In this issue of the peel:

• 📈 Who invited inflation to the party? It’s staying long past its welcome and appears to have brought friends with it in December. Find out why JPow’s life just got harder—and why his legacy is at an inflection point.

• 💊 Vertex Pharma was inspired by Hulu’s Dopesick for its latest product, while Abbvie boringly beat quarterly estimates. Decker’s got bullied for being too honest, and Walgreens got bullied, too, because that’s exactly what they deserve.

• 🪙 Visa and Mastercard continued to rip off consumers and businesses alike in Q4. But, a quiet competitor overtook both giants in 2024, potentially ushering in a new future of payments.

Market Snapshot

Banana Bits

• Is it still Sunday? If not, congrats—you’re not living the plot of Groundhog Day. Speaking of which, famed meteorologist Punxsutawney Phil saw his shadow yesterday.

• Canada and Mexico are fighting back on U.S. tariffs with tariffs of their own.

• With 36% of companies reporting, S&P 500 earnings have been mixed for Q4.

• I’m sure this will work out just as great as last time—the FDA has approved a new class of pain medications from Vertex Pharma.

• Intel had the mildest earnings reaction after beating expectations but issuing weak guidance.

• Chevron shares sank on declining profits and its first refining loss in 4-years.

• Google is offering to buyout employees in its “Platforms & Devices” unit ahead of an expected 25k cuts.

• Deep dive into DeepSeek.

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Macro Monkey Says

JPow: Volcker 2.0 or Burns 2.0?

I hope Federal Reserve Chairman JPow has some Irish in him.

We could really use that Leprechaun luck these days, especially after December’s Personal Consumption Expenditure (PCE) report showed higher inflation coming back harder than bird flu in 2025.

With his term set to end in 2026 and a President who I doubt will be inviting the Fed Chair to his birthday party, Powell now decides if he’s the next coming of Volcker or Burns.

Let’s get into it.

The Numbers

Looking at the tape or your Twitter feed, you might not have even noticed Friday’s inflation report. 

There is commotion around tariffs and the potential for China’s AI to enslave the world before we Americans steal the show. However, behind it all, inflation is on the rise again in the United States.

Much like the CPI earlier this month, December was the third month in a row of rising PCE inflation—and that officially makes it a streak.

Headline PCE inflation clocked in at 0.3% monthly and 2.6% annually in December. That’s the highest annual inflation rate since May of last year and the highest on the monthly side since April.

Luckily, JPow and the FOMC gang only really care about core PCE inflation, which excludes food and energy prices (because who buys food and energy?).

Core inflation clocked in at 0.2% for the month and 2.8% annually. That was largely in-line with expectations and effectively flat against the last few months.

Compared to recent history, the path of inflation hasn’t changed much from the Fed’s view. After cutting rates from September through the end of the year by a full percentage point, a slight uptick in inflation isn’t nearly as shocking as something like the Mavs trading Luka.

However, this inflationary trend can’t help but cause us to reminisce about the 1970s. I might have been ~30 years old then, but I hope JPow was taking notes.

JPow has a few times let it slip that he has a celebrity crush on Paul Volcker, Fed Chair from 1979-1987. Volcker’s broadly considered the GOAT of interest rates as he is credited with “breaking the back” of inflation that plagued the 70s and early 80s.

Inflation was out of control largely due to the policy of Volcker’s predecessor, Arthur Burns. Burns is one of those guys you wouldn’t trust to go pick up your lunch for you, so naturally, we put him in charge of the whole economy.

Burns acquiesced to another stand-up American, President Richard Nixon, and kept rates artificially low to boost the economy under his watch. Inflation ran rampant, and Volcker had to jack the Fed funds rate to 19% to save the day.

Hopefully, the right side of that chart doesn’t eventually mirror the left, but it was cutting interest rates too early that largely retriggered inflation in the early 1980s.

JPow has a decision to make. He’ll likely let the data do the talking for him, but we’re gonna be watching like a (Fed) hawk to see any sign of this historical tragedy fresh in the Fed Chair’s mind.

However, based on the rest of Friday’s report, that might not be a concern. 

Consumer spending grew strongly, which is only natural given the Holiday season. However, real wage growth stagnated.

Disposable personal incomes (DPI) grew 0.4%, or 0.1%, on a real basis. Annually, real DPI increased 2.4%, the weakest real wage growth since December 2022.

That was the worst part of the report and broadly the driver of any macro-driven selling on Friday. 

Although consumer spending remained strong, up 0.4% monthly and 3.1% annually, the writing on the wall is clear even to people like us who can’t read.

The Takeaway?

January’s data is gonna be watched more closely than the Super Bowl this Sunday.

You could argue that 2024 or even the whole rate-hiking-then-cutting cycle has been a macroeconomic inflection point, but when it comes to the conversation of the Big 3—inflation, wages, and spending—December’s data poses the biggest conundrum yet.

The billion-and-a-half speeches Fed officials give every week to cosplay JPow might actually matter over the next few weeks as markets try to parse the central bank’s view leading up to the next FOMC meeting on March 18-19th.

Spending is still strong, which means GDP growth should be, too. However, if higher inflation persists and wage growth continues to stagnate, we might have to rethink this rate-cut thing.

Career Corner

Question

I am applying for an Equity Research role (that I believe fits me well despite focusing on IB). The position is 1 week old and has over 100 applicants; would I stand out if I wrote an interesting statement as asked by LinkedIn?

Answer

I don’t have a strong view of these LinkedIn applications, but I assume marking them as your top choice can’t hurt. But also, importantly, you should be networking! That will likely have a bigger impact than whether or not you check this box.

And strong interview prep with a strong stock pitch will go a long way! (Also, as an aside, you can’t trust the number of applications on LinkedIn—some submissions are completely unqualified, and some are bots).

Head Mentor, WSO Academy

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What's Ripe

Vertex Pharmaceuticals (VRTX) 5.3%

• I’m pretty sure Hulu’s documentary Dopesick was meant to be a warning, not an inspiration for Vertex’s next products. This oh-so-generous big pharma firm wants to heal your pain.

• That worked out really well for the Sackler family, Purdue Pharma, and, most of all, their customers. But Vertex and the FDA promise “this time is different” as their pain drug is non-opioid.

• Apparently, the TAM for “pain” is pretty big, so markets were excited. The drug, called Journavx (just don’t ask me how to pronounce it), allegedly showed no evidence of “addictive potential.”

• That doesn’t mean non-addictive. For that, only time will tell. Just be on the lookout when your doctor tells you to “just double the dose!”

Abbvie (ABBV) 4.7%

• Abbvie and other drug dealers made a killing last quarter, and it didn’t even require lacing their products. The pharma giant beat estimates despite a GAAP loss.

• The company reported $2.16/sh on $15.1bn, beating estimates for $2.13/sh on $14.9bn. Decent enough, but strong guidance really sent shares soaring.

• Management issued an FY’25 EPS target range of $12.12 - $12.32/sh, above consensus estimates for $12.13. We’ll see what RFK has to say about that.

What's Rotten

Decker’s (DECK) 20.5%

• Honestly, you have to be a special kind of stupid to post results this good and still f*ck your shareholders this bad. Decker’s managed to tank an otherwise stellar earnings report. 

• The shoemaker pioneering running shoes, which are 90% sole, reported 17% annual revenue growth to $1.83bn, beating estimates by $100mn. EPS of $3/sh beat calls for $2.58/sh.

• Decker’s even raised guidance, but revenue forecasts were right in line with Street expectations. Because it didn’t surprise to the upside, shares sold off.

• Truist analysts seemed confused by the report, maintaining a Buy rating and hyping up Q4’s results while still cutting their price target on the maker of Uggs, Hokas, and a bunch of other brands no one’s ever heard of.

Walgreens Boots Alliance (WBA) 10.3%

• Hopefully, someone at the corporate graveyard has kept a spot warm for Walgreens. Shares are down ~90% since 2015, one year after Walgreens bought Boots Alliance.

• That’s what happens when your company’s growth relies on Europe. But, Friday’s faceplant is entirely attributable to the suspension of their dividend.

• Walgreens will no longer pay its $0.25/sh quarterly dividend, saving up cash for what’s sure to be a long legal battle against the Justice Department over medicine distribution. 

Thought Banana

Earnings Spotlight: The Walking Dead?

Like every other non-psych-patient on the planet, I gave up on The Walking Dead after season 6. Couldn’t dream of watching it without my boy Glenn.

However, despite a lot of talk about the Walking Dead of the payments space, no one seems to be ditching the zombies… at least for now.

Let’s dive in.

What Happened?

Last week, payment giants Visa and Mastercard released their latest earnings reports. 

There’s been a lot of talk about stablecoins taking over the “rails” of sending/receiving money, but based on these results, it sounds like the Two Kings just live rent-free in the minds of cr*ptobros.

Both firms beat sales and earnings expectations in Q4. While Mastercard rose by 3.14% after reporting last Thursday, the larger Visa group fell by 0.36%.

Although both Visa and Mastercard have multiple revenue segments, the key driver is growth in payment volumes.

Last quarter, Mastercard’s gross dollar volume sent through its payment network grew 9% in the U.S. to $793bn, 13% internationally to $1.77tn, and 12% in the aggregate to $2.56tn.

Visa, meanwhile, saw similarly solid performance. 

Visa’s gross dollar volume in Q4 totaled $4.15tn. So, in total, these two payment processing giants transacted $6.17tn to close out 2024.

Late last year, JPMorgan CEO Jamie Dimon said in an interview that his bank processes “over $10tn per day.” Many of those likely involved Visa and Mastercard, but the point is that this is an enormous market.

That’s why the business models of Visa and Mastercard rely on fractional prices and ridiculous volume. They use the Walmart model—however, there’s another Walmart stepping onto the block with even cheaper sh*t and (probably) scummier employees.

On any given transaction, Visa and Mastercard’s invisible tax ranges from 1.5-3.5% of the transaction amount. Interchange, assessment, processing, exchange, and other fees add up quickly. So, a $10,000 transaction could run you $150-350.

With stablecoins, transaction costs are ~1/10th that amount, ranging from 0.1-0.3%. Exchange and transfer fees don’t add up as quickly.

Plus, Visa and Mastercard take their sweet time to charge you that much, with processing times lasting 1-2 business days. With stablecoin providers like Tether and USDC, settlement time varies on the blockchain it uses but ultimately occurs in minutes regardless.

So, it should be no surprise that stablecoins are already bigger than Visa and Mastercard combined.

Stablecoin transaction volume totaled $27.6tn in 2024, 7.6% higher than the combined total of Visa and Mastercard, according to CEX.io.

The Takeaway?

The proliferation of stablecoins certainly threatens Visa and Mastercard’s business models, but not any time soon.

Wide moats via trust and scale are expected to insulate both businesses for years to come, but with bank CEOs like Bank of America’s Brian Moynihan saying how excited they are to use stablecoins if regulators allow it, that moat might not be quite as wide.

The Big Question: How might regulatory uncertainty around stablecoins impact their ability to disrupt traditional payment networks like Visa and Mastercard?

Banana Brain Teaser

Previous

Sam has $800 in his account. He will deposit $1 in his account for one week from now, $2 two weeks from now, and each week thereafter he will deposit an amount that is $1 greater than the amount that he deposited one week before. If there are no other transactions, how much money will Sam have in his account 50 weeks from now?

Answer: $2,075

Today

A certain state’s milk production was 980 million pounds in 2007 and 2.7 billion pounds in 2014. Approximately how many more million gallons of milk did the state produce in 2014 than in 2007? (1 billion = 10^ 9 and 1 gallon = 8.6 pounds.)

Send your guesses to [email protected]

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Happy Investing,
David, Vyom, Ankit & Patrick

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