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5.2% profit on Sainsbury PLC in our upside view

SBURYexit

Sainsbury

 


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12% profit on Activision Blizzard Inc in our downside view

ActivisionEXITAtivision

 

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Banks’ Next Act Gets Tougher

Investors should savor the dividends and buybacks coming from big U.S. banks right now. They might not get the same kind of boost next year. Banks still likely have more loan-loss reserve releases to come. That will certainly boost earnings, but it will have a somewhat more limited benefit on capital levels because banks were allowed by regulators to delay some of the negative effects of reserving on capital during the pandemic. Releases also mean that banks would have smaller loss cushions for next year’s stress tests. Presumably, though, if economic conditions continue to improve markedly, the test scenarios also will get a bit less dire. 

Screenshot 02

Meanwhile, capital requirements not related to stress tests also might start to squeeze more. The biggest banks’ required extra capital buffers due to their global systemic importance look to be on the rise. Meanwhile, huge deposit inflows have also pushed banks closer to their leverage-ratio limits. The Fed could recalibrate all these rules, but the likelihood or outcome of those tweaks is tough to forecast.

Investors might just need to start to change their frame of reference on capital—especially if they are inclined to believe that the economy is improving, which would lead to loan growth and higher rates. Bigger can often be better in banking. Banks that slim down too much to free up capital to return might start to sacrifice longer-term earnings power at just the wrong time. Ultimately it isn’t the capital that really matters to investors but the return on capital.

 

10.2% profit on HSBC PLC in our downside view

HSBCexit

 

HSBC Holdings PLC LSE 20210519 18.03

 

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22.3% profit on Zynga Inc in our downside view

ZYNGAexit

Zynga Stock Is Plunging After Earnings. At Least 8 Analysts Cut Their Targets.

Zynga Inc 20210623 16.37

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Investors Double Down on Stocks, Pushing Margin Debt to Record

Some investors have been tempted to chase bigger gains—and have exposed themselves to potentially devastating losses—through riskier plays, such as concentrated positions, trading options and leveraged exchange-traded funds. Others are borrowing against their investment portfolios, pushing margin balances to the first record in more than two years, to buy even more stock.

A strong indicator of stock-market euphoria flashed red last month. Investors borrowed a record $722.1 billion against their investment portfolios through November, according to the Financial Industry Regulatory Authority, topping the previous high of $668.9 billion from May 2018. The milestone is an ominous one for the stock market—margin debt records tend to precede bouts of volatility, as seen in 2000 and 2008.

Screenshot 10

Investors using margin debt pledge their securities in exchange for loans from brokerage firms to make further investments. They can get into trouble if their collateral falls below a certain threshold, triggering a margin call. They then have the option of either putting up more money or selling the securities underlying the loans.

Many investors also use their margin balances to trade options, contracts that give them the right to buy or sell shares at a specific price, later. Options trading exploded this year as individual investors flocked to the stock market. A record number of options contracts have traded this year. An average of 29 million changed hands each day this year, a 48% jump from 2019, according to data from Options Clearing Corp.

 

12.4% profit on Pfizer in our upside view

PFEeit

PFE

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15.5% profit on Uber Technologies in our downside view

 

UBERexitUber Technologies Inc All Sessions 20201202 10.29

 

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