The Journey Matters | The Daily Peel | 5/2/2023

May 2, 2023 | Peel #452

Silver banana goes to...

Market Snapshot

Happy Tuesday, apes.

Well, April showers certainly have brought about any May flowers just yet, in financial markets at least. A flurry of data from earnings to monthly construction spend only left Mr. Market even more confused, kind of like when you ask a question in your economics class.

Equities mosied around like no one was watching, seemingly just bouncing around with little to no conviction. All the U.S. majors finished narrowly in the red despite the best efforts from names like Nvidia to pull up the rest of the pack. No single sector stood out for the day, with 10 of 11 S&P sectors within a range of +/- 1% on the day, and energy’s -1.3% return was the only one with some volatility.

Treasury yields had a similarly meaningless day. The 2-year yield saw an approximately 0.06% gain (hold on to your hats!) while the 10-year gained by nearly double that. The only real takeaway here was that long-dated maturities actually moved more than their shorter counterparts for the first time in a while, despite the fact that that is what is definitionally supposed to happen.

Let’s get into it.

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Banana Bits

• Treasury Secretary JYell says it may be as little as 30-days, as the notorious “X Date” could be as close as June 1st (not priced in)
• We’re really gonna talk ourselves into GFC 2.0? Maybe that was all part of convicted felon Michael Milken’s revenge plan as financiers tweaked about the potential for a damning credit crunch from here
• The FDIC handed JPMorgan the next step of its foray into wealth management on a silver platter for the silver-haired Dimon, as his firm could obviously use the help
• Constructive spending helped fuel construction spending in March

Macro Monkey Says

The Right Direction

Much like inflation growing by less, manufacturing contracting by less is a damn good step in the right direction. After all, isn’t it about the journey, not the destination?

I guess that’s only true under the assumption you actually make it to that destination which, in the world of macro, is anything but certain.

But still, we do our best. On Monday, ISM and S&P held hands and joined together to give us an update on the current state of U.S. and global manufacturing. Spoiler alert: it was kind of like getting an internship at Northwestern Mutual. Better than nothing, but still far from where you want to be.

The Institute for Supply Management (ISM) reported an April increase in PMI to 47.1 from the 46.3-nightmare in March. Keep in mind 50 is the key level here. Above 50 = expansion, and below 50 = contraction.

So, manufacturing in the U.S. is still contracting…but contracting by less than before. For the inflation-phobes and recession-phobes alike, there’s some good news in here.

For JPow and all those terrified by a $9.34 increase in the cost of your weekly groceries, the maintained contraction confirms the bedrock of the economy is still getting shellacked by rate hikes. On the recession side of the coin, the move back towards the almost-holy 50 level is at least one positive sign.

Despite coming in 0.3 points above economist expectations, markets are pricing this as further evidence to justify the need for another rate hike. The pickup in production suggests businesses are improving their inventories to better match current and future consumer demand, with new orders increasing from 44.3 in March to 45.7 in April.

As for prices paid by these businesses, the ISM confirms that, just like wages, the cost of their other inputs continues to increase. Mr. Market may have kept his focus on this line item as odds for another 25bps rate hike tomorrow moved from 84% on Friday to 93% by close on Monday.

So, inflation is, in fact, subsiding, but not nearly fast enough for JPow in his high-beaming Ram truck. Probabilities for further rate hikes spiking on the same day we have the second-largest bank failure in U.S. history is just yet another reason why Jerome Powell has one of the single least enviable jobs of any in the world.

Of course, we have to keep in mind that here the government is still using George Washington-era technology to collect the official data, relying on surveys rather than real-time data that would just be way too easy and obvious to use.

We have roughly 36hrs until JPow steps on stage again. Let’s see what else can confuse the hell out of us in the meantime.

What's Ripe

Norwegian Cruise Lines ($NCLH) ↑ 8.91% ↑

• Old people are back, and so are the cruises that they go on. This was confirmed yesterday as Norwegian, like many other stocks this earnings szn, handily beat their pessimistic earnings estimates.
• The firm managed to pull $1.8bn from grandma’s purse as revenue topped $1.8bn vs. expectations for $100mn less, while per-share losses docked at only $0.30 vs. the $0.42 loss expected.
• Bookings are “at record levels” while revenue per passenger has beat the sh*t out of inflation, ripping 17.5% for the year, almost as high as the stock’s 22% rise so far this year.

ON Semiconductor ($ON) ↑ 8.85% ↑

• Semiconductor stocks gave the market a semi yesterday as strong earnings reports from mid-sized players like ON and NXP got investors excited for AMD tomorrow and Nvidia at the end of the month.
• EPS of $1.19 beat estimates, while sales came more or less in line with expectations. The real hype came from a look to next quarter, where management’s updated guidance implies only a 3% decline from highs seen last year vs. the Street’s previously priced-in 7% dip.
• Chips were one of if not the biggest drivers of the supply chain and manufacturing backlogs experienced over the past few years, so seeing any kind of improvements will drive outsized returns. Like when you’ve been super down bad but then get a like on Tinder, the excitement is a bit more than usual.

What's Rotten

Lordstown Motors ($RIDE) ↓ 23.29% ↓

• After sitting on the sidelines and seeing all the fun EV makers like Tesla and BYD have been having, Lordstown took one look and said, “Nah, it’s bankruptcy for me.”
• Potentially joining a party started by Bed Bath & Beyond and attended by a few regional banks, Lordstown may soon be crashing the bankruptcy party as bad news around the firm’s Foxconn deal threatens to jeopardize the whole damn business.
• Before yesterday, shares were already down a tremendous 83% from the peak. Basically, Foxconn is threatening to pull funding it gave to Lordstown since shares haven’t been able to remain above $1, a key part of the agreement. If Foxconn pulls out and no one else steps in, the $RIDE may finally be over.

SoFi Technologies ($SOFI) ↓ 12.20% ↓

• Earnings reports don’t get much better than a financial beat, user beat, and increased full-year guidance. In SoFi’s case, however, the market told the fintech firm to kindly go f*ck itself.
• Shares tumbled well over 12% despite almost no bad news in this report. Sales for the first quarter grew 43% annually while losses narrowed from $110mn last year to $34mn in Q1’23. Net interest income, meanwhile, boomed 113% for the year.
• Needless to say, those all obliterated estimates. Management continues to expect to stop setting money on fire and make a profit by the end of the year, but investors remain clearly skeptical.
• Declines in non-interest income by 14% for the year could be playing a role in the selloff, as the market is likely well aware that much of that 113% gain above is thanks to JPow rather than SoFi itself. Further, the firm didn’t even try to sell off any of its personal loan book, potentially driving concerns about the firm’s ability to roll those loans down the line. Clearly, sometimes even enough isn’t enough.

Thought Banana

JPMorgan or Bust

Wow, that happened fast. In case SVB and Signature’s monstrous, idiotic failures didn’t titillate you enough these past few weeks, we now have a new silver medalist in the category of the largest bank failure in U.S. history. Congratulations!

For all of us born in the modern age (aka post ~1990ish), the collapse of First Republic might as well be the largest ever because who tf under 30 knows what the hell a WaMu is? Regardless, the failure of First Republic did have some scary similarities to that of the largest bank failure in U.S. history, Washington Mutual.

Most notably, both of them were “bought” by JPMorgan. As we said yesterday, things had to move fast between the writing of Monday’s Peel and the 9:30 am open…and surprisingly, the FDIC did a great job listening to us.

Yesterday morning, assets of First Republic were seized by the FDIC…but only for like 5 mins. It was basically like a handoff to Jamie Dimon & Co. from there as by midday, all of First Republic’s 84 branches across 8 states, along with every dollar of deposits in them, was under the umbrella of the great JPMC.

That adds $103.9bn in deposits to a bank that already had the most in the nation, somewhere around $2.37tn per the April 14th earnings statement. In addition, JPMorgan now owns “substantially all” of First Republic’s $229bn in assets, including ~$170bn in loans and ~$30bn in securities (tough to get an actual value of these “assets” mid-bank-run).

The big just keeps getting bigger. But, it’s not without cost, as JPMorgan will pay a total of $10.6bn to the FDIC for the purchase. That might sound like a big number for a bank whose market cap was less than $750mn at the close of last week, but I urge you to see again: $2.37tn in deposits. Chump change, in other words.

Unlike during the GFC, these failures of regional banks turned into major wins for large banks that actually won’t cost the U.S. taxpayer a dime. Banks pay into a sort of insurance fund at the FDIC in order to be able to call themselves a “bank,” and, as stated by the White House and FDIC itself, the funds will come from that pot.

Then again, you just never know with banking and other economic failures. The tough thing in macro is that, unlike hard sciences like physics and chemistry, we’re dealing with people, and people have the amazing ability to change their behavior in response to ongoing circumstances that can lead to wildly disparate outcomes.

According to the likes of Dimon, Munger, and big boy Buffett over the past few days, the death of First Republic does appear to be the last corpse thrown onto the pile. Let’s hope they’re right.

The big question: Is that “appearance” of the last in this series of bank failures actually reality? How can regional lenders compete going forward in a two-tiered banking system? If JPMorgan faces trouble down the road, is the entire Earth gonna just blow up?

Banana Brain Teaser

Yesterday — What number do you get when you multiply all of the numbers on a telephone's number pad?

Zero. Anything multiplied by 0 is 0.

Today — It’s 50 bananas off the Financial Statement Modeling Course for the first 3 correct respondents. LFG!

There are 2 ducks in front of 2 other ducks. There are 2 ducks behind 2 other ducks. There are 2 ducks beside 2 other ducks. How many ducks are there?

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

Wise Investor Says

“The stock market is a reflection of the world we live in. It’s a zero-sum game. For every buyer, there’s a seller, and the market is always right.” — Jack Bogle

Happy Investing,

Patrick & The Daily Peel Team

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