July 17, 2023 | Peel #501

In this issue of the Peel:

• The U.S. economy has shown resilience with significant bank earnings reported by JPMorgan Chase, Citigroup, and Wells Fargo.
• UnitedHealth Group and Eli Lilly performed well, while Ericsson and State Street disappointed investors. UnitedHealth Group made significant profits on mental health services, and Eli Lilly plans to buy private obesity drug company Versanis.
• Elon Musk announced a new venture, an artificial general intelligence (AGI) company called xAI. The mission of xAI is to "understand the true nature of the universe," aiming for development by 2029.

Market Snapshot

Happy Monday, apes.

Hope you had a great and, most of all, restful weekend because this week is not going to take things easy on us. Thankfully, Friday gave us a bit of a warmup for the week ahead, with bank and other highly-anticipated earnings numbers dropping.

Speaking of dropping, that’s what the majority of stocks did in the aftermath of Friday’s warmup round. U.S. indices were mostly red on the earnings szn equinox, but once things really kick off on Tuesday, we’ll get a sense of how close to that “soft landing” thing we may (or, also very possibly, may not) be.

Bond yields rose in the meantime, with the 2-year’s gains outpacing those of the 10-year, still behaving opposite to how your econ professor taught you. Expectations for another hike from JPow next week haven’t moved much but did climb slightly in the past week, dragging the DXY back to the key 100 level on Friday.

Let’s get into it.

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Banana Bits

• Is the July meeting the last stop for the FOMC on the rate hike train?
• The soft landing scenario appears to slowly be creeping towards the consensus view more and more
• Microsoft pinky promised Call of Duty will remain available on Sony products after the acquisition of Activision Blizzard is complete
• Institutions appear to be moving more in agreement with Stanley Druckenmiller’s long-term bearish USD bet as of late, calling for the end of a seemingly endless bull market for the U.S. currency

Macro Monkey Says

Bank Earnings

The state of the U.S. economy can often be summed up in one simple, self-reflective question: how much money did I spend on stupid sh*t last month? Another great question to ask, for example, is: how are the big banks doing?

See, while both questions get at the same thing economically, only one of them doesn’t make us feel even worse about ourselves Monday morning.

Let’s focus on that one. On Friday, earnings szn got underway in classic fashion, with some of the largest banks and asset managers reporting their second-quarter numbers. I don’t know if you’ve heard, but banks have had a somewhat hectic 2023, to say the least, so without further ado, let’s get into it.

JPMorgan Chase, Citigroup, and Wells Fargo, who happen to be the 1st, 3rd, and 4th largest banks in the U.S., all dropped earnings on Friday (don’t worry #2 BofA reports tomorrow). All 3 beat on top and bottom line figures, but shares had very different reactions.

"The onboarding of First Republic bank assets and heavy lean into scooping up SVB assets certainly made huge impacts ..."

JPMorgan Chase: The most valuable and important bank in the world, JPMorgan knocked it out of the park in Q2. The onboarding of First Republic bank assets and heavy lean into scooping up SVB assets certainly made huge impacts, but even without them, the big boys are doing just fine.

Revenue saw a 34% annual jump on rate increases and expansions in NII spreads. At $4.75/sh, net income jumped 2/3rd over the same period.

“The U.S. economy continues to be resilient…Consumer balance sheets remain healthy, and consumers are spending, albeit a little more slowly,” said Jamie Dimon during the call.

Citigroup: The much more Wall Street-focused Citi actually saw revenue fall year over year, and sure, it was only by 1% and still beat estimates, but that’s not what you want to hear.

It’s mostly a reflection on the state of markets anyway, with low volatility among client activity being a primary driver for the less-than-exciting but still pretty okay quarter. EPS beat, too, netting $1.33 vs. 1.30 on a 36% dive in the bottom line.

Meanwhile, above, JPMorgan saw most of its growth (71% profit growth in this unit) come from retail banking. Citigroup hates poor retail people, obviously, and the spread could suggest there was a staunch spread between Wall and Main Street last quarter.

Wells Fargo: Speaking of success among consumer banks, the nation’s second-largest bank by deposits saw net income surge 57% annually to almost $5bn, largely on the health of the consumer as well.

"Rates rising for consumer banks is no big surprise most of the time, but the magnitude here is rare."

Rates rising for consumer banks is no big surprise most of the time, but the magnitude here is rare. At both Wells and JPMorgan, provisions for credit losses widened at the same time, obviously expressing increasing concern that loans won’t get paid back.

Regardless, the strong performance of these banks last quarter certainly speaks to the resilience of American banking and consumerism. That alone, and considering most of the growth is on the ability to make more off of customers while simultaneously not increasing deposit yields by a single basis point, isn’t exactly too encouraging.

But hey, at least our paychecks will still hit for a while, it looks like.

What's Ripe

UnitedHealth Group (UNH) ↑ 7.24% ↑

• Not sure if it’s a good or a bad thing, but UnitedHealth made an absolute bag on mental health services last quarter. Getting money and the help you need are cool, but incentivizing a $450bn company to want more depressed people seems…depressing.
• Regardless, shareholders clearly took their SSRIs on Friday as the stock popped right through standard dopamine levels amid a stellar quarter. United reported Q2 numbers that made investors feel quite differently than their patients.
• $6.14/sh on $92.9bn in top line sales (+16% YoY) both came in above analyst calls, solidifying the solid day that was only carried higher by management’s full-year boost in guidance.
• Much of that boost is expected to come from patients seeking mental healthcare services, which boomed in the double-digit percentages from 2022. Studies say things like exercise, nature, and reading The Daily Peel can be cures too…

Eli Lilly (LLY) ↑ 3.54% ↑

• Evidently, it was a solid day for U.S. healthcare companies on Friday, with the nation’s two largest stocks in the sector taking up all the ripeness. The only downside is that it seems when these guys do good, we all do terrible, so…
• Anyway, Eli Lilly joined the slightly larger UnitedHealth above in leading the sector as the firm announced it plans to purchase private obesity drug company Versanis for $1.93bn in cash.
• Versanis, with its eye-popping amount of drugs in the pipeline (1), just so happens to be working in the hottest market of the industry right now: obesity drugs. Other meds like Ozempic have recently taken the U.S. market by storm, getting investors hyped up and driving Eli Lilly’s good Friday.
• Even more fortunately, however, is the fact we can’t really see how much Eli Lilly is overpaying as we would for a public acquisition. Ignorance is bliss, and investors sure are excited.

What's Rotten

Ericsson (ERIC) ↓ 12.46% ↓

• “Eric, son, you f*cked up” – Ericsson’s dad, probably.
• And if that’s what the company’s dad said, it’s certainly what the shareholders said on Friday in response to the company’s second-quarter numbers.
• The Swedish telecoms giant managed to beat EPS handily, but posting $0.07/sh vs. expectations of $0.05/sh wasn’t enough to overcome the swing-and-a-miss in top line sales. As the 5G wave expands, investors (and customers?) seem to be waving bye.

State Street (STT) ↓ 12.05% ↓

• The company with the 2nd most boomer logo on Wall Street (shoutout to Franklin Templeton at #1) took a look at the way Ericsson disappointed investors and said, “Hold my beer.”
• Not to say the logos aren’t sick because that boat is objectively dope as hell, but clearly, something’s gotta change after a quarter like this. State Street continues to watch deposits fly away, losing $206bn last quarter and telling shareholders they’re going to have to start paying more on those deposits to keep them in the nest.
• This will hurt future NII numbers, translating into lower margins in all likelihood. That must’ve been the key driver for shares on Friday because, otherwise, it wasn’t all too shabby.
• AUM grew to $3.8tn, largely on market gains, while revenue and net income of $763mn barely beat out consensus. In this case, however, that win was not a win.

Thought Banana

Solving for X(ai)

Elon Musk has done it again, and man, this guy is crazy. This is arguably old news already in a market changing so quickly like AI, but the rowdiest rich boy of them all has stepped back into the limelight.

"To be fair, he never really leaves the limelight, but sometimes he steps out of the main cultural focus for a brief millisecond."

To be fair, he never really leaves the limelight, but sometimes he steps out of the main cultural focus for a brief millisecond. Anyway, this time, Musk has come at us with the announcement of his newest venture, an artificial general intelligence (AGI) company with the goal to “understand the true nature of the universe”—xAI.

Basically, Musk assembled some of the founders and top minds from Google, OpenAI, DeepMind (the OG), Microsoft, and on and on (you get the point)—with the goal of developing an AGI. That’s the kind of AI all the movies are about, where they have independent “thoughts,” self-control, free will, etc. Needless to say, that doesn’t exist right now, but Musk is shooting for 2029.

Of course, xAI is a subsidiary of Musk’s X Corp (very creative), a $15bn holding company for Elon’s non-Tesla-or-SpaceX companies, according to Fidelity.

"... xAI is a subsidiary of Musk’s X Corp (very creative), a $15bn holding company ..."

The valuation model there is probably even more confusing than its AI subsidiary’s stated mission to, I repeat, “understand the true nature of the universe.” It’s one of those things where we all know what it means, but no one can actually tell you what it means, you know?

With a broad purpose like that and extremely limited available information right now, no one outside the organization can really speak too thoroughly and (especially in my case) intelligently on what exactly they plan to do for things like, I don’t know, making money or whatever the hell “understand[ing] the true nature of the universe” means.

It is Elon Musk, however. At the very least, it should be interesting.

The big question: What, if anything, will actually come of xAI long term?

Banana Brain Teaser

Friday — What statement is described by the following rebus?

• It1
• It 2
• It3
• It 4
• It5
• It 6
• It7
• It 8
• It9

The odds are against it (the odd numbers are touching, or against, it).

Today — Only a small space and a single mark turns a deadly situation into a funny one. What can that be?

Shoot us your guesses at [email protected] with the subject line “Banana Brain Teaser”.

Wise Investor Says

“I don't believe that when the stock market goes into terrible gyrations its rules have changed.” — Benoit Mandelbrot

Happy Investing,

Patrick & The Daily Peel Team

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