Down the Earnings Slide | The Daily Peel | 9/20/22

Market Snapshot

Markets kicked off the week in the green coming off of their worst week since June.

JPow tightening the screws has been priced in, but sliding corporate earnings are flashing alarm bells.

Futures are pointing to a 75 bps hike this week, but investors are shaking in their boots that JPow could wallop them with a full point.

At the close, the Dow gained 0.64%, the Nasdaq ticked up 0.76%, and the S&P rose 0.69%.

If you’re looking to help sharpen your team’s skills in both financial modeling and the state-of-the-art tools used in the industry, the WSO Corporate Training Program has flexible options for online, in-person, or hybrid delivery of world-class instruction from talented instructors.

Let’s get into it.

Banana Bits

  • VW is planning to value Porsche at around $75bn for its upcoming gargantuan IPO
  • Consumer sentiment in the US rose slightly in September, but concerns about the long term persist
  • Instacart is trying a new strategy with its IPO—instead of issuing new shares, it’s letting employees cash out of theirs

Banana Brain Teaser

Yesterday — The more you take from me, the bigger I get. What am I?

A hole.

Today — It’s 70 bananas off of our Real Estate Modeling Bootcamp this weekend for the first 15 correct respondents. LFG!

A girl meets a lion and unicorn in the forest. The lion lies every Monday, Tuesday and Wednesday and the other days he speaks the truth. The unicorn lies on Thursdays, Fridays and Saturdays, and the other days of the week he speaks the truth. “Yesterday I was lying,” the lion told the girl. “So was I,” said the unicorn. What day is it?

Shoot us your guesses at [email protected] with the subject line Banana Brain Teaser or simply click here to reply!

Macro Monkey Says

Pitfalls of a Strong Greenback — At least for now, the dollar has few real threats to its world reserve currency status.

The Chinese yuan looked to be on the verge of overtaking it in recent years, especially during the money printing craze of 2020.

But struggles in both China and Europe have catapulted the dollar to its strongest level in years, which isn’t all sunshine and rainbows, even for Americans.

Inflation staying stubbornly high means even more rate increases on the horizon, which is stoking panic in developed and developing countries alike.

We’ve covered the slew of issues both Europe and China are dealing with at the moment (war and high energy prices in the former and property crash and C19-Zero in the latter).

Whispers of a global recession are getting louder, with corporate leaders sounding the alarm on slowing demand.

Emerging markets are straining under their US dollar debt burdens, which only stand to get worse as rate hikes build up dollar strength. These regimes run on shoestring budgets, and higher debt service usually means cutting critical services like healthcare and food subsidies.

Cheaper imports and vacations for those of us stateside sound nice, but we play in a global economy here.

Yellen has come out and said she doesn’t think a strong dollar is that big a deal, but the number of countries struggling versus benefitting from a strong greenback globally could backfire in the form of slower overall growth

Worth keeping an eye on.

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What's Ripe ($WIX) — Activist investors can be a fickle mistress. When they blitz you and enlist shareholders to vote against your board members, you can’t wait to get rid of them.

But sometimes, they buy up huge portions of your equity and send your stock to the moon. That happened Monday for Wix when activist investor Starboard Value bought up a 9% stake in the company.

Shares rose broadly on the report, which highlighted Wix’s attractiveness against a backdrop of falling earnings everywhere you look.

$WIX finished the day up 15.70%.

Warner Bros. Discovery ($WBD) — It’s been a bumpy ride since AT&T decided to spin off WarnerMedia and merge it with Discovery last year.

After an initial valuation of about $60bn, it’s gotten cut in half to $30bn, which has driven a cost-cutting frenzy.

But don’t sleep on the assets $WBD has, which include the DC Extended Universe (DCEU).

Many believe it has more pricing power available and just needs to figure out how to bundle the likes of HBO Max and Discovery+ optimally.

For now, investors believe this young company is oversold and like its prospects.

$WBD ended the session up 3.30%.

What's Rotten

Coinbase ($COIN) — Prayers up for those that bought $COIN after 

. It’s down bad since that spot aired in February.

BTC is struggling to stay above the $20k mark. Downward pressure on it and other internet coins have weighed on Coinbase shares all year, and the fate of the stock is basically tied to the value of the bigger coins.

CEO Brian Armstrong is trying to survive the DeFi winter through layoffs and other cost cuts, but it looks like a long road ahead with multiple rate hikes around the corner.

$COIN closed the day down 5.50%.

WeWork ($WE) — Despite reports from WeWork of an RTO surge post-Labor Day, investors aren’t enthused by the stock.

$WE now sits at a valuation below $2.5bn, but more rate hikes could dent it further.

It has a whopping $20bn in lease obligations on its balance sheet, which means higher debt service expenses as rates go up up up.

Without all the hoopla attached, $WE is more of a classic office REIT play at this point. Investors still didn’t like it Monday.

$WE kicked off the week down 5.23%.

Thought Banana

Reliant on Retail — Joey B went on 60 Minutes this past weekend and had a hell of a lot to say, including that “the pandemic is over.”

But he also went back and forth with Scott Pelley on the monthly vs. yearly inflation debate, which I’m just so sick of hearing at this point.

Sure, it might be flat since last month, but the point is that people are paying 8%+ more than they were last year, which still hurts.

Anyway, aside from that interview, we also got data that showed retail sales ticked up in August. Combined with a still-tight labor market and allegedly flat inflation, it might sound like the economy is hunky dory.

Turns out most of that increase was due to higher vehicle prices, and when you take that part out, sales actually dipped slightly.

I like to compare consumer sentiment with household debt levels because they tend to go hand-in-hand. Credit card debt is on the rise as households try to preserve their lifestyles amid higher inflation and adds a darker backdrop to the strong retail numbers.

What could really wallop the consumer is a sharp economic slowdown combined with higher interest rates on credit card debt. If you’ve ever been caught in the whirlpool that is out-of-control CC debt, you know the struggle.

Like it or not, a huge portion of the domestic economy depends on strong retail numbers during the holidays.

The FedEx report last week already points to a muted holiday season, and heavier debt burdens could weigh on consumer spending even further.

Wise Investor Says

“Never test the depth of the river with both of your feet.” — Warren Buffet

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