Russia's Ripple Effect | The Daily Peel | 4/19/22

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Market Snapshot

Happy Day after Tax Day. Hopefully, you’re not feeling too much lighter after the filing deadline last night. Yesterday, futures initially pointed to a mixed day on Wall Street. The 10-year is at its highest yield since 2018. 

Surprise, surprise: leaders in the markets yesterday were Energy and Utilities. Oil continues to pump higher (pun intended). Natural gas was up more than 5% yesterday.

Earnings season is in full swing, and recent results aren’t exactly the bright and shiny kind that analysts expected. We watched the major indices slide in the wrong direction, even with a tiny rally into the close. The S&P moved lower by 0.02%, the Nasdaq lost 0.14%, and the most contrived and arbitrary Dow shed 0.11%. 

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Let’s get into it.

Banana Bits

• China’s economy had a healthy Q1, at least until this new round of lockdowns. Groundhog day, anyone?
• Props to the richest dude in Ukraine for putting his money where his mouth is
• Diversification amongst under-explored asset classes can help you unlock some alpha in unexpected places
• EV maker Rivian still produces no vehicles and makes no money
• To our neighbors across the pond, this one’s for you: nice work taking cord-cutting a step further
• Not-news: Magic internet money has inherent risk & degens love its volatility

Macro Monkey Says

Russia’s Ripple Effect — That whole Ukraine thing, yeah. It’s still going on in Eastern Europe. 

Aside from the budding humanitarian crisis and rampant destruction & death, the West still stands more or less united against Russia in all categories, with a slight exception when it comes to Energy. 

Just like kickin’ your habit of a pack a day of cowboy killers, going cold turkey when it comes to Russian Energy is tough. It looks like Europe can’t quite get there, and if they could, it would be painful. We’re talking about economic hardships, potential recession, the shakes… you get the idea. 

All of that pain aside, the Europeans are still considering a ban on all energy imports from their vodka-chugging, bear-wrestling neighbors. This could make an interesting situation even more… interesting.

There are two other anomalies that are worth mentioning. Global commodities markets are still a mess, and the world could be on the brink of a global food crisis. Yeah, so like, only good news.

We’re seeing a significant scarcity in commodities like nickel, copper, and zinc. Low inventories and high demand can mean excessive volatility, which is exactly what is happening. 

Turns out, this volatility might even become an inherent characteristic of commodities’ prices in the immediate future, as market makers are on the struggle bus trying to determine fair and accurate prices for commodities trading.

Even without conflict in Ukraine and bans on Russian metal exports, demand for these commodities has grown in recent years. Thrash in Eastern Europe and bans on Russian everything is just another exacerbating factor in this weird new normal.

Wheat prices are at an all-time high. Corn and beans are close behind, near their peaks. You’ve probably been to the bodega or a grocery in the last few weeks – nothing is getting cheaper.

Even in the US, consumers have already started to experience hiccups in supply chains for pantry items and foodstuffs. In January this year, Americans saw something they aren’t used to seeing: bare shelves at the grocery store. It was so bizarre someone even wrote a song about it.

Russia is a world leader in grain production. Ukraine is called the breadbasket of Europe. Together, they traditionally export about 55 million tons of wheat annually. 

This year, there will be a different story. Ukraine is upside down, war-torn, and economically crippled – smack dab in the middle of planting season for one of their primary exports. Russian grain is the ag-equivalent of a persona non grata. Only the rogue states of the world will touch it openly.

To make things worse, Russia, Ukraine, and Belarus produce a good chunk of the world’s fertilizer supply. So even if someone in Europe wanted to bump up those rookie numbers of their own ag production, they’re likely to stumble when sourcing fertilizer.

There is likely enough supply in the system to make sure the world doesn’t starve. But in a world where supply chains are already totally f*cked, who wants to rearrange the planes, trains, and automobiles to move grain around? 

Prices will rise, and those parts of the world not fortunate enough to be bestowed with good farmland by mother earth will fare the worst. Looking at you, Middle East.

Food prices are already up like 10% in the last year. That’s probably going to persist. Consumers can probably get used to seeing higher and higher prices both at grocery stores and in restaurants because of fertilizer and grain ripple effects of Russia’s War in Ukraine.

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What's Ripe

Twitter ($TWTR) — We are dumbfounded by this one. People literally can’t stop talking about Twitter, and rightfully so. After some hints of rottenness last week, its shares were up 7.48% yesterday. 

Ironically, the bounce here might be because of a cryptic tweet from none other than the Technoking himself. His rendition of “love me tender” might be another farcical attempt to troll both the SEC and the Twitter board, or it could be a hint at a tender offer for the social media company.

We don’t usually do this, but today we think you deserve a second Wise Investor quote that is very fitting for this recent saga: 

“Twitter is a clown car that drove into a gold mine.” — Mark “Zuck” Zuckerberg

Energy Stonks ($XLE) — Alright, we f*cking get it already. Energy is a safe port in this $hitstorm of a year. Investors have been doing with their capital like me at closing time: finding somewhere that looks decent to stick it. 

Yesterday, that Southie 6 was again Energy. Broadly speaking, the sector ($XLE) was up 1.5%, with individual names like $OXY, $PSX, $VLO, and $MPWR up between 3 and 6% on Monday.

What's Rotten

Charles Schwab Corp. ($SCHW) – Schwab came up short on both the top and bottom line this most recent quarter, sending shares tumbling. 

Revenues declined, expenses are rising, and investors are taking the shares behind the woodshed. The battered banking stonk gave back 9.47% on Monday.

Snowflake ($SNOW) – Whenever the 2-year yield goes up 10 bps, another growth company dies inside, or at least that’s what appears to be happening lately.

The cloud-based data warehousing company dipped another 3.15% Monday, but that’s not the entire story. Its snowflake shares are down 20% from their debut during the great IPO madness of 2020, over 40% year to date, and about 50% since their all-time high in late 2021.

Thought Banana

Reagan Who? — Hopefully, you’ve recovered from Tax Day yesterday. There’s nothing quite like the feeling of getting robbed at gunpoint when that EFT hits your bank account, sending money off to the bureaucrats at the IRS.

You might not know or remember or even care, but right now, we are on a crash course for higher tax rates in a few years. Indeed, our previous Orange Presidente left a lasting impression on the tax code that will mostly go away in 2025. 

The current tax code has more favorable tax brackets and marginal rates if you consider paying less in taxes for a given income level as favorable. These sadly phase out in a few years, so enjoy this while it lasts.

Let’s face it; we’re probably doomed to fork over more bananas for the same low-quality, no-quality government programs. That’s because Congress needs to either adjust the tax code or extend the Trump-era tax cuts. Otherwise, our tax brackets revert to those from 2017.

When these measures were adopted during the Trump administration, they were passed on a mostly party-line vote in Congress. There’s no telling if reform is even possible in today’s hyper-political, uber partisan environment. 

I don’t know about you, but the world today is a different place than in 2017. At least in America, we have proven that we are absolutely enamored with entitlements and subsidies from Big Brother. 

Think about those fat stimmy checks that you yolo’d into deep OTM $TSLA calls in the summer of 2020 from your cave/mom’s basement. Remember listening to Daddy JPow run his printer for the last two years? What a f*cking time to be alive, Apes.

But there will come a time to pay the piper. No one is guaranteeing tax hikes in the future here, but just looking at recent fiscal and monetary policy in the US economy and the growth of the national debt, in the words of a GILFy Diane Keaton circa 2003, “Something’s Gotta Give.”

History has shown that when tax rates change, tax professionals typically help their clients find more ways to pay less in taxes. For high earners in high-tax states like New England or California, the pre-Trump tax code looked something awful, like a 45% marginal tax rate. But in practice, the wealthy didn’t end up paying anywhere near a 45% effective rate regardless of state or political party. 

One thing is absolutely certain. Congress can either extend these Trump-era tax brackets and rates, likely in a partisan fashion, or sober up and get back on the fiscal responsibility wagon. 

If things go down how we at the Peel think they will, don’t expect this tax code sobriety to actually increase tax revenues, particularly from the wealthy. But if you and I are gonna have to fork over more of our hard-earned ‘nanas to the government, at least we are in it together.

Wise Investor Says

“The problem is that you think of it as ‘your money,’ when in reality, it’s ours.”  — Charles Rettig, probably