August 17, 2023 | Peel #524

In this issue of the Peel:

• Investors reacted negatively to the recent Fed Minutes, revealing uncertainty about the economic impacts of past policy tightening. Federal Reserve Chairman JPow and the FOMC seem to be as uncertain as the general public.
• H&R Block's net income soared by 36% due to cost-cutting, while Target's share prices went up, despite a sales miss. Vietnamese car maker VinFast Auto saw a drop in shares after a successful Nasdaq debut, and Tower Semiconductor's shares fell due to China's refusal of an Intel merger.
• The yield on the 10-year U.S. Treasury Notes hit its highest since 2008, with the mortgage rate at a 22-year high. Questions arise about a potential new regime of high-interest rates and its impact on the economy and individual portfolios.

Market Snapshot

Happy Thursday, apes.

Welcome to a world of >7.5% mortgage rates, an S&P 500 within 10% of all-time highs, and, of course, one where Michael Oher wasn’t actually saved by the Tuohy family like The Blind Side might have you believe. Let’s have some fun.

Equity markets appeared to spend most of the day yesterday in a state of FUD as they waited for the Fed minutes to arrive. A brief uptick followed on the back of the release, but once traders actually had time to read the docs and adjust their algos, we went right back to the downtrend, seeing a lot of red on the day.

Treasury yields had a very non-boring day, much to the ire of fixed-income traders (who love when sh*t’s boring). U.S. debt obligations rode the roller coaster of news released on the day but ultimately ended higher. The 10-year yield finished at levels not seen since most of us were in elementary school, watching SpongeBob on the couch while parents tried not to lose the house amid the GFC. Good times.

Let’s get into it.

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Macro Monkey Says

Give ‘Em a Minute

Wow, it’s about time. I think if we’d gone any longer without discussing Federal Reserve Chairman JPow and the rest of the FOMC gang, I might’ve quit finance and moved to Wyoming or something. Just can’t take it.

But who am I kidding; if I moved to Wyoming, it’d for sure be to Jackson Hole, so I could get JPow’s autograph between August 24th-26th at their annual meeting.

But before I buy a plane/bus/horse ticket to get myself out there, maybe let’s get up to speed on what the overlord of economic overlords is thinking.

Three weeks following each (regularly scheduled) FOMC meeting, the Federal Reserve released the “Fed Minutes,” or a summary of discussions on economic and financial conditions held at that FOMC meeting three weeks ago. Basically, it provides investors with a context for the conditions in which the Fed made its most recent decision.

"While 10 two-column pages of the most boring combination of economic and political jargon are always tough to digest ..."

While 10 two-column pages of the most boring combination of economic and political jargon are always tough to digest, investors certainly did not like what the Fed was serving this time around.

Equities sold off, yields spiked, and probabilities for another 25 bps rate hike moved slightly higher on the day. Like Dave Portnoy at Barstool, the jitters over interest rates are back. Not that they ever really left, but safe to say the average trader cared more about this yesterday than their first-born child.

Anyway, to highlight some of the most important quotes & takeaways:

• Sentences like this, “Participants cited a number of tentative signs that inflation pressures could be abating,” seemed almost at odds with…
• …sentences like this “...the Committee would need to see more data on inflation and further signs that aggregate demand and aggregate supply were moving into better balance to be confident that inflation pressures were abating…”
• Maybe this is a bit of an explanation: “Participants generally noted a high degree of uncertainty regarding the cumulative effects on the economy of past monetary policy tightening.”

Good to know that they are at least as confused as we are, if not more. The kind of resilience we’ve seen in the labor market and health of the consumer, as the Minutes point out, declaring that:

"Good to know that they are at least as confused as we are, if not more."

“Participants noted that consumer spending had recently exhibited considerable resilience, underpinned by, in aggregate, strong household balance sheets, robust job and income gains, a low unemployment rate, and rising consumer confidence.”

Basically, JPow and the FOMC are trying to express that they mostly don’t know what they did or are going to do next. The lagging impacts of policy tightening, especially on the most important asset to Americans, their homes, muddy the water on exactly how far they’ve gone. With meetings every 6-8 weeks or so, the process of making high-frequency decisions leading to long-term effects is hardly enviable.

But nothing scares markets worse than uncertainty. Seeing that from someone as cool, calm, and confident (and handsome, I mean what) as Chair Powell is like seeing Dad cry—not a pretty sight.

What's Ripe

H&R Block (HRB) ↑ 9.70% ↑

• Did you get your taxes done this year? If so (sucker), there’s a strong possibility the company you used had itself a helluva day yesterday.
• And that would be the case if you happened to use H&R Block. Shares in Uncle Sam’s best friend surged to a half-year high as net income soared 36%—well above expectations—thanks largely to a drastic cut in OpEx in the last few quarters.
• Both the top and bottom lines beat estimates with a bat, but once again, cost-cutting has become the new user growth in 2023.

Target (TGT) ↑ 2.96% ↑

• Well, I don’t think many analysts had this in their price targets (bah dum tss). Thank you, I’ll be here all week.
• Shares in this retailer popped at the open only to increase shareholder disappointment for the remainder of the session. The stock opened 8% above Tuesday’s close to finish with a measly little under-3% gain.
• Actual EPS came in at $1.80/sh on sales of $24.8bn vs. estimates of $1.39/sh on $25.2bn sales. As 2023 has become the year of cost-cutting, thanks to Zuck, analysts don’t seem to mind a sales miss as long as profits are growing / still there.
• Guidance for the coming quarter was weaker than Bud Light sales have been so far this year. Still, analysts were too infatuated with improved inventory management allowing margins to expand, meaning the Street actually seemed to care about fundamentals for a change.

What's Rotten

VinFast Auto (VFS) ↓ 18.75% ↓

• You’ve never heard of them, I’ve never heard of them, but this Vietnamese car maker (yes, you read that right) is worth more than each Ford and GM, so maybe it’s time to pay attention.
• VinFast Auto ripped on its Nasdaq debut Tuesday, tripling in value midday only to learn the harsh realities of Mr. Market’s schizophrenia on Day 2 of trading.
• Shares are in major price discovery mode as investors try to size up what the hell this thing actually is. It’s got all the hallmarks of another entertaining EV maker to either make a bag off of or point and laugh at. We’ll roll with it either way.

Tower Semiconductor (TSEM) ↓ 10.69% ↓

• Oof. Talk about a geopolitical slap in the face formed by the brand-new hate triangle formed between Intel, Israeli chipmaker Tower Semiconductors, and China.
• Early Wednesday morning, Intel dropped a bomb on consumers in announcing their plans to drop their plans to purchase Tower Semi for $5.4bn after not getting regulatory approval from China in time.
• While not entirely unusual for countries to delay the M&A process, the 1) timing, 2) sector, and 3) Intel’s reaction are quite telling. As US-China tensions continue to simmer with a big focus on technology (aka, semiconductors), China’s implicit shutdown of the deal could be a sign of further beef abroad.
• Naturally, Tower’s market cap got dumped back down to ~$3.3bn as the Intel merger premium disappeared just as fast as it came.

Thought Banana

Yields Have a Field (Day)

Remember back in 2021 how everyone and anyone who didn’t have 6 streams of “pAsSiVe InCoMe” was dumb as rocks and didn’t deserve to be alive? Me too.

Well, now, you can get your 6 streams of passive income simply by hopping on TreasuryDirect.gov and purchasing 6 treasury bonds…or, better yet, notes…or even better (somehow), bills.

"Yesterday, the yield on 10-year U.S. Treasury Notes ... closed at its highest level since June 2008, over 15 years ago."

Yesterday, the yield on 10-year U.S. Treasury Notes—the most important rate in the world for consumers that serves as the “risk-free” benchmark for the entire damn global economy—closed at its highest level since June 2008, over 15 years ago.

That’s crazy. Just a few months later, Lehman collapsed, in part leading to the unleashing of the QE beast that kept rates well below historical averages until now. We’ve officially gone full circle.

We all know what’s driving this, given the amount of noise made around JPow’s rate hike hijinks. The impact on everything from your $APE shares to your mortgage rate, which now sits at 7.16% for the average 30-year fixed, a 22-year high, is certainly not lost on consumers.

But many expect the breaking of long-held rate records like this to become more commonplace going forward. The idea of a “new rate regime” has been floating around Wall Street since JPow was chucking up 75 bp-ers back in the day.

"But many expect the breaking of long-held rate records like this to become more commonplace going forward."

Now, trends like consumers actually signing 30-year mortgages for well over 7% are showing more evidence of becoming the norm. Keep in mind that just 30 months ago, you could get the same deal with the same credit score for less than half that rate at 2.65% in January 2021.

Lots changed, to say the least. A new interest rate regime could mean a lot of different things, but for us degenerate stock traders, this, unfortunately, means investing may just become hard again. Get ready for some fun, apes.

The big question: Are we in a new regime of higher interest rates? If so, how long are we talking here? What will the impact be on my portfolio and especially my mental health?

Banana Brain Teaser

Yesterday —

A life sustainer
But match restrainer

The farmer’s top aid
I quell a parade

What am I?

Answer: Rain.

Today —

My first is not as useful as it used to be
My second is an object of delivery
My whole is literature that you get for free

What am I?

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

Wise Investor Says

“In the world of business, the people who are most successful are those who are doing what they love.” — Warren Buffett

How would you rate today’s Peel?

All the bananas

Decent

Rotten AF

Happy Investing,

Patrick & The Daily Peel Team

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