Since January of 2022, the Federal Reserve has raised
interest rates over and over and over again, from essentially 0%
up to five and a quarter. They did this to combat
inflation, and inflation has been going down at a brisk pace.
With the economy now getting tighter and it being more
difficult to find jobs, the Federal Reserve has decided to
cut interest rates, and they're going to be doing so this week.
They're meeting this Wednesday to announce whether or not
they're cutting interest rates by 25 basis points or 50.
We get to find out in the meeting, but this puts us in a
tricky situation. It's not often that you have the
Federal Reserve start a new interest rate cut cycle.
This is the type of thing that happens like once every 10
years. And we know that interest rates
have a huge impact on inflation, mortgages, car loans, credit
cards. And as noted by Warren Buffett,
interest rates also have a huge impact on stocks.
He called them like gravity for equities.
So we're going to be taking a look at these new interest rate
cuts, what we think the Fed is going to do and the impact this
has on our portfolios. Now, of course, we have some
other news to get to. Overall today in the market,
somewhat unremarkable except for Apple.
Apple is down 3.3% on a news report of weak iPhone 16 demand.
We're going to take a look at the analyst reports and see
what's going on with Apple. Chipotle is also piloting their
new robots. They're finally adding them to
their restaurant. This one can make guacamole.
We'll take a look at how more and more of these robots are
impacting food companies. President Biden is cracking down
on Sheen and Timu by closing a loophole that allows them to
skip tariffs. We're going to be looking at
this loophole, how Timu has been exposing it, and how this is
going to benefit Amazon. And then finally, here we have a
story about the Nike CEO. This is a scathing report going
over the man who made Nike uncool.
We're going to be taking a look at why Nike stock is down 25% on
the year. Nike's been a big loser over the
past five years and how they've allowed competitors to catch up
and invade their Moat. So we have a lot of news to get
to. Let's go ahead and jump in now.
We start off with the main story today that the Federal Reserve
is going to be cutting interest rates this Wednesday.
They're going to be cutting it either between 25 basis points
or 50. The markets right now are
betting that they're actually more likely to cut it by 50
basis points. So that's kind of like two rate
cuts put into one. That would be a really
aggressive rate cut. The derivative markets show
roughly a three and five chance that investors are betting on
1/2 point cut on Wednesday. So realistically, we have three
options. We know the Federal Reserve is
not going to keep interest rates the same, so they're going to be
cutting them. The question is by how much.
We have between 2550 and 75 basis points.
Most investors right now are saying that 75 is a little too
aggressive, that's a little too big of a cut, 25 might be a
little too weak, That's not doing things quite fast enough.
Most investors believe it's going to be that 50 basis point
cut. So it's either between 25 or 50,
with most of them leaning towards 50.
Now, anytime you get the start of a new interest rate cut cycle
and we see the Fed going down this path, we have a lot of
different opinions on what this really means.
A lot of people will drudge through historical data digging
up what happened last time we cut interest rates, but a lot of
that data is misleading. If we look at the data right
now, there isn't a clear historical template for the
current situation. Usually by the time the Fed
starts cutting rates, the economy is already in pretty big
trouble. That isn't the case now.
The labor market has cooled, but still it's decent and the
economy has been posting solid growth.
So we see all of this post and analysis and what happened last
time we had interest rate cuts, It's not fully applicable to
today. And that's the problem with
these type of events. We don't have context to really
know what's going to happen. In some cases, we're going in a
bit blind and that's the situation here.
But there are some things that we know for sure, some solid
financial principles that are true no matter what happens this
time. The most important one, I
believe, is what Warren Buffett has to say about interest rates.
He says interest rates are like gravity for every other
financial investment. When interest rates go up, it's
like increasing the amount of gravity.
It pushes down everything else. And that is because of the
simple math behind interest rates.
If we look at this slide here, this is something I created to
illustrate the overall impact that interest rates have.
Interest rates go up, then the Treasury, the risk free rate
goes up as well. The yield that you get on
Treasury bonds, and you've seen that happen with savings
accounts. People are pouring money into
savings accounts and money market accounts because the
yield is higher right now. You can put your money in a
savings account or buy a treasury and earn a 5% yield on
that money. As you can see looking at this
chart, 5% earnings yield is the same as APE ratio of 20.
That's the simple math. So right now, if you're looking
at treasuries and you're trying to equate them to companies,
it's as though you're buying a company at a 20 PE ratio.
It's not that bad. It's actually a low PE ratio,
right? It's not too bad, especially
factoring in that treasuries don't have risk.
So that seems like a decent deal and that's why a lot of people
are pouring money into savings account.
Trillions of dollars have gone into money market funds, savings
account and buying treasuries. But as interest rates go down,
like what's going to happen this week, the yield on savings
account and the rate that bonds yield go down as well.
It goes down to 4%. When you have a 4% yield, that's
equivalent to a 25 Ford PE ratio.
As the yield goes down, the multiple goes up.
If it goes down to 3 1/2 percent, that's a 28 Ford PE
ratio. If it goes down to 3%, that's a
33. You can see that as the interest
rates go down, investing your money and Treasuries becomes
more and more expensive. So Warren Buffett says that
interest rates are like gravity. As interest rates go up,
everything else is pushed down. Well, the inverse is true as
well. If interest rates start their
path downward, that makes all other relative investments aside
from Treasuries and guaranteed instruments worth more.
The discount rate is lowered for alternative investments, and
that's a good thing for stocks. Investors are always seeking
yield. Investors always want to return.
You want your money working for you.
If investors can get a positive expected return of 5% from a
risk free savings account, many of them will just shrug their
shoulders and say I'm going to put my money there.
I'll earn my 5% with no risk and I'll be happy.
But as the interest rates go down, that 5% moves to 4% and
then the 3% and then the 2% at 2%.
Investors think I'm not getting a real return here because
inflation is 2%, so I need to move my money somewhere else.
That somewhere else is equities. That's where equities become
more valuable. That's where the portfolios you
have of world class assets all of a sudden have money off the
sides pouring into them. If you've already built
positions in world class companies, having investors move
money from the sides, from money market funds, from savings
accounts into equities is a good thing.
And the amount of money that investors have put into savings
accounts seeking these high yield, risk free investments is
incredible. Americans piled trillions of
dollars with AT into savings accounts and money market funds
the past two years. When rising interest rates made
cash more appealing, retail assets and money market funds
totaled nearly 2.6 trillion last week.
So the amount of money in these risk free assets has increased
by 1.1 trillion in just the past two years.
Now financial advisors say it's time to recalibrate that cash
hoard. The calculation is already
changing. They say, quote, you'll see
banks pull back on CD offerings pretty fast Already you're
seeing banks do this and they have a chart here showing how
quickly banks did this historically in March of 2020.
You can see how fast banks lowered their interest on CDs
after the new was announced. It only took a couple months.
Within two months, most banks have moved down their CD
offerings down to the current interest rate.
So banks are going to react very quickly to this move.
Now, of course, this isn't to suggest that when interest rates
go down, everyone's going to move their money out of savings
accounts into equities. That's likely not going to
happen. But it is true that investors
looking to have some type of attractive yield will be more
inclined to take on additional risk if you're not getting the
returns that you require with the risk profile and with the
accounts you have. Now, if interest rates go down,
that changes the calculation. And many of these people
stocking away a lot of money in savings accounts are going to be
forced to move it into equities. So when I look at this, I see it
is only a positive thing for stocks.
Even though you can show some data that historically stocks
have gone down with interest rate declines, that is mostly a
consequence of the economy faltering.
When you look at this just purely mathematically, interest
rates going down is undoubtedly good for stocks.
When we look at our investments. I have the same game plan.
I will continue to hold these world class assets because even
in the event that we potentially enter into a recession, these
companies are going to be more than fine.
They will make it through and in the event that the economy does
well, I think they're going to be extra attractive given the
situation. Now moving on, this hasn't been
a good day for Apple. It's down 2.8% on the news that
analysts are saying that they're experiencing lower than expected
demand. Now Apple doesn't give out how
much demand they have. So this is all from third party
analysis and we can take a look at how they try to piece this
together. So it's based on my latest
supply chain survey and pre-order results from Apple's
official websites. I've compiled key data on iPhone
16's first week pre-orders for each model.
Now he outlines the most important part of his analysis.
The conclusions here. First of all, the iPhone 16
series first weekend pre-order sales are estimated to be about
37 million units, which is down 12.7% year over year.
So sales estimates so far are down 12% year over year.
The delivery times for the iPhone 16 Pro series are
significantly shorter than those of the 15 Pro series.
So they're looking at this analysis again, it's all third
party stuff, but they're noticing that the pre-order
sales and the delivery times are both down and shorter.
So judging this right now, it looks like Apple's off to a weak
start. Things may change in the future.
It may speed up. We've seen Apple grow demand
over time and there's a lot of explanations of why it could be
off to a weak start, but the data doesn't look good right
now. There's other analysts that have
more positive views on the future of Apple, specifically
this iPhone cycle. Gene Munster being one.
Gene explains why he thinks the upgrade cycle of Apple is most
similar to looking at a box office.
You can use a box office approach to an iPhone upgrade
cycle. Basically, looking at lead times
of the first few days can generally get you a sense in
terms of what that cycle is going to look like.
This time, of course, it's different given some of the
comments that you had. The timing on when these AI
features come into play at the end of the day is that there is
a lot of talk around AI. There's actually not a lot of
usage of it and ultimately that consumers need to use these
features to get excited. I think that's going to happen.
I just want to put a finer point on this.
A lot of talk and not a lot of usage.
Open AI now has given the number of their weekly subscribers,
their users, it is 200 million. That puts the dailies probably
somewhere around 75 to 100 million.
Facebook, Google have 3 billion plus dailies across their
properties. There's a lot of talk of AI.
There hasn't been much usage. I think 1 when consumers
actually get a hold of these features, you're going to see a
significant increase in that. I understand what he's really
saying. Right now, the AI features are
not released on the iPhone, so there's little incentive to
upgrade today. But overtime, they're going to
roll out those new AI features that are mostly only on the new
iPhones. And if a lot of people are
online using these new flashy features, if people are in
person using them, then naturally, if they're really
cool and they're sharing them online, other people are going
to want them. So over time, we might have a
more gradual upgrade cycle. It's like a movie that starts
off a little slow in the box office, but the second weekend
it does really well. And then it does really well
internationally. And it does well over time.
There could be a chance of Apple having the same outcome with
this new iPhone. Right now, Wall Street has
iPhone sales growing at 7%. This analyst Gene Munster
believes are going to grow at 15%.
So right now Apple's being priced with 7% growth based on
Wall Street's expectations and he thinks that Apple's going to
round double those expectations. I don't think that Apple's going
to double them, but I do think it will be easy for Apple to
beat the 7%. In almost every case Apple comes
above their expectations. So I believe the analysis that
right now the iPhone 16 has lower than expected demand.
I think that's very likely to be accurate.
But I also agree with the argument that if AI really does
wow users if but it really is magical if Siri is all of a
sudden way better, like 10 times better, then I think there's a
chance they could have an incremental positive upgrade
cycle that more and more people be convinced to finally pull the
trigger to finally upgrade. If they see their buddy that has
the new iPhone and it's amazing, if your friend has one that's
amazing that has all of these AI features that he keeps bragging
about, you're eventually going to want to upgrade.
But Apple needs to have those features.
They need to have very compelling, interesting, useful
features with AI. If it's just some incremental
enhancements, some small changes, it's not going to be
enough. Now we get to the news that
Chipotle is finally launching. They're actually implementing
their new robots. A lot of people will mock you
for saying that Chipotle is becoming this robotics company,
but they're actually proving it. They have a robot that makes
guac and one that makes actual bowls faster.
You can see some of the images here.
This is their avocado. It peels the avocados and gets
them ready for this tub. But then they also have the
automated make line. You can see right here that this
bowl that came out of the counter was underneath it and it
was made automatically. The employee here is rolling a
burrito while the the make line that's automatic made this bowl.
I think these advancements in robotics in Chipotle are great
for the company. One of them is obviously the
reduced labor costs. No longer are your employees
having to prepare all these avocados.
But not only that, the automatic make line makes perfectly
consistent meals. One of the biggest complaints
people have for Chipotle is not knowing what their portions are
going to look like. The automated make line would
have the exact same proportions every single time you come.
There'd be no discrepancy. So you'd get a completely
consistent meal every single time.
In fact, one of the things they promise here is that it will
never skimp you. It'll never give you less
protein than what you want. So that is another massive
potential benefit that could solve one of their biggest
challenges. Chipotle's up 2.46% on this
news. The stock is back up to $57.
It's actually doing rather well. It's recovering a little bit
now. I sold Chipotle couple months
ago because I thought the valuation was getting a little
up there, a little bit higher than what I'd like for this
company. But Even so, a lot of people may
look at me selling the stock and the fact that it's recovering as
a negative thing. They think that if you sell a
stock, it means the stock should go down.
That's a good sale. I don't agree with that.
I think it's a good indication when even the stocks I sell end
up doing well. I don't like selling stocks and
then seeing them go down 50 or 60 or 70%.
If Chipotle just plummeted and it went down 50%, there's 70%,
then selling it right here would feel like I dodged a bullet.
And when I'm investing, I don't want to feel like I'm dodging
bullets. I want to feel like I'm making
great investments that even though I'm preferencing one over
another, all of them are great investments.
And I continue to believe that even though I sold Chipotle,
this will continue to be a great investment.
Even from today. The company will likely do
really well with earnings growth and free cash flow growth.
So I look at companies that I sold and I'm happy if they
continue to do well. I don't like investing in
companies where I feel like I got away with something where I
sold the company luckily just before it tanks.
Now we have this news, which is really good news for Amazon.
Biden is cracking down on this exploitive loophole that Sheen
and Timu have been using to unfairly compete with Amazon.
So apparently there's this rule, the de minimis imports rule,
where if you import something that's worth less than $800 then
you don't pay a tariff on it. Now this is probably thrown in
there, I would guess, because they want to be fair to small
retailers and people importing small goods.
But apparently this has been heavily exploited by large
Chinese e-commerce companies. These importers, mainly from
China, have used the de minimis exemption for shipments of
$800.00 or less to flood the US markets.
The number of these shipments has jumped from 140 million
annually to over 1 billion a year, according to White House
statements. We can look at a chart here
showing how many day minimus imports there have been over the
years. In 2018 it was around 400
million and now it's jumped all the way up to a billion.
Now the US government has a list of reasons for doing this.
They believe that the exemption is making it more difficult to
track different drugs like fentanyl and synthetic drug
content. They believe that Chinese
retailers specifically are abusing this rule and importing
cheap goods that they can flood the US market.
They say finally that the loss of the exemption could be a blow
to the Chinese companies such as Tamu and Sheen that compete by
keeping their prices low and might now have to face
additional scrutiny. Now, both Tamu and Sheen have
responded to this saying that it's not a big deal.
They don't rely on these exemptions for their business
model, but either way, this is going to make it more expensive
for them, it's going to make it more difficult, and this will
help out companies that compete with them, like lots of US
retailers and Amazon. Now finally, we get to the story
on Bloomberg, which is a scathing breakdown for the CEO
of Nike. If you haven't been keeping up
with Nike stock, the stock is up today, but it's down 25% year to
date. When we zoom out over the past
half of a decade, the stock is down 8.7%.
Nike is a globally dominant brand, an incredible asset, and
it has not performed well. Investors have not done well in
this company, and a lot of it comes down to the person running
the company and specific decisions he made.
The CEO of Nike in this case is John Donahoe.
Under Donahoe, a veteran technology executive and
consultant who arrived at Nike knowing little about sneakers
and everything about server side infrastructure and cloud storage
elasticity, the company's most successful shoes had been some
of its oldest. His first two years were a
triumph. As he deftly navigated the early
stages of the COVID-19 pandemic and sales improved by around
25%, Donahoe flooded the market with sneakers shoppers couldn't
get enough of. Nike released more Dunks, Air
Force Ones and Air Jordan models they developed around 40 years
ago and hundreds of colors with new drops almost daily.
These were lifestyle lines by means of St. wear, not to be
worn on the fields or in the courts by athletes who had
driven Nike's business since inception.
Watching revenue pour in, Donahoe was hooked.
So what was the first thing he did?
He focused on the technology and he made it so that Nike could
release new drops on their apps every single day.
And this worked. People were buying these things.
I remember when Nike was the most hype brand.
Everybody was looking for their next drop.
There are forms or entire communities around this, but
things started to change rather dramatically after a couple
years. They started to go downhill as
he implemented these changes in distribution of their products.
They say, like Apple, Nike was masterful at making product
breakthroughs and engineering cultural movements along with
them. Nike hired Donahoe to transform
its selling machinery for the modern age, cutting out the
middleman so it could get better margins from each sale.
He led a corporate culling on global scale, ending
relationships with more than half of its retail partners,
terminating hundreds of agreements, and downsizing sales
teams and marketing around the world.
As Nike directed customers to its own stores and websites, it
halted the flow of sneakers to retailers including Amazon,
Zappos, Dillard's and Urban Legends, and even curtailed
goods in its. Closest partners at US
Footlocker. So what they did here and the
basic decision from Donahoe was to make it so that Nike was no
longer selling everywhere. They closed off a lot of their
distribution. They made it so that the only
retailers, physical ones that were selling their products was
like 10 or 15 top ones. They're very picky and choosy
with which ones. And then they took all of their
products off of Amazon. Amazon used to be a massive
sales outlet for Nike, but they said they wanted to control the
sales experience. They didn't want to pay Amazon
any fees, so you have to go to the Nike app.
Now. All of this, again, seemed like
it was working right away. The margins of Nike went up.
So a lot of people thought that this was a huge success.
So like a lot of these decisions, you have the 1st
order impact. What immediately happened
following these decisions, Nike's revenue grew like crazy.
That was a very positive thing. Nike's margins went up.
That was another positive thing because they were selling on
their own website, they cut a lot of costs and they cut a lot
of retail expenses. So it seemed like things are
really good so far with this strategy.
The problem was this caused some 2nd and 3rd order outcomes, and
those outcomes weren't good for Nike.
Donahoe's strategy seemed to be working until it didn't.
That recently abandoned shelf space was quickly filled by all
of Nike's top competitors. Adidas, New Balance, Puma, even
Ugg. A flurry of running shoe brands,
many of them upstart such as Brooks, Hoka and Solomon,
suddenly found themselves with more exposure and they ate away
at Nikes market share in one of its most important categories.
Meanwhile, at the company's headquarters, the pace of
product development had slowed as Donahoe took fewer risks on
performance oriented shoe lines across the sports.
So he took a lot of shoes off the shelves.
He put everything on the Nike app, allowing all the
competitors, all these start-ups like On and Hoka Brooks, all
these companies that were small that are now massive took
massive market share from Nike because the retailers replaced
Nike with these new brands. And then he also cut cost
raising margins by slowing down development.
Slowing down development gave more access to companies like on
to develop newer exciting shoes while Nike was falling behind.
In December, Nike slashed their revenue forecast.
Donahoe said, quote, we know that we must be faster,
increasing the pace of innovation.
He unveiled a plan to cut $2 billion of costs.
So they're laying off more employees.
And if we look at the stock price today, we can see the
history of CEO 10 years. When Donahoe became the CEO of
Nike, the stock price was around $100, so now it's well below the
price when he first became CEO. The stock peaked above 160.
When he first implemented his plans, when Nikes were selling
really well, when the market started to catch up, all the new
brands started to take market share and it became increasingly
clear to investors that Nike has a serious problem with
competition. Now the stock is at a new low
now. This write up continues on
detailing out his entire tenure and it's not good right now.
Nike has a lot of internal issues and if I had a guess, I
believe that the current CEO of Nike, John Donahue, is going to
go down as one of the worst CE OS, if not the worst one that
Nike has had throughout its history.
The policies that he's implemented, the direction that
he's brought the company, the lack of focus on innovation and
driving new designs, allowing so many other top competitors to
form and create real brand value has caused devastating
consequences to the ongoing terminal value of Nike.
So I think this is a real struggle.
And the more that you read about the struggles this company
faces, the more I'm concerned about their future.
So I hope the best for Nike investors, but as of right now,
this is what I'm avoiding. That's all for now.
See you in the next.