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Herman Chan has his CFA.
He's also been monitoring the bank earnings and JP Morgan got us started today, although the stock, as John mentioned, is off by two and a half percent and banks are the worst performing group in the S and P five hundred. So Herman big takeaway for JP Morgan's latest results.
Yeah, takeaway since that the performance was strong, So we were talking about really strong markets, trading revenue year every year, investment, Magina game with Solo lights, and then the balance sheet lending growth was really good.
So solid quarter all around.
Guidance was in line with what they had expected heading into quarter, but a couple of lingering things. Higher expenses for twenty twenty six as they continue to invest for growth. We're talking about nine billion dollar increase in expenses, and then the credit card cap is still lingering.
Across the JP Morgan and the large banks.
Herman, since everyone's been talking about the proposed cap by President Trump on credit card fees. What was the messaging from JP Morgan on the impact of that.
Yeah, the messaging was that this would have drastic repercussions not only for JP Morgan, the banking industry, consumers, and overall GDP growth. So you think of credit as being the lubricator for economic activity, and when you slash card rates, that really will reduce the credit availability for a lot of JP Morgan's customers. So you can think of a large swath of them just not having credit card usage going forward under a ten percent rate cap.
And JP Morgan is obviously a lot more sensitive to a potential cap on credit card interest rates than some of the other big banks. I mean, this is a bank that just purchased the Apple credit card business, or is taking on that Apple credit card business that Goldman Sachs gave up.
That's right.
So that's adding about two point that's adding twenty billion bounces, give or take.
So that's something that will be helpful for them.
But really, JP Morgan is one of the more active credit card issuers in our large cap bank coverage.
City is the first, followed.
By JP Morgan and then Bank of America's City and US Bank lag after that.
What's the thing, Hermann that stood out most to you today from JP Morgan's results. Was there anything significant compared to prior quarters.
Yeah?
Really the takeaways were just how forthfore they were on the credit card rate cap issue, just reminding everybody that this is not just the JP Morgan and banks issue.
This is going to have.
Really big repercussions for economic activity in the United States and really will hurt some of the less advantage consumers that I think really this this ratecap would intend to help. And then the second one is really just they double down on the expense outlook, which surprised some folks when they unveiled that late last year. So nine billion dollars in higher expenses really driven by gross inflation, healthcare costs, etc.
I want to go back to the President's effort to cap credit card interest rates, because from what I understand, it's not something that he has the authority to do. This is something that Congress has to pass. Yet he's talking about this January twentieth deadline. How does that work? I mean, he's calling for it, but calling for it doesn't mean that he can do it.
Right, So a lot of it seems to be posturing at this point of just pushing himself to address some of the broader affordability issues. Is heading into midterm elections, is how I view it.
So why don't the banks point that out or not point that part out, but call them ount on the fact that this would take an act of Congress to do anything about it, right.
Well, they're not.
There was a question posed during the earnings call if somebody from the administration had reached out the JP Morgan, and they said that, as far as they know, nobody has, so a lot of it seems to be just tweeting by edicts at this point. So we'll see if that shakes out to be something else more definitive. But we would expect the banks to push back and really wait for any congressional legislation to come in to really cap the rates.
Herman, this slowed down and investment banking revenue down five percent from a year earlier. Do you expect that to pick up later this year given the expectation for more deal making.
Yeah, that's right.
The fourth quarter seems to be more of a blip to us fourth quarter. We're investment making usually is seasonally soft given the holiday season. It sounds like from their comments that a few deals were pushed out into the first quarter, So these deals didn't.
Go away, they were just delayed.
And looking ahead into twenty twenty six, we see robust activity investment banking. You can just think about the IPO calendar that that's really firming up. And then for M and A activity, we think lower rates will help. This deregulation effort by the administration is helping increase consolidation not only in banks but in other industries as well. And then we've seen a sponsor activity of private agreeplayers really
jump back in. So those are really strong factors for improving investment banking activity next year.
So, Herman, how does this set us up for the other big bank earnings which we'll be reporting over the.
Next day or two.
How are you seeing how is this changing expectations for say, City Bank of America Goldman Sacks Morgans.
That's right, So JP Morgan really set a high bar for markets and trading, so about seventeen percent year over year.
That's gonna be tough for others to meet.
But that's where the bogie is at this point in terms of investment banking, we probably expect some others to do a bit better than the year over year decline for JP Morgan.
So more to come on that front.
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Let's shift gears and talk about big tech because the news this week is that Apple is partnering up with Google Alphabet, the parent company, to power the iPhone's AI technology using Gemini. Gemini, of course, has become kind of the you know, the software that everyone's looking at right now is a big winner in the whole AI battle. So let's bring in on rog Rana, our Bloomberg Intelligence
technology analyst on this and onnrag. You know, people are already crowning Google as a winner here in the AI battleground, and it definitely looks like Gemini is picking up momentum, picking up market share. What specific advantages does Google bring with the Gemini to Apple, So you.
Know, we'll give first of all credit to Mark German from breaking this back in November when he said, you know, Google will work closely with Apple or on this model. Now we go back in history. You know, Apple doesn't have that big of their own foundational model on which it's running or it's supposed to run some of these technologies. But Apple and Google go back long way. They have a very very good agreement on search, which pays Apple billions of dollars. So you know, there was some legal
issue around it. So we always knew that once that legal issue goes away, Apple may be working closely with Google to basically outsource a lot of their foundational models
into the technology that they have. They have. Now it's possible that the next CD upgrade, which is most likely going to be in the March April timeframe, could be that one big moment that we are all looking for Apple to finally come out and say that okay, you know, we are not a laggard in AI, that they also have a product that's pretty good.
Ana rag I saw a tweet actually from the official Google account announcing this deal, and Elon Musk replied. He said that this seems like an unreasonable concentration of power. For Google obviously has a vested interest here, given you know, his participation in xai. But does he have a point. What are the regulatory risks around this deal?
Yeah, I mean he won't have a point if his model was being used at that point. So I mean everybody's trying to pitch Apple to use that model. But you know, at the end of the day, Apple actually, for the first time, if you go back a year and a half ago, they used open ai. I mean you can still use open ai when you go to sea and ask a question and it can take you
out of there. But for Apple, it has to be integrated within the iOS, within the software, but they won't do it to an outside vendor where they don't control the data. So what Apple's going to do here, They're going to use the foundational models from Google, but they're going to run a lot of that either on the device or their own private, private cloud data centers, which means they will still protect the privacy of that question and not let it have access to other players as well.
Yeah, the privacy angle is really big for Apple.
It's kind of its mark of distinction here among the big tech players. ANRAG Apple has seen this exodus of talent AI talent going to other big tech companies in recent months. Does this multi year deal with alphabet with Google change any of the Does that stanch the bleeding at all?
Yeah? For me, it does only because I am now buying the model outright from somebody who's doing all the hard work. So I'm not in the business of model development. If I can use the best model that's out there into my product and I pay them some money, and the humor amount is about a billion dollars a year, which is, to be honest, nothing compared to how many billions these companies are spending to come up with their
own large language model. And that's what actually Apple said in the search case and says, I'm not in the search business. If Google has the best search I will outsource that technology into my products from them.
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Scarlettfu and Alex Samanova for Paul Sweeney. I'm kind of tired of shopping. I've done so much of it in the past month or so, overwhelmed.
I don't believe that for a second.
I'm not into it.
It's allowing to walk into a store these days.
Yeah, price plants are way too high.
And then also I'm just tired of it because I did so much of it in the last couple of weeks. But maybe technology will help me. Maybe it'll make it easier, It'll take some of the friction out. We want to bring in Travis Hesse, a CEO of Commerce which is treated on the NASAC under the ticker CMRC. Travis are going to tell us how AI is changing shopping, but in particular, this has to do with what Google has been doing with this thing called a universal Commerce protocol.
Explain how that will make my shopping needs easier.
Well, given the extent of which Google plays in all of our lives and how people think of them, it's essentially setting the foundation and the standard for brands and retailers and other organizations to be able to scale agentic commerce across all of the surfaces that Google AI would hit. So think of the contextualized conversations everyone's having through answer
engines today. Those conversations are then dynamically recommending not only experiences in facts, but certainly shopping and brands based on the enrichment of data against those surfaces. And Google is enabling a standard by which consumers would be able to buy in a standardized, safe, secure way. As it serves up discovery, you'll be able to buy seamlessly across those surfaces.
Travis, can you walk us through how AI will change the shopping experience in practical terms, Let's say I'm looking for a bag? How do I go about using your platform?
The consumer behavior has changed more than anything. So the amount of eyeballs and behavior going to the answer engines is probably the fastest adopting technology we've seen. So because the consumers are going there and they're having these conversations, brands and retailers are having to respond in kind, and they tend to have a fair amount of brand ethos, so they're very concerned about where they show up, how they show up, and who they show up next to.
Is it the cornerstone of this, So a lot of the foundational stuff you're hearing about now is to set up that trust. So when you're shopping for that bag, it's giving you a response that you can objectively trust. It's not serving up who paid the most to be listed or injected in that conversation. The thesis behind this is based on your own behavior within those answer engines, and of course other behavior within Google, whether that's through
Chrome or through other Google products. They have a unique advantage there because of the amount of surfaces an individual might use to synthesize that in a hyper personalized way.
So think of it as not only shopping either, but think of it going in your favorite store and someone as you walk in can scan a code and immediately knows what you own, what you like, where you're going, what you're looking for, so they could curate something for you immediately, where that friction is removed through the process. Think of that virtually in this particular capacity. That's the future state.
So all the information that Google has on me, they are also selling. Who are they selling it to?
Oh that's not from me?
I mean the reason I ask is because it depends on me logging into Google for them to give me those personalized recommendations. If I don't choose to log in, then I end up with the equivalent of a Google search on a public computer.
You do.
I think the models are changing. Certainly the old model was you're searching for terms, and certainly organizations are optimizing through SEO to be listed organically at the top, or they're through paid search basted. That still exists today, certainly
in this behavior that drives that. But where this is evolving to is called GEO, so generative optimization, which is really going to be a combination of structured data, which is like product catalog data, skew, color size, all those dynamics dimensions coupled with unstructured data, which are brand guidelines, call center, transcripts, blogs, articles, all the things that would
contextualize that brand and that product, if you will. That's being enriched oftentimes by us on the fetonomic side, which is part of our portfolio, and then syndicated across these different surfaces, be that Google or Open AI or Microsoft or whomever. And it's going to continue to expand as the channels have expanded over the last several years.
Travis, we have the National Retail Federation conference underway. Believe today's the last day what kind of AI trends and retail trends. Have you been monitoring out of it?
It's all about AI this year. That's what's hot exactly this right. I think there's two sides of the spectrum. There's a lot of buzz, which is exciting, but at the same time, it's confusing a lot of people because everyone is doing everything and it's hard to kind of reconcile what's meaningful to the business. I think for larger organizations that we work with, brand manufacturers and retailers, trust,
brand ethos, and security are top of mind. So for them, it's less about the sizzle, it's more about the stake and the foundational elements. I think the importance of the Google announcement is they are taking a very pragmatic approach to this, to lay the tracks so this can scale and scale properly with trust, with security, and most importantly with a frictionless experience for customers. Because the brands don't want to lose that customer data. They still want to
maintain that experience. Even though they're not fully controlling the surface by which they're showing up against. It's not like they're showing up against their own websites, so they're in a surface they don't completely control. They're controlling part of it through the data enrichment in syndication, but they're not controlling all of it. So they're very, very concerned that that experience is a positive one and a frictionalist one.
Otherwise it has ramifications. It drives cost up and call centers, it drives maybe negative customer experience, it drives arts exactly we're in turns bad things on the back end. So that's the reconciliation people are trying to have. But yes, the EI has sucked all the oxygen out of the room at Javits. And it's a big rule.
What will AI not change for shoppers?
But will it not change for shoppers? I think the behavior in the surfaces by which they're going to they're still going to go to. Right. I think new ones are showing up. I think the expectation personalization has been promised for a long time. I think there's some hesitancy there around the trust. So I think forcoming the trust aspect of this and having that reinforced through continued behavior.
The shopping is very new. There was a big rush to do this in holiday and the experiences weren't great, so I think there's a little bit of hesitation. I think you'll see a much more robust offering this holiday season.
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Delta is the first airline to report earnings as well, and according to the stock market reaction investors not to impress. The shares of Delta are down about two point eight percent after it's full year forecast came a little bit lighter than anticipated. Let's bring in George Ferguson right now. He is our senior Aerospace, Defense and Airlines analyst, joining
us from Princeton, New Jersey. George, you know, at the start of twenty twenty five, Delta sounded very optimistic about demand, about what pricing looked like, and the forecast that it gave today kind of stands in contrast to that.
Yeah, I mean, at Bashlom, I think it was a little reticent to get too deep into what he sees happening in twenty twenty six. He said, you know, there'll be surprises much like they received in twenty twenty five.
And you know, I just.
Think as people look at the results, you know, really what we saw here from Delta was a continuation of the you know, the premium and the loyalty revenue are rolling in strongly, rolling in I think sort of five to seven percent if I recall correctly, you know above sort of GDP growth rates. But the back of the airplane, you know, they call it the main cabin or basic economy that's there was that revenue was down seven percent in a quarter where Delta was growing a couple percent.
And so now I think we still see this premium trend, and I think we're going to see a lot of growth in premium seats this year. We've got Southwest converting to to more of a full service carriers premium, Delta plans to go premium, United plans to go premium. Alaska, Jet Blue, everyone wants to go premium. So I think there's probably some concern in the marketplace that maybe premium gets crowded and pushes closer to that main cabin kind of kind of fair rather than main cabin coming up.
Maybe too much supply, we'll see.
By the way, at Bastian, the CEO of Delta Airlines, we'll be joining Bloomberg Television surveillance on Wednesday, that is tomorrow, of course, at eight fifteen am Eastern Time, for a live interview from Delta's headquarters in Atlanta.
And something that stood out to me Scarlett was that Delta said they're bracing for risk to their forecast, noting the geopolitical environment, whether it's international or domestic policy. George, is this unusual for them to issue the kind of warning.
I mean again, I think we're at the beginning of the year and management teams like the caveat things right, and so I guess what I would say is we had plenty of geopolitical challenges in twenty twenty five. You know, we were watching transatlantic demand closely because you've got a war raging in Ukraine. It's been doing that for a bunch of years now. Didn't seem to slow down that demand. That demand seemed to do okay some days. I wonder
if maybe there's more risk domestically right. One of the other things we're watching is the president wants to cap interest rates for the credit card companies at ten percent. Loyalty through the MX program brings a lot of money in for Delta, definitely a source of their competitive advantage. And I think if you're capping interest rates, I think some of those credit card programs have to change and that would hurt some of those loyalty programs. So there's
I mean, there's risk all over the place all the time. Again, the geopolitical didn't seem to hurt demand as much as we would expect in twenty twenty five.
Right, It kind of always threatens to hurt demand, but in the end, people still prioritize traveling and paying for traveling. George, I'm looking at some headlines coming out on Delta at the start of this hour, and one of the comments from Delta was that the airline industry could see consolidation in twenty twenty six. Which players would that most likely involve.
Yeah, so we're already starting to see some of that, right. We had an announcement the other day that Allegiance and Sun Country are going to put themselves together. They're two smaller low cost airlines, some of them pretty quickly growing there quickly growing, so they'll consolidate. You know, we've heard discussion about Frontier potentially buying Spirit Airlines. We still have to see, you know, the ultimate outcome for Spirit uring
Chapter eleven. We're trying to figure out what their structuring looks like the second time they've been there. So you can see on the edges, especially where in that low cost marketplace, you can see consolidation beginning. It takes a long time and that's the challenge, but you could see some of that consolidation already begin. We don't see the big players getting consolidated, but you got to put together. I think you're not going to see sort of a
United to Delta and American Southwest. They're not going to We're not going to put any of those together. I think that's too much, but I think a lot of other stuff is potentially.
I play George.
We also got news that Delta is ordering thirty Boeing seven eighty seven Dreamliner jets, aiming to boost the company. How much do you expect this purchase to impact its bottom line?
Yeah, so they're not going to see these airplanes until twenty thirty, so it's a bit of a ways away. They're replacing seven six sevens, which are old airplanes. We have an average age of them about twenty seven years right now. You know the seven eight is going to be a lot more efficient. Delta games and numbers the fifteen ish plus percent more efficient, so I think that really helps the bottom line. Also very interesting to us is that Delta is traditionally more of an airbus shop.
They buy a lot of Airbus product. The recent wide bodies they've bought. Our Airbus is a three fifty and Airbus is a three thirty. Again, the Boeing wide bodies I just told you twenty eight ish years old. Interesting to see them come in for the seven eighty seven. That's really I think, been a category leader in that small narrow body world. Boeing has over one thousand orders for that airplane. We see rates continue to rise, which will improve profitability at Boeing as they put more through
put in that seven eight. I thought it was a bit of an endorsement for seven eight, even though Delta is not going to say that. Probably.
Yeah, George, you mentioned that Delta is traditionally an airbus carrier.
Do you think we'll see more of that?
These airlines kind of splitting the difference between Boeing and Airbus.
You know, I think every airline has to be a little it that way in order in order to keep the manufacturers competitive. Right, If the manufacturer knows you just got to come in for their product all the time, I do think that hurts you. But a lot of times that we see a lot of airlines have a preponderance of a certain type of product. It keeps costs down, right because you train your pilots for one type of wide body for one type of narrow body, and helps
you keep your cost down. So there's and your maintenance pushes easier. Yeah, fair Parts needs a lighter.
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