June 16, 2023 | Peel #483

In this issue of the Peel:

• The U.S. retail sales data shows an unexpected rise, defying experts’ prediction of a slump due to high inflation and interest rates.
• In the market, CAVA Group had a remarkable IPO day, surging by 99%, while Peloton suffered a downturn, dropping by 7.53% due to a lawsuit against them. Domino’s Pizza rose by 6.46% following an upgrade by Stifel.
• The S&P 500’s market cap is highly concentrated, with Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla, and Meta making up around 29.5%.

Market Snapshot

Happy Friday, apes.

And thank god we can finally say that. Following a week that saw CPI, JPow, retail sales, and the shocking revelation that Gwen Stefani and Gavin Rossdale don’t co-parent their children (wow!), we can really use the break.

Equity markets had absolutely no time for a break yesterday, however, much like the analysts trying to value them. Traders appeared to have finally had time to read the Fed statement and learn there was, in fact, no rate hike. We’ll see if they feel the same come July, but the only thing we know is that shares were feeling themselves yesterday.

Treasury yields dropped below Wednesday’s close in the meanwhile, signaling that after a few short weeks involving little things like a debt ceiling crisis, strong jobs report, strong(ish) inflation report, and no rate hike, traders are starting to get some clarity. Fingers crossed, that sticks around.

Let’s get into it.

Banana Bits

• JPow chilled, but Lagarde went for the thrill in her decision to continue raising rates in the European Union yesterday
• Wow. Microsoft just straight up went for it and said, “Yeah, I bet we can make a cool $10 billy on this” yesterday, and the Street went nuts
• Earnings out of the boomer-est “big tech” name came in hot, but CEO Shantanu Narayen’s comments on AI were far hotter
• Rates remain negative in the land of the rising sun as economics students, professors, and bullsh*tters from across the nation are still scrambling to figure out how the hell that works

Macro Monkey Says

Built Different

The United States has long been known as the Land of the Free and Home of the Brave. Most people buy that, but hey, it’s a free country, so it’s for you to decide. To help out, we came up with one that surely everyone can agree on: the “Sanctuary of Spending.”

It’s already well understood that the U.S. economy is “built different.” Keynes and Friedman may have used slightly varying words to describe it, but we don’t have to be huge nerds when we talk about this stuff, right?

Regardless, that different build was on full display yesterday—and really all month long—as the latest retail sales data poured into your Bloomberg Terminal.

With both interest rates and inflation simultaneously trying to force you into bankruptcy, experts had expected retail sales to mostly slump throughout 2023. Lately, those experts have been quite surprised.

"In May, retail sales rose by 0.3% monthly and 1.6% annually across the United States ..."

In May, retail sales rose by 0.3% monthly and 1.6% annually across the United States, a stark acceleration in a month when consensus estimates called for a negative rate of change. And not only that, but customers were buying BIG on the BIG ticket items like cars and building materials.

In fact, on a monthly basis, only two categories measured by Census Bureau across all retail sales fell compared to April: gas stations and “miscellaneous retail stores” (whatever the hell that means). Not only is that historically unusual, but it’s just downright weird for a year that’s seen a simultaneous increase in consumer prices and borrowing costs.

"... called for the bottom in retail sales on CNBC following the report."

Nevertheless, after the morning release, Matthew Boss (douchey name), a retail analyst at a little firm called JPMorgan Chase, called for the bottom in retail sales on CNBC following the report.

Like BMO senior economist Robert Kavcic (less douchey) in stating, “The U.S. economy is holding up relatively well,” both seem to be pleasantly surprised with numbers like that of the latest retail sales data.

We can mostly thank wage gains, particularly at the lower end of the income spectrum (which tends to have a higher propensity to spend), for most of this support.

But once again, we beg the question: is JPow actually gonna nail the soft landing? It’s as if we flew right out of the eye of Hurricane Katrina and straight onto a nice, peaceful Gulf Coast beach where everyone is making and spending more than ever.

Don’t worry, bears. There is still plenty of time for him or any number of other things to f*ck sh*t up. Wouldn’t be the first time.

What's Ripe

CAVA Group Inc. (CAVA) ↑ 99.00% ↑

• The hottest new thing out of the Mediterranean region since the Roman Empire is, much like those guys, off to a hot start.
• For this Chipotle-style Mediterranean restaurant chain, yesterday was their very own version of the birth of Romulus & Remus. Many of you probably haven’t been to Cava before, but if it’s anything like Chipotle in 2016, you sure will be soon.
• The stock IPO'd yesterday, obviously under the ticker CAVA. What was less obvious, ostensibly, was the price at which to value shares. Cava exploded on its opening day, leaving a whole bag on the table that bankers and founders alike could have cashed in had shares been listed at a higher price.
• Sadly, we don’t have counterfactuals in markets, so we don’t know if that’s certain, but it sure seems like it. IPOs are volatile, and this is the last significant one I can remember since the Dutch East India Company.

Domino’s Pizza (DPZ) ↑ 6.46% ↑

• Hating food from Domino’s is one of those things people say to say to be cool, but all of a sudden, when everyone’s hammered at 1:36 am Sunday morning, everyone goes crazy for a slice.
• Don’t pretend you’re better than Domino’s. Stifel sure doesn’t think you are after the firm upgraded shares on a brighter outlook yesterday, giving the stock a nearly 6.5% gain.
• Stifel cited stabilizing delivery sales paired with elevated carry-out volume throughout the remainder of the year. Sounds great, but so does Domino’s hammered after Saturday night, but it sure doesn’t make you feel better the next morning.

What's Rotten

Peloton (PTON) ↓ 7.53% ↓

• Riding downhill is a lot easier for cyclists. Unfortunately, the same can’t be said for shareholders in cycling companies.
• Specifically, we, of course, mean Peloton. Honestly, if you told me this thing had gone bankrupt 7 times since the pandemic began, I’d believe it just as easily. Unfortunately, this isn’t all that entertaining, but after a strong rise seen over the last month, Peloton shares took a bit of a spill.
• There wasn’t all that much news around the name yesterday, but a class action lawsuit against the firm for (allegedly) enabling 3rd-party apps to eavesdrop and collect information on users without their noticing and sure as hell without their consent. No biggie.

Kroger (KR) ↓ 2.69% ↓

• Nobody’s perfect; we all know that. But Kroger shareholders made that blatantly clear to management following the firm’s earnings report early yesterday morning.
• The nation’s largest pure-play grocer reported earnings of $1.51/sh on $45.2bn in sales last quarter, beating expectations on the bottom while coming in just about in line with consensus sales expectations.
• Nevertheless, that wasn’t really the problem. Kroger is a bold company, and they like to jack up their guidance for the coming period a lot. However, they did not do that this time.
• The lack of a bump in guidance, while the midpoint of management’s range for the fiscal year sits at $4.52/sh and analyst expectations at a whopping $4.54/sh. Should we start building the bunkers now?

Thought Banana

Lucky Number 7

You know that saying that goes, “Sometimes all it takes is one.” Well, that’s definitely true in investing, but it turns out that rule isn’t exclusive to active investing. It’s just that under a passive management strategy, all it takes is 7.

And, by 7, we, of course, mean these guys: Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla, and Meta.

As pointed out by the FT, those 7 companies make up ~29.5% of the S&P 500’s market cap as of Wednesday’s close. In other words, 1.4% of all companies in the S&P 500 make up nearly 1/3rd of the index’s market cap. Like big oil back in its heyday of the 1960s, it’s clear who’s running things.

"Most of the rise in market-market share (bah dum tss) is attributable to multiples expansion ..."

Performance among these names has led the S&P 500’s increase to be the most concentrated on record since Ronald Reagan was still just an old actor. In fact, it’s so crazy that one company, the nearly $3tn Apple, is larger than the entire damn Russell 2000.

This is crazy, but it’s definitely not very new in U.S. markets. Most of the rise in market-market share (bah dum tss) is attributable to multiples expansion, not necessarily corresponding earnings growth.

It’s a sign of a certain bubble-ish-is-ness (trademark it) in these names, but this trend of hyper-concentration also speaks to the uncertainty in recent markets.

To paraphrase this nearly 3-yr old tweet from NYU Professor and certified wild man Scott Galloway, investing in these pristine cash printers that not even the U.S. government seems to be able to control pays off, even during periods when no one knows what’s going on (even more than usual).

"Companies like these can be argued to be somewhat diversified investments all on their own."

Companies like these can be argued to be somewhat diversified investments all on their own. I mean, just look at Amazon; you get everything from leading AI and cloud infrastructure to god damn grocery stores. What the hell is going on there?

Nevertheless, the size, profitability, cash flow size, and balance sheet strength make them the perfect case for just about any investor and investment manager profile. The good thing is you probably (hopefully) have at least some kind of exposure to these names through index funds, so why don’t we all settle down and enjoy these profits while they last.

Banana Brain Teaser

Yesterday — Which is the only word in the English language to be comprised of two letters, each used three times?

Deeded.

Today — A clothes shop was running a promotion giving away free jeans. In order to get the free jeans you had to try a pair on, then, while still wearing the jeans you had to put your right hand in the left pocket and your left hand in the right pocket and reach right to the bottom of the pockets at the same time. Many people tried but were unable to achieve the feat until one chap walked in and walked out a few minutes later with his free jeans. How did he do it?

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

Wise Investor Says

“The time to buy is when there’s blood in the streets.” — Baron Rothschild

Happy Investing,

Patrick & The Daily Peel Team

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