Beginning tomorrow, the Federal Reserve will commence its so-called quiet period ahead of the December 18 rate decision.  Prior to that fleeting pause in so-called forward guidance, the monetary mandarins held forth Friday in prolific fashion. A sampling of Bloomberg headlines:

*BOWMAN: INFLATION REMAINS UNCOMFORTABLY ABOVE FED'S 2% GOAL

*GOOLSBEE: INFLATION IS DECLINING OVER THE 'LONG ARC'

*HAMMACK: `AT OR NEAR' THE POINT WHERE FED SHOULD SLOW RATE CUTS

*DALY: UNCERTAINTY CALLS FOR MORE THOUGHTFUL, CAUTIOUS APPROACH

Interest rate futures now price near 90% odds of another 25-basis point downshift to the funds rate, compared to 66% a week ago.

Escape velocity achieved! A brave new world is at hand, BlackRock contends in its newly released 2025 Global Economic Outlook: “we are not in a business cycle. Historical trends are being permanently broken in real time as mega forces, like the rise of artificial intelligence, transform economies.”  Accordingly, the asset management behemoth concludes thus: “we stay pro-risk, starting with our confidence in U.S. corporate strength and outperformance.”

You don’t have to tell Mr. Market twice, as evidenced by recent developments in speculative-grade credit. Sixty-two leveraged loan deals totaling $74.3 billion launched over the three days through Wednesday by LCD’s count, easily eclipsing the prior full-week record of $57.8 billion established in January 2020.  Repricing deals accounted for $55.3 billion of this week’s tally, as issuers continue to capitalize on fair-weather conditions to trim their interest expense.

LCD’s Marina Lukatsky notes that, of the 39 firms that launched a repricing, nearly half had already undertaken such a move in 2024, lowering their borrowing costs by nearly one percentage point, on average.  Instructively, that cadre includes “plenty” of borrowers rated single-B-minus, a half-dozen notches below investment grade.

Issuers are likewise finding fair weather conditions in the fixed-rate realm, as Bloomberg reports that Hertz Global Holdings sold $500 million in first-lien, senior secured notes Thursday at a 10% all-in yield, supplementing its June offering at a 12.625% coupon after the bonds have since rallied to just under 109 cents on the dollar. The rental car mainstay, which filed for bankruptcy in 2021, will pay down a revolving credit facility with proceeds from that deal.

With option-adjusted spreads on the ICE BofA U.S. High Yield Index remaining south of 270 basis points, levels unseen in the post Lehman Brothers era, pickings are slim for price-conscious creditors.  Marty Fridson, chief investment officer at Lehmann Livian Fridson Advisors LLC, relays today that the tally of bonds identified by his model as undervalued contracted to 47 from 116 over the past month.

Indeed, the performance tilt towards marginal credits makes for a fitting bookend with BlackRock’s post-business cycle hypothesis. Thus, the triple-C rated portion of the Bloomberg high-yield gauge has returned 15% in the year-to-date, roughly double that seen in the single- and double-B-rated components. On a similar note, Bank of America credit strategist Oleg Melentyev delivered a striking finding Friday:

Imagine a portfolio where the management team has nailed every future upgrade: on Jan 1, 2024, their holdings included only the names that were about to get upgraded or [ascend to] investment-grade over the course of 2024, and not a single defaulter. Such a portfolio would have returned 9.0% so far this year, beating the index by 30 basis points.

Now imagine the exact opposite portfolio, where no credit decisions were made. It consisted only of [the bottom decile of quality] names and was responsible for 95% of all year-to-date defaults. This basket would have returned 13.4% year-to-date, leaving the index in the dust.

A five-basis point drop in two-year yields to 4.1% headlined a low-wattage session, while stocks caught a modest bid to leave the S&P 500 green by just under 1% on the week. WTI crude slipped to $67 a barrel, gold traded flat at $2,631 per ounce, bitcoin flipped back above $101,000 and the VIX retreated below 13.

- Philip Grant

Your latest reminder that value is a relative term, via the New York Post:

This is a whole new meaning to “drawing a blank.” A barren white canvas, valued at more than $1.5 million, is up for auction in Germany this week.

The 1970 piece by minimalist American painter Robert Ryman — titled “General 52″ x 52″,” a nod to its dimensions — will be up for grabs by art enthusiasts at the Ketterer auction house in Berlin on Dec. 6 and 7. . .

Just last month, Maurizio Cattelan’s art piece of a banana duct taped to a wall, titled “Comedian,” sold for $6.2 million at auction — and was promptly eaten by the crypto entrepreneur that purchased it — inciting debate, especially because the fruit stand vendor only earned pennies for his contribution.

Santa’s got a brand-new bag, or two. U.S. consumers did what they do best over the long weekend, shelling out a record $10.8 billion on Black Friday according to Adobe Analytics, up a brisk 8.2% year-over-year.  Spending on so-called Cyber Monday rose more than 13% to $13.3 billion, while total holiday season expenditures will reach $240.8 billion if Adobe’s forecasts are on point, representing an 8.4% uptick from 2023. 

Largely stable household debt levels further color those impressive growth rates, with the total tab rising a modest 3.8% year-over-year in the third quarter per Moody’s, trailing the 4.9% and 4% expansions in nominal GDP and nonfarm wages, respectively, over the same period.  Credit card balances rose at an 8.1% annual clip to a record $1.17 trillion, though Bloomberg notes that such borrowings as a share of income stand at 8%, in line with the pre-pandemic ratio. 

Yet while rollicking asset prices and low unemployment have served to underpin today’s sanguine spending backdrop, the cumulative impacts of the pronounced post-Covid price pressures take their toll among the less well-off.  Thus, an October study from the Federal Reserve found that, since the middle of 2021, households earning $100,000 and above have increased their real spending levels by nearly 7%, while those taking home $60,000 and below have pulled back their outlays by about 2% on an inflation-adjusted basis.  Prior to the pandemic, those spending patterns moved in relative lockstep. 

Evidence of such a squeeze is on further display in the New York Fed’s latest Quarterly Report on Household Debt and Credit. The share of credit card balances which are at least 30 days delinquent stood at 8.79% as of Sept. 30, well above the 5% to 7% range seen between 2013 and 2019, let alone the 4.1% nadir logged in the stimulus-drenched last three months of 2021. 

Political and regulatory shifts likewise serve to pile the pressure on the cash-strapped lower income cohort: A Tuesday bulletin from CNBC shines a light on the credit card industry’s response to Consumer Financial Protection Bureau rules rolled out in March, which capped late fees at $8 per incident rather than the industry average of near $32. 

Issuers such as Barclays, Citigroup, Synchrony and Bread Financial, which cater to customers with weaker credit scores via co-branded cards with the likes of Banana Republic, Home Depot, Verizon and JCPenney, have since bumped their annual percentage rates by three to five points on average, leaving some APRs as high as 35.99%. Synchrony and Bread have also subsequently introduced monthly fees of up to $2.99 for paper statements. 

Yet with Donald Trump and Republican congressional majorities set to take office next month, “the consensus, now, however, is that the rule isn’t going to happen,” KBW analyst Sanjay Sakhrani told the network. More broadly, Adam Rust, the director of financial services for the Consumer Federation of America, anticipates “a deregulatory approach on rules and also efforts to dismantle the [CFPB] itself.”

Might such red-tape rollbacks translate into reciprocal relief for those encumbered shoppers? Don’t hold your breath. Synchrony CFO Brian Wenzel put it this way on his firm’s Oct. 16 earning call: “People use the term ‘rollback.’ As a company, we haven’t spent any real time thinking about that.”

No backsies. 

Long-dated Treasurys came under some pressure with 30-year yields rising four basis points to 4.3%, while the two-year note finished unchanged at 4.17% following dovish commentary from the Fed’s Waller late Monday. Stocks fluttered through a flat showing on the S&P 500 with the Nasdaq 100 managing a 0.3% gain, with WTI crude jumping to near $70 a barrel and gold edging higher at $2,643 per ounce. Bitcoin stood little changed at $96,000 and the VIX remained at 13 and change.

- Philip Grant

Western commerce runs headlong into the Great Wall, via the Financial Times:

Apple is facing an uphill battle to release its own artificial intelligence models for iPhones and other products in China, with a top Beijing official warning that foreign companies will confront a “difficult and long process” to win approval unless they partner with local groups. 

Apple chief Tim Cook arrived in China on Monday for his third visit of the year as the company tries to navigate the country’s complex regulatory regime and bring its Apple Intelligence to devices sold in the country. . . 

The U.S. tech group has been working to reinvent itself around AI this year, betting that consumers will upgrade their devices to access new features that will not work on older models of the iPhone. 

Apple’s sales in China have faltered amid a top-down campaign to cut iPhone usage among Chinese state employees and a nationalist backlash over thorny U.S.-China relations.

Behold the latest display of percolating animal spirits, this time among leveraged exchange traded products. Total trading volume among such single-stock ETFs reached $86 billion last week according to Bloomberg, topping the prior $80 billion bogey to mark the largest such figure on record. Those contraptions purchased a net $2.1 billion of U.S. stocks at Thursday’s close according to Nomura, likewise marking a daily peak. More fuel for a bull market fire that didn’t need it. 

“Rampant speculation on par with the 2000 peak” is at hand, JonesTrading chief market strategist Michael O’Rourke opined to Bloomberg. “These levels of momentum and turnover are hard to maintain for an extended period of time.” 

In the meantime, stock market punters enjoy a Saylor’s delight on the back of bitcoin’s near 40%, one-month surge to the doorstep of $100,000. Thus, a pair of leveraged vehicles tracking MicroStrategy gathered a net $420 million last week, as shares in the bitcoin speculation vehicle powered higher by 24% over the five days through Friday. The bull-minded T-Rex 2X Long MSTR Daily Target ETF (ticker: MSTU), which debuted on Sept. 18, now manages $2.6 billion in assets, up nearly fourfold since election day. 

Instructively, that hair-raising ascent is clogging pipes on Wall Street. Bloomberg relayed Friday that several of the fund’s prime brokers have curtailed access to swap lines, spurring Rex Shares custodian Matthew Tuttle to the options market to help fulfill his fund’s mandate. “If [the ETF] was based on Procter & Gamble, I could get as much swap exposure as I wanted,” Tuttle lamented. “But MicroStrategy is a different beast.” 

Indeed, intrepid industry players look to bring the leveraged ETF movement beyond hot money trades to the platonic ideal of long-term, buy-and-hold investing. Thus, South Korea-based Kiwoom Securities is partnering with U.S. firm Tidal Investment to launch an ETF providing 200% of the daily performance of Berkshire Hathaway Class B shares according to an Oct. 24 filing with the Securities and Exchange Commission. 

While Berkshire declined to comment on that development, Warren Buffett laid down some potentially relevant thoughts in the firm’s 2002 annual report, terming derivatives "financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal."  The Oracle of Omaha, who began selling equity index put options and credit default swaps in 2004, expanded on those remarks a few years later: “I don’t think they’re evil per se. . . but they do let people engage in massive mischief.”

The monkey shines continue. 

New highs are at hand for the S&P 500 following a near 0.6% rise for the broad average, which now sits higher by 27% in the year-to-date. Treasurys gave back a piece of yesterday’s gains on the long end as 10- and 30-year yields each rose three basis points to 4.3% and 4.48%, respectively, while the two-year remained at 4.21%. WTI crude slipped below $69 a barrel, gold bounced to $2,633 an ounce, bitcoin remained under pressure at $91,600 and the VIX settled just above 14. 

- Philip Grant

A Friday bulletin from the Financial Times:

The E.U.’s top three central bankers all sounded the alarm over economic decline on Friday, warning that political paralysis was leaving Europe even more vulnerable in a potential trade war with the U.S. 

In a rare and strongly worded joint statement, the governors of the Bundesbank and Banque de France said the continent would be “condemned” if Germany and France cannot revive “joint French-German action”. 

Meanwhile Christine Lagarde, president of the European Central Bank, gave a speech stressing the “urgency” of capital markets reform, which had not been “matched by tangible progress” despite rising risks. She lashed out over Europe’s “extraordinarily fragmented” financial markets and implored political leaders to “bypass the vested interests that are protected like a fortress in the ancient ages.”

And a Bloomberg headline from last month:

ECB Warns Banks of Yet More Fines Over Climate Risk Management

MicroStrategy is for pikers. Behold the price action in Quantum Computing, Inc. (ticker: QUBT), as shares have rallied by 440% since Halloween, leaving the firm’s market capitalization at $723 million. Coloring that parabolic ascent: the announcement of photonic chip foundry orders from the University of Texas at Austin and an unidentified “prominent research and technology institute based in Asia.” Terms for those transactions were not disclosed. 

QUBT, which posted a net loss of $5.7 million and $101,000 in gross revenue over the three months through September, boasts a unique corporate history, as detailed in a 2019 prospectus. First incorporated in Nevada in 2001 as Ticketcart, Inc., the outfit sold inkjet cartridges online before calling an audible six years later, purchasing Innovative Beverage Group Holdings, Inc. and taking its acquiree’s name “to better reflect its business operations at the time, which was beverage distribution and product development.” 

Innovative Beverage Group ceased operations in 2013 in less-than-harmonious fashion, as shareholder William Alessi filed suit four years later for fraud and breach of fiduciary duty, alleging that officers and directors abandoned the company and squandered its assets. North Carolina Superior Court ruled in favor of the plaintiff, placing Innovative Beverage in receivership and paving the way for the latest name-cum-business model pivot in 2018.

Riding Mr. Market’s coattails, Quantum conducted a 16 million share secondary offering late last week, pricing the deal at $2.50 per share. The stock settled Friday at an even $6.00. 

Another eye-catching development came to the fore in early September, as the company was obliged to restate its consolidated financial statements for the past two years.  Spurring that do-over, the Securities and Exchange Commission charged its previous auditor, BF Borgers CPA PC, “with deliberate and systemic failures to comply with Public Company Accounting Oversight Board (PCAOB) standards in its audits and reviews incorporated in more than 1,500 SEC filings from January 2021 through June 2023.”  The accounting firm agreed to pay a $12 million civil penalty, with owner and eponym Benjamin F. Borgers forking over an additional $2 million, and accepted a permanent suspension from the industry, without admitting or denying guilt.

It's a bull market, you know. 

Who needs Santa Claus? Stocks rose by 0.3% on the S&P 500 to wrap up a 1.6% gain for the week and leave the broad index near its high-water mark with a 26% year-to-date advance, though Treasurys could use home holiday cheer as two-year yields ticked to a near four-month high at 4.37% while the long bond settled at 4.6%, compared to 4.47% at the start of November. WTI crude advanced past $71 a barrel, gold remained on the front foot at $2,709 per ounce, bitcoin continued to consolidate its post-lunar mission at $99,000 and the VIX retreated to 15 and change, down close to two points on the day. 

- Philip Grant

Chips ahoy! Buckle up for Nvidia’s third quarter earnings report tomorrow afternoon, an event which stands as the most significant market catalyst left in 2024 by Barclays’ lights. 

Jensen Huang’s corporate pride and joy will deliver $33.25 billion in revenue and $16.4 billion of free cash flow if Wall Street is on the beam, compared to $16.1 billion and $7.04 billion, respectively, in the same period last year.  The stock is up 196% in the year-to-date after logging 239% gains in 2023.

With shares changing hands at $147 as of Tuesday’s close, not far below their $149 split-adjusted high-water mark, stronger than anticipated results could easily spell fresh record highs for the artificial intelligence boom’s avatar. Options markets imply a roughly 10% post-print price move, Barclays relays, while pointing out that assets in leveraged exchange traded products tracking Nvidia shares have reached $6.7 billion, up 18-fold from fall 2023. 

Bullish sentiment among the sell-side likewise approaches unanimity, with all but eight of the 76 firms tracked by Bloomberg rendering a “buy” verdict. Taking no chances, analysts at Truist Securities and Stifel bumped their respective price targets today to $167 and $180, respectively, from $148 and $165. 

Meanwhile – unlike the prior earnings release in late August – publicly disseminated plans for a New York City area watch party have yet to take shape as of Tuesday afternoon. 

Even a hill of beans doesn’t come cheap these days.  Nestle SA is turning to a familiar strategy to contend with ongoing input inflation, as the world’s largest coffee purveyor announced plans to hike prices and shrink portion sizes Tuesday after trimming medium-term operating margin and revenue growth forecasts to 17% and 4%, respectively, from 18% and 4.5%. Nestle will likewise allocate more resources into cheaper soluble and capsule coffee formats, deputy executive vice president David Rennie relayed at Tuesday’s investor meeting in Switzerland. 

“We are not immune to the price of coffee, far from it,” Rennie said, adding that they have and will continue to pass those rising java costs onto consumers. Futures prices for arabica and robusto beans have risen by about 50% and 65%, respectively, in the year-to-date. 

Nestle’s travails illustrate a multifront squeeze on the mass-market foodstuffs industry, as name brands wrestle with simultaneous competitive pressures from high-end entries catering to wealthy noshers to cheaper private label alternatives capitalizing on stretched budgets among the less well-off.  

Citing data from consumer research firm Circana, Bloomberg relays that mainstream products from the likes of Kraft Heinz and General Mills saw unit sales tick lower by 1% this year through July 14, while store brands grew 3% and the super-premium category expanded at a 4% clip. “It’s a very polarized picture” Danone deputy chief executive Juergen Esser told Bloomberg, while RBC Capital Markets analyst Nik Modi ominously declared that “you’re seeing the middle disappear.”

Such dynamics similarly serve to complicate life for the dine-out cohort, further aggravated by a sharp updraft in wages. Nearly 90% of respondents to a September survey from Restaurant Business Online predict that labor costs will keep rising over the next year, while roughly 75% say that affording sufficient help will pose their stiffest staffing-related test.  

The post-Covid experience directly informs those beliefs, as 59% of RBO poll participants report “significant” labor cost increases over the prior 12 months, building on the explosive price pressures seen in 2021 and 2022. Michelle Korsmo, CEO of the National Restaurant Association, pegs average labor inflation over the past five years at more than 30%. 

Might such cumulative cost pressures, in tandem with a bifurcated consumer backdrop, serve to disrupt the best-laid plans of one fast-casual chain?  See the current edition of Grant’s Interest Rate Observer dated Nov. 6 for a bearish analysis of one longstanding, marginally profitable restaurant concept which may struggle to justify today’s exorbitant valuation. 

Stocks shook off some early losses to rack up 0.4% and 0.7% gains on the S&P 500 and Nasdaq 100, respectively, leaving each of those gauges higher by about 25% for the year-to-date, while Treasurys also finished a bit stronger with the two-year yield ticking lower by two basis points to 4.27% and the long bond dipping to 4.57% from 4.61% Monday. WTI crude edged higher at $69 a barrel and change, gold managed a second green finish at $2,633 per ounce, bitcoin settled at $92,400 and the VIX remained above 16. 

- Philip Grant

Green sees red, via the Financial Times:

[German] police searched the home of a 64-year-old man after he was accused of insulting German vice-chancellor Robert Habeck. 

In an awkward revelation that comes as Habeck seeks the nomination of his Green party as candidate for Chancellor, prosecutors on Friday said the economy minister had filed a criminal complaint after the man called him an “idiot” on social media in June. 

The post on X featured a photograph of Habeck over a doctored version of the logo for the shampoo brand Schwarzkopf Professional, with the pun “Schwachkopf Professional” — meaning “professional idiot.”  

Lawyers acting for Habeck filed a criminal complaint, prosecutors in the Bavarian town of Bamberg told Germany’s DPA news service, confirming earlier media reports.

Might the sound of trumpets soon be in the air? Donald Trump spoke with Vladimir Putin last week, The Washington Post reported Monday, with the President-elect advocating for additional talks in service of ending the war in Ukraine. 

The Kremlin denied that any conversation has taken place, though Russia’s strongman recently praised Trump for his “manly” response to the July assassination attempt and said he was “ready” to open a dialogue. Meanwhile, Putin and German Chancellor Olaf Scholz held a Friday phone call (confirmed by both parties) to discuss a cessation of hostilities, marking the first such direct communication since late 2022.

Of course, peace in Ukraine and a Russia détente with the West is no sure thing. The Wall Street Journal points out that Trump frequently lobbed friendly remarks Russia’s way during his first White House stint, while his administration lifted a Ukrainian arms embargo and ejected dozens of Russian diplomats/intelligence operatives from New York and Washington.  Then, too, a recent string of battlefield successes may dim Russian appetite for compromise.  

“Putin is not ready for any substantive talk around any possible peace plan because he is not ready to make any concessions – full stop,” Andrei Kolesnikov, senior fellow at the Carnegie Endowment for International Peace, told the WSJ yesterday. “He believes that he has enough financial and emotional resources to continue.” 

While the prospects for an imminent armistice and accompanying relaxation of economic sanctions remain anybody’s guess, investors are certainly warming to the possibility. To wit: the JPMorgan Emerging Europe, Middle East and Africa closed-end fund, the subject of a bullish analysis in the Aug. 30 edition of Grant’s Interest Rate Observer (thank you, Willem de Mol van Otterloo), has doubled since Nov. 5, pushing its market capitalization to £100 million ($126 million). Average daily volumes have exploded to 295,000 shares over the eight sessions following the U.S. elections, up tenfold from the prior octet. 

The tiny, London-listed vehicle (ticker: JEMA LN), which holds stakes in the likes of Sberbank, Lukoil, Novatek and Gazprom, wrote down its Russian exposure by 99% in response to the Feb. 2022 invasion of Ukraine, in turn holding £25.2 million of accumulated and undistributed dividends in a Moscow custody account with a further £7.9 million likely forthcoming.  Meanwhile, a re-marking of the fund’s Russia positions to their current market value would ratchet today’s £54 million net asset value sharply higher. “Can you buy JEMA and still look yourself in the mirror?” Grant’s rhetorically asked in August, answering thus:

As a practical matter, the indirect acquisition of frozen Russian shares couldn’t contribute to Putin’s war effort. The prohibition on foreign trading precludes capital inflow. Similarly, the prohibition on selling Russian shares rules out the possibility of an inflow of capital-gains tax receipts into the Kremlin’s war coffers. This is a peace trade.

May it be so. 

Stocks came for sale with the S&P 500 and Nasdaq 100 dropping 1.4% and 2.4%, respectively, to each settle well lower on the week, while the Treasury curve steepened a bit with two-year yields declining three basis points to 4.31% and the long bond ticking to 4.6% from 4.58% Thursday. WTI crude retreated to $67 a barrel, gold fell yet again at $2,562 per ounce, bitcoin ripped to $91,400 and the VIX rose above 16, up nearly two points on the day. 

- Philip Grant

This avatar of the bygone venture capital boom-and-bust looks to meet Mr. Market in the middle, via the Financial Times:

Klarna has begun its long-anticipated stock market flotation after the Swedish buy now, pay later pioneer said it had filed initial public offering documents in the U.S. The fintech on Wednesday said it had “confidentially submitted” a draft registration statement to the U.S. Securities and Exchange Commission. 

The IPO, which could value Klarna between $15 billion and $20 billion, would take place after the SEC review and the timing would be subject to market conditions, the company added. Klarna said the price range and number of shares to be offered in the IPO were still to be determined. 

Klarna has been on a rollercoaster ride since it was valued at $46 billion in a 2021 deal that made it Europe’s most valuable start-up. It was then valued at $6.7 billion during its last official fundraising round in 2022, as investors sharply re-rated fintech companies in response to rising interest rates.

How low can we go? Option-adjusted spreads on the ICE BofA U.S. Corporate Index ticked to 77 basis points Tuesday, marking a fresh post-1998 nadir for high-grade credit risk premiums. That milestone follows a seven-basis point downshift last week, which represented the largest weekly drop since June 2023 per BMO Capital Markets and leaves the current pickup over Treasurys at roughly half its 20-year average. 

Recent rate cuts and all, still-elevated yields relative to the post-2008 norm inform the ongoing feeding frenzy, with high-grade corporates still offering more than 5% compared to 2% and change in the summer of 2021. Nevertheless, today’s ebullient, blue-sky backdrop gives pause to some observers: “You have to have dry powder in case you hit. . . volatility,” T. Rowe Price portfolio manager Lauren Wagandt opined to the pink paper last month.

An uptick in rating agency scrutiny towards the category speaks to that cautious stance. As Bloomberg’s Sam Geier relays today, the tally of high-grade debt facing either a negative outlook or review for potential rating agency downgrade tops $2.5 trillion, up from $1.8 trillion two years ago. 

Meanwhile, so-called fallen angel debt (issued by heretofore investment-grade borrowers then relegated to junk status) could reach $60 billion in 2025, analysts at Barclays predicted on Oct. 25. That provisional figure – topped only in 2020 and 2016 in the post-Lehman era – would mark a material uptick from this year’s $6 billion tally, which stands as the lightest such slate since 1997.  

More broadly, leverage ratios within the non-financial, non-utility IG cohort tracked by Bank of America continue to drift higher. Net debt among that cohort topped 1.9 turns of trailing 12-month Ebitda in the third quarter, up from 1.4 times in September 2007, with gross debt rising to 2.6 times trailing Ebitda from 1.9 times over the same period. 

Though excluded from the BofA balance sheet data, financial firms certainly made their mark yesterday: the segment raised a hefty $27 billion, nearly matching the bank’s expectation of $30 billion in new high-grade issuance for the full week and posing the question of what spurred those generally plugged-in borrowers towards such outsized activity. 

“This strong acceleration in financial supply signals the desire by issuers to lock in historically tight spreads,” BofA credit strategist Yuri Seliger writes. “The rush to borrow also suggests [that debtors] are worried these tight spreads may not last.” 

An inline reading of October CPI was enough to bolster Mr. Market’s anticipation of a December rate cut as two-year Treasurys dropping seven basis points to 4.27%, while the long bond rose to 4.63% from 4.58% Tuesday and stocks finished unchanged on the S&P 500 and Nasdaq 100. WTI crude again remained at $68 a barrel, gold failed to hold an early bounce and fell to $2,576 per ounce, bitcoin hovered north of $89,000 and the VIX retreated to 14.

- Philip Grant

Mr. Market lets it ride. Investors leaned headlong into the latest asset price levitation late last week, pouring a net $1.9 billion into the iShares MSCI USA Momentum Factor exchange traded fund Friday. That sum, equivalent to 15% of the BlackRock-managed vehicle’s total assets, marks the largest single session inflow in its 11-year history, Bloomberg relays.

In turn, the iShares Core Total USD Bond Market ETF logged a $1 billion outflow, a record sum dating to its 2014 inception.

That’s not to say that fixed income is asset class non-grata among the risk-hungry hordes, as the Direxion Daily 20-year Treasury Bull 3X ETF gathered a net $625 million last week. That’s a record performance for the 2009-launched fund, which has posted a 24% drop in the year-to-date to bring its three year showing to minus 44%. 

“Commercial real estate has set its bottom,” Marathon Asset Management chairman Bruce Richards declared to The Wall Street Journal late last month. “The worst is over.”  A pair of recent rate cuts from the Federal Reserve – with futures pointing to more easing on the way – along with a still-constructive growth backdrop should pave the way for better days ahead.  

Indeed, the Green Street Commercial Property Price Index increased by three percentage points over the first nine months of 2024.

Yet some industry players will need a lot more where that came from, as the Green Street gauge still sits 19% below its 2021 era peak. Still-buoyant 10-year Treasury yields likewise serve to keep a floor under cap rates (meaning a property’s net operating income as a share of asset value; lower figures equate to a fancier price tag), in turn raising the bar for a further recovery in prices. “You will see improvement in financing costs, but you won’t see a pop from the value standpoint,” Richards added. “Therefore, it’s not going to be a V-shaped recovery, it’s going to be a very slow grind and will take years to work through.”

In the meantime, evidence of the bygone boom and bust continues to manifest on the balance sheets of some domestic lenders, as the Financial Times highlighted a material uptick in CRE-related woes the other day. 

Thus, the value of delinquent property loans reached $26 billion in the third quarter per the Federal Deposit Insurance Corp., double that seen in the first three months of 2023, while modified loans – in which a borrower secures relief through forgiven payments, lowered mortgage rate or other such mercy – exceeded $15 billion over the three months through September, up from about $3 billion early last year. According to research outfit BankRegData, the quarterly value of CRE repeat defaulters reached $5.5 billion from July to September, up $1 billion over the three months through June and nearly double that seen in the third quarter of 2023.

The monetary mandarins have taken notice. Domestic banks have “’extended and pretended their impaired commercial real estate mortgages in the post-pandemic period,” wrote researchers at the New York Fed on Oct. 30, adding that a spate of ongoing debt modifications could spur “credit misallocation and a build-up of financial fragility” (those terms could also aptly summarize side-effects stemming from Fed’s post-2008 EZ-money stance - ed). 

Indeed, such continued can kicking has served to steepen the near-term “maturity wall,” with the industry’s share of loans coming due within the next three and five years reaching 27% and 40%, respectively, in the fourth quarter of 2023, up from 16% and 27% in late 2020.  Since the tightening cycle began in early 2022, “credit risk in the CRE space has increased substantially and banks have been somewhat sluggish in assessing their deterioration,” warned the NY Fed, adding that lightly capitalized lenders are particularly exposed to trouble in this area. 

See the Oct. 25 edition of Grant’s Interest Rate Observer for more on the risks and opportunities at hand as banks look to contend with the pileup of dodgy property debts, along with a bearish look at one fast-growing industry darling that arguably holds insufficient reserves against its “troublesome” loan book. 

Fire up those laser eyes: another rip higher in bitcoin headlined today’s trading, with the pre-eminent digital ducat jumping more than 10% to $88,000 and change, up more than 30% from seven days ago. Stocks managed another green finish but only barely as the S&P 500 stayed near unchanged throughout the session, while WTI crude fell to $68 a barrel and gold retreated to $2,621 per ounce. The bond market was closed for Veterans Day, though the iShares 20+ Year Treasury Bond ETF ticked lower by half a percent. 

- Philip Grant

Talk about grading on a curve: Yesterday’s post-election bull stampede was an odd one, as the S&P 500 rallied by more than 2.5% despite fewer than 70% of New York Stock Exchange components finishing in the green and less than 70% of exchange trading volume flowing to rising stocks. 

As SentimenTrader founder Jason Goepfert relays on X, such a bifurcated backdrop appeared on only three prior occasions in modern finance, once each in the aftermath of market wipeouts in 1987 and 2020, and again during the dot-com bubble’s feverish finale in March 2000. 

Meet the new boss, same as the old boss. Donald Trump’s imminent return to the Oval Office marks a new day for financial regulation, likely auguring the end of Securities and Exchange Commission chair Gary Gensler’s time in the big seat. Robinhood chief legal officer and former SEC commissioner Dan Gallagher is a favorite to take over per CNBC’s Bob Pisani. 

Accordingly, Bloomberg relays that newly minted ESG- and cryptocurrency-related rules may soon go by the wayside, with registration and short sale strictures governing hedge funds also potentially on the chopping block. “We are looking to turn the page. . . and undo the damage of the Gensler years,” Bryan Corbett, chief executive of the alternative assets-focused lobbying group Managed Funds Association, told the Financial Times.

Tuesday’s political sea change could likewise carry major implications for the belle of the buyout ball. The Gensler-led SEC continues to review Apollo Global Management’s and State Street’s mid-September proposal for a private credit ETF (current rules cap the share of illiquid net assets at 15%) with a thumbs-up sure to spur an array of competing contraptions. 

Notably, the pair’s formal application left some observers cold, offering sparse information on investor redemption procedures and other salient matters. “The lack of details in the filing is pretty staggering,” Duke University law professor Elisabeth de Fontenay told Bloomberg last Friday. “It feels like a cut-and-paste job from your usual ETF filing.” 

Indeed, agency upheaval further muddies the waters for those ETF hopefuls, with one prominent industry player voicing an opposing set of objections. Blue Owl Capital co-chief executive Marc Lipschultz extolled the virtues of direct lending’s transact-by-appointment characteristics in a Halloween Bloomberg Television interview, adding that “private markets are private for a reason. . . I don’t know what problem we’re trying to solve in creating a bunch of trading in a non-traded underlying asset. It’s not our mission to seek liquidity in the asset.” 

While the philosophical and practical debate over such closely held loan-to-ETF alchemy continues apace, one institutional mainstay offers an eye-catching solution. Witness an Oct. 23 S&P Global analysis titled “tokenized private credit: a new digital frontier for real world assets.”  

The rating agency imagines an array of advantages from shifting private loans to the blockchain, with such a migration “potentially facilitating enhanced liquidity, efficiency and transparency.”  On the other hand, S&P notes that some technology-forward firms have abandoned tokenization efforts “due to concerns that the market environment and/or the blockchain technology are not quite ready.”  A constrictive regulatory backdrop and laborious conversion process similarly bedeviled the early movers, as did “insufficient” investor demand for decentralized, public ledger-domiciled debt instruments. 

In any event, technology’s ceaseless advance contrasts with the timeless idiosyncrasies of lending and borrowing. S&P recounted one ill-fated emerging markets-focused initiative on the DeFi platform Goldfinch – in which investors took losses on their digital debt portfolio – concluding thus: “Even when tokenized, the quality of the credit matters.”

This one goes to 11: a 25-basis point Fed rate cut helped turn the bull market party up another dial, with the S&P 500 tacking on a further 0.8% to reach new highs with a near 27% year-to-date return. Treasurys managed to rebound from their post-election beatdown, with the long bond dropping eight basis points to erase half of yesterday’s lurch higher. WTI crude toggled above $72 a barrel, gold bounced back to $2,708 per ounce, bitcoin continued its lunar-bound journey at $76,200 and the VIX retrenched to near 15 from 22 Monday afternoon.

- Philip Grant