248yrs Later, We Still Got

🏈 We just got the latest data on U.S. GDP. Growth is down, but spirits (and prices) are up. Find out what’s driving the gains and pains below.

October 31, 2024

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In this issue of the peel:

  • 🏈 We just got the latest data on U.S. GDP. Growth is down, but spirits (and prices) are up. Find out what’s driving the gains and pains below. 

  • đŸ‘» Snapchat had its first good quarter since nudes were invented, and Alphabet beat estimates. Eli Lilly’s market cap took some Ozempic, and UBS’s integration with Credit Suisse faces some hiccups.

  • 🎃Happy Halloween. Americans spent at record levels to put on a good show this All Hallow’s Eve. Find out what it means for the economy below.

Market Snapshot

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Macro Monkey Says

Still Got It

The United States is feeling like a creepy old man hitting on his waitress at the local diner.

He’s 248 years old, gray, kind of depressing to look at, and it’s clear there’s no one running the show. But every time his poor waitress forces a smile while considering how important this job really is to her, he can’t help but think, “I still got it.”

The only difference is that the U.S. actually does still got it, as long as the “it” we’re talking about is GDP growth.

Let’s get into it.

The Numbers

The Bureau of Economic Analysis (BEA) just released their advance, preliminary estimate of U.S. GDP growth in the third quarter.

According to the agency, real GDP grew at an annualized rate of 2.8% from June through September 2024.

Not sure what morons I mean economists* CNBC was talking to, but the news organization claims that estimates were anticipating an uptick in GDP growth to 3.1% for the quarter. 

The Atlanta and NY Fed branch models were calling for growth somewhere in the range of 1.8%-3.1% for Q3. In that context, I’d say GDP growth came right in line with estimates and, if anything, leans to a more positive surprise. 

Although 2.8% is a slowdown from Q2’s 3%, the 0.2% decline itself gives little reason for concern. Real GDP growth rates remain in an ongoing process of normalization after spiking as much as 12.2% in Q2’21, and it appears that we’re back at a long-term trend.

Markets couldn’t have cared less about the mixed data. While the Q3 report confirms the U.S. remains in a healthy expansion, some of the underlying drivers are worrying.

Starting off with the good news, the biggest factor of last quarter’s rise was a 3.7% growth in real consumer spending. That was nearly a full percentage point higher than the 2.7% spending growth in Q2.

The cherry on top was an 8.1% growth in spending on durable goods, growing the fastest among each spending category. 

Spending was supported by growth in real disposable personal incomes, up 1.6% and 3.1% on a nominal basis. 

However, the real driver of spending was good ol’ financial irresponsibility. The personal savings rate declined from 5.2% in Q2 to 4.8% in Q3, which is normal during rate-cutting cycles as lower interest rates disincentivize saving and encourage investing.

Export growth of 8.9% was the next big factor in the Q3 increase but was immediately offset by growth in imports of 11.2%. In the GDP equation, that translates to a 2.3% decline.

However, high imports are again a good sign for consumer spending, demonstrating that American demand for foreign goods and services remains high while foreign demand for American goods and services grew healthily as well.

Then comes the bad news


The Bronze medalist factor driving Q3 GDP growth was Uncle Sam’s wallet. Federal government spending grew 9.7%, led by a 14.9% spike in defense spending.

While that’s a great sign for the economies of Ukraine and Israel, government spending can’t power GDP growth long-term because to maintain government spending, tax receipts need to keep increasing, which requires either high taxes or higher output.

Lastly, inflation continued to decline in Q3 as well.

Both the personal consumption expenditure (PCE) and gross domestic purchases price indexes decline. The two measures are similar, but the gross domestic purchases index includes impacts from import prices. PCE focuses only on the domestic side.

In Q3, both readings clocked in under the Fed’s 2% target, with the gross domestic purchases price index up 1.8% and the PCE price index up 1.5%.

Food and grocery prices, along with continued impacts from shelter, pull the core indexes higher, but nothing to tweak about.

The Takeaway?

Sh*t got weird during the pandemic. But it seems like we’re approaching a point in which we may soon be free of C-19 economic impacts.

For example, the first chart above is no longer distorted by the enormous quarterly declines and growth of GDP during Q2 and Q3’2020. Bout damn time.

So, what we’re seeing in the data is not an aging empire on the brink of collapse but one that’s normalizing after a massive shock to the system. 

The macro picture may soon be “normal” again if that truly exists in economics. If only politics could follow suit


Career Corner

Question

Hi mentors, I saw this interview question online and was wondering how you would go about answering it. "Which valuation method is the best?"

Answer

Go through the pros and cons of each (briefly, or stick to the one most relevant) and then use that to explain why you think the pros of X make it the best in Y situation (or overall, depending on the exact interview prompt).

Head Mentor, WSO Academy

What's Ripe

Snap Inc (SNAP) 15.78%

  • Snap’s Q3 earnings reveal some disturbing, previously unknown news. Apparently, there are 12mn freaks out there actually paying for Snapchat+. Investors appreciate it, and I’m sure their therapists do too.

  • Snapchat+ subscribers helped the firm beat sales and earnings estimates for the quarter on 15% YoY revenue growth. The social media firm also announced $500mn in buybacks.

  • Snap is the OG AR/VR glasses maker, by the way. They announced the 5th gen version of these in September, currently only available to developers for $99/month to build AR apps on the new computing platform.

  • Shares boomed mostly because the firm halved their loss from Q3’23 to $156mn in Q3’24. Guidance for next quarter was slightly below estimates.

Alphabet (GOOG) 2.92%

  • It was cloudy with a chance of AI for Google-parent Alphabet in Q3. The firm blew past estimates as Google Cloud's revenue growth sped up.

  • Total revenue grew 15% to $88.27bn, a faster growth rate than Q3’23, as Cloud revenue surged 35%, driven by new AI offerings, including enterprise subscription products.

  • The real help from AI, however, was on the cost-cutting front. Net income grew 33.5% from Q3’23, padding margins despite traffic acquisition costs of $13.7bn coming in north of the $13.5bn expected.

  • Search revenue grew 12%, driven by strong YouTube ad revenue of $8.92bn. CEO Sundar Pichai cited a “virtuous cycle” created by AI on consumer-facing products as improved recommendations for Search or videos keep users engaged longer, allowing further improved recommendations, and so on.

What's Rotten

Eli Lilly (LLY) 6.28%

  • Eli Lilly spilled some Zepbound on its share price Wednesday morning as its market cap lost a lot of weight. The world’s most valuable healthcare firm missed estimates on Q3 earnings.

  • Lilly reported $11.44bn in sales vs estimates for $12.11bn. Sales of Mounjaro, a diabetes treatment, surged >120% while Zepbound, an obesity treatment, added $1.26bn to the top line not present in Q3’23. Total revenue grew 20% YoY.

  • Net income swung from a $57mn loss in Q3’23 to $970.3mn last quarter. That translates to an EPS of $1.18/sh, but the market was looking for $1.47/sh.

  • FY’24 EPS guidance was cut by 18% at the midpoint, getting shares hammered and not in a fun way. It seems that analyst expectations for these GLP-1s were overly exuberant.

UBS Group AG (UBSG) 4.53%

  • After their borderline incestuous marriage with Credit Suisse, UBS has changed a lot in recent years. Just not in a good way, at least in Q3, according to markets. 

  • The Swiss banking giant smoked analyst estimates with profits of $1.43bn vs estimates for $667mn. Investment banking was a point of strength, with revenues up 22% and net income up 36% in this segment.

  • Wealth Management was a surprising weak point as lower margins on deposits and loan volume hit revenue. Shares sold off as investors appear increasingly skeptical of the firm’s combined wealth management unit.

Thought Banana

Economics Of Halloween

Usually, Halloween is the scariest night of the year. But every four years, the first Tuesday in November unfortunately gives it a run for its money. 

This year, though, the true nightmare might be November 1st—when we realize how hard Halloween hit our wallets. In 2024, we’re clocking in at record spending levels, so... 

Let’s dive in.

The Numbers

Behind all of the Barbies, Jojo Siwas, Travis Kelce & Taylor Swifts, and Deadpools walking the streets tonight is $12.2bn in spending power.

That’s how much Americans are estimated to have spent on Halloween this year, an average of ~$35.88 per citizen and a 15% jump from 2023.

$4.1bn of that spending goes to costumes, with pet costumes estimated to have made up ~$700mn of that total spend. See, that’s why my dog is going as Scooby Doo this year.

Decorations are estimated to cost $3.9bn, with 31% of consumers claiming they now spend “as much or more” on Halloween decorations as they do for Christmas.

Then, we get to the good stuff, the real reason we’re all excited (and obese). Candy spending clocks in at $3.5bn, way too low for my liking, but maybe if we just buy a few more 100 Grand Bars, we’ll be set.

Resse’s continues to lead a Patriots-like dynasty as the most popular Halloween candy in the U.S. M&M’s—classic and peanut—are the silver and bronze medalists, while KitKat, Snickers, and Hershey’s round out the top 6.

It’s clear we like chocolate, which Ozempic loves to see. But Sour Patch Kids, Skittles, and Twizzlers are the most popular non-chocolate candies, despite my firmly held view that giving out Twizzlers on Halloween is a form of child abuse.

The Takeaway?

Halloween is estimated to be the 5th most impactful holiday on the economy, following Christmas, Thanksgiving, Mother’s Day, and Independence Day and just surpassing Valentine’s Day.

Like Cicadas emerging from underground every 17 years to remind us it is summer, Spirit Halloweens have done the same all month long to remind us it’s spooky szn. 

Expect them to return to the underworld soon.

The Big Question: How can I make money off investing in Halloween? What are you dressing up as this year? 

Banana Brain Teaser

Previous

To order certain plants from a catalog, it costs $3.00 per plant, plus a 5% sales tax, plus $6.95 for shipping and handling regardless of the number of plants ordered. If Company C ordered these plants from the catalog at the total cost of $69.95, how many plants did Company C order?

Answer: 20

Today

The value of Maureen’s investment portfolio has decreased by 5.8% since her initial investment in the portfolio. If her initial investment was $16,800, what is the current value of the portfolio?

Send your guesses to [email protected]

❝

Remember that reputation and integrity are your most valuable assets and can be lost in a heartbeat.

Charlie Munger

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Happy Investing,
David, Vyom, Ankit & Patrick