🤝 Apple and JPMorgan Team Up

MARKET UPDATE

Good Morning Investor! On Wednesday, the Federal reserve announced a 50 basis point cut to interest rates on Wednesday afternoon, bringing its target range to 4.75% to 5%, and sending the market rocketing higher almost instantaneously. The Fed cited falling inflation as the reason for this sizable first cut.

TODAY’S BIG HEADLINES

All Eyes on Central Banks & Interest Rates This Week

Apple and JPMorgan Team Up

Trump-Linked DeFi Project Launches

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EQUITY MARKETS

Mid-Caps are Having Their Moment in the Sun🎊

Mid-Caps are no Longer “Mid”: When it comes to picking stocks or stock indexes, traders often seem to go big or go small — but many overlook the sweet spot in the middle: mid-caps. It's like they're playing a financial version of "Goldilocks and the Three Bears," but forgetting about the just-right porridge in the middle. Companies in the middle of the market are becoming more attractive buying opportunities than their smaller and larger counterparts, thanks to favorable valuations, strong margins, and solid industry conditions. They're the stock market equivalent of being tall enough to ride all the rollercoasters, but short enough to still fit in airplane seats comfortably.

The Middle Child Finally Gets Some Love: Over the past 12 months, 91% of the stocks in the S&P 400 Mid-Cap Index ($MDY) reported positive net income — outperforming the 77% in the S&P 600 SmallCap Index ($USML). While S&P 400 companies' margins aren't as high as those of large- and mega-cap firms in the S&P 500 or Nasdaq-100, they've held up well, even against inflation. They're like the financial world's version of dad bod – not ripped, but surprisingly resilient.

• Additionally, small-caps have already had their chance to shine, after the S&P 600 SmallCap Index saw an over 9% rally since the beginning of July, as investors began pricing in the positive impact of rate cuts.

• Higher interest rates are typically more harmful for smaller companies, as lending standards tighten, the cost of borrowing increases, and their ability to pay back debt diminishes, thus increasing the risk of invest — resulting in suppressed valuations. Mid-Caps, however, are somewhere in between. They're the financial world's Switzerland.

Not Too Hot, Not Too Cold, Just Right: The S&P 400 may not have the same quality as the S&P 500, but it makes up for that with one key advantage — valuations. With a price-to-earnings ratio of 18x, it's cheaper than small-caps and significantly less expensive than large- and mega-cap companies. It's like finding a designer outfit at TJ Maxx – all the style, half the price. Mid-caps could be considered a "hedge against the S&P 500" because of their heavy weighting in industrials and financials. Their focus on value makes them an appealing long-term play — especially as rates begin to drop. It's like betting on the tortoise in the race against the hare, but this tortoise has been hitting the gym and drinking protein shakes.

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MEGA CAPS & BANKING

Apple and JPMorgan Team Up🤝

The Great Apple Card Heist: Over the past decade, JPMorgan ($JPM) has emerged as a key competitor to Goldman Sachs ($GS), like a scrappy underdog in a Wall Street rom-com. Now, it may be on the verge of another big win—taking over the AppleCard. Apple recently ended its partnership with Goldman, after the bank's attempt to build a consumer business resulted in billions of losses. Turns out, Goldman's consumer banking skills were about as sharp as a butter knife at a steak dinner.

• The discussions are still in the early stages, with the deal potentially months away. But JPMorgan is already negotiating key terms, such as seeking a discount on the $17 billion in outstanding loans due to higher-than-expected losses in the AppleCard portfolio. Despite the early stage of talks, JPMorgan seems well-positioned for the win, as it already has a strong relationship with Apple, offering Chase customers deals on Apple products. They're practically finishing each other's sentences at this point.

When Goldman Went Sour: But first, let's address the elephant in the room. How did Goldman end up with such significant losses? Goldman didn't have a credit card history, a portfolio of accounts to defend. It was new, and Apple wanted to kind of break the traditional credit card model. The other banks weren't willing to do that. Why though? Goldman has been one of the most profitable banks serving high net worth clients for such a long time, why would a bank like that, that's been so historically successful, want to get into the consumer business? Just everyday people. It's like a Michelin-star chef deciding to open a fast-food joint.

• It needed to diversify its revenue stream. Investment banking and trading are very volatile businesses. The highs are high and the lows are low, and they're prone to big swings. What Goldman leaders had realized was something else is needed to offset the lulls in deal making and trading, and they placed their bets on consumer. Unfortunately, their crystal ball must've been on the fritz that day.

• Other banks, after missing out on this partnership, stated: "The economics on that deal, the economics on that deal were just horrible. Goldman got a really bad deal." Additionally, customer service for the AppleCard was a nightmare, since Apple insisted that all cardholders get their billing statements at the very beginning of the month. So that has flooded Goldman's customer service department, they got inundated. These customer service issues even drew regulatory scrutiny. It's like trying to serve filet mignon at a McDonalds drive-thru – chaos ensues!

A Tower of Financial Jenga: From 2020 to the third quarter of 2023, Goldman has lost roughly $5.6 billion on a pre-tax basis on a big chunk of its consumer lending business, a feat that's about as impressive as setting fire to a pile of cash while trying to roast marshmallows. This financial fiasco occurred despite the firm's $2 billion acquisition of lending company GreenSky - which turned out to be about as "green" as a wilted salad. As the bank running things behind the scenes, Goldman was taking on all of the credit & lending risk while also facing regulatory scrutiny, while suffering significant losses — it was a partnership doomed from the beginning.

JPMorgan's Shot at the Bouquet: Back to current day, the contenders for the AppleCard program include Synchrony Financial ($SYF), Capital One ($COF), and American Express ($AXP), but JPMorgan, America's largest bank and the biggest credit card issuer by volume, appears to be the frontrunner. If JPMorgan wins this deal, it's going to cement the bank's dominance on both Wall Street and Main Street. It'll be like the banking equivalent of winning both the Nobel Prize and an Oscar in the same year. JPMorgan already has the biggest credit card business in the country through Chase, and JPMorgan could pitch AppleCard's 12 million users on more financial products. If you work on Wall Street, you know JPMorgan is good at winning deals - and we'd bet they have a good shot at winning this one.

CRYPTOCURRENCY & DEFI

Trump-Linked DeFi Project Launches 👀

Ready for Takeoff? More Like Ready for a Nosedive!: The much-hyped debut of a crypto project backed by former president Donald Trump and his sons came and went on Monday with all the grace of a bull in a China shop – if the bull decided to take a nap instead. Over the course of a two-hour X Spaces conference that Trump claimed would "launch" World Liberty Financial, few details were shared about the reported decentralized-finance project. Meanwhile, listeners dropped off faster than Trump's hairpiece in a windstorm. While WLF didn't exactly launch, some details were shared – about as clear as mud in a sandstorm.

• The initial coin offering (ICO) for the WLF crypto "governance token" (which would let users vote on how the project is run) was said to be nontransferable and wouldn't earn yield. In other words, it's about as useful as a chocolate teapot. The WLF team would get 20% of the supply, with 63% set aside for big-fish investors.

• The Spaces speakers — which included Donald Trump Jr., Eric Trump, and two project insiders — leaned into the value of stablecoins. It's still rather unclear, however, how or if WLF even involves stablecoins.

When Cyber Meets MAGA: World Liberty Financial's bumpy rollout — which included the apparent hack of Lara and Tiffany Trump's X accounts — has had mixed reactions from crypto insiders. One prominent crypto VC called it a "huge mistake" that seemed like a cash grab. Now that's what we call "stating the obvious" – it's like calling water wet or Trump's tan orange. Now analysts say the project's ties to Trump could backfire for the industry by alienating Democratic lawmakers just as they've started warming to crypto.

• Regardless, Trump is still charging ahead: “Crypto is one of those things we have to do,” he said on the stream. “Whether we like it or not, I have to do it.” Sounds like someone's treating crypto like a colonoscopy – necessary but unpleasant.

• Trump had found support in the crypto community after his public embrace of bitcoin over the summer (he’d previously called it a “scam”). Now, as the US presidential election nears, he risks losing some of that support should WLF fail or be perceived as sketchy.

MORE NEWS

Additional market-moving events🌎

Tupperware Shuts Up Shop: Tupperware Brands is boxing itself up and filing for bankruptcy, as one of the pioneering forces in the food container game continues to struggle with increasing competition, waning demand, and piling debt. (AP)

UK Inflation Meets Expectations: The UK’s headline consumer price index (CPI) reading matched analyst expectations, coming in at 2.2%, inline with July’s figure. (CNBC)

Japanese Economic Woes Worsen: Japan’s export growth slowed sharply in August as shipments to the U.S. dropped for the first time in three years, while machinery orders unexpectedly shrank in July in a worrying sign for an economy struggling to mount a solid recovery. (CNBC)

$100 Billion AI Fund Forms: Microsoft, BlackRock form an investment group to raise $100 billion with the sole ambition of investing in the build out of AI data centers and power. (TR)

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Our selections performance👾

On Monday the 11th of March, we released our “superperformers” stock pick which we believe will provide significant outperformance compared to the S&P 500. Then on the 14th of June we released our next stock selection. Lastly, on August 6th, we initiated a position in Celsius holdings.

Here’s how the stocks have performed since:

• Hims & Hers Health: $16.73 (📈+15.55%)

• PayPal: $73.45 (📈+21.09%)

• Celsius: $35.025 (📉-12.61%)