The S&P's Magnificent Seven

In this issue of the Peel:

• According to the WSJ and Intercontinental Exchange data, more than 32 million Americans have mortgage rates under 4%. However, average mortgage rates are currently sitting around 6.9%
• U.S. Steel and Adobe had a ripe day, seeing their share price rise for the day. On the other hand, SunPower and VF Corp saw their share price struggle to stay afloat.
• The Magnificent 7—Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta, and Tesla—have carried equity markets, playing a massive role in the S&P's ~24% surge.

Market Snapshot

Happy Tuesday, apes.

That’s a Happy Tuesday to everyone except Trevor Milton, the former Nikola CEO that finally got sentenced to prison for all his lying scumbaggery. Say hi to Sam for us.

But there was no scumbaggery afoot in equity markets to start the week. In addition to the usual depression Monday brings it also gave us gains almost across the board in equity markets. All 4 U.S. majors gained, with the Nasdaq’s 0.61% charge leading the way while the Dow rose less than 0.01%, but a gain is still a gain. And that was despite only 4 of 11 S&P sectors rising on the day. But once again, we’ll take it.

Another thing we’ll take is the 0.29% gain the apes at WSO Alpha blessed us with. It’s cold across the U.S., but their room temperature IQs kept me out of bankruptcy for another day, and that’s all we can ask for.

Let’s get into it.

Open a Virtual Data Room, Get Good Shit

Look — we know you’ve been naughty this year. But CapLinked doesn’t care if you used ChatGPT to write pitch decks, missed a zero on a valuation, or got sloshed at every team happy hour.

They’re going to hook you up with whatever’s on your holiday wishlist. We’re talking courtside tickets, luxury vacations, VIP passes to Coachella, and more.

Get on CapLinked’s nice list by opening an Enterprise Data Room before the end of the year to claim the reward of your choice. Because you deserve it, even if your boss doesn’t think so.

Learn More

Banana Bits

• Strolling down the Red Sea is becoming as dangerous as wearing a red shirt in the Crips part of town, with the U.S. Navy needing to step in to make sure massive international corporations- I mean, *Santa Claus, can still deliver your presents.
• The scumbag founder of Nikola, Trevor Milton, has been sentenced to 4 years in federal prison for being a huge scumbag.
• Tesla is starting to pay employees effectively to not form a union…

Macro Monkey Says

Housing Market CPR

Learning and/or giving CPR can be a tough and incredibly awkward experience, like for this poor lifeguard trying to save the legend Squints’ life in the iconic childhood movie, The Sandlot.

But economic CPR seems a whole lot easier. Instead of learning where to place your hands, what rate to do the compressions, or how to blow air into someone’s mouth in the most PG way possible, there’s really only one thing: lower interest rates.

I expect my Nobel Prize to come in soon for the above observation, but with housing data set to burst onto the scene later today, let’s check the state of play.

We haven’t been able to shut up over the last year about how—pardon my French—f*cked us 20-somethings are as we look to purchase homes in the next… ever. But, after seeing the 10-year U.S. treasury drop below 4% for the first time in months last week, we’re keeping our fingers crossed that this may have actually done something.

And, according to preliminary data, it did. The 10-year yield hit its recent high right around the beginning/middle of nowhere as the note’s annual payouts nearly breached 5%.

"At the same time, average mortgage rates dropped from 7.8% to a really nice 6.9% ..."

Since then, yields have rapidly declined, bringing with it a love-to-see-it uptick in mortgage applications across the U.S. At the same time, average mortgage rates dropped from 7.8% to a really nice 6.9%, where they currently sit. Even just 12-24 months ago, a 6.9% mortgage rate would’ve caused most people to sue their mortgage officer, but in 2023, it’s pretty much the best you’re gonna get.

With that in mind, it’s no wonder why homeowners haven’t been willing to even consider selling their homes. According to the WSJ and Intercontinental Exchange data, more than 32 million Americans have mortgage rates under 4%, nearly half the rate of the two-decade highs pointed out above.

Now, 2023 is set to see the lowest number of existing home sales since 2008, a time when you must’ve been reading Harry Potter or discovering Smosh on YouTube when you clearly should’ve been sizing up the local property market.

"Only ~4.1 million existing homes are expected to change hands, a low not seen for 15 years ..."

Id**ts, but then again, I did the same thing. Only ~4.1 million existing homes are expected to change hands, a low not seen for 15 years when the country’s population was ~11% smaller and we had just begun to crawl out of the worst housing crisis literally since ‘Nam.

That lack of selling by the boomers, our parents, and other cohorts teeming with bald spots has only contributed to the distinct lack of inventory that is, in turn, keeping home prices elevated. Economics is doing a really good job showing why it’s definitely not a science here as, most of the time, asset prices move inversely to their interest rate via pure mathematics.

When a home value goes up, the coupon rate on that mortgage stays the same, but the yield falls purely as a function of the home value rising. But, when interest rates fall… and home prices refuse to budge… this is the kind of anomaly/inconsistency hard sciences don’t allow for.

Later today, we’ll get an update on all things housing, like building permits and housing starts, and then we can decide if this is an unhinged rant or if we’re actually just genius calling for the revival of the housing market. Or, much more likely, a combination of the two… with the emphasis on unhinged.

What's Ripe

U.S. Steel (X) $49.59 (↑ 26.09% ↑)

• Douglas brought down Tyson, the Giants brought down the Patriots, and Fairleigh Dickinson brought down Purdue—meanwhile, decades of manufacturer outsourcing and low-return investment brought down U.S. Steel.
• That’s just as exciting as the other three, right? I mean, this thing was once the single largest company on the face of the Earth, and now it’s being sold to a Japanese competitor.
• The bidding war over U.S. Steel has ended, and Tokyo-based Nippon Steel was the big winner (or loser, depending on how your trades are positioned). The $14.9bn price tag smacked rivals like Cleveland Cliffs and ArcelorMittal, who were also throwing out bids, into realizing that they’re poor.
• Now, the (formerly) third-largest steel producer by volume might claim that 2nd place title going forward, but no one holds a candle to China’s homegrown China Baowu Steel Group. Everything’s bigger in Texas? Uh, kinda seems like everything’s bigger in China…

Adobe (ADBE) $599.13 (↑ 2.47% ↑)

• Well, it looks like Adobe couldn’t figma this deal out. And after calling off the acquisition, shareholders are loving it.
• Brilliant humor, I know, but like all good jokes, it’s based on the truth. On Monday, Adobe announced they are canceling their planned $20 billion acquisition of collaborative design software maker Figma.
• Another victim of the red tape stranglehold, this deal was called off entirely due to regulatory scrutiny around antitrust concerns. Clearly, Adobe has some of the worst divorce attorneys ever, as the two never even moved in together, but the software giant still has to pay Figma $1bn in alimony, a.k.a. breakup fees.

What's Rotten

SunPower (SPWR) $4.22 (↓ 31.27% ↓)

• As an 864k mile diameter nuclear fusion reactor in the sky, it’s no surprise that sun power never runs out. Unfortunately, its namesake company, SunPower, takes it even a step further and runs directly into the ground.
• The solar panel maker got as fried as Ed Sheeran would in Death Valley without any sunscreen. Shares tanked via the company’s issuance of the dreaded “going concern warning” as delayed quarterly filings may have triggered a default on its debts.
• Basically, SunPower included in an agreement with at least one creditor that delayed financial reporting was grounds for immediate repayment, and, according to their own release, SunPower lacks the liquidity to pay off that debt.
• And, much like the sun will do in a couple of billion years or something, SunPower now may have to call it quits and turn the lights off. Stay tuned.

VF Corp (VFC) $18.36 (↓ 7.79% ↓)

• Imagine getting bullied, and then somehow, you’re the one who ends up in trouble because of it. That’s essentially what happened to North Face and Vans maker VF Corp on Monday.
• But, like a lot of bullying, VF Corp actually deserved it this time. The company behind every hipster’s favorite brand announced that they had suffered a cyberattack while including as little detail as humanly possible in doing so.
• No one knows what went on, but experts say it shows “textbook” signs of a ransomware attack. Personal data was leaked, and VF has already said it’ll probably f*ck the holiday szn for them. But at least their holiday was ruined by something other than coal or your distant relatives’ less-than-ideal dinner table commentary on race in America.

Thought Banana

Gravitational Returns

We are officially 12 days from the start of a brand new year, and with that, your local gym is about to be packed to the brim for about 2.5 weeks as all the “get healthier” New Year’s resolutions start and invariably burn out.

Expect to see a bull market on X and other platforms in funny videos of people about to hurt themselves and/or get kicked out of Planet Fitness.

But the bull market we really wish we could have called has occurred this year in just 7 stocks. In fact, these stocks are so special, so profitable, and so damn big that we might just have to call them… magnificent.

The Mag 7—a.k.a. the Magnificent 7—a.k.a Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta, and Tesla—have carried equity markets like Forrest Gump carried Bubba out of the woods before that damn air strike. It’s been them or nothing.

And now, we have the data to prove it. Just take a look:

Source

"... the S&P has surged ~24% so far this year."

Shoutout to the WSJ for all the data today… you nerds.

Anyway, if the above chart isn’t clear enough, let’s spell it out. These 7 stocks, the largest companies in the S&P 500, now make up 30% of the market cap’s total index after gaining an insane 75% altogether. Meanwhile, the other 493 names have gained, too, just a way more boring 12%.

With that, the S&P has surged ~24% so far this year. An equal-weighted S&P fund—where all companies make up the same percentage of the index’s total market cap—has gained just about 10.5% for the year. In other words, the big got bigger.

And I’m not sure I’ve fully expressed to you how enormous these companies are. I mean, the 8th biggest stock is Berkshire Hathaway, valued at $23bn less than Tesla (the smallest of the list at ~$800bn), with the 9th biggest name a cool $250bn lower than Elon & Co, being Eli Lilly at $550bn… the largest healthcare stock ever.

But it gets better. Of those companies listed above, two of them—Apple and Microsoft—are, on their own, larger than the entire market value of the whole f*cking U.K. stock market. Add them together, and they’re bigger than even China and Japan’s markets… combined.

"Add them together, and they’re bigger than even China and Japan’s markets… combined."

Oh, and it gets even better. If we take the 5 largest U.S. stocks—Apple, Microsoft, Alphabet, Amazon, and Nvidia—they alone command a combined market cap larger than the entire equity markets of China, Japan, the U.K., and France COMBINED. That’s the 2nd, 3rd, 6th, and 7th largest GDPs in the world, for reference.

It just goes to show that, all else equal, the bigger you are, the bigger you’ll get. I’m no doctor, but I am pretty sure that’s one of Newton’s Laws of Physics. As planets, stars, or some other sh*t get more massive, their gravitational pull increases, too, leading them to attract more matter, grow larger, grow a larger gravitational pull, and on and on and on.

But, in stocks, all else is almost never equal. Still, 2023 presented a year of challenge and uncertainty where gains were made trepidiously by climbing the metaphorical “Wall of Worry.” Big tech names became replacements for bonds that were assaulted by JPow’s rate hikes—meaning, investors bought shares in these companies because they were so big, only making them bigger, and making more investors want shares, making them even bigger, and on, and on, and on.

Jerome Powell famously said the FOMC was “navigating by the stars under cloudy skies.” Minus the cloud part, if he actually did navigate his portfolio by the stars, he’s probably a whole lot richer.

The Big Question: Will the Magnificent 7 continue to power markets in 2024? What could stop these companies besides something like regulatory pressure? Who will be the “Magnificent 7” 10, 20, or 50 years from now?

Banana Brain Teaser

Yesterday —

A 3-inch cube is painted red on all sides. The cube is then cut into small cubes with a dimension of 1 inch. All the so-cut cubes are collected and thrown on a flat surface. What is the probability that all the top-facing surfaces have red paint on them?

Answer

Zero. The core of the 3-inch cube, when cut, has all faces that are not painted. Hence, at least one cube with no painted face always occurs.

Today —

What is always behind you, but you can never touch it?

Shoot us your guesses at [email protected]

Wise Investor Says

“Millionaires don't use Astrology, billionaires do.” — J.P. Morgan

How would you rate today’s Peel?

All the bananas

Decent

Rotten AF

Happy Investing,

Patrick & The Daily Peel Team