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Down 23%, Is Disney Stock a Buy in 2023?

With countless stocks on the rise in 2023, several streaming and entertainment companies have joined them — beginning a recovery from their steep declines last year. For instance, Walt Disney (DIS 0.10%), Netflix, and Warner Bros. Discovery have enjoyed stock price growth between 22% and 41% since Jan. 1.

Despite the market’s recent upward trend, Disney shares are still down 23% year over year. The company’s stock has enjoyed considerable growth in 2023, but it likely still has a mountain to climb before it fully gains investors’ trust as a strong buy.

Here’s why it’s wise to keep a long-term perspective with Disney’s stock in 2023.

A promising start to the new year

Investors have grown bullish about Disney shares in the new year, pumping up its stock 22% year to date. The rally was triggered by the box office hit Avatar: The Way of Water, which had earned $2.24 billion by Jan. 22, becoming the sixth-highest-grossing film in history. The sequel to 2009’s Avatar reportedly cost $350 million to produce, suggesting it will provide a much-needed boost to Disney’s media earnings.

Investors have been further encouraged by Netflix’s earnings release on Jan. 20, in which the streaming company revealed it added 7.6 million subscribers in its fourth quarter of 2022. As Disney has beaten Netflix for most subscribers in the two quarters prior, its stock has benefited from the prospect it could be in for a big boost to memberships.

In the fourth quarter of its fiscal 2022, ended Oct. 1, 2022, Disney’s media and entertainment segment reported a 3% year-over-year decline in revenue to $12.7 billion and a 91% decline in operating income to $83 million after a significant investment in streaming content. As a result, recent signs that the segment is recovering have its stock on the rise.

Disney’s stock is a very long-term hold

The last few years haven’t been easy for Disney, with its stock down 5% since 2018. By comparison, shares of streaming competitors Netflix and Apple are up 58% and 220%, respectively, over the same period. Disney has been hit far harder over the long term, with the company having to contend with pandemic closures in 2020 and 2021, which stifled revenue from theme parks and theaters. Then in 2022, Disney suffered from macroeconomic headwinds and the hefty expense of trying to succeed in the competitive streaming industry.

With pandemic reopenings seemingly here to stay, prompting consumers to boost parks operating income by over 100% in Q4, and Avatar: The Way of Water proving the box office is back, Disney should have a smoother and more lucrative next five years. However, that doesn’t mean you shouldn’t be cautious with its stock and be prepared to hold for five to 10 years as the entertainment giant fine-tunes its restructured business and achieves profitability in streaming.

When comparing price-to-earnings ratios in the streaming industry, Disney’s is by far the highest — seen in the table below.

DIS PE Ratio Chart

Data by YCharts

The figures suggest other entertainment stocks are currently offering more value than Disney, even with its shares down over 20% since last January.

Since its founding almost 100 years ago, Disney has proven itself as a king of entertainment in nearly any form. The company has only strengthened that claim with its swift growth in streaming, dethroning Netflix for most subscribers and market share in 2022.

The company’s primary strength lies in its almost unparalleled library of immensely popular media franchises, which includes such brands as Marvel, Pixar, Star Wars, Avatar, and the many titles under Walt Disney Studios. As a result, the company will likely be around another hundred years.

Investing in the stock market should always be done with a long-term perspective. Disney’s dismal growth over the last five years makes its stock feel unreliable, so it’s best to exercise caution with the company for now and be prepared to hold the investment well into the future.

Dani Cook has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Netflix, and Walt Disney. The Motley Fool recommends Warner Bros. Discovery and recommends the following options: long January 2024 $145 calls on Walt Disney, long March 2023 $120 calls on Apple, short January 2024 $155 calls on Walt Disney, and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.

Source: https://www.fool.com/investing/2023/01/26/down-almost-35-is-disney-stock-a-buy-in-2023/

Wisconsin advisor pulled $1.9 million fraud on clients

The Securities and Exchange Commission Tuesday charged a Wisconsin financial advisor with defrauding 13 clients of $1.9 million and also misrepresenting the risk of GWG bonds and other investments, claiming those investments were low risk.

The advisor, Anthony B. Liddle, 40, was barred from the securities industry last June by the Financial Industry Regulatory Authority Inc. after he failed to cooperate with Finra’s investigation into the matter. Calls to Liddle’s firm, Prosper Wealth Management, or PWM, Wednesday morning could not be completed. The firm had $15.7 million in client assets, according to its most recent Form ADV.

GWG Holdings Inc., which sold $1.6 billion in bonds backed by life settlements through a network of independent broker-dealers, said in April it had voluntarily filed for Chapter 11 bankruptcy protection. Investors don’t know what the L bonds are worth.

From at least June 2019 and continuing through May 2022, Liddle “conducted a fraudulent scheme that defrauded at least 13 of his advisory clients, most of whom were senior citizens,” according to the SEC. “As part of the scheme, Liddle also made misrepresentations to advisory clients. Liddle followed a common pattern during the scheme.”

Liddle directed clients to sell positions in securities and then to invest in the GWG bonds and other riskier investments, according to the SEC.

“First, Liddle misrepresented the risk of GWG L Bonds and other similar investments, and claimed the offered security was lower-risk than existing client investments,” according to the SEC’s complaint. “Based on Liddle’s misrepresentations, certain of his advisory clients were induced to sell, or directed Liddle to sell, existing securities holdings.”

Liddle would then tell clients to send their newly available funds, including some who held funds not managed by his firm, to the Prosper Wealth Management, under the guise that Liddle would use the funds to purchase the new, allegedly lower-risk security on the clients’ behalf.

In the end, he stole the money, according to the SEC.

“Instead, Liddle misappropriated the approximately $1.9 million clients sent directly to PWM, never purchasing any investments as they requested,” according to the SEC complaint. “Further, in order to
maintain the scheme, Liddle fabricated statements and made ‘interest payments’ purporting to be returns on client investments, but were in fact made by Liddle using client funds.”

Learn more about reprints and licensing for this article.

“First, Liddle misrepresented the risk of GWG L Bonds and other similar investments, and claimed the offered security was lower-risk than existing client investments,” according to the SEC’s complaint. “Based on Liddle’s misrepresentations, certain of his advisory clients were induced to sell, or directed Liddle to sell, existing securities holdings.”

Source: https://www.investmentnews.com/wisconsin-advisor-pulled-1-9-million-fraud-on-clients-233112

IARs in 10 states, D.C. must complete continuing education by year-end

IARs continuing education

The CE requirements are the first for investment advisors, who must take 12 credit hours of courses in products and practice as well as ethics.

Investment advisor representatives in several states will have continuing education requirements for the first time.

The states have adopted a regulation that requires all IARs registered in their jurisdiction to complete 12 credit hours of courses — six hours in products and practice and six hours of ethics — by the end of the year. The states where the rule went into effect as of Jan. 1 are Arkansas, Kentucky, Maryland, Michigan, Mississippi, Oklahoma, Oregon, South Carolina, Vermont and Wisconsin. The rule’s also in effect in Washington, D.C.

The regulation is based on a model rule released by the umbrella group for state securities regulators — the North American Securities Administrators Association — in late 2020. Each state must approve the measure either through the legislative or regulatory process.

“NASAA’s IA Representative Continuing Education Committee is working to assist jurisdictions [with] the adoption process and we are pleased to see adoption of IAR CE continue to grow,” Linda Cena, chair of the NASAA committee and licensing manager in the Michigan Department of Licensing and Regulatory Affairs, said in a statement. “Currently 11 states have continuing ed requirements on the books and at least four other states are in the process of adopting a CE framework.”

The CE rule applies to all registered IARs of investment advisory firms that registered with a state as well as those that are registered on the federal level with the Securities and Exchange Commission, according to NASAA background on the rule.

Broker-dealers, who are overseen by the Financial Industry Regulatory Authority Inc., have long had CE requirements. Thanks to the NASAA model rule, IARs are now getting CE obligations as well.

“I think it’s terrific for Oregon and ultimately for anybody in Oregon who works with an investment advisor,” said Jeremy Solomon, president and co-founder of Solomon Exam Prep, which is located in Portland, Oregon, and owned by CeriFi. “It adds to the professionalization of the investment advisory business.”

Advisors in Oregon will have to sign up for and complete 12 credit hours of approved courses offered by firms that are approved by NASAA. Solomon Exam Prep is one of them.

A course that lasts one hour in real time will qualify for one credit hour of CE, Solomon said. Advisors taking the course must score 100% on a quiz taken during or at the end of the course to obtain the credit. No pre-course preparation is required.

“Everything that is tested is in the course,” Solomon said.

The courses can be taken online at the pace the advisor prefers.

Under the model rule, IARs who are dually registered as brokers would meet their state CE obligation if they obtain the CE that Finra requires for registered representatives. States also would accept CE required for certain financial advice credentials — such as the certified financial planner and chartered financial analyst marks — if the educational material is approved for IAR CE.

Learn more about reprints and licensing for this article.

The states have adopted a regulation that requires all IARs registered in their jurisdiction to complete 12 credit hours of courses — six hours in products and practice and six hours of ethics — by the end of the year. The states where the rule went into effect as of Jan. 1 are Arkansas, Kentucky, Maryland, Michigan, Mississippi, Oklahoma, Oregon, South Carolina, Vermont and Wisconsin. The rule’s also in effect in Washington, D.C.

Source: https://www.investmentnews.com/iars-in-10-states-d-c-must-complete-continuing-education-by-year-end-232997

Where Will Disney Stock Be in 3 Years?

The clock is ticking on Bob Iger. The former Walt Disney (DIS 2.00%) CEO that figured he’d enjoy a happy retirement of writing books and potentially pursuing political ambitions is back at the helm of the media giant. There’s a lot to fix at the company, and it’s easy to wonder if he’ll be able to get everything done in two-year timeline he has established before stepping down again.

I’ll cut to the chase: I think Iger will still be CEO three years from now. Let me make an even more brazen market call, predicting that Disney stock will more than double in three years. The shares are down to roughly half of where they were at their peak two years ago, so let’s see why I think that the House of Mouse can be hitting new highs by early 2026 (if not sooner).

Person wearing purple mouse ears admiring Disney World's Magic Kingdom castle.

Image source: Disney.

What might the future hold?

Let’s assume what many market watchers consider to be obvious right now. The global economy will get worse before it gets better, and that’s going to be hit to the gut of Disney as a consumer-facing titan. Advertisers will pare back their marketing budgets for the company’s TV and streaming businesses. The iconic theme parks segment that set new records in fiscal 2022 will be challenged. Box office returns will continue the systemic decline that’s been happening for two decades.

Thankfully, the horizon is brighter than the pothole-filled road that lies immediately ahead. Let’s start with Disney’s media and entertainment distribution segment. Revenue rose 8% in fiscal 2022, as a 20% surge in its premium streaming business was enough to lift flat results at its legacy linear networks.

Disney+ — along with Hulu and ESPN+ — now account for nearly a quarter of the company’s total revenue. The sticking point here is that the direct-to-consumer streaming business served up an operating deficit of more than $4 billion in the last fiscal year. The red ink at Disney+ is the main reason why Iger is here and dismissed CEO Bob Chapek is not. When the platform launched three years ago, the goal was for Disney+ to become profitable by the end of fiscal 2024. With losses widening, it didn’t seem likely. As Iger’s primary objective, you have to like his chances of getting the balance right on the streaming end. It may not happen in two years, but three years from now we could be there. A recent price hike and the addition of an ad-supported tier should help Disney+ in the quest to add to the media giant’s bottom line instead of subtract from it by early 2026.

Ads will naturally come back to the market once consumers are spending again, and Disney’s unmatched content catalog and franchises will continue to make it a desirable market for advertisers to reach. Despite Avatar: The Way of Water becoming the first film since 2019 to top $2 billion in worldwide ticket sales, theatrical distribution will continue to be a challenge for Disney and its peers. The good news is that the company already has strong and established streaming platforms that will help offset any weakness at the local multiplex.

Turning to Disney’s theme parks business, the segment saved it over the past year as “revenge travel” became a thing. Folks paid a premium to get back to the leading theme park operator after scrapping vacation plans in 2020 and at least globally in 2021. This segment will see turnstile clicks slow this year if not next year if there isn’t a soft landing to the mounting economic pressures, but Disney’s gated attractions always bounce back.

The interesting year for the theme parks will be 2025, when its largest rival in Florida opens Epic Universe at Universal Orlando. Disney will need a response if it doesn’t want to squander market share at its largest resort. Iger hasn’t said a lot about the future of Disney’s theme parks business, but if he really wants to cement his legacy — and be able to stay away for good this time — it will have to be about more than just turning Disney+ around. It’s too late for Disney to have a new park in Florida to compete against Epic Universe when it opens, but the plans will likely be in place by then to keep patrons close and shareholders even closer.

Disney continues to be the class act of media stocks. Trailing revenue already exceeds its pre-pandemic peak of fiscal 2019. Analysts see adjusted earnings surpassing the all-time high of $7.08 a share it posted in fiscal 2018 by fiscal 2026. Getting the stock back above $200 in three years seems more than reasonable if Iger is largely successful this time.

Rick Munarriz has positions in Walt Disney. The Motley Fool has positions in and recommends Walt Disney. The Motley Fool recommends the following options: long January 2024 $145 calls on Walt Disney and short January 2024 $155 calls on Walt Disney. The Motley Fool has a disclosure policy.

Image source: Disney.

Source: https://www.fool.com/investing/2023/01/25/where-will-disney-stock-be-in-3-years/

Binance moves to block a key market manipulation tactic that makes a token look more popular than it actually is

  • Binance announced a new feature intended to minimize a key form of market manipulation called self-trading.
  • The Self-Trade Prevention function will block the execution of orders that would result in a self-trade.
  • Also known as wash trading, the tactic is when one party trade with itself to create the perception of beefed up trading volume.

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Binance is launching a new function Thursday to block a key market manipulation tactic, the cryptocurrency exchange announced Tuesday.

Called the Self-Trade Prevention Function, it is aimed at clamping down on users or groups of users that trade with themselves to create the illusion of higher trading activity.

Here’s how Binance described the practice, which is prohibited in its terms of use.

“Self-trading happens when a user or a group of related users trade with themselves. The same participant is on both sides of the trade, so there is no actual change in the beneficial owner of the traded asset.”

The exchange did note that not all self-trading is intentional, as large traders such as liquidity providers may run multiple strategies simultaneously and end up with two of their own orders paired up.

The new feature accounts for unintentional self-trading, according to the company, as it will block the execution of orders that would result in a self-trade.

The Self-Trade Prevention Function is optional, and won’t impact those who choose not to use it. It will be available to all of users of Binance’s API, which allows users to connect to the company’s services via programming languages to allow for automated trading. Users of the Binance site and app won’t be affected.

The crypto sector has been plagued by market manipulation. According to a recent working paper from the National Bureau of Economic Research, so-called wash trading accounts for up to 70% of all transactions on non-compliant crypto exchanges. It creates a false perception of higher-than-actual liquidity, which can then generate real interest from other investors.

Source: https://markets.businessinsider.com/news/currencies/crypto-exchange-binance-self-trading-market-manipulation-token-ftx-cz-2023-1?op=1

Microsoft announces new multibillion-dollar investment in ChatGPT-maker OpenAI

Microsoft CEO Satya Nadella speaks at the company’s Ignite Spotlight event in Seoul on Nov. 15, 2022.

SeongJoon Cho | Bloomberg | Getty Images

Microsoft on Monday announced a new multiyear, multibillion-dollar investment with ChatGPT-maker OpenAI.

Microsoft declined to provide a specific dollar amount, but Semafor reported earlier this month that Microsoft was in talks to invest as much as $10 billion.

The deal marks the third phase of the partnership between the two companies, following Microsoft’s previous investments in 2019 and 2021. Microsoft said the renewed partnership will accelerate breakthroughs in AI and help both companies commercialize advanced technologies in the future.

“We formed our partnership with OpenAI around a shared ambition to responsibly advance cutting-edge AI research and democratize AI as a new technology platform,” Microsoft CEO Satya Nadella said in a blog post.

OpenAI works closely with Microsoft’s cloud service Azure. In July 2019, Microsoft backed OpenAI with $1 billion, and the investment made Microsoft the “exclusive” provider of cloud computing services to OpenAI. Microsoft said Monday that Azure will continue to serve as OpenAI’s exclusive provider.

Microsoft’s investment will also help the two companies engage in supercomputing at scale and create new AI-powered experiences, the release said.

OpenAI is ranked by AI researchers as one of the top three AI labs worldwide, and the company has developed game-playing AI software that can beat humans at video games such as Dota 2. However, it’s arguably received more attention for its AI text generator GPT-3 and its quirky AI image generator Dall-E.

Read more about tech and crypto from CNBC Pro

ChatGPT automatically generates text based on written prompts in a fashion that’s much more advanced and creative than the chatbots of Silicon Valley’s past. The software debuted in late November and quickly turned into a viral sensation as tech executives and venture capitalists gushed about it on Twitter, even comparing it to Apple’s debut of the iPhone in 2007.

The technology also caught the attention of Google executives, who said in a recent all-hands meeting that while Google has similar AI capabilities, its reputation could suffer if it moves too fast on AI chat technology.

OpenAI’s founders included Sam Altman, Tesla and SpaceX CEO Elon Musk, Greg Brockman, Ilya Sutskever, Wojciech Zaremba and John Schulman. The group pledged to invest over $1 billion into the venture when it launched. Musk resigned from the board in February 2018 but remained a donor.

— CNBC’s Jonathan Vanian and Jennifer Elias contributed to this report.

Source: https://www.cnbc.com/2023/01/23/microsoft-announces-multibillion-dollar-investment-in-chatgpt-maker-openai.html

Coinbase Director’s Insider Trading Claims Against Binance Highlight Regulatory Failures

InvestorPlace – Stock Market News, Stock Advice & Trading Tips

The relationship between crypto companies is strained. Just as with the dot-com revolution over two decades ago, these companies are trying to dominate an up-and-coming industry. They are clawing at each other in order to get themselves to the top, as investors are seeing this week with Coinbase (NASDAQ:COIN) and Binance (BNB-USD). However, the relationship between the crypto market and regulators is even more strained. As Coinbase calls attention to alleged insider trading on its competitor’s trading floor, the news prompts a conversation around whether regulators’ approach to crypto is truly as effective as it could be.

Coinbase’s Conor Grogan took some big shots at Binance over the weekend. The director at the U.S.’s most prominent crypto trading firm is accusing its biggest competitor of conducting insider trades. Grogan claims to have found evidence of multiple shady trades in which wallets load up on cryptocurrencies just before Binance announces their intentions to list these same currencies. Upon announcement, these wallets unload their holdings for incredible profits.

Grogan’s claims seem to be backed up by other analysts and blockchain data sleuths. Of course, his company has been quite controversially connected to insider trading as well. In August of 2022, the Department of Justice (DOJ) and Securities & Exchange Commission (SEC) arrested three people, including a former Coinbase product manager. The regulators charged the three with insider trading, accusing Ishan Wahi of using insider knowledge from his employer to front-run trades with his accomplices.

The first ever crypto insider trading arrest has resulted in an ongoing trial, though one of the accused has pled guilty and faces a 10-month prison sentence. These Binance accusations, if true, make for an even greater instance of insider trading. They also prompt thought over whether regulators’ current methods of enforcement are enough.

Insider Trading Is a Threat to American Investors

Binance is not getting away scot-free with anything, to be clear. The company has regulators constantly breathing down its neck. There are a number of active probes into it right now. And yet, as Grogan and others point out, there is damning evidence of insider trading which regulators have been quiet on.

One might not see insider trading as vicious a threat as the money laundering investigations the SEC is undertaking into the company. Indeed, that years-long investigation ties activity on the trading app to the likes of the dark-web drug market. However, insider trading is not a victimless crime, especially given the size of the transactions.

When an insider buys and dumps thousands of a given asset, it can have a noticeable negative effect on price. An insider with enough of a holding can effectively tank an asset entirely by offloading their wallet, or spark a fear-driven selloff which is entirely manufactured.

With this in mind, then, why are regulators not jumping on this data and investigating Binance? After all, American investors are under threat by insider whales manipulating prices at their expense. It all has to do with a lack of clarity.

Coinbase Director’s Claims Speak to Need for Regulatory Clarity

There are plenty of reasons investors are calling into question regulators’ methods of handling crypto. “Regulation by enforcement,” as many have taken to calling it, is the SEC’s ability to use its authority over any crypto project it decides to. It leverages the lack of regulatory clarity for flexibility. This has drawn criticism for allowing the SEC to pick and choose which firms to investigate.

Former SEC chief John Reed Stark has leapt to defend the SEC’s choice to forgo regulatory clarity. He calls critiques of its crypto regulation “baseless” and full of falsehoods. He references the dot-com era as evidence that this regulation by enforcement works, saying “flexibility of [the SEC] to police the internet cleared out the more egregious instances of early online securities fraud.”

However, Grogan’s and others’ evidence of wrongdoings by Binance insiders shows this regulatory game plan isn’t working as efficiently as Stark is trying to make it seem. Grogan’s data shows these suspicious-looking trades have been happening for well over a year, and maybe even longer. The data seems quite egregious, and yet after more than 18 months, there are no signs of these transactions stopping.

Would regulatory clarity have compelled the SEC to take a look at these trades earlier? Likely so. It would also better align blockchain experts with regulators. The sleuths who have been watching these transactions could flag this activity to officials more quickly and willingly if they had a more clear-cut explanation of what regulators are looking to investigate. Instead, they shout about crypto injustice from the rooftops of social media. Indeed, the news surrounding these insider trading reports highlight the regulation by enforcement model’s hypocrisy more than ever before.

On the date of publication, Brenden Rearick did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Brenden Rearick is a Financial News Writer for InvestorPlace’s Today’s Market team. He mainly covers digital assets and tech stocks, with a focus on crypto regulation and DeFi.

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The post Coinbase Director’s Insider Trading Claims Against Binance Highlight Regulatory Failures appeared first on InvestorPlace.

Source: https://markets.businessinsider.com/news/stocks/coinbase-directors-insider-trading-claims-against-binance-highlight-regulatory-failures-1032034722?op=1

Cryptocurrencies Price Prediction: Litecoin, Cardano & Ethereum– American Wrap 25 January

Litecoin price has been rising in stair-step fashion throughout the winter, suggesting a well-established uptrend will continue higher. Resistance near the current price levels, however, should not be underestimated. Even if bulls continue pushing higher, there is a risk of institutional investors front-running Litecoin price higher.

Cardano (ADA) price shows signs of distress and signals some issues ahead as a part of the rally is being pared back. Although only 10% of the 61% rally has been given back thus far, the way the fade is happening is a reason to worry. Where other cryptocurrencies have quite crucial support points nearby to underpin the price action, ADA is dangling and set to drop another 10% quite quickly if bulls cannot turn sentiment back in their favor.

ADA/USD daily chart

Ethereum (ETH) price sees pressure mounting as profit-taking gets sped up by bulls exiting their positions in light of the risk events into next week. With several big central banks set to issue their first monetary policy meeting for the year, traders are bracing for a cold shower as several central bankers have recently issued warnings that a victory dance in the markets is too early and too premature since inflation remains historically elevated. As long as the 200-day Simple Moving Average (SMA) at $1,425 holds, the rally is intact, while any lower break is a warning sign.

ETH/USD daily chart

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ADA/USD daily chart

Source: https://www.fxstreet.com/cryptocurrencies/news/cryptocurrencies-price-prediction-litecoin-cardano-ethereum-american-wrap-25-january-202301251938

Investment Banks Are Coming Off a Tough Year: Can They Rebound in 2023?

It’s been a tough year for investment banks like JPMorgan Chase (JPM -0.33%), Goldman Sachs (GS -0.71%), and Morgan Stanley (MS -0.95%). Nobody wants to go public in this market — at least not with the conditions they’ve faced in the past year. Goldman Sachs recently announced it would lay off 3,200 workers as its investment bank division slumped.

Inflation, interest rates, and geopolitical uncertainty have all had a hand in creating an unfavorable environment for investment banks. In a hard-to-predict climate, companies are holding off on going public. But hope could be on the horizon — here’s what needs to happen for investment banks to bounce back soon.

How the Federal Reserve’s inflation-fighting tactics cause ripple effects in the market

It’s been a challenging market that has far-reaching effects on companies raising money. The root of the problem is inflation and the Federal Reserve’s actions to bring it down.

Inflation has been running hot for nearly two years, and it wasn’t until last year that the Fed began taking action. One way the Fed looks to curb inflation is by raising interest rates. The thinking behind this is that rising interest rates would encourage more saving and less spending, removing cash from the economy and rewarding savers with higher returns.

Elevated interest rates affect debt issuance, especially if companies don’t want to take on debt at those higher rates. The rising rates also affect the valuations of companies, as fixed-income investments become more appealing because of their higher, low-risk returns.

Equity underwriting takes a hit as IPO activity plummets

Interest rates have risen at a pace not seen in decades. As a result, we have seen more drastic pricing revaluations across equities, including privately held companies. This has created conditions that make companies uneasy about issuing debt or going public through initial public offerings (IPOs).

We can see the impact by looking at the recent earnings from some of the major U.S. investment banks. JPMorgan Chase’s investment banking revenue dropped 52% during the year. Meanwhile, Morgan Stanley and Goldman Sachs saw their IB revenue drop 49% and 48%, respectively.

The biggest driver of these declines was nearly nonexistent equity underwriting because IPO activity plummeted. According to EY, a global professional services firm, IPOs in the U.S. hit a 20-year low in terms of total funds raised. At Morgan Stanley, equity underwriting revenue was down 81%, and JPMorgan saw its revenue drop 69%.

Sentiment and outlook are key to the investment banking industry’s recovery

For the investment banking business to pick up, JPMorgan Chase Chief Financial Officer Jeremy Barnum says that people need to get “comfortable with valuation and the level of the market.” There’s been so much volatility in the past year, and companies would like to see more stable markets before taking action.

If markets stabilize, companies could get more comfortable at valuations, even below previous levels, and finally make a move. Paul Go, EY Global IPO Leader, says that investment banks will likely start slowly in 2023.

However, more favorable conditions could arise in the year’s second half. What could bring those conditions about would be slower inflation and smaller interest rate hikes — or even better, the Fed putting rate increases on hold. Finally, the sentiment would need to improve as companies wait for the right opportunity to go public or raise debts.

According to Barnum, JPMorgan’s pipeline for deals is robust, and many companies want to raise capital. When conditions do improve, there will be a good tailwind for the investment banking industry, boosting these companies’ stocks in the process.

JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Courtney Carlsen has positions in Morgan Stanley. The Motley Fool has positions in and recommends Goldman Sachs Group and JPMorgan Chase. The Motley Fool has a disclosure policy.

Interest rates have risen at a pace not seen in decades. As a result, we have seen more drastic pricing revaluations across equities, including privately held companies. This has created conditions that make companies uneasy about issuing debt or going public through initial public offerings (IPOs).

Source: https://www.fool.com/investing/2023/01/25/investment-banks-are-coming-off-a-tough-year-can-t/