Here’s one for the PR annals, via TechCrunch:

CrowdStrike, the cybersecurity firm that crashed millions of computers with a botched update all over the world last week, is offering its partners a $10 Uber Eats gift card as an apology, according to several people who say they received the gift card, as well as a source who also received one.

On Tuesday, a source told TechCrunch that they received an email from CrowdStrike offering them the gift card because the company recognizes “the additional work that the July 19 incident has caused.”  “And for that, we send our heartfelt thanks and apologies for the inconvenience,” the email read. . .  “to express our gratitude, your next cup of coffee or late night snack is on us!” . . .

On Wednesday, some of the people who posted about the gift card said that when they went to redeem the offer, they got an error message saying the voucher had been canceled. When TechCrunch checked the voucher, the Uber Eats page provided an error message that said the gift card “has been canceled by the issuing party and is no longer valid.”

CrowdStrike did not immediately respond to a request for comment. 

How the turntables have turned: as the Federal Reserve and Bank of Japan each prepare to render their respective rate decisions next week, recent events suggest a shift in the zeitgeist. Thus, former New York Fed president William Dudley took to the Bloomberg Opinion page Wednesday to lobby his former colleagues for a July cut, citing a weakening labor market along with ebbing inflationary pressures and moderating wage growth.  

“I’ve long been in the ‘higher for longer’ camp. . . [but] the facts have changed, so I’ve changed my mind,” Dudley writes. Market-implied odds of such an outcome remain less than 10%, though interest rate futures now price 28 basis point reduction to the 5.25% to 5.5% funds rate by September, slightly more than the typical 25 basis point increment and up from just under 20 basis points of projected easing earlier this month. 

Monetary crosswinds are swirling in the Far East. Futures assess the likelihood of a July BoJ hike from the current 0% to 0.1% range at 72%, up from 51% three weeks ago. Similarly, more than 90% of economists surveyed by Bloomberg “see the risk” that the BoJ will opt to pull the trigger, turning the page on its longstanding negative, now, zero-rates policy in the face of mounting price pressures.  

To that end, core CPI grew a 2.6% annual clip in June, remaining north of the bank’s self-assigned 2% goal for the 27th consecutive month. On Friday, Tokyo’s Cabinet Office bumped its forecasted inflation rate over the fiscal year ending March 2025 to 2.8% from 2.5%.

 “We expect underlying inflation to remain around 2% until early 2025, which we think will prompt the BoJ to hike rates both this month and in October,” writes Marcel Thielant, head of Asia-Pacific at Capital Economics, adding that pronounced currency weakness is placing upward pressure on the price level, as evidenced by a recent pickup in the “other industrial products” CPI component.

The prospect of simultaneous Fed and BoJ policy pivots duly resonates in the currency market, as the yen has snapped higher by 5% over the past three weeks to 154 per dollar after marking a near 40-year low against the buck. Hefty outlays from the Ministry of Finance in service of propping up the yen – estimated by Reuters at $38 billion in July alone – have added oomph to the present course correction. 

 “This week has seen more pronounced unwinding of carry trades, underscoring the concentration of short JPY positioning that is now facing intense pressure from Ministry of Finance intervention to support the [yen],” Richard Franulovich, head of FX strategy at Westpac Banking Corp., commented to Bloomberg this morning. “Local politicians have become more vocal about the economic dangers from unfettered JPY weakness,” he added.

Indeed, the yen’s ferocious post-Covid selloff, which culminated in a 162:1 exchange rate on July 3 from 103:1 less than four years ago, has likewise stung local consumers and retailers alike. Witness the near 70% rise in import prices since the start of 2021, as well as 26 months and counting of declining real wages per government compiled data. Earlier today, a Labor Ministry-led panel bumped the national minimum wage by some 5% to ¥1,504 ($6.85) per hour, the largest annual increase on record. 

“Importing inflation through a currency is not the most sustainable form of economic stimulus,” Grant’s Interest Rate Observer noted last month. “In fact, it resembles lighter fluid.”  Might a lasting regime shift for the safe-haven currency be at hand?  See the analysis “Limits to debasement” in the June 21 issue of GIRO for more on this crucial topic. 

Stocks were pummeled to the tune of a 2.3% loss on the S&P 500, snapping the broad index’s 356 session streak without a 2% drop which stretched to December 2022, while the tech-heavy Nasdaq 100 fell 3.6% with the Roundhill Magnificent Seven ETF down 6.1%.  

Another round of pronounced curve steepening in Treasurys left the two-year yield at 4.37% and the long bond at 4.54%, with that 17-basis point differential marking its largest in over two years.  WTI crude steadied at $77.5 per barrel, gold gave back early gains to finish at $2,398 an ounce, bitcoin finished little changed at $65,800 and the VIX jumped three points and change to 18, approaching its year-to-date highs logged in April. 

- Philip Grant

Enjoy the show!  From Bloomberg:

AMC Entertainment Holdings Inc. has reached an agreement with creditors that calls for restructuring its debt and moving U.S. theaters into a different unit of the company, according to people with knowledge of the plans. 

The asset shift would move the theaters’ value out of the reach of some creditors and allow the company to exchange existing debt for new obligations backed by those locations, said the people, who asked not to be named discussing private negotiations.

Network effects can cut both ways. The fallout from the bricking of an estimated 8.5 million Microsoft Windows devices following CrowdStrike’s defective Friday software update continues to take shape.

The cybersecurity firm announced Sunday that “a significant number” of the darkened PCs “are back online and operational,” though such progress report may represent cold comfort for countless would-be travelers. Delta Air Lines cancelled more than 800 scheduled flights Monday per data from FlightAware, equivalent to 21% of its domestic slate. That’s on top of the 3,500-plus abandoned flights, or roughly one-third of its planned total, over the previous three days. 

The airline “has a significant number of applications that use [Microsoft Windows],” Delta CEO Ed Bastian explained, with flight crew-tracking software remaining “unable to effectively process the unprecedented number of changes triggered by the system shutdown.”  The airline promised to extend complementary itinerary changes for stranded customers and arrange meal vouchers and hotel accommodations “where available.”

Similarly cascading chaos remains on display in the medical realm. Britain’s Wilmslow Health Centre took to X this morning to warn that, despite “some return of functionality to our computer systems, we anticipate that there will be ongoing disruption to patient care for weeks to come.” Carter Groome, CEO of risk management firm First Health Advisory, likewise told the Washington Post that “just about every major health system in the world is using some level of Microsoft product, and they’re getting the blue screen of death. I’ve not seen anything of this magnitude and impact in my [30 year] career.”

Friday’s snafu likewise casts a long shadow on Wall Street, as CrowdStrike’s heretofore-sparkling sell-side reputation (45 of the 51 analysts following the firm said “buy” as of Thursday afternoon, with only a pair deeming CRWD a “sell”) comes under review.  “We believe there will be financial consequences from this issue,” warned BMO Capital Markets. “As one example, we think that customers will be seeking relief and compensation from damages.”  

Offering a concurring opinion, peers at Jefferies wrote that, “while we don’t know how CrowdStrike will appease its customers who dealt with outages and potential lost revenue. . . we assume it will require credits, discounting or other free products.”  Indeed, “there is a risk of large potential liability claims from customers that were affected by the outages,” commented Raj Joshi, senior vice president at Moody’s. 

Seasonal factors likewise lend urgency to today’s commercial predicament for fast-growing CrowdStrike, which has expanded its top line by upwards of 30% year-over-year in each of its 20 quarters as a public company. With quarter-end looming on July 31, Bloomberg’s Mandeep Singh predicts that “the incident [will] hurt. . . order closures” for the nearly completed period, while introducing “major reputational damage to its category-leading position in enterprise security.”  A sky-scraping valuation, with shares priced at nearly 13 times projected revenues and 54 earnings per share over the 12 months through January 2026 following a 23%, two-session pullback, likewise complicates matters for potential dip-buyers.

Then again, a cool 681% share-price levitation following the firm’s June 11 Nasdaq IPO goes a long way to engendering a forgiving stance. Analysts at Deutsche Bank put it this way (hat tip to X user @Random Muppet): "Our initial reaction on Friday was seeing a 10% plus pullback in a high-quality stock as a buying opportunity. However, we were ironically unable to publish our original research note due to the outage itself."

A sharp rebound in stocks served to turn the page on last week’s selloff, as the S&P 500 and Nasdaq 100 advanced by 1% and 1.5%, respectively, though Treasurys reversed early strength to leave the long bond at 4.48% from 4.45% Monday, while the two-year note ticked higher by one basis point to 4.5%.  WTI crude edged lower again to $78 a barrel, gold remained just below $2,400 an ounce, bitcoin stayed at $68,000 and the VIX tumbled nearly two points to settle south of 15. 

- Philip Grant

Here’s a Bloomberg headline from this afternoon, referencing remarks from Chicago Fed president Austan Goolsbee: 

Goolsbee Says Fed Risks ‘Golden Path’ If It Doesn’t Cut Soon

Of course, that’s not the first time that Goolsbee has busted out the catchphrase, which describes the happy convergence of disinflation, economic growth and low unemployment. A sample of recent instances:

Chicago Fed president still sees inflation on ‘golden path’ to 2%, but housing costs need to come down before rates cut (Chicago Tribune, April 4) 

Fed’s Goolsbee says ‘golden path’ of a huge drop in inflation without a recession is still possible (CNBC, Nov. 7, 2023) 

Fed's Goolsbee says he hopes 'golden path' is within reach (Reuters, Sept. 7, 2023) 

Will that Windy City-concocted slogan catch on with fellow monetary mandarins, perhaps in lieu of the ubiquitous “soft landing?”  Time will tell. 

Sacramento doubles down on the buyout barons: It’s a good news/bad news proposition for municipal staffers in the Golden State, as the California Public Employees Retirement System (Calpers) posted a 9.3% return over the 12 months through June, pushing assets in the largest U.S. pension above $500 billion and comfortably outpacing the fund’s 6.8% annual target. 

On the one hand, that figure serves to push rolling five-year annual returns to 6.6%, up from 6.1% at this time a year ago, while future obligations are now 75% funded, up three percentage points from mid-2023.  On the other hand, Calpers continues to lag the average 80.6% funding ratio for state and local pensions as of June 30, the Equable Institute finds, while that cohort collectively managed to improve funding levels by nearly five points from the 75.8% seen a year ago.

By way of remedy, Calpers revealed plans earlier this year to enhance the targeted private equity allocation to 17% of assets from 13%, further bumping its bogey from 8% as of late 2021.

Though noteworthy in its aggressive nature, Calpers’ strategy pivot reflects the industry at large. A collection of 54 prominent public pensions analyzed by Center for Retirement Research at Boston College committed an average 13% of assets to p.e. as of fiscal 2023, up from 7% in 2008. 

Might still-dicey demand for initial public offerings, in tandem with the sharp post-Covid rise in borrowing costs, render that broad-based migration problematical?  

Private equity exits in the U.S. registered at $141.4 billion over the first six months of 2024 per data from Cambridge Associates, laboring to match 2023’s near $300 billion full-year pace, which marked the slowest showing since 2012. Cash distributions to limited partners likewise registered at 11.2% of fund net asset values in calendar 2023 according to Raymond James, the weakest figure since 2008 and less than half of the 25% median logged over the past quarter century (Grant’s Interest Rate Observer, March 29). 

Evidence of a lurch higher in portfolio company problem-children accompanies that slowdown. The tally of distressed debt among holdings of the 50 largest p.e. firms reached $42.7 billion, Bloomberg-compiled data show, up 18% from the middle of March. To contend with the post-2021 updraft in borrowing costs, p.e. players increasingly opt to shift troubled assets to new entities that they themselves manage, with the number of so-called continuation funds seeing a “considerable uptick” over the three months through June, according to Jeff Hammer, global co-head of secondaries for private markets at Manulife Investment Management. 

Loose legal documentation for buyouts during the freewheeling, bygone ZIRP-era credit cycle likewise serves to obscure the true state of play. “You don’t know if there are defaults because there are no covenants, right?” Zia Uddin, president and co-portfolio manager at private credit firm Monroe Capital, rhetorically asks Bloomberg. “So, you see a lot of amend and extend that may be delaying decisions for lenders.”  

The fact that 99% of secondary market transactions for p.e. holdings last year took place at or below the net asset value according to Jefferies, up from a 73% share in 2021, may represent an ill omen for cash-hungry LPs.

On the bright side for public pension Johnny-come-lately’s, any prospective misery from an extended industry downturn would certainly be shared across the most hallowed halls of academia.  

Thus, endowments for the eight colleges constituting the Ivy League, along with Stanford University and the Massachusetts Institute of Technology, allotted an eye-watering 36.7% of assets to p.e. on average during fiscal 2023, a newly released report from Markov Processes International finds, while the ratio of unfunded commitments to liquid portfolio assets at Brown University, Harvard University and Princeton University stood at 78%, 60% and 52%, respectively. 

With distributions on the wane and the timing and scope for future interest rate relief remaining an open question, “there looks to be more artful navigating ahead,” Markov concludes. 

It was a red-letter day as stocks followed through on yesterday’s steep declines with the S&P 500, Nasdaq 100 and Russell 2,000 falling by 0.8%, 0.5% and 1.9%, respectively, though each index managed to finish off their worst levels of the session, while Treasury yields rose four to five basis points across the curve to leave the two-year note at 4.46% and the long bond at 4.41%.  WTI crude settled south of $81 a barrel, gold retreated to $2,445 per ounce and bitcoin slipped to $63,600. The VIX leapt nearly 1.5 points to approach 16, its most elevated reading since April. 

- Philip Grant

Here’s Fed chair Jerome Powell, laying the groundwork for easier money ahead in Monday remarks at the Economic Club of Washington:

Our test has been for quite some time that we want to have greater confidence that inflation was moving sustainably down towards our 2% target, and what increases confidence in that is more good inflation data. And lately, we have been getting some of that. . .

If you wait until inflation gets all the way down to 2%, you’ve probably waited too long, because the tightening that you’re doing, or the level of tightness that you have, is still having effects which will probably drive inflation below 2%.

The Federal Trade Commission turned the screws on Big Restaurant Friday, unveiling new actions designed to thwart “unfair and deceptive” practices.  Among the items on the regulator’s menu: a crackdown on undisclosed “junk fees” for technology, employee training, marketing and property improvements levied outside of franchise disclosure documents, as well as the use of non-disparagement clauses designed to dissuade complaints over alleged mistreatment.

“Franchising is a chance for Americans to build a business, but the FTC has heard concerns about how unfair franchisor practices, like a failure to fully disclose fees upfront, go unreported thanks to fear of retaliation,” stated FTC chair Lina Khan. “Today, the Commission is making clear that contractual terms prohibiting franchisees from reporting potential law violations to the government are unfair, unenforceable and illegal.”

Enhanced government scrutiny of franchisor vs. franchisee disputes arrives against a rough-and-tumble operating backdrop, as the amply levered dining industry contends with a downshifting consumer and persistent cost pressures. Citing data from Bloomberg, analysts at Bank of America relay that median restaurant sales growth slipped to a 2.2% annual clip in June from 5% in May and more than 6% at the end of last year, while nationwide foot traffic ebbed 3.3% over the first six months of 2024 according to Black Box Intelligence. 

Last week, seafood chain Kura Sushi ratcheted down its full fiscal-year sales forecast to $236 million from $245 million using the midpoint of provided ranges, with management citing a “sudden and unexpected” business slowdown beginning three months ago. Kura, which posted a 28% year-over-year revenue gain over the three months through May, likewise warned that California’s FAST Act, which established a statewide $20 hourly minimum wage for fast food employees, has spurred “a general perception that restaurants as a category have become expensive, introducing industry-wide pressures regardless of a given restaurant's relative value.”

Such sticker shock likewise bedevils casual dining mainstay Darden Restaurants, as analysts at Jefferies downgraded the Olive Garden parent to “underperform” Thursday, introducing a $124 per share price target, 13% south of current levels and the lowest bogey among 31 firms covering the name.  Darden’s “disciplined approach” to discounting could prove a competitive impediment, as an industrywide uptick in promotions threatens the firm’s market share. “In the context of lingering lower-end [consumer] weakness, we believe some recalibration on the value front may be needed,” the investment bank contends.

Meanwhile, planet Earth’s pre-eminent fast-food chain faces an “underwhelming” response to its own high-profile discounting initiative, Gordon Haskett finds, as the McDonald’s $5 meal deal – featuring a McDouble or McChicken sandwich, small order of fries, small soda and four-piece chicken nuggets – which debuted on June 25, was met with a mere 1% annual increase in foot traffic over the 11 days through July 5. The independent research firm added that it expects the Golden Arches to roll out “increasingly aggressive” promotions in the coming quarters.  

Peers at Truist Securities likewise write that the meal deal (which yields profit margins of 1% to 5% rather than the typical 5% to 10% range per estimates from fast-food industry analyst Mark Kalinowski ) “does not appear to have reignited momentum” for the MCD top line, adding that last month ended on a “low note” for Restaurant Brands International-owned peer Burger King. 

Where's the beef? See the analysis “With a side of debt” in the current edition of Grant’s Interest Rate Observer dated July 5 for more on the inherent tension between so-called asset light restaurant owners and their often-put-upon franchisees, as well as broader industry tribulations in the wake of the pronounced post-Covid inflation. 

Stocks assumed their usual green hue, with the S&P 500 and Nasdaq 100 each settling higher by about 0.3% after giving back stronger early gains, while the small-caps remained white hot with the Russell 2,000 logging a near 2% advance to bring its cumulative three gains to 6.8%.  Treasurys saw some bear steepening as the long bond rose seven basis points to 4.46% and two-year yields ticking to 4.44% from 4.45% Friday, while WTI crude edged below $82 a barrel. Gold pushed above $2,420 per ounce to draw within about 1% of its prior peak, bitcoin rebounded to $63,700 and the VIX toggled above 13. 

- Philip Grant

I’d buy that for a dollar! Incorrigible Tesla boss Elon Musk took to his X social media platform to trumpet the electric vehicle’s full self-driving technology, responding to a video demonstration of the latest iteration, known as FSD version 12.4.3, with the following: “Buying anything except a Tesla will seem like buying a horse & buggy.”

On that score, time will tell.  As the Washington Post documents today, the automaker faces parallel investigations from the U.S. Department of Justice, California’s Department of Motor Vehicles and the Securities and Exchange Commission regarding the veracity of claims to customers and investors regarding FSD and Autopilot, Tesla’s software suite powering the nascent technology, which retails for $8,000. 

“Contrary to Tesla’s repeated promises that it would have a fully self-driving car within months or a year, Tesla has never been merely close to achieving that goal,” allege litigants in a civil complaint logged with the U.S. District Court for the Northern District of California. 

Meanwhile, Bloomberg reports that Musk et al. are pushing back a showcase of the firm’s so-called Robotaxi to October from Aug. 8, marking the latest setback for the long-promised driverless car service. As the Post notes, Musk declared in 2019 that Tesla would deploy one million Robotaxis by the end of 2020, utilizing existing but idle vehicles. “The fleet wakes up with an over-the-air update,” he explained prior to the pandemic. 

Or, as the case may be, hits the snooze button. 

Call it Schrödinger’s coin: The crypto category contends with simultaneous bull- and bear-market conditions, as digital assets sport a combined valuation north of $2.1 trillion by Coinmarketcap.com’s count, up nearly 100% year-over-year, though that figure is likewise down 20% from early March. Similarly, bitcoin enjoys a near 90% gain from mid-July 2023, while nursing a 17% drawdown over the past five weeks. 

Indeed, recent developments highlight the concurrent states of prosperity and gloom. This morning, industry mainstay MicroStrategy announced a 10:1 stock split effective in early August, as the software provider-cum-bitcoin speculation vehicle looks to render its shares “more accessible to investors and employees.”  Following a 238%, one-year rally, loss-making MicroStrategy sports a $24 billion market cap, nearly double the $13.1 billion valuation assigned to its cache of 226,331 BTC.

Yet as one digital avatar basks in Mr. Market’s adulation, another throws its backers for a loop. Bloomberg reports today that investors owning some 70% of Skybridge Capital’s crypto-focused hedge fund asked for their money back in the latest redemption window earlier this year, with the fund, which is structured to return investor cash via tender offers, buying back only 7% of shares outstanding during that period.  

That development marks a curious contrast with the $1.6 billion fund’s 46.4% gain over the 12 months through March, though Skybridge Founder and short-lived former Trump administration communications director Anthony Scaramucci told Bloomberg that the deliberate pace of redemptions is within “the ambit of the prospectus.”

Farther-flung corners of the crypto universe, meanwhile, are slogging through the summer heat. The Capriole Investment’s Crypto Speculation Index, which measures the share of alternative tokens outperforming bitcoin on a rolling 90-day basis, has slumped to 7% from a near 60% share in January.  

Nearly 15,000 so-called altcoins are in circulation by data firm CoinGecko’s count. Most of that cohort “are illiquid and struggle to prove their use cases,” as CoinDesk puts it, though prior sub-10% readings from that indicator preceded substantial, broad-based crypto rallies in early 2019, late 2020 and the back half of 2023. 

A pair of prominent such tokens could certainly use a renewed jolt of speculative appetite: Doland Tremp and Jeo Boden – memecoins depicting the current Presidential nominees – are off 74% and 96% from their respective peaks in early June and early April, leaving those unofficial avatars valued at $39 million and $25 million, respectively.  

The inspiration for one of those coins duly plays his part in trying to turn the tide. Challenger and erstwhile commander-in-chief Donald Trump will deliver a 30-minute address at a bitcoin themed conference in Nashville on July 27, organizers announced yesterday, a speech “likely to further burnish a self-assigned image of crypto booster,” CoinDesk predicts. 

   
The official art of the unofficial presidential altcoins

A cooler-than-expected June CPI print spurred an intense rotation in stocks, with the small-cap Russell 2,000 vaulting nearly 4% and the tech-heavy Nasdaq 100 slumping 2.2%, while the S&P 500 settled 0.9% in the red. Treasurys enjoyed a frenzied short-end rally in anticipation of imminent Fed rate cuts, with two-year yields dropping a dozen basis points to 4.5%, while the long bond saw a more measured decline to 4.41% from 4.47% Wednesday. WTI crude advanced to $83 a barrel, gold ripped to $2,414 per ounce to approach its May peak near $2,450, bitcoin edged modestly lower at $57,500 and the VIX remained below 13 once more. 

- Philip Grant

From the Sporting News: 

The Congressional Baseball Game isn't the only place you can watch politicians play ball in 2024—just look to Sioux City, Iowa, where Iowa state representative J.D. Scholten (D) just pitched a strong outing after a 17-year hiatus from American baseball.

Scholten played baseball in various independent leagues from 2003-07, pitching for Sioux City for the majority of the time. He then took time off from the sport and eventually found himself running for Iowa congress. 

Somehow, amid his political career, he has found his way back to the diamond and has been successful in doing so. His first appearance back in his home state went as well as one could have hoped: a 6.2 inning performance where he struck out two and gave up seven hits and two runs.

A real estate battle royale takes shape in U.S. District Court: Realtor.com parent firm Move, Inc. filed a lawsuit against CoStar Group (ticker: CSGP) in California last week “over the alleged theft of portal data and documents,” as HousingWire first reported on July 3.  

According to the complaint, a longtime Realtor.com staffer who migrated to CoStar unit Homes.com earlier this year subsequently accessed sensitive information from his former employer on dozens of occasions, gathering user traffic metrics along with contact information and compensation data for other Realtor.com employees in violation of state and federal statutes. “There is nothing wrong with lawful – even intense – competition,” the complaint reads. “But competitors should never be allowed to cheat and steal to get ahead.” 

CoStar offered no dull soundbite in its own defense:

The employee in question is a mid-level manager who writes and edits stories about condos. [It’s] safe to say he has zero input into Homes.com’s strategy. And even Move’s creative writing exercise doesn’t pretend that CoStar itself engaged in any misconduct. . . Realtor.com is losing the battle with Homes.com and its attempt to change the story doesn’t change that reality.

As HousingWire notes, the rival firms have long vied for the mantle of second-largest residential real estate portal behind Zillow, as the industry adapts to a March settlement between the National Association of Realtors and litigating home sellers which could serve to cut broker commissions by some 30%, per estimates from Keefe, Bruyette & Woods.

Indeed, Move’s complaint asserts its number two status by the lights of “every independent third-party [data] source [it] can identify,” including Comscore, Nielsen and others, adding that “Homes.com is last” among the industry’s four entrants. Realtor.com ranks 21st within the lifestyle section of the Apple App Store, behind only Zillow at number three and far ahead of Homes.com’s 128th position (fellow entrant Redfin sits in 25th place). 

CoStar has led a largely charmed existence from its 1987 founding, growing into a leading aggregator of commercial real estate data before branching out into the residential business. Witness the ongoing 52 straight quarters of double-digit year-over-year revenue growth, 20%-plus compound annual share price appreciation spanning the 10 years through March, universal admiration of Wall Street analysts (none of the 17 polled by Bloomberg say “sell”) and wide berth from the bears, with short interest summing to 2.3% of the float. 

Yet slowing growth, execution risk surrounding an ambitious, an expensive Homes.com advertising campaign and a skyscraping valuation equivalent to 160 times projected 2024 earnings informed a bearish verdict in the March 29 edition of Grant’s Interest Rate Observer (“Sell a great stock”). Shares have since logged a 26% decline, lagging the 7% rise in the S&P 500 including reinvested dividends and minus 3% return for its equally weighted counterpart.

Recent developments illustrate a new, potentially less lucrative state of play for CoStar investors. On April 22, the firm announced the acquisition of data provider Matterport for $1.6 billion in an even mix of cash and stock, forking over a 216% premium to the target’s undisturbed share price and equivalent to just over 10 times Matterport’s 2023 revenue (top line growth registered at 16% last year). Following the close of business on July 3, the firms disclosed receipt of request for additional information from the Federal Trade Commission, suggesting unwelcome regulatory scrutiny towards the prospective transaction, which is slated to close in the fourth quarter. 

Rivals in the fiercely competitive industry, meanwhile, maintain a full court press. Late last month, Zillow revealed a new venture with Moody’s in which the rating agency will furnish data and analytics for its multifamily residential division, while Zillow will provide multifamily rental property data for Moody’s own CRE platform.  “It seems like they have joined forces to attack CSGP,” muses an informed friend of Grant’s. 

On the bright side, those recent struggles don’t look to be keeping CoStar founder and CEO Andy Florance down. The Wall Street Journal reported last week that Florance parted with a one acre, 9,700 square foot beachfront home in the Florida panhandle for $28.5 million, topping a $25 million deal logged in 2022 to mark the highest transaction price ever recorded in the so-called redneck Riviera. Florance purchased the dwelling for $15.1 million in 2020. 

Stocks crept higher by 10 basis points on the S&P 500 as molasses-type price action persists at the index level, while a strong three-year auction headlined another quiet day for Treasurys as the yield on the long bond rose to 4.49% from 4.46%. WTI crude slipped below $82 a barrel, gold edged higher at $2,364 per ounce, bitcoin climbed to $57,900 and the VIX notched its 11th straight session south of 13. 

- Philip Grant

If it’s not on your phone, did it really happen?  From the Independent:

Two couples were filmed fighting with each other at an observation deck in Tibet allegedly to secure the best selfie spot while attempting to climb Mount Everest.

The incident took place on June 25 after a tour guide asked the group to pose together on the viewing platform next to the Everest Elevation Measurement Monument for a photo.

Command and patrol: Beijing is putting the finishing touches on laws to establish a financial stability guarantee fund to backstop stricken institutions and snuff out potential contagion. 

To be sure, tinder for such an imagined conflagration is in abundant supply. Commercial banking assets in the Middle Kingdom reached $58.2 trillion at the end of May, equivalent to more than half of last year’s GDP (not China’s, but the world’s) and towering over the U.S.’s $23.3 trillion figure.The tally of debt amassed by so-called local government financial vehicles, or municipal entities which fund output-flattering spending projects, reached some $9 trillion as of Dec. 31 per the IMF, up 65% from the year-end 2020 figure and far above the $3.3 trillion in aggregate borrowings among U.S. state and local authorities. 

A now-sketchy growth picture brings that towering debt stack into sharper relief.  Yields on China’s onshore 10-year sovereign bonds touched 2.18% yesterday, marking the lowest level on record dating to 2002 and underscoring a “pessimistic mood on the economy,” per Bloomberg chief Asia FX and rates strategist Stephen Chiu. 

China’s lynchpin housing market, meanwhile, continues to sag. Home prices across 70 major cities fell by 0.71% month-over-month in May per the National Bureau of Statistics, the steepest sequential drop in that government-compiled data series since October 2014.  Property-sector investment likewise sank 10.1% year-over-year from January to May, further downshifting from a 9.8% decline during the first four months of 2024.

Tellingly, perhaps, Wall Street is packing its bags. The Financial Times relays today that a sample of seven U.S. and European-headquartered investment banks have slashed their headcounts in China by a combined 13% from levels seen in 2022, as year-to-date IPO volumes in the world’s second-largest economy reached only $8.3 billion as of May 31 per Dealogic, the worst such start to a year since 2009.

Those dynamics reflect a “vicious cycle” according to Han Lin, China country director at consulting firm The Asia Group. “Weak deal flow means less investment in onshore capability, which further limits deal flow.”  Mincing no words, JPMorgan boss Jamie Dimon commented at a May conference that business had “fallen off a cliff.”  

Stocks staged a strong intraday advance following dovish commentary from Fed chair Jerome Powell, with the S&P 500 settling higher by two-thirds of a percent to break from its narrow range and top the 5,500 threshold for the first time. Treasurys managed a moderate bounce with the long bond dropping four basis points to 4.6%, while WTI crude ticked to $83 a barrel and gold finished little changed at $2,329 per ounce. Bitcoin slipped back below $62,000 and the VIX stayed at 12. 

- Philip Grant

From the Financial Times:

Sales of olive oil have plunged in its Mediterranean heartland as Spaniards and Italians are forced to shun their most beloved culinary ingredient following steep price rises. 

Ignacio Silva, chief executive of Deoleo, the world’s biggest olive oil seller by revenue, said cost-conscious consumers were changing their habits to cope with the impact of droughts that have wrecked harvests. 

“We’ve clearly touched a price that is a problem for Spanish and Italian consumers,” he told the Financial Times, alluding to falling sales of Deoleo brands including Bertolli and Carbonell.

A kilogram of the foundational foodstuff now wholesales for about €7 ($7.49) in global number one producer Spain, data from Expana Benchmark Prices show, compared to a bit more than €1 per kilo at the start of 2021.

Which way, Mr. Market? Placid price action in stocks following the steep post-October rally is spurring a virtuous cycle in equity derivatives. Thus, Bloomberg reports that straddle and strangle strategies, which entail selling both bullish call and bearish put options at various strike prices in a bet on limited moves, are increasingly en vogue, in turn helping contribute to index level stability. 

The S&P 500 has now gone more than 300 sessions without logging a single day 2% decline, its second longest such streak in the post-2008 era. Similarly, the Chicago Board Options Exchange's CBOE Volatility Index (VIX) has topped 15 on a closing basis only 21 times in the year-to-date, rarely approaching its three-decade average of near 20 over that period. 

“We are seeing absolutely pervasive at-the-money volatility selling from customers,” Nomura cross-asset strategist Charlie McElligott writes. Meanwhile, the broker dealers who stand on the other side of that trade – accumulating calls and puts alike from their income seeking customers – hedge their positions by selling rallies and buying dips, a dynamic which is “simply choking out the ability” for benchmark gauges to sustain material moves, McElligott concludes. 

Yet as plain vanilla pervades at the index level, those looking to add zest to their portfolios have a new recipe at their disposal. Yesterday, exchange traded funds issuer T-Rex Group filed paperwork with the SEC to pave the way for a contraption offering two times the daily return in MicroStrategy, Inc. (ticker: MSTR), the loss-making enterprise software provider-cum-bitcoin speculation vehicle helmed by crypto evangelist Michael Saylor. T-Rex likewise plans to introduce an inverse MSTR fund for those of a bearish bent. 

MicroStrategy, which boasts a cache of 214,400 bitcoins currently valued at just over $13 billion, has seen shares rally by 118% this year, compared to 41% for the blue-chip digital asset, leaving its market capitalization at $24.4 billion. Terming the prospective securities the “ghost pepper of ETF hot sauce,” Bloomberg’s Eric Balchunas elaborated thus on social media platform X: “these are a near-lock to be the most volatile ETFs ever seen in the U.S., [offering roughly] 20 times the volatility of the S&P 500.”

Don’t forget a cold glass of water. 

Stocks came under modest but persistent pressure following an early ramp to leave the S&P 500 some 40 basis points in the red, trimming year-to-date gains to 15% and change at the halfway point of 2024. Treasurys came for sale following last night’s inspiring redux of Lincoln versus Douglas, with the long bond jumping eight basis points to 4.51% to mark a near-three-week high. WTI crude remained slightly below $82 a barrel, gold edged lower at $2,325 an ounce, bitcoin ticked to $60,100 and the VIX remained south of 13. 

- Philip Grant

This Citi’s not big enough for the both of us. From Bloomberg:

Citigroup Inc. urged staffers not to get drawn into altercations with protesters targeting the bank’s New York headquarters, a sign that activists’ protracted campaign is beginning to wear on employees and executives alike.  Climate activists have sought to blockade the entrance to the bank’s main office since early June, with video footage showing angry scenes in the public plaza outside the building.

Citigroup’s Security and Investigative Services team is advising employees on how to handle the events, according to a memo to staff seen by Bloomberg. . .  Protesters have dubbed their campaign against Citigroup the “Summer of Heat.” On a website replete with slogans such as “Hot People Hate Wall St.” and “Eat the Rich,” organizers said protesters will be “going hard all summer long. Week after week. Month after month.”

So far, protest organizers say that roughly 200 activists have been arrested as police have lined up almost daily outside Citigroup’s headquarters. Protesters had vowed to avoid physical violence, but they also say their goal is to physically prevent employees from entering the building and doing their jobs.

Now comes the hard part. The post-2022 crypto renaissance has worked its magic in one key corner of the market, as heretofore-jilted customers of Sam Bankman-Fried’s infamous outfit FTX have enjoyed no small reversal in fortunes.  

Claimants are set to be made whole and then some, according to a liquidation plan put forth by FTX bankruptcy managers last month, a far cry from the secondary market prices of just 10 cents on the buck seen early last year on trading platform Cherokee Acquisition (the analysis “Pennies on the dollar” in the March 10, 2023 edition of Grant’s Interest Rate Observer proved a timely review of that opportunity).

Yet as The Wall Street Journal documented Monday, several institutional investors enjoying substantial paper gains are now struggling to collect their money, with existing hodlers either demanding a greater share of the winnings or refusing to part with their claims entirely, spurring a series of lawsuits. 

“We have sellers from all over the world that are interfacing with buyers and the bankruptcy court for the first time, and have never experienced a U.S. Chapter 11 case,” Andrew Glantz, chief strategy officer of crypto bankruptcy venue Xclaim, told the Journal. Call it learning by doing. 

Indeed, some crypto “degens” may soon receive a crash course in bankruptcy law. Many prospective sellers don’t have lawyers and “don’t realize that a verbal contract to sell a claim is binding under New York law, where most of these hedge fund [buyers] are based,” claims broker Thomas Braziel likewise commented to the WSJ.

Outsized, unrealized gains have likewise failed to extract other constituents from their crypto winter of discontent. Yesterday, U.S. Bankruptcy Judge John Dorsey gave FTX the green light to poll creditors on a liquidation format which would repay them in fiat currency. As Reuters reports, that plan is going over like a lead balloon in some circles, as the price of bitcoin has mooned above $60,000 from less than $17,000 when the digital bourse bought the farm in fall 2022.  

Earlier this month, a group of claimants filed a class action lawsuit contending that, since FTX never owned customer deposits, the estate must render the full, current value of their digital assets. “Customers must be made aware that the plan’s ‘full recovery’ is nothing of the sort,” the creditors groused. 

That argument overlooks the slipshod state of FTX’s books at the time of its demise, estate attorney Andy Dietderich argued at a court hearing Tuesday: “Everybody was an involuntary investor in this crazy pool of assets, and our job was to turn it to cash.” 

Current CEO John Ray III likewise told Reuters that virtually all the crypto assets under FTX’s purview are long gone, with the bourse holding just 0.1% of bitcoin and 1.2% of ethereum that customers believed it had as of fall 2022. “You cannot pay one creditor more without taking it from another creditor,” Ray explained. “Those arguing for appreciation of ‘their’ tokens would be taking money away from fellow customers who held cash, stablecoin or other crypto.” 

Multi-fold returns, manifold headaches. 

A noteworthy lurch higher in the rates complex headlined today’s session, with 2- and 30-year yields rising six and nine basis points respectively to 4.71% and 4.45%, while stocks maintained their index level inertia ahead of quarter-end with the S&P 500 snoozing through another virtually flat session (+0.12%). WTI crude remained just south of $81 a barrel, gold slipped to $2,298 per ounce, bitcoin retreated to $60,700 and the VIX ticked to 12.6. 

- Philip Grant