Mar 10, 2023 | Peel #416

Market Snapshot

Happy Friday, apes.

Modern American philosophers such as Polo G have aptly pointed out that “I know sometimes I’m crazy, I was hoping you could bear with me.” In this case, “I” must be the market.

Yesterday was nothing but downhill for the equities trade, thanks almost entirely to one stock, which we’ll get to later. We opened higher, but by day’s end, the Russell 2k was off nearly 3%, while the Nasdaq, S&P, and Dow weren’t far behind. Yields were mostly flat for a while, suddenly plummeting late in the session, with the 2-year going from +5% to sub-4.8% in a matter of hours.

Commodities mostly tanked in the meantime, while the dollar was probably the most boring part of the trading day, losing a little over 0.1%.

Let’s get into it.

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Banana Bits

• Silicon Valley Bank started a fire like it was in a California forest yesterday, sending bank shares everywhere straight down the toilet
• People desperately searching for a way to make an income surged last month, and JPow couldn’t be happier
• Late-stage capitalism at its finest (and we’re loving it); Elon Musk plans to build a town(?) for employees to work, live, and (probably soon) formally start a cult in Elon’s name
• Wow! Xi Jinping officially began his next term as President…what a surprise! Oh yeah, and he still hates the US

Macro Monkey Says

Biden’s Budget Bonanza

Joe Biden woke up yesterday morning and said, “how can I piss off the maximum number of people in the minimum amount of time?” It did not take long for him to find his answer.

Yesterday, the White House dropped Big Dawg Joey B’s budget proposal for the government’s next fiscal year. As a reminder, the US government loves to make things as hard as they possibly can be, so our fiscal years run from October 1st to September 30th of the following year. The calendar year was just too easy.

Nevertheless, our elected officials still reserve the right to decide how to set ablaze, I mean, *spend trillions of your tax dollars. Here’s the full thing, but it’s 184 pages of incomprehensible mumbo jumbo, likely designed specifically so that none of us care enough to actually look at the thing. So, let’s check out the highlights (or lowlights?).

The story of the fiscal year 2024 can be summarized in two words: higher taxes. Specifically:

• A 25% minimum tax on households with wealth >$100mn
• Reversing rules of the TCJA, like putting the top marginal tax rate back to 39.6%
• Boosting funding for Medicare by boosting the Medicare tax rate from 3.8% to 5% on those earning >$400k/year (Medicare set for insolvency in ~5years rn)
• A fully refundable child tax credit of $3,600 per year per child
• Setting the corporate tax rate at 28% and 4x taxes on buybacks
• Taxing cap gains at the same rate as marginal income for those earning >$1mn/year

We could go on and on…after all, 184 pages is a lot of running room to f*ck around a little bit.

Needless to say, it was hit with a lot of criticism. So much so, in fact, it was as if Kanye came out and said, “he sees good things about [this budget], too.” Some of the main criticisms included:

• Creating incentives for wealthy Americans to put their capital to use elsewhere
• Kicking the can of unfunded entitlement programs like Medicare and Social Security down the road a decade or two
• Incentivizing corporations to evade taxes even harder, raise prices to make up for the increased tax, or a combination of both
• Raising taxes = slower growth, even in the Keynesian model, during periods of elevated inflation and recession
• Wealthy Americans already pay a substantial majority of the nation’s income taxes (see the below chart)

Other provisions not included above yet still heavily criticized include goals of reducing costs and expanding access to healthcare, policies on China, increased pay to military service members, etc. etc.; it really is a lot.

If that sounds pie-in-the-sky to you, trust your instincts. It’s basically a formality at this point for the White House to put out a budget under any President. Going into an election year in particular, the strategy behind this move is to rally support from the President’s base so that when Congress tears it a new one, the President can then point to the other side and say, “see what those evil numbskulls did to my big, beautiful budget? They prob eat babies too.”

It’s both funny and sad to think about but all too true. With a debt ceiling looming and the potential for a US default on the horizon, this one will likely be extra-contentious for a long time. Expect even more finger-pointing and grandstanding than usual.

You all know we hate everyone equally here at the Peel, so don’t be coming at me thinking this is some right-wing attack. All we do is spit facts and facts only, but regardless of what ends up happening with the budget, we’ll be here to speculate wildly about how we might be able to make money off of it.

What's Ripe

Asana ($ASAN) ↑ 18.93% ↑

• Nearly two decades later, it looks like Asana CEO Dustin Moskovitz has finally succeeded in something his former college roommate Mark Zuckerberg can’t scum him out of. Let’s take a look.
• Workflow management and optimization firm Asana smashed quarterly expectations yesterday. Revenues of $150mn easily surpassed analyst expectations, losses were nearly just half of what was anticipated, and customer additions beat expectations with a baseball bat.
• Looking to the next fiscal year, the main theme is that the firm expects growth to slow down, WAY down, to 18%...which is still pretty damn good, don’t get me wrong, just not the +45% shareholders are used to.

Build-A-Bear Workshop ($BBW) ↑ 21.04% ↑

• Despite the, uhhh, let’s say, “provocative” ticker symbol, it turns out this company actually just makes stuffed animals for children. Little weird, but hey, let’s go with it.
• You remember Build-A-Bear, right? Tbh, I figured this thing died alongside low-class malls, but I guess you learn something new every day. In fact, the company is apparently killing it actually as last quarter’s sales and EPS both smashed expectations and boosted the stock to its highest since we entered the year.
• Projecting 5-7% top line growth for this year, investors said, “good enough for me” and sent shares on one hell of a ride. You in on the teddy bear wave, apes??

What's Rotten

Silicon Valley Bank ($SIVB) ↓ 60.41% ↓

• Quoting Vladimir Lenin in a time like this might not be ideal, but little did he know that his quote, “There are decades when nothing happens, and there are weeks when decades happen.” hit the nail on the head with SVB’s day on Thursday.
• Now, this isn’t some sh*tco like Silvergate (below). SVB is an institution in both the finance and tech sectors. For it to lose over half of its value in less than a single day, it must be the apocalypse, right??
• Ehhhh, not really. Basically, SVB announced early into the session on Thursday that the firm would be raising funds through an offering of $2.25bn in common shares and convertibles.
• SVB is taking this admittedly drastic step as the firm sells off “substantially all” of the marketable debt it owned and needs some bread to plug losses from the sale. Meanwhile, deposits are moving in the opposite direction than they’d like as the firm’s corporate clients (mostly young tech companies) try not to get murdered by Jerome Powell.
• Now, the only question is, is this a “be greedy when others are fearful” moment, or is the next leg of the JPow reckoning? Well, as always, place your bets now.

JD.com ($JD) ↓ 11.28% ↓

• Okay, now, bringing us back to a mild sense of normalcy, it turns out Chinese tech stocks are still definitely not the vibe.
• This was confirmed on e-commerce giant JD.com’s most recent earnings reports, released yesterday, which included a major revenue miss. Still, earnings smashed expectations, taking in $0.71/U.S.-ADR vs. expectations of $0.51.
• Guidance was nothing special in either direction, so yesterday’s selloff can likely be ascribed to investors’ newfound desire to GTFO of China.

Data Peel

Source

Thought Banana

From Silver to the Sh*tter

The Silvergate Saga certainly has a Netflix documentary or two on the way.

But, so that you can look smart in front of your friends when the doc(s) drops, let’s take a high-level look at exactly what went on at the non-crypto crypto bank that led to the demise. Despite the collapse, Silvergate still wasn’t nearly as much of a fiasco as FTX, meaning that in terms of recent crypto meltdowns, Silvergate still only gets the silver medal.

Believe it or not, Silvergate Capital Corp, the holding company for Silvergate bank, was founded in 1987, at least 31 years before anyone on Earth had ever heard of a Bitcoin.

It wasn’t until 2013 that Silvergate took its role as the banking partner for crypto cos everywhere, and as we look back today, that’s really where all the trouble started.

First off, we have to give credit where credit is due. Compared to FTX, this meltdown is as boring as listening to some nerd professor talkin’ about the “fair value” of a stock (lol). But, depositors are set to be fully repaid ($1 for $1) without any kind of FDIC involvement of other taxpayer bailouts. A win is a win.

So, how did we get here? Well, like most things in crypto at this point, it all started with the Celsisu, Voyager, BlockFi, and, much grander, FTX collapses. These downfalls plummeted the market value of crypto investments, leading to a very low-key bank run that the non-crypto crypto bank might’ve been able to fight through.

But that was until the DOJ stepped in. See, Silvergate is just a regular bank. That’s why we call them “non-crypto” because it’s not like their balance sheet was loaded up with $SHIB or anything. The low-key bank run, combined with regulatory pressure and financial difficulties associated, was just too much to handle.

To be clear, DOJ hasn’t called out Silvergate for any sus behavior just yet. They are facing the dreaded probe, but this is almost 100% as a result of one account held at the bank by none other than Binance.

Now Binance, on the other hand, was definitely doing some sus sh*t. Turns out that Binance US had accounts at Silvergate allegedly only accessed by Binance US executives.

Welp, it turns out one of those accounts was for a trading entity known as Merit Peak, run by Binance CEO CZ himself. Turns out CZ and other non-Binance-US execs were funneling hundreds of millions through this account to do…sadly, we still don’t really know. But, given the tortuous levels of KYC/AML laws that banks in the US must adhere to, it would be the worst surprise of all time to see Silvergate face some kind of charges on this front. We’ll see.

Banana Brain Teaser

Yesterday — A man wants to enter an exclusive club, but he doesn’t know the password. Another man walks to the door, and the doorman says 12. The man says 6 and is let in. Another man walks up, and the doorman says 6. The man says 3 and is let in. Thinking he had heard enough, he walks up to the door, and the doorman says 10. He says 5, and he isn’t let in. What should he have said?

3. He should have said how many letters were in the number he said.

Today — It’s 100 bananas off the WSO's IB Interview Course for the first 3 respondents. LFG!

I am always in front and never behind. 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

“If you’re not willing to react with equanimity to a market price decline of 50% two or three times a century, you’re not fit to be a common shareholder, and you deserve the mediocre result you’re going to get compared to the people who do have the temperament, who can be more philosophical about these market fluctuations.” — Charlie Munger

Happy Investing,

Patrick & The Daily Peel Team

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