Not All Regional Banks… | The Daily Peel | 4/18/2023

Apr 18, 2023 | Peel #442

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Market Snapshot

Happy Tuesday, apes.

At this point, it’s like the market wants to be boring. Somebody tell JPow to start printing again or something; let’s get the blood flowing again.

Earnings szn is off to a hot start, with bank stocks moving and shaking like they’d never heard of an SVB. Most S&P sectors rose on the day with a post-2 pm rip into the close, powering many. The S&P led the way, but barely as the Big 3 of US indices moved just about in tandem, within a range of ~5bps.

Meanwhile, and almost just in time for the Holiday, the 2-year yield danced briefly above 4.20% as it flirts with a month-long high. The 10-year yield followed a similar trajectory but obviously remains miserably inverted at ~3.6%.

Let’s get into it.

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Banana Bits

• I’m starting to think we should just short all banks that start with ‘S’ as State Street and Schwab see sliding savings subsequent to some scare started by SVB, Signature, and some others
• Tim Cook is a legend, and Apple stays the most badass company on the planet as amid a banking scare, the tech giant comes out with a 4.15% APY savings account… Damn
• And, as if needing another reminder that they are, in fact, not Apple, Google takes a gut punch as Samsung ponders a switch to Bing as the default search engine on their devices
• China’s economy shows that it’s still got it, as the nation adds 4.5% in the first quarter

Macro Monkey Says

New McCarthyism…?

Senator Joseph McCarthy, a Wisconsin Republican who served from 1947-1957, was quite the mover and shaker in Washington back in the day. Overall this guy seemed to be pretty mid (I‘m not a damn historian), but there is one thing for which this guy can never be forgotten: communism.

His outright genetic aversion to communism sowed the seeds for America’s hatred of it. Like Joe, our new McCarthy-branded leader is pretty terrified of one particular thing.

That, of course, is a debt ceiling breach, and House Speaker Kevin McCarthy came out hot on this topic yesterday.

As this story could very well become the defining economic event of the year, or just another last-second vote to avoid destroying the country, it seems worthwhile to revisit. Oh yeah, and the “X Date” – aka the date on which the Treasury can no longer pay its obligations – could be as few as just weeks away.

Anyway, McCarthy came out fired up with a speech that was essentially one long subtweet at Uncle Joe. He condemned what he sees as President Biden and his administration’s unreasonable spending, slinging potentially the hardest-hitting line of the day when he said, “a no-strings-attached debt limit increase cannot pass,” meaning Republicans demand spending restraints and reform to avoid what would certainly be a collapse of the US economy.

Let’s keep in mind some facts (that’s all they are):

• The National Debt sits at $31.7tn, roughly 124% of 2022 GDP
• Government spending is nearing all-time highs as a % of GDP, sitting at 23.7%
• Defense spending is nearing record lows as a %of GDP, hovering around 3%

Taken together, this tells us one thing: discretionary spending has been wildin’.

Let’s be clear because I can feel your political funny bone tingling, but both of the past two administrations have authorized some of the largest spending packages in history. No one’s perfect; we’re all just trying our best (right?).

Basically, McCarthy called for the promise that fiscal discretionary spending slow to 1% per year for the next 10 years without touching entitlement programs like social security and medicare in exchange for House Republicans to agree to a ~1-year lift on the national debt ceiling.

Naturally, volcanoes erupted in response. Republicans in the press are hyperventilating at the prospect of cuts to defense spending to match what Democrats largely view as just as tear-inducing spending on discretionary programs.

The big concession out of the Speaker was the lack of cuts to social security and medicare, which is all too predictable from a guy that’s about to be able to withdraw penalty-free from his IRA(s).

Regardless of whatever bullsh*t these overachieving nepo-babies inevitably stir, everyone expects this to come down in classic American government style – at the absolute last minute. Still, the big fear remains a US debt default, which some say is not only a last-cent scenario but literally unconstitutional.

See, amid all the money pissing, the Treasury actually does continually take in gobs of revenue. Experts expect the department to continue to make plenty in the meantime so that, if needed, it could direct as much cash as needed to avoid a default on our obligations. Losers – excuse me, *lawyers and other law nerds – claim the 14th Amendment effectively bans any national debt default, which kinda sounds like a Robinhood-style infinite leverage glitch if you ask me.

Buckle up.

What's Ripe

Prometheus Biosciences ($RXDX) ↑ 69.73% ↑

• According to Greek myths, Prometheus was the creator of humanity, giving us fire while he was at it. To Merck, Prometheus is an $11bn paycheck.
• The S&P’s 4th-largest healthcare company announced plans to purchase the biotech behind several winning autoimmune disease drugs for ~200/sh. Obviously, shares closed in on this price, finishing nearly 70% higher on the day.
• Prometheus should be able to fire up (pun intended) Merck’s autoimmune align as well as help push along remedies for ulcerative colitis and Crohn’s disease. We only hope they’re successful enough that I never have to hear those words shoved in my ear during every commercial break ever again.

M&T Bank ($MTB) ↑ 7.71% ↑

• Wow, I guess not all regional banks are managed by sh*t-for-brain idiots.
• At least, that’s what M&T’s earnings suggest. The ~$21bn market cap Buffalo-NY-based bank nearly doubled its revenue, earnings, and net interest income from a year ago, beating the brakes off expectations across all three. After making this call amid the banking turmoil last month, someone better be buying Citi analyst Keith Horowitz a drink or two tonight.
• The results, particularly the $4.01/sh and $1.83bn in net interest income, were more than just a jolt to shareholders of this bank, however. SPDR’s Regional Bank ETF $KRE soared all day, finishing 2.98% higher.
• Not only did they not go bankrupt nor undergo a bank run, but they actually managed to perform so well that Warren Buffett for sure had to change his pants after reading this report.

What's Rotten

State Street ($STT) ↓ 9.18% ↓

• Only in the most unentertaining of market times do we find ourselves gorging over mid-sized 231-year banks and clearing houses. But then again, this thing did drop almost 10%, so let’s check under the hood.
• The 4th-largest asset manager in the US with ~$3.5tn to its name plummeted on an earnings report showing leaking deposits and a 3% contraction in net interest income from a year ago. Revenue barely rose, and earnings fell as much as the stock, but it only got worse.
• Safe to say executives at the Boston-based bank carry a lot of that Irish optimism, expecting things to be nothing but worse going forward. NII is expected to shed as much as 5-10% in Q2, and, in this economy, that was just too much for traders to handle.

Moderna ($MRNA) ↓ 8.36% ↓

• Who knew that literally curing cancer isn’t good enough for Wall Street? Well, in retrospect, I guess we all should’ve.
• Over the weekend, Moderna and lab partner Merck released data from a joint trial that saw the now-household name biotech company’s cancer vaccine with some ungodly name demonstrate statistical significance in improving melanoma patient outcomes in studies done alongside Merck’s Keytruda.
• To be fair, way too much of Moderna’s income and sales still rely on its C-19 medication, which the White House just declared was no longer an emergency. Whatever the reason, investors weren’t impressed with the firm’s overall pretty-good results. Better luck next time.

Thought Banana

China is Back

Chinese President Xi Jinping is having a great day amid his country’s economic outperformance to kickstart 2023.

According to UBS Chief China Economist Tao Wang, China is back. More specifically, what he said was, “The momentum at the beginning of the year was stronger than expected,” which, to be fair, is basically the same thing.

According to Bloomberg polling, as reported by the FT, analysts were expecting a 4.0% growth out of China for the first quarter. The 4.5% figures pose a strong beat as the world’s most populous nation (for now) surges on a strong recovery from that whole zero-C-19 policy.

In particular, an exports surge was the momentum driver out of “the world’s factory,” but the real surprise was the realization of strong growth during a quarter that saw yet another nationwide outbreak of a certain particular virus. Of course, some experts often call out the reliability of self-reported measures from the CCP, but for us, it’s definitely the best we’ve got.

But a guy like Xi has big ambitions, you know? The President had expectations set for 5% annualized growth to start the year, meaning China exceeded everyone else’s expectations while still disappointing itself. Idk man, sounds like some sh*t Jocko Willink would be proud of, though.

Still, can’t hate on strong growth. While China’s economy recovers strongly, following in the direction of the US in our immediate post-pandemic days, we seem to be stuck in limbo between high inflation and recession while barreling towards a debt ceiling crisis.

2023 is fun, huh?

The big question: Will China’s economy continue to see continued strength in recovery throughout the rest of the year?

Banana Brain Teaser

Yesterday — In a one-story pink house, there was a pink person, a pink cat, a pink fish, a pink computer, a pink chair, a pink table, a pink telephone, a pink shower– everything was pink! What color were the stairs?

There weren’t any stairs. It was a one-story house.

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

Never resting, never still. Moving silently from hill to hill. It does not walk, run or, trot. All is cool where it is not. What is it?

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

Wise Investor Says

“It is better to be roughly right than precisely wrong.” — John Maynard Keynes

Happy Investing,

Patrick & The Daily Peel Team

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