The Big Apple's Big Slump | The Daily Peel | 5/16/2023

May 16, 2023 | Peel #462

Silver banana goes to...

Market Snapshot

Happy Tuesday, apes.

Grass, the Geico Gecko, and one particularly jolly giant have proven themselves to be the new torch carriers for the color green in 2023. Yesterday’s stock market tried to get in on the action, but traders simply were not having it.

Equity markets gained for most of the day, but besides Meta’s surge of well over 2% on the day, unfortunately, not every stock trades on the depression levels of American teenagers. Breadth was there for what felt like the first time ever, but without conviction in either direction backing the big tech names, Monday’s trade mostly felt like we were going through the motions until the next big catalyst.

Speaking of watching grass grow and paint dry, the movement (or lack thereof) seen by treasuries in recent days speaks solely to the “no-fuckin’-clue” mindset backing traders as they enter each trading session one day closer to a U.S. default. With all else considered, all we can say is best of luck!

Let’s get into it.

To Win the M&A Game, It Helps to Know the Terrain

Ah, the annual SRS Acquiom M&A Deal Terms Study. It’s back again already? You bet it is. And, as always, it’s bubbling over with the deal data and insights you need to be truly in the know.

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Why should you care? Think: better negotiating and smoother due diligence. Think: avoiding potential transaction issues. Think: competitive advantage for you and your clients, and all the good stuff that comes with it.

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Banana Bits

• If he was a rapper, he’d be one of if not the highest-selling of all time as Volodymyr Zelenskyy (which I recently discovered has two-Ys at the end, my b) racks up quite the bag during his Europe tour
• At this point, Wells Fargo looks like its purposely attempting to solidify itself as the U.S. version of Deutsche, HSBC, Credit Suisse, or all 3 with their latest regulatory fine
• You thought the party was over? Nah, Vodafone just brought out yet another Gatorade container of jungle juice filled with nothing but layoffs to make sure we all know the jobs market still sucks for the highly paid among us, especially in the tech world

Macro Monkey Says

NY Empire State manufacturing

Now that Jay-Z has taken a certain State of Mind and made a whole big deal about it, the Empire State and their manufacturing survey are ready to run with it and accept the respect that Jay has earned them.

To cut right to the chase, this was one of the worst performances from an economic indicator that we’ve ever seen. From coming off the bench right at 8:30 am yesterday, the numbers reported may have been horrendous, but no match for the market’s ability to just shrug that right off.

The Empire State Manufacturing Index, which tracks the monthly business sentiment of manufacturing execs in the state of New York, contracted by a massive 42.6 points to a horrendously low reading of -31.8.

We’re not sure if it was the Knicks’ game 6 loss, the Yankees having their worst season seemingly since before Babe Ruth got there, or simply being from New York itself, but these executives were down bad last month.

In particular, new orders were a particularly ugly part of the report. No, not just because New Orders and their -28.0 reading came in lower than expected, but because it was one of the worst readings in the history of this metric observed last month. New orders tend to be the leading indicator, if there is any, among manufacturing data. Last month, it was clear where the executives’ heads were at.

Now, markets didn’t really react at all, which makes sense because—as a reminder for those who live there—New York is just one of 50 states in the U.S. If they’re doing terribly, maybe some other states like Wyoming or Arizona can pick up the slack. Diversification, right?

Well, let’s just say we sure hope so.

From JPow’s perspective, the reduction in new orders, in particular, is yet another feather in the cap of his inflation-fighting warfare. This is as concrete of evidence as one could get for proof that the rate hikes are working. The only question now is whether Powell and the team choose to listen, not to listen, or to do something wild we never would’ve thought of.

Regardless, one thing is abundantly clear: monetary policy’s often-mentioned-but-rarely-minded “long and variable lag” could be at play since manufacturing, as one key pillar to the base of our economy, is getting hammered (in a bad way) worse than an 18-year old suburban kid during orientation week.

Now, this is just yet another piece of data for Mr. Market to incorporate into his calculations when pricing in a potential June rate hike. Market-implied probabilities for yet another 25bps jump next month fell from around 20% to below 15% at the time of writing, demonstrating the market’s trepidation to trade with any kind of conviction in either direction.

With a reading as drastic as this, some economists and market watchers will legit just throw this sh*t out and pay it no mind. Considering it is just one of our 50 states, maybe they’re right. Or, maybe this reading is the first sign we’ve gotten (so far) for a general business slowdown set to lead into that long-rumored second-half recession.

We’re in it together, apes, and we’ll find out soon enough. Stay tuned.

What's Ripe

C3.ai ($AI) ↑ 23.43% ↑

• If “getting the people going” was an Olympic event, CEO Thomas Siebel and the rest of the C3.ai team, without question, took home the gold after Monday’s close.
• Shares gained nearly 25% in value by the end of the day’s trade and seem to have reignited investor fear of/optimism for an AI-laced future.
• Thankfully, lacing shares with AI isn’t nearly as bad as lacing something else with something else, if you catch my drift. For the year ended April 30th, 2023, C3.ai expects to beat the hell out of revenue forecasts, building up expectations for a stellar quarter.
• With earnings expected to release in early June, traders appear to be sizing their bets in order to (hopefully) ride the wave of an expected earnings beat. With that on the horizon, it’s no surprise why investors were particularly upbeat,

Shake Shack ($SHAK) ↑ 7.81% ↑

• Riding that sugar rush, investors carried their bullishness over into the pre-eminent maker of milkshakes on the U.S.’s east coast in the form of a nearly 8% runup of Shake Shack shares seen on Monday.
• And I mean, who doesn’t love some good ol’ fashion ice cream in a bottle? Well, that, along with McDonald’s-esque food, is exactly what Shake Shack offers, gearing the firm up to sling those frozen slushies in any way that they can, especially as most economists expect the average American to soon fall on financial hard times. But, for investors, it certainly worked out last quarter.
• Riding the back of punishing inflation and an already overly concerning macro backdrop, Shake Shack decided to keep jacking up prices, and dammit, it worked beautifully for them.
• The burger & shake slinger lost $0.01/sh on $253mn in sales for the quarter, both handily beating Wall Street expectations and setting shares up for their best day in way too long. Guidance held strong as well, giving Shake Shack nothing but good vibes to kick the week off with.

What's Rotten

ONEOK ($OKE) ↓ 9.06% ↓

• Who said M&A was dead? Well, we did, along with every other media agency, their mothers, and their mother’s mother, as we apparently fully expected a Mother’s Day meltdown.
• Thankfully for you, your mom, and your portfolios, this might not be the nightmare investors are pricing in. Yesterday, shares in diversified energy conglomerate ONEOK (don’t ask me how to pronounce it) lost nearly 1/10th of their value in a single day following an acquisition announcement,
• As of yesterday, ONEOK looks to be solidifying a deal to acquire Magellan Midstream, an energy firm focused on petroleum pipelines and ammonia production, as Google’s weak-a** Congressional answer arguably demonstrates the corporate version of the dark triad.
• Fundamentals have been comparatively weak, analyst teams able to give this thing another shot have triggered a downgrade, and acquirers usually lose money on deals like this as loyal shareholders get the sh*t diluter out of them for a bag of chips (if they get even that).
• As a result, analysts weren’t all too excited about anything announced yesterday. As energy costs have generally under-paced the overall inflation rate, maybe it shouldn’t be a total surprise as to why shares (might buy for the onomatopoeia alone) tumbled on the day.
• Not only is it a highly priced acquisition for this environment, but it’s during a time in which savers like non-acquiring companies can early >5% on their idle cash; any kind of durationally-based risk-taking will undoubtedly bring down the hammer. Just watch out, apes.

SoFi Technologies ($SOFI) ↓ 4.98% ↓

• On the other hand, hardly anything at the one-stop-financial-shop SoFi Technologies has been able to stem the ~80% decline in share price since the peak in early 2021. Nonetheless, a downgrade tends to get traders even more downbad.
• Shares plunged nearly 5% in the online bank, powered by investment advisors, mortgage and student loan originators, and much more. Analysts at Wedbush are exactly the opposite of excited for Noto and the rest of SoFi’s poor, sweet shareholder base and have assigned a $2.50/sh price target that seems about as accurate as a measurement of the average length of a unicorn’s horn.
• And that’s exactly what those analysts said in a meeting with Fed and political officials held yesterday; that AI remained the least-discussed-yet-most-credible technology to emerge from the tech space since maybe the internet itself.

Thought Banana

Redlight? Greenlight

Activision Blizzard CEO Bobby “Cocaine” Kotick (no one else on Earth calls him that, but look at this pic) was back in the news big time yesterday as investors, shareholders, and traders alike know (allegedly) what he’s been up to.

The gamer-apes among us still haven’t slept in the well-over one-year period since this was announced, but to make sure we’re all on the same page.

Approximately 483 days ago, on Tuesday, January 18th, 2022, Microsoft announced its intention to acquire game maker and distributor Activision Blizzard, the developer behind many games including Call of Duty, World of Warcraft, Diablo, Candy Crush, and others.

Last month, the Brits, as they do with *checks notes* literally everything, tried to ruin the party with the nation’s Competition and Markets Authority (basically the FTC but with a British accent), denying the two parties the right to proceed with their deal.

Now, that bloc does carry enough weight to halt the transaction alone, but the CME played it responsibly. They did the “wise” thing and ran the case up to the European Commission, the top antitrust enforcer on the continent.

Long story short, they did not care one bit. Regulators at the Euro Commission gave the thumbs up nice and easy, thanks mostly to Microsoft’s parental level of responsibility and their decision to take steps to avoid some of the allegations made by the U.K.’s CMA. Namely, the most important of these was Microsoft’s agreement to automatically license out all cloud-based games to fellow industry players, immediately setting ablaze the CMA’s best attempt (so far) to stem the deal.

Now, the almost $70bn deal—the largest in the history of Microsoft and video games in general—has cleared yet another hurdle to jump. Microsoft investors were mildly excited, although no one on Earth can tell for sure if it’s from this or not, as yesterday’s basically flat move was so small, but at least Activision holders made their bad.

To be fair, that “bag” was a 1.24% on the day, going positive essentially the second the European Commission told the CMA to f*ck off.

Maybe it’s revenge or Brexit or for simply having the audacity to be British, but Europe seems to be enjoying the taste of vengeance—for now, at least.

Banana Brain Teaser

Yesterday — Birbal was a jester, counselor, and fool to the great Moghul emperor, Akbar. The villagers loved to talk of Birbal’s wisdom and cleverness, and the emperor loved to try to outsmart him. One day Akbar (emperor) drew a line across the floor. “Birbal,” he ordered, “you must make this line shorter, but you cannot erase any bit of it.”

Everyone present thought the emperor had finally outsmarted Birbal. It was clearly an impossible task. Yet within moments, the emperor and everyone else present had to agree that Birbal had made the line shorter without erasing any of it. How could this be?

Birbal simply drew a line longer than the first, which made the first line shorter than the second.

Today — It’s 50 bananas off the IB Interview Course for the first 3 correct respondents. LFG!

There are 4 clues below. Each clue is related to a type of candy. You have to try to figure out what each candy is.

1. The average worker loves this day
2. When actors or actresses get a little break
3. Think of the 4th planet from the sun
4. Also referred to as ‘geeks’

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

Wise Investor Says

“Generally, the greater the stigma or revulsion, the better the bargain.” — Seth Klarman

Happy Investing,

Patrick & The Daily Peel Team

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