China, Cheeseburgers, and Chips | The Daily Peel | 5/24/23

May 24, 2023 | Peel #468

In this issue of the Peel:

• An even better chip complement than fish
• Vax stocks boom, Pandemic 2.0 on the table?
• Gazprom’s Gas Probs

Market Snapshot

Happy Wednesday, apes.

The sun is shining, birds are chirping, and Spring is slowly rolling into summer as investors switch right back to the heavily bearish selling that has plagued almost all of 2023 so far. Nature is healing. Beautiful, right?

Not so beautiful for US equity holders, that is. Shares broadly fell on Tuesday, with an extra leg lower late in the afternoon bringing all the major indices down and dragging the S&P back below the key resistance level of 4,155. As we’ve been discussing ad nauseam this week, all eyes are on the debt ceiling.

Speaking of which, US government debt also continued selling as the asset that is usually a safe haven for investors is now the very thing we’re all worried about. Looks like USD is the only safe space for investors left, but wasn’t BTC and that whole gang supposed to be doing something about that? Hmm…

Let’s get into it.

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Banana Bits

• How to make trillions by chatting with your mates: the secret guide to Libor manipulation
• TikTok challenges Montana's ban in court, says it's not fair to deprive government workers of viral videos
• Neeva mind: The search engine that couldn't find enough users
• Ryanair flies high with €1.4bn profit, but don't expect any peanuts

Macro Monkey Says

China, Cheeseburgers, & Chips

How about we skip the torture today and talk about something other than the debt ceiling? Good, glad we all agreed.

Anyway, despite Washington’s best attempt to retain the Main Character slot in this rampant show we call the US economy, there actually is other sh*t going on.

Specifically, let’s take a look at chips. Shortly after you read this, the world’s largest chip maker in market cap terms (by far) will drop their latest quarterly earnings. Let’s get the sector celebration started a little early.

"The tech-onomic...proxy battle occurring between the world’s two largest economies continues to simmer."

And, for some even more perfect timing, the CEO of that alluded-to largest chip maker, Jensen Huang of Nvidia, has preempted the company’s report by coming out with a statement warning against potential “enormous damage” headed for the sector.

It’s been a while, so to jog your memory, we’re, of course, talking about the US and China.

The tech-onomic (thank you, thank you very much) proxy battle occurring between the world’s two largest economies continues to simmer. We briefly mentioned this following the CCP’s effective outright ban of Micron products earlier this week, sending shares in the US chipmaker on a downward spiral, but this is bigger than an idiosyncratic and retaliatory ban.

The tech-onomic showdown between the US and China has been an ongoing…uhh…let’s call it an “engagement” at least since China entered the World Trade Organization (WTO) in 2001 and immediately began (continued?) to steal a massive amount of US tech IP.

Since then, a lot has happened. But, the battle arguably didn’t become the classic tit-for-tat we now know it as until former Pres Donnie T stepped into the Oval.

Back then, Donnie was worried about a Chinese telecom maker, Huawei, that had his administration really nervous about data, IP, and other forms of software-enabled theft.

"Trump and his team effectively banned Huawei products
...igniting the flame we still see burning today."

Trump and his team effectively banned Huawei products from being used in any meaningful capacity in the US, igniting the flame we still see burning today.

We can argue until we’re blue in the face (or red, we don’t get political) over whether or not this was a good idea in the long-term, but what we know now is that industry experts are nervous…most of all, Jensen Huang, the inventor of the GPU as well as the Founder and CEO of Nvidia.

“If [China] can’t buy from . . . the United States, they’ll just build it themselves,” said Huang in an interview with the FT reported on at approximately the-middle-of-the-night ET.

"...this could simply be a case of an exec trying to lobby Washington..."

That kinda sums it up, but essentially Huang is voicing concern over Nvidia and other advanced US chip makers’ newly-hamstrung ability to sell chips in one of the world’s largest markets.

He was specifically referring to the Biden admin’s recently updated export controls for advanced semiconductors (typically in the 2-10nm range) that power the coming new-age infrastructure like data centers, AI/ML models, and much more.

Huang likened the new rules to having their “hands tied behind our back.” As the CEO of the largest chip maker—and the one that has so far arguably monopolized AI chips—this could simply be a case of an exec trying to lobby Washington to protect his bottom line and compensation structure.

But, on the other hand, he does make a point. It’s not like China would simply roll over and give up on the tech-onomic battle. Although experts allege the nation still lacks the technical capability to match Nvidia and other US rivals, it’s not like it would take decades for them to catch up…especially with all that IP theft they got going on.

We all want the same thing: economic growth. But, in geopolitics, any growth seen by one country is growth not seen by another country, so every decimal in that GDP growth figure counts.

Of course, in a wildly globalized economy like we have now, growth in one country isn’t actually necessarily a zero-sum game, but I guess all these Presidents and PMs need something to fight about. So, put the dukes up, I guess.

What's Ripe

Moderna ($MRNA) ↑ 8.69% ↑

• Is there a new pandemic? Are we all gonna die again? What do I do if I already told my doctor to “eat my vaccinated b*lls?”
• Let’s ignore that, he’s been fired, but damn, we can’t help but get scared when shares like Moderna, Pfizer ($PFE +2.30%), and BioNTech ($BNTX +8.19%) all rise together. This, however, has to do with the exact opposite of a pandemic—curing them.
• Without getting into all the legal mumbo jumbo that I can’t even pretend to comprehend, basically, Pfizer and Moderna have both won minor patent-violation decisions in courts recently. Shares ripped as that calms nerves related to the larger suits still pending.
• Not to mention, shares in Moderna and BioNTech especially have had the sh*t kicked out of them, losing ~70% from peak each, and that’s even counting yesterday’s gains.

Yelp ($YELP) ↑ 5.72% ↑

• Yelping is what a dog does when you step on its tail or if it gets really excited or something. Apparently, it works the same way for investors as Wall Street was yelping all day yesterday.
• Safe to say Yelp needs a lot of help (sorry, had to), at least according to activist investor TCS Capital (who owns 4% of Yelp), publicly expressing harrowing frustrations with the company’s lackluster performance.
• Basically, TCS is pushing for a sale, which is usually accomplished at a premium unless the acquiree is an absolute piece of dogwater. According to the tape, this one is looking good. We’ll find out soon enough.

What's Rotten

Zoom ($ZM) ↓ 8.07% ↓

• The only zooming going on in markets yesterday was Zoom’s hurried tumble following yesterday’s earnings report.
• Oh, how the mighty have fallen. Peaking at a weekly close of $560/sh back in late 2020 (for obvious reasons), Zoom shares have been a disappointment to every investor that bought and held after late 2019. Close at $65.65 yesterday, shares fell well over 8% on the day.
• This time around, it’s essentially the polar opposite of Zoom’s pandemic trade. Back then, earnings would suck, and shares would rip. Now, earnings are absolute gas, and shares sucked.
• Zoom pulled $1.18/sh on $1.1bn in revenue as the video conference provider made analysts wonder simply, “How’s he pulling that?” Obviously, stellar fundamentals like strong annual growth can’t be nearly enough to pull shares out of the trash heap in this economy. Better luck next time.

BJ’s Wholesale ($BJ) ↓ 7.26% ↓

• Costco-wannabe BJ’s Wholesale really wants to become Mom’s new favorite, hence the company’s decision to report earnings two days in advance of the one that matters.
• We’re sure that decision has been immediately regretted after seeing shares plummet over 7.25% following the release. Still, despite BJ’s being ~25x smaller than Costco, those numbers can give us a glimpse into the big dawg’s incoming earnings out on Thursday.
• In the retail space, especially discount retail, sequential “same-store sales”—or average sales growth by individual stores themselves—is key. BJ’s came right from the top rope with a miss on that front, delivering 5.7% annual same-store increases vs. expectations for 5.9%.
• Small but major tough look. Sales of $4.7bn slightly missed the $4.8bn anticipated, while EPS of $0.85 proved why forecasting can sometimes work and why analysts have jobs, as that was right in line with expectations. Don’t go too far, however; with Costco’s numbers out tomorrow, we have a feeling we’ll be back to getting BJs soon.

Data Peel

Source

Thought Banana

Gazprom’s Got Gas Probs

Much like the morale of the Russian army this winter, state-owned energy giant Gazprom has seen a massive decline over the past year, according to the firm’s latest annual numbers.

As the name European-ly implies, Gazprom sells gas, mostly. That gas, although not specifically targeted from Gazprom’s refineries, has been hit with major sanctions from geopolitical powers like the US and other G7 countries since Russia’s invasion of Ukraine.

"...a 40% drop is actually kind of impressive, no?"

The gas giant reported earnings earlier this week, posting a 40% decline in net income while simultaneously eliminating the second half of what was supposed to be a full fiscal year's worth of dividends.

Given that gas exports from Russia have just about halved over the same period, a 40% drop is actually kind of impressive, no?

No, not at all, according to analysts at Sinara Investbank, one of few reputable institutions closely covering the company, who rate shares as a big, fat “Sell.”

Despite the haters and mixing in a little creative accounting, what Gazprom calls its “Core” profit (taking a page from JPow’s book, are we?) remains roughly in line with that earned in 2021. “Core” profit, however, is essentially just EBITDA with a bit of a Russian twist (no pun intended).

This was ugly, and for all the depression among shareholders, that is immediately made up for by jubilance from Washington and its allies.

"What exactly do the US and its allies want out of their sanctions imposed on Russia?"

If we were on Jeopardy, the answer would be “40% decline in net income,” and the jackpot-winning correct question would be “What exactly do the US and its allies want out of their sanctions imposed on Russia?”

The big question: Is this the worst of the impact sanctions, as they currently stand, will have? Or do we get worse from here? Given the opacity of the Kremlin’s finances, how long can they handle major reductions in State revenue like this?

Banana Brain Teaser

Yesterday — What expression is represented here?
Sale Item: Yoursel

Selling yourself short.

Today — It’s 50 bananas off the IB Interview Course for the first 3 correct respondents. LFG!

The U.S. Presidents made some horrible political decisions. They decided to hide from the mob coming after them by hiding in these five sentences. You are hired as a private sleuth to find each of them. Can you find their last names in these five sentences?

1. Ice pops taste the best on hot afternoons.
2. The weird dictator said that he would build magenta dams.
3. The man told his mother that he wouldn't be home for dinner.
4. I have to fill more of the holes our dog dug in the yard.
5. I was going to take the bus home, but I missed it.

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Wise Investor Says

“Innovation is the lifeblood of any company. It’s about constantly pushing boundaries and thinking outside the box.” — Bernard Arnault

Happy Investing,

Patrick & The Daily Peel Team

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