M&M Pop-Tarts?

In this issue of the peel:

• July’s consumer inflation print came in so low you’d think it was wearing apple bottom jeans, boots with the fur. It definitely had the whole market looking at her, but the low reading actually increased yields and decreased expectations for a 50bp cut. Find out why below.?
• M&M flavored Pop-Tarts could be on their way to a store near you after this acquisition. UBS’s marriage with Credit Suisse is going well, but the Starbucks CEO transition isn’t as good as we thought. Finally, Chili’s needs our help.?
• Rumors are swirling that the DOJ is considering a breakup of Google as a remedy to their recent antitrust ruling. Find out what it means for markets, macro, and your money.

Market Snapshot

Banana Bits

• Fed Funds futures markets are pricing for a bottom of 3%.
• Former Google CEO Eric Schmidt exposes the firm for being behind in AI.?
• The refinancing boom is underway—it took about 50bps for refinancing to grow 35%... I can’t imagine what this looks like after a rate cut.
• Didn’t take long for Americans to get over the company’s takes on social issues.
• U.S. small business sentiments set a 2.5yr high.
• Megacap tech stocks are getting more attention than they’ve ever gotten in decades.

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Macro Monkey Says

From CPI To FBI

Has a Fed Chair ever been arrested?

It took 248 years for a U.S. President to become a convicted felon. Given that the Fed’s only been around for 111 years, it’s gonna be much shorter.

That’s because we’re officially pressing charges against Fed Chair JPow and the FOMC for assault with intent to murder. To sum up our case, please see the below evidence:

Source

Time to call the FBI. But before you start dialing, let’s get into it.

The Numbers

Yesterday, the Bureau of Labor Statistics (BLS) released the latest Consumer Price Index (CPI), revealing that consumer inflation continued to cool last month.?

In July, consumer prices increased 0.2% compared to June and 2.9% compared to July 2023. That’s the lowest annual inflation we’ve seen since March 2021.

Source

A round of applause for anyone trying not to go bankrupt.

On a monthly basis, July’s 0.2% increase is actually the highest since April, increasing 0.3% compared to June’s 0.1% decline.

Surprisingly, this is actually more good than bad. The decline in June could’ve created worry that the Fed has gone too far, sending the economy on a deflationary path. July’s return to relatively normal price increases implies we’re doing alright.

However, 90% of July’s monthly reading is attributable to a single line item—for anyone not immediately guessing shelter, kindly read a book… after finishing this, of course.

Source

Shelter costs increased 0.4% last month. The monthly increase could be overstated because shelter encompassed 36.3% of July’s CPI weighting, with the drunkenly created “Owner’s Equivalent Rent” metric making up 73.7% of shelter costs.

Owner’s Equivalent Rent is how a literal infant baby child would measure shelter costs—the BLS (no joke) calls landline phones and asks, “Hey, how much do you think you could rent your house for?”?

We probably don't trust it too much unless we think our grandparents are housing market savants.

Stripping out shelter, food, and energy costs gives us so-called “Supercore Inflation.” Last month, this less-volatile metric clocked in at 0.0% for the month and 1.7% annually.

Normal core inflation, which removes just food and energy prices, increased 0.2% for the month and 3.2% since July 2023, the lowest annual increase since April 2021.

Source

Food prices grew 2.2% annually, with the food at home category up 1.1%, led by a 3.0% increase in meat, poultry, fish, and eggs. Food away from home grew 4.9%, which I can only assume is led by McDonald’s $18 Big Mac.

Energy prices grew just 1.1% annually. However, this was led by energy service costs rising 4.4% on a 4.9% increase in electricity costs. Every energy commodity price fell by at least 0.3%, and motor fuel prices fell by 2.3%.

Some of the largest annual gainers included frozen noncarbonated juices and drinks, eggs, and motor vehicle insurance, up 19.2%, 19.1%, and 18.6%, respectively.?

The biggest decliners were apples (-14.5%), men's suits (-12.0), and used cars and trucks (-10%).

The Takeaway?

Unless you’re a huge fan of frozen noncarbonated juices and drinks, there was nothing to worry about within this report.

Inflation basically just gave Fed Chair JPow the world’s most valuable thumbs up to cut rates in September.

Before then, Powell will give and make highly anticipated speeches and comments at the Fed’s annual meeting in the middle of nowhere, I mean Jackson Hole, Wyoming. We’ll then have a clear picture of the Fed’s thoughts.

Because of the continued decline and lowest reading in 41 months, markets now expect a lighter cut in September, pricing for a 25bp decline in the Fed Funds Rate.

Source

The soft landing is soft landing-ing. We’re right on track to 2% in 2025, so Powell will likely not want to change things too much. However, because the labor market has shown signs of weakness, it is clear that some kind of policy loosening is prudent.

We’ll get the August jobs report before the next FOMC meeting as well. So, if/when we can’t read through JPow’s Fed Speak next week, we’ll have our answer then.

What's Ripe

Kellanova (K) 7.76%

• M&M flavored Pop Tarts, anyone? How bout Twix Flavored Pringles? These innovations of taste and diabetes could be on their way to a store shelf near you after the most delicious acquisition of all time.?
• Announced yesterday, America’s 4th largest private company, Mars, is acquiring fellow snack maker Kellanova for $35.9bn or $83.50/sh, a 33% premium.
• The 2nd-largest deal of 2024 so far is expected to close in early 2025. After getting dumped by Kellogg last year, Kellanova didn’t stay single for long.
• According to analysts, Mars wants to double down on the branded snack market, growing its portfolio of offerings to meet a nation of sweet-treat lovers.

Source

UBS Group AG (UBSG) 5.29%

• Like seeing your ex get married to a billionaire, UBS has been doing a lot better since a certain former-employee-turned-newsletter-writer left the Swiss bank…
• Anyway, the firm performed particularly strong in Q2, nearly tripling bottom-line estimates with EPS of $0.34/sh on $11.9bn in revenue, a 4.2% beat.
• Markets reported recorded revenue, but Banking was the star of the report, posting 55% YoY top-line growth. Assets grew by $27bn, suggesting the merger with Credit Suisse is going well.

What's Rotten

Brinker International (EAT) 10.71%

• Great news for America as reports indicate a spike in the number of citizens that heard the 3 most important words in the English language… “Welcome to Chili’s.”
• The parent company of Chili’s & Maggiano’s reported upbeat revenue on higher traffic, with same-store sales up 14.8% at Chili’s and 2.5% for Maggiano’s.
• But, too many customers are taking advantage of the legendary 3-For-Me deal. Costs grew 12% YoY, denting profits and contributing to a weak 2025 outlook.

Starbucks (SBUX) 2.09%

• After Tuesday’s glimmer of hope, the hipster recession is back on, with Starbucks shares tumbling. Insider selling and more are hurting the stock.
• For his hard work in overseeing a $32bn loss in market cap, former CEO Laxman Narasimhan will walk away with a fat pay package worth ~$10.6mn.
• Salt was added to the wound when interim CEO Rachel Ruggeri disclosed a $320k share sale, cashing in on the company’s first good day since pumpkin spice was invented.

Thought Banana

Dismembering the Alphabet

Back in 1999, Eminem murdered the alphabet in his poignant piece, Still Don’t Give a F*ck. Now, the DOJ is considering dismembering a different kind of Alphabet.

Let’s dive in.

What Happened?

Rumors began to swirl on Wednesday that, as part of a remedy in ruling Google a monopoly, the Department of Justice is considering breaking up the search engine’s parent company, Alphabet.

The last time a U.S. company was forcibly broken up in this way was in 1982 when AT&T—a.k.a. “Ma Bell”—was broken up into 8 different companies.

And, perhaps surprisingly, this move is generally thought to have increased shareholder value (love it) and led to more industry innovation:

Source

The decision is far from being made. In fact, many legal scholars and analysts have recently begun to think breakups are suboptimal remedies.

Wedbush analysts have already come out and called a breakup of Alphabet “a stretch.” Regardless of the outcome, the case will almost certainly remain in court for years to come.

However, if an Alphabet breakup occurs, let’s speculate wildly on how that might get done. My guess would be a breakup resulting in X distinct companies:

• Google Search, with restrictions and requirements to share data with competitors
• YouTube
• Google Cloud
• Android, Hardware, & Digital Infrastructure
• “Other Bets,” which would become essentially a VC portfolio / PE Holdco

Source

The Takeaway?

Breaking this thing up might be as complex as trying to solve an age-old geopolitical puzzle.

It’s unlikely, but the fact that DOJ is even publicly acknowledging this a possibility should be a flashing red signal to other big tech firms, especially Amazon, Meta, and maybe even Nvidia.

I’d say we’ll find out soon, but the breakup orders given to Microsoft, AT&T, Alcoa, the American Tobacco Company, and Standard Oil each lasted a minimum of 7yrs.

I don’t know about you guys, but it doesn’t seem like the government or legal system has gotten much faster in recent years…?

The Big Question: Will the DOJ order the breakup of Google? If they do, will it actually go through, and how will the breakup work?

Banana Brain Teaser

Previous

Guadalupe owns 2 rectangular tracts of land. One is 300m by 500m and the other is 250m by 630m. The combined area of these 2 tracts is how many square meters?

Answer: 307,500

Today

A rope of 20.6 meters long is cut into two pieces. If the length of one piece of rope is 2.8 meters shorter than the length of the other, what is the length, in meters, of the longer piece of rope?

Send your guesses to [email protected]

?

Antitrust enforcement actions are perceived as punishments or moral judgments, but we should think of them as recognition. If a company is good enough for long enough, it can achieve market dominance and earn its profits from stifling competition vs. competing on products or services. It’s the logical, shareholder-driven thing to do. And when we stop them, the benefits accrue to almost everyone.

Scott Galloway

How Would You Rate Today's Peel?

?? All the bananas

?? Meh

?? Rotten AF

Happy Investing,

David, Vyom, Ankit & Patrick