August 8, 2023 | Peel #517

Silver banana goes to...

In this issue of the Peel:

• Berkshire Hathaway and PayPal saw gains, while BioNTech and Tyson Foods faced losses. Warren Buffett's firm set a new record, and PayPal announced a stablecoin; whereas BioNTech missed sales expectations and Tyson Foods is closing chicken processing plants.
• The Commercial Real Estate market is facing a three-pronged attack with increasing borrowing costs, slowing rent growth, and growing expenses, making this sector highly risky.
• Yellow, a significant transportation company in the U.S., has gone bankrupt, impacting the long-haul trucking economy and potentially causing increased costs in the transportation market.

Market Snapshot

Happy Tuesday, apes.

Welcome to the dog days of summer, apes. Not sure why dogs get all the credit when it’s we apes doing all the real, hard, degenerate-as-possible work, but clearly, someone’s getting lazy.

And that’s pretty normal for the month of August. Traders, investors, and scumbags alike tend to take vacations in this late-summer month, leaving trading activity lower and the happiness of spouses higher.

And on Monday, everybody was happy—happy to buy, at least. Equity markets saw mild gains throughout the day without any major news to make or break your portfolios. Treasury yields were largely lower, giving a nice middle finger to Fitch as investors shrugged off the 3rd-stringer’s downgrade of U.S. debt. I mean, imagine if Brian Scalabrine criticized your basketball skills. C’mon, man.

Let’s get into it.

To Win the M&A Game, It Helps to Know the Terrain

Ah, the annual SRS Acquiom M&A Deal Terms Study. It’s back again already? You bet it is. And, as always, it’s bubbling over with the deal data and insights you need to be truly in the know.

You won’t get this intel from industry news sites, regulatory filings, or any other sources, by the way. Nope, only the SRS Acquiom Study provides analysis of more than 2,100 private-target acquisitions valued at more than $460 billion—most of which aren’t required to be publicly reported.

Why should you care? Think: better negotiating and smoother due diligence. Think: avoiding potential transaction issues. Think: competitive advantage for you and your clients, and all the good stuff that comes with it.

By the way, the Study is free. You have no excuse not to download it right now.

Click here to get the good stuff >>

Macro Monkey Says

Evicting Landlords

As much as you probably (definitely) hate your landlord, we can almost guarantee they hate their landlord even more. And if not, they sure seem like they will soon.

Remember that banking crisis back in March? The one where everyone tried to set the internet on fire over SVB, and then not a single depositor lost a cent? Yeah, that one.

Following that, everyone then turned their attention to the Commercial Real Estate market as regional lenders tend to play an outsized role there. While dollars remain walking on a tightrope of pennies in that market, now, all of a sudden, a new challenger has entered the “most f*cked up asset class” contest: apartment buildings.

"While dollars remain walking on a tightrope of pennies in that market ... a new challenger has entered the 'most f*cked up asset class' contest: apartment buildings."

A three-pronged attack has been levied against the sector, with the primary attackers being:

• Doubling in the cost of debt servicing annually
• Rent growth slowing way down since the pandemic
• Growing building expenses outside of borrowing costs

It’s a nightmare on College Street for apartment owners across the country.

In the Commercial Real Estate game, apartment buildings are like index funds. They’re the safest among a risky group of bets to make. Following the housing bubble burst and the GFC, you could say the vibe in real estate was semi-risk-off (I wonder why?). Since then, outstanding mortgages in multifamily homes have more than doubled from $874bn in Q1 2013 to $1.99tn in the first quarter of this year.

"... this market feels about as safe as buying a third beach house in 2006."

Plowing into the safest bet in a risky bunch seemed like the obvious choice. But now, with borrowing costs at multi-decade highs and almost $1tn due on those outstanding mortgages between 2023 and 2027, this market feels about as safe as buying a third beach house in 2006.

As a result of this perceived safety (because “who doesn’t pay their rent?” and “people always need a place to live!”), CapEx has poured into the construction of new, mostly higher-end apartment buildings in major metros across the country.

With a sizable amount of those set to come online just as that nearly $1tn comes due in a 5-year period, it doesn’t take a Michael Burry to spot the risk.

As with anything in economics, people behave differently when they learn something new. Simply knowing an asset class is becoming more risky than it was before will likely change the behavior of participants in those markets, hence why predicting macro moves is more like predicting a poker move than predicting something in physics, chemistry, or other real sciences.

But hey, isn’t that what makes it fun?

What's Ripe

Berkshire Hathaway (BRKB) ↑ 3.56% ↑

• Warren wins once again, with shares ripping in the first trading day following Big Dawg Berkshire’s Q2 earnings.
• Berkshire class B shares—the ones that cost less than the average American home—soared over 3.5% (yes, that’s soaring for this stock) as investors applaud the firm’s massive profits, cash pile, and, most of all, interest income on treasury yields.
• The company set a new all-time record in value around midday yesterday, with the A shares hitting $555k and B shares at a much more sane $364.54. As long as you didn’t buy shares literally today, congrats on the gains.

PayPal (PYPL) ↑ 2.66% ↑

• Okay, maybe we were a little harsh to advocate for fraud charges against PayPal last week for having a poor earnings report. It’s not their fault they suck, right?
• Or maybe it is. Contrarian bets are hot commodities in tech and finance, and with PayPal sitting at the intersection of the two, it’s no surprise the firm is finally launching a stablecoin called PayPal USD (PYUSD).
• When you play in the innovation game, the announcement of any kind of innovation generally works for you. Once investors find out it doesn’t work, however, well, let’s just cross that bridge when—or if—we come to it.

What's Rotten

BioNTech (BNTX) ↓ 7.49% ↓

• Alright, kids, time to form a circle and point and laugh. One of the world’s saviors during the pandemic is becoming more like the devil to your portfolios.
• Disgusting, embarrassing, and downright sad are the only way to describe BioNTech’s quarter. Investors had been pricing for ~€672mn in sales for the quarter, and what they got was ~€168mn.
• Safe to say Wall Street isn’t a big fan of €500mn misses, and not to mention losses coming in wider than expected too. I don’t even think investors made it down that far on the P&L.
• Welp, they say C-19 was a “once-in-a-century” pandemic. So, BioNTech and their investors must be rooting for C-20 to show up, or they’re just realllllllly long duration.

Tyson Foods (TSN) ↓ 3.81% ↓

• Less animal abuse might sound good to most of you, but as with any moral question, it comes down to one person: the shareholder.
• Tyson Foods, one of the country’s largest producers of a myriad of meats, posted weak-a** results as growth in food costs slowed. As a result, the company is closing yet another 4 chicken processing plants due to the factory farming strategies used here not being cheap/abusive enough.
• Naturally, shares tumbled. A good day for chickens is a bad day for shareholders. All in all, Tyson posted $0.15/sh on $13.14bn in sales vs. the $0.26/sh on $13.59bn expected.

Thought Banana

It Was All Yellow

Coldplay said it best. Little did they know when they wrote the song in 2000, they were actually describing the state of the long-haul trucking economy in the U.S. in July of 2023. If only real economists could have such foresight.

The most important company you didn’t know that you knew about has officially gone bankrupt. Yellow, a (formerly) +$5bn transportation company running up to 50,000 shipments per day, has collapsed.

Source

As you can see (thanks to FactSet and the WSJ), Yellow was just about tied for the 3rd largest player in this annoyingly acronymed industry (LTL stands for “less than truckload,” by the way).

As the leader in low-cost LTL transport across the country, Yellow’s downfall is music to the ears of industry competitors. Without the Walmart version of LTL, other players are less pressured to deliver at lower prices. Higher margins for everyone!

"Already, competitors of the (former) company have seen stark upticks in growth since Yellow’s absence ..."

They hope, at least. Already, competitors of the (former) company have seen stark upticks in growth since Yellow’s absence, with smaller regional players in (formerly) Yellow-dominated markets seeing shipments jump by over 2,000 in the weeks since the company’s nightmare began about this time last month.

But where there are winners, there are bound to be losers too. Specifically, the biggest losers here include 1) Yellow’s 30,000 employees and 2) you.

That decline is the single largest fall-swoop of unemployed workers from one company in 3 years. Moreover, 30,000 workers are approximately 16% of the size of the total non-farm payroll additions in July.

Thankfully, however, whenever I’m unfortunate enough to find myself on the highway, ~9 out of 10 times, I see a “Drivers Wanted!” sign on the back of some random truck next to the “Oversized Load” sticker.

"You, on the other hand, may never recover. I know I won’t."

You, on the other hand, may never recover. I know I won’t. With countries like China slowly developing working standards and, more importantly, lacking any young people to work in factories, goods globally were already trending more costly. Now that we’ve lost the low-cost LTL leader, expect your next Amazon order to be priced like a VC isn’t funding your purchase.

The big question: Is the potential impact of Yellow’s bankruptcy being overstated? How long-term will these effects really be? How will the LTL and larger transportation market adapt?

Banana Brain Teaser

Yesterday —

If:

SAFE + STAY + SOON + SKIP = STOP

Then:

PINK + PORE + PUSH + PLOT = ?

Answer: POST

Today — Two people come to a river. There is a boat. However, it can carry one person only. How can they each get to the other side of the river using the boat?

Shoot us your guesses at [email protected].

Wise Investor Says

“No investment is without risks, and no opportunity is guaranteed. Nothing is certain.” — Marc Andreessen

How would you rate today’s Peel?

All the bananas

Decent

Rotten AF

Happy Investing,

Patrick & The Daily Peel Team

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