Math Checks Out | The Daily Peel | 3/24/23

Mar 24, 2023 | Peel #426

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Market Snapshot

Happy Friday, apes.

At this point, the Feds must be intentionally trying to confuse us. Markets are acting like Bart Simspon taking a math test, with just no clue what is going on.

And that ripe uncertainty was on full display yesterday. Equities once again rallied at the open, only to close basically flat once again after gradually selling off from 11 am to 3 pm. We closed slightly above the 50-day and equally below the 200-day SMAs for the S&P yesterday, confirming the lack of confirmation in markets.

Treasuries were mildly less erratic on the day, however. Traders bought up US debt as the search for safety continues while probabilities for a no-hike move at the next Fed meeting moved from about 50% all the way up to nearly 70% yesterday.

Let’s get into it.

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Banana Bits

• A day after decisively denying “blanket coverage” to all US bank deposits, Yellen pivots the message once again by saying, “These are tools we could use again for an institution of any size…” Thanks, JYell!
• Maybe somebody does want SVB after all; at least, that’s what the FDIC is hoping on a wing and a prayer as they prepare for a sale by Monday
• Drafted into the MLB and soon-to-be drafted into the NFL Hall of Fame, the GOAT Tom Brady proves he’s still a three-sport athlete by buying a piece of the WNBA’s reigning champs, the Las Vegas Aces
• Caught Red Handed: CNBC calls out Binance and its employees for just flat-out telling citizens of China, where crypto of all kinds has been illegal since 2021, how to access and use Binance from the country

Macro Monkey Says

Could Ruin Everything

That’s what CRE stands for in finance, right?

Oh, never mind - my editor tells me it’s actually “commercial real estate.” I guess we can roll with that.

This month, for the first time since ‘Nam, inflation was no longer the greatest fear among investors, according to Bank of America’s monthly fund manager survey. As if I even need to say it, but the new biggest fear is officially the threat of a looming “credit crunch.”

For a nation whose national pastime is spending money, particularly with credit, a reduction in loan prevalence is an absolute nightmare scenario. Let’s see how bad it could get.

CRE, or commercial real estate, is estimated to be a $20tn asset class powered by over $5tn in CRE loans. According to JPMC data, as reported by the FT, about 70% of CRE loans are issued by small and/or medium-sized banks. At the same time, these loans take up ~43% of the loan book for those smaller banks while making up just 13% on average for the big dawgs.

Remember the whole WFH home thing? You might not if you’re a 20-something working in finance, but for all the civilians out there, the “trend” is alive and well.

Further, these smaller banks don’t play like the big boys. Those CRE loans making up a fat chunk of their balance sheets don’t often get securitized and sold off their balance sheet at these smaller lenders, meaning they alone carry loss exposure. Compared to treasury rates, which have utterly ripped higher in the last year, the spread on commercial mortgage-backed security (CMBS) loans has absolutely mooned.

We could go on and on about how precarious this seems, but I think we all get the point.

The reasoning is self-evident, so it’s probably no surprise to hear that fear is abounding among the “the world is ending!” types. The cards are stacked against them, but given time and increased certainty, the CRE market doesn’t have to commit seppuku immediately.

For starters, the primary concerns here are twofold, including:

• Borrowers stop paying back their loans and defaults spike, and
• LTV ratios get so high that credit freezes and defaults spike

Basically, CRE as an industry is levered to the you-know-whats, meaning that the combinations of rocketing rates and vast vacancies create the exact cocktail that lenders, borrowers, and investors in the market wanted the least.

Many expect CRE to be this massive crash-inducing another GFC-like event, but considering the structure of the industry, we might have a little more breathing room than we think. For starters, these aren’t short-term loans that need to be paid back in full or rolled into a sky-high rate immediately; these loans are generally made on at least a 5-10 year bases, often up to as much as 20 years. Last I checked, it’s not like there was a massive surge in CRE loan origination in 2013.

As they say, time heals all wounds, and things are rarely as bad (or as good) as they seem. Consumer credit drying up, on the other hand, could still be a bunker-building or grave-digging fear, but luckily that data takes time to reliably measure.

We already witnessed a slowdown in credit build in the last quarter of 2022, so as Q1 rolls to a close, we’ll soon see if this trend continues. Not much to worry about, though; it’s not like consumer spending is at least 2/3rd of GDP, with 50% of it coming from revolving credit facilities…right??

What's Ripe

Accenture ($ACN) ↑ 7.26% ↑

• Following in the footsteps of *checks notes* literally every other company in the world this year, consulting firm Accenture posted a triple-threat earnings day that got investors jumpin’.
• EPS of $2.69 on $15.81bn in top line sales beat the hell out of estimates. But, what got investors most excited, of course, was the fact that about 19,000 (former) Accenture employees are getting canned.
• Wall Street obviously loves when people’s livelihoods are taken away, especially in a rising rate environment like this. That’s about 2.5% of the company’s workforce, which seemed wrong at first to me, too, but apparently, they have (had) ~738,000 employees before yesterday, so the math checks out.

Regeneron ($REGN) ↑ 6.77% ↑

• For all you vapers out there, yesterday may well go down in vape history as the holiest of holy days, thanks to Sanofi and Regeneron.
• The two European drug developers have been getting after it, trying to find some way to let you all continue to look super dope with your damn Elf Bars without getting one of the myriad diseases vaping can (will) expedite.
• In a phase 3 trial of 939 current and former smokers, the two companies showed a 30% reduction in moderate to severe cases of COPD, aka “smoker’s lung.” So now, not only is vaping super f*ckin’ cool, it’s healthy, too. JK! Nobody is saying that.
• I don’t wanna cherry-pick quotes or anything, but some reports did say that the study suggested: “current or former smokers also showed improvements in lung function, quality of life and respiratory symptoms.” Lesson of the day? Put down that vape and go grab a cigarette for your health.

What's Rotten

Block ($SQ) ↓ 14.82% ↓

• Little did they know it, but Block (formerly Square) has been in the sniper scope of at least one notorious short seller for the past two years. They promised it would be big, and, we can confirm, they weren’t cappin’.
• Hindenburg Research has already brutalized one large, globally significant company this year, so why not another? The short seller revealed its position betting against Block Inc yesterday in a ~18,000-word blog post and an infinitely long tweet storm.
• The firm alleges everything from facilitating criminal activity to shotty accounting to straight up fraud. It was damning, to say the least, if true, of course, but the market didn’t wait around for proof one way or another.
• Shares plummeted nearly 15% on the day despite Block trying to throw some shade back. The market didn’t care one bit, sensible in an environment like this when even a damn checking account is viewed as a risky investment. Stay tuned.

Chewy ($CHWY) ↓ 7.49% ↓

• At this point, I would’ve thought a downgrade from Deutsche Bank would be bullish for a stock, but I guess they haven’t gone full CS just yet.
• Prior to that downgrade yesterday, online pet retailer Chewy reported some surprisingly strong numbers for its latest quarter. From a loss of $0.11/sh over the same period last year, Chewy turned that loss into sauce by getting last quarter’s income up to an actually positive $0.16/sh.
• Meanwhile, margins improved, sales beat estimates, and guidance was pretty not-too-bad. Still, Deutsche bank did not f*ck with this at all, slapping a downgrade on the stock and calling for growth to be “tepid at best.”
• The haters managed to tank shares, leading to Chewy’s 7.5% fall.

Thought Banana

The Clock is Tiking

But after yesterday, it may not be Toking for much longer.

For over 5-hours yesterday, Shou Zi Chew easily stole the title for “the least enviable person in the world” right from JPow’s hands. Watching the testimony felt like watching the 5th-grade troublemaker get a stern talking to the day after a substitute teacher left a bad note about his behavior.

But in this case, Congress had a lot more than just one note to give to Chew.

Honestly, this whole hearing might as well not have even occurred. Nothing was learned that we didn’t already know, except for maybe the fact that the Federal government has apparently already made up its mind about the eventual outcome in this case.

But in some sense, we did already know that. The notable element here was just how united the Representatives were in their disdain for the app for a lot of the same reasons as well. Essentially, the allegations levied against TikTok boil down to the following:

• Corrupting the youth (spreading anti-US propaganda)
• Espionage (giving the CCP a direct line to user data)
• Intentionally lowering the IQ of users (popularizing cringe dances and things like the “blackout challenge”) and
• Making too much money not in the United States

Without commenting on the validity of those allegations, they’re almost definitely all true.

Chew has laid low since taking the helm at TikTok two years ago. To be honest, I had to Google “TikTok CEO” again before writing this. But despite his lack of fame, his app is absolutely all the rage. To prove that point, it should be noted that Chew was likened to the man, the myth, the legend of Congressional testimonies himself: Mr. Mark Zuckerberg.

The Reps kept pressing Chew for “dodging questions,” which he clearly was at times, but at other times, the only thing clear was the lack of basic social media and internet understanding from our amazing legislators.

To no one’s surprise, the testimony was more of the same. As we discussed with JPow’s last testimony, these politicians are at an all-time high in trying to draw up support from their base as we enter the Presidential election season.

Tensions were hot, and you got the sense that not a single lawmaker in the room was cool with letting us continue to scroll TikTok in the US.

PSA: get used to Shorts and Reels; they’re really not that bad. Just whatever you do, please avert your eyes from Snapchat’s Spotlight.

The big question: Is America’s favorite app about to be banned? How will the youth of America mindlessly waste hours on end day in and day out without TikTok? Does this bode well for competitive apps like YouTube, IG, Twitter, Snapchat, and whatever the hell else people use?

Banana Brain Teaser

Yesterday — It cannot be seen, felt, heard, or smelt. It lies behind stars and under hills, and empty holes it fills. It comes first and follows after. Ends life, kills laughter. What is it?

Darkness.

Today — It’s 50 bananas off the Consulting Interview Course for the first 3 correct respondents. LFG!

I have hands that wave you, though I never say goodbye. It's cool for you to be with me, especially when I say HI. What am I?

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

Wise Investor Says

“Buy land. They ain’t making any more of the stuff.” — Will Rogers

Happy Investing,

Patrick & The Daily Peel Team

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