JPow Signals The Market

JPow’s using his special powers of loosening without loosening June 18, 2024 | Peel #733 Silver Banana goes to... [Mosaic. ]( In this issue of the Peel: - 💡 JPow’s using his special powers of loosening without loosening - ✅ Major upgrades clocked in yesterday, but certainly not for GameStop - 📓 Updated S&P 500 price targets make less cents than I have in my bank account Market Snapshot 📸 Banana Bits 🍌 - Who knew a 7% boost to tax rates would [start this much of a fight](=) - Autodesk (also in WSO Alpha portfolio, nbd) surged on Monday in response to [activist investor interest](=) - Consumer spending expectations are [back on the rise]( - Market concentration is much worse [in other countries]() The Next Hostile Takeover? Your VP’s Job Ever wanted to run your own Barbarians at the Gate of your boss’s job? Now you can, with Mosaic. Mosaic isn’t just a tool for modeling and managing deals - it’s your secret weapon for career domination. 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Mosaic is the industry's - and your - new best friend.[Request a demo today]() Macro Monkey Says 🐒 Loosening Without Loosening 2024 has been a year of yappin’. And few have done more yappin’ than our boy, Federal Reserve Chair Jerome Powell. Last week, JPow gave us a rare rundown of exactly why the Fed is not yet ready to cut rates. Or, put another way, why they’re not loosening monetary policy. But it doesn’t necessarily take a rate cut to loosen policy. Expectations and other tools come into play, and it looks like the Fed is already putting those to work. Let’s get into it. What Happened? Beyonce said, “Girls run the world,” but according to Dunkin’ Donuts, “America runs on Dunkin’.” In fact, both are wrong—it’s all the Federal Reserve. It’s JPow’s world, and we’re just living in it. And in JPow’s world, he and the rest of the FOMC—the policy-setting arm of the Fed—can tighten and loosen monetary policy through hard and soft methods. Hard methods involve things like changing the prevailing level of rates or altering the Fed’s balance sheet. But soft monetary policy is just as valid in its effects on markets, macro, and, most of all, the movement of money. All “tightening” or “loosening” of monetary policy means is that the flow of money through the economy is becoming more or less restricted. When we talk about “loosening” policy, we’re essentially talking about adding liquidity or increasing the availability of money, making it less valuable to the current holder and, therefore, more free to move around. Consumers and businesses don’t just make decisions based on the current conditions of money movement but also on how they expect that environment to change. [Source]() This grants the Fed the soft tool of policy expectations. If JPow stood up there last week and said, “We’re holding rates steady, but we’re gonna cut in September,” consumers and businesses would be able to plan around those future changes. But at the same time, if we had perfect knowledge, many consumers and businesses would put off credit-linked purchases until lower rates materialized. That reduction in spending could cause a recession. So, the Fed has to walk a tightrope of setting expectations clearly but not explicitly. This is where reading between JPow’s silver-fox lines comes into play. By saying things like “We’ll need to see more good data to bolster our confidence that inflation is moving sustainably toward 2%,” Powell is implicity telling us that if inflation continues moving lower, the odds of a rate cut will increase. That alone signals the path of policy, allowing us to make plans for expected rate cuts without the risk of delaying spending to the point it triggers a downturn. Last meeting, this commentary on expectations was paired with an updated Summary of Economic Projections, including forecasts for the path of rates. [Source]( The end-of-year rate level essentially stayed the same, somewhere around 5%, leaving room to argue if that means 2 cuts (to a range of 4.75%-5%) or one cut (5%-5.25%). Regardless of the exact level, the direction is clear and has already led to changes in arguably the most important underlying rate in the entire economy—the 10-year Treasury yield. Yields dove following the Fed’s last meeting, effectively loosening policy already as mortgage rates, auto loans, etc., generally build upon the 10-year rate. [Source]( The Takeaway? JPow is giving markets the wink-wink. Not the wink that someone gives you at the bar to let you know they want to go home with you (unfortunately), but more of a “you know what I mean” kind of vibe. He’s basically saying that rate cuts will come when the data is right without telling us exactly what is meant by “the data is right.” But analysts and traders know this means low inflation, high unemployment, slow GDP growth, etc. I may have never received that wink before in my life, but I can recognize one from a 71-year-old man like JPow any day of the week. Message received—quiet and clear. What's Ripe 🤩 Palantir (PLTR) 📈6.1% - Harold Dorsey would be horrified to know that his “value”-oriented investment research firm, Argus, was issuing Buy ratings to the likes of Palantir. - But nonetheless, that’s exactly what happened on Monday. Analysts initiated coverage with a Buy rating on high upside potential driven by AI and war. - Both things we can all get behind. The firm issues a $29/ price target, implying a 23% return from Friday’s close. Best Buy (BBY) 📈4.6% - This is a rare case where a company’s name perfectly describes its trading performance. Best Buy shares ripped on a much-needed upgrade. - UBS dapped up this tech retailer on expectations of a big upgrade cycle along with fresh excitement for their expected new products. - The Swiss bank slapped on a $106/sh price target, implying a 21.5% return from Friday’s close. What's Rotten 🤮 Virgin Galactic (SPCE) 📉14.6% - Don’t be fooled by the charts on Google—Virgin Galactic’s reverse stock split is doing nothing to shed their earnings virginity. - Post reverse split, shares traded at $14.80. Now, they’re already far below as traders easily sniffed out this bullsh*t attempt to stay on the NYSE. - Add space tourism to the list of bubble indicators because although revenue is still growing (somehow), this industry lived up to the hype as much as NFTs. GameStop (GME) 📉12.1% - I think I speak for myself, every financial advisor literally ever, and most of all, Keith Gill’s (a.k.a. “Roaring Kitty”) family in saying one thing—thank you. - Gill has ostensibly closed his options position and purchased more shares in GameStop while pulling $6.3mn in liquid cash off the table. - Assuming he doesn’t reinvest in something dumber if that’s possible, the Gill family is $6.3mn richer. The only ones not thankful are the GME bagholders. Thought Banana 🤔 S&P 500 Forecasts: Make it Make Sense Admitting you’re wrong is tough. For banks, it’s like eating a bowl of nails for breakfast (without any milk). Although they might not say, “Here’s where we went wrong,” they certainly will say, “Pretend we didn’t say that 6 months ago. This is what we’re saying now.” Everyone’s updating their macro outlooks and, the most fun part, their year-end S&P 500 price targets, so let’s take a look. What Happened? Banks are becoming more optimistic (kinda). The S&P 500 ended 2023 at 4,769.83, gaining on the back of Fed Chair JPow’s dovish pivot. Coming into 2024, the median projection implied a flat year. Even though JPow was casting wind into the S&P’s sails, the implied return for the year came in at 2.20%. Now, using their “Latest” price targets, the implied return for 2024 sits at 9.5%. [Source]( So, even with the added optimism, Wall Street still expects roughly an average year. However, the problem with expecting the average is that returns rarely fall into this range. Below, we can see a scatterplot of annual returns from 1928-1H’2024. The blue lines mark the range between 8-12%, giving a 2% margin of error to the S&P’s historical average return of ~10% (7.93% + ~2% for dividends). As we can see, only 8 years have historically fallen cleanly into this range. In fact, we’ve had more years of returns above 30% than in this loosely-defined average range. The same is true of years in which the S&P fell more than 17.8%. Then again, being approximately right is a lot better than being exactly wrong, as the old saying goes. The Takeaway? It’s surprising to see that when consensus expectations called for 6-7 rate cuts this year, implied returns were lower than they are now, with consensus calling for just 1-2 cuts. This suggests that the resiliency of markets and the underlying economy have surprised to the upside so far in 2024. But, the funny thing is that at the same time, the “Latest” median expectation now implies a 3.8% loss from Friday’s close. Make it make sense. The Big Question: What’s your year-end S&P 500 price target? How “average” will 2024 turn out to be? Banana Brain Teaser 💡 Previous 🗓 The present ratio of students to teachers at a certain school is 30 to 1. If the student enrollment were to increase by 50 students and the number of teachers were to increase by 5, the ratio of students to teachers would then be 25 to 1. What is the present number of teachers? Answer: 15 Today 🕐 Sixty percent of the members of a study group are women, and 45 percent of those women are lawyers. If one member of the study group is to be selected at random, what is the probability that the member selected is a woman lawyer? Send your guesses to vyomesh@wallstreetoasis.com Wise Investor Says 🤓 “These people [forecasters] don't really have skin in the game. They just need to tell a good story.” — Nassim Taleb How Would You Rate Today's Peel? 😁[All the bananas]( 😐[Meh]( 😩[Rotten AF](=) Happy Investing, David, Vyom, Jasper & Patrick [ADVERTISE](=) // [WSO ALPHA](=) // [ACADEMY](=) // [COURSES](=) // [LEGAL]() [Unsubscribe]( IB Oasis Corp. (aka "Wall Street Oasis") 14435 Big Basin Way PBN 444 Saratoga, California 95070 United States