Pot, Meet Kettle | The Daily Peel | 04/06/2023

Apr 06, 2023 | Peel #435

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Market Snapshot

Happy Thursday, apes.

Damnit, I’m about to fall asleep; this market is so boring. Not a single investor on Earth has any conviction in any direction, apparently, and as a result, the same markets that gave us round-the-clock, 24/7 news for the past few years have officially become a sophomore-year math teacher: just plain boring.

Equities did literally nothing, trading most lower yesterday as most traders presumably just got bored and went home. The main US indices finished across the board just slightly in the red, with utilities and healthcare leading the way, confirming the immaculate nothingness going on in markets right now.

We usually trash on bonds for being “boring,” but these days, the treasury market is the only place we’re seeing any action. In just under a month, 2-year treasury yields have crashed from nearly 5.1% to right around 3.8%, roughly a 25% fall in an asset that’s supposed to provide “stability” to your portfolio. Yesterday, yields mostly continued that decline, with a late-day pick-me-up coming in handy. All we can say for now is good luck with that.

Let’s get into it.

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Banana Bits

• To highlight the overwhelming boredom in markets thus far this year, the main story in investing has been none other than goddamn money market funds
• Mortgage rates are moving in the right direction once again as the >6% rates we’re currently experiencing feel like a dream but easily would’ve been an absolute nightmare any other time in the last decade
• According to the most scientific of scientific articles I’ve read (of course, meaning the headline), ChatGPT-4 is currently dancing on Google’s not-yet-dug grave

Macro Monkey Says

Pot, Meet Kettle

When I was sitting/sleeping through classes like Monetary Econ or some other BS back in the day, never once did it cross my mind that I’d be writing about slower job growth and weakening demand for housing in a positive light. But hey, crazier things have happened.

Still, it’s a little weird right now. Without any actual catalysts occurring all the way until tomorrow, markets at this stage are experiencing a similar feeling to when you and your friends are coming off your high: no one’s really saying much, no one’s laughing or crying; nothing’s happening.

But yesterday, two early yet key indicators of broader macro forces printed bad but good reports. Let’s take a look.

First, we gotta talk about the ear-to-ear grin put on JPow’s face in response to Wednesday’s ADP Employment change report. Broadly considered a worse indicator than the actual job numbers out of the Labor Department set to drop tomorrow, the ADP report does come out just a tad sooner, so let’s all bet our lives on it.

According to ADP data, private payrolls expanded by 145k over the course of March, about 30% below consensus guesstimates for 210k and a monstrous dropoff from the revised addition of 261k in February.

A slowdown was priced in, but a slowdown this hardcore was just outright surprising. Still, markets didn’t have all too much to say in the immediate aftermath.

At the same time, the Mortgage Bankers Association, unfortunately, abbreviated as MBA, reported a likable decline in average 30-year fixed mortgage rates across the US. Average rates declined to 6.4% from 6.45% in the preceding week (yes, week) as the home purchase index from MBA saw a respectable decline as well.

Despite jobs and mortgages seeming to sit on opposite sides of the table, from a macro-synthesis point of view, they mean essentially the same thing. Pot, I’d like you to meet my friend, kettle.

JPow has been crossing his fingers and holding his breath for over a year now in hopes of watching home and labor demand decline soon rather than later. In 2023, it’s finally what he’s getting, largely, especially according to data this week, as discussed over the past two days.

Now, of course, basing a macro theory off a single-digit number of data points probably isn’t the smartest move, but we like to keep it simple (stupid) here at the Peel, and unlike people, numbers never lie.

Wage-push inflation has been the primary culprit of the past year’s debilitating uptick in prices of *checks grocery list* everything. Dissimilar to producing goods, effecting services for clients carries a primary and, at times, effectively singular cost: people. So, when S&P reported in tandem with the two previously discussed reports that readings from prices to new orders for non-manufacturing PMI (aka services) had come in below expectations and largely declined from preceding months, this was almost certainly welcome news at the FOMC.

And, by historical and, frankly, rational terms, that is just ludicrous. Economic slowdowns are shockingly usually not the best news to go around, but in an economy like this, we’ll do anything to finally beat the last sh*t out of inflation.

What's Ripe

Johnson & Johnson ($JNJ) ↑ 4.49% ↑

• Adding to the “bad news is now good news” train that left the station above, who knew that Johnson & Johnson’s agreement to payout nearly $9bn to settle claims that one of its most well-known products literally causes cancer could be a good thing.
• Despite the amoral senselessness of you degenerate gamblers (def not me, obv) to hype up something like this, $JNJ is gonna make back that fine in market cap terms in no time. Basically, the king of big pharma has agreed to an $8.9bn settlement to settle claims that the firm’s talcum powder causes cancer, spread out over the next 25 years.
• I guess the idea here is that it, in theory, could’ve been a lot worse. That’s always a great reason to celebrate something, right?

FedEx ($FDX) ↑ 1.52% ↑

• Despite the fact that by close, Fedex has shed more than half of its intraday gains, investors still got some pretty sweet news yesterday.
• The company’s announcements yesterday, both before and during its investor presentation, were hard to be mad at. Most significant of all was the enormous courier corp’s decision to jack up its annual dividend by 10%.
• That announcement came before the real festivities, and it was where every MBA’s favorite word ruled the day. FedEx announced its intention to consolidate several of its currently independent delivery units into one lone arm of the business, expected to drive some BS like “synergies” and “efficiencies.”
• Damnit, even reading the above words makes me cringe, but regardless, as long as my packages keep coming on time, we’ll be just fine over here.

What's Rotten

Western Alliance Bancorp ($WAL) ↓ 12.38% ↓

• Turns out the schizophrenia we usually see in equities isn’t exactly gone; it’s just moved on to a typically-way-more-boring area of finance: bank accounts.
• Even saying the words “bank account” makes me sick, as all I can think about is my dad’s constant reminders to put at least 10% of every paycheck in there, but nevertheless, news around deposit activity sent Western Alliance from down ~18% to down just under 12.4% yesterday apparently the bank has seen a $1.2bn deposit inflow in April alone.
• Uh, sorry, I thought we were still terrified of banks. I didn’t get the memo, apparently, especially after seeing the very same bank report deposit outflows of >$6bn hours before giving us the above referenced update.
• Don’t get me wrong, shares still induced vomiting up and down Wall Street, but it got a lot less bad after investors were told that deposit flows are (allegedly) beginning to normalize once again. Maybe the real news here is we’ve found something to “normalize” that we can all get behind.

Albemarle ($ALB) ↓ 6.14% ↓

• Like when Spongebob ripped his pants, and no one wanted to hang out with him anymore, it looks like the once incredibly-hot trend around lithium might be losing steam.
• One of the most straightforward plays a normal person (aka, non-commodities trader) could make to gain exposure to lithium price action would be to go long/short Albemarle stock. Shares are nearly 40% off their November peak as it turns out this whole “picks and shovels” play on lithium through EVs espoused by every Joey-bag-of-donuts “trader” with a Twitter account might actually have been a *tad* overbought.
• And yesterday, the pain didn’t stock as shares fell >6% on news that analysts at BofA have downgraded the stock and forecasted a ~7% fall from Tuesday’s closing value. I mean, if this company was trying to prove the BofA analyst team right, they’re sure doing a good job so far.

Thought Banana

“Show Me the Money!”...Market Fund

When was the last time your banker/advisor gave you a call? In this market, probably not long ago whatsoever.

From a more realistic perspective, you probably got a notification on your phone rather than an actual call, but the point remains the same. Much of the influx in begging-for-money that goes on from broker to investor is determined by just one thing: yield.

When safe, short-term assets see rates moon, it becomes a key selling point in any money manager’s repertoire, allowing them to expand their AUM base in a quick and dirty way. So, when I tell you that well over $400bn has flown from checking and savings accounts into money market mutual funds, can you really be that surprised?

Maybe, but probably mostly because that stack of cash is worth more than Walmart and about equivalent to 3 AT&Ts or 2 McDonald’s in terms of market cap.

With banks still paying absolute jack sh*t on deposits, for the most part, it’s no surprise customers are using that cash for their own purposes. Why let the bank take those funds and earn a 4.8% APY when you can go ahead and do it yourself?

Exactly. This short-term, NIM-padding strategy sounds great for the time being, but an extended and sizable deposit outflow is exactly the kind of thing that’ll slow lending in the economy, restrict standards for that lending, thus effectively removing gasoline from fire and attempting to force the economy to cool off.

As money market funds invest in only the safest of safe assets, they often exit the banking system entirely and end up in Fed-backed lending programs like repos and reverse repos, the latter of which has climbed to a monstrous $2.3tn in recent days.

It goes back to that saying that truly is as old as time itself: “flows over pros.” Follow the money trail, not random Twitter people with “Not Financial Advice” in their bios.

The big question: How sustainable is the trend of outflows seen in bank deposits recently? How sticky within their money market funds are these dollars that have already left bank accounts? What are the broad implications for the overall economy?

Banana Brain Teaser

Yesterday — I repeat only the last word you say. The more I repeat, the softer I get. I cannot be seen but can be heard. What am I?

An echo.

Today — It’s 100 bananas off the Hedge Fund Interview Course for the first 15 correct respondents. LFG!

What is a Caribbean shape that makes ships disappear?

Shoot us your guesses at [email protected] with the subject line “Banana Brain Teaser” or simply click here to reply!

Wise Investor Says

“The discount rate is a critical component of investment analysis because it determines the present value of future cash flows.” — Warren Buffett

Happy Investing,

Patrick & The Daily Peel Team

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