LBA Monthly View | June 2023


• For the first time in 15 months, the Federal Reserve “skipped”—rather than “paused”—raising rates at its June meeting. While much of the market took the move as an indication the Fed may be close to the end of its rate hike cycle, comments from the meeting were quite hawkish, with Fed Chair Jerome Powell stating “not a single person on the committee wrote down a rate cut this year, nor do I think it is at all likely to be appropriate, if you think about it. Inflation has not really moved down. It has not so far reacted much to our—to our existing rate hikes. And so we’re going to have to keep at it.”1

• Is IPO mania back? IPO activity collapsed in 2022, but as equity markets continue to shrug off uncertainty and conflicting macro data, investors’ appetite for risk—including IPOs—is ever increasing. CAVA, a fast-casual Mediterranean salad concept, went public in June and soared on its debut: its share price closed at over $43—up 97 percent from its opening price and more than double the expected range of $19 to $20 per share.2

• According to TrueCar’s CEO, car dealer inventories are rebuilding from pandemic lows but remain significantly lower than pre-pandemic levels. Inventories were roughly 1.7M as of March 2023, less than half of what they were in December 2019 (3.5-4M).3

• After being placed into forbearance by the government in response to the pandemic, student loan payments are set to resume at the end of summer. The recently passed debt deal explicitly prohibits further extensions of the payment pause. With student loan payments averaging $393 per month, household budgets may tighten.4

• No honor among thieves: “Shrink,” the corporate term for losses from theft, is a big issue. Estimates from the National Retail Federation suggest retailers could lose as much as $100B this year due to theft. Unsurprisingly, shrink has been widely discussed on recent earnings calls.5

Company Highlights

Home Depot (HD)
A 540-square-foot “Getaway Pad” framing kit, priced at $43,832, marks Home Depot’s entry into the tiny homes business. Might tiny homes be the solution to today’s current housing challenges, which soaring mortgage rates and home prices have only amplified? The National Association of Realtors recently stated that in the current market, over 75 percent of homes for sale are too expensive for middle-class buyers.6

On May 25, NVIDIA experienced one of the largest single-day market cap gains in history: it added $184B and was, by the end of the day, worth more than Intel and Advanced Micro Devices (AMD) combined. On May 30, the company surpassed $1T in market cap—a milestone that just a few companies, including Apple, Microsoft, Aramco, Alphabet, Amazon, Meta, and Tesla, have achieved.7

Amazon (AMZN)
Doesn’t it feel like everyone is an Amazon Prime member these days? As of 2022, there were 168M Prime members in the US, which equates to roughly 50 percent of the US population. At 5x Amazon’s 2013 Prime membership figure, this represents a 20 percent compound annual growth rate (CAGR).8

Apple (AAPL)
At its annual developer conference in June, Apple unveiled Vision Pro, the company’s long-awaited mixed reality/virtual reality headset and the first new major product launched since the Apple Watch in 2014. The Vision Pro is being marketed as a “revolutionary spatial computer” and relies on two Apple-designed chips, M2 and R1, which were designed for real-time sensor processing (they reportedly update the display within 12 milliseconds, roughly eight times faster than the blink of an eye).9

Kenvue (JNJ/KVUE)
On May 4, the IPO of Kenvue, the consumer health business from Johnson & Johnson, took place on the New York Stock Exchange. It was the largest carve-out transaction in roughly two decades and the largest restructuring in JNJ’s 135-year history. JNJ retains roughly 90 percent ownership of the company.10

On Our Minds

By now, many of you have heard (probably from LBA!) about the risks that remain in the banking industry in the wake of recent bank failures (SVB and others). But in case this isn’t sufficient to give you a healthy skepticism about the strength of the economy, we’d like to explore the shadow banking system—and the risks related to it—this month.

What is shadow banking? It is a system of any nonbank financial intermediaries (NBFIs) such as pension funds, money market funds, mutual funds, private equity funds, hedge funds, mortgage lenders, insurers, or sovereign wealth funds. These entities are largely unregulated; they are not subject to the same risk, liquidity, and capital restrictions placed on traditional banks. Due to tightened regulations for banks following the 2008 financial crisis, a significant amount of financial activity migrated from the traditional banking sector to the NBFI sector. Today, the NBFI system controls $239.3 trillion—nearly half of the world’s financial assets—according to the Financial Stability Board.

Some believe that shifting riskier lending and investing activities away from the traditional banking system is an improvement, because NBFI investors may be more capable of managing a substantial loss. However, the traditional banking system and the NBFI sector are interconnected in many ways, some more straightforward than others. And, like the traditional banking sector, higher interest rates and a slower economy will put stress on the shadow banking system. The following table, compiled by the European Central Bank (ECB), illustrates how recent nonbank events spread into and impacted the broader global financial system.

The growth of shadow banking has created a much more complex financial landscape, one that is not transparent, rife with illiquid assets and synthetic leverage (aka derivatives), and inextricably linked to mainstream markets. LBA always supports innovation and the growth that comes with it, but we are wary of the post-2008 financial maneuvering within the shadow banking sector.

  1. Board of Governors of the Federal Reserve System
  2. Factset and Cava prices IPO at $22 per share, above stated range
  3. CEO’s commentary during the JP Morgan Global Technology, Media & Communications Conference 5/22/23 and Talking shop: vehicle affordability, digital retailing, and philanthropy — Mike Darrow | TrueCar
  4. Federal Reserve Bank of New York and Student loan payment pause nixed in debt limit agreement
  5. CEO Talk Of “Shrink” Hits Record On Earnings Calls Amid Nationwide Shoplifting Crisis and Kohl’s, Foot Locker, Target, Walmart say brazen retail theft worsening
  6. Getaway Pad 540 sq. ft. 1 Bed and Roof Deck Tiny Home Steel Frame Building Kit ADU Cabin Guest house, US Housing Market Needs More Than 300,000 Affordable Homes for Middle-Income Buyers
  7. Nvidia Sees Near-Record Jump in Market Cap , Nvidia Nears $1 Trillion In Market Capitalization, Nvidia Joins the Trillion Dollar Club
  8. Prime Has Delivered An Enormous Customer Base For Amazon
  9. Apple Vision Pro
  10. Kenvue’s IPO Extravaganza: A Historic $41 Billion Spinoff from Johnson & Johnson, Consumer Health Separation Shareholder Q&A (PDF)

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