FOMC's Showtime

In this issue of the Peel:

• Housing starts hit a 3-year low, posting an annual decline of 11.3% overall and 4.3% for single-family homes
• Rackspace Technology and Instacart had a ripe day, whereas Nio and Disney closed in the red amidst certain announcements
• Several staff members of the Evergrande Financial Wealth Management Co. were arrested with about as little detail as possible released

Market Snapshot

Happy Wednesday, apes.

This might be a dumb question, but who's excited to see JPow later today?? I, for one, can’t think of anything more exciting than listening to a 70-year-old man discuss monetary policy and how he plans to save/ruin the economy for about an hour.

But that’s exactly what we’re lucky enough to have in store. The Fed’s 2-day policy meeting wraps up today, and with markets mostly selling off, traders are going in with trepidation. This time, however, the concern is primarily on the Summary of Economic Projections (SEP), with the best part being the updated dot plot, which is the FOMC members' projections of future rate moves.

All 4 of the major U.S. indices were lightly in the red—yet another pinot noir day. Treasury yields also had no idea what to do, sliding for most of the day on potentially adjusting expectations for future “higher for longer” levels. Meanwhile, the Dollar followed a similar trajectory, losing for most of the session only to rip right back by the overnight open.

Let’s get into it.

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Macro Monkey Says

Unpacking the Housing Puzzle

Don’t you just love how the latest data on the one thing most important to many Americans comes out exactly one day before JPow and the gang decide whether to once again yeet interest rates or not? Perfect timing.

As we gear up for Powell along with a hot and fresh Summary of Economic Projections, the Commerce Department released the latest data on – you guessed it – housing. As usual, the agency dumped some figures on us and just left us there to fend for ourselves. Anyway, to go over some highlights:

• Housing starts hit a 3-year low, posting an annual decline of 11.3% overall and 4.3% for single-family homes.
• Building permits jumped a very nice 6.9% and 2.0% for overall and single-family homes, respectively.

"Pardon my French, but that sh*t doesn’t make sense."

That was actually pretty much all the data right there, but you see what I mean by fend for ourselves? Pardon my French, but that sh*t doesn’t make sense.

At least, it seems so. The especially ironic thing about the timing of the release along with the mortgage application data due tomorrow is that JPow and the FOMC’s rate hikes have essentially been the lone driver of success (or lack thereof) for the sector… and who knows what could happen today at 2 pm when the announcement comes out?

The story being spun at the moment is the classic “long and variable delays” in monetary policy. As we’ve discussed in the past, housing is an especially slow one using the methods in which official data from the government is collected (of course), so their long and variable delays are extra long and, yup, extra variable.

But, while mortgage rates have eviscerated demand faster than Usain Bolt eviscerated his competition, the belief is that down that line, things will normalize.

"... the belief is that down that line, things will normalize."

Whether that’s through an economy catching up on enormously higher rates, rates adjusting lower to slowing growth after coming off a pandemic rebound, or some kind of combination of the two, developers don’t seem to mind.

Now, markets are all but certain rates will be held tomorrow where they currently sit, at least according to the CME FedWatch tool.

Just a few hours, apes, until the most important FOMC meeting of all time… until the next one. It almost feels like Christmas morning, except, this time, I’ll know for sure that the guy delivering “gifts” is real.

What's Ripe

Rackspace Technology (RXT) ↑ 35.81% ↑

• Carl Icahn once famously said, “If you want a friend on Wall Street, get a dog.” Or, you could just get Raymond James.
• At least, that’s who Rackspace chose to be their absolute best friend on Tuesday. Shares in the San Antonio-based cloud provider ripped almost 36% on an upgrade amid positive turnaround efforts at the over-$500mn name.
• According to RJ, the young firm has done a solid job following the Zuckerbergian playbook of cost-cutting and performance enhancing. Other banks agree, with plenty of other sell-side firms recently growing positive as well.
• But none have been this bold, with RJ setting a $3.50/sh price target, a 74.1% upside from yesterday’s close.

Instacart (CART) ↑ 12.33% ↑

• 24 hours later, we now know that investors did, in fact, load up the CART. Actually, maybe they skipped the “add to cart” option because you don’t get this kind of performance without going straight to “buy now.”
• Listing at $30, Instacart shares first traded at a 40% premium of $42. And that, ladies and gentlemen, was the last bit of fun they had.
• As venture capitalists are dying for an exit so that they can pay their annoying a** LPs and insiders are dying for personal gain by dumping shares, the stock ultimately only closed up as much as you see above… ending at $33.70. Price discovery mode has officially engaged.

What's Rotten

Nio (NIO) ↓ 17.07% ↓

• While we slowly learn that China’s economy may not be as nightmarish as it originally seemed, Nio decided to go the opposite way. The EV maker spooked markets into oblivion on Tuesday with a big, fat dilution plan.
• The young car maker, which operates partly on a model of leasing batteries themselves separately from their cars, announced plans to offer $1bn in convertible notes on Tuesday. Needless to say, investors weren’t happy.
• Not much is known, but since convertible bonds can be, well, converted into equity along certain criteria, the threat of reduced ownership sent Wall Street running for the hills. Plus, after falling over 80% since an early 2021 peak to a market cap of just $14.43bn, that’s a sizable chunk.

Disney (DIS) ↓ 3.62% ↓

• Mickey and Co. picked up a bazooka, loaded it up with $60bn, and shot itself right in the head. Safe to say, investors weren’t too pleased.
• In the midst of an already drastically underperforming year, Disney shares set fire to the rain yesterday after announcing plans to double investments in their parks and cruise business line all the way to $60bn. Don’t get me wrong, that’s sweet, but they’re also giving themselves quite the runway with a 10-year timeline.
• Basically, the idea seems to be that parks (particularly international locations) have been the lone bright spot in recent months, growing 13% last quarter. While that’s great, investors very well could be displeased with the idea that old, dusty theme parks and not super hip and cool streaming services are getting the nod.
• Investors love two things: 1) technology and 2) recurring revenue. They go hand in hand, and Disney+, Hulu, and EPSN+ are all perfect examples. But disappointment has been all too frequent here while parks continue to perform, but theme park companies don’t get multiples like a tech/recurring revenue firm. And at a 66x P/E, maybe it was a long time coming.

Thought Banana

Ever-gone-de

At Starbucks, grande means “medium.” In Spanish-speaking countries, “grande” means “big, large, or great.” In this case, those Spanish-speaking countries nailed it, at least when they’re describing the problems at Evergrande.

You remember Evergrande, right? If not, it might help to recall that they are, in fact, a Chinese real estate developer who’s essentially been dancing on the edge of collapse since 2021. Oh yeah, and they’re one of – if not the – largest property developers in the world (or, at least, they were).

That was until 2021, of course. That year, months of zero C-19 policy across China had real estate developers reeling.

"... months of zero C-19 policy across China had real estate developers reeling."

Poor performance for an extended period, along with a massive, whopping $300bn of debt on their balance sheet in 2021, led to serious cash flow issues in which sales just couldn’t keep up with debt payments. Naturally, this continued, leading to the downward spiral of a liquidity crisis, putting the firm on even thinner ice.

Excellent. Now that you remember, let’s talk about this week. Things became not boring again.

Several staff members of the Evergrande Financial Wealth Management Co. were arrested with about as little detail as possible released. We don’t know things like 1) who was arrested, 2) how many were arrested, 3) exactly why they were arrested, 4) when they were arrested, or 5) where they were arrested. That’s about 1/6th of the gang unanswered.

"It’s a stark reminder of the woes of the property sector in China ..."

Obviously, there is a ridiculous amount of complexity and, as the Chinese government sees it, potential criminal behavior at play. It’s a stark reminder of the woes of the property sector in China and somewhat globally.

While Evergrande is the single most indebted property developer in the world, rival Country Garden reminded us of these issues when they missed payments on dollar-backed bonds and sought delays on domestic issuances.

The outlook isn’t good, but we’ll see if the government support is. Stay tuned.

The big question: What does the future of China's Real Estate Sector look like? Will it take years before it rebounds? How will the rest of the world be impacted?

Banana Brain Teaser

Yesterday —

What is the only letter in the alphabet that is not in any of the names of the 50 U.S. states?

Answer: The letter is Q.

Today —

There are 14 teams in the National Rugby League. During Round 6, every team plays another team, so there are 7 matches. What is the probability of Glenn tipping every match right, assuming an equal probability of winning, losing, and drawing?

Shoot us your guesses at [email protected] with the subject line “Banana Brain Teaser.”

Wise Investor Says

“An investment in knowledge pays the best interest.” — Benjamin Franklin

How would you rate today’s Peel?

All the bananas

Decent

Rotten AF

Happy Investing,

Patrick & The Daily Peel Team