The Great Deleveraging

In this issue of the Peel:

• U.S. borrowers applying for loans are being rejected at the highest rate in 5 years as lenders tighten the belt on loan requirements.
• Microsoft won more time from British regulators as it tries to overcome opposition to its Activision deal
• China’s economy lost momentum last quarter, with GDP lagging expectations, fueling calls for more stimulus

Market Snapshot

Happy Tuesday, apes.

Hope you survived another scary Monday! We’ve been spoiled this summer with two market holidays. Even though Independence Day was a couple of weeks ago, having to work a full 5-day week just doesn’t sit right with me. Anyone else feel the same?

Every weekend I think to myself how nice it would be to return to work and see green across the board. I manifested, and that is exaclty what the market provided, reversing last Friday’s slump.

In macro news, investors are looking forward to the Fed approaching the end of its rate-hiking cycle, and Janet Yellen allayed fears about an impending doomsday, saying that she doesn’t expect a recession.

In other big news, Microsoft took a monumental leap closer to finalizing its acquisition of Activision. The deal looks more than likely to close, which sent a shockwave in ATVI’s stock and throughout the markets.

Let’s get into it.

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Banana Bits

• Pilots working for United Airlines could see?wage increases of up to 40%?after reaching a new deal
• In another blow to Cathie Wood’s reputation, Ark announced it had?written down?the value of its Twitter stake by 47%
• The co-founder of telecommunications firm Altice has been?arrested in Portugal?in connection with an ongoing corruption investigation
• Treasury Secretary Janet Yellen apparently?let loose and dined?on some hallucinogenic mushrooms during her trip to China

Macro Monkey Says

China’s Post-C-19 Conundrum

China reported weaker-than-expected GDP results in the second quarter as its economy continues to struggle from the era of zero-C-19 lockdowns.

GDP grew 6.3% YoY, which was a much lower base comparison as most of the country was still closed last year. When looking quarter-over-quarter, which is the preferred measure, the economy grew less than 1%, a far cry below the country’s 5% growth target.

On top of that, youth unemployment is at an extremely high 21% prompting concerns about potential deflation. With China representing around 18% of global GDP, the data has major implications for the rest of the world.

Global leaders and investors are focusing on a meeting later this month of China’s Politburo, which will decide economic policies for the year. The calls are growing louder for additional stimulus in the Chinese economy.

Breaking down the GDP report, consumer spending showed the biggest slowdown. This had been the primary contributor to China’s economy. Retail sales dropped over 9% from last year, and investment by China’s property sector was dampened as the broader housing market continues to decline.

"... it was widely expected that reopening would lead to a sharp increase in demand for services and experiences."

?After a 2-year long period of Zero-C-19 policies, which led to a total lockdown across the country, it was widely expected that reopening would lead to a sharp increase in demand for services and experiences. That narrative is being called into question based on this quarter’s data.

Fixed asset investments declined, and household savings rates remained elevated, showing that Chinese consumers are saving rather than spending and maintaining a cautious tone for the foreseeable future.

Wall Street economists are also lowering their projections for China’s growth. Citigroup lowered their forecast to 5% from 5.5%, while Morgan Stanley also cut their forecast to 5%.

?"... Beijing may probably end up giving in and delivering additional stimulus ..."

Ultimately, Beijing may probably end up giving in and delivering additional stimulus to the economy. Global leaders are calling on The People’s Bank of China (PBOC) to ease monetary policy and introduce a rate cut.

While it is never a good idea to harp on just one report, there have been many signals over the past few months that point to more fiscal and monetary policy changes around the corner.

What's Ripe

Black Knight Inc. (BKI)?↑ 16.23% ↑

• Black Knight rallied today after clearing a major regulatory hurdle related to its deal to be acquired by Intercontinental Exchange (ICE).
• Both Black Knight and ICE have been in a year-long d**k-measuring contest with the government over their merger proposal announced in May 2022. The Federal Trade Commission is basically the kid in school who had to remind the teacher of an assignment rather than let everyone have fun and live their life. The regulatory agency has been dragging out the deal for over a year due to ongoing antitrust concerns.
• Both companies announced today that they have agreed to divest Black Knight’s Optimal Blue unit to Constellation Software. This signals to the market that they are committed to alleviating the FTC’s concerns, paving the way to clear the $13.1bn deal.

BridgeBio Pharma (BBIO)?↑ 76.00% ↑

• Yay for advancements in science! BridgeBio jumped 76.00% after reporting outstanding results for its cardiovascular disease medicine. ATTR-CM is caused by a buildup of faulty proteins in the heart that can lead to heart failure.
• The positive data brings the company a step closer to receiving FDA approval and a commercial launch. The trial achieved an 81% survival rate in test patients, which is a result unheard of for clinical-stage biotech companies.
• BridgeoBio seems to be like the 2016 Warriors; they literally can’t miss and are clicking on all cylinders. This is just the icing on the cake for a stock that has had several positive updates and has been on a roll this year, up +139% YTD.

What's Rotten

AT&T (T)?↓ 6.76% ↓

• AT&T is that old-world boomer company that just keeps managing to stick around, but it received two “Tyson Blows” in the past week that sent the stock spiraling.
• Last week The Wall Street Journal broke the story that several telecom giants have networks of underground cables that are covered in toxic lead, which poses a risk to the environment. I’m neither a toxic lead export nor a climatologist, but even my finance bro brain can comprehend that doesn’t sound good.
• With AT&T already down 8% over the last week, the company received its second blow when Citigroup downgraded the stock, reporting that there are over 2,000 cables that still haven’t been addressed.
• AT&T is on the ropes right now, fighting for air. Next week the company reports earnings, which can either be a life-saving injection or a knockout blow.

Paramount Global (PARA)?↓ 3.76% ↓

• If you ever think your personal, daily decisions have no impact on the market, Paramount would tell you otherwise. The stock took a hit today after?Mission: Impossible - Dead Reckoning Part One?had a lousy weekend at the box office, bringing in $80mn versus projections for up to $90mn. And it’s all because you didn’t get off your couch and go see it.
• If you’re like me, you probably had no idea that the seventh installment of the franchise was even coming out. But for people in the know, this comes as a surprise as the movie was expected to be one of the most anticipated of the year. After all, Tom Cruise’s?Top Gun: Maverick?was the highest-grossing movie last year. You win some; you lose some.
• Paramount is in a pivotal place as both actors and writers across the industry remain on strike. Paramount+ has over 60 million streamers, but the company missed a big revenue-making opportunity as movie releases are expected to slow in the coming months.

Data Peel

Thought Banana

Consumers Running Out of Leverage

Congrats, America! The top lenders in the country have collectively come together to inform us that we are untrustworthy borrowers and we should stop applying for loans. That pretty much sums up the most recent Federal Reserve survey in layman’s terms.

After the credit-card bonanza that overtook Americans the last two years, during which access to loans was pretty much automatic, rejection rates are finally starting to creep up.

A new Federal Reserve Survey that was released showed that Americans are now more likely to see a big “REJECTED” on their applications. This is largely a result of the Fed raising interest rates along with a more cautious tone among lenders after the collapse of Silicon Valley Bank.

?"... largely a result of the Fed raising interest rates along with a more cautious tone among lenders after the collapse of Silicon Valley Bank."

Rejection rates on loan applications reached a 5-year high of almost 22% and particularly impacted consumers with credit scores below 680. Rejections have been consistent across the board and across all age groups (no ageism here).

In fact, for the first time ever since the survey started, the denial rate for auto loans actually exceeded the rate of new applications. Translation: Sh*t is getting real.

Does knowing you’re going to get shafted before it actually happens lessen the damage at all? If so, then I have good news. The survey also reported an increase in the percentage of applicants that expected to be turned down for new mortgages (46%), mortgage refinancing (30%), and credit card limit increases (42%).

"Many factors go into determining eligibility for loans, the most noteworthy being credit score, history of timely payments, and debt-to-income ratio."

?It seems that the belt-tightening has been working so far, as there has been a moderate pullback in borrowers seeking loans. Many factors go into determining eligibility for loans, the most noteworthy being credit score, history of timely payments, and debt-to-income ratio.

Loans are also much easier to obtain in a low-rate environment. However, when that happens, as we saw from 2020 to 2022, the result is super-high inflation. The Fed hopes to tame inflation by raising rates.

Then, the Fed sits back and watches as the impact of higher rates flows into the economy. One of those impacts is that it makes access to loans more restrictive, slowing spending and ultimately bringing down inflation.

The Big Question: Where does this leave the average consumer in the long run? While easy access to credit helped keep the economy strong throughout the pandemic, it led to stubbornly high inflation that ultimately hurt the average person.

Banana Brain Teaser

Yesterday?—?Only a small space and a single mark turn a deadly situation into a funny one. What can that be?

With a small space and an apostrophe, you can change “manslaughter” into “man’s laughter.”

Today?—?I add six to eleven and get five. Why is this correct?

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

Wise Investor Says

“You can’t do a good job if your job is all you do.”?— Katie Thurms

How would you rate today’s Peel?

All the bananas

?Decent

?Rotten AF

Happy Investing,

Patrick & The Daily Peel Team