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📝 Focus

• For everything else, there’s MasterCard

📊 In the Markets

• Unilever, Meta, US GDP, Amazon, Snap

📖 MoneyFitt Explains

🎓️ Credit Card Schemes (payment network)

📝 Focus

For everything else, there’s Mastercard

Mastercard results show that rising interest rates and persistent inflation have had little impact on wealthier consumers, with pent-up spending on travel and entertainment continuing to be strong. The company posted slightly better than expected earnings for the first quarter and remains optimistic as consumer spending and travel booms: Gross dollar volumes (the value of all transactions processed) rose 15% to $2.1 trillion, while cross-border volumes (spending on cards outside the country of issue) surged by 35%.

..... ▷ The big three credit card companies 🎓 are enormous. Even 20 years ago, before Visa and Mastercard were even listed, American Express had a market capitalisation (share price X number of shares) of $50bn. Visa, the biggest of the three, is now the 12th largest listed company in the world by market cap and is not only larger than the biggest bank in the world (JPMorgan), it is also larger than the next two (ICBC of China and Bank of America) combined.

..... ▷ BUT Visa and Mastercard do not issue any credit cards of their own. AmEx does, though, and this at least partially explains the difference in both the companies' long-term growth (see above) and how they fared in the quarter just gone. Like Mastercard on Thursday, Visa beat profit estimates earlier in the week, but AmEx missed. That could easily be down to hopelessly inaccurate forecasting from Wall Street's Finest, once again (too low for V and MA, too high for AXP) but bigger provisions on non-performing loans at AmEx reveal its exposure to the actual consumer lending business (for which it gets annual fees, interest, late charges, merchant fees etc) through the cards it issues. The other two just provide the pipes and take a tiny sliver of the billions of dollars rushing through every second. (More in today's Explainer below!)

..... ▷ Meanwhile, the Justice Department is conducting an antitrust investigation into Mastercard's debit card programme in the US and its competition with other payment networks. (Visa reported a similar probe in January.)

📊 In the Markets

Big day in US markets as Facebook-parent Meta, which surprised Wall Street's Finest after the market close the day before, blasted out of the gate to close the day worth $75bn more than it did at the end of Wednesday, a 14% gain. And then economic growth came in weaker than expected, which raised hopes the imminent peaking in interest rates would be followed more quickly by cuts, which fed the rally in growth stocks like tech. (With most of the value of a "growth" business in the future, the value of the company right now, based on a stream of ever-increasing future earnings, is higher when interest rates are lower.)

Earlier in the day, Asian markets inched higher, as did European stocks (with Unilever beating the best guesses of The City's Finest, and Deutsche Bank reporting decade-high profits.) Japan has new BoJ Governor Ueda's first policy speech to look out for on Friday. Continued Yield Curve Control... はい or いいえ?

Unilever: Consumer goods giant Unilever reported Q1 underlying sales growth of 11%, comfortably beating the 7% forecast. Echoing peers on both sides of the Atlantic, Unilever jacked its prices up 10.7% and yet the sales volume was only down 0.2%. (Nestlé prices were up 10%, with sales down 0.5%.)

..... ▷ Inevitably, Unilever flagged big increases in the prices of dairy, soybean oil, cocoa and sugar in the first half of this year and said that it is passing on only about three-quarters of those increases to consumers and that its profit margins had fallen. There can be a limit to what price hikes Cornetto lovers are willing to, er, swallow, though. As prices become too high, Unilever's brands are starting to lose market share to supermarkets' own private label brands. (See yesterday's MFM on "Greedflation.")

"For companies, the first rule of price gouging is you do not talk about price gouging. The second rule of price gouging is you DO NOT talk about price gouging." - Paul Donovan, amateur heavyweight boxer.

Meta: Results and forward guidance for Meta was better than expected, but most of the excitement seemed to come from the ratio of metaverse-to-AI mentions in Zuckerberg's statements.

..... ▷ Obviously Meta has been using AI for some time, but talking about it, well, that's the game changer. The most interesting AI number was the 24% increase in time spent on Instagram after its AI-powered TikTok clone, Reels, was introduced. Generative AI (underlying ChatGPT, Bard etc.) was also being used to help brands create more personalised ads. But, Zuck stressed, Meta's weird, avatar-filled metaverse pipe-dream isn't going away anytime soon!

US Economy: The gross domestic product rose by just 1.1% in the first quarter, far lower than the 2% expected by economists polled by Reuters and a long way down from the 2.6% increase logged the previous quarter. Wall Street is back on the "Bad News Is Good" train and seems to have left recessionary fears a distant memory. (For today.)

..... ▷ The strongest part of that weak number was a 3.7% gain in consumer spending and which, coupled with the lower-than-expected new job losses last week, could have tipped traders into screaming "Good News Is Bad", but luckily that gain was largely due to a warmer than usual January. Traders (thinking "Bad News Is Good") see that as an anomaly and, with consumers running down their pandemic savings and having to borrow more, that figure should soften and the Fed won't see the need to hold rates higher for longer after all.

Amazon: After the market close on Thursday, Amazon also surprised Wall Street's highly-paid analysts who had been expecting the March quarter to show weak spending among consumers and enterprise cloud customers due to the weaker economy and persistent inflation. Revenues grew 9% though online sales were flat, largely driven by 16% growth at its cloud unit, Amazon Web Services.

..... ▷ Strong growth at AWS and aggressive cost cuts (with more to come, now even from the profitable cloud and ad divisions) starting to pay off sent the share price up 8% in extended trading.

Extended Trading - A Mini Explainer

• It's actually possible to trade outside official market hours if you can find the "other side" of your desired trade (meaning a buyer if you're selling, or vice versa.)

• Most exchanges do permit Extended Hours trading "after market" or "after hours" (or even "overnight" and "before the bell") that are official, meaning that they are done through the exchange, just not during regular market hours.

• There are several differences, though. There are no market makers on the NYSE, so the trades may take longer to fill and have less attractive pricing (wider bid-ask spreads). Outside market hours, there is generally less liquidity (i.e. enough volume on the "other side").

Snap: The faded social media platform that yesterday was still somehow worth $17bn reported that its revenues dropped 7% and warned of a further decline in the current quarter, with gross margins squeezed by the changes to Apple’s privacy policies from back in June 2021. This is in contrast to a 3% pickup in ads at both Meta and Google, leading the price to drop 19% in extended trading. Little mention of TikTok and the competing platforms copying it.

📖 MoneyFitt Explains

🎓️ Credit Card Schemes (Payment Networks)

• Credit card "schemes" like Visa, Mastercard and American Express are payment technology companies that provide the infrastructure to enable cardholders to use their cards at merchants worldwide. Of them, AmEx is the only one also to issue credit and charge cards of its own.

• They charge "interchange fees" to merchants for every transaction processed on their network and additional fees for transactions in foreign currencies, both as a percentage of the transaction value. Transaction fees are around 4 times foreign currency fees and all fees are shared with the card issuers.

• Because Premium cardholders who get exclusive benefits and perks (e.g.Visa Infinite or Mastercard World Elite) are richer and spend more, the schemes charge higher fees to merchants getting paid on those cards. In contrast, debit card fees are much lower. Merchants are generally not permitted to determine which to accept.

• In the United States, interchange fees for credit cards range from 1.3% to 2.4% (much higher for Premium cards) with debit cards from 0.05% to 0.3%. In Europe, they are regulated, at max 0.3% and 0.2% for credit and debit cards.

• AmEx is also a payment network but also issues its own credit and charge cards, generating revenue not only from (premium) transaction fees but also from interest charges, annual fees, late fees and other charges for its cards. Even though AmEx targets more affluent customers, it's still subject to credit card non-payment risks.