Bananas To Spare | The Daily Peel | 3/6/23

Mar 6, 2023 | Peel #412

Market Snapshot

Happy Monday, apes.

Hope you had a great weekend. Equity markets certainly gave us a reason to celebrate on Friday as the risk-on trade stormed higher as traders decided inflation was actually nbd for the day. On that same note, treasury yields have been retreating since early Friday, but as you’ll see below, that decline is about as useless as the IRS helping you fill out your taxes.

Let’s get into it.

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Banana Bits

• It was an unseasonably warm February, and the U.S.’s PMI was feeling the vibe, coming in slightly hotter than expected
• Credit Suisse quite literally can’t pay people to own their stock; just ask one of the company’s (former) largest shareholder
• New regulation is putting CEOs on blast by making them disclose how much money they actually make; maybe politicians can do the same too?
• Only in Ohio…no, but fr because Norfolk Souther just had another train derailment in the state

Macro Monkey Says

2-Year Fear

Are you better off now than you were two years ago? Maybe, maybe not, but if you’re a buyer of treasury bonds, you absolutely are.

That’s because two years ago, and really for the entirety of the last decade, putting $10k into a 2-year treasury bill would net you something like $80/year if you were lucky. Today, that same investment will bless you with nearly $500 annually, and it’s all thanks to Jerome Powell and his buddy C-19.

We don’t have to go and rehash all the rate hikes over the past year. You, me, and our portfolios remember them like Taylor Swift remembers Jake Gyllenhaal (All Too Well).

And like T-Swizzle, there’s nothing we can do now aside from reminiscing on the good ol’ days. However, and apparently, unlike Taylor Swift, we can actually learn from our past and try to make our future a little better.

Right now, the 2-year treasury yield sits right around 4.895%. Obviously, the rates on these bills are extremely sensitive to both the level and direction of the feds fund rate, but it’s important to know that the 2-year is often viewed by Mr. Market as the best proxy for future rate moves.

And since February 1st of this year, the lower bound of the feds fund rate has sat at 4.50%. Cool, not too shabby, but what’s interesting to see is just how dramatically future inflation expectations have shifted since that last rate hike.

As treasury bonds are risk-free (allegedly), there’s no real reason to assign a risk premium to these assets beyond the economy’s base interest rates. Therefore, Mr. Market, in his infinite wisdom and laziness, essentially views the yield on treasury bonds as the market’s expectation for the annual inflation rate for that given bond’s maturity.

Coming into 2023, the consensus view was for *potential* additional rate hikes and even the possibility of cuts in the second half of the year. Now, with the 2-year yield far surpassing the lower bound of the fed funds rate, the message from the bond market is clear: bond investors are betting quite assuredly on additional rate hikes and that those elevated rates will be around for a long time. Safe to say that take coming into 2023 is about as cold as betting on Man U in their game against Liverpool yesterday.

Anyway, this isn’t necessarily new information, but it does show a significant shift in investor mindset since we were all making 2023 resolutions that we’ve already given up on. For instance, bond investors:

• are betting that inflation has not yet been quelled
• believe more rate hikes are coming
• are pricing in longer-lasting elevated rates
• are still nerds

Again, nothing groundbreaking in terms of event-driven news, but the shift in investor mindset is a little weird, considering equity markets are still holding decently strong for the year.

But like we always say, the bond market, along with dogs, is basically the only thing in the world we can truly trust. It’s a tough bet to be on the other side of, but hey, you do you.

What's Ripe

C3.ai ($AI) ↑ 33.65% ↑

• Crypto this, web3 that, now everyone’s hopping on the AI train for the latest hype-cycle kickstarter. The only difference is that with AI, there appear to be actual use cases with this trend.
• That’s a crazy idea, I know, but 450 bps worth of rate hikes will do that to you. And the early numbers actually reflect this, especially C3.ai’s latest earnings report.
• The enterprise AI software provider still posted a loss last quarter, but at $0.06/sh, this came in way cleaner than the $0.22/sh loss expected. Sales beat too by an even slimmer margin, but it was more than enough to get the adrenaline pumpkin’ among investors.
• Guidance was stellar too, but the real sweet spot of the report was the nearly 80% gross margins and 85% recurring revenue. To investors, numbers like that are equivalent to a dog smelling peanut butter; they’re damn well gonna be all over it.

Broadcom ($AVGO) ↑ 5.70% ↑

• The company with simply the worst-matched name and ticker symbol in history managed to pull off a helluva quarter and keep investors excited for the future.
• Broadcom shares pumped almost 6% to close last week as the chip maker and cyber firm just barely beat on both the top and bottom lines. That was cool, but the way better part was the “robust demand trends” seen by both analysts and management.
• Although “robust” is just the monocle Winnie-the-Pooh version of “big” or “a lot,” it does sound way smarter and apparently holds true for Broadcom. The company is up nearly 15% already in 2023 and doesn’t plan to chill anytime soon. Place your bets now, apes.

What's Rotten

Zscaler ($ZS) ↓ 11.10% ↓

• Oof. It was a tough day to have a tough day on Friday, but nevertheless, Zscaler found a way.
• Shares in the cloud-based cybersecurity provider nosedived on a solid earnings report where the firm beat both sales and earnings expectations. Makes sense, right?
• Not at all, but as the boisterous Mr. Market knows, it’s all about the future. Zscaler’s guidance was described by analysts as “muted,” aka the market equivalent of Buddy the Elf being called a cotton-headed ninny muggins.

Costco ($COST) ↓ 2.15% ↓

• 2022’s winner of the highly-prestigious and ubiquitously sought-after Platinum Banana award for “Company of the Year” is facing a bit of their very own Madden Curse to start 2023.
• I mean, after reaching the pinnacle of corporate America by receiving the above award, it’s gonna be tough to outperform that. Shares are still up 4.85% YTD, but yesterday’s minor loss was just not the vibe.
• But still, that’s what happens when you disappoint on earnings like Costco did. Thursday’s figures showed in-line earnings as well as a sales miss, and although the company doesn’t do financial guidance, they do report monthly sales figures. Needless to say, these numbers weren’t up to snuff.
• Sure, February comparable sales were up about 5% overall, but the >11% dive in online sales was a real kick in the you-know-where. We’ll see how that goes next time.

Data Peel

Source

Thought Banana

Nation of Gamblers

Maybe Nietzsche was right?

For most of the country’s history, gambling was illegal and heavily stigmatized in the United States. Today, gambling is a booming industry, with 2022 putting up an all-time season for the industry as it raked in over $60bn for the year.

To state the obvious, revenues for the gambling industry will almost definitely continue to increase each year as the practice becomes legal in more states, bigger players get involved, and sports leagues lean into it as a revenue driver.

But still, $60bn is a whole lot of money, so let’s talk about it for a minute.

Excluding tribal-owned casinos, sales raked in by casinos and online betting sites alike boomed 14% higher compared to 2021 to get to that $60bn level. Now, 14% might not sound like “booming,” but when benchmarked against an overall economy that grew sub-3% in the same period, that’s about as fast as it gets for large industries.

The growth alone isn’t much of a surprise, but the narrative shift in the space is. Since that damn virus showed up, basically anything done through a WiFi connection has exploded in popularity. Naturally, online betting followed that trend, but the story at first was that the spike would fade as the world re-opened. Looking at the data for 2022 and around things like this past Super Bowl (f*ck the Eagles), safe to say online betting ain’t going anywhere.

And later this month, we’ll begin arguably the most fun annual event in sports that practically begs you to put a month’s salary on several 7-leg parlays per day: March Madness.

The college basketball tournament officially begins on March 14th, so if you’re not into the whole sports, betting, or sports betting thing, just be mindful of your gambling friend’s mental state during tourney time.

But it’s not just sports betting, either. Everyone knows Robinhood sucks and is run by scumbags, but we also know that traders on Vlad’s app are the degenerates of degenerates in the world of investing.

Like sports betting, it was theorized that activity would plummet as the world re-opened and, according to the company’s latest earnings report, that is what the kids would call huge cap.

I mean, just look at the stock. Shares are up well over 22% this year already, meaning we sure hope those investors on the app bought the app’s stock as well.

Basically, what we can learn here is that Americans love gambling. An increased willingness of a population to put “hard-earned” money at risk on random bets like $CUMMIES or Jayson Tatum’s points in a game is a sign of an economy full of people with money to spare. It might not be great, but it could be worse!

The big question: Will we see the gambling trend continue to grow in the coming years, or did the last few years wear us out? How will real-time and other styles of gambling change the fan experience of sporting events and other bet-able spectacles?

Banana Brain Teaser

Friday — My sides are firmly laced about, yet nothing is within; you’ll think my head is strange indeed, being nothing else but skin. What am I?

A drum.

Today — It’s 100 bananas off the WSO's Real Estate Modeling Course for the first 10 respondents. LFG!

I have no voice and yet I speak to you, I tell of all things in the world that people do. I have leaves, but I am not a tree, I have pages, but I am not a bride or royalty. I have a spine and hinges, but I am not a man or a door, I have told you all, I cannot tell you more. 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, you have to be willing to be wrong in the short term in order to be right in the long term.” — Cathie Wood