BP Ain’t Got Nothing on This Oil Spill | The Daily Peel | 1/11/23


Market Snapshot

Happy Wednesday, apes.

Wow, the party actually continued for more than a day!

Equity indices carried the good vibes from Monday into another positive session on Tuesday as cautious optimism reigned supreme in the days leading up to Thursday's CPI report and Friday's bevy of bank earnings.

Treasuries sold off in the meantime, with the U.S. 10-year yield ending 10 bps higher while the dollar pretty much just vibed all day. Lucky dollar, I wish I could do that. But for now…

Let's get into it.

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Banana Bits

Macro Monkey Says

Let's Get Fiscal

If only politicians were as efficient with our dollars as they are in making radical changes under new leadership. Alas, this is America.

Anyway, now that House Speaker Kevin McCarthy has finally claimed victory following one of the most embarrassing votes in U.S. history, let's talk about some of the changes, wannabe-changes, and never-gonna-happen changes rolling around inside the halls of Congress. We talk monetary all the time, but today it's all about fiscal.

For starters, something actually bipartisan occurred. The House approved the creation of a new committee to keep a more watchful eye on China. A 365-65 vote created the "House Select Committee on the Strategic Competition Between the U.S. and the Chinese Communist Party."

Aside from having a comically long name, this committee had McCarthy sounding like he was reading lines straight from Washington's farewell address with a radical emphasis on the need for bipartisanship here, even under new leadership.

But what does this mean? Well, for starters, it's even more confirmation of the beef between the U.S. and China. A formalized committee will almost certainly lead to more resources being allocated to advance our standing against China. After reading yesterday's "Thought Banana," it's no secret as to why.

Further, the GOP wasted no time dishing out wild bills that sure do grab headlines but have about equal odds at passing as Snoop Dogg does taking a urine test.

Regardless, one that seems to have had Twitter especially up in arms last night is the alleged bill set to abolish the IRS and eliminate the federal income tax. Now, I'm as huge a fan of tax evasi-ahem, tax avoidance as much as the next guy, but removing the IRS just takes the fun out of it, you know?

Further, replacing income, corporate, gift, and other taxes with a national consumption tax might sound great on paper, but for an economy that lives and dies on consumer spending (70% of GDP), we might want to think a little harder on that one…for the sake of our portfolios.

Lastly, and the most important fiscal ongoing of the day, is the hot, red beef set to roast over the nation's debt limit. Already a touchy subject, with the GOP running the House (the chamber that holds the "Power of the Purse"), reducing the debt ceiling will be a driving economic factor until the next election cycle each time a deadline comes up.

Fiscal austerity in government seems like an oxymoron, but the GOP does tend to focus on this issue more heavily. You might want to add the word "sequestration" to your vocab, which describes legislatively-automated reductions in spending (and not a horse-riding sport), because imposing such a dynamic is sure to be at the top of McCarthy's and other Republican minds.

We'll keep you updated each time the government is about to go broke or hit a debt ceiling. Might be a lot, might be a little, but it's American politics, so, as always, literally anything can happen.

What's Ripe

Bed, Bath, and Beyond ($BBBY) ↑ 27.78% ↑

  • Just kill me already. You're telling me I drove myself into poverty for a finance degree, and THIS is the sh*t that keeps happening? Nahhh man…
  • I'm gonna try not to puke while writing this but Bed, Bath, and Beyond somehow rose nearly 30% yesterday, rallying out of the -97% hole it dug itself.
  • There was hardly any good news to drive the gainz either. Sure it was earnings day, but all they did was call for more layoffs and store closures, but some idiot on r/WallStreetBets probably ignited a mini-short-squeeze or something; who cares.
  • The thing is dead, and I'd like to apologize for wasting your time by making you read this. Just skip to the next stock already.

Oak Street Health ($OSH) ↑ 27.47% ↑

  • Oh, you didn't hear? Turns out old people are all the rage on Wall Street these days.
  • Sure, geriatrics aren't the most fun people exactly, but they sure do have a lot of money. And that's a big reason why CVS is looking to drop $10bn on this (formerly) ~$5bn old folks home.
  • But for real, as the population ages bringing more and more dollars into the retiree healthcare space, the acquisition should pad the stats for CVS in a positive way.

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What's Rotten

Illumina ($ILMN) ↓ 6.20% ↓

  • Talk about asking for it. Illumina is either the ballsiest company around or like your friend that thought university police would be "cool" if you just admitted that you were, in fact, smoking weed.
  • The $30bn gene-sequencing darling of the pandemic plummeted over 6% after stepping on stage in front of investors-at the JP Morgan Healthcare Conference of all places-and announced a slowdown in sales similar to bullets after WWII.
  • The icing on the cake, however, was a 50% reduction from Street estimates on their EPS guidance. A pivot from genes to jeans might be in store.

Super Micro Computer ($SMCI) ↓ 7.55% ↓

  • With a company name as dumb as that, you know the story driving a nearly 8% single-day fall is gonna be even worse.
  • "Super Micro Computer" (can't even say it without a smirk) tanked yesterday on news of sprawling corporate scumbaggery. Spruce Point Capital, an NY-based investment firm, issued a report so bearish it makes a grizzly look cute and cuddly.
  • With looming SEC action and heavy reliance on a downbad Mark Zuckerberg, analysts are betting the firm's profits will begin to take after the company's name and potentially get even worse from there.

Thought Banana

Oil Spill

I don't know if I have the energy for this one, apes (bah dum tsss).

Get it? Energy? C'mon, that's just comedy gold right there.

Okay, enough of the professional comedian content; we're here to talk business. Specifically, the oil of the business world, which is, of course, oil.

The United States, for one, really loves oil. In fact, we love oil so much that we, at one point, had over 725mn barrels of the stuff in our government's hands. Now, that figure currently sits at way less than 400mn.

The Strategic Petroleum Reserve is basically a savings account for oil in the event that a global catastrophe occurs, disrupting energy supplies in the United States. It's a rainy day fund behind a glass case labeled "break in emergency," and under Big Dawg Biden's tenure, that glass has been absolutely shattered.

Thus far, President Biden has already dumped more barrels from the SPR than every single president before him combined.

Ostensibly, this was done in a bid to loosen the need for petro and other energy supplies from a certain really big country that happened to invade a certain smaller country right next to it for no reason. In reality, a large part of the drain was spurred by gasoline prices hitting well over $5 and the entire country losing their minds over it.

Supply constraints brought on by the Russian invasion of Ukraine skyrocketed prices, but the administration's dumping of reserves brought things back to a more normal equilibrium, for now.

Good news is that gas is cheap. Bad news is that America's energy supply has been becoming incrementally more fragile since this time last year. Worst part is that the U.S. government has publicly announced intentions not to begin restocking until prices have fallen to roughly $70/bbl, a level not seen since December 2021, and even then, only briefly.

I get it; they want to make their bag too. Most of the U.S. supply dumps has averaged around $96/bbl, so buying below $70 would be the trade of the century. But what happens when you have a buyer looking to replenish ~300mn barrels of anything? Yup, the price of that barrel moons, killing the golden goose where it lays.

So, we're in a bit of a rock and a hard place right now. Well-timed, gradual restocking certainly is possible, but if 2023 plans to be like any year since C-19 showed up, then your guess as to what will happen is as good as mine.

The big question: How will the U.S. replenish the SPR stock without driving prices over its threshold level? What will happen if an event that actually calls for draining the SPR even more occurs?

Banana Brain Teaser

Yesterday First, I threw away the outside and cooked the inside. Then I ate the outside and threw away the inside. What did I eat?

Corn on the cob.

Today - It's 100 bananas off the WSO's PE Interview Course for the first 10 respondents. LFG!

I have keys, but no locks and space, and no rooms. You can enter, but you can't go outside. 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

"Einstein was right about relativity, but even he would have had a difficult time applying relative valuation in today's stock markets." - Aswath Damodaran

Happy Investing, Patrick & The Daily Peel Team


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