August 7, 2023 | Peel #516

Silver banana goes to...

In this issue of the Peel:

• Amazon experienced a surge, with shareholders celebrating a “blowout” quarter. DraftKings saw an 88% jump from 2022, resulting in positive earnings and future prospects. Apple’s revenue beat wasn’t enough, leading to almost a 5% drop, signaling concerns about slowing iPhone dominance. Icahn Enterprises slashed its dividend, with its stock decreasing by more than 23%.
• The July jobs report showed an addition of 187,000 jobs, with a dip in the unemployment rate to 3.5%. However, the job addition numbers for both May and June were revised down. The rate of employment growth has been declining, with fewer job additions in 2023 compared to 2022.
• Berkshire Hathaway, under Warren Buffett and Charlie Munger, announced a switch from a losing Q2 the previous year to a $35.9bn profit in this Q2. They also reported operating profits growing to $10bn and have $147bn in cash on their balance sheet.

Market Snapshot

Happy Monday, apes.

The new week beckons after that rollercoaster of a Friday. Sipping on your morning coffee and peering through the aftermath of last week, it’s easy to see Wall Street had its hands full.

Our indices might’ve taken a hit but hopes still linger for a rally. Especially when we remember the S&P has had a killer year so far with a 16.6% climb, riding on the wings of AI and hopes of the U.S. economy making a graceful descent.

The profits were scooped off the table last Friday after that relentless rise due to some juicy economic insights, a potpourri of earnings, and those ever-climbing Treasury yields.

Now, come Thursday, all eyes and possibly some sweaty brows will be focused on the U.S. consumer price reading, which could either confirm or defy the central moves.

Earnings have surprised more than a few, with a whopping 79.1% of the S&P 500 companies that spilled the beans so far managing to outdo analysts’ predictions. And let’s give a tip of the hat to Berkshire Hathaway, waking up today with a 1.3% boost in Class B shares in premarket trading after showcasing a staggering quarterly operating profit.

Still, as with every sunrise, there’s always a shadow. Yellow Corp, with nearly a century of trucking behind it, has filed for Chapter 11 bankruptcy, pulling its shares down a heart-stopping 25.2%.

Alright, apes, that’s Monday morning in a nutshell. Here’s to forging ahead, caffeinated and ready.

Let’s get into it.

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Masterworks now has over 790,000 users, and $800mm AUM. With numbers like that, it’s no surprise paintings like Banksy, Basquiat, and Picasso have sold out in minutes, and there’s even a wait list. So act now; Daily Peel readers can skip the waitlist here.

See important disclosures at: masterworks.com/cd

Macro Monkey Says

JPow Took Our Jobs

Much like owning a boat, everybody wants a job until they actually get one.

Realizing that the 9-to-5, “Another day in paradise!” life is actually the exact opposite, Americans are far less hungry for new roles than last year. Shockingly, fewer people are signing up to stand/sit under fluorescent lights pretending to be a sane human being for 8 hours/day. Crazy, I know.

On Friday, we received the jobs report for July, showing 187,000 jobs added to non-farm payrolls and a dip in the unemployment rate back down to 3.5%.

At the same time, both May and June’s job addition numbers were revised down, adding more confirmation to the fact that something—whether it really has been JPow’s rate hikes or not—is leading to a slowdown in hiring. In 2022, we averaged a ridiculous ~420,000 job additions per month. In 2023, that number has been ~228,000.

"... after watching oil go negative and getting repeatedly publicly insulted by a certain former President just a few years ago, nothing can rattle Chair Powell now."

Most of the time, a decline in employment growth like this might spook a sitting Fed Chair, but after watching oil go negative and getting repeatedly publicly insulted by a certain former President just a few years ago, nothing can rattle Chair Powell now.

But, with unemployment sitting near a half-century rock-bottom low, there’s not much to be upset about, especially when slowing job growth has actually been your explicit goal, as JPow and the FOMC have made clear.

The primary reason for wanting to take your job? You were making too much money. Just look:

Above is a 10-year chart of annual growth in average hourly earnings across the U.S., measured monthly. As you can see, we are clearly trending back towards pre-pandemic levels, but the 4.4% growth registered in July will likely still be seen by the Fed as far too much money for you, me, and all the other apes to be making.

"... that is exactly what JPow and the FOMC have been hoping to slow ..."

We all know about wage-push inflation at this point, and that is exactly what JPow and the FOMC have been hoping to slow with rate hikes.

It’s tough to prove that one thing in the macro environment is explicitly due to a particular other thing, but clearly, something is working here. Now, the two main questions to ask seem to be 1) Is the Fed’s goal what it should be, and 2) what does this mean for future rate movements?

The Fed’s goal is to hold unemployment at the “natural rate,” which changes over time, and to hold inflation at 2%. Why 2%, you may ask? To give the technical answer any economist would give you, it’s because “1% is too low and 3% is too high.” Duh.

But, some economists argue that targeting natural unemployment matched with growing wages above the rate of inflation should be the main goal. If that was the case, well, mission accomplished!

We don’t get another FOMC rate hike, “JPow Speaks” day, until September 19-20. In the meantime, we’ll get the August jobs report as well as inflation data for July and August. We’ll see if that helps.

What's Ripe

Amazon (AMZN) ↑ 8.27% ↑

• Shareholders in Amazon haven’t felt this good since the company started selling CDs and other non-book products back in 1998. Who knows, maybe your parents even bought some diapers for you from Jeff back in the day.
• And, if they’re still a customer of Mr. Bezos and Jassy, they, along with millions of others, helped push Amazon to a “blowout” quarter. It’s not often we see >$1.3tn companies surge almost 10% in a day.
• But as we highlighted on Friday, AWS margins, advertising growth, and a combination of strong spending & margins in retail formed Q2 into Amazon’s dream quarter. It’s almost like they don’t need Bezos at all.
• In fact, many had been betting that the OG CEO would return to the helm in 2023. Safe to say that’s far less likely at this point unless the $164bn man needs some extra money.

DraftKings (DKNG) ↑ 5.84% ↑

• When gambling on stocks isn’t degenerate enough for you, there’s always DraftKings (if it’s legal in your state). And apparently, this last quarter, we were feeling a lot more degen than usual.
• Online sports betting company Draftkings rallied hard Thursday night into the Friday session on damn good earnings with even more exciting guidance going forward. The $875mn in revenue vs. $765mn expected is a ridiculous 88% jump from 2022, while EPS of $0.14/sh beat out the $0.12/sh analysts estimated.
• With 6% of the U.S. population recently allowed by their state legislatures to download and use online sports betting services like DraftKings, management was even more excited than usual to hype up the future.
• Sales for the full year are now expected to surge 54-58% annually, higher than previous and ridiculous growth for any public company. Can’t be mad!

What's Rotten

Apple (AAPL) ↓ 4.80% ↓

• A revenue beat on earnings day ain’t gonna do it when you’re the largest stock in the world.
• Unfortunately, Apple had to learn that one the hard way. I guess being the best really is a blessing and a curse. Also, as we discussed Friday, Apple and their shareholders had basically the exact opposite day to Amazon’s “blowout.”
• This was more of a blowup, as losing nearly 5% on $3tn is a market cap loss of ~$150bn, or about equivalent to losing the entire value of Disney or Intel. The booming services unit couldn’t compensate for a slowdown in devices like the iPhone—at least, that’s what Mr. Market seems to think.
• The iPhone has long been viewed as a funnel for further growth. Slowing dominance of that funnel means trouble, and while Apple expects things like VR and other offerings to make up for it, investors don’t seem to quite agree just yet.

Icahn Enterprises (IEP) ↓ 23.23% ↓

• Markets really are heartless, and soon, too, will be the 87-year-old running Icahn Enterprises if the stock keeps seeing wild moves like this.
• After being brutalized by stock serial killer and short report firm Hindenburg Research in the first half of this year, the company run by the legendary icahnic investor Mr. Carl Icahn is once again in hot water after announcing a slash to its dividend.
• Icahn, one of the most famous shareholder activists of all time, is getting a taste of his own medicine. Activist investors at his company forced the man not only to reduce payouts to $1/sh but also made clear the firm’s mistakes in betting against the market so far this year, winding down bearish trades as well.

Thought Banana

Statler & Waldorf Report

Who doesn’t love two (extremely) old men cracking jokes and tossing around billions of dollars in market value in the meantime?

For Warren Buffett and Charlie Munger, it’s just another earnings day. For Statler and Waldorf, the two old guys in the Muppets, that’s just another night at the Opera—minus the billions of dollars.

"Buffett and Munger like to drop numbers on Saturday, hoping the delay between then and Monday’s 9:30 am makes the market a little less erratically insane."

On Saturday, all eyes once again turned towards Omaha, Nebraska, which the $765bn Berkshire Hathaway humbly calls home. Buffett and Munger like to drop numbers on Saturday, hoping the delay between then and Monday’s 9:30 am makes the market a little less erratically insane. With a $533k Class A stock price, however, we wouldn’t be too concerned.

Either way, the size and scale of Berkshire give us a great view into how macro, markets, and old men are doing these days. Let’s look at some highlights:

• From a losing Q2 last year, the company swung to a $35.9bn profit this Q2, both due to respective losses and gains on the firm’s massive investment portfolio
• That’s an EPS of nearly $25k
• Excluding those investments, operating profits grew to $10bn
• $147bn in cash sitting on the balance sheet, up from $130bn
• Insurance underwriting and insurance investment income were the main drivers

Despite the insane profits earned by net income, Buffett has always tried to steer investors to operating earnings instead. That way, shareholders can assess results without factoring in the unrealized gains/losses that GAAP rules force to be included in the bottom line.

Buffett saying this even in a year when investment income was the biggest driver just gives more confirmation he really is just a sweet old man.

"Buffett saying this even in a year when investment income was the biggest driver ..."

Good days and good quarters for Berkshire generally correlate to the same for markets and macro.

Slowing stock buybacks, Berkshire has been plowing $10bn per week into U.S. treasuries, and why the hell not? When you have $150bn just sitting there, you might as well put some to work earning 5.5% risk-free. For you mathematicians out there, that’s ~$550mn in annualized income for each lot of $10bn treasury purchases.

Not a bad time to have a sh*t ton of cash, but unfortunately, I and many (most, if not all) have no idea what that feels like. Maybe someday…

Banana Brain Teaser

Friday —

I’m quite a show, and people know;
Spinning threads for capture of heads.

My limbs are many, but I may be less than a penny.
One prick of me, and in pain you will be.

I may fly and float as a baby, and I swing when I’m older, maybe.
I can live in dark and have homes of bark.

I peel and fight. Some people eat me in a bite.
What am I?

A spider.

Today —

If:

SAFE + STAY + SOON + SKIP = STOP

Then:

PINK + PORE + PUSH + PLOT = ____

Shoot us your guesses at [email protected].

Wise Investor Says

“Every portfolio benefits from bonds; they provide a cushion when the stock market hits a rough patch. But avoiding stocks completely could mean your investment won't grow any faster than the rate of inflation.” — Suze Orman

How would you rate today’s Peel?

All the bananas

Decent

Rotten AF

Happy Investing,

Patrick & The Daily Peel Team

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