July 26, 2023 | Peel #508

Silver banana goes to...

In this issue of the Peel:

• The FOMC has a big meeting today, where it is widely expected to raise the Fed Funds Rate by another 25 bps
• Markets continue their ascent higher, driven by technology stocks and an AI craze that shows no signs of slowing
• UK billionaire Joe Lewis, the owner of the Tottenham Hotspur club, has been arrested and charged with insider trading

Market Snapshot

Happy Wednesday, apes.

All smiles on Wall Street as a rally in technology stocks drove the Nasdaq and the rest of the market higher. Traders are parsing through earnings and realizing that the AI craze isn’t going anywhere. Google parent Alphabet exceeded expectations, while Microsoft and Texas Instruments underperformed.

The S&P hit its highest level since April of 2022 and is just 5% shy of its all-time high. We’re making history here, folks! The Dow Jones rose for the 12th day in a row, which is its longest winning streak since 2017. This all comes on the night before Jay Powell delivers the official Federal Funds Rate decision.

Treasuries gained, and yields dropped, as they are more sensitive to Federal Reserve moves, while the dollar halted a 5-day advance.

Let’s get into it.

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Banana Bits

• Visa just released card spending data, and it looks like consumers are still revenge-spending.
• US-born Casey Phair is the youngest player in world cup history at only 16 years old.
• Our favorite monthly event is back right on schedule as the FOMC delivers its rate decision.
• Department of Education is taking a look into Harvard’s donor and legacy admissions process.

Macro Monkey Says

To Hike, or Not to HIke

This is the question facing JPow and the Federal Reserve Board at today’s Federal Open Market Committee (FOMC) meeting. The market is still confident that the target rate will be hiked by 25 bps, pushing borrowing costs to 5.25 - 5.50%, which would be the highest since February 2001.

The market is generally accurate this close to the decision, so there’s no controversy there. The more interesting question is what the Fed decides thereafter.

While the market shows strong conviction on the forward rate path, economists differ in their opinions on when the current hiking cycle will end.

"Don’t just take my word for it; hear from the experts themselves, like Michael Gapen ... Then there’s the opposite approach, like Kathy Jones ..."

Don’t just take my word for it; hear from the experts themselves, like Michael Gapen, U.S. economist at Bank of America, who forecasts a 25 bps hike today, not necessarily going against the grain there. He also believes the Fed will maintain its current rate guidance as the Fed is not quite ready to end tightening.

Then there’s the opposite approach, like Kathy Jones, Chief Fixed Income Strategist at Charles Schwab. In her view, the central bank has gone far enough and could be in danger of tipping the economy into contraction. According to Jones, “The Fed should be done already, they’re walking a difficult line here.”

More meaningful than conjecture are the actual words from Mr. JPow himself, which we will get at the Fed’s post-decision press conference.

That’s where a lot of the action happens in the equities and bond markets, with traders hanging on to every syllable from the Chairman, sending stocks flying up or down in a matter of seconds. Everybody will be looking for clues as to whether the Fed feels they’ve done enough to pause or whether they will continue pushing rates higher.

"Everybody will be looking for clues as to whether the Fed feels they’ve done enough to pause or whether they will continue pushing rates higher."

The Fed strongly indicated at its prior meeting to expect at least two more hikes this year. Of course, last month’s news doesn’t necessarily have to apply today as things evolve rather quickly. However, since that meeting, a flurry of data has been released showing that the economy has absorbed rate hikes pretty well and could probably eat a few more.

We will have to be patient as the next meeting isn’t scheduled until September. Either way, the market doesn’t seem to care, as stocks have been on a tear this year, particularly in the past few weeks.

Takeaway: There won’t be too much shock-value at today’s FOMC meeting with mostly everyone with a pulse who’s been paying attention expecting a 25 bps hike. Economists, bankers, and traders differ, however, in the path of rate hikes to end the year.

What's Ripe

Aurora Acquisition Corp (AURC) ↑ 223.03% ↑

• I promise I’m not being paid to promote SPACs. That ship sailed two years ago. But when stocks are in the news for spiking over 200%, we have no choice but to cover them.
• The blank-check company that is set to acquire online mortgage lender Better ripped on… no news at all. Strange. Even stranger is the company’s volume spiked from an average daily volume of 72k to 8.5mn today.
• One would have to assume that the retail gang stepped in and pumped the stock. Aurora has been a retail-friendly stock since its inception and is among the top trending tickers on StockTwits. This could be a sign that a deal is right around the corner.

Banc of California (BANC) ↑ 11.17% ↑

• The Banc of California is coming to the rescue and buying PacWest Bancorp in a deal that could be consummated as early as next Tuesday. Centerbridge Partners and Warburg Pincus got a case of FOMO and decided to contribute equity to help fund the deal.
• Ironically, Banc of California is much smaller than PacWest, with $10bn in assets, versus PacWest at $40bn in assets. However, PacWest has been in trouble since the run on bank deposits hit several regional lenders, leading to the collapse of First Republic and Silicon Valley Bank. In response, PacWest has been consistently selling assets to improve liquidity, including a sale of its asset-backed loan portfolio to Ares and a real estate portfolio to Kennedy Wilson.
• The combined firm will have a total of over $50bn in assets. As of 2023, PacWest’s total deposits were $27bn, up 7% from midday. This trend is expected to be accretive to BANC’s 2024 EPS by over 20%.

What's Rotten

Spotify Technology (SPOT) ↓ 14.27% ↓

• After announcing a 20% increase just two days ago, Spotify disappointed investors with lower-than-expected sales and lowered forward guidance. Its second-quarter revenue was up 11% to $3.5bn, missing the expectation of $3.5bn ever so slightly.
• The streaming giant also expects to reduce its headcount again after cutting 2% of its staff in June, mostly in the podcasting division. Despite the company reporting an increase in subscriber growth, that hasn’t translated to higher revenue as average revenue per user declined.
• Total active users increased 27% this quarter, well above expectations. Premium subscribers, the real cash cow, increased 17% as Gen Z listeners become a more prominent demographic for Spotify.

Rimini Street (RMNI) ↓ 35.82% ↓

• Rimini took a hit after announcing that it plans to appeal a Federal Court decision regarding its ongoing battle with Oracle.
• Just a couple of days ago, courts found Rimini Street liable for “repeatedly and illegally” infringing on Oracle’s copyrights and impermissibly removing Oracle’s copyright notices. The court also found CEO Seth Ravin personally liable for Rimini’s copyright infringement.
• Rimini will be required to publicly out itself by making a corrective press release so that customers and prospective customers are aware of the “false and misleading statements” made by the company.

Thought Banana

Billionaire Bad Boy Club: Octogenarian Edition

Joe Lewis is many things: British billionaire, owner of the Tottenham Hotspur soccer club, and now potentially convicted felon.

The British Bruce Wayne has been officially arrested and formally charged with insider trading in the United States. You’d think that the federal government would leave an 86-year-old alone, but apparently, even the elderly can’t get away with passing on inside information to friends and family.

Lewis is being charged with abusing his position as a large investor in various companies to provide stock tips to everyone from his personal pilot to his former lovers. In fact, the government claims that he loaned his pilots $500k each for them to purchase shares in a company before a major news event became public.

The big question is, why? For someone who is already a billionaire, it’s hard to discern his motivation to provide inside information except for mere shits and gigs.

"... it’s hard to discern his motivation to provide inside information except for mere shits and gigs."

It didn’t take long for Lewis’s lawyers to bark back, saying that the government made an “egregious error in judgment” by charging Lewis and that the octogenarian is of “impeccable integrity and prodigious accomplishment.”

Prosecutors are saying that Joe was involved in the shenanigans for over 8 years. Not sure who looks worse, Joe Lewis for insider trading that long or the US government for taking that long to realize it.

"Another story alleges that Lewis told his then-girlfriend in South Korea to buy stock in Solid Biosciences because he knew about an upcoming clinical trial announcement."

Another story alleges that Lewis told his then-girlfriend in South Korea to buy stock in Solid Biosciences because he knew about an upcoming clinical trial announcement. He loaned her $700k to purchase the shares before the announcement, and she made a profit of $849k afterward. He engaged in the same behavior with personal assistants as well.

Before becoming a household sports figure in the UK, Joe Lewis made a humble living in the restaurant business, eventually building a chain before pivoting into currency trading in the 1970s. He made it big by betting against the British pound and Mexican Peso in the 90s and then began diversifying into various sectors such as real estate, sports, luxury hotels, and beaches.

Perhaps having a billion dollars isn’t satisfying in and of itself. In Joe Lewis’ case, it seems like that patented insatiable desire for more when it comes to wealth just kicked in.

Banana Brain Teaser

Yesterday — Find a number less than 100 that is increased by one-fifth of its value when its digits are reversed.

Answer: 45

Today — Which word in Group B can be added to Group A? Why?

Group A: forty, grape, react, rouge

Group B: carat, claim, coast, crass, curse

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

Wise Investor Says

“If companies tell us more, insider trading will be worth less.” — James Surowiecki

Happy Investing,

Patrick & The Daily Peel Team

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