Inflation Is Getting Boring

In this issue of the peel:

• Wednesday's inflation report was spicier than the last level of Hot Ones. Thursday’s inflation report was the tall glass of milk you get at the end to stop the crying and humiliation. The August PPI report just dropped, giving us a glimpse into the wholesale side and (potentially) the direction of CPI going forward.
• Kroger’s latest earnings give us confidence in the consumer while putting to be that whole grocery store “price gouging” thing. Roku TV got fired up from the team at Wolfe Research, while Moderna’s new business plan extinguished any fires it had left. Finally, Wells Fargo reiterates why they’re the bad boy of banking.
• The housing market is more insane than usual and has been since the onset of the pandemic. My personal assistant put some slides together for me below, and I think we need to talk about them.

Market Snapshot

Banana Bits

• The Fed’s tough decision—go big or go home.
• Bank of America’s Consumer Checkpoint gets us hyped on consumers.
• They did it. JPMorgan and Bank of America announce new policies capping junior banker hours at 80hrs/week—we’ll see if they actually hold to it.
• A federal judge just confirmed that betting on the U.S. Presidential election is not only legal but f*ckin’ sick too.
• Adobe shares plummet more than 9% after-hours on earnings.
• Japan is a rising sun in the world of private equity.

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Macro Monkey Says

We’re Gonna Need A Bigger Cut

In Jaws, Police Chief Martin Brody was smart enough to realize that—unless they got a bigger boat—that shark was about to turn them into the next Titanic.

Fed Chair JPow is in a very similar seat. Instead of a 3-ton shark, he’s watching something much scarier—slight upticks in the risk of a minor recession.

I don't know what's worse—getting eaten alive or another harrowing 0.1% increase in unemployment. I do, however, know that I’ll need a new pair of pants if I find out.

Let’s get into it.

The Numbers

Since the inflation rate started heading back towards the Fed’s target of 2%, the primary macro risk has shifted to rising unemployment and the potential to create a recession.

Although August’s jobs report implied relatively stable unemployment, this week’s declining inflation data are making macro watchers second-guess purported strength in the labor market due to the inverse relationship between inflation and unemployment.

Yesterday’s PPI report for August was like watching the labor market’s arm shake by their 2nd rep on the bench—it really makes you question its strength.

Source

According to the BLS, producer prices rose 0.2% last month, an increase from July’s 0.0% and in line with June’s 0.2% rise.

Amazingly, economists got this one right, guesstimating a 0.2% rise in August.?

August’s 0.2% increase was entirely attributable to final demand services, rising 0.4%, while prices for final demand goods didn’t budge.

The rise in services prices was led by a 0.3% spike in final demand for services less trade, transportation, and warehousing. Finished consumer goods drove this index, rising 0.4%.

However, one of the most random index line items—“guestroom rentals”—which I assume just means Airbnbs, rose 4.8% monthly, obfuscating lower inflation present in much more commonly purchased items.

Nearly half of all line items in the services index declined, with the 2.7% decline in transportation services leading the way.

Source

Annually, producer prices increased by just 1.7%, the lowest since February’s 1.6% rate. However, if we exclude food, energy, and trade services—because what business ever needs that stuff?—wholesale inflation clocked in at 3.3% last month.

Trends were similar to the monthly side, with services leading the way, up 2.6%. At 67.2% of the PPI’s total weighting, this increase, relative to the annual rise in prices for final demand goods of 0.0%, drove the total 1.7% rise.

But PPI wasn’t the only shark fin showing over the waters of macroeconomics yesterday.

Source

Initial jobless claims—a.k.a., the number of new Americans filing for unemployment benefits—increased 2k to 230k from the prior week’s revised total of 228k.

The Takeaway?

This was one of the most boring inflation reports in a long time.

Unlike how Wednesday’s August CPI report scared markets into thinking the economy wasn’t falling apart fast enough for a series of rate cuts, yesterday’s PPI confirmed that inflation is more gone than Aaron Hernandez and the risks like in employment.

Markets digested the data well, and the implied probabilities for a 25 vs a 50bp rate cut next week returned to levels seen on Tuesday, prior to the Wednesday morning mayhem triggered by the CPI report.

Source

Now, the odds for a 50bp cut sit at 27%, nearly doubling from the day prior’s 14% but well below last week’s 40% odds.

Thank god. I was worried the economy was gonna be healthy going forward—can you imagine what terror strong growth and employment would bring to my portfolio?

Hopefully, millions of people lose their livelihoods so we can get an extra 25bps of cutting.

What's Ripe

Kroger (KR) 7.18%

• Just like when I leave self-checkout and have to bag my own groceries, Kroger’s earnings report was a mixed bag that didn’t make much sense. But investors aren’t mad about it.
• The country’s 2nd-largest grocery chain (behind Walmart) reported EPS of $0.93/sh vs estimates for $0.91/sh while sales of $33.9bn grew 1.2% YoY and missed expectations.
• I’ve been hearing a lot about grocery stores price gouging, but Kroger’s gonna have to step up their game because this is honestly embarrassing:

• Despite the lack of robbing consumers, investors were pleased to see that people are still buying food as the retail sector wanes with spending concerns.

Roku (ROKU) 5.67%

• Are boomers finally cutting cable? They must be, given how bullish analysts at Wolfe Research just became on streaming platform provider Roku.
• The research firm lifted its price target on shares to $93, increased sales, earnings, and free cash flow expectations, and said risks are “more balanced” as shares had been cut 21.2% YTD.
• After trying to convince my parents to cut cable, they told me it’s bundled with their home phone and internet, so it’s not as simple as my brilliantly youthful mind imagined. Maybe the tides are turning…

What's Rotten

Moderna (MRNA) 12.36%

• They really thought they did something. Moderna just got booed off the talent show stage as the company announced new plans for its path forward.
• Speaking with CNBC on Thursday, CEO Stephane Bancel unveiled his game plan, including $1.1bn in cost cuts and 10 new products by the end of FY’2027.
• However, that f*cked the market’s expectations. Analysts say the path to profitability has now been pushed out >2yrs and aren’t happy with slashed R&D expenses.?

Wells Fargo (WFC) 4.02%

• It’s a tough day to launder money—America’s best bank for fraudulent transactions just got out of the principal’s office with a big punishment.
• The Office of the Comptroller of the Currency (OCC), which supervises all national banks, issued enforcement action against the firm for failure to maintain adequate KYC/AML controls.
• Basically, that means the bank didn’t do enough to verify the sources and recipients of funds and didn’t monitor potentially fraudulent transactions closely enough.

Thought Banana

Housing: Outlook or Lookout?

I might have to hire Torsten Slok as my full-time assistant.

As Chief Economist of Apollo, I’m sure he’d jump at the opportunity. Already, he’s doing a great job of taking care of my research. This time, our focus was on housing.

Let’s dive in.

What Happened?

Earlier this week, certified smart pants Torsten Slok published this 116-page chartbook summarizing the U.S. housing market.?

As you might assume, there are a lot of charts in that bad boy, but some of our key takeaways are summed up in these three:

Source

Since the Fed dropped their rate hike nuclear bombs on the economy, the extremely frozen housing market we’ve been living in is, in fact, the steepest slowdown on record.

Much of the frozen state of the housing market is due to reduced investment in residential construction.

Source

But I’m not as mad at homebuilders (talking to you, dad) today as usual because it looks like they have a reason for it:

Source

Costs remain elevated in the industry, discouraging investment due to a lower ROI and, therefore, leading to less construction.?

With short-term demand below historic levels, this becomes even more understandable. But, in the longer term, the demand is there for the profit.

Source

Source

Source

The Takeaway?

As many inputs as there are in sizing up the equities market, the housing market takes that and multiplies it… by 10… million.

Rate cuts have the potential to increase both demand and supply by making access to mortgage credit less restrictive and reducing borrowing costs in the construction process. However, that doesn’t necessarily mean prices will move anywhere.

To bring prices down, supply creation would need to vastly outpace demand. Looking at the charts above, that race is tougher to win than a triathlon against Usain Bolt, Michael Phelps, and Lance Armstrong (when he was on steroids).

Buying a home is never easy, but at least you can smoke we*d without worrying about your landlord (in some states). I can’t imagine a better reason to buy.

The Big Question: Will the housing market ever “normalize” to pre-pandemic trends? How else can we incentivize builders to construct more supply?

Banana Brain Teaser

Previous

At a garage sale, all of the prices of the items sold were different. If the price of a radio sold at the garage sale was both the 15th highest price and the 20th lowest price among the prices of the items sold, how many items were sold at the garage sale?

Answer: 34

Today

Company C produces toy trucks at a cost of $5.00 each for the first 100 trucks and $3.50 for each additional truck. If 500 toy trucks were produced by Company C and sold for $10.00 each, what was Company C’s profit?

Send your guesses to [email protected]

?

The human side of every person is the greatest enemy of the average investor or speculator.

Jesse Livermore

How Would You Rate Today's Peel?

?? All the bananas

?? Meh

?? Rotten AF

Happy Investing,

David, Vyom, Ankit & Patrick