Fairies and Leprechauns | The Daily Peel | 8/2/22

Market Snapshot

What a fun way to start the month, huh, Apes? Markets broadly opened higher but ended in the red almost across the board. Consumer names largely led, while energy took a rare seat in the laggard position.

Luckily, we have another big week of earnings to look forward to. Although the peak of the szn has passed, a few big names like PayPal, AMD, Starbucks, and Alibaba will drop their numbers today and later this week.

To kick off August, however, the S&P finished the day down 0.28%, while the Nasdaq shed 0.18% and the Dow lost 0.14%.

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Let's get into it.

Banana Bits

  • It might not feel like it, but millennials made a bag during the pandemic
  • The easiest way to become a billionaire is to have billionaire parents; the second easiest way is doing what this guy did
  • The solution to the lithium-battery shortage could be on your kitchen table
  • Why anyone would ever want to live in New Jersey is beyond me, but apparently, everyone does
  • Certain skills are invaluable in finance, and we can help you master them

Banana Brain Teaser

Yesterday - What has many keys but can't open a single lock?

A piano.

Today - It's 50 bananas off of our DCF Modeling Course for the first 15 correct respondents. LFG!

Your last good ping-pong ball fell down into a narrow metal pipe embedded in concrete one foot deep. How can you get it out undamaged if all the tools you have are your tennis paddle, your shoe laces, and your plastic water bottle?

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

Macro Monkey Says

The Real Economy - We talk a lot about inflation, movements in stock prices, and recently-thanks to a confused administration-what actually defines a "recession." But the thing is, all of these concepts are what Matthew McConaughey's character in The Wolf of Wall Street would call "fairy dust," "a fugazi," or simply "not f*ckin' real!"

So today, let's zero in on how the real economy is doing. By "real" economy, I'm referring to actual stuff that gets produced in factories that you could touch.

That's it for the italics, I promise. Yesterday, the economic overlords dropped a couple of bombs on us in the form of the July ISM Manufacturing reports, along with a reading on construction spending for the month. Let's dive in.

If you placed our bets on "pretty bad, but not horrific," congratulations! You nailed it. July's Purchasing Manager's Index (PMI) registered a cool 52.8%. As you'll recall from Macro 101, anything over 50 represents an expanding economy, so we're looking good on that front. The problem is that the reading is a 0.2% drop from April, meaning we're heading in the wrong direction.

Still, July's numbers mark the 26th straight month of expansion, according to the ISM, but it sure doesn't feel that way, does it?

According to the report, the main culprits include production backlogs, imbalances in inventory levels, record-long lead times for production materials, and slowing new orders and employment. If you were wondering why your new car has a 4-month delivery wait time or why there are only two employees working at your local Dunkin', this certainly provides some explanation.

As for construction spending, we were blessed (cursed?) with another instance of economists being way off. Estimates put July construction spend at a month-over-month growth rate of 0.1%. Instead, spending actually declined by 11x that amount, falling 1.1% in July.

That was primarily driven by a steep slowdown in residential housing construction. This makes sense and might even bring a smile to daddy JPow's face. With interest rates on the rise, consumers are far less eager for a new place.

While that's not awful on its own, the US already has a drastic housing shortage. This underinvestment in residential construction will only make that shortage worse, so if you're like me and hope to buy a place to live in the next few years, this is a tough look, to say the least.

See, aren't you glad we talked about the real economy? Instead of just stock price movements causing depression, now production and housing can too.

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What's Ripe

EVO Payments ($EVOP) - After bleeding almost a quarter of its market cap over the past year, diamond-handed holders of EVO Payments were finally relieved from all that suffering with yesterday's 23.30% gain. That relief came in the form of a $4bn acquisition by none other than Global Payments ($GPN).

While I wouldn't exactly call the acquisition a steal, this could be a sign that larger companies are starting to take advantage of this bear-curious market and buy up smaller rivals on the cheap.

Normally on a buyout like this, shareholders of the acquirer get butthurt over potential dilution or paying too high of a price, but $GPN holders stole a line from McDonald's and said, "we're lovin' it," sending shares up 4.63%.

HSBC Holdings ($HSBC) - Unlike the rest of the continent's economy, Europe's second-largest bank was popping off yesterday. The "London-based" holding company posted hella strong earnings this past quarter, beating on both the top and bottom line.

They can thank ECB Pres Christine Lagarde and her rate hiking escapades for the beat, leading to yesterday's 6.50% gain.

Sure, profits for the first half still may have fallen 15% from last year, but given what a trash heap the European economy is right now, traders were just psyched it wasn't any worse.

What's Rotten

Energy ($XLE) - Nope, not a typo. For the first time seemingly ever, energy stocks were as red as that flashing "E" symbol on your car's dashboard.

And don't worry, this should come as a shock given the stellar numbers big oil firms have been delivering this earnings szn.

But facts and figures on earnings reports are no match for absentminded emotional swings that drive much of global oil price movements. This time, weak economic data out of China in particular is spooking traders with fears of lower global demand.

As a result, crude prices plummeted yesterday, dragging the whole sector down with it. Energy ETF $XLE lost 2.07%, while individual names like Haliburton ($HAL) and Marathon ($MRO) fared even worse, losing 3.79% and 3.27%, respectively.

Royal Caribbean Cruises ($RCL) - In general, cruise ships try not to sink. But lately, cruise ship companies have been playing a multi-billion dollar game of chicken to see who can sink their company the most.

Yesterday, Royal Caribbean won that game. Shares tanked 7.54% just a few days following last week's less-terrible-than-expected earnings call on the announcement of plans to raise more $ through a ~$1bn debt issuance. This is almost as much of a red flag to investors as a guy putting a shirtless pic as his first photo on Tinder.

Not only are they telling investors they don't have enough cash to run their business effectively, but the company's interest payments will jump alongside rate hikes. If that's not bad enough, ~$900mn will be in convertible notes, opening up the possibility for nearly $1bn of dilution down the line.

Someone throw these guys a life jacket!

Thought Banana

The Fairies and Leprechauns Act of 2022 - Oh, that's not the bill's real name? Sorry, I thought we could just label anything whatever we wanted at this point, regardless of how true or blatantly misleading it is.

I'm told the real name of this incoming half-a-trillion-dollar bill is the "Inflation Reduction Act" of 2022. As far as we're concerned, our name is about as accurate as that one.

We don't get partisan here at the Peel, but what we won't stand for are faulty economics and deliberately fallacious labels. To give a high-level view, the Act will do the following:

  • $369bn to investments in climate change and clean energy
  • $64bn on expansion of the Affordable Care Act
  • Impose a 15% minimum tax on corporate profits over $1bn
  • Close the Carried Interest loophole enjoyed by PE firms
  • Beef up IRS Tax Enforcement

While that's all fine and dandy, notice anything missing from this bill? Oh, that's right, ANYTHING TO DO WITH INFLATION. I mean, damn, over 80% of the bill's spending is going towards climate efforts, which is fine and dandy, but why not just call it what it is?

Anyway, I digress. Despite the fact that the Penn Wharton Budget Model forecasts that this bill "would very slightly increase inflation until 2024," it's almost certainly going to get passed into law now that Presiden-er, I mean, *Senator Joe Manchin is on board. He's the guy that's been stonewalling his own party on several other massive pieces of proposed legislation, but this time, the West Virginia Democrat is on team Biden.

Now, Democrats in Congress seem to have the numbers to get the bill to pass, likely through reconciliation. I'm not gonna sit around and pretend like I have any idea what that is, but just know it's a complicated legislative process around budget provisions. Maybe we'll figure it out together.

Wise Investor Says

"There is nothing new in Wall Street. There can't be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again." - Jesse Livermore

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Comments (1)

Aug 2, 2022 - 6:30am
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