Silver banana goes to…

In this issue of the peel:

• 📉 The market is going through a historic stretch of “bad breadth,” with more decliners than gainers in the S&P.

• 🏦 After a bumpy week of economic data, the Fed looks set to cut rates at next week’s meeting.

• ✂️ Trump is looking to trim some proverbial meat off the governmental bone by cutting employees.

Market Snapshot

Banana Bits

• Take a look at which stocks top investors think will be winners heading into the new year.

• The case of the mysterious googly eyes continues as authorities search for the hilariously creative vandals.

• Millennials are helping push a trend away from muscle cars and back to 80s classics.

• Mortgage rate buydowns: The sneaky strategy home buyers use to get cheaper mortgage rates.

The Daily Poll

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Macro Monkey Says

The Market’s Bad Breadth

Not breath, breadth stupid! There are several indicators of stock market health that go beyond simply whether stocks are up or down. 

One of those indicators is market breadth or the number of stocks within an index that are advancing versus declining. 

This metric provides insight into whether individual stocks are moving in-line with the headline index or whether the index is being driven by a few weighty stocks. 

What Happened

The S&P 500 is up 27% YTD, but looking beneath the surface unearths a deeper story. Compare the number of winners to the number of losers, and you will see a deterioration that hasn't occurred in over 20 years. 

As of Friday’s close, more stocks in the S&P have fallen than risen for 10 trading sessions in a row, even as the overall index has gone up. 

Zooming in on this month, the S&P has been slightly up since the beginning of December, while the S&P Equal Weight Index, which weighs each component of the index equally, returned a negative 2.5%.

The Numbers

Why does this matter? Because market breadth reveals hidden trends. If a major index is rising but most of its individual components are not, it means that the market is being upheld by a few large-cap stocks. 

Taking a close look reveals that indeed, Nvidia is up 171% YTD. And if that wasn’t enough, the other FAANG stocks (Meta, Apple, Amazon,  and Google) together are up 58% YTD. 

Simply put, people don’t necessarily love individual companies, but rather, they love a handful of companies while ignoring the rest. The data is concerning to investors for a couple of reasons. 

The first is that the long-term health of the economy depends on solid performance from a diverse array of businesses, ranging from small and mid-caps to large caps. 

The second is that overreliance on a few companies creates a stock market that is trading on thin ice. What happens to the S&P if Nvidia isn’t up 171%? Does it all fall apart?

We do have some historical precedent for this. The market experienced something similar leading up to September 2001. The result: The S&P ended down 13% that year and down another 23% the year after. 

That doesn’t make me feel good about the decision I just made to dump more of my 401(k) match into the market. Of course, there were obviously a lot more important geopolitical matters in 2001 that contributed to the market’s decline.

A more recent example was in December 2018. The S&P was positive for the year, but its individual components fell. On Christmas Eve of that year, stocks got beaten down so badly that the S&P reversed to a YTD loss.

Interestingly, when breadth is this bad, stocks are generally well below record levels. According to SentimenTrader’s research analyst Jason Goepfer, there have been 20 comparable episodes over the past 70 years. On average, these occurred when the S&P 500 was 12% below its record.

2024 brings uncharted territory as we’re sitting at a record high for the market, leaving prognosticators confused as to the next move. 

The Takeaway

The current state of the market’s breadth highlights a troubling imbalance beneath the surface of headline gains. 

While the S&P 500's record-breaking performance may capture attention, the underlying data paints a less optimistic picture. A small handful of mega-cap stocks, like Nvidia and the FAANG giants, are shouldering the weight of the index, leaving the broader market behind. 

This skew not only signals a lack of widespread confidence in individual companies but also raises concerns about the sustainability of the rally. 

Historical precedents remind us that such narrow market leadership has often preceded periods of volatility or decline. With the S&P sitting at record highs despite dismal breadth, the market enters uncharted waters, leaving investors questioning whether the ice will hold—or crack.

Career Corner

Question

Yesterday, a banker replied to me asking when I would be available to talk. I gave him times for today, but then it seemed like he forgot about me. How would you recommend following up? He said that he could not talk any time after today.

Answer

Hi NAME,

I hope you’re doing well! Given the upcoming holiday, I wanted to check if it might be more convenient for you to schedule our chat after the holiday period. Since my schedule is flexible, I could talk from 9am to 9pm ET throughout the rest of the summer. Please let me know what works best for you.

Looking forward to our conversation!

Best,

NAME

Head Mentor, WSO Academy

Check out WSO Academy

What's Ripe

Broadcom Inc. (AVGO) 24.43% 

• Broadcom joined the elite club of BATMMAAN stocks. This is a basket of 8 stocks with a trillion-dollar market cap and includes names like Nvidia, Microsoft, Apple, and Tesla. The 24% jump was the best one-day performance in the company’s history after destroying earnings. I may not be able to explain AI and its various use cases eloquently, but I sure do know it is making people a lot of money, and it signals a good time to get in.

• The company saw a 220% increase in AI revenue, posting $12.2bn in sales for the quarter. CEO Hock Tan is rapidly developing custom AI chips to sell to large cloud customers like Meta, Google, and Microsoft. Man, it hurts to see Broadcom soar while my Nvidia position continues to cause me pain each and every day, but such is life.

• Broadcom has been a leader in the semiconductor industry for quite a while. Rather than the typical AI companies we hear about, which focus on GPUs, Broadcom has built its business on connectivity and networking solutions. They focus more on hardware with products like ethernet switches, fiber optics, and Wi-Fi connectivity, while companies like Nvidia focus on software for machine learning and other AI applications.

Restoration Hardware (RH) 16.95% 

• Despite missing earnings, Restoration Hardware was one of the best-performing stocks on Friday. It looks like demand is finally coming back for luxury furniture retailers after experiencing “the worst housing market in 30 years,” according to the CEO.

• During the pandemic, RH’s stock popped off as high-income customers were flush with cash. The pandemic led to a wave of home buying as people moved out of cities and into suburbs. People figured if they were gonna be stuck in the house for the better part of two years, they might as well quarantine in style. So, luxury furniture stores like RH got a huge boost in sales.

• Fast forward a couple of years later, and people were back in the office, the opposite of flush with cash. Broke, as it is colloquially known. We’ll say “financially constrained” to be diplomatic. Anyway, the home upgrading frenzy came to an end, as did the stock’s bull run. Now, the company is seeing double-digit increases in demand per month, a great sign of a stabilizing economy.

What's Rotten

Sweetgreen, Inc. (SG) 8.69%

• Sweetgreen’s stock has been on a LeBron-type run for the ages this year, up over 200% since January. Ok, if I’m an investor, I don’t care how disciplined my investment style is or how amazing the company is. At some point, I’m going to take a few dollars of profit and call it a day, even if there is more room for the stock to run.

• That seems to be the driver of Friday’s selloff, as there were no damning news reports or scandals. The stock ripped after earnings and simply ran out of breath. Christmas is approaching, and people need to start their egregiously last-minute gift shopping. Now seems like a perfect time to grab some money from a stock that has killed it all year.

• Investors are putting a lot of genuine faith into this stock. On the outside, you see a delicious salad and a trendy exterior. When you look under the hood, you find a company with around $50mn in net losses YTD and a CFO and Founder who have been aggressively selling shares.

Under Armour (UA) 8.13%

• Looks like Under Armour is losing style along with losing investors. On Friday, Morgan Stanley reiterated its underweight rating and set a $4.00 price target. Yikes. That’s almost like a lifeguard tossing you a pool noodle when you’re drowning in the deep end. Thanks for the gesture, but you actually didn’t help at all and, in fact, made me look worse.

• Recent hiccups have included an 11% decrease in revenue in Q2, costly restructuring expenses, and management turnover. In fact, things got so turbulent that former CEO Kevin Plank returned to the company, replacing a CEO who had been at the helm less than a year.

• Wall Street has been split since Under Armour had its first investor day under a new management team. The company laid out its strategic plan going forward, which some analysts had and still have difficulty buying into. UA needs to revitalize its brand after losing steam to the likes of Nike and Adidas, but Morgan Stanley is saying, “Don’t tell me, show me.”

Thought Banana

Time to Cut the Fat

Former President Donald Trump has unveiled plans to significantly restructure the federal government if reelected, aiming to streamline operations, cut costs, and improve efficiency. 

His proposals include measures to reduce the size of the federal workforce, expedite the dismissal of underperforming employees, and target inefficiencies in government spending. 

According to supporters, these changes could lead to substantial deficit reductions over time, though they also face scrutiny regarding implementation and impact.

Key Aspects of the Plan

Reducing the Federal Workforce - Trump has proposed shrinking the federal workforce through a combination of attrition and more flexible firing policies. 

Legislation under consideration would make it easier to dismiss government employees who fail to meet performance standards. Proponents argue that reducing redundancy and promoting accountability could lead to a leaner and more effective government. 

Critics, however, caution that such changes might undermine employee morale and weaken federal agencies' ability to deliver essential services.

Streamlining Government Operations - The plan involves consolidating overlapping functions across federal agencies. 

The government could save billions annually by centralizing administrative duties and eliminating duplicative programs. Similar efforts have been attempted in the past, but success often depends on rigorous implementation and bipartisan support.

Focusing on Spending Efficiency -  Another cornerstone of Trump’s plan is to reevaluate federal spending priorities. Programs deemed inefficient or unnecessary could face cuts, while funds would be redirected to areas with measurable returns on investment. 

Advocates of this approach point to potential savings in areas like procurement and grants administration.

The federal deficit—the gap between government spending and revenue—has been a persistent concern, with projections showing continued growth due to rising entitlement costs and interest payments on the national debt. Trump’s proposed reforms could help reduce the deficit in several ways:

• Lower Payroll Costs: Shrinking the federal workforce would reduce salary and pension obligations.

• Program Cuts: Targeted cuts to underperforming programs could save billions.

• Enhanced Productivity: Improved efficiency in government operations might increase the value derived from taxpayer dollars.

However, the extent of these savings depends on factors such as the scale of workforce reductions, the effectiveness of spending reforms, and the political feasibility of implementing cuts.

Challenges and Criticism

While the potential for savings is substantial, Trump’s proposals face several challenges:

• Implementation Risks: Past efforts to reform the federal government have encountered significant resistance, both from within federal agencies and from external stakeholders. Streamlining large bureaucracies is inherently complex and prone to delays.

• Service Delivery Concerns: Critics argue that reducing the workforce could impair the government’s ability to deliver critical services, particularly in areas like healthcare, defense, and disaster response.

• Economic Implications: Job cuts in the federal sector could have ripple effects on the broader economy, particularly in regions heavily dependent on government employment.

Historical Context

Efforts to downsize and reform the federal government are not new. Presidents from both parties have pursued similar agendas with varying degrees of success. 

For example, during the 1990s, the Clinton administration’s "Reinventing Government" initiative sought to reduce waste and improve efficiency, achieving modest success. 

Trump’s proposals echo these past efforts but come at a time of heightened partisanship, potentially complicating their execution.

The Takeaway

Trump’s plan to shrink the federal government and make spending more efficient represents a bold approach to tackling the deficit. Supporters see it as a necessary step to address long-term fiscal challenges, while critics worry about unintended consequences. 

As the debate unfolds, the success of these proposals will depend on their design, execution, and the ability to balance cost-cutting with maintaining essential services. 

Whether these measures can make a meaningful dent in the national deficit remains to be seen, but they have undeniably reignited conversations about the role and size of government in modern America.

The Big Question: Given the challenges of bipartisan support and implementation, what strategies could increase the likelihood of success for Trump’s proposed government reforms?

Banana Brain Teaser

Previous

Last week, Chris earned $x per hour for the first 40 hours worked plus $22 per hour for each hour worked beyond 40 hours. If last week Chris earned a total of $816 by working 48 hours, what is the value of x?

Answer: 16

Today

In a certain sequence of 8 numbers, each number after the first is 1 more than the previous number. If the first number is -5, how many of the numbers in the sequence are positive?

Send your guesses to [email protected]

How Would You Rate Today's Peel?

Happy Investing,
David, Vyom, Ankit & Patrick

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