Aug 3, 2023 | Peel #514

In this issue of the Peel:

• The S&P is up 18.2%, and the Nasdaq 34.53% in 2023, unemployment is at 3.6%, and consumer inflation is at 3%. Nevertheless, companies' inventory growth is surpassing new orders, indicating goods piling up on shelves - a potential sign of a challenging business cycle.
• CVS Health and Starbucks have seen encouraging revenue increases, overcoming estimates, while AMD and Generac saw a decline.
• The U.S. Treasury market experienced a sell-off due to the U.S.'s credit rating downgrade by Fitch. While some like Jamie Dimon claim it doesn't matter, others worry about the impact on the U.S.'s position as the risk-free borrower and global reserve currency.

Market Snapshot

Happy Thursday, apes.

Throwing up and crying is never a great way to end the day, but after a trading session like Wednesday’s, it’s hard to do anything else. Fingers crossed, that’s not how this morning starts, too.

But hey, whatever works for ya. Unfortunately, though, just about nothing was working for U.S. equities yesterday. Investors appear shaken in the aftermath of Fitch’s downgrade, some not-so-wonderful earnings, and a “too good to be true” view of the macro outlook. The Street has been looking for a reason to break the winning streak we’ve seen this summer.

Treasuries were range bound in the meantime, with the 2-year yield break dancing just below that key 5% mark. Meanwhile, the USD continued its surge against other currencies breaking right through the 102.5 level by the DXY.

Let’s get into it.

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With the WSO PE Interview Course, you’ll be able to:

• Learn from experts at top PE megafunds and UMMs
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Don’t miss this opportunity to invest in your career and achieve your PE goals.

Macro Monkey Says

Take the W

If you told an alien civilization that in the last 3 years, we have gone from a once-in-a-century pandemic right into 4-decade high, long-run inflation only to then stumble our way to a (potential) soft landing—yeah, they just might make us their gods.

".... let’s take a look at where we are from an investor and a consumer standpoint."

Of course, there’s still the big “if” of whether we can actually pull this whole “soft landing” thing off. But, as we’ve all learned in recent weeks, it’s never too late to start preparing your statement to the aliens.

In order to get ready, let’s take a look at where we are from an investor and a consumer standpoint. While you probably don’t feel great mentally (who does??), your portfolio probably does. As we stand right now:

• The S&P is up 18.2%, and the Nasdaq 34.53% in 2023
• The Dow just had its second-longest streak of up days since 1897
• Unemployment sits at 3.6%, while consumer inflation is at 3%
• CDs and 6-month treasuries are paying 5.5% (risk f*ckin free, baby)

What more could we want?? To add the cherry on top, all told, the WSJ estimates that investors are earning an additional $121bn annually from investment income compared to this time last year. Then again, that does come with a $151bn estimated increase in debt servicing costs, however.

Don’t worry, we as humans will undoubtedly find a way to screw it up eventually, but for now, our paychecks and portfolios are looking okay in the United States.

One underrated yet useful leading indicator promoted by Michael Cembelast, Chairman of Market and Investment Strategy for JPMorgan Chase, is a measure of the delta between the change in new orders vs. the change in inventories over the same period per ISM manufacturing data.

"One underrated yet useful leading indicator ... is a measure of the delta between the change in new orders vs. the change in inventories ..."

As of the latest data, inventory growth continues to surpass new orders. That means companies are seeing goods pile up on shelves at a faster rate than they can get them out the door—generally not a great sign for the business cycle.

Maybe ChatGPT will let JPow in on how exactly to land this $25tn economic plane without a hiccup. But for now, we might as well enjoy the strong environment we’re in while we can.

Not sure if discovering an alien civilization is bullish or bearish, however. Stay tuned while we call Mr. Market to find out.

What's Ripe

CVS Health (CVS) ↑ 3.33% ↑

• It was a great time to have sick people as your customers in Q2, apparently, as CVS continues to muscle its way into the healthcare insurance game while attempting to drastically reduce costs at the same time.
• Easy enough, right? Apparently so, as we said, with CVS’s reported $89bn in revenue, of which they raked in $2.21/sh, handily overcoming estimates for $2.11/sh on $86.5bn.
• The healthcare and convenience retail giant has dropped $18.6bn on its acquisitions of Signify and Oak Street Health, so cost-cutting is easily top of mind. Still, even with the company’s 37% decline in net income, the health services segment was the key to sales, which is really all anyone cared about.

Starbucks (SBUX) ↑ 0.86% ↑

• Without much to really celebrate, investors got their early morning buzz going by sending shares in coffee giant Starbucks 3.7% higher by the time you got out of bed. Unfortunately, that gain did not hold.
• But it wasn’t all dark skies and thunderstorms for one of the world’s largest drug dealers. The coffee slinger earned $1.00/sh vs. expectations of $0.95/sh while actually missing on the top line.
• Even with a Chinese market that is sucking down those milkshakes-disguised coffees faster than college girls during Pumpkin Spice season, sales couldn’t hold up. Still, Starbucks ever so slightly bumped EPS growth guidance for the year while maintaining estimates for a 10-12% increase in sales this year.

What's Rotten

Advanced Micro Devices (AMD) ↓ 7.02% ↓

• By the skin of their teeth, AMD was able to advance on a micro earnings beat, thanks largely to weakness in certain devices.
• For the second quarter, Nvidia’s little brother posted EPS of $0.58/sh on $5.36bn in sales vs. expectations for 0.57/sh pn $5.31bn. Overall, that was an 18% decline in total revenue, largely due to reduced demand for PCs.
• Fewer PCs = fewer AMD chips sold, but that doesn’t even scratch the surface. Watching Nvidia shares boom >200% to AMD is like watching their sibling get into Harvard, but even with upbeat demand expectations for their next-gen AI chip, analysts were having a tough time buying it (no pun intended).
• That said, analysts didn’t have much to be excited about in the near term either, as AMD’s Q3 sales guidance was about as depressing as waking up with a dead phone because you forgot to charge it last night.

Generac (GNRC) ↓ 24.43% ↓

• Shares in Generac just couldn’t get any power to them on Wednesday as investors dumped the stock in response to an un-electrifying earnings report.
• Sales slid 23% annually, but Generac still managed to top estimates. The real horror only came about when the backup power company let us know just how downbad they are about Q3.
• With a forward P/E of 32.29x (higher than Alphabet’s), hopes abounded for the stock. With great expectations comes great disappointment when failing to meet those expectations (as I’m sure you all have experience with), but Generac decided to learn that the hard way.

Thought Banana

Different This Time?

Despite what many of you degenerate, adrenaline-junkie trading legends out there may think, believe it or not, but you’re actually supposed to want something less when it gets riskier.

That’s exactly what happened yesterday morning in the U.S. Treasury market. Fitch’s downgrade of the U.S.’s credit rating from AAA to AA+ led to a selloff and a quick hop in yields.

The funny thing is, however, the last time the U.S. saw our rating downgraded back in 2011 by Standard & Poor’s, investors piled into treasuries. The idea then was the classic flight to safety move, but compared to now, the fact that investors sold off yesterday morning suggests we were a lot more sure of ourselves just 12 years ago.

"Yields gaining here ... is a further signal ..."

So, is something actually different this time? Reading into the stock market is tough enough, and it’s supposed to be the dumb one in the group.

Bond markets, however, are considered the “responsible older brother” of the two. Yields gaining here rather than in equities, which sold off on the day as well, is a further signal that investors are actually worried this time around.

According to the Congressional Budget Office, the reasons for the selloffs appear warranted. The U.S. massive fiscal deficit(s) and debt balance are becoming too much to ignore as the Treasury is estimated to be paying $745mn in interest payments alone for FY’24.

"The U.S. massive fiscal deficit(s) and debt balance are becoming too much to ignore ..."

That’s right around 75% of our non-defense discretionary budget.

But it’s not like we needed Fitch to tell us about this problem. Everyone already seemed all too aware. As the U.S. has dug itself into a worse and worse fiscal position, investors watched with keen eyes the whole time. It seems that now, Fitch has just brought the spotlight back, hence the spooky vibes on the Street today.

Other investors, like JPMorgan Chase CEO Jamie Dimon, took different stances, saying, “It doesn’t really matter that much.”

The big question: How will a U.S. downgrade impact the country’s position as the risk-free borrower and global reserve currency? Who’s right here, cool, calm Jamie Dimon or the ever-so-erratic Mr. Market?

Banana Brain Teaser

Yesterday — Find a rhyme for each word below so you end up with a familiar three-word phrase in the form “__, __, and __.”

Example:

• Clue: “Cook, Wine, Drinker”
• Answer: “Hook, Line, and Sinker”

1. Won, Dune, Cars
2. Wed, Night, Two
3. Shove, Goner, Betray
4. Blast, Pheasant, Suture

Answers:

1. Sun, Moon, and Stars
2. Red, White, and Blue
3. Love, Honour, and Obey
4. Past, Present, and Future

Today — Which weighs more: a gallon of liquid water or a gallon of ice?

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

Wise Investor Says

“As an investor my job is to figure out what will happen rather than what should happen.” — David Einhorn

How would you rate today’s Peel?

All the bananas

Decent

Rotten AF

Happy Investing,

Patrick & The Daily Peel Team

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