Welcome to Blue Room's Weekend Update. Each week, we're sharing what companies we're researching and the what, the who and the how that we think makes the companies interesting and unique. This roundup is brought to you weekly by a group of interns, creative minds, artists and investors who believe that through best in class investing along with the democratization of financial education we can do great things together. Enjoy, Explore and Share.

U.S. equities snapped a 6-day selloff on Thursday when an assortment of factors propelled stocks to the 5th largest intraday reversal from a low in the history of the S&P 500. That sharp reversal, which seemed to defy another hot CPI reading, was short-lived as Consumer Sentiment showed inflation expectations increasing in October and sent equities lower on Friday. The S&P 500 closed the week at 3,583.07 (-1.55%), the Dow Jones Industrial Average closed at 29,634.83 (-1.15%), and the Nasdaq Composite closed at 10,321.39 (-3.11%).

In economic news for the week, the Consumer Price Index excluding food and energy surpassed expectations at 6.6% year-over-year in September — rising to the highest core inflation the U.S. has seen since 1982. Preceding Thursday’s CPI reading, the Producer Price Index also came in above expectations on Wednesday, with the headline number for September at 8.5% year-over-year. U.S. Small Business Optimism rose for the 3rd month in a row as employers saw slight improvements to their outlooks on the economy, hiring struggles incrementally eased, and the environment became slightly more conducive to expansion and investment. On Friday, the University of Michigan’s Consumer Sentiment report showed 1-year inflation expectations rising for the first time in 7 months — putting significant pressure on the Federal Reserve’s goal to keep inflation expectations anchored. 

The first glimpse into third-quarter earnings showed very resilient consumer demand and strong sales aided by high inflation. PepsiCo beat earnings estimates as it raised prices on snacks and drinks by an average of 17%, Domino’s Pizza reported strong sales driven by higher prices, and Delta Airlines guided to strong travel demand and a willingness among consumers to pay higher fares. Luxury fashion company Moët Hennessy Louis Vuitton also reported that third-quarter sales surged 27% due to robust demand for luxury goods from U.S. tourists in Europe. Banks also began to report earnings on Friday, with the majority beating expectations due to continually strong consumers and businesses, but banks also began setting aside money for potential credit losses as the economic outlook becomes increasingly uncertain. 

Thank you Blue Room Analyst JARED FENLEY

One of this week’s top news items was the Bureau of Labor Statistics’ September inflation print. The consensus among economists was 8.1% year-over year headline inflation (which includes food and energy, and 6.5% year-over-year core inflation (which excludes the volatile food and energy items). The actual readings came in hotter-than-expected on both fronts—8.2% headline, and 6.6% core, prompting a sell-off Thursday morning followed by a market rally on the belief that the Fed would follow-through with a 75-basis-point hike in November and possibly turn dovish in the face of deteriorating economic conditions. 

Taking a deeper look at the major components of CPI, we see the following year-over-year changes:

Category Weight Aug 2022 Sept 2022 

All items 100.0 8.3% 8.2%

Food 13.6 11.4% 11.2%

Energy 8.2 23.8% 19.8%

All items less food and energy (core) 78.12 6.3% 6.6%

Consumer sentiment is essentially unchanged at 59.8, 1.2 index points above September — in spite of a 23% improvement in current buying conditions for durables owing to an easing in supply constraints. 

Consumer sentiment is now 9.8 points above the all-time low reached in June, but this improvement remains tentative, as the expectations index declined by 3% from last month. 

Continued uncertainty over the future trajectory of prices, economies, and financial markets around the world indicates a bumpy road ahead for consumers. 

Institutional Securities

Institutional Securities reported net revenues for the current quarter of $5.8 billion compared with $7.5 billion a year ago. Pre-tax income was $1.6 billion compared with $3.0 billion a year ago.

Investment Banking revenues down 55% from a year ago:

• Advisory revenues decreased from a year ago driven by lower levels of completed M&A transactions.

• Equity underwriting revenues decreased significantly from a year ago reflecting the substantial decline in global equity volumes.

• Fixed income underwriting revenues decreased from a year ago as macroeconomic conditions contributed to lower issuances.

Equity net revenues down 14% from a year ago:

• Equity net revenues decreased across businesses from a year ago, driven by declines in equity markets and lower client activity compared with elevated levels in the prior year quarter.

Fixed Income net revenues up 33% from a year ago:

• Fixed Income net revenues increased from a year ago reflecting strength in macro products on high client engagement and volatility in the markets.

Other:

• Other revenues decreased from a year ago driven by mark-to-market losses on corporate loans held for sale, net of hedges compared to gains in the prior year quarter and higher mark-to-market losses on investments associated with certain employee deferred compensation plans.

Total Expenses:

• Compensation expense decreased from a year ago primarily due to lower revenues

Introduction:

Mark Zuckerberg — Chief Executive Officer

• Meta believes in the Metaverse so deeply that it named the company after it

• Now, we have a sign this future isn’t so far away with developers working hard and new technologies emerging

• Today, Meta is taking another big step forward

Progress Across the Ecosystem:

Andrew Bosworth — Chief Technology Officer

• 1 in 3 apps in the Quest Store are making revenues in the millions 

• 33 titles have made more than $10 million in gross revenue

  • That is up from just 22 this February

• The number of apps making $5 million + has doubled since last year

• VR experiences are going to keep getting better

• Meta is focused on making the ecosystem more open

  • So, that means people can stream apps over PC or sideload them

  • The opportunities here will keep growing

• Beyond games, a lot of the most interesting VR work is around social experiences

• At first glance, most people assume VR is a first-person experience 

• A decade ago, Meta believed this would be a great social platform

  • That’s coming true

• Today, the top apps in the Quest Store are social metaverse apps

• Every technology platform brings value, but the most important piece is the way they can keep up connected

• VR and AR bring us a feeling of Presence 

• For the first time, Meta can build technology centered around people

• The metaverse is first-person

Last week, after months of threats to curtail production, OPEC+ finally announced their downward supply adjustment of 2 million barrels per day. This announcement sent markets – and politicians – reeling. It seems as if many had considered Saudi Arabia's repeated comments on the irrational state of crude prices as hollow. The responses by both politicians and financial markets have been fierce. But before analyzing the implications of a major OPEC+ supply cut, let’s first look at the OPEC Monthly Oil Market Report (MOMR), which was released this week, as it informs the 2 mb/d cutback.

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