With a Grain of Salt | The Daily Peel | 2/15/23

Feb 15, 2023 | Peel #400

Market Snapshot

Happy Wednesday, apes.

Not gonna lie, apes; that was a weird one. Markets fluctuated like a trader with its head cut off on Tuesday following the heavily anticipated CPI print released yesterday morning.

More details below, but for now, just know that equities were getting so mixed we thought Mr. Market was making a cake. The Nasdaq did finish green while other majors were mildly red or flat, but bond yields were the real story, decidedly higher on the day while the dollar just kinda vibed around 103.25 by $DXY.

Let’s get into it.


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Banana Bits

  • CNBC apparently thinks it can do a better job than us at explaining the January CPI print (lmao)
  • The Fed’s Vice Chair, Lael Brainard, and JPow’s Chair competitor back in late 2021, secured the spot as the chief of the National Economic Council. She must be excited; it’s not like our debt is out of control or anything
  • Never would’ve seen that coming (jk, it’s about time). India’s national markets regulator finally announces plans to go sus out the Adani Group
  • Good data is in, and our suspicions are confirmed: the 2023 Super Bowl was an absolute banger

Macro Monkey Says

CP-Ight

It was 8:29 am. My palms were sweaty, knees weak, and all I could think about was how badly I just wanted some of my mom’s spaghetti. The inflation perspiration was getting out of hand, and then, the report dropped.

January CPI came in at 0.5% for the month and 6.4% for the year. Yes, that was above economists’ expectations. Yes, that was higher on a monthly basis than December’s (revised) 0.1%. And yes, that is more than 3 times the Fed’s 2% target rate. An uptick in price hikes to start 2023 was almost def not priced in, so how was Mr. Market feeling?

Surprisingly to some, not too bad. Despite driving close to the heaviest trading volume the S&P 500 has seen in 2023, bulls and bears were nearly evenly matched.

Now, if I told you yesterday that CPI was gonna come in hotter than expected, the vast majority of us probably would’ve said markets would be looking like March 2020. So what happened? Glad you asked.

While the chart below shows the change in purchasing power as basic lines and bars, the real data is a whole lot more granular. Don’t ask me how they track it, but these “people” got line items including hyper-specific data like “shelf-stable fish and seafood” and even separate “instant coffee” from “roasted coffee.” It can’t be that deep…

But apparently, it is. These hyper-specific line items give us just the insight we need to see where that inflation bastard is still lurking. Last month, it was the usual suspects of food, energy, and shelter once again.

Food inflation surged 10.1% on the year, or 0.5% for the month, and proved one of the most significant contributors to the monthly uptick. Energy really wasn’t tryna help either, surging 2% for the month but “just” 8.7% annually.

The real scumbag of the report was once again housing and housing services inflation. Together, these metrics make up over 1/3rd of the entire index. If that’s not ridiculous enough, just know that the largest part of that 1/3rd is “owner’s equivalent rent,” where people who OWN their homes are made to act as if they rent it.

Housing posted 7.9% YoY growth and 0.7% for the January period. But sometimes, the Fed is smart. Recently, the idea of “super core” inflation (inflation ex-food, energy, AND shelter) gained just 0.2% monthly and 4.0% for the year.

See, JPow and the gang know CPI works on a lag, and they also apparently know that the housing services section is the laggiest of all the lags. As a result, super-core inflation is going to be the word of the first half of 2023 at least, as home costs aren’t expected to register a material slowdown in the data until this summer.

But then again, it’s always good to remember: nobody actually knows what’s going on in macro, and everyone mostly just hypes up their portfolio / previous take. Markets seemed to digest the super core inflation idea, likely as this aligns with JPow’s relentless focus on housing costs at the recent Washing “Economic Club” forum.

Then again, JPow is also the guy that told us in May of ‘22 that 75 bps rate hikes were “not something the committee was actively considering.” 42 days later, the first 75 bps hike since 1994 was instituted.

Take macro with a grain of salt.


What's Ripe

Tesla ($TSLA) ↑ 7.51% ↑

  • That might’ve been the longest stretch in Peel history where Tesla and Elon didn’t get a shoutout. As yesterday was V-Day, we had to go back to our one true love. <3
  • This was a big one. Even when Tesla shares were booming, often-revered investors stood far away as the overvaluation dripped in career risk for those buying the stock. Yesterday, Barclays came out and told the Street to buy every share they could, slapping a +30% PT on that bitty.
  • If that’s not good enough, George Soros, the man that “broke the British pound,” loaded up in recent days as well. If history is any indicator, it’s tough to win a bet against Elon or Soros. Imagine betting against both of them together.
  • I’d send my boy Elon some flowers (as we’re obvi close personal friends), but I think the share gains were more than enough of a gift.

Zoetis ($ZTS) ↑ 5.37% ↑

  • Good dog, good stock. That was the story of pet healthcare provider Zoetis yesterday. Sure, the numbers were good, but obviously, our main concern was the health of the pet pharma company’s patients.
  • Top line sales beat narrowly, while EPS was basically exactly in line with analyst anticipations. Guidance for 2023 was what really got investors wagging their tails and paying their dollars, however.
  • Execs expect to handily beat 2022’s revenue numbers, guiding for 7-8% growth on the higher end of estimates, proving that if you literally just make up numbers higher than your benchmark, shares = up. As long as the dogs are okay, they can do whatever they want as far as we’re concerned.

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What's Rotten

Geo Group ($GEO) ↓ 16.23% ↓

  • Absolutely laughing my a** right now. This. This right here is why we love capitalism.
  • Geo Group, a prison company (apparently that’s still a thing), plummeted well over 16% on the day Tuesday on the back of a disappointing report despite beating on both sales and EPS. The tumble came from largely underwhelming guidance and a whole lotta variable rate debt on the balance sheet, driving interest costs much higher for the quarter.
  • But that’s not even the best part. Of course, this was one of investing “guru” Michael Burry’s favorites. Just goes to show you that even if you’re one of the most followed people in financial media, you can still be wrong, like Burry himself, who tweeted “Sell.” on January 31st and is now, of course, buying.
  • And, I mean, hot take, but who is this guy anyway? Burry is clearly smart, as he holds an MD, but in terms of investing, he made one good call. And he wasn’t even the guy that made the most money on the same f*cking trade. They just happened to make a movie about him, so now, everyone (including Burry himself) sees him as some kind of market god. Stop the FUD, shut up, and buy (and hold).

Restaurant Brands International ($QSR) ↓ 2.73% ↓

  • ♫ Whopper, whopper, double whopp- ♫, maybe not. The only whopper we saw on the quarterly numbers for Burger King owner RBI was the fat dip shares took on Tuesday
  • With all due respect (bc they do own other companies besides BK), Restaurant Brands Intl posted surprisingly strong numbers, with EPS of $0.72 right in line with estimates and sales narrowly squeaking out a gain.
  • In all seriousness, the fries might be a little overcooked on this stock, if you catch my drift. The inflation pressure of 2022 forced us to muck the absolute slop BK and others disk out, but with price rises (allegedly) abating, traders seem to be betting on less self-hatred-inducing meals. Trust me, skip the chicken fries. NOT worth it.

Data Peel

Chart 1. One-month percent change in CPI for All Urban Consumers (CPI-U), seasonally adjusted, Jan. 2022 - Jan. 2023

data peel

Chart 2. 12-month percent change in CPI for All Urban Consumers (CPI-U), not seasonally adjusted, Jan. 2022 - Jan. 2023

data peel

Source


Thought Banana

Maybe the Math is Mathing?

Okay, hear me out…

2022 was a year in which consumer spending, savings rates, and credit card balances roughly began to normalize back to pre-pandemic levels. This came amid the highest inflation our economy has seen since Ronald Reagan was just some old actor.

While that alone wasn’t unexpected, many analysts and economists had, arguably rightfully so, planned for and priced in for those household balance sheet items to not only normalize but deteriorate substantially.

Somehow, the US consumer managed to maintain spending and balance sheet management roughly on par with pre-pandemic trends. This was a head-scratcher for quite a while, but ever since Vanguard dropped the gem of a report we’re about to talk about, part of the answer may be making itself evident.

In an average year for Vanguard investors, roughly 2% of 401(k) customers tap these retirement savings accounts for “hardships” or other needs. In 2022, that number spiked by 40% to 2.8% of customers. Maybe, just maybe, part of the answer for that presumer stop-gap and return to normalization was driven by tapping retirement savings.

Okay, 2.8% still isn’t a whole lot, and even if it was 20%, that’s still probably not enough to account for the fact that consumers didn’t go into default in droves. All we’re saying is this might just be a partial explanation. And the government, of course, played a big role in this.

Starting in 2020, in response to C-19, Congress and the IRS made it a whole lot easier to get funds from 401(k) plans. Some changes made between then and now include:

  • Withdrawing as much as $100k with no 10% penalty (2020)
  • Elimination of the evidence requirement for hardship withdrawals
  • Up to $22k in penalty-free withdrawals from federally-declared emergencies

Basically, Congress gave the stamp that 401(k)s could no longer be solely for retirement but could play a role as emergency savings too. This ease in getting funds surely creates a stronger incentive to place tapping of the ol’ 401(k) towards the top of the financial emergency game plan. As savings dwindled, rates rose, credit boomed, and purchasing power plummeted, the 401(k) saved the day.

And it’s important to keep in mind that these retirement plan numbers come from one company for one kind of retirement savings plan. We haven’t even mentioned the myriad forms of IRAs or other firms like Fidelity, but Vanguard investors tend to be known as the savviest financially. If that client cohort was tapping their retirement plans at record rates, imagine what the bums at other companies were doing.

Just a theory.

The big question: Did 401(ks) save the day? How can we expect retirement planning and saving laws to change going forward, given these data?


Banana Brain Teaser

Yesterday — No matter how much rain comes down on it, it won’t get any wetter. What is it?

Water.

Today — It’s 100 bananas off the WSO's IB Interview Course for the first 3 respondents. LFG!

Susan and Lisa decided to play tennis against each other. They bet $1 on each game they played. Susan won three bets and Lisa won $5. How many games did they play?

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


Wise investor says

“I am convinced that my success on Wall Street can be attributed largely to my curiosity about life. Trading securities requires a lot of intuition, something you can only develop as a student of life.” — Roy Neuburger



Happy Investing, Patrick & The Daily Peel Team

 

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