Silver banana goes to…

In this issue of the peel:

• 💸 Does anyone know anything? Hopefully, your doctor does, but when it comes to inflation, answers are as rare as a brain cell in Washington D.C. Let’s try to solve it.

• 🍻 AB InBev cheers’ed its way to a strong Q4 despite continued hating on Bud Light while GM trades self-driving tech for an extra $3 cents a share. Meanwhile, no one likes Bloomin’ Onions anymore.

• 🐿️ Nvidia CEO Jensen Huang’s spirit animal isn’t a chipmunk, it’s a chip monk. That's what this guy has become as Nvidia delivers another quarter of “shut up and take my money” numbers. 

Market Snapshot

Banana Bits

• The U.S. and Ukraine are about to sign a key mineral rights deal that could play a key role in ending the war.

• The yield on 10-year U.S. Treasuries fell below that of the 3-month yesterday, a bigtime recession signal as the real inverted yield curve.

• Americans can’t stand Elon Musk or Mark Zuckerberg, but Musk engenders more extreme feelings.

• The White House is developing an unprecedented media format in which the President hand-picks only certain reporters and outlets to ask questions.

• Salesforce missed on earnings and gave weak guidance.

• President Trump announced plans for a “Gold Card” that costs $5mn and gives buyers Green Card status, with plans to use the funds to help pay down debt.

The Daily Poll

Previous Poll:

With Netflix dominating streaming and YouTube raking in ad dollars, the battle for your screen time is heating up. Who’s got your attention?

Netflix all day: 22.8% // YouTube wins: 45% // I rotate between both: 26.7% // Neither, I’m gaming: 5.5%

Tilt the Odds in Your Favor

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Macro Monkey Says

Is Inflation In The Room With Us Now?

We’ve all been woken up by our parents before, right?

After a long week of cheating on your homework and vaping in the bathroom, you just want to sleep in on Saturday. But then you hear mom or dad say, “Come down here.”

The possibilities are endless. They could be ready to tell you that you’re going to Disney World or that your next 4hrs will be spent shoveling snow in a way that your dad inevitably has to fix later.

That dichotomy—Disney World or shoveling and disappointment—is exactly how the U.S. inflation picture looks right now.

Let’s get into it.

The Numbers

To cut or not to cut has been the question facing Federal Reserve Chairman Jerome Powell and every interest rate from sea to shining sea for more than 2-months now.

With many key economic growth drivers—previously bolstered by massive fiscal spending in recent years—now slowing to rates below inflation as austerity measures take place, concerns are bounding over the potential for stagflation.

Stagflation is a situation in which an economy gets high inflation, so prices are rising quickly, without corresponding growth—much like going to college today.

Now, there is certainly no guarantee that’s our fate in the U.S., but with headline, core, and “supercore” CPI inflation at 3.0%, 3.3%, and 4.1% annually and trending higher as GDP growth slows from 3.1% in Q3’24 to 2.3% in Q4’24, it’s clear where that concern comes from.

So, actual inflation is trending higher. That’s been a big reason why bond yields reversed their decline immediately after the Fed cut rates by 50bps in September, with the 2-year yield rising from just over 3.9% then to just under 4.5% now.

However, as we’ve yapped about for months now, much of that increase has been driven solely by fluctuations in our heavily distorted and delayed housing market.

And we can see this below as, when excluding shelter, sticky core inflation declines by almost a full percentage point:

Still, even with the knowledge that bullsh*tty CPI metrics are skewing inflation readings higher, expectations for future price increases are rising across the board.

We talked about that recently, too, with the University of Michigan’s consumer sentiment survey showing the highest monthly increase in annual inflation expectations since November 2023 and the highest annual jump in yearly expectations since June 2022.

But, as one of my many man-crushes points out, much of the jump in inflation expectations has been due to extreme estimates driven by politics—“absurd forecasts,” as Neil Dutta calls them.

According to Renmac’s Chief Economist, estimates for annual inflation of over 10% have been in a “surge.” He calls these “absurd” because “Trump could implement all of his tariff policies, and inflation still would not be this high.”

Inflation is at least partly a self-fulfilling prophecy. So, if consumers actually expected a spike in short-term (<1yr) inflation, you’d see this play out in rising consumer spending growth and labor market dynamics, like increase wages or raises.

Instead, recent months have shown us flat consumer spending and wage growth while layoffs and discharges have trended higher:

So, elevated inflation expectations are at least somewhat artificially inflated (no pun intended) due to politics and probably avian flu, too. 

But that doesn’t mean that they’re directionally wrong. Inflation very well could still be on the rise, albeit, to a lesser degree than consumers expect.

Business inflation expectations, as again pointed out by Dutta, signal expectations for an inflation rate of  2.3% over the next 12-months. That’s still elevated against the Fed’s 2.0% target but far from the hellish nightmare non-Republican consumers anticipate.

With credit spreads extremely narrow compared to historical trends, this reflects highly liquid financial markets, promoting lending to a degree that could put upward pressure on prices. 

However, with fiscal tightening expected to take place via austerity measures while monetary easing is expected by stopping the balance sheet runoff in May and potential rate cuts, the outlook for liquidity and its impact on inflation is anyone’s guess.

Breakeven inflation, as measured by the spread between the interest rates on regular and inflation-linked debt securities of the same maturity from the same or similar issuer, continues to trend lower for the next 1-3yrs but spikes from the 5-10yr range.

This could signal persistent inflation expectations driven by borrowing to cover deficit spending following the current Administration’s game plan. 

Alternatively, some expect that the Fed may adopt a new inflation target above 2% after JPow peaces out early next year, potentially signaling a fundamental shift in the governance of monetary policy.

The Takeaway?

Here’s my inflation conspiracy theory—no one knows anything.

With signals partially obfuscated by trends that show a myriad of different directions for inflation to head in the next year and beyond, it can be smart to revert to Occam’s razor.

The simple things are that we know 1) consumer spending has been solid, 2) wage growth has been steady, 3) labor markets are strong, 4) fiscal spending is expected to shrink, and 5) much of the actual increase seen in inflation has been drive by shelter.

All of that implies that current inflation fears are overstated and that I just wasted everyone’s time by making you read all that.

Only one way to find out. Stay tuned.

Career Corner

Question

Most job descriptions have "must obtain series 7 and 63 in 90 days". What happens if you don't? Does the company fire you?

Answer

Yes, typically, you need to get licensed, and it will be a condition of employment. Depending on the role and org, it may be the SIE, S79, S7, and S63.

Head Mentor, WSO Academy

Check out WSO Academy

What's Ripe

Anheuser–Busch InBev (BUD) 7.2%

• AB InBev owes Shane Gillis his own personal Clydesdale and probably a few more million than they are already paying him for saving their most valuable brand, Bud Light.

• However, Bud Light had almost nothing to do with the world’s coolest company, I mean, *largest alcoholic beverage maker, beating Street estimates for Q4 earnings.

• The brewer delivered EPS of $0.88/sh on $14.8bn in sales vs estimates for $0.69/sh on $14.1bn. Total sales rose 3.4% despite a 1.9% decline in volumes.

• The company blamed weakness in China and Argentina for lower volumes. Excluding those countries, volume grew 0.9%, mostly driven by U.S. purchases of Chick, I mean, *Mich Ultra. 

General Motors (GM) 3.8%

• “Haha, sorry guys, I know we canceled our next-gen autonomous driving platform that could’ve taken us to a $1tn valuation, but instead, how does an extra 3 cents a share sound?”

• That’s the strategy GM’s going with as the icon of American car manufacturing announced a hike in its quarterly dividend from $0.12/sh to $0.15/sh along with a $6bn buyback program.

• Killing Cruise, along with tariff concerns, have plagued the automaker for months, with shares down almost 20% since late November despite beating earnings estimates last month.

What's Rotten

Bloomin’ Brands (BLMN) 16.8%

• Like a child of a divorce, it can be traumatizing to realize that two things you love most aren’t on the same team. I felt the same way when I learned that Chili’s had a great Q4, but Outback Steakhouse struggled.

• Apparently, no one wants Bloomin’ Onions anymore as revenue was murdered 18.6% YoY, down to $982mn vs estimates for $1.08bn. EPS of $0.22/sh wildly missed estimates for $0.37/sh too.

• Operating margins fell from 4.8% to 1.7%. EPS guidance missed estimates, store openings guidance missed estimates, and someone kicked the CEO’s puppy, too.

Stellantis (STLA) 5.3%

• Wow, your local Chrysler Jeep Dodge Ram dealer wasn’t kidding in that ad when he was screaming about his company’s discounts. Their prices are so good that annual profits fell 70% in Q4.

• The junk drawer of automakers, with all its mish-mosh brands, reported a 17% decline in sales to $164.5bn and earnings of $5.8bn, both well below estimates.

• An oversupply of vehicle inventory and the search for a new CEO that has now gone on for almost 3 months weighed heavily, but the company guided for a return to growth in 2025.

Thought Banana

3 More Months of AI

While that Punxsutawney Phil punk is f*cking around, killing the vibe by promising 6-more weeks of winter, Nvidia is making sure it’s summer everyday where it really matters: on Wall Street.

The firm (pronounced “The” as in “The Ohio State”) reported Q4 earnings that beat Street expectations and gave guidance so strong and high, I thought it was on a fentanyl dose.

Naturally, shares fell immediately in response. Let’s dive in.

The Numbers

The chipmaker that once was known only by people who didn’t drop out of their CS classes in college and is now a household name sought again to buy Wall Street a bullish quarter.

Since ChatGPT launched and Nvidia blew up beginning in late 2022, much of the valuation premium that’s been assigned to the broader market, especially the S&P 500, has been built on a view that AI demand remains strong and that capex spending, cost cuts, and productivity gains born out of the technology will save us from an otherwise looming recession.

There’s no better pulse check for that thesis than Nvidia’s earnings. And regardless of how stimulant-addicted traders respond in the immediate term, the company’s numbers last quarter hold that thesis in tact… for now.

Nvidia reported revenue of $39.33bn and per-share earnings of $0.89/sh, edging out (pause) expectations for $38.05bn and $0.84/sh.

The interesting thing going on here is that the degree to which Nvidia has beat revenue has declined over time. This is expected as a company becomes more mature and develops more stable, predictable revenue streams and analyst coverage increases.

However, what makes it interesting is that the guidance-implied revenue growth rate going into Q1, expecting $43bn in sales this quarter, sits at 9.33%, the highest implied growth rate since Q3’24 (which was really Q3’23 by calendar years, as this company can make computers talk but can’t count).

FY’25 revenue of $130.5bn grew 114% YoY, while Q4 revenue jumped 78%.

Data center revenue led the way, up 142% YoY through the fiscal year to $115.2bn. Auto and robotics revenue was next, up 55% YoY to $1.7bn, while Professional Visualization revenue grew 21% to $1.9bn. Gaming and AI PC sales rose 9% to $11.4bn.

The company’s gross margin continued to deteriorate, falling to 73.5% from 75% in Q3 and 76.7% in Q2.

Q4 net income of $22.09bn grew 14% QoQ and 80% YoY. Net income for FY’25 shot up 145% to $72.88bn.

The only immediate concern I could find stems from declining margins. But still, if having a gross margin of 73.5%, operating margin of 61.1%, net margin of 56.2%, and free cash flow margin of 39.5% is your biggest problem, you’re doing just fine.

The Takeaway?

Nvidia crushed it again, proving why its market cap deserves to be in the 4-comma club. The biggest risks to the company remain 1) supply constraints and 2) narrative change. 

You’re never gonna have zero risk as a publicly traded stock, especially as long as I’m around and will fly to HQ and set the building on fire if they miss earnings, but those are the kinds of risks companies dream of having.

Trade wisely and stay tuned.

The Big Question: Given Nvidia’s dominant position in AI chips, do you think its growth is sustainable, or are we approaching peak AI hype?

Banana Brain Teaser

Previous

A three-digit code for certain locks uses the digits 0, 1, 2, 3, 4, 5, 6, 7, 8, 9 according to the the following constraints. The first digit cannot be 0 and 1, the second digit must be 0 or 1, and the second and third digits cannot both be 0 in the same code. How many different codes are possible?

Answer: 152

Today

Jackie has 2 solutions that are 2% sulfuric acid and 12% sulfuric acid by volume, respectively. If these solutions are mixed in appropriate quantities to produce 60 liters of a solution that is 5% sulfuric acid, approximately how many liters of the 2% solution will be required?

Send your guesses to vyomesh@wallstreetoasis.com

How Would You Rate Today's Peel?

Happy Investing,
David, Vyom, Ankit & Patrick

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