Three Things (1/16)

Monday, Jan 16th 2023

Commentary

"I'm just a regular upper-middle-class guy who happens to be a billionaire." – David Tepper


1) Goldman's Wrong Turn on Main Street: Goldman Sachs' consumer lending unit has lost over $3 billion since 2020. Its foray into consumer banking, with its creation of Marcus in 2016 and its 2019 credit-card partnership with Apple has, up to this point, been a disaster for the prestigious Wall Street firm. The unit has never been profitable and has sparked divisiveness inside the firm, in which some senior executives are arguing against continuing to dump billions into the endeavor. 


Titan's Takeaway: The financial sector was rocked in 2022 as rising interest rates put a cap on underwriting businesses leading to an all-but dried-up M&A market. Goldman's entry into the consumer landscape was supposed to diversify its business from its reliance on its bread-and-butter investment banking. But still unable to capitalize on long-term headwinds in the shift to providing retail investors access to financial services, Goldman is back where it started. Big banks are stuck with $40 billion of risky debt on their books, a perilous sign that the M&A and IPO market isn't ready for revival yet. 


2) Tesla Slashes Car Prices: Tesla slashed prices on vehicles by as much as 20% on some models to help jump-start lagging sales after disappointing delivery numbers at the end of 2022. Tesla's Model 3 was cut by roughly $3,000, and the sticker price on its Model Y Long Range fell by $13,000. The U.S. and European price reductions follow other discounts Tesla implemented in China, Japan, and South Korea as demand lags and competitors start eating into market share. Shares fell on the news, especially as investors have already been worried about the possibility of a recession eroding margins. 

Titans Takeaway: Certainly, Tesla's price reductions are one way to drum up lagging demand and open up to a broader swath of customers, but there may be an ulterior motive at play. Upstart EV manufacturers may be unable to keep pace with Tesla's discounts, spurring a price war that the first-mover and premier EV maker will likely win. Price wars are like skydiving; you take the leap with faith that you’ll be caught before you fall too far. The difference is that in price wars, there is only one parachute - generally, only one firm survives and thrives, while most go too low. Elon Musk and Tesla are betting that the rip chord is squarely in their hands.


3) BlackRock Invests in 401(k) Provider: The largest asset manager in the world is dipping its toes in small business 401(k)s, investing in Human Interest, a provider that focuses on small businesses. BlackRock and Human Interest didn't state the investment amount or the current value of Human Interest, but it was last valued at $1 billion as of August 2021. The retirement account market that serves small businesses has long been underserved and neglected within the broader financial sector. BlackRock's foray into the space marks a recognition of its growth potential and need for access. 


Titan's Takeaway: Over 30% of private-sector employees lack access to 401(k)s, making it an untapped sector with a lot of growth potential. With relatively low fees, Human Interest is one of a cohort of 401(k) providers that emerged out of an outgrowth in catering to these small businesses. BlackRock clearly smells opportunity, with over four million small businesses and their employees without access to retirement plans. While Human Interest offers BlackRock funds now, its current default investment fund is Vanguard - we'd wager that will change soon. 

As of this writing, TSLA was a portfolio holding of Titan. This security may cease to be a portfolio holding at some point in the future.
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