F***'d if you do f**'d if you don't (The Fed)

Email agenda:

Estimated read time: 4 minutes 45 seconds

1. The Fed's Dance with the Devil

2. The Rise and Fall of Peloton

3. The US Dollar

Good morning and happy Monday - let's get smarter

The Fed's Dance with the Devil

The Fed (federal reserve) has 2 main jobs:

1. Keep inflation in check

2. Employment growth

The main issue is that they often have to do one job at the expense of the other

How so?

The Fed is currently raising interest rates in help reduce inflation

But by raising interest rates, it costs more money for companies to take on debt, driving profits and cash flows down for companies

Your companies valuation using future cash flows (discounted cash flows) are being discounted at a higher rate, driving valuations, earnings, and stock prices down

Your denominator has discount rate going up, and your cash flow growth rate going down

Driving down company value as you can see below:

When all of this happens, you start to see more and more companies hiring less people, or trying to trim excess labor or expenses

Market bounce

Last week, the stock market briefly bounced on news that the Fed may slow the number of interest rate hikes

While Pocahontas Warren is indeed correct that the Fed's rate hikes will impact employment growth, they don't really have any other tools to fight inflation - so "the wrong medicine" doesn't really make sense kind of like her being Native American because she took an Ancestry.com test

So what now?

Companies will continue to guide their earnings projections lower and try to reduce costs

The Fed will continue to raise rates to slow inflation, while GDP is also slowing in the US

This will likely continue into Q2 of 2023

None of this is bullish for the markets, companies, valuations, or the economy

The Rise and Fall of Peloton

Peloton announced it's 4th layoff this week laying off 500 more employees

The once booming pandemic company has a valuation of $4 billion compared to it's $40+ billion valuation in January 2021

The CEO called their operating loss of $1.2 billion in Q4 2022 "significant progress"

The unfortunate truth is their business model is significantly flawed and the sales growth they saw during COVID was 1. not sustainable and 2. not recurring business the way they hoped

The company's trailing twelve month gross margin (gross profit / revenue) was 19%

That means for every incremental $ of revenue they are only keeping 19% before factoring all of their overhead like marketing, employees, etc

That is puke worthy

Walmart - who literally prides itself on selling at low prices and doing a high volume of sales has gross margins of 24%!

And not surprisingly, their CEO is confused why we aren't all singing songs and dancing as he terminates employees

The trend of COVID winners like Shopify, Zoom, Peloton, all made spending and hiring decisions base off of continued growth

But in reality - growth in future years was just pulled forward and now they are reverting back to the mean

So now that your growth isn't going where you thought it was, you have to right size the business back to where it needs to be

My guess? Amazon or Apple will acquire Peloton on the cheap

Amazon and Apple are both getting into the health/wellness space and they have more cash on their balance sheets than they know what to do with

What I am doing / not doing

My biggest position still remains the US Dollar $UUP

The US dollar has a deep inverse correlation to the S&P 500

So on days the stock market bounces, I am typically buying the US dollar as it is going down

Bonds?

I have a small amount of bonds in my portfolio - but I am still not anywhere close in terms of position size to my US dollar position

Why?

The yield curve / bonds market still isn't pricing in a recession

Until it does - I will hold off

Crypto

There isn't much to say other than HELL NO

Just because it's low, doesn't mean it can't go lower

Crypto also trades inversely to the US Dollar

When the US Dollar starts to underperform and we are on the back-end of US economic slo down, then we will buy crypto

- Dev

DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.