Quantum Problems | The Daily Peel

Jan 17, 2023 | Peel #379


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Market Snapshot

Happy Tuesday, apes.

Shoutout to Martin Luther King for all he did and being a GOAT American citizen…and, of course, for the long weekend. Maybe it's just me, but I kinda feel like we'd need a full week off to really honor MLK, but we can talk about that later.

Regardless, Friday kickstarted earnings szn and gave us some positive vibes to take into the new week (hope that didn't just jinx us all). Less bad than expected earnings data brought back the risk-on trade for the day, but we'll find out real soon if that can hold true as a slew of quarterly reports starts rolling in later today.

Let's get into it.

Want to Feel like This? Say Less

Don't you hate it when you miss out on a good investment? Us too. That's why we're kicking ourselves for not investing in art with Masterworks sooner.

This fintech powerhouse secured 10%, 27%, and 35% net returns from three of their recent sales. Of course, past performance doesn't guarantee future results, but getting +10% returns in this market isn't easy.

And if you want to sell your shares early, you can use their secondary market to cash out.

Plus, they get every offering qualified by the SEC. And not everyone does that. Just ask the crypto-hopefuls: they're still waiting on the Bitcoin ETF to drop.

You're probably thinking "but it's art, why wouldn't I just stick with stocks?" We thought the same thing – until we saw these numbers:

  • Near 0 correlation to stocks, according to Citi
  • Prices increased by 20% annually on average during high inflation (MW All Art Index)
  • Contemporary art prices outpaced the S&P 500 by 131% (1995-2021)

The best part? You're not too late. You can get priority access to their offerings with our Daily Peel link.

*"Net Return" refers to the annualized internal rate of return net of all fees and costs, calculated from the offering closing date to the date the sale is consummated. IRR may not be indicative of Masterworks paintings not yet sold and past performance is not indicative of future results. See important Regulation A disclosures.

Banana Bits

  • Okay, you got your day off already, now take a second to appreciate the legacy of Dr. Martin Luther King Jr while looking at this new and uhh, let's just play it safe and say "unique" statue in Boston
  • Wow, I guess limiting freedom of movement as much as reasonably possible is actually bad for a country's economy, even one that's grown as fast as China's
  • But not only did economic growth slow, but the population of the world's most populous country (for now) actually fell in 2022 for the first time ever
  • The king of meme stocks (besides the legend Keith Gill) is moving onto bigger and better things with a new stake in Alibaba

Macro Monkey Says

The Most Wonderful Time of the Year

It might be winter in the Northern hemisphere, but the only season me and my homies care about is the earnings szn.

The party got started on Friday with some of the largest US banks dropping their latest figures, blessing us with data, and making my job of finding content to write about a whole lot easier.

In an attempt to minimize their own individual scrutiny, the big banks like to drown us in data all at once, hoping we won't notice that one line item that could lead to another GFC. Fingers crossed, that's not the case here, but everyone from J.P. Morgan to BofA to BlackRock came out swinging.

While they're for sure swinging for the fences, there's certainly no Aaron Judge to be found. Revenues and net incomes nearly beat across the board, but not by much, driving Wall Street's general "meh" response. Here's a quick look at the basics:

  • JPM → EPS: $3.57 act. vs. $3.11 exp., Revenue: $34.5bn act. vs. $33.9bn exp.
  • BofA → EPS: $0.85 act. vs. $0.78 exp., Revenue: $24.5bn act. vs. $24.1bn exp.
  • WF → EPS: $3.57 act. vs. $3.11 exp., Revenue: $19.6bn act. Vs. $19.8bn exp.
  • Citi → EPS: $1.10 act. vs. $1.18 exp., Revenue: $18.0bn act. Vs. $17.9bn exp.

But as always, the devil is in the details. A lot of eyes were immediately drawn to loan loss provisions, cash piles that banks hoard for when you miss your car payment(s). Basically, it quantifies exactly how scared banks are. JP, for one, beefed this up nearly 50% from $1.54bn to $2.3bn hardcore while saying that a mild recession is now the firm's "central case."

While that's not ideal, we love to hear that in comparison to Dimon's "economic hurricane" freakout rant from last year.

Arguably the most important part, however, is a bank's net interest margin, aka the spread between what they make from lending activities and what they pay you in deposits.

As I'm sure you noticed, your deposit rate is moving a whole lot slower than JPow is. Right now, the nation's average is a diabolical 0.22%, which is still more than 3x last year's miserable 0.06% and 2x the long-term average of 0.09%. But damn, it really makes you miss the definitely-not-fake-or-scammy 100% or 1,000% rates some crypto projects offered.

So with those deposit rates moving slower than the line at the DMV, net interest margins (NIM) jumped pretty much across the board. Wells Fargo, the silver medalist in consumer banking (behind Chase ofc), saw NIM spike to 3.1% from 2.1% last year. Despite that, the apparently slow-reading skills of investors gave bank stocks a scare in the morning, with Wells falling 3.7% by 10 AM. But once those mouthbreathers got to the NIM line item, the bottle started popping, and $WF finished up 3.3%

And although it's not technically a bank, taking a peek at BlackRock's $8.6tn of assets and their flows is like staring into the 401(k)s of every US investor all at once. In short, they are still scared, with a net of $15bn in long-term retail holdings leaving the firm's products.

Hate to make you apes read so much, but with bank earnings, you gotta let the party run a little long. Don't worry, though; we got plenty more coming our way today when Morgan Stanley and Goldman drop.

Stay tuned for part 2.

What's Ripe

Virgin Galactic ($SPCE) ↑ 12.34% ↑

  • If trying to manifest future events was a business model, Virgin Galactic would be worth more than Apple. I'd say it's not rocket science, but…
  • After sister company Virgin Orbit's stock plummeted last week (much like their rockets), the future of European space travel was thought to have the potential to go up in flames. But fear not! The management team behind this down-90%-from-peak-stock said they remain "on track" for planned Q2'23 launches.
  • As a result, shares ripped as investors either 1) were previously just assuming the company wouldn't make its targeted launches or 2) were just reminded the stock still exists.

Wendy's ($WEN) ↑ 5.97% ↑

  • I mean, you don't even have to own Wendy's shares to be happy this thing is going up. No matter what, we'll probably never be able to repay them for blessing the world with the 4 for $4.
  • Actually, after reading (*skimming) preliminary figures from last quarter, maybe we have paid them back…in spades. Shares ripped on Friday on the company's beat and raise release as well as the announcement to DOUBLE their dividend for this year. Really y'all, in this economy??
  • I guess so. The firm is also instituting a big time organizational redesign, but as long as they keep slinging those God-like spicy nuggets, they can do whatever they want.

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What's Rotten

Bed, Bath, and Beyond ($BBBY) ↓ 30.15% ↓

  • Schadenfreude really is an mfer, isn't it?
  • Bed, Bath, and Bankrupt traders came back to reality on Friday, with shares falling back to Earth after ripping 300% in under a week.
  • The over 30% collapse on Friday comes as rumors spread that the firm is now negotiating with creditors to provide financing to undergo bankruptcy proceedings. Short squeezes are hard enough to orchestrate, so trying to keep that going in the face of literal bankruptcy is, uh, yeah…good luck.

United Health ($UNH) ↓ 1.23% ↓

  • The US's largest health insurer couldn't catch a break on Friday, much like I imagine their customers when struggling to pay for medical bills…
  • Anyway, shares in the 8th-largest S&P 500 stock sank after a solid earnings report dropped on Friday. The firm beat consensus on both the top and bottom line, and investors still told 'em to go pound sand.
  • The drop likely comes as profit guidance for the year was trimmed. Still, sales rose 12.3% annually on an $83bn quarterly run rate. What more do you want??

Thought Banana

Quantum Problems Require (non)Quantum Solutions

In 1229, two years following the death of Genghis Khan, his successor Ögedei Khan expanded the Mongolian Empire to the height of its power and cemented its title as the largest contiguous land empire in history.

But even the Mongols would be unspeakably outmatched against even a single F-35 fighter jet produced today.

So, to finish up this random and slightly awkward running analogy, a Mongol horde fighting the US military is roughly equivalent to the computer you're reading this on right now going up against a quantum computer. That's how powerful these things are, and I eat crayons, so this analogy may even woefully understate it (someone smart pls correct me if you're reading this).

Because of that power, a few weeks ago, the first Quantum World Congress (QWC) was held in Washington, DC Sure, the industry is in its infancy right now, but if Genghis Khan was still around in 1775 when the US army was formed, he probably would've been shaking in his shoes too.

Both are great reasons to be scared as well. See, the thing is, quantum computers have the ability to snap through almost any modern encryption system in use today, like an F-35 up against horse-riders.

That means your financial, medical, and all other personal data could be at risk of being hacked, leaked, and maybe even worse. Don't even bother rushing to go delete your search history; it's no use (I tried).

But fear not! Actual smart people already have a solution worked out. The thing is, it's gonna take a long while to get that solution in place.

Now, I understand science and math like a fish understands a solar eclipse, but the scientists at places like the QWC claim that they have the math and encryption systems needed to defend against quantum already developed with existing classical computers and encryption systems.

But now, it's about implementation.

The race is on. Experts say that nation states would likely be the first party(ies) to actually try to use quantum in those naughty ways. It's an arms race of monumental technological proportion, and yes, there's probably someday gonna be some quantum stock you and your friends can pump to the moon one day.

Let's just hope we make it there before Putin gets his hands on a quantum code breaker.

The big question: When will quantum technology be understood and developed enough to become mainstream, if ever? Will we even make it to that point before this whole encryption thing potentially blows up? Mom, please come pick me up…I'm scared.

Banana Brain Teaser

Friday Mike and Pat are in a desert. They both have packs on. Pat is dead. Mike, who is alive, has his pack open. Pat has his pack closed. What is in the packs?


Today - It's 100 bananas off the PE Master Package for the first 15 correct respondents. LFG!

What can travel around the world while staying in one corner?

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

Wise Investor Says

"…the one thing I learned in jail is that money is not the prime asset in life. Time is." - Gordon Gekko

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