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- Warren Buffett's Berkshire Hathaway invested $860.6 million in Amazon along with increased bets on JPMorgan and Red Hat, while reducing holdings in Southwest Airlines and Wells Fargo in the first quarter. (Bloomberg)
- WeWork CFO Artie Minson urged investors to see its $264 million Q1 losses as "investments." (CNBC)
- Investigators say PG&E was responsible for causing California's deadliest and most destructive wildfire in 2018, and may file criminal charges. (Axios)
- Senior managers at the Bank of England are now 31% female, approaching its target of 35% by 2020. Ethnic minorities, however, make up just 5% of top jobs, less than half of the 13% goal for 2022. (Bloomberg)
1 big thing: Bankers take cover
A recent survey of bank officers shows U.S. institutions are tightening their lending standards and raising rates on commercial loans and credit cards. Bankers say they have increasing concern about future economic growth, despite continued U.S. labor market strength and solid economic fundamentals.
The data banks are seeing runs contrary to the overall narrative of a strong U.S. economy, Axios' Courtenay Brown writes.
Driving the news: Credit card delinquency rates in Q1 hit the highest level since 2012, driven in part by a spike in overdue payments by people ages 18–29, according to a report out this week from the New York Federal Reserve.
What's happening: In addition to the inability to make credit card payments, the rise in younger borrowers' delinquency rates — by far the highest among all age groups — reflects the cohort jumping into the credit card market at a faster rate, as well as the eagerness of banks to latch on to younger consumers. Still, the delinquency rate remains well below that seen during the financial crisis.
- More young people are opening credit cards now than they did in the the past decade — about 52% in 2018 verses 46% in 2008, per the New York Fed — pushing up the likelihood of more delinquencies.
- Credit card accounts among young borrowers fell in 2009 following the passage of the Card Act, which added new rules for consumers under 21 looking to borrow and limited how much banks could advertise to young people.
- "There has been some recovery in credit card prevalence in recent years, consistent with increased issuance in card accounts," according to the Fed.
Why it matters: After the financial crisis, young people had been largely debt-averse — particularly with credit cards — as a result of the the Great Recession. But that trend looks to be reversing.
The bottom line: "Banks were a little concerned going forward and [expect to] tighten standards," David Norris, head of U.S. credit at TwentyFour Asset Management, tells Axios.
- "I think from the viewpoint of the marketplace, if that’s going to continue ... it works its way into consumer spending habits, consumer attitudes, and that can affect the demand side of the economy."
Bonus: U.S. debt is $1 trillion higher than previous record
The N.Y. Fed's latest report shows that total household debt increased by $124 billion in Q1. It was the 19th consecutive quarter with an increase, and household debt is now $993 billion higher than the previous peak of $12.68 trillion in the third quarter of 2008.
Between the lines: Delinquency rates are trending up again, and not just for younger consumers.
- The report found that seriously delinquent credit card balances have also risen for consumers aged 50–69.
- For borrowers aged 50–59 and 60–69, the 90-day delinquency rate increased by nearly 100 basis points each.
"People are probably extending themselves too much," said TwentyFour's David Norris, also noting that the headline numbers for Q1 U.S. GDP were a bit misleading.
- "Banks are seeing this currently and they're beginning to get concerned about credit quality and the quality of borrowers and they're trying to tighten standards. This is a signal that we need to watch out for."
Double bonus: Credit card delinquencies are steadily rising
In the Fed's latest U.S. bank senior loan officers survey, which provided data from the fourth quarter of 2018, loan officers predicted more delinquencies this year as a result of the growth of "non-prime" borrowers. They've cited that as a reason for an anticipated pullback in credit and an increase in rates.
- U.S. card holders are expected to pay $122 billion just in interest charges this year. That's 50% more than what they paid just 5 years ago.
- The average credit card assessed interest rate is now 16.91%. It was 13.14% in the first quarter of 2014.
- The average interest rate on retail cards is more than 25%.
2. U.S., China retail sales moving in the wrong direction
Even before President Trump heated up the trade war again, consumers in both the U.S. and China were slowing down their spending.
- China's retail sales rose 7.2% in April, the slowest rate of growth since May 2003, a sign their economy is cooling significantly.
- U.S. retail sales unexpectedly fell 0.2% last month when analysts projected a 0.2% increase. However, retail sales did show year-over-year growth of 3.1%.
3. Hedge funds and short sellers dig into health care stocks
Hedge funds and short sellers are raising their bets that lawsuits against pharmaceutical companies will drive down their stock prices and maybe even put them out of business.
Driving the news: Close to 2,000 lawsuits have been filed accusing big pharma companies of fueling the opioid epidemic.
- Drugmakers including Mallinckrodt, Allergan, Endo Pharmaceutical, Johnson & Johnson and Teva, and several drug distributors have been named as defendants.
The intrigue: Data from S3 Partners provided exclusively to Axios shows bets against biotech and pharmaceutical companies have risen 12% since the beginning of the year to nearly $62 billion of short interest.
- "Wall Street is underestimating the impact on companies from the opioid litigation," Justin Simon of health-care hedge fund Jasper Capital Management told the Wall Street Journal.
Why you'll hear about this again: Jasper has been betting against Mallinckrodt and other companies named in the lawsuits, WSJ reports, noting that "Some hedge funds have been watching for distress in the sector, citing certain companies' use of leverage or declining profitability."
- "On Teva's most recent earnings call, Chief Executive Kåre Schultz said, 'As you know, we have a lot of debt, so we don’t have that much money. So I think [opioid plaintiffs will] have to find somebody else if they want big settlements. It won't be with us.'"
4. Bayer's $66 billion headache
Bayer's stock price fell to its lowest in nearly 7 years this week, in the wake of a third U.S. jury verdict that found its Roundup weedkiller caused cancer. The plaintiffs were awarded more than $2 billion, the 8th-largest product-defect jury award in U.S. history.
- Bayer has lost more than 45% of its equity value since the merger with Monsanto, the maker of Roundup, for which it paid $66 billion. Bayer chose to do away with the Monsanto name and carry products like Roundup under its moniker.
5. But the stock market is going up again
U.S. stocks rose for the second day in a row because "trade tensions eased." Bloomberg reported President Trump would postpone a decision about new car tariffs on vehicles from Europe and Japan by up to 6 months that was due by Saturday.
The S&P 500 has shaken off about half of its losses since the the trade war with China flared up last week.