Just The Tip | The Daily Peel | 4/8/22

Silver Banana goes to...

Market Snapshot

The major indices played around in the red and green on Thursday. We watched the yield curve slightly steepen, which, so I’m told, is good for America. When the dust settled, after starting the day off in losing territory, all three of our usual suspects ended the day in the green. 

The S&P led our gainers, ending the day up 0.72%. The Nasdaq recovered from what looked to be a no-good, horrible, very bad day to finish up 0.50%. Finally, the Dow finished Thursday up 0.44%. Not a bad comeback after a rough morning for the bulls.

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Let’s get into it.

Banana Bits

• If you think you’ve got what it takes to intern at Goldman, get in line. 
• Zuck is now trying to dip his greedy little toes into the world of crypto. 
• Do you ever wonder what would happen if Robinhood, Discord, and Tiktok had a baby? Me too, all the time – here is that baby.
• A bunch of grown a** men who get paid money to play a game for a living kicked off their season with an opening day of games that won’t mean anything in October.
• Apparently, if you’re looking to hide your yacht, Maldives was the place to stick it.
• Alright, we get it: the labor market is a very tight b***hole.

Macro Monkey Says

Full Employment & Inflation — It’s official: the labor market is still excessively tight. US first-time unemployment claims fell to levels not seen since 1968. In other words, this is not your father’s labor market. 

There’s a lot going on. High prices, low inventories, mortgages and refinancing applications plummeting, housing shortages… and a $hit load of open jobs.

Many businesses are struggling to find help. How many “help wanted” signs have you seen even just this week? Literally everywhere in every industry for every business type is hiring.

Usually, low jobless claims and low unemployment could lead to wages going up to steady demand for labor, and an economy could be close to full employment. 

In today’s reality, we might be seeing an economy that is so hot that the labor market’s tightness is another contributing factor to sustained inflationary pressures.

But honestly, what did we expect? The writing has been on the wall since mid-2020 when we realized that there exists this alternate reality in which more entrants into the labor market can function as knowledge workers for an employer anywhere in the world with just a laptop and an internet connection. 

After closing the economy and watching unemployment rise to artificially high levels at almost 6%, we’ve witnessed a hiring boom amid increased workforce mobility. 

So is this the new normal? Parts of it are here to stay, that’s for sure. Have our boomer bosses finally admitted that WFH or hybrid models will be here forever? Not yet, I don’t think – but those old farts are due to die off soon enough, and then a generation of digitally capable millennials will finally replace those geriatrics.

So what does increased tightness mean for stonks? Well, wages are probably going to rise, increasing costs for employers and taking away dollars from their bottom lines. This sometimes forces companies to up their prices, hence the nifty term “wage-price spiral.”

You’ve probably heard this term, but you might not be clear as to how a wage-price spiral actually manifests in an economy. 

• In our case, the labor market is a tight butthole, and employers have to raise wages to attract workers with the right skills.
• These workers have more money in their pockets, so they demand more goods and services. 
• As a result of increased demand, producers increase their prices.
• As companies pass labor cost increases onto consumers, this price spiral continues, in theory, for all eternity.

This doesn’t always occur in a macro environment where supply chain challenges are increasing input costs, and the inflationary environment is drastically different than it has been for the entirety of the last decade. 

Ironically, the cure for higher prices is higher prices. Eventually, we reach a point of demand destruction, a force that can moderate growth and tamper inflation. It also could cripple an economy and lead us into a dark recession. Here’s to hoping we don’t make it that far.

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What's ripe

Hewlett Packard ($HPQ) — When the Oracle of Omaha senses fear in the markets, it’s probably time for him to mobilize his capital. That’s exactly what he did Thursday, announcing a fat new 11% stake in the traditional PC player.

Shares of HPQ had their best day since March of 2020, ripping ahead 14.77% after the announcement of Buffet’s $4.2bn acquisition. HP has more than 20% market share in the personal computing hardware space, from which it generates more than 70% of its revenue. HP also runs one of the largest share buyback programs amongst publicly traded companies, which might validate Buffett's bid for the PC maker.

Constellation Brands ($STZ) — It would appear that the world is still in a healthy relationship with booze. Initially flat after announcing a top and bottom line beat, shares of STZ finished up 4.61% yesterday.

Constellation Brands’ leadership also provided guidance that was generally in line with analysts’ expectations for the rest of the year. 

I’ll say this, apes: even in a Bear Market, demand for certain items can remain relatively sticky. Beer, wine, and spirits are on that list. 

What's Rotten

Chinese Tech Stonks ($BIDU, $JD, $BABA, $DADA) — Chinese Tech and Internet stonks took turns getting punched in the face behind the barn on Thursday. There still remains a hefty amount of uncertainty surrounding several non-technical, non-fundamental factors that play a role in determining how much we love or hate these stonks. In general, these cats paired back between 3% and 10%.

Will the SEC enforce delisting en masse for these companies? Will increased regulatory cooperation between Chinese and US government agencies enable more transparency for these companies? Are the financial statements of these companies worth at least as much as the cost of the paper they’re printed on? We have to wait and see. But for yesterday, ChiTech was certifiably rotten.

SoFi Technologies, Inc ($SOFI) — In the wake of yet another student loan repayment pause, SoFi chopped its guidance for the remainder of this fiscal year, sending shares into the toilet, down 7.20%. 

SoFi makes its buck as an online personal finance company, dedicating a huge chunk of its business to student loan refinancing and mortgages. Even in the wake of record financial results, product growth, and sustained profitability, SoFi’s adjusted outlook is likely one of the first of many guidance updates for this earnings season. 

Thought Banana

Growth isn’t dead… yet — This is some nerdy $hit, but people really like application programming interfaces. APIs enable users to bake in the functionality of a piece of software as an ingredient to a new application, as opposed to just bolting on a third-party software solution that was never optimized for your use case.

Software is no longer just an enabler for business. For many companies, software is the business. 

The terms Software-as-a-Service, cloud, and digital transformation are as overused as a Will Smith meme at this point. In theory, these ideas afford businesses the opportunity to shift not only how they get their product to market but also how entire industries use software to solve customers’ problems and meet their needs.

At this point, you’re probably asking yourself, “WTF is this dude talking about?” Well, if these digital shifts were so ubiquitous and important for 21st-century companies, why is there still significant risk in investing in so many of these tech companies?

Well, yesterday, we brought up a new dynamic in the macro environment. Today, I want you to think about a shift in the technology environment. 

The market has changed; growth for the sake of growth is no longer acceptable. Surprise, surprise – you have to actually make money.

We’ve seen a rather rapid shift away from growth into a subset of technology growth businesses. This subset is profitable growth, particularly in companies that have short-term profitability that is not at risk in an environment that includes rising interest rates and a tight labor market. 

There are literally loads of really smart innovators who run companies that are included in the Nasdaq. The challenge is that loads of these cats haven’t made a single dollar on the bottom line yet. For the most part, their stocks enjoyed a rising tide for like the last 7 quarters since March of 2020, but they’ve been crushed year-to-date, many down 25-50% in the last three months.

In 2020 and early 2021, growth stonks that were attached to businesses with limited profitability but a niche in a work-from-home or “closed economy” environment were incredibly successful. The stonks of the Zooms and the Pelotons went to the f*cking moon.

But let’s examine some of these growth names during this year’s Q1. Zoom is down almost 40%. Peloton is down almost 35%. After moving from $51 in March of ‘20 to the $340s in late 2021, NVDA has shed 20% YTD and 30% since its November highs. If you were a member of WSO Alpha, you’d have watched us experience all the pain that these positions have caused us and our financial future.

Now think about a company like Activision Blizzard ($ATVI) or McAfee Corp (MCFE). They’re in the software space, they’re squarely growth names, and there’s a major difference between their business and that of a Zoom or a Peloton. They actually make money.

These are just a couple of examples of companies. But the point remains – a rising interest rate environment will stifle growth, and if a company has limited profitability because of its pursuit of growth, things might not turn out that great for its share price during this tightening cycle.

Wise Investor Says