China's Real Estate Problem

In this issue of the Peel:

• In the third quarter, China’s GDP accelerated at an annualized rate of 4.9%, faster than expected and an acceleration from Q2 growth.
• Knight-Swift and Merck & Co. had a ripe day, whereas SolarEdge and American Express struggled to keep their share price up.
• In SBF's trial, the defense argued that while FTX customers didn't have access to their money, what they had was a credit to their funds.

Market Snapshot

Happy Monday, apes.

Hope your fantasy teams did well this weekend and you didn’t have any money riding on the Miami Dolphins in last night's game.

It’s a good thing you didn’t have the S&P 500 starting in your fantasy lineup this weekend. The major U.S. indexes finished out last week in a mood almost as depressing as the current state of the Presidential election. The Nasdaq fared even worse as losses were driven by large-cap tech names—among literally everything else—falling 1.53%.

Treasury yields continued their streak of wild days, bouncing around Friday, with the 10-year ultimately settling just under 5% after briefly breaking that level overnight. The craziness of these moves does seem to be concentrated in treasuries, however, as the dollar continues to bore FX traders around the world.

Let’s get into it.

This Is the Holy Grail of Investing

There’s a reason that successful founders like Marc Andreesen and David Sacks go into venture capital—it’s f*cking awesome.

Huge paydays without grueling hours, wearing Allbirds to work, and having the best entrepreneurs in the world grovel at your feet. What’s not to like?

The only problem is breaking in. You think landing a PE interview is hard? Getting into VC is on another level.

To put yourself in the best position possible, you need to know the tools of the trade. That’s why we’ve put together a VC Course that has everything you need to know about the space—cap tables, term sheets, due diligence, and venture fund structure will be second nature by the time you finish the course.

Lessons containing hands-on experience from industry veterans will keep you engaged on your way to becoming a legend on Sand Hill Road.

Because Daily Peel readers are important to us, we’re also giving out free access to our Excel Modeling Course for the first 3 Peel readers to sign up for the VC course in the next 24 hours. Don’t delay—word’s gotten out about this one-of-a-kind course, and spots are filling up fast.

The next Uber is out there, waiting for funding. Sign up today and be on your way to a great lifestyle and huge exit packages.

Macro Monkey Says

Chilling in China

The U.S. national hockey team defeated the Soviet Union in the 1980 Olympic semifinals. Macklemore’s The Heist beat out the likes of Jay-Z, Kanye, Kendrick Lamar, and Drake for the 2014 Best Rap Album Grammy award. And a golden retriever named Buddy helped lead the Timberwolves to victory in the movie Air Bud.

Upsets happen all the time. Even if they make no sense, like Macklemore’s Grammy, or don’t work out like the U.S. ultimately losing in the Olympic final, it’s always fun to be along for the ride.

This year, the biggest economic upset could very well be China defeating… China.

At the start of this year and throughout most of the early half, massive debt loads on the consumer, government, and businesses across the world’s (probably) second-most populated country and (definitely) second-largest economy had observers worried. Now, it looks like they’re already moving back in the right direction.

In the third quarter, China’s GDP accelerated at an annualized rate of 4.9%, faster than expected and an acceleration from Q2 growth.

"... China’s GDP accelerated at an annualized rate of 4.9% ..."

Stimulus measures instituted recently by the CCP have helped, including lowering interest rates (not that anyone in the U.S. knows what that feels like), increasing liquidity in the banking system, and directly supporting real estate markets.

Source

When China Evergrande, literally (and I mean literally) the world’s largest property developer, began spiraling into insolvency back in 2021, a sneaky and orderly utter collapse ensued throughout the country’s real estate sector.

Over-leveraged firms in both commercial and residential real estate saw defaults and bankruptcies like never before, but stimulus from the CCP kept the sector on a ventilator.

Now, as China’s Country Garden, another enormous developer, follows in Evergrande’s footsteps, concerns rebounded in 2023.

"Over-leveraged firms in both commercial and residential real estate saw defaults and bankruptcies ..."

As we learned in SpongeBob, the only thing worse than one giant paint bubble is two giant paint bubbles… or, in this case, two giant, insolvent real estate developers.

In addition to the direct impacts on the nation’s real estate sector, other related issues like:

• Bordering on the brink of deflation
• A crisis in confidence among consumers and investors that has recently just barely started to turn
• High unemployment, especially among those aged 16 to 24, which hit 21.3% before the government decided to stop reporting the figure (I’m sure that’s a good sign)
• Slow but returning growth in consumer spending

… and much more have all contributed to the mainstream view that China is far from chilling. But, we learned earlier this month via stronger retail sales and the higher GDP growth figures above that the government’s stimulus measures and “don’t look at the problem” attitude may have actually turned things around.

No one wins when an $18tn economy is teetering on the brink. Given China’s position as the global factory, there is potential disruption in one of the most highly-valued parts of life in the Western world: buying random sh*t with Amazon 2-day free shipping.

For now, thankfully, it looks like we don’t have to worry about losing that necessity. But don’t worry. We’ll give you a heads-up if that changes.

What's Ripe

Knight-Swift (KNX) ↑ 11.75% ↑

• There might be a Swift present in this company, but unlike the NFL, we’re actually able to talk about something besides that. Knight-Swift is carrying the team for transportation stocks.
• The Phoenix-based owner of the 5th largest trucking company in the U.S. reported earnings on Friday, registering a very nice 69% drop in earnings… but still magically beating expectations.
• Given slowing spending, higher rates, higher energy costs, and everything else pulling money out of the pocket of Knight-Swift investors, the fact that the numbers weren’t worse was the primary driver on Friday.
• We’ll see if that can continue this week, but earning $0.40/sh on $2.02bn vs the estimated $0.36/sh on $1.89bn might not be enough to drive this long-term tomfoolery.

Merck & Co. (MRK) ↑ 2.23% ↑

• They might not be saving the world from the epidemic even larger than C-19 in obesity like Novo Nordisk and others are, but pharma supplier Merck should still be getting investors going, according to UBS.
• Shares moved higher Friday on the back of an upgrade from UBS, who I can’t believe even has time to look at the market given their ongoing forced consummation of the marriage with Credit Suisse. But according to the Swiss bank(s?), investors are undervaluing Merck’s coming pipeline.
• Almost immediately after the report, Merck proved UBS analysts kinda right by signing a $5.5bn cancer treatment deal. It’s not a bad start, but we’ll see how long this lasts.

What's Rotten

SolarEdge (SEDG) ↓ 27.27% ↓

• Investors in SolarEdge may have woken up Friday morning thinking the damn sun was going bankrupt. Nope, it’s just your stock!
• Shares plunged about as fast and far as portfolio New York portfolio managers did in September of 2008. The nearly 30% single-day drop comes on the back of a looming drop in European demand.
• SolarEdge is due to report earnings early next month. To get investors excited, the company naturally came out and said that sales, margins, and earnings would all be lower than previously guided. Adding the cherry on top, revenue expectations for Q4 were also described as “significantly lower.” Big oof.
• Most solar panels are installed on some kind of credit and payment plan. With rates higher than the company’s power source (the sun), consumers aren’t exactly itching to hike up their debt. Sorry, shareholders, but the good news is at least the rest of us will be okay.

American Express (AXP) ↓ 5.38% ↓

• Y’all have been challenging a lot of “mistaken” charges on AmEx this quarter, huh? Well, congrats, it worked. Shares dove Friday on a jump in the firm’s provisions for delinquent loans.
• This last quarter wasn’t just good. It was arguably phenomenal. Revenue boomed 13% annually to another all-time high of $15.4bn while earnings clocked in at $3.340/sh, also an all-time high and above expectations.
• Customers were still big on travel and entertainment spending, as is natural even in poor economic environments when you have the world’s richest people as your customer base.
• But as we all know, the market is forward-looking. Essentially, Wall Street seems to be saying that they expect spending to slow, especially on rich people sh*t, but spending money is America’s national pastime. We’ll see.

Thought Banana

Sam Bankman-F*cked

Thankfully, there were no new wars, acts of terror, or other extreme disruptions to the ways of life for millions of people around the world this weekend, so let’s check back in on everyone’s favorite scumbag.

Scum Bag-Fraud, aka SBF, aka Sam Bankman-Fried, is still on trial. You might’ve thought that given SBF ran what appears to be more of a blatant, flagrant series of frauds as opposed to an actual business, this would’ve been a speedy trial. Nope. Turns out billions of dollars of pure lies take a while to properly work through.

And finally, late last week, the federal prosecutors on the case used language that even the scummiest scumbags running FTX/Alameda could understand: Dumb and Dumber.

"Turns out billions of dollars of pure lies take a while to properly work through."

Basically, the defense made the claim that even if there was no actual money backing certain customer deposits, there was value there via credit. As the prosecution pointed out, the argument seemed almost plagiarized from Jim Carey’s argument here.

What this means is that, as the defense made their arguments all last week, it hinged on this idea that as FTX and Alameda were imploding, and customers weren’t able to withdraw their deposits, it wasn’t because FTX didn’t have the money. It was just that money was being used for “something else” at the time.

In case it’s not obvious, that’s finance talk for bulls**t. They claim it was being lent for other trading purposes to generate those above-market APYs they promised, but according to the prosecution, some portion of those deposits went to plugging losses at Alameda, political donations, and the $35mn residence that employees worked, ingested drugs, and—allegedly—fornicated in.

Going into next week, everyone following the trial has one question in mind: will SBF take the stand?

"... some portion of those deposits went to plugging losses at Alameda ..."

In the U.S., you must be sworn under oath to give testimony. That means it’s a crime, called perjury, to knowingly state anything false while on the stand. But perjury has a maximum sentence of 5 years. But five years is nothing compared to the 115 years he could be on the hook for, so it might just be useless.

From the defense’s perspective, this doesn’t really matter. He was able to convince investors to give him billions and fool publications like Fortune into calling him the “next Warren Buffett” (definitely not the Daily Peel into calling him CEO of the year or anything…), so he might be able to convince a jury he just made an oopsie.

Hard to believe he still has a chance after Wang’s and Ellison’s testimonies, but you’re innocent until proven guilty in the U.S., and I don’t know about you, but I’d like to keep it that way. Just in case, y’know… never know what you might get into.

The big question: Will SBF take the stand and testify? If he does, what are the odds that he commits perjury? Will SBF get off the hook after this trial, or is he getting tossed in jail, and for how long?

Banana Brain Teaser

Friday —

In Delaware, you must pay a deposit on all bottles, and you can return your bottles to receive your deposit back. If you buy a bottle of soda for $2 and the deposit is $1.60 less than the actual cost of the soda, how much is the deposit for?

Answer

The answer is 20 cents. Since the deposit is $1.60 LESS than the cost of the soda, the total cost for the soda must be $1.80, plus a 20-cent deposit, which equals the $2 you paid for the soda.

Today —

Xavier was going to the casino. His friend, Rex, gave him ￡100. He asked him to place it on Red 13 at the roulette table. How much would Rex win if he won his bet?

Shoot us your guesses at [email protected].

Wise Investor Says

“The desire to perform all the time is usually a barrier to performing over time” — Robert Olstein

How would you rate today’s Peel?

All the bananas

Decent

Rotten AF

Happy Investing,

Patrick & The Daily Peel Team