☀️☕️ Game Ov…?

📊 Also: China uptick; German recession; credit card mega deal; Unloved Junkiest Junk 🎓 Gross! Net Margins

📈 Market Roundup [20-Feb-24]

US large-cap S&P 500 closed for a PH

Tech-heavy Nasdaq Composite closed for a PH

Pan European STOXX Europe 600 closed 0.16% UP ▲

HK/China's Hang Seng Index closed 1.13% DOWN 🔻

Japan's broad TOPIX closed 0.57% UP ▲

📝 Focus

  • Game Ov…?

📊 In the Markets

  • China uptick; German recession; credit card mega deal;

  • Unloved Junkiest Junk

📖 MoneyFitt Explains

  • 🎓 Gross! Net Margins

💸 Personal Finance Corner

📝 Focus

Game Ov…?

It’s an article of faith that the video gaming industry is always larger and growing faster than you think. More money than Hollywood! Bigger viewership than the Olympics and (pre-Taylor Swift) Superbowls!

Looks like plateauing sales in OASIS, sir - Image credit: Ready Player One (2018) Warner Bros. Pictures / via Tenor

But last week, Sony slumped by $10bn in market value as it slashed its sales forecast for the PlayStation 5 to 21mn units from the previously projected 25 million. Just as importantly, thanks to rising software production costs, margins🎓 are plummeting in Sony's gaming business, hitting just under 6% in the December quarter, from over 9% a year earlier… despite robust digital sales and high-margin services like PS Plus.

Shredder’s Revenge on Nintendo bulls - Image credit: Nintendo via Tenor

And then, on Monday, Nintendo's shares fell 6% after Bloomberg reported a delay to 2025 for the launch of its hotly-anticipated Switch 2 console. Its initial target date to replace the 7-year-old original blockbuster Switch was late 2024. Investors had been bullish on Nintendo's stock in anticipation of the new console's release, carrying momentum from recent successes, including the "Super Mario Bros. Movie" and the hugely successful new Zelda game. However, a delayed Switch 2 launch would skip the lucrative holiday season, despite Nintendo's raised forecast for Switch sales in the current fiscal year. (MFM: Zelda and Mario’s Record Run.)

..... ▷ The $200bn video games industry faces its most substantial slowdown in 30 years, marked by declining hardware sales. After the surge during the pandemic, growth faltered in 2023, suggesting saturation. 

But spending on the industry’s hitherto major growth driver, mobile gaming, also decreased by 2% to $107.3bn and is forecasted for low single-digit growth in 2024.

..... ▷ Concerns are mounting over the lack of new gaming devices to drive market expansion, particularly with Sony cutting its PlayStation 5 sales forecast and Microsoft exploring alternative growth strategies, including a pivot towards selling games on competitor consoles. 

Though now apparently delayed, the anticipated launch of a new Nintendo console could further erode PlayStation and Xbox console sales.

..... ▷ Escalating game development expenses and a Hollywood-esque dependence on major franchises (read: sequel after sequel, like the Marvel multiverse) compound hurdles, while entertainment behemoths like Disney and Netflix enter the gaming fray. 

Intensifying competition in a contracting or at least plateauing sector, Disney's $1.5bn investment in Fortnite maker Epic Games and Netflix's expansion into gaming reflect a strategic response to demographic viewer/user trends showing comparable engagement in gaming, TV and film.

Meanwhile, Hollywood will soon have OpenAI’s Sora text-to-video sorcery to do battle with too. - Image credit: Sora AI generated video/OpenAI

📊 In the Markets

Chinese stock markets saw a slight uptick as traders returned from the long Chinese New Year or Spring Festival holiday, with the CSI 300 rising 0.5%. Tourism stocks led gains following upbeat travel data showing increased consumer spending, though spending per person was down. However, Hong Kong's Hang Seng index fell 1%, and the Hang Seng Tech index dropped 2.7%, after the strong Friday rallies. Japan's Nikkei 225 dipped 0.07%, while the broader Topix added 0.5%. 

Over in Europe, Germany, the continent’s long-time economic powerhouse (and now the world’s third-largest economy, having just pipped Japan), is forecast to contract in Q1 due to uncertainty over government policy, transport strikes and weak demand. 

With consecutive quarterly declines, Germany faces a “technical recession,” with the economy minister revising down growth forecasts for this year and next. Foreign demand for German industrial goods is decreasing, and domestically, consumers remain cautious. Despite the miserable label of being “in a recession”, the Bundesbank doesn't see a significant and prolonged economic decline, citing stable labour markets and rising wages supporting household spending.

U.S. markets were closed for Presidents' Day.

Might be room for one more? Perhaps one starting with the letter T? Or maybe O? - Image credit Jéan Béller via Unsplash

Credit card mega deal

Meanwhile, Capital One has agreed to buy Discover Financial for $35bn, forming one of America's largest credit card companies. This deal comes as card loan delinquencies are on the rise as US consumers spend down their excess pandemic savings (and then some.) 

With a combined market value of over $80bn, Capital One, the ninth-largest US bank with a market value of $52bn and backed by Warren Buffett’s Berkshire Hathaway, and Discover both already rank among the top credit card lenders behind JPMorgan Chase and Citigroup. What’s interesting is that Discover also has its own payment network like (a smaller) Visa or Mastercard. 

This merger marks one of the banking industry's largest deals since 2008. Recent months have seen a resurgence in megadeals, including ExxonMobil's acquisition of Pioneer Natural Resources for $60bn and Chevron's deal with Hess for $53bn.

Unloved junk (the junkiest)

US corporate bonds face fresh pressure this year, particularly the riskiest Triple C-rated bonds, which now yield 13.6%, up from just over 13% in 2023. Their spread over US Treasuries, reflecting how much risk an investor needs, has widened to 9.28 percentage points. This contrasts with a rally in higher-quality credit markets, where investment-grade bond sales hit a record in January, and better rates high-yield volumes reached a two-year high.

The disparity in bond spreads reflects concerns about risky companies losing funding access, potentially leading to more defaults. This worry coincides with investors reevaluating the US interest rate outlook, with markets now pricing in three or four quarter-point rate cuts from the Fed this year, compared to six cuts initially expected. This adds pressure on companies needing debt refinancing.

Investors are actually optimistic about high-yield credit overall (MFM: Grabbing Junk Bonds) but cautious about the bottom-most segment, with higher default rates and lower recovery rates expected specifically in the Triple C market. (“Investment grade” refers to BBB- or higher)

High yield geek corner:

  • BB and B: These are considered speculative or non-investment grade bonds. They offer higher yields but come with increased risk. BB bonds are at the higher end of the high yield spectrum, while B bonds are lower.

  • CCC and Below: These are the lowest-rated high yield bonds. The CCC rating indicates a substantial risk of default. Bonds rated CC or C are even riskier, with a higher likelihood of default.

  • D: not exactly high yield… This rating signifies that the bond has already defaulted. 

📖 MoneyFitt Explains

🎓 Gross and Net Margins

The gross profit margin is the percentage of revenue that remains after accounting for the cost of goods sold (COGS), while the net margin is the percentage of revenue that remains after accounting for all expenses, including COGS, operating expenses, taxes, and interest.

Gross margin is a measure of how efficiently a company manages its production costs.

Net margin is a measure of how efficiently a company manages all its expenses, including production, operating, and financial costs.

A higher gross margin means a company is better at controlling production costs, while a higher net margin means a company is better at controlling all expenses. Both gross and net margins are important indicators of a company's financial health and are closely watched by investors and analysts.

💸 Personal Finance Corner

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