Another Tech War

In this issue of the Peel:

• Credit spreads are on the decline in the U.S. and rising in Europe, despite the fact that recession odds are higher in the U.S. than in Europe.
• Williams-Sonoma and Tilray Brands had a ripe day, while Alcoa and WeWork ended the day in the red amidst unraveling events.
• On Monday, AI researcher and Public Benefit Corp Anthropic announced a $1.25bn investment from Amazon.

Market Snapshot

Happy Tuesday, apes.

It’s been a while since we started off a week this green, huh? And no, I don't mean green with jealousy of yourself last Friday.

The only green we need is rising stock prices, and that’s what we got. Equity markets largely rose in the U.S. coming off a week in which a lot of uncertainty was wiped away. Even if the news wasn’t ideal, the bridge has been crossed, and the Nasdaq and Russell 2k’s 0.45% gains were here to party.

Utilities, energy, and staples (aka, the nerdy “safe” sectors) were the only ones down for the day while the rest of us were having an actual good time.

Treasury yields were only higher. In the meantime, U.S. 10-year yields continue to rise, which, as you’ll see below, is causing a lot of head-scratching for global economists. The 2-year yield and just about every other tenor was also higher, with that key maturity re-approaching 5.15%. USD has been hitting the gym as well, seeing nothing but gains compared to the rest of the day.

Let’s get into it.

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Macro Monkey Says

Euro-cession vs. Ameri-cession

I’m going to go out on a limb here and assert that absolutely 0 people, regardless of their continent, are hoping & praying for a recession. That said, markets are saying otherwise, and what they’re saying isn’t making a whole lot of sense.

PE giant Apollo Global Management’s Chief Economist, Dr. Torsten Sl?k, for lack of a better term, is a genius in many regards. He’s one of those economists who actually seems to recognize the flaws in this “science” and has a great way of using them to his advantage.

For example, in Apollo’s in-house publishing room, Apollo Academy, Sl?k recently dropped this gem. Get excited, apes, because it’s time to talk credit spreads.

"... absolutely 0 people ... are hoping & praying for a recession."

“CCC Spreads,” or high yield (aka “junk”) spreads, refers to the difference between the yield on lower-rated and higher-rated corporate bonds in a given market.

As yield increases along with risk, lower-rated bonds carry higher yields. And, when the spread between these higher-yielding bonds and their safer counterparts narrows, it’s a sign of a lack of serious financial stress.

When it’s increasing, however, look out below. That’s the “smart money” bond market telling you there may be something wrong as a “flight to safety” pulls down yields in safer assets, like U.S. treasuries.

Now that we got that out of the way, look at this:

Source

Now, look at this:

Source

The Tale of Two Cities here, as Sl?k points out, is that 1) credit spreads are on the decline in the U.S. and rising in Europe, while 2) recession odds are higher in the U.S. than in Europe. This, ladies and gentlemen, does not make sense—according to economic theory.

"This, ladies and gentlemen, does not make sense—according to economic theory."

As the smart economist that he is, Apollo’s top guy didn’t offer an explanation. Instead, he only sought to reframe the thinking of credit investors to the question of whether credit fundamentals or pure yield levels were being prioritized in thought.

Much like stock market fundamentals vs. that of price momentum, bonds can suffer the same symptoms. Despite being the “smart money,” the flight to safety that may have been expected in U.S. treasuries hasn’t occurred, driving the lack of a spread in the U.S.

For the reasons driving the lack of a flight to safety to U.S. debt, you might as well ask the stars, Santa Claus, or your congressman. The point is that something is disconnected, breaking the usual correlation, at least for the time being.

We’ll see if it’s a mean reversion or yet another symptom of JPow’s “higher for longer” line. At this point, I’m just gonna get that tattooed on me because, like rates, isn’t that just how we’re all tryna be?

What's Ripe

Williams-Sonoma (WSM) ↑ 11.62% ↑

• What’s one thing that rates at 5.50% still can’t kill? Id**ts.
• For real. Shares in the now $10bn furnishing company’s stock soared as morons on Twitter (X?) confused the “cashtag” (cringe) $WSM—meant for the Wall Street Memes token—for Williams-Sonoma, for obvious reasons…
• Having the same ticker as some sh*tcoin is apparently still a valid investment thesis. Williams-Sonoma had no news for the day, but apparently, there are still enough brain cells in Cryptoland to drive embarrassing moves like this.
• To be fair, the stock is at a ~18% short interest, meaning an uptick could’ve triggered a short squeeze. Either way… c’mon apes. I hope you at least made money.

Tilray Brands (TLRY) ↑ 7.08% ↑

• Weed is still cool. On Monday, cannabis and newly minted craft beer maker Tilray Brands roared on continued optimism around getting stoned.
• Like above, social media has been a non-ignorable factor (unfortunately) here. Reddit is abuzz with names like Tilray and other pot stocks like Canopy Growth (+12.26%).
• Moreover, Tilray CEO Irwin Simon hyped up the company’s recent alcoholic beverage acquisitions as “synergistic” (gross) with the cannabis-infused beverage market, which is expected to be one of the largest parts of this market when and if it actually does exist.
• Bottoms up, and they sure hope so for their stock prices.

What's Rotten

Alcoa (AA) ↓ 6.07% ↓

• For a 137-year-old company, hitting 2-year-lows on your stock price can’t be all that bad, in hindsight. But, it also sure can’t feel good in the moment.
• Unfortunately, that’s the reality for steelmaker Alcoa. Shares plunged as the firm shocked the Street with an unexpectedly timed CEO switch-up.
• Retiring Chief Roy Harvey had that dawg in him, hence why investors are sad to see him go. While they’re overall pleased with new CEO William Oplinger’s appointment, with B Riley calling him the “most well-positioned” for the role, the out-of-nowhere-ness of the move means uncertainty, and we all know how much investors hate the U word…

WeWork (We) ↓ 5.50% ↓

• Nearly two years and two documentaries following the horrendous IPO of this fundamentals-forsaken stock, WeWork is still kicking. But based on yesterday’s move, traders aren’t sure why.
• While there wasn’t any especially bad news, WeWork has been really quiet since telling landlords it would have to renegotiate most leases. Coworking apparently isn’t all it’s cracked up to be when rates hit 5.50%.

Thought Banana

Financial Infidelity

Cheating in a relationship isn’t cool, and generally, it’s even worse in business (is that actually true?)

Anyway, there appears to be some major corporate adultery occurring in the land of megacap tech and AI this week. On Monday, AI researcher and Public Benefit Corp Anthropic announced a $1.25bn investment from Amazon, with the option to up that to $4bn over time.

"... Anthropic announced a $1.25bn investment from Amazon ..."

The investment grants Amazon a minority stake in the company that, much like OpenAI, was founded on the idea of not being solely focused on making a sh*tton in the AI space. With Amazon’s hands in it now, we’ll see how that goes…

Anthropic has been a little more under the radar than OpenAI, given that it was founded later and by former employees of the Microsoft-backed ChatGPT owner. But the younger firm has its own bot, named Claude, and a newly-released Claude 2.0, gearing up for battle against the king.

Over the next two years, Anthropic seeks to develop yet another iteration of this tech that many expect to be called “Claude-Next.” According to TechCrunch, they plan for that model to be 10x more powerful than today’s most powerful AI systems.

Google, who also owns a ton of Anthropic, has been assisting in this endeavor as well. Between both Amazon and Google, we’re still not even at half of Microsoft’s latest $10bn (with a B) investment in OpenAI. But the battle is on.

"... Anthropic seeks to develop yet another iteration of this tech ..."

I’m just glad the whole idea of keeping the world’s most powerful tools outside the hands of giant corporations is working out well. Comforting, huh?

The big question: Will Anthropic succeed enough to actually rival OpenAI? Is big tech going to dominate AI and use it to molest our privacy even more? Should we be asking “when” instead?

Banana Brain Teaser

Yesterday —

If you have me, you want to share me. But if you share me, I will no longer exist.

What am I?

Answer

A Secret

Today —

When filling an empty barrel, which happens first?

A) 2/3 full B) 1/4 empty C) 1/2 full D) 3/4 empty

Shoot us your guesses at [email protected]

Wise Investor Says

“Buying’s easier, selling’s hard – It’s hard to know when to get out.” — Seth Klarman

How would you rate today’s Peel?

All the bananas

Decent

Rotten AF

Happy Investing,

Patrick & The Daily Peel Team