Fed Cuts Rates

Happy belated Fed Rate Cut Day to all who celebrate. JPow turned back to JPump with the Fed’s decision to cut rates by 50bps yesterday, sending stocks higher. However, as usual, he killed the vibe when he opened his mouth. Scroll down to find out why.

September 19, 2024

In partnership with

In this issue of the peel:

  • Happy belated Fed Rate Cut Day to all who celebrate. JPow turned back to JPump with the Fed’s decision to cut rates by 50bps yesterday, sending stocks higher. However, as usual, he killed the vibe when he opened his mouth. Scroll down to find out why.

  • This moon-based company just signed a contract worth 4x its market cap, while VF Corp proves that looking drippy is still cool. Meanwhile, poor communication from insiders led to a tough session for Opendoor, and Casella Waste Systems proves why they are (literally) trash.

  • Sure, JPow cuts rates, but homebuilders have been in falling rate mode for months now. That’s why we saw strong data in August’s New Residential Construction report, released yesterday. Get all the details below.

Market Snapshot

Banana Bits

The Rising Demand for Whiskey: A Smart Investor’s Choice

Why are 250,000 Vinovest customers investing in whiskey?

In a word - consumption.

Global alcohol consumption is on the rise, with projections hitting new peaks by 2028. Whiskey, in particular, is experiencing significant growth, with the number of US craft distilleries quadrupling in the past decade. Younger generations are moving from beer to cocktails, boosting whiskey's popularity.

That’s not all.

Whiskey's tangible nature, market resilience, and Vinovest’s strategic approach make whiskey a smart addition to any diversified portfolio.

Macro Monkey Says

What’s Next?

We don’t have a subscription to ESPN8 The Ocho, but that didn’t stop us from watching an event “bigger than the World Cup, World Series, and the moon landing combined!!!”

The Fed finally did it. Our hero, Fed Chair JPow, is back to his JPump ways as equities ripped in the immediate aftermath of the central bank’s cut.

Let’s get into it.

What Happened?

The Mona Lisa, a sign that says “Free Beer,” hitting a 4-leg parlay—some things are too beautiful to describe.

Add to that list the image below.

After 419 days of the highest interest rates we’ve seen in the last two decades and 916 days after starting the fastest rate hiking cycle in American history, interest rates are finally moving lower.

The Federal Reserve cut rates by 50bps on Wednesday, which is the higher end of expectations.

As recently as July, Powell said, “We are not actively considering a 50 basis point cut at this time." However, climbing unemployment while inflation continues to move lower convinced the Fed to move more aggressively.

Not everyone agreed. For the first time since 2005, a Fed Governor dissented from the decision as Michelle Bowman preferred a 25bp cut.

Several key quotes underscore the reasoning behind the Fed’s decision to cut by 50bps, including:

  • “The labor market is in solid condition and our intention with our policy move today is to keep it there. The U.S. economy is in good shape… we want to keep it there, that’s what we’re doing.”

  • “We don’t think we’re behind. We think this is timely, but I think you can take this as a sign of our commitment to not get behind.”

  • “We’re not thinking about stopping runoff because of this at all. We know that these two things can happen side by side. In a sense, they’re both a form of normalization and, so, for a time, you can have the balance sheet shrinking but also be cutting rates.”

  • “The level of those conditions is actually pretty close to what I’d call maximum employment. So, you’re close to mandate, maybe at mandate on that.”

Translation: the U.S. economy is in great shape, arguably at equilibrium, and the Fed’s goal with yesterday’s cut is to keep it there by preventing further deterioration in the labor market.

What’s Next?

This is the moment we’ve been waiting for. Now that the cut has come and gone, all eyes will be on the path of policy loosening going forward.

Luckily, this meeting came with an updated Summary of Economic Projections, so we can see how the Fed is thinking about these things going forward.

The above image, called the “Dot Plot,” shows each Fed Board Governor’s expectation for the level of interest rates at the end of each given year, represented by… a dot. 

Prior to today’s decision to cut by 50bps, two Fed Governors expected just two 25bp cuts before year-end. 17 of 19 members expected three or more, 10 expected four or more, and 1 expected five or more.

That is a drastic change of pace from the July dot plot. Take a look below:

Back then, 3 members expected zero cuts by year-end. Moreover, in June, the lowest rate expectation by year-end was… exactly where rates are now, 4.75%-5%.

With that in mind, take the following with a heaping grain of salt. 

Since July, expectations for unemployment by the end of 2024 moved higher, expectations for inflation moved lower, and GDP growth moved lower too.

The Takeaway?

God damn, busy day today.

The problem with the U.S. economy today is that the only path forward appears to be some kind of worsening, at least from the Fed’s perspective that we’re currently “maybe at mandate.”

The funny thing is that, as of now, “no rate cuts are planned” going forward. That’s at least the Fed’s explicit position, but they’re also kinda giving markets a wink-wink, appearing to know that position will change going forward.

Markets continue to price in further cutting than the Fed expects by year-end. According to the Atlanta Fed’s Tracker, expectations are for the midpoint of the Fed funds target range to sit around 4%. Meanwhile, the Fed’s dot plots imply a year-end midpoint of 4.5%.

As we approach 2025, the spread in year-end expectations will be one of the most impactful factors on equity prices going forward.

Time, along with pending employment and inflation reports, will bring those closer together. Stay tuned to see who ends up being right.

What's Ripe

Intuitive Machines (LUNR) 38.33%

  • How does a quick $4.82bn sound? Goes without saying I have no need for it, but this Lunar company just earned a contract 4x the size of its market cap.

  • From NASA, the contract involves a 5-year term with a max value of $4.82bn and a $150mn award upfront to build “lunar data satellites.”

  • Analysts are excited not only because of the deal size but also because winning the award serves as proof of the young firm's game.

VF Corp (VFC) 3.86%

  • Breaking News: not being naked is still in style. We’ll see how long that lasts with the way Gen Z is heading, but for now, analysts are getting more bullish on VFC.

  • The company behind Vans, NorthFace, and other cool kid brands got an upgrade from Barclays early Wednesday on a “more attractive risk-reward.”

  • Shares were down 1.3% YTD before yesterday’s rise. Fears of retracted apparel spending appear to be abating, given recent strength in income and savings data.

What's Rotten

Opendoor (OPEN) 6.78%

  • It requires a truly special kind of stupid for a housing stock to fall on the same day the Fed cuts rates. Honestly, I’m impressed.

  • Interim Chief Financial Officer Christina Schwartz sold 25.8k shares on Monday—the exact same day Chief Legal Officer Sydney Schaub sold 77.4k shares.

  • Communication is tough. There are many reasons to sell, but the striking coincidence of selling on the same day at the same price signals an expected downside from insiders.

Casella Waste Systems (CWST) 5.78%

  • After Casella took 4 additional days to pick up the dumpster from my driveway, it’s not hard to understand why they need to fundraise.

  • The waste management firm announced plans to raise $400mn by selling Class A shares, directly diluting the ownership of current investors.

  • Maybe if they picked up their dumpsters on time, they could increase turnover enough to not need to fundraise. But I digress.

Thought Banana

Hyped Up Homebuilders

Does Fed Chair JPow think he’s cool or something?

Sure, he might’ve cut rates, but that’s old news to homebuilders. Mortgage rates have been there, done that since (conveniently) the day after I finalized my mortgage financing.

I’m not clinically depressed about it or anything. Homebuilders, on the other hand, feel like kids getting Happy Meals and saying, “I’m Lovin’ It.”

The Numbers

China might’ve taken home the gold in ping pong at this summer’s Olympics, but homebuilders are bringing strong competition.

Last month, the annualized amount of Permits, Starts, and Completed housing units clocked in at:

  • Permits: 1.475mn, up 4.91% monthly and down 6.53% annually

  • Starts: 1.356mn, up 9.62% monthly and up 3.91% annually

  • Completions: 1.788mn, up 9.22% monthly and 30.23% annually

Not great, but not terrible either. Each building stage set a multi-month high in its MoM growth rate, with Permits rising the fastest since August of last year.

The question, however, is whether these strong numbers indicate a trend of increased building or are just another example of the monthly ping-ponging back and forth between growth and contraction.

There are reasons to believe this uptick is here to stay, however.

Going into August, average 30-year fixed mortgage rates sat at 6.78%. By the end of the month, they were sitting at 6.35%, a 6.3% drop, according to Freddie Mac.

Declining mortgage rates carry increased demand via rising mortgage applications. So, the implied demand increase following rate declines could motivate homebuilders to maintain higher levels of construction in the short-intermediate term.

The Takeaway?

But…. don’t expect that to change anything to do with home prices.

Record-low affordability is driven by both sky-high mortgage rates and limited housing supply. With rates coming lower, supply should continue to increase, but we’d expect demand to follow right along with it. If that’s the case, prices won’t move.

Demographic tailwinds from the extended adolescence of millennials and Gen Z provide a backbone of demand that doesn’t look to let up anytime soon.

Or, maybe I’m just sh*tting my pants that prices will collapse as supply grows, and my house will put me in an even worse financial position (if that’s possible). Regardless, I’ll keep smoking this copium.

The Big Question: Will home prices ever fall into “affordable” territory again? What policies could be put in place to make housing more affordable, if any?

Banana Brain Teaser

Previous

A positive integer n is a perfect number provided that the sum of all the positive factors of n, including 1 and n, is equal to 2n. What is the sum of the reciprocals of all the positive factors of the perfect number 28?

Answer: 2

Today

In a certain medical survey, 45% of the people surveyed had the type A antigen in their blood and 3% had both the type A antigen and the type B antigen. What is the closest to the percent of those with the type A antigen which also had the type B antigen?

Send your guesses to [email protected]

❝

One man's opportunism is another man's statesmanship.

Milton Friedman

How Would You Rate Today's Peel?


Happy Investing,
David, Vyom, Ankit & Patrick