Winners and Losers | The Daily Peel | 5/23/23

May 23, 2023 | Peel #467

Market Snapshot

Happy Tuesday, apes.

Monday = mid day, we all know that, but it was especially true in yesterday’s markets. With a light day on the macro news front, we sure are glad we still have the federal government to massively drop the ball and give us content to write about!

Equity markets were fairly mid this Monday, too. US stocks within the Nasdaq broadly rose, gaining 50bps on the day, while the Dow’s boomer-heavy, cyclical businesses slumped. The S&P tried its hardest to stay green, but after a late-session decline led by Consumer Staples, a flat performance was all we could eke out.

Treasuries were mostly unexciting as well, with yields moving higher throughout the day. The rise of the 2-year and 10-year yields especially could suggest a risk-on attitude in markets, but given that we’re talking about minor moves from a one-day sample size, it could be anything. It’s almost like there’s something else going on in Washington related to the government’s debt that could be spooking treasury holders.

Let’s get into it.

Financial Modeling Skills Get You Paid

Attention all financial wizards and career climbers, are you ready to take your modeling skills to the next level?

If you're looking for an undervalued investment in your career, look no further than WSO's Elite Modeling Package! With 6 courses designed to turn you into an absolute Excel master, this is the package that keeps on giving.

From building a 3-statement model to tackling complex LBO modeling and M&A transactions, this package has got you covered. You'll also build a solid foundation in trading comparables and precedent transactions analysis and DCF modeling, all using the versatile and relatable example of Nike, Inc.

And as if that wasn't enough, the first 3 Peel readers to sign up for the Elite Modeling Program in the next 24 hours will also get access to our Foundations Program! That's right, a two-for-one deal that'll have you feeling like a baller in no time.

So don't miss out on this opportunity to boost your career and invest in WSO's Elite Modeling Package now!

#ModelOn #FinancialGains #CareerGoals

Macro Monkey Says

Run It Back

You’re gonna hate us for this, but sorry, apes, we simply have to talk about the debt ceiling again.

Actually, we’re not sorry—aside from the depressing *ss War in Ukraine, the NBA Playoffs, and Pete Davidson’s latest girlfriend, there ain’t a whole lot to trade on lately. Maybe Taylor Swift’s Eras tour will help us avoid a recession, at least?

Well, I guess if cups of rain from her Boston show continue to sell for $250 a pop, maybe JPow does need to keep raising rates.

Regardless, right now, the only thing we need to shake off (lmao) is this debt ceiling debacle. Last we spoke, Biden and McCarthy were beefing again after briefly building up the possibility of coming to a resolution soon.

Not anymore. Now, the beef is seared, hot, and ready for all to enjoy.

"...were allegedly spitting game at each other in another high stakes oval office meeting."

At the time of writing (6:50 pm ET), Joey B and Kevvy Mac were allegedly spitting game at each other in another high stakes oval office meeting. By the time you read this—hell, even by the time I’m done writing this—things very well could’ve changed.

But as of now, hammering out plans is the plan. We are now 9 days away from Secretary Janet Yellen’s identified “X Date” of June 1st. According to everyone’s favorite TikTok politician, it takes about 10 days for that deal to morph into a bill and actually go into effect, meaning if you’re reading this Tuesday morning and no deal has been reached, we might be, technically, f*cked (if JYell’s X Date prognostication is accurate).

If not, we have, at best, a little more time. You likely have heard that steps have been made and terms conceded on the spending cuts front from both sides in order to reach a digestible bipartisan deal, so what’s getting in the way now?

Well, we’re at record-low unemployment, and not wanting to take away from that record, Speaker Kevin McCarthy really, really wants to keep his job. But at the same time, the US government, economists, and, most importantly, citizens want—no, *need—us to keep paying off our debts.

Source

Basically, the concessions made by McCarthy to reach a deal, such as foregoing a plethora of spending cuts outlined in that debt ceiling Bill House GOP members passed in April, are arguably far too much for the harder-right flank of the House majority party.

If Kevvy Mac allows Joey B to remove too many of those spending cuts, that hard right flank will call for a vote to remove McCarthy as speaker and, despite Democrat Hakeem Jeffries as the clear favorite to take the Speakership in his absence, hardline House GOP members seem just fine with that to send a message.

"...hardline House GOP members seem just fine with that to send a message. Joey B, on the other hand..."

Joey B, on the other hand, can’t really be removed from his position over this debacle (unless he completely falls all over the Constitution like he did 

"...they can’t simply vote him out of office..."

By even giving in to the spending cuts, Biden has already crossed the line set by hardcore Democratic Congresspeople.

Thankfully, they can’t simply vote him out of office, so Uncle Joe certainly has more to give from a job-keeping perspective than Kevvy Mac.

To counter spending cuts, Biden & Co. have proposed tax rate increases on wealthy Americans, which was obviously immediately met with a big, bold “F*CK YOU” from the Right.

Aside from those headlining elements, there remain countless moving pieces underneath, like permitting processes behind energy projects and eligibility criteria for certain welfare programs that aren’t as attention-grabbing but sure do affect many Americans out there. These likely won’t be the deciding factors in any eventual deal, but we can’t ignore the long-term implications.

And, apes, that basically brings us to where we are (were?) at the time of writing. No news has been released as of now (7:13 pm), but we sure hope a deal is reached and all of the above is outdated by the time you read this.

Hope graduation was fun this weekend, though!

What's Ripe

PacWest Bancorp ($PACW) ↑ 19.55% ↑

• SVB’s little brother PacWest was back in the news to kickstart this week for us, but luckily for depositors, investors, you, and everyone else linked to the US economy, this time was mostly good news.
• PacWest shares ripped like no one had ever heard of a bank run yesterday. Ultimately, the driver was the firm’s decision to sell a ~$2.7bn portion of the bank’s real estate portfolio.
• Often alleged but rarely with actual evidence as the “next shoe to drop,” US commercial real estate is now about as downbad as your Hinge profile. The only difference is people are actually paying attention to the CRE market.

PDC Energy ($PDCE) ↑ 7.22% ↑

• Whether you’re the average investor, Warren Buffet, or your parents heading into winter, everyone’s loading up on energy lately.
• And on Monday, the biggest culprit in that development was none other than Chevron ($CVX -1.80%), loading up on $7.6bn worth of new energy output in the form of purchasing PDC Energy Corp, a company approximately 1% may have been familiar with before you started reading this.
• Naturally, shares ripped on the day, The fat premium Chevron plans to pay is both the reason PDC shares were up and Chevron shares were down on the day, for the most part. What can we say? The double-edged sword strikes again.

What's Rotten

Nike ($NKE) ↓ 3.99% ↓

• For a company named after the Greek goddess of victory, shares were sorely lacking on that “Big W” energy they needed.
• Falling just about 4% on the day, shares seem to be tanking in tandem with Foot Locker’s sh*tshow of an earnings report last week. Both Nike and Foot Locker were slapped with downgrades across Wall Street, with the most damning for Nike stemming from analysts at Williams Trading, alleging that Nike’s product line is about as exciting as the Laker’s performance last night.
• Speaking of which, apparently, that lifetime deal with LeBron James may not have come with as much winning as anticipated. Traders may have been pricing in the disgusting performance of LeBron & Co last night, and if true, we just gotta tip our caps.

Micron ($MU) ↓ 2.58% ↓

• Tit, I’d like you to meet tat. As the United States grows wary of Chinese tech firms like Huawei and plenty of others, China appears to take steps similarly in the name of national security in effectively banning Micron nationwide.
• Meanwhile, Chinese and other Southeastern Asian semi shares ripped Monday in the wake of a newly apparent economic nationalism, similarly to that of the US in recent years within similar industries.
• US deep state lizard people (probably) and other internal officials allegedly urged South Korean chip manufacturers not to fill the newfound demand for Micron’s chips being removed from the market.
• Nevertheless, those shares seemed to snatch up all the market share Micron lost (and then some). Investors had been worried about Chinese tech, but maybe worrying about tech in China was more appropriate.

Thought Banana

Earnings $zn

Your portfolios are cooling down, your Stocktwits and r/WallStreetBets notifications are lightening up, and there’s a distinct chill in your wallet despite the warming of the air around you. That, my friends, means earnings szn is coming to an end.

And what a glorious season it was. As of this weekend, 95% of S&P 500 companies (and all the ones that matter, besides Nvidia on Weds) have reported earnings.

"...doing even slightly less sh*tty or more poorly than expected can drive fanatical outcomes."

Coming into the year, we all expected Q1 reports to give us a clue as to how companies were dealing with everything from inflation to bank crises to retracting consumer spending patterns. Well, let’s see how they did.

In short, they killed it. Like Michael Jordan’s legendary performance in the (in)famous “Flue Game,” companies with a lot of doubt around them came through and delivered, with 78% of S&P 500 companies reporting a beat on earnings and 76% a beat on revenue. LFG.

Now, some caveats. When we say “beat on earnings,” that doesn’t directly translate to “fundamentally performed well as a business.”

As wise apes know all too well from the What’s Ripe / Rotten of the past few months, doing even slightly less sh*tty or more poorly than expected can drive fanatical outcomes.

Earnings expectations are constantly revised. As new information comes in, the macro backdrop changes, or analysts have too much or too little blood sugar in their systems, estimates for short-term performance will vary widely.

"... “beating on earnings” at one point in time can also mean a whole lot more than at other times."

So, “beating on earnings” at one point in time can also mean a whole lot more than at other times.

Consensus earnings remain a tad more stable, largely by definition, as the “consensus” view is essentially just an average of the EPS and/or sales expectations of analysts from the major Wall Street banks. When we cite expected EPS and revenue, we’re talking consensus.

Now, 78% of companies reported earnings beats, but according to Factset, the average beat seen this past quarter of 6.5% is below the 5-year average of 8.4% but just a hair above the 10-year average of 6.4%.

Banana Brain Teaser

Yesterday — Customer services at RightWrite headquarters received the following letter recently. Luckily their top puzzle solvers were able to determine the meaning and help Mrs. Miggins. Can you work out what her problem was?

Da S,

ld lk cmlan ab h f m .

hs ls aa n k ccl.

As can s, hs ls a mssng fm hs dcmn.

ld b v gafl f cld cc hs blm fhh.

Man hanks,
Ms Mggns.

The letter was written on a typewriter which has a problem with the top row of letters - they did not print. The letter should have read:

Dear Sir,

I would like to complain about the top row of my typewriter.

These letters appear not to work correctly.

As you can see, these letters are missing from this document.

I would be very grateful if you could correct this problem forthwith.

Many thanks,
Mrs. Miggins.

Today — It’s 150 bananas off the Elite Modeling Package for the first 15 correct respondents. LFG!

What expression is represented here?

Sale Item: Yoursel

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 the story of cycles and of the human behavior that is responsible for overreactions in both directions.” — Seth Klarman

Happy Investing,

Patrick & The Daily Peel Team

Was this email forwarded to you? Sign up for the WSO Daily Peel here.

ADVERTISE // WSO ALPHA // COURSES // LEGAL