Fact of the day
Take a deep breath and step back. The big picture for market corrections doesn't need to cause alarm. When you’re investing for the long term, the time to recover from the bottom to the top might not be that long in the grand scheme of things.
How’s that for a dose of optimism with your morning cuppa?
What’s been happening?
Just after the financial crisis in 2008, market soothsayers cited a pharaoh’s dream told by Joseph in the old testament.
In the dream, ancient Egypt experienced seven years of bumper crops and feasts followed by seven years of famine.
The crisis certainly felt biblical and those seven years of famine turned out to be 15 for the UK’s banks. But the pandemic might be an important step in their long healing process.
Coming through the crisis unscathed is a win for the industry, and gives weight to the argument that it's time for regulators to take their foot off the industry's neck.
Management teams would also argue cultures have changed and we'll never again see the risk-taking of the credit boom days. We’ll have to see about that.
For now, all eyes are on the trajectory for interest rates in 2022.
Retail banking operations make money by lending to people and companies at an interest rate higher than the rates they pay to borrow.
Rate increases are generally good for banks because they have an immediate impact on the interest received from new loans, or existing ones that charge a variable rate.
It’s unlikely we’ll see more interest hitting our current account balances any time soon. We might get a free Boots meal deal or discounted train travel though.
Better than a poke in the eye and cheap for banks to shell out.
So rising rates tend to widen the spread between the amount of interest a bank pays and the interest it receives, boosting profits along the way. We saw evidence of this when NatWest reported its earnings last week. Let's see if Lloyds can follow suit tomorrow.
And banks, if you’re reading, less of the feasting please. The public wants to see a lean mean dividend-paying machine this time around.
You know when something objectively uncool gets called cool by someone relatively cool?
Something similar happened with Clipper Logistics this week.
While logistics may not strike you as the sexiest part of e-commerce, the firm’s shareholders would probably beg to differ.
The announcement that GXO Logistics will acquire the firm for £943bn sent Clipper’s share price on a tear.
GXO is Clipper’s American rival and is the designated order-handler for big names like Apple and Nike. On this side of the pond, Clipper’s customers include ASOS and Asda.
The deal means Clipper will soon de-list from the London Stock Exchange (LSE). It’s not the only one to be grabbed by a foreign firm this week either. Edinburgh-based aviation firm John Menzies just accepted a £558m offer from Kuwaiti firm Agility.
It’s yet another sign that the UK looks cheap to investors but that certainly doesn’t mean everything out there’s a good deal.
While GXO clearly thinks there are cost-savings or scale advantages from the Clipper deal, if we mere mortals pounce on shares just because they’re cheap, we might end up catching a falling knife.
Make sure you know why it’s cheap and whether it deserves to be, before you assume the market has unfairly cast it aside.
Got stung 🚑
It ain’t cheap being king. And boy, does DraftKings know it.
The firm forked out $981.5m for sales and marketing in 2021 to try and snatch customers from its competitors.
A 98.2% increase in costs for the year seemed to strike investors as a bit much. Not even annual revenue growth of 110.9% to $1.3bn could keep its share price from tumbling this week.
DraftKings and FanDuel (owned by UK-based Flutter) are kind of like the Coke and Pepsi of mobile sports betting. They’ve been duking it out since American states gradually began legalising sports betting in 2018.
At the end of 2021, FanDuel had 40% of the market while DraftKings had 29%.
To DraftKings’ credit, revving up promotions may be its best bet to steal from FanDuel’s base.
But you can’t just wave a wand and turn new customers into profitable ones too. DraftKings spent $10m on Superbowl promotions to lure in sports bettors on game day.
App installs shot up by 197% that week, though that doesn’t mean much for the firm’s future success. If DraftKings is going to recoup its costs, customers need to place a lot more bets after their initial download.
In the news
- The Evening Standard featured our thoughts on HSBC’s latest results.
- Our take on NatWest appeared in The Guardian, Proactive Investor and The Express.
- We were in Proactive Investors discussing how to hedge against inflation.
- The Express featured our comments on inheritance tax in your ISA and pension.
- Morningstar covered our analysis of Glencore’s recent earnings.
- And we were in The Telegraph discussing value stocks.
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