Boring is the new exciting
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Happy Friday Everyone! 👋
Best advice I ever received for my portfolio on weeks like these - 'just don't look at it'
SIX things you need to know this week in 60 seconds.
Off the table: 75 basis points
Porsche is racing into its IPO
Boring is the new exciting
If you thought high gas prices were bad…
Demand for virtual land crashes Ethereum network
Elon is making friends
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1. MACROOff the table: 75 basis points
Facing the highest inflation in 40 years, the Fed increased the benchmark interest rate by half a percentage point this week. It’s the most aggressive hike since 2000.
But we already knew this going into the meeting. What we didn’t know was just how aggressive the central bank would be willing to get to make sure we’re not all eating lentils in a year.
J-Pow stressed that increases of 75 basis points were not under serious consideration.
We are, however, likely to see back-to-back rounds of similar 50 basis-point hikes at the June and July meetings.
The federal funds target rate has been pushed to 0.75-1% and the market is currently pricing in rates of 2.75-3% by the end of the year.
GRIT’S TAKE: The money printer is being thrown in reverse soon too: asset reduction on the Fed’s $9T balance sheet starts June 1 with $30B in Treasurys and $17.5B in mortgage-backed securities rolling off per month for 3 months. After that (October), the pace will double.
GRIT’S ACTION: Took them long enough to admit inflation was real (bad). I am staying long stocks. I don’t think we’re going back to the 80’s with +20% rates.
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2. DEALSPorsche is racing into its IPO
With an IPO expected in the Fall, Porsche is as profitable as its ever been since being taken over by Volkswagen in 2012.
VW earnings this week included a stellar 18.6% operating margin for the premium brand, good for second in its class behind only Ferrari (26%).
Porsche has managed to keep the rubber to the road even as sales have revved up too.
Over the past decade, annual operating margins have never dipped below 15.4% despite revenues more than doubling in that time. The 15.4% low came during the pandemic.
Investors eager to get a piece of the German automaker ahead of the IPO can look to Volkswagen preferred shares (at a 12-year valuation low of 4.6x earnings) which will pay a special dividend equivalent to about half the proceeds of VW’s sale of 25% of Porsche’s shares.
GRIT’S TAKE: Assuming a forward earnings multiple similar to that of Mercedes, BMW, and Ferrari, Porsche's valuation is ballparked around $84B.
GRIT’S ACTION: Love cars, but not car stocks.
3. STOCK MARKETBoring is the new exciting
Longtime GRIT readers know I love my good ole’ dependable boring stocks.
As of earlier this week, nearly 90% of staples companies that had reported earnings beat estimates compared to 80% across all industries in the S&P 500.
Unsexy names like Coca-Cola, Procter & Gamble, Kraft Heinz, and Kimberly-Clark—companies that offer everyday necessities—are as attractive as ever as they’ve been able to keep costs down or pass along increases to customers.
Some might even say they’re gotten too sexy: the consumer staples sector traded at a higher forward PE multiple than the tech industry for 5 sessions last week, finishing at 21.7x earnings vs tech’s 21.5x.
That hasn’t happened since April 2020.
GRIT’S TAKE: Consumer willingness to absorb higher prices helped push staples to a +2.4% gain last month—it was the only S&P 500 sector in the green.
GRIT’S ACTION: Staples over discretionary for the few quarters.
4. COMMODITIESIf you thought high gas prices were bad…
The average price for US diesel hit an all-time high this week, topping $5.50 a gallon, as inventory drops to its lowest levels since 2005.
On the East coast, where prices climbed above $5.70, inventories are at their lowest in over 30 years.
Nearly every train and truck that transports goods across the US runs on diesel, as do the engines of 80% of the ships that carry products across oceans.
Even more dependent is the US farming industry where diesel engines power more than 2/3 of all machinery and equipment, transport 90% of its product (food), and pump more than 20% of its water.
GRIT’S TAKE: The farming supply chain is dominated by diesel and the chart above could get uglier if we don’t see prices come down.
GRIT’S ACTION: The best inflation hedge is buying stocks that go up over time.
5. CRYPTODemand for virtual land crashes Ethereum network
Bored Ape Yacht Club (BAYC) creator Yuga Labs raised ~$320M worth of ApeCoin in a sale of virtual land for its highly anticipated Otherside metaverse project—the latest extension of the BAYC franchise.
Sounds like a hit, right? Not quite.
The sale triggered one of the highest spikes in Ethereum transaction fees ever which left buyers paying more in minting costs than the price of the digital parcels, called “Otherdeeds”, themselves.
After facing backlash from investors for the chaotic debut, Yuga has refunded gas fees to anyone whose transaction failed due to the network overload caused by the sale.
GRIT’S TAKE: Buyers at launch paid $5,800 per Otherdeed plus as much as $6,000 in gas fees for a total of ~4.21 ETH. The current floor price is 3.85 ETH, but bids for the NFTs are much lower.
GRIT’S ACTION: Demand doesn’t seem to be the issue here.
6. ENTERTAINMENTElon is making friends
As soon as the keys are handed over to him, Elon Musk is taking Twitter private. Its stint on the private markets may be short-lived though.
This week Musk, who is expected to act as temporary CEO after the deal closes later this year, said that he’d like to stage an IPO within three years of buying the company.
He’s also gaining support.
A new filing shows over $7B in equity commitment letters from investors including Sequoia Capital, Qatar’s sovereign wealth fund, crypto exchange Binance, and Oracle founder Larry Ellison.
Even Saudia Arabian investor Prince Alwaleed bin Talal, who tweeted his opposition to the deal in April, has agreed to hold onto his $1.89B worth of shares rather than cash out.
GRIT’S TAKE: Meanwhile, Twitter executives are trying to convince advertisers everything is under control, which is kind of like the Fed trying to tell us they’ve got a handle on inflation.
GRIT’S ACTION: Grab your popcorn, things are about to get (more) weird.
Here's a look at the put and call volumes for yesterday's session by sector:
*SOURCES
1. CNBC
2. WSJ
3. WSJ
4. Freight Waves, WashPo
5. Bloomberg, CoinDesk
6. WSJ, CNBC, CNET, Bloomberg
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