Inflation Falls Further

What’s that saying about beating a dead horse? I can’t remember, but these monthly inflation prints are starting to feel like we’re beating a dead cavalry. Wholesale inflation continued to fall in July, and for some line items, maybe by too much. We’ve killed the inflation beast; now, it's like we’re setting the body on fire.

August 14, 2024

Silver banana goes to…

In this issue of the peel:

  • What’s that saying about beating a dead horse? I can’t remember, but these monthly inflation prints are starting to feel like we’re beating a dead cavalry. Wholesale inflation continued to fall in July, and for some line items, maybe by too much. We’ve killed the inflation beast; now, it's like we’re setting the body on fire.

  • On Running shows Nike where all their (former) customers are going for shoes now with their latest earnings report. Meanwhile, Home Depot begs for a rate cut while Chipotle just lost the GOAT of a CEO, making Starbucks very happy. 

  • The U.S. is going nuclear again—and this time, it might actually be a brilliant move. Investment in nuclear reactors has come back to life in 2024. We love to see it—cheap and limitless energy, here we come!

Market Snapshot

Banana Bits

The Daily Poll

Which stock will perform better over the next 12 months?

Login or Subscribe to participate in polls.

Previous Poll:

Which sector will have the highest returns between now and the end of 2024?

Technology: 47.9% // Financials: 11.6% // Healthcare: 12.4% // Consumer Discretionary: 1.5% // Communication Services: 1.1 // Industrials: 4.5% // Consumer Staples: 3% // Energy: 9.4% // Utilities: 2.6% // Real Estate: 6%

Tilt the Odds in Your Favor

In the competitive world of high finance, every advantage counts. Our exclusive curriculum, designed by industry experts, sharpens your skills and knowledge, making you a top candidate.

Enjoy personalized coaching, targeted internship opportunities, and a robust network of finance professionals with WSO Academy. 

Macro Monkey Says

Disinflation To Deflation

For portfolio managers across America, the only days more cherished than their wedding and the birth of their children might be those sweet declining inflation prints. 

Except, these are the anniversaries they’ll actually remember.

Tuesday, August 13th is now the latest big day for PMs, strategists, and the other Wall Street types Kanye toasts in Runaway. 

Wholesale inflation continued to decline in July. Let’s get into it.

The Numbers

Yesterday, the Bureau of Labor Statistics (BLS) reported that wholesale inflation, as measured by the Producer Price Index (PPI), increased by just 0.1% for the month.

That’s a decline from the 0.2% PPI increase in June and below the same 0.2% guesstimate economists expected in July.

And it was all thanks to services. Goods prices were putting in work, increasing the most on a monthly basis since February at 0.6%.

Luckily, a hero emerged in the form of services prices, which declined by 0.2% in July and moved officially into deflationary territory for the first time since December.

Annually, this translated into a 2.2% increase, a more-than-welcome decline from the 2.7% posted in June.

That 0.5% decline in annual PPI from June to July is huge because it’s the first slowdown in year-over-year wholesale price growth we’ve seen since January.

I was starting to get worried for a minute, but just like it does for my hatred of heat and humidity, July brought back my confidence that a rebound in inflation is less likely than RFK winning the election.

Core PPI, excluding wholesale food, energy, and trade services prices, came in a little hotter with a monthly gain of 0.3%.

Breaking down specific drivers of this month’s PPI, the 0.2% decline in Service prices—which make up 67.2% of the index—was led by a 1.3% decline in trade services. 

Trade services essentially measure the margin wholesalers charge, so shoutout to them for taking one for the team.

Energy prices did the exact opposite. Gasoline prices rose 2.8% monthly, pushing the Energy index’s gain to a recent high of 1.9%. However, the single biggest gainer among all final demand goods was energy for export, up 4.3%.

But it wasn’t just trade services that brought the index down. Transportation services continued to fall, down 0.2% for the month. 

And if it wasn’t for you greedy people, services would’ve declined even more because the cost of portfolio management apparently jumped 2.3% in July. 

Markets took the report in stride, pushing equity prices higher along with a slight increase in the odds for a larger 50bp cut at the FOMC’s September meeting. On Monday, the odds for a cut of either size were neck and neck at 50%.

The same was true for the December meeting, with markets now giving ~75% odds for 100-125bps of cutting by the end of the year.

Bond yields fell too, with the 2-year Treasury back below 4%.

The Takeaway?

Once you finish reading this, please Google “July CPI report.” It’s dropping at 8:30 am today and matters significantly more than a few bps of change within the PPI.

The story for this PPI report remains the same: Inflation is on its way out and experiencing volatility as it does so. 

Services going deflationary could be concerning if extended in the long term, but given that most of the declines came from transportation and trade services, there’s not much to worry about.

If the Fed waits too long and the economy does go full deflationary, we’ll all have to again listen to Kanye’s advice and… Runaway.

What's Ripe

On Holdings (ONON) 4.35%

  • RIP to Mac Miller, but if there’s a chance he sees this, I think it’s time to change “Nikes On My Feet”  to just “On My Feet” after recent earnings reports.

  • That’s because On Holdings is eating the industry stalwart's lunch. The Swiss newcomer delivered a strong Q2 with a revenue beat and a slight earnings miss.

  • Analysts overlooked the bottom-line miss for that sweet 28% revenue growth and gain in market share. Strong guidance helped, too.

Home Depot (HD) 1.23%

  • Despite putting Halloween decorations on sale in July, investors are pleased with Home Depot’s decision-making. The company beat across the board in Q2, 

  • The company delivered $4.60/sh on $43.18bn, compared to estimates of $4.49/sh on $43.06bn. But with rates quelling home remodeling, guidance was spooky.

  • Home Depot now expects same-store sales to fall 3-4% for the full year, up from the 1% previously expected. No one wants a rate cut more than these guys.

What's Rotten

Tencent Music Entertainment Group (TME) 15.31%

  • With a ~$25bn market cap (before Tuesday), TME’s founders better hope they don’t disappear like Alibaba founder Jack Ma. For now, the only thing disappearing is users. 

  • The Chinese music streamer beat on earnings, but a 32% decline in MAUs, along with a 46% drop in ARPU on the firm’s social media side, killed optimism.

  • Core music streaming lost 4% of users but increased ARPU by over 10%. Total revenue fell 1.7% to $985mn, missing estimates for $996mn.

Chipotle Mexican Grille (CMG) 7.50%

  • The shock felt by Chipotle investors on Tuesday was almost as bad as the shock felt by customers seeing the company’s latest prices. Their CEO just bailed.

  • Starbucks recruited (former) Chipotle CEO Brian Niccol to save the coffee chain from faltering sales after Niccol led a turnaround for the burrito chain.

  • In his 6yr tenure, Niccol oversaw a ~690% and—at times—940% share price increase. So, it’s no wonder why investors are down bad and Starbucks is up 24.5%.

Thought Banana

U.S. Goes Nuclear

The U.S. has 5,044 nuclear warheads (that the public knows about) and about 1.8% as many nuclear power reactors. 

For a lot of Americans, nuclear energy scares the sh*t out of us… but in the wrong way. We were scared off by Three Mile Island, Fukushima, and Chornobyl while oddly ignoring the destructive history of Hiroshima and Nagasaki. 

Luckily, that fear is starting to dissipate. Let’s dive in.

What Happened?

If what smart people say about nuclear energy's effectiveness is true, then investing in reactors seems as obvious as banning Congresspeople from stock trading or choosing the $500k over dinner with Jay-Z.

 

Fortunately, some have recently started to act on my idea before I had it—nuclear energy investments have ballooned so far in 2024.

2023 was the first year since 1990 that the U.S. increased its number of operational nuclear reactors, rising to 93 and then to 94 earlier this year. 

While we do have the most reactors in the world (obviously), we’re getting smoked by France in terms of the % of nuclear power in total domestic energy generation.

Many more reactors have been shut down in recent years than built, but because of technological advancements, operable nuclear power capacity has also started growing for the first time in almost a decade.

 

Who Cares?

Those 94 plants generate ~20% of U.S. energy supply. Reactors generally last for 40yrs or more, are 90% efficient (compared to 25% for solar and 35% for wind), are the most scalable source of energy generation, and emit almost zero greenhouse gas.

Along with primal fear, the cost of building these bad boys is an issue. But, once these things are up and running, their levelized cost of electricity is one of the lowest among known energy generation methods.

And we’ve only talked about nuclear fission. Nuclear fusion, still very early, is the holy grail.

The Takeaway?

This is one of those no-brainer investments we should all be able to get behind. They’re not perfect and certainly have a stained track record, but—I don’t know if you guys have noticed—technology has gotten a little better since 1986.

Icing on the cake, we don’t have to rely on broke *ss Uncle Sam to build them. Startups like Commonwealth Fusion Systems, TAE, Helion, General Fusion, and many others have raised billions on their own with planned deployments in the years ahead.

Or, of course, we can just keep buying bombs. Regardless of what it’s used for, it seems like uranium investments could maybe possibly have a long way to run…

The Big Question: Should we prioritize investment in nuclear over other renewable energy systems? What’s the best way to make money off this?

Banana Brain Teaser

Previous

A certain financial institution reported that its assets totaled $2,377,366.30 on a certain day. Of this amount, $31,724.54 was held in cash. Approximately what percent of the reported assets was held in cash on that day?

Answer: 1.3%

Today

Guadalupe owns 2 rectangular tracts of land. one is 300m by 500m and the other is 250m by 630m. The combined area of these 2 tracts is how many square meters?

Send your guesses to [email protected]

❝

When something is important enough, you do it even if the odds are not in your favor.

Elon Musk

How Would You Rate Today's Peel?


Happy Investing,
David, Vyom, Ankit, & Patrick