The U.S. Debt Puzzle

It’s time to sit back and watch as the trial of FTX founder and CEO Sam Bankman-Fried gets underway [The Daily Peel... ]() October 6, 2023 | Peel #558 In this issue of the Peel: - U.S. longer-maturity treasury yields have been increasing on account of increased uncertainty around economic growth and inflation expectations. - Lamb Weston and UWM Holdings had a ripe day, while Rivian and Clorox struggled to remain green for the day. - It’s time to sit back and watch as the trial of FTX founder and CEO Sam Bankman-Fried gets underway. Market Snapshot Happy Friday, apes. It's kind of like how everyone else thinks of you before you go to a party—traders are already scared of today’s jobs report, and it hasn’t even arrived yet. That said, have fun going out tonight! Whether or not your “friends” truly feel that way (we’ve got a feeling…), equities sure did. Markets sold off broadly yesterday as the numbers loom because both a too-strong and too-weak report will almost undoubtedly spin into bad news. Most sectors were off, but mega-cap names carried the team for tech and communications. Still, the Russell 2k was the only U.S. major to finish not red, gaining 0.08% on the day. Meanwhile, the “smart money” over in the fixed-income world was getting prepared as well. The yields that spiked after Tuesday’s JOLTS report were down for the most part on Thursday, with the 10-year settling at ~4.70%. The even more rate-sensitive 2-year yield dove as well, almost getting all the way down to 5.0%. Wow, it’s still hard to believe 5% is on the way down… Let’s get into it. Financial Modeling Skills Get You Paid [image](=) Attention all financial wizards and career climbers, are you ready to take your modeling skills to the next level? 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So don't miss out on this opportunity to boost your career and invest in [WSO's Elite Modeling Package]() now! #ModelOn #FinancialGains #CareerGoals Banana Bits - Everyone’s favorite three-letter agency, the SEC, has launched a [formal investigation]() into Elon Musk’s purchase of Twitter (X?). Macro Monkey Says Yield YOLOs Meme stocks were fun. But, since the days of $GME and $AMC holdings hands on their way “to the moon,” traders have taken on an even greater enemy: The U.S. Treasury. Alexander Hamilton’s brainchild—the U.S. financial system—begins at the Federal level with the Treasury. Essentially, it’s their job to collect revenue (aka, your taxes) and borrow funds in order to pay the obligations of the federal government. Simple enough, right? Not so much when you start running deficits that are as large as a Big Tech market cap annually, then these things get more complicated… and bad for your portfolio. [image] [Source]( Now, “the deficit” refers to the annual difference in U.S. spending vs. revenue collection. It’s like when a company is unprofitable but for a federal government. "It’s like when a company is unprofitable but for a federal government." And while surpluses are possible, the chart above tells us we haven’t had one in a while... kind of like your checking account. In theory, deficits—especially of the massive size we’ve seen since the pandemic—are hella inflationary thanks to the increase in cash dumped onto the economy, the crowding out of private borrowers, and the manipulation of capital structures. As the end of rate hikes looms, and the inflation picture measured by CPI and PCE continues to improve (for now), there hasn’t been much of a reason for the recent reverse-roller coaster runup in U.S. treasury yields. Now, that has investors eyeing the deficit. U.S. 10-year yields reached 4.801% earlier this week, the highest since Kanye dropped Graduation back in 2007 (good times). Without an immediate fundamental reason to drive this, longer-term trends like an oozing deficit—and therefore increases to the federal debt—along with slower growth are today’s primary suspects. Given that the rise in yields has been concentrated on the longer-dated end of the yield curve, as we can see below, many are viewing this as a rotation into shorter-dated notes on account of increased uncertainty around economic growth (or, of course, lack thereof) and elevated, long-term inflation expectations. [image] [Source]( "That’ll lead to lower prices and higher yields mathematically." This rise has also come along with an increase in debt auctions from the Treasury, increasing their supply without a compensatory increase in demand. That’ll lead to lower prices and higher yields mathematically. But, those higher yields and higher deficits work hand in hand elsewhere. This means things like higher interest payments on the national debt, but if that’s the case because we expect inflation to be higher, GDP and subsequent tax receipts to the U.S. government should be higher as well… right? Or, it could create a vicious cycle of rising rates = higher debt payments = higher deficits = more rising rates and inflation. There aren’t any easy answers here, and if there are answers at all, we sure don’t have them. Asking the right questions can be just as important, and now, for investors, maybe questioning if you should take advantage of those higher yields or de-risk your equity portfolio might be more important than wondering when he/she is gonna text you back. Whatever you do, don’t give up, and definitely don’t double-text. What's Ripe Lamb Weston (LW) ↑ 8.02% ↑ - Based out of Eagle, Idaho, your favorite company that you’ve never heard of was also the market’s favorite stock on Thursday. Shoutout to the beat-and-raise earnings call. - I don’t need to tell you apes how absolutely gas McDonald’s french fries are. With Lamb Weston as the ones making them, given that they’re one of the largest fry producers in the world, I might go buy shares just to say “thank you.” - With that, it’s no surprise the firm crushed earnings. Cranking out those crispy, delicious bits of pure joy earned LW $1.63/sh on $1.67bn in sales, while the Street foresaw just $1.08/sh on the $1.62bn top line. - Guidance was raised almost as much as my dopamine levels when I eat a fry from McDanks, taking EPS estimates up from a range of $4.95-$5.40 to $5.47-$5.92. UWM Holdings (UWM) ↑ 7.92% ↑ - If bad timing itself could have IPO-ed, it would’ve been called “UWM Holdings.” This mortgage lender went public back in January 2021, and then, not long after, the rate hikes began. - Things were going well for UWM at first, gaining big in its first few days, only to get swallowed by JPow’s rate hiking bonanza about a year later. Shares are still off >60% from highs, but analysts are starting to come around. - Analysts at BTIG, a middle market investment bank partly owned by Goldman Sachs, upgraded shares from neutral to buy, citing a (potentially) less garbage outlook for the mortgage market. We’ll see what the FOMC thinks about that during their next meeting just a few weeks away. What's Rotten Rivian (RIVN) ↓ 22.88% ↓ - The American philosopher and noted ear-biter Mike Tyson once said, “Everyone’s got a plan until they get punched in the face.” Well, Rivian just got punched in the face—hard—so let’s see if there was even any kind of plan at all. - The stock was in an apparent fire sale yesterday morning as a slew of disappointing news depressed shares and shareholders. Sales guidance for the coming quarter was adjusted to $1.34bn, below the $1.38bn expected. But that wasn’t even close to the worst part… - Ostensibly, Tesla’s main rival here in the U.S. also announced a fundraising round through $1.5bn of convertible notes. - In addition to potential dilution, short interest increased (as often happens with convertible offerings) as being issued convertibles and shorting the stock at the same time is basically the same as writing a covered call in terms of risk and income/upside potential. Clorox (CLX) ↓ 5.23% ↓ - Clorox investors love pandemics. But, what they don’t love, like most, are cyberattacks. Sadly, those factors did the opposite of the above last quarter. - Although they aren’t reporting for another month, the cleaning supply company decided to take it on the chin early, announcing sales would be weaker for the last quarter thanks in large part to an August cyberattack. - Production was heavily disrupted by the attack, and without pandemic-era demand, there isn’t a lot more Clorox can do to drive marginal revenue through increased demand. Tough scene. If only they could wipe it all away… Thought Banana Crypto’s “Madoff” Tries to Make-Off Alright, you’ve had months to make your popcorn, buy that new recliner, and actually make some friends to enjoy it with. Now, it’s time to sit back and watch as the trial of FTX founder and CEO Sam Bankman-Fried gets underway. In case you don’t recall (how could anyone forget?), Sam Bankman-Fried (aka, SBF) is on trial for seven criminal charges—of which originally was 13—including all sorts of fraud, money laundering, conspiracies to commit these acts, and other scumbaggery. The main allegation is the use of FTX customer deposits to plug losses in connected but allegedly “separate” hedge fund Alameda Research. As we hope you don’t recall, SBF was also the (former) recipient of the esteemed, highly sought-after Platinum Banana award for CEO of the Year in 2021. But now, the only thing he’s receiving is all the hate in the world. With the trial getting underway this week, both sides went hard in their opening statements. "With the trial getting underway this week, both sides went hard in their opening statements." For the prosecution, it’s the same story as you’ve been hearing for months. SBF and his (alleged) band of (unwitting?) thieves essentially defrauded customers out of ~$8bn through conscious decisions to knowingly engage in illicit activity. For the defense, they aren’t denying that each and every one of these activities occurred, but essentially are trying to play it off as a combination of back luck, bad timing, and bad record keeping. Yesterday, the main event was the testimony of long-time friend and roommate of SBF, Adam Yedida, who swore under oath that “... Alameda had used FTX customer deposits to repay its loans to creditors.” Unfortunately, it takes a lot more to get proof “beyond a reasonable doubt” in the minds of a jury, as anyone watching Suits is well aware. It will surely be a long trial and one in which the court of public opinion seems to have already made its own ruling. Specifically, legendary finance writer Michael Lewis has joined SBF under fire after coming to his defense (apparently?) in his new book on the former crypto superstar, Going Infinite. "... the court of public opinion seems to have already made its own ruling." Additionally, there have been plenty of movies and series planned out, but my personal favorite SBF-related media drop was this [New Yorker article](=) (more like a short novel) on the FTX founder’s time awaiting trial. In case you thought maybe he was lying about his case—don't worry! His mom said, “Sam will never speak an untruth.” Phew, that’s a relief. I thought the millions of dollars SBF gave to her and her preferred political activism causes might cloud her judgment, so I’m glad to hear that the guy can’t even lie about his bench press PR. And that’s not entirely relevant as this guy has almost definitely never stepped foot in a gym in his life, despite [alleged healthy eating habits.]( One thing he might see, however, is the inside of a prison cell. Just keep your fingers crossed. The big question: How long will the trial last? What else will we learn about this guy professionally and personally? Will he end up in prison, and what will the ultimate sentence be? Banana Brain Teaser Yesterday — A man named Stewart is traveling all over the world. First, he travels to Cape Town in South Africa. Then to Jakarta in Indonesia. Then to Canberra in Australia. Then to Rome in Italy. Then, to Panama City in Panama. Where does he travel next? Answer Santiago in Chile. He travels to each continent in alphabetical order, then to the capital of the country that has the most southern latitude. Today — Which is larger, infinity or infinity + 1? Shoot us your guesses at vyomesh@wallstreetoasis.com. Wise Investor Says “A banking system is an act of faith: it survives only for as long as people believe it will.” — Michael Lewis How would you rate today’s Peel? [All the bananas]() [Decent](=) [Rotten AF](=) Happy Investing, Patrick & The Daily Peel Team Was this email forwarded to you? [Be smart like your friend](=). [ADVERTISE](=) // [WSO ALPHA](=) // [COURSES]( // [LEGAL](=) Don't want The Daily Peel? [Unsubscribe here](. Click to [Unsubscribe]( from ALL WSO content IB Oasis Corp. (aka "Wall Street Oasis") 20705 Saint Charles St Saratoga, California 95070 United States