DOA – Debt on Arrival | The Daily Peel | 5/10/2023

The Daily Peel...

May 10, 2023 | Peel #458

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Market Snapshot

Happy Wednesday, apes.

“Shaking in their shoes” is really the only way to describe investors’ mentality on Wall Street yesterday. A lack of conviction in either direction has been a key feature of the 2023 investing landscape, but yesterday we may have set an all-time low.

In anticipation of today’s CPI release, along with a word from Biden and McCarthy’s debt ceiling discussion, equities traded on thin ice. We saw a primarily down day across major U.S. indices, with the Nasdaq leading the way lower. Energy and industrial stocks fought like hell to lift the rest of the market, but the spark wasn’t there.

Like a dog hiding in the corner when his owners come home after he had a fun day of ripping through the kitchen trash can, treasuries were docile on the day as well. We saw mostly flat moves across almost all maturities as rate hike expectations were little changed leading into today’s 8:30 am CPI release. The dollar followed suit, rising against most other currencies, but it’s barely even worth talking about.

Let’s get into it.


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Banana Bits


Macro Monkey Says

DOA – Debt On Arrival

The countdown is well underway – as you read this, we currently sit 22 days away from the Treasury Secretary’s predicted “X Date,” or the date on which the U.S. defaults on its debt.

Yesterday, we were 23 days away from that June 1st projected deadline, and with that looming deadline, House Speaker Kevin McCarthy popped over to President Joey B’s crib to spit some game about how they can *not* deliberately and irreparably eviscerate trust in the U.S. financial system.

Needless to say, they didn’t solve sh*t. This wasn’t a surprise; most analysts expected yesterday’s talks to be DOA – or debt on arrival – and they were right.

Now, we’re three weeks and 24hrs from actually defaulting on our debts for the first time ever. I say “actually defaulting” because the U.S. did technically default on its debt obligations in 1979, but this was due to a glitch from the word processor used to schedule when individual paper checks would be sent out…not exactly the situation we face now. Now, we’re worried about the ongoing glitch in human processing power, not digital.

We’ve been laser-focused on the debt ceiling talks as default now seems about as likely as a coin flip, and given the implications, it could very well become the economic story of the year or even decade. But let’s see why we’re “playing chicken” and “holding a gun to the head” of the U.S. economy.

As mentioned, there are essentially two key parties in this debate, with their goals and incentives pulling in opposite directions. These include:

  • President Biden and the Democrats
  • Goal: Raise borrowing limit (aka “the debt ceiling”) without agreeing to spending cuts
  • Incentive: Win re-election and maintain control of the Senate and/or gain power in the House
  • Kevin McCarthy and Republicans
  • Goal: Raising the borrowing limit only with commensurate spending cuts
  • Incentive: Gain power in Congress, win re-election, and reduce non-military government spending

Starting with Biden and his pals, their refusal to negotiate spending as part of debt ceiling talks is the sticking point. Essentially, the argument is that budget debates for FY’2024 will begin in a few months anyway, as next year’s budget gets solidified.

For McCarthy, it’s a little bit more complicated. Non-hardo Republicans like McCarthy may be okay with a lack of negotiation for the time being, but we’ll never know it as the second this is admitted, the Speaker will lose the support of a 20 or so group of those Hardo Republicans he needs to get anything done. Moreover, these individuals would likely call for his removal from the Speakership as in case you forgot, it took quite a while for McCarthy to win the position anyway, and a “no increase to the borrowing limit without spending cuts” agreement was part of what won him the seat.

So, McCarthy finds himself in between a rock and a hard place. He either 1) refuses to negotiate and risks the Dems not budging, thus leading to a default, or 2) he does negotiate and gets the debt ceiling raised, only to immediately be removed from the Speakership at the House’s next session.

As Speaker, McCarthy has full control over the bills and issues that are brought to the House floor. Naturally, he has not allowed a “clean” debt-limit-raise bill, meaning one that comes with no spending cuts, to come to the floor.

But but but, Dems last week announced their intention to force a vote on a clean raise through a discharge petition. A discharge position is one of those weird workarounds the Founding Daddies gave us that allows the House to bypass the Speaker’s ability to control the bills brought for debate. They’d need 218 House votes to pass this, of which 213 Democrats are already locked in. It would only take 5 Republicans to break the line for a clean debt-limit-raise bill to hit the floor for a vote.

And McCarthy would probably thank his lucky stars if this happened. This would force the vote to go to the floor, increasing the odds of not defaulting and doing so without McCarthy being forced to concede anything and likely maintain his Speakership.

Did that make sense? I hope the rambling, discombobulated style in which the situation was described encompasses the rambling, discombobulated nature of this debate in Washington.

Regardless, 22 days, apes. Get your Representative’s number locked into speed dial; you just might need it soon.


What's Ripe

Novavax ($NVAX) ↑ 27.79% ↑

  • Novavax pulled the classic double-whammy yesterday, announcing two good things on the same day, and investors were loving it. And for a stock down over 82% in the past year alone, it was desperately needed.
  • For starters, Novavax announced some apparently sick vaccine study data. Time to embarrass myself again by talking about science, but the biotech firm reported what smart people consider to be promising data on a C-19 and flu vaccine. With its C-19 vaccine currently the only product the company sells, investors were understandably hyped.
  • In case you’re still not entertained, Novavax also announced cost-cutting initiatives. Management plans to cut SG&A and R&D costs by as much as 20-25% compared to last year, making investors hopeful for margin improvement (maybe even actually earning some money this time?).

Palantir ($PLTR) ↑ 23.39% ↑

  • Following in Novavax’s footsteps, Palantir announced a bit o a double-whammy on its own. In addition to a strong earnings beat, the firm also had some exciting expectations for the year ahead.
  • For a company that works a lot with the Department of Defense and is arguably part of the new-age military-industrial complex, the jury’s still out on whether or not that’s a good thing. For shareholders, it sure was on Tuesday as the firm reported EPS of $0.05/sh vs. $0.04 expected (20% beat) and announced expectations to remain profitable for the year.
  • This whole “profitability” thing is a bit of a foreign concept for many Palantir investors, but it still got the people going. As we discussed yesterday, announcements around the firm’s AI game plan were also more than enough to get the people going in late trading on Monday. Safe to say that feeling has been confirmed.

What's Rotten

PayPal ($PYPL) ↓ 12.73% ↓

  • You hate to see it when your friend is feeling down but what about your pal? Specifically, your PayPal? Well, apparently, investors love it.
  • Sick bastards, I know, but there might be a good reason for this one. PayPal slaughtered quarterly expectations like there was still a pandemic going on, beating on the top and bottom lines with $7.04bn in revenue and $1.17 per share vs. expectations of $6.98bn and $1.10.
  • Obviously, that wasn’t enough. The firm warned of a 1% drop in expected operating margin for the year, leading to a thorough shake-up of confidence among shareholders.

Nikola ($NKLA) ↓ 13.04% ↓

  • If an investor like Warren Buffett or Ben Graham were in charge of the SEC, they might arrest anyone who owns this stock at this point. Nevertheless, the -99%-from-peak stock once again had an absolutely foul day.
  • Shares tanked a further 13% on news that the scam company founded by convicted fraudster Trevor Milton that “sells EVs” sold its entire stake in a European joint venture to partner Iveco out of Italy.
  • Not to mention, the company reported quarterly revenues below expectations at $11.1mn ($12.5mn expected). Earnings were (unfortunately) right in line with expectations, setting ablaze -$0.26/sh, and that’s on an adjusted basis, too.

Thought Banana

Fuss in Russia

They say you can’t argue with stupid. Similarly, it looks like we’re all starting to learn you can’t work with delusions.

May 8th, this past Monday, represents “victory day” for European and other nations involved in the WWII fights against the Nazi regime. Generally, that day is met with capital city celebrations across the continent praising the defeat of one of, if not the most horrific governments in human history.

Not this year. Contrary to popular belief, Russia (known back then as the Soviet Union) used to kinda be boys with Europe, but ever since Russia’s invasion of Ukraine on February 24th of last year, this friendship has turned into the complete opposite.

And this switch-up was on full display yesterday. Hours before Russia celebrated victory day, with the official festivities taking place on the 9th, the Kremlin’s war machine proceeded to bomb the sh*t out of Ukrainian cities like Kyiv, Dnipro, and other regions, and also just hours before European Commission President Ursula von der Leyen arrived in Kyiv.

At this point, this is Exhibit 49,628-b in the prosecution’s evidence to make the case that Russia and Europe are now at each other’s throats (duh). But, we learned recently, too, that revenues received in Russia from energy exports, like oil and gas, have taken a beatdown.

Tax revenue on the oil and gas industry, one of the main funding sources of Russia’s federal budget, plummeted by 45% in the first quarter of the year compared to 2022, according to the FT. Refined oil product revenue was hit the hardest, with taxes claimed on this segment crashing by 85%.

According to officials collecting the data, this sh*tshow is “prima facie,” which is just a douchey way of saying “apparently” or “at first glance,” evidence that the G7 price cap, along with other more minor sanctions are making Moscow sweat.

Despite the clear beatdown on state finances that will inevitably have impacts on the dynamics and severity of the ongoing war, Russia is still going hard in the paint. All signs remain pointed to a looming “spring offensive” from both sides as the cold, muddy winter season rolls to a close in Western Russia / Ukraine.

There’s not a whole lot in the way of takeaways here. As of now, it looks like the only viable strategy is to go full Jonah Hill in War Dogs, but let’s not jump to conclusions just yet. As of now, the only thing we can definitively say is that no one knows where this thing is heading.

But nonetheless, Slava Ukraini.

The big question: When will this war end, and how will European borders and relations with the East change in the following years? How much longer can the pain and suffering inflicted by the war go on?


Banana Brain Teaser

Yesterday — If half of five was two what would a third of ten be?

The answer is 1. This is because you halve the amount of letters in fi-ve to get two therefore a third of t-e-n is three divided by three giving you one.

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Wise Investor Says

“Don’t trust your own opinion and back your judgment until the action of the market itself confirms your opinion.” — Jesse Livermore


Happy Investing,

Patrick & The Daily Peel Team

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