The Icarus Market | The Daily Peel | 6/1/2023

The Daily Peel...

June 1, 2023 | Peel #472

 

Silver banana goes to...

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In this issue of the Peel:

  • Like Icarus, the S&P flew too close to the sun and has now almost wiped out all of its monthly gains
  • The Treasury market has undergone a complete transformation from pricing in rate cuts just a month ago to now predicting additional hikes
  • The 2024 Presidential race is getting interesting, with a former financier potentially throwing his name in the ring
 
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Market Snapshot

Happy Thursday, Apes.

Congrats! We’ve made it past the other side of the proverbial mountain. Just two more work days left to go. Wednesday was pretty much a reversal of every trend we’ve been seeing in the past week. Big tech lost momentum and helped drag the market down, with Nvidia losing 5.7%.

Energy stocks also took a beating as oil continued to slide. A selloff in regional banks gave investors some terrifying flashbacks and signaled that the banking sector is not out of the woods just yet.

Concern about the global economy is rearing its ugly head again. The treasury market has done a complete about-face. Traders went from predicting a rate cut in June, then to predicting a rate pause and are now pricing in another rate hike. However, expectations were mildly tempered after two Federal Reserve officials went on record saying it might be appropriate to “skip” a rate increase.

Just a few days ago, the S&P broke a key technical level above 4,200 but is now trading below that level once again and has almost erased total gains for the month. The Nasdaq, on the other hand, is still flying high and is experiencing the longest winning streak since 2021.

 

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Banana Bits

 

Macro Monkey Says

Treasury About-Face

While the equities market is more flashy and gets all of the headline-grabbing attention, Treasuries are the more subtle but leading indicator for the future of the economy. Equities have more risk but also more return, while treasuries are safer and more consistent but generally offer lower returns.

Put another way, stocks are the flashy, good-looking co-ed with whom you initially try to make things work long-term, and treasuries are the boring yet dependable partner you turn to when you inevitably have your heart ripped out of your chest.

For pretty much all of recorded human history (which, as far as we’re concerned, begins with the invention of the stock market), stocks and bonds have had a negative correlation.

"This is why the treasury market is widely seen as a leading indicator of where the economy is going."

 

In simple terms, this means that when things are going well, the bills are being paid, and papa’s got a brand new pair of shoes, equities go up, and in turn, as people shun treasuries, their returns go down.

Likewise, when the economy goes through a natural downturn, people shun stocks in favor of the consistent and reliable returns they can get from bonds.

This is why the treasury market is widely seen as a leading indicator of where the economy is going. They are an indication of consumer confidence.

When there is less demand for bonds, it means that people are seeking high-risk, high-return investments. The opposite is true when people are buying bonds. It means that people are seeking safety.

 

"Just last month, the bond market was signaling smooth sailing ahead."

Just last month, the bond market was signaling smooth sailing ahead. This was largely because the consensus was that the Fed would put a pause to rate hikes at its upcoming meeting in June.

In fact, at one point, rates were even implying that the Fed was going to cut. This was perceived as good for the economy, and so people started selling treasuries.

"The bond market, on the other hand, is your tedious friend trying to warn you of what’s to come."

 

The market has completely changed its tune since then, and it now thinks the Fed is going to actually raise rates. Therefore, people are once again seeking protection.

Lately, investors have been buying treasuries like they’re going out of style, and for good reason. Between inflation that refuses to go down, the US potentially running out of cash, and an economy potentially on the brink of recession, there is a flight to quality taking place.

If you look solely at the equities market, they’re pumping along as if nothing is happening. The bond market, on the other hand, is your tedious friend trying to warn you of what’s to come.

 

What's Ripe

SoFi Technologies ($SOFI) ↑ 15.09% ↑

  • Our pain is SoFi’s gain. The personal finance company is jumping for joy at the fact that student-loan payments will be resuming in August, which is a plus for their business model.
  • As we’ve covered in detail, there is a new debt package being voted on. Whenever Congress issues new legislation, each side uses it as an opportunity to put little Easter eggs on their wishlist that frankly have nothing to do with the issue at hand. Yesterday, we saw an energy company surge because of an energy clause in the deal. Today, we found out that the deal includes the resumption of student loan payments, which have been on a federal pause since the pandemic.
  • We all knew this day would come sooner or later, and we still probably didn’t make the proper financial arrangements. Student loans coming back means there will be a much greater demand for refinancing, and SoFi is one of the best in the business. The only comfort I can offer everyone out there is to remember it’s the government we’re dealing with, so when they set a goal for August, they probably mean August 2024 or something.

Intel Corp ($INTC) ↑ 4.97% ↑

  • For so long, this list has been dominated by high-flying tech stocks or sleek, innovative companies of the future. It’s nice to see a good old-fashioned boomer company on the list.
  • The nice thing about companies founded in the 1960s is that their business models are easy to understand and don’t contain the words “crypto,” “DeFi,” or “AI” in their business statement. Simply put, Intel makes chips that power the computers and laptops we use every day. Lately, they’ve been selling a lot more of them.
  • The company said “nvm” to the initial revenue guidance they provided investors and actually said they will make $1bn more than expected. They also excited investors by discussing the next generation of chipmaking that will influence the global economy.
 

What's Rotten

Advance Auto Parts ($AAP) ↓ 35.04% ↓

  • Advance Auto Parts is doing exactly the opposite of what its name implies. Take a second to think. If you guessed declining, you get a gold star.
  • The stock got hammered after it not only whiffed on earnings but also reduced its dividend by 83%. That is a pretty clear signal that the company doesn’t expect to be able to generate enough cash flow to return to investors.
  • Interestingly enough, revenue was actually up for the quarter, driven by new store openings. However, that did not flow to the bottom line as costs continued to pile up. The company was not able to raise prices enough to cover the cost of inflation.

U-Haul ($UHAL) ↓ 16.27% ↓

  • U-Haul hasn’t seen worse days since the pandemic. Seriously! The company had its worst intraday stock decline since March 2020. It all boils down to a normalized level of moving activity.
  • We all know what happened; when the pandemic sidelined us and forced us to stay at home, many people left the city in favor of secondary cities. U-Haul got a nice boost in revenue from all of that activity. A year and a half later, we all rushed back to the cities, and U-haul was right there for us. Now, moving activity has returned back to normal historical levels.
  • On top of that, U-haul pays a lot for its fleet of cars which require both storage and repairs, the costs of which have all swelled significantly.
 

Data Peel

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Source

 

Thought Banana

France Flight Ban

In an effort to clamp down on climate change policies, the French government announced this week that it was banning all short-haul flights, which it defines as any domestic flight that could be replaced by a train of 2.5 hours or less.

Climate activists pushed for 4 hours but were forced to settle for 2.5. On the surface, this sounds monumental, made even more heroic by French President Emmanual Macron’s epic “Promise Kept” tweet announcing the decision.

While many have praised the move, some critics are calling France’s bluff. As always, the devil is in the details, so what do they say?

 

"The official legislation comes with a few exceptions."

The official legislation comes with a few exceptions. The first is that it does not apply at all to connecting flights. Fair enough. Another exception is that it does not include the infamous Charles de Gaulle airport, which, if you didn’t know, is France’s busiest airport. That means any domestic flight under 2.5 hours to and from that airport is still fine.

"...the headline’s fragrance is fading like a three-day-old baguette."

 

Hmm, starting to notice a trend here. Lastly, it only applies to cities connected by direct train service running “several times a day.” All in all, the ban eradicates three routes.

When taking all of this into account, combined with the fact that France already has a robust train system that most citizens already prefer, the headline’s fragrance is fading like a three-day-old baguette.

According to estimates by Transport & Entertainment, a cleaner transport campaign group, the ban will only impact 3% of France’s mainland domestic flights and 0.3% of emissions produced by flights taking off from the country.

Supporters are saying that while the ban may not have as much impact in the initial stages, it sets a precedent for future measures within the country and could influence other countries to enact their own policies.

 

"If every country were to make similar small changes, the synergistic effect could be massive."

If every country were to make similar small changes, the synergistic effect could be massive. Others make the argument that the ban could have an educational impact on consumers by influencing them to consider the impact of their travel decisions and seek out alternatives.

The big question: Did France take a major step toward influencing global change on a broader scale or a major step toward more virtue signaling?

 

Banana Brain Teaser

Yesterday — 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 1 ball is chosen from 1 of the buckets at random?

You want to put 1 black ball in 1 of the buckets and all of the other 99 balls in the other bucket. This gives you just slightly less than a 75% chance of having a black ball chosen. The math works as follows: There’s a 50% chance of selecting the bucket containing 1 ball with a 100% chance of selecting a black ball from that bucket. And a 50% chance of selecting the bucket containing 99 balls with a ~49.5% (49/99) chance of selecting a black ball from that bucket. The total probability of selecting a black ball is (50% % 100%) + (50% * 49.5%) = 74.7%.

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

What day of the week will it be 100 days after Monday?

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

 

Wise Investor Says

“The best way to predict the future is to create it.” — Peter Drucker

 

How would you rate today’s Peel?

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Happy Investing,

Patrick & The Daily Peel Team

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