The Ultimate Tax | The Daily Peel | 4/13/22

Silver Banana goes to...

Market Snapshot

Buy the rumor, sell the news. Futures were relatively flat until Tuesday morning’s key inflation report publication, and then they experienced a nice little pop, even as the inflation print was slightly hotter than expected and worse than ever in the last 40 years.

Stonks had a weird day, feeling bullish in the morning and pairing back gains as the day went on. The S&P closed down 0.34%, the Nasdaq slid by 0.30%, and the Dow closed down 0.26%. All in all, a relatively flat day for stonks and the major crypto benchmarks while Oil went on a tear. 

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Let’s get into it.

Banana Bits

• The CPI numbers are in; if you got a 6% raise this year, congrats on your 2.5% pay cut
• Small businesses agree it’s not the labor market that is eating their lunch
• Joey B to the rescue: The Big Guy is considering allowing you to power your car with corn
• Diversification amongst under-explored asset classes can help you unlock some alpha in unexpected places
• Great news, Apes: now you can yolo your parent’s money into additional magic internet money options on the toilet bowl that is Robinhood 
• Just in case you forgot, lady baller Brittney Griner is still in a Russian prison #FreeBrittney

Macro Monkey Says

Tired of Hearing About Inflation Yet? — I know, I know. The Daily Peel probably sounds like the Daily Inflation lately.

The numbers are in: 8.5% year-over-year inflation. Higher than expected and worse for the middle class than expected. Monthly core inflation was slightly better than expected, but it still doesn’t sound like good news.

Yesterday, we saw the markets react favorably to inflation news, probably because the core CPI number was slightly better than expected and is showing that inflation for a stable basket of goods is slowing. It still exists, but it’s not to the moon right now.

If you’ve lived through the last decade here in the States, hearing whispers about over 8% inflation numbers is as wild as a Cardi B concert. And when the White House said that it expects the inflation print to be extraordinarily elevated, we decided to dive a bit deeper into what this number means for us all.

China released its year-over-year inflation numbers last week: also 8.5%. Inflation isn’t an isolated issue. It’s a global challenge, which can become massively problematic for the world’s economy.

The IMF and its band of merry men have predicted that the US GDP will expand by 4.4%. Not bad for an economy that still, in our eyes, doesn’t have its feet under it in the digital marketplace of the 21st century. At the same time, ask any analyst on the Street: earnings are going to grow in 2022 after a blockbuster year in 2021.

All of these pretty little predictions for 2022 growth in corporate earnings and GDP were slapped together when Daddy JPow was whispering sweet nothings into our ears: transitory, baby…

The question is: will March’s inflation numbers be the peak? Or will inflation really, really get out of hand?

With the return of inflation to the US economy, we have watched the rise of inflation politics. While goods and services creep up in cost, economists with certain political affiliations have debated the difference between “good” inflation and “bad” inflation.

Another hot take: in election years, there sometimes manifests what I’d like to call an uncertainty bias, an increase in expected inflation. Looking into poll numbers and the yield curve, we aren’t there yet, but when we get there, we will see the yield curve adjust to take into account expected future inflation while watching other economic indicators of consumer sentiment decline.

This isn’t a political newsletter, so we’re sorry if you expected us to saddle ourselves to a particular ideology or set of candidates. But inflation is the ultimate tax, and it steals from the middle class and the poor while crushing the financially illiterate.

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What's Ripe

Energy Stocks ($MRO, $DVN, $FANG) — WTI was up another $5 yesterday, and with it went 2022’s darlings: the energy stocks. Broadly speaking, the energy sector ETF ($XLE) ended up 1.66% yesterday, with some of its starts up between 3% and 5% ($MRO, $DVN, $FANG).

Commodity prices are a fickle beast; liquidity challenges following Putin’s War in Ukraine are propping up commodity prices worldwide and allowing energy stocks more room to run.

Darden Restaurants, Inc. ($DRI) — Apes got a lot out of pumping Darden Restaurants on Tuesday, pushing shares higher 3.16%.

I don’t know about you, but “unlimited salad and breadsticks” sounds like a great deal as everything else gets more expensive.

What's Rotten

Carmax ($KMX) — Even though used car prices are through the rough in the last couple of years, Carmax’s shares took a dump on Tuesday after a fat EPS miss. 

Used car prices were the only piece of good news in the CPI print yesterday, but that doesn’t mean they’re not up by something ridiculous, like 40%, in the last year. 

$KMX shed 9.54% after this miss and is down 30% since mid-summer.

MaxCyte, Inc. ($MXCT) — We’ve held this stinking pile of ape$hit in our WSO Alpha portfolio since last July. A relatively small position. We liked it because of its speculative growth potential in the bio-engineering space. 

However, after months of sitting on the edge of our seats, waiting for this sucker to pop, it’s finally time. We’re closing our position. Our lead trader is making room for a better position somewhere else. MXCT is down 60% in the last three quarters.

Thought Banana

A Tale of Two Economies— Just under two years ago, the price of the May 2020 WTI oil futures contract closed at negative $37.63. The unemployment rate across the country topped out at 14.7%. The average 30-year fixed-rate mortgage hovered around 3.31%. According to the annualized CPI, the inflation rate was 0.35%. The ten-year yield at the end of April 2020 was 0.66%.

We know that the annualized inflation rate is 8.5%, according to the CPI. Next month’s WTI futures contract is trading around 100 bucks. The average 30-year fixed-rate mortgage is above 5.25% and climbing. The 10-year yield is at its highest rate in years at 2.7%. The unemployment rate is 3.6%, while there are 10 million open jobs. 

If I could sum up yesterday’s sentiment following the inflation print: everyone was expecting a downright and absolutely $hitty print. What we saw was just a bad print. As it would turn out, bad is relatively better than $hitty. 

Two years ago, the S&P was trading below 2,800. Today it’s at 4,400. The Dow was around 23,500. Today, we’re hovering above 34,000. The Nasdaq today is above 13,000. In April of 2020, it was between 8,000 and 9,000. These numbers were sharply lower than former all-time highs achieved by the major indices in Feb 2020. 

A lot has happened since then. The macro environment has completely changed. The economy has shifted towards a more flexible, more nimble digital ecosystem. The events of 2020 are by all means in the Black Swan category. 

Retail, hospitality, rideshare, travel... all crushed in the Spring of 2020. Today, those industries are mounting a comeback.

But where will we be in April of 2024? Long term, it’s hard to bet against the US economy. But in the interim, on a short time horizon, who is to say that we aren’t entering a longer-term bear market or even a recession that will last two years?

A little pop in the futures on Tuesday following the CPI print and a generally flat day for stonks signals to us at the Peel that maybe the Street thinks the worst is behind us. Things might be getting better, or at least getting worse at a slower rate that is more palatable to economic growth. 

Are we out of the woods? Will inflation magically go away? Only a foolish ape would believe that there isn’t volatility ahead, but I can’t fault you for having some hope.

Wise Investor Says

“Those who do not remember the past are condemned to repeat it.” — Benjamin Graham