An Offer We Can Refuse | The Daily Peel | 2/10/23

Feb 10, 2023 | Peel #397


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Market Snapshot

Happy Friday, apes.

Weekends are a bit bittersweet, no? Yeah, we can sleep in, but there’s no market action when we wake up. But hey, after market performance this week, we could sure use the break.

Yesterday, equities continued to trade lower as newfound recession- and rate-induced panic continued to weigh. The 2- and 10-year treasury notes moved around underwhelmingly throughout the day, spiking later on and continuing to as I write this right now. USD dipped mildly, rising after hours, just confirming no one has any clue what’s going on out there. Regardless…

Let’s get into it.

Banana Bits

  • The OG Bob is back at Disney, and big changes are coming. Old man Nelson Peltz calls off proxy battle
  • Joey B wants all the smoke with billionaires since calling them out in the State Of the Union
  • The US is once again trying to kill Elon’s vibe, but this time it’s related to an alleged “illegal movement” of various hazardous pathogens by Neuralink, so…actually might be kinda messed up maybe
  • Coinbase and other exchanges plan to get b*tch-slapped by the SEC on staking rules, sending shares and coins like ETH tumbling

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Macro Monkey Says

An Offer We Can Refuse

“The largest trade deficit in the history of trade deficits, maybe ever.” That’s how that classic, ol’ Donnie T quote goes, right? Something like that…

Regardless, it is certainly the case. Earlier this week, the Commerce Department dropped some data on the United State’s performance in international trade last year. And, as yesterday was the NBA trade deadline, this seems like an apt time to take a look at the US 2022 season. Spoiler: it was far from an MVP year.

The trade deficit is a measure of the difference between a country’s imports and exports.

Exports > Imports = a Surplus; Imports > Exports = a deficit; it’s that simple.

But, the trade deficit is just one part of a larger calculation called the Balance of Payments. The Balance of Payments is kind of like a country’s balance sheet with respect to its dealings with the rest of the world. On one side, you have the current account, measuring the flow of goods and services from a country to the rest of the world. The other side of the equation is the capital account, a measure of the flow of financial assets from a country to the rest of the world.

In theory, the Balance of Payments should always equal zero. Remember, it’s economics, so a theory is more of a “theory,” but this one tends to hold up, albeit with minor measurement-driven errors. Every dollar in needs a corresponding dollar (or good/service in the value of $1) out.

Are you confused enough yet? Good, because the US 2022 trade deficit of $948.1bn was the largest ever recorded, representing a 12.2%, or $103bn, jump from 2021.

That might sound like a HUGE problem, but controlling the global reserve currency gives the US a bit of gravitas in the game of global trade. Much like my bank account, a growing deficit has become economic normalcy for the US.

And that’s largely what this record deficit represents. As the impacts of the pandemic subside, global supply chains, demand, and exchanges of goods and services are slowly but surely returning to pre-C-19 trends. The widening deficit reinforces the US’s reliance on other countries for goods and services (mostly goods) and generally gets accounted for by increased foreign investment into the US and, less so, increased borrowings from foreign countries.

Basically, what we’re seeing confirms a couple of things. The US does not make nearly enough stuff to satiate consumer and business demand. Legislation like the CHIPS act seeks to remedy this, but it’s nearly impossible for US goods to be cost-competitive with those from overseas.

Moreover, the US remains the investment capital of the damn universe. Dollars flow in hand over fist for a variety of investments, notably last week into treasury securities sitting on top of newly jacked-up interest rates.

And that right there was the big story of the year: the strength of the US dollar. There are about 752 bajillion things that impact a currency’s exchange rate, but one of the largest drivers is the monetary policy of that currency’s nation. You may have noticed things got just a tad bit tighter in the US last year, spiking the value of the USD against basically everything else.

This is super-duper helpful for driving foreign investment but super not helpful for reducing a trade deficit. As the USD value skyrockets, goods priced in USD become relatively more expensive, reducing demand for US exports. On the other hand, this will only increase imports as foreign-made goods become relatively cheaper to consumers buying in USD.

Let’s take a breath because even my brain is fried after reading that over.

TL;DR: a rising USD value contributed strongly to normalizing international trade by spurring a larger US trade deficit while driving more investment to the US. It’s a long road back to 2019 times, but directionally, we’re coming.

What's Ripe

Sonos ($SONO) ↑ 16.46% ↑

  • You hear that? That sound blaring through your speaker? Yeah, that’s the sound of money. Specifically, that’s the sound of Sonos absolutely raking it in like they did last quarter.
  • If there was a gold medal for flexing on Wall Street, Sonos took home the gold yesterday. Shares popped well over 16% on the back of a monstrous EPS beat, posting numbers nearly 75% higher than expectations, while sales of $672mn beat the piss out of guesstimates, too.
  • Few firms suffered more supply chain disruptions throughout C-19 than Sonos. Execs kept alleging the demand was there, but the supply wasn’t. Now that the world is just about as normal (or weird) as it should be, the company actually had enough stock to meet demand. Hell, they could even actually run ads last quarter, which happened to be over the Holidays, giving the stock the alley-oop they needed.

Madison Square Garden Entertainment ($MSGE) ↑ 11.49% ↑

  • Boom. That’s how you manage a live-entertainment biz through a god damn global pandemic. Good on ya, MSG.
  • As much as I hate the teams that play at MSG in New York, I gotta tip my strictly-Bostonian cap to the firm on the last quarter. Sales boomed 24% from last year while the firm’s EPS came in nearly double those guesstimates, clocking in at $2.25/sh vs. expectations of $1.17.
  • As they say in the industry, but wait - there’s more! MSGE took plenty of time on its call to hype up the incoming MSG Sphere in Las Vegas, and although I still don’t quite understand how a spherical building works, investors certainly got excited. After results like that, time to change from MSG to LFG. Well deserved.

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What's Rotten

Canopy Growth ($CGC) ↓ 17.15% ↓

  • You’d think Big Ron and Nancy Reagan were back in the Oval with the way pot stocks sold off yesterday. But actually, it was just some hot garbage earnings posted by one of the leading companies in the space, Canopy Growth Corp.
  • The Canadian cannabis corp tumbled after last quarter’s EPS came in at -$0.35, nearly 3x the expected loss. Sales didn’t offer much relief either, missing by a massive 12%.
  • Both of those figures represent horrendous drop-offs from 2021. We all know drugs are super cool, so did we all just become huge losers afraid of a little weed now? Or maybe just having the option to leave your bedroom nowadays calls for a little more sobriety.
  • Either way, that’s lame. Wall Street and potheads are kind of each other’s exact opposites, so no surprise they don’t exactly get along too well. We’ll see if Big Dawg Biden and Kamala want to toss out any legislation on this, as it seems to be the only way for pot stocks and their products to get us high again. Maybe someday, the potheads can say, “we did it, Joe!”

Credit Suisse ($CS) ↓ 15.41% ↓

  • Everyone, circle up; it’s time to point and laugh. Credit Suisse has been having a rough year, leaving them somewhere in between Scum Bag-Fraud and your Tinder profile in terms of how downbad they are.
  • The firm made the mistake of reporting earnings yesterday. Shares spent the whole day just flopping lower in response, closing near an all-time low of $3.02/sh on US markets.
  • Top-line revenue missed by just under 4%, but the real swing-and-a-miss came lower on the P&L, with the firm’s EPS loss coming in wider than expected at -$0.28/sh.
  • Expectations are for another fat loss in 2023 as the firm tries to turn its ship away from IB, trading, and routinely paying massive fines and more towards wealth management and other more sane industries. Rival UBS pulled off the switcheroo about a decade ago, so CS is seeing if their fortunes can be the same. Hey, better late than never!

Data Peel

data peel


Thought Banana

Pony Up, Putin

^That’s a statement we could start to hear soon. To put it as professionally as we can, Russia’s finances are starting to get f*cked, and the outlook doesn’t suggest things will be better anytime soon.

Turns out the US isn’t the only government flirting with deficits of late. On Wednesday, Axios reported that the Kremlin manages its finances about as well you do, and as a result, they’re starting to feel the heat (or maybe the cold? It is Siberia, so…)

Anyway, remember all those sanctions we were talking about like 10ish months ago? Well, they’re apparently starting to work. To be fair, *they* did warn us from the jump that it’d take time for the full brunt of Russian sanctions to be felt. At the time, most of us probably assumed that meant a few weeks, but just like Credit Suisse above, better late than never.

Russia is a weird country, financially speaking, at least. It’s one of those places that probably have wet dreams about being a closed economy. But in this day and age, the only country that can “pull that off” is North Korea.

With that, the Kremlin and its financial minister(s) have built up a heavily fortified balance sheet, likely anticipating that they’d get the boot from the global economy eventually. Not to say they were planning something like this, but there’s gotta be a reason why the nation’s financial structure is almost entirely exclusive to them.

Even with that, they can’t survive everything. This week, we learned the nation’s revenues pulled in from its oil and gas trade plummeted 46% from January of 2021.

Without the Western European market, Russian O&G almost entirely relies on the likes of India and China to purchase its energy. Adding salt to the wound, these sales are generally made at steep discounts, as both Russia and the counterparties know that literally no one else wants the sh*t.

Still, a 46% drop in O&G cash isn’t nearly enough to actually cause any major issues. What it does do, however, is speed up the timeline to feel those major issues. The reason Russia has been able to fortify a massive pile of rainy-day cash is primarily due to its history of reaping in gobs of $ from that oil and gas. Without that stream of revenue coming in as it used to, the clock is ticking.

Russia’s national wealth fund holds ~$155bn in assets—if you believe their records, that is. That’s more than enough to plug this year’s newly created budgetary deficit, but the million dolla—no, more like the hundred-billion dollar question—is just how long that can last.

Experts claim the real takeaway here is that the state of Russia’s finances is “highly unusual and points to a larger deficit for the full year.” I don’t mean to go full Patriot here, but hell yeah. Let’s go, Ukraine.

The big question: How long can Russia withstand the nearly universal blacklisting from global finance and energy markets? How will this change their invasion of Ukraine, if at all?

Banana Brain Teaser

Yesterday — You have three boxes. One has Apples, one has Oranges, and one has Apples and Oranges, but they are all labeled incorrectly. You have to label them correctly, but you can only pick one fruit from one box. How would you be able to correctly label the boxes?

The most important fact in the question is that all the boxes are labeled incorrectly, which gives us the following information:

  • Box labeled apples -> Must be oranges or apples + oranges
  • Box labeled oranges -> Must be apples or apples + oranges
  • Box labeled apples + oranges -> Must be apples or oranges

Start with the box labeled apples+oranges, and pick a fruit out of the box. You know that it has to be only apples or only oranges, since the box was labeled incorrectly, so you would label the box with the fruit you ended up picking from the box (apple in this example).

Now that you know only oranges and apples+oranges are left, the box labeled oranges would have to be apples+oranges, and you would label it as such. The box labeled apples would be apples+oranges by process of elimination.

Today — It’s 150 bananas off the Venture Capital Course for the first 3 correct respondents. LFG!

I am heavy and hard to pick up, but backward I am not. What am I?

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

Wise Investor Says

“In investing, what is comfortable is rarely profitable.” — Robert Arnott

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