Silver banana goes to…

In this issue of the peel:

• Powell showed off his dance moves at Jackson Hole, confirming that rate cuts are coming. It’s like watching your dad try to be cool at a wedding—awkward, but you appreciate the effort. Now, we wait to see how markets react when the music stops.

• Cava is the cool new kid in the restaurant game, winning hearts (and wallets) with a killer Q2. Meanwhile, Workday is proving misery loves company with solid earnings, but Red Robin and Intuit had the kind of quarters that make you want to hide under the bed.

• Finally, the DOJ is coming for landlords, claiming they’ve been using shady software to squeeze renters dry. It’s about time someone asked, “Who’s really the victim here?” Spoiler: It’s not your landlord.

Market Snapshot

Banana Bits

• The only question for rate cuts now is how much.

• Mag 7 companies remain under-owned in active portfolios.

• Looks like the CEO of Telegram is adding 'arrested in France' to his list of accomplishments—right next to 'master of cryptic messaging!'

• NASA forces Boeing to do the walk of shame and taps SpaceX to save stranded astronauts.

• Intel called Morgan Stanley for backup in their ongoing activist battle.

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Macro Monkey Says

Takes One To Tango

They say it takes two to tango. 

But on Friday, it only took one as the Silver Fox Fed Chair himself danced all over the central banking world to the music of rising stock prices.

The Powell pivot is complete… again. However, after pivoting this much during his tenure, it’s starting to look more like JPow’s been dancing this whole time.

And now, the market is loving his moves. Let’s get into it.

What Happened?

On Friday, Fed Chair Jerome Powell delivered his magnum opus at Jackson Hole.

The main point of JPow’s speech was a Fedspeak-riddled declaration that the U.S. Central Bank would cut rates in September.

But, before he got to that point, Powell gave a speech reminiscent of a high school valedictorian—summarizing events of the last four years, explaining why certain decisions were made, and drawing a few forced laughs from the audience.

Needless to say (hopefully), inflation was a big focus. 

After regaling the audience of our economic traumas from the early pandemic period and explaining how inflation got so out of control in the first place, he went on to describe how the Fed landed the knockout punch.

Long story short, the Fed does not see inflation as a worrisome problem anymore. Powell clarified this by saying, “The upside risks to inflation have diminished.”

Now it’s time for a new problem. Powell immediately followed the above statements by saying, “And the downside risks to employment have increased.” 

I dream of a day we can go 5-minutes without this guy killing the vibe, but looking at the above chart, it’s easy to understand why the stick is so far up his...

Anyway, recent months have seen an increase in unemployment alongside a steep drop in job openings. Speaking to the Fed’s employment outlook, Powell added, “We do not seek or welcome further cooling in labor market conditions.”

Then, the mic drop moment came. Story time was over when Powell declared, “The time has come for policy to adjust,” adding, "The direction of travel is clear.”

Boom. Rate cuts are coming. Ironically, the ambiguity of JPow’s language actually made it blatant that the FOMC is open to cuts larger than 25bps (or 0.25%).

Although the above charts show a weakening economy with lower inflation, higher unemployment, and lower labor demand— all forecasting slower growth to come—it’s not a “weak” or “bad” economy at all.

GDP growth is slowing but remains healthy and above pre-pandemic trends.

Overall, macro conditions are still good, and inflation remains above the Fed’s target, but the trends are clear in the Fed’s view. If left unchecked, inflation will fall below target, unemployment will continue to rise, and growth could slow, stop, or enter a recession.

To mitigate these risks and maintain credibility, the central bank feels that they have to do something. However, it’s not exactly an emergency this time.

The Fed has made clear that some loosening is necessary to uphold their dual mandate of price stability and maximum employment, but even a slight loosening of monetary policy could have big implications.

We don’t necessarily need a loose policy, but rather a less tight policy. Markets are pricing rates to sit in a range of 3-3.5% by the end of 2025, implying at least 200bps (2%) of cuts by then.

But, according to the latest dot plot, Fed officials don’t see a need to follow shawty and get that low, low, low, low, low, low, low, low.

The Takeaway?

Rate cuts are coming. Not because we’re in emergency circumstances but simply to mitigate employment risks.

As Renmac’s Neil Dutta pointed out, “The risk of recession is now receding because the Fed is seeking to support the labor market.”

Market-implied odds still forecast just a 25bp cut, but with the next Q2 GDP growth estimate coming on Thursday, July’s PCE data on Friday, August’s jobs report the following week, and some big earnings left to come like Nvidia on Wednesday, that narrative could change quickly.

Stay tuned.

What's Ripe

Cava Group (CAVA) 19.63%

• Cava is the Barack Obama of restaurant chains—new to the scene, adored by young people, some question where they’re from, but they just keep winning.

• Q2 was the latest example as the Mediterranean fast food chain destroyed estimates with sales up 35.2% and same-store sales up a huge 14.4%.

• Driving the results was a 9.4% jump in traffic and a new steak menu item. Margins grew, EBITDA spiked 59%, and the market decided Cava earned its premium valuation.

Workday (WDAY) 12.49%

• So this is why employee satisfaction has plummeted this year—companies are using Workday more. Maybe owning shares is a good hedge against office misery?

• The administrative software provider reported 16.7% sales growth and a 17% spike in subscription revenue, more than doubling operating margins to 5.3%.

• Free cash flow rocketed 43% to $516mn as net margins expanded too, thanks to good cost controls. The total number of users came in at 70mn, also a new record.

What's Rotten

Red Robin Gourmet Burgers (RRGB) 8.25%

• What, y’all don’t like bottomless fries anymore? Or maybe we like them too much, and that’s what caused Red Robin’s losses to come in wider than expected.

• Shares in the burger chain sh*t the bed worse than their customers as losses widened to $0.47/sh. Alongside a 7.6% increase in prices, traffic fell 6.7%, 

• Same-store sales fell 0.8% in total, leading to lower guidance. The company is still trying to pass inflation onto customers, but it isn't working out too well.

Intuit (INTU) 6.83%

• Rookie mistake—Intuit delivered a helluva quarter but ruined it by being way too honest. The owner of TurboTax, QuickBooks, etc., beat but issued weak guidance.

• Total revenue grew 17% for the quarter and 16% for the full 2024 fiscal year. The firm’s Small Business and Self Employed units led, growing 19% annually.

• Analysts were distracted by guidance for just 5-6% sales growth in Q1 and the fact that TurboTax continues to shed users, falling 1% in total for the year.

Thought Banana

Controlling Rent

Pausing their tireless work of maintaining properties and collecting rent, it turns out the landlords of America have been the real victims all along—who’d have thought?

You’re not alone in thinking your rent is too high. In addition to every other renter in the country, the Department of Justice agrees.

Let’s dive in.

What Happened?

Days after VP Harris fledged out her theory of monopoly-driven rent prices, the DOJ opened a lawsuit against RealPage, a Thoma Bravo-owned property management software and service provider.

The DOJ is alleging four violations of the Sherman Antitrust Act, including:

• Unlawful sharing of information (collusion).

• Agreements with landlords to align rent prices (again, collusion).

• Monopolization of the commercial revenue management software market.

• Attempted monopolization of the same market.

The DOJ claims all this bad boy behavior has led to unjustly high rent costs, and it’s not hard to see why.

For 70.7% of the post GFC-period, rent prices have grown more rapidly than overall inflation, sometimes by more than 2.5x… as I’m sure most of you know all too well.

The allegations center on the fact that RealPage’s revenue management tools, YieldStar and AIRM, use “transactional competitive market data” to give their pricing recommendations.

Essentially, this means that the DOJ thinks RealPage’s data-sharing requirements strip our poor, sweet landlords of “fully independent centers of decision-making on pricing.”

The DOJ’s second charge claims that RealPage’s terms effectively force landlords to price units at whatever the pricing algorithm spits out.

So, landlords are harmed by a loss of independence. Then, consumers are harmed because RealPage’s models (allegedly) “are designed to increase prices as much as possible and minimize price decreases.”

DOJ’s third and fourth allegations allege that RealPage is only able to do this through monopoly power.

The Takeaway?

Federal agencies are getting smart when it comes to data sharing.

Similar practices are common in other industries, so I’d be shaking in my shoes if I were out here sharing transactional, competitively sensitive data.

8 state attorneys general joined the DOJ in the lawsuit and are now looking for a federal judge to stop RealPage from continuing these practices going forward.

Slower rent price growth could be on its way. As U.S. Attorney General Merrick Garland so eloquently put it, “Everybody knows the rent is too damn high, and we allege this is one of the reasons why.”

The Big Question: Are other industries at risk of similar lawsuits? Will these proposed changes actually lead to slower rent increases? Will the DOJ win the case?

Banana Brain Teaser

Previous

There are 10 books on a shelf, of which 4 are paperbacks and 6 are hardbacks. How many possible selections of 5 books from the shelf contain at least one paperback and at least one hardback?

Answer: 246

Today

There are 5 cars to be displayed in 5 parking spaces, with all the cars facing the same direction. Of the 5 cars, 3 are red, 1 is blue, and 1 is yellow. If the cars are identical except for color, how many different arrangements of the 5 cars are possible?

Send your guesses to [email protected]

How Would You Rate Today's Peel?

Happy Investing,
David, Vyom, Ankit & Patrick

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