June 20, 2023 | Peel #484

Silver banana goes to...

In this issue of the Peel:

• Macro factors continue to shape the market, with factors like pandemic recovery and inflation swings influencing investor sentiment. Consumer sentiment, though not always informed by macroeconomic understanding, plays a pivotal role in shaping the economic future.
• Market movement this week shows iRobot and Virgin Galactic on the rise, while Cava Group and SoFi Technologies experienced downturns. Notable events include iRobot’s sale to Amazon and Virgin Galactic’s plan for space tourism.
• Tech giants like Meta, Amazon, and Google have been highlighted for their massive net losses in certain sectors, showcasing a common trend of burning cash for long-term gains. The viability of this strategy under a new rate environment remains a question.

Market Snapshot

Happy Tuesday, apes.

Friday may feel like years ago after this wonderfully long weekend, but it’s officially (sadly) time to get back to it. To paraphrase a once-adored American philosopher/rapper, “Even if you are not ready for the trade, it cannot always be night.”

Friday broke a 6-day green streak in broad equity market returns, but last week still managed to pull off the best 5-day session in months. The minor selloff seen Friday had breadth but not all too much depth as traders seem to be, at the very least, catching their breath from this recent run straight back into a bull market.

Still, investors appear to remain more uncertain as the market’s turnaround before any kind of recession is a little bit like a drug addict going to Amsterdam to celebrate being 1-day sober.

Anyway, treasuries and the US Dollar gained to end the week, potentially reflecting a simultaneous adjustment for further interest rate moves following the Fed’s move to scare the bullishness out of everyone last week.

Let’s get into it.

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Banana Bits

• US Secretary of State Antony Blinken finished up his trip to China with a classically casual, friendly stop at his buddy Xi Jinping’s place, with the ultimate goal seeming to be the avoidance of World War III
• As investors continue to do the uncertainty dance, it appears the real battle for returns is caught between the Fed and AI
• Intel is grabbing a stein, chowing down on some schnitzel, and putting on its lederhosen as the firm looks to invest $33bn in two chipmaking plants in Germany, the largest foreign investment the nation has ever seen
• Expect to see Messi decked out in pink and black for his MLS debut in just over a month, owner Jorge Mas says

Macro Monkey Says

The Average Joe’s Vibe

Strong markets make good times, good times make weak markets, weak markets make bad times, and bad times make strong markets—or something like that, right?

But that framework couldn’t possibly be more accurate in describing the post-pandemic market and macroeconomic environment. Simply put, we had:

• C-19 show up, leading to a big, brief market crash and the economy screeching to a halt
• JPow, Donnie T, Joey B, and their gangs dump gobs of cash all over the US economy, covering the land ankle-deep in dollars
• Inflation spikes and labor participation goes anemic, followed way too slowly by a battering ram of interest rate hikes
• We pause rate hikes, avoid a debt ceiling crisis, watch inflation abate, and unemployment remain low as we slowly realize we might just be ok after all

Decent summary, right? The last bullet hasn’t really written itself yet, but based on the way consumers are feeling in June 2023, optimism sure isn’t in short supply.

The University of Michigan reported Friday in its monthly measure of consumer sentiment that our outlook on the economy isn’t actually as bad as the CNBC and Bloomberg headlines want you to believe.

"... our outlook on the economy isn’t actually as bad as the CNBC and Bloomberg headlines want you to believe."

Aggregated sentiment jumped to a 4-month high after rising 8% to 63.9 in June, beating economist expectations as expectations for inflation over the next 12 months dropped from 4.2% last month to 3.3% this month. Along with those data points came:

• Current economic conditions rising to 68.0 from 64.9
• Sentiment has gained 28% from the historic downbadness of last year
• Index of Consumer Expectations gained 10.6% to 61.3

"Consumers like you and I are nodes in this economic machine ..."

Obviously, the average Joe consumer doesn’t have a clue what’s going on in the macro landscape, but why would they?

Consumers like you and I are nodes in this economic machine; the microeconomic environment we find ourselves in and the conditions along with the future expectations for that environment are all that matter to any one of those nodes. Aggregated, however, those expectations can shake the macro outlook.

That’s because consumers plan right now for what they expect to happen then. For example, in a deflationary environment, no one buys anything because they know whatever good it is will be less expensive next month, and so on.

The point is that despite consumers not actually knowing anything, what we think we know about the future can end up shaping it, so it’s important to stay tuned.

Last month’s report certainly doesn’t indicate that consumers expect good times to get rolling immediately, however. Sentiment readings above expectation are generally positive signs, but we’ve still got a lot of deadlifting to do to get off these historic lows. Hope your back isn’t hurting too much yet.

What's Ripe

iRobot (IRBT) ↑ 21.20% ↑

• Yes, this company has the same sounding name as a 2004 Will Smith movie, but that—and the fact that no one got slapped in the face during the making of either one (we believe)—are the only similarities that we could find.
• However, only one of them saw their relevance and value spike by over 1/5th on Friday. iRobot shares rallied like you realizing that this past Sunday was actually just Saturday 2.0 upon getting the green light from UK antitrust authorities to complete their sale to Amazon.
• The CMA, aka the UK’s FTC, said the deal would not cause “a substantial lessening in competition.” We’ll see if US and EU regulators follow suit and put an end to the biggest freakout ever over a tiny little $1.7bn acquisition.

Virgin Galactic (SPCE) ↑ 16.50% ↑

• After months and months of epitomizing the “C’mon do something” meme, Virgin Galactic did something.
• Technically, they announced they plan to do something, but that’s a helluva more than anything else they’ve done since Branson and his merry little band of space cadets flew to not-space in 2021.
• 3 members of the Italian Air Force will, sometime between June 27th and June 30th, take part in Virgin Galactic’s first-ever official “space tourism” flight. Don’t worry, though; this one is all about doing some science-y, research-y bullsh*t or something rather than simply being a bored billionaire.
• Nevertheless, monthly space tourism trips are planned following this inaugural journey, and there’ll be plenty of boredom-curing on those, we’re sure. I think I’d be a little less salty about it if someone simply offered me a ticket.

What's Rotten

Cava Group (CAVA) ↓ 12.86% ↓

• Mediterranean quick-service restaurant Cava went from the peak days of Roman expansion on Thursday (up 99%) to immediately hearing barbarians in the woods the very next trading session.
• In a classic post-IPO melt-up followed by the inevitable meltdown, Cava insiders got their first taste of Mr. Market’s wrath on Friday, losing nearly 13% as traders test the waters in pricing this thing.
• After the year our portfolios have undoubtedly had, drops like this are nothing to the average degenerate. They’ll get used to it.

SoFi Technologies (SOFI) ↓ 9.95% ↓

• Like Jimmy Butler against the Nuggets in this year’s NBA Finals, SoFi shares were in for a major heat check.
• After scorching the tapes up nearly 105% in less than a month, traders pulled back as analysts at Bank of America downgraded the stock from “Buy” to “Neutral.”
• SoFi has been itching for Big Dawg Joey B to force you and quite literally all of your friends to start paying back your student loans, a major line of business for them that has been on pause since March of 2020 (remember that sh*tshow?)
• The recent rally likely priced in the August 29th scheduled end to the student loan moratorium, and now, BofA is essentially that’s all SoFi’s got. CEO Anthony Noto couldn’t be reached for comment (bc we didn’t try), but he presumably would say, “Challenge accepted.”

Thought Banana

Bets, Bags, and Balls

Spending money to make money: a concept that is both true and wildly overused by unemployed dropouts begging their parents to “invest” more in their “startup.”

In those cases, having the bank of mommy and daddy dump more cash into the incinerator won’t do much (or really anything), but for companies like Meta, Amazon, and Google, burning cash has long been just another day at the office.

Now, these organizations are some of the most profitable in the entire history of capitalism, but that doesn’t mean every product they launch rakes it in (remember Google’s Loon project?).

Anyway, as venture/angel investor and certified tech-bro Matthew Ball pointed out in his month-ago piece (more like a novel, but we digress), even some of the most popular tech platforms in the world have been net losers for their creators, specifically shouting out:

• Meta’s Reality Labs seeing a cumulative net loss of $49bn since 2012
• Amazon’s Alexa driving cumulative net losses of $43bn since 2012
• Google Cloud’s $35bn cumulative net losses (but actually turned a profit in Q1)

"... Ball argues that steampiling losses like this can actually be a decent strategy ..."

Even if every analyst on Earth expects profitability going forward, it’s going to take one helluva long time to reach cumulative net profitability.

But aside from simply creating new cash-burning verticals just to steal more data from you in a new, innovative way, Ball argues that steampiling losses like this can actually be a decent strategy and, even crazier, is something investors should learn to not only stomach but encourage it. This all comes with the caveat of having some kind of long-term vision.

Ball goes on to point out that the end of 0% interest rates brought on by JPow and leading to shifts like Meta’s focus on efficiency and current cash flows could distract from the investments that lose money now yet lead to massive outperformance at some point down the line.

"In the month since dropping, investors may have been reminded of this tech-induced dynamic to burn cash now in order to reap it in down the line."

In the month since dropping, investors may have been reminded of this tech-induced dynamic to burn cash now in order to reap it in down the line. That’s exactly what Amazon, the classic example, did for years on end in order to reach the scale it has today.

So, are you ready to start burning cash again? My portfolio is already one step ahead of me there, so I might as well join in on the fun!

The big question: Will companies continue to pile cash into money-losing investments in a non-ZIRP environment? How will investors react to investments like this in the new rate environment?

Banana Brain Teaser

Friday — A clothes shop was running a promotion giving away free jeans. In order to get the free jeans, you had to try a pair on, and while still wearing the jeans, you had to put your right hand in the left pocket and your left hand in the right pocket and reach right to the bottom of the pockets at the same time. Many people tried but were unable to achieve the feat until one chap walked in and walked out a few minutes later with his free jeans. How did he do it?

He tried the jeans on inside-out. The left pocket was then on his right side, and the right pocket was then on his left side.

Alternate answer: He tried the jeans on backward.

Today — Unscramble the words below, then take the letters from each word as instructed to form another word that is the answer to this teaser:

• AXRET, Take letters 1 & 4
• MBGHUU, Take letters 1 & 3
• ENCLAC, Take letters 1 & 2
• NIILST, Take letter 5

Unscramble the letters you collected... what do you get?

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

Wise Investor Says

“Cash combined with courage in a time of crisis is priceless.” — Warren Buffett

Happy Investing,

Patrick & The Daily Peel Team

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