Tip of the Spear
Consumer wallets go into lockdown:
Consumer wallets go into lockdown: As surging inflation takes a toll on discretionary spending, service economy employees are themselves feeling the pain. A survey of domestic dining industry operators and consumers last month from restaurant technology firm Popmenu found that 43% of respondents report tipping their servers more than 20% on average, while 32% provided their delivery drivers with the same 20%-plus gratuity. In fall 2021, those figures stood at 56% and 38%, respectively. 
Some staffers report a drastic downshift in their compensation. NYC Uber driver Carlos Tavares reports that he earned $75 a week on average from customer tips prior to the pandemic, but those discretionary payouts have since fallen to $20 or $30 per week. “I don’t really know why,” he said to the Guardian today. “Maybe people are just trying to save money.” 
Yet for some laboring in the so-called gig economy, tightening consumer purse strings may represent only part of the problem. Gustavo Ajche, DoorDash deliveryman and founder of labor organization Los Deliveristas Unidos, tells the Guardian that nearly 80% of the $250 he might receive during a 12-hour shift comes from tips, though he reports “strange discrepancies” between the earnings promised by the DoorDash app and his actual take home pay. “They don’t give us the real amount,” he contends.
Of course, that’s not the first time that the industry has faced complaints of less than fair play, from workers and businesses alike. A trio of examples: 
In November 2020, DoorDash forked over $2.5 million to settle a lawsuit from Washington D.C. Attorney General Karl Racine alleging that the company pilfered millions of dollars in driver tips. 
A 2019 New York Post dispatch found that food delivery outlet Grubhub created more than 30,000 web pages that “masquerade” as restaurant sites, often replete with the eatery’s logo, while funneling business onto its own platforms at a markup to the restaurant’s actual pricing. By way of explanation, Grubhub stated that they created the duplicate websites as a “service,” adding that “It has always been our practice to transfer the domain to the restaurant as soon as they request it."
Yesterday, the office of Chicago Mayor Lori Lightfoot announced that Uber will pay a $10 million settlement after city investigators found that the firm listed restaurants on its Uber Eats and Postmates delivery platforms without their permission and "deceptively advertised that certain merchants were ‘exclusive to’ or ‘only on’ the platforms,” while also running afoul of the Windy City’s 15% fee cap enacted during the pandemic.  Upwards of 2,500 local restaurants are eligible for recompense, the Chicago Tribune reports. 
The above corporate foibles illustrate a stark feature of the gig economy “ecosystem.” Namely: the durability of those business models remains in question, despite the category's rapid ascension and Wall Street’s continuing admiration during this year’s market downturn.
Thus, shares of Grubhub parent Just Eat Takeaway.com, which shelled out $7.3 billion in stock for the company last year, have sunk by 55% this year to leave the company with a $4.8 billion market cap.  Just Eat has lost money on an operating basis each year since 2015, generating a cumulative $1.55 billion deficit from the start of that year through June 30.  DoorDash, which sports a $21 billion market cap after a 65% year-to-date decline, has posted an aggregate $2.5 billion operating loss from 2018 through September 30. Undaunted, the sell side sees sunny skies ahead for the pair, with the 23 and 31 analysts, respectively, covering Just Eat and DoorDash expecting shares to rally 44% and 51% over the next year according to each company’s average price target. 
Meanwhile, the average rideshare fare jumped by 92% from January 2018 to the middle of last year, data from Rakuten Intelligence show. Yet those bounding price hikes haven’t been enough to staunch the cascade of red ink at the largest such operator. Uber posted minus $1.3 billion in operating income over the first nine months of the year, bringing the firm’s cumulative shortfall to $30.3 billion going back to 2015. Though Uber shares have struggled since their spring 2019 IPO with a 40% loss over that stretch compared to a 45% total return for the S&P 500, the company remains valued at $54 billion, with the 47 analysts covering the stock collectively expecting a 75% rally over the next 12 months. 
Recap Dec. 6
A second straight selloff left the S&P 500 weaker by 3% this week so far, though Treasurys managed to catch a bid as the long bond dropped ten basis points to 3.52%. WTI crude slipped below $75 a barrel to mark its lowest close in the year-to-date, gold edged higher to $1,783 an ounce and the VIX popped back above 22.   
- Philip Grant
Star Gate
Twice bitten, thrice shy?
Twice bitten, thrice shy? The $14.6 billion Starwood Real Estate Income Trust (a.k.a. SREIT) is limiting redemptions after investors in droves asked for their money back last month.  
November redemption requests equaled 3.2% of net asset value, the company relayed in a letter to financial advisors that found its way to Barron’s over the weekend, well above its 2% monthly withdrawal limit. SREIT accordingly accommodated only 63% of those entreaties, advising the disappointed others to try their luck again in December. That comes just days after Blackstone tapped the brakes on redemptions in its own non-traded BREIT fund after repurchase requests exceeded its own monthly threshold, spurring the asset management behemoth to honor only 43% of those applications in November. 
SREIT, which, like Blackstone’s vehicle, features a portfolio concentrated in the multifamily apartment and warehouse businesses (two categories that have remained in brisk demand during and after the pandemic) generated a 10.2% total return this year through October, the company relays, topping the 9.3% for BREIT over that stretch. Similarly, SREIT advertises a 4.5% annual distribution to shareholders, just above the 4.4% on offer in the Blackstone-managed peer. Yet that strong performance wasn’t enough to keep shareholders from ringing the register en masse. “These [withdrawal] limits are designed to protect existing investors and the long-term health of the vehicle, and ultimately to maximize shareholder value,” the company stated. 
Those private entities have company in the exchange-traded sphere. This morning, SL Green Realty Corp. (ticker: SLG) announced that it will trim its regular monthly dividend to $0.2708 per share beginning in January, 12.9% below the prior payout.  That downsized dividend from Manhattan’s largest office landlord reflects a corresponding decline in the company’s expected bottom line next year, SL Green added.  For context, the cadre of 19 sell side analysts covering the company had anticipated a 7.8%, year-over-year decline in funds from operations in 2023. 
The Best Laid Plans...
Here we go again:
Here we go again: Friday’s stronger-than expected reading of nonfarm payrolls for November wasn’t exactly music to the ears of easy money aficionados. That release marked the eighth consecutive month that headline payrolls topped the economist consensus, Bianco Research finds, the longest such stretch since Bloomberg began keeping track in 1996.  
As Nick Timiraos points out in today’s edition of The Wall Street Journal, those data have driven the Federal Reserve to target a funds rate of between 4.75% and 5.25% next year, compared to a prior view of a 4.5% to 5% benchmark borrowing cost.  For context, the funds rate last topped 5% during the 2007 tightening cycle on the eve of the global financial crisis. 
Then, too, elevated borrowing costs may be in the cards longer than the market believes. The WSJ Fed whisperer highlighted potentially telling remarks from chair Jerome Powell last week, suggesting he prefers to slow the pace of rate hikes from the recent 75 basis point-per-meeting clip, but also “to hold off longer at a high level and not loosen policy too early” if the economy shows signs of strain. 
On that score, investors have their doubts. Interest rate futures now pencil in a peak funds rate of 4.9% by March, before a long dwindle to 4.4% by the end of 2023. “The markets are trying to have their cake and eat it too, hearing Powell say that he doesn’t want to overtighten, while ignoring the second half of the sentence where he says he will hold rates in restrictive territory,” Calvin Tse, head of macro policy for the Americas at BNP Paribas, tells the Financial Times
Then again, the central bankers’ own Swiss bank believes there may be something to Mr. Market’s guesstimate. In its quarterly review released today, The Bank for International Settlements highlighted several acute side-effects stemming from the Fed’s comprehensive retreat from its longstanding EZ money stance, noting that liquidity in the Treasury market remains “noticeably worse than during the March 2020 episode of Treasury market dysfunction.” 
What’s more, the BIS flagged “huge, unseen dollar borrowing” in foreign exchange swaps, whereby an institution borrows dollars against their local currency in the spot market for repayment at a future date. The BIS estimates that global nonbank institutions such as pension funds hold a whopping $80 trillion in those off-balance sheet and predominantly short-term borrowings, equivalent to 83% of last year’s global nominal GDP and nearly four times total U.S. commercial bank assets. Of course, the recent fast-moving U.K. pension fund crisis underscores the potential systemic pitfalls presented by the widespread usage of leveraged investment strategies. 
More broadly, years of ultra-accommodative policies have fomented a financial system that is ill-suited for the withdrawal of monetary stimulus. Authors led by Claudio Borio summarize the Fed’s predicament: 
Financial stability risks from high leverage and inadequate market liquidity are not confined to the pension fund sector. Indeed, long periods of low interest rates have incentivized a reach for yield and leverage build-up by financial institutions across the spectrum, including more innovative forms of securitization, such as those of private equity funds. With rapid increases in interest rates and receding liquidity in core markets, simultaneous deleveraging can generate liquidity demand pressure, which could lead to market dysfunction. 
When these risks materialize and the attendant economic costs are substantial, there will be pressure on central banks to provide backstops – as market-makers of last resort. 
Recap Dec. 5
Stocks broke lower after some recent sideways price action, with the S&P 500 retreating by 1.8%, while Treasurys also came for sale as two- and 10-year yields jumped to 4.41% and 3.6%, respectively, up 13 and 10 basis points from Friday’s finish. Gold slipped to $1,781 an ounce, WTI crude fell to $77 per barrel and the VIX climbed back to near 21.
- Philip Grant
Talk House
Silence is golden? Here’s your headline of the day, from Bloomberg:
Sam Bankman-Fried Should Shut Up, Bernie Madoff’s Lawyer Says
Indeed, there’s a thin line between celebrity and infamy. 
Caddies Welcome 1 to 1:15
Don't miss your window.
Don’t miss your window. It’s been a year to forget in the high yield bond market, as domestic issuance sits at a measly $110 billion per Bloomberg, slowest since 2008 and a shadow of the $500 billion-plus gusher across 2021 and an annual average of $340 billion over the prior decade.  
Accordingly, Wall Street has curbed its enthusiasm for 2023: junk bond supply next year should range from $170 billion to $210 billion, strategists at Barclays guesstimate, while peers at JPMorgan pencil in $200 billion and analysts at CreditSights expect $175 billion. 
With benchmark interest rates remaining far above their virus-era levels thanks to the Fed’s tightening campaign, would-be issuers hold off in hopes of fairer financial weather. “In 2022 the clear answer has been to wait, but eventually chief financial officers will get nervous and pay up to sleep at night,” Christian Hoffmann, portfolio manager at Thornburg Investment Management, told Bloomberg. “If you are a high-quality, high-yield company, there is absolutely no need to come to market and if you [do], the market extracts a wicked toll.” The ICE BofA US High Yield Index sported an 8.26% effective yield as of yesterday, nearly double the 4.74% on offer a year ago. 
By one observer’s reckoning, those borrowing costs are at risk of ratcheting higher still. In a Nov. 22 analysis for PitchBook, Lehmann Livian Fridson Advisors LLC chief investment officer Marty Fridson relayed that his computed fair value option-adjusted spread for the ICE BofA US High Yield Index finished October at 784 basis points over Treasurys, 2.6 standard deviations north of the 463 basis point pickup seen on Halloween (that OAS has since tightened to 448 basis points) to leave the market in “extremely overvalued” territory. 
Helping to drive that yawning gap from his estimated fair value: a notable downshift in credit availability in October, as “significantly more banks than formerly were tightening their standards for companies to qualify for loans,” Fridson writes. 
Things are hardly more welcoming on the equity side. Domestic IPO volume over the first eleven months of the year reached $18.1 billion by Bloomberg’s count, off a cool 93% from last year’s pace. “The underwriting calendar is effectively zero and if you are an underwriting business, you are not making any revenue,” lamented Morgan Stanley CEO James Gorman at a Reuters conference yesterday.  Prospects for near-term improvement appear remote, Nasdaq CEO Adena Friedman added: “We are hopeful that the second half of 2023 becomes an opportunity for companies to [cash] out, but I would expect a quiet first half.” 
Sure enough, companies’ hearty (or desperate) enough to tap the capital markets for cash are obliged to get creative. The Wall Street Journal reports today that dozens of firms, including publicly traded Bright Health Group (ticker: BHG) and Lordstown Motors (ticker: RIDE) have turned to so-called structured private funding rounds to raise capital. 
Those bespoke deals, which often feature convertible bonds and include investor-friendly enhancements like additional dividends, warrants and preferred notes that sit above common equity in the capital structure, are increasingly the only game in town for firms facing beaten-down share prices and lacking access to traditional credit markets. “Our backlog for these types of deals has never been larger” Kurt Tenenbaum, managing director at private credit giant Blue Owl Capital, told the Journal
Recap Dec. 2
A stronger-than-expected reading of November payrolls didn’t bother the bulls, as stocks recouped steep early losses to settle little changed for a second straight day following Wednesday’s intense rally. Treasurys similarly rebounded from an initial selloff as two-year yields finished at 4.28% compared to 4.25% yesterday while the long bond finished at 3.53%, its lowest since September. WTI crude pulled back to $80 a barrel, gold edged lower to $1,812 per ounce and the VIX slumped to 19, its lowest since early April. 
- Philip Grant
Standing Eight
Mr. Market gets off the mat. Bloomberg’s U.S. Aggregate Bond Index logged a 3.68% gain in November, Gregory Blaha of Bianco Research relays today. That marks the second-best single month showing for that broad fixed-income gauge since 1995, behind only the 3.73% rally in December 2008.  
The bulls are going to need a lot more where that came from. With one month left in 2022, this year’s 13% decline in the U.S. Agg stands as “easily the worst year-to-date return on record” with data going back to 1976.
Zeus' Wild
One of Wall Street’s premier franchises lobs a thunderbolt:
One of Wall Street’s premier franchises lobs a thunderbolt: Asset management behemoth Blackstone, Inc. announced it will limit further redemptions in its $69 billion Blackstone Real Estate Income Trust (BREIT), after investor requests for cash topped the fund’s monthly and quarterly withdrawal limits of 2% and 5% of net asset value, respectively.  
Blackstone said it fulfilled all of October’s redemptions, which equated to 2.7% of NAV, but met only 43% of November redemptions after repurchasing 2% of NAV, leaving only 0.3% of net assets available for repurchase in December. Unmet requests will not carry over automatically, so limited partners who receive some or none of their requested money will need to resubmit those applications in the first quarter of next year. 
In tandem with that announcement, Blackstone moved to raise cash for its real estate vehicle, announcing the sale of its 49.9% stake in a pair of Las Vegas hotels to Vici Properties in exchange for $1.3 billion in cash along with the assumption of Blackstone’s share of a $3 billion debt load backing those properties. 
Today’s news of a growing exit queue is notable considering the high marks Blackstone has given its fund. BREIT generated a 9.3% total return this year through October, the firm relayed last week, leaving total per-annum returns at 13.1% since its 2017 launch and delivering an average 4.4% yearly distribution. For context, the Vanguard Real Estate Index Fund ETF is off by 24% in the year-to-date and has returned an average 4.7% since the beginning of 2017, while paying a 3.6% trailing 12-month dividend. 
“Our business is built on performance, not fund flows, and performance is rock solid,” stated a Blackstone spokesperson. “BREIT has delivered extraordinary returns to investors since inception nearly six years ago and is well positioned for the future.”
Yet as evidenced by the near 10% intraday selloff in Blackstone shares following the BREIT announcement, the market was unprepared for the prospect of retrenchment among high net-worth individual investors. “Growth of the retail channel has been a key driver of Blackstone’s success in recent years,” Keefe Bruyette & Woods analyst Michael Brown observed today, “and the growth challenges facing the company on the retail side could continue to weigh on BX’s valuation.”
Other tribulations could soon present themselves. As the analysis “Don’t ask, don’t sell” in the May 27 edition of Grant’s Interest Rate Observer argued, BREIT’s stellar performance relative to publicly traded peers and torrents of inflows from income-hungry investors creates its own set of complications, particularly as the industry struggles to contend with the sharp rise in interest rates (witness the yawning discounts to NAV visible across the public REIT “space”). “With private equity, you do a capital call when you want to buy something,” Jonathan Litt, founder and CIO of investment manager Land & Buildings, was quoted as saying. “Here, the money is just pouring in, and if they don’t turn it around and get it out super-fast, they’re not going to be able to pay the dividend, right?”  
More broadly, the rapid ascendancy of Blackstone’s non-traded product underscores a curious dynamic. The limited recourse for shareholders looking to exit their positions has long presented a latent risk, as BREIT’s fine print includes a stipulation that Blackstone reserves the right to amend or suspend its share repurchase plan at its discretion. “You shouldn’t sell in a panic, a financial adviser might counsel, and with BREIT, you probably couldn’t,” Grant’s cautioned.
Indeed, the popularity of that vehicle represents something of an avatar for modern finance. “In times past, illiquidity would carry a cost – the inability to transact seemed a drawback,” reflected Grant’s in a Sept. 30 follow-up.  “No more, as investors are paying up for the smoothing of returns that private managers are only too happy to provide.” 
There’s something to be said for price discovery. 
QT Progress Report
Reserve Bank Credit stands at $8.57 trillion after last week’s $19 billion runoff, leaving interest-bearing assets on the Fed balance sheet some $350 billion below their late March peak and down $93 billion from the first week of November. That’s on pace with the Fed’s $95 billion monthly target. 
Recap Dec. 1
Stocks managed to consolidate yesterday’s euphoric rally as both the S&P and Nasdaq finished little changed, while bonds got into the holiday spirit as rates darted lower across the curve, headlined by the 10-year note sinking to 3.53% from 3.68% on Wednesday.  Key commodities enjoyed a party of their own as the Dollar Index slumped to its weakest since June 30, as gold rocketed 3% to $1,817 an ounce and WTI crude pushed back above $81 a barrel.  Completing the pleasant picture: the VIX closed below 20 for the first time since August. 
- Philip Grant
Greenhouse Glass
Now they tell us.
Now they tell us. Here’s an excerpted blog post today from the European Central Bank, having a go at the leading digital currency:
The value of bitcoin peaked at $69,000 in November 2021 before falling to $17,000 by mid-June 2022. Since then, the value has fluctuated around $20,000. For bitcoin proponents, the seeming stabilization signals a breather on the way to new heights. More likely, however, it is an artificially induced last gasp before the road to irrelevance – and this was already foreseeable before FTX went bust and sent the bitcoin price to well below $16,000.
As noted wordsmith Yogi Berra once observed, predictions are hard, especially about the future.   Let’s look back at a Financial Times headline dated Dec. 3, 2021:
Christine Lagarde says EU inflation a passing ‘hump’ and 2022 rate rise ‘very unlikely’
Wild, Wild East
Never a dull moment:
Never a dull moment: The roller coaster continues for the cohort of U.S. listed, Chinese technology stocks, as the Nasdaq Golden Dragon Index ripped higher by nearly 10% today after yesterday’s 5% advance, leaving its November gains at a heady 42%. That’s easily the best monthly showing on record (the index was launched in 2000).  Sturdy price action across the broader stock market, along with optimism of an end to the interminable “Covid Zero” crackdown, armed the charge for that ignition, which follows declines of 25% in October and 17% in September.  
As Morgan Stanley’s Laura Wang relayed yesterday, Golden Dragon constituent companies have seen an average 4.3% standard deviation in their daily share prices over the last year, a dynamic likely to continue “due to potential binary sentiment swings between overly simplified hope for a rapid opening-up and disappointment from a seemingly slow and zig-zagging move towards a Covid Zero exit."
Of course, that spin-cycle price action from large cap and relatively liquid stocks looks positively quaint compared to the parabolic rallies, and equally jarring plunges back to earth, of a series of smaller Chinese firms that launched initial public offerings on the Nasdaq this summer (Almost Daily Grant’s, Aug. 26, Aug. 5, Aug. 2).  Late last month, The Wall Street Journal reported that the Nasdaq has put the crimps on further Chinese IPOs, a freeze that leaves as many as 30 firms -- which had hoped to raise less than $40 million each – out in the cold.  
What’s more, the exchange has asked underwriters and syndicate members to provide the names and account information of the investors who received share allocations as well as any potential lockup agreements governing minimum holding periods. The concern: insiders could manipulate the share price of securities with limited floats before dumping them on an unsuspecting public, Andrew Tucker, partner at law firm Nelson Mullins Riley & Scarborough LLP, told the Journal. “They didn’t ask these questions even during the dot-com bubble,” he marveled. 
Regulators provided their imprimatur for Nasdaq’s move soon thereafter. Weeks after that WSJ bulletin, the Financial Industry Regulatory Authority (FINRA) issued a Nov. 17 notice warning of “significant unusual price increases on the day of or shortly after the IPOs of certain small-cap issuers, most of which involve issuers with operations in other countries.” The agency expressed “concerns regarding potential nominee accounts that invest in the small cap IPOs and subsequently engage in apparent manipulative limit order and trading activity,” adding that “some of the investors harmed by ramp-and-dump schemes appear to be victims of social media scams.” Overall, U.S. listed Chinese IPO volume stood at a mere $153 million this year through mid-November, data from Refinitiv show, a fraction of the $12.8 billion seen across 2021. 
With U.S. capital markets all but shut, would-be issuers from the Middle Kingdom look for greener pastures. Reuters reported on Nov. 14 that Chinese firms are “lining up for Swiss listings after China this year expanded the Shanghai-London Stock Connect Scheme – a mechanism for cross-border investment – to include Switzerland and Germany.” Eight Chinese companies have raised a total of $2.44 billion in the Alpine nation via global depository receipt (GDR) listings so far this year, with upwards of another dozen disclosing plans to do the same, per filings with the SIX Swiss Exchange. “Our GDR mandates will keep coming,” Mandy Zhu, head of China global banking at UBS, assured Reuters.
Is that a promise, or a threat? 
Recap Nov. 30
Good times are here again!  Stocks zoomed higher by 3% on the S&P 500, leaving that broad index back above its 200-day moving average for the first time since April, while the tech-heavy Nasdaq 100 gained almost 5%, after Fed chair Jerome Powell indicated a slowing pace of tightening is now in store. That euphoria followed a one-two punch of poor data this morning, as the Personal Consumption Core Price Index advanced at a hotter-than-expected 4.6% sequential rate in the third quarter, while the November Chicago Purchasing Managers Index logged its weakest reading since the pandemic nadir in May 2020. 
Elsewhere, two-year Treasury yields dropped ten basis points to 4.38%, while the long bond barely budged, while gold jumped to $1,783 an ounce and WTI crude climbed back above $80 per barrel. The VIX slumped below 21. 
- Philip Grant
Sunday Morning Coming Down
“Out of the blue, all of these kids from crypto
“Out of the blue, all of these kids from crypto started coming down and spending a lot of money – like, an insane amount of money,” Andrea Vimercati, director of food and beverage at Moxy Hotel Group, told the Financial Times over the weekend, recalling the fruits of the covid-era boom in digital assets. “They were booking tables [at swanky Miami nightclubs] for $50,000 and it was like ‘who the hell are these people,’” he added.  
Answering his own question, the hospitality executive continued: “ninety-five percent men, young. . . with a kind of nerdy style. . . They wanted to show they didn’t have any limits. They were ordering 12 or 24 bottles of the most expensive champagne and just showering themselves without even drinking.”
Yet as sunrise follows night, that bacchanal has given way to a less-celebratory backdrop. [In]famous Miami nightclub E11even, which began accepting crypto as payment in April 2021, processed more than $6 million in such sales last year, operating partner Gino LoPinto relays. Over the past three months, that revenue stream has slowed to a trickle of less than $10,000. 
Unfortunately for those former highfliers, converting crypto into fiat for spending purposes is a federally taxable event.
Wealth Defect
Sweden’s citizenry battens down the hatches en masse. Retail sales for November collapsed by 7.7% from a year ago, Statistics Sweden finds today, the worst such nominal decline on record and one rendered even worse by bounding consumer price growth, measured at a 9.3% annual clip in October. “We continue to expect sales numbers to weaken as households tighten their purse string to adjust for the cost shock,” Swedbank economists Maria Wallin Fredholm and Pernilla Johansson write. “We expect GDP growth to slow as both households and businesses are acting cautiously, which dampens consumption and investments.” 
Mind Over Matter
On second thought:
On second thought: De facto down rounds now pervade across the formerly high-flying realm of technology startups, The Wall Street Journal reports. 
Though that cadre of fast-growing, privately held firms had largely held up through the middle of this year despite pronounced weakness in the tech-heavy Nasdaq, that divergence has narrowed in recent months as secondary market transactions now regularly value those firms at a 30% to 40% discount to their prior high-water marks. Some notable players have re-rated even lower: for instance, shares in TikTok parent company ByteDance have recently been offered at as low as a $220 billion valuation, relays Idan Miller, CEO of secondary trading platform Unicorns Exchange, down from its 2021 peak of $450 billion.  
Relatively robust price discovery accompanies those markdowns. More than $150 million worth of privately held tech shares changed hands on his platform in the third quarter, Miller says, topping the previous volume record established in the last three months of 2021. 
Of course, those losses resemble a mere flesh wound in comparison to a cadre of small tech firms that came public during the short-lived special purpose acquisition company mania. As Bloomberg’s Chris Bryant reports today, “big data” outfit Palantir Technologies absorbed some $333 million in realized and unrealized losses in its shareholdings of about 24 early-stage tech firms through September (the majority of which came public via mergers with blank check firms), equivalent to a 75% drawdown. Tellingly, the companies in Palantir’s portfolio each agreed to enter multi-year contracts to use the firm’s software and other services in exchange for those investments, propping up Palantir’s own revenues in the process and echoing a practice seen in the late stages of the 1990s-era tech bubble. 
Bryant likewise notes that, as many tech startups are now facing a dwindling pile of cash, “Palantir may also be overestimating how much revenue it will receive from them.” Those firms chipped in about 6% of the software firm’s total top line during the third quarter, nothing to sneeze at considering that, even after an 80% selloff from its early 2021 highs, PLTR trades at eight times full-year consensus revenue estimates while generating $143 million in operating losses over the first nine months of 2022. 
“A bubble is more than nosebleed earnings multiples,” remarked the July 9, 2021 edition of Grant’s Interest Rate Observer, referencing Palantir’s revenue-hunting shopping spree. “It is a state of mind.” 
Recap Nov. 29
Stocks edged slightly lower ahead of tomorrow’s speech from Fed chair Jerome Powell, while Treasurys came under another round of pressure, concentrated this time in the long end as the 30-year yield rose seven basis points to 3.81%. WTI crude advanced to $79 a barrel, gold rose to $1,764 per ounce and the VIX ticked below 22. 
- Philip Grant
Margin Call
On a relative basis, at least,
On a relative basis, at least, the Black Friday shopping bonanza was a winner. Americans shelled out a record $9.12 billion for online purchases according to Adobe Analytics. That’s up by 2.3% from a year ago, topping the research outlet’s guesstimate of a 1% increase. In a similar vein, brick-and-mortar foot traffic rose some 2.9% from 2021, relays retail consultancy Sensormatic Solutions. 
Yet a concerning dynamic lurks behind those pleasant-enough figures. Namely, retailer discounts reached uncharted territory, as analysts at Jefferies write today that 73% of the 54 surveyed vendors increased their promotions from last year, the highest proportion in the 15-year history of the data series. Over the previous decade, that share had never topped 60% and only exceeded 40% twice. 
Buy the Whip
Is it safe?
Is it safe? Signs that the global inflationary tsunami has crested are multiplying, the Financial Times reports, as wholesale prices, shipping rates, commodities and consumer inflation expectations have each ebbed of late from their respective zeniths.  That synchronized retreat leads some observers to believe that the worst is over. “Inflation is likely at its apex,” Moody’s chief economist Mark Zandi declared to the pink paper, as the rating agency’s tabulated 12.1% year-on-year increase in worldwide consumer prices will likely represent the “high-water mark."
Stateside investors are betting on it. Domestic bond funds attracted a net $15.7 billion over the first 23 days of November, data from EPFR show, which would stand as the strongest monthly showing since the early days of the pandemic. Meanwhile, the cohort of domestic high-grade bonds maturing in more than 10 years has rallied by a hefty 9.5% in the month to date, Bloomberg finds, on pace for its best one-month showing since December 2008. 
That collective rush back into the market may prove premature, some believe. “There’s a fairly high degree of irrational optimism generated by the still rather uncomfortable number for U.S. inflation in October,” commented EPFR research director Cameron Brandt. Muscle memory of cycles past informs that sunny outlook. “There’s a pool of investors who have been trudging through a yield-starved environment for the better part of a decade,” he added. 
Indeed, as the Federal Open Market Committee gears up for its final meeting of 2022 on Dec. 14, key policymakers evince little interest in curtailing the ongoing rate hiking regime. “Further tightening of monetary policy should help restore balance between demand and supply and bring inflation back to 2% over the next few years,” New York Fed President John Williams said in a speech today. “Inflation is far too high, and persistently high inflation undermines the ability of our economy to perform at its full potential.”  
Peer James Bullard, who is also a voting member on the rate setting FOMC, said in an interview today that markets may be “underestimating” the extent to which the Fed raises rates, reiterating his view that overnight borrowing costs of as high as 7% may be required to slay the inflationary beast. “I think we have to . . . really stay with a restrictive level of the policy rate longer in order to be sure that we’re pushing inflation back” down, he added. 
The question before the house: considering the prospects of both higher interest rates and a faltering economy (note the deepening inversion of the three-month Treasury bill and 10-year note yields, a phenomenon that has preceded each of the past eight recessions), are bond investors receiving adequate compensation for their risks?  Interest rate futures project that the Fed Funds rate will top off at just over 5% in early 2023, compared to the current range of 3.75% to 4%. For context, Bloomberg’s U.S. Aggregate Corporate High Yield Index finished Friday’s session with a 5.24% yield-to-worst and 129 basis point pickup over Treasurys. That’s inside the 25-year average of a 153 basis point spread, and compares to peaks of 270, 618 and 377 basis points, respectively, during recessionary periods in 2002, 2008 and 2020. 
Recap Nov. 28
Stocks slogged their way to a 1.6% decline on the S&P 500 as the broad average settled near its lowest levels of the day, while Treasurys came under modest bear flattening pressure as two-year yields rose to 4.46% from 4.42% on Friday.  Gold retreated to $1,740 per ounce, WTI crude edged higher to $77 a barrel and the VIX jumped two points from Friday’s multi-month low to finish at 22. 
- Philip Grant
Target Practice
Where the rubber meets the road:
Where the rubber meets the road: The recent selloff in Tesla has put miles between the electric vehicle pioneer and its Wall Street fans, with the average 12-month price target of $302 a share sitting some 80% north of today’s levels. As Bloomberg relays, that trails only the 87% gap in Chinese tech firm Baidu for the largest such shortfall among components of the Nasdaq 100. 
Analysts have been a bit quicker  one the draw with another automotive bull market darling. The sell side has cut its average price target on Carvana Co. by a cool 94% in the year-to-date, including a 60% markdown from their early October levels. The purveyor of used vehicles via giant vending machines, a pick-to-not-click in the Aug. 6, 2020 edition of Grant’s Interest Rate Observer, has absorbed a 97% share price decline so far in 2022. One year ago today, the 26 analysts tracked by Bloomberg collectively pegged Carvana’s 12-month per share value at $375, representing a 32% premium to its then current $284 price. Carvana shares now fetch about $7. 
Science Diet
How time flies.
How time flies. As retired Air Force Captain, chemical engineer and financial historian Peter Schmidt reminds the Twitterverse this morning, this Friday will usher in the 14th anniversary of the Fed launching its quantitative easing initiative in response to the unfolding global financial crisis. 
That initial announcement, which detailed plans to purchase $100 billion in agency debt and $500 billion of mortgage-backed securities by the end of 2008, of course preceded a trio of similar undertakings culminating in the pandemic-era, $4.4 trillion splurge spanning March 2020 through early 2022.  Interest-bearing assets on the Fed balance sheet currently stand at $8.63 trillion, up from less than $1 trillion shortly before Lehman Brothers bought the farm.  The Fed now holds $5.56 trillion in Treasurys, equivalent to 22.7% of the $24.4 trillion in federal debt held by the public, compared to $476 billion and a 7.4% share,
respectively, in November 2008. 
In light of that approaching red letter day, it might be useful to compare the course of events with the various public statements from the architect of those policies, then-Fed chair and recent recipient of one-third of the Sveriges Riksbank Prize in Economic Sciences, Ben S. Bernanke, Ph.D. 
In a February 2011 testimony in front of the House Budget Committee, Bernanke dismissed concerns that the Fed’s shopping spree served to directly finance government spending, arguing that the then-$2.5 trillion balance could easily be whittled back to pre-crisis levels once financial conditions improved:
[Federal debt] monetization would involve a permanent increase in the money supply to pay the government’s bills through money creation. What we’re doing here is a temporary measure which will be reversed, so that at the end of this process, the money supply will be normalized, the Fed’s balance sheet will be normalized and there will be no permanent increase, either in money outstanding or in the Fed’s balance sheet. 
Undaunted, the former Fed chair continued to advocate for the heretofore unconventional policy approach on the eve of the pandemic, declaring in a January 2020 address to the American Economic Association that QE has “proved an effective tool for easing financial conditions and providing economic stimulus when short rates are at their lower bound. The effectiveness of QE does not depend on it being deployed during a period of market turbulence.” 
Indeed, the absence of financial adversity was no reason to halt those open market operations. “Studies that control for market expectations of the level and mix of planned asset purchases find that later rounds of QE remained powerful, with effects that did not diminish during periods of market calm or as the central bank’s balance sheet grew.” 
Bernanke offered some gentle criticism of his successors in a May interview with CNBC. Referencing Jerome Powell et al.’s belated post-pandemic moves to push rates off zero and throttle back on the latest round of QE in response to surging inflation, he declared: “I think in retrospect, yes, it was a mistake” to move so slowly, adding that: “And I think they agree it was a mistake.” 
On that score, some establishment voices are beginning to grumble. In an opinion piece today, Bloomberg columnist Allison Schrager wrote that fewer than half of academic studies of QE conducted outside of central bank purviews find that the practice confers benefits on the pace of economic growth or inflation. 
The costs, by contrast, are readily apparent, including the distortion of market signals thanks to manipulated “risk-free” interest rates, the proliferation of so-called zombie companies kept afloat through artificially cheap capital and a blurred relationship between fiscal and monetary realms, a dynamic which threatens the Fed’s ostensible independence from career-minded politicians. “The great quantitative easing experiment was a mistake,” Schrager concludes. “It’s time central banks acknowledge it for the failure it was and retire it from their policy arsenal as soon as they are able.” 
Recap Nov. 22
Stocks caught a strong bid as the S&P 500 advanced to the cusp of the 4,000 plateau for its best closing finish since mid-September, while Treasurys rallied in spite of a soft seven-year note auction with the long bond dropping eight basis points to 3.83%. Gold traded sideways at $1,741 an ounce, WTI crude bounced above $81 and the VIX logged a three-month low near 21. 
- Philip Grant
Pay, Go
Here’s your deal of the day:
Here’s your deal of the day: Travel software firm Sabre Corp. is marketing $535 million in five-year secured notes at an all-in yield of more than 12%, Bloomberg relays. Proceeds are earmarked to repay a $536 million floating-rate term loan due in 2024, which was issued at a 200 basis point spread over Libor, for a current coupon of 6.65%.  
Pegged by S&P Global Ratings as a single-B credit, that offering “will modestly improve the company’s debt maturity profile but will result in higher interest costs,” the rating agency notes today. Indeed, Sabre’s existing loans maturing in 2027 and 2028 are priced to yield roughly 9% and 10%, respectively, while the single-B rated component of the Bloomberg U.S. High Yield Bond Index sports a 9.07% yield. 
The Four Seasons
Hope springs eternal:
Hope springs eternal: This year’s bruising selloff hasn’t exactly spurred a wholesale migration from stocks. To the contrary, investors have purchased a net $86 billion worth of domestic equity mutual and exchange-traded funds in the ten months through October, data from Morningstar show.  That would mark the second strongest annual inflow going back to 2013, trailing only the $156 billion tally seen across last year. 
Fond memories of good times past may be behind that resilience, as the S&P 500 has rallied nearly 500% from its 2009 financial crisis lows, towering over the 178% advance for Japan’s Nikkei 225 and the 125% gain in the Stoxx Europe 600 over that stretch (all figures are in dollar terms). “For the last decade, the U.S. market was ripping every year,” Jim Masturzo, chief investment officer of multi-asset strategies at Research Affiliates, mused to The Wall Street Journal today. “Why would people invest anywhere else?” 
Complementing that enduring buy-the-dip ethos is the increasing prominence of short-dated equity derivatives. Strategists at Goldman Sachs relayed last week that a notional $470 billion in S&P 500 options expiring within 24 hours change hands each day, on average, representing 44% of all activity tied to the benchmark index since the beginning of July. That compares to just over a 20% share in the fourth quarter of 2021 and less than 10% the final three months of 2018.  Retail investors will soon enjoy easier access to that innovation, as brokerage Robinhood Markets announced last week that it will provide users with access to S&P 500 options that expire each and every trading day. 
The mushrooming prominence of those short-term contraptions carries wider implications. “Dealer hedging in derivatives markets has absolutely become a factor in influencing market movement at short term horizons,” Garrett DeSimone, head of quantitative research at OptionMetrics, told Reuters last month. 
Meanwhile, another bull market dynamic persists despite the stark change in financial conditions relative to a year ago. As Bloomberg noted on Friday, the so-called meme stock craze remains alive and well in the form of the movement’s avatar, GameStop Corp. (ticker: GME). To wit, shares finished October a cool 501% above their year-end 2020 levels, compared to a 3% rise for the S&P 500 over that stretch, and a 26% decline in a basket of 37 other meme stocks tracked by Bloomberg.  
That levitation bestows a near $8 billion market capitalization on the electronics and video game retailer, which last turned a net profit in the fiscal year ending in February 2018 and which posted a $954 million free cash flow deficit over the four quarters through July.  GameStop is on pace to run through its cash holdings within the next 12 months at the current burn rate, Investor’s Business Daily relayed on Nov. 8, a flimsier cushion than all but one of the 25 components of the Roundhill Meme ETF (that would be the purveyor of exercise bicycles Peloton Interactive, Inc.).  “Fundamentally, GameStop remains a mess,” Wedbush analyst Michael Pachter concludes.
Recap Nov. 21
Stocks wiggled a little lower to begin the holiday-abbreviated trading week,  in what was one of the S&P 500’s narrowest intraday ranges so far this year, while Treasury yields finished within a few basis points of Friday’s levels across the curve. Gold slipped to $1,740 an ounce, WTI crude held at $80 a barrel and the VIX settled at a near three-month low south of 23. 
- Philip Grant
Dry Idea
Call it hooligan’s bluff.
Call it hooligan’s bluff. Organizers at the quadrennial World Cup made a slight change of plans two days before the tournament kicks off in Qatar, communicated via a statement today from the Fédération Internationale de Football Association:
Following discussions between host country authorities and FIFA, a decision has been made to focus the sale of alcoholic beverages on the FIFA Fan Festival, other fan destinations and licensed venues, removing sales points of beer from Qatar’s FIFA World Cup stadium perimeters.
Point, Counterpoint
Let's play the blame game.
Let’s play the blame game. Here’s Minneapolis Fed President Neel Kashkari on Twitter this morning (lightly edited for clarity), referring to the FTX fiasco:
This isn't a case of one fraudulent company in a serious industry. The entire notion of crypto is nonsense. It’s not useful for payments, nor an inflation hedge. No scarcity. No taxing authority. Just a tool of speculation and greater fools.
That rumination spurred the following reply from ZeroHedge:
If only there was some organization that created $20 trillion in "transitory" excess liquidity that enabled this speculation...
Around and Around
Easy does it:
Easy does it: Measured inflation in Japan excluding fresh food prices advanced at a 3.6% annual pace last month, topping the 3.5% consensus and marking the hottest reading in 40 years. 
On a year-over-year basis, core CPI has now accelerated on eight occasions in the last nine months following the seventh straight reading above the Bank of Japan’s 2% inflation target, a bogey that the monetary mandarins have, of course, exerted no small effort to achieve. The BoJ maintains a minus 10 basis point policy rate and permits no more than a 25 basis point yield on the 10-year government bonds via unlimited purchases at that threshold. 
Today’s striking data show no signs of bothering BoJ boss Haruhiko Kuroda, who pointed to relatively soft 2.1% annual wage growth in September as a reason to press ahead with his negative rates-cum-aggressive asset purchase regime. “Raising rates now could delay Japan’s economic recovery,” Kuroda said earlier today. “We’ll continue with our monetary easing to support the economy and achieve our 2% inflation target in a sustained, stable fashion backed by wage growth.” 
Of course, stable is a relative term. Kuroda et al.’s dogged adherence to an ultra-easy stance as fellow central bankers tighten the monetary screws has manifested in an 18% selloff in the yen relative to the dollar this year, leaving the exchange rate stuck near its weakest level since 1990. 
That dynamic, in turn, feeds the stirring inflationary beast: Japan’s trade deficit registered at ¥2.16 trillion ($15.3 billion) in October, far above the ¥1.62 trillion consensus and the fifteenth consecutive month featuring a negative trade balance. That’s the longest such streak since 2015, before the BoJ embarked on its experiment with negative nominal borrowing costs. Import prices grew at a cool 42.6% annual clip in October per BoJ data, the seventh straight month north of 40%, as measured wholesale prices logged 9.1% year-over-year growth after September’s record 10.2% advance.  
“It’s getting harder for the BoJ to keep saying that the current cost-push inflation is temporary,” Mari Iwashita, chief market economist at Daiwa Securities Co., writes today. “If the yen remains weak, more companies will try to pass on cost [increases] to customers.” 
Recap Nov. 18
Stocks fluttered higher to wrap up a low voltage week that saw the S&P 500 finish virtually unchanged. Treasurys came under modest pressure with two-year yields rising eight basis points to 4.51% while the long bond settled at 3.92%, below the 3.93% on offer for one-month bills.  WTI continued its retreat, settling at $80 per barrel, gold pulled back to $1,751 an ounce and the VIX slipped to 23. 
- Philip Grant
Groan at the Top
He sells, you buy:
He sells, you buy: As crypto exchange Coinbase attempts to weather a financial squall in the wake of the FTX implosion, the c-suite offers a less-than reassuring signal. Last Friday, co-founder and CEO Brian Armstrong rang the register on $1.63 million in fiat currency’s worth of company stock, achieving an average price of $54.66 per share. Those open market sales look pretty good six days later, as COIN shares now hover some 10% lower.
Passive investment mainstays have spent recent months on the other side of the ledger, as Vanguard and BlackRock each added just over 2 million Coinbase shares during the third quarter, as the stock ranged from $47 to $98 a share.  
In eyeing the exits, Armstrong has company in his firm’s creditors. Coinbase’s double-B-rated senior unsecured, 3 3/8% notes of 2028 changed hands at 56 cents on the dollar yesterday, good for a 1,083 basis-point pickup over Treasurys, well outside the 1,000 basis point pickup that typically denotes a distressed issue.  That spread sat at 720 basis points as of Oct. 31. 
Desert Storm
The world’s largest financial market visits the upside down.
The world’s largest financial market visits the upside down. As Bianco Research eponym Jim Bianco chronicled yesterday, inversion in the Treasury realm has reached historic proportions: the two-year yield topped that of the 10-year by 62 basis points, the steepest differential in four decades. More ominously, the 10-year yield has held below that of the three-month bill for the last two weeks, a phenomenon that preceded each of the last eight recessions going back to 1979. “Extremely inverted yield curves signal that the Fed is too tight,” Bianco concludes. 
Relief on that score may prove elusive. St. Louis Fed President James Bullard (currently a voting member on the policy setting Federal Open Market Committee) mused today that a funds rate of between 5% and 7% may be required to curb still-raging inflation, north of his prior 4.75% to 5% prescription and current market expectations of a 5% peak. The funds rate currently rests between 3.75% and 4%.  
As investors labor to adapt to this year’s sea change in interest rates, those looking to deal in the lynchpin $24 trillion Treasury market are having a bear of it. DoubleLine Capital bond portfolio manager Gregory Whiteley relayed to the Financial Times Tuesday that a trader attempting to accumulate a relatively modest $400 million government bond position is now well advised to break up the order into smaller pieces and gradually build his or her position over the course of a day. In the past, acquiring that sum would have been a snap, he added. Indeed, J.P Morgan co-head of U.S. rates strategy Jay Barry finds that market depth, or the ability to transact without impacting prices, has deteriorated to its weakest since the March 2020 tempest. 
“Markets are in a much more fragile place, with terrible liquidity” Greg Peters, co-chief investment officer at PGIM Fixed Income, told the FT. “The way I think about fragile market function is that the odds of a financial accident are just higher.” 
Compounding that brittle backdrop: the prospect that Japan will curtail or reverse its persistent accumulation of Treasurys. Purchases from the world’s third-largest economy and top foreign holder of U.S. government debt at some $1.2 trillion have “sputtered in recent months,” The Wall Street Journal reported last week, as the Land of the Rising Sun looks to contain pronounced currency weakness stemming from its adherence to sub-zero borrowing costs as peer central banks push interest rates higher. 
“Going forward, it isn’t clear that there is going to be any new buying from Japan,” Brad Setser, senior fellow at the Council on Foreign Relations, warned the Journal. Tellingly, news that Japan had waded into the foreign exchange market on Sept. 22, selling dollars to prop up the faltering yen spurred a 19 basis point leap in 10-year yields, the second largest one-day increase in the year-to-date. Japanese life insurers and pensions unloaded $40 billion in overseas bond holdings from April through September, research firm Exante Data finds, after accumulating a net $500 billion of those securities since 2016, the year that marked the start of Japan’s sub-zero interest rate regime. 
Some monetary mandarins have taken note, as New York Fed President John Williams declared yesterday that “if the Treasury market isn’t functioning well, it can impede the transmission of monetary policy to the economy.” The Fed, which began to unwind its Treasury holdings earlier this year, sports $5.563 trillion of Uncle Sam’s obligations on its balance sheet, equivalent to 22.8% of federal debt held by the public. At the start of the pandemic, those figures were $2.33 trillion and a 13.6% share, respectively. 
“For a risk-free asset, Treasurys are curiously accident prone,” the April 15 edition of Grant’s Interest Rate Observer, ahem, observed. “From time to time, the market misfires, stutters or lurches higher or lower for reasons that post-mortem investigations can’t seem to identify.”  What ramifications might result from a prolonged state of disrepair in the world’s most important financial market?  See “Unsafe at current yields” in that April 15 issue, along with “Case of the misplaced money” from the Sept. 30 edition of Grant’s, for more on this essential topic. 
QT Progress Report
Reserve Bank credit declined by $13.4 billion from a week ago, leaving the Fed’s holdings of interest-bearing assets at $8.629 trillion.  That’s down roughly $300 billion from the late March highs, and $92 billion below the Oct. 20 reading; roughly on pace with the Fed’s targeted $95 billion monthly runoff. 
Recap Nov. 17
Stocks managed to work well off their morning lows to finish just south of unchanged on the broad S&P 500, while Treasurys also traded weaker in bull flattening fashion as the two year yield settled at 4.43%, 54 basis points above the long bond. WTI crude retreated below $82 a barrel, gold pulled back to $1,763 per ounce and the VIX went nowhere once again, settling at 24. 
- Philip Grant
Urban Commando
Behold the following dispatch
Behold the following dispatch this afternoon from Big Apple publication THE CITY: 
New York City’s app-based food delivery workers should be paid at least $23.82 an hour plus tips by 2025, an amount that takes into account their costs of operating, the city Department of Consumer and Worker Protection proposed via public notice Wednesday morning.
The highly anticipated pay scale is mandated by a 2021 local law that requires a minimum wage for workers using apps such as DoorDash and Uber Eats. As proposed, the pay minimum would start at $17.87 on Jan. 1, 2023, and increase to $23.82 by April 1, 2025. 
The city estimates that delivery workers currently earn $11.12 an hour including tips after expenses, according to a draft copy of the pay study obtained by THE CITY.
Though DoorDash’s stock price has pulled back 75% from its November 2021 highs, shares remain priced at a cool 196 times the sell side’s earnings per share guesstimate for 2023.  Then again, as the manager of the eponymous, fictional rock band in the 1984 film This Is Spinal Tap put it following news of a cancelled gig: “I wouldn’t worry about it. Boston’s not a big college town anyway.” 
This Old House
The hour is getting late.
The hour is getting late. A syndicate of bulge-bracket banks is set to fund the bulk of a $5.4 billion debt package financing Apollo’s buyout of auto parts firm Tenneco, Inc., Bloomberg relayed Monday, after struggling to attract sufficient investor demand for leveraged loans and junk bonds backing the deal ahead of tomorrow’s scheduled transaction closing. Lenders including Citigroup and Bank of America were reportedly shopping a $1.4 billion loan tranche at as low as 84 cents on the dollar and a 500 basis point pickup over the Secured Overnight Financing Rate, with a $1 billion high-yield portion offered at 83 cents for an all-in yield of about 12%. 
As that episode illustrates, Wall Street’s appetite to underwrite further takeover activity remains in question, as banks are already stuffed with a $38 billion backlog of buyout loans. If investor appetite doesn’t pick up soon, “the banks will just stop making new commitments,” Tim Clark, senior private equity analyst at PitchBook, predicted to Bloomberg yesterday.  
Indeed, buyout-related leveraged loan volume slumped to $10.6 billion during the three months through September, LCD finds, marking the weakest quarter since 2016 and representing a fraction of the $46.1 billion of deals in the same period last year. “The public markets, for all intents and purposes, are not open as a provider of capital to growing private companies,” Ares Management co-founder and CEO Michael Arougheti said on his firm’s Oct. 27 earnings call. “The leveraged loan market is largely unavailable. The high-yield market is largely unavailable.”
Those that do come to market are obliged to pay up, as data from LCD show that newly issued single-B-rated loans are currently priced-to-yield upwards of 10%, double the borrowing costs on offer for that p.e.-heavy cohort just a year ago.  
Likewise, the heretofore red-hot private credit market is showing signs of wobbling, as an analysis today from investment bank Lincoln International found that average valuations tracked by an in-house index of direct loans to middle market companies declined to 96.8% of par value in the third quarter from 97.4% in the second. Average interest coverage ratios in that cohort declined to 2.2 times from 2.4 three months ago, and default rates rose to 3.7% from 3% over the quarter ended June 30 and 2.5% in the first quarter. “While private company valuations have held up thus far. . . in the last four weeks there has been a noticeable tone shift for private market participants,” comments Ron Kahn, managing director at Lincoln. 
How might the industry adapt to the suddenly inhospitable conditions after a long stretch of fair financial weather? Industrywide “dry powder” stood at $749 billion as of June 30 according to PitchBook, up nearly 50% from five years earlier. 
Yet the broad-based decline in asset prices complicates that picture: as investors absorb losses elsewhere in their portfolio, fiduciaries’ relative allocation to p.e. floats higher. Accordingly, limited partners may be reluctant to cut checks that they have already committed to writing. Meanwhile, debt levels among p.e. sponsored firms continue to climb, as median buyouts have taken place at 10.5 times debt to Ebitda this year through September, PitchBook finds, up from 6.1 turns of leverage a year ago. That figure reached 5.7 turns as the prior LBO boom crested in 2007. 
Sure enough, the search for liquidity has led some p.e. players far afield. Bloomberg reported yesterday that so-called net asset value loans, in which such firms borrow against a pool of portfolio companies to raise cash for new buyouts and/or fund investor distributions, are increasingly de rigueur.  Clogged primary markets are “obviously pushing managers to get other ways to raise capital,” Robert de Corainville, managing partner at NAV lender 17Capital, tells Bloomberg. His firm projects that such loan volume will reach $700 billion by the end of this decade, compared to about $100 billion currently. 
Leverage upstairs, leverage downstairs. 
Recap Nov. 16
Stocks sat moderately lower in late afternoon, when your correspondent had to leave, with the S&P 500 nursing near 1% losses to continue this week’s see-saw price action, while long-dated Treasurys continued their tear as the 30-year yield dropped to about 3.85% compared to 4.3% early last week. WTI crude retreated towards $85 a barrel, gold held at $1,778 an ounce to consolidate recent gains, and the VIX ticked to 24. 
- Philip Grant
Marathon Man
Profiles in liquid courage.
Profiles in liquid courage. From Friday’s edition of the Times of India:
A man in Australia had a drink in 78 pubs across Melbourne in a 24-hour period to break a Guinness World Record. South African native Heinrich de Villiers took the pub crawl record for most pubs visited in 24 hours from Nathan Crimp, who drank at 67 establishments in Brighton, England.
Meanwhile, another steely competitor’s exploits render that feat positively quotidian. Canadian Running Magazine explains in a dispatch yesterday: 
A runner who goes by the nickname “Uncle Chen” made headlines after he ran a marathon in three hours and 28 minutes while chain-smoking a pack of cigarettes.
Although Chen was not shooting for a Guinness World Record for the fastest marathon while chain-smoking, there isn’t any previous record in place. Technically, there are no rules prohibiting runners from smoking since most have the common sense [to know] it will not help their performance. 
Are We There Yet?
Here’s investor Michael Burry weighing in via Twitter on the cascading collapse of digital exchange FTX:
Long thought that the time for gold would be when crypto scandals merge into contagion.
Hungry Heart
Open sesame:
Open sesame: Investors got another dose of relatively good news on the inflation front today, as the U.S. Producer Price Index rose 0.2% month-over-month and 8.0% from a year ago in October, compared to expectations of 0.4% and 8.3%, respectively.  Coming on the heels of last week’s lower-than-anticipated CPI data, the prospect of easing price pressures represents a key cog in the bull case.
Yet rapidly rising costs of sustenance across the Western world temper those hopes. This morning, Spain’s National Statistics Institute relayed that food prices jumped 15.4% from a year earlier in October, the hottest reading since recordkeeping began in 1994. That surge came as overall headline inflation ebbed to 7.3% year-over-year from 8.9% in September and 10.8% in July.
Similarly, Statistics Sweden reports today that food and nonalcoholic beverages were 17.2% more expensive than a year ago in October, pushing the underlying inflation rate (which excludes energy prices) to 7.9% year-over-year, the hottest since 1991. Then, too, France’s Institut national de la statistique et des études économiques revealed today that food prices jumped 12% last month from the same period in 2021, led by a 17.3% jump in fresh produce as vegetable prices ripped higher by 34%. As Bloomberg notes, preparing the traditional French chicken dish coq au vin will set consumers back 19% more than a year ago, on average, representing the biggest such annual jump in at least three decades.
Stateside revelers can likewise expect to pay up for their traditional Thanksgiving fare, as per-pound turkey prices rose 17% year-over-year in October, the Bureau of Labor Statistics finds, with analysts at Wells Fargo forecasting a 23% annual uptick across the fourth quarter.  
“Americans may actually find more value in eating out” to celebrate the holiday this year, Wells Fargo’s Brad Rubin wrote last week, adding that “what is [typically] considered a luxury experience is more of a value experience this year.” Indeed, the cost of dining out increased by “just” 8.6% year-over-year in October by the BLS’ count, compared to a measured 12.4% uptick in eating at home expense.  Sure enough, a consumer survey conducted late last month by The Vacationer found that more than two-thirds of respondents anticipate altering their Thanksgiving plans in response to high inflation. 
Might consumer spending habits be set for a more lasting downshift? Analysts at Jefferies relay today that overall U.S. food sales increased 13.8% from a year ago during the four weeks through Nov. 5:  Higher prices accounted for 16 percentage of that change, lower volumes, 2 percentage points.  
Recap Nov. 15
Stocks managed to rebound from yesterday’s pullback as the S&P 500 rose 90 basis points to approach its 200-day moving average, while Treasurys caught a bull-flattening bid with the long bond sinking nine basis points to 3.98% and the two-year note settling at 4.37% from 4.4% Monday.  WTI crude rebounded to $87 a barrel, gold edged towards a three-month high at $1,782 an ounce and the VIX climbed back above 24. 
- Philip Grant
Damage Assessment
Take off your coat and stay a while.
Take off your coat and stay a while. Inflation expectations are entrenching themselves, the Federal Reserve Bank of New York finds today, as its latest consumer survey reveals that respondents expect price growth of 5.9% over the next 12 months and 3.1% during the next three years. That compares to 5.4% and 2.9%, respectively, last month. 
It’s not just shoppers girding for a more prolonged stretch of elevated price pressures. The Financial Times reports that the Securities and Exchange Commission has asked leading corporate lights such as FedEx, Eastman Chemical and Costco to provide more information to investors regarding the impact that protracted high inflation may have on operating results and what steps, if any, they are taking to mitigate the effects of that phenomenon on sales and profitability. 
“Are you forced to pass along your increased costs to customers or do you just absorb those losses?” SEC deputy chief accountant Sarah Lowe rhetorically asked attendees at a conference organized by Financial Executives International last week. “Are you negotiating with customers about price changes, and is there uncertainty about how those talks will resolve?”
Someone has to pay. 
Many Unhappy Returns
What goes up, must come down?
What goes up, must come down? Japanese conglomerate SoftBank Group Corp. delivered an unwitting demonstration of financial gravity on Friday, disclosing that the firm’s in-house venture capital arm logged a ¥1.378 trillion ($9.8 billion) net loss over the quarter ended Sept. 30. That latest shortfall pushed the Vision Fund’s cumulative P&L performance to minus $1.46 billion dating to its launch in 2017, the same year that Grant’s first dubbed SoftBank the “epitome of the cycle.” As the v.c. boom crested in March 2021, the Vision Fund was sitting on a cool $66 billion in paper gains. The subsequent red ink gusher has served to slam the brakes on deal activity, as the Vision Fund and its sequel undertook only $300 million in new investments over the three months through September, compared to $14.1 billion in the year-ago period.  
As SoftBank’s stark reversal of fortune illustrates, v.c.-backed firms are obliged to adapt to a new state of play: Glen Kernick, managing director at consulting firm Kroll, told PitchBook last Wednesday that his firm has advised nearly half of the technology startups under its purview to cut their internal valuations. Importantly, most of those downward adjustments are stemming from weaker-than-expected financial results, Kernick relays, rather than multiple contraction owing to the bear market.  
“If Kroll’s sample is any guide, it would indicate that startups are in much worse shape than was believed until recently,” PitchBook concludes.  Median pre-money late-stage valuations slipped by 29% over the six months through Sept. 30, the data firm finds, though the global tally of unicorns, or private businesses valued at $1 billion or more, stood at 1,201 at the end of October per CB Insights. That’s up from 956 at the start of 2022 and fewer than 500 on the eve of the pandemic. 
Meanwhile, the spectacular collapse of crypto exchange FTX continues to ripple through the industry, as SoftBank is set to write down its near $100 million investment in the digital bourse to zero, Bloomberg reported Friday. Similarly, v.c titan Sequoia Capital penned a letter to limited partners relaying that it has marked its $213.5 million equity investment in Sam Bankman-Fried’s firm at zero. “At the time of our investment in FTX, we ran a rigorous diligence process,” Sequoia asserted, noting that FTX generated some $1 billion in revenue and $250 million in operating income during 2021. 
Eye-catching circularity further colors last week’s memorable episode. The Information reported Thursday that Bankman-Fried shelled out “hundreds of millions of dollars” in investments into Sequoia and other v.c. firms that had, in turn, invested in his enterprise, an arrangement that the tech publication termed “unusual.”
How might investors profitably position for a continued unwinding of the supersonic v.c. boom?  See the Aug. 5 edition of Grant’s Interest Rate Observer for a bearish analysis on a large cap firm with plenty of exposure to the industry. 
Recap Nov. 14
A late round of selling pressure left stocks lower by nearly 1% on the S&P 500, as the index gave back a piece of last week’s outsized gains, while Treasury yields moved moderately higher across the board to leave the two-year note at 4.4% and the long bond at 4.07%. WTI crude retreated to $85 a barrel as the greenback caught a bid, though gold managed to edge higher to $1,750 an ounce. The VIX rebounded to settle near 24. 
- Philip Grant
Treasury Bill
Shares in video game developer Snail, Inc. (ticker: SNAL)
Shares in video game developer Snail, Inc. (ticker: SNAL) rallied by as much as 94% today after the firm announced a $5 million share buyback on Thursday evening.  Yet those already-striking facts tell only part of the story: Snail made its Nasdaq debut only yesterday, after an initial public offering that raised $15 million. SNAL shares lost 55% in their debut session, before briefly approaching those opening levels at today’s intraday high. 
Suffice it to say, that sequence of events left some observers nonplussed. “What is the point of raising money by selling shares and immediately using money to buy a third of them back?” Erik Gordon, professor at the Ross School of Business at the University of Michigan, rhetorically asked Bloomberg. “The IPO was priced badly, and the use of proceeds is unusual.” 
Storm Chasers
Steady as she goes.
Steady as she goes. So-called stablecoin tether fell to as low as 97.7 cents yesterday, temporarily breaking the company’s long touted 1:1 peg to the U.S. dollar before rebounding.  Asserting that his firm had accommodated $700 million of withdrawals over the previous 24 hours, Tether chief technology officer Paolo Ardoino tweeted “no issues, we keep going.” 
While overshadowed by the industrywide chaos following the dramatic implosion of Sam Bankman-Fried’s digital empire, yesterday also featured the release of Tether’s latest quarterly attestation, as mandated by New York Attorney General Letitia James. Thus, as of Sept. 30, the world’s largest stablecoin counted $68.1 billion in assets, including $39.7 billion in U.S. Treasury bills, $7.1 billion in money market funds and $6.1 billion in cash.  Other stated holdings include $6.1 billion in “secured loans,” $3.2 billion in corporate bonds, funds and precious metals, $3 billion in “reverse repurchase agreements” and $2.6 billion in “other investments.” 
Instructively, the company noted that both the secured loans and other assets line items “are valued at amortized cost (notional value for short-term assets and liabilities) less any expected credit losses,” an accounting method of dubious informational value.  As Jonathan Weil points out in today’s edition of The Wall Street Journal, “Tether didn’t disclose [those assets’] market value, which would matter more in a crisis than what Tether paid for them.” 
Meanwhile, now-bankrupt Alameda Research initiated an eye-catching position shortly before this morning’s Chapter 11 filing. Citing data on the blockchain, MarketWatch relays that the crypto trading firm sold short more than one million tethers yesterday. “Clearly. . . they are trying to short tether to make a quick buck,” Eliézer Ndinga director of research at crypto platform 21.co, told MarketWatch. 
Message in a Bottle
Call it gnome defense:
Call it gnome defense: Swiss National Bank President Thomas Jordan delivered a sober message in a speech today, declaring that “the current policy is not sufficiently restrictive in order to create price stability in the medium term.”  
The SNB, which was a leading light of the negative interest rate experiment with an imposed minus 75 basis point policy rate from 2015 to June of this year in a bid to forestall unwanted currency appreciation, has since hiked benchmark borrowing costs by 125 basis points, with more tightening likely on tap at next month’s meeting. Measured inflation reached 3.0% in September, remaining near a 30-year high.  “We will take any measures necessary to bring inflation back into the realm of price stability,” the central banker vowed.
Jordan has company on the Old Continent. Referencing the European Central Bank’s tightening campaign that has brought the deposit rate to (positive) 1.5% from minus 0.5% as recently as July, ECB executive board member Isabel Schnabel said yesterday that this “is no time for monetary policy to pause. We will need to raise rates further, probably into restrictive territory, to bring inflation back to our medium-term target in a timely manner.”  
Fellow Governing Council member Robert Holzmann likewise cautioned euro area governments from loosening their purse-strings in response to the inflationary dust-up, which features a 10.7% CPI print in October. “We’re trying to slow down a bit while others. . . step on the gas a bit politically. It would be nice if we could soon have alignment in the area of fiscal policy as well,” he told the press this morning.  
Stateside, yesterday’s cooler-than expected 7.7% annual increase in October CPI and subsequent asset price liftoff didn’t impress ECB Vice-President Luis de Guindos, who opined today that “there was an overreaction of financial markets that considered that the situation had changed – but that may not be the case.” 
Fortunately, U.S. investors will have every opportunity to hear about the current state of play in monetary policy. As the handy below chart from Bank of America demonstrates, “the Fed Speaks” tour will be in full swing next week:
Get talkin’.
Recap Nov. 11
Stocks kept their momentum as the S&P 500 and Nasdaq 100 rose just under 1% and 2%, respectively, wrapping up the week with heady 5.5% and 8.4% advances, while the Treasury market was closed in observance of Veterans Day, though iShares 20 Plus Year Treasury Bond ETF finished marginally lower after yesterday’s rip.  WTI crude pushed higher to $89 a barrel, gold advanced to $1,771 per ounce and the VIX fell to 22.5, its lowest since late August.
- Philip Grant
Green Means Go
An ounce of intervention is worth a pound of cure?
An ounce of intervention is worth a pound of cure? The Treasury Department is comfortable with foreign government efforts to directly influence the foreign exchange market, or so Bloomberg relays this afternoon. The likes of Japan, China and South Korea have attempted to prop their currencies against the greenback in recent weeks, as the U.S. Dollar Index reached its strongest level in 20 years relative to a basket of currencies in late September.
“Treasury is cognizant that a range of approaches. . . to global economic headwinds may be warranted in certain circumstances,” Treasury Secretary Janet Yellen stated.  
'Base Effect
First things first, a brutal typo in Tuesday’s ADG:
First things first, a brutal typo in Tuesday’s ADG: It was, of course, the Coindesk news outlet that delivered last week’s expose of the ties between crypto exchange FTX and trading firm Alameda Research, not the Coinbase exchange. 
Speaking of Coinbase, co-founder and CEO Brian Armstrong took to Twitter yesterday in an attempt to forestall a wider crypto crackdown in the wake of this week’s troubles, writing that, as FTX was an overseas exchange operating outside the Securities and Exchange Commission’s purview, “punishing U.S. companies for this makes no sense.” In fact, Armstrong contended, “the problem is that the SEC failed to create regulatory clarity here in the U.S., so many American investors (and 95% of trading activity) went offshore.” 
While the Coinbase boss continues his crusade against the predominant U.S. financial watchdog (recall Armstrong’s lengthy Twitter thread in fall 2021 assailing regulatory resistance to the company’s crypto lending program, which began: “Some really sketchy behavior coming out of the SEC recently”), peer organizations likewise give his firm the side eye. On Tuesday, Germany’s Federal Financial Supervisory Authority instructed Coinbase to tighten its risk management protocols and internal financial controls after auditor Deloitte identified “organizational deficiencies” within the exchange’s German division.  Among the regulator’s remedies: that Coinbase make “appropriate arrangements that allow the institution’s financial position to be determined at all times with reasonable accuracy.” 
On that score, recent results suggest increasingly slippery footing, as Coinbase logged a $545 million net loss over the three months through Sept. 30 on sales $590 million, which themselves fell 55% over the same stretch in 2021. “Sustained low revenue for multiple years – that’s a scenario that’s very probable,” CFO Alesia Haas warned Bloomberg Friday.  
Sure enough, The Information reports this afternoon that the crypto bourse is conducting another round of layoffs following a cull of 1,100 staffers, equivalent to 18% of corporate headcount, just five months ago. Corporate “rightsizing” aside, stock-based compensation expense jumped to $1.14 billion over the nine months through September, up just over 100% year-over-year.
The subject of a skeptical Grant’s Interest Rate Observer analysis prior to its public listing (“Disrupters cash out,” March 5, 2021), Coinbase has seen shares retreat by 85% from the November 2021 peak, leaving the company valued at a $11.6 billion market capitalization. That plunge aside, COIN shares remain priced at more than two times book value as of Sept. 30, while the sell-side consensus calls for continuing net losses through 2026. 
Meanwhile, creditors are beginning to sweat, as the firm’s senior unsecured, 3 5/8% notes due 2031 last changed hands at just under 50 cents on the dollar, equivalent to a 13.18% yield-to-worst and a 931 basis point spread over Treasurys. In other words, that double-B-rated debt is trading far wider than the 508 basis point pickup on offer for the single-B-rated segment of the Bloomberg U.S. High Yield Index.
“What makes this new phase of crypto deleveraging induced by the apparent collapse of Alameda Research and FTX more problematic is that the number of entities with stronger balance sheets able to rescue those with low capital and high leverage is shrinking,” analysts at J.P. Morgan wrote yesterday. 
QT Progress Report
Some $19 billion in Reserve Bank credit rolled off the Fed’s balance sheet over the past week, leaving the central bank’s holdings of interest-bearing assets at $8.64 trillion.  That’s down $83 billion from the second week in October, a bit shy of the Fed’s targeted $95 billion monthly runoff, and $280 billion from the late March highs. 
Recap Nov. 10
Cooler than expected consumer price data for October ignited a ferocious rally in asset prices, as the S&P 500 jumped 5.5% and the Nasdaq 100 ripped 7.4%, the best one-day showing for each gauge since the early stages of the pandemic, while a Goldman Sachs basket of highly shorted stocks surged by 11%. Treasurys enjoyed similarly euphoric price action, with two- and 30-year yields declining to 4.34% and 4.03%, respectively (off 27 and 28 basis points from a day ago), while gold vaulted to $1,760 an ounce and WTI crude edged back above $86 a barrel. The VIX retreated to 23.5, down 10% on the day. 
- Philip Grant
Play Ball
Never a dull moment:
Never a dull moment: Now follows the (it is to be hoped) final entry in the saga of the stricken crypto exchange FTX (Almost Daily Grant’s, Nov. 4, Nov. 7), following rival bourse Binance’s weekend pronouncement that it, Binance, would liquidate its cache of FTX’s native FTT tokens. That thunderbolt followed Coindesk’s Wednesday expose revealing that FTX sister trading firm Alameda Research held $6 billion of FTT as of June 30, comprising nearly half of Alameda’s balance sheet assets and three quarters of the digital ducat’s fully diluted market cap. 
Though Alameda Research CEO Caroline Ellison proclaimed yesterday that her firm would be happy to purchase Binance’s entire FTT holdings at $22 per coin, the price broke decisively through that financial Maginot Line overnight. 
Sure enough, Reuters reports that punters pulled some $6 billion from FTX over the 72 hours through this morning. The exodus spurred head honcho Sam Bankman-Fried to declare that withdrawals would be “effectively paused,” an ominous development considering that similar maneuvers directly preceded the demise of crypto firms Celsius and Voyager Digital earlier this year.  
On form for the hyperactive asset class, resolution (of a type) followed hours later, as Binance CEO Changpeng Zhao tweeted that “FTX asked for our help. There is a significant liquidity crunch. To protect users, we signed a non-binding letter of intent, intending to fully acquire FTX and help cover the liquidity crunch.” Mr. Market was less than reassured, as FTT sank below $6 at press time, compared to about $15 when CZ attempted to save the day. The global cryptocurrency market now garners a $906 billion market value, Coinmarketcap.com shows, down 10% from late morning. 
Attracting A-list investors was no problem for FTX, which achieved a $32 billion valuation in a January series C funding round led by stewards such as the Ontario Teachers' Pension Plan Board and Tiger Global (alongside YOLO investors like SoftBank’s Vision Fund 2). The firm, in turn, lacked no corporate ambition, as SBF mused to the Financial Times in July of last year that the idea of his outfit acquiring Goldman Sachs or the CME Group “is not out of the question at all.” 
Those grand designs are today less grand, but the digital bourse did manage to make its mark. In March 2021, FTX signed a 19 year, $135 million deal for naming rights to the arena hosting the National Basketball Association’s Miami Heat. Three months later, the exchange inked a deal with Major League Baseball to become the first company to adorn the sport’s umpires with snazzy FTX patches (financial terms were not disclosed). In announcing that pact, MLB chief revenue officer Noah Garden lauded the “incredibly exciting. . . partner[ship] with a global leader in the early stages of their unbelievable growth.” 
Still smiling? 
Revision Fund
The gauge points towards “E.”
The gauge points towards “E.” Strategists at Goldman Sachs took the proverbial red pen to their S&P 500 earnings guesstimates on Friday, now projecting zero earnings growth next year compared to a 3% expansion. “We believe S&P 500 margins have inflected downwards and lower our estimates to incorporate greater margin compression,” David Kostin et al. wrote, by way of clarification. 
Indeed, blended net profits within the SPX have registered at 11.9% of revenues during the third quarter, FactSet found on Friday, still north of the 11.3% average over the past five years but down from 12.2% in the three months through June and 12.9% in the prior year period.   
We may be seeing that slow motion margin contraction in action: The nearly completed third quarter earnings season, in which 85% of S&P 500 components have reported, has exceeded analyst EPS expectation by an average 1.9%. That’s well below the average 8.7% upside surprise over the past five years and would mark the second lowest “beat rate” since 2013. Predicting that, by year-end, more than half of S&P sector groups could find themselves in an earnings recession (i.e., two straight quarters of year-over-year bottom line shrinkage), analysts at Bloomberg likewise note today that year-over-year S&P 500 earnings growth is tracking negative for the third quarter after excluding the energy patch. 
On a bottom-up basis, Wall Street now expects fourth quarter earnings to slip 1% from a year ago across the S&P 500. That would mark the first episode of negative earnings growth in nine quarters. For further context, analysts had collectively penciled in a 9.1% annual advance for the fourth quarter as of June 30, and a 3.9% uptick just six weeks back. 
With corporate earnings growth poised to retreat, this year’s pronounced bearish price action has yet to confer much in the way of optically commanding value. Thus, the S&P 500 now sports a cyclically adjusted Shiller price to earnings ratio of 28. That’s down from 37 times at the start of the year as markets peaked but sits far above the long-term median of 17 times, according to eponymous Yale economist Robert Shiller. 
Recap Nov. 8
Stocks managed to grind moderately higher for a second straight day to start the week, while Treasurys likewise enjoyed a bid as the two- and 30-year yields dropped five and six basis points, respectively, to 4.67% and 4.28%. WTI crude retreated to $89 a barrel, gold raced higher to $1,716 an ounce as the October CPI report looms on Thursday (consensus calls for a 7.9% year-over-year headline advance, down from 8.2% in September) and the VIX popped back above 25. 
- Philip Grant
The Hodl and the Beautiful
Battling in the blogosphere:
Battling in the blogosphere: This weekend ushered in a new chapter in the drama involving crypto magnate Sam Bankman-Fried’s Alameda Research trading outfit and FTX exchange, following a Wednesday dispatch from Coindesk revealing that Alameda held $6 billion of FTX’s native FTT crypto on its $14 billion balance sheet as of June 30, against only $134 million in cash (Almost Daily Grant’s, Nov. 4). 
That report caught the attention of the world’s largest digital bourse, as Binance Holdings founder and CEO Changpeng “CZ” Zhao took to Twitter yesterday to proclaim that his exchange will liquidate its $580 million cache of FTT owing to “recent revelations.” That disbursement would be no small development, as FTT sports a fully diluted market capitalization of $8 billion. 
Crypto punters were quick to react to the Binance bombshell, as open interest in FTT derivatives jumped to $203 million this morning from $87.6 million late yesterday, data from Coinglass show. “Many new shorts seem to have been put on,” Markus Thielen, head of research at Matrixport, tells Coindesk. 
CZ’s rival didn’t take that salvo lying down. Alameda CEO Caroline Ellison tweeted yesterday that the June 30 snapshot includes “hedges that aren’t listed,” and “that specific balance sheet is for a subset of our corporate entities, we have >$10 billion of assets that aren’t reflected there,” adding that her firm is willing to buy all of Binance’s FTT holdings at $22 per token (the price has largely traded between $22 and $23 today, briefly dipping below that level shortly before press time). For his part, SBF wrote in a locked Twitter thread (meaning only certain users can reply) that “a competitor is trying to go after us with false rumors. FTX is fine. Assets are fine.” 
Red Light Green Light
Talk about slamming on the brakes.
Talk about slamming on the brakes. Shares in pandemic-era darling Carvana Co. (ticker: CVNA) careened lower by 16% today to $7 per share, building on Friday’s 40% wipeout following a weaker-than-expected round of third quarter results. The subject of a bearish analysis in the Aug. 6, 2020 edition of Grant’s Interest Rate Observer, that purveyor of used vehicles via giant vending machines now sports a $1.2 billion market cap, down from $60 billion in fall of 2021, while the firm’s triple-C-rated 10 1/4% senior unsecured notes of 2030, which were issued just six months ago, sank to 46 cents on the dollar for a 27.9% yield-to-worst. 
This year’s broad-based jump in interest rates has helped put the crimps on the Carvana story by taking a bite out of used vehicle demand: CEO Ernie Garcia III noted on the earnings call that average monthly auto payments have jumped some 160% from their pre-pandemic levels, while the Manheim Used Vehicle Value Index plunged 10.6% from a year ago in October, the sharpest drop on record (data goback to 1994). “We are building our plans around assumptions that the next year is a difficult one in our industry and the economy as a whole,” Garcia said.
On form, the company’s cadre of Wall Street analysts have adapted to the new state of play, with the sell-side trimming its average price target to $28 from $43 last week and $367 at year-end 2021. Morgan Stanley analyst Adam Jonas withdrew his $68 bogey on Friday, offering a new base case range of between $1 and $40 per share. As recently as March, Jonas pegged the company’s equity value at $430 per share. 
Meanwhile, Mr. Market’s drastic reappraisal has taken its toll on the personal finances of CEO Garcia and his father, Ernie Garcia II, owner of former Carvana parent company and supplier DriveTime Automotive Group. Bloomberg relayed Friday that the duo, who control more than 75% of voting shares in Carvana, have seen their combined net worth sink by some 80% this year to $3.7 billion. Garcia II shelled out $429 million to buy CVNA stock in April at $80 per share, followed by a further $42 million outlay two months later with shares near $21. 
That’s not to say that every open market transaction was cause for regret. The elder Garcia disposed of a cool $3.6 billion in CVNA shares from October 2020 through August of last year as the bull market percolated, twice modifying his 10b5-1 automated sale plan to upsize the amount of stock being offloaded.
Recap Nov. 7
Stocks caught a late bid to leave the S&P 500 higher by 1%, as the broad index remains in the upper end of its one-month trading range, while Treasurys came under broad-based pressure with the two- and 30-year yields rising six and seven basis points, respectively, to 4.72% and 4.34%. Gold consolidated Friday’s rally with a flat showing at $1,678 an ounce, WTI crude pulled back to $92 a barrel and the VIX reached a fresh two-month low near 24. 
- Philip Grant
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