Retail Blues | The Daily Peel | 5/17/2023

The Daily Peel...

May 17, 2023 | Peel #463

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Market Snapshot

Happy Wednesday, apes.

Is Wall Street trying to tell us something? According to the mainstream media, every slight tick in markets is worthy of a 5-7 minute rant on CNBC by some receding-hairline fund manager (if they have hair at all), but yesterday, the idea of the Street “sending a message” might actually have some merit.

Basically, equity markets were stripped of green like the Sahara desert aside from the only stocks that actually matter for index performance. Dollars poured into mega-cap big tech names, allowing the Nasdaq’s 0.18% loss to drastically outperform the Dow on the day, but almost anything with less than a $1tn market cap painted the tape red.

Treasuries, meanwhile, joined the non-$1tn companies out there in selling off, with the 2-year yield closing near 4.1% while the 10-year soared through resistance at 3.5%. The Dollar has been mostly flat this week, continuing that lack of conviction into Tuesday’s trade.

Now, it is just one day, so it’s not evidence of anything at all really…but with a looming debt ceiling crisis, we have to wonder: are investors rotating out of treasuries and into big tech names? Does Wall Street trust Amazon to maintain the value of their $ more so than Uncle Sam? Well, we sure don’t know, but nevertheless…

Let’s get into it.


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Banana Bits

  • Big Dawg Biden had to cut his Asian vacation short as debt ceiling talks get fired up months after they already should’ve been…fingers crossed, apes, fingers crossed
  • The UBS-CS arranged marriage is only just getting started, and already, the combination of two of Europe’s largest banks is throwing billions both ways
  • As we slowly start to repress and ignore the horrible, evil memory of C-19 and that whole pandemic thing, the WFH movement appears to be finding a stable point too
  • Are there any two words in a headline that can drive more clicks than “Elon Musk”? Maybe find out why here

Macro Monkey Says

Retail Needs Therapy

Everybody’s always asking, “Where’s the store?” but never, “How is the store?” So, naturally, it’s not hard to see why retailers may have felt a little depressed lately.

Most of the time, you can cure a case of the downbads by hitting the mall, Amazon, or just about anywhere else where you’re encouraged to spend way-too-much cash. This idea of “retail therapy” arguably works a little too well (not that our $25tn economy minds), but after yesterday’s reporting, it’s clear that now it’s retail itself that needs therapy.

Like many others in therapy, on the surface of Tuesday’s Advance Monthly Retail Sales figures from the Census Bureau, everything seemed fine. The 0.4% increase in spending throughout April was a reversal of declines seen in each of the previous two months, yet the 1.6% annual growth rate implies a woeful decline in real retail spending.

Markets seemed to agree. The Big Dawgs of retail in the U.S. did not have a fun lead-in to taco Tuesday dinner yesterday, notably aside from Amazon, who is a certified Big Dawg of anything it’s in. Names including Walmart, Home Depot (who also missed on earnings yesterday morning), Costco, Target, TJX, and plenty of others all underperformed each of the major U.S. indices on the day, suggesting that nerves were flaring up despite a good-on-the-outside broad retail sales report.

There are a few reasons for this. For starters, despite reversing a months-long trend of declines, Wall Street had priced in a ~0.8% uptick in April retail spending.

For the mathematicians in the crowd, that’s 2x the growth in retail spending we actually saw. That alone provides an explanation for the market’s outperformance of those Big Dawg retail names, but the overall story was one equivalent to telling an economist that their dog died.

Most of the declines registered last month can be attributed to things like hobbies, sporting goods, furniture, and other items mostly seen as “wants” rather than “needs.” Gasoline aside, of the 13 categories of retail spending these reports center on, 6 of them were down and primarily consisted of things consumers can more easily forgo when falling into financial hardship.

Not ideal. Slowing spending in “wants” can often precede a similar, but albeit less extreme, slow down in “needs.” This is exactly the kind of news that economists who aren’t betting on a recession hate to see.

Now, loyal ape readers know all too well that consumer spending is the driving force of the U.S. economy, but the thing is that retail spending data is low key a**. When they say “retail,” they mean it, as the Census Bureau excludes from the report items like healthcare, education, professional measures, and more of the economy’s most crucial line items get absolutely 0 representation in the measure.

Revisions in this reading are also frequent. This can often lead to skepticism around a monthly release, but for March at least, this inevitable revision moved in the right direction: from down 1% to down just 0.7%. It might not be much, but it sure is honest work, and we’ll take it…I guess.


What's Ripe

Big Tech ($GOOGL, $AMZN, $MSFT)

  • When Apple is the worst performer of the day among your group, you know you’re doing something right. Shares were somehow absolutely flat on the day while fellow tech monopolies like Google, Amazon, and Microsoft dominated.
  • Those three stocks are essentially the entire reason why the Nasdaq 100 was up on the day, no questions asked. While it’s not exactly clear what the catalyst was, investors scared of JPow’s wrath along with a potential recession could be piling their equity allocation into large, “blue chip” names that appear safer.
  • And apparently, they might be parking some of their treasury funds there too? We won’t dwell on this, but C-19 was a great test case to see how these names perform during the worst of times. For those who forgot, let’s just say investors in big tech names that power our every move weren’t exactly upset when expenses became more “need” than “want.”

GE Healthcare ($GEHC) ↑ 3.80% ↑

  • GE Healthcare can thank the analysts over at Oppenheimer for the boost on the day yesterday as the Wall Street firm initiated coverage of the freshly-split MedTech company.
  • Weeks after the company’s first solo earnings report came in as nothing short of a disappointment on par with you to your parents, shares managed to get a much-needed bump as at least someone out there is mildly bullish.
  • We’ll see if it can last. Opp cites an expected influx of old people and chronic diseases among the U.S. population as the primary drivers. Happy now, shareholders??

What's Rotten

Sea Limited ($SE) ↓ 17.74% ↓

  • (Prepare for the worst joke of all time.) Well, I guess it’s safe to say that shareholders of Sea Ltd didn’t exactly see that one coming yesterday.
  • Boom! Nailed it, very much unlike Sea, the online conglomerate hailing out of Singapore and valued at over $40bn (still) threw up after reporting a decidedly unsatisfactory earnings report.
  • Revenue came in $20mn below expectations at $3.04bn, while earnings were off by a similarly slight yet apparently unforgivable miss. Still, it’s unprofitable tech giants like Sea that have been getting their teeth kicked in for more than the past year now, so maybe it’s just Sea’s turn at the chopping block.

Horizon Therapeutics ($HZNP) ↓ 14.17% ↓

  • Oof. Just as mega deal szn is trying to get back into full swing, the FTC goes full narc and sues would-be Horizon acquirer Amgen in an attempt to prevent the $27.8bn deal.
  • Now, it’s an all-out war. This is a marked change in the FTC’s attitude towards large pharma deals, usually working out some kind of agreement involving divestitures and other forfeits in order to permit a deal. Lina Khan and the rest of the FTC are going right the jugular.
  • The biotech giant looking to scoop up Horizon reiterated their belief that the deal poses no legitimate competitive threat to fellow pharma friends nor consumers alike. Lawsuits like this take about one forever to resolve themselves, so we may be hearing about this for quite a while.
  • As the deal was priced at a hot premium for Horizon shareholders, the stock tumbled on the day. Amgen shares fell too, likely a mix of depression from this headache and general market sluggishness. RIP, for now, I guess.

Thought Banana

U.S. Equity Carbonation

Stanley Druckenmiller, Peter Schiff, your angry grandfather, and many others often lament the U.S. equity market’s apparent overvaluation. Evidently, some of these takes and arguments are a bit more persuasive than others, but dammit, can you imagine Schiff at Thanksgiving dinner? Straight up nightmare fuel.

Anyway, regardless of what these macro experts think, say, and place bets on, it is clear that compared to the rest of the world’s equity markets, the U.S. carries a staunch premium.

Since about 1988, U.S. equities have, on average, traded at an ever-higher CAPE multiple compared to other MSCi-tracked nations. The question is, is it justified?

Aside from a market meltdown at the turn of the millennium that sent U.S. markets back to the stone ages, this premium has only been maintained or expanded over the long term. And for those wondering, this CAPE has nothing to do with Batman, referring simply to the cyclical-adjusted price-to-earnings (P/E) ratio taken as an average of a given country’s stock market.

It’s basically an average of how much investors are willing to pay for $1 worth of earnings in a given country. For an assortment of reasons/theories, investors have been willing to place a heftier bet on the U.S. corps than fellow nations.

While Druck, Schiff, and Uncle Steve grieve the “inevitable” evisceration of decades worth of gains in equity markets, others aren’t too sure.

Many onlookers are keen to observe that, well, maybe the U.S. deserves a valuation premium despite all the craziness that we practically inject into our veins. U.S. financial markets are far and beyond the most liquid, developed, and trusted in the world. Not to mention the U.S. also maintains an internationally recognized rule of law, controls the world’s currency, and maintains the world’s most powerful military again on a far and beyond basis; it’s no surprise why this insane 50-state brotherhood is somehow seen as “stable.”

When sh*t hits the fan, you find out what people really think. Going into recessions, depressions, and anything in between, investors tend to pile up on greenbacks as we’ve seen lately while loading up on U.S. treasuries too, a trend that’s been reversing in recent days.

It goes without saying that there’s a whole lot more to it than this crude summary of a book series worth of debates. Each side is always looking for the smoke and tends to have their heels dug in round the clock, so choose your side and place your bets. It’ll be a fun story either way.

The big question: Do U.S. equity markets deserve and justify the premium often assigned to them by investors? If not, how long will it be maintained, and what happens in the aftermath?


Banana Brain Teaser

Yesterday — There are 4 clues below. Each clue is related to a type of candy. You have to try to figure out what each candy is.

  1. The average worker loves this day
  2. When actors or actresses get a little break
  3. Think of the 4th planet from the sun
  4. Also referred to as ‘geeks’
  1. Pay Day
  2. Take 5
  3. Mars Bar
  4. Nerds

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

A time to sow, a time to reap|
But over a life, this time would creep

I was created in 46 B.C.
Brought into being by Caesar's decree

But still the seasons were unimpressed
Man-made and tropical slowly digressed

So good Pope Greg set everything straight
with inspired rules that worked out great

I am grander than my common peers
I come 97 times every 400 years

By following my rules, as widely agreed
We all know what day to plant our seed

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

“The United States has a history of resilience and adaptability. It’s a country that fosters innovation and rewards risk-taking, making it an attractive destination for investors seeking high returns.” — Abigail Johnson


Happy Investing,

Patrick & The Daily Peel Team

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