Fatter Paychecks And Smaller Shopping Bags | The Daily Peel | 2/1/22

Market Snapshot

Even yesterday’s stellar rise couldn’t save January from being a down month. In fact, it was officially the worst month since the dreaded March 2020. Not a great way to start 2022, but Monday was a good lead into February if momentum holds. 

The Nasdaq was up 3.41%, while the S&P gained 1.89%, and the Dow rose 1.17%

Let’s get into it.

 

Macro Monkey Says

Yield Check — Investors (you might be surprised) like to make money. In fact, most like to make a whole lot of it, but that’s pretty tough to do when yields are literally at rock bottom levels. 

But for fixed income investors, a savior might just be on the way and his name is Rate Hikes. Even now, before hikes are actually implemented, the effects can be seen.

The most notable of these effects sound really boring, but stick with me for a sec. The spread between the 2-year and the 10-year treasury yields turns out to be a damn good predictor of economic fortunes to come. 

Known casually as the 2- and 10-year spread, 2- and 10-year premium, or pretty much anything along those lines, this metric measures the difference between the 10-year treasury yield and the 2-year treasury yield. 

Intuitively, the yield on a 10-year note should be higher than that of a 2-year as holding an asset for 10 years implies a lot more risk than holding it for 2 years. But every once in a blue moon, the 2-year yield manages to spike over the 10-year, and that’s not a good sign. 

This is known as a yield curve inversion and it’s really good at predicting recessions. Typically, when the 2-year yield rises above that of the 10-year, investors have learned to expect that a contraction is more likely within the next 18 months. 

While we’re chilling right now, the spread between these two all-important assets is at the closest level since October 2020. We can thank JPow and the forthcoming rate hikes for that. 

See, the process of policy tightening, although well-advertised, adds major uncertainty into financial markets as no one knows how everyone else is going to react, often leading to a rotation out of short-term fixed-income assets. 

As of right now, the market is pricing in 32 bps (basis points) of rate hikes at the end of March, suggesting most traders see a 25 bps jump while a minority of traders are eyeing a 50bp jump. 

The higher investors expect the rates to rise, the closer we’ll get to a yield curve inversion, which historically means we’re more likely to see a recession sooner than later, and it just might mean the end of humani— okay fine, I’ll calm down. 

Just watch out, apes.

Shut Up and Pay Me — U.S. workers are rolling in it right now, at least, if you ignore inflation. Compensation for members of the U.S. labor force rose at the fastest clip since the turn of the century in the fourth quarter, but despite those gains, wage boosts couldn’t catch inflation.

Last quarter, U.S. worker comp rose 4% from a year earlier. Meanwhile, the Core PCE measure of inflation, the Fed’s preferred inflation gauge, rose 4.9% from the final quarter of 2020. So yeah, your paycheck might look fatter, but your shopping bags definitely aren’t. 

Despite every single small business you’ve been to recently displaying “Now Hiring” signs, workers still couldn’t get their pay above the rate of inflation. The bright spot, however, comes when you parse the data a bit. 

The majority of wage gains came to those in the lowest income earning segments, meaning earners in this classification did outpace the jaws of inflation. The higher you go on the income-earning scale, the lower their growth was in 2021, for the most part.

At this point, we can’t even be sure if wages are rising because of inflation or some other force in the labor market like tight supply and hella demand. Long story short, inflation is a b*tch. 

 

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What's Ripe

Spotify ($SPOT) — No matter how hard Neil Young or Joe Rogan tried, Spotify’s gains yesterday could not be stopped. Shares were all jazzed up on a freshly dropped mixtape from Citi that puts the fair value of the stock at $240, a ~39% increase from Friday’s close. 

Needless to say, this got investors almost as excited as Drake fanboys when CLB dropped, with the EV-per-subscriber analysis that Citi used suggesting shares might just be undervalued. 

Shares were up 13.5% on this music to investors’ ears.

Beyond Meat ($BYND) — Everybody’s getting upgrades today, but only Beyond Meat got the elusive double upgrade, sending shares up 15.2%

A double upgrade simply means the stock’s rating got bumped two notches instead of just one. In Beyond Meat’s case, Barclays analysts lifted their rating from underweight, skipped over neutral, and went straight for the overweight. 

The reasons for this upgrade are pretty in-depth and super complex, so try to stay with me here, but the analysts cited “more positives than negatives” as the leading factor.

 

What's Rotten

Citrix Systems ($CTXS) — Citrix is going private. It may not be at $420/sh, but this deal definitely has funding secured. 

Vista Equity Partners and Elliott Management’s PE arm are ponying up $16.5bn for the joint acquisition in which Citrix will become part of Vista’s Tibico Software portfolio, bringing the portfolio of products up to 100mm users in 100 countries. 

Shares sank 3.4% on the news to $101.94, despite the buyout being done at $104/sh. That’s free money, apes, as long as you think the deal’s getting done…

Pfizer ($PFE) — Apes, we’ve made history. For the first time in almost 2 years, Pfizer traded on news not directly linked to vaccinations! It’s a miracle and maybe tells us we’re finally on our way out of this thing. 

Shares sank 3.0% on the news surrounding the firm’s discontinuation of clinical development for the cardiovascular therapeutic vupanorsen. The drug that was licensed from a smaller healthcare firm back in 2019 had high hopes, with Pfizer at one point thinking it could generate $3bn annually. 

Yeah, safe to say that was not at all even close to the case. Oh well, those 7bn vaccine doses hopefully help out a little.

Thought Banana

Here, Take $579,020 — That’s what FanDuel Sportsbook said to one lucky user this weekend. That’s right, another great weekend of football minted some fat checks to some smart degenerates out there, with this one, in particular, seeing a gain of 2,895,000%.

Actually, it was more like an infinity percent gain because the lucky winner of this payout didn’t actually pay any money for it. As a user of FanDuel, the customer received $20 worth of free credits to bet on anything they wanted to.

By some miracle, this individual bet the $20 on a two-leg parlay that had the AFC championship game finishing 27-24 Bengals and the NFC game finishing 20-17 Rams. For the non-NFL fans out there, I’ll save you the Google search. Those are the exact scores the games finished at.

Wow. Imagine spending $0 to download an app, click a few buttons, and a few hours of great football later, you’re $579,020 richer. The odds of this parlay hitting were roughly 29,000 to 1, which is somewhere between the odds of dying by getting hit by a cyclist and dying from bee stings. Congrats, anonymous new rich person.

 

Wise Investor Says

“Sometimes buying early on the way down looks like being wrong, but it isn’t.” — Seth Klarman 

 

Happy Investing,

Patrick & The Daily Peel Team

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