July 25, 2023 | Peel #507

In this issue of the Peel:

• The market is in the thick of earnings season, with almost half the S&P expected to report this week.
• Bankers at the most prestigious firms are slumming it and sending out resumes to places they would never have given the time of day.
• A recent NABE survey showed improving sentiment among respondents concerning the odds of a recession.

Market Snapshot

Happy Tuesday, apes.

#EarningsSzn is upon us, and I have no idea what to wear! So far, only 12% of the S&P has reported, but that number will increase to 40% by the end of the week.

The most sought-after mega-cap tech names set to report include Meta, Microsoft, and Google. By the end of the week, we will either look back with fondness or blaze ahead with intentional forgetfulness that vows to never look back at the carnage.

The macroeconomic calendar is pretty full as well. Key data expected to be released includes PMI, GDP, and PCE, not to mention a slate of Central Bank Decisions from the Fed, ECB, and BOJ.

All three major indices ended the day on a positive note, with the Nasdaq slightly lagging on continued pressure in big tech names.

Let’s get into it.

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Banana Bits

• Barbenheimer crushed it at the box office, bringing in a combined $200mn and proving that all you need is a zero-cost meme-marketing strategy.
• Disney is biting the bullet and thinking about delaying movies that were scheduled to be released this year amid the ongoing Hollywood Writer’s strike.
• Twitter dropped its iconic bird logo and rebranded to “X.” Elon Musk is a genius, just not a creative one.
• UBS is playing sugar daddy to Credit Suisse and paying off $300mn of its bills after just two months of the relationship

Macro Monkey Says

Revolving Door of Opinions

Thank goodness for economic surveys that help keep us all in the know. The newest survey by the National Association for Business Economics interviewed a mere 52 people on their view of the world. Sophisticated financiers then proceeded to write articles, hunched over their laptops, crafting investment strategies based on the opinions of less than .00001% of the population.

As silly as it sounds, these surveys are mandatory to cover as they have a real impact on the market. The recent report highlighted economists’ ever-changing views on the so-called impending recession.

According to the survey, 71% of respondents see a less than 50% chance of the U.S. entering a recession in the next 12 months.

This sharply contrasts with the April survey, which showed most respondents forecasting higher odds of a recession. A small percentage (25%) of economists actually forecasted a very low likelihood of a recession.

"A small percentage (25%) of economists actually forecasted a very low likelihood of a recession."

Ok, now that I’ve assaulted you with data, let’s get into the meat & potatoes.

Outside of this echo chamber called “Finance” & “Tech” in which we all exist, the labor market has remained quite strong, particularly for middle to lower-income workers.

In addition, consumers have fought back against C-19 lockdowns by “revenge spending,” especially for service & entertainment. It turns out that our boy JPow might be the pilot we need to bring this economy to a smooth landing. Let the record reflect that I always believed in him even when the haters doubted.

If you’ve been paying attention, the change in tone should be of no surprise. Based on surveys taken at the beginning of last year, we should have already been in a recession by now. Economists slowly walked back their forecasts for when it would all come crashing down and are now questioning if it will all come crashing down at all.

"If Powell is able to pull this off, his jersey belongs in the rafters right next to Tom Wambsgans, as he would have effectively pulled off the economist’s triple threat."

If Powell is able to pull this off, his jersey belongs in the rafters right next to Tom Wambsgans, as he would have effectively pulled off the economist’s triple threat. Raising rates at one of the fastest clips we’ve seen in history while 1.) bringing inflation down to sensible levels, 2.) engineering a great return for the stock market, and 3.) doing all of this while avoiding a recession.

Some survey respondents who were the most vocal about a potential 2023 recession have reversed course. Peter Hooper, the Chief Economist at Fannie Mae, joined Deutsche Bank Vice Chair of Research Doug Duncan in saying it’s basically a coin-flip whether the economy keeps growing or suffers a setback. (Sidenote: Is it just me, or does it not reassure you when the leaders of the free world use phrases like “coin-flip” when discussing the trajectory of the economy?)

Investors will gain more insight when GDP estimates are released on July 27. Last quarter’s GDP was revised to a positive 1.5%, while this quarter’s is expected to be 1.8%. For the time being, those in the “soft landing” camp look to be right.

What's Ripe

AMC Entertainment (AMC) ↑ 32.73% ↑

• Allow me to conjure some pandemmy-nostalgia into your minds by bringing up our good old friend, AMC. The stock ripped after a shocking court ruling that put the brakes on a planned AMC/APE conversion deal.
• Let’s recap. After becoming a meme stock and soaring to epic heights, AMC sold stock at a higher price to raise more money. After they ran out of stock to sell, they created AMC Preferred Equity Units (APE) and did some top-notch financial engineering that would have converted APE into common stock.
• Hedge funds and other precocious investors bought APE and shorted AMC to oblivion, betting they would be able to profit on the spread of both positions. But then, some AMC shareholders spoiled those plans and sued the company, citing that the financial engineering was less ingenious and more illegitimate. The judge turned down the deal, forcing everyone to cover those shorts.

Sculptor Capital Management (SCU) ↑ 16.45% ↑

• Sculptor Capital is one of the small number of asset management firms that are public. Sculptor is a multi-strategy hedge fund that operates equities, credit, and real estate investment strategies.
• The firm is being purchased by Rithm Capital for $639mn. The deal is somewhat of an olive branch for the asset manager, which has been entangled in the weeds of a legal dispute with hedge fund competitor Dan Och. The proposed price of $11.45 per share represents an 18% premium to last Friday’s closing price.
• After going public in 2007, Sculptor sprang to the top of the hedge fund rankings, managing $50bn in assets. Rithm manages $32bn of assets, and the acquisition is expected to be accretive to their earnings by 2025.

What's Rotten

AppHarvest (APPH) ↓ 73.13% ↓

• New harvest season, new bankruptcy filing. AppHarvest is the latest victim, officially filing for Chapter 11 and beginning the dreaded proceedings. The sustainable food company will continue operating its farms and distributing products to grocery stores, restaurants, and food service outlets.
• AppHarvest also obtained a $30mn commitment from Equilibrium, its largest creditor. This lifeline will give AppHarvest a little more time to support its ongoing operations while the Chapter 11 process takes place. That part of the story either got lost or completely discarded, as it doesn’t seem to have helped the stock at all.
• Management is hoping that this will be a small blip in the company’s story. The board is looking to beef up operations by acquiring AppHarvest Berea for $3.75mn. They are hoping that the deal will help to revamp operations and add value to shareholders in the future.

Kodiak Sciences (KOD) ↓ 45.88% ↓

• Kodiak Sciences was trying to slow down the process of macular degeneration but ended up slowing down its own progress. The company announced it was ending the development of its exploratory drug, tarcocimab, for treating age-related macular degeneration.
• They tried so hard and got so far, but in the end, it didn’t even matter. Sing it with me! Kodiak had already tested the drug in separate clinical trials, but the company said an increase in cataracts was observed and decided to call it quits.
• Management is still committed to its vision, which is ironic because its drug literally reduces other people’s. On a serious note, though, CEO Victor Perlroth attempted to ease investors, letting them know that the company still has $379mn to pivot and find the next transformative therapy.

Thought Banana

Oh, How the Turn Tables

There has been a strange rotation happening inside the walls of Investment Banks, particularly among junior employees. During “BC” (Before C-19) times, bankers from the most prestigious shops like Goldman, Morgan Stanley, and JP Morgan wouldn’t dare be seen anywhere within a one-mile radius of a smaller middle-market firm. Now, in an ironic twist of fate, smaller firms are being harassed by those same bankers looking to work there.

Apparently, recruiters at firms like Jefferies, Evercore, and PJT Partners say they have been “inundated” with resumes from bulge-bracket candidates. In fact, one banker at an unidentified firm stated, “Never have they seen so much interest from Goldman staffers.”

This is what we call the boom and bust of the economic cycle, otherwise simply known as life. I’m a self-proclaimed millennial, and I’m sure many of you out there are as well. For the majority of our adult lives, we’ve only experienced the “boom” part of the economic cycle. For the most part, dealmaking was solid, revenue increased along with hiring, and we all took that for granted.

"Remember all the technology specialists and SPAC bankers that were hired in 2020? Investment banks haven’t had use for those people in over two years."

Now, M&A and IPO volume are so nonexistent that banks have been forced to scale back on hiring as well as implementing “forced vacations,” to use a nicer phrase. Remember all the technology specialists and SPAC bankers that were hired in 2020? Investment banks haven’t had use for those people in over two years.

Goldman led the brigade at the beginning of the year, cutting 3,200 bankers & traders. It was a mess, and junior employees reportedly had no idea they were let go until they showed up to the office and their badge wasn’t working. JP Morgan cut 1,000 employees, while BofA slashed 250 investment banking jobs, and we all know what happened with Credit Suisse.

Higher finance costs, volatility, and geopolitical conflict have led to a 40% drop in global volumes. In response, Wall Street’s biggest banks have shed nearly 21,000 people in total so far, and the year isn’t over.

Not only does this leave thousands of people searching for jobs, but it also dents the morale of employees who survived the layoffs. Interns who got a front-row seat to the bloodbath were also spooked.

"Interns who got a front-row seat to the bloodbath were also spooked. "

This is all leading to the great rotation away from bulge-bracket banks to smaller firms. Companies like Deutsche Bank, Banco Santander, Jefferies, and other small firms are taking advantage of the opportunity and scooping up talent.

Even more shocking, this trend is being seen among senior employees and Managing Directors as well. “Rainmakers,” as the top bankers are affectionately known, have little incentive to jump ship. They are paid handsomely and have already built a solid reputation with their current firm. Those attitudes are changing, and recruiters have seen senior management open to conversations with other vessels.

With so much talent on the market, investment banks are taking the opportunity to beef up their business, even if it means playing the long game. The market isn’t expected to recover immediately, but rather it will be a slow and steady race. However, these firms are clearly prepared to rough it for the next few years until that happens.

Banana Brain Teaser

Yesterday — What is the next number in the following sequence: 0 0 1 2 2 4 3 6 4 8 5

The pattern consists of two series of numbers.

0 0 1 2 2 4 3 6 4 8 5 __

0 0 1 2 2 4 3 6 4 8 5 __

Answer: 10

Today — Find a number less than 100 that is increased by one-fifth of its value when its digits are reversed.

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

Wise Investor Says

“If you think it’s expensive to hire a professional, wait until you hire an amateur.” — Red Adair

Happy Investing,

Patrick & The Daily Peel Team

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