July 10, 2023 | Peel #497

In this issue of the Peel:

• The June jobs data from the BLS sparked market activity, but the increase of 209,000 jobs in the US economy is slower than recent trends. Inflation, driven by wage gains, could see further interest rate hikes.
• Rivian and Alibaba stocks rose, while Levi Strauss and Costco faced setbacks. Rivian’s growth in the EV market and Alibaba’s potential public listing of Ant Group are positive, but Levi’s sales decline and Costco’s membership sharing crackdown could impact their performance.
• The high level of credit card debt in America, particularly following the pandemic, raises concerns about a potential spending slowdown, especially in the face of rising interest rates and the end of the student loan moratorium.

Market Snapshot

Happy Monday, apes.

I know. I wish I got hit by a train on the way into the office this morning too, but it’s okay. That’s because we have one helluva fun week ahead of us and beyond, with CPI, earnings szn, rate hikes, and PCE all set to drop in the next 3 weeks. Something tells me you won’t wanna miss it.

Neither do equity markets, for that matter. The news of the day centered around the 8:30 am drop of the June jobs data out of the BLS, which, surprisingly, jolted markets at the start of the day. However, by 1-2 pm ET, the pullback began, led by large-cap names, and forced most of the US majors into the red for the day. Small-cap Russell 2k was the only player left standing, gaining 1.22%.

Since setting decade-and-a-half highs earlier this week, the 2-year treasury yield has pulled back slightly to just below 5% leading into the week. The 10-year yield is still cooking as well, gaining above a high 4.20% to slightly narrow this monstrous yield curve inversion. Speaking of which, are we still sure that’s nothing?

Let’s get into it.

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Banana Bits

• Treasury Secretary Janet “JYell” Yellen uses the first positive words seemingly ever to describe the US and China’s relationship, calling her recent trip a “constructive visit”
• Already working to destroy the hopes and dreams of other US Big Tech megacaps, TikTok now turns its sights to Amazon with a goal of quadrupling TikTok Shop to $20bn this year
• Earnings expectations are already getting the people goin'
• Threads is already sewing (lmao) the seeds of destruction for Twitter and all the other copycats out there

Macro Monkey Says

The Real Show

As usual, the previews got us a little too hyped up for the real movie. As we discussed the Jobs Report trailer released by ADP last Friday, today it’s time for the critics to come out and chop it up about the real thing.

As you can see below, the US economy added 209,000 jobs to our non-farm payrolls in the month of June, according to the Bureau of Labor Statistics (BLS).

"Sources say that Fed Chair JPow was pumped to see the news but quickly came back to reality ..."

That’s the lowest rate of additions we’ve seen in 2 years. Sources say that Fed Chair JPow was pumped to see the news but quickly came back to reality after being reminded that it’s still well above the 2019 monthly average of 175,000 - and even that was a strong labor market.

Once again, the headline for how this data fits into the US macro equation remains the same: we’re moving in the right direction.

But, at the same time, we’re arguably not moving there fast enough. Markets didn’t vomit this data on Friday as they did for the ADP numbers on Thursday, but it was still far from a good day as wage growth data bolstered arguments again for further rate hikes.

Basically, markets appear fed up with the audacity of people like you and me to actually have the gall to ask for more money. Can you imagine? All of us greedy wage-earners saw our average pay increase 4.4% annually for the period, higher than expected amid a month with lower-than-expected demand for new labor, creating a seemingly opposed dynamic to squeeze more money out of poor, sweet executives and shareholders.

I hope that sarcasm is obvious enough, but in case it’s not, let’s dive a little deeper…

This whole rate hike bonanza JPow has taken us for a ride on has one goal: bring inflation structurally back down to 2%. So far, rate hikes have proven an effective blunt tool for doing so, getting us from +9% CPI to 4% in less than a year.

Much of that inflation has been driven by wage gains driven by a smaller pool of labor following the C-19 shutdowns and supply chain/production shenanigans we witnessed that brought the labor participation rate back below average levels. Less labor supply = higher cost per unit of labor, or what nerdy economists call “wage-push inflation.”

"... this all but guarantees JPow being given the green light to once again jack up your interest rates."

With wages still rising strongly even during a period where job growth was weaker than expected, this all but guarantees JPow being given the green light to once again jack up your interest rates.

There’s plenty of data to come out between now and the July 26th FOMC meeting and rate decision. Most notable will be the dropping of the June CPI report on Wednesday and the slew of bank earnings set to light up your Bloomberg Terminal starting on Thursday and Friday.

Long story short, get ready for a fun end to the month. We’re getting into the good part of summer here in the US, but with all this macro data, something tells me none of us will be touching grass for a while.

What's Ripe

Rivian Automotive (RIVN) ↑ 14.25% ↑

• While Elon and Tesla still undoubtedly and absolutely dominate the US EV market, one rival, in particular, has been stealing a lot of that spotlight lately.
• Rivian has been blowing up in the financial news cesspool once again. Shares are up 83% over the last 2 weeks as strong production and delivery numbers try to assure the haters that this company’s future is closer to Tesla than those sh*tcos Lordstown and/or Nikola.
• Moreover, plenty of Street analysts have been updating their price targets and recommendations on the name as a result, and they’re only moving in one direction. We’ll see how long that lasts, of course.

Alibaba (BABA) ↑ 8.05% ↑

• It was a dreamy news day for the Amazon of China on Friday, and yes, we say that about the day that one of the firm’s subsidiaries got hit with a $1.1bn fine.
• That subsidiary was Ant Group, the fintech/super-app company set to go public back in 2021, just after the Chinese government took an AK47 to their tech and IPO markets.
• Now, investors anticipate that this fine should clear the way for the firm to eventually list publicly. Owned 33% by Alibaba with some personal ownership by Jack Ma and others in place, seeing this thing list publicly may just make the whole battle worth it.
• In addition, Alibaba also released an AI tool capable of producing images from prompts, and while we don’t really know how that helps the firm now, it has the term “AI” in it, so obviously, investors freaked tf out.

What's Rotten

Levi Strauss (LEVI) ↓ 7.79% ↓

• Oof. You know it’s bad when beating EPS expectations by 33% results in a nearly 8% down day. What, do we all just hate jeans now? If so, please, just no one tell my dad.
• Anyway, Levi Strauss saw shares crater on a damning revenue decline unveiled in the firm’s latest quarterly numbers. Net revenues fell 9% from Q1 in a clear sign of high prices keeping customers in their sweats and slacks.
• Now, Levi announced plans to cut prices, hopefully spurring back that demand. But, after seeing costs associated with making denim and other inputs skyrocket over the last year, this wasn’t exactly the way to get investors excited. Damned if you do, damned if you don’t. [*insert shrug emoji*]

Costco (COST) ↓ 2.29% ↓

• 2022’s winner of the esteemed, prestigious, and widely sought after Silver Banana award for Company of the Year did not live up to the glory days of 2022 on Friday.
• Shares slipped just under 2.3% as the big box, membership-based retailer saw sales slip 1.4% on a comparable sales basis in the last month. That comes with a 2.5% drop in US sales as well, obviously the most important market.
• The 4.5% rise in non-Canadian international markets barely registered, but many are now looking forward to the firm’s card-sharing crackdown similar to Netflix’s account-sharing crackdown.
• As membership fees are the key revenue driver, sharing that beautiful piece of plastic that allows you into the capitalist mecca is now a no-no.

Thought Banana

Land of the Free, Home of the Debt

Everyone knows that the United States is a global superpower. Most of the time, that fact is recognized via our military, the US dollar’s dominance, our immigration stats, yada, yada, yada.

But getting more meta (not the Mark Zuckerberg kind), not everyone is aware of America’s own internal superpower: spending money.

Not only spending money but, for the most part, spending money we don’t have. In other words, we’re really, really good at racking up credit card debt.

"As any statistician will tell you, survey data is borderline garbage for the most part ..."

Hard data on this stuff varies and can be difficult to ascertain, but surveys are here to save the day. As any statistician will tell you, survey data is borderline garbage for the most part, given that people don’t actually know what they purport to “know” when answering these questionnaires.

But you could make the argument that, in an economic survey, the fact that people don’t actually know could be a positive given how much expectations (aka, things we don’t know) weigh on the macro environment. Just food for thought.

Anyway, let’s look at some data from Yahoo Finance:

• 49% of Americans depend on credit cards to meet living expenses
  -- For Gen Z, that figure is 61%
  -- Boomers sit at 26%
• 45% of Americans have increased their credit card debt balance since C-19 began
• 57% of Americans have reportedly missed a payment in the past
• 13% of Americans have no emergency savings, 37% would use a credit card to cover a $1,000 emergency, while 44% would do so for $2,000
• 33% of Americans expect to take >2 years to pay off their balances

Wow. We all know that most Americans aren’t financially savvy, mostly thanks to the complexities of regulations, products, and lack of true knowledge of exactly what kind of trap they’re getting themselves into.

But with JPow’s nuclear rate hike bomb over the last year and potential to remain steadily on the rise while consumer credit growth is still going strong, those monthly payments just might come in to clock some borrowers right in the face.

"... those monthly payments just might come in to clock some borrowers right in the face."

Usually, this is a manageable issue for the economy as a whole. As discussed above, incomes are rising above the rate of inflation (finally), but with growth in interest payments and yet another “end” to the student loan moratorium in, the storm we’ve been expecting in downbad consumer spending may be brewing.

Once again, this is your call to go out there and spend money, or even more preferably, spend your parent’s money. That way, you get your sh*t, the economy gets its spending, and your parents can deal with the debt and other bullsh*t. Just how nature intended.

The big question: Will the explosion in debt and rates lead to an eventual spending slowdown? How will student loan payments coming back online change this?

Banana Brain Teaser

Friday — Some words can be used as both nouns and adjectives. You will be given a definition, and that definition can be replaced by a single word that is used twice, once as an adjective, the other as a noun.

For example: “a 12-inch podiatrist specialty” is a “foot foot.”

Given the following four definitions, what are the corresponding doublets?

1. an underweight source of illumination
2. an ordinary prairie
3. a quick period of not eating
4. a cruel average

Answers:

1. light light
2. plain plain
3. fast fast
4. mean mean

Today — A man hijacks an airplane transporting both passengers and valuable cargo. After taking the cargo, the man demands two parachutes, puts one of them on, and jumps, leaving the other behind. Why did he want two parachutes?

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

Wise Investor Says

“We know from chaos theory that even if you had a perfect model of the world, you’d need infinite precision in order to predict future events. With…economic phenomena, we don’t have anything like that.” — Nassim Taleb

Happy Investing,

Patrick & The Daily Peel Team

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