In this issue of the peel:

• U.S. GDP hit a nitro boost in Q2, already earning a gold medal before the games even started. Find out where the growth came from and what was trying to kill the vibe

• War continues to drive shareholder value while teenage girls across America are suffering under a brutal recession

• A classic American brand and company just had its worst trading day since I was in 3rd grade. Earnings szn is a dangerous game to play.

Market Snapshot

Banana Bits

• Lineage just completed the largest IPO of 2024, up 3%

• Southwest’s latest earnings are causing a huge change in the business model

• Uber and Lyft breathe a huge sigh of relief as California rules that drivers can remain contractors

• This glucose monitoring company just lost almost 40% after-hours

The Daily Poll

Macro Monkey Says

GDP’s Nitro Boost

Current President drops out of the election? No problem. Former President gets shot? Light work. About to rack up an infinite amount of gold medals in Paris? Absolute lock.

And amid all the craziness, the U.S. economy keeps on singing

Specifically in Q2, the song we were singing came from our very own Miley Cyrus because GDP simply can’t stop and won’t stop…. for now, at least.

We’ll see how long it lasts, but for now, let’s get into it.

The Numbers

Real GDP growth doubled in Q2, according to yesterday’s preliminary estimate, rising from 1.4% in the first three months of the year to 2.8% over the last three months.

Even better, we only have one-quarter left until that stupid, distorting far-left bar is gone from the above image!

Anyway, Q2’s Pete Davidson growth levels (surprisingly hot) were primarily driven by a 1.5% increase in total consumer spending over the period. Clearly, you apes are taking my advice to rack up godless amounts of credit card debt to keep spending, so good work!

Under the hood, the spending consumers were doing is relatively encouraging as well.

Much of the uptick came from increased outlays to home durable goods, vehicles, and recreational goods. Those first two tend to have rate exposure through credit financing, so consumers are either 1) accepting higher rates or 2) getting ready for rate cuts.

Increased spending on recreational goods bodes well for discretionary spending, indicating consumers may not be as pinched as they seem.

However, on the services side, healthcare costs and housing came in as the largest contributors. While fine from a pure spending point of view, the increase here is linked to outsized inflation in these items rather than increased consumption.

Killing the vibe were imports and total housing investment.

Increased imports are a good sign from a consumer lens as they contribute to spending but can be viewed as weak from a trade deficit perspective. But, while the USD is still the global reserve currency, rising imports aren’t much of a threat.

Keep in mind: Imports get subtracted from the GDP equation. (GDP = C+I+G+NX)

GDP’s real nitro boost in Q2, however, came from a scarcely watched line item called “final sales to private domestic purchasers.” This reading strips government spending and volatile line items like inventory investment to get a more accurate measure of underlying demand.

In Q2, this reading increased at a 2.6% real annualized rate, continuing to show strength in U.S. materialism.

Spending on equipment and intellectual property was also strong, growing 5.2% and 4.6%, respectively, suggesting business demand remains strong and productivity remains on the rise.

Lastly, and more depressingly, real disposable personal incomes grew at a slower rate in Q2 than in Q1, coming in at just 1%.

Prices, as measured by gross domestic purchase prices, grew 2.3%. But we’ll get an updated PCE price index tomorrow, so stay tuned for Q2’s “truest” inflation reading from the Fed’s point of view.

The Takeaway?

I hope Fed Chair JPow is chilling on a beach hammering piña coladas somewhere in the Caribbean because the Fed’s got all the time in the world.

With inflation continuing to recede while domestic demand and consumer spending are elevated, the Fed is in no rush to cut rates.

However, with unemployment continuing to rise and corporate earnings off to a mixed start, this earnings szn, there is still reason to be concerned.

Yesterday’s data did almost nothing to rate expectations in September and beyond. Like Flatts punching SpongeBob, markets absorbed the impact without much reaction at all.

What's Ripe

RTX Corp (RTX) 8.2%

• The age-old question “War, what is it good for?” has finally been answered—quarterly earnings. Just ask RTX about their 1,038% free cash flow growth.

• Revenue may have only grown 8% annually while GAAP net income was down 92%, but that was enough to beat estimates across the board.

• Revenue and earnings guidance were increased, and the company’s backlog remains enormous, as it is apparently unable to make missiles fast enough. That’ll make ya feel good, huh?

American Airlines (AAL) 4.2%

• It can’t be a coincidence that the airline with the most freedom also created the most shareholder value last quarter, truly living up to the name “American.”

• Now, all they have to do is bomb a Middle Eastern country for their oil, but for now, I think they’ll settle with a 3.8% earnings beat… despite missing on sales.

• The company didn’t escape ticket fare declines, with net income down 46% on 2% annual revenue growth. Shares only rose because their numbers were less bad than Delta and United.

What's Rotten

Lululemon Athletica (LULU) 9.1%

• An epic tragedy is underway as teenage girls across America face a recession of their own. Starbucks already got hit, Lulu was slammed today, and we can only pray for Pinterest when they report on Tuesday.

• Yesterday’s smackdown of Lulu shares came as JPMorgan, Citi, and TD Cowen coincidentally downgraded shares prior to open.

• The firms cite a category slowdown in premium apparel. Price targets were slashed by 26%, 28%, and 6%, respectively, but all still see upside.

New York Community Bancorp (NYCB) 3.0%

• If Diary of a Wimpy Kid were a stock, it would be NYCB. Shares got bullied as the firm’s CRE exposure has proved worse than having the cheese touch.

• Loan loss provisions spiked a comedic 695% YoY with a 330% quarterly increase in net charge-offs, leading to a loss of $1.05/sh, 133% wider than expected.

• Net interest income came in 38% lower than Q2’23 at just $557mn, leading to a 9% miss on revenue, a 44% decline from last year. Just devastating.

Thought Banana

Earnings Spotlight: Ford Motor Company (F, 18.3%)

Oh, how the tables turn.

We’ve all received those “I’d like to talk to you about your car’s extended warranty” scam calls, but last quarter, Ford was on the receiving end.

The company just had its worst trading day since 2009 on—to put it as nicely as possible—absolute dogsh*t earnings. Let’s check it out.

The Numbers

Driving its worst day since flirting with bankruptcy amid the GFC, the U.S.’s second-largest automaker by market share missed big time on its bottom line.

Ford missed estimates by >30%, reporting $1.8bn in net income, or $0.47/sh, against estimates for $0.68/sh.

Cratering sales in Ford’s EV unit, labeled “Model E,” hurt quite a bit, especially considering an EBIT loss in this unit of $1.143bn wiped nearly all EBIT earned in Ford’s legacy consumer unit, Blue, of $1.171bn.

Ford’s Pro segment, which sells to organizations and businesses, was the only solid performer, registering an EBIT of $2.564bn.

But, one of the primary causes for concern was the spike in the company’s warranty reserves.

Ford and other similar firms build a warranty reserve balance similar to a bank’s provision for credit losses. It’s essentially a savings account to cover future warranty claims.

Last quarter, that balance ballooned to $800mn QoQ. As a ratio against sales, warranty reserves now sit around 4%, more than double the firm’s historical average of 1.9%.

However, we might not even know how bad it really is as the firm didn’t disclose total warranty costs for Q2.

In addition to the concern about income and cash burns, watching this line item grow faster than OJ Simpson driving his Ford Bronco poses an additional concern for the quality of Ford vehicles.

The Takeaway?

CEO Jim Farley sought to put a positive spin on things, signaling that this quarter should be the worst of it.

With rates set to decline, auto sale activity should increase in tandem as financing becomes cheaper. That will help, but arguably, the focus should be on building cars that don’t require as much repair as New Orleans did after Katrina.

The Big Question: Can Ford make a recovery and make its EV business profitable in the near future? Should Ford join the race for autonomous driving like GM and Tesla?

Banana Brain Teaser

Previous

Xavier, Yvonne, and Zelda each try independently to solve a problem. If their individual probabilities for success are 1/4, 1/2, and 5/8, respectively, what is the probability that Xavier and Yvonne, but not Zelda, will solve the problem?

Answer: 3/64 

Today

Seed mixture X is 40 percent ryegrass and 60 percent bluegrass by weight; seed mixture Y is 25 percent ryegrass and 75 percent fescue. If a mixture of X and Y contains 30 percent ryegrass, what percent of the weight of the mixture is X?

Send your guesses to [email protected]

How Would You Rate Today's Peel?

Happy Investing,
David, Vyom, Jasper & Patrick

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