Motley Fool analyst Asit Sharma discusses:
- HowAmazon(AMZN-2.55%)renewed its deal withJPMorgan Chase(JPM-1.16%)to issue Amazon's rewards credit card.
- Why shareholders of both companies should be happy with the outcome.
- How investors can take solace in a growing economy, even as stocks cooled off this quarter.
Motley Fool analyst Dylan Lewis talks with Motley Fool contributor Brian Feroldi about how investing in the stock market is the greatest wealth creation machine in the world, and about Brian's bookWhy Does The Stock Market Go Up?
Chris Hill:As the first quarter comes to a close, we've got some thoughts for your mindset, and we've got a preview of Brian for all these new investing bought. Motley Fool Money starts now. I'm Chris Hill, joined by Motley Fool senior analyst Asit Sharma. Thanks for being here.
Asit Sharma:Chris, thanks for having me.
Chris Hill:We're going to get to the end of this quarter -- mercifully, the end of this first quarter for investors. But I want to start with Amazon because for months, Amazon has been negotiating with JPMorgan Chase on its rewards credit card. You tell me how big a deal is this, that essentially JPMorgan Chase, for all intents and purposes, won the bidding rights to remain the flagship rewards credit card for Amazon? Because it seems like it's been a good relationship in the past. Although that had some...reportedly stopped Amazon from talking toAmerican ExpressandCitigroupamong others about saying, what would you be willing to give us? It seems like JPMorgan Chase made some concessions to keep this business. But when you look at 150 million Amazon Prime members in the U.S., it was worth it.
Asit Sharma:Chris, this deal is huge. If you think about what a big business consumer lending is in this country, it starts to make sense. This reminds me of one of those deals where a big company is trying to relocate a manufacturing plant and local cities and states are bidding against each other and given all kinds of concessions, but it's worth it over five or 10 years: I feel the same way about this deal. There's a massive amount of loans that JPMorgan [Chase] has under its purview now, through this program for so many years, I think 20 billion was the figure I saw. There are companies that do this full-time for a living. [An] example is Synchrony Bank.Synchrony Financialis in the business of teaming up with companies issuing these retail credit cards. Chris, Synchrony Financial, last year, had about $15 billion in interest income. This just goes to show you that a bank which does full-time credit analysis understands how persuasive it can be if they can manage their risk to get that spread on the interest that consumers pay. What better customer to have, what better partnerships to have, than Amazon.com, which has grown so inexorably. This was fiercely contested. Kudos to JPMorgan for being able to retain this business. I think it will continue to be lucrative for them, even though they give up 5% on Prime purchases, on Whole Foods purchases, that customers make; they still make money on the interest spread.
Chris Hill:It seems like a win for both companies and a win therefore for shareholders of both companies. Although I think if you're an Amazon shareholder, this is one of those deals that lives in the shadows in a way. It's meaningful to the bottom line for Amazon, and yet it is not something I have ever really thought about as an Amazon [laughter] shareholder, in the way that I have thought about Amazon Web Services or the retail part of the business, the investments that they've made in shipping and logistics, that sort of thing. Those are things that I study a little bit more closely. When I saw this story this morning, I thought to myself: Wait, this actually matters to the underlying business and the bottom line. Based on the reports I've seen, negotiation has got heated at times, which doesn't surprise me when you think about a bank like JPMorgan Chase being led by someone as smart as Jamie Dimon. But again, I think if you're a shareholder of either, you've got to be pretty happy.
Asit Sharma:I think so. Looking at Amazon's balance sheet, they have the ability to leverage that balance sheet up and take over this business themselves. I know this sounds like an out-of-left-field comment, but look atPayPal [Holdings]. A few years ago, PayPal was handling its own financing for its own consumer lending. It's a gravy-type business. As a shareholder of Amazon, your mind starts wondering like, hey, this could be impactful to the bottom line. Companies like Amazon are smart, though; as well as Amazon does logistics and so many other things, it's not a financing company. It's best to find a very strong partner, robust partner, in a company like JPMorgan [Chase]. Let them take that business, which helps Amazon's profit to keep them efficient.
If you're, of course, a shareholder of JPMorgan [Chase], you're absolutely right, Chris. They actually need to have this extension of their consumer lending business because you're talking about again, a massive base, as you mentioned, of customers. A gravy-type business. It allows them to take more risk in other areas of their business, which of course, they are very good at, whether it's derivatives or investment banking. You need this core strong business which provides the gravy. Both sets of shareholders should be happy.
Chris Hill:Today is the last day of the first quarter of the fiscal year. It is, for investors, the first losing quarter in two years. Right now we're looking at theDow Jones Industrial Averageand theS&P 500. We'll probably finish the quarter down 4%.Nasdaq, down somewhere in the neighborhood of 9%-10%. I'm happy this quarter is over. I know nothing magical necessarily happens when the calendar flips to the second quarter, but it does feel like we've all been through this. I don't want to say we've been through the wringer, because it could've been worse. Look, in the short term, it canalwaysget worse. But it does feel like as investors, we've gone through a rough quarter together.
Asit Sharma:I feel the same way, Chris. I think the one thing that gives me a lot of hope and a lot of optimism is the fact that the first quarter correlates with most of the earnings season that's just passed. I was looking at S&P 500 corporate profits this morning, up 30%. Big companies are finding ways to make money. Growth companies are still growing. Many Foolish investors out there listening, have much of their portfolios in high-growth stocks, and those have taken a beating. Yet if you look through the earnings that most of the star and leading growth companies produced, they were quite robust. Market sentiment, market downturns, both of these can take your attention away -- and here I'm going to roll out my lame analogy of the day. I went to the stables this morning. I walked and looked at all the stalls... All my analogies were lame, but here we go. You are the baker of your own cake. Sometimes I'm baking a cake and my wife or my kids will come in and peek in the oven. It's ready, it's not ready, you should pull it out, you should check on it. But I'm the one who put that cake together. Eventually, I'm going to pull it out and plunge a dull knife in and see if it comes out and the knife is clean, I know my cake is done. No one else can really tell me when my cake is done.
What earnings season does is [it] gives the retail investor a chance to check on his or her cake. You focus on the earnings, focus on the narrative of the companies you've invested in one by one through that quarter, and you start to get a sense that most of us [are] OK, and I'm going to be OK on the long run. These are good companies. They're doing a lot of good in the world. They're throwing off some profits, operating cash flows. This is something that helps me. I hate to undermine this lame analogy by pointing out that I'm a terrible baker. Nonetheless, here we all keep trying.
Chris Hill:That was not a lame analogy. That's the first thing. Secondly is, there's an investing podcast in the U.K. called "Playing FTSE," which I recommend people checkout. F-T-S-E, "Playing FTSE." I was invited to be a guest on the show recently. It's three guys in England. One of the things we talked about was because I'm older, probably by a couple of decades than the guys who host the show, one of the things I talked about was...it's always painful. I've been reminded of that recently when I think about 2008-2009, when I think back to 2001. Now, any period where the market over a three-month period, a year or more, it's never fun. It's always painful. The longer you stay in the market, it's not that you don't feel the pain, it's that you become experienced by what you went through in the past. You're forged by the fires you've gone through, to stick with the baking analogy in some small way. But thank you for pointing that out about corporate profits. Because these are the times when it's all the more important to push aside the stock price and what is happening with the stock and focus on the business. That's how you -- it's not easy to do, because the stock price is so readily available and it's so much easier to just look at your portfolio and say, "Oh, is it green or red? What has it done over the past few months?" It takes a little bit more effort to look at the business and say, "Wait, how is it doing, even though the stock price may be coming down?" But it's almost always worth it to go through that exercise.
Asit Sharma:I think it's a really nice point that you've made for those of us who have been through a few cycles. You do get a bit of that toughness, or at least memory of the past, which makes things easier. I wasn't going to do this, but another lame analogy: When I was walking through the stalls this morning...it's like going to a very large museum; if you have ever walked through the Metropolitan Museum of Art or the Art Institute in Chicago, after a few hours your feet are really tired, you cannot do this anymore. But that really wonderful landscape painting is like two galleries ahead, I gotta get to that. Years later, you remember the painting, you don't remember how much pain your feet were feeling and how tired you were. I think veteran grizzled investors know this. Some of the younger investors listening today, and it's their first experience, so I guess we're here to tell you that the battle scars start shrinking and you realize over time that if you do focus on the companies -- and I'll add one more thing, just focus on the U.S. economy, how resilient it is -- things will be OK. Look, we've got a war right now that's going on in the Ukraine, we have soaring inflation, higher interest rates, so much uncertainty in the world, and yet this country continues to innovate. Companies are going about their business investing their capital, albeit a little more cautiously. [music] The world, I hope, is going to be OK. I can't make that call any longer, but if the world is OK, I think the U.S. stock market over time will be OK too.
Chris Hill:Asit Sharma, great talking to you. Thanks for being here.
Asit Sharma:Thanks for having me, Chris. [music]
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