Tag Archives: Interest Rates

Business

Larry Summers predicts Fed will need to raise interest rates more than market anticipates

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Former Treasury Secretary Larry Summers said the Federal Reserve will likely need to raise interest rates more than the market anticipates as prices remain high but grew at slower rates in October. 

Summers told Bloomberg Television’s “Wall Street Week” with David Westin that the economy has a “long way to go” before inflation is under control. 

“My sense is that inflation is going to be a little more sustained than what people are looking for,” he said. 

The Fed has raised interest rates by 0.75 percentage points four times in a row in successive meetings, but Chairman Jerome Powell said it will likely raise it by a smaller amount at its meeting later this month. 

Still, he said the Fed needs “substantially more evidence to get comfort” that inflation is declining. Consumer prices rose at a slightly slower pace in October than expected despite Americans increasing their spending. 

Powell has said the Fed will continue to raise interest rates as much as necessary to get inflation under control. Officials are aiming for inflation to get back to a 2 percent annual rate. 

The stock market surged after Powell’s comments that the interest rate hikes will slow down. 

Some financial experts have expressed concerns about the Fed raising rates too much too quickly and causing an economic downturn. Reports have indicated the rising interest rate has not had a major effect on the overall economy, but Summers said the effects of the increases can happen suddenly. 

“At a certain point, consumers run out of their savings and then you have a Wile E. Coyote kind of moment,” he said, referring to the cartoon character who falls off cliffs while chasing Road Runner. 

Summers said a “real risk” for an “avalanche aspect” exists but added that the Fed should not change its target of 2 percent for inflation.

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Business

Jobs Report Keeps Federal Reserve on Track for 0.5-Point Rate Rise

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Fed officials have warned in recent days that they are likely to lift rates to and hold them at levels high enough to slow economic activity and hiring to bring inflation down from 40-year highs.

The employment report showed continued strong hiring and brisk wage growth, which is a source of concern to Fed officials because they are trying to slow both trends to prevent higher prices and wages from growing embedded across the economy.

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Employers added 263,000 jobs in November and the unemployment rate held steady at 3.7%. But revised wage data released Friday could concern Fed officials because it points to an acceleration in pay gains in recent months.

For the three months through November, average hourly earnings rose at a 5.8% annualized rate, the Labor Department said Friday. That is up from an initially reported 3.9% annualized rate for the three months ended October.

At the same time, senior Fed officials have clearly signaled their expectation that they can cool the pace of rate rises at their Dec. 13-14 meeting, ending an unprecedented string of 0.75-point rate rises at their past four meetings.

The Fed raised its benchmark federal-funds rate last month to a range between 3.75% and 4%, and officials have signaled they are on track to continue raising it to at least around 5% by next spring.

Federal Reserve Chair Jerome Powell said at a Brookings Institution event that the central bank is prepared to slow the pace of rate rises as soon as its December meeting. Photo: Valerie Plesch/Bloomberg News

The Fed’s preferred inflation gauge, the personal-consumption-expenditures price index, rose 6% in October from a year ago. Excluding volatile food and energy categories, the so-called core PCE index rose 5%. Economists often look at core inflation as a better gauge of underlying price pressures. The Fed targets 2% inflation over time.

Current pay gains are around 1.5 to 2 percentage points above what would be consistent with the Fed’s 2% target, Fed Chair

Jerome Powell

said during a moderated discussion on Wednesday. 

“We want wages to go up. We want wages to go up strongly,” he said. “But they’ve got to go up at a level that is consistent with 2% inflation over time.”

Mr. Powell said it was possible prices that rose sharply over the last two years, including housing costs and goods such as used cars, could decline in the coming year. But he signaled concern that inflation might ease to levels that are still too high. “Despite some promising developments, we have a long way to go” in bringing down inflation.

Mr. Powell and several of his colleagues have said they don’t believe wage growth played the primary role in driving up prices. But they are concerned that strong demand for labor and high inflation could create conditions that lead paychecks and prices to move higher in lockstep, which economists sometimes call a wage-price spiral.

“When you get to that point, you’re in serious trouble,” Mr. Powell said Wednesday. “We don’t think we’re at that point. But it can’t be that we can go on for five years at very high levels of inflation and that doesn’t work its way into the wage- and price-setting process pretty quickly.”

Fed officials have signaled they are entering a new phase of raising interest rates after having lifted them at the fastest pace since the early 1980s. Now, they are trying to determine more carefully how high rates will need to go and for how long to lower inflation.

Mr. Powell outlined two possible strategies. One would be to quickly raise interest rates well above the 4.5% to 5% level that many officials thought in September would be appropriate. Another would be to “go slower and feel your way a little bit to what we think is the right level” and “to hold on longer at a high level and not loosen policy too early.”

Mr. Powell indicated he and his colleagues were more comfortable with the second strategy because they don’t want to cause unnecessary damage to the economy. “We do not want to over tighten because cutting rates is not something we want to do soon,” he said. “So that’s why we’re slowing down and going to find our way to what the right level is.”

Write to Nick Timiraos at Nick.Timiraos@wsj.com

Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

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Business

20 dividend stocks with high yields that have become more attractive right now

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Income-seeking investors are looking at an opportunity to scoop up shares of real estate investment trusts. Stocks in that asset class have become more attractive as prices have fallen and cash flow is improving.

Below is a broad screen of REITs that have high dividend yields and are also expected to generate enough excess cash in 2023 to enable increases in dividend payouts.

REIT prices may turn a corner in 2023

REITs distribute most of their income to shareholders to maintain their tax-advantaged status. But the group is cyclical, with pressure on share prices when interest rates rise, as they have this year at an unprecedented scale. A slowing growth rate for the group may have also placed a drag on the stocks.

And now, with talk that the Federal Reserve may begin to temper its cycle of interest-rate increases, we may be nearing the time when REIT prices rise in anticipation of an eventual decline in interest rates. The market always looks ahead, which means long-term investors who have been waiting on the sidelines to buy higher-yielding income-oriented investments may have to make a move soon.

During an interview on Nov 28, James Bullard, president of the Federal Reserve Bank of St. Louis and a member of the Federal Open Market Committee, discussed the central bank’s cycle of interest-rate increases meant to reduce inflation.

When asked about the potential timing of the Fed’s “terminal rate” (the peak federal funds rate for this cycle), Bullard said: “Generally speaking, I have advocated that sooner is better, that you do want to get to the right level of the policy rate for the current data and the current situation.”

Fed’s Bullard says in MarketWatch interview that markets are underpricing the chance of still-higher rates

In August we published this guide to investing in REITs for income. Since the data for that article was pulled on Aug. 24, the S&P 500
SPX,
-0.50%
has declined 4% (despite a 10% rally from its 2022 closing low on Oct. 12), but the benchmark index’s real estate sector has declined 13%.

REITs can be placed broadly into two categories. Mortgage REITs lend money to commercial or residential borrowers and/or invest in mortgage-backed securities, while equity REITs own property and lease it out.

The pressure on share prices can be greater for mortgage REITs, because the mortgage-lending business slows as interest rates rise. In this article we are focusing on equity REITs.

Industry numbers

The National Association of Real Estate Investment Trusts (Nareit) reported that third-quarter funds from operations (FFO) for U.S.-listed equity REITs were up 14% from a year earlier. To put that number in context, the year-over-year growth rate of quarterly FFO has been slowing — it was 35% a year ago. And the third-quarter FFO increase compares to a 23% increase in earnings per share for the S&P 500 from a year earlier, according to FactSet.

The NAREIT report breaks out numbers for 12 categories of equity REITs, and there is great variance in the growth numbers, as you can see here.

FFO is a non-GAAP measure that is commonly used to gauge REITs’ capacity for paying dividends. It adds amortization and depreciation (noncash items) back to earnings, while excluding gains on the sale of property. Adjusted funds from operations (AFFO) goes further, netting out expected capital expenditures to maintain the quality of property investments.

The slowing FFO growth numbers point to the importance of looking at REITs individually, to see if expected cash flow is sufficient to cover dividend payments.

Screen of high-yielding equity REITs

For 2022 through Nov. 28, the S&P 500 has declined 17%, while the real estate sector has fallen 27%, excluding dividends.

Over the very long term, through interest-rate cycles and the liquidity-driven bull market that ended this year, equity REITs have fared well, with an average annual return of 9.3% for 20 years, compared to an average return of 9.6% for the S&P 500, both with dividends reinvested, according to FactSet.

This performance might surprise some investors, when considering the REITs’ income focus and the S&P 500’s heavy weighting for rapidly growing technology companies.

For a broad screen of equity REITs, we began with the Russell 3000 Index
RUA,
-0.18%,
which represents 98% of U.S. companies by market capitalization.

We then narrowed the list to 119 equity REITs that are followed by at least five analysts covered by FactSet for which AFFO estimates are available.

If we divide the expected 2023 AFFO by the current share price, we have an estimated AFFO yield, which can be compared with the current dividend yield to see if there is expected “headroom” for dividend increases.

For example, if we look at Vornado Realty Trust
VNO,
+1.01%,
the current dividend yield is 8.56%. Based on the consensus 2023 AFFO estimate among analysts polled by FactSet, the expected AFFO yield is only 7.25%. This doesn’t mean that Vornado will cut its dividend and it doesn’t even mean the company won’t raise its payout next year. But it might make it less likely to do so.

Among the 119 equity REITs, 104 have expected 2023 AFFO headroom of at least 1.00%.

Here are the 20 equity REITs from our screen with the highest current dividend yields that have at least 1% expected AFFO headroom:

Company Ticker Dividend yield Estimated 2023 AFFO yield Estimated “headroom” Market cap. ($mil) Main concentration
Brandywine Realty Trust BDN,
+1.82% 		11.52% 12.82% 1.30% $1,132 Offices
Sabra Health Care REIT Inc. SBRA,
+2.02% 		9.70% 12.04% 2.34% $2,857 Health care
Medical Properties Trust Inc. MPW,
+1.90% 		9.18% 11.46% 2.29% $7,559 Health care
SL Green Realty Corp. SLG,
+2.18% 		9.16% 10.43% 1.28% $2,619 Offices
Hudson Pacific Properties Inc. HPP,
+1.55% 		9.12% 12.69% 3.57% $1,546 Offices
Omega Healthcare Investors Inc. OHI,
+1.30% 		9.05% 10.13% 1.08% $6,936 Health care
Global Medical REIT Inc. GMRE,
+2.03% 		8.75% 10.59% 1.84% $629 Health care
Uniti Group Inc. UNIT,
+0.28% 		8.30% 25.00% 16.70% $1,715 Communications infrastructure
EPR Properties EPR,
+0.62% 		8.19% 12.24% 4.05% $3,023 Leisure properties
CTO Realty Growth Inc. CTO,
+1.58% 		7.51% 9.34% 1.83% $381 Retail
Highwoods Properties Inc. HIW,
+0.76% 		6.95% 8.82% 1.86% $3,025 Offices
National Health Investors Inc. NHI,
+1.90% 		6.75% 8.32% 1.57% $2,313 Senior housing
Douglas Emmett Inc. DEI,
+0.33% 		6.74% 10.30% 3.55% $2,920 Offices
Outfront Media Inc. OUT,
+0.70% 		6.68% 11.74% 5.06% $2,950 Billboards
Spirit Realty Capital Inc. SRC,
+0.72% 		6.62% 9.07% 2.45% $5,595 Retail
Broadstone Net Lease Inc. BNL,
-0.93% 		6.61% 8.70% 2.08% $2,879 Industial
Armada Hoffler Properties Inc. AHH,
-0.08% 		6.38% 7.78% 1.41% $807 Offices
Innovative Industrial Properties Inc. IIPR,
+1.09% 		6.24% 7.53% 1.29% $3,226 Health care
Simon Property Group Inc. SPG,
+0.95% 		6.22% 9.55% 3.33% $37,847 Retail
LTC Properties Inc. LTC,
+1.09% 		5.99% 7.60% 1.60% $1,541 Senior housing
Source: FactSet

Click on the tickers for more about each company. You should read Tomi Kilgore’s detailed guide to the wealth of information for free on the MarketWatch quote page.

The list includes each REIT’s main property investment type. However, many REITs are highly diversified. The simplified categories on the table may not cover all of their investment properties.

Knowing what a REIT invests in is part of the research you should do on your own before buying any individual stock. For arbitrary examples, some investors may wish to steer clear of exposure to certain areas of retail or hotels, or they may favor health-care properties.

Largest REITs

Several of the REITs that passed the screen have relatively small market capitalizations. You might be curious to see how the most widely held REITs fared in the screen. So here’s another list of the 20 largest U.S. REITs among the 119 that passed the first cut, sorted by market cap as of Nov. 28:

Company Ticker Dividend yield Estimated 2023 AFFO yield Estimated “headroom” Market cap. ($mil) Main concentration
Prologis Inc. PLD,
+1.29% 		2.84% 4.36% 1.52% $102,886 Warehouses and logistics
American Tower Corp. AMT,
+0.68% 		2.66% 4.82% 2.16% $99,593 Communications infrastructure
Equinix Inc. EQIX,
+0.62% 		1.87% 4.79% 2.91% $61,317 Data centers
Crown Castle Inc. CCI,
+1.03% 		4.55% 5.42% 0.86% $59,553 Wireless Infrastructure
Public Storage PSA,
+0.11% 		2.77% 5.35% 2.57% $50,680 Self-storage
Realty Income Corp. O,
+0.26% 		4.82% 6.46% 1.64% $38,720 Retail
Simon Property Group Inc. SPG,
+0.95% 		6.22% 9.55% 3.33% $37,847 Retail
VICI Properties Inc. VICI,
+0.41% 		4.69% 6.21% 1.52% $32,013 Leisure properties
SBA Communications Corp. Class A SBAC,
+0.59% 		0.97% 4.33% 3.36% $31,662 Communications infrastructure
Welltower Inc. WELL,
+2.37% 		3.66% 4.76% 1.10% $31,489 Health care
Digital Realty Trust Inc. DLR,
+0.69% 		4.54% 6.18% 1.64% $30,903 Data centers
Alexandria Real Estate Equities Inc. ARE,
+1.38% 		3.17% 4.87% 1.70% $24,451 Offices
AvalonBay Communities Inc. AVB,
+0.89% 		3.78% 5.69% 1.90% $23,513 Multifamily residential
Equity Residential EQR,
+1.10% 		4.02% 5.36% 1.34% $23,503 Multifamily residential
Extra Space Storage Inc. EXR,
+0.29% 		3.93% 5.83% 1.90% $20,430 Self-storage
Invitation Homes Inc. INVH,
+1.58% 		2.84% 5.12% 2.28% $18,948 Single-family residental
Mid-America Apartment Communities Inc. MAA,
+1.46% 		3.16% 5.18% 2.02% $18,260 Multifamily residential
Ventas Inc. VTR,
+1.63% 		4.07% 5.95% 1.88% $17,660 Senior housing
Sun Communities Inc. SUI,
+2.09% 		2.51% 4.81% 2.30% $17,346 Multifamily residential
Source: FactSet

Simon Property Group Inc.
SPG,
+0.95%
is the only REIT to make both lists.

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Business

Bank of America CEO predicts two years of pain ahead in the housing market

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New York
CNN Business
 — 

The CEO of one of the nation’s largest banks is preparing for an economic downturn in 2023. But he’s also hopeful that the likely recession will be brief and “mild.”

Bank of America

(BAC) CEO Brian Moynihan said in an exclusive interview with Poppy Harlow on “CNN This Morning” Tuesday that there is a lot of uncertainty in the global economy due to the potential US freight railroad strike, Russia’s war with Ukraine and Covid shutdowns in China.

So an economic pullback shouldn’t be a major surprise. But Moynihan told Harlow that the worst-case fears for the economy may not materialize — thanks to the continued resilience of American shoppers.

“That was predicted to happen earlier this year. There was going to be a real slowdown,” Moynihan said. “The Fed was going to raise rates and it’s all pushed out largely because of the US consumer.”

Moynihan’s comments about the economy are decidedly more bullish than some of his peers.

JPMorgan Chase

(JPM) CEO Jamie Dimon said earlier this summer that Americans should brace for an economic “hurricane.” And Goldman Sachs

(GS) CEO David Solomon told Harlow in July that there’s a “good chance” the United States has yet to reach peak inflation.

Still, Moynihan is concerned that there could be more tough times ahead for the housing market. Mortgage rates have skyrocketed this year due to the Federal Reserve’s series of aggressive interest rate hikes. That has made it difficult — if not impossible — for many younger Americans to buy a first home.

“This is the toughest thing. You have to slow down the economy. You have to slow down inflation. And the way you do that is raising interest rates,” Moynihan said. “The intended outcome of [the Fed’s] policies doesn’t feel good when you are trying to buy a home.”

Moynihan told Harlow that there could be two years of pain in the housing market before activity returns to normal.

But despite worries about the housing market, Moynihan said he’s still optimistic that the US economy will continue to lead the global recovery, especially given concerns about China’s recent Covid outbreak and the intensifying protests over the country’s strict lockdown policies.

“I think our economy is holding on better than the rest of the world,” he said.

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Business

Mortgage rates fall for the second week in a row

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Mortgage rates dropped again this week, after plunging nearly half a percentage point last week.

The 30-year fixed-rate mortgage averaged 6.58% in the week ending November 23, down from 6.61% the week before, according to Freddie Mac. A year ago, the 30-year fixed rate was 3.10%.

Mortgage rates have risen throughout most of 2022, spurred by the Federal Reserve’s unprecedented campaign of hiking interest rates in order to tame soaring inflation. But last week, rates tumbled amid reports that indicated inflation may have finally reached its peak.

“This volatility is making it difficult for potential homebuyers to know when to get into the market, and that is reflected in the latest data which shows existing home sales slowing across all price points,” said Sam Khater, Freddie Mac’s chief economist.

The average mortgage rate is based on mortgage applications that Freddie Mac receives from thousands of lenders across the country. The survey only includes borrowers who put 20% down and have excellent credit. But many buyers who put down less money upfront or have less than perfect credit will pay more than the average rate.

The average weekly rates, typically released by Freddie Mac on Thursday, are being released a day early due to the Thanksgiving holiday.

Mortgage rates tend to track the yield on 10-year US Treasury bonds. As investors see or anticipate rate hikes, they make moves which send yields higher and mortgage rates rise.

The 10-year Treasury has been hovering in a lower range of 3.7% to 3.85% since a pair of inflation reports indicating prices rose at a slower pace than expected in October were released almost two weeks ago. That has led to a big reset in investors’ expectations about future interest rate hikes, said Danielle Hale, Realtor.com’s chief economist. Prior to that, the 10-year Treasury had risen above 4.2%.

However, the market may be a bit too quick to celebrate the improvement in inflation, she said.

At the Fed’s November meeting, chairman Jerome Powell pointed to the need for ongoing rate hikes to tame inflation.

“This could mean that mortgage rates may climb again, and that risk goes up if next month’s inflation reading comes in on the higher side,” Hale said.

While it’s difficult to time the market in order to get a low mortgage rate, plenty of would-be homebuyers are seeing a window of opportunity.

“Following generally higher mortgage rates throughout the course of 2022, the recent swing in buyers’ favor is welcome and could save the buyer of a median-priced home more than $100 per month relative to what they would have paid when rates were above 7% just two weeks ago,” said Hale.

As a result of the drop in mortgage rates, both purchase and refinance applications picked up slightly last week. But refinance activity is still more than 80% below last year’s pace when rates were around 3%, according to the Mortgage Bankers Association weekly report.

However, with week-to-week swings in mortgage rates averaging nearly three times those seen in a typical year and home prices still historically high, many potential shoppers have pulled back, said Hale.

“A long-term housing shortage is keeping home prices high, even as the number of homes on the market for sale has increased, and buyers and sellers may find it more challenging to align expectations on price,” she said.

In a separate report released Wednesday, the US Department of Housing and Urban Development and the US Census Bureau reported that new home sales jumped in October, rising 7.5% from September, but were down 5.8% from a year ago.

While that was higher than predicted and bucked a trend of recently falling sales, it’s still below a year ago. Home building has been historically low for a decade and builders have been pulling back as the housing market shows signs of slowing.

“New home sales beat expectations, but a reversal of the general downward trend is doubtful for now given high mortgage rates and builder pessimism,” said Robert Frick, corporate economist at Navy Federal Credit Union.

Despite a general trend of falling sales, prices of new homes remain at record highs.

The median price for a newly constructed home was $493,000 up 15%, from a year ago – the highest price on record.

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Business

Mortgage demand rises as interest rates decline slightly

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A home, available for sale, is shown on August 12, 2021 in Houston, Texas.

Brandon Bell | Getty Images

Mortgage applications rose 2.2% last week compared with the previous week, prompted by a slight decline in interest rates, according to the Mortgage Bankers Association’s seasonally adjusted index.

Refinance applications, which are usually most sensitive to weekly rate moves, rose 2% for the week but were still 86% lower than the same week one year ago. Even with interest rates now back from their recent high of 7.16% a month ago, there are precious few who can still benefit from a refinance — just 220,000, according to real estate data firm Black Knight.

Mortgage applications to purchase a home rose 3% for the week, but they were down 41% from a year ago. Some potential buyers may now be venturing back in, hearing that there is less competition and more negotiating power, but there is still a shortage of homes for sale and prices have not come down significantly.

Rates are still twice what they were at the beginning of the year, but they eased somewhat last week. The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($647,200 or less) decreased to 6.67% from 6.90%, with points increasing to 0.68 from 0.56 (including the origination fee) for loans with a 20% down payment.

“The decrease in mortgage rates should improve the purchasing power of prospective homebuyers, who have been largely sidelined as mortgage rates have more than doubled in the past year,” Joel Kan, an MBA economist, said in a release. “With the decline in rates, the ARM share [adjustable-rate] of applications also decreased to 8.8% of loans last week, down from the range of 10% and 12% during the past two months.”

Mortgage rates haven’t moved at all this week, as the upcoming Thanksgiving holiday tends to weigh on volumes.

“It’s not that things aren’t moving. They just aren’t moving like normal,” said Matthew Graham, chief operating officer at Mortgage News Daily. “Expect things to get back closer to normal next week, but for the market to continue to wait until December 13 and 14 for the biggest moves.”

That’s when the government releases its next major report on inflation and the Federal Reserve announces its next move on interest rates.

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Business

Collapse of Carvana, the ‘Amazon of Used Cars’, Continues

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The sky is not clearing up for Carvana. 

On the contrary, big clouds continue to gather over the company which was one of the big winners of the covid-19 pandemic, with a massive growth. 

Since announcing its quarterly results on Nov. 3, Carvana  (CVNA) – Get Free Report shares have lost 44% of their value and are currently trading at $8.06 versus $14.35 on that day. This translates into a decline in market capitalization of approximately $1.1 billion in two weeks. Carvana currently has a market value of $1.43 billion.

The company, founded in 2012 and based in Arizona, took advantage of favorable conditions to market its new way of buying a car. The group’s car vending machines stuck well with the pandemic, a period during which consumers wanted to avoid contact as much as possible, to limit their exposure to the virus. 

The federal government had also flooded consumers with money via stimulus programs. Interest rates were almost zero, which meant that financing the purchase of a vehicle cost practically nothing. 

Added to this, the supply chains of car manufacturers were disrupted, which made the production of new vehicles difficult. Faced with these challenges, consumers turned to the second-hand market as the waiting times for new vehicles were long. Used car prices therefore jumped, making it a good deal for Carvana. 

Basically, all the winds were blowing in the right direction for the company.

New Car or Used Car?

But coming out of the pandemic, Carvana’s fortunes seem to have turned completely. The used car market remains hot. But all the other factors have reversed. There is no more stimulus money. The central bank is aggressively raising interest rates and inflation is at its highest in 40 years. The economy is also close to a recession more than ever, and the waves of job cuts follow one another. Used car prices remain high but financing the transaction has become very expensive for consumers. Supply chains have improved significantly, facilitating the production of new vehicles.

This was felt in the latest quarterly results from Carvana: In the third quarter, Carvana’s revenue fell 2.7% year-on-year to $3.4 billion, while net loss jumped to $283 million from just $32 million in the third quarter of 2021, the company said in a letter to shareholders.

Used car sales in the U.S. fell almost 13% year-on-year, in the third quarter of 2022.

“If you’re looking at newer used cars — models in the 1 to 3-year-old range, you may find that prices are still relatively close to what they sold for new,” Consumer Reports said. “If you have to borrow money to buy the car, it may be better to find a new car that can qualify you for a lower interest rate, to say nothing of the benefit of a fresh factory warranty. Many manufacturers subsidize financing and may offer interest rates that are much lower than normal to qualified buyers.”

All this complicates the affairs of Carvana, which had to go into $3.3 billion of debt to finance the acquisition of auctioneer Adesa’s physical auction business this year.

Carvana

Elimination of 1,500 Additional Jobs

The group is therefore under enormous financial pressure.

“Significant nearer-term operational and financial risks for Carvana have emerged and are likely to cloud the CVNA investment story for the foreseeable future,” Oppenheimer analyst Brian Nagel said in a note on Nov. 15, downgrading the stock.

He added that “we do not envision investors bidding CVNA meaningfully higher until prospects for a manageable and sustained capital base become clearer.”

Nagel seems to confirm that Carvana has a liquidity problem which the group must address fairly quickly if it wants to stop the collapse. The company has between $6 billion and $7 billion in debt net of the cash on the balance sheet, according to FactSet. 

But Carvana is not profitable: its adjusted EBITDA margin loss increased by 6.2% in the third quarter. EBITDA refers to earnings before interest, taxes, depreciation and amortization, which helps investors to gauge the financial health of a company.

The company is struggling to try to change things and delay as much as possible raising equity capital or adding more debt. Carvana, for example, is determined to drastically reduce costs. After cutting 2,500 jobs in May, the company has just announced an additional wave of layoffs which affects 8% of its workforce, or 1,500 employees.

“It is fair to ask why this is happening again, and yet I am not sure I can answer it as clearly as you deserve,” Chief Executive Officer Ernie Garcia told employees in an email on Nov. 18. “I think there are at least a couple of factors. The first is that the economic environment continues to face strong headwinds and the near future is uncertain. This is especially true for fast-growing companies and for businesses that sell expensive, often financed products where the purchase decision can be easily delayed like cars.”

In addition, “we failed to accurately predict how this would all play out and the impact it would have on our business. As a result, we find ourselves here.”

The new cuts will affect “many corporate and technology teams as well as some operations teams where we are eliminating roles, locations or shifts to match our size with the current environment,” Garcia wrote.

Reached by TheStreet, Carvana didn’t comment.

The new job cuts come after ratings agency S&P Global Ratings warned it was likely to downgrade Carvana in the near term, changing the outlook from stable to negative.

“GPU [gross profit per unit] is expected to remain weak due to higher used car depreciation rates and lower returns from selling loans and other products,” said the rating agency. “Carvana generates over 50% of its GPU from selling loans and other products. With rising interest rates, it is more difficult for Carvana to compete with the large banks that can keep loan rates low, which will reduce the number of loans allocated to Carvana.”

Garcia ruled out the option of raising capital on Nov. 3. 

“Our goals are going to be on driving down expenses and trying to get positive EBITDA as quickly as we can,” he told analysts. “We’ve got a bunch of committed liquidity. We’ve got a bunch of real estate. And I think that we feel like that puts us in a good position to ride out this storm. And we’re making great moves inside the company.”

But apart from these financial difficulties, Carvana also faces legal challenges. The company is facing lawsuits from customers in multiple states involving alleged issues over titles and registration and over purchasing vehicles.

Michigan Secretary of State Jocelyn Benson also suspended the retailer’s license, with Carvana suing in return.

Carvana has said the lawsuits are without merit and called the decision in Michigan “arbitrary.”



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Key inflation report indicates the Fed’s rate hikes may be starting to cool prices

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Minneapolis
CNN Business
 — 

A key measure of inflation, wholesale prices, rose by 8% in October from a year before, according to the latest report from the Bureau of Labor Statistics.

While still historically high, it was the smallest increase since July of last year and significantly better than forecasts. It’s the second inflation report this month to show signs of cooling in the rising prices that have plagued the economy.

Economists expected the Producer Price Index, which measures prices paid for goods and services before they reach consumers, to show an annual increase of 8.3%, down from September’s revised 8.4%.

On a monthly basis, producer prices rose 0.2%, below expectations and even with the revised 0.2% increase seen in September.

Year-over-year, core PPI — which excludes food and energy, components whose pricing is more prone to market volatility — measured 6.7%, down from September’s revised annual increase of 7.1%.

Month-over-month, core PPI prices were flat, the lowest monthly reading since November 2020. In September, core PPI increased by a revised 0.2% from the month before.

Economists had expected annual and monthly core PPI to measure 7.2% and 0.3%, respectively, according to estimates on Refinitiv.

President Joe Biden heralded October’s PPI report Tuesday calling it “more good news for our economy this morning, and more indications that we are starting to see inflation moderate.”

“Today’s news – that prices paid by businesses moderated last month – comes a week after news that prices paid by consumers have also moderated,” Biden wrote Tuesday. “And, today’s report also showed that food inflation slowed – a welcome sign for family’s grocery bills as we head into the holidays.”

For much of this year, the Federal Reserve has sought to tamp down decades-high inflation by tightening monetary policy, including issuing an unprecedented four consecutive rate hikes of 75 basis points, or three-quarters of a percentage point.

The better-than-expected PPI data reflects an economy that has slowed, with supply moving more into balance, said Jeffrey Roach, chief economist for LPL Financial.

Costs associated with transportation and warehousing, for example, declined for the fourth consecutive month, a likely result of the improved global shipping climate, he said. Producer costs for new cars fell the most since May 2017, he added.

“Barring geopolitical or financial crises, inflation should continue its deceleration into 2023,” he said in a statement.

Since PPI captures price changes happening further upstream, the report is considered by some to be a leading indicator for broader inflationary trends and a predictor of what consumers will eventually see at the store level.

“The PPI read certainly adds more fuel to the fire for those who feel we may finally be on a downward inflation trend,” Mike Loewengart, Morgan Stanley’s head of model portfolio construction, said in a statement.

Last week’s Consumer Price Index showed inflation slowed to 7.7% from 8.2% year-over-year for consumer goods, surprising investors and giving Wall Street its biggest boost since 2020.

The CPI data was “reassuring,” Fed vice chair Lael Brainard said on Monday, signaling that the rate hikes appear to be taking hold, and if the economic data continues to show inflation on the decline, then the central bank could scale back the extent of its future rate hikes.

“When you look at the inflation numbers, there’s some evidence that we’ve peaked, but are we coming down quickly?” Steven Ricchiuto, chief economist for Mizuho Americas told CNN Business.

Ricchiuto noted that the October figures are only a couple steps lower than what was seen in September.

“These aren’t the types of things that tell the Fed to stop tightening rates,” he said. However, “they may tell you [that] you don’t need 75 basis points.”

CNN’s DJ Judd and Matt Egan contributed to this report.

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U.S. Treasurys as traders look to PPI inflation data

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Treasury yields fell on Tuesday as markets awaited the release of October’s producer price index figures and digested U.S. Federal Reserve speaker commentary.

At around 4:20 a.m. ET, the yield on the benchmark 10-year Treasury was down by around three basis points to 3.8367%. The 2-year Treasury yield was last at 4.3677% after declining by four basis points.

Yields and prices have an inverted relationship. One basis point is equivalent to 0.01%.

Traders looked ahead to the latest PPI figures which are due later in the day. The PPI reflects wholesale inflation by measuring how prices paid to producers for goods and services develop.

Markets are hoping that the data will provide more clarity on whether overall inflation is cooling, after consumer inflation figures released on Thursday hinted at this.

Fed Governor Christopher Waller suggested on Monday that last week’s data was only part of the bigger picture and other data points would have to be considered before drawing any conclusions.

He also indicated that the Fed would consider slowing rate hikes, but a pause to them is not imminent.

Federal Reserve Vice Chair Lael Brainard also hinted at a potential slowdown of rate hikes in remarks made on Monday.

Investors have been following Fed speaker comments closely as uncertainty about the central bank’s future policy and concerns about the pace of rate hikes leading the U.S economy into a recession have continued.

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Fed’s Waller says market has overreacted to consumer inflation data: ‘We’ve got a long, long way to go’

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Federal Reserve Gov. Christopher Waller said Sunday that financial markets seem to have overreacted to the softer-than-expected October consumer price inflation data last week.

“It was just one data point,” Waller said, in a conversation in Sydney, Australia, sponsored by UBS.

“The market seems to have gotten way out in front over this one CPI report. Everybody should just take a deep breath, calm down. We’ve got a ways to go ” Waller said.

Investors cheered the soft CPI print, released Thursday, driving stocks up to their best week since June. The S&P 500 index
SPX,
+0.92%
closed 5.9% higher for the week.

The data showed that the yearly rate of consumer inflation fell to 7.7% from 8.2%, marking the lowest level since January. Inflation had peaked at a nearly 41-year high of 9.1% in June.

Waller said it was good there was some evidence that inflation was coming down, but noted that there were other times over the past year where it looked like inflation was turning lower.

“We’re going to see a continued run of this kind of behavior and inflation slowly starting to come down, before we really start thinking about taking our foot off the brakes here,” Waller said.

“We’ve got a long, long way to go to get inflation down. Rates are going keep going up and they are going to stay high for awhile until we see this inflation get down closer to our target,” he added.

The Fed is focused on how high rates need to get to bring inflation down, and that will depend solely on inflation, he said.

Waller said “the worst thing” the Fed could do was stop raising rates only to have inflation explode.

The 7.7% inflation rate seen in October “is enormous,” he added.

The Fed signaled at its last meeting earlier this month that it might slow down the pace of its rate hikes in coming meetings.

The central bank has boosted rates by almost 400 basis points since March, including four straight 0.75-percentage-point hikes that had been almost unheard of prior to this year.

“We’re looking at moving in paces of potentially 50 [basis points] at the next meeting or the next meeting after that,” Waller said.

The Fed will hold its next meeting on Dec. 13-14, and then again on Jan. 31-Feb. 1.

At the same time, Powell said the Fed was likely to raise rates above the 4.5%-4.75% terminal rate that they had previously expected.

“The signal was ‘quit paying attention to the pace and start paying attention to where the endpoint is going to be,’” Waller said.

In the wake of the CPI report, investors who trade fed funds futures contracts see the Fed’s terminal rate at 5%-5.25% next spring and then quickly falling back to 4.25%-4.5% by November. That’s well below the levels prior to the CPI data.

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