Give ‘em Some Credit

[The Daily Peel... ]() Feb 9, 2023 | Peel #396 Silver banana goes to... [SRS Acquiom. ](=) Market Snapshot Happy Thursday, apes. Hope you’re all doing fantastic because markets sure weren’t yesterday. The bearish vibes have returned as we depressingly gear up for all those V-Day posts on social media, oh yeah, and because of the whole recession/FUD thing. Equity indices ended broadly in the red as the economic picture just gets more and more confusing. Meanwhile, bonds don’t know what the hell is going on either, trading pretty much flat yesterday. Let’s get into it. [image] Paradise? No, but Here’s a Smarter Way to Manage Your Deals. [image]() What we’re supposed to say: The SRS Acquiom suite of [M&A solutions](=) can take you and your clients from pitch book to post-closing yadda yadda. Our [experienced team]( will deliver unbiased and precise support across this, that, and everything else. 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[CLICK HERE FOR THE HARDER SELL](=) Banana Bits - Sequels are [on the way]() as Disney’s streaming numbers fall… - An absolute [frenzy ensued]() on the back of the US Treasury’s 10-year note auction yesterday as international investors just can’t get enough of that sweet American paper - For your daily dose of cringe-induced serotonin, Cathie Wood’s Ark Invest is out with their latest 2030 BTC price prediction…I’d tell you what the numbers are, but I think you’ll get a better laugh by just clicking [here]( Macro Monkey Says Give ‘em Some Credit We often talk about how much American consumers adore their credit cards. But, like some multi-decade marriages, the attraction tends to fall off after a while. Don’t worry; they’re still far from breaking up. But safe to say US consumers have hit a rough spot with their significant other. In December, consumer credit growth slowed to its lowest rate in more than two years, meaning credit growth hasn’t been this bad since the days when no one even knew what the term “meme stock” was. Like anything in economics, it’s not just a double-edged sword; it’s more like a mace with all those spikes, as there are often endless ways to interpret any given piece of data. Before we get started, here are some of the numbers: - Consumer credit rose by $11.6bn in December against expectations of $26bn - ^ That’s a growth of 2.9%, the smallest in over 2 years - Revolving credit (i.e., credit cards, etc.) grew by only 7.3% annualized - Non-revolving credit (i.e., auto loans, etc.) grew by only 1.5% Disclaimer: mortgages are not included in [this report](=) from the Federal Reserve, so don’t come at me with all this “oh, but what about housing??” b.s.) Now that we got that out of the way, let’s speculate wildly on what this could mean. Traditionally, declining consumer credit growth is a horrifically bad sign for the US economy. As we said, credit and consumers have been madly in love for decades in the States, so when the romance slows down, the whole economy gets concerned. And that’s largely because consumer spending makes up two-thirds of the US GDP in any given year. There’s no way we’d be a $25tn economy without the likes of Discover all the way up to Amex. Credit drives spending like a gas pedal drives a car, which is obviously great for the macro environment. But, taking a micro perspective, this could be interpreted as a good sign for the balance sheet of the average consumer. Ben Franklin said that he’d “rather go to bed without dinner than rise in debt,” and although we’re not exactly fans of starving over here, we can’t help but smell what he’s steppin’ in. Some debt can be good, but obviously, an excess of debt is a great way to put on some financial handcuffs. The fact that debt growth on the balance sheet of the individual consumer slowed on average isn’t exactly the worst thing in the world from a micro perspective. Lesser debt means fewer defaults as well as more discretionary income, giving consumers the assist from the micro perspective. Unfortunately, this is Macro Monkey, and the macro generally tends to outweigh the micro. In economics, scaling up from the individual to the national is far from linear. The magnitude of a slowdown in credit and what that means for the “C” in the below equation carries far more importance. C + I + G + NX = GDP Let’s not sit around and ponder why credit might be slowing. I’d like to introduce you to my friends Rate Hikes and Expected Recession. I think they may have something to add here. Credit carries elasticity, and that elasticity can vary based on wider economic conditions. When good times are expected, an uptick in interest rates isn’t generally a reason to run for the hills. But, when expecting poor economic performance in the short- and intermediate-term, any growth in a monthly payment is a reason to run past the hills and just keep running. Now, with recession fears even trendier than the latest TikTok dance, combined with the fastest rate increases the US economy has ever seen, it’s no surprise consumers are falling out of love with their credit cards. Like any relationship, it’s complicated. They have their ups and downs, but they always find themselves back together in the end. Someone get Julia Roberts and Hugh Grant over here; I think we’ve got a great idea for 2023’s next rom-com. What's Ripe New York Times ($NYT) ↑ 12.04% ↑ - Remember that whole “newspapers are dead” thing people have been saying since the moment the internet was invented? Well, turns out even papers can go digital too. - Don’t believe me? Just look at the surprisingly solid report posted by the NYT yesterday. Despite a distinct drop off in C-19 fear-mongering, the Times continued to get us to click and subscribe. - Much of this uptick is due to the bundling strategy the NYT has started to pursue. The bundling of recurring revenue products—what Prof G would call a “rundle” —like core news, cooking, podcasts, games, etc., has arguably kept this boomer stock alive. - Shareholders can’t complain about a 35% EPS beat along with a strong beat on the top line. Oh yeah, and a $250mn buyback announcement ain’t too bad either. Uber ($UBER) ↑ 5.53% ↑ - “Surprise profit” is basically the dream headline for Uber investors going into earnings…and yesterday, they got it. - The king of ride-hailing and food delivery destroyed estimates, embarrassing analysts from NYC to San Fran. Uber posted EPS of $0.29 vs. the expected loss of $0.18/sh with a little over 1% beat on revenue. - That revenue also happened to be a nearly 50% jump from 2021’s Q4. CEO Dara Khosrowshahi went as far as to say it was the firm’s “strongest year” and “strongest quarter ever.” Can’t ask for much more, so honestly, kinda sad shares weren’t even up 6%. What's Rotten Affirm ($AFRM) ↓ 19.16%, AH ↓ - In 2023, firing employees for share price returns has been a winning bet for these companies. Then, Affirm stepped onto the scene. The buy-now-pay-later (BNPL) darling of the pandemic utterly cratered on the announcement, and it only got worse with the earnings numbers. - Both earnings and revenue missed hard. The loss of $1.10/sh was deeper than expected, while sales came up ~4% short, killing any hope that BNPL was anything but a liquidity-induced boom. - Who knows, maybe the BNPL model is just sliding along with the distorted credit market. All we can say for sure is that this report was garbage. Good luck, bulls. Alphabet ($GOOGL) ↓ 7.68% ↓ - We’re scared of “AI”? After it told us that James Webb was the first telescope to spot exoplanets? Rookie mistake, and it cost $100bn. That was the most embarrassing thing I’ve ever seen, and if we’re quantifying embarrassment by economic harm, this might objectively be the all-time winner. - On its very first ad ever, Google’s insanely-hyped, ChatGPT competitor gave out just factually inaccurate answers more than once, spooking all the day’s bullishness out with one switch keystroke. - Microsoft, with its “multibillion-dollar” investment in OpenAI, didn’t move much in response. Shares fell slightly, mostly flat, confirming this was a problem with Google’s AI, not AI in general. Big mistake, but betting against the company hasn’t exactly worked out in the past, so… Data Peel Annualized Percent Change in Total Consumer Credit [image] [Source]() Thought Banana WTF Even Is WFH? I ask that question as I sit here…working from home…anyway. Turns out going into the office is cool again, at least according to recent office occupancy rates in the US. That’s right, rates of actually going into an office building (if you can imagine) have hit a post-pandemic high, but what this means is a bit of a mixed message. Sure, occupancy rates have been slowly trending higher, hitting the high mark of 50.4% just this past week. But, at the same time, this trend higher has been one hell of a slow grind and appears ready to plateau. Throughout the depths of the pandemic, we asked ourselves a lot of deep questions. Some were absurd, like “will I ever shake someone’s hand again?” but others, like “oh God, please can you make sure I never, ever, ever have to go into the office ever again?” were a tad more opaque at the time. Nearly 3 years onward, we appear to be getting some clarification. Work from home is here to stay for some and a pipe dream of the crazy days of C-19 for others. Some roles, like software engineering or data analytics, lend themselves to the WFH model. Others, such as creative roles or the [financial jobs]() most of you apes have/want, aren’t exactly down for the whole “never see your coworkers” thing. Moreover, the trend in office buildings can be likened to that of American malls. Once thought to be entirely gone for good, thanks to the homie Bezos, sentiment in the space hints that “class A” malls, or the nice, upscale, and maybe even outdoor malls, are largely expected to stick around. Subpar, dreary, depressing malls, however, are falling apart faster than Bed Bath and Beyond. The same story seems like a reasonable expectation for offices. Nice, upscale buildings in strong locations will likely be here to stay, while the same dreary and depressing offices could follow Bed Bath and their mall counterparts. Now I know what you’re thinking, and yes, pretty much all offices are immensely depressing, but here, we’re talking about the Office Space levels of work-induced depression. Nothing’s guaranteed, but if your company hasn’t made you sit through traffic to then sit in the office only to sit in traffic once again just yet, you might be in the clear. Feel free to share your secrets with the rest of us. The big question: Are offices back? Will the US commercial real estate market ever see occupancy rates comparable to pre-pandemic levels? How will WFH policies impact talent acquisition and retention? Banana Brain Teaser Yesterday — There are 10 boxes in front of me. In nine of them, the coins weigh 10g, and in one of them, the coins weigh 9g. You can take as many coins as you like out of each box. How do you find the box with the lighter coins after weighing the coins you took just once? - Firstly, we take those 10 boxes and mark them serially from 1 to 10. - Then we take 1 coin from the first box, 2 coins from the second, three coins from the third, and so on till the tenth box. - Now we put them on the weighing machine. - Now think logically; the total number of coins taken from all the boxes is 55 (1+2+3…+10). - If all the coins from every box would have weighed 10gms, then the total weight of the coins taken out would have been 550g (10g * 55 coins). But there is one box that has coins of 9g each. - So if the total weight is 549g, that means that there is 1 coin that weighs 9g. - But we know that 1 coin was taken from the first box, so the first box would be the answer. - If the total weight came out to be 545g. This means there are 5 coins that weigh 9g each. Now, 5 coins were taken from the fifth box, so that would be the answer. Today — It’s 100 bananas off the [Hedge Fund Interview Course]() for the first 15 correct respondents. LFG! You have three boxes. One has Apples, one has Oranges, and one has Apples and Oranges, but they are all labeled incorrectly. You have to label them correctly, but you can only pick one fruit from one box. How would you be able to correctly label the boxes? Shoot us your guesses at [vyomesh@wallstreetoasis.com](mailto:vyomesh@wallstreetoasis.com?subject=Banana%20Brain%20Teaser) with the subject line “Banana Brain Teaser” or simply [click here to reply!](mailto:vyomesh@wallstreetoasis.com?subject=Banana%20Brain%20Teaser) Wise Investor Says "The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage." — Steven A. Cohen How would you rate today’s Peel? 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