As they say, 90% of success is just showing up. From KOCO-Oklahoma City:
An Oklahoma man is facing charges of stealing a vehicle after he couldn’t get a ride to court. The court case he was attempting to attend was for unauthorized use of a vehicle. The Oklahoma Highway Patrol said Kody Adams stole a pickup and drove himself to Pawnee.
Troopers said Adams was at a Stillwater gas station asking people for a ride to his court date in Pawnee. When he couldn’t find a ride, troopers said Adams decided to hop in an unoccupied LifeNet Emergency Services pickup and drive himself to court. . . A trooper caught Adams as he was walking into the courthouse.
Adams said he was just “borrowing” the truck. . . He made his court case and was transported back to Payne County and booked on new charges.
Where’s the salt? A pair of D.C. lawmakers looked to put the clampdown on “big snack” over the weekend, as Sen. Elizabeth Warren (D-MA) and Rep. Madeleine Dean (D-PA) penned missives accusing the likes of General Mills, Coca-Cola and PepsiCo of a “pattern of profiteering” via so-called shrinkflation, NBC reports.
“People have noticed that their box of Cheerios and bag of Doritos are smaller, but prices are higher,” commented Warren, who lobbied the Federal Reserve for a 75-basis point rate cut less than a month ago. She added that “we can’t let them get away with this price gouging.”
Of course, acute post-Covid price pressures inform that rising political heat, as the foodstuff industry faces a soggy sales backdrop in the wake of bountiful price increases. This morning, PepsiCo reported $23.3 billion in third quarter revenues this morning, down 0.6% from a year ago and trailing the $23.8 billion sell-side consensus, likewise downshifting its full-year outlook to about half the prior 4% top line growth rate.
Those figures – along with commentary from PepsiCo CEO Ramon Laguarta that “the cumulative impacts of inflationary pressures and higher borrowing costs over the last few years have continued to impact consumer budgets and spending patterns” – do little to raise spirits on Wall Street. Citi analysts write that “we believe investors will continue to question the topline guidance for the fourth quarter” and beyond.
A similar dynamic is on display in the quick service restaurant realm, as McDonalds logged a 1% annual same store sales decline over the three months through June, undercutting sell-side expectations of a flat showing and marking the first such decline since the 2020 plague year (third quarter results are due on Oct. 29).
By way of combatting that unwelcome downshift, the fast-food purveyor rolled out a $5 meal deal featuring a McDouble or McChicken sandwich, small order of fries, small soft drink and four-piece order of chicken nuggets to cater to cash-strapped diners. As the Washington Post points out today, average menu prices at golden arches establishments rose some 40% from 2019 to 2024.
“The consumer across a number of. . . markets, is being very discriminating,” lamented McDonalds CEO Chris Kempczinski on the July 29 earnings call, adding that “consumer sentiment in most of our major markets remains low” (see the July 5 edition of Grant’s Interest Rate Observer for more on the industry’s difficulties).
As the post-virus inflationary impulse continues to reverberate, it’s not just shoppers and diners facing the squeeze. Thus, McDonalds filed suit Friday in U.S. District Court against JBS, Cargill, National Beef and Tyson Foods for antitrust violations, contending that the quartet “collusively reduce[d] the slaughter-ready cattle and beef supply” over the past nine years. Thanks to that “conspiracy in restraint of trade,” the producers allegedly managed to achieve prices “artificially higher than [they] would have been in absence of their conspiracy.”
No sacred cows here.
Stocks resumed their ascent after yesterday’s downward detour, with the S&P 500 storming higher by 1% to reach the cusp of fresh highs, while Treasurys consolidated their recent selloff with a little changed showing as two-year yields dipped one basis point to 3.98% and the long bond settled at 4.32% from 4.3% Monday. WTI crude pulled back below $74 a barrel, gold retreated to $2,620 an ounce, bitcoin floated sideways at $63,100 and the VIX settled a bit north of 21 after testing 23 yesterday.
- Philip Grant
When’s the next “Fed listens” tour? Michelle Bowman, Neel Kashkari and Alberto Musalem, presidents of the Federal Reserve Banks of Minneapolis, Atlanta and St. Louis, respectively, each made public appearances today. Monday’s trifecta marks a mere warmup for the parade of monetary ruminations as this week progresses:
Forward guidance, aweigh!
Last month’s supersized, 50 basis point rate cut has spurred an arguably curious response, as Reuters today highlights a “massive” inflow into money market funds. The category attracted a net $41.3 billion over the week ended Oct. 2 according to data from LSEG Lipper, following a $113.1 billion influx over the prior seven days. For a sense of scale, the $30.8 billion inflow for U.S. equities over the week ended last Wednesday marks the largest such figure since at least December 2020.
Total money market fund assets reached a record $6.46 trillion Friday according to the Investment Company Institute, up from $6.3 trillion as the Fed began its easing cycle on Sept. 18 and compared to just over $5.6 trillion a year ago.
As dwindling compensation does little to dim investor appetite for cash equivalents, demand for highly rated, lower yielding corporate debt remains exceptionally brisk. Each of the 20 U.S. investment-grade corporate bond tranches that priced last week broke higher in secondary trading, marking only the second such clean sweep of 2024, while the asset class enjoyed its strongest inflow since Easter over the seven days through Wednesday per LSEG Lipper.
In turn, Friday’s hotter than expected reading of September nonfarm payrolls – and accompanying downshift in expectations over future policy easing (interest rate futures now price a 4.16% funds rate as of January 2025, up nearly 30 basis points over the past two sessions) – has done little to cool the asset class’s momentum. Spreads on Bloomberg’s gauge of investment-grade corporate debt contracted to 83 from 87 basis points, marking the narrowest pickup over Treasurys since September 2021 and approaching the lowest levels of the post-Lehman Brothers era.
Meanwhile, the all-weather hunt for yield has pushed one corner of the stock market to history-making heights. Citing data from SentimenTrader, Bloomberg relays today that 96% of S&P 500 utilities sector components change hands within 5% of their respective 52-week highs, a phenomenon seen less than 1% of the time going back to 1953 and last observed in 2016. That rate-sensitive cohort, which sports a 2.8% trailing 12-month dividend yield, logged a monster 18% rally over the three months through September.
Stocks came under pressure to start the week as the S&P 500 dipped nearly 1% for its worst single showing in just over a month, while 2- and 30-year Treasury yields rose six and four basis points, respectively, to 3.99% and 4.3%. WTI crude remained on a roll with a push above $77 a barrel, gold settled slightly lower at $2,643 per ounce, bitcoin caught a modest bid at $63,100 and the VIX jumped three points and change to 22.6, its highest finish since the aftermath of the early August market convulsions.
- Philip Grant
Extinction is transitory. From the Daily Mail:
It has been more than 4,000 years since the last woolly mammoth vanished from the face of the Earth. But if one group of scientists is right, it may be less than four years before these gentle giants walk the plains of North America once again.
Ben Lamm, CEO and founder of Colossal Biosciences, now says he's 'positive' the first woolly mammoth calves will be born by late 2028. 'I like to think of what we're doing like reverse Jurassic Park,' Mr. Lamm told MailOnline.
In the classic films, scientists bring back dinosaurs by recovering ancient DNA frozen within amber before using genes taken from frogs to patch the holes in the dino DNA. But, unlike those fictional scientists, the researchers at Colossal Biosciences are actually working backwards.
Mr. Lamm says: 'We're not taking mammoth DNA and plugging in the holes; we're trying to engineer the lost genes from mammoths into Asian elephants.’
It's a wrapper’s delight: U.S. investors funneled a net $282 billion into exchange traded funds over the three months through September per data from Morningstar, pushing year-to-date inflows to $696 billion. That’s on pace to top the $900 billion full-year peak established in 2021 and leave the $1 trillion figure “well within reach,” as the typically bountiful fourth quarter gets underway. Stateside ETF assets reached a tidy $10 trillion, up tenfold since 2010.
“ETFs now offer nearly universal access to asset classes and strategies that were once available only to the world’s most sophisticated institutional investors,” Amrita Nandakumar, president of Vident Asset Management, commented on Bloomberg Television, adding that last week’s milestone is a “testament to how much ETFs have democratized investing.”
Indeed, Wall Street’s amply demonstrated ability to meet investor demand is once again on display. For instance, 532 such funds now hold a position in AI lynchpin Nvidia according to ETF.com, up from 482 late last year (Grant’s Interest Rate Observer, Dec. 22). This includes funds devoted to tracking only one company, such as the GraniteShares 2x Long NVDA Daily ETF (ticker: NVDL).
Underscoring today’s saturated backdrop, Bloomberg warns today that “America risks running out of tickers for single-stock ETFs.” Proximate cause of that shortage: exchange strictures requiring the contraptions to sport symbols approximating the underlying security, spurring some providers to squat on attractive combinations in behavior recalling the toilet paper hoarding seen in early 2020. “Competition for them has never been fiercer,” observed Gavin Filmore, chief revenue officer for Tidal Financial Group. “We can see market participants constantly grabbing tickers, especially as certain sectors or themes become more crowded.”
That urgency appears well founded, if Mr. Market’s warm welcome to a pair of newly minted, high-risk products are any indication. Thus, CoinDesk relayed last Friday that the Defiance Daily Target 1.75x Long MicroStrategy ETF (ticker: MSTX), which aims to generate 175% of the daily performance of Michael Saylor’s enterprise-software provider-cum-leveraged bitcoin speculation vehicle, attracted a cool $857 million since its Aug. 15 debut, putting the fund in the top 8% of ETF launches so far this year per Bloomberg Intelligence analyst Eric Balchunas.
In turn, newly minted peer T-REX 2X Long MSTR Daily Target ETF (ticker: MSTU), which ups the ante via 200% daily MicroStrategy exposure, gathered more than $72 million in assets a mere seven trading days after its debut. “Both have robust liquidity,” Balchunas posted on X. “I didn’t think there was room for both. . . it just [shows] how much ‘need for speed’ there is out there.”
No points for second place.
A hotter-than expected September jobs report did nothing to derail the potent bull market in stocks, with the S&P 500 climbing nearly 1% to mark its seventh weekly increase in its last eight tries, though Treasurys came under marked pressure as the long bond rose eight basis points to 4.26% while the two-year note vaulted to 3.93% from 3.7% Thursday. WTI crude remained on the front foot by advancing towards $75 a barrel, gold finished little changed at $2,651 per ounce, bitcoin rallied to $62,300 and the VIX settled just below 19.
- Philip Grant
From Politico:
A new HBO documentary claims to have cracked the true identity of the pseudonymous creator of Bitcoin, Satoshi Nakamoto. . . Satoshi himself is estimated to control about 1.1 million Bitcoin, but it's unclear if he still has access to the cryptographic keys to the fortune. If he did, this would put his net worth at $66 billion at current valuations.
Intriguingly, as the date for the airing of the documentary has drawn near, a number of high-value wallets from the “Satoshi era” have become active for the first time since 2009.
The program is set to debut next Tuesday Oct. 8 at 9pm ET.
An unstoppable force meets the immovable object in private equity. Easy-peasy credit conditions have allowed p.e. promoters to issue new debt earmarked for their own pockets like never before, as $18.3 billion in domestic leveraged loan supply backing so-called dividend recapitalizations came to market in September according to PitchBook, blowing past the prior single-month peak of $13.4 billion established in July 2021. The year-to-date tally through Monday stands north of $70 billion, nearly matching the record $76 billion logged during full-year, bubbleicious 2021 with one fiscal quarter to spare.
Yet a still-moribund IPO market and muted merger and acquisition activity following the post-pandemic tightening cycle starkly contrast with that ebullience. Private equity exits in the U.S. registered at $141.4 billion over the first six months of 2024 per data from Cambridge Associates, trailing 2023’s near $300 billion full-year pace, which already marked the weakest such output in over a decade.
“There’s been such a lack of M&A activity and leveraged buyout activity that a lot of sponsors are looking at how to return cash to their investors, and if you’re not selling companies, one way to do it is to take dividends,” Lauren Basmadjian, global head of liquid credit at Carlyle Group, told Bloomberg Thursday.
On a global basis, distributions as a share of paid-in capital (DPI) among fund vintages spanning 2007 to 2014 topped 1.0 times (i.e., investors received more cash than their initial outlay) by year seven on average, relays the Financial Times, citing Preqin-compiled data. In contrast, DPI for vintage years 2015 to 2018 stand at less than 0.8 times as of year eight, while distributions for 2019 to 2022 have returned well below 20 cents per paid in dollar on average. Overall, the unrealized industry backlog of unsold portfolio companies stood at a record $3.2 trillion as of Dec. 31 per Bain & Co., double that seen just prior to the pandemic.
“Exits and pressure to return liquidity is sort of the big new topic for the next 12 to 24 months," commented CVC managing partner Giampiero Mazza during a Bloomberg-hosted event in Milan Thursday. “A lot of managers sitting on assets bought at high multiples don’t really want to face reality.”
Beyond dividend recaps, pressing cash needs have spurred other noteworthy contortions. Earlier this week, middle market-focused TJC announced the closing of a so-called continuation fund with $2.1 billion of assets. The vehicle purchased a half dozen portfolio companies from a pair of TJC funds established in 2013 and 2018.
Such continuation funds – feats of financial engineering by which general partners shift assets from one vehicle to another while cashing out some investors (not to mention, scoring new fees in the process) – represented 43% of the $72 billion in secondaries deal volume over the first half of 2024 per data from Evercore, a figure on pace to top 2021’s $134 billion in activity for the highest full-year sum on record. Those machinations duly leave some practitioners cold. “We signed up for a 12-year fund,” Brian Dana, managing principal at Meketa Investment Group, groused to Bloomberg over the summer. “Now they’re asking investors to wait another seven years to get their money back.”
Meanwhile, today’s debtor-friendly backdrop ushers in an accompanying downshift in legal protection for creditors, presenting the risk of excessive borrowing from liquidity parched promoters. Witness the proliferation of so-called high-watermark provisions – which allow p.e. promoters to borrow against the maximum Ebitda generated over a given period rather than the customary metric of average adjusted profitability.
In other words, as Covenant Review senior analyst Ian Feng put it on Sept. 16, such terms “ensure that borrowers always have the greatest flexibility that was historically available to them, even if the company is severely distressed now. In essence the highest watermark rewards borrowers for bad performance.”
Feng likewise relayed last week that at least 20 deals within Covenant Review’s purview have included that feature, with lenders refusing up to eight highest watermark designations in September. However, the analyst speculates that, in some cases, borrowers are using highest watermark provisions as something of a negotiating gambit to extract other concessions. Indeed, covenant scores remained largely unchanged in deals where lenders successfully pushed back on the HW feature.
Might the bifurcated dynamic of easy credit and a bulging exit queue present broader financial implications? See “Reversion to the boom” in the current edition of Grant’s Interest Rate Observer dated Sept. 27 for a closer look at this dynamic against the backdrop of private equity’s “newly unpromising. . . value proposition.”
Stocks edged lower again by 0.2% on the S&P 500 ahead of tomorrow’s September payrolls data, while Treasurys also came under some pressure with 2- and 30-year yields rising seven and four basis points, respectively, to 3.7% and 4.18%. WTI crude vaulted to near $74 a barrel, gold erased some early losses at $2,657 an ounce, bitcoin ticked towards $61,000 and the VIX jumped to 20.5, up a bit less than two points on the day.
- Philip Grant
There’s (almost) nothing more permanent than a temporary government program. From Bloomberg:
French President Emmanuel Macron endorsed a temporary tax on the country’s largest companies, supporting his new government’s strategy even as it departs from his longstanding pro-business stance. . .
Just under €20 billion ($22 billion) will be generated by boosting government revenues, with tax increases for wealthy individuals and large companies, as well as increased green taxation.
Artificial intelligence mainstay OpenAI announced today that it has completed its hotly anticipated funding round at a $157 billion post-money valuation. That’s the highest such figure in Silicon Valley history.
Sam Altman’s outfit, which was valued at $29 billion in April 2023 and conducted a February tender offer at an $86 billion price tag, gathered a hefty $6.6 billion from the latest transaction. Though OpenAI expects to post some $5 billion in losses on $3.7 billion in revenues this year, the firm anticipates a swift top line acceleration to $11.6 billion in 2025. “AI is already personalizing learning, accelerating healthcare breakthroughs and driving productivity,” OpenAI CFO Sarah Friar told CNBC. “And this is just the start.”
Considering that backdrop, it is no small curiosity that key corporate cogs are seeking the exit. OpenAI chief technology officer Mira Murati and chief research officer Bob McGrew each opted to hit the bricks last week following six-plus year stints. Upwards of 20 researchers and executives have quit so far this year, The Wall Street Journal reported Friday, as disagreement over the firm’s original not-for-profit structure and subsequent ambitions have yielded “chaos and infighting among executives worthy of a soap opera.” For his part, Altman commented Thursday that “I think this will be a great transition for everyone involved and I hope OpenAI will be stronger for it, as we are for all our transitions.”
Investors are certainly counting on it. Altman et al. have managed to put the squeeze on their recent backers, the Financial Times relays, “ma[king] clear that [they] expected an exclusive fundraising arrangement,” which precludes any outlays into rival players such as Anthropic and xAI. “If a company holds all the cards, they can force people to do things unnaturally,” one venture capitalist told the pink paper.
Corporate foibles and all, an avatar of the Covid-era venture capital boom and bust sees fit to throw its hat into the ring. As the Information first relayed Monday, SoftBank’s Vision Fund is among OpenAI’s latest backers, chipping in $500 million. The deal marks SoftBank boss Masayoshi Son’s maiden investment in the ChatGPT developer, which had previously completed seven funding rounds by Crunchbase’s count.
As of June 30, the original $100 billion Vision Fund and its $108 billion sequel – established in 2016 and 2019, respectively – have posted a combined cumulative investment loss of $1.2 billion. For context, the Nasdaq 100 has returned 330% from the start of 2017 and 134% since the outset of 2020.
Meanwhile, a leading light in SoftBank’s checkered investment history likewise looks to saddle up once more. As Bloomberg Businessweek documented Wednesday, former WeWork honcho Adam Neumann is getting back into the co-working game, rolling out a new format dubbed Workflow: “Like WeWork, it will offer space on flexible terms to companies and individuals, though it will aim to create a calm atmosphere with fancy artwork and plush furniture, instead of providing kombucha and beer at offices filled by twentysomethings run amok.”
Then, too, Neumann’s Workflow will construct offices in residential properties it already controls and enter into partnerships to manage space it doesn’t itself own, pivoting from WeWork’s ill-advised decision to pair long-term leases with landlords alongside short-term arrangements from customers, with that mismatch leaving it exposed to swift and catastrophic drops in revenue in the work-from-home era.
Indeed, as BusinessWeek notes, “WeWork burned through cash with an unclear path to profitability, which eventually proved disastrous for the company and its investors.”
Lesson learned?
Stocks treaded water to the tune of a flat finish on the S&P 500 following yesterday’s moderate selloff, while Treasurys saw a bear steepening move with 2- and 30-year yields rising two and six basis points, respectively, to 3.63% and 4.14%. WTI crude advanced towards $71 a barrel, gold consolidated Wednesday’s gains at $2,660 an ounce, bitcoin remained under pressure at $60,600 and the VIX pulled back below 19.
- Philip Grant
Eventually, water finds its level. From the Financial Times:
Heat pump sales across Europe fell by 47% in the first half of the year as consumers lost enthusiasm for switching away from gas boilers, putting more pressure on the EU’s green agenda. . .
Under plans published in 2022 after Russia’s full-scale invasion of Ukraine drove up the price of fossil fuels, the EU set a goal of installing at least 10 million more heat pumps by 2027. Heat pumps heat or cool buildings by using electricity to transfer heat to and from the outside ground or air.
They are widely seen as a solution to decarbonizing household heating, when powered by renewable energy, but their adoption has been hampered by cost, a lack of qualified installers and wavering government subsidy schemes.
Germany had hoped to become a pioneer in the switch to the new technology, but a law introduced last year to encourage people to replace their gas and oil-fired boilers with heat pumps prompted a massive public backlash and the government eventually retreated and watered down the proposals.
Call it the manic Middle Kingdom: The Shanghai Shenzhen CSI 300 Index launched higher by 8.48% today, marking its best one-day showing since September 2008 (alongside record high trading volumes) to extend its winning streak to nine sessions. After sitting on year-to-date losses of just over 7% as of mid-September, China’s benchmark gauge now sports near 18% gains for 2024.
Coming in direct response to a torrent of fiscal and monetary stimulus from Beijing and local governments alike, that bull stampede duly sets hearts aflutter ahead of China’s Golden Week holiday, which commences Oct. 1. “On the surface, I’m keeping my cool, but deep down in my heart I’m celebrating,” Shao Qifeng, chief investment officer of Ying An Asset Management Co., told Bloomberg this morning. “This is an epic day in Chinese market history,” commented GROW Investment Group chief economist Hao Hong, adding that “this is one of the happiest days” in his three-decade long career. The trio of picks-to-click in the Feb. 16 Grant’s Interest Rate Observer analysis “Commie value play” have since delivered dollar-denominated returns of 19%, 47% and 65%.
Meanwhile, conditions in China’s so-called special administrative region mark a 180-degree contrast to the mainland’s pronounced euphoria. Thus, Bloomberg reported Sunday that China’s cascading property sector pileup has inflicted particularly acute damage in Hong Kong, as measured home prices languish near eight-year lows.
Thus, some 75% of real-estate transactions valued at $10 million or above over the first half of 2024 involved financially distressed sellers, data from CBRE Group show, while corporate bankruptcies registered at 305 from January to August, on pace to easily eclipse the 354 logged during all last year – which was the largest tally since 2010. “There are more distressed assets in the market than I have seen in the past 30 years,” relayed Derek Lai, Deloitte’s global insolvency leader and China vice chair in Hong Kong.
That dismal backdrop is now reverberating across the consumer facing realm, as retail sales sank 12% year-over-year in July according to the Hong Kong Chamber of Commerce, while the vacancy rate in Tsim Sha Tsui, a tourist hub replete with luxury brands geared towards wealthy mainlanders, stands at 15% per data from Midland ICI, up three percentage points from March. “The problem we are facing right now is that we have no customers,” Pamela Mak, president of the Hong Kong Chamber of Commerce, lamented to Bloomberg.
Treasurys came under pressure with the two-year yield jumped 11 basis points to 3.66% following some less dovish than usual commentary from Jerome Powell, while stocks enjoyed their customary quarter-end ramp to leave the S&P 500 higher by 0.4% after treading water all day. WTI crude held above $68 a barrel, gold continued its pullback at $2,635 an ounce, bitcoin likewise retrenched to $63,600 and the VIX settled just south of 17.
- Philip Grant
Here’s a press release headline format bulls never want to see:
Volkswagen Updates Its Forecast for 2024
Sure enough, the Wolfsburg, Germany-headquartered automaker had bad news to share after the close of European business Friday, downshifting its projected full-year operating return on sales (i.e., operating margins) to 5.6% from 7% last year and a 6.5% to 7% outlook as of July. Volkswagen, which likewise trimmed its forecast for global deliveries to 9 million units from about 9.5 million.
Electric vehicle-related tribulations duly inform today’s dour state of play, as Volkswagen publicly weighed German plant closures and large-scale job cuts earlier this month in response to brutal competition from state-subsidized Chinese producers alongside soft demand.
Thus, EV registrations across the Old Continent registered at just 92,600 in August according to the European Automobile Manufacturer’s Association, down a hefty 44% year-over-year. That compares to an 18% annual drop for total vehicle registrations for the same period and leaves EV market share at 14% compared to 21% as of August 2023.
Perhaps tellingly, waning appetite for the heretofore-fashionable battery-powered conveyances extends to society’s fringes. Citing data from the Insurance Institute for Highway Safety, Axios relayed Thursday that four of the six least stolen autos in the U.S. last year were electric models, with thieves absconding with only 1 out of every 100,000 insured Tesla Model 3s. That compares to 49 stolen cars per 100,000 for the auto industry at large.
No 5%? No problem. Investors poured a net $121 billion into money market funds over the seven days through Wednesday, data from the Investment Company Institute show, pushing total assets to a record $6.42 trillion.
Coming directly on the heels of Sept. 18’s half-point lurch lower in benchmark rates – with Fed chair Jerome Powell suggesting more to come – that arguably counterintuitive influx defies expectations of a swift migration towards higher-yielding, riskier assets.
“[Investors should] find the balance of having some total return, which benefits from the price appreciation in bonds,” Jerome Schneider, head of short-term portfolio management at Pimco, argued on Bloomberg Television yesterday. “To do that, you need to step out of that curve.” Jason Britton, founder of $5 billion fund Reflection Asset Management, took a similar stance to Reuters last week: “Money market assets will have to become fixed-income holdings; fixed income will move into preferred stocks or dividend-paying stocks.”
Yet dwindling compensation and all, the category’s alure could be poised to persist. Greg Blaha of Bianco Research argued this morning that money market funds primarily compete with paltry-yielding bank deposits rather than higher risk assets like stocks. Accordingly, “the idea of $6.4 trillion of dry powder being unleashed on risk assets is enticing, but we see this as an unlikely scenario.”
Might the money market aficionados be onto something? See the July 5 edition of Grant’s Interest Rate Observer for a contrarian look at the virtues of capital preservation via Treasury bills and similar instruments, along with the Aug. 30 issue for an array of income-generating ideas as the easing cycle unfolds.
Correction:
A wishful thinking typo in yesterday’s edition, which cited a $1.9 billion fiscal deficit over the 11 months through August. Of course, its $1.9 trillion.
Stocks edged lower by 0.13% on the S&P 500 and 0.6% on the Nasdaq 100 to wrap up a mostly forgettable trading week, while two- and 30-year Treasury yields dipped by five and two basis points, respectively, to 3.55% and 4.1%, likewise finishing little changed relative to last Friday. WTI crude bounced to $68.5 a barrel, gold pulled back to $2,652 an ounce, bitcoin rose again to $65,700 and the VIX bucked the sleepy action by advancing to near 17, up a point and a half on the day.
- Philip Grant
From CoinDesk:
Moo Deng, a newborn Thai hippo at the Khao Kheow Open Zoo in Bangkok, has captured the hearts of many online through her cute antics. Now, she's the star of a $100 million memecoin.
The Solana token crossed the milestone capitalization earlier Thursday, becoming one of the few to reach that level from zero in recent months, CoinMarketCap data shows. . .
Holder count has zoomed to 12,400 unique wallets, with over $48.5 million in volume traded over the last 24 hours, a fan page for the token said Wednesday.
One trader made millions from the hippo heartthrob, with on-chain data from Lookonchain showing a wallet that turned $1,331 into $3.4 million by correctly timing the market.
Jaywalks the walk: Fed chair Jerome Powell flexed his muscles during the recent Federal Open Market Committee gathering, corralling what had been a divided group into a near unanimous verdict with only governor Michelle Bowman formally dissenting from the 50-basis point rate cut. Such an abrupt downshift is unusual outside of crisis situations, with 25 basis points representing a more typical increment.
“There is a clear success story in Powell’s ability to get all but Bowman on board, and he is a more powerful chairman now,” Mark Spindel, founder of Potomac River Capital, told Bloomberg.
Investors likewise expect that demonstrated authority to translate to another lurch lower in borrowing costs, as interest rate futures point to greater than 50/50 odds of another half point rate cut to the 4.75% to 5% funds rate at the Nov. 7 FOMC gathering. “Given his comments in Jackson Hole, and what we heard from him at [last week’s] press conference. . . I think chair Powell would lean toward cutting 50 basis points again” predicts Deutsche Bank chief U.S. economist Matthew Luzzetti.
As Powell et al. pivot from the quickly obsolete “higher for longer” mantra, the D.C. spending machine remains at full bore. The federal budget deficit reached $1.9 trillion as of August with one month left to go in the fiscal year, up 24% from the same period last year and equivalent to more than 6% of projected gross domestic product. That output-adjusted ratio, which takes place in the context of a sturdy growth backdrop (second quarter GDP printed a 3% annualized pace this morning, rather than the 2.9% economist expectation), is the widest shortfall on record barring World War II, the great financial crisis and Covid.
Suffice it to say, the imminent presidential election pitting Kamala Harris against Donald Trump doesn’t exactly portend relief on that score. The Wall Street Journal put it this way last week:
The country’s fiscal trajectory merits only sporadic mentions by the major-party presidential nominees, let alone a serious plan to address it. Instead, the candidates are tripping over each other to make expensive promises to voters.
Instructively, the Fed’s demonstrated E-Z money predilection, in tandem with Uncle Sam’s spendthrift ways, evince no particular concern among the political class over a revival in price pressures. “We are in a very good place,” commented IMF managing director Kristalina Georgieva on Bloomberg Television Tuesday in response to an inflation query. “The U.S. has helped the world economy stay afloat in this very difficult time.” Charity begins at home: The Nasdaq 100 is up some 80% over the past two years, while investment-grade and high-yield credit spreads each reside near decade-plus lows.
Treasury Secretary Janet Yellen struck a similarly sanguine tone this morning on CNBC, responding in the affirmative when asked if she viewed inflation as sufficiently under control. "I always believed that there was a path to a soft landing, that it was possible to bring inflation down while maintaining a strong labor market, and to me, that's what the data suggest has happened," she added.
Might today’s freewheeling monetary-cum-fiscal backdrop provide a profitable opportunity within the Treasury Inflation Protected Securities (TIPS) realm? Five-year TIPS now yield 1.45% compared to 3.55% for conventional Treasury obligations for that tenor.
The differential – known as the breakeven inflation rate – now stands at 2.1%, down nearly 50 basis points from the spring and illustrating Mr. Market’s belief that headline inflation will indeed settle near the Fed’s self-assigned 2% per-annum mandate over the next half decade. For context, year-over-year CPI has registered at 4.2% on average since September 2019.
Stocks kept the good times rolling with another 0.4% S&P 500 advance following China’s latest bullish salvo overnight, while short-dated Treasurys gave back some recent gains with the two-year yield snapping seven basis points higher to 3.6% (the long bond ebbed to 4.12% from 4.14% Wednesday). WTI crude tumbled below $68 a barrel, gold rallied again to $2,672 per ounce, bitcoin jumped towards $65,000 and the VIX settled just above 15.
- Philip Grant
Evidently, some trees do grow to the sky. Artificial intelligence firms continue to make hay in fair weather 2024, as aggregate funding for industry startups reached $24 billion over the three months through June according to Crunchbase, double that seen in the first quarter. The ongoing frenzy has duly pushed a trio of high-profile entrants further into the financial stratosphere as the third quarter winds down.
Thus, The Information reports that OpenAI rival Anthropic is sounding out investors on a new funding round which could value the Claude chatbot creator at up to $40 billion, more than double the startup’s price tag achieved early this year. That provisional figure would represent roughly 50 times Anthropic’s in-house projection for annualized gross revenues, while helping infuse some much-needed capital; the startup anticipates upwards of $2.7 billion in cash burn across 2024, the Information likewise relays.
Fellow decacorn (i.e., startups valued at $10 billion to $99 billion) CoreWeave is likewise arranging a sale of existing shares at a $23 billion valuation, Bloomberg reported on Sept. 13, as the AI-themed cloud computing firm looks to quickly exceed a $19.1 billion price garnered four months ago and more than treble the $7 billion figure logged in December.
Meanwhile, the brightest constellation in the AI galaxy enjoys a full-scale bidding war, as OpenAI works to wrap up a super-sized $6.5 billion funding transaction valuing Sam Altman’s outfit at $150 billion. That’s up some 75% from the $86 billion seen during a tender offer conducted early this year.
As the Financial Times pointed out Friday, the ChatGPT developer’s mushrooming valuation presents a quandary for home run-seeking venture capitalists, who often write smaller checks to nascent startups in hopes of earning windfalls equivalent to 10 to 100 times their initial outlay. To achieve such an outcome, OpenAI would need to grow to $1.5 trillion and beyond, which would eclipse the likes of Berkshire Hathaway and Meta. OpenAI’s annualized revenues currently register at roughly $4 billion, while annual cash burn remains north of $5 billion. “How would you ever get a venture-style return on an investment of this sort?” one U.S. foundation chief investment officer rhetorically asked the pink paper. “I’m not sure what the math is there, or if there is any math.”
One thing’s for sure: a lynchpin of the bygone venture capital boom and bust is leaning headlong into the AI revolution. Citing data from PitchBook, CNBC relayed Sunday that Middle Eastern sovereign wealth funds have increased their funding for AI-related projects in the year-to-date by five-fold relative to 2023, while the United Arab Emirate’s new AI-focused fund MGX is among investors “looking to get a slice” of OpenAI during the ongoing funding round. The New York Times likewise reported this spring that Saudi Arabia’s Public Investment Fund – which famously poured $90 billion into SoftBank’s Vision Fund and its sequel – is “creating a gigantic fund to invest in AI technology,” with a proposed $40 billion size sufficient to render Saudi Arabia “the world’s largest investor in artificial intelligence.”
Short rates continued to tumble as two-year Treasury yields logged another multi-year low at 3.49% compared to 3.57% Monday, while stocks enjoyed another push higher with the S&P 500 gaining 0.25% and the Nasdaq 100 managing a 50-basis point advance, as Nvidia rode a sharp late-morning rally to a 4% gain. WTI crude rebounded above $71 a barrel, gold maintained its momentum at $2,659 per ounce, bitcoin advanced past $64,000 and the VIX settled just above 15.
- Philip Grant
Set them up and knock them down. From the San Francisco Standard:
“Let me get this straight,” John Mulaney said. “You’re hosting a ‘future of AI’ event in a city that has failed humanity so miserably?”
Everyone inside the auditorium at the Moscone Center groaned. Any notion that the award-winning comedian would play the corporate gig safe (and clean) were thrown out the window Thursday, when Mulaney, closing the Dreamforce festivities, started roasting his host, Salesforce, and the audience sitting right in front of him.
“You look like a group who looked at the self-checkout counters at CVS and thought, ‘This is the future,’” Mulaney said. . . “Some of the vaguest language ever devised has been used here in the last three days,” he continued. “The fact that there are 45,000 ‘trailblazers’ here couldn’t devalue the title any more.”
Mulaney then shared an anecdote about how he and his son, who is nearly 3, like to play baseball in their front yard.
“We’re just two guys hitting Wiffle balls badly and yelling ‘Good job’ at each other,” he said. “It’s sort of the same energy here at Dreamforce.”
Contingent convertible bonds may be going the way of the dodo bird Down Under, as Australia’s banking regulator has proposed removing the application of so-called additional tier 1 (AT1) obligations toward local lenders’ capital requirements.
Rather than using those special purpose converts, known as CoCos, banks should seek “cheaper and more reliable forms of capital” by 2032, the Australian Prudential Regulation Authority argued on Sept. 10. A two-month consultation period is now underway.
Last year’s mini banking crisis informs that regulatory proposal, as some $17 billion of the convertible bonds were wiped out following Credit Suisse’s demise even as the bank garnered a $3.2 billion equity value during a subsequent all-stock shotgun marriage with UBS. Vexed AT1 holders quickly filed suit. “The proposed changes seek to support financial stability at times of crisis with simpler and more certain resolution of banking in the unlikely event of failure,” APRA stated. “They are also aimed at reinforcing confidence in the safety of deposits in times of stress.” Australia’s four largest lenders have about $26 billion of AT1 securities outstanding by Bloomberg’s lights, representing roughly 10% of global supply
Might the Aussie salvo presage a wider regulatory reassessment of the niche credit corner? The rating agencies aren’t counting on it, as S&P Global predicted last week that “APRA’s proposal is unlikely to be widely replicated.” Peer Fitch Ratings noted that Australia’s “radical actions. . . may, in part, reflect the unusually high level of retail investor holdings of AT1 instruments in the country,” likewise casting doubt that the Old Continent will follow suit on such an initiative barring an express recommendation from the supranational Basel Committee on Banking Supervision.
Potentially shifting regulatory backdrop and all, CoCos have delivered fine results for risk-tolerant creditors of late: Deutsche Bank’s 10% junior subordinated perpetuals have jumped to near 110 cents on the euro from 92 following a bullish Grant’s Interest Rate Observer analysis (“A kind word for ‘CoCos’) on April 7, 2023, while Invesco’s London-listed AT1 exchange traded fund has generated a near 10% year-to-date return in dollar terms, topping the 7.8% and 6.4% seen from high yield bonds and leveraged loans, respectively.
Yet, somewhat curiously considering today’s freewheeling credit backdrop, that strong showing has not translated to much attention from the investing public. As Bloomberg pointed out Thursday, Invesco’s ETF has seen assets under management shrink to roughly $1.05 billion, down more than $100 million since the start of 2024. “Flows haven’t really caught up,” Barclays analysts wrote earlier this month. “There was an expectation of higher inflows into the asset class once the Fed started its rate-cutting cycle.”
Stocks fluttered higher in low-wattage trading as the S&P and Nasdaq 100 each settled green by 0.3%, while two- and 30-year Treasurys rose by two basis points apiece to 3.57% and 4.09%, respectively. WTI crude ticked below $71 a barrel, gold continued higher at $2,628 per ounce, bitcoin edged lower at $63,300 and the VIX finished just below 16.
- Philip Grant
At least the in-flight entertainment was free. From Agence France-Presse:
A mouse that crawled out of a passenger’s meal has forced an SAS flight to make an
unscheduled landing, the company said on Friday.
The incident occurred during Wednesday's Oslo to Malaga flight, forcing the plane to land in Copenhagen. Airlines usually strictly prohibit rodents on board because the animals can chew through electrical wiring, key to the operation of a plane.
"Believe it or not. A lady next to me... opened her food and a mouse jumped out," wrote one passenger, Jarle Borrestad, on his Facebook page, along with a photo showing him smiling next to two other women, also smiling. A spokesman for SAS, Oystein Schmidt, told AFP that "in line with our procedures, there was a change of aircraft" and the passengers were flown to Malaga on another flight.
Everybody into the pool! “Investment advisors are urging clients to dump hefty cash allocations” in response to the Federal Reserve’s half-point rate cut Wednesday, Reuters reports. Retail money market fund assets stood at $2.6 trillion on Wednesday, up 80% since the start of 2022 prior to the Fed’s aggressive, belated post-pandemic tightening campaign.
Further downward pressure on the compensation for those outsize cash holdings appears in the offing, as interest rate futures point to a 4.08% Fed funds rate by year end, compared to the current 4.75% to 5% range. The odds of another 50-basis point cut at the Federal Open Market Committee’s Nov. 7 gathering stand slightly above 50%.
“You’re going to have to shift everything. . . further up in the amount of risk that you’re accepting,” Jason Britton, founder of Reflection Asset Management, told Reuters. “Money market assets will have to become fixed-income holdings; fixed-income will move into preferred stocks or dividend-paying stocks.”
Such a migration is well underway in the speculative grade credit realm, as option-adjusted spreads on the ICE BofA US High Yield Index reached 310 basis points Thursday, down from 346 basis points as recently as Sept. 10 and fast approaching the 301-basis point pickup seen at the end of 2021, the tightest reading of the post-crisis era.
Bloomberg’s high-yield gauge in turn wrapped up a 12th consecutive week of gains today, its longest winning streak since the start of 2021, while the triple-C-rated portion of that index now sports a 664-basis point OAS, down 100 basis points over the past three weeks and well inside the roughly 830 average pickups seen over the past five-, 10- and 20-year periods. Meanwhile, the spread differential between triple-C and single-B-rated bonds has edged below 400 basis points, compared to nearly 550 basis points in early July.
Fast-eroding premiums in the riskiest corners of fixed income complement a rampaging stock market which gathered a net $31.7 billion over the seven days through Wednesday per EPFR-compiled data – its highest inflow in nine weeks – and is now arguably priced for perfection.
Thus, FactSet relays that Wall Street analysts collectively anticipate 15.2% earnings growth for the S&P 500 across calendar 2025 against a 5.9% year-over-year uptick in revenue, while penciling in a bottom-line acceleration to 15% year-over-year growth in the fourth quarter from the 4.9% guesstimate for the current period ending Sept. 30.
Even considering those great expectations, the S&P now sports a 21.4 times 12-month forward earnings multiple, comfortably above the 19.5 and 18 average price tags seen over the past five and 10 years, respectively. The broad index changes hands at 36.8 times its cyclically adjusted Shiller price-to-earnings ratio, up nearly eight turns from this time a year ago.
“It takes one generation to forget the dangers of a bubble, and it is Groundhog Day versus the 1990s Tech Bubble,” Stifel Nicolas chief equity strategist Barry Bannister wrote yesterday. “Just as countries that go rogue become almost un-investable, investors caught in the grips of a speculative fever become almost unanalyzable.”
The show goes on.
Muted trading action characterized the final trading day of summer, as stocks took a breather following yesterday’s post-ease euphoria with the S&P 500 ticking lower by 0.2%, while two-year yields dropped four basis points to 3.55%, establishing fresh post-2022 lows. WTI crude finished little changed at $71 a barrel, gold remained white hot at $2,620 per ounce, bitcoin edged lower at $62,700 and the VIX settled just north of 16.
- Philip Grant
Amateur hour is over. From CNBC:
The University of Tennessee is raising its season ticket prices by 10% across all its sports to prepare for athletes to start to get a cut of the school’s sports revenue, according to an email sent to football season ticket holders on Tuesday.
Tennessee is calling its hike a “talent fee,” and said it “will help fund the proposed revenue share for our student-athletes,” according to the email. . .
Tennessee already has one of the biggest athletic departments in the country, coming in at eighth overall for total operating revenue in the 2022-2023 seasons in Sportico’s database of public university athletic departments.
One erstwhile crypto giant pushes up daisies, while an evidently thriving peer continues skyward. Here’s a pair of instructive bulletins in the digital currency realm, beginning with a Wednesday report from the Financial Times:
The U.S. Securities and Exchange Commission has charged the auditor of collapsed cryptocurrency exchange FTX with misconduct, saying the firm took on Sam Bankman-Fried’s company as a client without properly understanding the crypto market.
Prager Metis, an accounting firm that ranks outside the top 50 U.S. firms by revenue, gave a clean bill of health to FTX’s financial results for the two years before it collapsed in November 2022 with an $8 billion hole in its balance sheet.
And here’s CoinDesk Tuesday:
Tether’s USDT, the largest stablecoin [i.e., tokens purportedly pegged to the dollar one-to-one], is not only growing larger, it’s also cementing its dominant position and now accounts for almost 75% of stablecoin market value, up from 55% two years ago.
An eye-watering windfall accompanies Tether’s ascent. As Blockworks pointed out last week, cumulative reported net profits from the fourth quarter of 2022 through June 30 stand at $12.72 billion, comfortably eclipsing BlackRock’s $9.83 billion bottom line over the same stretch. For context, Tether has 125 employees by employment site Zippia’s count, compared to nearly 16,000 for Larry Fink’s outfit per the BlackRock website.
By way of allocating that firehose of cash, Tether has gone into the venture capital business, with CEO Paolo Ardoino detailing plans to Bloomberg in June to allocate $1 billion to startups over the following 12 months. On the agenda are firms focused on “alternative financial infrastructure for emerging markets,” along with artificial intelligence and biotech.
“We can offer AI computing to all the companies we have invested in,” Ardoino declared in that interview. “It’s all about investing in technology that helps with disintermediation [of] traditional finance. Less reliance on big tech companies like Google, Amazon and Microsoft.”
British Virgin Islands-based Tether may be orbiting outside the Silicon Valley constellation, but the stablecoin giant looks to exert its own gravitational pull in the halls of power. The firm announced Friday that it has hired Jesse Spiro as head of government affairs, writing in a blog post that the former PayPal and Chainalysis executive’s “extensive background in the legislative and regulatory arenas makes him exceptionally well-suited to help advance Tether’s mission of building a future-proof financial and technological ecosystem.”
Yet Tether’s mushrooming profits and towering industry stature haven’t translated into much respect from financial statement sleuths. Ardoino told digital news site DL News that neither Deloitte nor PwC, EY or KPMG are willing to inspect his outfit, putting it thus from the auditor’s perspective: “So you are a big four accounting firm, and you have the entire banking industry that is your customer. Why would you risk 100,000 customers for a couple of stablecoins?” Ardoino added that he and his colleagues continue to lobby the celebrated quartet to take on the job.
Big four or otherwise, The Wall Street Journal notes that Tether has promised a complete audit of its books that “since at least 2017,” while general counsel Stuart Hoegner told CNBC in July 2021 that such an inspection would be completed “within months.”
Instead, Tether hired BDO Italia just over one year later to conduct a what it trumpeted as a monthly review of its reserves beginning by the end of 2022, though those attestations have since taken place on a quarterly basis. BDO Italia’s most recent analysis, which identifies $11.3 billion in overnight reverse repurchase agreements, $1 billion of term reverse repurchase agreements, $6.5 billion in secured loans, $6.4 billion in money market funds and $3.5 billion in “other investments” among Tether’s $118 billion in assets, likewise includes the following disclaimer: “The reporting date is limited to a point in time as of June 30, 2024. We did not perform procedures or provide assurance at any other date and time in this report.”
E-Z money aficionados got their 50-basis point rate cut Wednesday, but that wasn’t enough to keep the party going as the S&P 500 dipped 0.3% to snap its seven-session winning streak after jumping nearly 1% in initial response to the move. Treasurys in turn ended the day in the red, as two-year yields rose two basis points to 3.61% and the long bond jumped to 4.03% from 3.96% Tuesday. WTI crude pulled back to $69 a barrel after approaching $71 at lunchtime, Gold briefly touched $2,600 an ounce post-FOMC before reversing to $2,554, bitcoin retreated below $60,000 from a post Fed perch near $61,000 and the VIX settled north of 18, up three-quarters of a point on the day.
- Philip Grant
Almost Daily Grant’s will resume Friday
From Bloomberg:
Bankrupt trucker Yellow Corp. and its hedge fund owners lost a key court ruling over $6.5 billion in debt that pension funds claim the defunct company owes them, likely wiping out most recovery for shareholders.
U.S. Bankruptcy Judge Craig T. Goldblatt sided with pension funds over how to calculate the penalty Yellow must pay for canceling workers’ retirement plans when the company shut down last year. The ruling, issued last week, means there is little chance the company will have any cash left for shareholders like hedge fund MFN Partners after Yellow finishes selling its real estate portfolio and paying the pension penalty. . .
The Pension Benefit Guaranty Corp., which regulates retirements funds like those set up for Yellow’s union workers, argued that other companies with traditional pension plans would have an incentive to cancel their retirement benefits if Yellow won since shareholders wouldn’t be forced to pay a hefty penalty. Yellow claimed it was unfair to make it pay the penalty since federal grants made the pensions solvent for decades.
This big band needs a conductor: The artificial intelligence craze is spurring an unwelcome side effect in the form of global copper shortages, as the rapid buildout of energy-ravenous data centers will serve to boost worldwide demand to 52.5 million tons by 2050, BHP chief financial officer Vandita Pant predicted to the Financial Times Monday. That’s up 72% from the 30.4-million-ton figure logged in 2021.
The economically sensitive red metal, which has seen spot prices ebb lower by 15% since May thanks in part to weak Chinese demand, helps supply power to the server-laden venues, while also featuring in their cooling systems and processors. “Today, data centers [account for] less than 1% of copper demand, but that is expected to by 6% to 7% by 2050,” she said. “There is a lot of copper in data centers.”
Even beyond the copper category, recent developments underscore BHP’s concerns over AI-related resource constraints. The Telegraph relayed over the weekend that “the electricity grid in the West London cluster, home of the biggest collection of data centers outside of the U.S., is at full capacity and unable to connect any new sites.” As a result, 14 of the planned facilities are now on hold, with expansion-minded firms facing a multi-year delay. Access to the so-called Slough Availability Zone, the final site offering current data center connectivity, “is being [bid] on by every operator under the sun, including us,” one tech executive told the Telegraph.
While a power paucity continues to bedevil contestants in the explosive AI arms race, longstanding political spats likewise strain key pockets of the commodity complex. On Sunday, China announced new export controls on an array of minerals including antimony, which is used by the U.S. for high-tech military equipment including night vision goggles, infrared missiles and nuclear weapons, “in order to safeguard national securities and interest, and fulfill international obligations such as non-proliferation,” as the Ministry of Commerce put it. The Middle Kingdom accounted for 63% of domestic antimony metal and oxide imports last year per the U.S. Geological Survey, leaving number two player Belgium in the shade at 8%.
Diplomatic explanation and all, that announcement came just days after the Biden administration finalized increased tariffs on an assortment of Chinese goods including electric vehicles, semiconductors, solar cells and battery parts, with the bulk of those hikes to take effect at the end of next week. The FT likewise reports that the U.S. and Japan are finalizing an agreement to curtail chip-related exports to the world’s second-largest economy, despite Tokyo’s concerns that China could retaliate by cutting off its own supply lynchpin minerals including gallium and graphite. “Clients need guaranteed supplies and those guarantees are now becoming very difficult,” one higher-up at a trading house specializing in those crucial, niche components told the pink paper.
The question before the house: might a series of supply snafus across the resource realm presage an unwelcome broader resurgence in price pressures? With the Federal Reserve waiting in the wings to begin its easing cycle Wednesday, Wall Street sure doesn’t appear prepared for such an outcome.
Thus, Bank of America’s September Global Fund Manager Survey finds that the share of institutional investors reporting an overweight allocation to the commodity complex reached a seven-year low, below that seen in spring 2020 after WTI crude futures famously printed at minus $37 per barrel in April. See the current edition of Grant’s Interest Rate Observer for more on the risks of a supply-driven inflationary revival, along with one way to potentially profit from such a dynamic.
Stocks briefly kissed new highs on the S&P 500 before returning to unchanged ahead of tomorrow’s rate cut extravaganza, while bonds came under some modest pressure with two-year yields rising three basis points to 3.59% and the long bond ticking to 3.96% from 3.94% Monday. WTI crude rose above $71 a barrel, gold edged lower at $2,570 an ounce, bitcoin sat north of $60,000 and the VIX approached 18.
- Philip Grant
Not all side-hustles are created equal. From The Wall Street Journal:
Two former New York City fire chiefs were charged Monday with accepting tens of thousands of dollars in bribes in exchange for expediting safety inspections—marking the latest corruption case to hit the administration of Mayor Eric Adams.
The Manhattan U.S. attorney’s office alleges that Anthony Saccavino and Brian Cordasco fast-tracked required safety-plan reviews and inspections of hotels, apartment buildings and restaurants.
A third official, Henry Santiago Jr., a retired Fire Department of New York chief who pleaded guilty and is cooperating with the government, ran an expediting business and told customers he could help fast track their projects in exchange for payment. Saccavino and Cordasco were secret partners in the expediting business as well, according to federal prosecutors. Santiago would give the defendants cash payments for their help, sometimes over steakhouse dinners or in their FDNY offices, prosecutors said.
Fifty basis points is for pikers. Rate cuts are front of mind for the political class ahead of this week’s gathering of the Federal Open Market Committee, as a trio of lawmakers penned a Monday missive urging a super-sized, three-quarter percentage point downshift to the benchmark funds rate. “If the Fed is too cautious in [easing policy], it would needlessly risk our economy heading towards a recession,” wrote Sens. Elizabeth Warren (D-MA), John Hickenlooper (D-CO) and Sheldon Whitehouse (D-RI). “The Committee must consider implementing rate cuts more aggressively upfront to mitigate potential risks to the labor market.”
Mr. Market has likewise been expressing his preferences, as interest rate futures now price 64% odds of 50 basis point move Wednesday (with 25 basis points representing the remaining 36%) – triple the chances of that outcome discounted five days ago – while guesstimating a sub 3% funds rate by mid-2025. The policy sensitive two-year Treasury yield now sits nearly two percentage points below the funds rate’s upper bound, easily marking the largest such spread of the post-crisis era and more than double the 80-basis point discount seen as recently as early July.
That abrupt shift ripples far and wide, including in the foreign exchange realm. Thus, the Japanese yen changed hands at fewer than 140 per dollar this morning, its strongest reading in 14 months and up 13% from the multidecade lows logged in mid-July. The Bank of Japan, which pushed benchmark borrowing costs to a 16-year high of 0.25% in July following a near decade-long experiment below zero, likewise convenes on Friday, with interest rate futures pricing a near 1% overnight call rate by next June. Ebbing rate differentials from the U.S. duly pressure carry trade positions, in which investors borrow in yen terms to invest in higher-yielding assets stateside and beyond.
“I still think that there is a lot of [carry trades] that can unwind, especially if you look at how undervalued the yen is,” Richard Kelly, head of global strategist at TD Securities, commented on CNBC last week. “That’s going to have spillover effects.”
ING strategist Chris Turner articulated one of those potential spillovers to Barron’s on Monday:
When forex volatility rises, it increases a metric called value at risk [which measures potential losses for a given trade]. Risk managers will then tell traders to downsize their portfolios. It’s the volatility channel that can really trigger shrinking position sizes.
Could such a dynamic manifest in a risk aversion reprise of the early August episode? Unwinding carry trades “could be a volatility factor that’s not on everybody’s radar because they think we went through this already,” added Arnim Holzer, global macro strategist at Easterly EAB Risk Solutions. “We think investors should have some exposure to products that benefit from volatility.”
On that score, some punters expressing concern on the state of the economy are taking a flier on an even swifter rate cut cadence than is widely expected. Thus, analysts at Goldman Sachs relay that the “bond market has significantly adjusted its recession probability over the past three months,” as rate futures now price near 25% odds of the Secured Overnight Financing Rate tumbling below 2% by December 2025 from the current 5.33%. As of June, those odds stood well below 10%.
Treasurys remained on the front foot with the long bond edging lower by four basis points to 3.94% and the two-year note marking another fresh 2024 low at 3.56%, while stocks painted a mixed picture with the S&P 500 slightly higher and the Nasdaq 100 lower by a bit less than half a percent. WTI crude continued its rebound at $70.50 an ounce, gold managed another green finish at $2,583 per ounce, bitcoin ticked below $58,000 and the VIX stayed above 17.
- Philip Grant
Gambling on further gambling legalization seems like a sure winner. From Politico:
Americans are about to vote with their wallets in a big way.
Financial exchange startup Kalshi on Thursday got the green light to begin offering day traders, wannabe political pundits and financial institutions the chance to wager thousands of dollars on whether Democrats or Republicans will control Congress next year. Some financial firms will be allowed to bet as much as $100 million.
The Silicon Valley-backed company debuted the first fully regulated election-betting markets in the U.S. shortly after District Judge Jia Cobb in Washington rejected a bid by Wall Street regulators to temporarily block the company from launching them. The Commodity Futures Trading Commission, the top U.S. derivatives cop, says the markets violate federal and state law.
The best offense is a good defense - or is it the other way around? Safety-minded trades are all the rage these days, The Wall Street Journal and Financial Times each pointed out Friday, as the S&P 500’s consumer staples sector last week posted its best one-week showing relative to the broad average since March 2020. Shares of Wal-Mart, Target and Clorox have logged 14.8%, 9.1% and 15.6% respective gains over the month through Thursday, each lapping the S&P 500’s 4.5% figure, while utilities are up 23% in the year-to-date, trailing only tech’s 26% showing for the index’s top performing group.
“It’s really been something to see,” David Bahnsen, chief investment officer and eponym of the Bahnsen Group, marveled to the WSJ. Next week’s Federal Open Market Committee Meeting, with a rate cut of either 25 or 50 basis points looking like a 50/50 proposition, duly informs that dynamic. “Historically, defensives like consumer staples have done well in the lead up to [an easing cycle], which tends to come once there’s enough evidence the economy is slowing,” Irene Tunkel, chief U.S. equity strategist at BCA Research, told the pink paper.
Suffice it to say, evident risk aversion remains in short supply elsewhere. Strategists at Deutsche Bank laid out the case for further stock market upside this morning, painting the bullish picture thus: “[share] buybacks are larger and rising along with earnings, [while] inflows have been robust and boosted by strong risk appetite.” The S&P 500 changes hands at 36 times its cyclically adjusted price-to-earnings ratio and nearly three times sales, price tags representing the 95th and 99th percentiles, respectively, going back to 1950 according to data compiled by Hulbert Ratings.
Animal spirits likewise abound in fixed income, as evidenced by the fact that the triple-C-rated portion of the Bloomberg U.S. High Yield Index today put the finishing touches on an 11th consecutive weekly rally, its longest such winning streak since the 2021 bacchanal. Meanwhile, speculative-grade municipal bonds have delivered a 7.23% total return in the year-to-date, Bloomberg relayed Wednesday, far above the sub-2% figure for its broader muni gauge.
Finally, cryptocurrencies collectively command a $2.08 trillion market capitalization by Coinmarketcap.com’s count following a recent pullback, still up an even 100% year-over-year. On form, that heady price appreciation spurs conspicuous behavior from wealth-seeking degens, as a Friday headline from tech publication Wired illustrates: “People are setting themselves on fire and getting punched in the face to pump their crypto coins.”
More anything? More everything!
Friday the 13th was another lucky day for the bulls, as the S&P 500 tacked on another 0.5% to finish with a steep 3.2% advance to swiftly erase the bulk of last week’s selloff in a similar fashion to that seen in early August. Treasurys rallied as well with two-year yields diving another seven basis points to a fresh year-to-date low of 3.57%, while the long bond ebbed to 3.98% from 4% Thursday. WTI crude ticked above $69 a barrel, gold remained red hot at $2,581 per ounce, bitcoin jumped to near $60,000 and the VIX settled south of 17.
- Philip Grant
Behold an instructive pair of headlines – posted within minutes of each other on Wednesday afternoon – from Reuters and Bloomberg, respectively, regarding questionable personal account transactions by Atlanta Fed president (and current FOMC voting member) Raphael Bostic:
Atlanta Fed's Bostic violated trading rules, U.S. central bank watchdog says
Fed watchdog found no proof Bostic traded on inside information
Better safe than sorry. One of Warren Buffett’s top lieutenants cashed out in a major way on Monday, as Berkshire Hathaway vice chairman of insurance operations Ajit Jain liquidated 200 Class A shares for roughly $139 million in proceeds. That sale represented 55% of Jain’s stake in the conglomerate by CNBC’s count, the largest such decline since the 73-year-old joined Berkshire in 1986.
“I think, at best, it is a sign that the stock is not cheap,” Bill Stone, chief investment officer at Glenview Trust Company (a BRK shareholder), told the business news channel. “At over 1.6 times book value, it is probably around Buffett’s conservative estimate of intrinsic value. I don’t expect many, if any, stock repurchases from Buffett around these levels.”
Indeed, Jain’s employer is taking chips off the table across its own portfolio. Berkshire Hathaway sold a combined 5.8 million shares of Bank of America over the three days through Tuesday per SEC paperwork, cashing in some $230 million to push total sales since mid-July to roughly 175 million shares and $7.2 billion (the firm still holds a near 860 million share position, equivalent to an 11.1% ownership stake). BAC shares have ranged from roughly $36 to $44 over that near-two month stretch, compared to an effective $7-and-change cost basis for warrants which accompanied Buffett’s initial $5 billion preferred stock outlay back in 2011.
Berkshire has likewise been trimming fruit from its investment diet in 2024, pruning over 500 million shares of Apple – equivalent to more than half its holdings – between January and June. The bulk of those sales took place during the second quarter at a Barron’s-estimated $186 per share average price, multiples of the roughly $34 a share cost basis logged between 2016 and 2018.
That lucrative outcome duly spurs the most welcome type of financial headache: a hefty bill from Uncle Sam. New York-based tax and accounting analyst Robert Willens pegs combined state and local AAPL-related tax payments at $15 billion during the second quarter alone, telling Barron’s thus: “I guess Mr. Buffett felt that the investment case for unloading the Apple stock was so compelling that he was willing to endure the tax consequences of the sale of such highly appreciated stock.”
To be sure, planet Earth’s foremost value investor doesn’t seem to be seeing much of it these days. Berkshire’s pile of cash, near cash and Treasury bills topped $270 billion as of June 30, equivalent to 88% of the firm’s equity portfolio, and up from 40% in mid-2023. Two years ago, the ratio stood at 31%. What to make of that high-profile retrenchment? See “Warren Buffett’s money fund” in the brand-new issue of Grant’s Interest Rate Observer dated Sept. 13 for a closer look at today’s state of play following a stellar decade-plus run for U.S. equities.
Green energy was abundant Thursday, as stocks staged an impressive rally with a near 1% advance on the S&P 500 to leave the broad index in shouting distance of its mid-July highs, while WTI crude snapped higher by 3% to $69 a barrel, bitcoin rose to $58,300 and gold logged a fresh peak near $2,460 an ounce. Treasurys came under some modest pressure to leave the long bond at 4% even, and the VIX settled near 17 after testing 24 less than a week ago.
- Philip Grant
You’ve got to give the people what they want: Apollo Global Management is laying the groundwork for a private credit-themed ETF in a partnership with State Street, the firms announced Tuesday, provisionally marking the latest milestone for the mushrooming asset class (if the regulators confer their blessing).
“We believe investors will increasingly supplement their portfolios with private fixed income and equity strategies as they seek to build resilient and diversified portfolios to serve their retirement and investment needs,” commented Apollo CEO Marc Rowan. As Bloomberg notes, the firm is cooking up other ways to infuse liquidity into the (arguably, by design) infrequently transacted securities, including by building out a trading desk to foster a secondary market for direct loans.
Apollo and State Street aren’t alone in their efforts to market closely held assets to the well-heeled masses. Brookfield Asset Management likewise detailed plans on Tuesday to launch a private equity product tailored towards wealthy individuals. “We did it in credit, we did it in real estate, and now we’re doing it in private credit,” crowed Brookfield global client group CEO David Levi at the firm’s investor day in New York.
When Wall Street speaks, Washington, D.C. listens. The Federal Reserve will drastically scale down a planned increase in capital requirements for the U.S. banking system, with vice chair for supervision Michael Barr unveiling a revised proposal calling for the eight largest lenders with at least $250 billion in assets to increase reserves by 9%. That’s down from a 19% uptick floated in July 2023, and likewise exempts smaller institutions from most of the so-called Basel III endgame rules.
“There are benefits and costs to increasing capital requirements,” Barr commented in a Brookings Institution speech Tuesday. “The changes we intend to make will bring these two important objectives into better balance, in light of the feedback we have received.” Indeed, the shift follows an intense lobbying effort by the industry, reflecting “a shift in the balance of power between big banks and their regulators, turning the page on an era in which the Fed held the upper hand,” as The Wall Street Journal puts it.
Yet the afterglow of that victory proves short-lived for a pair of industry mainstays. JPMorgan Chase &. Co. is set to disappoint Wall Street in its bread-and-butter loan and deposit business, as president Daniel Pinto declared Tuesday that sell-side expectation for about $90 billion in net interest income next year is “not very reasonable” and that profits from that segment “will be lower.” JPM shares slid by as much as 6.8% in response, the largest intraday decline since June 2020.
Then, too, Goldman Sachs delivered some unwelcome news to investors Monday, with CEO David Solomon telling listeners-in to a Barclays conference that trading revenues are on pace to slip 10% year-over-year in the third quarter given "a more challenging macro environment, particularly in the month of August.” Goldman shares dropped by a bit more than 4% on Tuesday, extending their post Aug. 30 pullback to 8.5% after the investment bank had enjoyed a 32% year-to-date advance.
You win some, and you lose some.
Another lurch lower in short-dated Treasurys left the two-year yield at 3.59%, down more than 30 basis points from the start of the month, while stocks settled higher by 0.5% as the bulls took control late in the day after a mid-session downdraft and ahead of tomorrow’s August CPI data. WTI crude was hammered again to $66 a barrel, gold logged modest gains at $2,517 per ounce, bitcoin rose to $57,800 and the VIX retreated towards 19.
- Philip Grant