The Dow's All Time Highs

On Friday, the Dow Jones closed at its highest level ever in the entire 127-year history of the index. [The Daily Peel... ]( December 5, 2023 | Peel #599 Silver banana goes to... [CapLinked. ](=) In this issue of the Peel: - Headline CPI rose 3.2% annually in October, while the Core reading increased 4.0%. - Carvana and Spotify had a ripe day, whereas Virgin Galactic and Alaska Airlines suffered a decline in share price. - On Friday, the Dow Jones closed at its highest level ever in the entire 127-year history of the index. On the other hand, the S&P 500 is ~4.5% off all-time highs seen at the start of 2022. Market Snapshot Happy Tuesday, apes. Shoutout to the word “rizz” for rizzing Oxford University into labeling this abomination of letters the “word of the year.” Can someone just send the asteroid already? Well, if the asteroid did come yesterday, the only thing it hit was my portfolio. Stocks were down in the US of A as a pullback from the early “Santa Claus Rally” seen in November could be taking effect. The Russell 2k was the only index higher on the day, gaining 1.07%, while the others bled their way to a tough start to the week. But, the wise apes among us have begun using the WSO Alpha portfolio as their benchmark, mostly because it’s really easy to beat. Like yesterday, for example, we lost 0.27%, thanks largely to a distinct lack of brain cells. Anyway, at least we don’t have exposure to bonds because those things largely saw yields move only higher yesterday, meaning investors were selling off. This is that time when end-of-year considerations come in, like tax loss harvesting of your whole portfolio(s) and all that other nonsense that can throw performance for a loop. Anytime your stocks go down, just blame tax loss harvesting. Obviously, it could never be your fault. Let’s get into it. 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[Claim your gift today.]( Banana Bits - The only leaks the world wants more than Elon Musk’s nudes dropped on X yesterday, leading Rockstar games to go ahead and just release the trailer for [GTA VI a day early.](=) - Uber is catching a ride of their own as it is set to grab a seat and buckle [into the S&P 500.]() - Ukraine may have U-drained all their available funds from the U.S. by the end of the year, according to [the White House.]( - FSU and fans are likely gonna be mad for a while about how plain F’d they got heading into the [College Football Playoffs.]() Macro Monkey Says Deflation Nation You know inflation must be a tough thing to understand when even the damn President of the United States [tweets a take](=) so ice cold it would’ve immediately caused him to fail out of Macro 101. Now, I’m sure the guy isn’t running his own account, but to use his own quote against him, “C’mon man!” Anyway, economists tend to openly admit how little they and everyone else understand inflation. Even Fed Chair JPow set the internet on fire back in mid-2022 when he said, “We understand better how little we understand inflation.” That's a real confidence booster for the country right there—thanks JPow! But right now, trying to understand inflation in the U.S. is like trying to do a mental Cha Cha Slide. First, you go left, then take it back now, y’all, only to then take one hop this time, followed by a series of stomps—whatever you think or do in one minute, it’s bound to change in the next. "... trying to understand inflation in the U.S. is like trying to do a mental Cha Cha Slide." And it’s that divergence in understanding inflation that allows us to say things like “inflation is still well above the Fed’s target, but we’re starting to see deflation.” Remember, apes—we’re here to make cents, not sense. Headline CPI rose 3.2% annually in October, while the Core reading increased 4.0%. Meanwhile, the Fed’s preferred inflation metric, PCE, followed a similar dynamic, growing 3.0% and 3.5%, respectively. All of these readings are well above the central bank’s 2% target, however… We’re already starting to see deflation in some key items. But don’t sound the alarms just yet. So far, this deflation has been limited to pretty much just some durable goods. As big and scary as inflation is, deflation is a spookier beast lurking in the shadows that we rarely get to see. This is the first time in 3-years we’ve seen this trend emerge, and as we touched on yesterday, deflation is much worse for the economy as spending all but comes to a halt while consumers simply put off spending today in favor of lower prices tomorrow. Can’t rate-hike your way out of that one! But, the good thing is, the odds of this localized deflation ballooning into an economy-wide force is about as likely as a fat man with a beard and presents squeezing down your chimney in 20 days. "You could argue that this is both good and bad (welcome to macroeconomics!)" There are a few factors at play here, but just about anything that remotely requires credit has seen prices sag for some time now. Vehicles, appliances, furniture, and other goods are leading the charge while others, like gasoline and non-cigarette tobacco products, joined in on the fun too. You could argue that this is both good and bad (welcome to macroeconomics!) The good comes from the argument that declining prices are going to play an essential role in getting inflation back down to 2%. While service spending shows no sign of slowing down, in order to fall the ~1% we need in order to get back to 2%, we’ll need some items to experience deflation, not just disinflation. That way, even as service prices increase, price levels in aggregate can still chill out all the way to 2%. As we said above, the massive run-up in rates we’ve seen makes spending on big-ticket items much less likely, as no one wants to be paying off their fridge for seven years or whatever it would be. But there is also the simple fact that absolutely no one knows what to expect for economic conditions around this time of next year, making the decision to outlay a large stack of cash an even tougher one than usual. And that’s where the bad part comes in. If Americans broadly adopt this perspective and, as is certainly possible, we adopt this line of thinking for more goods even gradually, aggregate price levels could certainly enter a deflationary stage. In that case, well, look out below. So, despite the fact that “inflation remains high” and we’re ripping a “higher for longer” rate environment (allegedly), keep in mind inflation is never a uniform picture. And how could it be? Everyone loves a person in uniform, and absolutely no one loves inflation. What's Ripe Carvana (CVNA) ↑ 13.77% ↑ - I don’t know if you guys know CPR or anything, but clearly, the analysts at JPMorgan do. They just breathed life back into this name, and they’ve been needing it for a while. - Shares in the company behind those car vending machines designed to eviscerate any last architectural beauty of the areas they’re in fell as much as 99% from its peak by this time last year. Bankruptcy talks were running rampant, but shares have ripped up along a wall of worry in 2023. - And that only got further solidified yesterday with the world’s most valuable bank upgrading shares from a “Sell” rating to “Neutral.” That bullish sentiment fueled a rally, continuing the firm’s >700% run seen already this year, but keep in mind a neutral rating really isn’t anything to get excited about. - JPMorgan assigned a $40/sh price target at the same time, which was hit yesterday as well, so these next few weeks will give markets a chance to see how wrong those analysts are. Best of luck to all involved. Spotify (SPOT) ↑ 7.46% ↑ - Sounds like trouble in Stockholm has led to egregious levels of hype in New York as Spotify shares rip while 17% of the firm’s workforce falls. - CEO Daniel Ek released a (way-too-long) memo to employees announcing that the audio firm has wrapped up the careers of ~17% of its workforce. The layoffs come as Spotify pursues “substantial action to rightsize our costs.” This amounts to ~1,500 total employees, adding to the ~800 that have already been cut so far this year. - Meanwhile, profits have soared, and the stock is up nearly 150% YTD. But, according to Ek, that ride is still carrying far too much dead weight. - Investors were hyped, as traders and shareholders love nothing more than to see livelihoods ended, especially as a result of over-hiring in the preceding years, as cited by Spotify to be the driving factor in the decision. Clearly, everyone besides those ~1,500 employees loved what they heard. What's Rotten Virgin Galactic (SPCE) ↓ 17.70% ↓ - Usually, Richard Branson and his portfolio of companies act like Chad in this [(in)famous meme](, but after an interview on Sunday, he is starting to live up more to the other guy in that meme, which also happens to be the first word in all of his company names... - Virgin Galactic, along with Branson’s other companies like Virgin Atlantic, Virgin Hotels, Virgin Mobile, and more, all suffered Monday after the famous founder stated that he and his firm now lack “the deepest pockets” to pursue further investment in his companies. - Basically, Branson told the FT that Virgin Galactic, in particular, is expected to have “sufficient funds to do its job on its own.” For a CEO to even have to say that, it’s a tough sign. But, when you recall that this company is really, really good at blowing up rocket ships, we’re sorely reminded that they’re always one fiery explosion away from changing up that tune Branson outlines above. Alaska Airlines (ALK) ↓ 14.22% ↓ - Alaska is way up north, but the share prices of the state’s homegrown airline headed nowhere but south on Monday. Thanks, Hawaii… - Or, I guess we should thank whatever incredibly bold executive decided to pay a ~270% premium to purchase competitor Hawaiian Airlines. That stock nearly tripled on the day, up 192.59%, but for all you arbitrageurs out there, you have a lot of room before the $18/sh acquisition price is hit… if you think the deal will go through, of course. - That’s a big if, too, especially with this FTC and DOJ. But even before they get involved, Alaska shareholders are already nauseous at the price tag, with one analyst already labeling the decision “a bit of a head-scratcher.” Thought Banana Santa Claus Cut The tough part about being good at something is that you’re expected to succeed at that thing 100% of the time. Having never personally succeeded at anything myself, I have no idea what that’s like, but imagine, like, Tiger Woods missing a put or Tyreek Hill dropping a pass. I think we all get the idea. The same is true for the stocks. Equities in the U.S. are just about at or near all-time highs, and, much like American philosopher and artist DJ Khaled, our portfolios may soon find themselves Suffering From Success. On Friday, the Dow Jones (which no one should care about) closed at its highest level ever in the entire 127-year history of the index, right around 36,245. The S&P 500 is ~4.5% off all-time highs seen at the start of 2022, and the Russell 2k and Nasdaq aren’t doing too shabby either. According to analysts, however, what is doing shabby right now are expectations for next quarter’s most wonderful time of the year. Q4 earnings szn isn't set to begin for at least another month, with big banks like JPMorgan kicking off the season on January 12th, 2024. But analysts are wasting no time chopping their earnings estimates. Just take a look: "... analysts are wasting no time chopping their earnings estimates." [image] [Source]( Above, we can see dual line charts that overlay the current price of the S&P 500 (light blue) with aggregated earnings expectations for the index (dark blue). The dark blue aggregated earnings line represents consensus estimates of analysts projecting the aggregate EPS of the S&P 500 for Q4. It’s considered a bottom-up estimate as the figure comes from taking the current median consensus estimate for all S&P 500 companies and simply adding them up together. "... most of the time, we get a little depressed/pessimistic when the quarter begins." Since the end of Q3 on September 30th, that estimate has fallen ~5% while the S&P 500 itself is up 6.57%. While that’s not an enormous divergence, it’s a change of pace as that reduction in EPS estimates is fat compared to historical trends. Now, most of the time, we get a little depressed/pessimistic when the quarter begins. Kind of like Eminem in 8 Mile, analysts palms get sweaty while their knees are already weak from sitting all day (no word yet on their mom’s spaghetti, however), leading the average change in earnings estimate in the first 2-months a quarter to sit at a cool 2.9%. That’s 2.7% for the past 10 years as well, meaning analysts are getting much more pessimistic than we were back when it was still warm out. Whether it’s seasonal depression or not, it’s interesting to see that Q3’22-Q1’23 all saw reductions in earnings estimates of a similar magnitude, but these were paired with a falling S&P 500. For a forward-looking indicator (allegedly), the S&P isn’t doing a great job looking forward at these analyst estimates. Obviously, analysts are wrong all the time (unless they work for [WSO Alpha]()), and the S&P 500 might be the only thing on Earth that’s been more wrong than my opinions. We’ll see how it plays out. Just get goin’ and place those bets now, apes. The Big Question: Is there a bubble? Is the S&P 500 overvalued, or are analysts’ EPS estimates for Q4 wrong? Are you investing in the S&P Index, or are you better off holding cash? What about treasury bonds? Banana Brain Teaser Yesterday — A bat and a ball cost $1.10. The bat costs one dollar more than the ball. How much does the ball cost? Answer The ball costs 5 cents, not 10 cents. If one dollar more than 10 cents is $1.10, then $1.10 + 10 cents is $1.20. Therefore, the ball costs 5 cents. Today — A duck was given $9, a spider was given $36, and a bee was given $27. Based on this information, how much money would be given to a cat? Shoot us your guesses at vyomesh@wallstreetoasis.com Wise Investor Says “Investing is simple, but not easy” — Warren Buffet 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? 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