Solving a Crazy Problem | The Daily Peel | 5/22/23

May 22, 2023 | Peel #466

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Market Snapshot

Happy Monday, apes.

Hope everyone had a great weekend, unlike Jon Rahm taking home a disgusting 50th at this weekend’s PGA Championship. Get ‘em next year.

Nevertheless, we ended last week on a nice, quiet, and supremely boring note. Equities pulled their classic 2023 move, bouncing around in a narrow range all day only to finish slightly lower. US major indices slightly fell, with the Dow’s 0.33% loss taking the crown for the biggest loser, but the S&P managed to notch a weekly close above that key 4,155 level, leaving us to wonder, are the bulls back??

Maybe not yet, at least, if the treasury market is any indication. Yields largely rose to end the week as investors realized the US government’s credit profile may soon be about as good as that of Bed Bath & Beyond. The 2-year broke through 4.3% briefly while the 10-year crossed the 3.7% line and remained above. As a reminder: the longer-dated ones are supposed to have higher yields.

Maybe Apple is the new Treasury, issuing 40-year bonds with >4.2% coupons recently. Not really sure whose credit profile I trust more there.

Let’s get into it.

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Banana Bits

• Debt ceiling talks are starting to resemble the texts sent to my ex at 1:34 am on Sunday mornings—just getting no response
• Weeks away from the next FOMC Rate Day, officials are starting their routine process of testing the waters of rate moves via public comments and reactions, with Minneapolis Fed Pres Neel Kashkari stepping up first
• Internet’s resident Fed expert drops another gold mine detailing how banks aren’t exactly out of the woods just yet
• Midsize pickups: the new auto battleground for automakers

Macro Monkey Says

Predictably Predictable

11 days, apes. We have 11 days until US politicians potentially and entirely unnecessarily trigger a global economic…uh…let’s just call it a “problem” for now.

Naturally, debt ceiling talks have paused as we get into the home stretch. Politicians arguably want to heat the pot to a boiling point before reaching any deal, and I think we all knew this from the get-go.

Back in 2011, the US’s credit rating was actually downgraded during a similar but distinct debt ceiling debacle. Like every other issue in Washington, we knew the problem was coming for a long time, but it took until an 11th-hour vote for the US to avoid default. Because neither side wants their colleagues nor constituents to see them as having “caved,” waiting until the last possible moment is kinda what they’re incentivized to do. We knew this was gonna come down to the wire.

A deal before the alleged June 1st “X Date” is still on the table, but every day that passes without a deal increases the probability of doing something wild to avoid default.

One of those wild moves often floated in financial media is a $1tn coin minted by the Treasury in order to allow the government to throw that cash on their nearest debt obligations. As the Treasury is able to freely mint platinum coinage with no restrictions as to its size, value, or anything else (unlike paper money), this seems like a quick and easy solution.

But it won’t happen. If they were to run with the $1tn coin idea, that would basically be the Fed directly funding the US government rather than simply controlling the money supply and managing monetary policy as is the Fed’s job. It would bring the Fed from monetary into the fiscal battlefield, the former exclusive to the Fed while the latter is supposed to be exclusive to Congress and political institutions.

JPow and the Fed have done, throughout their respective histories, absolutely everything they can to avoid fiscal dealings—the Fed is meant to be apolitical. A $1tn coin brings them into the political realm and would forever alter the view of the Fed’s independence, a crucial psychological element to the central bank’s function.

So no, JPow isn’t gonna walk on stage with a quarter-sized, platinum token that has “$1tn” and Joe Biden’s face printed on it (can you imagine?). We’re not The Simpson’s yet, at least.

At this point, if Biden and McCarthy can’t work out their middle-school-esque disagreements, the much more likely option to avoid absolute global financial chaos could rest in invoking the 14th Amendment.

The 14th Amendment, as you obviously remember from APUSH, is a long one with 5 parts and mostly deals with the rights of citizens. But, one key phrase at the start of Section 4 of the Amendment could be our saving grace, stating:

“The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.”

Basically, it is a violation of the Constitution for the US government to not pay any and all of its debt obligations. The Biden Administration could simply invoke this 1866 law and ignore the debt ceiling. I’m sure I don’t need to explain why that would be a political powder keg the size of a certain object dropped on Hiroshima and Nagasaki.

For now, Biden and McCarthy spent most of the weekend posturing from opposite sides of the world, as coincidentally, Joey B is actually in Hiroshima right now at the G7 meeting. The two intend to continue fist-fighting when the Pres returns, but that by no means will automatically translate into a deal of any kind.

It’s Washington, DC. Anyone over the age of 6 could’ve predicted an issue this hot-button would cause way more stress than needed, and they would be damn right.

What's Ripe

Catalent ($CTLT) ↑ 15.65% ↑

• With shares getting hammered all of 2023 so far, Friday was finally Catalent shareholder’s turn to get hammered, but in celebration this time.
• Shares boomed over 15.6% to close last week on the back of “news” that could easily trigger future shareholder lawsuits. After earlier in the week announcing further delays in filing their form 10-Q (not good news), executives came out and simply just stated that they have been able to “win significant new business.”
• LMAO imagine. Delayed financial reports, existing guidance that operational performance has “fallen significantly short of our expectations and our February forecast,” and the CEO comes out with a statement essentially saying, “Trust us, guys. We’re killing it!”
• Enjoy the win for now…might not last forever.

Occidental Petroleum ($OXY) ↑ 1.51% ↑

• Like a fat kid running around the neighborhood on Halloween night, Buffett simply cannot get enough of Occidental Petroleum. This dude bought shares every single day in the last 6 trading sessions, an addiction that even the best junkies can’t match.
• Buffett-owned Berkshire’s stake in the oil and gas business has grown to ~25% as of the end of last week. The old man has made it clear he has no intentions to buy a controlling stake in the firm (meaning he’ll keep it under 50%), but investors can’t help but get hyped when Buffett buys.
• More broadly, this is evidence that oil & gas still have a long way to go. If the 90-year-old Oracle, whose favorite holding period for his firm of “forever,” is still buying O&G in 2023, safe to say that smart people still expect this sector to rip for a while.

What's Rotten

Foot Locker ($FL) ↓ 27.24% ↓

• It was a tough day to be a mid-ass retailer to close out last week, with Foot Locker leading the way lower. If only the company’s referees could’ve blown a whistle to stop this game.
• Earnings szn is all but over, yet Foot Locker still had to get in on the action. But after Friday’s performance, we’re sure shareholders wish they hadn’t. Earnings of $0.70/sh came in less than half that of last year’s Q1 and well below Street estimates. Sales missed too, only adding to the humiliation.
• In fact, the humiliation of this report was so daunting it simply couldn’t be contained in one stock. Names like Dick’s Sporting Goods ($DKS -6.80%), VF Corp ($VFC -8.18%), and even online names like Wayfair ($W -8.55%) felt the shame too.
• Basically, all the mid-retailers that sell sh*t you may want but don’t exactly need tumbled. Might not be a coincidence, given that is the exact dynamic suggested in Tuesday’s retail report. Even goddamn Amazon underperformed on the day, losing 1.61%.

Disney ($DIS) ↓ 2.57% ↓

• As the popularity of MMA grows and news around the UFC-WWE merger gets bigger and bigger, who knew the biggest fight of 2023 would be between a 99-year-old company and the government of its home State?
• In addition to calling off an adrenaline-inducing $1bn investment into its theme park operation in Florida (for obvious reasons), investors had other motivations to be downbad about Disney on Friday.
• Specifically, the analysts at Macquarie chipped into the decline by downgrading shares from Outperform to Neutral, citing “interim uncertainties” on their way to becoming a DTC-first company. It’s funny; I didn’t know Florida Governor Ron DeSantis had legally changed his name to “interim uncertainties.”

Thought Banana

What DeFi Wishes It Was

At this point, we could do an AI in every section just about every day. Hell, might as well even have ChatGPT write it too. Actually, wait, forget I said that…and please, nobody give Patrick that idea either.

Ahem, anyway. The world of artificial intelligence continues to evolve rapidly. While the evolving done by digital currencies throughout their own hype cycle was one of price movements, laser eyes, and “have fun staying poor,” the evolution of AI seems to have already gone from idea to countless real-world use cases in the same amount of time BTC went from $0.0008 to $0.10.

Quite honestly, there are few better places to find these updates than Twitter. If you search “AI” on the platform, odds are you’ll stumble across something wild I missed, as the sector is quite literally oozing with new updates.

For starters, ChatGPT is now available as an iOS app, newly released as of May 18th. Accessing the GPT-4 LLM is now just one click away every single time you open up your phone…and to think, only 6 months ago, you were still using Safari.

Earlier in the week, a company called Gamma released an app that just may save all you IB hardos 10 of the 90 hours you work each week by creating slide decks for you simply based on the natural-language words you use to describe what you want. And yes, it’s free, but no promises on whether or not your MD will catch you.

Meanwhile, for all you ER and other analysts out there, speed reading industry reports gets taken to the next level with ChatPDF. Like a gift from the heavens, you can drop any PDF file at all into this platform, and it will immediately become, effectively, an LLM specialized in that one PDF. You can then ask the bot any questions about the PDF, and it doesn’t take much imagination for where things can go from there.

Also released on May 18th was Perplexity AI’s newest update to its CoPilot search tool, allowing interactive and personalized search designed to save time when browsing.

But while most companies run into the AI battlefield ready for action, one particularly notable is moving in the opposite direction. Last week, Apple banned certain employees from using these LLMs as the firm is wary of leaks related to product design, financial information, or other sensitive data that would cause a historically secretive company like Apple to throw up if leaked.

At its most fundamental, what these LLMs allow us to do is interface with a computer using human language. Previously, that interface was reserved to nerds speaking C++, Javascript, or some other bullsh*t. But taking things one step further, the LLMs essentially allow you to interface with the entirety of the internet in one place; rather than interfacing with whatever link pops up first on your Google search, you’re able to interact with the internet’s hivemind in its entirety all in one place.

This “bundling” of essentially the entire internet in one place, needless to say, has countless possibilities on its own, with just a few pointed out above. As the hardware behind these things, like Meta’s new AI chips and others, continues to get better, the possibilities will only mount.

There’ll still be a massive bubble, I’m sure, but very unlike BTC and digital “assets,” this one actually has a consumer-facing use case. The internet revolution gave us the dot-com bubble, where countless companies listed publicly and ran up to multi-billion valuations just for having “.com” in their name. Out of that, you got a ton of Pets.com meltdowns, but you also got Amazon and Google.

Lesson of the day? Choose wisely.

The big question: What even are the appropriate questions to be asking about the long-term development of AI? What are some of the greatest economic opportunities with this technology? And, of course, how close are we to Skynet?

Banana Brain Teaser

Friday — Below are four epitaphs (writing on gravestones). From the writings, can you tell the occupation of each person?

1. Here lies Mortimer Bibbs. He took part of ours and gave it to big brother, but he always had good form.
2. Here lies Dirk McDuff, who toppled giants with weapons of steel. If only he'd heard his partner's shout before the giants found their revenge.
3. Here lies Suzy Smelt. She constructed many a bomb but mostly brought smiles to our faces.
4. Here lies Ethel Grant. She spent her whole life fighting with what she will now become.

1. Mortimer was a tax man.
2. Dirk was a lumberjack (and died because he didn't hear his partner yell "Timber!").
3. Suzy was a comedian.
4. Ethel was a maid, always fighting dust (referring to "ashes to ashes and dust to dust").

Today — It’s 100 bananas off the Hedge Fund Interview Course for the first 15 correct respondents. LFG!

Customer services at RightWrite headquarters received the following letter recently. Luckily their top puzzle solvers were able to determine the meaning and help Mrs Miggins. Can you work it out what her problem was?

Da S,

ld lk cmlan ab h f m .

hs ls aa n k ccl.

As can s, hs ls a mssng fm hs dcmn.

ld b v gafl f cld cc hs blm fhh.

Man hanks,
Ms Mggns.

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

Wise Investor Says

“Over the next 10 years, I expect many more industries to be disrupted by software, with new world-beating Silicon Valley companies doing the disruption in more cases than not.” — Marc Andreesen

Happy Investing,

Patrick & The Daily Peel Team

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