Hard Knocks of Capitalism

In this issue of the Peel:

• A circus of companies are getting their degree in the hard knocks of capitalism and filing for bankruptcy at record levels
• Miami’s economy is getting Messy(i). The football legend’s arrival into the city comes with the hope of economic prosperity.
• Markets are continuing to deal with the aftereffects of weak tech earnings among some big-name companies.

Market Snapshot

Happy Mercurial Monday, apes.

That is the most fitting word to describe last week’s market activity. Stocks gyrated every which way, with the S&P and Dow notching slight gains on Friday. The Nasdaq, however, slid on weakness in technology stocks as earnings continued rolling in. American Express killed the weekend vibe with slowing revenue that could portend weaker consumer spending ahead.

Meanwhile, investors were prepared for market volatility as a heap of options expired on the Nasdaq ahead of its special rebalance. Recall that this special, one-time rebalance was put into effect in order to lower the weights of large stocks in the index while increasing those of smaller stocks.

The market has defied all odds so far this year. Wall Street strategists, who penciled in a decline for 2023 at the beginning of the year, are now revising those predictions. All eyes will be on the S&P and NASDAQ to see whether they will continue the trend or revert back to the mean.

Let’s get into it.

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Banana Bits

• Ray-Ban and Oakley’s shades are being inflated by over 1,000%, according to a recent antitrust lawsuit
• The SEC has accepted six applications for spot BTC ETFs recently, and the regulator seems to be changing its initial tone
• ESPN is flirting with several sports leagues, including the NBA, NFL, and MLB, on formalizing a strategic partnership
• A tiny college in Kansas received a $1bn donation from an anonymous donor. If it can happen to them, it can happen to you!

Macro Monkey Says

A Pile of Dirty Laundry

American companies are facing a sight problem. Actually, it’s a potentially catastrophic problem. You know “the chair” in your bedroom? Everybody has one, don’t pretend. It could be considered the eyesore of your apartment. It’s that otherwise functional chair that you’ve turned dysfunctional by piling a mountain of clothes on it (clean or dirty).

You could’ve addressed the situation head-on when it was a small issue, just one or two shirts and maybe a pair of shorts. But now you’ve let it get so out of hand that your only course of action is to continue piling more, hoping the chair slowly disappears into the abyss.

That was one long metaphor for the debt crisis that American companies are facing. Corporate bankruptcies are increasing this year. High-profile names like Bed Bath & Beyond and First Republic Bank are just two examples of the many near-bankrupt companies that collectively owe $3tn in high-yield and leveraged loans. For comparison, that is more than double the amount in 2008.

The past decade has been debtor-friendly. The era of cheap money via low-interest rates led to companies being willing to take on massive loads of debt, and investors were more than willing buyers.

There were many clear-headed and sober-minded financiers on Wall Street who publicly voiced their concerns, but they were largely ignored. We all knew the day of comeuppance would arrive, but companies were able to borrow money to fund their operations, and banks were making a killing underwriting debt. So why mess up a good thing?

"Broke companies have to compensate investors with a higher yield on their debt to make up for the higher risk."

 The quality of companies seeking debt has also deteriorated meaningfully. Many of those outstanding loans are high-yield, which = sh*t. Broke companies have to compensate investors with a higher yield on their debt to make up for the higher risk. This contrasts with consistent, profit-generating businesses, which have lower interest rates on their debt.

There were many clear-headed and sober-minded financiers on Wall Street who publicly voiced their concerns, but they were largely ignored. We all knew the day of comeuppance would arrive, but companies were able to borrow money to fund their operations, and banks were making a killing underwriting debt. So why mess up a good thing?

The quality of companies seeking debt has also deteriorated meaningfully. Many of those outstanding loans are high-yield, which = sh*t. Broke companies have to compensate investors with a higher yield on their debt to make up for the higher risk. This contrasts with consistent, profit-generating businesses, which have lower interest rates on their debt.

There have been some fantastic meltdowns in the high-yield bond market throughout history. The way Wall Street operates in reductionist terms is that when a strategy is working, we continue doing that strategy until it leads to a bubble that will ultimately pop. Once it pops, we write articles about how we should have done something about it earlier. That’s just how the world works.

 "... who hasn’t heard of the Savings & Loan Scandal of the 1980s? Well, since most of our readers weren’t born yet, I’m going to assume nobody has heard of it."

Aside from the Great Financial Crisis of ‘08, the “Dot Com” crash in 2002 set a record for the number of companies defaulting on their loans and filing bankruptcies. 1990 was a game-changer as well, given it was the first time the high-yield bond market returned negative results in over a decade. And, of course, who hasn’t heard of the Savings & Loan Scandal of the 1980s? Well, since most of our readers weren’t born yet, I’m going to assume nobody has heard of it.

History does a pretty decent job of highlighting our emotional and psychological instincts. We get way ahead of ourselves, ignore warning signs, and then become reactive when things fall apart.

Based on historical data, about every 10 years or so, the market is due for a big correction. It’s been over 15 years since the Financial Crisis with no significant downturn (if you don’t count the very quick drop and recovery in equities in March of 2020). Could this be a sign that pain is right around the corner?

What's Ripe

Digital World Acquisition Corp (DWAC) ↑ 50.30% ↑

• While Trump is taking multiple L’s in the personal and legal arenas, at least his SPAC is soaring to the moon. Digital World Acquisition Corp, the Trump-tied stock jumped 50% on Friday after the SEC settled fraud charges against the company.
• The SPAC, which is bringing Trump’s media company public, had been accused of misrepresenting its financial position in paperwork filed with the SEC. The allegations came at an inopportune time, as the deal has until September 8 to be completed. Trump Media & Technology Group says that it does not believe it is bound by the deal after the deadline, leading investors to worry whether both parties will walk away.
• On Friday, the SPAC reached a deal with the SEC to end its investigation, which sent the stock up 50% and the warrants up a whopping 90% DWAC shareholders are set to vote on August 17 to get an extension on the deal

22nd Century Group, Inc. (XXII) ↑ 31.08% ↑

• For the first time, 22nd Century Group’s stock was higher than its customers last week. The stock is a pretty good gauge for tracking the cannabis industry. By the looks of it, business is clearly booming.
• The biotech-focused company launched its first-ever nicotine-combustible cigarette in the California market. VLN cigarettes will contain 95% less nicotine and are a game-changer for the industry.
• 22nd Century also got a boost from receiving compliance clearance from the Nasdaq. The company was in danger of being delisted but passed the minimum bid price rule required for continued listing.

What's Rotten

First Republic Bank (FRCB) ↓ 15.07% ↓

• The live stream of FRCB’s descent to $0.00 is the most popular show in town. FRCB slid another 15% on Friday. The interesting question, though, is not why the stock is trading so low but why it’s trading so high.
• For a company that has gone into bankruptcy and effectively ceased all operating activity, why is it trading at a market cap of $50mn at all? Who’s buying this thing?
• Here is the subtle nuance. The failed bank is not technically in Chapter 11 Bankruptcy because banks cannot file for Ch.11 bankruptcy. This is different from Silicon Valley Bank, whose parent company SVB Group filed for bankruptcy. First Republic is in what is called FDIC receivership. Since receivership can last for 7 years, some investors are holding on to a glimmer of hope that the stock will continue trading for that long.
• If there is anything positive to glean from a stock price of $0.31, it’s this. A wise trader once said, “At least investors can’t short the stock below zero.”

Bed Bath & Beyond (BBBYQ) ↓ 13.50% ↓

• On the other side of the coin is a company that has filed for Chapter 11 Bankruptcy. After being discussed for weeks, it’s finally official. Unsurprisingly, shareholders will not receive any recovery money. Instead, they will be completely wiped out while shares will be canceled.
• This is the part where it gets messy. Shareholders are planning multiple lawsuits against former and current directors and officers of the company in an attempt to get any scraps of money, or at least a leftover pillow case lying around the store, that they can. This is pretty standard procedure, and investors usually end up with a fat nothing.
• The courts will go through the company’s assets with a fine tooth comb to determine what the company has to its name. Then, they will sell off those assets and pay back debtholders first, in order of seniority. Since equity holders are the most junior in terms of priority, they get paid after debtholders and other creditors. So, I really wasn’t kidding that shareholders should mentally prepare themselves to receive leftover pillowcases as compensation.

Data Peel

Thought Banana

Miami’s Economy Is Getting Messy(i)

When football legend Lionel Messi announced his intention to sign with MLS club Inter Miami, the impact was felt immediately. Before the announcement, fans could stroll into the empty stadium at the last minute for between $40-$55.

Immediately after the announcement, tickets spiked to a high of $6.8k for the best seats and a low of $291 for the worst seats. Inter Miami will be traveling to a few hotspots this fall, including Los Angeles, Atlanta, and New York, where prices are averaging almost $1k on Ticketmaster.

"Ticket prices are just the tip of the iceberg. Messi’s arrival will create economic reverberations throughout the city for years to come."

 Ticket prices are just the tip of the iceberg. Messi’s arrival will create economic reverberations throughout the city for years to come. Miami is experiencing the “Messification Effect.” Just remember when that term is in the Webster’s Dictionary that you heard it here first.

Miami is no stranger to stardom. In 2004, Shaq joined the Miami Heat, and in 2010, it was LeBron James who brought his talents to South Beach. Both stars left their marks on the city. Let’s take a look into specific sectors of the economy to see how vast Messi’s impact will be.

Tourism: Concerts and sports events equate to a spike in tourism. Not only will Inter Miami fans become more invested in games, but Messi’s arrival will lure the casual fan into the city.

When people visit a city, they need food, drinks, and somewhere to lay their heads. Reading that sentence again, I think drinking should certainly be the first priority. Anyway, more tourism is great for a variety of adjacent industries, including restaurants, bars, and hotels.

This generates higher tax revenue and also keeps local residents employed. This is why cities fight with each other for hosting privileges of other major sports events like the Super Bowl or the NBA All-Star game.

Construction: More tourism into the city means more money to spruce up the amenities. Inter Miami has already announced a $1bn renovation of the club’s DRV PNK Stadium as well as Freedom Park Stadium, expected to be completed in 2025. That means guaranteed employment for the next two years for developers, construction workers, and other related parties.

 "That means guaranteed employment for the next two years for developers, construction workers, and other related parties."

Real Estate: Disgruntled New Yorkers don’t need much convincing to move to Miami as it is. The beautiful weather and favorable tax environment are just two reasons why some high-profile firms have shifted their headquarters to the city. Wherever LeBron moved in his career, whether it was Miami and especially Cleveland, it led to a spike in real estate prices.

While stars like LeBron have major appeal in their own right, we can’t discount the international appeal that football stars like Messi have. It may look like Miami has reached a peak for housing prices, but foreign investment might say otherwise.

Sponsorships: We can’t forget about sponsorships. Inter Miami just increased its marketability to indeterminable proportions. The club already has sponsors from AutoNation, Heineken, and Baptist Health, to name a few. Typically, companies make investments in the city when they sponsor a sports club.

The effects on Miami’s economy are just the start. Nearby Fort Lauderdale and its surrounding areas are poised to benefit as well. I’m excited to see how Messi’s signing materializes within the city over the course of many years.

Banana Brain Teaser

Friday — Find pairs of homophones using the descriptions given to you.

Example: A large omnivore and to be without covering. The answer is bear and bare.

1. A board on hinges and the pattern of steps of a horse at a particular speed.
2. Being just and money collected to pass.
3. A form of precipitation and to rule.

Answer

1. Gate and gait.
2. Fair and fare.
3. Rain and reign.

Today — What is the next number in the following sequence: 0 0 1 2 2 4 3 6 4 8 5 __

Shoot us your guesses at vyomesh@wallstreetoasis.com with the subject line “Banana Brain Teaser”.

Wise Investor Says

“An expenditure of words without income of ideas will lead to intellectual bankruptcy.” — Ravi Zacharias

How would you rate today’s Peel?

All the bananas

 Decent

 Rotten AF

Happy Investing,

Patrick & The Daily Peel Team