Work-From-Port Is Back

The port strike is over... for now. This bandaid over a bullet hole will get us through the holiday and election season but bring us right back to where we were when the tentative deal expires on January 15th.

Author

Vyomesh Kumar
October 08, 2024

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In this issue of the peel:

  • Fed Chair JPow wants the entire economy on cocaine. But the smart money isn’t on board. Find out below why a rate cut in November may do more harm than good.

  • They say that “expensive” isn’t necessarily “good” in the wine business, but this company just bought $1.95bn worth. Plus, Trump Media shares somehow managed to rise again while insurance stocks sold off as hurricane season hit a peak. Finally, sell-side analysts don’t like chocolate anymore.

  • The port strike is over… for now. This bandaid over a bullet hole will get us through the holiday and election season but bring us right back to where we were when the tentative deal expires on January 15th.

Market Snapshot

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Macro Monkey Says

Rate Cut Cocaine

When doctors sign the hippopotamus oath or whatever, one of the most important things they commit to is to “First, do no harm.”

The idea is to ensure that interventions don’t make a patient’s health worse. Like, no doctor would prescribe an otherwise healthy person cocaine to cure drowsiness.

I’m no doctor, but I get the vibe that the risks of cocaine probably outweigh the intended wake-up call. However, Dr. Federal Reserve seems to disagree. 

Let’s get into it.

What’s Happening?

At 3% real GDP growth, the U.S. economy is far from drowsy. But still, Dr. Federal Reserve and nurse Jerome Powell want to prescribe cocaine in the form of rate cuts.

Recent months have seen treasury yields decline in anticipation of the start of an (alleged) rate-cutting cycle. However, it appears the view of “smart money” in the fixed-income world might be changing.

Every day so far in October, yields on longer-dated notes and bonds have steadily climbed higher, with the steepest change found in 2-year notes.

Bond yields move in anticipation of changes in underlying interest rates. 

If a rate cut or series of cuts is expected, yields will move lower as fixed-income traders buy up the higher coupon securities already in the market, pushing prices higher and, in turn, yields lower.

The 2-year yield, in particular, gets a lot of attention as it is often seen as a proxy for the bond market’s view of where rates are heading. 

Sitting at 4.01% at the time of writing, it’s clear the bond market still anticipates cuts, but potentially not as much as it did less than two weeks ago when the 2-year yield sat at 3.49%.

We can see this in the interest rate futures market too.

One week ago, traders slinging rate futures contracts implied a 0% probability that rates would be held steady at the FOMC’s November 7th meeting. Further, there was a 35% chance of another 50bps cut.

Now, there is a 0% chance of another 50bp cut and an almost 16% chance of no cut at all.

These movements might seem miniscule, but their implications are the opposite. Remember, it’s not the level of these yields and probabilities that truly matters from a predictive standpoint but the direction they’re heading in.

And they’re all moving higher. 

This is the market’s way of saying, “Hey, our patient, the U.S. economy probably doesn’t need as much cocaine as we thought.” And, as usual, less cocaine is probably a good thing.

Two months of declining unemployment, a huge upside surprise in the number of job additions in September (254k vs 150k expected), and even huge-r revisions to additions in July and August have markets thinking our patient is healthier than we thought.

In addition to strong employment and GDP growth, the U.S. is also seeing:

  • Nominal spending is up 5.2% annually, and real spending is up 2.9%,

  • Declining default rates from consumer and corporate borrowers,

  • (Slowly) increasing mortgage applications,

  • An increasing personal savings rate near 5%,

  • Strong ISM Services data (but slightly weak manufacturing) and

  • Already, high wage growth increased to 3.1% after adjusting for taxes and inflation.

In other words, as we keep saying, the U.S. macroeconomy is firing on all cylinders.

And, in fact, with wage growth coming in hotter and hotter the past few months, concerns have emerged that inflation may soon pull a Slim Shady and announce,  “Guess who’s back?”

The Takeaway?

Dr. Powell is a wait-then-hurry-up kinda guy.

He wants to see his patients falling asleep behind the wheel of a Mack truck before he prescribes cocaine. Then, he’ll call his buddy El Chapo for a large enough shipment.

We saw this in the C-19 response and at the beginning of the rate hiking cycle. Powell waits until the data tells him what to do, then acts accordingly, with a high degree of urgency.

Given the higher-than-usual degree of opacity in macroeconomics right now, don’t be surprised if the Fed just recommends getting plenty of fluids and exercise after it conducts the U.S. economy’s next physical on November 7th.

As of right now, it seems that no treatment is needed. And the bond market knows it.

But, between today and the next great FOMC holiday, we’ll get the first estimate of Q3 GDP growth, a CPI report, a PCE report, and the October jobs report, among other things.

We’ll see how JPow responds a month from yesterday. Stay tuned.

Career Corner

Question

When an application for a program asks you to detail your individual experiences, is it okay to copy and paste the role description from your resume, even when it asks you to also submit the resume?

Answer

It’s fine, but I think the better approach is to rephrase a bit so you can use the space to your advantage, highlight your biggest achievements, and write in prose instead of bullets. But in the end, it probably won’t make a huge difference either way, so if you’re tight for time, it’s okay.

Head Mentor, WSO Academy

What's Ripe

Duckhorn Portfolio (NAPA) 102.78%

  • Party at 9595 Wilshire Blvd in Beverly Hills, California, tonight! The firm headquartered here, Butterfly Equities, just bought $1.95bn of wine.

  • But they didn’t buy crates, bottles, and boxes—Butterfly bought “North America’s premier luxury wine company” with their acquisition of Duckhorn Portfolio. 

  • The buyout is an all-cash transaction done at an $11.10/sh price, a 63.5% premium to Duckhorn’s 90-day VWAP, and a 105% premium to Friday’s close.

Trump Media & Technology Group (DJT) 11.45%

  • I’m truly amazed—the less of a company this “company” becomes, the higher the share price goes. Trump Media shares are ripping on nothing but bad news.

  • The Chief Operating Officer for the firm behind Truth Social and their still non-existent media empire, Andrew Northwall, resigned on September 28th, according to SEC documents.

  • No reason was given for his resignation, but my guess was the distinct lack of anything to operate finally hit him. I’m still trying to figure out why shares went higher.

What's Rotten

Insurance Stocks (KIE) 3.44%

  • Shares sold off in the insurance market as investors realized these companies might have to actually serve their purpose soon. Hurricane season is rough.

  • Most insurance companies provide weather catastrophe coverage. That means Helene and brewing hurricane Milton could rack up the payouts owed from these firms.

  • Florida-based Universal Insurance was the worst, losing 19.5%. Reinsurers like Everest Group suffered too, down 8.5%.

Hershey (HSY) 2.25%

  • Guess y’all don’t like sweet treats anymore as Hershey shares melt faster than their product in your pocket. A few haters are taking down shares.

  • UBS and Bernstein both downgraded shares to “Neutral” and “market weight.” UBS’ view is based on cocoa inflation squeezing margins with less ability to pass costs onto consumers.

  • Bernstein’s beef with Hershey comes from a view that the popularity of GLP-1s like Ozempic will decrease chocolate volumes from the real world Willy Wonka.

Thought Banana

Back To Work

The good news: our bananas are no longer actively rotting in containers off the East Coast.

The bad news: striking dockworkers and their employers have only reached a tentative deal, meaning if nothing changes, we’ll be right back where we were in 99 days.

Let’s dive in.

What Happened?

Last Monday, 45,000 longshoremen represented by the International Longshoremen Association, North America’s largest union of dockworkers, went on strike.

Because of the crucial function these dockworkers provide to the functioning of the U.S. economy, especially in agriculture, the ILA going on strike effectively holds the U.S. economy—and the public—hostage. 

So, it was no surprise to see that the strike was short-lived, ending after only 3 days. However, it was a surprise to see the manner in which a tentative deal was reached, especially because this only creates more questions going forward.

Basically, the two sides met close to the middle on pay. Employers represented by the U.S. Maritime Association (USMX) were offering a 50% wage increase, but the ILA wanted 77%. They settled at 62%... for now.

The sticking point of the negotiations is a request from the ILA to ban automation.

Much like a child who doesn’t want to learn fractions because he’s scared of math, ILA dockworkers are asserting an “absolute, airtight anti-automation” stance.

In addition to the borderline-absurd 77% wage increase, the ILA is demanding an outright ban on the automation of cranes, gates, and trucks—all things ports in Europe and Asia almost universally already have in place.

The concerns of ILA members are understandable, but trying to ban automation in East Coast ports is like trying to stop night from turning into day by keeping the lights off in your bedroom. 

The Takeaway?

The ILA is already winning these negotiations.

By refusing to use the Taft-Hartley Act of 1947 to suspend the strike for 47 days and instead “strong-arming” USMX into this tentative deal, as reports allege, the Biden Admin has forced the employers of the ILA to concede on a key negotiating point.

This gives the ILA leverage because they can say, “You’re not giving us what we asked for on pay, so you better give it to us on automation.”

So, we’ll be okay for the election and holiday season, but the new President—who will be sworn in 5 days after round two of the ILA strike inevitably begins on January 15th—will have a fun challenge on their hands.

Stay tuned.

The Big Question: Will the ILA get their demand on port automation? How does this impact competitiveness among American import/exporters?

Banana Brain Teaser

Previous

Items that are purchased together at a certain discount store are priced at $3 for the first item purchased and $1 for each additional item purchased. What is the maximum number of items that could be purchased together for a total price that is less than $30?

Answer: 27

Today

If ½ the result obtained when 2 is subtracted from 5x is equal to the sum of 10 and 3x, what is the value of x?

Send your guesses to [email protected]

❝

The function of economic forecasting is to make astrology look respectable.

John Kenneth Galbraith

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David, Vyom, Ankit & Patrick