Inflation Coming in Hot

In this issue of the peel:

• September’s headline Consumer Price Index came in fairly hot, posting a monthly gain of 0.4% and 3.7% annually.
• Fastenal and Viasat closed the day in the green, whereas Birkenstock and Infosys closed the day with a lower share price.
• Earlier this week, Rep. Steve Scalise of Louisiana bested Rep. Jim Jordan of Ohio by a slim margin in the House GOP’s vote to become the party's official nomination.

Market Snapshot

Happy Friday, apes.

Don’t be scared, apes, but in case you forgot—it’s October, it’s Friday, and it’s the 13th. We’re not superstitious here, but like Michael Scott, we are a little stitious. Steer clear of any black cats, opening any umbrellas inside, and probably making any new trades.

You might not be scared (yet), but markets sure were. Only 2 of the 11 S&P sectors moved higher yesterday, being technology and energy. Things were going alright in the morning session, but after worries spread about both looming recession and further rate hikes from yesterday’s CPI report, it was all downhill from there. The Russell 2k took by far the biggest hit, with the small-cap index losing 2.26% and the next worst-performing index—the Nasdaq—losing just 0.63%.

For their part, yields were loving September’s CPI and spiked as soon as the news dropped. The 10-year headed right back over 4.7% while the 2-year decided to once again close in on the 5.1% line. The Dollar followed suit with a big up day as inflation—and therefore—rate expectations moved a step higher.

Let’s get into it.

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Banana Bits

• While X comes under fire, the EU is fired up about it, putting Musk’s social media firm under investigation while the SEC did the same things just days ago.
• The picture was already bleak for energy prices heading into the winter, but according to the EIA, it only gets worse.
• While the House is in shambles, one Senator finds himself in an even worse position as Senator Bob Menendez faces additional charges of acting as an agent of Egypt.

Macro Monkey Says

Mr. Market’s Mind Melt

We’ve all faced tough decisions—which college to go to, if at all? Should I buy this stock or that stock? Do I really need to leave a tip at the Popeyes drive-thru? It just goes on and on. Some find making these calls easier than others, but nobody struggles more than Ben Graham’s “Mr. Market.”

And in his case, Mr. Market only has one decision to make: up or down. Coming off a 4-day win streak in stocks, the decision hasn’t been too tough lately. And then, yesterday morning, we got the latest CPI report.

And yet again, we find ourselves in a position where—somehow—the odds of an additional rate hike and a looming recession, which theoretically should be diametrically opposed, both increased. Now, Mr. Market apparently has no clue what to do.

September’s headline Consumer Price Index came in fairly hot, posting a monthly gain of 0.4% and 3.7% annually, both just slightly above estimates (not bad for economists).

Inflation coming in hotter than expected, and therefore not moving back down towards 2% as the Fed hopes, increases the probabilities in investors’ heads of another rate hike.

This theme was driving the whole “good news is bad news” trade last year when markets would dump on a strong jobs report, but looking a little deeper into September’s CPI tells a slightly different story.

"September’s headline Consumer Price Index came in fairly hot ..."

Source

As we can see, the headline inflation number (in blue) has been choosing to engage in some naughty behavior of late, getting itself taken off both JPow and Santa’s Nice Lists. But, the Core CPI shown in red, which thankfully the Fed cares more about, has done nothing but move in the right direction.

Core CPI strips out food and energy costs because despite being the most important things in your budget (if you actually kept track of one), they’re hella volatile, and economists don’t like things that are hard. This index gained 0.3% on the month and 4.1% annually, right in line with expectations, with most of the move once again attributable to shelter costs.

Rising 7.2% annually, the shelter index’s gain drove a massive 70% of the Core CPI’s increase for the year. Living somewhere is important, sure, but judging by the way the FOMC measures this factor, it’s almost useless. Not only is it on a massive delay, but the “Owner’s Equivalent Rent” line item—one of, if not the, most important items in the Core index—is done via survey and can’t be relied upon as well as something more real-time, like Redfin data.

Further, the primary driver of shelter cost increases is, once again, the simple lack of available supply.

"... I’m sure I don’t need to remind most of you that student loan repayments are back on the table ..."

Despite skyrocketing rates, the lack of home sellers/movers—thanks to the 3% rates they locked in all last decade—combined with a drastic shortage in new construction post-GFC, home prices haven’t declined as we might’ve expected.

But still, with shelter costs on the rise along with an increase in Energy and food prices for the month, consumers are getting extra squeezed. And I’m sure I don’t need to remind most of you that student loan repayments are back on the table as well…

So, while some decisions are easy, Mr. Market’s directional call is nearly impossible. The only harder decision will be the one JPow faces at every FOMC meeting, likely for the rest of his tenure.

Thankfully, there are some easy decisions in this world, like joining the waitlist for WSO Academy to make sure you land your dream high-finance job and make so much f*cking money you forget what inflation even is. Check it out here.

What's Ripe

Fastenal (FAST) ↑ 7.52% ↑

• One of the most innovative and exciting companies of our generation, Fastenal, just killed it on earnings.
• This producer of all-the-rage products like fasteners, tools, and janitorial supplies delivered a solid beat on both the top and bottom lines yesterday. EPS of $0.52/sh on $1.85bn beat expectations for $0.50/sh and moderately lower sales estimates.
• Now, shares are off to the races. But investors apparently forgot that markets are supposed to be forward-looking, ignoring the demand warnings issues alongside the earnings numbers.
• “Sluggish” was the exact word used by CFO Holden Lewis in describing foreseeable demand. Investors shrugged it off, but we’ll see how that story goes when earnings szn really picks up today following bank earnings. Stay tuned.

Viasat (VSAT) ↑ 7.49% ↑

• Space—there’s a lot of it out there, and satellite company Viasat is ready to snatch it all up… once SpaceX is done with it, of course.
• But, this publicly traded space stock got the blood flowing in traders’ “Buy” fingers yesterday as news broke that the firm will not suffer the stress it expected from errors among a particular satellite in orbit.
• My brain is way too small to describe the exact problem that was at hand, but the important thing for us (and our portfolios) is that management was able to minimize the damages and front most of the cost with insurance money. Not bad.
• Now, investors were glad to hear the news, but any further f*ck ups will sure hurt a lot more than this one originally did as that will essentially be the firm saying, “Yeah, guess our engineers just aren’t as good as Elon’s.”

What's Rotten

Birkenstock (BIRK) ↓ 6.59% ↓

• Investors hoping for a quick turnaround in Birken-flop shares discovered they were sorely mistaken as of yesterday. In only two days as a public stock, shares are already down 18.4% from the offer price.
• Damn. It just became Friday the 13th today, but this stock knows bad luck all too well already. Birkenstock can now boast the title of “Worst IPO in 2 years” based on this performance, and as price discovery continues, we’ll certainly keep our fingers crossed.

Infosys (INFY) ↓ 6.53% ↓

• You’d think a company with “Info” in its name would’ve got the memo—lowering guidance in 2023 is effectively like your CEO launching himself out the window. And share prices followed a similar trajectory yesterday as if he did.
• This giant Indian tech consultancy, which has a very nice ~69bn valuation, tanked Thursday on the heels of poor quarterly numbers.
• Net income of $751mn barely grew at all from last year, posting $0.18/sh in both periods and once again disappointing investors. Sales followed a similar path, but the lowering of the next quarter and full-year guidance was really the triggering factor for traders.
• But it’s alright; the company has to be used to it as of now. After all, yesterday’s decline was the worst in a while—all the way since their last earnings report in July. Keep it up!

Data Peel

Thought Banana

The House Divided

Babe Lincoln—excuse me, *Abe Lincoln once told us that “a house divided against itself cannot stand.” Well, with our two-party system, this house—the House of Representatives, that is—is always somewhat divided.

But now, one of those parties is even more split against itself than we could’ve imagined. And as a result, for now, nothing seems to be able to stand.

Especially not new House Speaker nominations.

"... one of those parties is even more split against itself than we could’ve imagined."

Earlier this week, Rep. Steve Scalise of Louisiana bested Rep. Jim Jordan of Ohio by a slim margin in the House GOP’s vote to become the party's official nomination.

But, still lacking the support of a hazy amount of Republican caucus members—roughly a dozen or so, per reports—Scalise was unable to end the chaos.

Yesterday, the full House—Republicans and Democrats—voted to appoint the new Speaker. But, being a two-party system, the Democratic caucus has its own nomination in House Minority Leader Hakeem Jeffries of New York.

All either one of them needs is a simple majority to officially take over the Speakership. Republicans currently hold an 8-seat majority in the lower chamber, but given the holdouts that currently refuse to vote for Scalise—preferring to vote for Jordan—Scalise was unable to be voted into the third highest office in the land yesterday.

This intransigent majority has proven very effective at being able to delay or stop certain proceedings, and this is no different.

"All either one of them needs is a simple majority to officially take over the Speakership."

Given the GOP split, Hakeem Jeffries actually seems to have a chance at becoming Speaker in a House dominated by the other party.

At the time of writing (4:37 pm yesterday), the GOP caucus remained too split to seal the deal. Experts see the vote resolving itself in the coming days, but the more time this takes before the next potential government shutdown (Nov 17th) isn’t exactly a heartwarming proposition. Fingers crossed.

The big question: Will Scalise, Jordan, or another Republican be able to seal the deal? What are the odds a non-Congressperson—such as former Pres Donnie T—steps in? Does Hakeem Jefferies have a shot?

Banana Brain Teaser

Yesterday —

Three years ago, Mad Ade was three years more than three times older than his son (Mad Ade junior). Now, Mad Ade is ten years more than twice his son's age.

How old is Mad Ade?

Answer

36; his son is 13, by the way.

Today —

All of the odd numbers from 1 to 999 are added together.

What is the total?

Shoot us your guesses at [email protected] .

Wise Investor Says

“There is nothing new in Wall Street. There can't be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again” —Jesse Livermore

How would you rate today’s Peel?

All the bananas

Decent

Rotten AF

Happy Investing,

Patrick & The Daily Peel Team