July 31, 2023 | Peel #511

In this issue of the Peel:

• The U.S. economy seems to be controlling inflation, reflected in the slowing growth rates of the PCE and Core PCE.
• Reata Pharma and Intel saw a good run, gaining significantly due to a purchase deal and stronger-than-expected earnings, respectively. Live Nation Entertainment and Enphase Energy's stocks, however, tumbled.
• Big Oil companies Exxon and Chevron reported huge earnings, and despite the declining oil prices, they indicated plans for more acquisitions, particularly in America's Permian Basin.

Market Snapshot

Happy Monday, apes.

Hope you had a great weekend and that the Liquid IV you downed on your commute is helping. After all, now that we know the aliens are watching, we gotta be on our A game.

Equities sure were on Friday, speaking of. Slowing inflation is to the market like a kid at a candy store in Disney land on Christmas Day - it’s all coming together. Strong economic data and not-horrible Q2 earnings have powered a strong July, and with today being the month’s last session, we’d say hot market summer is confirmed.

Meanwhile, yields across the spectrum retreated to close last week, with the 2- and the 10-year yields settling below key 5% and 4% levels. The USD had a mostly flat day in the face of strong inflation data, keeping FX traders nice and bored for the day.

Let’s get into it.

Unlock Your Investment Banking Potential

Hey there, future investment bankers! Tired of being rejected by the big dogs in finance? Say goodbye to those blues and hello to WSO's IB Interview Course!

We will show you how to slay those tricky interview questions and ace your dream job. Our 200+ questions and 10+ hours of videos will help you master the technical and behavioral interviews, plus insider tips from banking veterans, and you'll be 100% prepared for anything they throw your way.

What’s more? You’ll even find yourself landing more interviews with our proven resume templates and LinkedIn tips. And with the WSO Company Database, you'll get exclusive access to compensation, interview insights, and employee reviews for hundreds of banks.

Level up your finance game

Macro Monkey Says

Back to Reality

Aaand there goes gravity—or so it seems—as the U.S. economy manages to pull inflation back down to Earth, posting the slowest annual print in June since March 2021.

The “Fed’s preferred measure of inflation,” known as PCE and Core PCE, grew a slowing 3.0% and 4.1%, respectively, for the year last month. I’ll say it again, Happy Monday, apes.

Source

If the CPI report is Winnie the Pooh, the PCE report is Winnie the Pooh in his top hat and monocle…basically sums it up.

As we said, that’s the lowest rate of acceleration for personal consumption expenditure in over 2 years. Markets immediately started popping bottles as the equities trade seemed allergic to a down day (let’s hope that allergy lasts).

"Also released on Friday was the Employment Cost Index, a measure of exactly what it sounds like ..."

Adding fuel to the “slower inflation” fire is the fact that you, me, and all the other apes out there are growing our earnings less (congrats!) and less each month. Also released on Friday was the Employment Cost Index, a measure of exactly what it sounds like, which grew 4.5% annually in June.

Both reports carry big weight independently to the Central Bank and its watchers. From the two dropped on Friday, we learned (in part):

• Overall personal consumption expenditure grew 3% annually and 0.2% monthly
• Core PCE (excluding food & energy) grew faster annually at 4.1%
• Personal savings rate fell slightly to 4.3%
• Wages & Salaries grew 1% for the quarter ending in June

Needless to say, the headline news of the day was overwhelmingly positive for markets. For JPow and his Central Bank buddies, however, it was great to see the data—but maybe not the reaction.

Econ 101 classes teach us that Central Banks try to slow economies by increasing the costs of borrowing and opportunity costs on marginal dollars. This, in theory, leads to weakened demand for spending on goods and services for households as well as labor and investments for businesses.

While that weakening has definitely occurred on either side of the coin (no pun intended), we are still seeing a drastic slowdown in inflation this year. Might lose my job for this, but we have to ask, was inflation actually transitory??

"While that weakening has definitely occurred on either side of the coin ... we are still seeing a drastic slowdown in inflation this year."

No, it can’t be, right? Just maybe.

The two key factors (that are obvious, at least) to consider are 1) the first and only decline in the M2 money supply the U.S. has ever seen began to occur last summer, and 2) supply chain disruptions continue to lessen.

Diving into these two will be a story for another day (we promise), but the important thing is that JPow’s rate hiking adventure may have mattered a whole lot less than the attention we gave to it. As usual, only time will tell, but you’ll actually want to stay tuned for this one.

What's Ripe

Reata Pharma (RETA) ↑ 54.02% ↑

• Could biotech companies stop buying each other? Need a damn master’s degree in biochemistry just to understand the deal terms, but let’s see what we can do.
• On Friday, biotech big boy Biogen announced a $7.3bn deal to purchase Reata Pharma, the maker of a recently FDA-approved drug.
• That drug, with some unpronounceable name, is currently the only FDA thumbs-up treatment of a hella rare genetic disease called Friedrich’s ataxia. It’s one of those treatments that very few people will buy, but when they do, Biogen and the rest of the industry will charge approximately 1-life-savings for the therapies.
• As that $7.3bn price tag is a solid premium for Reata, investors poured in for some sweet merger arbitrage. Let’s see how it works out.

Intel (INTC) ↑ 6.60% ↑

• While the cool kids like Nvidia and AMD soak up all the investors, customers, and other things you need to run a company, Intel is still quietly plugging away in the corner.
• No one likes Intel; hence the firm’s 25% fall in value over the last five years, while AMD and Nvidia are both up >500%. But on Friday, it looked like the classic American blue chip had a shot at getting a bid.
• Following two quarters of losses, Intel actually posted a profit of $0.13/sh vs. expectations for a $0.03/sh loss, largely thanks to strong progress on the $3bn planned cost reduction in 2023. Revenue beat narrowly, too, despite absolutely disgusting annual growth comps across all segments.
• But investors are here for tomorrow, not yesterday. CEO Pat Gelsinger actually had the stones to say the business would see weak a** numbers through year-end. With a Q2 gross margin of 40% (vs. guidance for 37.5%) and a strong belief in the company’s turnaround plan, the path back to the cool kids’ table may just work out.

What's Rotten

Live Nation Entertainment (LYV) ↓ 7.84% ↓

• While Taylor Swift and Barbie are busy propping up the U.S. economy even better than JPow did, it turns out Ticketmaster is still trying to ruin your life and rob your family.
• Shares in Ticketmaster owner Live Nation Entertainment tumbled live on Friday despite earnings figures that went beyond investor’s Wildest Dreams. EPS of $1.02/sh nearly doubled the $0.57 analysts expected, while revenue of $5.6bn toppled the $4.9bn estimate.
• And it’s not just Taylor. The Jonas Brothers, Beyonce, Ed Sheeran, and probably some Indie randos your weird roommate loves are pumping the supply of live entertainment. Sadly, at the same time, Ticketmaster is trying to f*ck up Taylor and the others even more than Jake Gyllenhaal did.
• But alas, shares enjoyed the ride for a time even shorter than Taylor’s last relationship. The DOJ announced a potential suit to come against Ticketmaster “by the end of the year,” so stay tuned for that one.

Enphase (ENPH) ↓ 7.48% ↓

• It was a brutal day to be named Enphase Energy on Friday, and unfortunately, shareholders learned that one the hard way.
• Like Alexander’s terrible, horrible, no-good, very bad day, just about everything went wrong for the company. Beginning with a sizable revenue miss where Enphase reaped just $711mn for the quarter, the trouble only got worse when banks from Wells Fargo to Deutsche downgraded the name.
• Shares posted a shiny new 52-week low on the news. Other solar names were downbad on the day, too.

Thought Banana

Earnings Spotlight: Big Oil, Big earnings

Out of sheer coincidence and definitely not planning or collusion, the nation’s two largest oil producers both dropped earnings on Friday. What’s that? You think they dropped on the same day so they didn’t get more scrutiny from investors by releasing independently?? No, it couldn’t be…

"Both companies came roughly in line with street expectations, hence the minimal reaction ..."

Anyway, Exxon and Chevron have a big problem: they both have way too much money.

Both companies came roughly in line with street expectations, hence the minimal reaction from both bulls and bears.

To get specific:

• Exxon earned $7.9bn on $82bn in revenue
• Chevron raked in $6.0bn on $48.8bn in sales
• Exxon sits on nearly $30bn in cash as of June 30th, roughly in line with Dec 2022 levels
• Chevron hoards a pile of $9.2bn, way down from Dec 2022 levels

Coming in line was great, but both companies are seeing massive declines in earnings since the tumbling of the price of oil from the end of Q2 last year on the heels of Putin’s invasion of Ukraine (Brent crude was ~$112 last year).

While both companies have already recently announced big-ticket acquisitions, like Exxon’s purchase of Denbury for $4.9bn and Chevron’s $6.3bn takeover of PDC Energy, the important thing here was that management at both companies signaled plans to keep the M&A party going.

"... the important thing here was that management at both companies signaled plans to keep the M&A party going."

Both are looking to expand access in America’s most oil-dripping region called the Permian Basin, sitting in the Texas / New Mexico / Middle-of-Nowhere area.

But, at the same time, it’s great news for all you M&A nerds out there. As a cyclical and economically sensitive industry, big oil can big-time precede the general economy and bring those juicy deals back to your desk and inbox.

The big question: Can big oil get the party going again for both themselves and the economy as a whole?

Banana Brain Teaser

Friday — I am more microscopic than microscopic; I am more minuscule than minuscule. I am smaller than small and I am tinier than tiny. Yet surprisingly, I am still big. What am I?

The word "big". It only has 3 letters and is therefore shorter in length than the words "tiny," "small," "minuscule," and "microscopic."

Today — What special characteristic do the following words have in common?

• anyone
• before
• envy
• foresee
• seedy
• teepee
• tutu

Shoot us your guesses at [email protected] with the subject line “Banana Brain Teaser”.

Wise Investor Says

“There are times when money can be made investing and speculating in stocks, but money cannot consistently be made trading every day or every week during the year. Only the foolhardy will try it. It just is not in the cards and cannot be done.” — Jesse Livermore

Happy Investing,

Patrick & The Daily Peel Team

Was this email forwarded to you? Be smart like your friend.

ADVERTISE // WSO ALPHA // COURSES // LEGAL