Big Split: Industrial Giant Breaks Up

In this issue of the peel:

• ?? The industrial giant is peeling itself into three separate companies. Is this a sweet split or just a messy breakup?
• ?? Interest rates remain unchanged, but tariffs and rising costs could keep prices spicy.
• ?? Despite yet another blowout earnings report last week, Nvidia’s stock is cracking under the pressure.

Market Snapshot

Banana Bits

The Daily Poll

Will new tariffs drive inflation up?

• Absolutely
• A little
• No big deal
• Trade war incoming

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Previous Poll:

Where do you see inflation heading next?

Cooling off: 13.9% // Staying steady: 26.9% // Rising more: 50% // Stagflation ahead: 9.2%

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Macro Monkey Says

Inflation: The Uninvited Guest

As we swing into March, the economic jungle drums are beating with tales of inflation, interest rates, and central bank maneuvers. Let's peel back the layers and see what's brewing.

In January, U.S. consumer prices experienced their most significant increase in nearly 18 months, with the Consumer Price Index (CPI) rising 0.5% for the month and 3.0% year-over-year.?

This uptick was driven by higher costs in shelter, food, and gasoline, signaling that inflation remains a persistent force in the economy.?

Federal Reserve: The Tightrope Walkers

The Federal Reserve, in its January meeting, opted to keep the federal funds rate steady at 4.25% to 4.50%, following three consecutive rate cuts in late 2024.?

This decision reflects the Fed's cautious approach as it balances the need to support economic growth while keeping inflation in check. February’s economic data is set to come out next week, followed by a Fed Meeting the week after, but investors aren’t expecting a whole lot to change.

Looking ahead, the Fed's March 18-19 meeting is on the horizon.?

While no immediate rate cuts are anticipated, policymakers are keeping a close eye on economic indicators, especially in light of potential inflationary pressures from new tariffs and immigration policies.?

Let’s all remember that time in 2020 when the US government gaslit us into thinking we were crazy for worrying about so-called “transitory” inflation.

Eurozone: The Cooler Cousin

Across the pond, the eurozone is experiencing a slight cooling of inflation.?

February saw consumer prices increase by 2.4% year-over-year, down from January's 2.5%.?

This deceleration brings inflation closer to the European Central Bank's (ECB) target, and markets are buzzing in anticipation of the ECB's upcoming meeting on March 6, where a 0.25 percentage point rate cut is widely expected.

The Tariff Tango

President Trump's recent tariff announcements—25% on imports from Canada and Mexico and 10% on Chinese goods—are adding spice to the economic stew.?

These measures are expected to exert upward pressure on consumer prices in the short term, with inflation traders bracing for annual headline inflation near or slightly above 3% over the next seven months.

Monkey See, Monkey Do

In this economic circus, central bankers are the tightrope walkers, balancing growth and inflation with every step.?

As they juggle tariffs, consumer prices, and policy decisions, investors and consumers alike watch closely, bananas in hand, waiting to see if the next act brings a thrilling leap or a precarious wobble.

Career Corner

Question

When connecting with the mentors from the roster on LinkedIn, should I add a note mentioning I’m in the WSO academy or just send a connection request without a note?

Answer

Yes, strongly suggest it. I get connection requests, and they are not entirely clear from the Academy. Just makes a quick accept easier.

Head Mentor, WSO Academy

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What's Ripe

BAE Systems (BA.L) 14.5%

• The UK defense giant is flying high after European leaders pledged increased military spending, sending shares to a record. Investors are betting big on rising global tensions boosting demand for defense contracts. The Trump/Zelenskyy White House showdown last week didn’t hurt either.
• BAE Systems has been securing major contracts, including a multi-billion-pound deal for submarine production in the UK’s AUKUS partnership with Australia and the US.
• Defense stocks have been red-hot as countries boost defense budgets, and BAE's strong earnings forecast signals continued growth in 2025.

Rolls-Royce Holdings (RR.L) 4.4%

• Yes, the fancy car company that you grew up hearing about actually makes the majority of its revenue from jet engines and aerospace manufacturing. The stock is soaring, with shares hitting a 52-week high on optimism over defense spending and a successful restructuring plan.
• Rolls-Royce announced a ￡1 billion share buyback, signaling confidence in future cash flows and rewarding investors.
• Demand for jet engines is picking up as both commercial and defense aviation remain strong amid increased air travel and global security concerns.

What's Rotten

Nvidia (NVDA) 8.7%

• My personal account is officially on life support. Check in on your boy. The AI chip leader continued to get wrecked as investors questioned whether the AI boom could keep up its breakneck pace. Shares plummeted after reports of regulatory scrutiny on Nvidia’s exports.
• Despite record earnings last quarter, concerns about demand sustainability have led to a sharp pullback. NVDA is still up over 200% in the past year, but today’s drop is a warning shot.
• Analysts also pointed to rising competition from AMD and Intel, along with potential China-related headwinds, as reasons for the sell-off.

Super Micro Computer (SMCI) 13.0%

• Super Micro got slammed as regulatory concerns surrounding Nvidia spilled over into AI server suppliers. The company is a major player in AI data centers but is facing a reality check.
• SMCI had been one of the best-performing stocks of the past year, with a 700% gain in 2023, but today’s drop reminds investors that high-flying stocks can come down fast.
• Increased competition from Dell and HPE in AI servers is adding pressure, and analysts fear margins could take a hit in the coming quarters.

Thought Banana

Honeywell's Triple Play: Splitting Up to Level Up

Breaking up is hard to do, but for Honeywell, it might just be the key to unlocking three times the fun (and profit).?

In a strategic maneuver reflecting the evolving landscape of industrial conglomerates, Honeywell International has announced plans to split into three independent companies.?

This decision aims to enhance agility, focus, and shareholder value by allowing each entity to concentrate on its core competencies.

The Three New Entities

1. Aerospace Technologies: This segment, contributing approximately 40% of Honeywell's $15 billion revenues in 2024, will become a standalone company. It specializes in avionics, engines, and systems for both commercial and defense aviation sectors.
2. Automation Solutions: Encompassing Honeywell's automation and control systems, this division generated $18 billion in revenues. The new entity will focus on industrial automation, building technologies, and safety products, aiming to capitalize on the growing demand for smart infrastructure and industrial IoT solutions.
3. Advanced Materials: The smallest of the trio, with $4 billion in revenues, this company will concentrate on specialty chemicals and materials, serving industries like automotive, electronics, and healthcare.?

Source

Strategic Rationale

• Enhanced Focus: By segmenting into specialized entities, each company can tailor its strategies, investments, and operations to its specific market dynamics, potentially leading to improved innovation and customer responsiveness.
• Shareholder Value: The separation allows investors to align their portfolios more closely with their preferences, whether in aerospace, industrial automation, or advanced materials, potentially unlocking greater shareholder value.
• Agility and Competitiveness: Smaller, more focused companies can adapt more swiftly to market changes, regulatory shifts, and technological advancements, enhancing their competitiveness.

Source

Market Context

Honeywell's decision mirrors a broader trend among industrial conglomerates reevaluating their structures. Companies like General Electric and 3M have undertaken similar breakups to streamline operations and focus on core businesses.?

This shift indicates a move away from diversified conglomerates towards specialized entities better suited to navigate today's fast-paced, technology-driven markets.

Looking Ahead

The success of this split will depend on each new company's ability to leverage its independence to drive growth and innovation.?

Investors and industry analysts will be watching closely to see if this move delivers the anticipated benefits or if challenges arise in the transition.

In summary, Honeywell's strategic breakup represents a significant shift in the industrial sector, highlighting the ongoing trend of large conglomerates opting for specialization to enhance performance and shareholder value.

Banana Brain Teaser

Previous

If Jake loses 8 pounds, he will weigh twice as much as his sister. Together, they now weigh 278 pounds. What is Jake’s present weight in pounds?

Answer: 188

Today

For each student in a certain class, a teacher adjusted the student’s test score using the formula y = 0.8x + 20, where x is the student’s original test score and y is the student’s adjusted test score. If the standard deviation of the original test scores of the students in the class was 20, what was the standard deviation of the adjusted test scores of the students in the class?

Send your guesses to [email protected]

?

The stock market is filled with individuals who know the price of everything but the value of nothing.

Philip Fisher

How Would You Rate Today's Peel?

?? All the bananas

?? Meh

?? Rotten AF

Happy Investing,

David, Vyom, Ankit & Patrick