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CPI Report - “C” Is For “Confusing”

💸 Inflation came in both higher and lower than expected. And everyone loved it. Find out why this particularly confusing CPI print sent markets soaring.

January 16, 2025



In this issue of the peel:

  • 💸 Inflation came in both higher and lower than expected. And everyone loved it. Find out why this particularly confusing CPI print sent markets soaring.

  • 🍫 Bank shares soar on strong earnings and a steepening yield curve. Tesla joined them for a ride despite the SEC’s new lawsuit. Hershey is losing its longtime CEO and Lululemon didn’t blow analysts away enough.

  • 💰 Highway robbery is occurring on the gridiron right in front of our eyes every week. Find out how FanDuel and DraftKings users are fleecing their sportsbooks.

Market Snapshot

Banana Bits

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Macro Monkey Says

Confusing Price Index

Remember yesterday when we were all hyped up on inflation chilling tf out to the end of 2024?

Haha yeah… about that…

As sick of a prank as that was, it turns out I’m a huge liar. Wholesaler inflation might be moving in the right direction, but we’re gonna have to have words with headline consumer inflation.

Let’s get into it.

The Numbers

On Wednesday, the Bureau of Labor Statistics (BLS) released the December Consumer Price Index (CPI) report, sizing up consumer inflation for the month.

While I’d like the chart below to be what my savings account looks like, I’d rather it not be my country’s inflation rate.

According to the BLS, the CPI increased 0.4% in December, marking the highest monthly print since March. Sadly, this does continue the trend of rising inflation we’ve seen in recent months, especially since rate cuts began in September.

If you’re looking for something to blame, look no further than energy.

Energy costs rose 2.6% for the month, accounting for over 40% of the index’s jump. Gasoline and fuel oil prices rose 4.4% MoM but declined on an annual basis.

Energy prices had been on the decline for much of 2022 and 2023. So, tracking the trend in this index over the next few months will be crucial to understanding inflation’s trajectory.

Core CPI, which strips out food and energy costs, was where the party was at. The core index rose just 0.2%, it’s smallest increase since July and below the 0.3% expected by economists.

Even better, inflation on an annual basis was slightly less change-of-pants-inducing.

The headlining index rose 2.9% annually last month, up from 2.8% in November. As the third month in a row of rising inflation, that’s officially a streak. However, since annual core inflation declined to 3.2%, markets were okay with it.

Our usual suspect—shelter costs—were back up to their dirty tricks but wasn’t as much of an outlier pulling up the rest of the index as it had been for most of the year.

Total shelter costs, which accounted for 36.7% of December’s print, rose 0.3% monthly and 4.6% annually. Owner’s equivalent rent—the BLS’s braindead method of quantifying most of the shelter cost index—rose 4.6% for the year.

If my math is right, 4.6% annual inflation is still higher than the Fed’s 2% target. But we can’t be too mad—that was the lowest annual increase in shelter costs since January 2022.

Plus, markets are all too aware of how poor and lagging the methodology for quantifying shelter costs in the CPI is. So, strong jumps in this index dont make traders flinch.

Of course, I had to save the worst part for last. As much as I hate to be the bearer of bad news, unfortunately, prices for cigarettes rose 7.8%.

The Takeaway?

Underlying inflation mostly (probably) continued its trajectory towards 2% last month.

A blip in energy prices and the longtime thorn in the side that has been shelter prices appear to explain the vast majority of the jump in the headline index. Given the broader context of these markets, investors weren’t too worried.

Equity prices soared, and Treasury yields tanked in the aftermath of the report, with hella-strong earnings from banks like JPMorgan helping build a tide to lift all boats. 

Career Corner

Question

I have a question about networking and applying for positions on the website.

Should I apply to a firm first and then connect with employees to set up calls, or should I reach out to employees at the firm, connect with them, and schedule a call before applying for a position? What would be the best strategy?

Answer

It depends on specific roles and timelines. Ideally, it is great to network before applying, but if the application is open, you need to submit it.

You don’t want to be left out of the process just because you were too late! Most of these applications are rolling, so if you wait too long to apply, you could miss it entirely

Head Mentor, WSO Academy

What's Ripe

Tesla (TSLA) 8.0%

  • This might be the only company in history whose shareholders are actually excited to see their CEO get sued by the SEC. Bro’s X feed is about to be a comedy. Remember this?

  • Anyway, investors looked past the SEC’s investigation likely because 1) it’s immaterial to Tesla (i.e., no one cares) or 2) shareholders think the coming change in Admnistration will fix the problem.

  • But, the real reason shares soared yesterday is because, just like bank stocks above, Tesla loves declining core inflation, easing fears of restrictive rates sticking around for long.

Bank Stocks (C, GS, WFC) 6.5%, 6.0%, 6.7%

  • Maybe we can trade on astrology because when the stars align like they did yesterday for bank stocks, it’s pretty clear which direction we’re heading.

  • Wednesday’s double-whammy of a lower-than-expected core CPI print (which helped steepen the yield curve) combined with strong Q4 earnings sent shares soaring.

  • The most Wall Street-linked banks, like GS and Citi, led the way. Goldman rode a 58% YoY profit jump, while Citi posted a huge swing from Q4’23’s $1.8bn loss to a $2.9bn profit last quarter.

What's Rotten

Lululemon (LULU) 3.1%

  • I guess all those “It’s like Lulu, but 90% cheaper” stores are finally catching up with the emperor of athleisure. Even raising guidance didn’t help shares.

  • On Monday, Lululemon joined a chorus of retailers in updating guidance for the all-important Holiday season. Despite Lulu’s hike to Q4 sales and earnings estimates, markets weren’t impressed.

  • Lulu raised revenue guidance from “high single-digit” to 11-12% growth while upping Q4 EPS from $5.60/sh to $5.825/sh. As early data suggests, the Holiday shopping season was stronger than expected, and markets wanted bigger increases. 

Hershey (HSY) 2.3%

  • We’re gonna be playing Taps for a while on this one. The winner of The Daily Peel’s 2022 Platinum Banana Award for CEO of the Year is hanging ‘em up.

  • Michele Buck, CEO of Hershey since 2017, announced plans to depart the firm last Friday. However, her exit won’t actually become effective until June 30th… 2026.

  • I’d want to stick around for some free chocolate, too. But, with cocoa prices still sky-high combined with declining snack prices as shown in December’s CPI, a new CEO is the least of their problems.

Thought Banana

Beating The House

Getting denied entrance to a casino is a common problem for card-counting geniuses, such as myself (in case that wasn’t already obvious).

I get it, they don’t want the smoke. And it definitely has nothing to do with my strategy of sending grandmas into comas to grab their slot machine winnings.

But, now, the rest of us degenerate gamblers could face a similar problem, too. We’re getting too good at sports betting—let’s dive in.

What Happened?

Great philanthropic institutions like casinos and sportsbooks have been kind enough to allow us all the opportunity to earn financial freedom for ourselves and our families.

Simply put, they’ve replaced the U.S. government as the provider of the American Dream. However, recent reports show that we might be taking too much from these charities.

Last Tuesday, FanDuel, the leading sportsbook subsidiary of Ireland-based Flutter Entertainment, announced that bettors have gotten problematically good, especially in NFL games.

In an update to investors, FanDuel lowered estimates for FY’24 revenue and EBITDA after realizing how badly they were getting smoked by users on NFL games.

We can’t blame them—coming from Ireland, they probably just learned what football is (real football, that is).

But learning the hard way comes with a hefty price to pay. 

If you’re a sportsbook, you want users to win their bets just enough to keep them coming back, but hopefully at a net loss overall, however, when bettors get on a winning streak, that can become the equivalent of a run on the bank for these firms.

According to FanDuel, “The 2024/2025 NFL season to date has been the most customer-friendly since the launch of online sports betting with the highest rate of favorites winning in nearly 20 years.” We can see this dynamic in the above chart.

As a result, Flutter had to slash FY’24 revenue guidance late in the year, pulling expectations down from $6.15bn to $5.78bn.

Total revenue reductions from the period of Nov. 12th-Dec. 31st amounted to $438mn. According to the firm, that will translate to a full-year decline in U.S. revenue of $370mn and a reduction in U.S. EBITDA of $205mn.

FanDuel’s biggest U.S. competitor, DraftKings, issued a similar warning in November.

At the time—which was BEFORE what FanDuel called the “most customer-friendly” game outcomes in nearly two decades—DraftKings CEO Jason Robins estimated that NFL games had already created a $250mn headwind.

Shares sold off ~7% at the time.

The Takeaway?

We won’t know the true impact of genius bettors on these platforms for a few weeks. 

Flutter Entertainment reports their Q4 earnings in late March, while DraftKings is scheduled for February 20th. I can’t wait to see how this plays out.

The Big Question: Did sportsbooks update their odds and pricing well enough to stop the bleeding? How will markets price in a more active yet accurate user base? What locks have you guys got for this week?

Banana Brain Teaser

Previous

A manufacturer makes and sells 2 products, P and Q. The revenue from the sale of each unit of P is $20.00, and the revenue from the sale of each unit of Q is $17.00. Last year, the manufacturer sold twice as many units Q as P. What was the manufacturer’s average (arithmetic mean) revenue per unit sold of these 2 products last year?

Answer: $18.00

Today

A worker carries jugs of liquid soap from a production line to a packaging area, carrying 4 jugs per trip. If the jugs are packed into cartons that hold 7 jugs each, how many jugs are needed to fill the last partially filled carton after the worker has made 17 trips?

Send your guesses to [email protected]

❝

The game taught me the game. And it didn’t spare the rod while teaching.

Jesse Livermore

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Happy Investing,
David, Vyom, Jasper & Patrick