August 21, 2023 | Peel #526

In this issue of the Peel:

• U.S. housing market is facing challenges due to high interest rates on home purchases, reaching multi-decade highs. This has led to a slowdown in both buying and selling, resulting in a stagnant market.
• Hawaiian Electric assured no bankruptcy, and Applied Materials showcased strong performance boosted by high demand in China. Keysight Technologies faced downgrades despite strong earnings, and Deere & Co.'s good performance might indicate an upcoming peak in its business cycle.
• SpaceX sees robust financial growth, with a recent valuation of $150 billion. Speculations around Starlink's public spinoff and competition with other space companies are discussed.

Market Snapshot

Happy Monday, apes.

Hope you had a nice weekend. Shoutout to the dozen or so people that live in the great State of Wyoming. If any of you happen to be reading this right now, give Fed Chair JPow my regards when he gets to your state later this week.

Equity markets certainly tried to give us a warm sendoff into the weekend, but outside the Russell 2k’s 0.54% up day, there wasn’t much movement in either direction. Energy stocks tried their best to pull indices higher, but deadweight from sectors like communication and consumer discretionary was far too strong.

Meanwhile, treasuries had a mostly non-exciting day too. Without any major economic releases or news of a pending U.S. bankruptcy going around anymore, they were mostly flat on the day, with the 10-year pulling back from the >4.3% levels seen late Thursday.

Let’s get into it.

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Macro Monkey Say

“You Can Always Refinance”

As if buying a house wasn’t enough of a nightmarish experience anyway—only made worse when an overpaid, way-too-smiley real estate agent “helps out”—now you get to go through the same process while paying way more money!

Good times.

"With an estimated total value of ~$45tn, driving roughly 1/5th of overall GDP in any given year ..."

The United States housing market is (in)arguably the most important sector within our economy for the average American. With an estimated total value of ~$45tn, driving roughly 1/5th of overall GDP in any given year, if something is wrong in housing, we’re in trouble.

And right now, interest rates on home purchases are breaching multi-decade highs, with the average 30-year fixed rate (the standard American mortgage terms) pushing upwards of 7.09%. It hasn’t been that high since you were sitting in a high chair with a full diaper refusing to eat your food unless someone pretended it was an airplane, and I’m not talking about the last time you visited home.

I’m talking about 2002, the last time we saw +7% average mortgage rates in the U.S. Just take a look:

Source

The reasons behind the run-up are obvious, thanks to JPow’s rate-hiking escapades over the past year and a half.

But most mortgage lenders base rates off of the yield on 10-year treasuries, and at 4.25% now, that’s a high we haven’t seen since 2007. With every key interest rate spiking like your blood pressure when your team’s starting QB is playing in the pre-season, your Econ 101 professor would say prices should be crumbling. Spoiler alert: they (mostly) are not.

The above chart clearly shows a decline in median home value over the past year, but not nearly to the degree we might expect and absolutely not nearly enough to get us back to pre-pandemic levels.

With buyers not wanting to pay top dollar for a home and then get f*cked on a +7% rate for the next 30 years, nobody wants to buy. At the same time, would-be sellers with rates set before March of last year often feel “locked in” to their homes, not wanting to sell and move to a rate that’s likely more than double their current one.

All this together has created a frozen housing market, with activity plummeting and layoffs at mortgage lenders ramping up.

"All this together has created a frozen housing market ..."

This dynamic is a prime example of the “lagged effects” of monetary policy. We very well could continue to see home prices fall, increasing the home turnover rate and spurring the sector back to life, but after a decade of ZIRP, locking in +7%, hell, even +5% rates, kinda makes you feel like an idiot.

So instead of reading Harry Potter and learning about Christopher Columbus back in 4th grade, you clearly should’ve been reading Federal Reserve press releases and learning about title insurance and property tax deductions.

Don’t even bother googling those things now, either; it’s too late. Let’s all just give up.

What's Ripe

Hawaiian Electric (HE) ↑ 14.46% ↑

• Burning down an entire island is bullish? Maybe, but Hawaiian Electric’s stark reversal on Friday says it just might be.
• While everyone continues to point their fingers at these scumbags for failing to follow safety protocols that likely could have sparked the wildfires that recently (and tragically) tore through the island of Maui, the company managed to assuage some concerns on Friday.
• To paraphrase their release, Hawaiian Electric said, “We probably won’t go bankrupt” as a result of their recklessness. They’ve got insurance, but we’ll see how that goes.

Applied Materials (AMAT) ↑ 3.68% ↑

• Moving on to actual good reasons for a stock to go up, Applied Materials is having a helluva year.
• The company beat consensus estimates for $1.73/sh on $6.1bn in sales, reporting $1.90/sh on $6.4bn. Just a day later, analysts at firms including Keybanc have already gone ahead and upped their price targets on the semiconductor equipment company.
• A lot of the increased bullishness comes from updated expectations from China, where analysts are now betting that demand for chip equipment won’t contract as much as anticipated.
• This company sits right at the precipice of some of the hottest topics in markets lately, including chip security, China, and of course, AI. With a nearly 50% increase in share price YTD already, Mr. Market appears to think those drivers won’t crumble apart.

What's Rotten

Keysight Technologies (KEYS) ↓ 13.78% ↓

• But, not all electronic equipment companies are made the same, apparently. Unlike Applied Materials, similarly strong earnings ruined the day for Keysight shareholders.
• Revenue came mostly in line with expectations, clocking in at $1.38bn, which is basically flat annually. On the bottom line, EPS of $2.19/sh vs. estimates of $2.04/sh clearly beat the brakes off expectations, but it wasn’t nearly enough to overcome negative commentary.
• Barclays analysts wasted no time downgrading the stock to Equal Weight from Overweight, citing a lack of positive catalysts for the foreseeable future.

Deere & Co. (DE) ↓ 5.28% ↓

• Up is down, red is blue, and once again, beating earnings expectations is now apparently equivalent to a factory explosion.
• The maker of heavy machinery, agricultural equipment, and other big-ticket items blasted past estimates, reporting $10.20/sh on $14.3bn, while the Street was looking for just $8.22/sh on $14.1bn.
• It wasn’t guidance that did them in, either. Management raised expectations for the rest of the year, but it may be that very fact that led to the selloff.
• Share price moves are all about future expectations. In a cyclical business like agriculture, strong performance like this could be a signal to analysts that the sector is hovering around the top of a cycle. Basically, things are so good they’re bad.

Thought Banana

Earnings Spotlight: Exploring SpaceX

Don’t call me a genius or anything, but I think I’ve discovered the key to success in the space industry: don’t blow sh*t up.

Wild concept, I know, but for SpaceX, it seems to be working out. Sure, the Starship launch back on 4/20 of this year (nice) went boom, but that was allegedly intentional, I guess? We’re not scientists, so don’t come at me, but we can all be pretty damn sure the explosion that matters the most is the firm’s revenue growth.

"... a the rarely seen but often fantasized-about financials of the world’s 2nd most valuable startup ..."

The Wall Street Journal gave us a sneak peek into the rarely seen but often fantasized-about financials of the world’s 2nd most valuable startup (behind ByteDance).

To go over some highlights:

• SpaceX earned a small profit $55mn on $1.5bn in revenue in Q1’23
• The company was recently valued at $150bn through an employee stock sale
• 2022’s revenue clocked in around $4.6bn, on track for +30% growth in 2023
• Expenses in 2022 totaled $5.2bn
• Price hikes of the Falcon 9 flights helped breathe life back into the bottom line

Safe to say, things are going well at Elon’s 2nd-largest company.

Recent pushes for the Starlink network, spurred by Russia’s invasion of Ukraine, have boded well for the company, too. Rumors still swirl that Starlink is a top prospect for a public spinoff, but nothing even close to certain has been said.

Fellow space-faring companies like Jeff Bezos’ Blue Origin and, much more publicly, Richard Branson’s Virgin Galactic and Virgin Orbit appear to have already lost to Musk & Co., but there’s plenty of time for plenty of change in the space.

As of now, Virgin Orbit has gone bankrupt and fully closed its doors, while Blue Origin seems to spend most of its time litigating contracts given to SpaceX rather than trying to win the next one.

"Virgin Orbit has gone bankrupt ... Blue Origin seems to spend most of its time litigating contracts given to SpaceX ..."

SpaceX COO Gwynne Shotwell has been recognized as the key to the company’s business success, but Musk remains as CEO, with most of his time focused on the actual technology and engineering. Still, whatever this duo is doing clearly doesn’t suck.

The company’s goal of getting asses on Mars hasn’t changed, but clearly, we’re still a long way from someone upstaging Neil Armstrong. I just hope whoever it is has a line as good as his.

The big question: Has SpaceX already won the private space industry? Can they hang onto this dominant position long-term? Will it ever go public or have public spinoffs? When will we get to Mars?

Banana Brain Teaser

Friday —

My first serves as positive recognition
My next’s played in a friendly competition
My whole is a pay-later proposition

What am I?

Credit card.

Today — Complete the words below using three consecutive letters in alphabetical order, e.g., _ _ A _ U S; add A B and C, and it would become ABACUS.

• D O _ I _ _
• _ R A _ I _
• _ _ A _ U E

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

Wise Investor Says

“Good ideas are always crazy until they’re not.” — Elon Musk

How would you rate today’s Peel?

All the bananas

Decent

Rotten AF

Happy Investing,

Patrick & The Daily Peel Team

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