Happy Sunday.
Credit card delinquencies are rising at the fastest pace since 1991.
Since 2022, credit card delinquency rates have increased by +60%.
To put that in perspective, during the height of the Great Finance Crisis in 2008 credit card delinquency rates only increased by a peak of +50% — which means the 2023 everyday American is failing to make their minimum monthly payments despite unemployment rates being 7% lower than in 2008…
What the heck is going on?
Please remember, you should not be investing AT ALL if you’re carrying high-interest consumer bad debt (credit cards, personal loans, medical debt, etc.) — you can’t out-invest high-interest debt.
Week in Review — Too Long, Didn’t Read:
Microsoft remains the largest AI beneficiary, Google is beginning to care more about operating leverage, Amazon shows resilience, a potential credit crisis, the Japan carry trade, Bitcoin is ripping, Jamie Dimon sells $141M worth of JPMorgan Chase stock, GDP grew by +5%, and Core PCE grew by +3.7%.
Key Earnings Announcements:
Microsoft remains the largest AI beneficiary, Google is beginning to care more about operating leverage, and Amazon shows resilience.
Microsoft (MSFT)
Key Metrics
Revenue: $56.5 billion, an increase of +12% YoY
Operating Income: $26.9 billion, an increase of +24% YoY
Profits: $22.3 billion, an increase of +26% YoY
Earnings Release Callout
“With copilots, we are making the age of AI real for people and businesses everywhere. We are rapidly infusing AI across every layer of the tech stack and for every role and business process to drive productivity gains for our customers.”
My Takeaway
I couldn’t be more excited about Microsoft at the moment. Their Azure business segment finally experienced re-acceleration after 5 consecutive quarters of slowing growth — and management guided to only a modest -1 to -2% deceleration for the coming 12-months, a positive in my opinion given the general macro uncertainty.
Beyond Azure, something I’m very much excited about is how they’re continually able to take advantage of operating leverage. Their revenue during the quarter exceeded expectations by $2B, while their profits exceeded by $2.4B — operating leverage and discipline.
Finally, all eyes on Microsoft during November as they shared with us that now 40% of Fortune 100 companies are already using their AI-powered copilot. Eager to see how this one shakes out! I’m going to be increasing my Microsoft position into 2024 and buying any weakness after this stellar quarter as I believe their stock price (black) still has room to run in 2024.
Google (GOOGL)
Key Metrics
Revenue: $76.7 billion, an increase of +11% YoY
Operating Income: $21.3 billion, an increase of +28% YoY
Profits: $19.7 billion, an increase of +41% YoY
Earnings Release Callout
“The fundamental strength of our business was apparent again in Q3, with $77 billion in revenue, up 11% year over year, driven by meaningful growth in Search and YouTube, and momentum in Cloud. We continue to focus on judicious capital allocation to deliver sustainable financial value.”
My Takeaway
Google reported mixed results with revenue coming in slightly higher than expected — with outperformance in YouTube and Search. The company cited strong growth in the retail vertical, catalyzing momentum for their AI-powered advertising capabilities. Google will likely continue to benefit from the resiliency of the ad market — showing no signs of market share loss to Bing.
With that being said, their Cloud business segment experienced “only” 22% growth during the quarter – 2% below Wall Street’s forecasts. The tightening of the belt by corporations is continuing to impact Google, and weirdly enough, not other names like Azure whose growth actually accelerated this quarter.
Most importantly, there seems to be a sort of “debate” on Wall Street right now about Google. One side of the aisle believes Google will continue to optimize their spending — allowing them to benefit from operating leverage like Microsoft displayed (above). The other side of the aisle believes Google will continue to spend, spend, spend and instead of rewarding shareholders with cash flow / EPS, continue to reinvest into R&D and other expenses.
Considering the company has dramatically slowed their hiring of new employees, I have reason to believe they’re looking for operating leverage. I remain bullish on Google.
Amazon (AMZN)
Key Metrics
Revenue: $143.1 billion, an increase of +13% YoY
Operating Income: $11.2 billion, an increase of +343% YoY
Profits: $9.9 billion, an increase of +242% YoY
Earnings Release Callout
“We had a strong third quarter as our cost to serve and speed of delivery in our Stores business took another step forward, our AWS growth continued to stabilize, our Advertising revenue grew robustly, and overall operating income and free cash flow rose significantly.”
My Takeaway
Amazon delivered a strong quarter, with a very healthy guidance for the remaining quarter of 2023. While their revenue guidance for Q4 was modestly below expectations, management reaffirmed their expectation for AI-driving revenue to accelerate into 2024.
AWS margins of 30% came in much higher than Wall Street’s 24% expectations — this was paired with headcount reductions, a slower hiring process despite massive AI demand, continued cost control in non-people categories, and lower energy costs.
I firmly believe Amazon remains one of the best “earnings growth” stories in the market today, and certainly as we think about 2024 — AWS re-acceleration driven by AI, North America operating income delivering way ahead of expectations, International business segment back to break-even, and double digit revenue growth. Incredible!
Just look at these graphs — the first shows you their earnings-per-share expectations, and the second is their free cash flow expectations. Both are very exciting to imagine! I could see $175 / share in 2024.
Investor Events / Global Affairs:
A potential credit crisis, the Japan carry trade, Bitcoin is ripping, and Jamie Dimon sells $141M worth of JPMorgan Chase stock.
Risk to Financial Stability Rises
While yields in the corporate debt market — which is $10.6T+ in size — have been rising alongside the yields of U.S. Treasuries, spreads (or risk premiums) have remained relatively tame.
This suggests that credit investors haven’t been overly worried about the impact of higher rates on this supposedly rate-sensitive asset class.
Now, as the yield on the 30-year Treasury reaches heights not seen for decades — that dynamic seems to be changing.
The correlation between government bond yields and credit spreads on junk-rated debt has turned positive — signaling that risk premiums in corporate credit are now moving higher alongside benchmark rates.
Your takeaway is this — the Fed’s manipulation of interest rates does not only impact interest rates. This has been the most aggressive rate hikes in history — and we have not felt the full effects.
If financial stability in America comes into question and “more things break” — Jerome Powell is going to be in a very difficult situation.
Revisiting the Japan Carry Trade