June 29, 2023 | Peel #491

Silver banana goes to...

In this issue of the Peel:

• Jerome Powell's recent comments suggesting continued rate hikes and a slow return to 2% inflation have sparked investor concerns. Powell's remarks had a noticeable impact on market trends, with most equity markets turning lower. The anticipation of the next FOMC meeting is high as the odds for a 25bp hike stand at 81.8%.
• The stock market saw significant fluctuations, with Joby Aviation and Pinterest observing a surge, while Cava Group and General Mills experienced a slump. Joby Aviation's stock soared after receiving FAA permission for test flights of its eVTOL aircraft. Conversely, General Mills reported minimal annual revenue growth and a volume decline.
• The US and China's economic relationship is under strain due to proposed US restrictions on chip sales to China. Nvidia expressed concern over potential losses, highlighting the risk of Chinese companies developing competitive technologies.

Market Snapshot

Happy Thursday, apes.

I swear, this guy. Few things in our lives have been more of a roller coaster than the direction Fed Chair JPow drives markets. Such a hater.

And equity markets were feeling a little bit of that hate on Wednesday. The 3 U.S. majors were each broadly higher prior to Powell’s public appearance yesterday, turning most lower right up until the closing tick, seemingly in reaction.

Despite his best efforts to re-traumatize the investor psyche, treasuries were mostly lower throughout the day’s main session. A lot of decline in yields, although minor, can be attributed to strong demand at the 7-year note auction held during the day as well. USD rode the wave higher, as expected, with the DXY crossing above 103.

Let’s get into it.

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Banana Bits

• A deep dive into why Nvidia’s chips in China’s hands makes the U.S. want to take its ball and go home
• Civil War back on? Putin seizes opportunity to seize control of Wagner’s global military and (allegedly) “criminal empire”
• The Fed’s annual “stress test” (yeah, okay) gave U.S. banks a 4.0 in this year’s examination…after a bank with an A debt rating from Moody’s collapsed and led to the collapse of other sizable banks just weeks ago, this is borderline comical
• I promise the next sentence I write is a fact: Every single person in South Korea simultaneously just became either 1 or 2 years younger

Macro Monkey Says

JPow Speaks

No, there wasn’t an FOMC meeting or anything. But, much like the Lebron James Decision to go to Miami, Fed Chair Jerome Powell took his talents elsewhere on Wednesday.

Specifically, he took his talents across the pond to the ECB. Meeting and speaking in a semi-informal manner, JPow dazzled us with words of wit and wisdom while worries only grew.

Exactly 4-weeks from yesterday, the next FOMC meeting is set to take place. Markets are currently pricing in 81.8% odds of a 25bps hike at said meeting, with the remaining 18.2% given to another pause.

Prior to yesterday, however, those odds sat at just 75%. Maybe JPow’s essentially screaming from the rooftop that “WE’RE RAISING TWO MORE TIMES” might’ve had just a lil’ something to do with that.

In all seriousness, reminding markets that just because we paused once doesn’t mean we can’t f*ck your calls once again in July seemed to be the Chair’s main goal.

Clearly, he did that successfully.

But, there was plenty more on the minds of JPow and the audience alike, leaving the Fed chair to drop some additional color commentary throughout the meeting. Included in those words of wisdom were things like:

• (when asked if rate hikes would move to an every-other-meeting basis) “That may work out that way, it may not work out that way—but I wouldn’t take moving consecutive meetings off the table at all.”
• (when asked about the timeline of getting back to 2% core inflation) “I don’t see us getting back to 2% this year or next year…I see us getting there the year after.”
• “But I think the bottom line is that policy hasn’t been restrictive enough for long enough.”

Rapper and noted spaghetti-lover Eminem once famously questioned, “How many times can I say the same thing different ways that rhyme?” Jerome Powell is wondering the exact same thing.

"Rapper and noted spaghetti-lover Eminem once famously questioned ..."

"Naturally, however, the Fed Chair and FOMC will speak in this particularly vague manner ..."

“We know we’ve hiked a lot, very fast, and that monetary policy has a lagged effect, but we’re not where we need to be on inflation, so we plan to keep rates elevated for longer. We do not know what the terminal level will be or when that will end.”

Naturally, however, the Fed Chair and FOMC will speak in this particularly vague manner just to keep you guessing in case things don’t go according to plan. Like the cool kid in high school, credibility is everything to the Fed and its chairs.

What's Ripe

Joby Aviation (JOBY) ↑ 40.22% ↑

• Shares in Joby Aviation took flight yesterday, soaring into the stratosphere on news that the company’s product will be soon too.
• Joby, a leading eVTOL (electric vertical take-off and landing) aircraft maker, received permission yesterday to begin test flights of its weird heli-car thing.

• The “Special Airworthiness” certificate issued by the FAA to Joby means the company can take that ever-important step closer to its goal of building an “electric aerial” rideshare network. Idk if it’ll work, but it sure sounds sick, huh?

Pinterest (PINS) ↑ 6.59% ↑

• Although we may not know what’s coming, Pinterest will be ready, at least according to CEO Bill Ready yesterday.
• It’s early for sure, but so far, he’s right for sure. Yesterday, analysts at Wells Fargo gave shares a major upgrade, joining other Wall Street firms that have recently increased their expectations for the app.
• Wells analysts bumped their price target to $34/sh, above the ~$29 average but still well below the high of nearly $41. No time to hate apes; let’s go place our bets.

What's Rotten

Cava Group (CAVA) ↓ 7.33% ↓

• It took Rome 478 years to figure out they shouldn’t be a Republic but an Empire. It’s no wonder why the Mediterranean-inspired food chain Cava is taking some time to figure itself out too.
• We’re two weeks from the IPO today; that’s only just barely one fortnight. Shares are taking their time to figure themselves out as analysts weigh how much of the company’s nearly $5bn price tag is real vs. Chipotle-inspired hype.
• Despite the uptick in more risk-on stocks, Cava couldn’t get it done. But, its actions nonetheless may have inspired others to get in on the game.
• According to Yahoo Finance, fellow private corps are set to list publicly to close out this week and month. Hopefully, they fare better than Cava shareholders did yesterday, but the stock is only down 3.6% all-time. Can’t be too mad.

General Mills (GIS) ↓ 5.17% ↓

• Something about this ticker symbol really grinds my gears, and it seems like Wall Street agrees. The only difference is they actually have a reason.
• That’s because General Mills, maker of your favorite cereal and your dog’s favorite dinner, came out and dug its own grave for the day. The company reported Wednesday 3% annual revenue growth, entirely again on the back of higher prices, along with a 6% decline in volume.
• Next, General Mills thought it wise to downgrade their own expectations of themselves. Kind of like when you rate yourself below a 10. Obviously, Wall Street isn’t gonna think you’re a 10 after that. Better luck next time.

Thought Banana

Fish But No Chips

Don’t worry, Brits; we’re not talking about you guys (why would we?).

Anyway, we are, in fact, talking about two much more relevant countries: China and the U.S.

As you may be mildly aware, China and the U.S. don’t exactly have a loving relationship. Kind of like parents that are separated but still married, they might not want each other right now, but the love behind the marriage is (probably / hopefully) still there.

"Sure, the odds are low, but they are not 0% ..."

In this case, if the love is entirely gone, we could very well be looking down the pathway toward a possible nuclear war, so let’s focus on this one today.

Sure, the odds are low, but they are not 0%, so when we see things like continued fraying to the economic love these countries have for each other, it has to be top of mind.

Semi stocks were down almost across the board for the day as news came to light that the U.S. is pushing for further restrictions on the chips that American companies are allowed to sell to China. Once again, one particular company seems to be in mind.

Nvidia was not at all happy with the news. CFO Colette Kress made sure the world knew it too, identifying the potential for “permanent loss of opportunities for the U.S. industry to compete and lead in one of the world’s largest markets.

"... they are simultaneously allowing homegrown Chinese players to develop competitive and potentially better tech ..."

Specifically, she’s referring to the fact that if the U.S. government goes overboard on the restrictions, they are simultaneously allowing homegrown Chinese players to develop competitive and potentially better tech of their own that’ll get sold to buyers that otherwise could’ve been Nvidia or AMD customers.

Tough call. Regardless, this ban, just like Nvidia’s A100, seems focused pedantically on Nvidia’s new chip, the H100. We’ll see if they can simply just “find a workaround” for this multi-10-bands chip.

The big question: Will the U.S. and China ever be friends again? Does this fray-on-chip technology lead to further escalations of conflict? How does the industry look from a global perspective in the next 5-10 years and beyond?

Banana Brain Teaser

Yesterday — What do you use from your head to your toes, and the more it works, the thinner it grows?

Soap.

Today — Below are 3 pairs of words. Find the words that fit in the middle of each pair of words to create two new words, one front-ended and one back-ended.

Example: EVER - ______ - HORN
Answer: EVER - GREEN - HORN

1. LENGTH - _______ - CRACK
2. WITH - _______ - OVER
3. MAKE - _______ - LESS

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

Wise Investor Says

“Investing is a continuous learning process. Stay curious, adapt to changing market conditions, and never stop educating yourself.” — Mohnish Pabrai

Happy Investing,

Patrick & The Daily Peel Team

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