Blue Note

From crypto-focused site Blockworks:

With bitcoin nearing its all-time high, eye watering nonfungible token sales appear to be cropping back up. A CryptoPunk just sold for 4,500 ether, worth over $16 million at current prices.

That’s the second largest sale ever for the blue-chip NFT collection, trailing only a $23.7 million CryptoPunk purchase made in Feb. 2022. CryptoPunk 3100, the one that sold Monday morning, sold for $2,127 in 2017 before changing hands again for $7.58 million in 2021.

There are 10,000 unique CryptoPunks. Each punk has randomly generated attributes, like differing glasses or hairstyles. Punk 3100 is one of nine so-called alien punks that have blueish skin. The rareness of this attribute has made alien punks the most sought-after CryptoPunks.

Buy the Sip
It's the choice of a new generation:

It’s the choice of a new generation: Private credit remains the coveted flavor within speculative-grade fixed income. The latest Bloomberg Markets Live Pulse survey finds that 43% of respondents predict that the category will outperform other fixed income categories over the next 12 months, compared to 31% and 11%, respectively, for junk bonds and leveraged loans.  Investors anticipate annual returns “in the high teens” from direct lending – topping the 12% generated from both high yield and syndicated loans over the past year – while avoiding the price volatility inherent in publicly-traded securities. 

Yet recent fundraising dynamics belie that bullish stance. Citing data from Preqin, the Financial Times relayed Friday that domestic private credit funds accumulated just $11.4 billion in January and February, a fraction of the $30.4 billion gathered over the first two months of last year.  Then, too, full-year 2023 fundraising of $123.1 billion trailed the $150.8 billion tally seen in the prior annum.  

The sharp post-2021 updraft in borrowing costs has helped usher in some choppy weather for private credit borrowers, as average interest coverage ratios within that cohort fell to two times Ebitda as of the third quarter from 3.1 times as of mid-2022 per a Feb. 23 analysis from the Federal Reserve, “indicating weakening debt service capacity.” 

As the heretofore-mushrooming private credit market undergoes some growing pains, investors turn to the leveraged loan market once more. Issuance of collateralized loan obligations – i.e., packaged and securitized collections of loans – reached $32.7 billion in the U.S. during January and February by Bank of America’s count, topping the $24.6 billion issued in the first two months of 2021 to mark the fastest start to a year on record.   

That supply surge bodes well for broader loan demand, as CLOs held 70% of all leveraged loans as of September per Guggenheim Investments, up from 52% five years earlier.  At the same time, domestic supply of new money loans has registered at just $105 billion this year according to Bloomberg, off 15% from last year’s pace to mark the weakest such output in a decade. 

Crucially, the contraptions offer an á la carte risk profile. “Safety is a CLO design feature rather than a characteristic of the loans themselves,” notes the current edition of Grant’s Interest Rate Observer, as cash flows from coupon and principal payments flow from the top, triple-A-rated tranche down to higher-yielding, more speculative segments. Conversely, any losses accrue at the bottom before impacting the triple-A segments, which currently sport floating-rate yields of nearly 7%, some 200 basis points above those on offer from the Bloomberg U.S. Aggregate Bond Index.  

See the analysis “Triple-A by design” in the March 1 issue of GIRO for an upbeat assessment of the opportunities on offer in the CLO realm, along with a review of investment vehicles offering arguably attractive risk-adjusted returns. 

Recap March 4

Stocks settled modestly lower thanks to a late lurch to the downside, but that didn’t keep bitcoin from ascending above $67,000 following a 7% rally during the past 24 hours. Treasurys came under pressure with 2- and 30-year yields to 4.61% and 4.36%, respectively, up seven and three basis points on the day, while WTI crude slipped below $79 a barrel and spot gold ripped another 1.5% to a record $2,116 per ounce. The VIX edged higher to 13.5. 

- Philip Grant

Slake Superior

From the New York Post:

A Greenland start-up is being accused of doing titanic damage to the environment by shipping ice from glaciers over 100,000 years old to be used in cocktails served at high-priced bars in Dubai.

Arctic Ice, which started this year, touts its product as the “oldest and purest” ice in the world as it is harvested from icebergs in Greenland — a distance of more than 4,730 miles from the Middle Eastern megalopolis.

Though the makers say they hope to highlight global warming’s effects on ice sheets with their business model — and even stop sea levels from rising — the scheme is getting a frosty reception. “Guys. This is nuts,” one person wrote in the comments section on Arctic Ice’s Instagram page in response to a promotional video. “The planet is freaking burning.”

Policy Honk
"Rates are pretty restrictive,"

“Rates are pretty restrictive,” Chicago Fed president Austan Goolsbee told attendees at a Princeton University-hosted event Thursday. Referencing the tandem of today’s 5.33% effective funds rate and 2.8% rise in the core personal consumption expenditures index over the 12 months through January, Goolsbee rhetorically asked: “the question is, how long to remain this restrictive?”

Peer policymakers have echoed that sentiment in recent days, as New York Fed president John Williams told Axios that “at some point, I think it will be appropriate to pull back on restrictive monetary policy, likely later this year.”  Cleveland Fed president Loretta Mester, in turn, relayed to Yahoo! Finance that “if inflation expectations. . . continue to move down then I think we’re in a good spot where we could consider an easing of the restrictive level that we’re in.”

Yet no one seems to have clued in Mr. Market. The S&P 500 ripped higher by 5.3% last month, marking its best February showing in nearly a decade, while the broad Nasdaq Composite Index reached a record high Thursday for the first time since 2021.  

As Bloomberg documents today, the bull stampede has spurred Wall Street into catchup mode. Strategists at Piper Sandler, UBS and Barclays each raised their year-end price targets for the S&P during the past week, while Goldman Sachs and UBS have upped their guesstimate twice since December. “I’ve been doing the strategy job for 20 years, and this is the first time I’ve ever done something like that,” UBS chief U.S. equity strategist Jonathan Golub confides.

Rarified air is certainly at hand, as the Wilshire 5000 Index – a comprehensive gauge of U.S. equity market cap – stands at roughly 183% of GDP.  Though that’s down from 199% as of late 2021, the so-called Buffett indicator stands at double its average ratio going back to 1970 and remains well above the 145% figure seen during the climax of the dot.com bubble. 

Attendant with that princely price tag: elements of speculative frenzy seen during the 2021-era salad days. Thus, Wednesday brought news that Cayman Islands-based online trading venue Webull plans to list its shares on the Nasdaq via a merger with special purpose acquisition company SK Growth Opportunities, targeting a $7.3 billion valuation in the deal. Overall, 33 pending blank check IPOs have taken shape over the first two months of 2024 according to SPAC Research, surpassing the 31 seen throughout last year. 

Animal spirits likewise enjoy free rein in the digital asset realm, as the price of bitcoin hovered near $63,000 this morning, up some 22% from Sunday morning (good old 24/7/365 trading) and nearly 50% in the year-to-date.  BlackRock’s iShares Bitcoin exchange traded fund reached the $10 billion assets under management threshold yesterday after gathering a net $604 million Thursday, marking the vehicle’s 34th consecutive session of inflows. CoinDesk, meanwhile, relays that open interest in Dogecoin futures reached a record $1 billion yesterday, “indicative of strong interest in the tokens” and up 54% from one day earlier. The so-called meme coin, which was conceived as a joke at its launch just over a decade ago, is up nearly 60% this week to push its fully diluted valuation above $19 billion per Coinmarketcap.com.

Then there’s the resurgent mergers-and-acquisitions realm. Nine corporate transactions of $10 billion or more were announced during January and February per data from the LSE Group, equaling 2018’s record tally for so-called mega-deals at this time of year. Issuers have sold some $50 billion in high-grade debt to finance M&A over the past two weeks, data from Bloomberg show, helping investment grade supply reach a record $385 billion in the year-to-date through Thursday. Option-adjusted spreads on the ICE BofA U.S. Corporate Index reached 94 basis points over Treasurys last week, approaching the narrowest such pickups of the post-crisis epoch. 

“The ability to lock in historically low spreads to appeal to investors who are more motivated by yield – all while the economy is saying that we’re in great shape – is a perfect storm to compel borrowers to step in and take advantage of the backdrop,” Meghan Graper, co-head of debt capital markets at Barclays, told Bloomberg last week.

Imagine an accommodative monetary stance!

Recap March 1

Green screens pervade once more as the S&P 500 tacked nearly 1% and the Nasdaq 100 enjoyed a 1.5% rally to kick off March in appropriate fashion, while 2- and 30-year Treasurys settled at 4.54% and 4.33%, respectively, down 10 and 5 basis points on the day.  WTI crude tested $80 a barrel to approach four-month highs, gold jumped 2% to $2,083 per ounce and the VIX retreated to near 13. 

- Philip Grant

Schrödinger's Rate

Behold the following pair of headlines from Bloomberg this morning:

Fed’s Preferred Inflation Metric Increases by Most in a Year

Yields Drop as In-Line PCE Supports Dovish View: Markets Live

Drive Through Financing
Talk about a lead trial balloon.

Talk about a lead trial balloon. Wendy’s Co. (ticker: WEN) performed a corporate pirouette Wednesday, ruling out the potential introduction of Uber-style “surge pricing” on its suite of fast-food offerings. “We have no plans to do that and would not raise prices when our customers are visiting us the most,” the company stated on its website.  

CEO Kirk Tanner sent customers into a tizzy following the fast-food chain’s Feb. 15 earnings call, after telling listeners-in that “we will begin testing. . . dynamic pricing and daypart offerings along with A.I.-enabled menu changes” beginning early next year. That commentary spurred widespread consternation on social media, with Sen. Elizabeth Warren (D-MA) taking to X to declare Wendy’s plans “price gouging, pure and simple,” while peer Burger King announced it will dole out free Whopper sandwiches for purchases over $3 tomorrow, conspicuously adding that “we don't believe in charging people more when they're hungry.” 

Beyond the public outcry, that aborted initiative likewise earned the reproval of industry insiders.  Roger Lipton, president and eponym of restaurant and retail-focused Lipton Financial Services, put it this way in a Tuesday commentary:

Every restaurant operator knows that prices will be taken up over time, to mirror the inevitable rise in operating expenses [i.e., the dollar’s ever-deteriorating purchasing power -ed.]. He or she also knows enough not to be perceived as a leader in this regard, because some customers will blame the messenger. 

Yet Tanner et al.’s decision to dig deep into the corporate playbook is understandable. Wendy’s will generate $536 million in adjusted Ebitda this year if Wall Street consensus is on point, up only modestly from the $504 million seen in 2019. Shares have managed a 20% return after accounting for reinvested dividends over the past five years, far below the 82% logged by the S&P Restaurant Index during that stretch.  

Then, too, goosing the sluggish stock price through further financial engineering may prove easier said than done, after the company undertook some $2.9 billion on share buybacks over the decade spanning 2023, equivalent to nearly 80% of today’s $3.7 billion market capitalization. 

In the wake of that shopping spree, single-B-plus-rated Wendy’s sports an adjusted leverage ratio of nearly six times Ebitda, analysts at S&P Global calculate. That compares to five turns of leverage for Burger King’s double-B-rated parent firm Restaurant Brands International by the rating agency’s lights, and just over three turns for triple-B-plus-rated McDonalds. 

QT Progress Report
Reserve Bank credit stands at $7.54 trillion following a $7.5 billion decline over the past week.  The Fed’s portfolio of interest-bearing assets is down $80 billion over the past four weeks and sits 15.5% below its peak logged some two years ago.
Recap Feb. 29

The first leap year trading day since 2016 brought more good tidings for the bulls, as the S&P 500 and Nasdaq 100 rose 0.5% and 0.9% respectively to each sit higher by some 7% for this still young 2024. Treasurys stayed steady on the short end with two-year yields remaining at 4.64% while the long bond declined two basis points to 4.38%, WTI crude held above $78 per barrel and gold advanced to $2,043 an ounce.  The VIX remained slightly above 13. 

- Philip Grant

Brave Art
Forget spring green shoots,

Forget spring green shoots, crypto summer is here again: The digital asset complex continues its rampage in the wake of last month’s debut of a slew of spot bitcoin exchange traded funds, along with ravenous risk appetite. The price of bitcoin reached some $57,400 this morning per Coinmarketcap.com, up a cool 37% over the past month and nearly 250% north of its fall 2022 nadir.

As X user Arun Chopra (@Fusionpointcaptial) points out on the social media platform today, the dramatic rebound spells a measure of reputational relief for some high-profile, heretofore hapless bulls.  Hollywood actor Matt Damon, who famously declared that “fortune favors the brave” in an ad for Crypto.com which ran during Super Bowl 56 on Feb. 13, 2022 – preceding a 70% swoon in bitcoin over the following nine months – has now broken even on that very public endorsement.   

Block Party
Number go up, residential real estate edition:

Number go up, residential real estate edition: Nationwide house prices logged a 5.5% annual increase in December, Tuesday’s release of the latest S&P CoreLogic Case-Shiller U.S. National Home Price Index showed, accelerating from a 5% advance in November and marking the fastest pace of annual appreciation since the final month of 2022. 

Year-over-year prices grew at 19% and 10%, respectively, during the Covid- and lockdown-addled 2021 and 2020, before briefly slipping into negative territory early last year as the Federal Reserve’s belated, aggressive tightening campaign took hold. Average 30-year fixed mortgage rates reached as high as 7.79% last fall per Freddie Mac, nearly triple those seen in late 2021. 

Noting that calendar 2023 price appreciation exceeded the 4.7% average growth rate seen over the past 35 years, Brian Luke, head of commodities, real and digital assets at S&P Dow Jones Indices commented that “above-trend growth should be well received considering the rising costs of financing home mortgages.”  

Some constituencies may view housing’s resilience more warmly than others. Prices have logged an 8.7% annual increase since year-end 2018 per the Case Shiller data, well higher than the 4.1% and 5.3% per-annum advances in headline CPI and personal income, respectively, over that five-year stretch. 

Relatively sparse inventory has helped drive that dynamic, as household formation over the decade through 2022 outpaced new single family home construction by 6.5 million units, data compiled last year by Realtor.com show.  Meanwhile, fading prospects of near-term rate cuts further complicate matters for would-be homebuyers: average 30-year mortgage rates reached 6.9%  of last week per Freddie Mac, up some 30 basis points from year-end 2023. 

By one metric, at least, the combination of outsized relative price appreciation and macroeconomic headwinds is putting the squeeze on large swaths of the public. Thus, 54% of respondents to a survey of aspiring homeowners undertaken late last month by Bankrate.com report that their income is insufficient to afford both the requisite downpayment and closing costs required to purchase a new dwelling, up from 46% reporting a similar predicament in early 2023. 

Others are making better weather of it. A poll of more than 700 professional house flippers undertaken by John Burns Research & Consulting late last year found that 49% planned to increase their activity during 2024, with only 18% planning to throttle back.  That’s despite the fact that effective interest rates for the fix-and-flip industry averaged a chunky 10.1% during the fourth quarter of 2023. 

Recap Feb. 27

A quiet session saw stocks levitate by some 20 basis points on the S&P 500 and Nasdaq 100 while long-dated Treasurys came under some pressure with 30-year yields rising four basis points to 4.44%. WTI crude logged a fresh post-November high near $79 a barrel, gold finished little changed at $2,031 per ounce and the VIX hovered below 14. 

- Philip Grant

Just Add Podium

Michael Barr, vice chair for supervision at the Federal Reserve’s Board of Governors, will deliver the keynote address Tuesday at the New York Fed-hosted Conference on Counterparty Credit Risk Management in lower Manhattan. 

Though that event is by invitation only, monetary policy aficionados left out in the cold will nevertheless enjoy a healthy portion of forward guidance in the coming days.  An even dozen Fed speakers are set to take the stage this week, headlined by a quartet of events Wednesday featuring New York Fed President John Williams, Chicago Fed president Austan Goolsbee, Atlanta Fed president Rafael Bostic and Cleveland Fed president Lorretta Mester. 

Up in the Air
No ZIRP, no problem.

No ZIRP, no problem: Investors can’t get enough of corporate America’s debt obligations with interest rates hovering well above their post-2008 norm, as high-grade borrowers sold $60 billion in bonds over the five days through Friday. This marks the busiest week in nearly two years, helping push February supply to a record $153 billion, per data from Bloomberg, on the heels of January’s record $189 billion tally. Investment grade bond supply of $342 billion now stands some 27% above last year’s run-rate.  

Fading hopes of imminent relief on the rates front have done little to curb Mr. Market’s enthusiasm.  Though interest rate futures now price roughly 75 basis points of easing from the current 5.33% Fed Funds rate for 2024, compared to an anticipated 157 basis points as of year-end, spreads on the ICE BofA U.S. Corporate Index reached 93 basis points over Treasurys Friday, a level undercut only in early 2018 and mid/late 2021 during the post-crisis era. 

“This price action suggests the demand for IG corporate bonds is getting unusually strong,” Bank of America strategists noted last week. “I don’t see any signs of this supply wave abating,” Meghan Graper, global co-head of debt capital markets at Barclays, added to Bloomberg.

The hotting up competition to lend to speculative-grade borrowers further demonstrates the freewheeling state of play. The Financial Times reports today that the battle between banks and private lenders to finance leveraged buyouts has swung into high gear, as private equity sponsors have turned back to the syndicated loan market to trim their interest costs. 

Illustrating that shifting dynamic: single-B-rated Cotiviti, Inc., a KKR-backed health care tech firm, issued a hefty $4.25 billion term loan last week at a 325-basis point premium to the secured overnight financing reference rate.  That’s not only inside of the 350-basis point spread floated during initial price talk, but far below the 525-basis point to 550 basis point pickup that was provisionally on offer in the private credit market, Bloomberg reported back in December. 

“As we’ve turned the year you can see banks being more aggressive,” Chris Bonner, head of leveraged finance capital markets at Goldman Sachs, told the FT. “You have seen more stability in the ecosystem. . . As an underwriter you’re more comfortable with putting on risk positions.” 

Those placid financial waters span the globe. Last week, the single-B-plus-rated, West African nation of Benin issued $750 million of 8 3/8% notes maturing in 2038 in its first ever dollar bond sale, drawing some $5 billion of investor demand in the process. Following recent offerings from double-B-minus-rated Ivory Coast and B3/single-B-rated Kenya, sovereign issuers in Sub-Saharan Africa have issued more than $4.5 billion of dollar-denominated debt since Jan. 1, already topping full-year supply forecast issued by Goldman Sachs. 

Spreads on the JPMorgan EMBIG Diversified Africa Sovereign Index have compressed to some 700 basis points from more than 1,000 basis points early last year.  That’s despite the fact that total sovereign defaults within the so-called emerging and frontier market categories have numbered 14 since 2020 according to Fitch, nearly matching the 19 such events seen over the prior two decades. 

“For developing nations, the loosening of financial conditions and resumption of market access is unequivocally positive,” Samy Muddai, head of emerging markets fixed income at T. Rowe Price, told Bloomberg. As for the creditors, time will tell.   

Recap Feb. 26

Stocks floated lower throughout the session to settle 0.4% lower on the S&P 500, while Treasurys likewise remained under modest pressure following a soft five-year auction as the long bond rose three basis points to 4.4%. WTI crude rebounded back towards $78 a barrel, gold ticked lower to $2,031 per ounce and the VIX held just south of 14. 

- Philip Grant

Chip Maker
Where's the salt?

Where’s the salt?  President Biden is set to take aim at the food industry at the annual State of the Union address in early March, Politico reports this morning, as “painfully high grocery prices” remain front-and-center.  The Commander-in-Chief recorded a video address on Super Bowl Sunday decrying so-called shrinkflation, telling listeners-in that “you might have noticed one thing, sports drink bottles are smaller, a bag of chips has fewer chips, but they're still charging you just as much.”

The topic is certainly a salient one. Consumers allocated an average 11.4% of their disposable income towards food in 2022 (the most recently available data) per the U.S. Department of Agriculture, the highest relative sum since 1991. In 2021, that ratio stood at 10%.  

“If you look historically after periods of inflation, there’s really no period you can point to where [food] prices go back down,” Steve Cahillane, CEO of Kellanova – the snacks purveyor spun out of Kellogg last year – told The Wall Street Journal. “They tend to be sticky.” 

Or, perhaps, more than sticky. This morning, the U.S. Department of Agriculture bumped its food inflation projection for 2024 to 2.9% from a prior 1.3% figure, after tweaking that guesstimate from a 1.2% growth rate a month ago.  Those enhanced price pressures come despite help from key commodities, as soybean and corn futures each languish at their lowest levels since late 2020. 

Choose Your Own Adventure
A windowless van no more?

A windowless van no more? Automotive retailer Carvana Co. (ticker: CVNA) gave the people what they wanted in Thursday evening’s earnings report, posting $450 million in net income for 2023 to notch its first-ever annual profit while predicting that adjusted Ebitda will come in “significantly” above $100 million during the first quarter.   

“2023 was an exceptional year for Carvana, where our deliberate focus on efficiency and profitability drove fundamental business improvements that not only led to our best-ever financial results but also increased customer [satisfaction] throughout the year,” stated founder and CEO Ernie Garcia. “Carvana is stronger than ever.”

Wall Street and Mr. Market were each duly impressed, as no fewer than eight sell-side analysts raised their price targets following the report, while shares jumped 32% Friday to reach their best levels since spring 2022.  

Though CVNA remains off some 67% from when Grant’s Interest Rate Observer had its bearish say in the Aug. 7, 2020 edition, the stock sits higher by some 1,400% from early 2023 when bankruptcy concerns proliferated, pushing Carvana’s market capitalization back above $13 billion.  For context, legacy retailer AutoNation, which sports a market cap of just below $6 billion, generated $1.02 billion in net income a year ago. Carvana’s $450 million in black ink likewise stemmed from an $878 million accounting gain associated with the extinguishment of roughly $1 billion in debt. 

Fixed income investors, meanwhile, take a different tack from Carvana’s jubilant shareholder base. Thus, the firm’s senior secured, 10 1/4s of May 2030 changed hands this morning at 79.4 cents on the dollar, for a 15.39% yield-to-worst and 1,111-basis point spread over Treasurys. Typically, spreads north of 1,000 basis points denote a distressed credit.  Carvana shelled out $632 million of interest expense during 2023, up 30% year-over-year and nearly double the $339 million in adjusted Ebitda which the company trumpeted as a record figure in its press release.   

Place your bets. Or, don’t. 

Recap Feb. 23

A strong rebound in Treasurys headlined the day’s proceedings, as the long bond dove 10 basis points to 4.37%, while stocks finished little changed on the S&P 500 and Nasdaq 100 to wrap up another banner week for the bulls. WTI crude retreated nearly 3% after logging multi-month highs Thursday, gold rallied to $2,035 per ounce and the VIX settled south of 14, more than two points below Wednesday’s intraday peak. 

- Philip Grant

Gum Drop

Here’s yet another reason to cut rates, via a press release from insurance network Delta Dental:

The slowing of U.S. inflation has trickled down to the Tooth Fairy.  New Delta Dental findings from its 2024 Original Tooth Fairy Poll revealed the average value of a single lost tooth during the past year declined by 6% from $6.23 to $5.84. This represents the first year-over-year decline in Tooth Fairy giving in five years.

Don't Call it a Comeback
It's all over but the shouting, or is it?

It’s all over but the shouting, or is it?  The Financial Times documents a contentious dispute between a pair of crypto-focused players in the wake of FTX’ s spectacular collapse, as an investor in Tyr Capital Partners alleges that the fund disregarded both internal risk protocols and investor objections over its outsized exposure to the now-defunct digital exchange.  

Investment manager TGT, a limited partner in the Geneva-based fund, contends that it sounded the alarm regarding FTX’s precarious position on several occasions in early November 2022, but that Tyr only attempted to recover its funds housed at the exchange on Nov. 11 of that year, the day that FTX filed for bankruptcy. The litigant seeks to wind down Tyr’s portfolio and take control of its remaining positions, including a $22 million claim against FTX that represents nearly 20% of its assets under management.

Recent developments add financial weight to that kerfuffle. Thus, FTX lawyers told U.S. bankruptcy judge John Dorsey last month that claimants against the defunct digital exchange are potentially poised to recover 100 cents on the dollar. That marks a dramatic turn in fortunes for the firm’s unsecured creditors, who were initially thought to be facing painful haircuts with roughly $9 billion in customer funds remaining unaccounted for. FTX founder Sam Bankman-Fried was convicted last fall of fraud in connection with that gaping balance sheet hole. 

Yet that was then, as new FTX broom John J. Ray III and his restructuring team report that they have already recouped the bulk of those missing funds. The recent levitation in asset prices likewise assists in today’s fast-brightening picture, as bitcoin remains north of $51,000, up more than 200% from its late 2022 levels.  Then, too, FTX’s 7.8% stake in generative A.I. firm Anthropic could prove lucrative for claimants, as the startup achieved an $18.4 billion post-money price tag in December, valuing FTX’s $500 million outlay at roughly $1.4 billion (yesterday’s Nvidia print should, of course, do little to slow that momentum). 

Indeed, claims against the husk of SBF’s former corporate pride and joy now change hands at an 85-cent on the dollar bid and 90 cent offer as of Friday per data from trading platform Cherokee Acquisition, up from roughly 17 cents early last year.  A jolt in activity accompanies that brisk rebound, as $714 million worth of FTX claims changed hands on the Xclaim digital transaction venue in December (the most recently available data), compared to just $3.6 million in turnover March of last year. 

More broadly, the happy outcome for early movers in post-bankruptcy FTX (an opportunity identified in the March 10, 2023, Grant’s Interest Rate Observer analysis “Pennies on the dollar”) illustrates a noteworthy dynamic seen in various busted crypto exchanges, as a relative concentration of unsecured creditors – and a paucity of claims such as bonds or bank debt sitting senior in the capital structure – acts as a tailwind for overall recoveries. For an updated look at the state of play in this speculative niche and the potential implications for the bankruptcy investment strategy at large, see “Crypto Lazarus act” in the current edition of Grant’s Interest Rate Observer dated Feb. 16.

As for Bankman-Fried, who awaits a March 28 sentencing hearing at Kings County lockup, his skills for winning friends and influencing people apparently remain well-honed.  Freelance crypto reporter Tiffany Fong got the scoop in an interview with fellow detainee “G-Lock,” who termed the ex-FTX boss “weird as shit,” but offered enthusiastic praise for his street bona fides: “He is a good guy. . . he didn’t snitch on nobody. Sam is a gangster.”  

QT Progress Report
A chunky $49 billion weekly decline in Reserve Bank credit leaves the Fed’s holdings of interest-bearing assets at $7.548 trillion.  That’s down $91 billion from the final week of January (virtually reaching the $95 billion monthly cap) and 15.4% south of the high-water mark set in March 2022. 
Recap Feb. 22

It was a day of superlatives thanks to the euphoric 17% rip for Nvidia following better-than-expected fourth quarter results yesterday evening.  Thus, stocks stormed higher by 2.9% for the Nasdaq 100 to establish fresh record highs with a near 9% advance for this young 2024, while 2- and 10-year Treasurys rose to 4.69% and 4.33%, respectively, with each establishing a fresh multi-month peak.  WTI crude settled at $78.50 to remain near its most elevated levels since the fall, gold stayed at $2,024 for a third straight session and the VIX pulled back below 15. 

- Philip Grant

Hot Towel
Until next time:

Until next time:  No U.S. recession is in the offing, the Conference Board declared today, after the group’s Leading Economic Index for January showed net gains for 6 of the 10 tracked subcomponents over the past six months.  

The research outfit had anticipated an imminent output contraction since July 2022, repeating that prediction as the LEI extended its string of sequential declines to 23 months and counting (representing the longest such streak since the financial crisis) to reach 102.7, its lowest since the dark days of April 2020.   

No matter, as a potentially brightening growth picture, in tandem with the decline in the measured rate of inflation (January CPI notwithstanding), leaves some well-placed monetary observers feeling their oats. Princeton University economics professor and former Federal Reserve vice chair Alan Blinder put it this way in a Wall Street Journal opinion piece today:

The central bank has landed the economy so softly that some economists are referring to the drop as the “immaculate disinflation.” Break out the garlands of roses. How did Mr. Powell & Co. pull off this minor miracle? The great Yankee pitcher Lefty Gomez famously said he’d “rather be lucky than good.” The Fed has been both.

Spirits Animal
So what? So let's dance!

So what? So let’s dance!  The S&P 500’s maiden voyage to the 5,000 mark earlier this month has stirred the masses once more, as Google search engine prompts for the term “call option” reached a two-year high last week, Bloomberg relays.

Individual investors are doing more than browsing. Those upside-focused derivatives accounted for nearly 60% of total options trading volume, strategists at Goldman Sachs found last week, approaching the highest such share since the meme stonk mania reached its zenith in early 2021. 

“Single stock calls are bid,” the Goldman team additionally points out, as the average cost of one-month call options on S&P 500 components outpaces premiums for the broad average by 2.3 times, also one of the highest ratios over the past three years. 

Bullish speculators are likewise coalescing around the immediate gratification strategy, as volumes for zero-days-to-expiration options tracking the S&P 500 have more than doubled over the past two years, data collected by Bloomberg show. For context, total U.S. equity derivatives activity has remained virtually unchanged during that stretch. 

Beyond the options market, cryptocurrencies stand as a readily available outlet for speculation-minded punters. To that end, VanEck’s Bitcoin Trust (ticker: HODL) saw notional turnover balloon to more than $400 million Tuesday, more than a 22-fold increase from its $17 million daily average dating to its Jan. 11 debut.

Yesterday’s explosion in activity, which preceded VanEck’s downshift in its management fee to 20 basis points from 25 basis points Wednesday, was driven by the public rather than institutional “whales,” Bloomberg ETF analyst Eric Balchunas concludes, as 50,000 individual transactions hit the tape, compared to roughly 500 on Friday.  "[I] still haven't figured out what happened," Balchunas said on the X social media site, speculating that social media coordination may have spurred the "retail army" into collective action. 

A foundational piece of the meme stock edifice, meanwhile, prepares for its star turn in fitting fashion. The Wall Street Journal reports that social media platform Reddit will earmark share allocations to some 75,000 of its most prolific users ahead of its planned March IPO.  

Such a strategy would mark a departure from convention, the WSJ notes, as investment banks in an IPO syndicate typically seek larger shareholders with a long-term orientation rather than individuals, who “are viewed as more fickle, and prone to selling at the first sign of weakness.”   

Then again, such a contrarian move is in keeping with the corporate brand.  “I want our users to be shareholders, and I want our shareholders to be users,” Reddit CEO Steve Huffman declared back in 2021.  

Recap Feb. 21

A late rebound helped stocks narrow their losses to 0.4% on the Nasdaq 100 ahead of this afternoon’s Nvidia report (the chipmaker advanced some 6% as of 4:40pm eastern time after posting expectations that largely topped sell-side consensus). Treasurys had no such luck following a weak 20-year auction this afternoon, with the 2-year note settling at 4.64% and the long bond at 4.49%, each up five basis points on the session. WTI crude bounced back above $78 a barrel, gold finished flat at $2,024 per ounce and the VIX held north of 15. 

- Philip Grant

Close, Cigar
Horseshoes, hand grenades and monetary policy?

Horseshoes, hand grenades and monetary policy? Here’s Bank of England governor Andrew Bailey delivering a dovish message to the Parliament’s Treasury Committee Tuesday: 

We don’t need, obviously, inflation to come back to target before we cut rates. I must be very clear on that, that it’s not necessary.

Headline and core CPI in the United Kingdom advanced at 4% and 5.1% annual clips in January, respectively, with each registering near their lowest growth levels of the past two years but remaining well above the BoE’s 2% target. 

Go Your Own Way
It's splitsville in the junk bond market,

It's splitsville in the junk bond market, as investors increasingly shun the most speculative borrowers in hopes of finding firmer financial ground.  Thus, spreads on the triple-C-rated portion of the ICE BofA High Yield Index reached 928 basis points over Treasurys Friday, up 78 basis points from the final trading session of 2023. 

Conversely, average spreads at the double-B rating threshold, i.e. near the pinnacle of junk, reached 199-basis points on Friday, down from more than 300-basis points in late October to mark the slimmest pickup over Treasurys since the bug barged in. 

 “Our view is that for reasonably high-quality businesses, there will be interesting ways to access capital,” Ed Testerman, partner King Street Capital, told the Financial Times yesterday. “[But] for the lowest quality companies, there will be fewer options at their disposal, which may drive more defaults.” 

Indeed, the tally of such marginal borrowers unable to punch the credit ticket remains elevated. Global speculative-grade corporate defaults registered at 14 in January, data from S&P Global show, well above the long-term monthly average of nine and marking the busiest January since 2010.  At the same time, new financing activity within the most speculative junk cohort remains sparse, as triple-C-rated borrowers raised just $2.96 billion in bonds last year, off 79% from 2022 to mark the weakest annual pace of issuance since 2008. 

Creditors in firms forced to restructure have been obliged to endure outsized financial pain of late. Recovery rates for defaulted domestic high-yield issues averaged just 33 cents on the dollar in 2023, data from JPMorgan Chase & Co. show, down from roughly 50 cents on the dollar over the prior two years and an average 40 cent recovery rate since Y2K.  

On the bright side for issuers in the bottom of the martini shaker facing that bitter cocktail of dour price action, limited financing activity and soft recovery rates, misery loves company.  Thus, S&P Global’s count of so-called weakest links, or U.S. firms sporting a single-B-minus rating or lower along with a negative ratings outlook, reached 228 as of last week, up 19% from early last year.  

More broadly, some 40% of debt tracked by the Bloomberg U.S. High Yield Index now features a rating in the single-B tier, strategists from Barclays led by Bradley Rogoff found earlier this month, nearly matching the 45% of the market sporting a stronger, double-B imprimatur. As of late 2021, those figures were 34% and 52%, respectively.  Triple-C, meanwhile, accounts for 14.4% of the junk gauge, up from 12.2% in December 2021, “Index quality is beginning to deteriorate,” Rogoff et al. conclude. 

Recap Feb. 20

Stocks remained under moderate pressure ahead of tomorrow afternoon’s lynchpin Nvidia earnings print, with the S&P 500 and Nasdaq 100 retreating by 0.6% and 0.9%, respectively.  Treasurys enjoyed firmer footing as 2-year yields ticked lower by five basis points to 4.59% and the 10-year note settled at 4.27% from 4.3% Friday, WTI crude pulled back to $77 a barrel and gold edged higher to $2,024 per ounce. The VIX climbed above 15 to mark its second-highest close of 2024. 

- Philip Grant

Ex Officio
Necessity is the mother of invention:

Necessity is the mother of invention: Vornado Realty Trust is looking far afield as it considers options for the demolished Hotel Pennsylvania site in midtown Manhattan, as promotional brochures produced by the company depict tennis and basketball courts, along with a concert venue and a large tent suitable for hosting events such as New York Fashion Week, Crains New York relays.  The vacant 80,000 square-foot property, which sits across the street from Madison Square Garden and Penn Station, was earmarked for office use before the developer called an audible in 2022.

As that eye-catching bulletin suggests, rough sledding in the commercial real estate realm continues apace. Vornado CEO Steven Roth lamented a “total blacklisting of office in the capital markets,” last Tuesday as the Federal Reserve’s aggressive, belated post-Covid tightening cycle has ratcheted borrowing costs higher and crimped refinancing activity, while the rise of remote work hinders demand. 

The share of office commercial mortgage-backed-security debt classified as distressed (i.e, more than 30 days past due or loans which have been transferred to a special servicer) reached 10.5% at the end of January, data from CRED iQ show, more than triple the tally seen a year ago.   

Steep valuation declines can be expected to follow for those troubled assets, as a collection of office properties tracked by Cred iQ that were reappraised by a special servicer last year saw a near 50% markdown on average.  “We will continue to see upticking levels of distress,” Omar Eltorai, director of research at Altus Group, predicts to Bloomberg. “It’s one of those variables that you can call early, but there’s a delay before it [manifests].”

An aggressive cadence of debt maturities adds further urgency to the dynamic, as most commercial mortgages are non-amortizing, obliging the non-delinquent borrower to either refinance or pay in full. Upwards of $1 trillion in commercial property debt is set to come due by the end of next year, data firm Trepp finds, with that figure set to reach $2.2 trillion by December 2027.  For context, $541 billion fell due during 2023 – itself a record. 

Risks of further pain in the sector are widespread, as those obligations are held by banks, asset managers, pension funds and life insurance companies around the world.  Yet the composition of vulnerable debt on lender balance sheets is difficult to ascertain, as the fragmented and relatively opaque CRE market largely lacks granular property-by-property ownership data. “We know it’s a problem, but its hard to precisely state to what degree across lenders,” Rich Hill, senior vice president of real estate investment at Cohen and Steers, told The Wall Street Journal

One thing’s for sure, the ranks of encumbered property players impatiently await monetary salvation from the Federal Reserve. “I think if interest rates go down, which they’re supposed to, some of these guys are going to skate through this, narrowly,” Nicole Schmidt, managing partner at Oberon Securities, told Bloomberg last week. “For commercial real estate, rate cuts can’t come soon enough,” Matthew Anderson, managing director at Trepp, likewise concluded to the WSJ in January.   

Belated Recap Friday Feb. 16

What day is it again?  Stocks ticked lower by 0.5% Friday on the S&P 500 (major indices in Europe and Japan each settled slightly lower Monday) with Treasurys likewise coming under pressure as 2- and 30-year yields settled at 4.64% and 4.45%, respectively, up eight and three basis points on the session. WTI crude held just above $78 a barrel, gold ticked to $2,018 per ounce and the VIX rose to near 15. 

- Philip Grant

Frienemy Mine

A pair of Silicon Valley mainstays cross paths once more.  From Bloomberg:

Meta Platforms, Inc. released new guidelines for small businesses that advertise on Facebook and Instagram, aiming to help them get around fees imposed by Apple, Inc.  Meta is advising the companies to buy ads through a web browser, rather than on Facebook or Instagram iOS apps, according to guidance released Thursday. That will help them avoid an Apple commission that Meta said would take effect this month. 

Apple’s new policy requires advertisers to use its In-App Purchase feature whenever they pay to “boost” social media posts — a move that gives the content more exposure. Apple takes a cut of as much as 30% on app purchases in its iOS software, meaning that Meta will lose a portion of its ad revenue to the iPhone maker. . .

Apple Chief Executive Officer Tim Cook has been a vocal detractor of the privacy practices at Meta, which relies on user data to sell ads. Previous Apple changes have hit Meta in the
pocketbook. In 2021, an iOS tweak that limited third-party data collection led to an estimated $10 billion loss in ad revenue for Meta.

The Hair Over There
Last foreigner out turns off the lights:

Last foreigner out turns off the lights:  first-world investors poured a net $5.3 billion into a collection of eight emerging market exchange traded funds which exclude China from their respective portfolios, the Financial Times relays, citing data from ETF.com, triple the prior year’s figure.  At the same time, the FT’s tally of China focused funds bled a net $802 million in 2023 after attracting $7.5 billion during the prior annum. 

“The correlation of Chinese equities towards other major emerging markets has absolutely collapsed in the last few years,” David Dali, head of portfolio strategy at Matthews Asia, told the pink paper. “There is certainly a percentage of our investors that just prefer not to have China in their portfolios at all.” 

That dynamic is far from limited to the ETF realm, as foreign net purchases of mainland equities fell to RMB 44 billion ($6 billion) last year per Bloomberg, by far the lowest since at least 2017. Tuesday brought word, meanwhile, that MSCI, Inc. will remove 66 Chinese firms from its benchmark All Country World Index, effective at the close of trading Feb. 29. 

As those developments suggest, it’s been tough sledding for shareholders in the world’s second-largest economy, as the mainland CSI 300 Index has shed 42% in the past three years while the Hong Kong-based Hang Seng Index has endured a 50% drawdown since early 2021 to reach levels seen in summer 1997, just prior to the Asian currency crisis. 

To be sure, a bevy of adverse fundamental factors drive that discouraging state of play, including the messy aftermath of China’s longstanding debt fueled real estate bubble and daunting demographic “challenges,” to say nothing of Beijing’s cowing of private enterprise (the Communist Party’s treatment of Alibaba founder Jack Ma in 2021 in response to his criticism of regulators ahead of the aborted Ant Financial IPO stands as “exhibit A”).

Yet as the calendar flips to the year of the Dragon following the conclusion of the Lunar New Year, those widely understood pitfalls may set the stage for better investment days ahead. “For markets to work, you don’t need things to get better, just less bad,” Ariel Investments emerging markets portfolio manager Christine Phillpotts told Barrons today. 

See the Feb. 2 edition of Grant’s Interest Rate Observer for more on the hangover from China’s debt-fueled growth party and its potential big-picture implications, along with the brand-new issue dated Feb. 16 for a look at a trio of Middle Kingdom-focused plays featuring conservative balance sheets, unimposing valuations and strong cash generation capabilities. 

QT Progress Report
Reserve Bank credit wriggled higher by $2.8 billion over the past seven days, leaving the Fed’s portfolio of interest-bearing assets at $7.597 trillion. That’s off by $52 billion from a month ago, and 14.9% below the March 2022 highs. 
Recap Feb. 15

We are so back:  stocks rose another 0.7% on the S&P 500 to carve out another fresh closing high on the broad index and push Wednesday’s post-CPI tumble farther into the rear-view, while the long bond declined another three basis points to 4.42% with two-year holding at 4.56%. WTI crude rose to near $78 a barrel, gold bounced back above $2,000 per ounce and the VIX slid to 14, some 3.5 points below the mid-week peak. 

- Philip Grant

Satellite Office

Talk about a Chinese wall. From the Financial Times:

U.S. law firm Latham & Watkins is cutting off automatic access to its international databases for its Hong Kong-based lawyers, in a sign of how Beijing’s closer control of the territory is forcing global firms to rethink the way they operate. 

The world’s second highest-grossing law firm has told staff that while Hong Kong will have access by default to China documents, from this month they will not be able to see other content in its international databases unless specifically given permission, according to two people with knowledge of the matter. 

The move underscores the growing difficulties for global companies operating in a city that made its name as an international financial hub. It comes after Beijing introduced new anti-espionage and data laws restricting information flows out of the country. . . It is already considered best practice to wall off confidential client data, restricting access only to those who need to see it. However, the change will mean staff in Hong Kong no longer have default access even to non-private files from outside China.

'We have to do Something'
Call it overdue diligence:

Call it overdue diligence: Hewlett Packard Co. is seeking some $4 billion in restitution from Autonomy Corp. founder Mike Lynch after a London court determined that Autonomy improperly exaggerated its revenues ahead of HP’s acquisition of the software firm for $11 billion back in August 2011.  HP (which spun off its enterprise division in 2015), swallowed an $8.8 billion Autonomy-induced impairment charge, equivalent to 79% of the purchase price, a mere 14 months after the merger announcement. 

“The fraud was consistent and clear: to inflate Autonomy’s ostensible software revenues,” HP lawyers contended in a Monday hearing. The acquisition target, which itself pursued a rollup strategy prior to falling into HPs arms, sought to “maintain its reputation as a highly successful pure software company with beat-and-raise financial results. . . to ultimately sustain its share price” ahead of the takeover.  

Attorneys for Lynch – who was extradited to the U.S. last year to face criminal charges related to the affair – argued that the purchase price “would not have been materially different” if the alleged creative accounting had come to light, as the “fundamental value” of Autonomy’s technology “is unaffected” by the alleged accounting fraud. 

To be sure, HP coughed up a pretty penny to get the deal done, bidding a 64% premium to Autonomy’s public valuation in 2011, equivalent to just over 10 times the target’s stated annual revenues. For context, the Nasdaq 100 Index currently sports an enterprise value to sales ratio near five.  

Instructively, a fear of missing out played no small part in the debacle, as one insider relayed to Reuters in 2019 regarding HP’s then-CEO Leo Apotheker: “What happened is that he talked to Autonomy, and they got into a dialogue, and he told the board that we have to do something. It was out of frustration and desperation to a large degree."

Ill omens accompanied the Autonomy deal announcement, as HP simultaneously disclosed a $1 billion restructuring charge related to its 2010 purchase of Palm, Inc., nearly matching the $1.2 billion transaction figure.  Mr. Market, meanwhile, promptly registered his verdict, as HP shares tumbled 20% on the day of the deal announcement and reached a 65% drawdown by late 2012. 

In abandoning a bullish stance on HP initiated less than two months prior, Grant’s Interest Rate Observer concluded in the Sept. 9, 2011, edition that the firm’s bottom-scraping multiple of five times trailing earnings might represent a compelling opportunity “if HP stockholders had any real claim on its cash flows. But they seem not to have.”  

Recap Feb. 13

A hotter than expected reading of January CPI spurred all sorts of asset price indigestion, as stocks slumped to the tune of 1.6% on the Nasdaq 100 while the small-cap Russell 2000 lost 4.1%. Two-year yields surged 18 basis points to 4.64%, with the 10-year reaching 4.31%, well above the 4.09% auction print from last Thursday, WTI crude advanced to near $78 a barrel and gold sank to $1,992 per ounce.  The VIX ripped two points to near 16 after testing the 18 handle in mid-afternoon. 

- Philip Grant

A Story Behind Every Rule
“Meeting the expectations of our regulators

“Meeting the expectations of our regulators through our transformation continues to be our top priority, and we’re making steady progress simplifying and modernizing our bank” a Citi spokesperson told Reuters, concerning actions related to recent complaints from federal banking regulators. “Like any multiyear effort of this scale, progress isn’t linear and there are important learnings across the way that we’re incorporating into our efforts.” 

Such corporate “learnings” take various forms.  Thus, Bloomberg relayed Friday that Citi management has told dealmakers “to be disciplined when consuming alcohol at client events” following “complaints of unruly behavior.” 

Chain of Custody
Many happy returns?

Many happy returns?  The price of bitcoin briefly popped back above $50,000 Monday afternoon, reaching that milestone for the first time in more than two years after enduring a 64% swan dive in 2022. 

Though a broad-based resurgence in risk appetite hasn’t hurt the cause, the introduction of spot bitcoin exchange traded funds, with the accompanying $2.8 billion of net inflows since their Jan. 10 debut, appears to be powering the latest leg higher, an impressive 26% over the past three weeks. Bitcoin ETFs purchased some 12,000 bitcoins Friday to meet investor demand, James Butterfill, head of research at crypto-focused asset manager CoinShares, told CNBC, far outpacing the average daily creation rate of roughly 900 bitcoins. 

On form, such euphoric price action drives sentiment to match. Prices could reach as high as $112,000 this year if the current rate of ETF inflows persists, Ki Young Ju, CEO of on-chain data provider CryptoQuant mused on X yesterday, with the digital ducats poised to rally a further 10% to $55,000 under a “worst case” scenario.

One thing’s for sure: the prospect of higher prices surely excites one less-than scrupulous constituency.  Scammers managed to pilfer $1.1 billion in crypto-related ransom attacks last year, blockchain analytics firm Chainalysis found last week, eclipsing 2021’s prior peak by some 12% and representing nearly double the illicit haul seen in 2022. “It is important to recognize that our figures are conservative estimates, likely to increase as new ransomware addresses are discovered over time,” the Chainalysis team adds. 

Recap Feb. 12

All quiet on the Treasurys front ahead of tomorrow’s January CPI print, as the long bond held at 4.37% while two-year yields ticked to 4.46% from 4.48% Friday.  Stocks reversed early gains to finish slightly lower on the S&P 500, a move augured by day-long strength in the VIX (the volatility gauge rose one point to near 14), WTI crude held at $77 a barrel and gold ebbed to $2,021 per ounce. 

- Philip Grant

Taking it From the Streets
But what does this have to do with Nvidia?

But what does this have to do with Nvidia?  Behold a trio of headlines illustrating the unfolding “democratization of finance”:

Blackstone, BNP Paribas team up over private debt fund for retail investors (Reuters, Feb. 6)

KKR sees ‘trillions’ of retail investor dollars moving to alternatives (InvestmentNews, Feb. 7)

Bill Ackman’s Pershing Square targets U.S. retail investors in new fund (Bloomberg, Feb. 8)

Apollo CEO Marc Rowan, meanwhile, had this to say on yesterday’s earnings call regarding opportunities that high-net worth investors present to the alternatives industry:

We are in the earliest early days of this. [It] hasn’t even started. This is a $65 trillion market that ultimately has the potential for private markets investors such as ourselves and our peer group to be as large, if not larger, than our institutional market. 

Asked about the roughly $12 trillion in global wealth stored in 401(k) retirement plans, Rowan replied thus:

I do see an opening in the 401(k) market. . . You’re seeing the first baby steps as fiduciary managers in 401(k) begin to mix in private [strategies] into their heretofore public solutions, simply to get better outcomes and better diversification.

Band on the Run
Thanks, but no thanks:

Thanks, but no thanks: Directors at Nikola Corp. rejected a quintet of nominees for the board advanced by incarcerated founder and former CEO Trevor Milton, the company announced today.  The ex-boss’s slate of hopefuls “have no public company experience, add no skills or experience to the board, and indisputably lack the depth of experience that the current Nikola board members bring,” the statement read. 

Recall that Milton, who remains Nikola’s third-largest shareholder with a 4.5% stake while cooling his heels in federal prison following securities and wire fraud convictions, guided his electric truck startup to a $29 billion market cap in summer 2020 (briefly eclipsing Ford), before resigning later that year after Hindenburg Research revealed that a promotional video depicting the flagship Nikola One semi in motion was staged.

Though the company retains a $832 million market capitalization after posting a cumulative $1.87 billion cash burn since 2019, Nikola’s current management faces an uphill climb. Shares have remained below $1 since the start of December, spurring the Nasdaq to issue a delisting notice in January, its second such warning in the past eight months. By way of response, CEO Steve Girsky took a philosophical tone in an interview with FreightWaves: 

Stocks are connected to companies like rubber bands. Sometimes they get ahead, sometimes they get behind. We can only control what we control, which is the performance of the company and satisfying our customers. 

Recap Feb. 9

Stocks wrapped up their 14th green week in the last 15 tries, as the S&P 500 advanced 0.6% to extend its year-to-date gains to just over 6% with the Nasdaq 100 gaining 1% to sit higher by 8.6% for 2024. Treasury prices dropped again but finished off their worst levels as the 10-year yield settled at 4.17% after testing a two-month high at 4.19% this morning.  WTI crude held above $76 a barrel, gold ticked lower to $2,025 per ounce and the VIX stayed south of 13. 

- Philip Grant


Call it breakups-as-a-service. From the New York Post:

Need to passive-aggressively dump your significant other before Valentine’s Day? Pizza Hut has you covered.

On Tuesday — known as “Red Tuesday” for its popularity as a date for couples to split a week before Valentine’s Day — the restaurant chain kicked off a heartbreak-inducing promotion offered to customers in select cities.

Through February 14, lovers in New York, Chicago and Miami can order a “Goodbye Pie” and have it sent to their soon-to-be-exes. The “delivery driver will deliver the bad news in the best way,” the website states.

Everything in Moderation, Including Moderation
Corporate America gave Mr. Market a boost to the S&P 500’s maiden 5,000 foray

Corporate America gave Mr. Market a boost to the S&P 500’s maiden 5,000 foray Thursday, as U.S. firms announced a combined $105 billion in share repurchases over the first seven days of this month according to data from Birinyi Associates.  That’s more than double January’s total sum and marks the strongest start to February on record, coinciding with a chunky 3.1% advance for the broad index over that stretch to establish fresh highs. 

The recent buyback binge “does tell you that management is getting more confident about where the economy is headed,” Matt Maley, chief market strategist at Miller Tabak & Co., told Bloomberg. “It should be seen as a somewhat constructive indicator.”  

As C-suites nationwide snap up their own shares in the context of a raging bull market, a pair of prominent firms speak to the pitfalls associated with an excessive use of the tactic.  Witness the reputational and financial predicament facing Boeing Co., which allocated $39 billion to stock repurchases over the five years through 2018, equivalent to some 80% of free cash flow over that stretch (see “Ice on the wings” in the January 19 edition of Grant’s Interest Rate Observer for more).

Then there’s Charter Communications, Inc.  As X user Masa Capital pointed out yesterday, the telecommunications and media firm shelled out $72 billion from September 2016 through December of last year to purchase its own stock, equivalent to just over 50% of the fully diluted outstanding share count, achieving an average price of $455 a share on that seven-plus-year endeavor.  

With Charter stock down 38% from mid-October to some $280 per share on the back of a surprise drop in internet subscribers during the fourth quarter, the company market cap now stands at $41 billion, or just over half its buyback-related outlay.  Net debt, meanwhile, swelled to $98.3 billion as of Dec. 31 from just over $60 billion at the end of 2016.  

Buyback-happy management teams may be well served to apply a (paraphrased) piece of advice from the late private equity titan Ted Forstmann, who likened balance sheet leverage to chocolate cake: a little bit hits the spot but too much can make you sick. 

QT Progress Report
A $24.9 billion weekly decline in Reserve Bank credit leaves the Fed’s portfolio of interest-bearing assets at $7.594 trillion. That’s down $53 billion from this time last month, and 14.9% south of the high-water mark logged in March 2022. 
Recap Feb. 8

Another round of weakness in the Treasury complex headlined the day’s proceedings, with 2- and 30-year yields each rising five basis points to 4.46% and 4.36%, respectively, while stocks managed to finish slightly higher in listless, tight-range trading. WTI crude caught a strong bid to settle just shy of $77 a barrel, gold stayed near $2,035 per ounce for a third straight session and the VIX remained stuck below 13. 

- Philip Grant

Fruit Juiced

We’ve got your wedge issue right here. From the U.K. Independent:

A 285-year-old lemon, found in an antique cabinet, was auctioned for £1,416 ($1,784) in the U.K. According to Brettells Auctions in Shropshire, the lemon was unexpectedly found inside a 19th-century cabinet which was being photographed for sale.

The cabinet was brought in by a family claiming it belonged to a deceased uncle. The lemon was inscribed with these words: “Given By Mr. P Lu Franchini Nov. 4, 1739 to Miss E. Baxter.” The auction house decided to sell the 285-year-old lemon. “We thought we’d have a bit of fun and put it (lemon) in the auction with an estimate of £40-£60,” said auctioneer David Brettell.

Ball Security
All in the game:

All in the game: A record 67.8 million adults plan to wager on Sunday evening’s Super Bowl LVIII in Las Vegas per data collected by the American Gaming Association, up 35% from last year’s tilt.  Some $23.1 billion of wagers will be put in play if the AGA figures are on point, far above the $16 billion handle seen in 2023. 

“As the Super Bowl comes to Las Vegas for the first time, this year’s record interest in wagering marks a full circle moment for the U.S. gaming industry,” AGA president and CEO Bill Miller commented yesterday. “Our priority remains getting this opportunity right by providing the consumer with protections that only a regulated market can guarantee, and investing in responsible gambling tools, safeguards and education.” 

Yet the scores of citizens looking to try their luck on an NFL-sanctioned gambling venue have more than the dreaded “bad beat” to contend with. Last week, a federal judge sentenced a 19-year-old Wisconsinite to 18 months in the hoosegow for hacking the DraftKings gambling site and stealing $600,000 from 1,600 accounts.  

The perpetrator, who pleaded guilty to a single count of conspiracy to commit computer intrusions in November, purportedly stored some 38 million username and password combinations on his personal computer for further potential hacking misadventures. 

Publicly traded DraftKings (ticker: DKNG) likewise contends with internal breaches.  Bloomberg relays that the firm filed a lawsuit against a former senior executive contending that the ex-employee pilfered the gambling site’s Super Bowl business plans – including sensitive information regarding celebrities and corporate sponsors – before sharing them with competitor Fanatics.  

DraftKings asked a Massachusetts district court to issue an order blocking defendant Michael Hermalyn, its former vice president of VIP management, from joining the rival platform, arguing that “the trade secrets and confidential information that Hermalyn learned and accessed. . . are among the most valuable owned by DraftKings.” 

Legal hiccups aside, investors are warming to the DraftKings value proposition, as shares have climbed 283% from late 2022 to push its valuation near $20 billion, even though the company has shown negative adjusted Ebitda during each quarter going back to the start of 2019.  DraftKings management has in turn sold $145.2 million of stock into the open market over the past three months, more than all but five of the 152 U.S.-listed consumer cyclical firms tracked by Bloomberg. 

Meanwhile, a fellow NFL official betting partner looks to avert its own potential litigation morass. ESPN relayed Friday that the Jacksonville Jaguars have asked FanDuel to return roughly $20 million that was stolen from the team by former Jaguars finance manager Amit Patel and subsequently frittered away on the gambling app.  

Such outfits are obliged to perform anti-money laundering and know your client protocols to ensure transferred funds are on the up-and-up, white collar criminal attorney Stephen Bell advised ESPN, adding that “where the size of the customer’s bets far outweighs their income, red flags are present and should require additional due diligence to confirm that the funds are clean.”  Yet a second source told the sports site that FanDuel is unlikely to play ball: “the way they see it. . . ‘we got this money fair and clear. It’s not our problem,’” he said, adding that “I would be gobsmacked if [a refund] happened.” 

As for Patel, who pleaded guilty to embezzling some $22 million via a virtual credit card system designed to pay Jaguars team expenses, his prolific use of FanDuel’s “ParlayPicker” daily fantasy sports contest – including buy-ins of upwards of $24,000 per diem – brought little in the way of financial success or competitive glory.  “He was legendarily bad” a veteran plunger told ESPN. 

Happy hunting, sports fans. 

Recap Feb. 7

The bulls continue to control the proceedings as the S&P 500 climbed another 0.8% to reach the cusp of the 5,000 plateau for the first time, while a stronger-than-expected reception for the record $42 billion auction of 10-year notes headlined a day of modest losses in the Treasury complex (2- and 30-year yields each ticked higher by two basis points).  WTI crude climbed above $74 a barrel, gold stayed at $2,034 per ounce and the VIX slumped below 13. 

- Philip Grant

Mag Lite
What goes up, must come down less?

What goes up, must come down less?  Price action in the S&P 500 has reached historically constructive heights in this young 2024, as Bloomberg relays that the benchmark index has averaged a 0.66% advance on green finishes since the start of the year compared to a 0.45% average down-day decline.  That approximate 1.5:1 ratio of average single-session gains to losses stands as the strongest such seasonal showing going back to 1995. 

“There’s still a lot of fear of missing out, which keeps investor bias largely to the upside,” Kim Forrest, chief investment officer at Bokeh Capital Partners, told Bloomberg. “People don’t want to be caught in the same trap as they were at this point last year, when they thought the glass was half empty. But it can be dangerous.” 

How far will the FOMO go? The S&P 500 has now logged weekly gains in 13 of its last 14 tries to settle Monday at an 11% premium versus its 200-day moving average – a level seen only a handful of times since the financial crisis, and which preceded a steep decline in July 2023 and the February 2018 “Volmageddon” episode – while reaching the median sell-side strategist forecast for year-end a mere 24 trading days into 2024. 

Dwindling participation in that levitation, meanwhile, takes center stage, as select mega-cap technology names undertake the bulls’ heavy lifting.  SentimenTrader founder Jason Goepfert finds that fewer than 20% of New York Stock Exchange components managed to finish higher yesterday despite the S&P 500 remaining within 35 basis points of its peak, a dynamic unseen since at least 1962.  On only two occasions during that stretch, in fall 1999 and January 2018, did that figure of green NYSE issues sink below 30% with the S&P 500 so close to its high-water mark. 

It's an unusual party which gets more exclusive the longer it goes on. 

Coloring Outside the Lines
From the "good things happen to relatively cheap stocks" file:

From the “good things happen to relatively cheap stocks” file:  L’Occitane International S.A. (ticker: 973 in Hong Kong) looks to be back in play, with Bloomberg reporting that Blackstone has been conducting due diligence with an eye towards a bid for the Luxembourg-headquartered company.  

A buyout would potentially take place in concert with L’Occitane’s billionaire chairman Reinold Geiger, who controls more than 70% of shares outstanding and undertook a failed attempt to purchase the multi-branded beauty products firm outright last summer.  Blackstone may ultimately decide against a bid, Bloomberg adds, while other suiters could, in turn, come to the fore. 

That news was music to the ears of L’Occitane shareholders, who have enjoyed 20% price appreciation in dollar terms since Grant’s Interest Rate Observer rendered a bullish verdict in a Sept. 29 analysis, compared to a 9% loss for the Hang Seng Index and a 16% total return for the S&P 500 over that period.  The stock endured a 17% swan dive on Sept. 5, after Geiger abandoned his approach. 

With the renewed potential of a bidding war or, perhaps, a relisting from Hong Kong to a Western exchange looming as potential bullish catalysts, L’Occitane currently changes hands at an enterprise value of just under 11 times adjusted Ebitda forecasts for the fiscal year ending March 31, 2025.  By contrast, U.S.-listed peer Estée Lauder, which announced Monday that it will lay off 5% of global staff after cutting earnings guidance four times during the 12-month stretch spanning November, sports an enterprise value equivalent to 18.6 times adjusted Ebitda estimates for the fiscal year through June 2025. 

As ever, beauty is in the eye of the beholder. 

Recap Feb. 6

A strong three-year Treasury auction catalyzed a solid bid across the Treasury complex ahead of a $42 billion offering of 10-year notes tomorrow, as 2- and 30-year yields fell seven and six basis points, respectively, to 4.39% and 4.29%, while stocks finished on either side of 20 basis points of unchanged for the S&P 500 and Nasdaq 100.   WTI crude ascended to $73.50 a barrel, gold ticked higher to $2,035 per ounce and the VIX slipped to 13. 

- Philip Grant

Always Be Closing

From the Financial Times

Asset managers from BlackRock to Grayscale have launched an online advertising blitz for their bitcoin exchange traded funds, taking advantage of a change to Google’s marketing rules on promoting cryptocurrency instruments. 

Google’s new marketing rules allow ads touting “cryptocurrency coin trusts” to appear alongside search results for queries such as “bitcoin ETF.” They took effect on January 29, weeks after 10 asset managers launched bitcoin ETFs on January 11. 

Ads have appeared from asset managers including BlackRock, Fidelity, Grayscale, Invesco and Bitwise touting spot bitcoin ETFs as the issuers try to get their products in front of as many potential clients as possible — retail investors in particular. . .  Bitwise has enlisted the pitchman from Dos Equis’s “The Most Interesting Man in the World” ad campaign, Franklin Templeton’s X account last month temporarily endowed its logo with laser eyes, a popular crypto meme, while BlackRock plans to project bitcoin ETF ads on buildings in major U.S. cities.

Chop Shop
Rubber, meet road:

Rubber, meet road:  Fed chair Jerome Powell threw cold water on investor dreams of imminently easier money ahead, declaring on 60 Minutes Sunday evening that “we want to see more evidence that inflation is moving sustainably down” towards a 2% annual rate before proceeding with rate cuts. The central banker added that he expects three 25 basis point reductions to the 5.33% effective Fed Funds rate this year, half the tally of rate cuts priced in by interest rate futures as of Thursday.

Recent data, meanwhile, do the bond bulls no favors:  witness Friday’s scalding non-farm payrolls print for January, which featured a 353,000 employment increase in headline employment, nearly double the 185,000 economist consensus.  Then, too, this morning brought news that the Institute for Supply Management’s non-manufacturing survey for January showed a marked acceleration in the Prices Paid diffusion gauge, with that measure of inflation jumping to 64 (figures above 50 indicate expansion) from 56.7 in December, marking the fastest monthly pace of acceleration in more than a decade. 

Though Mr. Market still anticipates some 125 basis points of easing this year according to interest rate futures, that downshift was sufficient to send benchmark assets into spin cycle.  Thus, 10-year Treasury yields traded to 4.175% this morning, nearly matching the 4.18% closing peak for 2024 thus far only two sessions after notching a year-to-date low of 3.83%.  As Bianco Research founder and eponym Jim Bianco points out, that’s the 10-year note’s second largest two-session upside lurch since the Fed began its aggressive, belated tightening regime in spring 2022. 

That volatility spasm may bode ill tidings for fixed income fiduciaries.  Bloomberg analyst David Cohne relays today that active bond mutual funds allocate an average 39% of their portfolio to corporate bonds, well above the 27.4% weighting for the Bloomberg U.S. Aggregate Index.  The tactical shift into corporate bonds proved fortuitous in 2023 as investment grade debt returned 8.5% versus 5.5% for the wider index, paving the way for 81% of surveyed managers to outperform their benchmark.  

However, Cohne warns that higher bond volatility has historically augured poorly for the corporate realm.  For instance, Bloomberg’s Corporate Bond Index absorbed an eye-watering 14.8% loss over the 10 trading days through March 20, 2020, as rates volatility skyrocketed, nearly triple the broader bond selloff seen during that Covid-related panic.  

Conversely, the prospect of a more hawkish monetary policy stance may work in corporate creditors’ favor, though such an outcome could ultimately portend wider trouble.  As Bank of America credit strategist Yuri Seliger writes today, “higher rates will continue creating downside risks to economic growth, and the potential for faster rate cuts down the road.” 

Recap Feb. 5

Stocks were able to recoup most of their early losses to leave both the S&P 500 and Nasdaq 100 slightly below unchanged, though Treasurys had no such luck as 2- and 30-year yields jumped to 4.46% and 4.35%, respectively, up 10 and 12 basis points on the session. WTI crude edged higher towards $73 a barrel, gold remained under pressure with a near 1% drop to $2,024 per ounce and the VIX remained just south of 14. 

- Philip Grant

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