In this issue of the peel:

• Demand for newly issued Treasury bonds continues to fall. Uncle Sam is having a hard time raising cash, potentially pushing us into a downward spiral that the Roman Empire remembers all too well.

• Nvidia cannot stop printing cash for investors, and it turns out that Robinhood has been a huge beneficiary, too. Meanwhile, B. Riley Financial collapsed under the weight of its own idiocy, and JetBlue joins Uncle Sam in a struggle to raise cash.

• 91% of companies have reported earnings so far. Check-in on how they're doing and remember to focus only on the things that truly matter.

Market Snapshot

Banana Bits

• The article we’ve been waiting for—The WSJ went deep into the culture of long hours in banking, which many of you know all too well. Make sure to give it a read to be a part of the change the industry so desperately needs.

• Markets have been extra jittery this earnings szn.

• Turns out the U.S. employment situation isn’t as much of a situation as we may have thought.

• Rising monthly prints may be gone, but the nut shot of inflation still looms large.

• Go Trees! (wtf is that mascot?) Stanford University earned more medals in Paris than most countries.

The Daily Poll

Previous Poll:

June’s CPI came in at 3.0% annually. Will July’s printer be higher or lower?

Lower: 49.5% // Higher: 29.3% // The same, right at 3.0%: 21.2%

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Macro Monkey Says

Untreasured Treasuries 

Much like my old Tinder profile, recent treasury auctions have received much less interest than anticipated.

Also, just like my Tinder profile, I don’t know why anyone is surprised.

Last week’s 10 and 30-year Treasury auctions highlighted the country’s shift into borderline subprime borrower status. If this trend continues, funding our super-competent and effective government could become much more challenging.

Let’s get into it.

What Happened?

When the U.S. government needs to raise cash and doesn’t feel like raiding your wallet just yet, they do so via debt financing by selling U.S. Treasuries.

This is done through an auction process. The goal of the auction is to minimize the government’s financing cost through competitive bidding and a liquid secondary market. When your national debt looks like this, low financing costs are crucial.

However, for several months now, traders haven’t been feeling very patriotic, allowing auction yields to surpass expectations.

The difference between expected and auction yields is called the “tail.” Generally, the greater the tail, the weaker the demand for Treasuries at that auction.

Last week, the Treasury Department held auctions for 10 and 30-year bonds, both “tailing” 3 basis points (3bps… a.k.a. 0.03%), meaning the auction yield came in 3bps higher than the when-issued yield (a.k.a., the expected yield). 

You might ask, “But David, you’re not tweakin’ about a 3bp tail, are you?” to which I’d say, “I absolutely am tweakin’ about 3bps, and I’m scared and want my mom and…”

Sorry, quick panic attack. But, as always, it’s not the level that matters; it’s the direction. And in this case, it’s the reason behind that direction that matters.

We can thank certified smart pants Torsten Slok, Chief Economist at Apollo, for the above chart showing the tail size of 10-year Treasury bond auctions for the last 4.5yrs.

As we can see, last week’s 10-year auction clearly continued the post-pandemic trend of higher, more frequent tails. That makes some sense when rates are expected to rise, but…

When rates are expected to fall, this generally strengthens demand for auctions prior to the expected rate cut because investors know that the starting point for yields—the Fed Funds rate—will move lower, thus decreasing yields for Treasuries issued after the cut.

Given that a September rate cut is more certain than this email hitting your inbox today, it’s even more concerning to see weak demand for long-dated Treasuries heading into this cut.

Yields have continued to move lower in the last few months, showing that demand is abundant in the secondary market. However, investors clearly have quite a taste aversion to sub-4% long-dated yields in the primary market, being the auction itself.

The Takeaway?

In summary, we have:

• A looming rate cut amid a worsening macro outlook.

• Auction yields repeatedly coming in higher than expected on an increasingly frequent basis.

• Declining bond yields in the open market.

The quote “If you’re not a little confused, you’re not paying attention” has never been more applicable.

While there’s no flashing red sell signal (yet), continually rising auction yields, especially in the face of a looming rate cut, are particularly concerning as this signals that investors have little interest in lending directly to Uncle Sam.

Uncle Sam has found himself in a pickle. Already high rates are making payments on the comically large national debt harder to make. 

This leads investors to demand higher rates at auctions, making interest payments harder to make and worsening fiscal conditions even more, leading investors to demand higher rates, making interest payments harder to make, worsening fiscal condi-

You see where this is going. 

Maybe Uncle Sam could benefit from some expert financial advice to go through these tough times. How about we look to our best and brightest for portfolio management?

What's Ripe

Nvidia (NVDA) 4.08%

• Although the Fountain of Youth is mythical, we’ve finally discovered the Fountain of Wealth—Nvidia stock. Money may not buy happiness, but it can buy chips.

• The stock is giving JPow a run for his money as the world’s largest money printer, especially now after getting further upgrades on Monday.

• Renewed optimism comes in response to the unfathomable spending on AI investment by tech companies announced throughout earnings szn.  

Robinhood (HOOD) 3.46%

• Wow, we’re SO damn back. Since last week’s hella-strong earnings report, Robinhood shares have been ripping, leading to a lot of hype from analysts.

• The exchange reported 40% total revenue growth on a 161% boom in digital asset trading revenues. Equities revenue grew 60%, with Options up 43%.

• Needless to say, the firm beat across the board, leading to an upgrade to Overweight from Piper Sandler on a growing bull market in degeneracy.

What's Rotten

B. Riley Financial (RILY) 51.92%

• There are good earnings reports, bad earnings reports, and then there’s B. Riley. All that’s been revealed so far is that this firm has a new arch-enemy—itself.

• That’s because this financial services provider just delayed its quarterly filing, suspended their dividend, and issued new guidance.

• The firm now anticipates a massive $14-$15/share loss. Despite claiming they’re “working diligently” on the filing, the market took it much like when your coworker says they’re “living the dream.”

JetBlue (JBLU) 20.66%

• Who knew that breaking a passenger's ankle with a seatbelt (however, if that happens) wouldn’t be the worst news for JetBlue coming into Monday?

• Not letting passengers hog all the pain, JetBlue passed some of the suffering onto shareholders by announcing a slew of fundraising rounds.

• The airline is raising $2.75bn in debt and another $400mn via a convertible note offering, leading to a downgrade from Moody’s and yesterday’s selloff.

Thought Banana

The Only Thing That Matters

Veterans, police officers, nurses, and financial newsletter writers—what do all these societal heroes have in common?

Besides all being heroes of equivalent valor, they experience quite a lot of volatility in their professional lives. Most of the time not much is going on. Then, all of a sudden, everything starts all at once.

The last few weeks have been the latter for we financial newsletter virgins, I mean writers. But it’s important to keep in mind what really matters. Let’s dive in.

What Happened?

As of last Friday’s close, 91% of S&P 500 companies had reported earnings for the second quarter. Viewing things positively, results have been… mixed.

Some of the headlining numbers so far include:

• 78% of companies have beaten EPS estimates.

  • This is above the 5-year average of 77% and the 10-year average of 74%.

  • The average EPS beat in Q2 has been 3.5%, below the 5yr average of 8.6% and the 10-year average of 6.8%.

• 59% of companies have beaten revenue estimates.

  • This is well below the 5-year average of 69% and the 10-year average of 64%.

  • The average revenue beat in Q2 sits at 0.5%, below the 5-year average of 2% and the 10-year average of 1.4%.

• The average annual revenue growth rate (so far) has been 5.2%, while the average EPS growth rate has been 10.8%.

  • If these growth rates hold, it will be the fastest revenue growth rate since Q4’22 and the fastest EPS growth rate since Q4’21.

The Takeaway?

Companies have been extremely effective in managing their cost basis and share count to keep EPS growing above estimates despite revenue doing the opposite.

The lower magnitude of revenue beats could signal weaker economy-wide demand, but given that it’s still the fastest growth rate in a year and a half, this speaks more to overzealous estimates from analysts.

The same is true on the bottom line. With EPS beating by less than average despite the fastest growth in two and a half years, the proportion of companies delivering beats remains higher than historical averages.

What this tells us is that the selloff that has coincided with much of earnings szn is a valuation-driven pullback. Fundamentals are still going strong, but markets are valuing those strong fundamentals at lower multiples.

Welcome to the all-guts no-glory market. Pick your portfolio wisely.

The Big Question: Can we expect higher returns in the future due to this valuation reset?

Banana Brain Teaser

Previous

The annual interest rate earned by an investment increased by 10% from last year to this year. If the annual interest rate earned by the investment this year was 11%, what was the annual interest rate last year?

Answer: 10%

Today

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?

Send your guesses to [email protected]

How Would You Rate Today's Peel?

Happy Investing,
David, Vyom, Jasper, Ankit, & Patrick

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