July 28, 2023 | Peel #510

Silver banana goes to...

In this issue of the Peel:

• Dow’s longest-ever winning streak ended yesterday. ECB also hiked rates for the ninth time, matching their all-time high set in 2001.
• In the current economic landscape, growth is accelerating, inflation is slowing, and Americans are saving more, exceeding economists’ expectations. Meta Platforms and Tilray Brands saw increases, while Chipotle and Southwest Airlines faced decreases in share value.
• McDonald’s Q2 was highlighted by the viral Grimace Shake campaign, which drove strong sales. However, it also raises questions on whether other brands can replicate such a distributed viral marketing campaign successfully.

Market Snapshot

Happy Friday, apes.

Hopefully, your hangover isn’t too bad this morning because we’re about to kill your vibe even more than usual.

It was a sad day for equity markets yesterday, one in which we saw the end of one of the Dow’s longest-ever winning streaks—if the gains continued for one more day, it would’ve set an all-time record going back to 1897 (not a typo).

But, despite the strong GDP numbers and overall solid earnings revealed on the day, the good vibes couldn’t last. Obviously, we can’t have nice things, so further digestion of the GDP figures only spurred fears of further rate hikes, but we won’t know if that’s justified, at least until the next FOMC meeting on September 20th.

Be patient, apes. We’ll be alright.

Let’s get into it.

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Banana Bits

• The ECB went full steam ahead with its ninth rate hike, bringing rates up to tie with their all-time high set in 2001
• The Dow snapped its longest winning streak since 1987 and second-longest since 1897
• Could lower fares suggest a relaxation (finally) in demand for air travel in the U.S.?

Macro Monkey Says

Reces-shun

When I think of “shunning” or being “shunned,” it generally reminds me of my time in the middle school lunchroom. Fortunately, however, that’s not the shunning we’ll talk about today.

This time, we have a $25tn shun on our hands: The U.S. economy appears to be giving a nice, big “f*ck off” to the idea of a looming recession. Let’s take a look.

Yesterday, the Bureau of Economic Analysis (BEA) reported its Advance Estimate on U.S. GDP growth in Q2. According to the preliminary data:

• Real GDP grew at an annualized rate of 2.4% in Q2 (up from 2% in Q1)
• Nominal (aka “current dollar”) GDP grew at a 4.7% annualized rate
• The PCE price index increased 2.6% last quarter vs 4.1% in Q1
• Real disposable personal income grew 2.5% in Q2 vs 8.5% in Q1
• Personal savings rates grew to 4.4% from 4.3% in Q1

"Equities surged ... at yesterday’s open, only to gradually fall back to reality, seemingly on speculation this could trigger further rate hikes."

Immediately on the release, Mr. Market decided it was time to throw a darty to celebrate. Equities surged (for the most part) at yesterday’s open, only to gradually fall back to reality, seemingly on speculation this could trigger further rate hikes.

But, based on the above data and more, they may have some damn good reasons to hold, grip, and squeeze all the hope that they can.

In headline terms, the big takeaways from this morning’s report were 1) Growth is accelerating, 2) Inflation is slowing, and 3) Americans are saving (just a bit) more. But not only are those occurring, but they’re also occurring in excess—and in some instances, well in excess—of economist expectations.

GDP growth was only anticipated to sit around 2% flat for the quarter. However, thanks to strong consumer spending fueled by a tight labor market that recently drove wages and salary increases at a rate faster than inflation, we managed to topple that estimate.

That’s great and all, but obviously, no one cares about what actually happened, just what’s going to happen, and we think (more like hope) recent trends can help answer that.

Remember that whole “monetary policy works on a lag” that Fed Chair JPow and your equally boring Econ 101 professor taught you? This is where that starts to come into play.

We can see it in the data already. Business and residential investment have slowed all year thanks to high rates increasing borrowing costs on purchases of big-ticket goods, things like washing machines for you and a new crane for the construction company. With rates continuing to accelerate and with no clear path forward, it would be quite a shock to see GDP growth get any major help from these items.

"Business and residential investment have slowed all year thanks to high rates increasing borrowing costs on purchases of big-ticket goods ..."

Still, consumers and businesses alike are growing more optimistic. Declining inflation (and specifically, gas and grocery prices) tends to soothe the macro-minded concerns of consumers.

Meanwhile, the incredible amount of fiscal spending in the form of the CHIPS act, IRA, infrastructure bill, and others are contributing to both real and expected growth trajectories as well.

All in all, we managed to pass this check-up with near-flying colors. Like a 42-year-old man that can still run a 7-minute mile, we’re doing alright—as long as we don’t tear our ACLs or get hit by a bus anytime soon (fingers crossed).

What's Ripe

Meta Platforms (META) ↑ 4.40% ↑

• Despite the fact that the only metaverse in existence 21 months after Facebook’s “Meta” pivot remains in Zuckerberg’s pasty head, shares in Meta are doing just fine. Sure, a lot of that is because of how horrendously they were doing last year, but these Q2 earnings results that just dropped had something to say as well. The Headline? Efficiency has proven effective.
• Meta managed to beat on both the top and bottom line in Q2 of this “Year of Efficiency” that is 2023. EPS of $2.98/sh on $32bn in revenue topped estimates for $2.92/sh on 31.1bn, largely thanks to recent rebounds in the digital ad market while all this cost-cutting (aka, firing) was going on.
• Moreover, what really got the people goin’ was the expansion of Q3 guidance to well above Wall Street’s expectations. Now, we’ll just wait and see if they can deliver.

Tilray Brands (TLRY) ↑ 10.88% ↑

• Sure, yesterday’s almost 11% gain was great, but it’s the 2-day nearly 30% rise in Tilray shares that has us wondering how we can get as high as the stock.
• Canadian “cannabis-lifestyle” and CPG company Tilray Brands has probably not re-entered your portfolio or your mind since the 99% decline (that it’s still in) initially began. But, after Wednesday’s solid earnings number, maybe it’s time to forget about forgetting about weed.
• The company posted a narrower-than-expected loss in Q2 on a 20% beat in sales, pulling in just over $184mn. Closing the crucial acquisition of Canadian rival HEXO helped drive this, but almost nothing matters besides U.S. regulation for these names.
• And, on that front, we sadly have nothing but nothing to report. But, hey, if you’re a shareholder in Cali or Mass or something, you can at least smoke the company’s products to take the pain away and pad next quarter’s revenue at the same time. That’s killing two birds at once if I’ve ever seen it.

What's Rotten

Chipotle Mexican Grill (CMG) ↓ 9.81% ↓

• Clearly, analysts haven’t wanted a burrito in a hot minute after looking at Chipotle shares on Thursday.
• Not only are we already upset that you practically need to remortgage the house in order to buy a share of this nearly (and formerly) $2,000 stock, but Chipotle managed to miss sales targets, raking in only $2.51bn vs. $2.53bn expected.
• Chipotle still beat on earnings, but the rest of the income statement is subject to the wild swings of annual price changes of the restaurant’s food costs that we’ve seen. Moreover, shares have already boomed over 52% YTD by Wednesday’s close, so maybe this thing was due for some profit-taking.

Southwest Airlines (LUV) ↓ 8.94% ↓

• Investors were far from LUVing Southwest Airlines on Thursday, proving that no matter how well you did, no one cares one bit.
• Exhibit A: Southwest delivered record quarterly revenue of $7bn while going from a net loss of $0.27/sh in Q1 to a $1.18/sh profit in Q2. Shares fell nearly 10% as a result. Don’t you love how sane and rational Mr. Market is???
• Anyway, the sh*t hit the fan when you looked into the why and the what. For starters, unit revenue declines of 8.3%, along with 12.1% growth in OpEx, suggest a potential margin-squeezing trend ahead. Moreover, available seat miles jumped 14.1%, implying monetization difficulties with this increased traffic.
• Unit revenue is expected to decline another 3-7% in Q3, too, all but confirming the above fears unless the record-setting demand for air travel continues. “Fingers crossed!” seems like their best strategy.

Thought Banana

Earnings Spotlight: A Grim(ace) Reality

Usually, it’s Ronald McDonald that steals the spotlight when it comes to his namesake restaurant. However, last quarter, his best friend Grimace undeniably became the main character.

You saw the videos. You know what was going on. You either loved it or hated it, but the (in)famous Grimace Shake defined McDonald’s Q2.

The company behind those beautiful Golden Arches managed to beat on both the top and bottom line it reported Thursday morning, earning $3.17/sh on $6.5bn in sales vs the $2.79/sh on $6.27bn expected.

In a period with hectic food costs (to say the least, remember Chipotle above?), the franchise of all franchises managed to make it work. Much of that, fortunately, or unfortunately, was due to mostly a stroke of luck around a ridiculously overpriced milkshake.

"Much of that ... was due to mostly a stroke of luck around a ridiculously overpriced milkshake."

The “Grimace Shake” was, as you know and likely tasted, a berry-flavored milkshake concocted as a tribute to McDonaldland commercial character and best friend of Ronald McDonald, Grimace. On their call, execs shouted out this shake as one of the primary drivers behind the outperformance of same-store sales to grow 10.3% for the quarter in the U.S.

But as we said, it was almost entirely a stroke of luck. This video, posted to TikTok on June 13th (the day after the shake was released), lit off an absolute firestorm of videos mimicking the OG, creating easily the most viral trend of the month. And McDonald’s had nothing to do with it.

To be fair, McDanks did lean into the Grimace vibe by having him run the company’s social media account from the release date until it was discontinued on June 29th. But, they didn’t actually even acknowledge the trend until two days prior to the sale’s end with this Tweet (or are they called Xs now?) on June 27th.

"Basically, McDonald’s unintentionally outsourced their entire marketing and ad production teams to TikTok stars."

Once again, this epitomizes the idea of companies relying on pop culture and the current thing to generate a piece of viral marketing without actually incurring any additional costs. Basically, McDonald’s unintentionally outsourced their entire marketing and ad production teams to TikTok stars. Doesn’t get much better.

The gold mine for any CMO in this day and age has to be how they can create the next Grimace Shake campaign. Got any bright ideas?

The big question: Can McDonald’s and/or other consumer-facing brands crack the code to a distributed viral marketing campaign? If so, what product(s) could be next?

Banana Brain Teaser

Yesterday — What is the lowest whole number possible that, when spelled out in English, includes every vowel and the letter Y at least once? Exclude numbers below zero.

1025. The first number that the letter A appears in is one thousand, so you know you have to start there. Starting at one thousand, the first number that includes the letter Y is one thousand twenty. Then the next number that includes the letter I is one thousand twenty-five which includes all other vowels too.

Today — I am more microscopic than microscopic; I am more minuscule than minuscule. I am smaller than small and I am tinier than tiny. Yet surprisingly, I am still big. 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

“In the world of business, the people who are most successful are those who are doing what they love.” — Warren Buffett

Happy Investing,

Patrick & The Daily Peel Team

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