Make Cents, Not Sense | The Daily Peel | 1/31/22

Jan 31, 2023 | Peel #389


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Market Snapshot

Happy Tuesday, apes.

Like getting punched in the face and hitting your head off the railing on the way down, equity markets were determined to make Monday way worse than it already is.

Stocks were down-tremendous across the board as investors batten down the hatches for the myriad of possible utterances from JPow and big tech earnings calls later this week.

Yields still managed to gain while the dollar continued into a mild slide to kick off the week and (almost) close out the month.

Only one day left of the first month of 2023; how’s your year starting?

Let’s get into it.


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Banana Bits

  • At this point, Congress should just combine with the WWE. I mean, this debt-ceiling showdown is a better cage match than I’ve ever seen
  • It’s a Big week for Big earnings in Big tech. I don’t want to get too meta, but this week could snap a streak in tech names that’s been better than eating an apple a day
  • Unlike most, this Bird hasn’t succumbed to avian flu just yet as it makes its first interest payment since a little-known billionaire bought them out
  • You gotta love democratic capitalism. Notorious sandwich chef and scam artist Billy McFarland is back, and he’s only charging $1,800/hr

Macro Monkey Says

PCE Says PeaCE to Inflation

Fingers crossed, I don’t deeply regret that section title a few months (or weeks) from now…

But hey, we’ll run with it. JPow and the gang begin their first of 8 FOMC meetings of 2023 later today, and you better believe this is THE most important one ever (until the next one, of course).

To celebrate the first macro Holiday of 2023, let’s check in on inflation. To close out last week, the Bureau of Economic Analysis blessed us with the Fed’s preferred measure of inflation, known as the Core Personal Consumption Expenditure (PCE) Price Index, or Core PCE deflator if you want to sound cool and smart.

To sum it up / dumb it down (whichever you prefer), it’s basically CPI stripped of the volatility of energy and food commodity prices. Yes, those are arguably the two most important expenses to Americans, but they also just so happen to be among the most volatile. After all, we’re not here to make sense; we’re here to make cents.

Core PCE came in smack-dab in line with economists’ expectations, posting price accelerations of 4.4% annually for the month of December. That’s the lowest level since wayyyy back in October 2021 and a 0.3% fall from November’s 4.7%. December’s numbers also mark 3-months in a row of decline. That’s officially a streak, baby!!

Unlike your career, we appear to be moving in the right direction. Following the reports, CME’s goated Fed Watch tool, which tracks market-implied probabilities for the size of the next rate hike, spiked to nearly 100% odds of a measly little 25 bps hike. This is almost definitely what was already priced in any way, but it’s nice to see the confirmation.

But as always, Mr. Market still has something to be afraid of. Just as we get inflation to maybe, hopefully, start to subside, investors became trepidatious over the now suddenly increased likelihood of a 2023 recession. Seemingly on a daily basis, depending on the data released from D.C., the market flip-flops between soft landing and outright recession as the year’s baseline expectation. Isn’t investing fun?

As your net worth hangs in the balance, the world will be hanging on every last syllable and its associated tone coming from the old, gray mouth of Jerome Powell. Driving this heightened fear is something we’ve touched on before: monetary policy lags.

The Fed’s tools to regulate the economy are okay, but they’re not the best. It’s like hanging drywall with nails rather than screws…it kinda works, but we can do better.

Raising rates is no different. The cost of money becomes elevated, drying up liquidity, which acts almost like a Butterfly effect and takes its sweet time to spread throughout the economy.

Repo rates feel the effects immediately, but a home remodeler in South Dakota feels the effects much slower as his customers slowly become more and more apprehensive about renovations as their borrowing rates rise.

The elasticity of the cost of money causes a chain reaction that slows growth like an airplane after landing rather than you slamming on the brakes inches in front of a red light.

This is the real trickle-down economics, and it’s scaring Mr. Market. The worst part is we can’t know if we’ve gone too far until we do. But 2022 saw the fastest rise in rates in US history, so maybe Mr. Market is right to be a bit skittish.

What's Ripe

Carvana ($CVNA) ↑ 28.70% ↑

  • Only slightly less infuriating than Bed, Bath, and Bankrupt, this dumpster fire of a stock has been absolutely ripping lately. But this one might actually make sense.
  • And it’s not because of anything the company itself did, but the used car market is heading onto an on-ramp, it seems. Supply for used cars has started to drop precipitously recently as cost-cutting Americans begin to focus more on saving on used vehicles than paying $20k more for a new one just to have Apple CarPlay.
  • Supply down, price up = good for used-car dealer Carvana’s margins. Tip of the cap to ‘em because, well, let’s just say there’s a Carvana building right across from my apartment, and despite dropping almost 99% from the peak, the lights never went out.

SoFi Technologies ($SOFI) ↑ 12.46% ↑

  • Shareholders couldn’t have gotten a better Q4 earnings report from SoFi even if the company committed fraud (maybe they did, idk). It’s a dream come true for the darling of FinTech.
  • Yeah, it was that good. Not only were revenues up 60% YoY in Q4, but deposits on checking & savings accounts surged 46% on the year, with a whopping 88% of those being linked to direct deposit plans.
  • Net losses fell 34% for the year and 64% for the quarter, too. But as you all know, in this economy, it’s all about what the company says about the future. While some banks zig, SoFi plans to zag itself to profitability in 2023, according to CEO Anthony Noto.
  • Now, just imagine where they could be if they did spen—excuse me, *waste $625mn on the naming rates to a stadium home to two of the middest teams in football

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What's Rotten

Tesla ($TSLA) ↓ 6.32% ↓

  • Damnit, apes, I can only make so many jokes about the same company. Can we pump and dump some new names once in a while??
  • Fine, whatever, we’ll make it work. After speeding up and to the right almost all year long, Tesla shares slammed on the brakes yesterday with an over 6% loss as other EV makers once again copy its every move.
  • Rivals—well, really just Ford in particular—have started to crash the price of the EV lines as well, hoping to stay competitive with the recently sticker-slashed Tesla Model Y.
  • The price war for the lowest-end of the EV market is officially plugged in and charging faster than an Apple 20W. It’s on like a light switch.

Alibaba ($BABA) ↓ 6.07% ↓

  • Speculation at its finest. Sometimes you really gotta admire the pure ignorance of people on Wall Street (obviously, you and me excluded, ofc).
  • Alibaba shares dumped heavy to start the week as rumors swirled that the company’s planned expansion to an office in Singapore is actually the first step to the e-commerce giant moving its HQ out of mainland China.
  • Alibaba came out and categorically denied these rumors. Did anyone care? Why do I even ask…

Data peel

data peel


Thought Banana

Maybe Cats Do Have 9 Lives…

Or at least Cathie Wood does. I wouldn’t blame you if you needed Dramamine on more than one occasion after watching the performance of Ark’s funds over the last 2 years, but it looks like Cathie is climbing again.

Maybe climbing isn’t the right word. Ms. Wood’s flagship fund, the Ark Innovation ETF ($ARKK), is on pace for its best one-month performance of all time. No, I’m not kidding.

From releasing an ad where they literally bully people for seeking cash-flow-producing assets to becoming the laughing stock of FinTwit by late 2022, Cathie Wood and Ark Investments really have seen it all.

But now, as January kicks off the new year, it looks like Icarus of Innovation Investing is back in the sunlight (let’s not get too close this time).

Returning over 26% as of close yesterday, January’s returns for $ARKK currently sit above that of the fund’s best ever before, being April 2020’s 25% run.

Of course, part of it is attributable to beta, or broad market returns. Ark, however, specializes in high-beta names that tend to dramatically outperform on up days and underperform on down days. I don’t need to remind you that 2023 has seen a whole lot of the former.

But it can’t all be beta, right? After all, the fund’s top holdings, like Roku and Tesla, are some of the top-performing stocks of the year so far, gaining 33.1% and 55.2% YTD, respectively.

Now, the big debate on Wall Street all month long has been whether this surge we’ve seen in risk assets is another head-fake like last Summer or if it could actually be here to stay. Most analysts seem to smell a junk rally, but it’s important to keep implicit human biases in mind.

Humans experience sad or negative emotions much more strongly than positive ones. This helped on the Savannah as a death-aversion tactic when getting eaten by a lion was a valid and all-too-possible outcome. Nowadays, it comes in less handy, but we’re sadly not yet all that different from our Great(^100) Grandparents.

As a result, it is not a stretch to say that it’s human nature to be averse to a rally in equities coming off the back of one of the worst years in decades. Moreover, reputation risk becomes top of mind in a time like this, as no analyst wants to be the first bull running down Wall Street.

These two factors can help explain all the doubt around this risk rally, but for all we know, they could be exactly right. Maybe we’ve got more trouble on the horizon, but for now, Cathie Wood and the Ark team are back on top (emphasis on “for now”).

The big question: Can Cathie Wood reclaim her crown in 2023? Is the January rally going to last? Are investors too hard-wired to their caveman brains to realize a good thing when they see it?

Banana Brain Teaser

Yesterday — A sundial has the fewest moving parts of any timepiece. Which has the most?

An hourglass.

Today — It’s 100 bananas off the PE Master Package for the first 15 correct respondents. LFG!

There is a magical waffle in a storage locker. Every minute, each waffle undergoes mitosis and turns into two waffles. At the end of an hour, the storage locker is full of waffles. At what minute is the storage locker 25% full of waffles?

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

Wise Investor Says

“Markets look a lot less efficient from the banks of the Hudson than from the banks of the Charles.” — Fischer Black

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