Stone Cold Strategy | The Daily Peel | 5/12/2023

May 12, 2023 | Peel #460

Market Snapshot

Happy Friday, apes.

Am I the only one that feels like this week has been more like a year? I’m sure it doesn’t feel like that to graduating seniors (congrats, by the way!) but welcome to the “real world,” young apes.

Speaking of the “real world,” it doesn’t get more “real” than equity markets. Yesterday, shares in US equities traded about as weak as a 3mg Zyn, but you might not know it by looking at index performance. That’s because names like Google and Amazon carried the team on their back while detractors like regional banks and Disney sought to throw cold water in the large-cap fire. Still, we closed at basically the highs of the day, so can’t be too mad.

Treasury yields followed suit in the flight to safety. Despite the full faith and credit of US debt hanging in the balance of two elderly & enemy politicians, investors still snapped up Uncle Sam’s bills, notes, and bonds. Maturities across the spectrum saw yields mostly fall, with the longer-dated issues seeing the most demand.

And confirming that flight to safety even more, the US dollar saw a strong rise because who wouldn’t want exposure to the largest debt default in human history? Gotta keep the party going.

Let’s get into it.

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Passive income can come from a bunch of different places, but real estate might be the king of them all. Returns tend to be stable, and in the right market, can provide equity growth along with checks coming in every month.

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Banana Bits

• While still sticking around for all the fun stuff, certified memelord Elon Musk is officially stepping down as Twitter CEO, much to the delight of Tesla shareholders and people who want to go to Mars alike
• A crucial debt ceiling meeting just days before a potential US default has obviously been postponed as leaders apparently have something more important to do? Idk I haven’t seen the nukes yet
• After chilling out for a second, deposit outflows kicked right back up at PacWest and sent shares spiraling
• Small businesses are just about as downbad as consumers lately as confidence dips to a 10-year low

Macro Monkey Says

“Good as money in the bank,” “you can bank on it,” and “break the bank” are all common expressions that demonstrate English speakers’ love for both money and idioms. But, it turns out, only one of the above is actually true.

Obviously and unfortunately for depositors, the true one is, of course, “break the bank,” as is hopefully self-evident given the events of the 2 months. Maybe if we change the other two expressions to “Good as money in the FDIC” or “you can FDIC on it,” then we’d be a truthful language.

But alas, it is not, and we are not. There is now more uncertainty than dollars at many regional banks across the US, but as the market stands now, it appears as though the worst is behind us (please bully me relentlessly if another big one goes down).

Now, the 2nd, 3rd, and 4th largest bank failures in American history all occurred within a 52-day span. That’s about 7.5 weeks for the mathematicians among us, but the truly crazy part is that the Fed CONTINUED RAISING RATES throughout the calamity.

We often call Steve Austin “Stone Cold,” and rightfully so, but we might have to add that certification to JPow’s official title.

As shown in the below graphic, we had been in a bear market for bank failures since the closing days of the GFC…so what the hell happened in 2023 that made the sector go belly up?

Dedicated apes should already have an answer pouring through their teeth: rate hikes. And while this isn’t wrong, it doesn’t exactly tell the full story.

To summarize, the most important confounding factors include:

• 500bps of rate hikes in 1 year after a decade of ZIRP catching bank CFOs and treasury directors off-guard in a deadly duration debacle
• The enormous success of the tech sector and overconcentration of these banks by having a majority of their clients with similar economic exposure
• Communication technology like Twitter and VCs screaming on podcasts, along with digital banking, made bank runs a lot easier
• Shareholders not wanting to get absolutely wiped

That’s just a summary. We’d need a book or two to really give the situation the attention it deserves, but we’ll work with what we have.

Quite honestly, these bank failures seem to have only grown to the point where they’re worthy of air time because of the run-up of the tech sector. For one, the “Silicon Valley” part is literally in SVB’s name. Moreover, the 1) egregious success, 2) concentration of, and 3) matched economic viability from the employees of these tech companies – those of which SVB, Signature, and First Republic specialized in – built a classic concentration risk that once JPow started to hike rates simply could not be stopped.

Much of the concerns come from uninsured deposits, which, as the FDIC only insures amounts up to $250k per individual per account, drove seemingly worthwhile concern from large customer bases that largely became ballooned from the tech-flation of the 2010s. SVB had upwards of 94% of deposits uninsured, while the US banking system overall averaged about 40% per this random source and peaked at 46.6% in 2021 per this not-random source.

No one can be sure one way or the other as to whether or not more banks are to come. The only thing we know is that JPow don’t give a damn until something like JPMorgan or BofA goes down, apparently. Let’s all just keep our fingers crossed that doesn’t happen, I guess.

What's Ripe

JD.com ($JD) ↑ 7.21% ↑

• The JD in JD.com must stand for “just did” or something because JD.com just did that. That, of course, being the delivery of yet another period demonstrating stronger-than-expected numbers coming in for the quarter.
• Beating from the top to bottom line, the Chinese e-commerce firm that stabs the biggest prick into Alibaba’s thigh also announced that CFO Sandy Ran Xu will soon be taking over current CEO Xu Lei’s position at the company’s top slot. Needless to say, investors were far from upset.
• Shares are still down almost 35% for the year, and yesterday’s performance didn’t much help the fact the company’s value has only increased ~4.6% in the past 5 years or so either. Get ‘em next time.

Robinhood ($HOOD) ↑ 6.39% ↑

• Degenerates rejoice! You are officially no longer restricted to gambling between 9:30 am - 4 pm ET. Thanks to the friendly & ever-responsible Robinhood, you can get margin called 24/7.
• Sports betters among us already enjoy this luxury, but now those wise enough to only wildly speculate on equities can get in on the action, too. Late on Wednesday, Robinhood announced they would soon allow 24/5 stock and ETF trading on their platform to all customers.
• To answer your first question, yes, it is legal. Most brokerages don’t afford this ability to retail clients, but since those are the only clients on Robinhood and because they drive the largest spread on trades, Vlad and the team have decided to give it a go.
• After-hours and pre-market traders will, however, be limited to limit orders when placing trades in the dark, while market makers like Jane Street and Virtu will get to rob—I mean, take the other side on the bets of these wily traders. Should be fun!

What's Rotten

Sonos ($SONO) ↓ 23.69% ↓

• The company behind the world’s most pretentious yet somehow “premium” speaker maker crashed and burned on Thursday as quarterly numbers didn’t sound all too great to investors (pun intended).
• Basically, they f*cked up. Losses for the quarter were wider than expected, while sales failed to get anyone excited, and that wasn’t even the bad part. Investors, forward-looking as they are, nearly had to be rushed to the ER due to portfolio sickness on management’s guidance.
• “Softening consumer demand and channel partner inventory tightening,” clearly being written by someone with an MBA, are the primary forces driving weaker-than-expected performance in Q2, according to management. For traders and shareholders, that meant far weaker than expected share performance yesterday.

PacWest ($PACW) ↓ 22.70% ↓

• I mean, does this one even need an explanation? Shares in regional bank PacWest, a near carbon copy of SVB that dresses slightly more responsibly, nosedived on Thursday as traders are confirmed still terrified of a regional lending crisis.
• JPow’s vicious continuation of rate hikes hellbent on slowing the economy this past Wednesday may have reignited fears on a day’s delay,
• The bank based in the West near the Pacific saw shares tank yesterday on investor sentiment switch given the context that, in regional bank failures, equity holders are the ones buying everyone else’s lunch. Now, that is as it should be per current law, but that doesn’t mean everyone wants to hang on for the ride, of course.

Thought Banana

Twitter Blows Up Twitter

Making yourself go viral is a scarcely observed luxury, but ever since he bought one of the world’s most influential social media platforms, Elon Musk has commanded this like no one else.

Yesterday, the CEO of…uh, everything(?), it seems like? I don’t even know anymore, but the world’s 2nd richest man (and 2nd funniest person in any given 3rd-grade classroom) announced yesterday that Twitter has finally found a new CEO.

Needless to say, rumors swirled immediately. Musk announced that Twitter had found itself a new CEO by 3:48 pm, and well before even 5 pm, media outlets were speculating wildly as to who that new person could be. After all, the only hint given in Elon’s OG Tweet was that the person in question is a “she.”

Score one for the ladies right here as ever since its founding, the massively influential company behind the incredibly disappointing stock that was $TWTR has been helmed by those of similar philosophy and biology, being all dudes with tech backgrounds.

As of 10:21 pm on Thursday night (time of writing), the top candidate rumored to be taking the top slot is NBCU’s Head of Advertising. Linda Yaccarino is “in talks to become the new CEO of Twitter, according to people familiar with the matter.”

Poaching an advertising head from a network that has managed to survive through pharma ads and advertisements for its own damn content has been impressive enough for Musk to add her to the roster, allegedly. Given the trend of companies pulling their ads from the platform in Q2 of last year as well as Q1 of this year, it certainly seems like they could use the help.

But, now that the company is no longer public, Twitter doesn’t have to release or even care to release material data to the public. Basically, Elon and CEO X don’t give af, for now, at least. For one, Tesla shareholders are a group certainly pleased with the move, as a strong gain in the EV maker’s share price after hours suggests this is the moment they’ve all been waiting for.

We say it all the time, but this is one you’re definitely gonna want to stay tuned in on.

The big question: What the hell is going on at Twitter? Will users be more or less pleased with the service once Elon is gone from the CEO slot? Does Twitter ever plan to relist publicly again?

Banana Brain Teaser

Yesterday — Four well known sayings have been reworded below. Can you identify the originals? Example : Lack of awareness brings elation. (Ignorance is bliss.)

1. Stop sleeping and sniff the java.
2. Fine items approach people who have patience.
3. One should not rate a volume by the lid.
4. Progress to the rhythm of another bongo player.

1. Wake up and smell the coffee.
2. Good things come to those who wait.
3. Don't judge a book by its cover.
4. March to the beat of a different drummer.

Today — It’s 100 bananas off the Real Estate Modeling Course for the first 3 respondents. LFG!

If you throw me from the window, I will leave a grieving wife. Bring me back, but in the door, and You'll see someone giving life! What am I?

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

Wise Investor Says

“The secret to investing is to figure out the value of something and then pay a lot less.” — Joel Greenblatt

Happy Investing,

Patrick & The Daily Peel Team

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