August 9, 2023 | Peel #518

Silver banana goes to...

In this issue of the Peel:

• Moody's has expressed concerns about U.S. banks, with regional banks getting downgraded, while some others are given "negative outlooks." Banking sector uncertainties could lead to reduced lending to small and medium-sized businesses, impacting the economy.
• Eli Lilly and Novo Nordisk stocks rose due to positive news on obesity treatments. Cloud stocks, particularly DataDog, saw declines after weak earnings reports, while Beyond Meat faced a setback due to lowered guidance.
• Analysts and investors are becoming skeptical about the rapid growth in AI stocks, especially following disappointing earnings from Palantir and a report from Morgan Stanley suggesting tech stocks might be overvalued.

Market Snapshot

Happy Wednesday, apes.

Banking failures are cool again, as we learned yesterday. Now that we know Mr. Market has his head on straight once again, let’s see what’s going on.

Equities began the day about as skittish as Jerry when Tom first showed up. Slowly, equities traded higher intraday, but none of the U.S. majors could close above Monday’s. International macro bad vibes, as well as Moody’s hating on banks—like it should have at literally any point back in 2005-2008—held us back.

That didn’t stop investors from piling into U.S. Ts and USD, however. Treasuries and the dollar are already viewed as safe when sh*t hits the fan globally, but that is only expedited when the “sh*t hitting the fan” is slowing growth outside our borders.

Let’s get into it.

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You don’t actually like going for drinks with VDR sales guys, do you?

Sure, we all like bottles of Opus One on someone else’s dime. But spending any more time than necessary with some guy pushing data room software? Hard pass.

Apart from being a lame way to spend your Tuesday night, it’s a straight-up bad way to pick software that you’re going to use all the time.

Those drinks may have been free, but the hours you’ll waste attempting to use a VDR that sucks will cost you (and your clients) cold hard cash.

At CapLinked, we won’t waste time pretending to be best buds. Instead of investing in sales guys pestering you to hang out, we’ve spent our money where it counts: creating the easiest VDR to use on the market.

Request a quote today, and we’ll send you $50 to GrubHub or Uber Eats (because you still deserve free stuff). Then, go out to drinks with your actual friends to celebrate all the time and money you’re about to save.

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Banana Bits

• China’s (new) largest developer defaults on interest payment for the first time
• Excuse me, why tf is PayPal getting in on the DeFi game ~3 years too late? Oh, maybe this is why
• The combination that formerly athletic Gen Z degenerates have been waiting for: ESPN and Barstool are teaming up to conquer the betting game

Macro Monkey Says

Banking on Uncertainty

What’s old is new again…and no, thankfully, we’re not talking about dudes re-starting to grow mullets.

We’re talking good, ol’ fashion crisis of confidence in the most important sector of a capitalist economy: banks.

Back in the late winter/early spring of this year, we all sat back with our popcorn and heart palpitations watching as the nation’s 2nd and 3rd largest bank failures occurred one right after the other. Importantly, nobody lost a penny of deposits. Perhaps more importantly, confidence in (mostly smaller) banks was shaken to the core.

Yesterday, Moody’s, a real, adult credit rating agency (unlike Abercrombie & Fitch or whatever they’re called), said “boo!” when talking about U.S. banks.

"The storied Wall Street firm loaded up a 10-round mag and went to town on regional banks ..."

The storied Wall Street firm loaded up a 10-round mag and went to town on regional banks in the U.S., downgrading 10 names. The largest of the bunch was M&T Bank up in Buffalo, the country’s 19th largest bank. For context, SVB was ~16th when it went kaboom.

They all maintained their investment grade ratings (for now), but as we saw with SVB (who had an A rating from Moody’s until it collapsed), that can change on a dime.

6 other banks—including ones that actually matter to everyone independent of the rest of the group—were put on notice that their investment grade ratings are under review. These lenders include:

• BNY Mellon
• State Street
• Truist
• Northern Trust
• U.S. Bancorp and
• Cullen/Frost Bankers

Three of those banks alone (State Street, BNY Mellon, and Northern Trust) hold a combined $7.2tn in AUM.

Aside from those names, Citizens Financial, PNC, Fifth Third, Capital One, and 7 others were given “negative outlooks.”

"Aside from those names, Citizens Financial, PNC, Fifth Third, Capital One, and 7 others were given 'negative outlooks.'"

So, we know the tweaking over the banking sector is far from over, but the reasons for that may be a tad less clear. Some cited and speculated drivers include:

• Deposit Flight: American banking customers have largely led a trend of flocking to larger, “systemically important banks” (SIBs) as 100% of deposits (even over $250k) are implicitly guaranteed by the FDIC.
• Higher Rates: Normally a good thing for banks, when rates rise so high, so fast amid deposit flight to larger banks, smaller banks losing deposits have to pay higher rates on those dollars. That means a narrower margin on a smaller deposit base, and the cycle continues.
• Shaken Confidence: This includes the other two, but where this becomes uniquely important is in the future. People only put money in banks (aka, help the bank grow its loan books) when they think that bank will be around for a while. With collapses, downgrades, and negative outlooks (oh my!), that’s not gonna help.

And while that’s bad for banks, it’s a nightmare for the economy. Less regional banks means less lending availability to small and medium-sized businesses, those who employ the majority of American workers (still), which means less growth → less investment → fewer new jobs → slow consumer spending and the velocity of money → standard of living growth slows or starts to decline.

Again, Happy Wednesday!

What's Ripe

Eli Lilly (LLY) ↑ 14.87% ↑

• Being fat is cool? The internet sure seems to think so, but drug companies (and investors) continue to bet on people preferring to actually be in good health.
• It’s only something like health that can make a nearly $500bn stock move nearly 15% in a day. At the same time, European counterpart Novo Nordisk (a $325bn stock) boomed 17.24%. What are investors taking?
• Well, they’re probably not taking it yet, but given the fact that Eli Lilly and Novo got positive news on treatments for a disease that affects 13% of the global adult population: obesity. That’s 1.04bn people, by the way. A decent amount of customers, I guess.
• Eli Lilly’s weight loss drugs Mounjaro drove the firm to stellar results for the quarter, while Novo’s Wegovy showed immensely beneficial lab test data, reducing heart attacks and stroke by 20%. While making people less fat long-term might suck $ out of the healthcare ecosystem, investors couldn’t have cared less yesterday. Short-term profits FTW once again.

New York Times (NYT) ↑ 8.50% ↑

• In what must be a first since Mr. Times originally founded the newspaper, newspaper stocks appeared to outperform tech names on the day. Is it 1851 all over again?
• Well, if Mr. Times was alive today, he’d be proud of his 172-year-old company. The newspaper’s stock soared on strong earnings, highlighted by a scorching (again, for a newspaper) revenue growth rate of 6.3%.
• That put sales just above consensus estimates while EPS of $0.27 also beat the Street’s estimates for $0.21.
• Investors, as smart as they think they are, love easy numbers. That’s why instead of actual dollars, most eyes were focused on that digital subscription figure finally closing in on the 10mn figure. Why 10mn you ask? Easy. Keep it simple, stupid.

What's Rotten

Cloud Stocks (DDOG, MDB) ↓ 17.18%, 6.88% ↓

• While investors' heads (and portfolios) may have been in the clouds, the money actually being earned by these companies, it turns out, was approximately 6 feet under.
• Cloud stocks like Datadog, MongoDB, Splunk, Dynatrace, and other names you’re vaguely familiar with tanked thanks to DataDog dumping dog sh*t earnings for the past quarter.
• Revenue of $509.5mn and EPS of $0.36/sh on much stronger than expected operating income pumped investors just a tad at first, but a weak outlook quickly became the headlining story.
• While it makes no sense, it makes sense. Cloud stocks are long-duration assets, meaning investors don’t expect much now, but they expect a lot later. Coming and saying, “We’re going to make less money in the future,” as DataDog did, would be like Superman eating a big bowl of Kryptonite.

Beyond Meat (BYND) ↓ 14.27% ↓

• If the “beyond” in Beyond Meat is short for “it’s beyond ridiculous how much money this company loses,” well, then they’re very aptly named.
• Who knew that sh*tty, plasticky “meat” wasn’t the solution to all the world’s problems? Bears did, for one, as shares in Beyond Meat got slaughtered on declining demand leading to misses on the top and bottom lines.
• Searing it even more, Beyond Meat lowered guidance for the year across the board, but most of the attention was on the company giving on being economically viable (aka, cash flow positive) by year-end.
• You could say they quit, just like their customers.

Thought Banana

AI: Anxiety & Insecurity

Maybe piling into the latest hype-cycle trend-setter in tech wasn’t as intelligent as we thought. According to Wall Street yesterday, it was all artificial.

Okay, I’m done with those, I promise.

In the most well-seen bubble of all time, analysts, investors, and other a-holes may be turning their backs on AI already. With the rise of Nvidia (for an actual reason), C3.ai (for having the ticker “AI”), and plenty of others for reasons somewhere in between, we’ve all been calling the AI bubble a bubble since even before day 1.

Following the launch of ChatGPT and your dad asking you what “LLM” stands for, it became clear this already much-hyped technology would be the future. That still very well could be true, but as usual, markets may have front-run the excitement just a tad.

"That still very well could be true, but as usual, markets may have front-run the excitement just a tad."

Take a look at Palantir. Shares in the freshman of the military-industrial complex focused on AI in defense (doesn’t sound end-of-world at all) tanked Tuesday on earnings.

The depression came on Tuesday in light of a Morgan Stanley report laying out a simple fact: big tech and AI stocks have already well exceeded the average gain of an industry when that industry becomes the hot new thing. For reference, the median is 154%...“U.S. large-cap tech” has boomed well over 200%, according to Morgan Stanley, this year alone.

"... it’s no surprise to see yesterday’s pullback."

With that one-two punch of poor actual results from Palantir and poor expected results from Morgan Stanley, it’s no surprise to see yesterday’s pullback.

But the unique thing about this bubble is how clear everyone’s 20/20 foresight has been. It’s like the opposite of the shoeshine boy indicator this time. Now, because of how well foreseen this bubble has been, investors could catch themselves pulling dollars out and collecting profits too early, but that would burst the bubble.

Seeing a bubble so far in advance could actually avoid the bubble altogether, as no one wants to be the guy that bought BTC at $69k (nice) or Pets.com for anything above $0.00.

Like trying to observe matter in a quantum state, none of this can stay the same once observed. Better place those bets now.

The big question: Did the AI bubble get so big, so fast, that it killed itself? Will stocks with other associated tickers like “LLM” or “ML” boom like “AI” did? How will AI stocks perform against the S&P over the long term?

Banana Brain Teaser

Yesterday — Two people come to a river. There is a boat. However, it can carry one person only. How can they each get to the other side of the river using the boat?

They are on opposite sides of the river.

Today —

By changing the second letter of each word below, you can make another valid word. Can you change each word such that the second letters will reveal an eleven letter word when read downwards? Therefore, what now reads AWPYRNUCEPA will be a real word.

1. Bake
2. Swap
3. Opal
4. Dyed
5. Arks
6. Snow
7. Lump
8. Aces
9. Melt
10. Spun
11. Rant

Shoot us your guesses at [email protected].

Wise Investor Says

“There are always bubbles forming and bursting. The key is to understand why they are forming and what will cause them to burst.” — Ray Dalio

How would you rate today’s Peel?

All the bananas

Decent

Rotten AF

Happy Investing,

Patrick & The Daily Peel Team

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