek warning that the stable door might just still be open long after the horses have bolted. Fitch seemed similarly behind the curve when it downgraded U.S. bonds last week, months after the debt ceiling crisis was resolved and the economy had strengthened.
And it might seem like a long time ago, but it’s worth remembering that these ratings firms kept the highest marks on the complicated financial products that brought the financial system to the brink in the 2008-09 financial crisis even as the subprime sector was in flames.
But Moody’s might also be providing a healthy reminder. The commercial real estate market still looks bad. A sharp economic downturn could be destabilizing, and yields on longer-term Treasuries are rising.
Moody’s call may be an opportunity to buy the dip in bank shares–the S&P Banks Industry Group index is up 15% over the past three months. But investors should also be wary of getting too bullish.
—Brian Swint
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***
Paramount Makes Progress on Streaming, Heaping Pressure on Disney
Paramount Global grew subscription revenue in its streaming segment by 47% over the last quarter and announced a deal to sell its publishing business, Simon & Schuster, for $1.62 billion to private-equity firm KKR.
- However, it added just 700,000 subscribers in the second quarter, compared to 4.1 million in the first quarter, which suggests the streaming wars are no longer just about subscriber growth.
- Losses in its direct-to-consumer business, which includes Paramount+, narrowed to $424 million from $445 million in the same quarter in 2022. Paramount’s improvement on that front adds to the pressure on Disney, which is due to report earnings Wednesday.
- Disney’s direct-to-consumer segment has lost $4.2 billion in the past four reported quarters but management expects it to break-even by the end of the fiscal year 2024.
What’s Next: Investors will be keen to see some signs of improvement in Disney’s fiscal third quarter results after the bell Wednesday. CEO Bob Iger has made turning around the media and entertainment giant’s streaming business a priority.
—Callum Keown
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Obesity Drug Investors Await Novo Nordisk’s Wegovy Results
Obesity drugs have investors excited for big growth, but results of a trial expected any day from Ozempic-maker
Novo Nordisk
could encourage or throw a wet blanket on the enthusiasm. The pharmaceutical company is testing whether its identical drug Wegovy cuts the risk of heart attack and strokes.
-
Wegovy and
Eli Lilly’s
very similar Mounjaro have shown an extraordinary ability to help patients lose weight, but the cardiovascular health benefits associated with weight loss haven’t been proven. Wegovy’s trial results could have implications for how the medicines are prescribed. - Insurers will pay for Mounjaro and Ozempic as Food and Drug Administration-approved treatments for Type 2 diabetes. But Medicare won’t cover weight loss medicines, and many insurers don’t, either.
- Obesity medicines’ high costs have prompted insurers and employers to limit their use. Wegovy, the only one approved as a weight-loss treatment, costs $1,349.02 a month, Mounjaro costs $1,023.04 a month, and Novo’s Ozempic costs $935.77 a month.
-
Lilly is seeking FDA approval for Mounjaro as a weight loss drug. Analysts estimate that Mounjaro sales could hit $23.9 billion in 2027 for both diabetes and obesity. That would be the highest single-year sales of any medicine in history, aside from
Pfizer’s
Covid vaccine.
What’s Next: Congress would need to approve Medicare coverage of the drugs for weight loss. A New England Journal of Medicine paper has estimated that if 10% of qualified Medicare patients took Wegovy, it would cost Medicare Part D $26.8 billion a year, nearly a fifth of what it spent in 2019.
—Josh Nathan-Kazis and Janet H. Cho
***
Palantir Swings to Profit and Sees Growing AI Opportunities
Palantir Technologies
met expectations for the quarter, swinging to a profit as revenue rose by double-digit percentages. The software maker announced a new $1 billion share buyback authorization and said the scale of the opportunity in artificial intelligence has increased significantly in recent months.
- It was the third-straight month of profit. Commercial revenue rose 10%, while government-related revenue rose 15%. Overall, revenue of $533 million was up nearly 13% from a year ago. It said it sees “unprecedented demand” for AI offerings.
- Palantir said it is talking with more than 300 additional enterprises about using Palantir’s AI platform. Its customer count grew 38% from a year ago, including a 35% increase from a year ago in U.S. commercial customers.
- For the third quarter, Palantir expects revenue of $553 million to $557 million and another quarter of profit, according to generally accepted accounting principles. Palantir also expects GAAP profit in the fourth quarter.
- Palantir is forecasting more than $2.212 billion in full-year revenue, which is slightly higher than Wall Street’s estimates for the year.
What’s Next: CEO Alex Karp and CFO David Glazer told Barron’s that with a fourth consecutive quarter of GAAP profitability, the company would become eligible to join the
S&P 500
index. Palantir hasn’t discussed the potential inclusion with S&P.
—Eric J. Savitz and Liz Moyer
***
Tyson Foods to Close More Chicken Plants as Sales Drop
Tyson Foods
is closing more chicken plants in an attempt to boost its chicken production operation after reporting lower-than-expected earnings and revenue. Closing the four plants resulted in a $210 million charge.
- Tyson reported adjusted earnings of 15 cents a share from revenue of $13.1 billion, down 2.6% from one year ago. It already closed two chicken plants in May and has been cutting jobs. CEO Donnie King said the closures will lower costs and improve capacity utilization.
- But the meat processing giant has been battling multiple fronts. Beef sales fell 5.3% in the quarter as prices rose, and pork sales are down 1.8%. Tyson’s brands include Jimmy Dean, Hillshire Farm, Ball Park, and Wright, among others.
-
Separately,
Campbell Soup
is making a push into gourmet pasta sauce, reaching an agreement to acquire
Sovos Brands,
the maker of Rao’s, for about $2.7 billion. Campbell already sells pasta sauce under the Prego brand, and the addition of premium-priced Rao’s is seen as complementary as canned soup sales slide. -
Beyond Meat
reported a 30% drop in second quarter revenue as demand for fake, or plant-based, meat products continues to fall despite price cuts. It cut its full-year net revenue forecast. It is hoping a new ad campaign will win over new customers.
What’s Next: Tyson expects full-year sales to range from $53 billion to $54 billion, which is in line with expectations. The Agriculture Department expects domestic beef production to fall about 3% in fiscal 2023, and Tyson expects chicken production to increase 3%.
—Janet H. Cho and Jack Denton
***
Gasoline Prices Inch Higher on Russia’s War, Production Cuts
Retail gasoline prices are inching up again, a blow to household budgets during the summer driving and vacation season. The increase is driven by Russia’s war in Ukraine, and decisions by major oil-producing nations Saudi Arabia and Russia to cut production amid increasing demand.
- Prices averaged $3.829 a gallon nationally late Monday, according to AAA. That’s lower than last year’s high of more than $5 a gallon, but still 29 cents a gallon more than last month’s average.
- Ukrainian maritime drones hit a Russian oil tanker near occupied Crimea and a Russian ship near the naval port Novorossiysk this weekend. Eurasia Group analysts said because crude exports from Novorossiysk average 2% of global supply, loss of volume from the region could push oil prices above $100 a barrel.
- JPMorgan commodities analysts forecast the price of West Texas Intermediate could hit $81 a barrel in the fourth quarter, and Brent crude could reach $85 a barrel. WTI last settled above $100 on July 20, 2022, while Brent was above $100 on Aug. 29, 2022, Dow Jones Market Data said.
- The national average wholesale diesel price jumped 23.1% over the past three months, according to Oil Price Information Service, a Dow Jones company. The national average wholesale gasoline price is up 12% over that time, and the national average retail gasoline price is up 8.2%.
What’s Next: Oil prices have risen for six straight weeks, the longest winning streak in over a year, boosted by Saudi Arabia’s decision to cut production by another one million barrels a day through September. Russia will cut production by 300,000 barrels a day in September, from 500,000 barrels a day this month.
—Janet H. Cho and Avi Salzman
***
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***
—Newsletter edited by Liz Moyer, Rupert Steiner, Callum Keown
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