Even at 92 years old, Warren Buffett can outwait you because he can afford to.
Buffett’s Berkshire Hathaway investing vehicle revealed in its 2Q earnings report on Saturday that it was sitting on a near-record cash pile of $147 billion, roughly the annual GDP of Ukraine. While Buffett’s choice to park that cash mostly in short-term Treasuries was seen as an endorsement of US government debt, it also suggests he hasn’t found much else to do with the money — namely, the splashy buyouts he’s known for. It’s not all bad, though: Buffett said high interest rates will bring the company $5 billion in investment income this year. Passive income indeed.
Morning Brief
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Leveraged loans return after debt builds up.
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Loyalty rewards start to betray consumers.
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Forget the pool. Go to the movies.
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Banking
Lower Recession Fears are Reviving Risky Loans
For banks, it’s the financial equivalent of Ozempic.
After about a year of being weighed down by roughly $80 billion of leveraged loans, banks are starting to offload some of that debt again, a sign that investors are starting to believe in the sweet spot of lower inflation without a recession to follow.
It’s So Heavy
Climbing out of the pandemic, large banks provided tens of billions of dollars in loans to fund major buyouts, including private-equity buys of Citrix, Nielsen Holdings, and the seismic $44 billion acquisition of Twitter last year by Elon Musk. Such leveraged loans are generally higher risk, but they’re also part of the standard practice of packaging up all that debt to sell to other investors on the secondary market.
But then global inflation took over, prompting central banks to raise interest rates to slow down white-hot price growth. And when interest rates go up too fast, too quickly, banks can be left holding the bag on securities they intended to offload. Lenders like Bank of America, Citigroup, and Goldman Sachs had two options: Sell the debt at a major loss or keep under-the-water debt on the balance sheets until the economy normalized. Thankfully, we might be heading in the latter direction:
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Banks still have plenty of unwanted debt, but investors seem more open to buying some of it than they were in 2022. Since May of last year, major banks have shed more than half of their “hung” debt exposure, which now sit at an easier-to-swallow $35 billion, according to Morgan Stanley data prepared for The Wall Street Journal.
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Bloomberg reported that leveraged loans have returned 8% so far this year, their best year since 2009, as the floating-rate instruments outperform other investments like junk and high-grade bonds in a rising rate environment.
Not as bad as we thought: At the end of July, the Federal Reserve raised interest rates for the 11th time in the last 18 months, with Chair Jerome Powell saying, “The process of getting inflation down to 2% has a long way to go.” Even if that doesn’t mean another rate hike — though Fed Governor Michelle Bowman predicts more in the future — it will still be a while before the Fed starts cutting. Yet many economists are increasingly buying into a mild recession as the absolute worst-case scenario.
Even resident doomsayer JPMorgan CEO Jamie Dimon has somewhat flipped his thoughts, recently telling The Economist that “Even if we go into recession, the consumer’s in great shape.” Instead, he’s more concerned about nuclear blackmail, starvation in Africa, and the escalating war in Ukraine. You could have left it at good economy, Jamie, but you had to go and make us feel bad.
–Griffin Kelly
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Retail
Companies are Getting Stingier With Customer Rewards
Rewards programs are less rewarding.
A swath of companies, from airlines to retailers, are paring down their perks in an effort to cut costs and revive consumer spending. The struggle is finding balance: Customers love free stuff, but give away too much, and investors rue the costs. Take away too much, though, and you alienate consumers.
Buying More, Getting Less
Retailers have started shrinking rewards as the pandemic’s buying bonanza tapered off. While inflation has begun to cool, rising prices followed years of people habitually looking to stretch their cash. As a result, a number of companies are capping rewards or forcing members to spend more to earn them, per a recent CNBC report. Frequent-flier perks are harder to earn at airlines, in part a reaction to customers essentially flying free after racking up points on credit cards during the pandemic. No more free birthday drinks at Dunkin’ Donuts, either.
Most businesses now have some kind of rewards gambit, either in-store or online. And most Americans — about 66% — belong to at least one loyalty program, according to market research firm Civic Science. Rewards schemes are more likely to appeal to younger demographics: 28% of Gen Z adults enrolled in them say they’re “very important” factors in choosing where to buy, compared to only 13% of Baby Boomers. And some rewards continue to deliver amid slumping spending:
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While many retailers including Amazon, Nordstrom Rack or Urban Outfitters are charging more to deliver or return packages, others including Target, Walmart, and Best Buy are offering loyalty programs that skirt those fees, but often at exorbitant prices ($180/year at Best Buy!).
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US retail sales rose in June for the third straight month, according to the Commerce Department, but the pace slowed from the previous month. Higher interest rates may be contributing to a slowing job market, which tends to make consumers less inclined to spend.
Retail’s Poly-curious: Some retailers have banded together to let buyers play the field. These “poly-reward” or “coalition” programs give discounts or perks at a network of partnered stores. They’re a hit outside the US and tend to pay off, as consumers spend more. But it’s hard to imagine cutthroat US retailers playing a team sport.
– Samson Amore
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Movie Theaters Can Thank Extreme Heat for a Boost in Ticket Sales
(Photo Credit: Krists Luhaers/Unsplash)
It’s not just Cillian Murphy’s beautiful yet tortured blue eyes driving people to the movies this summer.
In Southwestern markets like Los Angeles, Phoenix, and Tucson, Arizona, where daily temperatures have consistently surpassed 100 degrees Fahrenheit this summer, audiences are flocking to movie theaters to beat the heat, CNN reported.
It’s Getting Hot in Here
While Christopher Nolan’s Oppenheimer and Greta Gerwig’s Barbie were already on track to captivate audiences and bring in a combined box office of more than $1 billion, heat waves are providing another boost.
Many moviegoers have enjoyed the unofficial double feature dubbed “Barbenheimer,” allowing them to spend at least five hours in air-conditioned theaters:
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Boxoffice Pro analyst Shawn Robbins told CNN that US ticket sales have raked in $5.8 billion so far this year, $1 billion more than last year. While film quality and marketing plays a major role, “as we get into July and August, the dog days of summer, the heat can be a determining factor,” he said.
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And it’s not just the biggest films attracting audiences. In June, the Loft Cinema in Tucson hosted its annual 12-hour sci-fi slumber party, and program director Jeff Yanc told CNN it was one of the event’s most attended years. But this wasn’t your typical Star Wars or even Planet of the Apes-bolstered marathon. It was a niche selection including classics like Matango: Attack of the Mushroom People, The Last Starfighter, and Johnny Mnemonic.
The AC’s history: Before widespread adoption of air conditioning among movie theaters, summer was actually Hollywood’s lull period. The summer blockbuster as we know it didn’t exist in the days of Gloria Swanson, John Ford, and Charlie Chaplin. Once theaters began installing cooling systems in the 1920s, they opened their doors so that cool breezes would hit people walking by, subliminally tempting them to buy tickets, Salvatore Basile, author of Cool: How Air Conditioning Changed Everything, told CNN. Today’s theater ACs are relatively silent, and yet we still can’t hear half the dialogue in a Nolan movie.
–Griffin Kelly
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Extra Upside
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Wiggity Wack: Fake rapper and husband plead guilty in $4.5 billion Bitcoin launder scheme.
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