In this issue of the peel:

• 🏭 The most boring week of the year is finally over. Find out how U.S. manufacturing held up in December and what to expect this week as we get back to reality.

•  🍻 Rivian teaches Tesla a lesson in hitting delivery targets, and MicroStrategy is leaning further into its addiction. Meanwhile, Joe Biden just steel-blocked U.S. Steel, and the Surgeon General wants to take away your beer.

• 🫧 We’re coming into 2025 hot, but how concerned should we be? See how speculative U.S. markets are as we enter the New Year below.

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Macro Monkey Says

Back To Reality

Uhhh, what happened? When did we cut Christmas and the rest of the Holidays from a whole season down to less than 5 minutes?

Back in the day, it felt like Christmas lasted for a month. Now, I can only tell how long the Holidays have been by the number of overdraft notifications I get.

Anyway, now that it's the first full week of January and we’re all still here, it’s time to get back to the usual misery. But hey, maybe we can make some money along the way.

Let’s get into it.

What Happened?

Last week, for some reason, I guess manufacturers were still working while the rest of us gained presents, blood alcohol levels, and most of all, weight.

On Friday, the Institute for Supply Management (ISM) released their latest reports on the manufacturing Purchasing Manager’s Index.

This report measures manufacturing activity by asking purchasing managers how much they purchased last month. Like most other PMIs, the report is quantified on a scale of 0 to 100, where anything above 50 represents expansion and below contraction.

The Numbers

In December, the U.S. manufacturing PMI grew to 49.3 from 48.4 last month—a small change, but signaling less of a contraction occurring in the manufacturing sector than in November.

Economists were guesstimating a decline to 48.0, so despite remaining in contraction territory, U.S. manufacturing is 1) improving and 2) doing better than expected.

Meanwhile, demand remained strong. New orders grew from a reading of 50.4 in November to 52.5, suggesting any slowdowns in manufacturing are supply, supply chain, or inventory-related.

What Else Is Happening?

In addition to low-signal, overly noisy reports like that above, we’ll get plenty more throughout the rest of this week.

From mid-December to early January, markets essentially trade on vibes and at a very low volume. But now that we’ve maxed out our annual dose of fun, markets and macro reports are almost back to their regularly scheduled programming. 

This is gonna be a big week for macro news, but it is yet another abridged trading week as the New York Stock Exchange and others will close Thursday to mourn the recent passing of the U.S.’s 39th President, Jimmy Carter.

Outside of D.C., all eyes this week will be on the labor market. Wednesday brings the latest JOLTS report along with ADP’s monthly private payrolls report, while on Friday, we’ll get the full jobs report for December and all of 2024.

Then, the next week will be our first with normal trading hours since the week of December 16th. The following week will then, yet again, be shortened due to Martin Luther King Jr. Day on Monday, January 20th.

The Takeaway?

Getting any kind of signal on market performance over the past week is like trying to get a signal for your phone by throwing it in the ocean.

Low trading volume distorts reactions as the lesser liquidity causes exaggerations in share price reactions. Plus, little material news comes out during this time of year.

However, now that we’re back to reality, expect things to start happening again. 

Let’s make 2025 even more profitable than 2024. 

Career Corner

Question

I'm having trouble with accounting questions about non-cash expenses and adding them back to the cash flow statement.

For one question, I thought I had to add back interest expenses on the cash flow statement, but that was wrong, and for another question about writing down assets, I incorrectly didn't add back the write-down to the cash flow statement.

What exactly determines whether an expense should be added back to the cash flow statement?

Answer

What they’re looking for is your ability to tell something is non-cash.

Depreciation is non-cash because the cash went out the door when you bought the factory.

Asset write-down is non-cash because, again, the cash went out the door when that asset was bought—not in the current period. Writing it down is similar to depreciation…you’re not using cash to effect that write-down.

In your example, interest IS a cash expense in the current period. No need to add anything back—that cash is going out the door this period (and interest is captured in Net Income)

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What's Ripe

Rivian (RIVN) 24.5%

• Tesla should take notes as smaller EV maker Rivian puts on a show with its Q4 deliveries, suggesting issues at the larger EV maker aren’t industry-wide.

• Rivian reported a total 2024 production of 49,476 vehicles, 12,727 of which were made in Q4, and 51,579 deliveries, 14,183 of which were done in Q4.

• Rivian owes its past self a beer because the final Q4 and 2024 delivery numbers did beat the updated guidance from October but missed the OG estimate from the start of the year.

MicroStrategy (MSTR) 13.2%

• Imagine your buddy has levered his entire life to hitting black. As you wait for the dealer to spin, he says, “Wait, let me throw down another $2bn,” and the place goes nuts.

• That’s exactly what happened to MicroStrategy on Friday. The BTC holding firm is raising an enormous $2bn to fund even more BTC purchases.

• Planning to raise these funds through their “21/21” plan, MicroStrategy will amass the above war chest via multiple public offerings of perpetual preferred stock.

• As a reminder, the “21/21” plan is MicroStrategy’s official path to rock bottom as they struggle through their BTC addiction, looking to raise $21bn in equity and $21bn in debt to fund $42bn in BTC buying. 

What's Rotten

U.S. Steel (X) 6.5%

• Instead of saying, “I’m taking my ball and going home!” this is more like, “Sorry, I really don’t want to leave, but my mom said I have to.” U.S. Steel remains in the U.S.

• Joe “Steel Industry Protector” Biden, as I think his friend Andrew Carnegie used to call him, officially blocked Nippon Steel, a Japanese competitor, from buying the company.

• U.S. Steel is pissed, to say the very least. However, perhaps no one is more disappointed than Elon Musk, as that means this company will retain the ticker symbol “X,” which he must be dying for. 

Drinking Stocks (BUD, TAP, SAM) 2.2%, 3.4, 3.8%

• It was only a matter of time. After killing the fun of cigarettes decades ago, the U.S. government has its sights set on our final outlet of enjoyment—alcohol.

• On Friday, Surgeon General Dr. Vivek Murthy tweeted this nonsense on the “causal link” between being a chill guy with a few drinks in him and getting cancer.

• Way to kill the vibe, “Doctor.” This guy even wants to put warning labels on alcoholic beverages, potentially hurting sales for these companies but likely just making the cans look even cooler.

Thought Banana

Starting Off Hot

We enter 2025 on a high previously only felt by GOAT-level hedge funds and heroin users. For the first time since 1998, we’ve had back-to-back annual returns of >23.3%.

But, and I don’t know if you guys are market historians or anything, the years after 1998—like 2000, 2001, or 2002, for example—weren’t all that great. In each of those years, the S&P 500 set a new record for its worst performance since the 1970s.

I’m not saying current conditions are similar to 1998, but it’s time to get a sense of how speculative this market might be. Let’s dive in.

The Numbers

Based on current FactSet consensus estimates, the S&P 500 trades at a 12 month forward P/E of 23.71x. 

You can think of this metric as the amount investors are willing to pay for $1 worth of earnings over the next 12 months. So, investors today are willing to “pay” $23.71 for that dollar of earnings.

The higher the P/E ratio, the more investors value future earnings relative to income today, which naturally increases risk as those future earnings may never materialize.

That’s why the P/E is used to measure bubble-ish-ness, to use the technical term.

Historically, over the last 5 years, the S&P’s 5-year average forward P/E sits around 19.4 with a standard deviation of 2.17. That means the S&P 500’s current P/E is higher than almost 95% of all historical observations.

Alright, enough nerdy sh*t. We get it—the market appears overvalued, driven by a rate-cutting cycle, strong growth expectations, technological advancements like AI, quantum, and nuclear, and blah blah blah. That’s the prevailing narrative hovering over equities.

Outside of the equities market, signs of over-speculation remain all too abundant.

For starters, the bubble blower himself is back. Keith Gill, a.k.a “Roaring Kitty” or “DeepF*ckingValue,” is calling all aboard the hype train again with his recent purchase of Unity Software.

While not necessarily a glaring red flag, the return of meme “stonks” screams of building exuberance.

If that’s not ridiculous enough, please see the below chart:

Something called “Fartcoin” (because I can’t say “cr*pto” and refuse to call this a digital “asset”) is currently worth more than all of us combined, trading at a market cap of $1.3bn. 

Alongside historically stretched valuations and the return of meme stocks in the equities market, a rise in brainlessness and a severe lack of touching grass are sending the most middle-school-named tokens to the moon once again.

Even the now infamous Hawk Tuah coin still has a market cap of ~$475k.

This comes as BTC has spent the last few weeks hanging just below all-time highs, currently sitting at $98,425.87 (yesterday at 4:55pm ET). But despite the pullback, shares in companies like MicroStrategy and Robinhood continue to rip.

Lastly, it’s not just the most brainless of our society showing signs of speculation. The “smart money,” which actually refers to the bond market and not my personal portfolio, as you were probably thinking, is in a similar yet opposite position.

Broadly, nobody wants bonds. We get it—they’re super boring—but usually, boomers are all over this stuff. However, demand for fixed-income securities has rarely been lower.

At the same time, the Treasury yield curve is showing early signs that it may be building a “bear steepener.” 

Basically, a bear steepener occurs when long-term yields rise more quickly than short-term. While yields across the spectrum have been rising, it’s been led by the 10, 20, and 30-year notes, steepening the curve in a historically bearish signal.

Generally, a bear steepening can signal an expected return to inflation driven by an overexuberant consumer base and too-strong growth expectations.

So, the bond market is signaling potential speculation in a few ways. 

First, no one wants to buy fixed income, magnifying investor’s current preference for earnings then as opposed to earnings now. Second, bond markets can smell the exuberance in demand among consumers, potentially triggering inflation and carrying a big risk to the downside.

The Takeaway?

Markets are starting off hot in 2024.

As anyone who grew up ugly knows, not being hot forces you to develop some kind of substance or personality. If you grew up hot (and don’t call the FBI on me), you don’t necessarily need that fundamental support.

Maybe Mr. Market can stay hot his whole life in 2025, but we’d be surprised if there weren’t any rocks or wrinkles along the way. Stay tuned.

The Big Question: Is the market overly speculative in its current state? What other pockets of speculation exist? Is there any evidence to the contrary?

Banana Brain Teaser

Previous

What number is 108 more than two-thirds of itself?

Answer: 324

Today

A salesperson who had been driving at a speed of 100kmph slowed down to a speed of 47 kmph. Approximately how many miles per hour was the speed reduced? (1 kilometer ≈ 0.625 miles)

Send your guesses to [email protected]

How Would You Rate Today's Peel?

Happy Investing,
David, Vyom, Ankit & Patrick

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