Need a Drink | The Daily Peel | 5/15/2023

May 15, 2023 | Peel #461

Market Snapshot

Happy Monday, apes.

Hope your weekend was almost as good as that of the Heat, the Lakers, and the Celtics, who all joined the already-made-it Denver Nuggets in the NBA conference finals. Let’s go C’s, baby!

Equity traders def did not have that good of a weekend, with markets going to bed in a bad mood on Friday. The rotation into “safe” names like the giants of big tech that control our every waking second stopped for the day, notably aside from Google, while positive market breadth was far more present than earlier this week. U.S. markets mostly fell to close the week, with the Nasdaq’s 0.35% loss leading the way.

Currency markets held on tight to an actual-safety trade with assets like the U.S. Dollar steaming higher and yields. Treasuries, as they like to do, added some confusion into Friday’s cocktail as yields gained across the board as the 2-year returned to 4% and could suggest a shifting sentiment in the bond market’s belief in whether or not JPow has the stones to keep rates elevated. We’ll have our answer someday, but for now…

Let’s get into it.

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Banana Bits

• Seeing how much fun the U.S. had after its last presidential election, Turkey is getting in on the crazy as this weekend’s tense presidential election looks to be heading toward a runoff
• Google finally decided to Google itself and learned that it has a reputation of being one of the most tech-advanced companies in the world, leading the firm to finally make its chatbot competitive with, or maybe even better than, ChatGPT
• We haven’t seen the legislation to defund the IRS hit the House floor (yet), but Americans are playing a little vigilante justice anyway and driving down tax receipts
• Linda Yaccarino is choosing violence in leaving her role at the sane, solidified NBC Universal and moving to the second least enviable job in the world (behind JPow’s) and will now work for Elon Musk as the CEO of Twitter

Macro Monkey Says

(dis)Inflation Nation

It’s Monday morning. We’re in the midst of a debt ceiling crisis. Our top two Presidential candidates were both alive before the Korean and Cold Wars even started, everyone expects a recession, and Hasbulla is under house arrest. We could really use some good news.

Fortunately, we did get some kind of good news last week. Because macro is basically just the nerdy version of astrology, any data is rarely all good or all bad. But, if we’re talking inflation being brought down as our main goal, boy, do I have some good news for you.

On Friday, we learned that wholesale prices paid by producers grew slower than expected in April, gaining just 0.2% in April and 2.3% annually, the slowest annual growth posted since January 2021.

And, to be honest, most of that growth is all your fault. Portfolio management services, aka the sh*t most of you apes spend too much time doing, gained 4.1% for the month and drove nearly 1/3rd of the monthly increase all on its own. Them greedy financiers also took a >30% annual increase in brokerage services and investment advice, although that figure is not seasonally adjusted. With markets as boring as this, gotta put meat on the table somehow, I guess.

Loan services saw costs increase as well, likely directly related to the rate hikes and decline in credit availability JPow has bestowed. And rounding out the main contributors, alcohol wholesaling costs shot up as well as when your portfolio manager charges you 4.1% more and still loses money, you definitely deserve a drink (or 7).

Long-distance transportation and a massive 38% plunge in the cost of eggs did most of the heavy lifting to actually slow that growth you people reading this were desperately trying to jack up.

Just two days prior, we got the release of the Bank of America Consumer Checkpoint. Unlike official data primarily guiding our governing overlords, this is actual real-time, non-survey data that can actually give us a reliable clue about what’s going on.

Consumer spending, measured by household card spending, pulled back once again in April, growing at a nominal 0.3% monthly and actually falling by 1.2% annually for the first YoY decline since February 2021. Other highlights include:

• Growth in spending on services slowed to just 0.9%
• Workers earnings over $125k/yr saw wages decline 1.3% on a 3-month SMA
• Savings account balances remain at least >40% of that of 2019, on average
• Higher-income spending growth has slowed more than the middle and lower-income cohorts

It might not seem like it, but to the Fed, this is welcome news. A decline in consumer spending for the U.S. economy is like the Denver Nuggets paying without Nikola Jokic; we can keep moving, but it’s gonna be a lot less pretty.

But, the whole goal with beating the sh*t out of inflation is to do exactly that: slow the economy by slowing spending and demand for money, but hopefully not by so much that we enter a recession (fingers crossed). Moreover, declines in wages, especially at the top of the income scale, are kind of in a goldilocks position right now as lower-income earners tend to spend more of what they earn on goods and services, thus contributing more to the velocity of money that drives the C in the GDP equation (of which C makes up ~2/3rd in the U.S.)

Plus, that average uptick in savings, likely due to tax returns, is a massive buffer to the kind of crippling consumer profile that generally leads a recession.

So, while this definitely isn’t bad news, and JPow probably played his guitar a little extra this weekend on the data, it’s moving in a direction that markets see (for now) to be scary. Either the Fed nailed it, which is arguably more of a miracle than walking on water, or we could enter a recession in the not-so-far future.

As always, place your bets now, apes.

What's Ripe

First Solar ($FSLR) ↑ 26.48% ↑

• Following in the footsteps of the energy source for its products, First Solar shares rose early on Friday and held strong for the day as friends from both sides of the pond hooked the company up with some sweet deals.
• Stateside, the U.S. continues to do whatever it possibly can to piss off its European friends. Basically, the treasury released Inflation Reduction Act-based rules allowing U.S.-based solar manufacturers to get even more tax credits than anticipated, hyping up all their shareholders with a CPA.
• After a quick trip over the Atlantic, we learned that First Solar would be purchasing thin filmmaker Evolar for a chump change of $38mn at close. It’s a nice technical upgrade, and investors so far have just smiled and bought, apparently unbothered by the price tag.
• Despite First Solar trying to spin this as a move to benefit the whole industry, other sun-based energy names like Sunrun had an overcast day and couldn’t get traders powered up. We’ll see how those traders are feeling now soon enough.

Icahn Enterprises ($IEP) ↑ 11.85% ↑

• Has anyone checked on Carl Icahn’s health? Something tells me an 87-year-old’s cardiovascular system isn’t built for billion-dollar share price fluctuations like this.
• Nevertheless, if he’s still alive, he’s smiling after Friday. Shares in the latest company to enter stock serial killer Hindenburg’s iron sights recouped a decent amount of their recent losses to close the week as optimistic traders see this as free money provided Hindenburg’s allegations aren’t entirely true.
• Now, that’s a big “if.” I don’t have to explain to you all how a Democratic executive branch would probably love the chance to bring down the hammer on an entrenched Wall Street Icahn like Icahn Enterprises, but we’re still in “wait and see” time for now.

What's Rotten

Robinhood ($HOOD) ↓ 9.43% ↓

• Speaking of poor cardiovascular health, college dorm room and parents’ basement stock traders have been given an excuse to spend even more time away from their family, friends, and fresh air.
• Because 6.5 hours of schizophrenic market fluctuations 5 days a week wasn’t even close to enough, Robinhood is now going full-degen and is allowing trading 24/5 from Sunday at 8 pm to Friday at 8 pm. Initially, investors were loving this and the firm’s quarterly numbers, but one look at Friday’s chart confirms a reversal in sentiment.
• Traders seem to have gotten over their initial bliss of getting an excuse to spend more time away from their spouse(s) and are a little less hyped about the firm bringing us an extra 87.5 hours of action per week. Regardless, it’s coming to all users of the platform as soon as next month. Can’t wait to see how this one goes!

Rivian ($RIVN) ↓ 6.72% ↓

• Another name used to wild fluctuations in investor hype, Rivian saw shares crater on Friday after riding what had felt like the company’s first mostly positive week since going public in November 2021.
• Keep in mind that IPO was exactly one week prior to the Nasdaq posting its all-time high. To say that Rivian trades in line with almost nothing but sentiment is an understatement, as this thing probably has a 1.0 correlation with Elon Musk’s tweets or something.
• After reporting solid earnings numbers that we discussed early last week, shareholders were starting to build up a positive outlook on this name. But, after a few days of consideration, it seems like that theory is gone with the wind, and nobody seems to give a damn. Don’t worry; you’ll get an update by 9:30 am at the latest.

Thought Banana

Druck Calls Out the Drunks

No, the drunks in question are not exclusive to the USC students who listened to his presentation firsthand, but the billionaire investor and right-hand man of George Soros had some bones to pick earlier this month

Stanley Druckenmiller is one of the most well-respected investors, money managers, and, most of all, macro traders of our generation. He helped his boy George Soros break some currencies here and there while managing Duquesne Capital to become one of the best-performing hedge funds of all over the past few decades.

Nowadays, Stan likes to spend his time donating money, giving speeches, and scaring the sh*t out of capital allocators all over the world. In the latest edition, Druckenmiller gave a keynote address at the USC Marshall School of Business with words worrying enough to make you want to scrap plans for having kids, move out of the country (or off the planet, preferably), or maybe a combination of both.

The primary takeaway? Things do not look good for the U.S. in the short, intermediate, or long term. Some of the highlights included:

• Discussing his only “high conviction” trade at the moment, which, comfortingly, is a short against the U.S. Dollar
• Labeling the run-up in USD last year the “biggest miss of [his] career”
• Saying the Fed has made just about every mistake possible in raising rates to fight inflation, always moving too fast or too slow and acting to do too much or too little
• Calling the Ukraine war a “major headwind” for the global economy and the longer it goes on, the more it will distort energy markets and supply chains
• Opining that U.S. equities, despite the correction, are still wildly overvalued and in a “bubble”

But that wasn’t even the scary part. Druck, unlike most people, has what many like to call “f*ck you money,” a nice way of saying you can’t pay the guy off to do or say something he doesn’t want to.

In that regard, he pulled no punches in going after the U.S. government. Druck echoed points made by Ray Dalio in years-ago appearances alleging one major theme: the fiscal recklessness of the federal government has put our nation’s future in a far-too-precarious position and needs to stop right this very second.

The best part of the speech was Druck’s view of the debt ceiling crisis. While he made sure the audience understood his concerns, he likened the current freakout over the crisis to a government putting up storm-surge barriers for incoming 30-foot waves when you have a 500-foot tidal wave 10 miles offshore, with that 500-foot tidal wave being the out-of-control spending we’ve legislated ourselves into.

Basically, the primary concerns are around debt obligations and entitlement spending. Druck and others’ fiscal hawks project that using a 4% rate, the percentage of the U.S. government’s annual budget going solely to interest payments on debt would surge to over 50% before the end of the decade.

Moreover, entitlement programs like social security are already set to expire in the early 2030s if nothing is done, and this increase in the cost of debt servicing will only speed up that process.

In summary, Druck was calling out the drunks in Washington, liquored up on spending and low-interest rates and soon to face a shocking hangover. Unless we can solve the government’s propensity to run massive deficits and barely cover our interest costs, whether it be through spending cuts, higher taxes, or both, Druck says that discussing other issues is like trying to drive a car with no gas.

Moral of the story? Please, dear god, please, pay your taxes.

The big question: Will the U.S. default on its debt next month or ever? Can we expect the kind of Empire-implosion-scale economic event in the next few decades if the U.S. doesn’t right the ship? What does a U.S. meltdown mean for the rest of the world?

Banana Brain Teaser

Friday — If you throw me from the window, I will leave a grieving wife. Bring me back, but in the door, and You'll see someone giving life! What am I?

The letter 'n'.
wiNdow - widow
door - doNor

Today — It’s 100 bananas off the PE Master Package for the first 3 respondents. LFG!

Birbal was jester, counselor, and fool to the great Moghul emperor, Akbar. The villagers loved to talk of Birbal's wisdom and cleverness, and the emperor loved to try to outsmart him. One day Akbar (emperor) drew a line across the floor. "Birbal," he ordered, "you must make this line shorter, but you cannot erase any bit of it." Everyone present thought the emperor had finally outsmarted Birbal. It was clearly an impossible task. Yet within moments the emperor and everyone else present had to agree that Birbal had made the line shorter without erasing any of it. How could this be?

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

Wise Investor Says

“It amazes me how people are often more willing to act based on little or no data than to use data that is a challenge to assemble.” — Robert J. Shiller

Happy Investing,

Patrick & The Daily Peel Team

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