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America’s Excalibur: Inflation

💸 October inflation looked like the Tyson/Paul fight—objectively bad, but we’ve seen much worse. Find out how spending and incomes held up blew, too.

Silver banana goes to…

In this issue of the peel:

  • 💸 October inflation looked like the Tyson/Paul fight—objectively bad, but we’ve seen much worse. Find out how spending and incomes held up blew, too.

  • 👖 A new hire gave Unusual Machines unusual returns for the day as Urban Outfitters shows other retailers how to have a good quarter. Unfortunately, Nordstrom wasn’t paying attention, and CrowdStrike sold off for the wrong reasons.

  • 😁 U.S. Consumers were feeling hella grateful leading up to Thanksgiving, with confidence reaching a fresh 16-month high. See what’s driving it below.

Market Snapshot

Banana Bits

The Daily Poll

How are you handling rising prices?

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Previous Poll:

What’s your personal travel vibe lately?

Treating myself, no limits!: 17.9% // Keeping it budget-friendly: 30.5% // Mostly local trips: 14.7% // Haven’t traveled much lately: 36.9%

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Macro Monkey Says

America’s Excalibur

The rumor is that whoever can pull the sword, called Excalibur, from the stone it’s lodged in has the right to become the King of England.

I think it’s about time we adopt a similar policy in the U.S. But, instead of some cringy Dungeons & Dragons type of thing, we obviously need to make some money off of it.

Whoever pulls the inflation out of the economy it’s firmly lodged in is officially the God King Emperor of The United States. Sound fair?

Let’s get into it.

The Numbers

On Wednesday, the Bureau of Labor Statistics made sure we didn’t have a damn thing to be thankful for before chowing down on turkey and 6-leg parlays.

The agency released the latest report on Personal Consumption and Expenditures, sizing up the incomes earned, money spent, and prices paid by Americans in October.

Much like watching the Tyson/Paul fight, we’ve seen a lot worse, but it was hard to get excited about.

According to the PCE price index, the Fed’s preferred measure of inflation over the nonsensical abomination, the CPI, headline inflation clocked in at 2.3% last month.

That was in line with expectations but represented a semi-concerning uptick from the 2.1% inflation registered in September. However, PCE inflation was as high as 2.5% as recent as July, so don’t tweak it out on me (yet).

Core PCE, which excludes food and energy prices, rose to 2.8% in October from 2.7% in the prior month, which is above expectations and causing most of the concerns in this report.

Even with the inflationary uptick, markets only increased their bets that another 25bps cut is coming in December, rising to 70% from below 50% on Tuesday.

Americans still had no problem going out and spending despite the price hikes. 

Personal consumption—a.k.a, consumer spending—increased 5.4% in October, up from 5.3% the prior month. However, after we adjust for inflation, real personal consumption growth fell from 3.1% in September to 3.0% last month.

So, consumption grew similarly to September, but only because of inflation. It’s constructive to see consumer spending increase, given that it is the lifeblood of the U.S. economy, but we’ll want to keep close tabs on this for any signs of potential further deterioration. 

Likewise, incomes earned continued to increase in October, but at a slower rate, and almost definitely driving the mirrored trend seen above in consumption.

Total personal incomes grew 5.3% from October of last year, a decline from the 5.5% posted in September. Disposable personal incomes, which adjusts for taxation, increased by 5.1%, also a decline of 20bps from the prior month’s 5.3%.

Real disposable personal incomes, meaning incomes after Uncle Sam robs you with taxes and then robs you again via inflation, increased by 2.7%, a 40bp decline from September’s 3.1% growth.

That’s objectively healthy growth across the board, but each measure of income also grew at its slowest rate since at least December of 2022.

The Takeaway?

Inflation, along with spending and income growth, all trended in a worse direction last month. But, then again, it was spooky szn, so let’s not get too scared yet.

Although worsening, the degree to which each item worsened was minimal and maintained a relatively healthy pace. We’ll want to keep an eye on this as we close out 2024, but as of now, there’s no major cause for concern.

Separately, the Bureau of Economic Analysis also released its updated estimate of GDP growth and other indicators in Q3. According to the BEA, real GDP still grew by 2.8%, and quarterly inflation was unchanged at 1.5%, so maybe we should be slightly thankful.

Career Corner

Question

I was recently asked this question and would love to get some input on how I should answer it: "What are some line items that might be included in the COGS section of the income statement of a tech and/or biotech company?"

Answer

Look up the public financials of a tech company and a biotech company, and you'll see what they include in COGS (directly below revenue, above gross profit). You want to ensure these line items are directly tied to revenue production.

Then, research each line item and learn about what they are.

Head Mentor, WSO Academy

What's Ripe

Unusual Machines (UMAC) 84.51%

  • From nepo baby to boss baby, Donald Trump Jr. just got a promotion. The son of our 45th and soon-to-be 47th President just got added to the advisory board of this drone maker.

  • Let me be clear—he’s not on their board of directors but an advisory board with far less influence. But who would waste time reading when you could be buying?

  • Markets like the move for obvious reasons. Name recognition and a perceived ability to influence the drone market in favor of Unusual Machines. 

Urban Outfitters (URBN) 18.31%

  • The only time I’ve felt as uncool as I did inside an Urban Outfitters was the entirety of my 5-years of high school. But last quarter, the cool kids were loading up.

  • The owner of Anthropologie, Free People, and their eponymous brand, Urban Outfitters, smashed expectations, reporting earnings of $1.10/sh vs the $0.88/sh expected and sales of $1.36bn, representing 6.2% YoY growth.

  • The Urban Outfitters brand was the sole detractor, falling 8.9%, while sales at Anthropologie grew 5.8% and 5.3% at Free People. Nuuly, their nascent subscription apparel renting service, saw sales boom 48.4%.

  • Higher-end retail carried the sector in Q3. With the Holiday season in Q4 forcing middle-and-lower-income earners to shop, it will be interesting to see how this dynamic unfolds.

What's Rotten

Nordstrom (JWN) 8.12%

  • I figured simply growing sales as an apparel retailer in Q3 would be good enough, but apparently not for Nordstrom. A weaker outlook dominated the data.

  • My personal favorite clothing store delivered EPS of $0.33/sh on $3.4bn in revenue, both beating estimates. Total and same-store sales both grew 4%.

  • Obviously, the online channel was the strongest, up 6% annually. However, changing FY’24 comp sales guidance from “2%” to “1-2%” seems to have taken down the stock for the day. That’s hard to be thankful for.

CrowdStrike (CRWD) 4.59%

  • Someone should check on CrowdStrike’s customers. I feel like this might be a hostage situation, as growth only seemed to get better after the July 19th outage.

  • The cybersecurity leader smashed expectations, reporting over $1bn in quarterly revenue for the first time ever on 29% sales growth. Recurring revenue grew 27%.

  • The company even raised guidance, adding 1% to FY’24 revenue expectations, but it wasn’t enough for the tweenish Mr. Market. If I were CrowdStrike, I'd just be happy I’m still in business after that sh*tshow this summer

Thought Banana

Sunshine & Rainbows

Like the expression “happy camper” or “living the dream,” the term “sunshine and rainbows” is almost always used to describe the opposite or say something sarcastic.

Not today. While not known for their meteorology skills, Americans are forecasting strong economic conditions going forward. Let’s dive in.

What Happened?

On Tuesday, The Conference Board (which I’m still not exactly sure what they do) released the results from their latest consumer vibe check.

According to the survey, consumer confidence reached a 16-month high in November, clocking in at 111.7, a 2.1-point increase from October (where a reading of 100 = consumer confidence in 1985).

Most of the increase appears to stem from a more favorable view of current economic conditions. The Present Situation Index increased by 4.8 points to 140.9, while the Expectations Index increased by just 0.4 points to 92.3.

Underlying those indexes, the biggest drivers of November’s increase came from an improved view of business conditions and job availability.

Obviously, there were some clear contradictions in consumer’s assessment, with a lower proportion of consumers expecting their income to increase in the next 12-months, yet a much higher proportion expected their family’s financial condition to improve over the next 6-months.

Make it make sense.

Lastly, the final notable aspect of the release comes when looking at consumer’s assessment of the odds that a recession will hit in the next 12-months. According to Americans, the odds of that happening have rarely been lower:

The Takeaway?

American consumers tend to be a bunch of negative Nancy’s when asked about the direction of the economy. My personal theory is that people like to say the outlook is bad because pessimism feels smarter than optimis, but I digress.

Surveys are generally worth less than whatever the person conducting them is being paid to do it, but we like to follow these kinds of surveys sometimes because, in economics, expectations really can become a reality. 

Manifesting actually works in economics if enough people agree. If we think the economy will be good, consumers will have no issue going out and spending, largely keeping the economy in good health, for example.

So, despite their contradictions and ability to be even more wrong than economists, a lot of the time, if consumers are feeling good, the economy (probably) will, too. 

The Big Question: Will economic conditions live up to expectations? How much of an impact did the election have on consumer’s outlook?

Banana Brain Teaser

Previous

Set X consists of eight consecutive integers. Set Y consists of all the integers that result from adding 4 to each of the integers in set X and all the integers that result from subtracting 4 from each of the integers in set X. How many more integers are there in set Y than in set X?

Answer: 8

Today

Thabo owns exactly 140 books, and each book is either paperback fiction, paperback nonfiction, or hardcover nonfiction. If he owns 20 more paperback notification books than hardcover nonfiction books and twice as many paperback fiction books as paperback nonfiction books, how many hardcover nonfiction books does Theo own?

Send your guesses to [email protected]

Don't try to buy at the bottom and sell at the top. It can't be done except by liars.

Bernard Baruch

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Happy Investing,
David, Vyom, Ankit & Patrick