June 14, 2023 | Peel #481

Silver banana goes to...

In this issue of the Peel:

• Inflation data shows a mixed picture, resulting in varying interpretations and anticipation around JPow’s reaction.
• Manchester United shares soared with rumors of a potential sale, while Toyota’s announcement of a new business unit for EVs boosted its stock. Advanced Micro Devices, however, saw a decrease after the launch of their new AI-oriented chip MI300X, and Zions Bank shares dipped due to decreasing net interest income.
• The Microsoft-Activision Blizzard deal is under scrutiny from the FTC over antitrust concerns.

Market Snapshot

Happy Wednesday, apes.

Alright, we’re halfway through the week’s two most important economic events. Not only did our portfolios survive the first, but they thrived (as long as you’re a bull, of course).

Equity markets in the U.S. got a boost yesterday from some mostly positive inflation data, which, to be honest, we didn’t realize was even possible. Risk assets traded higher as markets seemed to price in a decreasing likelihood of further rate hikes later today, but we’ll see if they were right in a few hours.

On the other side of the coin, bond yields and the USD moved lower for most of the session before treasury yields spiked going into Wednesday. Usually, we expect yields to follow rates, which would imply an expected strong decline yesterday, but investors just as easily could’ve been rotating into equities at the same time. To quote Mr. Owl of the Tootsie Pop Corp., “The world may never know.”

Let’s get into it.

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Banana Bits

• Seemingly trying to copy us (tf?), CNBC drops a sick breakdown of the latest inflation data
• In the most predictable political event of 2023, former Pres Donnie T pled not guilty and immediately began fundraising on the back of 37 federal charges
• Sitting on your thumb must be a blast because it’s literally all the SEC is apparently capable of doing in the face of digital asset firms begging for some kind of understandable regulation
• With their struggling finances front and center, Russia seeks to raise funds by taxing the sh*t out of those poor, sweet oligarchs held so near and dear

Macro Monkey Says

Drop It Low

According to urban legend as documented by famed American historian Flo Rida, when “the whole club was looking at her,” the only possible response was that “Shawty got low, low, low, low, low, low, low, low.”

Thanks, Flo Rida. For our purposes, the “Shawty” in question is, of course, the May CPI print—and you better believe that, when the whole club was looking at her, she got real low.

Yesterday, we learned that over the month of May, average consumer prices increased by 0.1% compared to April and 4% compared to last year. That’s the lowest annual increase in over 2 years, and honestly, we’re getting mixed messages.

But the messages that we get don’t matter. Markets had a minimal reaction, suggesting the message they received was just as mixed as ours. Yet, the only one that matters is Fed Chair Jerome Powell, and when the whole club is looking at him later today, we’ll find out how that message resonated.

"... when we adjust for those costs and remove them from the equation, we see that the disinflation in question is much less drastic ..."

Food and energy-based inflation was the primary driver of those mixed messages. Both line items carried the team lower in May, but when we adjust for those costs and remove them from the equation, we see that the disinflation in question is much less drastic than the headline may seem.

Removing food and energy gives us the “core CPI,” and that gained 5.3% annually while rising 0.4% for the month.

We gotta tip our caps to economists this month, however, because just about every number you’ve read so far was almost exactly in line with their expectations. They got it right, and following the release, market-implied odds of a rate hike pause at tomorrow’s meeting immediately shot up from ~80% on Monday to 100% at one point, adjusting down to close around 95%.

The 3.6% decline in energy prices was easily the primary driver of the month’s 0.1% print. On the other hand, housing costs gaining 0.6% while encompassing nearly 1/3rd of the index alone pulled hard in the opposite direction.

"Usually, the core CPI reading comes in lower than the headline numbers, but that hasn’t been the case of late ..."

Food and energy prices are volatile af, to use a technical macro term. Usually, the core CPI reading comes in lower than the headline numbers, but that hasn’t been the case of late, thanks to Russia’s early-2022 invasion of Ukraine and the related spike in energy costs. On an annual basis, energy is coming off a tough base.

But the dichotomy here can be left wide open for interpretation. Some could argue that the headline number gives false optimism in JPow’s war against inflation, given the price changes in energy commodities over the last year. Others would simply recall that even 4% inflation, although the lowest in 2 years, is still 2x that of the Fed’s 2% target.

Thankfully, we’re not the ones who have to figure this sh*t out. We know JPow is reading this somewhere right now and, we’re sorry to say but, we don’t have much insight for the Fed Chair. The only thing in sight will be JPow himself later today.

We’ll see you at the meeting.

What's Ripe

Manchester United (MANU) ↑ 13.76% ↑

• If you’re the average, soccer-discriminating American like myself, you might think this has something to do with Messi (like I did). Spoiler alert: it does not.
• Shares in arguably the most recognizable soccer club globally (because my soccer-fan roommate swears it’s Real Madrid) kicked off yesterday with a big announcement that the organization may be up for sale.
• It’s just rumors for now, but reports swirled suggesting that the chairman of the Qatar Islamic Bank, Sheikh Jassim bin Hamad al-Thani, may be nearing a deal to snatch the club away from its current owners, the British-native Glazer family.
• We smell a battle afoot, so it’s time to get the swords and the pencils sharpened.

Toyota (TM) ↑ 5.68% ↑

• The world’s largest yet maybe least-discussed auto company by revenue quietly popped off yesterday, likely reminding shareholders that this stock is still in their portfolios.
• We see them so often, so it’s easy to forget that Toyota boasts 3 of the top-selling global car models each year—Corolla, Rav4, and Camry. And yesterday, it was announced that those models, along with every other car branded with that iconic circled T logo, are getting a major battery upgrade.
• Basically, Toyota is launching a whole new business unit called BEV Factory focused on developing EVs and their batteries as soon as 2026.
• Management described the new tech as “next generation,” but for a company as boomer-seeming as this one, their idea of “next generation” could be, like, adding power steering for all we know. Nevertheless, markets ate it up.

What's Rotten

Advanced Micro Devices (AMD ↓ 3.61% ↓

• They really thought they did something. If Nvidia is the 2017 Golden State Warriors, you might think that AMD is the Cleveland Cavaliers. But according to markets yesterday, they’re more like the Phoenix Suns (who went 21 - 61) of the same year.
• Late in the session yesterday, CEO Lisa Su stepped on stage to reveal AMD’s most advanced AI-oriented chip yet, the MI300X. Traders turned the name even lower on the announcement, suggesting they think 1) Nvidia’s chips are still better, 2) AMD’s 1-year timeline to ship in volume is too long, or 3) a combination of the two.
• Regardless, the fact that Nvidia finished the day with a 3.5% gain speaks volumes. At the very least, analysts expect the introduction of the MI300X to compete with Nvidia’s ~$30k/chip H100 may bring down the big dawg’s margin on that chip. Still, absolutely no one cared yesterday, apparently.

Zions Bank (ZION) ↓ 1.55% ↓

• Are the regional banks back at it again? Probably not, but a report from the $4.4bn regional lender Zions certainly didn’t make investors feel better.
• With all the shenanigans and what some may even call Tom Foolery within regional banks that occurred earlier this year, it’s no wonder why investors are hanging on the edge of their seats.
• So, when Zions announced yesterday that their net interest income was expected to be “decreasing” rather than the “moderately decreasing” label they put on it last time, shares took a mild dive.

Thought Banana

Stop Right There

As we all collectively and simultaneously learned in this highly educational video, there is a direct correlation between the amount one f*cks around and the corresponding amount one finds out.

Microsoft and Activision Blizzard are finding out a lot right now.

On Monday, chairwoman Lina Khan and the FTC finally decided to step up to the plate against the Microsoft and Activision Blizzard deal. A restraining order has been granted, essentially putting the deal on ice until further notice.

"And in case that’s not enough, the agency is also seeking a court injunction that would block the deal from continuing."

And in case that’s not enough, the agency is also seeking a court injunction that would block the deal from continuing. It has been nearly a year and a half since the deal was first announced when Microsoft originally planned to be past this by fiscal year 2023. Yeah, not looking too likely now.

As the nation’s primary trade regulator, it’s the FTC’s obligation to prevent unfair practices such as, in this case, antitrust. The concerns basically come from 3 places:

• Competition: The deal could allow Microsoft to withhold or degrade gaming content on competitive consoles or systems
• Consumer Harm: Microsoft could also simply force consumers to pay higher prices to license Activision Blizzard games for use on non-Xbox consoles
• Putting them in Timeout: Without filing this injunction, the deal could have continued to the point of irreversibility prior to the FTC officially OKing the deal

Not only are those concerns simplified, but they were also blatantly expected. Arguably, Microsoft has already taken steps to assuage these concerns with agreements such as licensing commitments for certain gaming franchises up to and including Call of Duty for competitors like Nintendo.

The $70bn deal would easily be Microsoft’s all-time largest, and for a company with a $2.5tn market cap that faced antitrust action in 2001, its not like they didnt see this coming.

"And thats probably why shares have still managed to gain this week ..."

And thats probably why shares have still managed to gain this week - one could argue this legal action was already priced in.

As youve probably (hopefully) realized by now, this thing will still have a long way to go. The U.S. government isnt exactly famous for its efficiency, but whenever this works its way through the courts, well be ready.

The big question: Will Microsoft complete its acquisition of Activision Blizzard? If so, how does this change the gaming landscape going forward, especially given the coming storm of VR/AR gaming?

Banana Brain Teaser

Yesterday Each group of three definitions describes three words that are spelled the same, except for one letter (each group describes a different set of words). Example: king, ring, wing.

1a) competition
1b) satisfied
1c) the circumstances surrounding an act or event

2a) to contaminate
2b) to force into something
2c) flea

1. contest, content, context
2. infect, inject, insect

Today What phrase is this?

• Left Side...1st Floor...Right Side
• Left Side...2nd Floor...Right Side
• Left Side...3rd Floor...Right Side

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

Wise Investor Says

The way to build [long-term returns] is through preservation of capital and home runs...When you have tremendous conviction on a trade, you have to go for the jugular. It takes courage to be a pig. Stanley Druckenmiller

Happy Investing,

Patrick & The Daily Peel Team

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