JPow Holds, Stocks Up

In this issue of the Peel:

• As of yesterday’s FOMC meeting, the Fed went back to back in holding rates steady at 5.25%-5.5%.
• Scotts Miracle-Gro and Advanced Micro Devices had a ripe day, whereas Paycom and Estee Lauder struggled to remain green for the day.
• WeWork has filed for Chapter 11 bankruptcy after missing an interest payment made payable on October 2nd.

Market Snapshot

Happy Thursday, apes.

What a day—that was a fun one, huh? Let’s hope Thursday keeps the party going because I damn sure know that you will tonight.

Equities did yesterday, at least. Consumer staples and energy were the only two S&P sectors down on the day, ruining the 2-day streak of all 11 rising that had been going on this week, but still, every major U.S. index gained, so we can’t be mad. Large caps led, allowing the Nasdaq’s 1.64% day to dominate the session. Things were a little hesitant at first, but after JPow spit some game on rates, it was off to the races.

Meanwhile, treasuries were throwing a party in response to the Fed’s actions and the Chair’s comments as well. Yields dove as investors snatched up government bills, notes, and bonds amid expectations that rates might not be going up again anytime soon. The 10-year yield fell below 4.8% while the 2-year pushed back below 5.0%.

Let’s get into it.

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Banana Bits

• It's good news for chipmakers to end the day, as Qualcomm actually has something positive to say for once.
• Toyota nailed it last quarter, ripping yesterday on the back of its latest earnings.
• The terms of Comcast’s sale to Disney are becoming more clear, setting a floor at $8.61bn yesterday.
• Maybe they don’t want WWIII? Either that, or they’re doing a really good job acting like it as China and the U.S. plan to discuss nuclear controls.

Macro Monkey Says

Hold Up

When the legendary Canadian artist and poet Drake beautifully wrote, “They gon’ ask if I can play this sh*t back to back” in his critically acclaimed 2015 masterpiece Back to Back, little did he know that he was also influencing American monetary policy.

Or maybe he did know. Drake’s the type of guy to mail JPow a letter after a rate hike and say, “I knew you could do it. The sky's the limit.”

Thankfully, however, he didn’t have to do that this time because, as of yesterday’s FOMC meeting, the Fed went back to back in holding rates steady at 5.25%-5.5%.

For the second meeting in a row, the effective fed funds rate was unchanged, and—based on the market’s reaction—you would’ve thought that money printer JPow was back or something. But, the excitement seems to stem from an upgrade to the view of recent economic performance that came along with it. Let’s dive in.

After 10 consecutive and 11 total rate hikes of varying degrees since March 16th, 2022, the FOMC officially has entered “wait and see” mode.

"For the second meeting in a row, the effective fed funds rate was unchanged ..."

The Fed’s preferred inflation metric, Core PCE, clocked in at 3.7% annual growth last week, still far above the Fed’s 2% target, but the language in the new Oct/Nov statement could hint at the game plan.

Source

For starters, we should note there was barely anything at all changed from the September vs Oct/Nov statements, as you can see here.

Most notable as it related to plans for the December meeting was the expansion of the phrase “Tighter credit conditions… are likely to weigh economic activity” to “Tighter financial and credit conditions…” Now, the Fed is recognizing that even without an additional rate hike at their last meeting, the market did its job for them and raised market rates anyway.

As if we haven’t discussed this enough, the Fed is almost definitely referring to recent spikes in treasury yields, particularly of the 10-year note. For context on certain relevant dates, the 10-year treasury has sat at:

• 2.19% on March 16, 2022—the date of the first FOMC rate hike since 2018
• 3.86% on July 14th, 2023—the last time the Fed raised rates
• 4.35% on Sept 20th, 2023—the date of the last FOMC meeting
• 4.77% on Nov 1, 2023—yesterday

Further, the 10-year yield has breached 5% a few times between both the July and September meetings and now. Mr. Market is effectively doing the Fed’s job anyway, and now, rate cuts aren’t expected until at least June of 2024, according to CME market-implied probabilities. “Higher for longer” is setting into Fed watchers, the broader market, and the economy in general.

Really, the only other change to the statement that mattered even a little was the reframing of recent economic activity to “expanded at a strong pace in the third quarter” from “has been expanding at a solid pace.”

"... JPow and the FOMC gang seem to think the best of 2023’s economic growth is behind us."

That’s Fedspeak for “we were killing it, and now we’re not so sure going forward.” Basically, JPow and the FOMC gang seem to think the best of 2023’s economic growth is behind us.

Meanwhile, the GDPNow tracker at the Atlanta Fed, which seeks to forecast short-term economic growth (about as possible as forecasting earthquakes on Mars), plummeted while listening to JPow drone on in his boring *ss voice. Q4 annualized growth expectations fell from 2.3% to 1.2%, almost as far as your portfolio fell yesterday.

Lastly, JPow obviously had some comments of his own to come along with the release. Some of our favorites include:

• “… the wage increases have really come down significantly over the course of the last 18 months… they're substantially closer to that level that would be consistent with 2% inflation over time… making the standard assumptions about productivity over time, it's much closer than it was.” (hyped you’re getting a smaller raise this year)
• “I will say that we're not confident this time that we've reached such a stance; we’re not confident that we haven't” (when asked if the policy is restrictive enough yet)
• “Persistent changes in broader financial conditions can have implications for the path of monetary policy.”

Just as we’d expect, and that last one gives a glimpse as to a potential reason why equities jumped in response: if financial conditions (aka bond yields) are becoming too restrictive (homebuyers sure think so), the Fed may change course on upcoming policy.

It’s the first time Powell didn’t outright dismiss suggestions of rate cuts, meaning we may just be moving back to the money printer JPow we all know and love.

What's Ripe

Scotts Miracle-Gro (SMG) ↑ 18.52% ↑

• What is this, the 1960s?? I thought weed was certified cool again, even by Wall Street…
• But apparently not. Scotts Miracle-Gro, a producer of gardening and cannabis supplies, reported earnings Wednesday that largely disappointed investors (no, that’s not a typo). Sales of $374mn beat expectations, but that was still a stellar decline from last year, while losses of $2.77/sh beat minimally as well.
• And shares popped because the market doesn’t want to make sense, only cents. The biggest thing here was CEO Jim Hagedorn (I wish his name was Scott) saying the firm is considering alternatives to its Hawthorne Gardening unit, including potential partnerships with cannabis companies.
• The idea is to get that sh*t off the books. Hawthorne sells things like hydroponic and other pot-growing equipment. This thing has been a detriment to earnings for far too long, according to management, so investors were hyped at the idea that they might finally break up.

Advanced Micro Devices (AMD) ↑ 9.69% ↑

• So, Nvidia isn’t the only one who can do well in the semiconductor space. The company’s little brother, Advanced Micro Devices, had a fairly solid earnings day of their own on Wednesday.
• AMD reported EPS of $0.70/sh on $5.8bn in sales vs the $0.68/sh on $5.7bn expected. It was a small beat, but simply seeing the firm wasn’t totally getting its lunch eaten by Nvidia was a plus, as sad as that is.
• Guidance for 2024 was lower than expected, but no one cared, as CEO Lisa Su assured investors that GPU sales would pick up. She and the company expect $400mn in sales here in Q4 and then as much as $2bn in 2024.
• Those are the AI-powering chips Wall Street is even more addicted to than cocaine. It’s still not nearly on par with the now-legendary numbers from Nvidia, but one firm has a lot to gain while the other has a lot to lose. The fight to the death rolls on…

What's Rotten

Paycom (PAYC) ↓ 38.49% ↓

• To quote a particularly unhappy audience member during SpongeBob’s standup comedy special, “Oh brother, this guy stinks!”
• That about sums up Paycom’s day and most recent quarter. Earnings of $1.77/sh beat expectations for $1.62/sh, but that was where the fun stopped. Sales of $406mn were light of the $411mn expected, and don’t even get me started on guidance…
• Paycom estimates Q4 will bring $400-$425mn in revenue to the firm, well off from the Wall Street estimate of $452mn. Not only was that well off expectations, but it implies a substantial slowdown in sales growth, too. Basically, they reported every analyst’s least favorite things, and yup, shares felt the pain.

Estee Lauder (EL) ↓ 18.90% ↓

• Much like the country that the company is based in, Estee Lauder’s got some China problems. And it turns out it’s worse than expected.
• Analysts had been expecting softer-than-usual results from the firm given its weakness in China, but apparently, last quarter’s guidance didn’t account for that. EPS of $0.11/sh on $3.52bn in sales was mixed against estimates for a $0.21/sh loss on $3.53bn.
• But that wasn’t nearly enough to keep the ship afloat after disappointing guidance for the next quarter and into the next fiscal year. Normally a boon for the firm, China’s recovery has been slower than expected, and as such, sales of nonessentials like makeup haven’t caught up to history.

Thought Banana

WeRan-Out-Of-Money

2 years and 11 days ago, WeWork Inc. went public. Since then, billions of dollars were paid to the firm’s founder to f*ck off, several documentaries were made, and as of yesterday, the company is bankrupt. Welcome to the story of WeWork.

Well before the coworking firm’s IPO date, WeWork was already making international news with some of its shenanigans. To review the timeline:

• WeWork was founded in 2010 and first began operating in April 2011.
• By late 2012, the firm had grown quickly and was profitable.
• On August 24th, 2017, WeWork announced it had received a $4.4bn investment from Japanese investment giant Softbank after CEO Masayoshi Son went on a tour of the firm’s Manhattan headquarters… a tour he was on for 12 minutes.
• In January 2019, WeWork got a $47bn valuation from an additional planned investment from Softbank… this didn’t last too long because…
• On August 14th, 2019, this legendary S1 was filed with the SEC so the firm could IPO, and that’s where it all went wrong.

Now, the story is officially reaching its closing chapters. Specifically, that chapter is Chapter 11, which allows the firm to restructure debts and continue operating.

"... the story is officially reaching its closing chapters. Specifically, ... Chapter 11 ..."

So, it’s not necessarily all over yet, but going from a $47bn to a $64.97mn valuation in just a few years shows a truly impressive ability to eviscerate shareholder capital. I mean, that takes talent, and for the math nerds out there, that’s a -99.86% total return. But hey, they still have 100% left to fall to $0!

The bankruptcy process first began on October 2nd, when WeWork missed an interest payment and started the stopwatch on the firm’s 30 days to make payment.

Thirty days later, and no dice. Maybe if they still had that ~$1bn exit package they gave CEO Adam Neumann back in early 2021, they could’ve made it, but oh well. Neumann effectively brought the firm from $0 to “$47bn” to $9bn right before leaving. He started it, ruined it, and left a billionaire. Gotta love corporate America, huh?

"He started it, ruined it, and left a billionaire. Gotta love corporate America, huh?"

But hey, we’re not here to judge. King got his bag and has been out there raising money for new ventures ever since. In the meantime, Neuman’s former homie Masa has compared himself to and seems to have the corporate version of dementia setting in.

Basically, WeWork was the quintessential embodiment of the craziness that was the latter days of ZIRP pre-pandemic exuberance. Now that investors are as good and depressed as they should be, there’s no time for hope like this.

Still, can’t wait to see how Neumann’s latest venture turns out. It’s called Flow, and naturally, it’s essentially a crypto-fueled residential version of WeWork seeking to create a “new type of social interaction.” Yeah, I know, but they already got $350mn from Andreessen Horowitz… so…

The big question: What’s next in the epic saga of WeWork Inc? Will Flow fail as miserably?

Banana Brain Teaser

Yesterday —

Mad Ade is waiting for the local Kebab shop to open.

He glances at his clock and notices the time is 3:15 pm. Out of sheer boredom, Mad Ade works out the angle between the minute and hour hand.

What was the angle between the hour and the minute hands at 3:15 pm?

Answer

7.5 degrees

At 3:15, the minute hand will be perfectly horizontal, pointing towards 3, whereas the hour hand will be moving towards 4. Also, the hour hand must have covered 1/4 of the angle between 3 and 4.

The angle between two adjacent digits is 360/12 = 30 degrees.

Hence, 1/4 of it is 7.5 degrees.

Today —

The day before yesterday, Suzie was nine years old. Next year, she will be twelve. How is this possible?

Shoot us your guesses at [email protected]

Wise Investor Says

“Interest rates are the prices of financial goods, and financial goods are the means by which we move resources through time” — Paul Volcker

How would you rate today’s Peel?

All the bananas

Decent

Rotten AF

Happy Investing,

Patrick & The Daily Peel Team