June 15, 2023 | Peel #482

Silver banana goes to...

In this issue of the Peel:

• The FOMC has paused interest rates at their current level, 5% - 5.25%, leading to market fluctuations; traders now predict a 65% chance of rate hikes in the July 26th meeting.
• IPG Photonics and Nike shares rose, while health insurance stocks and Dave & Busters saw a slump.
• Modelo beer surpasses Bud Light in U.S. retail beer sales as a result of a poorly received ad campaign from the latter; the incident raises questions about the future of brand strategy and customer base expansion.

Market Snapshot

Happy Thursday, apes.

You know the vibe has shifted when we get a CPI print one day and FOMC meeting the next, and markets still manage to rip higher through both. Someone start bumping Levels by Avicii, and you better keep that on repeat.

JPow and the rest of the FOMC gave markets quite a roller coaster ride yesterday. Going into the day, the story was nothing short of pure trepidation followed by an immediate selloff as soon as the Fed’s statement was released.

Luckily, our Hero JPow was able to quell the bears with his silver tongue and silver hair for indices to finish the day mostly higher.

Treasuries saw that roller coaster and said, “Yeah, we can do better.” Despite heavy fluctuations on the day, 2-year note yields settled unchanged during Wednesday’s main session, while longer-dated notes slipped slightly. Keeping things confusing as always, USD dropped off when JPow opened his mouth, only to shoot higher in the late session.

Let’s get into it.

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Banana Bits

• Apes, I’m begging you, please take the 3-5 minutes needed to check out the WSJ’s sick Fed Statement tracker to get a glimpse into JPow’s mind
• Is this the biggest fight yet between a government and an organization arguably more powerful than a government? We’ll find out not so soon as the European Commission has more than a few bones to pick with Google
• Turns out the U.S. isn’t the only economy to worry about right now
• Behind the scenes, the U.S. and Iran have (apparently) been working with each other to do the small task of avoiding nuclear war

Macro Monkey Says

ImPause-ible

No one likes having to go to the bathroom during a movie, especially right at the good part. Thankfully, we have a solution for this: pressing Pause.

And in this epic masterpiece/sh*tshow of a movie we call the U.S. economy, Jerome Powell yesterday decided to take a quick trip to the little Fed Chair’s room and hit pause right as we start to (hopefully) enter the good part.

Yesterday, JPow and the rest of the FOMC gang wrapped up their 4th meeting of 2023, once again deciding the fate of your portfolio and maybe even your income.

For the first time since January of last year, the Federal Reserve held interest rates at their current level of 5% - 5.25% (or 500bps - 525bps for the nerds out there).

Mazel tov! Rate hikes were paused, projections were updated, and nature started to heal. Let’s see what went down.

For starters, we gotta give Mr. Market credit here. Every trader on the Street was pricing in a pause in rate hikes, but it was the unexpected hawkishness going into the rest of 2023’s meetings that caused markets to react with their signature move of plummeting as soon as JPow opened his mouth.

"... those traders are pricing for a 65% chance that the FOMC hikes yet again when we hit the July 26th meeting."

We managed to finish the day with equities mostly flat, but it sure wasn’t a pleasant journey. But now, those traders are pricing for a 65% chance that the FOMC hikes yet again when we hit the July 26th meeting.

Additionally, at just about every other FOMC meeting, the Fed blesses us with their updated Summary of Economic Projections, or SEP for short. Take a look at this chart:

This monstrosity to the eyes is what macro nerds call the “Dot Plot,” hopefully for obvious reasons. Each dot represents one member of the FOMC’s projections for interest rate levels at the end of each year. This was the story du jour.

A trained Fed watcher notices immediately that the median estimate for interest rates at the end of 2023 is ~5.6%. Mathematicians among us may note that not only is that higher than the 5% - 5.25% range we’re in now, but that a jump to 5.6% implies two more 25bps hikes before year-end (or one of 50bps if JPow feels dangerous again).

Seeing this release, markets threw up as many were expecting JPow to sing them a lullaby and hint at more pausing or even rate cuts before year-end. That dream was crushed yesterday, but it sure wasn’t all bad.

"By signaling higher rates to come, the Fed leaves the risk of any potential changes in that outlook to the upside."

During his press conference, the message Chair Powell was attempting to send sounded something like, “Okay, we mostly like the data and the direction of the data we’re seeing, so we’ll take a break for now…but we’ve been wrong in the past and would rather play it safe by leaning on the side of further hiking to come.”

By signaling higher rates to come, the Fed leaves the risk of any potential changes in that outlook to the upside. Expecting higher rates that never come is far preferable to Mr. Market than the opposite.

Along with the dot plot, the Fed’s updated SEP gives us plenty more beige meat to chew on, including:

• 2023 GDP growth estimate bumped to 1.0% from 0.4% in March
• Dropping estimates for year-end unemployment to 4.1% from 4.5%
• Inflation expectations for year-end moved from 3.6% to 3.9% measured by Core PCE, while headline PCE estimates dropped from 3.3% to 3.2%, suggesting food and energy price increase should outpace everything else
• 2024 is expected to be a year of normalization, with inflation expected to move below 3%, unemployment to rise above 4%, and GDP growth to head back towards the 1.5% level with “normalization” realized in 2025 (fingers crossed)

2025 might seem a long way off, but as today is literally the halfway point of 2023, it might help to realize we’re just as close to 2025 as we are to 2021. Plus, it’s a $25tn patient the Fed is trying to treat; these things take their sweet time. We’ll see you there!

What's Ripe

IPG Photonics (IPGP) ↑ 13.47% ↑

• You’ve never heard of this company, I’ve never heard of this company, but they make some pretty sick sh*t: lasers.
• Not only are lasers f*cking sick as is, but companies making those lasers like IPG and their shares have been phenomenal as of late as well. In particular, yesterday was a storied day for the firm as Raymond James came out with one hell of a bull case for this and other laser stocks.
• Basically, the idea is that laser precision is essential to the manufacturing of EVs and their batteries. You may have noticed that both investor and consumer attention on these names has been far greater than most, so it’s no surprise that putting 2 and 2 together granted shareholders in this no-name a strong day.

Nike (NKE) ↑ 5.69% ↑

• For Nike, “just doing it” has become a lot more difficult as of late, but yesterday, the company’s shares did, in fact, do it.
• And by “it,” we, of course, mean rise quite a bit on a day when most other stocks bounced around like a chicken after JPow cut their heads off. Leading into earnings set to release at the end of the month, it appears that Nike traders are getting more and more excited.
• At the same time, Powell’s not-so-subtle comments regarding improved supply chain functionality going forward could have easily pushed investors into a more optimistic outlook for this company that does, in fact, rely primarily on nations like China to get shit out the door.

What's Rotten

Health Insurance Stocks (HUM, CVS, UNH)

• Turns out yesterday was a bad day to have health. At least, that’s what we think we’re seeing in the tape.
• Shares in the nation’s largest healthcare providers like Humana, UnitedHealth, and CVS (Aetna) went dumpster diving after UnitedHealth, the nation’s largest healthcare company, spooked industry investors by warning that more and more surgeries are coming.
• Basically, UNH relayed a message to markets explaining that old people are finally back in the operating room and getting those non-essential surgeries they skipped over during the pandemic.
• More surgeries = more risk = more expenses to these insurance names. Coming from a name with a big swinging sick like UnitedHealth, this proved more than enough to plague the whole industry.

Dave & Busters (PLAY) ↓ 5.81% ↓

• Don’t worry, both Dave and Buster are still here; that’s not why the stock is down.
• Actually, that’s total cap. A quick Google search just told me that James “Buster” Corley sadly passed this January. RIP to a legend that made all of our childhoods better, but there was nothing he nor Dave could have done to stop the selloff.
• In fact, even Raymond James, who hooked D&Bs up with a fatty upgrade, couldn’t help as they did with IPG above. The firm’s upgrade in rating on the arcade restaurant’s shares basically had the same effect on the share price as your friend slurring “I love Dave & Busters” after one too many beverages and not nearly enough ticket-winning.

Thought Banana

New King in Town

Let’s try to do this in a way that gets me the least angry email responses.

As you undoubtedly are aware, America’s (former) favorite adult beverage has been dethroned. Gone are the days of Bud Light dominance as a new steed rises to the top. Time to bow to your new market leader, King Modelo (long live the king!).

Yup, it’s true; all the controversy that came from one ~60-second-long video out of Bud Light’s marketing department has actually made a huge difference, just not at all in the way that owner Anheuser Busch was anticipating.

"Obviously, in retrospect, that plan backfired."

Since 2001, Bud Light has maintained such dominance over its competitors that even Tom Brady was jealous. To have a usurper slip through the cracks, well, it’s simply unheard of in the United States.

Specifically, what we’re talking about is Modelo’s rapid increase in market share, along with many other famed brands, while Bud Light not-so-quietly slips to second. For the month ending June 3rd, Modelo controlled 8.4% of the dollar volume of U.S. retail beer sales, while Bud Light fell to just 7.3%.

As most brands come to realize at a certain point, it seems that Bud Light was approaching essentially maximum market dominance. As a result, the brand was limited in terms of growth channels and decided to branch out beyond its base.

Obviously, in retrospect, that plan backfired.

Instead of reaping in additional customers that otherwise may have purchased competitive beers or other mind-altering goods like seltzers, ciders, or weed, all Bud Light seems to have done is alienated its base.

"... effectively taking half of Bud Light’s formerly-owned sales while every other beer brand vied for the other half."

For the week ending June 3rd, Bud Light sales had plummeted 24% from the prior period while Modelo ate up an additional 12%, effectively taking half of Bud Light’s formerly-owned sales while every other beer brand vied for the other half.

The OG ad campaign that ignited all this backlash is barely even two months old, yet, it seems to have had a profound effect on not only beer sales but the marketing strategies of large corporations from sea to shining sea.

The big question: Will Bud Light reclaim the top spot soon, if ever? How will this example change brand strategy for products attempting to attract a new consumer base?

Banana Brain Teaser

Yesterday — What phrase is this?

• Left Side...1st Floor...Right Side
• Left Side...2nd Floor...Right Side
• Left Side...3rd Floor...Right Side

There are always two sides to every story (storey).

Today — Which is the only word in the English language to be comprised of two letters, each used three times?

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

Wise Investor Says

“Do not be fearful or negative too often. For all its problems, the world is in better shape than it ever has been, and getting better all the time.” — Julian Robertson

Happy Investing,

Patrick & The Daily Peel Team

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