Wesley Chapel, FL
Tupperware (NYSE: TUP) warned back in April that it may not be able to continue as a “going concern,” and hired attorneys with expertise in bankruptcies. The stock reacted appropriately by dropping almost 50% overnight. Then, over the next couple days it climbed by about 50%... which, as long-time readers know, didn’t get the stock back to even.
If you start with $100 and lose 50% you have $50 left. If you then gain 50% on the remaining $50, you end up with $75 – down 25% from where you started. When something loses 50%, it needs to double, or earn 100%, just to get back to where it started.
At any rate, TUP subsequently dropped another 67% from there to a low of $0.61/share on 7/19/2023. But, on 7/21, the stock began to rise. It finished the day up 34% with no accompanying news. It continued to rise in the subsequent days hitting a high of $5.91 on 8/1, before pulling back. That’s a gain of almost 900%, or 10x, in a few days, with the company on the verge of bankruptcy.
Then, on August 3rd there was finally a headline. It said that the company had restructured its debt and had extended the due date for $348 million of principal and interest out to 2027.
And they say insider trading is illegal… It reminds me of a quote from my favorite book about trading, Reminiscences of a Stock Operator:
"The tape does not concern itself with the why and wherefore. It doesn't go into explanations. I didn't ask the tape why when I was fourteen and I don't ask it today, at forty. The reason for what a certain stock does today may not be known for two or three days, or weeks, or months. But what the dickens does that matter? Your business with the tape is now - not tomorrow. The reason can wait."
But that actually isn’t really my point…
Even at the recent high of $5.91 long-term holders of the stock were still down 94% from the all-time high of $97.14 from December 2013. The business is permanently impaired and still very likely to go bankrupt unless it can reinvent itself (perhaps as an AI, Metaverse, or Crypto company) in the very short term, or unless people suddenly return to buying A LOT more plastic containers.
I guess I have a few points to make with this story. The first of which has already been touched on: when you lose money, you need enormous returns just to get back to even. So, you are asking, begging really, a stock that has fallen out of favor to outperform everything else, and it simply isn’t likely to happen. In the case of Tupperware, after being down 94% it needs to go up about 1,600%, or 17x, and even if it does, that just gets it back to where it started if you were the unlucky person to buy it at $97, 10 years ago! Good luck with that.
My second point is to call your attention to the prevalence of significant gains showcased across mainstream financial media outlets, including CNBC (often humorously referred to as the Cartoon Network), Fox Business, Yahoo! Finance, Bloomberg, and even the Wall Street Journal, among others. What you'll rarely encounter are headlines or video clips discussing a gradual 10-year decline of 94%. These downward trends fail to capture attention and generate views.
So, what you get is the highlights, and to a certain extent, the lowlights… It’s like watching golf on TV. They only show the best shots and from the best players any given weekend – they don’t show many (if any) of the shots of all the people who missed the cut. This presentation leads viewers to believe that professional golfers always hit the ball close to the hole from 150 yards away, because that is all they ever show on their broadcast. But in reality, PGA Tour golfers only put the ball on the green about 60% of the time from 150 yards away. (Sorry for the sports analogy but I hope those of you who don’t play golf can still understand the point here.)
This is what the financial media does to retail investors regarding their investments. They put the best performing stocks on the screen every single day and the next thing you know, you’re sitting there wondering why you don’t just buy the stocks they keep talking about since everything they talk about goes up so much all the time. But the truth is that reality is much more boring than that. And a stock that is going up 100% today, for no reason, might still be down 900% from where it started. And even worse, it might be headed for a 50% drop back to reality tomorrow.
This distorted reality can be deadly.
The third point I want to make with the Tupperware story is that we live in some strange times where “meme stocks” are shockingly still a thing, and the announcement of even certain bankruptcy, which is generally very bad news indeed, is all you need to get your stock rallying by hundreds of percent. Tupperware is far from alone… just last week a 99-year-old trucking company that we all know by name shut down its operations. Yellow (NYSE: YELL), one of the oldest and largest trucking companies in the USA announced it would file for bankruptcy and what did the stock do? Well, of course it rallied 1,057% in four trading days! But even at those highs, like Tupperware, it was still down 86% from its highs in 2013… and down even more from its all-time highs achieved way back in 2005.
As I said on July 31st, in an internal message to my team:
“YELL stock up 163% today on bankruptcy headlines... such a perfect sign of the times.”
I don’t know about you but those aren’t the sort of things I want to own; I don’t care if they are going up 1,000% percent. All it takes is one day to drop 100% and end it all. That is exactly what the folks who bought for the same reasons found out already this year when:
· Bed Bath & Beyond went to zero in May.
· First Republic Bank went to zero in March.
· Silicon Valley Bank went to zero in March.
And that is only a few of the bankruptcies this year. As of the end of July, there have already been more bankruptcy filings in 2023 (402 of them) than there were in the full year 2022 (373 bankruptcy filings).
So, I continue to think that now is probably not the best time to be getting aggressive buying stocks despite everyone running around bragging about their “year-to-date” returns. Let’s talk about “cycle-to-date” returns once this cycle has fully completed.
Moving on…
Markets were up in July with the S&P 500 notching a 3.27% gain even with companies reporting on average, the 3rd consecutive quarterly decline in annual earnings. As of last night, with 87% of the S&P 500 companies reporting, earnings are showing a year-over-year (y/y) decline of 8.21%.
As with the examples above. Nobody cares. For now…
All the market seems to care about is how many times a company says “AI” during its earnings conference call or press release. On Alphabet’s (Nasdaq: GOOGL) conference call the term “AI” appeared 90 times! The stock gained almost 10%. Meanwhile, on Microsoft’s (Nasdaq: MSFT) call, the term appeared only 81 times and the stock has fallen about 8% since then.
I guess you really need to hit that 90 mark!
It is too bad that Alphabet only makes up 2% of the S&P 500 index while Microsoft is 6.5%. But the biggest component of every index, and pretty much all the biggest funds in the world is Apple (Nasdaq: AAPL). Apple is currently 7% of the S&P 500 index and 11.5% of the Nasdaq 100 index. That mean’s Apple and Microsoft together account for 13.5% of the S&P 500, but who’s counting? Apple reported earnings on August 3rd and announced its third consecutive quarter of declining revenue. It’s one thing to generate less profits/earnings due to higher costs or investments into the business. It is a totally different matter to consistently report lower sales/revenue.
Since we know that Apple products aren’t getting any cheaper, the revenue decline can only mean one thing – there is less demand for Apple’s products. iPhone revenue was the lowest it has been in a couple years, and they essentially said that hasn’t changed much into the current quarter which includes the full month of July. The stock dropped a little over 7% throughout the next couple days and is now down just about 10% from its recent all-time high.
With Apple being such a large component of the S&P 500 and Nasdaq 100, it is no surprise that the indexes have come down a bit in August, along with it. The recent drop in major benchmark indexes is all the less surprising if you factor in the fact that the second largest component, Microsoft, is also down during that time.
Thankfully Amazon.com (Nasdaq: AMZN), the third largest component of the S&P 500 (still only 3.3% of the S&P 500) reported strong numbers and rose about 10%, helping to dampen the blow of the big two.
To be clear, there is nothing wrong with Apple and it is still a company that we want to continue to own (along with the other three I have just discussed) for the long run, but I can make a good case based solely on technical analysis for Apple’s stock dropping another 8% to around $165. And even then, it would still not necessarily be “cheap,” especially if they can’t resume a growth trajectory in their sales. Fundamental analysis indicates that people are suddenly willing to pay a higher price for a company that is selling less – which doesn’t make a lot of economic sense and probably won’t last.
For example, the Price-to-Earnings (P/E) ratio and the EV/EBITDA (click here to learn more about valuation ratios) ratio have both increased while annual (TTM = trailing twelve months) operating income (OI) has decreased. Meanwhile, the Price-to-Sales (P/S) ratio has increased as annual growth in sales has fallen into negative territory. Notice the red lines falling and the blue/green lines rising in the charts below.
This doesn’t add up. Of course, it can continue on like this for longer than one might think possible, but eventually we should expect either the revenue and earnings to accelerate, or the price (and therefore the valuations) to come down – likely bringing the whole market along with it. Maybe that has begun. It isn’t like Apple is immune from big drops. Just last year (and I am old enough to remember last year…) the stock dropped over 30%. Don’t rule it out.
Now, let’s take a quick look at inflation and FED Funds rates…
I haven’t shared this table (below) in a few months so I thought it would be worth a look. You may remember I initially projected that the real FED Funds rate would turn positive in May or June of 2023, and that would be the catalyst for the FED to potentially stop hiking rates. I think I made that projection back in September of 2022. I’d say I did well, given that the real FED Funds rate did turn positive in May, and they did indeed “press pause” in their June meeting before hiking once more in July.
When it is reported on Thursday (8/10), if the Consumer Price Index (CPI) comes in at an annual growth rate of 3.3% for July as the market expects, the real FED Funds rate will be 2.075%. Remember, the real rate is simply the actual rate minus an inflation rate, in this case the annual CPI. So, using the FED Funds rate midpoint (5.375%) minus the CPI (3.3%) is where I get 2.075%.
The FED doesn’t meet again until September 20th and a lot can happen between now and then. For now, I do not have them raising rates at the September meeting, or in November/December. I actually think they may be done hiking for this cycle regardless of what I might think they should do. If inflation reaccelerates in both July and August, I will feel differently - and they probably will too.
Back to present day, this will be only the third month of positive real rates in a very long time, and this is just using one measure of real rates. There are many others, for example, the 10-year US Treasury rate is currently 4.0% and the Core Inflation rate (which excludes food and energy and is preferred to headline CPI by the FED) is 4.8%... so, that real rate is still negative (4.0% minus 4.8% = -0.80%).
Many other real rates are still negative as well, which can be called accommodative, or “loose” policy. What negative real rates cannot be called is restrictive. And even the 2.075% isn’t that much of a real rate. Back in the early 1980’s the real FED Funds rate was maintained at closer to 6% for almost 5 consecutive years and it still wasn’t restrictive enough.
That doesn’t mean I think we will get to a 6% real FED Funds rate now though. Things were different then. There was a lot less debt in our economy and our government wasn’t consistently running trillion-dollar deficits every year…
Here is a scary picture painted by Josh Steiner, CFA, over at Hedgeye:
"Rewind the clock a bit back to 2006. That was a long time ago, yes, but it doesn’t seem like that long ago. Guess what the amount of Federal debt outstanding held by the public was in 2006? $15 Trillion? No. $11 Trillion? No. $5 Trillion? Close, but still no. At the end of 2006, there was a measly $4.83 Trillion in debt outstanding. Yes, $4.83 Trillion. Today, $25.8 Trillion. 2033? $46.7 Trillion (best case scenario). That’s objectively pretty incredible. Going from $4.8 Trillion in 2006 to $46.7 Trillion in 2033. That’s about 25 years (technically, 27), but we’re talking about a 10x increase in debt outstanding.
Can you do the math off the top of your head what the CAGR of a 10x increase over 27 years is? (Another trivia question). The answer is: 8.8% per year. Guess what GDP grew/is expected to grow by over that period. The answer is 4.16%. Yes, debt has been (and is expected to keep) growing at >2x GDP.
For those thinking, so what, GDP’s growing too, the projected Debt/GDP ratio is projected to grow roughly 20% over the period from 98% at 2022 to 119% by 2033. And, by the way, have a guess what debt to GDP was in 2006? Answer: it was 37%. For reference, GDP was $13.1 Trillion while Federal Debt Outstanding Held by the Public was $4.8 Trillion. So, 37% in 2006, 98% in 2022 and a (optimistic) projection of 119% by 2033. Interestingly, in 2006, debt as a % of GDP was projected to decline materially over the following decade, from 37% in 2006 to 20% in 2017. Instead, now it’s projected to rise to 119% by 2033. Bottom line, the Government is on a Financial Path converging (careening) toward a hard reset. I’m reminded of that old saying, ‘Pay Me Now, Or Pay Me Later.’"
Given the above, perhaps it makes perfect sense as to why Fitch finally got around to downgrading the credit rating of the United States. Better late than never, I guess. If they were being honest, they probably would have cut it even further.
At this point, I am going to sort of “speed date” through a few charts.
First up, interest rate on credit card debt…
Americans who are carrying a balance on their credit cards are paying interest at the highest rates in recorded history.
Meanwhile, credit card debt has grown at the fastest annual pace on record, to a new all-time high.
Even Elon Musk has thoughts about that situation… he calls it “scary.”
The New York Fed just released its quarterly report on household debt. It is worth a quick scan. In it, we find that debt has reached new all-time highs. We also find that delinquency rates are ticking up.
Student loans will follow the rest of the delinquencies higher once payments resume in October. Just look at the end of my last commentary for evidence of that.
If you noticed that the total debt balances seem to be flattening out, the following might explain why. People can’t get new credit! They are already maxed out. The New York Fed also recently released its credit access survey. It didn’t look too good.
Our friends at Hedgeye put together a couple charts I couldn’t resist sharing. The first one shows US GDP and exports to the US from China. China exports to the US tend to be a leading indicator of US GDP. Notice how the black line tends to drag the blue line up/down. Right now, the black line seems poised to drag the blue line down, which would be indicative of a recession in the US.
New data just came out last night that shows Chinese Exports have dropped even further overall, while exports to the US specifically remain down more than 23%.
Another gem from Hedgeye… which speaks for itself.
It sure looks like people are spending more than they are making… as evidenced by that credit card debt from earlier… but check this out… again, speaks for itself.
Industrial production is falling… further indicative of a recessionary environment.
Total assets at commercial banks just declined y/y for the first time since 2010. This has only happened four other times since 1974… Do you remember all the way back in March of 2023 when banks started failing without their borrowers even defaulting on loans? I sure do. I won’t be surprised if there are still more of those to come.
Where is all the oil going? And why are we still not replenishing our Strategic Reserves?
S&P 500 earnings are declining, yet the index still trades at 2.5x sales – 46% above its long-term average. But hey, 2.5x is cheap compared to 3.17x in 2021, right?
As much as I would like to get into some comments on the press conference that Jerome Powell held after the most recent meeting of the Federal Open Market Committee, I need to wrap up for this month and get on a plane to Colorado! So, instead, I will just leave you with this link to the transcript, which you are welcome to read on your own. Kyle and I did cover some of the below items in our recent Elevate Market Chat which you can find on our YouTube channel, or in the nearby video player.
Some terms to search the document for and read about:
Hope
Barbie (it is really in there… 🤷♀️)
Raise again
Interesting question
Cut
QT
2025
Until next time, I thank God for each of you, and I thank each of you for reading this commentary.
Clients, I encourage you to click here to access your personalized performance portal to see how your portfolio performed vs. the markets last month.
Shane Fleury, CFA
Chief Investment Officer
Elevate Capital Advisors
Legal Information and Disclosures
This commentary expresses the views of the author as of the date indicated and such views are subject to change without notice. Elevate Capital Advisors, LLC (“Elevate”) has no duty or obligation to update the information contained herein. This information is being made available for educational purposes only. Certain information contained herein concerning economic trends and performance is based on or derived from information provided by independent third-party sources. Elevate believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based. This memorandum, including the information contained herein, may not be copied, reproduced, republished, or posted in whole or in part, in any form without the prior written consent of Elevate. Further, wherever there exists the potential for profit there is also the risk of loss.