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Wall Street misses equity risk if inflation is beaten

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(Bloomberg) — The conventional wisdom of stock bulls is that prices will shoot up when the Federal Reserve wins its fight against inflation. But the end of rising consumer costs could unleash another round of bad news.

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For months, a small group of researchers warned of a potential risk to profits if the campaign to curb inflation was successful. Specifically, the pressure on margins that can occur if an indicator is exposed is known as corporate operating leverage in an environment where sales are flat.

The indicator is a measure of the difference between a firm’s fixed and variable costs. It can turn negative in the wake of peak inflation when some of the company’s costs remain high but are unable to offset them by raising prices because demand has faltered.

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While earnings have held surprisingly well throughout the pandemic and supported a number of bear market rallies, a drop in operating leverage may be the ultimate risk driving stocks eventually lower, according to a team of Morgan Stanley strategists led by Mike Wilson.

“Thinking about areas of inflation likely to remain more resilient in the coming year (shelter, wages, some services) and areas likely to slow (commodities) does not paint a constructive picture of S&P 500 margins, in our view,” wrote Wilson, one of the biggest bears on the stock On Wall Street, in a recent note to clients.

Operating leverage, which his team measured by subtracting sales growth from earnings per share growth, is unlikely to remain positive in the coming quarters, according to his team. And while he is one of many sell-side analysts who have expressed concerns about margin contraction, consensus estimates remain positive for the year ahead.

Equity analysts expect earnings to increase 5.56% for the first quarter of 2023 versus a 5.48% jump in sales as margins expand. The current pattern also continues for the whole of 2023: profits are expected to rise more than sales as operating leverage remains positive.

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Jonathan Golub of Credit Suisse AG stands with Wilson’s point of view. While explaining his S&P 500 target price cut recently, he wrote that “lower CPI combined with fixed wages should lead to margin contraction.”

Wilson’s team has been arguing for months that the final bottom line for stocks will not be set by the Fed, but rather by an earnings growth path. He sees a bottom of the S&P 500 in the 3,000-3,400-point range occurring later in 2022 or early next year.

Read more: Morgan Stanley’s Wilson says stocks could surge in earnings

While stocks are down more than 22% year-to-date, a number of sell-side analysts say the bad earnings news has already been priced in, and earnings could actually surprise and soar. Global 12-month forward earnings were adjusted every month in the most recent quarter. For Jim Paulsen of The Leuthold Group – a strong stock bull – the fact that profit margins have broken historical patterns and held up while inflation has risen means it may not be set to fall after all.

But Liz Ann Saunders, chief investment strategist at Charles Schwab, profit margins could take a hit as companies lose their ability to raise prices enough to offset higher fixed costs.

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“Inflation, especially early in the cycle, tends to imply pricing power for businesses,” Saunders said. Demand is strong and spending is strong. This is great news for earnings. If you then lose the demand side and you lose the inflation that helps raise prices, then you could have a problem.”

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US Outdoor Stocks Rose 20% After Exceeding Earnings Expectations (NASDAQ:AOUT)

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american outdoor brands (Nasdaq:AOUTShares rose about 20% on Friday after quarterly earnings beat expectations.

In its fiscal second quarter, the Missouri-based company reported $0.29 in adjusted earnings per share, $0.11 above consensus estimates, while revenue It basically met analyst expectations. Management noted that sales topped pre-pandemic levels, driven by strong e-commerce performance.

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“Our direct-to-consumer business, which is largely comprised of outdoor lifestyle brands, remained strong in the second quarter, delivering year-over-year growth of over 119%,” noted CEO Brian Murphy. Sales to consumer are a measure of how well our brands are attracting consumers, since these sales are typically unaffected by issues that have held back retailers, such as inventory levels or limited purchase open dollars.”

CFO Andrew Vollmer added that the company moved to clean up its balance sheet and inventory levels during the quarter. He noted that inventory was down $9 million from the previous year’s quarter.

“Turning to our forecasts, we believe that retailers and distributors remain cautious with their inventory levels, and that future consumer spending patterns remain uncertain. However, we believe that our brands are consistently operating with positive external trends for consumers over the long term,” Vollmer said. As a result, we continue to believe that our net sales for fiscal 2023 can exceed pre-pandemic 2020 fiscal levels by up to 25%.”

He added in comments to analysts during the company’s earnings call that management continues to pursue a $10 million share buyback program, and acquired 84,000 shares at an average price of $8.97 during the second quarter.

Shares are up 19.27% ​​to the upside through Friday afternoon.

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Read the Earnings call text.

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Marshall Weiss shares a profit share of £720m

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Marshall Weiss, one of the world’s largest hedge fund firms, is sharing profits of more than £720m between its partners after computer-based trading systems made solid gains during a turbulent period in global financial markets.

The London-based company, which was founded by Sir Paul Marshall and Ian Weiss in 1997 and manages around $60 billion in client assets, has turned a profit as turnover jumped 62 per cent to more than £1.5 billion, the company said in a filing. reported its results for the year through February.

The news comes after Sir Christopher Hohn, the billionaire founder of hedge fund firm TCI Fund Management, paid out a $690 billion dividend to a company he personally controls for the same period, up from $152 million a year earlier.

The bumper payouts come during a very mixed period for the $3.8 trillion hedge fund industry.

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While some managers profited greatly from betting on a massive government bond sell-off or the start of a bear market in stocks, many traders were hurt when the high-growth technology bets they favored during the never-ending bull market. It was hit hard by the sharp rise in inflation and interest rates.

Chase Coleman’s Tiger Global, once one of the world’s top hedge funds, decreased by more than 50 percent This year until October. In contrast, Crispin Odey gained about 150 percent in its European Odey fund, aided by bets against bonds, while Haidar Capital gained more than 250 percent.

Equity hedge funds are down an average of 11.3 percent this year through the end of October, while hedge funds are down an average of 4.5 percent, according to the HFR dataset.

Marshall Wace has posted strong gains in its computer-based funds, as some volume managers managed to lock in profits by buying stocks they considered oversold during a bear market.

Its Tops Market Neutral fund, which analyzes buy and sell recommendations from about 1,000 outside analysts, rose 23.7 percent last year and is up more than 17 percent this year, according to figures sent to investors and seen by the Financial Times.

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The company’s $17 billion flagship Eureka fund, which Marshall manages, gained 10.8 percent last year and is up 4.4 percent this year.

The company’s profits were shared among 23 partners, which included Marshall & Wace as well as parent company Marshall Wace Asset Management.

Meanwhile, Hohn’s TCI Index, which tends to bet on stock prices rising rather than falling, and which has benefited from the strong bull market seen during the coronavirus pandemic, posted a 160 percent increase in earnings to $714 million, driven by performance fees.

Most of the dividend paid to Hohn was subsequently invested in TCI’s hedge fund.

So far this year, the fund is down about 12 percent, according to one investor.

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Marshall Weiss and TCI declined to comment.

laurence.fletcher@ft.com

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CD vs. Savings account: How to choose the best for your money

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Whether you’re just starting to build up your savings, or you’ve been saving for a long time and are interested in opening a new account, one of the most important decisions you can make regarding your savings strategy is where you want to go. You’ll bless your money. There are a number of savings tools available to consumers that all work a little differently. Depending on what you’re saving and whether it’s a short- or long-term goal, your money may be better suited to one type of account than another.

Two of the most popular deposit products are traditional savings accounts, which are the most common Banks and credit unions width f Certificates of deposit (CDs) which are also commonly offered but may not be available in all areas.

What is the difference between a CD and a regular savings account?

A certificate of deposit, or CD, is a type of savings account that pays interest in return for setting aside funds for a specified period. The interest rate will not change for the duration of the CD. Once it reaches the maturity date, you will have access to the amount you deposited, as well as the interest you earned.

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CDs They come in different lengths – anywhere from a few days to 10 years. despite, 1 yearAnd the 3 yearsAnd the 5 years The terms are the most common cds that are offered across different financial institutions.

Savings accounts It is a type of deposit account that usually pays interest on your money, but allows you to make withdrawals without penalty (up to a certain limit). These types of accounts provide a bit more liquidity in case the account holder needs quick access to their funds. On the other hand, CDs lock your funds and tend to charge a heavier penalty for making a withdrawal.

The savings rates for these products also look a little different.

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CD pros and cons

CDs offer a number of advantages for savers who are committed to leaving their money alone for a set period of time, but for savers who are on the fence, putting money into a CD can be a risky move and carry large early withdrawal penalties if they suddenly need access to those funds. This is why it is generally a good idea to have a goal of your CD and the money you put into it. Having a specific goal in mind for that money, and emergency fund In a separate savings account when sudden expenses arise, it will ensure that you are not subject to any early withdrawal penalties and that you still have savings earmarked for short-term expenses.

The pro: CDs tend to have higher APYs than traditional savings accounts. This can work for you or against you depending on when you open your CD. If savings rates are higher, your money will grow faster. But if you open your CD when savings rates are on the lower end, your money won’t grow as much as it would if you waited. “The CDs and terms of this deposit are between you and the issuer, usually with more restrictions on when the money is available to you than a savings account but higher rates can be offered,” says Doug “Buddy” Amis, a certified financial planner and president at Cardinal Retirement Planning. Inc. in North Carolina.

Con: You will likely pay a penalty for early withdrawal. If you attempt a withdrawal before your CD reaches its due date, you will be liable for an early withdrawal penalty. This penalty varies with different account conditions and financial institutions, but can range from a few days of interest earned on the account to months of interest (which could mean forfeiting all compound interest you’ve earned).

The pros and cons of traditional savings accounts

Savings accounts provide a great deal of flexibility to customers with the ability to make frequent deposits and withdrawals without penalty. Depending on your savings goal, this type of structure may be a better fit. However, savings accounts are not without their drawbacks. Easy access to your money can tempt you to overspend and make it difficult to make big savings. Another drawback: interest rates fluctuate.

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Pros: Your savings will accrue on interest. While the savings rates for traditional savings accounts may be lower than for other deposit products, it is still a useful account and will help your money grow more than if you left it in your checking account.

Con: Savings rates can and will change. Unlike CDs, savers who choose a traditional savings account do not have the security of a certain APY lock. “The flexibility of a savings account allows savers to move money more easily from savings to checking to spending, and some savings accounts support direct debit like a checking account,” says Ames. Unfortunately, this flexibility comes with no guaranteed interest rate. Banks can easily change interest rates on the savings account while CD rates are guaranteed for the life of the certificate.”

How to choose between a CD and a regular savings account

If you are not sure which type of account is right for you, consider the following three questions:

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  1. What is your savings goal? If you’re saving money for a specific purpose like buying a car, a CD can help you increase the amount you’ve saved and ensure that when the time comes to buy your car, you have enough money set aside for you to earn. the purchase. However, if your goal is to create an emergency fund with three to six months’ worth of expenses, you’ll need immediate access to that money in case you experience a job loss or some kind of financial hardship. And you need to supplement your income. In these cases, a savings account may be the most appropriate option.
  2. How much do you have available to put into your deposit account? Both account types can have minimum balance requirements, but not all CDs allow you to make additional deposits after you’ve funded your account. If you don’t have a good amount of money saved up front, you may be better off choosing an account type that you can keep adding money to over time.
  3. How might potential penalties affect you? Putting money into a CD means that you don’t expect to need your money before your CD is due. Doing so could mean forfeiting all of the interest you earned, or at least a significant portion of it. You typically won’t pay any fees for withdrawals from a savings account as long as you don’t make any withdrawals that exceed the federal limit. However, if you find you have to go over the limit, most banks will charge between $5 and $10 per transaction.

It is important to remember that having both types of accounts is a viable option if it is what is best for your financial situation. If you have a mix of short-term and long-term goals, using a savings account to cover your short-term goals or emergencies, and a CD to increase savings goals that are further afield, can be a worthwhile strategy.

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