A Friday bulletin from the Financial Times:

The E.U.’s top three central bankers all sounded the alarm over economic decline on Friday, warning that political paralysis was leaving Europe even more vulnerable in a potential trade war with the U.S. 

In a rare and strongly worded joint statement, the governors of the Bundesbank and Banque de France said the continent would be “condemned” if Germany and France cannot revive “joint French-German action”. 

Meanwhile Christine Lagarde, president of the European Central Bank, gave a speech stressing the “urgency” of capital markets reform, which had not been “matched by tangible progress” despite rising risks. She lashed out over Europe’s “extraordinarily fragmented” financial markets and implored political leaders to “bypass the vested interests that are protected like a fortress in the ancient ages.”

And a Bloomberg headline from last month:

ECB Warns Banks of Yet More Fines Over Climate Risk Management

MicroStrategy is for pikers. Behold the price action in Quantum Computing, Inc. (ticker: QUBT), as shares have rallied by 440% since Halloween, leaving the firm’s market capitalization at $723 million. Coloring that parabolic ascent: the announcement of photonic chip foundry orders from the University of Texas at Austin and an unidentified “prominent research and technology institute based in Asia.” Terms for those transactions were not disclosed. 

QUBT, which posted a net loss of $5.7 million and $101,000 in gross revenue over the three months through September, boasts a unique corporate history, as detailed in a 2019 prospectus. First incorporated in Nevada in 2001 as Ticketcart, Inc., the outfit sold inkjet cartridges online before calling an audible six years later, purchasing Innovative Beverage Group Holdings, Inc. and taking its acquiree’s name “to better reflect its business operations at the time, which was beverage distribution and product development.” 

Innovative Beverage Group ceased operations in 2013 in less-than-harmonious fashion, as shareholder William Alessi filed suit four years later for fraud and breach of fiduciary duty, alleging that officers and directors abandoned the company and squandered its assets. North Carolina Superior Court ruled in favor of the plaintiff, placing Innovative Beverage in receivership and paving the way for the latest name-cum-business model pivot in 2018.

Riding Mr. Market’s coattails, Quantum conducted a 16 million share secondary offering late last week, pricing the deal at $2.50 per share. The stock settled Friday at an even $6.00. 

Another eye-catching development came to the fore in early September, as the company was obliged to restate its consolidated financial statements for the past two years.  Spurring that do-over, the Securities and Exchange Commission charged its previous auditor, BF Borgers CPA PC, “with deliberate and systemic failures to comply with Public Company Accounting Oversight Board (PCAOB) standards in its audits and reviews incorporated in more than 1,500 SEC filings from January 2021 through June 2023.”  The accounting firm agreed to pay a $12 million civil penalty, with owner and eponym Benjamin F. Borgers forking over an additional $2 million, and accepted a permanent suspension from the industry, without admitting or denying guilt.

It's a bull market, you know. 

Who needs Santa Claus? Stocks rose by 0.3% on the S&P 500 to wrap up a 1.6% gain for the week and leave the broad index near its high-water mark with a 26% year-to-date advance, though Treasurys could use home holiday cheer as two-year yields ticked to a near four-month high at 4.37% while the long bond settled at 4.6%, compared to 4.47% at the start of November. WTI crude advanced past $71 a barrel, gold remained on the front foot at $2,709 per ounce, bitcoin continued to consolidate its post-lunar mission at $99,000 and the VIX retreated to 15 and change, down close to two points on the day. 

- Philip Grant

Chips ahoy! Buckle up for Nvidia’s third quarter earnings report tomorrow afternoon, an event which stands as the most significant market catalyst left in 2024 by Barclays’ lights. 

Jensen Huang’s corporate pride and joy will deliver $33.25 billion in revenue and $16.4 billion of free cash flow if Wall Street is on the beam, compared to $16.1 billion and $7.04 billion, respectively, in the same period last year.  The stock is up 196% in the year-to-date after logging 239% gains in 2023.

With shares changing hands at $147 as of Tuesday’s close, not far below their $149 split-adjusted high-water mark, stronger than anticipated results could easily spell fresh record highs for the artificial intelligence boom’s avatar. Options markets imply a roughly 10% post-print price move, Barclays relays, while pointing out that assets in leveraged exchange traded products tracking Nvidia shares have reached $6.7 billion, up 18-fold from fall 2023. 

Bullish sentiment among the sell-side likewise approaches unanimity, with all but eight of the 76 firms tracked by Bloomberg rendering a “buy” verdict. Taking no chances, analysts at Truist Securities and Stifel bumped their respective price targets today to $167 and $180, respectively, from $148 and $165. 

Meanwhile – unlike the prior earnings release in late August – publicly disseminated plans for a New York City area watch party have yet to take shape as of Tuesday afternoon. 

Even a hill of beans doesn’t come cheap these days.  Nestle SA is turning to a familiar strategy to contend with ongoing input inflation, as the world’s largest coffee purveyor announced plans to hike prices and shrink portion sizes Tuesday after trimming medium-term operating margin and revenue growth forecasts to 17% and 4%, respectively, from 18% and 4.5%. Nestle will likewise allocate more resources into cheaper soluble and capsule coffee formats, deputy executive vice president David Rennie relayed at Tuesday’s investor meeting in Switzerland. 

“We are not immune to the price of coffee, far from it,” Rennie said, adding that they have and will continue to pass those rising java costs onto consumers. Futures prices for arabica and robusto beans have risen by about 50% and 65%, respectively, in the year-to-date. 

Nestle’s travails illustrate a multifront squeeze on the mass-market foodstuffs industry, as name brands wrestle with simultaneous competitive pressures from high-end entries catering to wealthy noshers to cheaper private label alternatives capitalizing on stretched budgets among the less well-off.  

Citing data from consumer research firm Circana, Bloomberg relays that mainstream products from the likes of Kraft Heinz and General Mills saw unit sales tick lower by 1% this year through July 14, while store brands grew 3% and the super-premium category expanded at a 4% clip. “It’s a very polarized picture” Danone deputy chief executive Juergen Esser told Bloomberg, while RBC Capital Markets analyst Nik Modi ominously declared that “you’re seeing the middle disappear.”

Such dynamics similarly serve to complicate life for the dine-out cohort, further aggravated by a sharp updraft in wages. Nearly 90% of respondents to a September survey from Restaurant Business Online predict that labor costs will keep rising over the next year, while roughly 75% say that affording sufficient help will pose their stiffest staffing-related test.  

The post-Covid experience directly informs those beliefs, as 59% of RBO poll participants report “significant” labor cost increases over the prior 12 months, building on the explosive price pressures seen in 2021 and 2022. Michelle Korsmo, CEO of the National Restaurant Association, pegs average labor inflation over the past five years at more than 30%. 

Might such cumulative cost pressures, in tandem with a bifurcated consumer backdrop, serve to disrupt the best-laid plans of one fast-casual chain?  See the current edition of Grant’s Interest Rate Observer dated Nov. 6 for a bearish analysis of one longstanding, marginally profitable restaurant concept which may struggle to justify today’s exorbitant valuation. 

Stocks shook off some early losses to rack up 0.4% and 0.7% gains on the S&P 500 and Nasdaq 100, respectively, leaving each of those gauges higher by about 25% for the year-to-date, while Treasurys also finished a bit stronger with the two-year yield ticking lower by two basis points to 4.27% and the long bond dipping to 4.57% from 4.61% Monday. WTI crude edged higher at $69 a barrel and change, gold managed a second green finish at $2,633 per ounce, bitcoin settled at $92,400 and the VIX remained above 16. 

- Philip Grant

Green sees red, via the Financial Times:

[German] police searched the home of a 64-year-old man after he was accused of insulting German vice-chancellor Robert Habeck. 

In an awkward revelation that comes as Habeck seeks the nomination of his Green party as candidate for Chancellor, prosecutors on Friday said the economy minister had filed a criminal complaint after the man called him an “idiot” on social media in June. 

The post on X featured a photograph of Habeck over a doctored version of the logo for the shampoo brand Schwarzkopf Professional, with the pun “Schwachkopf Professional” — meaning “professional idiot.”  

Lawyers acting for Habeck filed a criminal complaint, prosecutors in the Bavarian town of Bamberg told Germany’s DPA news service, confirming earlier media reports.

Might the sound of trumpets soon be in the air? Donald Trump spoke with Vladimir Putin last week, The Washington Post reported Monday, with the President-elect advocating for additional talks in service of ending the war in Ukraine. 

The Kremlin denied that any conversation has taken place, though Russia’s strongman recently praised Trump for his “manly” response to the July assassination attempt and said he was “ready” to open a dialogue. Meanwhile, Putin and German Chancellor Olaf Scholz held a Friday phone call (confirmed by both parties) to discuss a cessation of hostilities, marking the first such direct communication since late 2022.

Of course, peace in Ukraine and a Russia détente with the West is no sure thing. The Wall Street Journal points out that Trump frequently lobbed friendly remarks Russia’s way during his first White House stint, while his administration lifted a Ukrainian arms embargo and ejected dozens of Russian diplomats/intelligence operatives from New York and Washington.  Then, too, a recent string of battlefield successes may dim Russian appetite for compromise.  

“Putin is not ready for any substantive talk around any possible peace plan because he is not ready to make any concessions – full stop,” Andrei Kolesnikov, senior fellow at the Carnegie Endowment for International Peace, told the WSJ yesterday. “He believes that he has enough financial and emotional resources to continue.” 

While the prospects for an imminent armistice and accompanying relaxation of economic sanctions remain anybody’s guess, investors are certainly warming to the possibility. To wit: the JPMorgan Emerging Europe, Middle East and Africa closed-end fund, the subject of a bullish analysis in the Aug. 30 edition of Grant’s Interest Rate Observer (thank you, Willem de Mol van Otterloo), has doubled since Nov. 5, pushing its market capitalization to £100 million ($126 million). Average daily volumes have exploded to 295,000 shares over the eight sessions following the U.S. elections, up tenfold from the prior octet. 

The tiny, London-listed vehicle (ticker: JEMA LN), which holds stakes in the likes of Sberbank, Lukoil, Novatek and Gazprom, wrote down its Russian exposure by 99% in response to the Feb. 2022 invasion of Ukraine, in turn holding £25.2 million of accumulated and undistributed dividends in a Moscow custody account with a further £7.9 million likely forthcoming.  Meanwhile, a re-marking of the fund’s Russia positions to their current market value would ratchet today’s £54 million net asset value sharply higher. “Can you buy JEMA and still look yourself in the mirror?” Grant’s rhetorically asked in August, answering thus:

As a practical matter, the indirect acquisition of frozen Russian shares couldn’t contribute to Putin’s war effort. The prohibition on foreign trading precludes capital inflow. Similarly, the prohibition on selling Russian shares rules out the possibility of an inflow of capital-gains tax receipts into the Kremlin’s war coffers. This is a peace trade.

May it be so. 

Stocks came for sale with the S&P 500 and Nasdaq 100 dropping 1.4% and 2.4%, respectively, to each settle well lower on the week, while the Treasury curve steepened a bit with two-year yields declining three basis points to 4.31% and the long bond ticking to 4.6% from 4.58% Thursday. WTI crude retreated to $67 a barrel, gold fell yet again at $2,562 per ounce, bitcoin ripped to $91,400 and the VIX rose above 16, up nearly two points on the day. 

- Philip Grant

This avatar of the bygone venture capital boom-and-bust looks to meet Mr. Market in the middle, via the Financial Times:

Klarna has begun its long-anticipated stock market flotation after the Swedish buy now, pay later pioneer said it had filed initial public offering documents in the U.S. The fintech on Wednesday said it had “confidentially submitted” a draft registration statement to the U.S. Securities and Exchange Commission. 

The IPO, which could value Klarna between $15 billion and $20 billion, would take place after the SEC review and the timing would be subject to market conditions, the company added. Klarna said the price range and number of shares to be offered in the IPO were still to be determined. 

Klarna has been on a rollercoaster ride since it was valued at $46 billion in a 2021 deal that made it Europe’s most valuable start-up. It was then valued at $6.7 billion during its last official fundraising round in 2022, as investors sharply re-rated fintech companies in response to rising interest rates.

How low can we go? Option-adjusted spreads on the ICE BofA U.S. Corporate Index ticked to 77 basis points Tuesday, marking a fresh post-1998 nadir for high-grade credit risk premiums. That milestone follows a seven-basis point downshift last week, which represented the largest weekly drop since June 2023 per BMO Capital Markets and leaves the current pickup over Treasurys at roughly half its 20-year average. 

Recent rate cuts and all, still-elevated yields relative to the post-2008 norm inform the ongoing feeding frenzy, with high-grade corporates still offering more than 5% compared to 2% and change in the summer of 2021. Nevertheless, today’s ebullient, blue-sky backdrop gives pause to some observers: “You have to have dry powder in case you hit. . . volatility,” T. Rowe Price portfolio manager Lauren Wagandt opined to the pink paper last month.

An uptick in rating agency scrutiny towards the category speaks to that cautious stance. As Bloomberg’s Sam Geier relays today, the tally of high-grade debt facing either a negative outlook or review for potential rating agency downgrade tops $2.5 trillion, up from $1.8 trillion two years ago. 

Meanwhile, so-called fallen angel debt (issued by heretofore investment-grade borrowers then relegated to junk status) could reach $60 billion in 2025, analysts at Barclays predicted on Oct. 25. That provisional figure – topped only in 2020 and 2016 in the post-Lehman era – would mark a material uptick from this year’s $6 billion tally, which stands as the lightest such slate since 1997.  

More broadly, leverage ratios within the non-financial, non-utility IG cohort tracked by Bank of America continue to drift higher. Net debt among that cohort topped 1.9 turns of trailing 12-month Ebitda in the third quarter, up from 1.4 times in September 2007, with gross debt rising to 2.6 times trailing Ebitda from 1.9 times over the same period. 

Though excluded from the BofA balance sheet data, financial firms certainly made their mark yesterday: the segment raised a hefty $27 billion, nearly matching the bank’s expectation of $30 billion in new high-grade issuance for the full week and posing the question of what spurred those generally plugged-in borrowers towards such outsized activity. 

“This strong acceleration in financial supply signals the desire by issuers to lock in historically tight spreads,” BofA credit strategist Yuri Seliger writes. “The rush to borrow also suggests [that debtors] are worried these tight spreads may not last.” 

An inline reading of October CPI was enough to bolster Mr. Market’s anticipation of a December rate cut as two-year Treasurys dropping seven basis points to 4.27%, while the long bond rose to 4.63% from 4.58% Tuesday and stocks finished unchanged on the S&P 500 and Nasdaq 100. WTI crude again remained at $68 a barrel, gold failed to hold an early bounce and fell to $2,576 per ounce, bitcoin hovered north of $89,000 and the VIX retreated to 14.

- Philip Grant

Mr. Market lets it ride. Investors leaned headlong into the latest asset price levitation late last week, pouring a net $1.9 billion into the iShares MSCI USA Momentum Factor exchange traded fund Friday. That sum, equivalent to 15% of the BlackRock-managed vehicle’s total assets, marks the largest single session inflow in its 11-year history, Bloomberg relays.

In turn, the iShares Core Total USD Bond Market ETF logged a $1 billion outflow, a record sum dating to its 2014 inception.

That’s not to say that fixed income is asset class non-grata among the risk-hungry hordes, as the Direxion Daily 20-year Treasury Bull 3X ETF gathered a net $625 million last week. That’s a record performance for the 2009-launched fund, which has posted a 24% drop in the year-to-date to bring its three year showing to minus 44%. 

“Commercial real estate has set its bottom,” Marathon Asset Management chairman Bruce Richards declared to The Wall Street Journal late last month. “The worst is over.”  A pair of recent rate cuts from the Federal Reserve – with futures pointing to more easing on the way – along with a still-constructive growth backdrop should pave the way for better days ahead.  

Indeed, the Green Street Commercial Property Price Index increased by three percentage points over the first nine months of 2024.

Yet some industry players will need a lot more where that came from, as the Green Street gauge still sits 19% below its 2021 era peak. Still-buoyant 10-year Treasury yields likewise serve to keep a floor under cap rates (meaning a property’s net operating income as a share of asset value; lower figures equate to a fancier price tag), in turn raising the bar for a further recovery in prices. “You will see improvement in financing costs, but you won’t see a pop from the value standpoint,” Richards added. “Therefore, it’s not going to be a V-shaped recovery, it’s going to be a very slow grind and will take years to work through.”

In the meantime, evidence of the bygone boom and bust continues to manifest on the balance sheets of some domestic lenders, as the Financial Times highlighted a material uptick in CRE-related woes the other day. 

Thus, the value of delinquent property loans reached $26 billion in the third quarter per the Federal Deposit Insurance Corp., double that seen in the first three months of 2023, while modified loans – in which a borrower secures relief through forgiven payments, lowered mortgage rate or other such mercy – exceeded $15 billion over the three months through September, up from about $3 billion early last year. According to research outfit BankRegData, the quarterly value of CRE repeat defaulters reached $5.5 billion from July to September, up $1 billion over the three months through June and nearly double that seen in the third quarter of 2023.

The monetary mandarins have taken notice. Domestic banks have “’extended and pretended their impaired commercial real estate mortgages in the post-pandemic period,” wrote researchers at the New York Fed on Oct. 30, adding that a spate of ongoing debt modifications could spur “credit misallocation and a build-up of financial fragility” (those terms could also aptly summarize side-effects stemming from Fed’s post-2008 EZ-money stance - ed). 

Indeed, such continued can kicking has served to steepen the near-term “maturity wall,” with the industry’s share of loans coming due within the next three and five years reaching 27% and 40%, respectively, in the fourth quarter of 2023, up from 16% and 27% in late 2020.  Since the tightening cycle began in early 2022, “credit risk in the CRE space has increased substantially and banks have been somewhat sluggish in assessing their deterioration,” warned the NY Fed, adding that lightly capitalized lenders are particularly exposed to trouble in this area. 

See the Oct. 25 edition of Grant’s Interest Rate Observer for more on the risks and opportunities at hand as banks look to contend with the pileup of dodgy property debts, along with a bearish look at one fast-growing industry darling that arguably holds insufficient reserves against its “troublesome” loan book. 

Fire up those laser eyes: another rip higher in bitcoin headlined today’s trading, with the pre-eminent digital ducat jumping more than 10% to $88,000 and change, up more than 30% from seven days ago. Stocks managed another green finish but only barely as the S&P 500 stayed near unchanged throughout the session, while WTI crude fell to $68 a barrel and gold retreated to $2,621 per ounce. The bond market was closed for Veterans Day, though the iShares 20+ Year Treasury Bond ETF ticked lower by half a percent. 

- Philip Grant

Talk about grading on a curve: Yesterday’s post-election bull stampede was an odd one, as the S&P 500 rallied by more than 2.5% despite fewer than 70% of New York Stock Exchange components finishing in the green and less than 70% of exchange trading volume flowing to rising stocks. 

As SentimenTrader founder Jason Goepfert relays on X, such a bifurcated backdrop appeared on only three prior occasions in modern finance, once each in the aftermath of market wipeouts in 1987 and 2020, and again during the dot-com bubble’s feverish finale in March 2000. 

Meet the new boss, same as the old boss. Donald Trump’s imminent return to the Oval Office marks a new day for financial regulation, likely auguring the end of Securities and Exchange Commission chair Gary Gensler’s time in the big seat. Robinhood chief legal officer and former SEC commissioner Dan Gallagher is a favorite to take over per CNBC’s Bob Pisani. 

Accordingly, Bloomberg relays that newly minted ESG- and cryptocurrency-related rules may soon go by the wayside, with registration and short sale strictures governing hedge funds also potentially on the chopping block. “We are looking to turn the page. . . and undo the damage of the Gensler years,” Bryan Corbett, chief executive of the alternative assets-focused lobbying group Managed Funds Association, told the Financial Times.

Tuesday’s political sea change could likewise carry major implications for the belle of the buyout ball. The Gensler-led SEC continues to review Apollo Global Management’s and State Street’s mid-September proposal for a private credit ETF (current rules cap the share of illiquid net assets at 15%) with a thumbs-up sure to spur an array of competing contraptions. 

Notably, the pair’s formal application left some observers cold, offering sparse information on investor redemption procedures and other salient matters. “The lack of details in the filing is pretty staggering,” Duke University law professor Elisabeth de Fontenay told Bloomberg last Friday. “It feels like a cut-and-paste job from your usual ETF filing.” 

Indeed, agency upheaval further muddies the waters for those ETF hopefuls, with one prominent industry player voicing an opposing set of objections. Blue Owl Capital co-chief executive Marc Lipschultz extolled the virtues of direct lending’s transact-by-appointment characteristics in a Halloween Bloomberg Television interview, adding that “private markets are private for a reason. . . I don’t know what problem we’re trying to solve in creating a bunch of trading in a non-traded underlying asset. It’s not our mission to seek liquidity in the asset.” 

While the philosophical and practical debate over such closely held loan-to-ETF alchemy continues apace, one institutional mainstay offers an eye-catching solution. Witness an Oct. 23 S&P Global analysis titled “tokenized private credit: a new digital frontier for real world assets.”  

The rating agency imagines an array of advantages from shifting private loans to the blockchain, with such a migration “potentially facilitating enhanced liquidity, efficiency and transparency.”  On the other hand, S&P notes that some technology-forward firms have abandoned tokenization efforts “due to concerns that the market environment and/or the blockchain technology are not quite ready.”  A constrictive regulatory backdrop and laborious conversion process similarly bedeviled the early movers, as did “insufficient” investor demand for decentralized, public ledger-domiciled debt instruments. 

In any event, technology’s ceaseless advance contrasts with the timeless idiosyncrasies of lending and borrowing. S&P recounted one ill-fated emerging markets-focused initiative on the DeFi platform Goldfinch – in which investors took losses on their digital debt portfolio – concluding thus: “Even when tokenized, the quality of the credit matters.”

This one goes to 11: a 25-basis point Fed rate cut helped turn the bull market party up another dial, with the S&P 500 tacking on a further 0.8% to reach new highs with a near 27% year-to-date return. Treasurys managed to rebound from their post-election beatdown, with the long bond dropping eight basis points to erase half of yesterday’s lurch higher. WTI crude toggled above $72 a barrel, gold bounced back to $2,708 per ounce, bitcoin continued its lunar-bound journey at $76,200 and the VIX retrenched to near 15 from 22 Monday afternoon.

- Philip Grant

From Reuters:

Europe’s investment needs for the green and digital transition, along with defense and research, should use public funds primarily to attract and boost private investment, E.U. finance ministers said on Monday. . .

Last month, former European Central Bank president Mario Draghi estimated the EU needs up to 800 billion euros ($870.80 billion) in annual investments - up to 5% of its GDP - to keep pace with global rivals. E.U. finance ministers said they cannot meet this sum alone, highlighting the need for strong capital markets to draw private funds as public finances have been depleted by multiple crises.

The limited public funds were "best used as a catalyst for leveraging private capital in areas with positive spillovers," the statement said.

Leveraging in this case means using a relatively small amount of E.U. funds to cover the riskiest parts of a project, thereby drawing private investors to the safer, more profitable segments.

What Jensen Huang wants, Jensen Huang gets.  South Korean semiconductor vendor SK Hynix will aim to bring its next-generation high-bandwidth memory (HBM) chips to market six months earlier than previously planned. A request from the Nvidia boss spurred Hynix’s more ambitious production timeline, SK Group chair Chey-Tae-won told the press Monday. 

The prospect of an accelerated influx of HBM – a crucial cog in the devices powering the artificial intelligence boom – is music to Mr. Market’s ears, as the industry looks to satisfy ravenous global appetite for server chips. Hynix shares advanced 6.5% in Korean trading Monday, bringing year-to-date gains to 37%. Conglomerate SK Square Co., which owns a 20.1% stake in Hynix, has itself delivered a 26% dollar-denominated return since a bullish analysis in the March 15 edition of Grant’s Interest Rate Observer (“AI on the cheap”), besting the S&P 500’s 12% return over that period. 

Further underscoring today’s yawning supply and demand imbalance (not to mention the mushrooming growth of private lending against an ebullient credit backdrop), the Financial Times reports that the global AI gold rush has spurred an adjacent boom in asset-backed financing. The likes of Blackstone, Pimco, Carlyle and BlackRock have lent more than $11 billion to so-called neocloud firms such as CoreWeave and Lambda Labs, with high-performance Nvidia chips serving as collateral. 

Circular arrangements figure prominently in those deals, the pink paper points out, with proceeds frequently earmarked for further chip acquisitions.  Nvidia itself owns stakes in the neocloud firms, which likewise represent some of the newest Dow Jones Industrial Average component firm’s largest customers. 

CoreWeave, the largest entrant in the space, began its chip acquisition spree in 2017 to help mine cryptocurrency before executing a well-timed business model shift, “securing GPU [graphics processor unit] capacity from Nvidia at exactly the moment when ChatGPT and AI hit its Cambrian explosion,” as one industry executive put it to the FT. The firm sports an $18 billion valuation, up from $2 billion in spring 2023, and hopes to complete an IPO in the first half of next year at a further premium to today’s price tag. 

A June 2023 cloud computing infrastructure deal with Microsoft, which will generate upwards of $1 billion in annual revenue for the next several years, helped bring those Wall Street leading lights to the table. “The Microsoft deal was critical,” commented one CoreWeave lender. “They won the contract, then said we need $2 billion of GPUs, which we were able to finance.”  That success story has duly brought other lenders into the fold, helping meet the capital-intensive neocloud industry’s need for ready cash.

However, questions over the durability of the AI-related spending spree, along with the ongoing value of those pledged assets as newer iterations of chips come down the pike, loom large for some observers. “Chips are a depreciating – not appreciating – asset,” Orso Partners portfolio manager Nate Koppikar points out.

To that end, Meta Platforms CFO Susan Li noted on a post-earnings analyst call last Wednesday that the Facebook parent has opted to maintain a five-year depreciation schedule for the bulk of its servers and networking equipment, bucking a shift from some big tech peers toward a six-year useful life for that hardware. In explaining that move, Li cited “the ongoing performance gains from new generations of GPU-based servers,” in turn illustrating obsolescence risks around the rapidly constructed AI lending artifice. 

Cruise control was largely in force ahead of the elections-cum-FOMC doubleheader beginning tomorrow, as stocks edged slightly lower on the S&P 500 and Nasdaq 100 while Treasurys recouped the bulk of Friday’s losses to leave 2- and 30-year yields at 4.17% and 4.5%, respectively. WTI crude climbed back towards $72 a barrel, gold finished little changed at $2,737 per ounce, bitcoin slipped to $67,100 and the VIX settled just below 22.

- Philip Grant

We all need someone to lien on. From the Australian Financial Review:

A Melbourne private credit firm being pursued by the corporate regulator for allegedly ripping off its customers sent enforcers to one of its borrowers’ homes in an attempt to settle a debt. . .

The director of a building company that borrowed money from Oak Capital, Peter Aquino, told the Financial Review that the firm had sent men who looked like “bikies” to his house last year while his partner and young children were home after he missed a payment.

Mr. Aquino’s Construct Homes, which has since collapsed, borrowed the funds in 2022 to finance property developments. He said Oak Capital imposed an 18% interest rate on his loan. 

No consolidated tape, no problem: Nasdaq Private Market LLC is set to debut an in-house pricing mechanism for unlisted firms, Bloomberg reports today. NPM has been marketing Tape D across Wall Street over the past few weeks, trumpeting the product’s three-decade database, which pulls data from historical trades as well as nearly two million deal terms gleaned from regulatory filings. 

“All of that information [investors] would pay an investment banker for, they can get from our data products,” NPM CEO Tom Callahan told Bloomberg. “Everything we’re showing here is public data, there’s no private information. All we’re doing is aggregating what’s out there.”  

There is certainly plenty to aggregate these days. The global tally of unicorns, or privately held firms valued at $1 billion and above, stood at 1,248 as of May according to CB Insights, up from fewer than 500 on the eve of the pandemic.  Total U.S. public company listings, meanwhile, have shrunk below 4,000 from more than 7,000 in the late 1990s. “What do the capital markets look like a decade from now?” Callahan mused. “We’re going to have far fewer public companies and we’re going to have more unicorns.”

Blurring lines between public and private assets color strikingly divergent conditions for the venture capital industry in the aftermath of the zero-interest rate era and Covid era bubble. Thus, North American deal volume tracked at a $170 billion annualized pace over the six months through September according to CrunchBase. That’s barely half the $320 billion in activity logged across 2021, even as the Nasdaq 100’s near 40% return over the past 52 weeks comfortably tops the 28% generated three years ago.  Domestic IPO proceeds for firms valued at $50 million and above foot to a modest $28.5 billion in the year-to-date per Renaissance Capital, compared to $142 billion in full-year 2021. 

Yet those pining for a return to the VC salad days need only train their eyes to the artificial intelligence realm, where the otherwise bygone boom carries on in full swing. Thus, Elon Musk’s xAI is in negotiations with deep pocketed investors in Qatar and Saudi Arabia for new funding at a tidy $45 billion valuation, the Financial Times relayed Thursday, up from $24 billion a mere four months ago to potentially leave the 17-month-old company valued at more than half of S&P 500 components.  

The Wall Street Journal, which pegs the prospective pre-money price tag at $40 billion, likewise reports that premium subscriptions on the X social media platform represented xAI’s only known revenue source prior to last week, when the company rolled out an application development tool for its Grok chatbot.

As one Musk entity rides the AI wave to lucrative effect, another contends with less-welcome forces of financial gravity. Fidelity’s Blue Chip Growth Fund marked its position in the company formerly known as Twitter at $4.19 million as of its October 30 monthly holdings report, down from $5.5 million in July and a 79% discount to its original $19.66 million outlay two years ago.

You win some, you lose some. 

Soggy results from Meta and Microsoft spurred a big tech-led beatdown in stocks with the S&P 500 losing 1.9% and the Nasdaq 100 absorbing a 2.5% decline, though Treasurys saw placid price moves ahead of tomorrow’s payrolls print with the two-year yield edging higher to 4.16% from 4.15% and the long bond ticking lower by two basis points at 4.47%. WTI crude jumped again to near $71 a barrel, gold lost 1.5% at $2,748 per ounce, bitcoin retreated to just over $70,000 and the VIX rose nearly three points to 23 and change.   

- Philip Grant

An outbreak of optimism has taken hold across the land, as the Conference Board’s monthly gauge of consumer sentiment painted a pretty picture for the economy and asset prices alike.

The proportion of consumers anticipating a recession over the next 12 months dropped to its lowest level since the question was first asked in July 2022, as did the percentage of consumers believing the economy was already in recession. Consumers’ assessments of their Family’s Current Financial Situation were unchanged, but optimism for the next six months reached a series high. 

Consumers became more upbeat about the stock market: 51.4% of consumers expected stock prices to increase over the year ahead, the highest reading since the question was first asked in 1987. Only 23.6% expected stock prices to decline. 

Notably, the public has long articulated a bearish bent. The share of respondents predicting higher equity prices one year out never topped 50% prior to this past July, while averaging only 36% over the past 37 years.  As the S&P 500 slumped towards its post-Covid low in fall 2022, that figure languished near 27%. 

It’s a big tech battle royale: Silicon Valley’s leading lights are increasingly encroaching on one another’s turf, striking a discordant tone for the bull market virtuosos. FactSet-compiled analyst estimates point to 18.1% annual third quarter earnings growth for the so-called magnificent seven, compared to 0.1% for the rest of the S&P 500. 

Meta Platforms is cooking up its own search engine, the Information reported Monday, as the Facebook parent looks to establish an in-house news and information pipeline for its artificial intelligence division.  The initiative marks a pivot from using Google Search and Microsoft Bing as primary inputs for the chatbot, demonstrating “the lengths to which Meta CEO Mark Zuckerberg is going to reduce. . . the need for other major technology providers.”  Meta’s ill-fated experience with Apple, in which the latter tweaked its iOS operating system three years ago in a move that cost Meta $10 billion in 2022 advertising revenue per then-CFO David Wehner, colors that push for independent content generation. 

Meanwhile, Meta’s spurned search engine peers are now at each other’s throats, as Microsoft deputy general counsel Rima Alaily penned a Monday blog post lamenting Google-led “shadow campaigns” in Europe designed to “discredit Microsoft with competition authorities and policymakers and mislead the public.”  

Those purported lobbying efforts, stemming from ferocious competition among cloud computing giants, follow Google’s September antitrust complaint to the European Union alleging that Microsoft was improperly hindering customers from shifting their business from its Azure unit via strict licensing terms. “We and many others believe that Microsoft’s anti-competitive practices lock in customers and create negative downstream effect [on] cyber security, innovation and choice,” a Google spokesperson told the Financial Times.

Fresh signs of intra-big tech rancor aren’t confined to the superb septet. Bloomberg relays today that Canadian e-commerce player Shopify is taking aim at Salesforce, successfully poaching scores of corporate clients including toy maker Mattel and mattress concern Casper and urging others to “join the mass migration.” 

Shopify COO Kaz Nejatian likewise took a swipe at Mark Benioff’s firm in a Tuesday Bloomberg interview, declaring that “the reason most enterprise software is so expensive is because it takes so many steak dinners to put it in your hand,” making light of Salesforce’s “penchant for wining and dining potential clients.” Shopify’s price conscious sales pitch is clearly striking a chord in some boardrooms, as clothing retailer Espirit pegs three-year cost savings of up to 50% for those opting to switch service providers. 

For its part, Salesforce trumpeted its superior customer service and IT capabilities, with senior vice president of product management Luke Ball telling Bloomberg that “we’re still the incumbent reigning champion in the [commerce and marketing] space other companies are trying to break into.” 

While those tech mainstays engage in overt corporate combat, great expectations prevail across both Wall Street and the investment public. Sell side analysts tracked by Bloomberg pencil in $2.37 billion in net income for Salesforce over the three months through October, up 79% from the same period last year, with Shopify projected to grow its bottom line 67% to $348 million.  Shares of the pair change hands at 29 and 58 times their respective estimated calendar 2025 earnings per share. 

Treasurys managed a strong intraday rebound after another round of early weakness, leaving 2- and 30-year yields each lower by a basis point at 4.11% and 4.52%, respectively, while stocks floated higher to the tune of 0.2% on the S&P 500 and 0.8% for the Nasdaq 100.  WTI crude digested its recent losses at $67 a barrel, gold jumped to $2,773 an ounce, bitcoin roared towards fresh highs above $72,000 and the VIX remained just above 19. 

- Philip Grant

All the world’s a canvas. From the New York Post:

The art world’s gone bananas.

Five years after its creation, Maurizio Cattelan’s “Comedian” — consisting of a banana duct-taped to a wall — could fetch an eye-popping $1.5 million when it is auctioned off by Sotheby’s in New York City next month. However, what you actually get for $1.5 million is not the original banana.

The art lover who makes the winning bid on “Comedian” can’t expect Cattelan to come and install the fruity work in their home. Instead, they’ll receive a certificate of authenticity, giving them the right to show the work and detailed instructions about how to display it.

Plus, they’ll get a new banana and a roll of duct tape.

Sounds like one of them good problems: Big tech’s bull stampede is spurring high-class headaches for some investors, as the Financial Times reports that funds managed by the likes of Fidelity and T. Rowe price are “are being forced to offload shares” in Silicon Valley mainstays to stay on the right side of the taxman. 

Internal Revenue Service rules bar any “regulated investment company” – i.e., most mutual funds and ETFs – from allocating more than 50% of its assets to large companies, defined as positions weighted at more than 5%. With the cadre of Nvidia, Apple, Meta, Microsoft and Amazon accounting for 46% of the S&P 500’s year-to-date gains, that quintet of big shots collectively command a near 27% share of the market cap-weighted S&P 500. Fidelity’s Blue Chip Growth Fund and BlackRock’s Long-Term U.S. Equity ETF each allocated 52% to such large holdings as of Sept. 30 according to Morningstar, while T. Rowe Price’s Blue Chip Growth Fund has been offsides in six of the past nine months. 

“It’s a very difficult situation for active managers,” Jim Tierney, CIO for concentrated U.S. growth at AllianceBernstein, told the pink paper. “Normally, having a position at 6% or 7%. . . is as far as most portfolio managers would want to push it for a business you have real conviction in. The fact that now would be a neutral weight or even underweight, it’s an unprecedented situation.”

It’s important to note that a brisk fundamental tailwind powers that mega-cap levitation: the so-called magnificent seven will generate 18.1% year-over-year earnings growth in the third quarter if FactSet compiled estimates are on the beam, compared to 0.1% for the other 493 components of the S&P 500.

Then again, unambiguously bubbleicious conditions are on display elsewhere. Shares in MicroStrategy, Inc. (MSTR), have more than doubled in the past seven weeks to bring year-to-date gains to a cool 250%. The enterprise software firm-cum-bitcoin trading sardine, which will post minus $242 million in adjusted net income in 2024 if sell side estimates prove accurate, sports a $48 billion market capitalization, nearly three times the $17 billion market value of its bitcoin holdings. At the start of 2024, that ratio stood near parity.

Fittingly, MicroStrategy’s enriching journey spurs one tech leader into the sincerest form of flattery.  Microsoft announced it will hold a December shareholder vote on allocating some of its corporate treasure to the digital ducats, making the case in telling fashion via its Thursday proxy statement:

As of March 31, 2024, Microsoft Corporation has $484 billion in total assets, the plurality of which are U.S. government securities and corporate bonds that barely outpace inflation (if assuming that the CPI is accurate, which it isn’t, so bond yields are actually lower than the true inflation rate).

Therefore, in inflationary times like these, corporations should – and perhaps have a fiduciary duty to – consider diversifying their balance sheets with assets that appreciate more than bonds, even if those assets are more volatile short-term. . . 

MicroStrategy – which, like Microsoft, is a technology company, but unlike Microsoft holds Bitcoin on its balance sheet – has had its stock outperform Microsoft stock this year by 313% despite doing only a fraction of the business that Microsoft has. And they’re not alone. The institutional and corporate adoption of Bitcoin is becoming more commonplace. Microsoft’s second largest shareholder, BlackRock, offers its clients a Bitcoin ETF.

That missive duly caught the attention of MSTR boss Michael Saylor, who took to X to address the Microsoft CEO: “Hey @SatyaNadella, if you want to make the next trillion dollars for $MSFT shareholders, call me.”

An opening gap in stocks was met with supply, as the S&P 500 floated back down to unchanged, snapping its six-week winning streak with a near 1% loss over the past five days, while the Nasdaq 100 managed a 0.6% advance.  Treasury yields finished higher by four basis points nearly across the board, with the two-year note finishing at 4.11% and the long bond at 4.51%, while WTI crude rebounded towards $72 and gold edged higher to $2,745.  Bitcoin ticked lower at $66,800 and the VIX climbed back above 20. 

- Philip Grant