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No Neighbors, More Problems

🏠🧊Beer and revenge are best served cold, but the housing market is not. Find out why America’s most important asset class is at its coldest in nearly 30yrs.

October 24, 2024

Silver banana goes to…

In this issue of the peel:

  • 🏠🧊Beer and revenge are best served cold, but the housing market is not. Find out why America’s most important asset class is at its coldest in nearly 30yrs.

  • ✈️🥤Spirit Airlines continued to takeoff alongside one of America’s most hated companies. Meanwhile, some stocks need a lot more sun… and c*caine.

  • ⚡🚗Tesla just dropped Q3 earnings, and oh my god, the market is hyped. Check-in on the charged-up numbers for the world’s most valuable auto company below.

Market Snapshot

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Macro Monkey Says

What’s Cooler Than Being Cool?

Say it with me now—“Ice cold!”

Shoutout to OutKast for writing today’s intro for me and to every frat in America for playing “Hey Ya!” at least 17 times per weekend so that we all instinctively know the lyrics. That’s at least one thing we learned in college…

Little did OutKast know, but that legendary lyric from the 2003 banger actually does a damn good job of describing the U.S. housing market in 2024.

Let’s get into it.

The Numbers

Yesterday, the National Association of Realtors (NAR) released the latest data on existing home sales in the U.S. through the month of September.

About 85% of homes sold in the U.S. at any given time are existing homes, which make up the bulk of the housing market. And, as you can see, it’s ice cold.

Using the NAR’s preliminary September data, 2024 is on track to be the worst year for home sales since 1995.

So, OutKast was right about the “Ice Cold!” part but gets it wrong later in the song when he says, “Lend me some sugar, I am yo’ neighbor!” At this rate, pretty soon, there’s not gonna be any more “neighbors” out there.

Anyway, in September, existing home sales fell 1% from August to an annualized, seasonally-adjusted rate of 3.84mn homes.

That’s the lowest monthly rate of home sales since the latter days of the GFC in October 2010.

Not only was September’s data the worst since Taio Cruz dropped “Dynamite,” but it was 23.7% below the average monthly rate over the last 34 years.

This is especially surprising because most market watchers and residential agents anticipated 2024 would be a recovery year after a down bad 2023. 

Mortgage rates have been falling for most of the year but have since started to climb back up after the bond market started calling cap on the Fed’s plans to continue cutting at their December meeting.

Rates touched as low as 6.08% for 30-year fixed mortgages on September 26th but now sit at 6.44%, a 6% gain in almost one month.

If mortgage payments getting higher than Snoop Dogg wasn’t enough to dissuade wannabe-buyers, just wait until we add in everything else.

I don’t know if you guys follow economics at all, but inflation has been on an absolute bender, to use the technical term, since 2021. Although the rate of monthly price increases has slowed, hardly any costs are falling back to their pre-pandemic level.

In fact, other housing-related costs have seen some of the most discouraging price hikes in recent years, especially in insurance. The average American now pays close to 30% more per year for home insurance than in 2019.

The rise in costs is a bit of a double-whammy too. Not only does it mean prices are higher, but it also means the qualifying level of income you’ll need to get lenders to throw you a few hundred grand has dramatically increased as well:

The Takeaway?

For the vast majority of Millenials and Gen Z, housing affordability is in full-on crisis mode.

On the economic side, home ownership has been the key to building long-term, cross-generational wealth in the U.S. If citizens can’t buy a house until they’re 40, all of a sudden, we eliminate over a decade in compounding years for home value appreciation.

Societally, home ownership is key too. Owning property forces citizens to have more skin in the game and, thus, forces them to be more invested in their community.

I’m starting to understand why the Founders said only property owners could vote…

Anyway, I’m one mortgage payment deep, with the second around the corner. Let me know if anyone wants to bet on when the first foreclosure notice hits!

Career Corner

Question

I have a question about networking and applying for positions on the website.

Should I apply to a firm first and then connect with employees to set up calls, or should I reach out to employees at the firm, connect with them, and schedule a call before applying for a position? What would be the best strategy?

Answer

It depends on specific roles and timelines. Ideally, it is great to network before applying, but if the application is open, you need to submit it. You don’t want to be left out of the process just because you were too late! Most of these applications are rolling, so if you wait too long to apply, you could miss it entirely.

Head Mentor, WSO Academy

What's Ripe

Spirit Airlines (SAVE) 45.97%

  • I don’t know what would cause a heart attack faster—the volatility of Spirit’s shares or their actual flights. All I know is I only ever want to ride the former.

  • After climbing off their deathbed earlier this week, Spirit may be attending their wedding soon as the down bad airline has reopened merger talks with Frontier.

  • The firms are just talking as of now; it’s not official yet or anything. After relationship struggles with JetBlue, Spirit seems hesitant to put a label on things.

AT&T (T) 4.60%

  • Deciding which brand of sh*tty, bad-customer-service phone company you want to suffer with is a tough call. But in Q3, the answer was clear—AT&T won big.

  • The firm beat on EPS yet missed on sales, but no one really cared. The firm added 403k postpaid accounts, easily beating estimates and driving the share price.

  • Churn declined and ARPU increased across the board. On top of a $4.4bn goodwill impairment charge, AT&T delivered $5.1bn in free cash flow, beating estimates for $4.7bn.

What's Rotten

Enphase Energy (ENPH) 14.92%

  • If Enphase is going down, they’re taking the entire solar sector—and WSO Alpha portfolio, unfortunately—down with them. Time to fire all of our analysts.

  • The maker of solar panels and inverters reported EPS of $0.68/sh on $380.9mn in sales vs estimates for $0.71/sh on $392.6mn. Weak demand in Europe hurt the most.

  • U.S. sales were up 43% from Q2’24, but still down from Q3’23. Revenue in Europe fell 15% on “further softening in… demand.”

  • American performance improved as distributors normalized inventory levels in Q2, leading to an increase in volumes of shipments in Q3. 

Coca-Cola (KO) 2.07%

  • Ozempic sales are up and brown sugar water is down as Coca-Cola’s earnings fail to excite investors. The company beat estimates, but there wasn’t much to celebrate.

  • Sales fell 1% vs last year, hit by weakness in bottling and the EMEA region, even as prices rose 10%. Unit case volumes fell 1%, signaling weak demand. 

  • My advice would be to load these bad boys with c*caine again. Like “The Facebook,” it’s time the company dropped the “a-Cola”—just coke.

Thought Banana

Earnings Spotlight: Tesla Inc.

You would think that adding $70bn in market cap in just 2 hours would require some pretty miraculous news.

Well… do you consider missing analyst estimates on deliveries, revenue, and brain cells “miraculous?” If so, Tesla’s earnings require no further explanation.

But if not… we’ll need to dive in.

The Numbers

Reporting their third quarter numbers, Tesla delivered total revenue of $25.18bn and earnings of $0.72/sh. The automaker beat on the bottom line but missed analyst expectations for sales of $25.37bn.

Vehicle revenue has been basically flat, with some volatility, since Q3’2022. Last quarter, automotive sales increased just 2% compared to last year. Deliveries grew 6%, implying weaker pricing and increased discounting.

Oddly enough, the Cybertruck was a bright spot despite getting hit with more recalls than raindrops in Q3.

The firm sold 16k Cybertrucks and achieved a positive gross margin on these bad boys for the first time ever. In fact, a Cybertruck was celebrated during the quarter as the 7 millionth Tesla car ever produced.

In fact, the Cybertruck was the third highest-selling full-electric vehicle in the U.S. last quarter, behind only the Model 3 and the Model Y.

Although growth in vehicle sales has been anemic, luckily, Tesla’s Energy and Services unit has been on fire.

Tesla’s energy unit grew sales 52% compared to last year to $2.4bn and achieved record gross margins of 30.5%. The Powerwall achieved record deployments for the quarter, but other Energy products are limited by supply.

Tesla’s Services & Other division, which includes vehicle servicing, supercharging, and more, also set record gross margins and improved 90% annually. Revenue for this segment grew 29% annually to $2.79bn.

Lastly, Tesla also earned record revenue from regulatory credits in Q3, clocking in at $554mn… and yet they still missed revenue estimates.

The Takeaway?

Luckily, Tesla’s issues are not idiosyncratic. 

Other automakers have been facing the same struggles, with companies like GM having an easier time on earnings as analysts have lower growth expectations.

But, Tesla gets valued as a tech company—by the way, when I call Tesla an “auto” company, that’s for “automation,” not “automobiles.” 

Speaking of which, the firm’s autonomous driving tech, called Full Self-Driving (FSD), crossed the 2bn mile mark in Q3, far and beyond any autonomous driving competitors.

Analysts seemed able to look past the headline revenue miss and under the hood (no pun intended), identifying success in Energy, market share growth, and autonomous driving.

The Big Question: Will Tesla’s plans for automation, as laid out at the “We, Robot” event, come to fruition? What impact will this have on profitability?

Banana Brain Teaser

Previous

What is the thousandth digit in the decimal equivalent of 53/5,000?

Answer: 0

Today

The price of a certain stock increased by 0.25 of 1% on a certain day. By what fraction did the price of the stock increase that day?

Send your guesses to [email protected]

❝

In the short run, the market is a voting machine. In the long run, it is a weighing machine.

Benjamin Graham

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Happy Investing,
David, Vyom, Ankit & Patrick