Return Of The Shorts

The Federal Reserve’s 25 bp hike is getting all the attention this week, but several other central banks recently made policy decisions worth noting. 📝

1. The European Central Bank (ECB) raised rates by 50 bps to 3.00%;
2. The Swiss National Bank raised rates by 50 bps to 1.50%;
3. The Bank of England raised rates by 25 bps to 4.25%;
4. The Bank of Canada held rates at 4.50%;
5. The Bank of Japan held rates at -0.1%; and
6. Banco Central do Brasil held rates at 13.75%.

The overarching theme among central banks is that they remain hyper-focused on bringing down inflation. They’re not letting the many market/economic distractions take them off track. With that said, many have slowed their pace of hikes and are nearing their projected terminal rate, where they intend to leave policy to observe how the economy reacts. Additionally, officials have become more optimistic about their economies’ ability to avoid a recession while inflation comes down. 🔮

Meanwhile, here in the U.S., concerns over the regional banking crisis remain. Bill Ackman and others have been highly critical of Treasury Secretary Janet Yellen’s recent comments. She said that complete deposit protection for all banks was not being considered. Instead, the government is choosing only to protect deposits at banks that pose a risk of contagion to the system. 🏦

And in Europe, Swiss regulators are facing backlash over UBS’ takeover of Credit Suisse. In particular, Additional Tier 1( AT1) bondholders feel that their investments should not be entirely written down. Others are more concerned about the risk this “mega-bank” could pose to the country, as it’s now twice the size of Switzerland’s economy.

So far, the market’s reactions have been mixed. However, policymakers are staying steady on their hiking path despite the looming bearish sentiment. So, whether it’s central bank decisions or news about private sector banks, the sector will remain in focus for the foreseeable future. 👀

Short seller Hindenburg Research has found its next target, Jack Dorsey’s Block. 🎯

After completing a two-year investigation into its Cash App business practices, the infamous short-selling firm confirmed Block as its latest short position.

The report ultimately alleges that Block misled investors on key metrics such as “transacting user base” and juiced profits through predatory offerings and by strategically disregarding compliance best practices.  🤯

Its two-year research into the company included speaking with former employees, analyzing screenshots of internal systems and messages, and much more. 🕵️

Former employees claim management pressured them to disregard Anti-Money Laundering (AML) and Know Your Customer (KYC) laws. Additionally, they estimated that roughly 40%-75% of the accounts they reviewed were fake, involved in fraud, or were additional accounts tied to a single individual.  

To test that theory, Hindenburg Research opened accounts under obviously fake names like Donald Trump and Elon Musk but received the Cash App card and account access anyway. These tests appeared to confirm what former employees suggested. 🪪

Hindenburg’s report was also critical of Cash App’s practices during the pandemic when it and other payment platforms convinced the government to issue stimulus checks to “unbanked” recipients through its platform. That practice ultimately boosted the platform’s transaction volumes, but at the inevitable cost of allowing fraudulent payments to go through. 💰

It also said up to 35%  of Cash App’s revenue came from interchange fees, which should be capped under current regulations. However, the company avoids the cap by routing that revenue through a small bank. It’s a method used by competitor Paypal, which is currently under investigation by the Securities & Exchange Commission (SEC) over the practice. Hindenburg believes a similar investigation into Cash App is warranted. ⚠️

Overall it calls into question whether the “unbanked customers” Cash App serviced were unbanked for a reason. Perhaps it’s because they were involved in criminal or illicit activities and couldn’t bank elsewhere? And maybe Block was aware of this but chose profits over the rule of law?

Those are essentially the questions this report is posing to Block’s stakeholders. And ultimately, it will be up to them to decide for themselves. 🤔

Block executives responded with a brief statement, saying they intend to work with the Securities & Exchange Commission (SEC) and explore legal action against Hindenburg for its “factually inaccurate and misleading report.” They questioned the short-seller’s motives, saying they’d reviewed the report within the proper context and believed it was designed to deceive and confuse investors.

Whether Block facilitated fraud or not, Hindenburg won today’s skirmish as $SQ shares fell 16%. 🔻

For now, we’ll just have to wait and see who has the last laugh in this war. But clearly, there will be a renewed spotlight on Block as stakeholders reassess their view of the company and adjust their positions accordingly. 🔦

Earnings season is still hanging in, with dozens of companies reporting daily. Let’s recap some of today’s biggest movers. 👀

First up is American luxury watchmaker Movado. ⌚

The company reported fourth-quarter earnings per share of $1.03 on revenues of $194.3 million. That topped analyst estimates of $0.86 per share and $184.4 million in revenues. Diving into the numbers further, we see gross margins dropped 250 bps YoY to 56.2%. Operating income also fell roughly 30% YoY to $26.1 million. 🔻

Executives say the challenging economic environment is impacting the company. As a result, they’re maintaining a disciplined approach to managing expenses and inventory levels while making strategic investments to ensure their brands maintain market share. 

They were also very cautious in their outlook for the fiscal year 2024. They expect net sales between $725 to $750 million, well below the $814 million consensus view. Their expected earnings per diluted share of $2.70 to $2.90 were also below the $4.61 estimate. ⚠️

Overall, investors were caught off guard that Movado’s sales did not hold up as well as its competitors. We’ve heard from many luxury brands this earnings season who have managed the downturn better and are still experiencing strong consumer demand. 

The company tried to smooth the bad news over by returning cash to shareholders, but that had little impact. The Board of Directors approved a special cash dividend of $1.00 in addition to the regular quarterly dividend of $0.35 per share. It also had $21 million remaining under its share repurchase program at the end of the quarter. 💰

$MOV shares fell about 15% on the day to their lowest level of the last year. 📉

On the flip side of that big decline was the Industrial firm Worthington Industries. 🏭

The metals manufacturer reported third-quarter earnings per share of $0.94 on revenues of $1.1 billion. While that was below the $1.11 per share and revenues of $1.4 billion in the previous year, it still topped Wall Street’s low expectations.

Inflation continues to push up manufacturing expenses, but higher steel spreads and a favorable building products mix helped keep its gross margin flat. Like its industry peers, its 28% YoY decline in steel processing revenues was primarily driven by lower average selling prices. 

Overall, stronger pricing and margins across all its segments helped drive the Q3 beat. $WOR shares rose 15% on the news. 👍

As the tech and media slowdowns continue, we’re beginning to see a tangible impact on the companies serving those industries. One of those is consulting, as Accenture confirmed today.

The professional services firm’s executives lowered their annual revenue and profit forecasts citing the broader tech slowdown. They also announced new cost-cutting measures, which include 19,000 jobs cuts (2.5% of the workforce) over the next eighteen months. ✂️

The company recognized weakness in Europe, where the Ukraine war has impacted client spending. IBM and India’s top IT services firm Tata Consultancy Services, noted a similar slowdown in the region. Overall, its clients are focusing more on executing compressed transformations as they look to become leaner in the weaker macroeconomic environment.

Accenture now expects annual revenue growth of 8 to 10%, down from 8 to 11%. Earnings per share estimates of $10.84 to $11.06 were down from $11.20 to $11.52. And it also anticipates $1.2 billion in severance costs through fiscal 2023 and 2024. 📉

Like its tech-sector clients, the market is looking past the growth slowdown and rewarding the company for its renewed focus on profitability.

$ACN shares rallied 7% on the news. 📈