Aug 1, 2023 | Peel #512

In this issue of the Peel:

• China's economy is not following the inflation trends seen in Western countries but instead struggling to reignite growth. With consumer inflation at 0%, concerns grow over deflation and a contraction in industrial activity. Housing market sales also fell, with a significant monthly decline.
• SoFi Technologies and Palantir Technologies stocks rose sharply, with SoFi seeing a nearly 20% increase on impressive earnings results. Palantir is being hyped as a leader in AI. Meanwhile, Johnson & Johnson faced a stock drop amid ongoing legal challenges, and Xpeng's stock fell by over 10%.
• The military-industrial complex is once again attracting significant investment, with almost $11 billion invested in defense technologies in the first quarter of 2023. This may result in the development of next-gen weapons and signifies a renewed relationship between Silicon Valley and the military.

Market Snapshot

Happy Tuesday, apes.

And happy August. Welcome to the final full month of summer and hopefully one that involves slightly less smoke from those damn Canadian wildfires. Can we figure it out up there, guys?

Anyway, equity markets managed to figure out a way to steal some green from the jaws of an otherwise red day. US markets traded mostly lower throughout the day as fears about earnings and probably just life, in general, took center stage. Still, a last-minute gap upward right before the 4 pm buzzer kept the bulls on top to start the week and close the month.

In the meantime, treasuries had a more muted and boring day, as they probably should. These things are supposed to be safe, but you might not know it by looking at price action in the last few years. The DXY managed to push the dollar above 102, which for no reason at all, kinda makes me want to start doing a “USA!” chant.

Let’s get into it.

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Macro Monkey Says

China Check-In

You know how when someone tells you to do something one way, and that immediately makes you want to do it in the complete opposite way? That’s kinda sorta how the Chinese economy (at least appears) to be set up.

And with this unique basis, China set itself up to pretty much always be zigging as others zag. Now, that idea seems to be holding true.

For the last ~18 months or so, Western economies like the US, Canada, UK, etc., have seen rip-roaring inflation causing outrage everywhere, from the gas station to the chicken coop. While some have fared better than others in their battle against inflation (looking at you, England), China has had the opposite problem: reigniting growth.

"... deflation ... is a far tougher monster to fight than inflation because why buy something today when it’ll be cheaper tomorrow?"

Consumer inflation in China settled at a whopping 0% annually last month, which might sound great, but it’s important to keep in mind that deflation, or falling price, is a far tougher monster to fight than inflation because why buy something today when it’ll be cheaper tomorrow? Spending and activity come to a halt.

On the industrial side, we received yesterday the latest Purchasing Managers Index from China’s National Bureau of Statistics, which suggested activity remains in contraction.

Now, it could be a lot worse (just look at 2020), but given China’s—to use the technical term—big-a** impact on the global economy, this could spill any hardships over into the global economy.

While the data below alone would have JPow smashing “BREAK GLASS FOR EMERGENCY” boxes and firing up his trusty ol’ money printers again, China’s economic overseers seem far less keen on the idea.

Already, the Chinese economy has received minor forms of public stimulus, but these efforts have done almost nothing to actually solve any kind of problem.

"... the Chinese economy has received minor forms of public stimulus ..."

Later in the day, we also learned that the housing market—one of the primary weights dragging down the overall economy—saw the largest monthly decline in almost a year throughout July in new home sales, falling 33.1% compared to last July.

China, of course, is full of surprises and tends to be one of those things that seem to always figure it out. After all, the country’s been around for damn near 3,500 years. The only problem is whether or not to actually trust their data.

What's Ripe

SoFi Technologies (SOFI) ↑ 19.90% ↑

• Shares in SoFi were looking so fine on Monday as the sh*t-kicked former fintech darling soared nearly 20% on earnings results that make Barbie look like a flop.
• SoFi’s most important business line, its lending unit, saw a 37% increase in origination while expanding margins earned on those loans at the same time. If that’s not goldilocks enough, Deposits also jumped, rising 26% YoY.
• With that, the company’s strong Net Interest Income was a big help in beating the Street’s forecast for the quarter.
• Clearly, the market was hyped, but no one was more excited than CEO Anthony Noto, who described the firm’s position as “the quarter in which all the pieces have come together.” As always, we’ll see how that goes.

Palantir Technologies (PLTR) ↑ 11.40% ↑

• It was a great day to name your company “... Technologies” on Monday (apparently) as Palantir joined SoFi in leading the market on a mostly mid Monday.
• Earnings for Q2 aren’t due for another week or so, but that didn’t stop Wedbush Equity Research Director Dan Ives from hyping this name like no other on the day. This guy described Palantir as “the Messi of AI.”
• Whether that means that the firm is the GOAT or that it will get traded to another country and make a bunch more money is unclear, but both are great for investors.

What's Rotten

Johnson & Johnson (JNJ) ↓ 3.98% ↓

• When you hear about a stock dropping on allegations that the company gives babies cancer (allegedly), you probably think that story is out of a movie. Johnson & Johnson would give anything for that to be the case, even $8.9bn.
• Shares in the big pharma giant saw their worst day in more than 3 years to start the week. Driving all the fun was the rejection by an NJ judge in the firm’s second attempt to go Chapter 11 in the face of the firm’s baby powder lawsuits.
• In case you missed it, JNJ is being sued for approximately 1 f*ck ton of money for (allegedly) neglecting to remove cancer-causing substances in the firm’s baby powder. As a result, they’ve loaded all those lawsuits into a subsidiary called LTL Management in order to take the bankruptcy on the chin.
• As was done several months ago, the judge denied the appeal on the grounds of lacking a good faith basis. Wow, never would’ve guessed that literally giving babies cancer would be considered “not good faith,” but hey, it’s 2023.

Xpeng ADR (XPEV) ↓ 10.56% ↓

• Haters gonna hate, and as a result, stocks are gonna drop. Exhibit A of that universal law yesterday was none other than Xpeng Inc.
• The Chinese EV firm has had a stellar 2023, gaining almost 130% YTD (before yesterday, of course). And according to UBS, that very gain is cause for concern going forward as the Wall Street firm sees Xpeng as priced for perfection.
• Xpeng couldn’t handle the hate and tumbled as a result. The company will have a chance to fire back in late August with its next earnings report, but until then, it should be an interesting ride.

Thought Banana

Eisenhower’s Worst Nightmare

The military-industrial complex: You know it, you love it, and you watch it (probably). Naturally, Silicon Valley has fallen in love.

Technology and the military have always had a love-love relationship. However, in recent decades, many tech companies have taken on various forms of protest against selling their products to the US military, allied militaries, contractors, and other parties involved.

Investors are absolutely dumping piles of cash into defense technologies in the Valley, almost $11bn in the first quarter of this year, to be exact.

Of course, there appear to be three primary drivers here, including:

• Russia’s invasion of Ukraine
• The US-China sword rattling over Taiwan / WWIII
• Higher interest rates

Of course, those first two are pretty spooky to consider. Together, they represent an increase in global geopolitical tensions rivaling beef only previously seen between Jim and Dwight.

"... an increase in rates means higher-risk investments like VC have a daunting opportunity cost ..."

Naturally, more cash will flow to products and services made for this market. However, higher interest rates driving investment in this space are more speculative and likely the most coincidental.

But an increase in rates means higher-risk investments like VC have a daunting opportunity cost in other asset classes. That means investment dollars will follow safer bets, such as bets on companies supplying products and services to an organization with an $825bn budget in 2024.

Maybe most importantly, this probably also means more money is being put to work to develop next-gen weapons like AI drones and God knows what other weapons designed to keep you up at night before they’re even invented.

"... this probably also means more money is being put to work to develop next-gen weapons ..."

Hopefully, we at least get to see some sick explosions along the way. If not, I guess you could always go see Oppenheimer.

The big question: Is the Military Industrial Complex falling back in love with Silicon Valley? What does this mean for the venture industry and, much more importantly, global warfare?

Banana Brain Teaser

Yesterday — What special characteristic do the following words have in common?

• anyone
• before
• envy
• foresee
• seedy
• teepee
• tutu

Their pronunciations consist exclusively of the sounds of the letters (“a” through “z”) and/or the digits (0 through 9), as follows:

• anyone - ne1
• before - b4
• envy - nv
• foresee - 4c
• seedy - cd
• teepee - tp
• tutu - 22

Today — What can be driven yet has no wheels and can be sliced yet still remain whole?

Shoot us your guesses at [email protected] with the subject line “Banana Brain Teaser”.

Wise Investor Says

“You need patience, discipline, and agility to take losses and adversity without going crazy.” — Charlie Munger

How would you rate today’s Peel?

All the bananas

Decent

Rotten AF

Happy Investing,

Patrick & The Daily Peel Team

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