Icahn't | The Daily Peel | 5/11/2023

May 11, 2023 | Peel #459

Market Snapshot

Happy Thursday, apes.

You’re almost there, just a few dozen more hours before the first socially acceptable Friday beers hit. At least markets are trying to put a smile on your face. At least large-cap equities sure are.

With Apple and Microsoft making up ~14% of the S&P alone, we’ll take a day in which the big dawgs lead. S&P equal weight index $RSP was essentially flat on the day, while $MGK (not the rapper, Google it) was over 1.1% higher. As such, the market cap-weighted indexes like the S&P and Nasdaq easily led the Dow for the day.

But it doesn’t get bigger-market-cap than the U.S. itself. Government debt saw yields climb as investors gradually continued to sell early in the session, only to set in a steep drop in yields, leading the two-year back towards 3.9%.

Let’s get into it.

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Banana Bits

• AI and search and folding phones - Oh my, indeed, at Google yesterday as the company partied hard with product announcements at the firm’s I/O conference
• Once considered the best product for kids since Disney, Disney+ reports a surprise drop in users as shares fall almost 5% after-hours
• Get the meme machines fired up again as Robinhood is now giving out heroin – I mean allowing stock and ETF trading round-the-clock, 24/7, from 8 pm ET on Sunday night to 8 pm ET on Friday night. Something tells me the SEC has already entered the chat
• Never one to shy away from stirring it up, Former President Donnie T ripped a CNN town hall yesterday, and it went as you probably expected

Macro Monkey Says

Trustworthy Dogs

Getting 10 in a row of anything is a difficult task (go ahead, try to hit 10 free throws in a row), but the U.S. economy is evidently built different. Maybe the question we should ask is - did inflation ever really stand a chance?

Just jokes, apes; my grocery list confirms inflation is, in fact, a ruthless Chad. But, the semi-decent news is that our expenses increased by “just” 4.9% annually in April, marking 10 months in a row of broad year-over-year disinflation.

Reminder: that does not mean falling prices; that would be deflation, but it’s still not bad news. The Consumer Price Index registered its slowest annual growth rate in 2 years at 4.9%, while the monthly rate jumped from 0.1% in March to 0.4% in April.

Monthly readings are generally more volatile as shorter-term measures are exposed to seasonal factors and outlier events in general. April’s jump came in the form of gas, used cars (not this again), and basically anything recreational or used at/for the home.

On an annual basis, energy products like fuel oil and gasoline remain down substantially, 20.2% and 12.2% down from April ’22 levels. Restaurants continue to rob us as food away costs continue to climb while items like food at home, fuel oil, and transportation & medical care services helped pull things down.

The big question now: how patient in Powell? JPow and the FOMC gang were undoubtedly pleased to see inflation continue to slow, but the 0.1% decline from March’s 5% is a snail’s pace that could make JPow jittery, contributing to the odds of yet another rate hike.

As of yesterday, market implied probabilities for a rate hike in June plummeted to 0.0% from over 20% on Tuesday, suggesting trader’s immediate reaction was that this CPI report to JPow is like a dispensary-edible to a normal person, just enough to take the edge off.

Moreover, the bond market is still calling absolute bullsh*t on the Fed’s ability to continue/maintain these rate hikes. The 2-year yield is often seen as the best proxy for the bond market’s expectations of future fed funds rates, and one look at the yield curve implies that rate cuts are priced in. A downward-sloping yield curve implies expectations for slowing economic growth on the horizon, hence the lower yields assigned to the longer-dated issues. Slowing growth generally = rate cuts (which is possible in the U.S. when rates aren’t 0%), and every rate from sea to shining sea starts with JPow.

Bond markets, like dogs, are generally considered trustworthy. Or, more accurately, at least more trustworthy than the cross-faded while speeding down the highway stock market.

Inflation has been pushed aside as the primary cause of investor FUD in recent months, however, with recession fears taking primacy. Obviously, normalizing inflation expansion is a good thing, but the worry is that the FOMC won’t be able to stop the decline right at that 2% target. That’s the “gone too far” theory, but as of yesterday’s equity market action, no one seems all too worried yet.

Or maybe it’s just an equal amount of bulls and bears getting even more confused by the good-thing-but-maybe-bad-thing cocktail we got going on. Once again, good luck JPow.

What's Ripe

Roblox ($RBLX) ↑ 7.41% ↑

• Yup, just keeps getting confirmed again and again: parents will not say no to their kids. A game whose average player is apparently between 9-15 years old will ride that wave all day long.
• More like all quarter long in this case, however. Sure, the $268mn loss was more than $100mn more burned compared to last year and came in larger than expected, but top line growth and solid user numbers were in the driver’s seat of the market’s reaction.
• DAUs hit 66mn, equivalent to about the population of California and Florida combined, driving over 23% revenue growth. Markets were optimistic about the growth of older users, too, despite the inherent ability of 12-year-olds to vacuum cash out of mom’s purse and dad’s wallet.
• Lastly, Roblox also proved itself as maybe the first tech company since rates hit 4.5% to announce that they were “comfortable” with their current headcount. Nevertheless, markets were loving it.

Google ($GOOGL) ↑ 4.10% ↑

• The Tales of Beedle the Bard describes real-life wizards, while the Tales of Google the Bard describes technological wizardry. I think it’s pretty clear which one the market prefers.
• In its latest attempt to show that the >$1tn company that Alphabet is remains at least on-par with “startup” OpenAI’s LLM technology, Google held its I/O conference yesterday with its latest AI features - along with investor smiles - on full display.
• Shares gained as announcements like bringing Bard’s tech to just about everything the firm offers got the people goin’. But, Pichai and the gang were sure to make clear that the ad giant is in no way leaving its legacy business, confirming that ads will still be present & primary in search even with Bard joining the party.
• I’m sure consumers will love that. And, even if they don’t, investors sure do, hence the over 4% gain following the announcements.

What's Rotten

Twilio ($TWLO) ↓ 12.64% ↓

• More than doubling your earnings expectations apparently wasn’t nearly good enough for Twilio traders yesterday. And I mean, in this economy? Management should know better by now.
• Brutal honesty, like CEO Jeff Lawson’s comments that he sees “moderation in our usage patterns” and a maxing out of their digital asset clientele more than a year past was not the news investors wanted. This was a good segue though into the company’s heartbreaking 1.5% undercut to the Street’s Q2 revenue forecast. Oh, the humanity.
• $0.47/sh on $1bn in “bookings,” which serves as a revenue measure and includes deferred sales, handily beat expectations for $0.21/sh on similar revenue forecasts. But, as we said, no one cared.

Airbnb ($ABNB) ↓ 10.92% ↓

• Taking a similar strategy on their release as Twilio, Airbnb too beat earnings like it was Ali vs. the Street’s Sonny Liston, but disappointing guidance stole the spotlight.
• EPS of $0.18 doubled consensus views for $0.09 while revenue clocked in at $1.82bn vs the $1.79bn expected. That’s 20% sales growth and a major swing from the $0.03/sh lost in the year-ago quarter.
• Guidance wasn’t pretty, but it could’ve been a whole lot worse. Basically, CEO Brian Chesky and the rest of the execs tried to give analysts a heads up that Q2 sequential growth will be an even harder left-swipe as they round last summer’s “pent-up demand” that gave the firm a much-needed boost.
• “Big changes” are coming for consumers, however, including integration of some kind of GPT-4 feature, the large language model behind ChatGPT. What’s this thing gonna do, make hosts even better at stalking me? Can’t wait.

Thought Banana

I-can’t

Putting your right shoe on your left foot isn’t exactly comfortable or functional, but it definitely can work. Turns out that in investing, putting the shoe on the other foot actually can work too.

But like a real shoe, it’s not exactly comfortable for those involved. Late last week, we learned that famed activist / corporate raider Carl Icahn, who famously 

Given Icahn’s conglomerate is down nearly 40% this year and 36% since the short seller’s position was announced, Hindenburg’s P&L is probably actually feeling both pretty comfortable and/or functional.

But yesterday, things only got worse for the 87-year-old Icahn-ic investor. Icahn Enterprises ($IEP, -15.14%) confirmed that federal prosecutors have opened an investigation into the giant of many industries on exactly the allegations laid out by Hindenburg.

In one glaring example even an intern could spot as problematic, IEP reported in March that an auto parts company owned by the firm was worth $381mn at the end of the year despite that same division going Chapter 11 (aka bankrupt) in January. Carl & Co. have since written down the value of this unit, per the WSJ.

The updated news came amid Icahn Enterprises dropping their first-quarter earnings report. This thing was already headline after headline. I mean, just look at the above. But it only got worse when we got the financials. Last year’s Q1 $323mn profit flipped to a $270mn loss largely on the back of failed short bets of their own, which alone lost nearly half a billion dollars in the first 90 days of the year.

Whether it be the shoe on the other foot, the tables turned, or a taste of his own medicine, Icahn is not having any fun. Guy came from the top shelf in his “and I took that personally”-style response to Hindenburg, suggesting at one point the serial killer of public stocks should change its name to “Blitzkrieg Research,” a bold move we’re not even sure Kanye would say.

Maybe if he’d shorted his own stock, he’d be 1) less mad and 2) profitable for the quarter, but unfortunately, laws exist. Whatever, maybe the $11bn mattress he sleeps on will make him feel better.

The big question: If confirmed true, will the allegations in Hindenburg’s report permanently tarnish Ichan’s (wall) street cred? What, if any, of the report is true, and who would be liable? How profitable has the trade been for Hindenburg already?

Banana Brain Teaser

Yesterday — I'm as small as an ant, as big as a whale. I'll approach like a breeze, but can come like a gale. By some I get hit, but all have shown fear. I'll dance to the music, though I can't hear. Of names I have many, of names I have one. I'm as slow as a snail, but from me you can't run. What am I?

A shadow.

Today — It’s 100 bananas off the PE Master Package for the first 3 respondents. LFG!

Four well known sayings have been reworded below. Can you identify the originals? Example : Lack of awareness brings elation. (Ignorance is bliss.)

1. Stop sleeping and sniff the java.
2. Fine items approach people who have patience.
3. One should not rate a volume by the lid.
4. Progress to the rhythm of another bongo player.

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

Wise Investor Says

“The game of investing is one of making better predictions about the future than other people. How are you going to do that? One way is to limit your tries to areas of competence. If you try to predict the future of everything, you attempt too much.” — Charlie Munger

Happy Investing,

Patrick & The Daily Peel Team

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