FOMC Texas Showdown | The Daily Peel | 6/2/2023

June 2, 2023 | Peel #473

Silver banana goes to...

In this issue of the Peel:

• A debt-ceiling deal has officially been passed through the House and now goes to the Senate, where it is expected to slide right on through
• A handful of Fed Board Members have been expressing their personal views on how Powell should act ahead of the June FOMC meeting
• Concerning compensation, the lines are getting blurred between hedge fund traders and athletes

Market Snapshot

Happy Friday, Apes

We did it! The debt ceiling deal has officially passed through the House and will now head to the Senate, where it is widely expected to pass as well.

Markets were reinvigorated Thursday in a whiplash rally with tech at the center. Technology stocks have been temperamental lately, dictating the direction of the entire market. Wednesday, they chose violence, but yesterday, they soared, driven by chipmakers yet again.

Bond yields fell in reaction to some weak factory data. A slate of employment reports came out, including Initial Jobless Claims and the ADP employment change, both of which came in ahead of consensus.

Outside of that, investors will be gearing up for Nonfarm Payroll numbers today, which will be a key report ahead of the Fed meeting.

Speaking of the Fed, a few Regional Bank Presidents have been pretty chatty lately, the most recent being Philadelphia’s Patrick Harker. In his view, the Fed should skip a rate increase at the upcoming meeting.

The S&P reclaimed a key technical level above 4,200 and is now up 10% YTD. According to a popular indicator from Bank of America that compiles Wall Street strategists’ opinions, this is the closest it has been to signaling “buy” since 2017.

Let’s get into it.

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Banana Bits

• Disgraced former CEO of Theranos, Elizabeth Holmes, has turned herself in. Here is what her daily life in prison will look like.
• Goldman Sachs warned investors of a 25% drop in trading revenue this year after a banner performance the year prior
• Elon Musk received official approval from the top dogs to start putting chips in our heads.
• Florida has a chance to make history with both the Heat and the Panthers competing for a championship.

Macro Monkey Says

FOMC Texas Style Showdown

The Federal Open Market Committee meets eight times a year to determine the direction of monetary policy. Basically, they get together in a secret room and decide whether to raise, cut, or do nothing with the federal funds rate.

Nobody outside of the 12 members of the Federal Reserve Board is allowed in, so as far as we know, they might have monkeys randomly throwing darts to determine where interest rates are going. That might sound crazy, but it’s what I’m going with until anyone can prove otherwise.

"Market participants are on the edge of their seats ..."

Anyway, back to the topic. Jerome Powell, the Chairman of the Fed, is most known in colloquial circles as the guy on all the finance meme pages making the “money printer go brrrrr” during the pandemic.

Indeed, Powell was focused on loosening monetary policy in those days to spur the economy, but times have changed. Since last March, the Fed has embarked on a series of rate hikes (10 to be exact), with the most recent being back at the May meeting.

as they await the Fed’s move on June 14th. For finance nerds, this meeting is like Vegas, and the rate decision is the hottest table in the casino.

Investors across equity and bond markets try to bet on which way the Fed is leaning. Members of the board are allowed to speak publicly, expressing their individual opinions on whether an increase, decrease, or pause is appropriate.

"... members enter a blackout period ... and that is where the fun really begins."

Markets will move (pretty violently sometimes) based on their rhetoric. However, 10 days before the meeting takes place, board members enter a blackout period where they cannot express any of their views to the public, and that is where the fun really begins.

The dot plot, appropriately named, is a plot of 19 dots. Seven members of the Board of Governors of the Federal Reserve System and presidents of the 12 regional banks are asked to indicate where they believe the Federal Funds rate should be in the future.

"Some banks ... are projecting two additional rate hikes, while others call for a continued pause."

Banks will also throw their cards out on the table and take part in the game as well. As it stands now, the consensus for the June meeting is for the Fed to do nothing and leave rates be. After that, bets are all over the place.

Some banks, like Barclays, are projecting two additional rate hikes, while others call for a continued pause. However, jumping over to the bond market, we can see it is predicting a rate cut.

Ultimately, the Fed will synthesize all of the macroeconomic data they have on hand since the last meeting to make the decision they feel best balances out lowering inflation while avoiding a recession.

This data includes unemployment rates, household income, house prices, inflation, jobless claims, etc. Just like in the casino, some investors will be right and others wrong, and there is a lot of money to be made or lost.

Fortunately, we have the luxury of being able to pontificate from the sidelines with no real skin in the game. Let’s sit back and watch!

What's Ripe

Chewy ($CHWY) ↑ 21.63% ↑

• Chewy’s stock just woofed the most since June of last year as the online retailer sold more pet supplies than anticipated. Its recurring-purchase program was a great way to keep customers and their pets hooked. Net sales per active customer totaled $500, a 15% increase from last year.
• Even more exciting, Chewy is planning to expand internationally into Canadian species. This is one of their many new initiatives that should spur growth and profitability in the coming years.
• Chewy’s profitable quarter was even more pronounced based on the fact that PetCo reported a sales decline, and the stock tumbled the most on record. It’s always great to report solid numbers, but it’s even better when your main competitor flops.

Carvana ($CVNA) ↑ 22.06% ↑

• Carvana traded higher after receiving a positive upgrade on their loans by the S&P’s rating agency. Carvana has a book of sponsored securitizations backed by prime auto loans. S&P Global raised its ratings on 21 classes of those loans.
• The upgrade signals to the market that Carvana has taken material steps to originate high-quality assets and conduct disciplined underwriting. This is a huge sigh of relief for a company that has been struggling as of late.
• Carvana is also one of the most shorted stocks in the market, with 69.4% of outstanding shares currently being sold short. This means that it is vulnerable to “short squeezes,” where positive news forces short sellers to buy back stock to close out their positions.

What's Rotten

Lucid Group ($LCID) ↓ 16.24% ↓

• This had all the makings of a positive story, but the market had other plans. Lucid got crushed yesterday after announcing yesterday it was raising $3bn from Saudi owners.
• What went wrong? A few things. For one, when companies raise capital by issuing additional shares into the market, it means current owners are diluted. In other words, their shares are worth less, and investors don’t like that.
• Additionally, asking the Saudi fund that already owns you to give you $3bn more dollars is like double-texting the girl you just asked on a date to “follow up,” it reeks of desperation.
• While the additional funding helps Lucid solve some immediate liquidity needs, investors were hoping that the company would be taken private, and this pretty much takes that option off the table.

C3.ai ($AI) ↓ 13.27% ↓

• The market giveth, and the market taketh away. Just the other day, this stock was in the news for its 30% rally on the back of positive news for chip stocks. In the heat of the movement, investors swept up as much tech as they could. Right around the corner was the company’s earnings report.
• C3.ai gave revenue forecasts for the next quarter and FY24 that disappointed investors, and they paid for it. The company sees revenue for next year coming in at $295mn versus the $320mn the market expected.
• In reality, C3.ai doesn’t actually have that much exposure to generative AI or large language models. Their business is still mainly focused on energy, which is already packed with competition.

Data Peel

Source

Thought Banana

Hedge Fund Compensation Wars

Hedge funds are hunting for top talent and are willing to pay up BIG to secure it. I’m talking about professional athlete numbers. Top traders are increasingly scoring guaranteed contracts worth $10mn to $15mn. A top-level headhunter in New York said that he’d done a number of deals offering $50mn.

There was even one reported hot-shot Senior Portfolio Manager who secured $120mn in guaranteed payouts from a large, reputable hedge fund.

We’ve always known that hedge funds pay well, and we all want to work in the industry for that reason; that’s why you’re here. But in the last few years, megafunds have taken it to another level.

This reflects both the expansion of assets among the largest firms along with the shrinking pool of top talent. Hedge funds spread their assets under management across several different strategies covering multiple sectors.

During the bull market run over the last few years, these funds increased their assets by a lot. This prompted a hiring spree to bring in more portfolio managers to trade these assets.

"... waste no time cutting underperformers ...
willing to roll out the red carpet for the top money-makers."

At the same time, because the market had been going up so much for so long, it became difficult to find traders and portfolio managers that could actually generate alpha rather than just ride the wave of the bull market. This created a bidding war for the ones that were generating alpha and led to exuberant salaries.

While hedge funds waste no time cutting underperformers, routinely firing talent within months of hiring them, they are willing to roll out the red carpet for the top money-makers.

In a now infamous story, back when a top portfolio manager quit Millennium Management to join a rival fund, he was not only offered a 1-year sabbatical but he was also given full payment during that time period and a bonus upon return.

Another reason why hedge funds are able to pay for talent is because of the leverage they have over clients in charging fees. Typically, they would charge investors “2 and 20.”

This means the fund takes 2% of assets under management as a management fee to pay base salaries and any other operating expenses and 20% of all profits gained, which is purely for bonuses.

While the “2 and 20” has become closer to “1 and 10” for most funds, the best-performing funds like Citadel, Point72, Millennium, and others are able to charge far more.

These firms have a waitlist of investors fiending to give them their money. As a result, funds have more bargaining power when charging fees to pay employees.

"These clauses prohibit an employee from joining or engaging with another company..."

Non-compete clauses are also standard in the industry. These clauses prohibit an employee from joining or engaging with another company within a prescribed time frame, usually between 6 months to 1 year.

Oftentimes, funds will poach employees from competitors and compensate them for the time spent “on the beach,” which leads to inflated payouts.

Whether or not these payouts are too much has been a hotly debated topic among hedge fund clients. Ultimately, as long as funds are posting superior returns, clients will be beating down hedge funds’ doors to give them their money and probably won’t care how much they pay employees.

Banana Brain Teaser

Yesterday — What day of the week will it be 100 days after Monday?

We know there are 7 days in a week, 100 mod 7 = 2, as 100/7= 14 remainder 2. Adding two days to Monday answers Wednesday.

Today — It’s 250 bananas off the FMV Bootcamp for the first 3 correct respondents. LFG!

Is it possible for the price level to go up at the same time inflation is going down?

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

Wise Investor Says

“Time in the market beats timing the market.” — Ken Fisher

How would you rate today’s Peel?

All the bananas

Decent

Rotten AF

Happy Investing,

Patrick & The Daily Peel Team

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