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“Somewhat Elevated,” Like My Stress Levels

📈 The Fed Minutes are about as boring as they sound, but we went ahead and read it so you don’t have to. Find out what’s going on under the surface below.

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In this issue of the peel:

  • 📈 The Fed Minutes are about as boring as they sound, but we went ahead and read it so you don’t have to. Find out what’s going on under the surface below.

  • 🚗 NRG shares were electrified by an upgrade, while Twinkies were a hot commodity in Q3. Kohl’s might as well just give up at this point, and GM got news that was even worse than Kendrick’s album, named after one of their cars.

  • 🤓 He’s no John Galt, but Trump’s nominee for Treasury Secretary is turning heads. Find out what this casanova’s all about below.

Market Snapshot

Banana Bits

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Macro Monkey Says

Wait A Minute

If I hear the phrase “somewhat elevated” come out of JPow’s mouth one more time, I’m gonna have to somewhat elevate my foot up his…

Anyway, our beloved economics overlords decided we’re finally worthy of hearing the conversation that took in September when the Federal Reserve slashed rates by 50bps.

If I seem upset, it’s because I am. Fed Chair JPow was not JPump-ing my portfolio like he usually does, leaving me to wonder if I should get rid of the shrine to him I built in my living room.

Let’s get into it.

What Happened?

Yesterday, the U.S. central bank released the Minutes of the Federal Open Market Committee for their meeting on November 6-7th.

The minutes summarize the reasoning behind the FOMC’s—the Fed’s policy-setting arm—decision to change (or not change) monetary policy. 

In addition to the obvious thrill we all feel when reading central bank commentary, this one was especially exciting as the FOMC hinted at plans to change the path of rate cuts.

Really missing the days when a Fed Funds rate of 4.25% was considered “high.”

Anyway, a lot of attention was placed on the November meeting in the days leading up to this economic Super Bowl, given that this was the first meeting after the 50bp cut in September—a move usually reserved for the eve of a recession.

However, recent economic data implies that’s less likely to be true than a story told by Jussie Smollett.

Rate cuts are intended to spur economic growth and/or ease conditions in the labor market when one or both of those things are signaling a slowdown. As the FOMC participants point out in the September minutes, both remain relatively healthy.

Unemployment and GDP growth are roughly on par with where they were heading into the pandemic. Unemployment now sits at 4.1%, and real GDP grew by 2.7% in Q3 compared to 3.5% and 1.28%, respectively, right before C-19 showed up.

The challenge at this point stems from the massive disruption brought on by the pandemic. More than 4-years later, you’d think its effects would be over with by now, but Jussie Smollett must’ve told you that.

Today, it remains difficult—if not impossible—to know whether the trends we’re seeing are a continued normalization to pre-pandemic levels or if there’s reason to expect GDP growth, unemployment, and/or inflation to worsen from here.

In their assessment, the Minutes stated that “Almost all participants judged the risks to the attainment of their dual-mandate objectives of maximum employment and price stability to be roughly in balance.”

So, if GDP growth is healthy and the risks to the Fed’s dual mandate are about equal, why even bother cutting? That appears to be the question the Fed is now asking itself.

According to the above dot plot from the Fed’s September Summary of Economic Projections (SEP), the majority of participants expected rates to close 2024 where they currently sit—from 4.50-4.75%—or down another 25bps.

However, a little more than a month later, in the November Minutes, the Fed was wondering aloud if another cut was justified given that risks are “roughly in balance.”

Some of the key statements made where this question is pondered included: 

  • “Participants noted that monetary policy would need to balance the risks of easing policy too quickly, thereby possibly hindering further progress on inflation, with the risks of easing policy too slowly, thereby unduly weakening economic activity and employment.”

  • “… participants noted that inflation had made progress toward the Committee’s objective but remained somewhat elevated… economic activity had continued to expand at a solid pace, labor market conditions had generally eased since earlier in the year, and the unemployment rate had moved up but remained low.”

  • “Participants emphasized that monetary policy decisions were not on a preset course and were conditional on the evolution of the economy.”

The Takeaway?

America’s central bank, like most of its citizens, doesn’t know what it’s doing.

And that’s not necessarily a bad thing. We’d much rather have a data-dependent, self-questioning Fed than the alternative, but damn, it’d be nice if we knew what to expect.

Markets certainly expect further cutting next month, with yesterday’s release only contributing to that view.

So, in a way, you could say the market’s expectations for further rate cuts were “somewhat elevated.”

Career Corner

Question

After a virtual info session on Thursday afternoon, when should I send my thank-you email? I know that it's supposed to wait 24-48 hours, but around that time, no one's available anymore. Additionally, just to confirm, applications are open today, so should I apply or write the thank-you email first?

Answer

Friday morning is a good time to send your thank-you email, and Monday morning also works if that's more convenient. Always prioritize submitting your application first before sending the thank-you email.

Head Mentor, WSO Academy

What's Ripe

NRG Energy (NRG) 10.11%

  • Someone should tell Jefferies that this energy provider hasn’t even inked a deal to sell power to a non-existent data center from a non-existent nuclear plant yet. Isn’t that the only reason energy stocks are going up these days?

  • But, according to Jefferies, that’s actually a positive. The investment bank views NRG’s pivot into diversified “retail electricity” as an underappreciated growth story.

  • That caused the firm to upgrade its price target on NRG from $93 to $113, implying a ~23% upside from Monday’s close.

J.M. Smucker (SJM) 5.69%

  • RFK was in shambles on Tuesday as the maker of healthy food products like Twinkies and Uncrustables crushed it on Q2 earnings. 

  • The “food” producer reported annual revenue growth of 17% to $2.27bn, right in line with estimates. Earnings of $2.76/sh beat expectations for $2.51/sh too.

  • The big focus going into 2025 is the further incorporation of their recently purchased suite of Hostess products. But that might be tough when RFK makes obesity illegal.

What's Rotten

Kohls (KSS) 17.01%

  • They say every kiss begins with K, and on Tuesday, Kohl’s taught us that every knosedive does too. Q3 earrings were rough, but get excited because Q4 looks even worse.

  • The retailer reported EPS of $0.20/sh on sales of $3.71bn vs estimates for $0.27/sh on $3.84bn. Sales fell 8.8% overall and 9.3% on a same-store basis.

  • Management now expects sales to decline 7-8% for FY’24 from the 4-6% previously expected. I’d wish them Happy Holidays, but it almost certainly won’t be. 

General Motors (GM) 8.99%

  • It makes sense for shares to plummet when one of the best rappers in history drops his worst album ever and names it after one of your cars. But it wasn’t just GNX that killed the vibe for GM and other car makers on Tuesday. 

  • What really killed the vibe was President-elect Trump floated the idea of slapping 25% tariffs on auto and auto-related imports from Mexico and Canada.

  • Most car companies have some part of their production or supply chain in these countries, but it was especially bad for GM as the firm fully produces its most profitable pickup trucks in Mexico. 

Thought Banana

Who Is Scott Bessent?

He’s certainly no John Galt, but the Trump Administration’s nominee for Treasury Secretary might be just as tantalizing.

Let’s dive in.

What Happened?

To make sure last week was closed on a hot note, President-elect Trump nominated Scott Bessent to the highest-profile remaining cabinet position—Secretary of the Treasury.

Bessent, whose Wikipedia page was so clean I can’t even find anything to bully him for, looks exactly like what ChatGPT would generate if you asked it to “draw me a picture of a Treasury Secretary.”

Because he’s likely stepping into one of the two highest financial positions within the U.S. government (the other being Fed Chair), it’s important to know a little bit about this casanova.

A 62-year-old Hawaiian organ donor—I mean, *resident of South Carolina, Bessent’s resume reads like he’s the Forrest Gump of modern finance and investing.

Bessent interned with Jim Rogers, began his full-time career at Brown Brothers Harriman in 1984, and then worked with the legend Jim Chanos before teaming up with one of history’s all-time investing greats, George Soros.

Ol’ Scottie boy was part of the team at Soros Fund Management—alongside other icons like Stanley Druckenmiller—that “broke” the British pound in 1992 and netted over $1bn in profit for SFM.

But he’s most well known for launching his own macro-focused hedge fund in 2015 called Key Square Capital Management. Returns were mid, AUM peaked at $5.1bn in 2017, and the fund has been closed, as indicated by its last 13F.

There’s been a lot of buzz over Bessent in the media since his nomination. We don’t get political at the Peel, so don’t take the below as an endorsement or condemnation of these ideas. It’s simply what Bessent has publicly stated.

His economic policy platform centers on his “3-3-3” Plan, which involves:

  • Cut the annual U.S. budget deficit to 3% of GDP by 2028 (that would’ve been a deficit of $820.8bn in 2023 vs the actual $1.7tn).

  • Boost annual GDP growth to 3% through deregulation and pro-growth policy.

  • Increase U.S. energy production by the equivalent of 3mn barrels of oil per day.

Through a combination of deregulation, increased energy production via traditional and clean methods, and providing forward guidance to improve investor confidence, Bessent believes these goals are achievable.

But, like anything, it’s a lot easier said than done.

The Takeaway?

Bessent’s “3-3-3” policy is an adaption of the “three arrows” of policy popularized by former Japanese Prime Minister Shinzo Abe. Then he got assassinated, so…

But that’s about it. Anything further might be construed as political, so decide your own takeaways as you wish. I’m sure your X/Bluesky feed would love to hear your thoughts.

The Big Question: Will Bessent be able to accomplish these goals? What other policies or changes should the next Treasury Secretary consider?

Banana Brain Teaser

Previous

In a set of 24 cards, each card is numbered with a different positive integer from 1 to 24. One card will be drawn at random from the set. What is the probability that the card drawn will have either a number that is divisible by both 2 and 3 or a number that is divisible by 7?

Answer: 7/24

Today

Set X consists of eight consecutive integers. Set Y consists of all the integers that result from adding 4 to each of the integers in set X and all the integers that result from subtracting 4 from each of the integers in set X. How many more integers are there in set Y than in set X?

Send your guesses to [email protected]

To preserve the confidence of the people, it is of the utmost importance that the public credit should be effectually established.

Alexander Hamilton, America’s First Treasury Secretary

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Happy Investing,
David, Vyom, Ankit & Patrick