In this issue of the peel:

• 🏘️ No one’s building and no one’s buying—that’s the story of the U.S. housing market. Take a look at how much worse construction activity got in October.

•  🛒 Microsoft crowned another AI champion in C3.ai while Walmart delivered surprisingly strong earnings. Trump Media actually did a thing, but investors aren’t liking it (yet), and H&R Block has some new competition… and new fines.

• 🌐 The Crowned Jewel of the Alphabet Empire is soon to be on the block if the DOJ gets its way. Find out how Step #1 of a potential breakup is set to go down.

Market Snapshot

Banana Bits

• Deal activity continued to come back to life in October, according to FactSet’s M&A Monthly Review.

• Breaking the hearts of bankers everywhere, Jamie Dimon says he doesn’t want a boss and won’t accept a potential nomination for Treasury Secretary.

• The problem with VC investments in AI? None of them are making money.

• Speaking of, Perplexity.ai is kicking Google while it is down.

• Russia’s economic problems and reliance on China are squeezing the country’s budget as they look to ramp up defense spending.

• The era of easy money is over in Tokyo as the Bank of Japan prepares further rate hikes.

• Cantor Fitzgerald CEO Howard Lutnick was nominated by Trump for a promotion to Secretary of Commerce.

• I didn’t realize it was possible for M&A deals to be more morally bankrupt, but then I saw this.

• Shares in Lowe’s got real low after their latest earnings report.

• Congestion charges are officially coming for NYC drivers.

• Joby Aviation is working with UAE officials to offer their eVTOL flying car service in Dubai by 2026 at a cheaper rate than most taxis.

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Macro Monkey Says

Alright, What Do You Want?

It’s funny—you would think that companies would actually want to build products to sell to consumers in order to make money.

Not homebuilders. Your money is no good to them, apparently, as they seem to love seeing you homeless so much that they want to lose enough money to join you on the streets.

As usual, feel free to blame my dad—who’s a carpenter—for what you’re about to read. But, before I give you his address to send your hatemail…

Let’s get into it.

The Numbers

Yesterday, the Census Bureau released another depressing report, this time sizing up exactly how down bad the homebuilding market was in October.

Nearly across the board, housing permits, starts, and completions were down on both a monthly and an annual basis.

In October, the total number of houses permitted to be constructed declined 0.63% from September to an annualized rate of 1.416mn. That’s an annual decline of 7.69%.

Meanwhile, housing units that began construction (starts) declined 3.10% for the month and 3.96% for the year to an annualized rate of 1.311mn.

Finally, the number of completed housing units declined by 4.38% from September to 1.614mn. But this is where we find the lone bright spot—completions were up 16.79% from October 2023.

Still, don’t get too excited about that growth in completions. Without requisite permits and starts, that number is just waiting to decline again, too, and we can already see that in the data on housing units under construction.

Builders were working on constructing an annualized rate of 1.465mn homes in October, a 1.94% monthly decline and a disgusting 12.80% decline from last year.

That brings the total number of housing units under construction to the lowest level since the latter days of the housing crisis in late 2010 and early 2011.

The less dark line sneaking around in the shadows of the above chart indicates the biggest reason why homebuilders hate building homes right now.

Private residential fixed investment is, excluding the pandemic, approaching lows, which has also not been seen since the immediate aftermath of the worst housing crisis the country’s ever seen.

Homebuilders cite a few reasons for this, including a shortage of labor, supply chain issues, high borrowing costs, and low mortgage demand. Each is related, and most are bullsh*t. 

For starters, unemployment in the construction industry is at 4.2%, in line with the rest of the economy and near multidecade lows. Moreover, the number of construction workers is at an all-time high and has grown 2.75% since last year, in line with historical averages.

Next, blaming supply chain issues in 2024 is like blaming your lack of an offer from a bulge bracket bank on the C- you got in sophomore year writing class—you’ve had plenty of time to figure it out.

However, we’ll give them some credence to the interest rate argument. Mortgage applications remain depressed, but mortgage demand—based on survey data—is storming back to life.

The problem is that, usually, when rates rise, home prices fall. However, that has not been the case in the post-pandemic housing market, squeezing would-be homebuyers and preventing them from even considering applying for a mortgage.

Demographic tailwinds support a strong backdrop of mortgage demand from Millenial and Gen Z buyers, but affordability challenges in the current market keep them sidelined.

So, this gives the impression that mortgage demand is low. But, if more homes were built, supply would increase, prices would (in theory) fall, and homebuilders would create their own demand… again, at least in theory.

The Takeaway?

There’s no getting around it—the basic issue plaguing the U.S. housing market is a lack of supply.

Unfortunately, increasing supply is the only way to fix the issue. But, with elevated borrowing costs and a more uncertain-than-usual macro outlook, homebuilders are hesitant to make big, sweeping investments in new construction units.

Homebuilders refuse to build despite ideal conditions for them. If only Uncle Sam had the money to help… 

Career Corner

Question

Had a great chat with a portfolio valuation guy and even got put in touch with another portfolio valuation analyst after the chat (always a good sign).

Do you think there is a respectful way to ask to be connected to actual investment bankers in a way that won’t offend the portfolio valuation guys?

Answer

Not sure what your exact circumstances are, but I strongly suggest following the process to ensure that you are getting the most value out of your networking.

If you go out before you are ready, you could end up missing out on what could prove to be good connections. Networking just to network isn’t super helpful; you need to have a strategy for when and why you are reaching out to maximize the outcomes.

Head Mentor, WSO Academy

Check out WSO Academy

What's Ripe

C3.ai (AI) 24.19%

• The competition to be daddy Microsoft’s favorite child is heating up for OpenAI as enterprise artificial intelligence software provider C3.ai just joined the family.

• Their “strategic alliance” announced Tuesday will make Microsoft Azure the preferred cloud provider for C3’s products while making C3’s software the preferred application provider on Microsoft’s cloud.

• This gives C3 huge product distribution, greatly reducing customer acquisition costs while allowing Microsoft to mooch off their enterprise AI software platform.

Walmart (WMT) 3.00%

• Walmart hitting an all-time high on Tuesday is a clear signal that consumers are at an all-time low with their shopping habits. Why else would earnings look this good?

• The largest company in the world by revenue, Walmart delivered EPS of $0.58/sh on $169.59bn in sales vs estimates for $0.51/sh on $167.72bn.

• An uptick in discretionary, non-grocery purchases boosted the results and led the company to increase Q4 sales expectations, a tough sign for consumers hoping to avoid fistfights on Black Friday.

What's Rotten

Trump Media & Technology Group (DJT) 8.88%

• I’m sure George Washington long dreamed of a day when a President-elect’s media company could acquire a cr*pto trading platform of, by, and for the People.

• Well, he’s smiling down today as Trump Media announced plans to purchase digital asset trading platform Bakkt Holdings. Amazingly, they can actually do it.

• Trump Media holds ~$673mn in cash & equivalents on its balance sheet. Bakkt Holdings trades at a market cap of ~$400mn.

• However, the transaction will almost certainly be done at a helluva premium, requiring financing to buyout the platform that boasts 0.7%, the AUM of Coinbase, and 0.3% of the transaction volume.

H&R Block (HRB) 8.20%

• Doing Uncle Sam’s dirty work won't be as easy—or profitable—for tax collection services like H&R Block this year. The FTC just cash-blocked them.

• Late Monday, the FTC settled a lawsuit with H&R Block, requiring the firm to disclose that most taxpayers don’t qualify for their frequently advertised “free” service.

• The firm also has to pay a $7mn penalty to the agency. Intuit shares, the parent company of TurboTax, fell 5.1%, too, as they, too, can’t engage in the same marketing sc*mbaggery.

• Separately, and later in the day, a Washington Post report emerged alleging that Elon and Vivek plan to use DOGE to create a free tax-filing app.

Thought Banana

No Place For Chrome

Finally, the shoe is on the other foot for those annoying *ss, un-skippable ads for Google on YouTube that always end in “there’s no place like Chrome.”

Now, there’s no place for Chrome, at least according to the DOJ.

Let’s dive in.

What’s Happening?

Late Monday, the Department of Justice announced that it’s swinging for the fences in the ongoing antitrust case against Google.

After a U.S. federal judge ruled on Aug. 5th, 2024, that Google-parent Alphabet holds an illegal monopoly on the search industry, the DOJ has been seeking ways for Google to remedy these antitrust violations.

Their first recommendation for Google? Sell Chrome.

Without digging back into the details of the case, Google’s flagship browser utterly dominates the search space. 

Keep in mind—Google pays Apple ~$20bn/yr to keep Chrome as the default search engine on Safari. So, Chrome’s dominance goes even further than the above image shows.

Plus, many others use Google’s Chromium open-source browser project to run their own, including Edge, Brave, Vivaldi, and more.

Early guesstimates indicate Chrome, which boasts 3.5bn monthly users, could sell for $15-20bn. Already, that excludes many small tech and media players from being able to bid unless they were to do so via some kind of consortium.

Still, the DOJ’s express goal in asking a federal judge to force Google to enact this divestiture is to increase competition in the digital advertising space and lower the barriers to entry for competitive browsers.

You already know names like Amazon and Apple—who could easily afford such an acquisition—would be interested, but that wouldn’t exactly fix any of the identified issues. 

That’d be like if the Dodgers traded Shohei Ohtani to the Yankees. 

The Takeaway?

If a federal judge agrees this is a good first-step remedy, someone else will likely take Google’s place in stealing all your data soon.

Losing Chrome would destroy Google’s ability to give targeted ads outside of YouTube and all but halt the firm’s practice of using Chrome to direct you to other Google services.

However, the forced sale is far from definite. Markets seem to think the move is unlikely, with up 1.57% today.

The only thing we know is that an inevitable years-long court case is in the works. Shoutout to Google’s lawyers— as usual, they’re the real winners.

The Big Question: Will Google sell Chrome? Who’s gonna buy it? Will the DOJ seek more breakup-style remedies? How will those play out? Will a judge let them go through? 

Banana Brain Teaser

Previous

On a vacation, Rose exchanged $500.00 for euros at an exchange rate of 0.80 euro per dollar and spent ¾ of the euros she received. If she exchanged the remaining euros for dollars at an exchange rate of $1.20 per euro, what was the dollar amount she received?

Answer: $120.00

Today

Bouquets are to be made using white tulips and red tulips, and the ratio of the number of white tulips to the number of red tulips is to be the same in each bouquet. If there are 15 white tulips and 85 red tulips available for the bouquets, what is the greatest number of bouquets that can be made using all the tulips available?

Send your guesses to [email protected]

How Would You Rate Today's Peel?

Happy Investing,
David, Vyom, Ankit & Patrick

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