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.