JPow's Crunches Failed to Impress | The Daily Peel | 5/1/2023

May 1, 2023 | Peel #451

Market Snapshot

Happy Monday, apes.

And Happy May. We’re certainly going into the month on a high note on the back of relatively impressive earnings (so far) and some not-entirely-terrifying earnings reports from major companies. Let’s see if we can keep it up.

Equities closed at a monthly high for the S&P in April, thanks largely to last week’s dumping of earnings numbers that, at least compared to recently revised expectations, blew us out of the water. We’re still downbad for the most part compared to a year ago, but JPow didn’t kill the vibes enough for the party to end fully, it seems.

Meanwhile, treasury markets have been bouncing around all year, but as we come closer and closer to the eventual debt ceiling debacle, we’re seeing the odds of a default incorporated into trading more and more. 2-year yields fell to close last week, although they didn’t move much by recent standards.

The U.S. dollar moved higher in premarket trading but seemed to get tamed slightly by the release of the Fed’s favorite inflation measure, the Core PCE.

Let’s get into it.

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Banana Bits

• Final bids for what could become the new second-largest bank failure in U.S. history are well underway from the likes of JPMorgan and Bank of America
• Turns out the biggest prick in JPow’s side might not be pesky minimum wage earners asking for more money but the U.S. construction industry’s addiction to building things
• From credit crunches to continued panic across key economic sectors, here’s what is currently keeping economists up at night
• According to Barron’s, there are not a lot of good choices JPow and the gang can make right about now

Macro Monkey Says

Core Day

JPow was banging out some crunches once again to close out last week as the Bureau of Labor Statistics dropped the latest core statistics.

Kind of like your grades this past semester, the results were pretty okay but still managed to disappoint. Let the underachievement reign.

Core PCE, which is required in media to always be followed with the descriptive phrase “the Fed’s preferred measure of inflation,” rose 4.6% annually in March. This represents a drop from the prior month’s revised reading of 4.7% but still disappointed markets as it was still hotter than the 4.5% economist anticipated.

Monthly, economists hit the nail on the head with a 0.3% gain from February. As this measure strips out the far more volatile food and energy price indexes, much of the decline was attributed to a slowdown in spending on goods.

Consumer spending was flat throughout March, but a partial shift in spending from goods to services takes the cake for driving the Core reading down last month. When we look under the hood a little bit, JPow’s face starts to sweat.

That’s because the underlying drivers of inflation – aka the sh*t that actually matters, like employment cost – continue to annoy the Chairman.

Wage earners saw their pay grow 1.2% for the first quarter, while compensation as a whole gained 4.8% annually. 1.7 jobs remain open for every unemployed American, a clear sign to Powell and his buddies that the labor market remains way too tight and that wage earners are just making way too much money.

According to the Fed, and don’t ask me which hat they pulled this figure out of, 3.5% annual wage growth is the target for consistency with 2% overall inflation. We’re still a long ways off, and while labor costs are moving in the right direction for the Fed, it might not be fast enough.

JPow is kind of like the driver of that lifted Ram truck with the literal sun for headlights that rides you like a piggyback in the middle lane of an otherwise uncrowded highway: he wants things to go faster but isn’t sure if making a move is the right way to do it, so he’ll just watch things closely.

Adding food and energy costs back into the equation, as these are the things we need to, y’know, stay alive in the 21st century, we get a 4.2% annual growth reading and 0.1% for the month of March, the slowest growth since last summer.

That means that food and energy costs are probably slowing faster than most other things you spend money on, at least for now. The indexes for these line items bounce around like Tesla when Cathie Wood opens her mouth, so we’ll see if that can hold true in April.

I just bought an 18-pack of eggs at Harris Teeter for $6.49 compared to the well over $7 they stole from me for the same eggs not too long ago, so fingers crossed we can keep the momentum.

What's Ripe

New York Community Bancorp ($NYCB) ↑ 16.32% ↑

• Stereotyping usually isn’t cool, and on Friday, we learned that it’s definitely not profitable. Turns out not all mid-sized regional banks are the same.
• The Savior of Signature Bank in the first quarter delivered quarterly results much to the liking of Wall Street. Revenue beat estimates while EPS of $0.23/sh came in almost exactly in line with consensus.
• Much more importantly, the company’s banking metrics, like net interest income and margin, topped consensus estimates as well. With that, this bank (despite victimizing itself by taking over toxic assets from the brainless incels that used to run Signature) is now decidedly outperforming the market in 2023, up 23.73% since Jan 1.
• But as you may have noticed, with one particularly erratic regional bank name (*cough* *cough* scroll down *cough*), it seems like anything in this sector can take a complete 180 at literally any second. Just try to keep your seatbelt on.

Restaurants ($BLMN, $BJRI) ↑ 12.60% ↑

• Finally, it seems the world has learned that just because you baked a half-decent sourdough bread does not mean you’re Anthony Bourdain. Time to get back to letting the professionals handle it.
• And that’s exactly what Americans are doing, according to earnings reports from restaurants like these. Owner of the fine dining establishment Outback Steakhouse and others, Bloomin’ Brands’ shares bloomed over 5% on Friday as sales and earnings beat consensus.
• Meanwhile, BJ’s Restaurants, the owner and maker of the world-famous Pizookie, gained over 12.5% on the day for the same reasons – handily beating sales and net income estimates.
• Beats here suggest that despite the spiking costs of food and wages over the past year, obviously a restaurant’s primary cost drivers, demand remains strong, and customers are still willing to shell out nearly 10% more than last year to not have to eat their own slop.

What's Rotten

First Republic ($FRC) ↓ 43.30% ↓

• Rumors swirl that a surge in patients admitted to ERs across the country for neck injuries have had just one thing in common: they own First Republic shares.
• The diagnosis isn’t difficult for the doctors or these shareholders. The whiplash spread across their investor base has been almost exclusively driven by Mr. Market’s ever-fickle feelings about how likely a save is from the U.S. government, state government(s), or Jamie Dimon / Warren Buffett.
• Based on Friday’s performance, you can see how that’s going. As I write this at 3:03 pm on Saturday afternoon, the FDIC has just made its intentions clear to take over the bank as the company apparently wasn’t hot enough for Jamie or Warren to swipe right.
• By the time you read this, formal announcements could already have been made, but shareholders are dying for something by 9:30 am ET at the latest.

Snap Inc ($SNAP) ↓ 17.05% ↓

• Snap Inc apparently tried to snap its own neck in half to close out last week, losing over 17% on Wall Street’s realization that digital ads are not yet confirmed back.
• Although Meta showed growth in this segment, Snapchat maker Snap Inc saw a continued revenue decline on an annual basis and failed to cross the $1bn sales mark in Q1. Amid that revenue decline, Snapchat users grew 15% to 383mn, emphasizing just how lousy the digital ad market still is for anyone that isn’t named Facebook, Google, or Amazon.
• Maybe executives should just ask the weird MyAI thing Snapchat forced upon users in the last few weeks how to stop sucking. Shares are already down 70.5% over the past year, so it’s not like they have much to lose.

Thought Banana

Oil Majors = Profit Majors

We’ve heard plenty of heckling from the benches of the U.S. Congress over oil companies making what they deem to be just way too much money. Personally, it doesn’t look like shareholders have a problem with it.

The world’s second and third largest oil companies by market cap, Exxon Mobil and Chevron (behind the $2tn Saudi Aramco), reported earnings last week that’ll make a grown man cry – tears of joy, that is, as long as they hold shares.

Exxon managed to more than double its net income on a GAAP basis from $5.5bn in Q1 of last year to $11.4bn in 2023. Demand for energy products from American majors has ballooned over the past year (for hopefully obvious reasons), allowing Exxon to rake in the most it ever has in a quarter despite falling oil prices and a $200mn windfall tax from the EU.

To make Elizabeth Warren’s blood boil even more, the company maintained share repurchases at $4.5bn and is on track to continue with its plan for $17.5bn for the fiscal year.

But Exxon wasn’t alone. Its friend and chief competitor in the U.S., Chevron, also reported an earnings beat of $6.7bn, just about 3% growth from the same period last year.

The primary difference comes from drastic production increases at Exxon, growing more than 300,000 barrels per day, according to quarterly statements. New investments in places like the Permian basis drove the growth, but damn 300,000 barrels per day is ~1.5% of daily U.S. demand – absurd growth for such a short time period.

Despite volatile energy prices and a whole lotta hate, oil companies simply just keep printing. That said, someone should probably go check on Greta Thunberg…something tells me she won’t like what she’s reading.

The big question: With the green energy subsidies governments around the world are releasing in all kinds of forms, how long can oil majors keep the momentum going? How would a Spring offensive in Ukraine change things for these companies in the second quarter?

Banana Brain Teaser

Friday — Lives without a body, hears without ears, speaks without a mouth, to which the air alone gives birth. What is it?

Echo.

Today — It’s 100 bananas off the Real Estate Modeling Course for the first 3 correct respondents. LFG!

What number do you get when you multiply all of the numbers on a telephone's number pad?

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

Wise Investor Says

“The more you learn, the more you earn.” — Warren Buffett

Happy Investing,

Patrick & The Daily Peel Team

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