Japan's Economic Woes

Late Wednesday evening (or bright and early on Thursday in Tokyo), Japan released its latest GDP data [The Daily Peel... ]( November 16, 2023 | Peel #587 Silver banana goes to... [Brilliant. ]() In this issue of the Peel: - The Census Bureau dropped its monthly retail sales report, and yesterday, we learned that retail sales in October declined 0.1% from the prior month. - Target and VF Corp had a ripe day yesterday, whereas Energizer and TJX Companies saw their stock close at a lower price. - Late Wednesday evening (or bright and early on Thursday in Tokyo), Japan released its latest GDP data showing that the nation’s economy contracted 0.5% quarter-over-quarter. Market Snapshot Happy Thursday, apes. Well, we hope your day is off to a much better start than ours was yesterday, with the sound on our livestream sounding like it was coming from a submarine. That’s our bad. It won’t happen again, and please keep the roasts coming. What wasn’t our bad, however, was the team over at WSO Alpha choosing to finally close out that Peloton position yesterday on its 8.37% pop. Thank god they did, as this really saved our portfolio, turning the position from a 93% loss into one of only 90%! Great job guys. These pikers did manage to give us a 1.17% return on the day. We’ll take it. And on a day like yesterday, that gain tastes even better given the Kansas-flat nature of yesterday’s broader market performance. Weak retail numbers had mixed reactions, but selloffs in Big Tech names like Amazon and Nvidia dragged. The Dow led with a 0.47% gain, while the Nasdaq’s 0.07% lagged and almost put us to sleep. Treasuries were slightly more exciting, somehow. These assets saw yields climb and smooth out the sharp drop seen following Tuesday’s CPI report. The 10-year yield pushed back above 4.5% while the 2-year is flirting with 5% once again. Let’s get into it. 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[Get started for ZERO BANANAS today!]( Banana Bits - Mortgage rates continued to move in the right direction for homebuyers this week as 30-year rates [take another dive.]( - China’s most valuable company, Tencent, earned a lot more than its name implies this last quarter, and [investors were loving it.]() - Starship’s second flight, to follow up on the “success” of blowing up the rocket back in April, has been [approved by the FAA.](=) - Just when we started to doubt the intellect, professionalism, and wisdom of our elected representatives, Senator Markwayne Mullin put that all to rest by challenging the Teamsters union boss to a [legitimate fistfight](=) on the floor of Congress…. It wouldn’t be the first time that’s [happened](), however. Macro Monkey Says Retail Fails Cue the dramatic music and get ready to hide under the covers… there’s a monster under the bed, and its name is slowing consumer spending. Thankfully, as we all know, hiding under the covers is the ultimate defense strategy, on par with being wrapped fully in Kevlar. But in this case, even that might not be enough to save you, as shocking as it sounds. Consumer spending drives 65-70% of U.S. GDP in any given year, so after seeing pullbacks here, I think I’d take my chances with the monster. This week, we’re getting treated to the latest earnings reports from massive retailers like Target (more below), Walmart, Macy’s, Ross Stores, The Gap, BJ’s, and others. As an appetizer, the Census Bureau front-ran those drops with a drop of its own in the monthly retail sales report. "I can understand you needing to run to the bathroom here if you just sh*t yourself (like I did)." Yesterday, we learned that retail sales in October declined 0.1% from the prior month and gained just 2.5% from the same period last year. Wall Street professionals and their institutions can sum up their perpetually intelligent and highly eloquent reactions with just one phrase: uh-oh! Sure, 2.5% annual growth might not sound bad, but sadly, that figure is not adjusted for price increases. Using Tuesday’s reported 3.2% growth in headline inflation, we can see the real annual change was more like -0.7%. I can understand you needing to run to the bathroom here if you just sh*t yourself (like I did). Anyway, this is far from ideal. Strong spending driven by a robust labor market has been the ultimate buoy in 2023, keeping the economy afloat. As the consumer's wallet goes, so goes the economy. And apparently, consumers are pulling back, especially on anything that requires credit. Auto sales, for instance, dove 1% in just a single month but still rose 3.3% annually (0.1% inflation-adjusted). Products related to these purchases, like spending at the pump, got hit as well, with gasoline sales plummeting 7.5% from October 2022. Hardware, furniture, and department stores were hit hard as well, signaling that consumer spending on discretionary items is being pocketed and saved for a rainy day. Or, those rainy day funds are simply finding their way to other avenues as sales at non-store retailers (like bars, restaurants, and online) all moved higher. For instance, spending at “food services & drinking places” surged 8.6% compared to last year, suggesting that we love getting fat and drunk even more than we did last year. "... we love getting fat and drunk even more than we did last year." It’s times like this when we learn what Americans really value by gauging where their cash is being spent. Apparently, booze and online spending seem to be dominating things like recreational activities because why bother putting in effort to do something fun when you can go and suck liquid fun straight out of a glass?? As you’ll see below, even your parent's favorite retailer, Target, couldn’t escape the trend despite Target runs being a borderline religious pilgrimage for many. Investors didn’t mind (for now), but they sure will next quarter. And that’s because the Holiday season is fast approaching. Black Friday is a little more than a week away, and then we’ll enter December—far and away the most important months for the top and bottom lines of these firms. Buying gifts for your friends and families that will inevitably be returned/re-gifted drives much of the activity these guys see all year so it’s an especially tough time for consumers to pull back in their eyes. Honestly, it’s pretty rude of consumers to be doing that. Donations to the wonderful charity that is the U.S. economy frequently go through these retailers, and if we’re slowing our contributions, how are my stocks gonna go up? These are the things that matter the most, obviously, and so if you’re not sure how to play it, don’t stress—WSO Alpha’s got you when those guys figure out how to play this reaction. They’re slow readers, needless to point out at this point, but once they get through it, you won’t wanna miss those trades. What's Ripe Target (TGT) ↑ 17.75% ↑ - Sunday Target runs have arguably become just about as important an American pastime as Football Sundays. Only with Target, it’s something much more rooted in our DNA—spending money. - And although they weren’t too pleased with our performance in that pastime last quarter, Wall Street sure was. The retail giant reported a 4.6% decline in same-store sales but managed to still beat sales estimates, delivering $25.4bn on the top line vs the $25.2bn expected. - Despite shoppers acting as picky as your average toddler staring down a plate of broccoli, Target still managed to beat on the bottom line, too. EPS came in at $2.10/sh vs the $1.48/sh expected, thanks to inventory controls and lower rates of discounts on products. - And then, traders ripped a line and sent shares to the moon. A $60bn firm gaining nearly 1/5th of its value in a single day is almost unheard of, but investors have been hating on this name since their inventory management shenanigans took the stock down almost 60% from late 2021 highs, any win is a big one. VF Corp (VFC) ↑ 14.13% ↑ - Your hipster friend’s favorite stock has finally had a few much-needed good days this week. And yesterday, they had only JPMorgan to thank. - The maker of Vans, North Face, Supreme, and other brands filling up your local middle school got a big stamp of approval from the world’s most valuable bank yesterday as JPMorgan upgraded shares to big, fat… “Neutral.” - So basically, the day’s gain—one of the company’s largest in the past decade—was entirely due to a few analysts hating the stock a little less. Earlier this week, shares gained ~10% on Tuesday in response to insider purchases from a company director. After losing 49% YTD before this week, it was a nice relief. What's Rotten Energizer (ENR) ↓ 6.76% ↓ - It was a bad quarter to have a giant, coked-out bunny as your company’s logo… as Energizer just learned the hard way. - Shares in the battery-maker dominating cable news commercial breaks across the country dumped yesterday despite a not-so-bad earnings report. Energizer reported EPS of $1.20/sh on $811mn in sales vs the $1.14/sh on $791mn that was expected. - While that wasn’t bad on its own, just about everything else around it was. Sales—despite beating estimates—declined annually while earnings stayed basically the same. Management expected a 6-8% decline in sales going into the Q1 of the firm’s 2024 fiscal year. TJX Companies (TJX) ↓ 3.32% ↓ - And following in the footsteps of the way-too-depressing retail sales report above, the stock behind everyone’s favorite discount clothing store had an overall solid quarter. - I know it doesn’t make any sense, but as always, the question is: does it make cents? In TJX’s case, it absolutely does, earning $1.03/sh on $13.3bn in revenue and easily beating the $0.99/sh on $13.1bn expected. - Same-store sales improved, full-year guidance was raised, but Q4 expectations were adjusted down, likely triggering the day’s selloff. Some profit-taking could be at play, too, as shares are up well over 13% YTD already, but it just goes to show that even when you do well, Wall Street doesn’t want you to be happy. Thought Banana Japan Needs a Jolt Gold and Silver medalists get all the attention, and it’s no different in macroeconomics. We talk about the U.S.’s $25tn GDP and China’s $18tn GDP, but the Bronze medalist of global GDP, clocking in around $5tn, often flies under the radar. And that Bronze medalist is, of course, Japan. The country of samurais-turned-auto manufacturers has been in a precarious position essentially since “Japan’s Lost Decade” from 1991-2001, and this past quarter was no different. And as a noted Toyota RAV4 driver (not to brag), I can tell it’s not because of low-quality cars. Negative interest rates, yield curve controls, and stubborn inflation are all at play, so let’s see what’s going on. Late Wednesday evening (or bright and early on Thursday in Tokyo), Japan released its latest GDP data showing that the nation’s economy contracted 0.5% quarter-over-quarter, or 2.1% on an annualized basis. I wouldn’t blame you if you thought some dumb*ss, WeWork-styled investment from Masa and the gang at Softbank were driving this, but sadly, that’s far from the case. Consumer spending, which accounts for ~55% of Japan’s economy, was unchanged for the quarter. Business investment fell 0.6% QoQ while exports still managed to gain a slight 0.5%. It's good to see y’all are still buying Nintendo Switches and Sony TVs. "It's good to see y’all are still buying Nintendo Switches and Sony TVs." This came as quite a surprise given that in Q2, Japan’s economy was ripping at a 4.5% annualized rate. The weakness in consumer spending and exports was certainly a drag, but the country’s monetary policy may have put them in that position. Much of the growth seen in Q2 was attributable to the country’s super-delayed, firm reopening of the economy post-C-19. Leading into Q3, experts were hoping consumer demand would compensate for lower export demand, given weakness in the country’s largest trading partner, China. And while the ~3% annual inflation Japan is currently seeing isn’t ideal, it absolutely sucks compared to the 0.6% nominal wage growth the country saw for the same period, meaning real wages are declining by 2.4%. "... they sure didn’t exactly take this win in stride." For a country that was begging for any kind of inflation to emerge over the last several decades, they sure didn’t exactly take this win in stride. The Bank of Japan, which still offers negative interest rates, meaning you are actively paying the central bank for the privilege of holding your money for you, is trying to spur this activity while ending the super-mega-ultra loose monetary policy regime investors have gotten used to. Yield curve controls, where a central bank artificially imposes a limit on domestic yields through open market bond purchases, have been a major driver of the lack of growth, too, often leading to weakness in the yen. The weakness in the yen is great for exporters as it allows them to sell goods at a price cheaper relative to other currencies. However, the weak currency is far from ideal for consumers in the country. Basically, almost nothing is working well for the economy in its current state, but stimulus plans may be coming soon to fix that up. For a country that’s used to change, given the switch of their primary export from textiles to, like, anime, we wouldn’t think that’ll be too hard. The big question: Are you betting on Japan? Will the BoJ be able to get inflation back on track where it needs to be? How will the country retreat from negative interest rates back into reality? Banana Brain Teaser Yesterday — A farmer knows that 20 of his hens, housed in 3 coops, will hatch 30 eggs in 21 days. How long will it take 30 hens housed in 4 coops to hatch the same number of eggs? Answer You can't shorten the process of egg-hatching by increasing the number of chickens. Therefore, 30 hens will also need 21 days to hatch their eggs. Today — What do you get when infinity divides infinity? Shoot us your guesses at vyomesh@wallstreetoasis.com Wise Investor Says “In economics, the majority is always wrong." — John Kenneth Galbraith 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. 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