Happy Four-Twenty | The Daily Peel | 4/20/22

Market Snapshot

FAANG had a good day until $NFLX dropped its earnings. Two years later, it appears that the handshake is finally back. The housing market, despite recent news, is still strong in spite of builder sentiment. Oil gave back a couple of bucks a barrel, and NatGas took it in the face. BTC was up nicely, and ETH ripped another 2.5%.

Every sector in the S&P except energy was green yesterday. The S&P climbed 1.61%, while the Nasdaq moved 2.15% higher. The Dow traversed higher, having its best day in weeks, ending up 1.45%.

Let’s get into it.

Banana Bits

• We messed up. Due to a misstep yesterday, we are running a correction at the bottom of today’s issue.
• We should celebrate all the money the working class gives to retirees
• Housing starts and building permits are up, beating estimates
• The IMF isn’t as bullish on the world as it once was
• Economic experts still can’t predict the future
• Airline stocks lead after the TSA’s mask mandate is struck down

Macro Monkey Says

A New Flavor of Housing Crisis? — Have you been to Baskin Robbins lately? Me neither, but there’s a joke in here about all the different options we have to wax poetic about macro doom and gloom lately. If you don’t know what I’m talking about, LMGTFY.

It’s funny: housing has historically not been viewed as a super sexy macroeconomic topic. Think about your parents’ approach to housing: it’s likely that they own their home and treat it like a savings account.

When you look at home values over time, they typically only went up. People bought them and did the OG HODL. Owning a home has even been a foundational tenet of the American dream for decades.

I’d argue that this changed in the last financial crisis and subsequent Great Recession.

Cheap, promiscuous credit; no income, no job, no problem; exquisite, elaborate financial instruments to go long America’s safest asset class; what’s the worst that could happen?

Well, you know what actually did happen. You’ve probably seen Margin Call or The Big Short, and you get the gist of how it all went down.

Today’s housing crisis is a little different. We’re not seeing millions of families underwater on their mortgages living in homes that are now suddenly worth way less than what they owe on them. We aren’t seeing a wave of defaults, and there isn’t some unexpected financial contagion associated with mortgage-backed securities quickly going tango uniform.

The market today is different. The housing market still has a supply shortage. Between 1950 and 2010, builders slapped together around 11 million new homes per decade. Between 2010 and 2020, only 6.9 million homes were built.

But just the number of new homes is not the full picture. The events of 2020 and a pivot towards a more digitally-enabled economy were a shock to the system. Millennials, in particular, began to demand WFH flexibility and the space and affordability that you can only find in suburban areas.

We’ve lived through a housing boom for the last two years. With the money printer still running and Daddy JPow pouring low-interest-rate gasoline on the flames, demand for housing in this country has skyrocketed.

If you have tried to buy a house in the last 18 months, I’m really, really sorry. That $hit sucked, I bet. If you sold your house, congrats – there’s a winner and a loser in every deal, and you probably hit a home run.

Buyers were forced into bidding wars, often ending in contracts at tens or hundreds of thousands of dollars above the asking price. No inspection? No problem. Just like Robert Kraft’s massage therapist, buyers were willing to do whatever it would take to get the deal done.

Things appear to be slowly changing. Take a screenshot of an outer suburb of a major city on Zillow today, and then compare it to that same area of interest in about a month. Inventory is drastically different today than it was a month ago.

One culprit here is the rise in interest rates. Mortgage rates have ballooned from below 3%, their all-time lows, now to above 5.25% for a 30-year mortgage. This means an extra $250/month out of your pocket for a mortgage at the median home value.

Buyers are suddenly having a harder time qualifying for mortgages compared to a year or two ago. This will have a significant effect on home sales, particularly above the median price.

That being said, historically, a 5% mortgage is not exorbitantly high. Will rates ever drop below 3% again? Maybe, maybe not. How should I know?

But one thing I do know is that we are already seeing slight demand destruction because of ballooning interest rates.

It’s not the end of the world for borrowers. With the recent CPI print at 8.5%, you can borrow money today and pay it back with cheaper dollars. This isn’t usually the case, and consumers can take advantage of it today if they so choose.

Borrowers can also eventually refinance if rates dip in the future. This is something they’re definitely not doing today, though. Refinance applications are down somewhere between 60 and 70%, a metric that might be pointing towards some stability in the housing market that we haven’t seen in a handful of quarters.

This morning, we paid close attention to housing starts data, coming in at a slight expansion compared to estimates. The same was true for building permits.

Clap your hands: these metrics on housing are usually believed to be leading indicators. Even as inventories stabilize and refinance applications take a dump, the wheels aren’t completely falling off the housing market. We can only hope that this relative normalization persists.

What's Ripe

American Campus Communities ($ACC) — Blackstone is at it again, making a fat $13bn offer to buy American Campus Communities. Shares of $ACC popped on Tuesday morning, eventually ending up 12.54% when the dust settled.

In case you were tired of paying exorbitant rent for student housing, there’s no reprieve in sight. American Campus Communities is the biggest purveyor of student housing communities in the United States, meaning that they have been raking students over the coals for years.

If you’re into exploiting college kids who would overpay for $hitty studios outside of mid-major campuses in flyover states, have I got a stock for you!

What's Rotten

Netflix ($NFLX) — Alright, I know that usually we only talk about things that happened during the market’s open hours, so technically, this is cheating.

Have you ever dropped a gallon of milk from a height of two stories or more just to watch it explode when it hits the ground? Well, that’s kind of what happened to Netflix’s stock price after their earnings went out yesterday afternoon.

They only had one good metric in operating margins; every other measure of Netflix’s performance was not pretty, particularly as they shed over 200k subs. $NFLX is down over 27% in after-hours trading.

SES AI Corporation ($SES) — The Mass-based, lithium-metal battery maker got rekt on Tuesday, with shares $hitting the bed by 9.78%.

Supply chain concerns have shifted away from semis and into the metals required to make batteries for EVs. If this is true, a 10% haircut is the least of SES’s worries.

Thought Banana

Weed (Revenue) for All my Friends — One of the best parts about writing the Daily Peel is the Thought Banana section, where I have artistic liberty to write about literally whatever the hell I want. Buckle up, kids. Today is one of those days.

It’s pretty early, so let me likely be the first to wish you a Merry Marijuana Christmas. Happy 4/20. In honor of today’s date, we’re going to talk a little about the economics of Mary Jane.

By all means, the targeted legalization of recreational ganja has winners and losers. For example, in Colorado alone, legal weed has raked in over $2bn in tax revenue in the last eight years, filling government coffers by $423mn in 2021 alone. The weed biz also employs almost 40k Coloradans, providing decent jobs to regular, everyday people.

A loser in this debate is plain, old, boring alcohol. Your granddad’s sixer is both more expensive and less popular than it used to be. Tax revenues say sales of marijuana are beginning to outpace alcohol sales and not just in Colorado.

In Massachusetts, 2021 was the first year in which weed sales were worth more to the state than alcohol sales, but it wasn’t the only state where this happened. Even in its first year of legalization in Colorado, weed tax revenues beat alcohol tax revenues.

While nationwide weed tax revenues still lag those of their older sibling alcoholic beverages by almost two-thirds, weed still isn’t legal in all 50 states nor at the federal level. Imagine a world in which both the stigma and the laws surrounding weed production and consumption are transitioned to a more 21st-century posture? The sky is likely the limit.

Another big winner in the legalization of cannabis is law enforcement. According to the ACLU, in 2010 (ancient history for some of you Gen Z degens), more than 52% of all drug arrests made in this country were marijuana-related.

The cats getting picked up for weed-related offenses usually weren’t kingpins or dealers. They were just regular people who enjoyed a good smoke occasionally.

In today’s penal system, almost 40,000 inmates are incarcerated for marijuana-related offenses. Using data from 2020, most of these alleged criminals are typically non-violent offenders. Again, literally just regular people who had a little weed on them at the time of their arrest.

Do you know how much it costs to keep someone behind bars? It turns out that it’s around $60k annually, aka you could pay someone $30/hr on a 2,000 manhour-year instead.

This additional $2.4bn spent on inmates is another hidden tax that we as consumers are paying. This is more than the GDP of Aruba or Belize. When I think about the opportunity cost of keeping these unfortunate schmucks on the wrong side of the law behind bars, I am reminded of how inefficient our government really is.

In this country, there are 70 million Americans with a criminal record. Almost all of them have to go through hell when looking for a new job because of their record.

This irony is not lost on me. As Mary Jane becomes legal pretty much everywhere, something has to be done about this criminal record problem. There are already dozens of activist groups raising funds and writing more sternly worded letters than The Daily Peel to elected representatives trying to change this, but to date, there has been no movement.

The economics of weed are fascinating. Weed biz “experts” (whatever that means) predict approximately 25% year-over-year weed sales growth for the industry… even in today’s legislative environment. Wowza!

Weed’s adoption also appears to be generational. The truth is in the data – the old guard can’t seem to let go of their drink of choice, whereas Gen-Z will gladly light up given the opportunity. Sorry, millennials, you’re caught in the middle of this dichotomy, and it’s not always about you.

Now here is an observation: most folks under 40 in this country are okay with leaving many of the personal choices up to the individual, even when these choices are contentious political battlegrounds or conservative versus liberal issues. Weed is something I’d add to this list.

Regardless of your poison of choice (or not - you do you), you have to admit that widespread legalization of recreational cannabis seems to be good for tax revenues, those of us without a criminal record, and the average taxpayer. By all means, the future looks green.

Wise Investor Says

CORRECTION

While we do enjoy bringing you a satirical and irreverent take on the daily happenings in the world of finance, we at the Daily Peel, unlike many other things, take true facts very seriously.

It was brought to our Chief Ape Patrick Curtis’ attention by a disgruntled, potentially butt-hurt Daily Peel subscriber that something we printed in yesterday’s edition of our newsletter was not completely true.

We would like to retract the following banana bit from yesterday’s Peel:

• EV maker Rivian still produces no vehicles and makes no money

We would like to print the following correction:

• EV maker Rivian still produces (almost) no vehicles and makes (almost) no money, and its stock is still probably overvalued after being down more than 70% from its November highs

Here at The Daily Peel, we like Rivian as a company only slightly more than we like Robinhood, which means that we hate almost everything about it (not financial advice!).

Do you guys remember the class action lawsuit pending against the EV maker for overvaluing the stock during its IPO and subsequent six-month period? We don’t either.

How about when Rivian raised prices on trucks by over $10k per vehicle and announced that these changes would affect previously pre-ordered vehicles? Then do you remember when their management was forced by the court of public opinion to honor the original price? Can’t say that we do either.

When Rivian IPO’d, its valuation was higher than that of Ford and General Motors combined. In 2021, Rivian delivered 920 vehicles, with about 99% of them being delivered in Q4. In 2022, they just pared delivery expectations down to 25,000 vehicles, even after producing less than 1,500 in the first quarter.

Perspective: Ford delivered 50,000 Mach-E Mustangs in its first year of production.

Rivian at one time boasted a $160bn market cap, on the same order of magnitude as Tesla, even though Tesla produced almost a million vehicles in 2021 and is on pace to produce almost 1.3mn vehicles in 2022.

To our readers, we sincerely apologize for the misunderstanding. Our judgment was clouded by these material facts about Rivian as a company that influenced our decision to print a satirical falsehood that could have been construed as a material fact.

Thanks for understanding. We love to hear from our readers, so please don’t hesitate to reach out to us (Instagram, Twitter, LinkedIn) to provide comments or critiques.