Diversification Is Overrated

Market concentration is rising again. Turns out that’s a good thing June 14, 2024 | Peel #731 Silver Banana goes to... [CapLinked. ]( In this issue of the Peel: - 🤯 A surprising Mays PPI is keeping the inflation vibes high… for now - 🤖 Looks like Elon will get his bag while Virgin Galactic is still a money virgin - ⚠️ Market concentration is rising again. Turns out that’s a good thing Market Snapshot 📸 Banana Bits 🍌 - Americans haven’t been [this out of a job in 10 months]() - Saudi Arabia is sick of this inflation, dropping U.S. dollar exclusivity and opening up to trading in the [RMB, Yen, Yuan, and Euro]() - Adobe shares took flight after hours on [solid earnings](=) - Growth in restaurant spending started [growing again in May](=) - A “mega port” built by China in Peru is [scaring the U.S.](=) A better VDR and Team Dinner is on Caplinked! WHY are you still using the VDR the partners used twenty years ago? Switch to CapLinked and make those tedious VDR tasks a breeze. No more late nights or weekend grinds dealing with software that should be in The Smithsonian. With CapLinked, you’ll manage your data room faster than you can say “due diligence.” Secure, efficient, and so user-friendly, you might even get your weekends back. Join the ranks of young finance pros in investment banking and private equity who’ve discovered the secret to smooth sailing. CapLinked: Making your work life easier, one deal at a time. Caplinked - A Better Platform at a Better Price [Start with a quote to get Team Dinner on Caplinked]() Macro Monkey Says 🐒 If It Ain’t Broke… Milton Friedman, Thomas Sowell, Alan Greenspan—these guys are alright. But no American demonstrates better macro forecasting abilities than 2020 Presidential Candidate, Kanye West. The rapper was right again—it really does All Fall Down. Thankfully, this time, he was talking about wholesale inflation. We just got the latest report on price changes at the producer level, so let’s get into it. The Numbers The Producer Price Index (PPI) just dropped yesterday—and this time, I mean it literally dropped. PPI inflation fell 0.2% in May from the month prior. [Source]() So, it wasn’t just consumers whose cash went a little further last month. Producer prices fell primarily due to a 0.8% decline in that of final-demand goods. Economists had been guesstimating a 0.3% monthly rise in PPI, but clearly, Kanye wasn’t part of that panel. Energy was the leading decliner in May, with prices falling 4.5%, despite a lot of nerves that rising tensions in the Middle East would jack up oil prices and other energy commodities. That hasn’t happened… yet. But even excluding the decline in energy prices, final demand still posted an “unchanged” reading in May, just like the headlining monthly CPI we got on Wednesday. On the services side, some of the strongest declines were found in transportation. Every price index in the sector fell for the month, ranging from -0.2% to -4.3%. That makes sense given that 1) one of the most important inputs to transportation costs is energy and 2) May’s CPI showed transportation services falling 0.5%. [Source](=) The most exciting part, especially for JPow and the reason why his neighbors are (probably) complaining about the volume of whatever Grateful Dead song he’s bumping to celebrate, is that annual PPI came in at just 2.2%. That’s right in line with the 2.2% annual increase seen in April. Although higher than in months prior (bars), keep in mind that the Fed’s goal is to achieve annual inflation rates of 2%... because 1% is too low and 3% is too high. They might be moving in different directions, but both CPI and PPI are heading back towards that 2% target, suggesting again that the Fed has been successful in doing something by doing nothing. The Takeaway? Right now, the inflationary environment appears almost as exciting as hearing that first piano note at the start of Runaway. Yesterday’s PPI gave further credence to the market’s dream of interest rates coming “lower for sooner” as opposed to the prevailing “higher for longer” narrative. Factor in slowing GDP growth, shaky consumer spending on discretionary items, and the [highest jobless claims](=) seen since last summer, and we have a recipe for some rate cuts. We can already see this opinion forming in treasury markets, with the 2-year yield plunging for the second day in a row. Bonds are considered the “smart money,” surprisingly not GME, and are viewed as a loose forecaster of the path of interest rates. [Source](=) The timeline can be tricky, but bond markets are clearly reacting to inflation data, jobs data, and Fed comments from the last two days in taking yields from 4.9% to 4.7% in that time. Market-implied odds of rate cuts by certain dates remained roughly unchanged per [CME data]( but did slightly move towards interest rates going lower for sooner. JPow went on a diatribe yesterday about why the central bank has yet to cut, unlike its peers in Canada, the Eurozone, and elsewhere, but based on this and other recent data, their hand may be forced sooner than expected. But for now, doing nothing seems to be working… so if it ain’t broke… let’s not break it anymore. What's Ripe 🤩 Broadcom (AVGO) 📈12.3% - Like eating a bag of Lays, companies can’t have just one of Broadcom's chips. Shares surged on solid earnings, helped by AI and a recent acquisition. - The chipmaker earned $10.96/sh on $12.94bn vs estimates for $10.84/sh on $12.03bn. Newly acquired VMWare grew sales and AI sales added $3.1bn. - That’s revenue growth of 43% annually. Plus, the firm also announced a 10-for-1 stock split, heightening retail interest. Tesla (TSLA) 📈2.9% - The largest pay package in the history of corporate America, going to the richest man in America, was officially approved by shareholders yesterday. - Tesla shareholders have just approved (for the 2nd time) Elon’s $56bn stock-based pay package after it was struck down by a Delaware court. - Earned by >10xing market cap, growing revenue by more than 350%, and other equally unfathomable metrics, Tesla is happy that King Musk is happy. What's Rotten 🤮 Virgin Galactic (SPCE) 📉14.3% - Didn’t this corporate incel go bankrupt a while ago? The involuntarily money-less space tourism firm is fighting to remain on the NYSE. - Richard Branson’s attempt at being as cool as Bezos and Musk isn’t going so well, leading the firm to pursue a reverse stock split to avoid delisting. - The firm will enact a 1-for-20 reverse split to avoid falling victim to NYSE rules that force delisting if a stock sits under $1/sh for 30 consecutive days. Dave & Buster’s (PLAY) 📉10.9% - As if we needed another sign of the collapse of Western civilization, poor performance by Dave & Buster is by far the most glaring. - This mecca of gambling and obesity missed earnings estimates by 42.8% while sales fell 1.5% for the year, also missing estimates. - Weakness in customer demand, especially in their arcades, is a big issue. Inflation, slower wage growth, and a lack of degeneracy all contributed. Thought Banana 🤔 Stock Inequality “The stock market is too high,” “companies don’t pay enough/any taxes,” “AI is a bubble”—enough. It’s time for someone to stand up and protect our poor, sweet corporations that aren’t empowered to defend themselves. Sure, they have trillions of dollars, but they have feelings too. That’s why I’m here to defend the plight of mega-cap corporations. Yes, the market is concentrated, but it’s not like 1999. What Happened? In a newly released paper, Morgan Stanley analysts argue that the concentration currently seen in the stock market isn’t nearly the red flag many think it is. [Source](=) Here, we can see that the market concentration of the top 1, 3, and 10 stocks in the S&P 500 is near all-time highs. Having so few companies makeup so much of the index is seen as a threat to diversification and returns, but… What if I told you that rising concentration generally coincides with higher returns? According to the data in this paper, that’s exactly what history says. = [Source]() Rising concentration alone isn’t enough to justify a bearish thesis, especially when the companies doing the rising are exactly the ones whose earnings have seen the most earnings growth. Just take a look at Nvidia. Gains in this company account for nearly 35% of all S&P 500 gains so far this year, but at the same time, the stock has actually gotten cheaper during this run-up: = A P/E of 75x is still expensive as hell, but the fact that it’s trending lower despite a booming share price shows that earnings growth, as opposed to bubbly behavior, is driving the stock higher. The same can be said for almost all the Mag 7 firms carrying the index for the last year or so. Although large-cap companies tend to trade at a higher multiple than smaller-cap stocks, there’s a damn good reason for it in this case. The Takeaway? Like anything in macro and markets, it takes more than one piece of data—such as market concentration—to arrive at any valuable conclusion. Market concentration is understandably concerning, but concentration alone isn’t a threat to returns… until the earnings growth stops. The Big Question: How long will Mag 7 earnings perform strong enough to justify these returns? What companies will be part of the next Mag 7? Banana Brain Teaser 💡 Previous 🗓 A store reported total sales of $385 million for February of this year. If the total sales for the same month last year was $320 million, approximately what was the percent increase in sales? Answer: 20% Today 🕐 For the numbers n, n+1, n+2, n+4, and n+8, the mean is how much greater than the median? Send your guesses to vyomesh@wallstreetoasis.com Wise Investor Says 🤓 “The best way to predict the future is to invent it. But when it comes to blue chip stocks, the best way to protect your future is to invest in it.” — Mark Cuban How Would You Rate Today's Peel? 😁[All the bananas]() 😐[Meh](=) 😩[Rotten AF]() Happy Investing, David, Vyom, Jasper & Patrick [ADVERTISE]() // [WSO ALPHA]( // [ACADEMY]() // [COURSES]() // [LEGAL]() [Unsubscribe]( IB Oasis Corp. (aka "Wall Street Oasis") 14435 Big Basin Way PBN 444 Saratoga, California 95070 United States