🔬The Fed and the Market Don't See Eye-to-Eye, Plus Defensive Stocks, How Peloton is a Joke, and Much More

"Markets are constantly in a state of uncertainty and flux, and money is made by discounting the obvious and betting on the unexpected"
- George Soros

“It’s amazing how fast later comes when you buy now!”
- Milton Berle

• The big US markets continued to suck this year with S&P 500 and Nasdaq down -0.34% and -0.56%, respectively. The Dow (+0.03%) eked out its first gain of the year but who cares, it’s lame.

• 3 of 11 sectors closed in the green yesterday, with last year’s winners continuing to hold the bag (more on this below). Health Care (+0.5%) and Financials (+0.2%) held in the best, while Energy (-1.6%) took it on the chin.

• December ADP private payrolls came in strong at 164k vs. a Wall Street estimate for 125k and November's 101k.

• Initial jobless claims missed Street estimates at 202k, its lowest since October.

• Bitcoin futures were up +4.2% with hopes of Bitcoin ETF approvals as early as next week.

Street Stories

INTEREST RATE CUTS

Yesterday I did a bit of an update following the release of the December Fed Minutes, and thought I’d add a bit more color to the current situation. While the Fed appears generally on board with the ‘peak Fed’ narrative there is still a large disconnect between where the market is currently pricing interest rates to move to versus where the Fed’s projections sit.

As you can see above, the polling of Fed committee members indicates that the majority feel that by year-end 2024 the Federal Funds target rate will be between 4.63% - 5.12%. With the current target range at 5.25% - 5.5%. That only represents between 1 to 3 cuts over the entire course of next year. The market, however, is currently pricing in between 5 and 6 cuts next year. Bit of a disconnect.

Above you can see that the futures market is pointing to consistent cuts at nearly ever meeting this year; with 4 to 5 cuts being the most expected outcomes by only the September meeting (they still will have meetings in November and December).

Ryan’s Take: It’s hard to tell if the disconnect between the Fed and Wall Street is real or just posturing. Whereas market participants are oft to pivot and reposition, it’s a lot harder - and potentially more dangerous - for the Fed to behave that way. Taking a slow and steady approach, and maintaining views on interest rates and inflation conservatively, keeps everyone on close to the same page but significantly reduces the risk they will have to do a policy about-face. Pulling a 180 for the Fed means more than just lost credibility; it seriously risks spooking the market and triggering a plethora of bad outcomes from the bond market to the labor market, and everything in between.

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NO MORE CHROME COOKIES

Google is implementing major changes to online tracking by restricting the use of cookies in its Chrome browser, causing significant upheaval in the $600 billion online advertising industry. Advertisers, caught in a cookie-less world, are scrambling like lost kids in a candy store, while Google insists its new approach is like swapping a sledgehammer for a scalpel in respecting user privacy. The shift, which started yesterday with a limited test (1% of Chrome users), will expand to all Chrome users by year-end. It has stirred mixed reactions in the industry, with some fearing reduced ad effectiveness and others adapting to alternative tracking methods from this ‘no-cookie diet’. (WSJ has a deep-dive on this)

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CYCLICAL vs. DEFENSIVE

After the rally in stocks topped out in late December, there has been a pretty clear split between the haves vs. have nots in the market. Defensives have been on a bit of a tear, while profit taking out of the big cyclical names has been pretty relentless.

What makes this even more interesting, is that it is almost a complete reversal of 2023 up until late December. The best places to be the last few weeks, were…well, pretty terrible places to be most of last year.

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PELOTON x TIKTOK

Peloton has launched a partnership with TikTok, introducing a fitness hub featuring short videos, live classes, and content from Peloton instructors, aimed at revamping its image and attracting a more diverse customer base (and proving it’s not just a dying pandemic fad). This strategic move, which boosted Peloton's shares by over 14%, is part of Peloton’s broader strategy to rebrand itself and expand beyond its high-end fitness equipment, focusing on digital subscriptions. The partnership will offer a mix of workout and lifestyle content, leveraging TikTok's vast, varied user base to showcase Peloton's offerings and instructors to a wider, younger audience. In other words, it’s not going to work.

Joke Of The Day

A woman hears from her doctor that she only has 6 months to live. The doctor advises her to marry an economist. The woman asks, “Will this make me live longer?” The doctor answers, “No. But it will seem longer”.

Hot Headlines

CNBC | Online holiday spending jumps nearly 5% to record, Adobe Analytics says.

Bloomberg | US mortgage rates rise for first time since late October. The 30-year mortgage ticked up slightly to 6.62%.

CNBC | Bitcoin rises as its volatile year continues ahead of an expected ETF approval. A bitcoin ETF decision by the SEC is widely expected to come as soon as next week. Once that’s out of the way, the price can go back down.📈🙏😅📉

Reuters | Islamic State claims responsibility for deadly Iran attack, Tehran vows revenge. IS literally blew up a crowd shouting ‘Death to America’. The enemy of my enemy, is …still an a$$hole.

Bloomberg | Amazon captured 29% of online orders before Christmas. That seems like a good enough reason not to launch ads on Amazon Prime video this month. Jerks.

Trivia

This week’s trivia is on ‘first year economics’.

1. The 'Phillips Curve' suggests a short-term trade-off between:
   A) Inflation and unemployment
   B) Interest rates and exchange rates
   C) Economic growth and inflation
   D) Supply and demand

2. The 'Efficient Market Hypothesis' suggests that:
   A) All markets are inherently efficient
   B) Stock prices fully reflect all available information
   C) Only financial markets can reach efficiency
   D) Market efficiency is impossible

3. Which of the following is an example of a 'public good'?
   A) A branded smartphone
   B) A private garden
   C) National defense
   D) A concert ticket

(answers at bottom)

Market Movers

Winners!

• Peloton Interactive (PTON) [+13.9%]: Unveiled an exclusive partnership with TikTok to deliver workout content on the social media platform.

Losers!

• Mobileye Global (MBLY) [-24.5%]: Issued a lower than expected 2024 revenue and operating income forecast, citing excess inventory of EyeQ SoCs at customers, but expects the majority to be cleared by the end of Q1.

• APA Corp. (APA) [-7.3%]: Announced plans to acquire CPE in an all-stock deal valued at approximately $4.5 billion, including net debt, representing a 14% premium over wednesday's close, with closure expected in Q2 of 2024.

• Walgreens Boots Alliance (WBA) [-5.1%]: Reported FQ1 earnings and revenue above expectations, driven by US pharmacy comps but faced retail challenges; reaffirmed FY24 guidance and cut dividend to enhance cash flow and capital spending. The only advice I have from my decade as a health care analyst is: Don’t buy pharmacies. Ever. I could do a 4hr friggin TED Talk on this.

Market Update

Trivia Answers

1. A) The 'Phillips Curve' deals with the short-term trade-off between Inflation and Unemployment.

2. B) That stock prices fully reflect all available information is the key tenet of the Efficient Market Hypothesis.

3. C) National defense is a public good.

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