# 696 – 😭 Diamonds aren’t forever – The Average Joe

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    # 696 – 😭 Diamonds aren’t forever

    victorlei

    May 16, 2024

    Good morning. Let’s take a moment to reminisce about the good ol’ days of Q1 2024 when the S&P 500 hit 22 record highs. This quarter has been a bit calmer, but the S&P 500 reached another record high just yesterday, hitting 5,308.

    You might find it surprising, considering we’re in wait-and-see mode with rate cuts, but corporate America kicked off the year with a fantastic earnings season. About 78% of companies beat forecasts, and now, investors are reaping the rewards.


    TRAVEL

    They Tried To Take On Marriott and Hilton. Now, These Hotel Upstarts Are On Life Support.

    The days of “revenge travel” might be over, but Americans can’t stop traveling — despite eye-watering prices. In 2023, the average nightly rate at US hotels hit a record high of $155.62, up 4.3% year-over-year. Even Airbnb ($ABNB) can’t offer much relief for weekend getaways. In recent years, new franchises promised hotels’ posh convenience alongside long-term apartment rentals’ cost and flexibility — but investors are finding that “cheap and luxury” and “apartment and hotel” are a costly oxymoron.

    No free lunch: Founded in 2014, short-term rental company Sonder ($SOND) and boutique hotelier Selina ($SLNA) aimed to offer an affordable mix of Airbnb and hotel experiences. After opening dozens of hotels with tens of thousands of units in world-class cities, they turned their widespread presence into billion-dollar valuations by going public via SPACs during the pandemic, only to see their stocks plummet by over 98% since then, risking delisting.

    • Despite 2023 revenue in the hundreds of millions, they lost even more — prompting “going concern” warnings in recent reports.

    • Making matters worse, both firms have struggled with property management, customer support, and quality — with Trustpilot ratings averaging 1.4 of 5 stars for Sonder and 2.3 for Selina.

    Hotel shakeout

    Sonder and Selina aren’t the only ones finding it hard to keep up with hotel giants like Marriott ($MAR) and Hilton ($HLT). Travelers prefer recognizable hotel chains over independent hotels or Airbnbs. And as a result, many boutique hotel chains are seeking new strategies in a post-revenge travel world.

    • In March, university-focused Graduate Hotels sold to Hilton for $210M to fuel rapid growth, aiming to become a “megabrand” with 400-500 hotels.

    • Days later, FT reported that European micro-hotel chain citizenM was searching for a new majority shareholder, seeking billions in capital to expand.

    Grow at all costs: Alastair Thomann, CEO of Generator Hostels and Freehand Hotels, emphasizes that “it is all about expansion,” even with “the current macroeconomic challenges.” Yet, high interest rates pose hurdles to profitability. And we speak for most travelers when we say that whatever they decide to do, it better not come in the form of extra cleaning fees (Airbnb, we’re watching you).

    Read: Leisure giants warn that hotel demand is leaving the country


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    LARGECAP RECAP

    🏭 Wind energy faces manufacturing woes

    Former President Donald Trump, birds, and quality assurance engineers may seem like an odd trio, but they all share a dislike for wind turbines. According to a recent report by the Financial Times, quality issues in the wind industry are leading to hefty losses for manufacturers, adding to the long streak of bad press for the industry and doubt about its viability.

    • Last month, a 20-ton wind turbine blade broke off from its tower at a Norwegian wind farm, highlighting a series of major incidents involving large wind projects.

    • As wind turbines grow in size, manufacturers are spending more on replacements — with warranties making up ~5.4% of producers’ revenues in 2023, as reported by Wood Mackenzie.

    Control the narrative: Despite renewable sources reaching a record 30% of global electricity production, as revealed in Ember’s latest Global Electricity Review, wind power remains financially precarious, even with subsidies. This issue has become a contentious topic in the culture war, particularly for Republicans. Addressing the industry’s challenges is paramount this election year — especially with politicians eyeing their subsidies.

    💎 For De Beers, diamonds might not be forever

    The sparkle of the diamond industry has dulled in recent years — and now, things are getting even trickier. Mining giant Anglo American ($AAUKF) plans to spin off or sell the iconic diamond brand De Beers as part of a massive restructuring. Given De Beers’ near-monopoly on the diamond industry, the move throws the diamond supply chain into disarray at a time when the market couldn’t be much worse.

    • Demand for diamonds has slowed further amidst inflation — compounding Russian sanctions and the meteoric rise of cheaper lab-grown diamonds.

    • Anglo’s decision comes amid a $43B takeover bid from mining rival BHP ($BHP) — prompting the company to streamline its focus on copper, its most lucrative business.

    Is diamond mining doomed? Embracing synthetic diamonds has proven successful for jewelers like Pandora ($PANDY), attracting younger, budget-conscious consumers and outperforming stocks of LVMH ($LVMUY) and Kering ($PPRUY). Yet, more disruption may be on the horizon, with startups dedicated to affordable lab-grown diamonds securing significant venture capital funding. In a world where synthetic diamond sales surged by 51% between 2022 and 2023, can De Beers maintain its dominance?


    JOE’S MARKET PULSE

    🔗 Oracle / Dell

    Under-the-radar play to capitalize on the 2024 bitcoin boom: A unique combination of events has taken place that could trigger a long-term crypto bull market… and potentially mean rapid growth for one under-the-radar Nasdaq stock. That company is Gryphon Digital Mining (NASDAQ:GRYP), and it appears well-positioned to take advantage of this bull market. Read the full report here →*

    Markets & Economy

    Oil demand-growth forecast revised down: But not by that much — the International Energy Agency originally anticipated growth of 1.2M barrels/day, but now it’s adjusted to 1.1M barrels/day due to slower-than-expected growth in the first quarter. Stubborn inflation is the main culprit. [Read]

    DoJ says Boeing ($BA) violated terms of 2021 settlement: Following two fatal 737 Max crashes, the manufacturer was directed to set up a compliance and ethics program to detect any instances of fraud — but the DoJ says Boeing failed to do so. [Read]

    Uber ($UBER) to debut shuttle services in the US this summer: Now customers can reserve up to five spots in a shuttle for events like sports games, concerts, or airport rides — and the fleets will be driven by professional commercial drivers instead of gig workers. [Read]

    Business & Wealth

    Disney+ streams Caitlin Clark’s WNBA debut: It marked the streaming platform’s first live sports event as it edges closer to profitability. And it’s just the beginning — Disney ($DIS) will be launching an ESPN streaming service and a sports streaming bundle with Warner Bros. Discovery ($WBD) and Fox ($FOX). [Read]

    Amazon ($AMZN) Web Services CEO Adam Selipsky steps down after three years: AWS has been a huge profit driver, contributing 62% of last quarter’s operating income. Although Selipsky’s departure leaves AWS during a big push into AI, CEO Andy Jassey assures the platform remains in a “strong position.” [Read]

    Chief scientist Ilya Sutskever departs OpenAI: Just a day after the unveiling of GPT-4o, the company’s co-founder will head out, likely to other AI-related pastures. CEO Sam Altman (whom Sutskever uh, tried to fire) says the departure makes him “very sad.” [Read]

    *Thanks to our sponsors for keeping the newsletter free.


    CHART


    DIGIT OF THE DAY

    April Core Inflation Up 3.6% Annually — Slowest Rise Since April 2021

    Inflation reports: where dreams go to die. But after three months of higher-than-expected inflation, consumers can finally breathe a sigh of relief. April’s core consumer price index (CPI), which is a broad measure of the cost of goods and services excluding volatile food and energy costs, only increased by 0.3% from the previous month — marking the first year-over-year decline in six months. Overall CPI also saw a modest 0.3% monthly rise, which was lower than the expected 0.4%. And again, shelter costs, the largest component of the CPI index, remained high:

    • Shelter prices climbed by 0.4% for the third consecutive month — indicating that housing expenses are still keeping inflation above the Fed’s 2% target.

    • Other notable gainers include car insurance, which has been rising at its fastest annual rate since 1976, and apparel, which has grown by 1.2% in April.

    So… what about those rate cuts? While one month of improvements isn’t likely to prompt immediate rate cuts from the Fed, it’s a step in the right direction. Charles Schwab’s chief fixed-income strategist said, “It does open the door to a potential rate cut later in the year” (BBG). Analysts worldwide are predicting the first rate cuts will come in the UK and Canada as early as June. However, in the US, though indicators suggest at least two cuts by year-end, the timing of their implementation remains uncertain.


    EXTRA JOE

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