A Roller Coaster Ride | The Daily Peel | 4/26/2023

Apr 26, 2023 | Peel #448

Market Snapshot

Happy Wednesday, apes.

Let’s hope it’s a happy Wednesday, at least, because Tuesday sure wasn’t. Disappointing earnings, particularly from the banks that power our economy, like the mitochondria powers the cell, had traders shook.

It was so bad that expectations for a rate hike next month fell a whole 15% in just about 24 hours, with the odds of no-hike climbing from 10% to 25% at the time of writing. Meanwhile, equities fell across the board like a poor pirate made to walk the plank. The Nasdaq’s nearly 2% fall led the way lower, and I don’t wanna talk about it anymore bc now I’m sad.

Anyway, treasuries at least reaped some reward. Investors snatched up these “risk-free” securities like no tomorrow, particularly in the early afternoon, with the 2-year yield losing nearly 20bps in a matter of minutes at one point. It was only natural, then, for the Dollar to rise amid all this FUD. Maybe that should be the new name of the Fed?

Let’s get into it.

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Banana Bits

• Homes prices gained when they weren’t supposed to last month, according to Barron’s and Case-Shiller
• Big Dawg Joey B’s officially running for President again, and you know what that means: grab your prunes and pull up a wheelchair because the fight (hopeful) begins soon
• Everyone’s favorite authentic Mexican restaurant, Chipotle, is not only delivering delicious food but earnings as well

Macro Monkey Says

Pity Party Economics

Consumers are confused. I mean, even professional economists seem to hardly know what they’re talking about, so we can’t really blame them. But damn.

Now, this is calculated based on a survey of people who literally have no clue what they are talking about and essentially just report how they think they feel, but the consumer does represent about two-thirds of our economy, so it’s not a bad idea to at least hear them out.

It’s one of those “generally positively correlated” economic indicators that might be kinda useful if you use it at the right time. Maybe, just maybe, we can make money off of it.

Well, if you were bullish on sentiment last month, you definitely would not have made money as the broad-scale Consumer Confidence survey hit a 9-month low in April, falling all the way to 101.3 from 104.0 reported in March. Economists expected it to be unchanged.

When asked to assess Current Conditions, however, consumers were grinning ear to ear, with a reading of 151.1 from 148.9 in March. Basically, everyone’s confident that they are in a strong economic position but equally, if not more confident, that they won’t be in the near future. What a time to be alive.

As you might expect, the Expectations Index played a corollary role in the increase in economic self-consciousness among consumers seen last month. Here, we saw a $BBBY-like decline (jk) from 74.0 in March to 68.1 in April. In all likelihood, this can be partially attributed to the timing of data collection as these things generally go out early/mid-month, meaning April’s reading is when we’d the full reaction to the collapse of SVB and its friends.

At the same time that consumers feel great about the now and nightmarish about the later, housing data released yesterday shows a wild market that could potentially maybe be finally on a path to stabilizing. Millennials rejoice.

For starters, home prices increased on a monthly basis, an almost unheard-of concept in 2023, while new home sales grew 9.6% in March. One thing is undoubtedly clear from the data here: buyers are buying the dip in mortgage rates like Buffet buys the dip in Apple.

Housing stabilization in a period when current confidence about the business and labor markets stays elevated seems about right, but that could suggest the potential for consumers to be prepping for a downturn to come. If consumers’ unchanged expectations for 6.2% annual inflation over the next 12 months, along with the +10-year low in the proportion of the consumer base planning to buy appliances in the next 6 months hitting 41% serve as any indicator, they might be onto something.

Sure, there’s an upcoming debt ceiling crisis, apparently rolling bank failures that might still be underway (looking at you, FRC(?) sus), and a not-very-fun-sized presence of war going down lately, so we can’t really blame consumers for feeling like it might not have a happy ever after.

Still, let’s focus on the positives. At least we haven’t heard from Harry and Megan in a while.

What's Ripe

Xerox ($XRX) ↑ 13.69% ↑

• The grandpa of the tech world is still kickin’, and last quarter, it looked like he was running marathons as shares surged nearly 14% yesterday.
• The printer/office device-maker that also dabbles in software and exciting things like ink and toner smashed expectations on earnings, reporting $0.49/sh while shareholders were looking for closer to $0.18. Sales came in right in the Goldilocks zone, just about right.
• Aside from strong underlying performance, this report and surging earnings help confirm the company’s recent cost-cutting initiatives are actually doing something. We could all take a page from that playbook ourselves, I’m sure.

Spotify ($SPOT) ↑ 5.14% ↑

• A swing from profitable to far from it is normally not something that sits well with investors, so I guess that means Spotify isn’t exactly a normal company.
• From $0.68/sh in earnings for the same period last year, EPS became LPS as the firm burned $1.28/sh. Revenue growth of 14% to almost $3.3bn didn’t get anyone excited either, but subscriber growth sure did.
• Monthly active users surpass half a billion at 515mn for the quarter, above guidance and estimates. Growth in Premium subscriptions was 15% to 210mn, also beating the bar that management, of course, set for themselves.

What's Rotten

United Parcel Service ($UPS) ↓ 9.99% ↓

• UPS hasn’t had a day this bad since well before Steve Jobs introduced the iPhone, setting a nearly two-decade record for the worst trading day.
• Shares fell just under 10% on missed earnings and revenue, something investors in this company aren’t all too used to. Volumes came in drastically worse than expected, and despite CEO Carol Tome’s attempt to explain it away as part of the shift from goods to services, the rest of UPS’s sector seemed to be doing much better.
• Falling retail sales and industrial production numbers across the US have been a particular place of pain. Not sure if this pun was intended or not, but UPS’s CEO also showed a focus on “driving productivity” (good one, Carol) in more ways than one.

UBS Group ($UBS) ↓ 4.67% ↓

• Like when doing someone a favor starts to horribly backfire because you didn’t fully think the situation through in the first place, UBS did not have a fun earnings day.
• The European banking giant saw shares dump on Tuesday as earnings disappointed big time for the quarter. Sales came up short of consensus as well, but like you could say for any bank these days, at least they’re still here.
• It was all doom and gloom, with income dropping over 50% for the business as a whole. Net inflows into the firm’s wealth management division came in strong, largely as part of the ongoing wedding with Credit Suisse.

Thought Banana

Big Dawgs Gotta Bark

Welcome to the beginning of the real fun. We know how thrilling the build-up of earnings szn has been so far, but yesterday, the true giants finally got started.

And by true giants, we obviously, of course, mean the companies that run the vast majority of our lives, and specifically yesterday, Microsoft and Google.

That’s $3.3tn in combined market cap dropping at once right there, so without further ado, let’s give our tech overlords even more of our attention.

Microsoft: Investors were psyched in the after hours session on Microsoft’s numbers, and after taking a glance yourself, you’ll understand why. Both earnings and revenue topped estimates, while key segments fared far better than expected, too.

The world’s 2nd largest company by market cap delivered $2.45/sh on revenue of $52.86bn against expectations of $2.23/sh on $51.02bn, per Refinitiv. Needless to say, shares gained over 8% before the close of late trading.

That’s 9% and 7% growth for the bottom and top lines, respectively, driven primarily by key segments like Azure, growing 27% on the year and basically right in line with consensus views. And despite the overwhelming levels of cringe on the platform, LinkedIn is absolutely killing it as usual – almost like it’s a mandatory service for anyone that wants to earn money.

Microsoft’s Processing and Business Process segment surged 11% to over $17.5bn, with a lot of help from ARPU growth across the segment as a whole. Meanwhile, the More Personal Computing department, including Xbox, Windows, and Bing (which, with 100mn users, actually matters now, I guess?) fell 9% but still beat expectations.

The real focus was Satya Nadella and the rest of management’s addiction to the term AI. It’s as if they are rolling out the red carpet for themselves as the leader in the technology, especially with their dominant stake and control in OpenAI. Can’t wait to see how that goes.

Google: Moving on to the world’s 4th largest market cap company, and speaking of AI, let’s ask Google how they’re doing.

Pretty damn good, it turns out. EPS of $1.17 on Nice top line figures of $69.79bn handsomely beat the $1.07/sh on an almost-nice $68.9bn in sales expected. Traders weren’t hopping on the Alphabet train as quickly as you might expect. Shares gained only about 1.67% aftermarket.

But it’s the first report in a year where the company beat quarterly expectations for both revenue and earnings, and we were starting to feel bad tbh. YouTube, in particular, has been killing it, bringing in $6.69bn, but at the same time, a miss in Google Cloud revenue could be seen as a gut punch.

Since AWS dangled its meat on the market, every big tech player has tried to get into the cloud game. This miss vs. Microsoft’s essentially in-line reading could explain part of the difference in late session moves.

Search revenue rose, but not exactly by a lot, which could as well be adding to fears of a little guy called ChatGPT stealing its traffic. And then, there’s the elephant in the room of Samsung’s alleged threat to switch its default search provider away from Google to Bing, a real kick in both the financial and reputational nuts.

All in all, big tech is still just big tech-ing their way through what has been an unpredictable year from the macro front. When all of us use their products every day, as you probably are in order to read this, it can’t really be too much of a surprise.

The big question: How much of an existential threat to Google are ChatGPT and LLMs in general? How does Microsoft’s ownership in OpenAI stack up against Google and DeepMind?

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Tomorrow.

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Wise Investor Says

“I made my money by selling too soon.” — Bernard Baruch

Happy Investing,

Patrick & The Daily Peel Team

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