#192 - How Pro Sports Split Playoff Revenues, Fed Raises Rates and Apple Bank

Reformed Millennials - Learn Earn and Invest

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* Business of winning a Championship

* Market update

* Federal reserve monetary policy

* Apple earnings

* Berkshire meeting

* Recommendations and Predictions

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📈📊Market Update💵📉

The big news from last week was Jerome Powell’s decision to raise the Fed Funds rate another 0.25%. This signaled what my people believe to be the last rate hike in a 14 month onslaught that saw the Fed raise rates 5%.

US stocks have weathered the most aggressive monetary policy tightening cycle since the late 1970s/early 1980s astoundingly well. There’s been a lot of volatility on the way, of course, but this is simply remarkable.

US large cap stocks are exiting the recent monetary policy cycle largely untouched from where the Fed first started “going big” – can be read in one of two ways. Either it says the road ahead is clearer than the bears think, or it says the impact of the last 9 Fed meetings has yet to be felt.

Chair Powell is hoping the former is true, but markets strongly believe the latter is correct.

Data Trek had a fantastic recap on what they thought was the most important pieces from Powells press release and commentary/Q&A.

Powell on Regional Banks:

Powell expressed guarded optimism that the rolling crisis in US regional banks is contained. In his prepared remarks he said conditions in the banking system have improved since March, when Silicon Valley Bank failed. During the Q&A session, he said regional banks are now improving their liquidity positions. In response to another question about the topic later in the press conference, he said the sale of First Republic “drew a line” under the current problems. He seems to view the issue as a macro problem.

Even with these reassuring words, the S&P Regional Bank Index (ETF symbol KRE) made a new 1-year low today. This is hardly a vote of confidence in Powell’s view, which seems to overlook the plodding but clearly apparent momentum of the problem.

Second, the Chair actually said, “This time could be different”, those famously dangerous words, about the risk of an upcoming recession. In his mental model, the US economy and particularly the country’s labor market both remain strong. To a degree, he has a point. The Fed has raised rates by 5.0 percentage points in a little over a year, and yet unemployment remains low and demand for labor is still high.

Some markets agree with Powell, and other do not. One could argue that an S&P 500 trading for 19-20x forward earnings is sympathetic to the Chair’s sunny forecast. But Treasuries and Fed Funds Futures both expect the FOMC to cut rates later this year, presumably because a recession has begun. And it’s not just fixed income markets saying that US rates are heading lower. The euro made a new 1-year high versus the dollar today.

Datatreks Favorite Sound Bites from Powell:

* Powell reaffirmed that the Fed continues to hold to a 2 percent inflation target. There has been a lot of speculation that the FOMC will change to a 3 percent target rather than drive the US economy into a deep recession.

* Corporate profit margins should continue to decline as supply and demand continue to come back into balance. This idea stands in stark contrast to Wall Street analysts’ earnings estimates, which continue to predict all-time high record S&P 500 profits by year end even as US economic growth continues to run below trend.

* US inflation has been stickier and more volatile than the Fed expected. We will dig into this issue in Data.

* Powell expressed the view that 3 percent wage inflation lines up with 2 percent price inflation. Last month’s Jobs Report showed average hourly wage growth of 4.2 percent, down from 5.9 pct a year ago. We clearly have a way to go on this front.

In closing, consider the following: cont. from datatrek

* On May 4th, 2022 the Fed raised rates by 50 basis points as it started to get more serious about taming inflation, and the day after that hike the S&P 500 closed at 4,147.

* Today, as the Fed most likely ended its post-Pandemic rate hiking cycle, the index closed at 4,091, just 1.4 percent below where we started this journey.

Next up was apple earnings, coming in better than many expected. A beat on both the top and bottom line. Apple continues to be the best business in history. But what was most notable, was the Active device base number. Deepwater Asset Management has a great piece outlining the new most important Apple investor Data point.

Device Base Info from DAM:

Apple did not report the base’s growth rate as they did in the December quarter (up 8%), but they did report it grew which is impressive given products revenue was down 4.6% y/y in March. That means more Apple customers are adding devices, and many of the devices that get turned in/resold are being refurbished and sold to first-time Apple customers. The used Apple device story is emerging as the company’s avenue to target the most price-sensitive smartphone buyer. While Apple does not directly benefit from the sale of a used device, there is a long-term revenue opportunity of selling services and capturing hardware upgrades in future quarters.

💸Reformed Millennials - Post of The Week

Aritzia vs. Lulu Lemon vs. Nordstrom

I've been participating in the O Zone Advisory governance and strategy program this spring and as we work our way through earnings season I've been paying a lot of attention to Canadian retail and the strategies being implemented.

I can't help but think about the colossal screw-up Nordstrom's(JWN) board made by rejecting the family's $50/share ($ 8 billion bid) buyout offer in 2018. The stock is ~$14.50 today (~$2.3 billion).

Aritzia (ATZ) reported last night and after revenue growing 160% over the last 2 years the stock is getting hammered. Their lowered guidance on CY margins seems to not be what investors wanted to hear.

It feels very 2017 Lulu Lemon($LULU) for Aritzia right now. In 2017, $LULU had a massive investment year that they executed well on but the stock struggled and didn't take off until 18 months after their "investments in infrastructure/square footage" were made.

Norstrom(JWN) isn't Aritzia or LuluLemon. But it's interesting to contrast the competing strategies and timelines.

One (ATZ) is expanding and leaning into its revenue growth while the other (JWN) is reducing its footprint and fighting the trend of the consumer in favor of small boutique shopping.

Should be interesting to see how this plays out into the future.

It's also important to recognize just how important a competent board is to the enterprise value of your company long term.

🎙Podcast & YouTube Recommendations🎙

3 part series on Cannabis: OddLots

Against All Odds - James Dyson: Founders Podcast

🔮Best Links of The Week🔮

* AI is here and there is nothing we can do to stop it - Source: The Catalyst

* Big business behind winning a championship - Source: Huddle Up

* Alberta Election Polling Data and it is TIGHT as a Tiger - Source: ThinkHQ, Ipsos

* Investing’s Big Blindspot - What makes Warren and Charlie so different? - Source: Sapient capital

* The Seven Virtues Of Great Investors (Curiosity, Skepticism, Independence, Humility, Discipline, Patience and Courage) - Source: Jason Zweig

* "The Dune: Part Two trailer promises that filmmaker Denis Villeneuve’s sequel will deliver more action than his first installment. That’s a notion Villeneuve shared last week at CinemaCon, when he showed off the first footage from the sequel. “Part One is more of a contemplative movie. Part Two is an action-packed, epic war movie. It is much more dense. We went to all new locations,” said Villeneuve... Dune: Part Two is based on Frank Herbert’s seminal novel and has a script from Villeneuve and Jon Spaihts. It has a release date of Nov. 3." You can watch the trailer here on The Hollywood Reporter.

👉 For specific investment questions or advice contact Joel @ Gold Investment Management.

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