The Unsung Hero | The Daily Peel | 4/3/2023

Apr 3, 2023 | Peel #432

Silver banana goes to...

Market Snapshot

Happy Monday, apes.

And Happy April. Hopefully, you pulled a sick prank or two over this Holiday weekend, but fingers crossed markets don’t share that mentality heading into the week.

But as long as we can keep that Friday energy, we should be all set. Equities closed last week on a definitively higher note as investors began to price in an expected halt of interest rate hikes. All but 30 S&P tickers gained on the day, while each and every sector finished higher too.

Over in the fixed-income world, increased buying pulled down yields in a reversal of the steady rise seen earlier in the week. The 10-year note saw its yield finish below the key level of 3.5%, while the 2-year is still hovering at just about 4%.

Meanwhile, as countries around the world consider telling the U.S. they don’t want to play with the dollar anymore, the primary index for the currency gained mildly against others.

Let’s get into it.

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Banana Bits

• OPEC+ shocked the nation this weekend by announcing out-of-the-blue production cuts to get in front of anticipated weaker demand for crude
• India looks to add its name to the list of countries challenging U.S. Dollar hegemony by offering to settle some trade in rupees
• Not even 2 weeks after announcing the deal, Swiss prosecutors are already investigating themselves to see if any criminal activity occurred
• Banks appear to be chilling out as borrowing directly from the Fed slowed last week

Macro Monkey Says

Peace, Love, PCE

The most disrespected economic indicator around dropped its latest figures on Friday, and, for once, Mr. Market gave it the respect it deserved.

Kind of like how all the attention in Harry Potter was given to Harry despite Hermione being the objectively better wizard. Wall Street cares a whole lot more about CPI than it does PCE.

That’s why you always see PCE next to the phrase “the Fed’s preferred measure of inflation” in media reports. This thing is so disrespected we need constant reminders that it’s actually the one that matters.

See, with PCE, you get a lot more dynamism and a higher dose of reality than CPI. The mix of goods measured in PCE changes in response to spending patterns, while CPI only reshuffles its basket of goods every two years. So, for example, if consumers shift spending from normal goods to cheaper substitutes, this will be reflected in PCE, while CPI will pretty much just give it the finger.

Anyway, the Personal Consumption Expenditure index saw a gain of 0.3% in February, just half the growth rate posted in January and below economist guesstimates for a 0.4% gain.

For the year, prices gained 5% through the month of February, also slightly lower than expected and confirming the market’s newly stumbled-upon view that JPow and the gang should chill on the rate hikes.

But of course, the one the Fed really likes is the Core PCE metric. JPow has beef with the volatility of food and energy prices and, as a result, prefers the reading that strips out these items. I mean, who buys food or gas or anything like that anyway?

Core PCE gained 4.6% on an annual basis and tied headline PCE’s 0.3% gain for the month.

The slowdown in price growth comes alongside a staunch drop in energy commodity prices seen last month driven by fears of bank panics sparking a broader recession. The higher the probability that we enter a recession, the more the market discounts energy prices as demand for these commodities drops like a rock in times of economic stress.

But, given consumers saw their incomes increase 0.3% for the month, just managing to keep up with inflation, while spending from consumers rose 0.2% for the same period, recessionary odds don’t appear to be spiking (yet).

Like how America runs on Dunkin’, the economy runs on consumers. As long as incomes and spending don’t subsequently get absolutely trounced by inflation for much longer, then the 2/3rd of our GDP that comes from consumer’s wallets should be fine (right?).

What's Ripe

Digital World Acquisition Corp ($DWAC) ↑ 7.58% ↑

• Do you think Elon and Donnie have a written agreement deciding who gets all the media’s attention for a given period, or does it just kinda happen naturally?
• Either way, after the events of this past week, the eyeballs have officially switched back to ol’ Pres Donnie T. On Thursday, a Manhattan grand jury indicted former President Trump in the criminal case against him sought by DA Alvin Bragg for his role in alleged hush money payments to cornstar Stormy Daniels.
• The Founding Fathers would be so proud of us, don’t you think? Anyway, Trump and his team alleged the charges are all trumped up (pun intended) and purely political. Normally we, of course, don’t care one bit about things like this that we can’t make money on, but Trump stocks ripped on the news, so…
• Names like $DWAC, the SPAC taking Trump’s Truth Social public, soared alongside others like $RUM on the newfound attention given right back to the former Chief. I’m sure this will go swimmingly.

Tesla ($TSLA) ↑ 6.24% ↑

• Tesla shareholders fanboyed even more than usual on Friday as excitement brewed for the company’s release of production and delivery numbers that dropped yesterday.
• As usual, growth in both metrics was monstrous, with deliveries gaining 36% annually and 4% compared to the preceding quarter. Despite the growth, deliveries, a good proxy for sales, remained ~20k units below production numbers.
• The controversial and industry-upending price cuts that Tesla put in place last year likely gave deliveries the boost they needed after seeing a much larger slowdown in demand for the company’s higher-end vehicles.
• Still, no Cybertrucks have been delivered just quite yet, and Tesla still isn’t letting us in on the numbers for their semi truck unit. But you gotta check out this video of the Cybertruck’s crash test.

What's Rotten

Nikola ($NKLA) ↓ 13.57% ↓

• Most of the time, we’re so here for not caring what other people think. But, if you happen to be a publicly traded corporation, it’s a bold move, to say the least.
• Nevertheless, that’s the strategy Nikola went with late on Thursday as the firm announced that it had raised about $100mn in cash by selling equity at a fat discount to the day’s closing price.
• This means at least three things:
  1. Existing shareholders got absolutely fleeced in getting diluted
  2. Nikola is so f*cked right now it was willing to publicly fleece investors so bad
  3. Management thinks $1.12 (the offering price) is a fair enough price to make the sale, implying that shares are still overvalued
• For a company with an already not great track record (re: Founder and former CEO is currently awaiting trial on a $100mn bail bond), it’s impressive their market cap isn’t negative (yet).

Micron ($MU) ↓ 4.36% ↓

• After ripping earlier in the week on the trashiest-a** earnings report you’ve ever seen, Micron got put in a body bag to close the session.
• Shareholders can thank Chinese President Xi Jinping for this one. In a move that hasn’t been confirmed to be but definitely for sure is out of pure retaliation, the country’s cybersecurity administration has launched an investigation into the U.S. chipmaker.
• For China, it’s an eye-for-an-eye move set to totally blind Micron in the country’s semi-market in order to counter the U.S.’s own similar restrictions already in place on Chinese chipmakers. Might be a stupid question, but why can’t we all just be friends, huh?

Thought Banana

Oh No, OPEC

OPEC+, the Organization of Petroleum Exporting Countries, along with some other countries, came into the weekend like Brendan and Dale went into a job interview in Step Brothers: they were here to f*ck sh*t up.

And boy, did they succeed. On Sunday, the world’s most influential cartel announced their intention to cut petro output by an additional 1.16mn barrels per day (bpd). With global demand sitting at roughly 100mn bpd, this roughly 1% cut brings the total cuts announced by OPEC+ members to approximately 3.7% of daily global demand, or ~3.7mn bpd.

While the oil-producing nations spin these cuts as necessary to maintain stability in the petro market, we can think of at least one person that’s not gonna be very happy: Uncle Joe.

President Biden, a noted car driver, despite being at the age when most families take grandpa’s keys away, really does not at all f*ck with high energy prices. No President does, especially ones going into a re-election year.

That’s why Uncle Joe flooded the market with barrels from the SPR in order to artificially raise supply in order to mellow out prices as much as possible. In total, sales of oil out of this reserve went so hard that the SPR hit its lowest point since the early 1980s last year.

In February, further sales were put into legislation, and more could be on the way, depending on how jumpy prices are in response to this move.

But, there is little doubt about price movements in response already. Analysts say that as soon as trading opens in global energy markets, particularly those in the west with an emphasis on the U.S., prices are expected to waste no time in adjusting for the new lack of supply, barring any further response from western governments.

It’s a big flex out of the Middle East on countries like the U.S. and shows further evidence of the United States slowly faltering from its position as the most geopolitically influential country in the world.

The big question: How will the U.S. and other non-OPEC+ respond to these announced production cuts? Will we continue to see OPEC+ nations acting more and more independently going forward?

Banana Brain Teaser

Friday — What type of cheese is made backward?

Edam. Spell out the word “Edam” backward.

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

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?

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

Wise Investor Says

“Inflation is taxation without legislation.” — Milton Friedman

Happy Investing,

Patrick & The Daily Peel Team

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