Intel earnings beat expectations, but stock drops. Why there could be room to cut credit card rates.

Market Domination Overtime - January 23, 2024 - Summary

Key Concepts:

• VIX: CBOE Volatility Index, a measure of market expectations of near-term volatility conveyed by S&P 500 index option pricing.
• Basis Points: A unit of measurement equal to one hundredth of one percent (0.01%). Used in finance to describe the percentage change in interest rates or yields.
• Russell 2000/S&P 600/S&P 400: Indices tracking small-cap, and mid-cap US stocks respectively.
• 18A Manufacturing Process: Intel’s advanced chip manufacturing process, intended to compete with TSMC’s leading-edge technology.
• ASIC: Application-Specific Integrated Circuit – a microchip designed for a specific application.
• Panther Lake: Intel’s new processor architecture.
• DRAM: Dynamic Random-Access Memory – a type of semiconductor memory commonly used in computers.
• Capex: Capital Expenditure – funds used by a company to acquire, upgrade, and maintain physical assets.
• Debanking: The practice of financial institutions terminating services to customers, often due to political or ideological reasons.

Market Overview & Performance (January 23, 2024)

The stock market experienced a second consecutive day of gains, seemingly erasing the volatility from earlier in the week.

• Dow Jones Industrial Average: Up approximately 300 points (0.61%).
• Nasdaq Composite: Up almost 1%, closing about ¼ off its intraday high.
• S&P 500: Up 0.5% (37 points).
• Russell 2000: Reached a record high, up 0.7%. The S&P 600 and S&P 400 also achieved record closing highs.
• VIX: Declined from a spike above 20 earlier in the week, returning to pre-volatility levels. This indicates reduced investor fear.
• Treasury Yields: The 10-year Treasury note yield remained relatively flat at 4.25%, while the 30-year yield decreased by 2 basis points to 4.85%. A previous high of 4.95% on the 30-year had caused investor concern.
• US Dollar Index: Down year-to-date and also down on the day, acting as a “pressure release valve” alongside rising stock prices. The inverse correlation between the dollar and stocks was noted as a positive sign.

Sector Performance:

• Leading Sectors: Communication Services (Alphabet, Meta - up 1.5%), Consumer Discretionary (Tesla, Amazon - up 1%), and Technology (Apple, Nvidia) were the strongest performers. Financials also showed gains.
• Underperforming Sectors: Real Estate, Utilities, Industrials, and Staples all underperformed and closed in the red.
• Notable Stock Movements: Meta up 5%, Tesla up 4% (contributing to mega-cap strength). Walmart and IBM down 1%, Merck down almost 2%. Proctor & Gamble and American Express up over 2%, Salesforce up almost 3%.

Intel Earnings Report & Analysis

Intel reported Q4 earnings, with mixed results:

• Q4 EPS: $0.15 (beat estimate).
• Q4 Revenue: $13.67 billion (beat estimate of $13.43 billion).
• Data Center & AI Revenue: $4.74 billion (beat estimate of $4.42 billion).
• Client Computing Revenue: $8.19 billion (slightly below estimate of $8.3 billion).
• Q1 Adjusted EPS: Missed consensus estimates.
• Q1 Revenue Forecast: $11.7 - $12.7 billion (below estimate of $12.56 billion).

The stock initially fell 4% in after-hours trading despite being up 40% YTD and 150% over the past 12 months. Analysts had focused on the 18A manufacturing process, foundry business potential, and favorable political environment.

Expert Commentary (Bob O’Donnell, Technalysis Research):

• The Q1 forecast was disappointing, but inventory limitations may be a factor.
• The server market is showing strength, and CPUs are increasingly important in AI computing.
• Intel’s ASIC business (networking chips) is growing.
• Panther Lake received positive initial reviews.
• Concerns remain about manufacturing yields for the 18A process.
• The DRAM market is a potential overhang, impacting PC and server production.
• Intel’s core PC customers are regaining confidence in the company.
• CEO Lip Bhutan acknowledged manufacturing problems and the need for improvement in yields.

Credit Card Interest Rate Debate & Bank Responses

President Trump has proposed a temporary cap on credit card interest rates at 10%. This has prompted responses from banks and policymakers.

• Bank of America & Citigroup: Reportedly exploring options for cards with a 10% rate, according to Bloomberg.
• Jamie Dimon (JP Morgan Chase): Warned that a 10% cap would be an “economic disaster,” potentially reducing credit availability by 80%.
• Sheila Blair (Former FDIC Chair): Argued that banks’ warnings are exaggerated and that rates could be cut without significantly reducing credit access. She cited a Vanderbilt study supporting this view.
• Political Dynamics: The issue has found common ground between Trump and Senator Elizabeth Warren, creating a challenging situation for banks.
• Trump’s Lawsuit Against JP Morgan: Trump is suing JP Morgan for $5 billion, alleging debanking for political reasons. Blair noted the timing of the lawsuit is curious.

Blair’s Assessment of the Banking System:

• Large banks are expected to have a strong year due to deregulation and favorable market conditions.
• Long-term stability is a concern due to the current economic stimulus and inflated asset valuations.
• The wealth effect (driven by stock market gains) is a key driver of consumer spending.

World Economic Forum in Davos & Upcoming Events

• The World Economic Forum in Davos concluded, featuring discussions on the economy, technology, and geopolitical issues. Elon Musk made his first appearance.
• Earnings: SLB (energy sector) will report Q4 earnings on Friday.
• Economic Data: The final consumer sentiment reading for January will be released on Friday.
• Special Coverage: A deep dive on the housing market ("Housing Crisis: The New Reality") will air on Friday at 4:30 PM Eastern.

Warner Bros. Discovery & Paramount Bidding War

Netflix’s all-cash offer of $27.75 per share for Warner Bros. Discovery is currently favored, with over 93% of WBD shareholders rejecting Paramount’s $30 offer. Paramount has extended its offer deadline to February 20th. Netflix’s move to an all-cash offer is seen as strengthening its position. The deal is being scrutinized for potential antitrust concerns, as it would give Netflix a significant market share (approximately 43%). Warner Brothers Discovery received the most Oscar nominations with 30.

Synthesis/Conclusion:

The market showed resilience with a second day of gains, though concerns remain about Intel’s guidance and the potential impact of a credit card interest rate cap. The bidding war for Warner Bros. Discovery continues, with Netflix currently in the lead. Upcoming earnings reports and economic data releases will provide further insights into the health of the economy and specific sectors. The overall tone suggests a cautious optimism, tempered by ongoing geopolitical and economic uncertainties.