Silver banana goes to…

In this issue of the peel:

• Miles Davis is cool, but June’s inflation print was even cooler. Price acceleration continued to slow along with growth in disposable personal incomes. But what does this mean for the path of interest rates?

• Coursera shares increased by the same percent as my average test score in college. But it’s time we start playing Taps for DexCom

• This earnings szn, the true most wonderful time of year, hasn’t been as wonderful as history suggests. So… are we in trouble?

Market Snapshot

Banana Bits

• Former President Trump is leaning into digital assets in America

• JPMorgan says internal ChatGPT-like bots are taking our jobs

• Supercore inflation is back to pre-pandemic levels, trending towards the Holy Grail of 2% annually

• Potentially more than politics, stock ownership has a huge effect on how consumers view the economy

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Macro Monkey Says

The Miles Davis Inflation Report

Like that crazy old bat from Billy Madison said, “If peeing your pants is cool, then consider me Miles Davis.”

Facts. But you know what’s even cooler than peeing your pants? Falling inflation.

And according to Friday’s Personal Consumption Expenditure (PCE) report, U.S. inflation is now just about as cool as Miles Davis.

So, let’s get into it.

The Numbers

In June, the PCE price index grew 0.1% monthly and slowed to an annual rate of 2.5%, declining from 2.6% in May.

Core PCE inflation held steady at 2.6% annually for the second month in a row, down from 2.8% in the three prior months.

Monthly, core prices grew 0.1%, higher than the 0.0% in May but down from the 0.3% reading in each of the three prior months as well.

Miles Davis has entered the chat. Inflation continued to cool in June, largely putting to bed concerns that the brief uptick seen coming into Q2 was cause for concern that secularly rising inflation was making a return.

Energy prices led the index lower, down 2.1% for the month and 2.0% for the year. Food prices grew just 0.1% monthly and a modest 1.4% annually.

Overall, goods prices pulled the index 0.2% lower on both a monthly and annual basis while prices for services f*cked around and increased 0.2% monthly and an annoyingly high 3.9% since June 2023.

Naturally, consumers chased those higher prices with their spending.

Total consumer spending increased 0.3%, driven by the 0.4% increase in services spending and a slight 0.1% bump in spending on goods.

International travel (a subcategory of “Other services”) led the charge with a huge 18.6% jump. Spending on housing and utilities followed close behind, jumping 17% throughout June.

Killing the vibe on spending was basically anything related to vehicles. Three spending categories declined in June, including motor vehicles and parts by a devastating 23.9%, gasoline and other energy goods by 11.4%, and transportation by a soft 1.5%.

Lastly, the incomes consumers used to drive up that spending continued to grow at a slower rate. Real disposable personal incomes (real DPI) grew just 0.1% while the personal savings rate declined slightly to 3.4% of DPI.

In the private sector, service-producing industries saw the fastest increase in DPI. However, the problem here was that the biggest driver of growing DPI was increases in government outlays for Medicare and Social Security.

So, we can thank the boomers for the increase in spending. But make sure to remind your grandparents it’s your tax dollars they’re spending. I’m sure they’ll appreciate that.

The Takeaway?

The U.S. economy continued to cool in June. On the back of Thursday’s GDP report, it’s clear the 1.5% uptick in quarterly consumer spending was top-heavy, stemming from April’s strong spending data driven by federal tax returns.

If anything, this report takes away the cloud cover Thursday’s GDP report gave the Federal Reserve. Given the clear slowdown, Fed Chair JPow’s gonna have to leave that Caribbean beach, put down the piña coladas, and pump the economy again.

By no means is the Fed in any rush. The soft landing is still very much alive and well, but if we keep rates too high for too long, the U.S. economy won’t be.

Like a triathlete wondering if she should get an AG1 subscription, the U.S. economy is in good shape… but maybe we could be even healthier with a looser monetary policy.

What's Ripe

Coursera (COUR) 44.7%

• This education stock schooled the market on solid quarterly earnings, going full Jordan Belfort to say, “I’m not f*ckin’ leaving” in the face of competition from AI.

• Shares are still down almost 80% since the firm’s 2021 IPO, but yesterday’s pop brought Coursera back to life on an 800% earnings beat, delivering $0.09/sh.

• Though GAAP income remained negative, losses declined from Q2’23, and free cash flow moved into positive territory for the first time, even if it was only $17mn.

Boston Beer Company (SAM) 7.7%

• Underaged drinking is going strong as Twisted Tea sales propelled this corporate bartender to a revenue beat. They must have the best office parties…

• And it must be a big party today as the alcoholic beverage maker reported $614mn in sales, a 2.8% beat. But… that was basically all the good news.

• Earnings of $4.39/sh came in below the $5.01/sh estimate, and Q2’23’s $4.72/sh as depletions (a.k.a. retail sales) fell 4% and shipments were down 6.4%.

What's Rotten

DexCom (DXCM) 40.6%

• This is the kind of earnings report that every other management team points at and says, “At least we didn’t do that bad!” Shares tanked on sales guidance.

• DexCom actually beat earnings estimates on 24% YoY earnings growth. However, complications with its distribution network brought sales growth to anemic levels.

• Plus, “certain unique items” highlighted by execs will eat into Q2, causing huge cuts to sales guidance of 14.1%. Competition from Abbott is heating up as well.

BJ’s Restaurants (BJRI) 15.4%

• Like how high school me felt when Juul stopped selling mango pods, BJ’s removal of the monkey bread pizookie should put them on trial for war crimes.

• But for now, I’ll settle for a bad earnings day. BJ’s beat across the board, but a tougher environment is on the horizon with declining discretionary spending.

• Same-store sales went negative as well at -0.6%. Net income was 44% higher than Q2’23, but higher commodity cost forecasts threaten margins into Q3.

Thought Banana

Earnings Szn Pit Stop

Thanks to Brian Fantana in Anchorman, we all know that 60% of the time, it works every time.

But for the S&P 500 so far this earnings season, the truth has been that 41% of the time, it works 78% of the time.

Confused yet? Good. Let’s dive in.

The Numbers

As of last week’s close, 41% of S&P 500 companies had reported quarterly earnings so far during this most wonderful time of the year.

So far, 78% of companies have beat their earnings estimates while 60% of companies have beat on revenue.

At 78%, earnings beats remain slightly above the 5 and 10-year average percentage of companies beating on the bottom line at 77% and 74%, respectively.

However, the degree of these beats has been less impressive than Team USA Basketball beating Team Serbia on Sunday.

Of those 78% of companies that did their job, the average beat percentage against consensus estimates sits at just 4.4%. Historically, the S&P’s 5-year average is nearly double this at 8.6%, with the 10-year average beat clocking in at 6.8%.

On the revenue side, the 60% of companies that have beaten estimates so far in Q2 sit below the 5 and 10-year averages of 69% and 64%, respectively.

Revenue beats are, like earnings, coming in at a lesser degree than average.

In the past 5 years, the average revenue beat has been 2.0% and 1.4% over the last 10 years. So far in Q2, the average revenue beat has been just 1.1%.

The Takeaway?

Like Sex Panther by Odeon, the 41% of companies reporting so far have been a bit of a disappointment. 

Fewer companies beating on revenue can be a cause of concern for aggregate demand going forward.

Plus, the below-average degrees of those beats are even more concerning. Either analyst expectations are too high, or the 2024 macro environment has stripped companies of much of their pricing, demand, and expense control powers.

We have 59% of companies left to go. This week, big hitters like Microsoft, Apple, Amazon, Berkshire Hathaway, McDonald’s, and hundreds more will all drop.

Fingers crossed that it goes well. Either way, we’ll see you there.

Big Question: Has the U.S. economy shown even more signs of weaknesses? Where will the S&P 500 close at year end?

Banana Brain Teaser

Previous

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?

Answer: 33.33%

Today

Of the 150 houses in a certain development, 60 percent have air-conditioning, 50 percent have a sun porch, and 30 percent have a swimming pool. If 5 of the houses have all three of these amenities and 5 have none of them, how many of the houses have exactly two of these amenities?

Send your guesses to [email protected]

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Happy Investing,
David, Vyom, Jasper & Patrick

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