Shaken and Stirred | The Daily Peel | 9/29/22

Market Snapshot

The chart for British bonds over the last few weeks looks like that of a third-world country.

Truss & team have to be scratching their heads. After what they thought would be stimulative tax cuts, investors are dumping government debt hand over fist.

Turns out that if you have no plan for how to pay for those cuts, markets get skittish about future issues.

Stateside markets staged a comeback and finally ended a session on a positive note.

At the close, the Dow shot up 1.88%, the Nasdaq gained 2.05%, and the S&P rose 1.97%.

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Let's get into it.


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Banana Bits

  • Florida is bracing for impact as Hurricane Ian barrels towards the East Coast; airports, schools, and Disney World are closing as a result
  • Uncle Joe's early Christmas present to student borrowers is projected to cost a cool $400bn
  • The CEO of the now-bankrupt magic internet money lender Celsius resigned
  • The Bank of England is buying government debt "on whatever scale is necessary" in an attempt to balance bond markets

Banana Brain Teaser

Yesterday We traveled the sea far and wide. At one time, two of my sailors were standing on opposite sides of the ship. One was looking west and the other one east. And at the same time, they could see each other clearly. How can that be possible?

The sailors had their backs against either end of the ship.

Today - It's a free WSO t-shirt for the 12th correct respondent. LFG!

What is full of holes but still holds water?

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Macro Monkey Says

America's Newest Export: Inflation - When you think of American exports, food, oil, and cars come to mind.

But in 2022, the U.S. is also sending inflation abroad.

  • The dollar strength driven by Fed rate hikes has shielded Americans from higher prices
  • By devaluing foreign currencies against the dollar, everyone else is feeling the pain
  • There's never been a time like this when so many countries are hiking rates in unison, and the domino effects will take years to play out
  • In the short term, a turbocharged dollar is making American goods and services eye-wateringly expensive for other countries, working against their attempts at slowing price increases

There's also the question of every other country's ability to reign in their own inflation. Hiking rates is hardly a precise way of cooling demand, and it works best when it slows consumer spending at home.

But if you're a European country, and the main driver of your inflation is rabid spending by American consumers, hiking your own rates may not make much of a dent.

If (and hopefully when) price increases are tamed in America, they're likely to slow around the world, too.

But other countries might have to wait a while for the slowdown to work its way throughout the global economy, and significant pain could come about in the interim.


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What's Ripe

Biogen ($BIIB) - If you've ever had someone close to you suffer from Alzheimer's, you know how debilitating the disease is and how few treatments are out there.

That's why there's so much excitement for lecanemab, a new drug that's showing huge reductions in the speed of cognitive decline.

Investors are excited about the market opportunity, which is "likely in the $6-8 billion range."

At the end of the session, $BIIB rocketed up 39.85%.

Netflix ($NFLX) - Despite competition pouring in from all sides and broad declines in tech stocks, $NFLX has held up pretty well over the last month.

It got another bounce Wednesday on the back of a bullish analyst report, which highlighted the growth potential of a new ad-supported offering.

The OG streaming company lost nearly 1 million subscribers in Q2, but it still managed to grow the top and bottom lines, proving its resilience to investors.

$NFLX was up 9.29% by the end of the day.


What's Rotten

Home Prices - Mortgage rates are soaring past 7%, which is bad news for homeowners in U.S. metro areas.

But those predicting an '08-style housing collapse are probably too apocalyptic since inventory and labor markets are still airtight.

And the pain isn't evenly spread out-it depends on location, location, location.

West coast markets, especially on the high end, are plummeting. Most other areas are seeing more modest declines.

Between May and August, the U.S. median sale price sank 5.47%.

Apple ($AAPL) - When your company valuation reaches the GDP of France (~$2.9Tn), losses sustained in a bear market will make your jaw drop.

Since the start of the year, Apple's lost about 19% of its market value, or $570bn. NBD, that's just the entirety of Berkshire Hathaway that's gone *poof* in 9 months.

Concerns are building about lackluster iPhone 14 demand. To be fair, once you're on the 14th of anything, it's just not as exciting.

$AAPL was down 1.27% on the day and is down 16.27% in just the last 6 months.


Thought Banana

Sour Street - I'm not sure how many Wall Street-ers blast Olivia Rodrigo's "Sour" on their way to work, but the album sums up the current mood on the Street pretty well.

  • Big bank revenues are expected to crater as the economy contracts and the mood in the stock market shifts heavily to the "fear" side of the fear-greed spectrum.
  • Nobody wants to IPO into a bleeding-red market, which means big drops in investment banking and capital market origination fees.
  • A small bright spot has been trading revenue from wildly volatile markets, but that's hardly offset the losses elsewhere. Goldman has already begun heavy layoffs.

Finance is one of the first dominos to fall when you have a Fed dead set on slowing economic activity. Capital allocators stop funding companies, which means they have to lay people off, and so on.

So all of this is to be expected, but will capital markets look the same after this cycle? Many in private equity aren't so sure.

PE absolutely boomed during C-19 and made plenty of partners plenty of dough. But several big banks are about to lose 9 figures on an LBO with Citrix. The deal sounded great at the top of the bull market, but then, well…

A dark winter for PE seems to be on its way. We'll see how long it lasts and if it changes the industry going forward.


Wise Investor Says

"Don't panic. The time to sell is before the crash, not after." - Sir John Templeton



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