July 19, 2023 | Peel #503

In this issue of the Peel:

• For the first time in years, paychecks increased more than inflation, leaving workers with a little extra spending money.
• Earnings results from Bank of America and Morgan Stanley boosted bank shares and added to the equity market’s rally.
• In macro news, retail sales came in weaker than expected, alluding to the potential of slowing inflation.

Market Snapshot

Happy Wednesday, apes.

“Another day, another dollar” is a fitting adage as markets ended Tuesday’s session in the green yet again. The S&P is building on a strong first half of the year when nobody believed it could. Banks are helping lift equities on positive earnings reports, and AI stocks are waking up again, adding to the rally.

As we approach next week’s Fed meeting, traders are fully pricing in a 25 bps hike. Treasury yields declined, however, after weaker retail sales data and signs of slowing inflation have led traders to decrease their targets on how high the benchmark rate will ultimately go.

Bank of America, Morgan Stanley, & Charles Schwab were the popular kids today. The stocks received outsized attention for positive earnings reports, which was the wave that lifted all tides in the market.

Let’s get into it.

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Banana Bits

• A firm connected to Ken Cordele Griffin’s Citadel just purchased another $83mn Palm Beach property
• You could be taking an air taxi to work as soon as 2028, according to this FAA proposal
• Prosecutors and Trump lawyers have a Western-style showdown in classified documents case
• Hedge fund makes a 14,800% return after taking advice from a 27-year-old Analyst

Macro Monkey Says

A Little Extra Pocket Change

American workers just received some rare positive news regarding their pay stubs. For the first time in years, wage increases have outpaced inflation.

Over the past 40 years, although our paychecks have increased, purchasing power has pretty much remained exactly the same. In order to make sense of this paradoxical statement, you need to understand two ways in which economists view wages.

Nominal Wages: The actual size of your paycheck, which has grown quite handsomely from a median of $5.6k in 1960 to over $56k today.

Real Wages: The actual purchasing power of your paycheck after accounting for inflation.

Simply put, if you make $100k and receive a 5% pay bump, you’re now making $105k. *Celebratory emoji!*

But if inflation is 10%, your purchasing power has actually decreased by a net 5%, despite the pay raise. *Crying profusely emoji!*

Get it?

"Inflation has outpaced wage growth on average every year, leaving workers in the same place."

In the years prior to the 2007-08 financial collapse, average hourly earnings often increased by around 4% YoY, and during the high inflation years of the 1970s and early 1980s, average wages commonly jumped 7%, 8%, or even 9% YoY.

Inflation has outpaced wage growth on average every year, leaving workers in the same place. Additionally, the bulk of those wage increases went to the highest-income earners. According to the Pew Research Center, the bottom tenth of earners have received an average increase of 3%, while the top tenth has averaged a 15% increase.

After adjusting for inflation, however, today’s average hourly wage has just about the same purchasing power it did in 1978, following a long slide in the 1980s and early 1990s and bumpy, inconsistent growth since then.

In fact, in real terms, average hourly earnings peaked more than 45 years ago: The $4.03/hr rate recorded in January 1973 had the same purchasing power that $23.68 would today.

But perhaps the tide is turning. For the first time in a long time, this trend reversed course. According to the June report, inflation slowed to 3.0% while wages crept up 4.2% YoY.

"For the first time in a long time, this trend reversed course."

Moreover, most of those wage gains are going to middle-class workers. The leisure, hospitality, and manufacturing sectors saw the most profound impact, while sectors like tech saw narrower gains given layoffs.

Of course, the natural question is, “Why can’t employers pay more?” That has been a topic of fierce economic and political debate. Some blame the rising costs of benefits like healthcare that restrict employers’ ability to pay more.

Other factors that have been cited include the decline of labor unions, lagging educational attainment compared to other countries, and a higher prevalence of job-switching among today’s workforce.

Either way, this report can’t be interpreted as anything but positive. Let’s take our extra 1.2% in savings, head to the bar, and let the good times roll.

What's Ripe

Charles Schwab (SCHW) ↑ 12.52% ↑

• Mr. Chuck had a great day on the pitch. The brokerage/commercial bank lifted investors’ moods with a solid earnings report. Schwab stated they expect to see bank deposit growth again by the end of the year.
• If you recall, Schwab was one of the banks caught in the wreckage of the SVB shipwreck a few months back. After the bank collapsed, frightened customers began pulling their deposits from various banks across the board.
• Now those customers are looking foolish. It turns out that banks are still safer to put your money into than your sofa cushion. Schwab reported $304bn in deposits in the second quarter versus estimates of $298bn.

Nikola (NKLA) ↑ 8.15% ↑

• Nikola moved higher and traded double its normal volume. This retail popular stock is used to being the Belle of the ball, constantly making headlines for one reason or another. This time, Nikola is having a bit of Schadenfreude, benefiting from others’ misfortune versus their own success.
• Essentially, when EV company Lordstown Motors filed for bankruptcy, it prompted investors to snap up shares of similarly challenged EV stocks. That sounds counterintuitive, but if investors were willing to allocate dollars to invest in a company, and that company fails, they now need to reallocate that capital and oftentimes purchase stocks in the same sector.
• To be fair, a tiny bit of NKLA’s performance has to do with the company itself. They recently announced that they will be the pilot customer for Bosch’s hydrogen fuel cell modules for commercial stocks.
• Fuel cells combine hydrogen and oxygen to generate electric power, allowing for additional energy storage and zero emissions. This could be a game changer for the industry if the concept can be proven successful.

What's Rotten

FREYR (FREY) ↓ 7.54% ↓

• FREYR, which provides batteries to the EV sector, is looking a little in need of charge at the moment. Goldman Sachs downgraded the stock as they expect the global battery market to have an oversupply issue starting as early as 2025, driven by excess capacity in China.
• In a research report, Goldman noted they expect overcapacity to serve 2.5x the entirety of Europe. This lines up with FREYR’s 2025 timeline to begin operating its gigafactories in Norway.
• In simple Economics 101 terms of supply & demand, oversupply of the product you are creating is no bueno. If customers can get that product somewhere else, it reduces your leverage in pricing negotiations.
• On the brighter side, Goldman still remains positive on FREYR’s long-term prospects as it believes in the company’s ability to ramp initial production lines.

Prologis (PLD) ↓ 3.18% ↓

• While we gleefully benefit from remote work, Prologis is desperate to bring people back into the office. The industrial landlord reported second-quarter results that showed occupancy rates falling.
• While overall metrics were strong and the company actually beat on earnings, investors chose to focus on occupancy rates. The company noted that they were looking to combat falling occupancy by pushing rent prices more aggressively.
• Prologis has to perform a balancing act of raising rent prices while not losing tenants to the competition. So far, it doesn’t seem to be working, as retention rates for current clients slipped to 70.5% from 78.6%.

Thought Banana

Checking in on Bank Earnings

Time for another spot-check on the health of consumers by taking a look at banks’ earnings. JP Morgan, Citigroup, and Wells Fargo surprised to the upside last week. Next up: Bank of America, PNC, and Morgan Stanley, which all reported before the bell.

"The gain in trading revenue for both groups came as a surprise, given the volatility in stock and bond markets this year."

Bank of America: First up to bat is Bank of America which hit a double, beating expectations across fixed income and equities. The gain in trading revenue for both groups came as a surprise, given the volatility in stock and bond markets this year.

Revenue from fixed-income, currencies, and commodities was the bright spot, up 18% to $2.8bn as clients reacted to higher interest rates. The bank also benefited from an increase in net interest income as well as getting a boost from higher rates to come in at $14.16bn. The one soft spot for the bank was deposits contracting 1.7% from the previous quarter, though it was lower than what analysts had predicted.

Morgan Stanley: Morgan Stanley also knocked it out of the park, which boosted the shares the most since January. For James Gorman’s firm, wealth management was the bright spot as the firm recorded $90bn of inflows from wealthy clients. Unlike BofA, equities and fixed-income trading revenue fell, but the bank was also helped by net interest income.

Gorman also said that he thinks the worst may be over for equity capital markets. It’s been a tough couple of years for Investment Bankers amid a sharp dealmaking slump that has led to street-wide layoffs. Morgan Stanley expects deal volume to return to normal next year.

"It’s been a tough couple of years for Investment Bankers amid a sharp dealmaking slump ..."

PNC: PNC is often viewed as the less relevant, red-headed stepchild of the group, but the regional lender is often a great barometer of the health of the average consumer, a reliable hitter that won’t win you the game but won’t lose it for you either.

The bank expects a boost in net interest income of 5%-6%. Like many of the other lenders, they are also planning for higher deposits, which will hopefully offset lower loan growth. Although the company missed on revenue and loans, the shares got lumped into the broader bank rally anyway.

Takeaway: So far, earnings have been better than feared for banks, which is always great for the market. Admittedly, Takeaway is that backup pitcher you have low expectations for, so you’re pretty happy with a mediocre performance. Still, investors are rightfully happy that banks are trending in the right direction after hemorrhaging customer deposits and a slump in dealmaking that has plagued the industry.

Banana Brain Teaser

Yesterday — I add six to eleven and get five. Why is this correct?

You have to think more broadly. When it is 11 a.m., adding six hours makes it 5 p.m.

Today — Two U.S. coins total 35 cents in value. One of them is not a dime. What are the two coins?

Shoot us your guesses at [email protected] with the subject line “Banana Brain Teaser”.

Wise Investor Says

“It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong” — George Soros

Happy Investing,

Patrick & The Daily Peel Team

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