August 2, 2023 | Peel #513

Silver banana goes to...

In this issue of the Peel:

• Fitch downgrades US debt rating from AAA to AA+ citing reasons such as increasing political instability, rising interest payments, and a steady deterioration in governance standards over the last 20 years.
• Tupperware Brands and Caterpillar stocks performed well with significant gains, while Norwegian Cruise Line and Uber stocks struggled yesterday.
• The latest Job Openings and Labor Turnover Survey (JOLTS) data shows a minor decline in job openings, indicating a possible slowdown in inflation and a possible soft landing for the economy.

Market Snapshot

Happy Wednesday, apes.

We may not have gotten the start to August that we hoped for, but we managed to make it to the eighth month of the year without a recession, regional banking failure, or alien invasion (so far). Man, do I really hope I didn’t just jinx us right there.

On the first day of trading in this historically lower-volume month, equities saw an average day in terms of trading with a mild bias lower, largely thanks to a certain credit rating agency hating on the Start & Stripes (more below). The Dow led as the only major U.S. index to break into the green, while the Nasdaq, S&P, and Russell 2k were all mildly lower.

Treasury yields were higher on the day, in the meantime. The 10-year briefly crossed back above 5% before coming back down to the day’s opening levels in the late night / early morning session.

Let’s get into it.

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Banana Bits

• Credit rating agency Fitch (the little brother of the Big 3) downgrades the US debt rating from AAA to AA+
• Binance and following rules appear to go together like San Francisco and attractive office properties…just completely incompatible
• Ol’ Donnie T gets slammed with yet another charge for alleged actions taken in relation to the 2020 election…here we go

Macro Monkey Says

Should’ve Studied More

We all had this kid in high school, the guy/gal that would “freak out” as the teacher was handing back freshly graded tests, dramatically concerned that their “lack” of studying would take them out of the valedictorian running.

Then, inevitably, they get the test back with a fat 97-100%, aka, an A+. In the world of global credit markets, the equivalent to your A+ is a little different, represented by AAA.

No, not alcoholics anonymous (that’s AA), but an AAA rating indicates the least risk of default by a credit issuing institution. In English, that means whoever gets this rating is the least likely to default on their debt payments.

"... Microsoft and Johnson & Johnson ... more likely to pay back their debts than the US government."

In the US, we have two companies that carry AAA ratings from all the rating institutions—including S&P Global, Moody’s, and Fitch—Microsoft and Johnson & Johnson. As of yesterday, and according to Fitch, those companies are more likely to pay back their debts than the US government.

Even if you read that correctly, go read that last sentence again. An organization that can hold all organizations that are under its purview at gunpoint and demand tax dollars has a lower rating than two companies it actually taxes.

Wild. In case you missed it, yesterday, Fitch downgraded the US government’s credit rating from AAA to AA+.

Now, like any rambunctious student, the US is used to this, having been downgraded in the same manner by the way-more-respected Standard & Poors Global back in 2011.

Safe to say this one caught investors off guard. On a day in which we were geared up for (and got confirmation of) some better than expected macro data including the ISM report, JOLTS, and others, all eyes turned toward this downgrade.

"Safe to say this one caught investors off guard."

Of the reasons Fitch cited for the downgraded, the most prominent include:

• Rising interest payments as a percentage of the federal budget
• Increasing political instability (Summer ‘20 protests, Jan 6th, etc…)
• Overall, “...a steady deterioration in standards of governance over the last 20 years, including on fiscal and debt matters…” - Fitch
• The new trend of down-to-the-last-possible-second debt ceiling votes

Just to name a few…

But then again, many investors expect this headline of today to be a nothing-burger of tomorrow. It’s not like these (glaring) problems weren’t already screaming in investors’ faces; it’s just that now, the least respected of the Big 3 credit rating agencies has confirmed that it concurs with those fears.

To sum it up, the US fiscal picture is simply not good. Who knew that after a decade of ZIRP and trillions of dollars in stimulus, we might be digging ourselves into a hole?

If only we could’ve seen it coming…

What's Ripe

Tupperware Brands (TUP) ↑ 26.00% ↑

• Damnit, here we go again… If you thought this whole “meme stock” thing was over and that you could make money in markets by being sane again, well, you’re sorely mistaken. Tupperware and its nearly 800% rise in the last two weeks is here to prove you wrong.
• It’s a classic short squeeze for the most part but fueled by nothing but nonsense, hype, and testosterone, as far as anyone can tell. Keep in mind that more than 3 months ago already, Tupperware issued a statement questioning their viability as a “going concern,” the ever-so dreaded phrase.
• Naturally, after falling over 97% since late 2020, shares have rallied unbelievably in the aftermath. Can’t wait to see how this plays out!

Caterpillar (CAT) ↑ 8.85% ↑

• Caterpillar managed to crawl their way into a beautiful butterfly this past quarter, largely as a result of a major uptick in overall construction spending.
• The manufacturing and construction giant saw sales jump 22% compared to last year on a stark revenue beat while EPS of $5.67 over delivered against $4.50 expectations as well.
• Not bad. In a strange turn of events, however, Caterpillar managed to give a rather weak outlook for Q3 and still managed to earn a spot in What’s Ripe (congrats, btw - you’re welcome).

What's Rotten

Norwegian Cruise Line Holdings (NCLH) ↓ 12.05% ↓

• Clearly unable to get the same love as Caterpillar above, Norwegian delivered a handy beat on earnings with a relatively pessimistic near term outlook…and shares got hammered.
• EPS of $0.30/sh on $2.2bn in sales vs. expectations for $0.26/sh adj. on $2.17bn wasn’t exactly close to the beat needed to overcome the firm’s weak numbers anticipated next quarter.
• Adding salt to the wound, Q3 is supposed to be all sunshine and rainbows for cruise operators who see their best business during the summer months in the northern hemisphere. Guiding for 0.70/sh next quarter vs. Mr. Market’s hopes for $0.80/sh was simply more than we could stomach.

Uber Technologies (UBER) ↓ 5.68% ↓

• Unfortunately, shareholders can’t simply call a Lyft to get themselves out of this one (sorry about that, I’ll do better).
• First and foremost, let’s begin with a big Congratulations. Q2 2023 was the first-ever quarter in which Uber delivered an actual operating profit, raking in $326mn vs. a $713mn loss for the same period last year. Of course, the stock tanked as a result.
• Now, the tanking here was also mostly due to weaker-than-expected projections for Q3 and the rest of the year. But Uber also came out and just plain said that competitor Lyft is effectively competing in areas like pricing.
• It’s not normal for companies to mention specific competitors and, much less so, compliment them in the meantime on an earnings call. Nevertheless, Uber apparently woke up on the ballsy side of the bed Tuesday morning.

Thought Banana

JPow <3s JOLTS

No, I didn’t just have a stroke on the keyboard to type the above…just hear me out.

Yesterday, we received the latest JOLTS data, which in English means the Job Openings and Labor Turnover Survey for the month of July. Spoiler alert: it’s just what Fed Chair JPow would’ve wanted to see.

Yesterday, we learned that job openings declined by a measly 34,000 last month, bringing the total down to a grand 9.6mn open jobs. As you can see above, that’s still ~1.6x the number of unemployed Americans out there, but the key word is declined.

"... that’s still ~1.6x the number of unemployed Americans out there, but the key word is declined."

Lately, we’ve talked a lot about how JPow and the rest of our FOMC overlords want you to be unemployed, make less money, be ugly (probably), or some combination of the three.

Wage earners growing their pay by less and less generally signals a slowdown in inflation, which means Powell can chill on the rate hikes, and we can remember what it’s like to feel rich again.

In all seriousness, the Fed has identified the tightness of the labor market as the primary enemy in the battle against inflation. Too much labor demand from employers meeting with too little supply from you, me, and the rest of the apes out there has meant one thing: cost of labor go moon.

"... we are seeing evidence that the US economy is moving in the right direction ..."

The main takeaway here is that - yet again - we are seeing evidence that the US economy is moving in the right direction on inflation without causing much damage to unemployment.

What’s the word we’ve been using for that again? It’s on the tip of my tongue, but for some reason, I just can’t seem to bring this section to a soft landing…

The big question: Will the Fed actually be able to achieve a soft landing? If so, how much credit do JPow and the FOMC deserve?

Banana Brain Teaser

Yesterday —

What can be driven yet has no wheels and can be sliced yet still remain whole?

A golf ball.

Today — Find a rhyme for each word below so you end up with a familiar three-word phrase in the form “__, __, and __.”

Example:

• Clue: “Cook, Wine, Drinker”
• Answer: “Hook, Line, and Sinker”

1. Won, Dune, Cars
2. Wed, Night, Two
3. Shove, Goner, Betray
4. Blast, Pheasant, Suture

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

Wise Investor Says

“If you have trouble imagining a 20% loss in the stock market, you shouldn’t be in stocks.” — Jack Bogle

How would you rate today’s Peel?

All the bananas

Decent

Rotten AF

Happy Investing,

Patrick & The Daily Peel Team

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