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“We Don’t Guess” JPow Mic Drops

🫡 Like me from the JV basketball team, interest rates have been cut again. Markets loved the news and Powell’s comments—find out what he said below.

November 08, 2024

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In this issue of the peel:

  • 🫡 Like me from the JV basketball team, interest rates have been cut again. Markets loved the news and Powell’s comments—find out what he said below.

  • 🏠 Under Armour’s new strategy to monetize losers has markets fired up, and Zillow is killing it amid a housing Ice Age. Wolfspeed shares were brutalized due to bad earnings, and Trump Media shares tumbled.

  • 🤝 M&A is soon to be legal again in America as President-elect Trump is likely to swiftly remove FTC Chair Lina Khan. Find out what that means for your deal flow.

Market Snapshot

Banana Bits

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Macro Monkey Says

JPow Speaks

Obviously, we all love having Presidents right on the brink of late-stage dementia, but I think we can all agree that no one wants that kind of excitement in our Fed Chair.

Luckily, Fed Chair Jerome Powell is rockin’ at a springy, young 71-years-old. Some people get their licenses taken away at that age; others control the entire economy.

As presumably the youngest person in Washington D.C., JPow always brings a sort of “fire up the money printer vibe” my portfolio loves.

And he was back to it on Thursday. Let’s get into it.

What Happened?

Yesterday, the Federal Reserve lowered the target range of the federal funds rate by 25bps, as was widely expected.

Now, the world’s most important interest rate sits in a range from 450-475ps, the lowest since March of last year. That brings the total cuts in 2024 so far to 75bps.

Not much changed in the prepared statement issued by the FOMC nor the sentiment in Powell’s predrafted remarks. However, the minimal changes speak volumes as to how the Fed’s mindset has changed in the last two months.

For starters, unlike the 50bp cut in September, this move was unanimously agreed upon. Michelle Bowman, the Fed governor who voted for a 25bp cut last meeting, was on board with the rest of the team this time around.

Modified comments in the statement indicate a view that the labor market is at or near the Fed’s “full employment” mandate, while inflation data suggests the same for the “price stability” half of their mandate.

But, listening to JPow speak at the post-meeting and policy announcement Q&A session was like listening to a Kendrick or Eminem song—you have to keep pausing to understand what he says, but you know it’s nonstop bar after bar.

Right off the bat, JPow was hit with the question on everyone’s mind. Now that the Fed Chair is soon to be back with a President who once told reporters, “So far, I'm not even a little bit happy with my selection of Jay,” everyone’s wondering if the beef has been squashed.

When asked how monetary policy might change in response to fiscal or other policies from the Trump Admin, Powell made it clear that it’s not something that has an effect in the short-term. 

In fact, the bar of the day came in response to this question when he said, “We don’t guess, we dont speculate, and we dont assume.” Then, he offered a little more color, saying, “Along with countless other factors, forecasts of those effects would be included in our models of the economy and taken into account through that channel.”

So, that answers one of our three questions from yesterday. 

However, in addition to wondering how the election might change policy, we also wanted to know what the Fed believes is the “right” level for rate and how “f*cked” the labor market is, to use the technical term.

While noting the weakness of the October jobs report, Powell wasn’t spooked by one month’s print, even though it was during peak spooky szn. 

He emphasized that their focus is on the unemployment rate. And, as this indicator remains at a historic low, the only concern with the labor market is how it might change inflation.

While he wasn’t directly asked what the “right” level of rates is, as he presumably thinks that the new rate he just set is “right” for right now, he was asked whether the four 25bp rate cuts planned in 2025 as indicated in the September SEP still holds true.

But, this was a dumb*ss question from an NYT reporter (no surprise there), as Powell just refused to comment and said wait until December.

Slightly more indirectly, Powell did lend some insight into how the Fed influenced their policy decisions in the recent dramatic rise in bond yields.

Only when financial market conditions are “persistent and material” does the Fed consider these factors, and according to JPow, “we’re not at that stage right now.”

However, JPow did offer an assessment of why rates have been rising, offering a non-inflationary answer and saying, “It appears that the moves are not principally about higher inflation expectations; they’re really about a sense of more likelihood of stronger growth and perhaps less in the way of downside risks.”

That view was based primarily on the NIPA revisions, an infrequently followed indicator, but one Powell thinks takes precedence right now: 

The Takeaway?

Inflation remains on target, employment is employing, and unless you’re my dog who just got neutered, macro conditions remain close to as good as it gets.

Equity markets moved higher in response to JPow’s remarks while Treasury yields fell. Expectations for the December meeting still peg (pause) the odds of a 25bp cut at ~70%, but now, there’s a 0.9% chance of another 50bp coming then too.

We love a boring Fed meeting, especially in the wake of a not-so-boring election. Now, go create some shareholder value.

Career Corner

Question

Hi mentors, I'm aiming to recruit IB San Francisco and am currently going to Berkeley. I've run out of Berkeley IB alumni in SF to connect with on LinkedIn; what should my next move be? Also how many calls should I be aiming to have over the next few months (I'm recruiting summer 2026). I've had 11 calls so far.

Answer

Some students are hitting 5-6 calls a week. It's about the depth of the connection and building a long-term relationship. Find warm connections: referrals, alums, interest clubs, common firms, etc.

Head Mentor, WSO Academy

What's Ripe

Under Armour (UAA) 27.20%

  • While Nike focuses on the Lebron and Serena Williams of the world, Under Armour is locked in on the f*cking losers… and analysts are loving it.

  • Revenue fell 10.7% to $1.4bn in Q3, but net income surged a very nice 69.5%. Cost cuts and a new branding concept give opportunities for margin expansion.

  • The “affinity for the underdog” brand strategy worked well in Q3, allowing the firm to raise prices in the product lines that leaned into the strategy. Analysts hope that success can continue across the whole company.

Zillow (Z) 23.77%

  • Zillow must’ve missed the memo on the Ice Age of housing the U.S. has been in for a few years now. In Q3, you’d think we were back in 2005 with these numbers.

  • Revenue grew 17% to $581mn, crushing estimates for $551mn, while a net loss of $20mn was half the expected $40mn. In case you forgot, we slapped a $75/sh price target on Zillow back in January. Shares just closed at $72.63.

  • Our genius aside, Zillow’s mortgage segment and its 63% YoY revenue growth has analysts fired up. The idea is to integrate the entire home financing process right within the firm’s app and website.

What's Rotten

Wolfspeed (WOLF) 39.24%

  • I guess Wolfspeed makes the equivalent of salt & vinegar because no one wanted their chips last quarter. Sales missed and guidance was weak.

  • The maker of chips for power and radio frequency applications reported revenue of $194.7mn vs estimates for $200.3mn. Losses were narrower than expected.

  • While Wall Street was looking for ~$214mn in sales next quarter, Wolfspeed issued a huge guidance range of $160-$200mn. Analysts don’t see a path to profits coming anytime soon.

Trump Media & Technology Group (DJT) 22.97%

  • Like Eminem, it’s back to reality, and oh, there goes gravity pulling down Trump Media shares. The only difference is instead of losing yourself, you’re losing money.

  • After a >300% run-up, Trump Media shares are now down more than 35% since reporting Q3 earnings onelection night. You know it’s bad when the first thing you hype up to investors is your cash balance…

  • Revenue fell 5% from Q3’23 to $1.01mn, but losses narrowed to $19mn. G&A costs were ~17x revenue, while interest income was 4.7x revenue.

Thought Banana

Make M&A Great Again

No one wants the hall monitor to be class president—even the kid’s parents realize Captain Clipboard is more snitch than statesman.

But, for the past few years, the M&A market has been overseen by a group even the band kids wouldn’t hang out with. Now, that’s set to end in a few months.

Let’s dive in.

What Happened?

FTC Chair Lina Khan was sworn into the role on June 15th, 2021. She was chosen essentially for writing a good anti-Amazon paperback in 2017 while at Yale Law School.

At 35 years old, Khan has been the youngest Chair in the FTC's history. Many see her tenure as once characterized by overly aggressive, punitive, and arguably politically-based enforcement action.

For example, a House of Representatives report found that the agency was “weaponized” against Musk’s acquisition of Twitter. But, looking at the hard data, it turns out Khan may not have been as much of a stick in the mud as we think.

Finding hard data on this stuff is tough, but from 2000-2020, the FTC challenged ~1-2% of all merger announcements in some form. Khan’s FTC has been below 1% from 2020 through the end of 2023.

Obviously, it’s a small sample size, but the FTC only announced 15 M&A challenges in 2023, the fewest in a year since 2005.

The reason that we see her as the hall monitor’s hall monitor is because of the specific deals she and FTC chose to go after and the reasoning behind them. Some of the most high-profile included blocking:

  • Amazon’s $1.7bn acquisition of iRobot

  • Nvidia’s $40bn merger with Arm (can you imagine?)

  • Lockheed Martin’s $4.4bn acquisition of Aerojet

  • Berkshire Hathaway’s $1.3bn acquisition of the Questar Pipeline

Moreover, many CEOs and bankers have reported rumored deals that companies would like to pursue but are waiting for Khan to exit before doing so.

The Takeaway?

Speaking of her exit, expect that to come within the first 6-months of the Trump Administration Round 2. Experts anticipate a looser M&A market, but only for certain sectors.

It’s no secret that Trump and his VP-elect, J.D. Vance, aren’t big fans of big tech. Acquisitions in this space, especially those focused on AI and media consolidation, will likely remain heavily scrutinized.

But industries such as pharmaceuticals, natural resources, financial services, and more can expect a much less restrictive M&A environment now that the guy who literally wrote a book called “The Art of the Deal” is in the White House.

Needless to say, there are other considerations that will spur the M&A market, such as a normalizing macro backdrop amid declining rates, but the regulatory environment plays as much of a role here, too.

The dorks are out, and the dudes are in. 

The Big Question: To what degree will Khan’s exit spur M&A market activity? You got any hot takes on major M&A deals to come?

Banana Brain Teaser

Previous

How many integers between a and 16, inclusive, have exactly 3 different positive integer factors? (Note: 6 is NOT such an integer because 6 has 4 different integer factors: 1, 2, 3, and 6.)

Answer: 2

Today

A school club plans to package and sell dried fruit to raise money. The club purchased 12 contains of dried fruit, each containing 67/4 pounds. What is the maximum number of individual bags of dried fruit, each containing 1/4 pounds, that can be sold from the dried fruit the club purchased?

Send your guesses to [email protected]

❝

A key question is not whether government shapes markets, but how government shapes markets and towards what ends.

Lina Khan

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Happy Investing,
David, Vyom, Ankit & Patrick