11.04.2024
Expendable Currency

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.

Buy Your 'Weave
What Jensen Huang wants, Jensen Huang gets.

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. 

Recap Nov. 4

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

11.01.2024
Shrug Pull

A pair of Friday morning headlines from The Wall Street Journal and Financial Times, respectively:

Big Tech Sees AI Bets Starting to Pay Off

Wall Street frets over Big Tech’s $200 Billion AI spending splurge

In a similar vein, here’s a discordant duet from Bloomberg both preceding and following this morning’s weather- and strikes-impacted October payrolls report:

Treasuries Post Loss as Economy Humbles Doubters: Rates Monthly

Treasuries Soar as Distorted U.S. Jobs Data Fuels Bets on Fed Cut

Yield to Worst
Either way you're a winner!

Either way you’re a winner! Blue skies are at hand for digital assets regardless of Tuesday’s election outcomes, Coinbase CEO Brian Armstrong told CNBC Wednesday, predicting that “no matter what happens. . . it’s going to be the most pro-crypto Congress we’ve ever had.”  Citing various constructive comments from Presidential hopefuls Kamala Harris and Donald Trump on the campaign trail, Armstrong added that sentiment in the nation’s capital has flipped markedly over the past few years: “I feel like the crypto industry was under siege. . . today it couldn’t be more different.”

Ripple Labs CEO Brad Garlinghouse struck a similar note on the finance network last week: “this is the most important election we’ve had, but I also believe no matter what happens, we’re going to have a more pro-crypto, more pro-innovation Congress than we’ve ever had.”

Mr. Market looks to share those sentiments, as the crypto category now sports a $2.33 trillion aggregate value per Coinmarketcap.com, up just over 80% year-over-year to more than double the Nasdaq 100’s performance over that stretch. Bitcoin likewise approached the cusp of fresh all-time highs near $73,000 earlier this week, sitting higher by roughly 100% from a year ago. 

Percolating prices and sunny sentiment pave the way for one industry mainstay to undertake a herculean financing effort. MicroStrategy unveiled a planned capital raise for the ages Wednesday afternoon, detailing plans to issue a combined $42 billion of debt and equity to burnish its cache of 252,220 bitcoins.  

For context, MSTR’s proposed initiative would be sufficient to acquire nearly 3% of the outstanding digital ducats at today’s prices and would more than double its current hodlings, which stand at 1.2% of total supply.  A fresh $21 billion in equity would represent nearly half of MSTR’s $46 billion market cap, while $21 billion in new borrowings would increase its $4.2 billion long-term debt load fivefold.

Those plans earned plaudits on Wall Street, with six of the eight sell-side firms tracked by Bloomberg raising their price targets in response. “If stock price is the true test for any business model, then in our view MSTR is hard to beat,” Canaccord analysts wrote in reference to the firm’s 230% year-to-date rally, which leaves shares valued at roughly 2.5 times the value of its current bitcoin reserve (MicroStrategy also operates a shrinking, loss-making enterprise software business).  That hefty premium may be justified, analysts at Benchmark believe, as “the ability of MSTR to generate compounding yield on its bitcoin holdings, using what management describes as ‘intelligent leverage,’ differentiates its stock from alternative means of gaining exposure to bitcoin” such as ETFs.

To that end, MicroStrategy introduced the term “BTC Yield” earlier this year, an artisanal indicator designed to measure the percentage change over time between its bitcoin holdings and fully diluted share count. That figure, designated a key performance indicator (KPI) by the company, reached 17.8% as of Sept. 30, up from 7.3% a year ago and 1.3% in fall 2022.

Yet as the firm notes in its press release, BTC Yield has its limitations: 

[I]t does not take into account debt and other liabilities and claims on company assets that would be senior to common equity and that it assumes that all indebtedness will be refinanced or, in the case of the Company’s senior convertible debt instruments, converted into shares of common stock in accordance with their respective terms.

Additionally, this KPI is not, and should not be understood as, an operating performance measure or a financial or liquidity measure. In particular, BTC Yield is not equivalent to “yield” in the traditional financial context. 

It is not a measure of the return on investment the Company’s shareholders may have achieved historically or can achieve in the future by purchasing stock of the Company, or a measure of income generated by the Company’s operations or its bitcoin holdings, return on investment on its bitcoin holdings, or any other similar financial measure of the performance of its business or assets.

Call it a metric of the mind. 

Recap Nov.1

Stocks managed only a modest bounce after yesterday’s sharp selloff, with the S&P 500 giving back much of its larger initial gains to finish higher by 0.4% on the day and 2% in the red for the week. Treasurys were smoked with the long bond jumping 10 basis points to 4.57% and the 10-year note finishing at 4.38% compared to 3.74% a month ago, while WTI crude edged below $70 a barrel and gold remained under pressure at $2,733 per ounce. Bitcoin retreated towards $69,000 and the VIX settled just south of 22. 

- Philip Grant

10.31.2024
Flex Terms

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. 

Balance Beam
No consolidated tape, no problem:

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. 

QT Progress Report
Reserve Bank credit fell $18.2 billion over the past seven days, leaving the Fed’s portfolio of interest-bearing assets at $6.974 trillion. That’s down $82 billion from the last week of September, and 21.9% below the spring 2022 peak. 
Recap Oct. 31

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

10.30.2024
Fuel Hardy

Inflation takes to the skies, via CNBC:

United Airlines customers will have to spend more to reach frequent flyer status next year, the latest move by the carrier to increase profits and give an exclusive feel to the increasingly crowded top ranks of airline loyalty programs.

The thresholds to earn elite status on the airline’s MileagePlus program are going up about 25% and include either spending on a co-branded card or a combination of spending and flying. The status earning requirements and accompanying perks earned next year will be valid in 2026.

Washington Commanders
There are no super safe bonds, only super safe prices.

There are no super safe bonds, only super safe prices. Benchmark 10-year yields settled today at 4.29%, up 27 basis points over the past two weeks and 66 basis points from mid-September following a near six-month downshift. 

Monetary and fiscal machinations in the nation’s capital loom large over that reversal, headlined by the Federal Reserve’s Sept. 18 half-point rate cut against a backdrop of solid economic growth, above-target inflation and euphoric stock and credit markets. 

Uncle Sam’s spendthrift ways similarly serve to turn the screws. The Wall Street Journal highlights today that new issue auction supply of 10-year notes have remained near $42 billion in each of the past three quarters, eclipsing their pandemic era peaks and standing far above the sub $25 billion baseline seen from 2015 to early 2018. 

Imminent relief on the supply front is not forthcoming. The Treasury Department announced $125 billion of note and bond sales next week in this week’s quarterly refunding announcement, matching July’s figure and standing just shy of the $126 billion peak logged during the Feb. 2021 Covid-induced spending barrage.  Total borrowing will likely reach $823 billion over the first three months of 2025, up from $765 billion during the third quarter.

Tuesday’s elections likewise present a less-than-bullish catalyst, as policies proposed by the Trump and Harris administrations would add a cumulative $7.8 trillion and $4 trillion, respectively, to the deficit over the decade through 2035 per the nonpartisan Committee for a Responsible Federal Budget.

Such additional red ink would supplement a federal shortfall that tipped the scales at $1.8 trillion over the 12 months through September per the Congressional Budget Office, the third highest figure on record. That figure will top $2 trillion during the year ending September 2025 regardless of next week’s outcome, strategists at TD Securities predict. 

Notably, the Federal Reserve continues to undertake no small bit of heavy lifting to help soak up those torrents of risk-free (of outright default, that is) paper. Even after nearly 30 months of balance sheet runoff under its Quantitative Tightening program, the central bank houses 15.3% of federal debt held by the public on its balance sheet, up from 14.3% in early March 2020. Over that stretch, the supply of marketable Treasurys has ballooned to $28.45 trillion, up an even $11 trillion.  

The deluge of new debt, in tandem with constrained primary dealer balance sheets owing in part to post-2008 regulations, has served to put the squeeze on funding markets, as evidenced by last month’s 12-basis point lurch in the Secured Overnight Financing Rate (SOFR) in response to routine end of quarter funding needs.  

By way of response, Reuters reports that “the Fed and market participants are floating ideas that would pull the central bank even deeper into markets,” including introducing centralized trade clearing and broadening access to its borrowing facilities, concepts which would mark the latest steps in the Fed’s longstanding mission creep. 

“It’s a serious problem,” Stanford University finance professor Darrell Duffie told Reuters. “We have to redesign the financial system and regulations so that the market can digest demands for liquidity, even on stress days, and we’re not there.”    

Indeed, rates-focused investors can expect another round of thrills and chills on Halloween, as Goldman Sachs anticipates that a record $531 billion of combined gross Treasury auction settlements Thursday will serve to siphon cash away from dealers and dry up the overnight repo market. 

“Such shifts are likely to translate to another jump in SOFR heading into to November, with risks firmly to the upside versus what has been the norm over prior mid-quarter month ends,” Goldman’s head of interest rate strategy William Marshall wrote Monday. “These elevated SOFR levels are becoming more common and will only move higher in magnitude and longer in duration over time, which will make it somewhat hard to write-off these spikes as simply temporary dislocations.” 

See the analysis “Disturbance in the weeds” in the current edition of Grant’s Interest Rate Observer dated Oct. 30 for more on the series of policy choices that have left funding markets in their precarious present condition, along with the potential implications of further market function-focused interventions from Jerome Powell and Co. 

Recap Oct. 30

Stocks came under some modest pressure this afternoon to leave the S&P 500 lower by 0.3%, while Treasurys saw a mixed picture with two-year yields backing up four basis points to 4.15% and the long bond dropping to 4.49% from 4.52% Tuesday.  WTI crude bounced to $69 a barrel, gold advanced to $2,788 per ounce, bitcoin held near $73,000 and the VIX settled north of 20. 

- Philip Grant

10.29.2024
Highly Confident Letter

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%. 

Group Mug
It's a big tech battle royale:

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. 

Recap Oct. 29

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

10.28.2024
Paper Trade

If you owe the bank $100, that’s your problem. If you owe the bank $290,939.47, that’s also your problem. From CNBC:

JPMorgan Chase has begun suing customers who allegedly stole thousands of dollars from ATMs by taking advantage of a technical glitch that allowed them to withdraw funds before a check bounced.

The bank on Monday filed lawsuits in at least three federal courts, taking aim at some of the people who withdrew the highest amounts in the so-called infinite money glitch that went viral on TikTok and other social media platforms in late August. 

A Houston case involves a man who owes JPMorgan $290,939.47 after an unidentified accomplice deposited a counterfeit $335,000 check at an ATM, according to the bank.

“On August 29, 2024, a masked man deposited a check in Defendant’s Chase bank account in the amount of $335,000,” the bank said in the Texas filing. “After the check was deposited, Defendant began withdrawing the vast majority of the ill-gotten funds.”

JPMorgan, the biggest U.S. bank by assets, is investigating thousands of possible cases related to the “infinite money glitch,” though it hasn’t disclosed the scope of associated losses. Despite the waning use of paper checks as digital forms of payment gain popularity, they’re still a major avenue for fraud, resulting in $26.6 billion in losses globally last year, according to Nasdaq’s Global Financial Crime Report.

Platform and Function
Behold, the golden age of political punting:

Behold, the golden age of political punting: Robinhood Markets unveiled separate Donald Trump and Kamala Harris election futures contracts beginning Monday, after a September U.S. District Court ruling paved the way for an influx of political derivative products over Commodity Futures Trading Commission protests that such contraptions “are susceptible to market manipulation” while posing broad risks to election integrity. 

“We believe event contracts give people a tool to engage in real-time decision making, unlocking a new asset class that democratizes access to events as they unfold,” Robinhood declared, adding that the products, also offered by Interactive Brokers and Kalshi, will be available to U.S. citizens only. 

The budding political-wagering arms race marks the latest indication of rapacious risk appetite. An investor survey conducted by Bloomberg last week concludes that regardless of next Tuesday’s winner, “American wealth [will] grow either way,” with nearly 60% of respondents expecting the S&P 500 to maintain or accelerate this year’s brisk 2% per-month pace of price appreciation if Trump manages to return to the presidency, with roughly half anticipating the status quo or better under a Harris administration. The broad index has enjoyed an average 6.6%, six-month return following the past eight presidential elections, compared to just 1.5% over preceding half-year periods.

As the ongoing bull stampede drives lopsided U.S. outperformance – capturing some 72% of the capitalization weighted MSCI World Index, up from 57% a decade ago and less than 40% in the mid-1990s – foreign investors likewise find themselves chasing the American dream. Domestic equity ETFs have attracted a net $145 billion from Europe and Asia in the year to date per Bloomberg-compiled data (hat tip: The Kobeissi Letter), already topping 2021’s roughly $130 billion, 12-month haul for the strongest full-year influx in at least a decade. 

Instructively, the clamor for U.S. assets spurs the nation’s most venerated trading venue to drastic steps. Thus, the New York Stock Exchange announced plans Friday to expand equities trading on its NYSE Arca electronic bourse to 22 hours per day, five days a week beginning in 2025, shuttering only during the wee hours of 11:30PM to 1:30AM.  “The NYSE’s initiative to extend U.S. equity trading . . . underscores the strength of our U.S. capital markets and growing demand for our listed securities around the world,” commented NYSE head of markets Kevin Tyrrell.

Competitive considerations (or a simple fear of missing out) may likewise loom large for the 232-year-old institution, as Robinhood rolled out around-the-clock, Sunday-evening-through-Friday equities trading in May 2023, with those overnight hours accounting for as much as one quarter of the retail investor-focused venue’s total turnover per CEO Vladimir Tenev. “Every single month, it’s continued to grow,” Robinhood chief brokerage officer Steve Quirk crowed to Bloomberg earlier this year. 

Who needs to dream, when you can meme? 

Recap Oct. 28

Trend continuation in stocks and bonds was the name of the game Monday, as the S&P 500 enjoyed a small gap higher at the cash open then cruised to a 0.3% advance, while long-dated Treasurys remained under pressure with 10- and 30-year yields rising three and two basis points, respectively, to 4.28% and 4.53%.  WTI crude was hammered by more than 5% to $68 a barrel, gold edged lower at $2,742 per ounce, bitcoin advanced above $69,000 and the VIX toggled below 20. 

- Philip Grant

10.25.2024
Peel of Fortune

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.

Windfall River
Sounds like one of them good problems:

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.”

Recap Oct. 25

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

10.24.2024
Hostel Approach
They’re here for a good time, not a long time:

They’re here for a good time, not a long time: Foreign investors are turning up their noses at long-duration domestic debt of late.

BofA Securities credit strategist Yuri Seliger finds that pre-8:00 AM ET net dealer purchases (which he uses as a proxy for overseas demand) of investment-grade U.S. corporate bonds maturing in 10 years or more has shrunk to $30 million per day over past two weeks, from a $130 million, 10-day average daily run rate as of late September.  

Conversely, corporate obligations maturing in less than a decade have attracted some $180 million in daily demand over the past two weeks, nearly double that seen early this month. 

Policy Game
“So far, I haven’t seen any information that would suggest we wouldn’t continue to reduce the interest rate,”

“So far, I haven’t seen any information that would suggest we wouldn’t continue to reduce the interest rate,” declared San Francisco Fed president and current Federal Open Market Committee voting member Mary Daly at a Wall Street Journal-hosted conference the other day. Today’s 4.75% to 5% funds rate “is a very tight interest rate for an economy that already is on a path to 2% inflation and I don’t want to see the labor market [weaken] further,” she added.   

Daly, who has long staked out a firmly dovish perch (“it’s not yet time to start thinking about talking about relaxing the accommodation that we’ve given” she said in May 2021, two days before April CPI jumped 4.2% year-over-year against a 3.6% consensus), has mainstream company in that view beyond boss Jerome Powell. “It looks like the global battle against inflation has largely been won,” declared IMF chief economist Pierre-Olivier Gourinchas in a Tuesday blog post. Headline consumer prices expanded at a 2.4% annual clip in September, near the Fed’s self-assigned 2% remit and well below the average 4.2% figure seen over the past five years. 

Yet as monetary authorities look to turn the page on the post-pandemic inflation, economic scars from that episode remain readily visible. A WSJ-commissioned survey of likely voters conducted in late August found that 38% said the rising cost of living has spurred “major strains for their families.” That’s the highest such share since polling began in Nov. 2021, when measured inflation stood far higher. 

Beyond the cumulative impact of those observed price pressures, factors beyond today’s inflation methodology serve to squeeze the populace.  As Bloomberg noted Tuesday, major expenses such as property taxes, tips and auto- and credit card-related interest charges fall outside the CPI’s purview, rendering that metric an incomplete gauge of the price level. 

“The CPI is capturing the goods and services that you purchased for consumption, but there are things that affect your cost of living that are outside of that,” commented Steve Read, an economist at the Bureau of Labor Statistics who works on the CPI. They “can’t realistically be priced,” he added (see the analysis “Consumers on the couch” in the April 14 edition of Grant’s Interest Rate Observer for more on this dynamic). 

Might an unwelcome reacceleration in measured prices serve to aggravate that lingering pain?  Investors appear increasingly concerned over such an outcome, as Alex Malitas of Bianco Research relayed yesterday that the 55- and 44-basis point respective rises in 10- and 2-year Treasury yields following the Fed’s supersized Sept. 18 rate cut easily mark the largest such post-easing updraft going back to 1989, a data set encompassing six prior instances including the famous economic soft landing-cum bond market selloff of 1995. 

“The reason rates are rising is that the Fed is not backing off [further planned] rate cuts fast enough,” Malitas concludes. “The market is pricing in a policy mistake of too much stimulus and the potential of a resurgence of inflation.”

QT Progress Report
Reserve Bank credit ticked lower by $10.3 billion from a week ago, leaving the Fed’s portfolio of interest-bearing assets at $6.993 trillion. That’s down $62 billion from the last week of September, and 21.6% below the March 2022 peak. 
Recap Oct. 24

Stocks managed a bounce after yesterday’s selloff, with the S&P 500 edging higher by one quarter percent and the Nasdaq 100 rising 0.8% on the strength of Tesla’s miraculous, EV industry-defying earnings beat-and-raise which pushed shares higher by 22%. Treasurys likewise saw some strength with the long bond dropping four basis points to 4.47% after logging near three-month highs Wednesday, while the two-year yield remained at its 10-week peak of 4.07%. WTI crude edged below $71 a barrel, gold recouped most of yesterday’s losses at $2,736 an ounce, bitcoin rose to $68,100 and the VIX settled just north of 19. 

- Philip Grant

10.22.2024
Class Struggle

When productivity-enhancing initiatives go wrong, via the Financial Times:

EY has fired dozens of U.S. staff for what the accounting and consulting firm called cheating on professional training courses, sparking an internal debate about business ethics and the limits of multitasking. 

The dismissals took place last week after an investigation found that some employees had attended more than one online training class at a time during the “EY Ignite Learning Week” in May. 

Several of the fired employees told the Financial Times they did not believe they were violating EY policy and were just trying to take advantage of interesting sessions that ranged from “How strong is your digital brand in the marketplace?” to “Conversing with AI, one prompt at a time.” . . .

One consultant who was fired last Friday said there was no warning that watching multiple sessions simultaneously was not allowed. . . A second person who lost their job said EY “breeds a culture of multitasking,” adding: “If you are forced to bill 45 hours a week and do many more hours of internal work, how can it not?”

Turn the Page
We’ve got good news and bad news in the Land of the Rising Sun.

We’ve got good news and bad news in the Land of the Rising Sun. Japanese consumer prices excluding fresh food rose at a 2.4% annual pace in September, downshifting from the 2.8% logged in August to mark the first sequential slowdown in that key inflation gauge since April. 

Conversely, last week’s figure topped economist consensus of 2.3%, while representing the 30th consecutive month that measured inflation matched or exceeded the Bank of Japan’s 2% target. That post-Covid updraft marks a material break from the longtime norm of low or nonexistent price pressures and radical monetary policy, including 0% benchmark interest rates beginning in 1999 and an eight-year experiment with sub-zero borrowing costs prior to a pair of rate hikes beginning in March of 2024. 

With the BoJ set to gather on Halloween, the mixed inflation picture will likely yield a stand-pat rate decision, with interest rate futures pricing 98% odds of no move to the current 0.25% benchmark rate. However, nearly 90% of economists surveyed by Reuters last week expect further rate hikes by March 2025, with that cohort split over the prospects of an upward move by year-end. 

High-profile labor market dynamics inform the prospects of a lasting interest rate revival in the world’s fourth largest economy. Last week, Japan’s largest union formally called for raises of at least 5% in 2025 after securing a 5.1% pay bump this year, up from 3.5% in 2023 to mark the largest such increase since the aftermath of Japan’s titanic equity-cum-real estate bubble in 1991. 

“We believe that continuing wage hikes of at least 5% is extremely important,” Japanese Trade Union Confederation (a.k.a. Rengo) president Tomoko Yoshino said at a press conference Friday. "We aim to keep wages, the economy and prices on a stable track to prevent a return to deflation."  Rengo’s goals are A-OK with the monetary mandarins, as Bloomberg notes that the BoJ “seeks further evidence of a virtuous cycle of rising wages and prices before proceeding with more rate increases.”

Such a further push into positive territory following the lengthy zero- and negative-rate epoch would stand to shake up Japan’s economic edifice. Analysts at CLSA predict that a further 0.1% rise to the benchmark rate would swell the ranks of so-called zombie companies, or those unable to cover their interest expense through operating profits, to roughly 632,000 firms from 565,000. Corporate bankruptcies, meanwhile, topped 5,000 over the six months through September per Tokyo Shoko Research, the highest such tally in a decade. 

That’s not to say that a tightening-led upheaval would necessarily spell disaster. “None of [the distressed firms] will be missed,” CLSA strategist Nicholas Smith told Bloomberg yesterday. “We’ve got to a situation where we are not concerned about unemployment in Japan. In fact, what we’re most concerned about is a severe labor shortage.” Nevertheless, such a marked reaction to minor interest rate tweaks serve to illustrate the acute side effects of ultra-EZ money: “Japan’s economy is reaching a turning point and we need a change in mindset,” commended Naoki Hattori, senior economist at Mizuho Research and Technologies. 

Recap Oct. 22

Treasurys were unable to catch a bid once again, with the long bond remaining flat at 4.49% and 2- and 10-year yields each edging higher by a basis point to 4.03% and 4.2, respectively, their highest since mid-August and late July.  Stocks finished flat after the S&P 500 managed to erase some early losses, while WTI crude rose to $71.50 a barrel and gold powered higher at $2,748 per ounce. Bitcoin held steady at $67,400 and the VIX remained just above 18. 

- Philip Grant

10.21.2024
Margin Call

No bull market here. From Reuters:

Profitability at asset managers has slipped for the past two years and is likely to decline further through 2028 as investors increasingly opt for products with lower fees, such as exchange-traded funds (ETFs), according to a new study.

The study of 40 global asset managers including BlackRock, State Street, JPMorgan and Goldman Sachs by German financial strategy advisor zeb Consulting showed their profits in 2023 slipped to 8.2 basis points (0.082%) of assets under management from 10.1 basis points in 2021 and 9.4 points in 2022.

"The good years are over for now," zeb senior consultant Fränk Hamelius, one of the study's authors, said on Monday.

Over the past five years, the assets under management of the firms studied have risen by 8.8% annually on average, but their operating profits have only gone up by 0.7% per annum, it said.

Tiff Hanger
Nothing stops this train:

Nothing stops this train: the artificial intelligence funding frenzy continues to gather steam, as The Wall Street Journal reports that search firm Perplexity is in negotiations for $500 million in fresh capital at a valuation of $8 billion or more, up from a $3 billion figure as of this summer and $520 million in January. For its part, Bloomberg pegs Perplexity’s latest post-money price tag at $9 billion, likewise noting that investors approached the startup about providing fresh cash, rather than the other way around. 

Indeed, AI remains the shining bright spot in an otherwise dreary, post-ZIRP venture capital backdrop, representing 31% of total VC funding in the third quarter per data from CB Insights after garnering a 35% share over the three months through June (OpenAI’s monster $6.6 billion round took place early this month, fueling a stellar start to the fourth quarter).  For context, financial technology accounted for roughly 20% of VC funding during bubbleicious 2021, while crypto-related concerns have yet to top 6% in a given quarter. 

“You have this market divergence thing where a lot of the market is following the pattern of the dot.com bust,” Wing VC founding partner Peter Wagner told the Journal. “But then you have this subset. . . which is very closely linked to generative AI [and] is kind of in a late ‘90s type of acceleration.”  

Meanwhile, domestic VC firms sat on a record $328 of so-called dry powder as of March 31 according to PitchBook, perhaps setting the stage for further AI-focused shopping sprees. “We’ve seen momentum [investing] before,” Rob Siegel, management-focused lecturer at the Stanford Graduate School of Business, told the San Francisco Examiner Sunday. “We’ve never kind of seen anything like this before.” 

Yet as torrents of capital flow to the nascent industry, users and investors alike tap their feet awaiting enhanced employee productivity, increased revenue or other commercial benefits. “The window for experimenting is mostly behind us now,” declared Erik Brynjolfsson, co-founder of software firm Workhelix, at a WSJ-hosted conference earlier this month. “This is a year when you have to be expecting business results.”  Unfortunately, some 90% of generative AI products fail to make it out of the lab, estimates Databricks vice president Naveen Rao. “Accuracy and reliability is a big problem,” Rao warned. 

In the meantime, one potentially instructive use case comes to the fore, as the New York Post reports today that couples are “using ChatGPT to help win arguments.” One Reddit user lamented his girlfriend’s mid-quarrel usage of the chatbot, after which “she’ll then come back with a well-constructed argument breaking down everything I said or did during our argument.” Another Redditor offered some telling advice to the lovesick poster: “It’s literally programmed to tell you exactly what you want to hear. Discuss her actions with ChatGPT from your perspective and it’ll do the same thing to her.”  

Your mileage may vary. 

Recap Oct. 21

Stocks edged lower by 0.2% on the S&P 500 to wrap up the final full week of October in forgettable fashion, though Treasurys once again made heavy weather of it with 10-year yields jumping to 4.19%, up 11 basis points from Friday and nearly 50 basis points from Sept. 18, when the Federal Reserve saw fit to lop half a percentage point from the benchmark rate. WTI crude rebounded back towards $70 a barrel, gold finished little changed at $2,720 an ounce, bitcoin pulled back a bit at $67,600 and the VIX settled north of 18. 

- Philip Grant

10.18.2024
All in the Family

Have portfolio, will travel. From the Financial Times:

Major retirement schemes are concerned that the [U.K.] government could compel them to pour money into British stocks and infrastructure as part of its plans to revitalize the [local] economy, a move that could mean they have to buy lower-quality assets at unattractive prices. . .

“Mandation would . . . be a huge mistake,” said Paddy Dowdell, executive director at the Greater Manchester Pension fund, which manages about £30 billion ($39 billion) of assets, adding there was a risk pension funds would be forced to buy at unattractive prices. 

The proportion of U.K. pension fund assets held in domestic equities has tumbled in recent decades owing to a slew of regulatory changes that pushed corporate defined-benefit schemes into bonds, while funds have also derisked as they mature and wind down. British funds held just 4.4% of their portfolios in U.K. stocks, compared with a global average of 10.1% for such domestic investment — one of the lowest proportions of any significant global pension market, according to a report from New Financial. 

Price Club
Many happy returns?

Many happy returns?  The booming bull market in U.S. equities celebrated its two-year birthday late last week, with the S&P 500 piling up a heady 69% total return after reaching its post-Covid nadir on Oct. 12, 2022. 

That steep ascent tests the adage that trees don’t grow to the sky, as the broad index now changes hands at 37.2 times cyclically adjusted earnings, topped only in the dot.com bubble and 2021 and up more than seven turns over the past 12 months. 

Yet as Piper Sandler chief investment strategist Michael Kantrowitz pointed out on CNBC Monday, “pretty much all valuation models have pointed to the market being expensive for quite some time,” with the Shiller PE ratio remaining near 30 as the market bottomed two years back. Kantrowitz added in a research note that “stocks can remain at rich valuations as long as a ‘fear’ catalyst doesn’t arise from the usual suspects,” referring unscripted jumps in interest rates, unemployment or inflation. 

In the meantime, Corporate America supplies a steady bid. Publicly traded firms have announced roughly $1.1 trillion of share buybacks in the year-to-date through Tuesday, data from EPFR show, topping the $943 billion logged at this time last year to mark the largest such figure on record. “Fewer companies are participating this year, but the announcements per company are bigger,” EPFR analyst Winston Chua told MarketWatch, adding that “a lot of companies have excess cash, and [insiders]. . . are paid through-stock-based compensation, providing them with incentives to push equity prices higher.”

Perhaps tellingly, C-suiters are a bit more circumspect with their own money. Citing data from InsiderSentiment.com, The Wall Street Journal relayed last week that only 15.7% of officers or directors transacting in their own shares in July made net purchases, the lowest single month total of the past decade, with that metric remaining below its 10-year average in August and September. Captains of industry including Jeff Bezos and Mark Zuckerberg have rung the register to the tune of billions of dollars this year, while Warren Buffett’s Berkshire Hathaway has likewise raised cash at an accelerated clip (Almost Daily Grant’s, Sept. 12).

“Insider trading is a very strong predictor of aggregate future stock returns,” Nejat Seyhun, professor at the University of Michigan’s Ross School of Business, contended to the WSJ. “The fact that they are below average suggests that [future returns] will be below average as well.”

Indeed, today’s elevated valuations have previously augured slim pickings for the bull crowd. Apollo chief economist Torsten Slok finds that the S&P 500’s near 22 times price-to-forward earnings multiple implies a modest 2.9% annualized return over the next three years. Since fall 2009, the S&P 500 has generated a 14.5% yearly return on average.

As the rich (equities) get richer, one plugged-in observer demonstrates sticker shock. As The Transcript highlighted yesterday, JPMorgan boss Jamie Dimon supplied an instructive response to a share repurchase-related query on last week’s earnings call:

We do talk to a lot of shareholders and they understand buying stock back at more than two times tangible book value is not necessarily the best thing to do, because we think we'll have better opportunities to redeploy [capital] or to buy back [shares] at cheaper prices at one point. Markets do not stay high forever.

See the analysis “Tale of two decades” in the current edition of Grant’s Interest Rate Observer dated Oct. 11 a bearish call on “one of America’s great businesses.” The stock in question, a 2010-era pick-to-click, has since garnered a 505% total return while “almost exactly inverting the value proposition” on offer 14 years ago. 

Recap Oct. 18

Stocks cruised toward moderate gains of about 0.5% on the S&P 500 with one hour left in the session (when your correspondent hit the bricks), leaving the broad index on the cusp of new highs and on track for its sixth consecutive weekly rise. Treasury yields dipped in turn with the two-year note hovering near 3.95%, while WTI crude slumped below $69 a barrel and gold marched higher to $2,720 per ounce. Bitcoin advanced towards $69,000 and the VIX retreated to near 18.  

- Philip Grant

10.17.2024
Everything's Up

From the New York Post:

This good boy is top dog.

A man paragliding over Egypt’s Great Pyramid of Giza on Monday spotted the jaw-dropping sight of a barking dog atop the oldest of the Seven Wonders of the World.

The footage of the Egyptian landmark — built more than 4,500 years ago — shows Marshall Mosher soaring in the desert sky in a paramotor when he zooms in on the top of the pyramid to find a dog casually having his day.

Fortunately, the canine was spotted on terra firma later in the day, marking the latest soft landing. 

Ain't we got Fund
Structured credit: the next frontier of the ETF gold rush.

Structured credit: the next frontier of the ETF gold rush. A quartet of Wall Street heavyweights including Nuveen and BlackRock are seeking regulatory blessing to launch separate exchange traded funds tracking collateralized loan obligations (CLOs), The Wall Street Journal reports. Those newcomers would join a dozen incumbents collectively overseeing $16 billion in assets, capitalizing on a recent issuance barrage. New CLO supply reached $147 billion in in the year-to-date through Oct. 11 according to PitchBook, up 69% over the same period in 2023. 

The contraptions – featuring bundled and securitized leveraged loans – offer investors an à la carte selection of credit ratings and yields, with lower-rated tranches absorbing first losses and offering commensurately higher payouts. The triple-A-rated portion yields roughly 5.6% on average, compared to the 4.8% on offer for single-A-rated corporate bonds.  (See the March 1 edition of Grant’s Interest Rate Observer for bullish look at the CLO penthouse).

“There’s a great demand for yield, especially for assets that aren’t so exposed to inflation or big swings in interest rates,” Jared Woodard, head of ETF strategy at BofA Securities, told the WSJ. “We think that CLOs fit the bill, especially within a wrapper like ETFs where you have a greater transparency about what’s owned.”

ETFs likewise stand front-and-center in private credit managers’ efforts to bring their wares to the masses. Apollo Global Management filed paperwork with the Securities and Exchange Commission last month to launch its own fund, with the asset management behemoth proposing to infuse liquidity into the infrequently traded asset class by building out a trading desk to foster a secondary market for direct loans. 

Yet as Pensions and Investments reports today, Apollo’s prospective feat of financial alchemy is raising eyebrows in the nation’s capital. “There is a potential that, absent additional transparency and strong controls, Apollo could use its position as liquidity provider for the ETF to influence, potentially for its own advantage, pricing for those and similar illiquid assets that are held elsewhere,” Andrew Feller, former SEC enforcement attorney-turned senior special counsel at law firm Kohn, Kohn & Colapinto, told P&I. 

The lobbying group Consumer Federation of America expressed similar concerns in an Oct. 4 missive to the SEC, contending that the ETF’s proposed strategy “raises red flags” as the custodians will struggle to sell certain underlying holdings within seven days without substantially altering their market value. Under SEC rules, a registered fund must hold at least 85% of its portfolio in securities that can be sold within a week without affecting material price changes. 

September’s filing also notes that Apollo would commit to purchasing any of the proposed fund’s underlying holdings, with the caveat that such an obligation would be subject to an undisclosed daily limit. Since the firm would reserve the right to decline redemption requests, the CFA argues that “this further underscores the conclusion that a private agreement cannot transform an inherently illiquid asset into a liquid asset.” Apollo declined to respond to those critiques, citing the ongoing SEC review.

In any event, the financial innovation train rolls on unabated. As Morningstar chief ratings officer Jeffrey Ptak flagged yesterday on X, Tidal ETF Services LLC filed paperwork for an octet of funds dubbed “Battleshares,” which would feature levered long and short single name pair trades via a mix of vanilla equities, swaps and options across various themes. Examples include Nvidia versus Intel, Tesla versus Ford, Eli Lilly versus Yum! Brands and Google parent Alphabet versus the New York Times. Loren Fox, director of research at consulting firm FUSE Research Network, quipped that it “sounds like someone was designing a CNBC game show but then launched it as ETFs instead.” 

QT Progress Report
Reserve Bank credit ticked lower by just $1.5 billion over the past week, leaving the tally of interest-bearing assets held by the Federal Reserve at $7.003 trillion. That’s down $68 billion from the middle of last month, and 21.5% below the March 2022 peak. 
Recap Oct. 17

Stocks jumped higher at the outset but were unable to hold those early gains in a departure from the recent norm, leaving the S&P 500 flat on the session.  Treasurys came under some notable pressure as the long bond jumped nine basis points to 4.39% while two-year yields climbed to 3.96% from 3.93% Wednesday, while WTI crude edged toward $71 a barrel and gold notched another fresh high at $2,692 an ounce. Bitcoin saw a shallow pullback to $67,000 and the VIX settled just above 19. 

- Philip Grant

10.16.2024
Pen and Teller

Score one for Elizabeth Warren.  From CNN:

PepsiCo is unshrinking shrinkflation.

The owner of Lay’s, Doritos, Tostitos and Ruffles chips will put more chips in some bags to claw back customers tired of higher prices with skimpier bags. Shoppers have balked at downsized chips, cookies, paper towels and other products, widely known as shrinkflation, and turned to cheaper options or stopped buying altogether.

A PepsiCo spokesperson told CNN that Tostitos and Ruffles “bonus” bags will contain 20% more chips for the same price as standard bags in select locations. PepsiCo is also adding two additional small chip bags to its variety-pack option with 18 bags, the spokesperson said.

Now, how about that 75-basis point rate cut

IOU Tube
Open sesame!

Open sesame! Investors scarfed down Chobani LLC’s five-year note offering on Tuesday, as a hefty $4 billion order book helped the triple-C-plus rated Greek yogurt purveyor to price the $650 million deal – upsized from a previously planned $500 million – at an 8.75% cash coupon and 99 cent original issuer discount to yield 9.008%. That compares to Bloomberg-reported initial price talk of 9.5% to 9.75%.  

The bonds, partially earmarked to redeem preferred equity owned by the Healthcare of Ontario Pension Plan, likewise feature a payment-in-kind (PIK) provision, which permits the issuer to service its obligations with additional debt rather than cash in return for a 75-basis point yield boost. 

As those details indicate, booming asset prices have spurred ravenous risk appetite in the deep end of the credit pool, and across junk bonds at large. The triple-C-rated portion of Bloomberg’s domestic high-yield gauge now offers a 602-basis point spread over Treasurys, the tightest pickup since early 2022 and down from an average 829 basis points over the past decade (triple-C spreads dipped below 500 basis points in the euphoric summer of 2021).  Overall option-adjusted spreads as measured by the ICE BofA U.S. High Yield Index stand at 293 basis points, undercutting those seen in 2021 for the tightest of the post-Lehman Brothers era.

Considering today’s not-so-restrictive funding backdrop, the growing share of borrowers opting to pay in scrip makes for a noteworthy development. Citing data from Moody’s, the Financial Times relayed on Monday that PIK interest payments accounted for 7.4% of second quarter investment income among the business development companies (i.e., publicly traded companies which lend to closely held, middle market firms) under their purview, up from 6.5% a year ago and the highest such share since at least 2020.  As the pink paper notes, “the growth in these types of loans is one signal of stress in corporate America even as the broader economy expands, particularly for businesses that were leveraged to the hilt by their private equity owners and are now struggling with those interest burdens.”  

To be sure, PIK structures are not in and of themselves surefire indicators of distress, as some borrowers may opt to preserve cash to underpin rapid growth. 

However, public proxies suggest that such a constructive dynamic represents the exception rather than the rule outside the large- and mega-cap category. Société Générale global head of quantitative research Andrew Lapthorne relays that aggregate growth in earnings before interest and taxes among the bottom 90% of S&P 1500 components – exclusive of the financials and oil and gas sectors – remains flat on a year-over-year basis, while the bottom 50% of that expansive cohort has seen EBIT growth trend toward a 20% annualized decline over the 12 months through August.  

Recap Oct. 16

Stocks resumed their winning ways after yesterday’s pullback with the S&P 500 climbing 0.4%, while Treasury yields also finished slightly stronger with 2- and 30-year yields each dropping two basis points to 3.93% and 4.3%, respectively. WTI crude consolidated its recent losses as $70.5 a barrel, spot gold rose to $2,674 per ounce after testing its record high of $2,685, bitcoin remained on the front foot at $67,800 and the VIX reversed Tuesday’s rally to finish just below 20. 

- Philip Grant

10.15.2024
Monopoly Money

Call it not-so-free parking. From the Financial Times:

Australia plans to ban “dynamic pricing” amid rising anger from fans faced with soaring prices as they try to buy in-demand tickets to see their favorite bands. “We’re taking strong action to stop businesses from engaging in dodgy practices that rip consumers off,” said Australian Prime Minister Anthony Albanese on Tuesday, as he outlined plans to strengthen consumer laws after a Treasury consultation. 

The move by the Labor government comes amid outrage about dynamic pricing, where prices change according to demand. . . In Australia, dynamic pricing has been used for some sporting events, including this year’s Australian Grand Prix and Australian Open tennis tournament. Then fans complained that tickets billed as “in demand” on Ticketmaster’s website were being sold for as much as A$6,000 (US$4,000). 

But fans were particularly outraged last month when tickets to see punk band Green Day went on sale and prices for shows in Sydney quickly soared above the initial price shown. Tickets were sold at more than three times their face value at A$500.

Under the Hood
Things are looking up on Wall Street,

Things are looking up on Wall Street, if Tuesday’s slate of third quarter earnings releases are any indication. Goldman Sachs generated $3 billion of net income, up 45% year-over-year, as investment banking revenues registered at $1.87 billion against a $1.68 billion consensus estimate. Citigroup posted $4.82 billion in revenue from its markets division, eclipsing the $4.6 billion sell-side bogey, as the equity sales and trading division grew its top line by more than 30% year-over-year to $1.24 billion.

Though potent bull market conditions directly inform those upside surprises, relative strength in Bank of America’s core lending operations may present a wider economic indicator. Thus, the Charlotte-headquartered behemoth set aside $1.5 billion for potential credit losses, undercutting the Street’s $1.57 billion guesstimate, while outstanding loan balances rose 2.5% year-over-year to $1.08 trillion to exceed the $1.07 trillion analyst expectation. 

"Our customers' deposit balances and asset quality are healthy and we believe we have good opportunities to grow," commented BofA chief financial officer Alastair Borthwick, while CEO Brian Moynihan added that, though the cumulative impacts of the post-Covid inflation remain front of mind among the public, “overall spending activity is fine and the U.S. consumer is doing fine.”

Yet a diverse array of data draw a puzzlingly stark contrast with those sunny reports. The New York Fed’s freshly released September Survey of Consumer Expectations finds that the average perceived probability of missing a minimum debt payment over the next three months accelerated to 14.2% last month, up from 13.6% in August and represented the highest reading since April 2020. Notably, that sequential uptick was concentrated among middle-aged consumers sporting annual household incomes above $100,000. 

Squeezed shoppers duly plan to channel Ebenezer Scrooge in 2024, as a Deloitte-conducted poll of 4,000 consumers finds that planned holiday gift spending will reach $536 on average, down 3% year-over-year.  In turn, four out of five surveyed retail industry executives anticipate market share gains for lower cost private label categories.

Broad-based belt tightening is likewise on display in one lynchpin consumption category. Citing data from Nielsen, Jefferies analysts relay that U.S. mass beauty sales fell 5% year-over-year over the past four weeks with makeup products posting a 6% decline, leaving those two categories weaker by 2% and 3% on a nominal basis in the year to date. 

Finally, 24.2% of third quarter new vehicle trade-ins included auto loans in excess of the vehicle’s current worth accordingly to freshly released data from Edmunds, up from an 18.5% share sporting negative equity in the same period last year. Then, too, the average amount owed on those underwater loans reached a record $6,458 over the three months through September, up 11.2% year-over-year, while 22% of that negative equity cohort owe $10,000 or more with 7.5% on the hook for upwards of $15,000.

“Consumers owing a grand or two more than their car is worth isn’t the end of the world, but seeing such a notably share of individuals affected at the $10,000 or even $15,000 level is nothing short of alarming,” commented Jessica Caldwell, Edmunds’ head of insights. Peer Ivan Drury added that “it’s easy to assume that only specific customers trading in higher-ticket luxury vehicles are the ones underwater on their car loans, but the reality is that this is a problem across the board.”

Choose your own economic adventure. 

Recap Oct. 15

Pain in the healthcare and chips sectors helped preempt today’s bull market programming, as stocks fell to the tune of 0.8% on the S&P 500 and 1.3% on the Nasdaq 100 to erase the latest leg higher for those indices, while Treasurys caught a bid on the long end with 30-year yields dipping seven basis points to 4.32%. WTI crude was hammered by another 4% to finish near $71 a barrel, gold pushed higher at $2,661 per ounce, bitcoin rallied to $66,800 and the VIX advanced to 20.7, up just under one point on the day.

- Philip Grant

10.14.2024
Forces Majeure

A headline from the Baltimore Sun:

Army and Navy football both ranked in AP Top 25 for first time since 1960

Challenge Accepted
Mission accomplished?

Mission accomplished? Personal consumption expenditures (PCE) inflation data for September will register at a 2.04% year-over-year clip, if Goldman Sachs-issued estimates from Friday are on the beam, all but returning to the Federal Reserve’s self-imposed 2% per annum target after measured price pressures exploded to a 40-year high in the summer of 2022. That prospective downshift follows last month's 2.4% annual growth in headline consumer prices, which topped consensus estimates of 2.3% but still marked the coolest reading since early 2021.  

Indeed, the post-Covid inflationary outburst appears firmly in the monetary mandarins’ rear-view mirror, as demonstrated by last month’s supersized, 50 basis point rate cut. Recent monetary misadventures aside, Chicago Fed president Austan Goolsbee flagged the potential for insufficient price growth in a Bloomberg Television interview last week: "if you look at [consumer] expectations, there are some signs that inflation might undershoot the 2% target, and we want to be mindful of that too.”

A similar dynamic is on display in the Old Continent, as the European Central Bank prepares to convene later this week. Interest rate futures discount a near-certain 25-basis point reduction to the 3.5% benchmark repurchase rate, in the context of a 1.8% 12-month rise in Euro Area headline CPI over the 12 months through September. Disinflation is increasingly front of mind in Frankfurt, as “the risk of undershooting the target [is] now becoming non-negligible” according to minutes from the September meeting. 

“Avoiding a fall back into the pre-Covid world [of sub 2% CPI growth] will be one of the ECB’s biggest challenges,” Morgan Stanley chief Europe economist Jens Eisenschmidt told the Financial Times. The former ECB staffer guesstimates that the deposit rate will halve to 1.75% by December 2025 but added that “it is very well possible” that rates will drop beyond that level. 

Yet as policymakers on either side of the Atlantic revert to full-blown dovishness, some on Wall Street express their misgivings. Strategists at Deutsche Bank noted today that five-year inflation swaps, which measure investor expectations over the next half decade, have accelerated at their fastest pace since the March 2023 mini-banking crisis over the past five weeks.  

The Deutsche team likewise flags geopolitical turmoil and an associated rally in energy prices (December Brent crude prices have rallied to $78 per barrel from less than $72 as of Sept. 30), broader upward commodity pressure stemming from China’s recent flurry of monetary and fiscal stimulus measures and a return to positive M2 and M3 money supply growth in the U.S. and Europe, respectively, following 2023 contractions.  Accordingly, an inflationary revival is “an important and growing risk to be aware of, not least given it completely took markets by surprise when it emerged again after the pandemic.” 

See the Sept. 13 issue of Grant’s Interest Rate Observer for more on inflation’s potential resurgence with ways to potentially profit from such an outcome, along with the Sept. 27 edition for a closer look at one time-tested variable repeatedly proven to spur outsized price pressures. 

Recap Oct. 14

Stocks kept right on roaring Monday, with the S&P 500 climbing another 0.8% to log fresh highs and a near 24% gain in the year-to-date. The bond market was closed for Columbus Day, though an early selloff the iShares 20+ Year Treasury Bond ETF (ticker: TLT) was met with a bid to leave that vehicle slightly in the green at day’s end. WTI crude pulled back below $74 per barrel, gold edged higher at $2,653 an ounce, bitcoin jumped above $66,000 for the first time since the summer and the VIX settled south of 20. 

- Philip Grant

10.11.2024
Print Julep

Drinks on Ben! The fat tail wags the dog these days, as a Friday Bloomberg bulletin demonstrates:

The consumers powering U.S. economic growth are increasingly those who are higher up the income ladder and likely enjoying a wealth effect from asset-price gains, according to research by Federal Reserve economists. 

In the two pre-pandemic years, average household consumption was growing at a similar pace across all income groups, the new Fed study of retail spending shows. But since then, spending patterns have diverged sharply. 

In the initial Covid period through mid-2021, low-income households increased spending faster than others with the help of public stimulus programs. But their consumption fell back after the last pandemic checks went out, while middle- and especially higher-income Americans have powered ahead. Overall, since the start of 2018, high-earning households raised spending more than twice as much as the low-income group. 

As a reminder, then-Fed chair Ben Bernanke took to the pages of the Washington Post in November 2010 to trumpet the central bank’s so-called QE2 asset purchase program, arguing thus: “Easier financial conditions will promote economic growth . . . and higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.”

Who says economists can’t predict the future?

Emissions Still Grow
What's in a name?

What’s in a name?  European Union strictures set to take effect next month will forbid funds with the words “green,” “environmental” or “impact” in their names from investing in oil and gas, coal and high-emissions electricity firms.  As the rule stands, managers in violation must either sell those offending positions or rebrand their funds. Some 55% of the applicable investment universe holds at least one verboten position, research firm Clarity AI finds.

Yet as Reuters reports today, Brussels is now weighing a downshift of those pending rules in the face of financial industry lobbying efforts, as fiduciaries argue that such a crackdown will curtail funding via so-called green bonds, instruments designed to help wayward firms walk the environmental, social and governance (ESG) straight-and-narrow.  

“Our main concern is not so much the impact on a given company or fund, it is the signaling to green bond issuers and investors that regulators could disrupt the market with new rules,” Agnes Gourc, head of sustainable capital markets at BNP Paribas, told Reuters. Energy and power-focused firms account for roughly 20% of outstanding green bonds and have issued more than $70 billion of such securities in the year to date, LSEG finds. 

As regulators on the Old Continent weigh their options, virtue minded investors contend with the Richard Russell-coined truism that markets make opinions.  Thus, CNBC pointed out last month that European defense stocks have been on a rampage since Russia commenced its invasion of Ukraine, with shares of Swedish munitions manufacturer Saab generating a 252% dollar-denominated return since Feb. 24, 2022. “I think we had, like, 45,000 to 50,000 shareholders before this tragic war began and now have [more than] 175,000 shareholders,” Saab CEO Micael Johansson told CNBC. “If you don’t have any security [or] a deterrent effect, then you can’t talk about the ESG from other perspectives. That’s sort of the foundation of sustainability in my eye.”

Brad Greve, CFO at British defense concern BAE Systems, struck a similar note in an August CNBC spot: “You couldn’t even have [investor] conversations pre-Ukraine because even though you might be doing great things across the E, the S and the G, you couldn’t even talk about it. What’s happened since Ukraine, there has been a real change in attitude.”  BAE shares are up 111% in dollar terms since that fateful day in early 2022, compared to 41% for the S&P 500. 

Similar tensions between high-minded thinking underpinning ESG and practical considerations are on display stateside, as the artificial intelligence revolution’s insatiable energy needs force a realpolitik rethink. Asked at an AI themed conference in Washington on Tuesday on whether the industry can achieve its energy needs without crimping the fight against climate change, former Google CEO Eric Schmidt offered a telling response: “we’re not going to hit the climate goals anyway because we’re not organized to do it. . . I’d rather bet on AI solving the [energy usage] problem than constraining it and having the problem.” 

Recap Oct. 11

Stocks continued their heady jaunt as the S&P 500 rose two thirds of a percent to reach fresh highs, up nearly 23% in the year-to-date, while Treasurys managed a mixed showing with two-year yields dipping three basis points to 3.95% while the long bond settled at 4.39%, up from 4.26% one week ago (the bond market is closed Monday for Columbus day). WTI crude consolidated its recent gains north of $75 a barrel, gold pushed higher by nearly 1% to $2,665 per ounce, bitcoin finished little changed at $63,100 and the VIX retreated below 21. 

- Philip Grant

10.10.2024
Participation Trophy
Everyone's a winner in 2024.

Everyone’s a winner in 2024. This year’s resounding bull market has left jubilant investors happy to overlook disappointment, as the following trio of examples illustrates: 

Artificial intelligence remains the ticket in Cupertino, as Apple’s highly anticipated next generation iPhone duly stirred the bull crowd to the tune of a 21.3% third quarter advance (contributing nearly one percentage point to the S&P 500’s 6% total return over that stretch by Bloomberg’s count). Yet consumers have responded to the AI-infused device with a shrug, thus far defying hopes of a pronounced upgrade cycle. “The high expectations for iPhone 16 [and] 17 are premature,” warned analysts at Jefferies Monday. “A lack of material new features and limited AI coverage mean high market expectations of 5% to 10% growth are unlikely to be met.” 

The investment bank has company in that opinion, as peers at JPMorgan, Barclays and Citi have each trimmed their respective iPhone unit sales estimates over the past two weeks. Meanwhile, a Piper Sandler survey of teenage consumers found that only 22% of respondents plan to upgrade to the newest iteration, down from 23% and 24%, respectively, anticipating such a switch over the past two years.  AI hype and all, that downshift is particularly surprising since “the average iPhone among teens is about three generations behind the iPhone 16, meaning these older models could be due for an upgrade,” Piper notes. 

Yet the growing prospect of an iPhone 16 disappointment, in the context of negligible revenue growth over the past three years, has not dislodged shares from virtual all-time highs. Apple commands a princely 34 times consensus earnings estimate, compared to an average price tag of 22 times forward earnings over the past 10 years.  

Supply-related troubles likewise prove of little concern to Boeing’s creditors, as the aerospace giant contends with a high-profile work stoppage. Earlier this week, the company yanked its self-described “best and final” proposal – featuring a proposed 30% pay hike over four years – to the International Association of Machinists and Aerospace Workers, which has designs on a 40% raise. “When we surveyed our members on that offer, the response was overwhelming – those who participated said it was not good enough,” the IAM stated Tuesday.

The near monthlong work stoppage, which is denting triple-B-minus-rated Boeing’s revenue to the tune of $100 million per day according to TD Cowen, is attracting unwanted attention from the rating agencies. S&P Global placed Boeing on CreditWatch Tuesday, following a similar move from Moody’s in foaming the runway for a potential downgrade to junk thanks to a projected $10 billion cash burn in 2024 against $60 billion in total debt, with $12 billion of that sum set to come due in 2025 and 2026.  What’s more, 737 Max production is unlikely to reach management’s 38 per month target until mid-2025, S&P likewise believes, rather than the company’s year-end 2024 goal.

Such a defenestration from the investment-grade ranks would bring fresh headaches, with Bloomberg pointing out Wednesday that annual interest costs could rise by $100 million thanks to provisions present in $53 billion of Boeing debt which call for 25 basis point coupon increases per downgrade. More concerningly, relegation to junk status would force some investors (i.e., those mandated to hold only investment grade securities) to sell their positions, applying further upward pressure on funding costs. Yet Boeing’s 5.15% senior unsecured notes due 2030 change hands at just 142 basis points over Treasurys, down from 152 basis point spread as the strike began and only marginally wider than the 100-basis point pickup seen on Jan. 19, when Grant’s Interest Rate Observer issued a bearish credit analysis.

Nowhere, perhaps, is today’s friendly dynamic more on display than in the private markets, as Sam Altman’s OpenAI last week raised $6.6 billion at a $157 billion post-money valuation, the highest in Silicon Valley history. Those eye-popping figures accompany a torrential red ink downpour, as The Information relays today that the ChatGPT developer expects net losses to reach $14 billion by 2026, nearly triple this year’s projected $4 billion shortfall. Aggregate losses over the six years through 2028 will tip the scales at $44 billion, the company believes. Notably, those figures exclude stock-based compensation, which registered at $1.5 billion over the six months through June, roughly matching total revenue over that stretch. 

Though investors are plainly unconcerned by those anticipated losses (OpenAi’s valuation has mushroomed from $29 billion less than 18 months ago), Altman and co. aren’t taking any chances. As the Financial Times reported Wednesday, management is planning to restructure itself as a public benefit corporation, following suit from rivals Anthropic and xAI. The structure would allow OpenAI to resist pressure from activists “who might claim the company is not making enough money,” one insider told the pink paper. “[It] gives you even more flexibility to say, ‘thanks for calling and have a nice day’, they added.”   

QT Progress Report
A $17.5 billion decline in Reserve Bank credit leaves the Fed’s holdings of interest-bearing assets at $7.004 trillion. That’s down $68 billion over the past month, and 21.5% below the March 2022 peak. 
Recap Oct. 10

A hotter-than-expected September CPI print caused little consternation in the stock market, as the S&P 500 dipped a measly 0.2% to remain right near its all-time high, though long-dated Treasurys remained under pressure with 10- and 30-year yields reaching 4.09% and 4.38%, respectively, up 33 and 30 basis points over the past seven trading days.  WTI crude bounced back above $75 a barrel, gold rebounded to $2,630 an ounce, bitcoin stayed at $63,100 and the VIX settled near 21. 

- Philip Grant

10.08.2024
Double Take

As they say, 90% of success is just showing up. From KOCO-Oklahoma City:

An Oklahoma man is facing charges of stealing a vehicle after he couldn’t get a ride to court. The court case he was attempting to attend was for unauthorized use of a vehicle. The Oklahoma Highway Patrol said Kody Adams stole a pickup and drove himself to Pawnee.

Troopers said Adams was at a Stillwater gas station asking people for a ride to his court date in Pawnee. When he couldn’t find a ride, troopers said Adams decided to hop in an unoccupied LifeNet Emergency Services pickup and drive himself to court. . .  A trooper caught Adams as he was walking into the courthouse.

Adams said he was just “borrowing” the truck. . . He made his court case and was transported back to Payne County and booked on new charges.

Air Pocket
Where's the salt?

Where’s the salt?  A pair of D.C. lawmakers looked to put the clampdown on “big snack” over the weekend, as Sen. Elizabeth Warren (D-MA) and Rep. Madeleine Dean (D-PA) penned missives accusing the likes of General Mills, Coca-Cola and PepsiCo of a “pattern of profiteering” via so-called shrinkflation, NBC reports.  

“People have noticed that their box of Cheerios and bag of Doritos are smaller, but prices are higher,” commented Warren, who lobbied the Federal Reserve for a 75-basis point rate cut less than a month ago. She added that “we can’t let them get away with this price gouging.” 

Of course, acute post-Covid price pressures inform that rising political heat, as the foodstuff industry faces a soggy sales backdrop in the wake of bountiful price increases. This morning, PepsiCo reported $23.3 billion in third quarter revenues this morning, down 0.6% from a year ago and trailing the $23.8 billion sell-side consensus, likewise downshifting its full-year outlook to about half the prior 4% top line growth rate.  

Those figures – along with commentary from PepsiCo CEO Ramon Laguarta that “the cumulative impacts of inflationary pressures and higher borrowing costs over the last few years have continued to impact consumer budgets and spending patterns” – do little to raise spirits on Wall Street.  Citi analysts write that “we believe investors will continue to question the topline guidance for the fourth quarter” and beyond. 

A similar dynamic is on display in the quick service restaurant realm, as McDonalds logged a 1% annual same store sales decline over the three months through June, undercutting sell-side expectations of a flat showing and marking the first such decline since the 2020 plague year (third quarter results are due on Oct. 29).  

By way of combatting that unwelcome downshift, the fast-food purveyor rolled out a $5 meal deal featuring a McDouble or McChicken sandwich, small order of fries, small soft drink and four-piece order of chicken nuggets to cater to cash-strapped diners. As the Washington Post points out today, average menu prices at golden arches establishments rose some 40% from 2019 to 2024. 

“The consumer across a number of. . . markets, is being very discriminating,” lamented McDonalds CEO Chris Kempczinski on the July 29 earnings call, adding that “consumer sentiment in most of our major markets remains low” (see the July 5 edition of Grant’s Interest Rate Observer for more on the industry’s difficulties).  

As the post-virus inflationary impulse continues to reverberate, it’s not just shoppers and diners facing the squeeze. Thus, McDonalds filed suit Friday in U.S. District Court against JBS, Cargill, National Beef and Tyson Foods for antitrust violations, contending that the quartet “collusively reduce[d] the slaughter-ready cattle and beef supply” over the past nine years. Thanks to that “conspiracy in restraint of trade,” the producers allegedly managed to achieve prices “artificially higher than [they] would have been in absence of their conspiracy.”

No sacred cows here. 

Recap Oct. 8

Stocks resumed their ascent after yesterday’s downward detour, with the S&P 500 storming higher by 1% to reach the cusp of fresh highs, while Treasurys consolidated their recent selloff with a little changed showing as two-year yields dipped one basis point to 3.98% and the long bond settled at 4.32% from 4.3% Monday. WTI crude pulled back below $74 a barrel, gold retreated to $2,620 an ounce, bitcoin floated sideways at $63,100 and the VIX settled a bit north of 21 after testing 23 yesterday.

- Philip Grant

10.07.2024
Drone Show

When’s the next “Fed listens” tour? Michelle Bowman, Neel Kashkari and Alberto Musalem, presidents of the Federal Reserve Banks of Minneapolis, Atlanta and St. Louis, respectively, each made public appearances today. Monday’s trifecta marks a mere warmup for the parade of monetary ruminations as this week progresses:


 
Forward guidance, aweigh! 

Income as you Are
Last month’s supersized, 50 basis point rate cut has spurred an arguably curious response,

Last month’s supersized, 50 basis point rate cut has spurred an arguably curious response, as Reuters today highlights a “massive” inflow into money market funds. The category attracted a net $41.3 billion over the week ended Oct. 2 according to data from LSEG Lipper, following a $113.1 billion influx over the prior seven days. For a sense of scale, the $30.8 billion inflow for U.S. equities over the week ended last Wednesday marks the largest such figure since at least December 2020. 

Total money market fund assets reached a record $6.46 trillion Friday according to the Investment Company Institute, up from $6.3 trillion as the Fed began its easing cycle on Sept. 18 and compared to just over $5.6 trillion a year ago. 

As dwindling compensation does little to dim investor appetite for cash equivalents, demand for highly rated, lower yielding corporate debt remains exceptionally brisk. Each of the 20 U.S. investment-grade corporate bond tranches that priced last week broke higher in secondary trading, marking only the second such clean sweep of 2024, while the asset class enjoyed its strongest inflow since Easter over the seven days through Wednesday per LSEG Lipper. 

In turn, Friday’s hotter than expected reading of September nonfarm payrolls – and accompanying downshift in expectations over future policy easing (interest rate futures now price a 4.16% funds rate as of January 2025, up nearly 30 basis points over the past two sessions) – has done little to cool the asset class’s momentum. Spreads on Bloomberg’s gauge of investment-grade corporate debt contracted to 83 from 87 basis points, marking the narrowest pickup over Treasurys since September 2021 and approaching the lowest levels of the post-Lehman Brothers era. 

Meanwhile, the all-weather hunt for yield has pushed one corner of the stock market to history-making heights. Citing data from SentimenTrader, Bloomberg relays today that 96% of S&P 500 utilities sector components change hands within 5% of their respective 52-week highs, a phenomenon seen less than 1% of the time going back to 1953 and last observed in 2016.  That rate-sensitive cohort, which sports a 2.8% trailing 12-month dividend yield, logged a monster 18% rally over the three months through September. 

Recap Oct. 7

Stocks came under pressure to start the week as the S&P 500 dipped nearly 1% for its worst single showing in just over a month, while 2- and 30-year Treasury yields rose six and four basis points, respectively, to 3.99% and 4.3%.  WTI crude remained on a roll with a push above $77 a barrel, gold settled slightly lower at $2,643 per ounce, bitcoin caught a modest bid at $63,100 and the VIX jumped three points and change to 22.6, its highest finish since the aftermath of the early August market convulsions. 

- Philip Grant

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