Saudi Arabia's Oil Cut: An Unexpected Shift | The Daily Peel | 6/5/2023

June 5, 2023 | Peel #474

In this issue of the Peel:

• A strong jobs report has boosted the S&P, and the US economy is showing promising signs with the signing of a new debt ceiling deal
• MongoDB and Lululemon shares surged due to impressive earnings reports, while wireless companies suffered from Amazon’s potential entry into the wireless game. Meanwhile, SentinelOne faced a significant stock drop as it failed to meet Wall Street expectations
• President Biden’s weekend saw the signing of a debt ceiling deal but also a potentially troubling announcement from Saudi Arabia of a production cut of 1 million barrels/day

Market Snapshot

Happy Monday, apes.

What a way to get June started, apes. The S&P is up almost as high as the pollen count so far this month, and our portfolios are loving it almost as much as our pharmacists.

Equities surged a leg up on Friday as a strong jobs report and a newly minted debt ceiling deal gave us the economic equivalent of taking molly at an EDM concert. Can’t ask for much better, but despite the rampant and apparent positivity, the Dow led the way with a relatively slight 2% gain.

In terms of dolla-dolla bills (y’all), USD chipped down almost a full point by midday on Friday before rising back above the 104.0 line overnight. Treasury yields spiked higher than your Monetary Econ professor’s blood pressure during a JPow speech, with the 2-year ripping right back through 4.5%.

Let’s get into it.

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Banana Bits

• Big Dawg Biden picked himself up off that stage and breathed a fresh sigh of relief into our suffocating economy by signing the debt ceiling deal
• Speaking of winners and losers above, Politico scorches the media with a hot take that low-income workers were actually big winners of the pandemic
• China is taking its ball and going home while the US does…the exact same thing. Thanks to the beef, Chinese goods coming into the US have hit a 10-year low
• It’s a bank’s worst nightmare: stricter regulation could be on the way

Macro Monkey Says

Jobs Day

Well, it certainly looks like you apes took Kim Karashian’s sage advice to heart. “Get your f*cking ass up and work” was the story of the American citizen in May, and dammit, we couldn’t be prouder.

According to the Bureau of Labor Statistics, the United States added 339,000 jobs throughout May while the unemployment rate rose to 3.7%.

"Makes way too much sense, right? Who doesn’t love macro."

Okay, yeah, I see it too—that might seem weird. Unemployment can rise while payrolls grow when the number of unemployed persons increases by larger than that payroll expansion.

Basically, more people moved from “outside of the labor force” and into the “unemployed” portion of the labor force. Makes way too much sense, right? Who doesn’t love macro.

Anyway, the report seems to have pleased traders about as much as Jimmy Butler has been pleasing Heat fans these past few weeks.

"... meaning May nearly hit that average right on the head."

For the past year, the average monthly job creation figure came in at 341,000, meaning May nearly hit that average right on the head. It’s also the highest growth since January, indicative of the fact that despite ongoing economic sh*tshows from high-profile layoffs to the dripping uncertainty, labor demand remains strong.

Meanwhile, some good news-bad news for all of us measly wage earners came to light as well. Hourly pay grew 4.3% annually, a historically strong nominal raise, yet that growth rate set a new low for the past year.

"... the potentially worrying strength of the report doesn’t seem to have weighed heavily on recession odds either."

JPow’s been trying to kill that vibe for well over a year now, as anyone with a pulse now knows. Although slow, he’s loving the fact that the pay increases your boss gives you are slowing down.

Markets barely even budged in terms of rate hike probabilities at next week’s FOMC meeting, with any movement in the odds heading more towards a hold at 5-5.25%.

At the same time, the potentially worrying strength of the report doesn’t seem to have weighed heavily on recession odds either. This metric is way harder to quantify, so I’m talking a little out of my *ss right now (what else is new?), but anecdotal quotes from the bears among us certainly haven’t gotten more positive.

Despite the anticipation for the report, job headlines had to share the stage with the formation of the debt ceiling deal (more on that tomorrow). Either one of these would’ve been great news for equities alone, so it’s no surprise why traders were particularly giddy to kickstart June trading.

What's Ripe

MongoDB ($MDB) ↑ 28.01% ↑

• Late in szn, the earnings party rolls on with MongoDB taking a turn on aux. If you’re wondering about the company’s DJing skills, well, spoiler alert: sh*t’s hot.
• Earnings blew guidance out of the water, raking in an adj. EPS of $0.56/sh vs. $0.19 expected on sales of $368mn while the Street was looking for $347mn.
• The world’s largest telecom co, China Mobile, had the hookup for the quarter in switching providers of a major database servicing job from old, boomer Oracle to the new and improved MongoDB, giving a big assist to the 29% annual sales growth the young company saw last quarter.

Lululemon ($LULU) ↑ 11.30% ↑

• It’s a tale as old as time: when life gives the consumer lemons, they make Lulu-ade or something like that. Now, with numbers like this, clearly, those lemons we’re talking about are closer to those “lemon” quaaludes that caused Jordan Belfort to crash his lambo than what the neighborhood children are selling.
• That’s because, much like quaalude users, investors felt nothing but euphoria on Friday. Lulu’s quarterly figures showed a beat on the top and bottom lines, along with consumer demand stretching about as far as the company’s pants do.
• And shareholders can thank China for that. We’ve been worried about slowing consumer demand here in the US, which Lulu seems to have evaded, but the real green came as China continues to wake back up from the zero-C-19 nightmare.

What's Rotten

Wireless Companies ($TMUS, $VZ, $T) ↓ 5.56% ↓

• Calling all cell phone users: I hate to be the bearer of bad news, but your dear sweet phone provider’s stock was almost definitely down yesterday. Maybe make a few extra calls this month; I’m sure they (and your mom) would love it.
• But nevertheless, it won’t save them from the Amazon-induced wrath felt Friday. Turns out the e-commerce/cloud computing/literally everything-giant may soon want to get in the wireless game through offerings rolled out to Prime subscribers.
• T-Mobile and Verizon both confirmed they were, in fact, not in discussion to be the providers for Prime users, but it’s unclear exactly how Amazon and Partner XYZ Co. would offer the “low cost or free” service.
• Dish, on the other hand, was cracked out of its mind gaining over 16% on the day. Presumably, Dish is Amazon’s top prospect for the time being. But of course, we’ll have to wait to see how long that lasts.

SentinelOne ($S) ↓ 35.15% ↓

• Cybersecurity name SentinelOne was easily the worst stock on Friday in a still-very-hot sector.
• Bears hacked the sh*t out of this cyber stock on Friday as the small firm’s 70% annual sales growth wasn’t enough to meet Wall Street’s great expectations.
• Losses narrowed, but top and bottom lines came up short, and when combined with a depressingly weak outlook, this created a cocktail that investors had to send back.

Data Peel

Source

Thought Banana

Pay Day

It was a mixed weekend for Big Dawg Biden: from signing a debt ceiling deal (feel free to take that sigh of relief now) to stealing the spotlight at this weekend’s US Air Force Academy graduation with an all-time 

Until Sunday afternoon, he probably thought that spill would be the worst part of his weekend. Unfortunately, Saudi Arabia had other plans.

Late Sunday night local time, the Saudi Energy Minister, Abdulaziz bin Salman, announced a fresh production cut of 1mn barrel/day to begin in July. Not sure what he means by this, but the minister called the move a “lollipop” (again, wtf?) as they seek to juice existing slashes to production already put in place in recent months.

"... likely leading to higher crude prices that may make your already miserable ride to the office even worse."

Once again, it’s a big “F*ck You” to Joe Biden and drivers from sea to shining sea. As this portion of production goes offline, we’ll begin to see a decrease in new supply later this summer, likely leading to higher crude prices that may make your already miserable ride to the office even worse.

I don’t mean to get you too excited, but traders don’t tend to wait for the cut to actually happen in order to price in the supply cut, so that tank of gas could get even more expensive even sooner.

"For two parties that used to be boys, recent beef driven by the new guy on the block, China, hasn’t exactly had a challenging time driving a wedge ..."

Moreover, this is yet another sign of the need for couples therapy between the US and Saudi Arabia. For two parties that used to be boys, recent beef driven by the new guy on the block, China, hasn’t exactly had a challenging time driving a wedge between the one-time-besties.

Traders have already had a practically impossible task in pricing crude this year as fears of:

• Inflation
• Recession probabilities
• Rate hikes
• Dollar movements
• China’s re-opening
• War in Ukraine

…and much more have done nothing but drive this market to be even more confusing than usual. Crude prices essentially reflect the collision of some of the most important ongoing global narratives, such as looming recession(s), geopolitical tensions, and war in Ukraine. Best of luck, traders!

"Heading into an election year with the SPR already drained like a Garelick Farms cow, Biden certainly won’t be happy when he reads this across the Oval’s telegraph."

Heading into an election year with the SPR already drained like a Garelick Farms cow, Biden certainly won’t be happy when he reads this across the Oval’s telegraph. A US response could be imminent, so stay tuned.

The big question: How will the divergence in energy policy impact U.S.-Saudi relations going forward? Will any other OPEC+ nations follow suit and expand existing production cuts? What does this middle finger to the US mean for the nation’s status as a global leader?

Banana Brain Teaser

Friday — Is it possible for the price level to go up at the same time inflation is going down?

Yes. Inflation measures the rate of growth of the price level. When the rate of inflation falls (called disinflation), the price level is still rising, but at a slower rate. When prices fall, we experience deflation.

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

The following clues give definitions for world capitals. These definitions describe what the capitals (just the city) sound like they would mean.

1. This capital is a recently opened store for cooked meats.
2. This capital is plant-covered bovine.
3. This capital is a tool used for fighting.
4. This capital is a royal weight.
5. This capital is something you get from the sun.

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

Wise Investor Says

“The dollar’s status as the world’s reserve currency is not guaranteed. If we don’t take the necessary steps, we risk losing it.” — Stanley Druckenmiller

How would you rate today’s Peel?

All the bananas

Decent

Rotten AF

Happy Investing,

Patrick & The Daily Peel Team

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