Going Global | The Daily Peel | 5/5/2023

The Daily Peel...

May 5, 2023 | Peel #455

Silver banana goes to...

SRS Acquiom.

Market Snapshot

Happy Friday, apes.

A whole lotta drama for a whole lotta nothing, that’s the energy we’re bringing to close the week – if Thursday’s vibe continues into today.

For U.S. equities, it’s become a battle of stocks vs. an army of global central banks hellbent on raising rates right up until they impale all the optimism we have. Maybe that’s dramatic (it is), but worries from San Fran to Frankfurt about banks, recession, inflation, disinflation, recession, etc., etc., etc., have markets a bit more than slightly shook. Support for the S&P was found at about 4,050, which, ironically, is also the year JPow plans to pause rate hikes.

Treasuries couldn’t escape either, with yield broadly lower on the day. The U.S. Dollar largely gained against competitive currencies, especially the Euro, despite the ECB’s 25bps hike, in a sign that investors are at cruising altitude in their flight to safety.

Let’s get into it.


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Banana Bits

  • Just in time for U.S workers to finally start to (begrudgingly) get back to work, productivity of those workers is falling fast
  • J&J thought they and their consumer health care unit would be better off just as “friends,”...and after not even a full day of trading, it looks like they were right
  • Wow, Coinbase managed not to massively disappoint investors, gaining over 9% after hours
  • Kind of like that meme of the 3 middle school kids sitting around a coffee table evidently engaged in a deep discussion, the White House is inviting big dawgs like Microsoft and Google to come give them the lowdown on AI risks

Macro Monkey Says

Going Global

The latest viral trend is taking over the world: 25bps increase to base rates in economies across the globe. This has been going on for a good few months now, but the newfound messaging across the pond has reached a new level of lockstep.

Yesterday, the ECB followed in JPow’s beautiful, silver-fox shoes and raised the Eurozone’s Fed funds rate equivalent by 25bps to a range of 3.25-3.75%.

As if we didn’t know this before, central banks around the world have been hiking rates like no tomorrow in an attempt to curb stomp inflation and catch a battery charge in the meantime. Given the egregiously delayed response to monetary policy moves like 25bps rate hikes, it’s often difficult for the Federal Reserve to get any kind of a pulse on the macro picture. And right now seems to be far from an exception.

We get jobs data at 8:30 am today for the month of April, surely to be a banger for markets on the day, although the direction of the bang is questionable. Yesterday, preliminary labor market numbers suggested a cooling labor market as hiring barely budged, jobless claims continued to trend higher, and the number of job openings reached nearly a 2-year low.

At the same time, we learned that U.S. worker productivity declined 2.7% for the first quarter of 2023, far worse than expectations and well below the prior reading of 1.7% growth.

Productivity is just output divided by time. Falling productivity means we’re producing less value per hour worked, an inflationary pressure driving a demand-pull inflationary possibility if market demand holds up.

Given the resilience of consumer spending despite recent slowdowns in wage growth for workers, demand has proven resilient so far this year. The point is, to a certain degree, economic fundamentals are pointing, pushing, and pulling in opposite directions. Once again, we wish JPow the best in what must be a real crap chute of a job.

We’ll get the next decision on rates in mid-June, but at least that gives us plenty of time to digest the messaging from central banks. Luckily the ECB’s messaging was not only aligned with the Federal Reserve’s but far more direct, with Chair Christine Lagarde showing JPow how to say it with your chest when she stated, “We have more ground to cover, and we are not pausing, that is extremely clear.”

If that’s not a subtweet at what JPow probably actually wanted to say, I don’t know what is. Either way, we’ll see how that one works out.


What's Ripe

Shopify ($SHOP) ↑ 23.84% ↑

  • Apparently, when rates go from zero to 500 almost immediately in macro terms, giving up becomes too hip, a cool thing to do, just look at Shopify’s latest endeavor to copy Amazon.
  • Similar to rival e-commerce platforms like Amazon, Walmart, and other small mom & pop shops, Shopify had spent years and its largest ever acquisition ($2.1bn) in one area: logistics. Now, the firm is officially offloading that unit to logistics wunderkinds Flexport.
  • No, not those sick flex tape commercials; Flexport is a ~10yr old supply chain management and logistics company, of which Shopify now owns roughly 13%.
  • Investors were thrilled, to say the least. The stock surged, as shareholders prefer a third party to handle that massively capital-intensive business line. In a world of 5% base rates, the less capex, the better, according to the Street.

Ball Corp ($BALL) ↑ 13.39% ↑

  • Once again, balling on the competition was none other than the confusingly named Ball Corp, which makes everything from the aluminum in the can you’re drinking out of to the mason jar your weed is in.
  • Not only that, but the company also apparently sells aerospace technologies, pretty much anything except for actual balls. That said, management sure has some after the guidance the firm gave following this past quarter, one in which a very nice EPS of $0.69/sh easily beat estimates.
  • It was a cost reduction story in Q1 that really got investors excited. On that, management was helped by a drastic reduction in base aluminum prices over the past year – game respect game, but gotta call it how it is. Still, a win is a win.

What's Rotten

Regional Banks ($KRE) ↓ 5.45% ↓

  • Well, as of yesterday, at least, the last thing on Earth you want to do with your bank shares is take them to that bank. I’d say someone get the doggy bag, but it’s too late; everyone’s portfolio has already thrown up.
  • Regional banks continued to sh*t themselves on Thursday, with usual suspects Western Alliance (-38.45%) and PacWest (-50.62%) leading the tumble. Like SVB, Signature, and First Republic, these firms share similar clientele and uninsured deposit ratios, stemming the cause of concern.
  • But yesterday, big banks all the way up to JPMorgan Chase (-1.37%) felt the pain too. Although the Federal government has effectively created a two-tiered banking system by implicitly insuring 100% of deposits at the “too big to fail” (aka GSIM) banks, general economic/recessionary concerns weighed heavy on the day and could have played a role.
  • PacWest is exploring a sale of itself for absolute chump change compared to where shares traded just weeks and even days ago. Rumors allege Western Alliance was in a similar boat, but execs label that as “absolutely false” for now. Yeah, we’ll see.

Paramount Global ($PARA) ↓ 28.35% ↓

  • Paramount Global has found itself stuck in a stream of sh*t. Both literally and figuratively, as the media and streaming firm controlled by parent National Amusement lost well over 1/4th of its value yesterday.
  • Shares cratered on a wider-than-expected streaming loss, an 83% dividend cut, and weak performance from the digital ad market. Basically, the firm announced exactly the three things that investors do not want to hear.
  • The secret ingredient here isn’t exactly a secret: content. Content is king, and with that, Paramount plans to reel in costs by consolidating assets and cutting expensive content deals before they get too costly.

Thought Banana

The One We’ve All Been Waiting For

Apple has entered the chat. In one press release, we got $2.6tn worth of earnings news, thanks to the big dawg out of Cupertino.

It took investors a second to decide how they felt, but ultimately, Apple shares finished the after-hours session with a 2.5% gain. It was back to the OG days when Apple became Apple, with the iPhone leading the firm higher.

Broadly, earnings and revenue both beat, with the company reporting $1.52/sh netted off $94.8bn in sales for the quarter vs. expectations of $1.43/sh of $92.9bn in top line.

But it almost doesn’t matter. When you get as big as a company like Apple, those broad-based numbers act like GDP figures for an economy; it’s good information and makes for great headlines, but we learn a lot more by seeing what’s under the hood. Specifically:

  • iPhone revenue dominated, clocking in at $51.3bn vs. $48.8bn expected
  • Services revenue grew surprisingly slow, racking up just a measly $20.9bn vs. the $21bn expected
  • iPad revenue came just about right in line at $6.7bn, while Mac sales were miserably off, clocking in at $7.2bn vs. $7.8bn expected
  • A 4% dividend increase (slower than inflation) and the fact that CEO Tim Apple, I mean Cook, is “not something we’re talking about at this moment”

And that’s just to hit the highlights. For Apple, the results speak to a relatively simple quarter. Consumers continued to snatch up the tried and true products like iPhones while the shiny new sexy stuff struggles to prove itself worthy.

Apple likes to release as little information as physically (and legally) possible in its reports, hence a less extensive breakdown than other big tech bros.

But the headline is that sales across almost every single segment declined compared to last year. iPhones carried the team on its back when it came to products while the Asian region led by geography, thanks largely to China’s return to economic “normalcy” as they exit Zero-C-19.

We’ll see if the momentum can carry today. This morning’s jobs report might have a thing or two to say about that, however…

The big question: How long will it be before Apple sees a return to growth across its product lines? As a luxury tech product, are the company’s products more defensive or cyclical, given its current mix? How will investors react amid an expected slowdown/contractions/recession?


Banana Brain Teaser

Yesterday — A man decides to buy a nice horse. He pays $600 for it, and he is very content with this strong animal. After a year, the value of the horse has increased to $700, and he decides to sell the horse. But a few days later, he regrets his decision, so he buys back the horse again. Unfortunately, he has to pay $800 to get it back, so he loses $100. After another year of owning the horse, he finally decides to sell the horse for $900. What is the overall profit the man makes?

The man makes an overall profit of $200.

Today — It’s 50 bananas off the DCF Modeling Course for the first 3 correct respondents. LFG!

Some cogs are tigs. All tigs are bons. Some bons are pabs. Some pabs are tigs. Therefore, cogs are definitely pabs. True or False?

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


Wise Investor Says

“Some people get rich studying artificial intelligence. Me, I make money studying natural stupidity.” Carl Icahn


Happy Investing,

Patrick & The Daily Peel Team

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