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- [00:02]
Ann Berry
First Brands auto parts has gone bankrupt. We explore why the little known company's downfall is causing waves in private lending. The rise of stuffed crust pizza. We break down what sent Domino's share price up and why it also matters for grocery giant Albertson and banking OG JP Morgan. Great earnings, strong facts. But we look at the messages inside the big bank's headline snatching past 48 hours for Tuesday, October 14, this blue markets Daily and I'm Ann Berry. More market details to come. But first, an op ed in the Wall Street Journal, another earnings beat. It's been a busy two days for Jamie Dimon, CEO of America's largest bank, JP Morgan. But there's one particular play I think the savvy dealmaker is making when you cut through it all. More in that in a moment. Now, JP Morgan reported strength across the board in its earnings this morning, hitting total revenue of 47 billion dol for the latest quarter. IPOs and merger making drove investment banking fees up 16%. Trading profits were robust. New checking and private wealth account openings were up and lending rose overall, exceeding expectations. But let's look beyond the numbers to what Jamie Dimon has been saying. It's not just the counting that matters because the market reacts almost as much to the comments of someone with as much access to America Wide data as he does, which is why today's earnings call is especially important. Now, amid the good news, diamond issued a caution about the U.S. economy now and in general terms. He pointed to risks of softening job growth, geopolitical uncertainty, high asset prices and also sticky inflation. He also warned about debt being issued outside banks. Let's hear what he had to say today on that call.
- [01:54]
Jamie Dimon
If you look at like CEOs CLOs and lending to leveraged entities that are underwritten with leverage loans, so there's kind of a little bit of double leverage in there. I would say that yes, there will be additional risk in the that category that we will see when we have a downturn.
- [02:11]
Ann Berry
Now hold on to that Ford, because when Jamie Dimon talks about leverage and when he uses the word cockroach, the market sits up and really takes notice. Stay with us to the end of the show because we're going to come back to this exact point. Now the importance of what Dimon has to say is also why I was so struck by his writing in the Wall Street Journal yesterday in an op ed, he announced a 10 year program called the Security and Resiliency Initiative in which JP Morgan commits to support American investment in key areas. And they're going to sound very familiar. Supply chains and advanced manufacturing, aerospace and defense energy, and of course AI quantum computing and cybersecurity. And he cited specific examples such as building American quote, manufacture of life saving pharma ingredients and updating electricity transmission. These are exactly the kinds of areas that the market in general is excited about. But the White House is focused on too. Now, JP Morgan would make a quote $1.5 trillion effort to help with the financing of all this. Although candidly, shoring up financing from other people is what the bank does anyway. It's really just a call to companies in those specific sectors. And this is JP Morgan saying we want to be top of mind, come to us when you have business to do. And diamond did say that the bank will use its own money up to quote, $10 billion in these investments. Frankly though, sounds like a big number, tiny money for this giant. So what is he really doing? Well, this is just one person's view. Jamie Dimon is very politically savvy. I admire him for it. And his patriotic rallying cry to invest in America sounds to me more like a mating call. For one thing in particular, and that's the prospect of a juicy IPO fee. The White House is reportedly considering a public offering of part of Fannie Mae and Freddie Mac. These were established by Congress in 1938 and 1970 respectively to provide liquidity to the mortgage market. They are private companies and but they have operated under federal conservatorship since the 2008 financial crisis. Press reports suggest that these companies could be valued at a combined $500 billion, which would make any IPO of the companies together or apart, all of them or a piece of them, massive. And the fees to the banks arranging those IPOs also massive. And I've no doubt that Jamie Dimon's timely support of all things USA coincides with adjusting that is happening right now for a part of those massive. All the banks are circling trying to win a piece of the action. Jamie Dimon is, after all, one of the most commercial CEOs out there. We'll keep watching. Coming up, we explore how the recent bankruptcy of an auto parts company exposed potential risk in private credit. But first, a word from our sponsor capital client group. Now our producer John and I were talking about some other podcasts that we listen to.
- [05:01]
John Coteau
That's right, some of the best lessons don't come from a classroom. They come from experience on the Power.
- [05:05]
Ann Berry
Of Advice, a new series from Capital Ideas and Capital Group. You'll hear from CEOs, investors and founders about how they built careers, took risks, and reinvented themselves.
- [05:14]
John Coteau
And if you're starting your own journey, this is the kind of advice you won't want to miss. Published by Capital Client Group, Inc. Well.
- [05:20]
Ann Berry
Two recent bankruptcies in the auto sector, First Brands and Trickolor, are raising big questions about how private credit operates. Now, these companies are not household names. I hadn't heard of one of them, and the other I hadn't thought about in many years. But their downfalls could mean the loss of billions of dollars and expose a complex web of debt structures and intermingling and put a spotlight on the private credit funds, propping them up. So let's start with First Brands. And I'm going to say the reason we're bringing this story up, it may seem obscure right now, but stick with us because there are reasons we think that we're going to keep covering this one over the next couple of weeks.
- [05:58]
John Coteau
Absolutely. So let's start with First Brands. It's a global conglomerate that manufactures auto parts. And I'm not familiar with these. I take the train. But it's brands like Autolyte spark plugs, Ank wiper blades. All right, so the company was founded in 2013, and it grew rapidly, using loans to acquire 15 competitors. And so we'll come back to that. And as of last year, the company said it employed 26,000 people, had sales of around $5 billion. And the company filed for bankruptcy last month. It had $10 billion in debt. Yesterday, its founder, Patrick James, stepped down. And new directors within the company are investigating accounting regularities tied to the company's complex financial arrangements and saying that debt collateral may have been quote commingled.
- [06:42]
Ann Berry
So many syllables and so many mentions of the word debt. So as I'm listening to this, John and I spent some time reading about this over the weekend. So, First Brands, multiple layers of financing, multiple layers of debt. And what's emerging in the reporting and the coverage of this is that lenders didn't really have a full picture of what exactly their borrower was doing as it was going out and raising all of this debt. And so the one word that I honed in on there is commingled. And I also look at the word layers of financing, Right? And those two things, frankly, create a pit in my stomach. Basically, what it seems as though First Brands was doing in one area of its capital structure was they were going out to lenders and saying, hey, lender, guess what? I've got this great customer, and the customer owes me X amount of dollars in revenue. Just Lend me the money, that amount of money until they actually pay up. Me. Pay me the cash. Right. And one of the problems that's unfolding here is investors are worried that First Brands gave that shtick to a bunch of different lenders, didn't disclose that they were going out to lots of different parties to basically get the same kind of debt on the same assets. And now the real concern, the alarm bells are ringing because it seems that maybe $2.3 billion of debt was raised this way, generating $2.3 billion of cash into the company, which maybe has now, quote, vanished.
- [08:02]
Danielle DiMartino Booth
Right.
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John Coteau
I keep hearing that it's vanished. And that sounds criminal.
- [08:05]
Ann Berry
Well, actually, it is. That's not just a turn of phrase because there are now reports that the Justice Department are investigating to find out what exactly has happened. And the word that kept coming up over and over and over again was debt. Right. So there's a specific kind of debt, which is when companies borrow against their accounts receivable. That's the promise that your customer is going to pay up. But there's other kinds of debt in first brands, too. $6 billion in high yield, affectionately known as junk debt, which actually sits on its balance sheet. That's where you tend to have the most visibility. It's other stuff that you structure cleverly and you have sitting off on your balance sheet that's really causing some anxiety. And I will just say that, looking at this, lots of folks are saying they're getting deja vu, that there are precedents in history that do not sit well with them as they think about this set of facts. Right.
- [08:55]
John Coteau
Well, they're saying, is this an auto parts company or is it becoming a finance company? So people are thinking back to Enron, which was a utilities company.
- [09:02]
Ann Berry
Yeah.
- [09:03]
John Coteau
But really it came down to was it giving out loans in a finance company? And just yesterday, I'm going to throw to a clip, you spoke. You spoke with Danielle DiMartino. Booth.
- [09:13]
Ann Berry
Yeah.
- [09:13]
John Coteau
And she had this to say about the situation.
- [09:16]
Ann Berry
Yeah.
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Danielle DiMartino Booth
If First Brands, which is just some. Who cares about air filters. If First Brands is our Enron and we are finding out every single day that it is a massive financing company. Yes, there are auto parts involved. But last night before I fell asleep, you know, one of the financing arms of this company said that $2.3 billion had up and vanished. Vanished. And I'm like, oh, this is so, so, so, so Enron or Tyco or WorldCom.
- [09:51]
Ann Berry
Interesting. So Danielle's seen a lot, John. So the fact that she's looking back and saying I'm having deja vu here was just a really one of the highlights of that conversation was actually getting her perspective on this.
- [10:00]
John Coteau
And this has made markets nervous because some of the banks that are affiliated with the lending here, Jefferies, UBS, BlackRock, they've been affected. And Jefferies stock fell 18% after these losses came out, thinking, are they going to have large exposure to this?
- [10:14]
Ann Berry
Right. So there's something about this that really is just starting to rattle folks. It is again, that sense of deja vu, an 18% drop in your stock price after news like this comes out is incredibly meaningful. There's a real red flag. So much so that the CEO actually had to come out and reassure investors into Jefferies that he actually thinks this contained and everything will end up being manageable. Also, just to give another sense, this Enron analogy, it's an important one because it reminds us of all the machinations and the way that this kind of behavior happened. Enron, though, at the time that its troubles were surfacing, you know, its peak market cap was $70 billion. At the time, it was the seventh largest publicly traded company in the United States. So just in terms of scale, I don't want to sort of overstate, but it's the substance of this that really matters. And the other issue here is trickle or Tricolor? Tricolor, the other company that has gone bankrupt, is also starting to utter another word that's giving people the jitters.
- [11:08]
John Coteau
That's right, subprime auto loans. Jamie Dimon commenting. We were talking about him earlier today on First Brands and Tricolor. He said, I probably shouldn't say this, but when you see one cockroach, there are probably more. Everyone should be forewarned on this one. So maybe the size and scale isn't that big, but. But they're starting to see little cockroaches. There might be more.
- [11:29]
Ann Berry
And JP Morgan in this issue, in this piece of it does seem to have some exposure to tricker law. Doesn't though seem to have was not involved in lending to First Brands. But the complexity of all of this is there are ricochet effects, there are ripples. And so what happens to one bank does tend to get attention from all the others. And what this is shining a light on is if folks don't do their homework, if folks get sold, for example, the same asset over and over again, this is where you run into issues. So we're going to keep watching this one because there's actually more to it than meets the eye. This is also one where I do think that the themes that are hidden in there are the kinds that make the market sit up and pay attention. So I think there are a lot of people quietly watching how this bankruptcy unfolds. Let's take a quick break and when we come back, why Domino's and Albertson stocks are up today and what it might say about consumer sentiment. Brew Markets Daily is sponsored by Public, the platform for those who take investing seriously. John, if you were to create a portfolio from scratch right here and now, what would you want to know?
- [12:28]
John Coteau
I mean, okay, at the very least, stocks, options, bonds and crypto.
- [12:31]
Ann Berry
Well, it's a good thing. Public combines a wide range of asset classes with the tools you need to build and manage your wealth. All of that plus Public has Alpha, an AI powered research assistant that can help you find the answers you're looking for.
- [12:42]
John Coteau
In fact, AI is woven into the entire experience of Public, from portfolio insights to earnings call recaps. Public gives you smarter context at every touch point.
- [12:50]
Ann Berry
Earn an uncapped 1% match when you transfer your old investment portfolio over to Public. Get started at public.com brewmarkets that's public.com brewmarkets full disclosures on public.com brewmarkets well, growing up, my family couldn't dine out much, but when we did, stuffed crust pizza at Pizza Hut was the ultimate treat. So I got to have a little trip down memory lane today while unpacking Domino's earnings, it just reported a healthy 5.2% US same store sales growth. That's a golden metric for restaurants, and it was a pretty good outcome. Now this was driven in part by the success of the Stuffed Crust Delight since its launch at Domino's this spring. But this also caught our eye because its performance was so much better than the other quick service concepts we've covered recently, folks like Carver and Sweetgreen. Those have been seen in customers paring back on eating out and their growth declining. Now, as well as innovating, the Pizza King ran a strong promotion. It was called Best Deal Ever, which let consumers get pizza for under 10 bucks with lots of toppings. And it rolled out a partnership with Doordash, which Domino's expects to see contributing more later this year. Despite this, Domino's did flag some warning signs about consumer sentiment. The CFO said on the earnings call that restaurant sales have visibly slowed in recent weeks. Well, taking note of that comment, I switched over to take a quick look at Albertson's earnings, also out today. And one of the reasons I love the markets and I love earnings season is you can go and find sort of pieces of a jigsaw puzzle and start putting them together to figure out what's going on at a larger scale. So in this instance, I wanted to see two slides of what I think are the same coin. In prior cyc, weakening of consumer sentiment often came with people just eating out less. But as a result, they were purchasing more groceries. And then within groceries, shoppers tended to buy cheaper brands. So I wanted to see if Albertsons are seeing this phenomenon happening right now. And sure enough, there are signs of consumer uncertainty there too. CEO Susan Morris said Albertsons shoppers are using more coupons, they're spending more on private labels, so read value. And they're also not splurging outside their essential purchases as much, despite the fact that Albertsons is trying to lure more purchasing by absorbing cost increases and keeping prices down. So between these two companies, the signs are starting to read difficult for consumers. Going to Domino's and Albertsons now. Both companies are trying to offset this risk. The pizza chain doing so with cost cuts. The grocer with more pharmacy and digital sales. For today, Domino's stock up nearly 4%. Albertsons up nearly 14%. We're going to keep watching because all of these are little pieces of the information puzzle and how consumer is doing. Well, it's 4:00pm on the east coast. The markets have closed and we don't have a ticker tape. So let's throw it over to our human ticker. John, thanks.
- [15:40]
John Coteau
It was a rocky day for the major indices on Wall Street. The S&P 500 finished down nearly 2.10 of a percent. The NASDAQ finished down 7.10 of a percent and the Dow finished up 4.10 of a percent. Another day, another commercial partnership with OpenAI. Today Walmart announced that its customers will be able to shop and purchase items directly on the ChatGPT platform using instant checkout, similar to recent arrangements with Etsy and Shopify. Additionally, on Walmart and Sam's Club websites, customers will be able to interact with ChatGPT in the search bar. Shares of Walmart were up nearly 4% today on the news.
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Ann Berry
Well, final thought on this one. It is the big week for bank earnings. We just unpacked what's going on at JP Morgan. Goldman Sachs also had its earnings results out today. Again, pretty healthy set of results. We saw that some with some others also. But there was a different piece of Goldman Sachs news that we wanted to flag and that actually announced yesterday and that is that the mighty bank is spending just under a billion dollars over the next couple of years buying Industry Ventures, which is an investor in venture capital firms and early stage startups. Now Industry ventures manages about $7 billion, which for Goldman Sachs is really not a lot of money. So why are they doing this? Well, one person's view, they're trying to go after two different things. Goldman Sachs too does not want to be left on the sidelines when it comes to getting involved in these big tech deals. And so gaining more SC more in that tech space by doing something like buying a big investor in the venture community is one way of getting into the flow a little bit more. The second thing here too, and we touched on it in our last story, is about continued access to private capital and private assets for retail investors. Banks are going to want to make sure that they're on the cutting edge of getting access to private investing vehicles out to more and more people. This to me, just another move in that direction. That's it for today's Blue Markets Daily.
- [17:33]
John Coteau
And Brew Markets Daily is hosted by Anne Barry and produced by John Coteau, Tarka, Belle Teef and Emily Milian. Our technical director is Uchena Waoghu and the president of Morning Brew Inc. Is Devin Emery.
- [17:41]
Ann Berry
Wake up tomorrow with the Morning Brew newsletter and tune in to Neil and Toby on Morning Brew Daily. See you back here tomorrow, same time, same place.