From the Financial Times:

The Pentagon is making a $400 million direct investment in a US rare earths producer, in an unusual arrangement highlighting the Trump administration’s determination to break Chinese dominance of critical minerals and bolster domestic supply chains.

MP Materials on Thursday said the Pentagon would become its largest shareholder, taking a 15% stake in the company, as well as investing billions of dollars to build a 10,000 metric ton magnet manufacturing facility — expected to begin preparing for operations in 2028. . .

Rare earth magnets are critical for weapons systems including the F-35 Lightning II fighter jet, unmanned Predator drones and the Virginia- and Columbia-class submarines. One F-35 needs 900 pounds of rare earths. They are also found in Tomahawk missiles and bombs for a guidance system developed jointly by the US Air Force and Navy.

Rugged individualism, writ large: retail investors are sitting pretty these days, as Mr. Market has handsomely rewarded the group’s dip-buying proclivities.  Thus, a policy of going long the Nasdaq 100 after the index logged a red showing in the prior session has returned 31% so far this year, Bank of America found last week, far eclipsing the tech-heavy gauge’s 8% return over that period and trailing only the plague year for the strategy’s best performance dating back to 1985.

Then, too, ProShares UltraPro QQQ (ticker: TQQQ) – which aims to generate three times the Nasdaq 100’s daily performance – garnered record inflows during the spring tariff convulsions, with that exchange-traded fund more than doubling from its April 8 close. “Pops and drops will occur. . . but the dip-buying belief has become the new religion,” Mike Zigmont, co-head of trading and research at Visdom Investment Group, told the Financial Times Monday.

Considering those remunerative outcomes, it is little surprise that retail investors have shunted a net $155.3 billion into U.S. equities and ETFs from January through June per Vanda Research, the largest first half sum on record.  Active trading (or is that hyperactive?) accompanies that shopping spree, with retail’s average daily turnover by dollar value jumping 44.5% year-over-year.  As Bianco Research points out, only locked-down 2020 saw a larger annual increase in activity during the past decade.

As with the 2021 meme stonk phenomenon, today’s potent retail impulse has redounded to the benefit of various highly-speculative names. Citing data from Bespoke Investment Group, The Wall Street Journal relayed last weekend that the 858 unprofitable Russell 3000 members rallied by 36% on average since April 8, comfortably outpacing the Russell’s 26% return over that stretch. All but four of the 14 index components that have tripled over that period likewise operate in the red.

One noteworthy example: shares of Aeva Technologies (ticker: AEVA) are up 440% since the Liberation Day kerfuffle, valuing the developer of lidar sensors for self-driving cars near $1.5 billion.  The firm posted $3.4 million in first-quarter revenues, alongside a $30.5 million operating loss.

“We’re not yet seeing a full-fledged ‘flight-to-crap,’ but it is clear that the motivation behind many of these stocks’ activity is something other than disciplined considerations of discounted cash flows,” Steve Sosnick, chief strategist at Interactive Brokers, told the WSJ.

With the major indices back at record highs, will the now-flush retail crowd opt to take some chips off the table?  Don’t count on it, analysts at JPMorgan wrote Wednesday, anticipating $360 billion of equity inflows in the back half of 2025.  Overseas individuals will snap up a further $50 billion to $100 billion of U.S. stocks through year-end, the bank predicts, writing that “investors cannot avoid the biggest and most important growth segment of global equity markets.”

Buy the dip, buy the rip.

Treasurys came under pressure with 2- and 30-year yields rising 4 and 10 basis points, respectively, to 3.9% and 4.96%, while stocks settled slightly lower after recovering most of another tariff-induced overnight drop, wrapping up a relatively low-wattage week with a flat showing for the S&P 500. WTI crude advanced towards $69 a barrel, gold jumped to $3,357 per ounce, bitcoin blasted off to $118,000 and the VIX ticked above 16.

- Philip Grant

Field general calls an audible, via CNBC:

Former New York Giants quarterback Eli Manning is no longer interested in buying a minority stake in his old team, telling CNBC Sport Wednesday that he’s been priced out. “Basically, it’s too expensive for me,” Manning told CNBC Sport in an interview. “A 1% stake valued at [near] $10 billion turns into a very big number.”

Manning’s comments come as NFL team valuations skyrocket. In CNBC’s Official NFL Team Valuations published in September, the Giants were valued at $7.85 billion, ranking fourth among the league’s 32 teams.

In December, the Philadelphia Eagles sold a minority stake in the team at a valuation of $8.3 billion — roughly $1 billion higher than where CNBC Sport had valued the team a few months earlier.

Pass the hot sauce: Professional investors are turning to the derivatives market to beef up their bond market returns, as net short positions within Markit’s U.S. investment-grade credit default swap (CDX) gauge now top $105 billion according to Barclays and Bloomberg-compiled data, the largest sum in at least three years.

Those instruments, which conventionally served to hedge against individual or broad corporate stress, have evolved into a tool for generating extra income on existing bond portfolios as part of a “structural shift,” strategists at Bank of America reckon.  

Ample liquidity, meanwhile, burnishes credit default swaps’ appeal for portfolio managers, with $1.2 trillion of the products changing hands across North America and Europe during April’s trade-related tumult. “You can easily do $500 million of CDX high-yield today,” Martin Coucke, global credit portfolio manager at Schroders, relates to Bloomberg. “Buying $500 million of bonds today on the high-yield side is close to impossible.”

Yet alongside that virtue comes basis risk, meaning an imperfect correlation between the swaps and underlying corporate obligations. Thus, the IG CDX reached a 63% premium to its year-end 2024 levels following Liberation Day, well above the 49% jump in equivalent benchmark bond spreads. “This activity is implicitly short volatility,” cautions Bloomberg’s chief global derivatives strategist Tanvir Sandhu. “There are casualties littered throughout history for those trying to boost income but on the wrong side of volatility.”  

Still and all, those looking to wager on continued smooth sailing in corporate credit have a new vessel at their disposal. This morning, Reckoner Capital Management launched the Reckoner Leveraged AAA CLO exchange-traded fund, offering up to 50% gearing on top-rated paper within collateralized loan obligations (i.e., packaged and securitized collections of debts backing leveraged buyouts).  

“We think of this as a natural evolution of the CLO market,” Reckoner co-founder and CEO John Kim told Bloomberg. “There’s relatively little risk of default in CLOs, and banks are quite willing to provide financing against them.” Indeed, some institutional investors are borrowing up to eight or nine times the initial cash outlay on their top-rated CLO holdings, the executive relays.

Growing leverage within another heretofore-humdrum credit category, meanwhile, raises alarm across the pond. In the latest edition of its biannual financial stability report, the Bank of England noted today that hedge funds are borrowing £77 billion ($105 billion) in gilt repurchase agreements to juice up basis trades – i.e., purchasing cash bonds while selling futures in an attempt to arbitrage the price difference. That’s up from just over £30 billion at this time last year.

What’s more, a “small number” of funds account for 90% of those net gilt repo borrowing, the BoE finds. As a result, “a rapid unwind of leveraged positions by a few key players could amplify shocks during periods of high volatility.”

Don’t forget the ice water.

Stocks enjoyed a solid 0.6% rebound on the S&P 500 to return to the cusp of recent highs, while Treasurys also caught a bid with 2- and 30-year yields declining four and seven basis points, respectively, to 3.86% and 4.87%. WTI crude stayed at $68 a barrel, gold edged higher to $3,314 per ounce, bitcoin climbed towards $111,000 and the VIX sank below 16.

- Philip Grant

From The Wall Street Journal:

Thousands of jostling traders once packed the floors of Chicago’s futures exchanges, before the advent of high-speed computerized trading turned them into relics of a bygone era. Now, some of them will finally have their day in court.

On Monday, a trial is set to begin in a long-running class-action lawsuit filed by traders who say that exchange giant CME Group  duped them out of the privileges they held as members of the city’s once-elite community of floor traders.

The plaintiffs, who estimate that they are owed about $2 billion in damages plus interest, say the company broke its promises to them when it opened a data center for electronic trading that effectively doomed the old trading floors. CME has called the lawsuit baseless. 

A spokeswoman for CME declined to comment. The company repeatedly tried to get the suit thrown out, but failed each time.

Sign, sign, everywhere a sign: Tokenized money market and Treasury bond mutual funds are all the rage in 2025, the Financial Times relays today, with assets within that category reaching $7.4 billion per data firm RWA.xyz, up 80% in the year to date. Such blockchain-based vehicles managed by BlackRock, Franklin Templeton and Janus Handerson have seen their combined AUMs triple since the new year.

Underpinning that rapid adoption: tokenized funds boast truncated settlement times (typically minutes rather than days for analog versions), which help mitigate capital requirement-related headaches. Cheaper administration expenses represent another virtue.

Crypto aficionados can park their excess cash in such products, as the format “is easy to use and, unlike most stablecoins, allows them to earn a yield,” writes Moody’s analyst Stephen Tu. The market for tokenized mutual funds, bonds and exchange-traded notes could eventually reach a combined $2 trillion by 2030, McKinsey speculated last month, compared to today’s $7 trillion in domestic money market assets.

The prospect of broader blockchain-based finance has investors in a lather.  Beginning last Monday, shares of Robinhood enjoyed an 18%, three-day rally on heavy trading volumes (more than 100 million shares changed hands in each of those sessions, compared to 29.5 million shares in average daily turnover over the past year) after the Gen Z-friendly trading app enabled users in Europe to trade tokenized versions of U.S. equities, as well as high-profile private concerns such as OpenAI and SpaceX.  

“The time is now for crypto to move beyond bitcoin and memecoins and introduce fundamental utility,” CEO Vlad Tenev commented on Bloomberg Television last week. “We think [that] in the future crypto and traditional financial services will fully merge, and crypto will become the infrastructure layer behind all kinds of financial services, from payments, which you’re starting to see with stablecoins, to holding deposits.”  To commemorate the rollout, Robinhood gifted €5 ($5.85) of OpenAI and SpaceX tokens to each eligible European who joined the platform through July 7.

Yet importantly, Robinhood will maintain the ownership in the equity backing those tokens via a special purpose vehicle, leaving hodlers without voting rights.  For its part, Sam Altman’s outfit expressed less-than enthusiastic sentiments toward the innovation, declaring thus on X:

These “OpenAI tokens” are not OpenAI equity. We did not partner with Robinhood, were not involved in this, and do not endorse it.  Any transfer of OpenAI equity requires our approval—we did not approve any transfer. Please be careful.

By way of response, Tenev took to the social media platform to make his case:

While it is true that they aren’t technically ‘equity,’ the tokens effectively give retail investors exposure to these private assets.  Our giveaway plants the seed for something much bigger, and since our announcement we’ve been hearing from many private companies that are eager to join us in the tokenization revolution.

Will the powers that be put the crimps on Tenev’s grand designs?  “We have contacted Robinhood and are awaiting clarifications regarding the structure of OpenAI and SpaceX stock tokens, as well as the related consumer communication,” a spokesperson for the Bank of Lithuania, which acts as the firm’s lead regulator in Europe, told CNBC this morning. “Only after receiving this information will we be able to assess the legality and compliance of these specific instruments.”

Better to ask for forgiveness than permission.

Stocks turned lower by 0.75% on the S&P 500 following the unwelcome return of “tariff man,”  as President Trump renewed his threats to impose steep trade levies on various partners. Treasurys came under bear steepening pressure with 2- and 30-year yields rising two and six basis points, respectively, to 3.9% and 4.92%, while WTI crude rallied to $68 a barrel and gold shook off an early selloff to finish roughly flat at $3,336 per ounce. Bitcoin stayed at $108,000 while the VIX rose modestly towards 18.

- Philip Grant

They're quite exquisite! From the New York Post:

Some Yankees fans are apparently just as fervent about iconic “Seinfeld” character George Costanza as they are for the team’s legends, as pre-sale prices for the bobblehead of Costanza sleeping under his Yankees office desk are going for more than tickets to the Aug. 21 game, when they’ll be given to the first 18,000 fans.

As of Tuesday morning, there were multiple sold listings on eBay for the bobblehead for over $200 and as high as $250. Meanwhile, tickets for that day’s game against the Red Sox can be had for as low as $52 including fees on Vivid Seats. . . A recent Aaron Judge Superman bobblehead given out at a game on June 20 has been selling for over $100 on eBay.

Everything must go: an eye-catching debt deal illustrates freewheeling financial conditions on the Old Continent, as Flora Food Group BV managed to sell €400 million ($471 million) of senior unsecured notes of 2031 at an 8.625% coupon.  Proceeds are earmarked to repay dollar- and euro-pay notes coming due in May 2026 and to bolster cash on the balance sheet.

KKR-backed Flora is likely to garner a triple-C-plus rating for that paper, Bloomberg relays, which would mark Europe’s most speculative primary market transaction in nearly a year.  The yield on that offering stands nearly four hundred basis points below a gauge of similarly-rated bonds, while brisk demand helped the deal progress from start to finish within a single day.   

Analysts at CreditSights, meanwhile, point out that Flora had previously planned to address next year’s maturities via existing liquidity and corporate cash flows. Accordingly, “the fact that the company decided to tap the market instead, in our view, means that either this is an opportunistic move given a favorable market backdrop. . . cash flow generation in the coming quarters may be below expectations, or, perhaps, a combination of these factors.”

In any event, Flora’s foray aptly demonstrates today’s ravenous risk appetite, as European junk bond issuance reached €22.5 billion last month, marking the strongest June on record after topping 2021’s prior peak by nearly €4 billion.   

Europe’s high-yield bond funds have, in turn, attracted net inflows for seven consecutive weeks according to EPFR, including a hefty $922 million haul over the week ended June 25.  “There’s a huge amount of money coming into the asset class,” Insight Investment Management high-yield portfolio manager Catherine Braganza told Bloomberg today. “Issuance is just reflecting that.”

A steadily rising stateside tide has likewise supported a packed issuance calendar, as June’s $37.4 billion in junk supply marked the largest single-month tally since the 2021 bacchanal. Bloomberg’s U.S. High-Yield Index, meanwhile, just wrapped up an 11^th consecutive quarterly gain, its longest winning streak since the late 1990s.

Against that fair-weather bicontinental backdrop, the Grant’s Interest Rate Observer-dubbed “Epitome of the cycle” (Dec. 15, 2017) makes its move: Double-B-plus rated SoftBank Group Corp. has kicked off a combined seven-part, euro- and dollar-denominated bond offering Tuesday, with pricing expected tomorrow.  

“We are not surprised to see SoftBank tap the market given its hefty cash needs over the next 12 months,” CreditSights commented this morning, as the risk-happy technology conglomerate promised to “immediately” begin deploying $100 billion towards its Stargate artificial intelligence project announced in January.

Any benefits from SoftBank’s AI ambitions would, of course, accrue to creditors only in the form of the return of their principal, alongside the contractually agreed-upon interest. Noting that the firm’s financial policy, which calls for maintaining cash sufficient to cover two years of bond redemptions, makes no mention of other liabilities such as margin loans and prepaid forward contracts, the analysts conclude thus: “given the perennial governance risk which comes with this name, this does not provide a lot of reassurance. . . we view the risk [versus] reward that comes with these investments as more favorable for equity holders.”

Big tech came under some pressure to begin the third quarter with the Nasdaq 100 absorbing a near 1% decline, while the rest of the stock market fared better with the S&P 500 trading flat and the Dow Jones Industrial Average rising about 1%. Treasurys saw a bear-flattening move with two-year yields rising six basis points to 3.78% while the long bond held steady one percentage point higher, while WTI crude advanced towards $66 a barrel and gold jumped to $3,338 per ounce. Bitcoin ebbed to $105,500 while the VIX hovered just below 17.

- Philip Grant

From the Financial Times:

The six largest U.K. accounting firms do not formally monitor how automated tools and artificial intelligence impact the quality of their audits, the regulator has found, even as the technology becomes embedded across the sector.

The Financial Reporting Council on Thursday published its first AI guide alongside a review of the way firms were using automated tools and technology, which found “no formal monitoring performed by the firms to quantify the audit quality impact of using” them.

The watchdog found that audit teams in the Big Four firms — Deloitte, EY, KPMG and PwC — as well as BDO and Forvis Mazars were increasingly using this technology to perform risk assessments and obtain evidence.

But it said that the firms primarily monitored the tools to understand how many teams were using them for audits, “typically for licensing purposes,” rather than to assess their impact on audit quality.

To infinity, and beyond: Artificial intelligence is yesterday’s news in the booming exchange traded fund business, Bloomberg reports, as issuers such as Roundhill Investments and KraneShares have turned to far-flung concepts such as humanoid robots (i.e., machines resembling people), quantum computers and even UFOs.

A pair of humanoid-focused funds have debuted since the start of June, attempting to capitalize on a market which could reach $5 trillion by 2050 according to Morgan Stanley. “In China, these robots are already in market and will be coming to. . . the U.S. in the near future,” predicted Roundhill CEO Dave Mazza, whose firm launched an actively-managed humanoid ETF yesterday. “We’re approaching a [Chat]GPT moment for humanoids,” concurred Derek Yan, senior investment strategist at KraneShares. “It’s the next big thing after generative AI.”

Competitive considerations color the industry’s forward-looking ways, as more than 40 AI-themed funds have come to market, with “many” of those contraptions “having a hard time attracting cash,” Bloomberg notes.

Indeed, broad bifurcation characterizes the mushrooming actively-managed ETF industry, which grew to $631 billion in 2024 from $81 billion five years earlier per Broadridge Data and Analytics.  The cohort comprised only 6% of total ETF assets as of the end of last year, “suggesting significant room for expansion,” the firm writes in a June 12 whitepaper.

Yet capitalizing on that opportunity may prove easier said than done, Broadridge contends, as “a small number of dominant funds and managers capture a disproportionate share of flows.”  Of the 814 active ETFs with a track record of at least three years, only 11% managed  to raise at least $100 million in assets over their first 12 months, with that contingent growing to $1 billion on average two years later and collectively accounting for two-thirds of total actively-managed industry AUM.  

How to reach those rarified ranks? A muscular distribution network among registered investment advisors is one key determinant of success, Broadridge reckons, alongside brand recognition and “unique investment strategies.”

With respect to that final virtue, an upcoming offering from Tuttle Management surely fits the bill. Yesterday, the firm filed a preliminary prospectus for the Government Grift ETF, an actively-managed vehicle “that seeks to achieve long-term capital appreciation by investing in equity securities and related instruments associated with government insiders and political influence.” To that end, Tuttle will undertake “proprietary, multi-step process that combines systematic screening of public disclosures, sentiment analysis, and active portfolio management.”

Bloomberg’s Henry Jim, who highlighted that SEC filing on X, writes that Tuttle will be “working” for its 75 basis points in annual fees, as the strategy calls for regular review of Congressional portfolios, corporate interaction with White House insiders, presidential speeches, interviews and social media posts. Holdings will be reviewed weekly, and the manager may “go all cash if all hell breaks loose.”

A mid-afternoon hiccup interrupted the now customary strength in stocks, though the S&P 500 staged a snappy recovery into the bell to log a 0.5% advance, good for fresh highs. Treasurys came under modest pressure with 2- and 30-year yields rising three and four basis points, respectively, to 3.73% and 4.85%, while WTI crude stayed at $65 a barrel and gold sank nearly 2% to $3,273 per ounce.  Bitcoin hovered near $107,000 while the VIX settled at 16 and change.

- Philip Grant

Time to rest easy, via medical industry publication Cardiovascular Business:

The American College of Cardiology (ACC) is embracing, more than ever before, the cardiovascular benefits of weight loss medications such as semaglutide and tirzepatide. 

Previous recommendations stated that patients should try exercise and other lifestyle interventions to lose weight before choosing pharmaceutical solutions.

Now, however, the ACC is recommending that cardiologists and other healthcare providers consider these medications as a first-line treatment option for eligible patients.

Let’s make a deal, please: The New York Stock Exchange and Nasdaq are drawing up plans to ease their listing requirements in concert with the Securities and Exchange Commission, Reuters reports, as the bourses look to drum up business.

Potential fixes include slashing disclosure requirements and trimming IPO-related costs, along with curtailing the ability of minority investors to lobby for corporate changes by launching proxy contests. The initiative, part of the Trump administration’s drive to slash regulatory red tape, could mark the most significant capital markets reform since the Obama-era Jumpstart Our Business Startups (JOBS) Act.  

Post-plague 2021 represents a noteworthy outlier for the otherwise dormant IPO industry, as newly-public firms valued at $50 million and above scared up $142.4 billion in that hyperactive annum per Renaissance Capital. Over the subsequent three and a half years, such fundraising registered at a combined $72.2 billion.  More broadly, the tally of U.S. listed companies stands at some 4,500 by Nasdaq’s count, equivalent to 13 per one million citizens. That ratio registered at 30:1 as of 1996 according to the World Bank.

“We need to make the public markets attractive because that is really how you democratize access to these companies,” Nasdaq President Nelson Griggs told Reuters. An SEC spokesperson likewise commented that the agency “is considering addressing regulatory burdens that undermine capital formation, including [ensuring] that IPOs are again something that companies are eager to do.”

As Washington and Wall Street work to breathe life into moribund equity capital markets, an industry upstart leans on a pair of bull-market pillars to get a competing initiative off the ground. The Wall Street Journal reports that startup trading platform Republic “plans to use blockchain technology to sell investors exposure to SpaceX.” 

Republic relays that it is now offering digital tokens tracking the performance of Elon Musk’s closely-held firm on the secondary market and plans to expand the offering to other off-exchange, household names such as OpenAI and Anthropic.   

Yet as the Journal notes, “plenty of questions” surround that enterprise, as token buyers won’t be able to access corporate financials nor will hodlers attain an actual equity stake. Republic rather describes the ducats as notes “assur[ing] token holders will be paid any increase in the price of SpaceX’s common stock if it goes public or is purchased.

As for potential pushback from regulators, CEO Kendrick Nguyen pointed to JOBS Act provisions allowing for limited retail fundraising by private firms, adding that his outfit need not seek permission from the underlying businesses because the tokens “represent securities sold by Republic.”

It’s counterparty risk for the 21^st Century.  

Stocks and Treasurys each snoozed through a consolidation day after the recent risk bacchanal, with the S&P 500 settling little changed while two-year yields ticked lower by a single basis point to 3.74% and the long bond remained at 4.83%. WTI crude and gold each bounced to $65 a barrel and $3,333 per ounce, respectively,  bitcoin rose towards $108,000 and the VIX slipped below 17.

- Philip Grant

From the Financial Times:

Germany and Italy are facing calls to move their gold out of New York following President Donald Trump’s repeated attacks on the U.S. Federal Reserve and increasing geopolitical turbulence.

Fabio De Masi, a former Die Linke MEP who joined the leftwing populist BSW party, told the Financial Times that there were “strong arguments” for relocating more gold to Europe or Germany “in turbulent times.”

Germany and Italy hold the world’s second- and third-largest national gold reserves after the U.S., with reserves of 3,352 tons and 2,452 tons, respectively, according to World Gold Council data.

 Both rely heavily on the New York Federal Reserve in Manhattan as a custodian, each storing more than a third of their bullion in the U.S. Between them, the gold stored in the U.S. has a market value of more than $245 billion, according to FT calculations.

Go West, young man: youthful investors are looking far afield in service of satisfactory returns, Bloomberg documents, as the number of retail clients holding pre-IPO unicorns, private equity, cryptocurrencies and other alternative assets has more than doubled since 2020.

More than 90% of BofA surveyed wealth-management customers under the age of 43 intend to increase their allocation to alternatives in the coming years. The daily pace of signups on pre-IPO trading platform Forge Global, meanwhile, have more than tripled since the firm slashed its minimum investment on some products to $5,000 from $10,000-plus in March.

“It’s often easier to convince an entrepreneur to put money into a 1-in-10 shot startup than it is to get them to park money in a conservative, long-term strategy,” Brian Werner, CIO at financial advisor Winthrop Partners, relates to Bloomberg.  “You’ve got this mix of investor preferences and product availability evolving in a way that they actually complement each other to create this procyclical uptake in alternative investments,” added Michael Pelzar, head of investments at BofA private bank. “We’re probably in the early innings of a real wave.”

So-called bitcoin treasury firms present a fitting avatar for that phenomenon, as the 3,000%, five-year rally in Michael Saylor’s Strategy (née MicroStrategy) has coaxed a litter  of copycats to the fore. A high-profile entrant joined those ranks Monday, with ProCap Financial announcing plans to go public via merger with blank check firm Columbus Circle Capital Corp. 

ProCap, helmed by former Facebook staffer turned crypto-evangelizing podcaster Anthony Pompliano, raised $750 million in equity and convertible debt while targeting a $1 billion bitcoin portfolio and planning to generate revenue via a bitcoin-denominated financial services operation. “There’s an old George Soros quote that goes, ‘when I see a bubble forming, I rush in to buy, adding fuel to the fire,’” Pompliano told CNBC this morning. “There’s a reason the bubble forms – because the trend works.”

See “Bitcoin goes corporate” in the current edition of Grant’s Interest Rate Observer dated June 20 for a closer look at the corporate crypto craze and its potential consequences, along with “The great inverted pyramid revisited” for more on the proliferation of illiquid securities across the financial system.

Iran’s modest response to the weekend U.S. campaign helped send WTI crude tumbling 8% to $67 per barrel, while the S&P vaulted 1% to leave the broad index roughly 2% below its February peak. Treasurys dropped to 3.84% on the two-year note and 4.87% on the long bond, down six and two basis points, respectively, while gold traded sideways at $3,372 per ounce. Bitcoin advanced to $104,000 and the VIX ebbed below 20.

- Philip Grant

Spanish waste management concern Urbaser looked to give its financial statements a power-wash in a recent debt offering, as Bloomberg reports the firm initially included a contractual provision which would have excluded tariff-related costs from its calculation of Ebitda (earnings before interest, taxes, depreciation and amortization).

Urbaser, which operates in 15 countries, ultimately scrapped the provision from its €2.3 billion ($2.7 billion) high-yield bond and term loan package, which will be used to refinance existing obligations and pay a dividend to its p.e. promoter Platinum Equity. Nonetheless, the attempted gambit sent eyebrows aloft: “The basic issue with this add-back [meaning an imagined future cost savings or other profitability-boosting measure], and many provisions these days, is that it fails to take into the account the borrower’s commercial reality,” Sabrina Fox, founder and eponym of Fox Legal Training, told Bloomberg.

Such gussied-up financial statements have long bedeviled some observers, with a seminal June 2000 analysis from Moody’s Investors Service concluding that Ebitda itself “can drift from the realm of reality.” 

The rating agency warned that the metric “can easily be manipulated through aggressive accounting policies relating to revenue and expense recognition, asset write-downs and concomitant adjustments to depreciation schedules. . . and by the timing of certain ‘ordinary course’ asset sales.”  

Ebitda’s rise to prominence has proved a boon to deal-doers, Moody’s likewise argued, “creat[ing] an illusion of making acquisition prices appear smaller. For example, a 6.5 times Ebitda multiple for a company whose Ebitda consists 50% of Ebita and 50% of depreciation equates to a materially higher 13 times multiple of operating earnings plus amortization.”

Of course, that view now appears positively quaint, as the supersonic p.e. boom and ZIRP-era reach for yield encouraged further flattery of that forgiving earnings gauge. During the first quarter of 2016, for instance, Covenant Review found that more than 80% of new leveraged loans capped the dollar value of projected cost savings that promoters could use to enhance pro-forma profitability. Two years later, that share slipped below 50%. See the Aug. 10, 2018 edition of Grant’s Interest Rate Observer for a contemporary analysis of the wobbly architecture underpinning p.e.’s perch.

The post-pandemic jump in borrowing costs has knocked the buyout business down a peg, with State Street’s private equity index underperforming the S&P 500 on a one, three, five and 10-year basis through 2024 while limited partner distributions as measured by Cambridge Associates sagged to half their long-term norm last year.

Shifting financial weather and all, Ebitda add-backs remain a hallmark of the p.e. industry. An April S&P Global analysis of 650 M&A and leveraged buyout transactions spanning 2015 to 2023 found a “clear correlation between the magnitude of add-backs at deal inception and the severity of management projection misses.” 

Thus, add-backs accounted for 28% of Ebitda on a median basis over the life of the study, with reality rarely conforming to those sunny projections: only 8% of surveyed firms met or exceeded earnings projections in the first year following deal inception, with that figure increasing to still-modest 17% in year two. Actual Ebitda missed the mark by 32% and 34% on a median basis in years one and two, respectively, leaving median leverage higher by 2.3 and 2.6 turns relative to the initial forecast.  

“[P.e.] sponsored transactions significantly underperformed nonsponsored transactions,” the ratings agency likewise relays, with median leverage among that sub-category topping projections by 2.7 turns in year one and 2.9 turns in the following annum. “This suggests that inflated add-backs may help companies with higher financial risk get deals done.”

Markets were mostly closed Thursday for Juneteenth, though S&P futures came under pressure to the tune of a near 1% decline, with WTI crude retreating back towards $75 a barrel from a foray north of $77 and gold slipping to $3,369 per ounce.

- Philip Grant

From CNBC:

“In finance, when you’re playing defense, you’re almost certainly losing,” [Ken] Griffin said to Citadel’s new class of summer interns Thursday evening. “There’s no other way to put it. Every time a portfolio manager tells me ‘I’m going on defense,’ I’m waiting to watch the red because that tends to be what happens next.”

Griffin, whose hedge fund oversees $66 billion in assets as of June 1, thinks cash would be a better place to hide out than what are often considered “safe trades” in a risk-off environment.

“If you are going on defense, just go to cash. Otherwise, you’re just in the ‘safe trades,’ where everyone else has already gone — and the safe trades are often where the losses are,” he said.

Persistent price pressures are bedeviling the Bank of Japan, Bloomberg relayed Thursday, with the monetary mandarins upgrading their inflation assessment ahead of the two-day policy meeting which concludes tomorrow. Japanese CPI excluding fresh food and energy rose at a 3% annual clip in April – the eighth sequential year-over-year acceleration in the past nine monthly prints – against a backdrop of 0.5% benchmark borrowing costs and largely status-quo investor expectations (interest rate futures point to little change to that overnight rate through the summer and a 0.65% bogey at year-end).

Bearish bond market dynamics likewise loom large over this week’s gathering, as 20- and 30-year Japanese government bond yields each marked multi-decade highs late last month, with 40-year borrowing costs ascending to a record 3.69%.

By way of response, roughly two-thirds of Bloomberg-surveyed economists expect that the BoJ will announce plans to slow down the tapering of open-market bond purchases from the ¥400 billion ($3 billion) per-quarter downshift introduced last summer. Better a bit more inflation than a busted bond market, the thinking may go.

The BoJ, which owns roughly half of all JGBs, whittled down its portfolio by ¥6.2 trillion during the first three months of the year, a record figure dating to 1996. That sum, however, pales in comparison to typical quarterly net purchases over the past decade, which routinely approached or eclipsed ¥20 trillion.

Stateside creditors may want to take heed of the BoJ’s decision. “Treasurys have become more sensitive to moves in Tokyo,” a Monday analysis from Bloomberg concludes, with correlations between those bond markets rising to their highest levels since 2020. Japanese investors represent the largest foreign contingent of U.S. bondholders, while the land of the Rising Sun commands a 16.7% weighting in the Bloomberg Global Treasury Total Return Index, second only to the U.S.

“The rise in Japan bond yields has meaningful spillover impacts globally,” commented Freddy Wong, head of Asia Pacific fixed income at Invesco. “As JGB yields rise, the relative attractiveness for sovereign bonds in other parts of the world decreases, which drives selloffs and increases volatility in other. . . markets.”

Friday’s stock market dip gave way to the requisite rebound, with the S&P 500 storming higher by some 1% at the open and cruising sideways from there, while Treasurys remained under pressure in bear-steepening fashion as 2- and 30-year yields rose one and six basis points, respectively, to 3.97% and 4.96%. WTI crude pulled back below $72 a barrel, gold retreated to $3,385 per ounce, bitcoin rebounded to $108,600 and the VIX settled just above 19.

- Philip Grant