An Icahnic Short | The Daily Peel | 5/4/2023

May 4, 2023 | Peel #454

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Market Snapshot

Happy Thursday, apes.

A quick thank you to JPow and all those earnings that dropped as we FINALLY got some well-deserved volatility. Sure, it probably wasn’t great for your portfolio, but it certainly was for your adrenaline system.

Equities allegedly had a 25bps rate hike increase “priced in,” but they still managed to soil themselves in response to yesterday’s finale to the May FOMC meeting. U.S. Big 3 all sank, with the Dow’s -0.8% fall leading the way lower.

Treasuries, reacting to the raise to 5-5.25%, interestingly didn’t move much, passing the torch of excitement back to equities, it seems, for now.

Let’s get into it.

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Banana Bits

• Everything you missed from Fed Day and just how JPow shook things up
• A duo as unlikely as Mario and Bowser is pushing the biggest no-brainer law I’ve ever seen
• Barely hours after JPow went ahead and jacked us up another 25bps, another one appears to be actively biting the dust
• A new SEC rule forces hedge funds to take a look in the mirror much more often (and not just to put more gel in their hair)

Macro Monkey Says

JPow Speaks

Are you having fun yet? Apparently, JPow was just as sick as the rest of us with how mind-numbingly boring markets have been lately. But unlike all of us, he actually decided to do something about it.

We’re all still coming off the high of Fed Day, so today’s movement could be seen as an extension of yesterday’s fun. For those that missed the party, the Federal Reserve has officially raised the Federal Funds Rate target range by 25bps from 4.75%-5% to 5%-5.25%. Welcome to History.

Everyone saw it coming, but as usual, Mr. Market acted like yesterday’s hike was the surprise of the century.

As always, it’s not just about the level but the direction. Expectations matter as least as much as reality in markets, and it was commentary from the FOMC statement and JPow’s post-press release comments that could’ve thrown a blanket over the fire. Let’s take a look at some of the highlights:

• “It will take some time, and in that world, if that forecast is broadly right, it would not be appropriate to cut rates, and we won’t cut rates.”
• “...inflation is going to come down not so quickly.”
• “There are no promises in this, but it just seems to me that it’s possible that we can continue to have a cooling in the labor market without the big increases in unemployment that have gone with many prior episodes.”
• “This is an exception for a failing bank and I think it’s actually a good outcome for the banking system.”
• “A decision on a pause was not made today.”

From that, we can speculate wildly on a few key takeaways:

• JPow and the FOMC reiterated their diehard belief that we’re still not at a point where the central bank can declare victory over inflation
• Even JPow and the rest of the decision-makers don’t know if they’re going to pause or not, creating as much ambiguity as possible
• JPMorgan Chase’s acquisition of First Republic for $3.50 and a bag of chips was a good thing for the sector in the Fed’s view (sorry, what?)
• The “soft landing” scenario is still very much on the table, but as inflation growth slows, it’s tough to tell if they’ve gone far enough

So yeah, Powell is just as confused as you and I are. He and the FOMC came about as close to a commitment as you can get to pausing rate hikes, but like an uncertain 28yr old that’s been dating the same person for 6-years, he’s still not ready to commit yet.

Despite the lack of easy answers, JPow’s deliberate attempt to answer questions without actually answering them is just one of those tightrope walks that Fed chairs and other officials have to undertake.

The goal is to give themselves as much wiggle room as possible. Not sure why they’d need that, as everything in 2023 has been totally normal and predictable, but hey, to each their own.

What's Ripe

Eli Lilly ($LLY) ↑ 6.72% ↑

• Nobody hacked Eli Lilly’s Twitter page this time, but shares are still making news as the U.S.’s 2nd-largest big pharma firm took off on Wednesday.
• In addition to robbing people for insulin for several decades (until recently), Eli Lilly has been working on some other big swinging drugs, too. And yesterday, it was all about Mounjaro - a word you might not know now, but absolutely 100% will see in commercials as often as Skyrizi and Humira soon enough.
• That’s because Mounjaro, a diabetes treatment in itself, could be used to treat obesity as well soon enough. If that clearance is granted, this thing is set to take the throne as the world’s biggest-selling drug, usurping Humira’s position as the top dawg.
• As of yesterday, it looks like that clearance is only a matter of time away. Naturally, shareholders were almost as hyped as FDU fans after their win over Purdue back in March.

Wingstop ($WING) ↑ 9.35% ↑

• When you look up the term “absolute gas” in the dictionary, you’ll see a nice, big photo of WIngstop’s logo front and center. And based on last quarter’s numbers, the dictionary sure is right.
• Whether they actually put crack cocaine in their wings or not, it doesn’t matter because the effects are exactly the same. Sales burst to an all-time high on the wing slinger’s 30% sales growth from last year, a period that gave a tough comp of 13% top line growth.
• Needless to say, both EPS and sales danced on the graves of expectations. As we discussed recently, restaurant stocks sure have made investor portfolios feel full recently, with other names like Darden, RBI, and Yum! Brands joining Wingstop at all-time highs.
• Must be nice to have the food shares in your portfolio pay for your meals, too. I mean, it only takes ~58 shares of Wingstop for that dividend alone to pay for a 10-pc boneless meal. Free meal, anyone?

What's Rotten

Advanced Micro Devices ($AMD) ↓ 9.22% ↓

• Well, shares sure didn’t advance, and the stock’s move was anything but micro. We can confirm, however, that devices are involved, meaning AMD managed to go 1/3rd for the quarter.
• Both earnings and sales beat, but it was enough to overcome a declining outlook as chips sales plummet over 60% annually.

Starbucks ($SBUX) ↓ 9.17% ↓

• Despite owning the rights to maybe the world’s greatest inflation hedge in their coffee rewards point, Starbucks was unable to spur any excitement among investors despite an otherwise solid earnings report.
• Similar to SoFi earlier this week, America’s most controversial coffee chain reported stellar earnings in which results of $0.74/sh on $8.72bn in sales handily beat expectations of $0.59/sh on $8.41bn.
• Guidance was reaffirmed, and your iced mocha espresso cold brew milkshake still cost approximately $420.69, but that wasn’t even close to enough to stem the market’s concerns. The disappointment likely stems from management’s decision not to raise guidance, but that problem has an easy fix: next quarter, simply lie about your “expectations.”
• If anyone has CEO Laxman Narasimhan’s contact info, let him know I am available for the CFO position. Thanks in advance.

Thought Banana

An Icahnic Short

To quote fictional philosopher Michael Scott, oh how the turn tables. Carl Icahn finally knows what it feels like when the shoe is on the other foot.

Icahn Enterprises, the holding company helmed by the one, the only, the elderly Carl Icahn. The 87-year-old has built an Icahn-ic (lol) reputation for himself as a first-ballot hall of famer in the activist investor / corporate raider league. In short, this guy f*cks.

But as we learned early this week, Hindenburg Research thinks the guy has lost his touch, to say the least.

The legendary and notorious short seller, an alternative form of activism to some, has taken a fat bet against Icahn’s firm. Allegedly, Icahn Enterprises has been overstating asset values and performing otherwise worse than would appear, according to Hindenburg, at least.

As with other big short (no pun intended) selling stories, it’s he-said-she-said for the time being. According to the movies, every single person on Wall Street is a compulsive capper, so we don’t know who to believe.

The market has taken a side, on the other hand. Since the HR report dropped, IEP shares have dropped by a massive 36% since Monday’s close, losing ~20% each in back-to-back sessions.

But that’s far from a guarantee that Hindenberg’s allegations are correct. This is the firm’s 3rd major allegation of 2023 alone, with The Adani Group and Block being the first two victims. For whatever reason, it looks like we have a far more feisty energy among this crowd lately.

You’d think short sellers would be making their boldest proclamations when markets are ripping on molly day in and day out like they had been since the pandemic began.

Nevertheless, they saved the drama for now, and we’re here for it.

Banana Brain Teaser

Yesterday — Walk on the living, they don’t even mumble. Walk on the dead, they mutter and grumble. What are they?

Leaves.

Today — It’s 50 bananas off the Hedge Fund Interview Course for the first 3 correct respondents. LFG!

A man decides to buy a nice horse. He pays $600 for it, and he is very content with this strong animal. After a year the value of the horse has increased to $700, and he decides to sell the horse. But a few days later he regrets his decision, so he buys back the horse again. Unfortunately, he has to pay $800 to get it back so he loses $100. After another year of owning the horse, he finally decides to sell the horse for $900. What is the overall profit the man makes?

Shoot us your guesses at [email protected] with the subject line “Banana Brain Teaser” or simply click here to reply!

Wise Investor Says

“An investment in knowledge pays the best interest.” — Benjamin Franklin

Happy Investing,

Patrick & The Daily Peel Team

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