All Eyes on SBF

Yesterday, we heard continued testimony from FTX’s (former) CTO Gary Wang [The Daily Peel... ]() October 11, 2023 | Peel #561 Silver banana goes to... [M&A Science. ](=) In this issue of the Peel: - The yield curve—instead of inverting due to short-term rates declining—is flattening as long-term rates wake up to the “higher for longer” environment. - Truist Financial and Solar Stocks closed the day green, whereas Akero Therapeutics and WK Kellog suffered some losses on their share price. - Yesterday, we heard continued testimony from FTX’s (former) CTO Gary Wang, along with hedge fund Alameda Research’s (former) CEO Caroline Ellison in SBF's trial. Market Snapshot Happy Wednesday, apes. Tensions across the globe are rising almost as fast as treasury yields, but nothing skyrocketed more yesterday than SBF’s blood pressure watching his former coworker/weird-girlfriend-thingy Caroline Ellison take the stand. More below. Equities got a bump as well, but it wasn’t nearly as sweat-inducing as Sam’s trial. For the day yesterday, yields actually reversed direction amid expectations shifting to no foreseeable rate hikes from the Fed at their meeting to close out this month. Naturally, stocks were pulled up with gains registering a wide breadth as long as you weren’t named Apple or Microsoft. As we said, yields had a much more mild day compared to recent weeks and months. The 10-year yield fell all the way back down to 4.7%, while the 2-year is seemingly trying to get below the 5% level but just can’t seem to stay away. Let’s get into it. M&A Science Fall Summit 2023 [image](=) The M&A Science Fall Summit is back on November 8th, 2023! Join us for this free virtual event as we discuss current trends and share advice from industry-leading practitioners. The sessions will cover a variety of M&A topics, including: - Developing an M&A Thesis with Siran Tanielyan - Paramount - Role of EQ in Technology Integrations with Windy Nicholson - Salesforce - Adapting Your Integration Playbook: Culture and Operating Model with Kimberly Baird - Maximize M&A - Valuation for M&A: Fair Market Value vs. Investment Value with Chris Mellen - VRC - Retaining Top Talent in a Post-Pandemic World: Insights & strategies from our groundbreaking survey with Klint Kendrick - HR Integration Roundtable - Breaking Up is Hard to Do: JV Exit Mechanisms with Scott Crofton - Sullivan & Cromwell LLP Take advantage of the opportunity to learn proven M&A techniques from the best. Want to learn more? [Click here](). Banana Bits - Small businesses still need a lot of work done to [heal their mental health](=) as inflation continues to take a toll on optimism. We’ll see if Thursday’s inflation reports can help. - The [battle for House Speaker](=) heats up, and sadly, it looks like this one will rage without the sure-to-be gargantuan entertainment value of seeing former Pres Donnie T throw his hat in the ring. - Per [the WSJ](), digital assets proved massively helpful in the terrorist organization Hamas’s ability to raise funds. Macro Monkey Says Equity Risk Delirium We all love to hear those rags-to-riches stories of someone growing up poor and making it big. But what’s almost never talked about is the opposite scenario: riches to rags. Probably because that’s way more depressing, but you could imagine a rich heir to some god-forsaken fortune losing it all through gambling, drugs, or any other of life’s great pleasures. Well, as much as we might hate to say it, the stock market itself could be leaning towards forming its own riches-to-rags story in the coming years or even the decade. And it’s all thanks to one idea—the equity risk premium. The equity risk premium measures the difference between the risk-free rate, which is the yield on U.S. 10-year U.S. treasury notes, and the S&P 500 earnings yield (as measured by expected earnings/price). Both of these signify, respectively, how much money you can expect in return per year per $100 investment to make it as simple as possible. Naturally, the more risk an investor assumes, the more they are going to want to get paid for that risk… so, the larger the spread between the risk-free rate and the stock’s earnings yield, the more preference investors have for owning stocks rather than bonds. For most of the last decade, that spread has been wider than a barn door with a sign saying “Welcome all!” to the stock market. But, thanks to recent moves in long-dated treasury yields, we may not have the luxury of an obvious equity risk premium any longer. Investing might actually become a challenge again. Take a look at the chart below: "For most of the last decade, that spread has been wider than a barn door ..." [image] [Source]( Here, we plotted data from FRED and the Treasury to show the simultaneous moves in the 2-year, 10-year, and effective fed funds rates since November 2020. There’s a lot going on, but the main takeaways for our purposes include: - The 2-year yield has led—almost dragged—the Fed funds rate higher. - The 10-year has only recently started to play catch-up. - That catch-up is leading to a less-inverted (and maybe one day, non-inverted) yield curve in the U.S. So, while it’s clear that the shorter-duration side of the bond market is where we actually find the alleged “smart money” in their collective ability to forecast base rates, the longer-duration side of the curve is only recently waking up to this realization. "... this will mathematically lead to a narrowing of the equity risk premium ..." That means that the yield curve—instead of inverting thanks to short-term rates declining—is flattening as long-term rates wake up to the “higher for longer” environment the Fed, bond markets, and investors now all see. In turn, this will mathematically lead to a narrowing of the equity risk premium, which is already well underway. That probably means a few things, like: - Expect lower relative returns in stocks. - The spread may be stabilizing, as seen in the stabilization of the 2-year around 5% and the current [~89% odds](=) the Fed holds at its next FOMC meeting. - The 60/40 portfolio makes sense again, with bonds producing actual, tangible, real income. For something with “premium” in its name, it sure doesn’t feel very premium to know this information. But, for all the young apes out there, this is a brand new environment that nobody in Gen Z has lived through (at least consciously) before. At least something is going to the moon; it’s just too bad it comes from boring old bonds. What's Ripe Truist Financial (TFC) ↑ 6.64% ↑ - One company’s trash is another company’s treasure. Nowhere was this scientific fact more glaring on Tuesday than in Truist’s rumored sale of its insurance business. - For other names, like Berkshire Hathaway or something, selling off your insurance business is like willfully submitting to a lobotomy. Much less reliant on its highly cash-flow positive and stabilizing insurance business, Truist would rather take what’s behind door #2. - And, behind that door, happens to be a cool $10bn from Stone Point Capital, a PE shop that already bought a ~20% stake in Truist’s insurance unit. - Now, they’re taking the remaining 80% and doing so at a fairly high multiple for the insurance industry. Truist shareholders were hyped because this thing is still a walking complexity since the 2019 merger of SunTrust and BB&T was completed, so any simplification is much appreciated. And, I guess an extra $10 billy in cash ain’t bad either. Solar Stocks (TAN) ↑ 5.67% ↑ - Once again on Earth, the sun rose another day. So did Sun stocks. Coincidence? Hmmm, that’s a tough one… - The bounce given to solar stocks on Tuesday seemed almost backward at first, especially for Maxeon (MAXN, +3.67%), which initially fell ~22% on preliminary quarterly data. But still, the primary driver was a decidedly negative report from one of the industry’s key suppliers, Tigo Energy. - Basically, Tigo was pointing out struggles in the supply chains and cost structures for the photovoltaic—fancy word for solar power—industry. To investors, however, the report was seen as notice that the worst is behind us. Time will tell. What's Rotten Akero Therapeutics (AKRO) ↓ 62.61% ↓ - Sometimes, stocks fall. This can be fast or slow, and if you’re like Akero, it’s more like how quickly your parents hope you fall after you tell them you’re joining the Greek life. - While that wasn’t the mistake Akero made, they did do something we all know all too well—they failed a test. The unpronounceable drug “[efruxifermin]()” (who tf names these things?) failed to “meet a primary benchmark” in its Phase 2B study. - Phase 2B is a big one, as drugs that get passed through and onto Phase 3 get investors hyped even more than cocaine does. That won’t be happening today for this biotech name, but like the wise investor Justin Bieber once said, never say never. WK Kellogg (KLG) ↓ 6.10% ↓ - To paraphrase Patrick Star—what could be more boring than a giant CPG company? I know… two giant CPG companies! - The consumer packaged goods sector has long been dominated by just a handful of companies. Now, there’s one more in the mix after Kellogg officially split itself in two. - Remaining under the ticker symbol “K” is the newly named Kellanova, which now houses Kellogg’s legacy snack, frozen foods, and international units, including two of the market’s finest delicacies in Pringles and Pop-Tarts (gas). - Meanwhile, the more boringly named WK Kellogg now houses only the company’s domestic cereal lines, including more boring sh*t like Corn Flakes. Investors aren’t happy with the split just yet, as KLG has traded down every day since, but as always, you never know. Thought Banana Testi-money 2 CEOs and a CTO walk into a bar, and… two end up turning on one and ratting him out to (hopefully) go to federal prison. That’s just one of the many jokes that make up the collapse and current standing of FTX and its (disgraced) founder and (former) CEO, Sam Bankman-Fried. SBF’s trial began earlier this month, and it’s already spicier than the Blazin Challenge at Buffalo Wild Wings. Yesterday, we heard continued testimony from FTX’s (former) CTO Gary Wang, along with hedge fund Alameda Research’s (former) CEO Caroline Ellison. These two are the definition of star witnesses for the prosecution. It’s kind of like if Tom Brady and Gronk testified against Bill Belichick during the whole “deflategate” saga (BS, but I digress). "Wang’s testimony has been damning already." Wang’s testimony has been damning already. Months ago, it was reported that FTX’s #2 leader would cooperate with the DoJ in their investigation and trial of Bankman-Fried. Now, that cooperation is on full display, with Wang’s testimony unearthing and/or confirming things like: - In FTX’s final days, while SBF was Tweet-storming that the firm had enough to make customers whole, Wang said, “FTX was not fine, and assets were not fine because FTX did not have enough assets for customer withdrawals.” - FTX’s insurance fund was calculated by multiplying the total volume of trades by—get this—a “random number around 7,500” and dividing by $1bn… when asked if this number had “anything to do” with the actual amount in the safety net insurance fund, Wang simply replied “No.” And that wasn’t even close to the best part. Alameda CEO Caroline Ellison, who was also Sam’s ex-girlfriend (or something like that, it’s some weird sh*t), followed up after Wang for her first day on the stand. According to her, the one jointly responsible with SBF for massive losses thanks to poor hedging, FTX and Sam: "And that wasn’t even close to the best part." - “... directed [Ellison] to commit these crimes”, in reference to a wide swath of allegations such as securities and wire fraud. - She fraudulently sent misleading financial information, such as Alameda balance sheets, to lenders to make the hedge fund appear “less risky.” - She began the testimony partly by saying, “I am truly sorry for what I did... I knew that it was wrong.” It's not looking great for Sam, despite what his biggest fanboy, Michael Lewis, might have you believe. Moreover, the “5% chance” SBF assigned to himself becoming President of the United States, as corroborated in Ellison’s testimony, seems like it might’ve been a little off. But hey—president, prison, they’re pretty similar words. After all, Sam isn’t the best at paying attention to detail. The big question: What else will be revealed by Ellison’s and Wang’s testimony? How long will the trial go on? What will Sam’s ultimate sentencing be? Will FTX customers ever see those funds again? Banana Brain Teaser Yesterday — Which is more: Buns in a dozen baker's dozens or hours in a week? Answer Hours in a week; there are 156 buns in a dozen baker's dozens and 168 hours in a week. Today — I have no voice, yet I speak to you; I tell of all the things in the world that people do. I have leaves, but I am not a tree. I have a spine and hinges, but I am not a man or a door; I have told you all; I cannot tell you more. What am I? Shoot us your guesses at vyomesh@wallstreetoasis.com. Wise Investor Says “You can't predict. You can prepare.” — Howard Marks 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](=). 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