The Club With the Toughest Door | The Daily Peel | 5/31/2023

May 31, 2023 | Peel #471

Silver banana goes to...

In this issue of the Peel:

• After a record-breaking, prosperous few years, the US IPO market is facing one of its longest droughts in history
• JP Morgan’s private bank is allocating resources to take a huge bet on the world’s small circle of mega-rich families
• The equities market is beginning to run out of steam as investors digest the debt ceiling deal and an industry titan issues a stern warning

Market Snapshot

Stocks are starting to lose some steam after a crazy week. While equities were hopped up on AI juice, the treasuries market told a different story. Bond yields continued to tumble and seem to be signaling that sticky inflation will lead to a recession and eventual Fed rate cut.

Investors also kept a close eye on the US Consumer Confidence report, which dropped to a 6-month low. Survey participants cited a dampening outlook on the labor market and future business conditions.

AQR founder Cliff Asness issued a harrowing prognosis on the market, saying that equities will be a “scary place” should inflation remain elevated. He also pointed out that the divergence between stocks and bonds is his biggest concern.

When all was said and done, markets sent a mixed signal to end the first day back from vacation. The S&P ended the day flat, while the Dow slipped slightly, and the Nasdaq was the only index to end in the green.

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.

You won’t get this intel from industry news sites, regulatory filings, or any other sources, by the way. Nope, only the SRS Acquiom Study provides analysis of more than 2,100 private-target acquisitions valued at more than $460 billion—most of which aren’t required to be publicly reported.

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.

By the way, the Study is free. You have no excuse not to download it right now.

Click here to get the good stuff >>

Banana Bits

• Don’t get too comfortable with the market’s performance. The founder of AQR warns stocks will be in a “scary place” if the US enters a recession
• Looks like student loan payments are making a comeback after the end of summer. I must admit it was nice while it lasted
• Meet the young White House Budget Director who played a central role in negotiating the debt limit deal with Congress
• Billionaire brothers, aka the Winklevoss Twins, are making another pivot and giving us all a lesson in how many chances America will give you to strike out

Macro Monkey Says

IPOs Historical Drought

Remember the good old days (2 years ago, to be exact) when we were all drunk off IPOs, each one sexier than the last?

Those days are firmly in the rearview mirror, and we’re now dealing with the delirium tremens afterward. That also might be describing some of you sitting at your desk right now after the weekend, but let’s not digress.

"...we all forgot to check whether they were solid companies or not."

After the floodgates opened in the second half of 2020, the US market experienced a wave of IPO volume that lasted until the end of 2021.

While everyone from banks to hedge funds was making quick money off of these IPOs, we all forgot to check whether they were solid companies or not. Or, in some cases, whether they were legitimate companies or not (*cough cough* WeWork).

Fast forward to now, most of those stocks have severely underperformed the broader market, with many down 50% or more from when they first went public.

"Many were high-growth tech companies that secured lofty valuations at the height of the market."

Many were high-growth tech companies that secured lofty valuations at the height of the market. Poor market performance for those IPOs, combined with the S&P dropping by 20%, is causing one of the longest IPO bear markets in history.

Of course, this isn’t the first time this has happened, but it sure is the longest, and people are getting impatient. Investment bankers are salivating for the opportunity to earn juicy fees on big IPOs.

"Believe it or not, IPOs bounced back even quicker after the financial crisis..."

Looking back over the last couple of boom-and-bust cycles takes us to the tech bubble of the late 90s into the 2000s and The Great Financial Crisis of 2008.

In the tech bubble, the IPO market was effectively shut from July 2002 before recovering in July 2003. Believe it or not, IPOs bounced back even quicker after the financial crisis, bottoming out in August 2008 before recovering in July 2009. The S&P finished that year up 23.5%.

This is shaping up to be one of the longest droughts on record, coming up on 18 months. Although the small number of IPOs that have come to market have traded well, the floodgates haven’t really opened.

Valuation remains a concern after investors realized they paid way too much for average companies a couple of years back. The good news is that based on all observable data from prior downturns, we can cross our fingers and be optimistic about a recovery this year!

What's Ripe

Equitrans Midstream Corporation ($ETRN) ↑ 34.81% ↑

• Whoever heard of this stock before today’s headline, shoutout to you. For the other 99%, Equitrans is a pipeline company that transports natural liquids and gasses in the Appalachian.
• The stock soared today because, apparently, if you look at the tiny fine print on the last page of the debt-ceiling agreement, there is language fast-tracking the construction of a pipeline in the Mountain Valley that has been held up in courts.
• While the bill hasn’t been officially approved, it goes to a vote on June 5th and states that all remaining permits must be issued within 21 dates. So, Equitrans could be making some serious dough very soon.
• The stock blew past analysts’ expectations, which had a $7.48 price target on it and doesn’t look to be slowing down any time soon.

Palantir Technologies ($PLTR) ↑ 7.80% ↑

• Palantir is getting a double shot of espresso in the form of positive news, that is.
• Not only are investors still fawning over the stock after it announced it increased revenue by 18%, but Palantir is also joining in on the AI-related stock rally. Gotta love how inclusive the tech sector is. When they rally, they’ll let anyone in.
• Palantir’s CEO Alex Karp recently provided insights on the pivotal role and influence AI will have on the global stage and how Palantir is gearing up to be a major player in that arena.

What's Rotten

Marvell Technology ($MRVL) ↓ 3.14% ↓

• This is surely a strange one to have on the rotten list. While the other chip makers are partying like there’s no tomorrow, MRVL didn’t get the invite. The stock took a hit today on reports that insiders are selling shares.
• Insiders include C-suite executives, managers, senior directors, or any entity that owns more than 10% of a company’s voting shares. These are the people you would reasonably expect to have the most intimate knowledge about a company.
• Insiders are usually restricted from selling shares outside of predetermined “insider windows.” One would expect that management would be the most bullish about a company’s future prospects. As a result, the market gets spooked whenever insiders sell their shares. This usually triggers more selling from investors that aren’t insiders.
• Of course, insider selling doesn’t have to be a negative signal. CEOs need liquidy too. We’re in a high-inflationary environment, after all. Hamptons vacation homes and private school tuition aren’t getting any cheaper

Big Lots ($BIG) ↓ 13.68% ↓

• Big Lots fell to its knees. The stock is down 14% and trades at its lowest point since 1991. The retailer had a disappointing quarter, with sales slipping 18.3%. Macro factors like lower consumer savings rates continue to impact discretionary spending, hurting Big Lots’ bottom line.
• The company also noted that the abrupt closure of United States Furniture Industries in November was a big contributor. It’s never good when your largest and most consistent vendor closes shop.
• The biggest kick in the n**s was trying to quietly slip in the fact they suspended their dividend. This signals major cash flow issues that may not let up anytime soon. The company announced it would lease back a distribution center in California to generate some proceeds, but that sounds like a desperate attempt to win back investors.

Data Peel

Source

Thought Banana

The Club With the Toughest Door in Town

JP Morgan has been dedicating resources to creating a suite of products that cater to the world’s mega-rich families. Wondering where exactly that places you?

The unit called “23 Wall”, which sits within the firm’s private banking division, focuses exclusively on the wealthiest 700 families worth a collective $4.5tn. That should provide some perspective.

Before you start hatin’, remember the wise words of a great rapper/prophet, “How can you hate from outside of the club, you can’t even get in!”

"...when high-net-worth individuals harvest enough investable assets..."

Unlike you and I, who open a brokerage account to place trades, when high-net-worth individuals harvest enough investable assets (generally $100mn or more), they typically set up family offices.

"JP Morgan’s 23 Wall unit will focus on providing investment banking services to individual and family office accounts."

These family offices are private companies that are fully capitalized with the family’s money and whose sole job is to manage the family’s assets to ensure preservation and expansion for future generations.

A family office is all-encompassing, meaning it handles all the day-to-day decisions, including managing household staff, making travel arrangements, property management, day-to-day accounting and payroll activities, management of legal affairs, and much more.

JP Morgan’s 23 Wall unit will focus on providing investment banking services to individual and family office accounts. These services were traditionally relegated to institutional clients only.

The shift to focusing on family offices reflects a scramble among global investment banks for a share of the wealth that has been generated in the past few years.

"...the firm added 40,000 new accounts with at least $100mn last year alone."

According to JP Morgan’s Asset & Wealth Management leader, the firm added 40,000 new accounts with at least $100mn last year alone. It also highlights just how sophisticated the world’s richest individuals are becoming in managing their portfolios.

Family offices are seeking greater diversification, and thanks to loosened regulatory oversight, they are able to invest in a broad range of assets, including public equities, private equity, venture capital, real estate, and much more. The unit now has a presence in multiple cities across the US, Asia, and Europe.

Just want to make sure all of you The Daily Peel readers out there know what’s what in the world of high finance. Once you’ve reached that ultra-high-net-worth status from reading these every day, you’ll be ready to open up a family office of your own.

Banana Brain Teaser

Yesterday — What is the angle between the hour-hand and minute-hand of a clock at 3:15?

At quarter past the hour, the minute-hand is exactly at 3:00, but the hour-hand has moved 1/4 of the way between 3:00 and 4:00. Therefore 1/4th times 1/12 = 1/48 of the clock. With the clock having 360 degrees, 360/48 = 7.5 degrees.

Today — It’s 150 bananas off the PE Master Package for the first 3 correct respondents. LFG!

You have 100 balls (50 black balls and 50 white balls) and 2 buckets. How do you divide the balls into the buckets so as to maximize the probability of selecting a black ball if a ball is chosen from one of the buckets at random?

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

Wise Investor Says

“One of the funny things about the stock market is that every time one person buys, another sells, and both think they are astute.” — William Feather

How would you rate today’s Peel?

All the bananas

Decent

Rotten AF

Happy Investing,

Patrick & The Daily Peel Team

Was this email forwarded to you? Sign up for the WSO Daily Peel here.