Have portfolio, will travel. From the Financial Times:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

- Philip Grant

Score one for Elizabeth Warren.  From CNN:

PepsiCo is unshrinking shrinkflation.

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

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

Now, how about that 75-basis point rate cut? 

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

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

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

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

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

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

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

- Philip Grant

A headline from the Baltimore Sun:

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

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

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

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

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

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

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

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

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

- Philip Grant

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

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

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

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

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

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

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

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

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

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

- Philip Grant

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

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

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

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

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