The Magic Kingdom vs. The Sunshine State | The Daily Peel | 4/4/2023

Apr 04, 2023 | Peel #433

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Market Snapshot

Happy Tuesday, apes.

More importantly, congratulations to the UConn Huskies for their absolutely diabolical evisceration of San Diego State University in yesterday’s men’s college basketball championships. We’re a day late on this one, but congratulations to the LSU Tigers and their women’s basketball team for doing the same to Iowa.

Now that we got that out of the way, let’s talk markets because yesterday was a weird one. Equities had no idea what was going on. Oil and other energy-sensitive stocks put up big numbers to start the week as they get the biggest alley-oop of all over the past few days from OPEC+. More risk-on names found in the Russell and Nasdaq brought their indices just barely lower while the Dow and S&P saw green.

Bonds had a rocky session, forming a distinct n-pattern on the day that ultimately led to the 2-year yield crossing the finish line below 4%, while the 10-year followed suit and ended right around 3.43% on the session.

The dollar was lower as well but formed more of a roller coaster pattern than the above. Briefly, the DXY index showed signs of crossing below 102 for the first time since January.

Let’s get into it.

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DIVE INTO THE DETAILS

Banana Bits

• Call your local carpenter because construction spending was down worse than your mental state
• The internet is set to break later today if former Pres Big Donnie T actually gets his mugshot taken later today, but to allegedly make this much money as a result might be worth it
• A major L is taken by Japan as the country resorts to purchasing Russian oil above the $60 cap to maintain market access, eventually getting a very reluctant thumbs up from the US
• Science keeps sciencing, and as a result, a weight-loss drug battle for the ages is soon to be underway

Macro Monkey Says

Man, You ‘Facturing?

No, you are most definitely not manufacturing, at least according to the latest data dump we got yesterday.

The Institute for Supply Management, aka the ISM, aka the gang reporting all the important manufacturing data, popped off yesterday morning, bringing us all kinds of new figures. I’ll stop beating around the bush now so we can get to it.

For the first time since 2009, every single component of US manufacturing, as quantified by ISM, was below the key level of 50, with readings above 50 representing expansion and below representing contraction across the sector.

At the same time, S&P Global dropped its own measure of US manufacturing PMI. The two readings differ slightly, with the primary distinctions including the following:

• Slightly different subcomponents, with ISM giving mildly more focus to things like new orders and customer backlogs, whereas S&P lasers in on output
• S&P equal-weights all its subcomponents while ISM weights them based on “perceived importance”
• ISM surveys 300 US-based purchasing managers, while S&P Global is more, well, global, surveying purchasing managers in ~40 countries

Otherwise, their readings are basically the same. But these differences can speak to a world of difference.

In March, the ISM Manufacturing PMI declined from the already-low 47.7 reading in February to 46.3 in March. Meanwhile, S&P’s PMI metric posted a score of 49.2 in February, increasing from the 47.3 level posted in February.

Wise apes out there may have noticed that one reading declined while the other gained, so naturally, we ask, what gives?

Let’s go back to those differences. Variations in the way these measures are calculated are the primary suspects, with an emphasis on things like:

• S&P Global, like Davey Day Trader, is global, suggesting US manufacturing may have suffered worse than the rest of the world last month
• ISM tends to give higher weightings to factors like new orders, which just so happened to get slammed even worse than the benchmark PMI in March

Or maybe it’s both. The cratering seen by new orders last month from 47.0 to a disgustingly low 44.3 makes us want to cry for all these poor, sweet factory owners. They might be the only ones that have it worse than landlords right now (sad!).

But it’s important to keep in mind exactly what we’re measuring. Manufacturing pertains to goods, but our economy is driven at least a nice 69% by services as opposed to the goods in question here.

And we’ll get service data later this week when both ISM and S&P report the same measures but for that side of the equation.

So yes, the slowdown in manufacturing last month can be seen as nightmare fuel, but context is key. For one, JPow is probably pretty happy to see the production of goods slow down, particularly in the case of new orders, as this is the clearest possible sign of a slowdown in demand for goods.

At the same time, this dropoff came during a month in which we experienced not one but TWO of the largest bank failures (2nd and 3rd, to be clear) in US history.

Manufacturing is an incredibly capital-intensive space (duh) that relies heavily on lending in order to expand production. So, it’s not exactly a surprise that production clamped up alongside capital, although the speed of the reaction is impressive, to say the least.

And, of course, 2023 has officially been the year where nothing makes sense. Economics is far from a science like physics, chemistry, or Tinder rizz, so macro events rarely make sense anytime in history. But c’mon, ever since C-19 showed up, it’s not just weird; it’s totally backwards.

What's Ripe

Macy’s ($M) ↑ 7.49% ↑

• Usually, Macy’s has approximately one good day per year, of course occurring on Thanksgiving during their massive parade.
• But yesterday was kind to the somehow-not-totally-bankrupt-yet retailer. Shares gained 7.5% on a surprising upgrade from neutral to overweight by the analysts at big dawg JP Morgan.
• Not sure exactly wtf they’re talking about here, but whatever “financial inflection point” the analysts were referring to must be a big deal as these people make like $130k/yr while I make dick jokes about stocks. Know your role, apes.

Energy ($XLE) ↑ 4.53% ↑

• Mohammad bin Salman, the Crown Prince of Saudi Arabia, was every energy investor’s best friend in the world yesterday, unless you were short oil, of course. But if you’re not an idiot, you must’ve seen some hefty gains amid crude oil’s >6.5% gain yesterday.
• These gains come on the back of exactly what we talked about yesterday – OPEC+’s Saudi-led decision to cut production in order to elevate prices and keep those margins as fat as the country’s deserts.
• For people like Uncle Joe here stateside, this was like getting teeth-kicked from halfway across the world. No major news of a response has appeared just yet, but with the administration’s commitment to not replenishing the SPR until crude prices fall off substantially, the US could be playing a dangerous game of chicken.

What's Rotten

Tesla ($TSLA) ↓ 6.12% ↓

• Now, moving over to the exact opposite of oil, we have Tesla. Sunday’s daunting report of Q1 vehicle production and deliveries turned out a great disappointment to investors, leading shares to start the week down horrendous.
• Apparently, 36% growth in delivery volume is not only bad for the company, but investors seem to have taken the figures as an insult. Shares dumped on the fact that, yeah, 36% growth is nice, but it’s well below the nearly 70% growth seen in the same period last year.
• Adding fuel to the fire, Tesla’s delivery numbers also came in below expectations, which, as we know, is Mr. Market’s absolute least favorite thing.
• Still, this stock is so volatile you could get motion sickness just by typing “tsla stock” into Google and clicking a 5-year chart. You never know what Elon’s got in store, and we’re not sure if we really want to find out.

World Wrestling Entertainment ($WWE) ↓ 2.15% ↓

• What do you get when you combine the two meat-headiest companies on the planet under one roof?
• A 2.15% selloff, apparently. Not what many would have guessed, but that is the outcome we saw yesterday on the announcement of UFC owner Endeavor announcing their intention to buy the struggling fake-sport company at a valuation of $9.3bn.
• Combined with UFC, the two will be worth slightly over $20bn. But, it won’t take long to see exactly what the market thinks of that figure as Endeavor plans to spin the combined company into an independent, publicly traded firm under the ticker symbol “TKO.” As badass as that is, sources say that markets generally don’t super care what your ticker is.

Thought Banana

Push It Somewhere Else

At this rate, newly returned CEO Bob Iger and Disney are gonna have to take a page out of Patrick Star’s playbook if this beef with the State of Florida doesn’t end soon. Like when the Alaskan Bull Worm came to Bikini Bottom, executives at Disney might want to take their Theme Parks and push it somewhere else.

But hold on, not so fast. Florida, at the same time, offers Disney some incredibly sweet terms that the company would be hard-pressed to get anywhere else, even if they followed the likes of Joe Rogan, Elon Musk, and hipster culture to Austin, TX or something.

In 1967, the world’s first ATM was installed in London, tens of thousands marched on the Pentagon in protest of the Vietnam war, and Disney inked the deal of a lifetime with the State of Florida, establishing the RCID.

The RCID, or Reedy Creek Improvement District, is a quasi-governmental body effectively controlled by the company. It is a municipal governing body that rules over 38 square miles across Orlando and is meant to provide municipal services like any other town or city. The RCID can issue bonds, impose taxes, and even assemble a police force, despite not being an actual town.

The governance of this organization is not only effectively but almost explicitly controlled by Disney. Though technically “independent,” the board members of the RCID are elected by the property owners of the district, and who do you think owns a majority of the land in their neck of the woods?

Exactly. A deal like this is hard to come by, and although Disney has performed better than most municipalities in terms of transportation, safety, cleanliness, and business development, getting another state to cede part of its territory to a private corporation just seems like a stretch.

But nonetheless, it really doesn’t matter anymore. Florida governor Ron Desantis has already inked legislation set to repeal the RCID in June of this year, and back in February, the RCID was officially dissolved into the “Central Florida Tourism Oversight District.” Moreover, the state’s legislature has already ceded control of the board to the State, allowing Desantis to replace the Disney-allied board with allies of his own.

But this is where it gets really wild. Disney put on its lawyer hat and used legislation dating back to 1692 that seeks to ban changes in control of the district “until 21 years after the death of the last survivor of the descendants of King Charles III, King of England, living as of the date of this declaration.” No, I’m not joking.

This legislation, signed by the RCID exactly one day before it became the CFTOD on Feb 8th, is going through a court battle as intense as Johnny Depp and Amber Heard’s.

But regardless of the outcome, legal, illegal, or somewhere in between, we’re just here for the beef. I mean, Disney’s already got parks in California and nothing resembling the RCID in that state; maybe some of that $17bn in planned investment in the peninsular state gets wired over to Anaheim.

The big question: Will Florida and Disney ever be the BFFs they once were again? Does California see this as an opportunity to move from the B-Team of Disney locations to the A-Team currently held by Orlando? What lessons can other companies, especially competitors, take away from this beef?

Banana Brain Teaser

Yesterday — There are 20 people in an empty, square room. Each person has full sight of the entire room and everyone in it without turning his head or body or moving in any way (other than the eyes). Where can you place an apple so that all but one person can see it?

Place the apple on one person’s head.

Today — It’s 150 bananas off the Venture Capital Course for the first 3 correct respondents. LFG!

Looks like water, but it's heat. Sits on sand, lays on concrete. People have been known to follow it everywhere. But it gets them no place, and all they can do is stare. What is it?

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

Wise Investor Says

“You can’t separate government from the economy. You have to have government and the private sector working together to create sustainable growth and jobs.” — Michael Bloomberg

Happy Investing,

Patrick & The Daily Peel Team

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