As they say, 90% of success is just showing up. From KOCO-Oklahoma City:

An Oklahoma man is facing charges of stealing a vehicle after he couldn’t get a ride to court. The court case he was attempting to attend was for unauthorized use of a vehicle. The Oklahoma Highway Patrol said Kody Adams stole a pickup and drove himself to Pawnee.

Troopers said Adams was at a Stillwater gas station asking people for a ride to his court date in Pawnee. When he couldn’t find a ride, troopers said Adams decided to hop in an unoccupied LifeNet Emergency Services pickup and drive himself to court. . .  A trooper caught Adams as he was walking into the courthouse.

Adams said he was just “borrowing” the truck. . . He made his court case and was transported back to Payne County and booked on new charges.

Where’s the salt?  A pair of D.C. lawmakers looked to put the clampdown on “big snack” over the weekend, as Sen. Elizabeth Warren (D-MA) and Rep. Madeleine Dean (D-PA) penned missives accusing the likes of General Mills, Coca-Cola and PepsiCo of a “pattern of profiteering” via so-called shrinkflation, NBC reports.  

“People have noticed that their box of Cheerios and bag of Doritos are smaller, but prices are higher,” commented Warren, who lobbied the Federal Reserve for a 75-basis point rate cut less than a month ago. She added that “we can’t let them get away with this price gouging.” 

Of course, acute post-Covid price pressures inform that rising political heat, as the foodstuff industry faces a soggy sales backdrop in the wake of bountiful price increases. This morning, PepsiCo reported $23.3 billion in third quarter revenues this morning, down 0.6% from a year ago and trailing the $23.8 billion sell-side consensus, likewise downshifting its full-year outlook to about half the prior 4% top line growth rate.  

Those figures – along with commentary from PepsiCo CEO Ramon Laguarta that “the cumulative impacts of inflationary pressures and higher borrowing costs over the last few years have continued to impact consumer budgets and spending patterns” – do little to raise spirits on Wall Street.  Citi analysts write that “we believe investors will continue to question the topline guidance for the fourth quarter” and beyond. 

A similar dynamic is on display in the quick service restaurant realm, as McDonalds logged a 1% annual same store sales decline over the three months through June, undercutting sell-side expectations of a flat showing and marking the first such decline since the 2020 plague year (third quarter results are due on Oct. 29).  

By way of combatting that unwelcome downshift, the fast-food purveyor rolled out a $5 meal deal featuring a McDouble or McChicken sandwich, small order of fries, small soft drink and four-piece order of chicken nuggets to cater to cash-strapped diners. As the Washington Post points out today, average menu prices at golden arches establishments rose some 40% from 2019 to 2024. 

“The consumer across a number of. . . markets, is being very discriminating,” lamented McDonalds CEO Chris Kempczinski on the July 29 earnings call, adding that “consumer sentiment in most of our major markets remains low” (see the July 5 edition of Grant’s Interest Rate Observer for more on the industry’s difficulties).  

As the post-virus inflationary impulse continues to reverberate, it’s not just shoppers and diners facing the squeeze. Thus, McDonalds filed suit Friday in U.S. District Court against JBS, Cargill, National Beef and Tyson Foods for antitrust violations, contending that the quartet “collusively reduce[d] the slaughter-ready cattle and beef supply” over the past nine years. Thanks to that “conspiracy in restraint of trade,” the producers allegedly managed to achieve prices “artificially higher than [they] would have been in absence of their conspiracy.”

No sacred cows here. 

Stocks resumed their ascent after yesterday’s downward detour, with the S&P 500 storming higher by 1% to reach the cusp of fresh highs, while Treasurys consolidated their recent selloff with a little changed showing as two-year yields dipped one basis point to 3.98% and the long bond settled at 4.32% from 4.3% Monday. WTI crude pulled back below $74 a barrel, gold retreated to $2,620 an ounce, bitcoin floated sideways at $63,100 and the VIX settled a bit north of 21 after testing 23 yesterday.

- Philip Grant

Extinction is transitory.  From the Daily Mail:

It has been more than 4,000 years since the last woolly mammoth vanished from the face of the Earth. But if one group of scientists is right, it may be less than four years before these gentle giants walk the plains of North America once again.

Ben Lamm, CEO and founder of Colossal Biosciences, now says he's 'positive' the first woolly mammoth calves will be born by late 2028. 'I like to think of what we're doing like reverse Jurassic Park,' Mr. Lamm told MailOnline.

In the classic films, scientists bring back dinosaurs by recovering ancient DNA frozen within amber before using genes taken from frogs to patch the holes in the dino DNA. But, unlike those fictional scientists, the researchers at Colossal Biosciences are actually working backwards.

Mr. Lamm says: 'We're not taking mammoth DNA and plugging in the holes; we're trying to engineer the lost genes from mammoths into Asian elephants.’

It's a wrapper’s delight: U.S. investors funneled a net $282 billion into exchange traded funds over the three months through September per data from Morningstar, pushing year-to-date inflows to $696 billion. That’s on pace to top the $900 billion full-year peak established in 2021 and leave the $1 trillion figure “well within reach,” as the typically bountiful fourth quarter gets underway.  Stateside ETF assets reached a tidy $10 trillion, up tenfold since 2010. 

“ETFs now offer nearly universal access to asset classes and strategies that were once available only to the world’s most sophisticated institutional investors,” Amrita Nandakumar, president of Vident Asset Management, commented on Bloomberg Television, adding that last week’s milestone is a “testament to how much ETFs have democratized investing.”

Indeed, Wall Street’s amply demonstrated ability to meet investor demand is once again on display.  For instance, 532 such funds now hold a position in AI lynchpin Nvidia according to ETF.com, up from 482 late last year (Grant’s Interest Rate Observer, Dec. 22). This includes funds devoted to tracking only one company, such as the GraniteShares 2x Long NVDA Daily ETF (ticker: NVDL).

Underscoring today’s saturated backdrop, Bloomberg warns today that “America risks running out of tickers for single-stock ETFs.”  Proximate cause of that shortage: exchange strictures requiring the contraptions to sport symbols approximating the underlying security, spurring some providers to squat on attractive combinations in behavior recalling the toilet paper hoarding seen in early 2020. “Competition for them has never been fiercer,” observed Gavin Filmore, chief revenue officer for Tidal Financial Group. “We can see market participants constantly grabbing tickers, especially as certain sectors or themes become more crowded.”

That urgency appears well founded, if Mr. Market’s warm welcome to a pair of newly minted, high-risk products are any indication. Thus, CoinDesk relayed last Friday that the Defiance Daily Target 1.75x Long MicroStrategy ETF (ticker: MSTX), which aims to generate 175% of the daily performance of Michael Saylor’s enterprise-software provider-cum-leveraged bitcoin speculation vehicle, attracted a cool $857 million since its Aug. 15 debut, putting the fund in the top 8% of ETF launches so far this year per Bloomberg Intelligence analyst Eric Balchunas. 

In turn, newly minted peer T-REX 2X Long MSTR Daily Target ETF (ticker: MSTU), which ups the ante via 200% daily MicroStrategy exposure, gathered more than $72 million in assets a mere seven trading days after its debut.  “Both have robust liquidity,” Balchunas posted on X. “I didn’t think there was room for both. . . it just [shows] how much ‘need for speed’ there is out there.”

No points for second place.

A hotter-than expected September jobs report did nothing to derail the potent bull market in stocks, with the S&P 500 climbing nearly 1% to mark its seventh weekly increase in its last eight tries, though Treasurys came under marked pressure as the long bond rose eight basis points to 4.26% while the two-year note vaulted to 3.93% from 3.7% Thursday. WTI crude remained on the front foot by advancing towards $75 a barrel, gold finished little changed at $2,651 per ounce, bitcoin rallied to $62,300 and the VIX settled just below 19. 

- Philip Grant

There’s (almost) nothing more permanent than a temporary government program. From Bloomberg:

French President Emmanuel Macron endorsed a temporary tax on the country’s largest companies, supporting his new government’s strategy even as it departs from his longstanding pro-business stance. . .

Just under €20 billion ($22 billion) will be generated by boosting government revenues, with tax increases for wealthy individuals and large companies, as well as increased green taxation.

Artificial intelligence mainstay OpenAI announced today that it has completed its hotly anticipated funding round at a $157 billion post-money valuation. That’s the highest such figure in Silicon Valley history.   

Sam Altman’s outfit, which was valued at $29 billion in April 2023 and conducted a February tender offer at an $86 billion price tag, gathered a hefty $6.6 billion from the latest transaction. Though OpenAI expects to post some $5 billion in losses on $3.7 billion in revenues this year, the firm anticipates a swift top line acceleration to $11.6 billion in 2025. “AI is already personalizing learning, accelerating healthcare breakthroughs and driving productivity,” OpenAI CFO Sarah Friar told CNBC. “And this is just the start.”

Considering that backdrop, it is no small curiosity that key corporate cogs are seeking the exit. OpenAI chief technology officer Mira Murati and chief research officer Bob McGrew each opted to hit the bricks last week following six-plus year stints. Upwards of 20 researchers and executives have quit so far this year, The Wall Street Journal reported Friday, as disagreement over the firm’s original not-for-profit structure and subsequent ambitions have yielded “chaos and infighting among executives worthy of a soap opera.”  For his part, Altman commented Thursday that “I think this will be a great transition for everyone involved and I hope OpenAI will be stronger for it, as we are for all our transitions.” 

Investors are certainly counting on it. Altman et al. have managed to put the squeeze on their recent backers, the Financial Times relays, “ma[king] clear that [they] expected an exclusive fundraising arrangement,” which precludes any outlays into rival players such as Anthropic and xAI. “If a company holds all the cards, they can force people to do things unnaturally,” one venture capitalist told the pink paper.  

Corporate foibles and all, an avatar of the Covid-era venture capital boom and bust sees fit to throw its hat into the ring.  As the Information first relayed Monday, SoftBank’s Vision Fund is among OpenAI’s latest backers, chipping in $500 million. The deal marks SoftBank boss Masayoshi Son’s maiden investment in the ChatGPT developer, which had previously completed seven funding rounds by Crunchbase’s count.

As of June 30, the original $100 billion Vision Fund and its $108 billion sequel – established in 2016 and 2019, respectively – have posted a combined cumulative investment loss of $1.2 billion.  For context, the Nasdaq 100 has returned 330% from the start of 2017 and 134% since the outset of 2020. 

Meanwhile, a leading light in SoftBank’s checkered investment history likewise looks to saddle up once more.  As Bloomberg Businessweek documented Wednesday, former WeWork honcho Adam Neumann is getting back into the co-working game, rolling out a new format dubbed Workflow: “Like WeWork, it will offer space on flexible terms to companies and individuals, though it will aim to create a calm atmosphere with fancy artwork and plush furniture, instead of providing kombucha and beer at offices filled by twentysomethings run amok.” 

Then, too, Neumann’s Workflow will construct offices in residential properties it already controls and enter into partnerships to manage space it doesn’t itself own, pivoting from WeWork’s ill-advised decision to pair long-term leases with landlords alongside short-term arrangements from customers, with that mismatch leaving it exposed to swift and catastrophic drops in revenue in the work-from-home era. 

Indeed, as BusinessWeek notes, “WeWork burned through cash with an unclear path to profitability, which eventually proved disastrous for the company and its investors.”

Lesson learned? 

Stocks treaded water to the tune of a flat finish on the S&P 500 following yesterday’s moderate selloff, while Treasurys saw a bear steepening move with 2- and 30-year yields rising two and six basis points, respectively, to 3.63% and 4.14%.  WTI crude advanced towards $71 a barrel, gold consolidated Wednesday’s gains at $2,660 an ounce, bitcoin remained under pressure at $60,600 and the VIX pulled back below 19. 

- Philip Grant

Here’s a press release headline format bulls never want to see: 

Volkswagen Updates Its Forecast for 2024

Sure enough, the Wolfsburg, Germany-headquartered automaker had bad news to share after the close of European business Friday, downshifting its projected full-year operating return on sales (i.e., operating margins) to 5.6% from 7% last year and a 6.5% to 7% outlook as of July. Volkswagen, which likewise trimmed its forecast for global deliveries to 9 million units from about 9.5 million. 

Electric vehicle-related tribulations duly inform today’s dour state of play, as Volkswagen publicly weighed German plant closures and large-scale job cuts earlier this month in response to brutal competition from state-subsidized Chinese producers alongside soft demand. 

Thus, EV registrations across the Old Continent registered at just 92,600 in August according to the European Automobile Manufacturer’s Association, down a hefty 44% year-over-year.  That compares to an 18% annual drop for total vehicle registrations for the same period and leaves EV market share at 14% compared to 21% as of August 2023. 

Perhaps tellingly, waning appetite for the heretofore-fashionable battery-powered conveyances extends to society’s fringes. Citing data from the Insurance Institute for Highway Safety, Axios relayed Thursday that four of the six least stolen autos in the U.S. last year were electric models, with thieves absconding with only 1 out of every 100,000 insured Tesla Model 3s. That compares to 49 stolen cars per 100,000 for the auto industry at large.

No 5%? No problem. Investors poured a net $121 billion into money market funds over the seven days through Wednesday, data from the Investment Company Institute show, pushing total assets to a record $6.42 trillion.  

Coming directly on the heels of Sept. 18’s half-point lurch lower in benchmark rates – with Fed chair Jerome Powell suggesting more to come – that arguably counterintuitive influx defies expectations of a swift migration towards higher-yielding, riskier assets. 

“[Investors should] find the balance of having some total return, which benefits from the price appreciation in bonds,” Jerome Schneider, head of short-term portfolio management at Pimco, argued on Bloomberg Television yesterday. “To do that, you need to step out of that curve.”  Jason Britton, founder of $5 billion fund Reflection Asset Management, took a similar stance to Reuters last week: “Money market assets will have to become fixed-income holdings; fixed income will move into preferred stocks or dividend-paying stocks.” 

Yet dwindling compensation and all, the category’s alure could be poised to persist.  Greg Blaha of Bianco Research argued this morning that money market funds primarily compete with paltry-yielding bank deposits rather than higher risk assets like stocks. Accordingly, “the idea of $6.4 trillion of dry powder being unleashed on risk assets is enticing, but we see this as an unlikely scenario.” 

Might the money market aficionados be onto something? See the July 5 edition of Grant’s Interest Rate Observer for a contrarian look at the virtues of capital preservation via Treasury bills and similar instruments, along with the Aug. 30 issue for an array of income-generating ideas as the easing cycle unfolds. 

Correction:
A wishful thinking typo in yesterday’s edition, which cited a $1.9 billion fiscal deficit over the 11 months through August. Of course, its $1.9 trillion. 

Stocks edged lower by 0.13% on the S&P 500 and 0.6% on the Nasdaq 100 to wrap up a mostly forgettable trading week, while two- and 30-year Treasury yields dipped by five and two basis points, respectively, to 3.55% and 4.1%, likewise finishing little changed relative to last Friday. WTI crude bounced to $68.5 a barrel, gold pulled back to $2,652 an ounce, bitcoin rose again to $65,700 and the VIX bucked the sleepy action by advancing to near 17, up a point and a half on the day. 

- Philip Grant 

Evidently, some trees do grow to the sky. Artificial intelligence firms continue to make hay in fair weather 2024, as aggregate funding for industry startups reached $24 billion over the three months through June according to Crunchbase, double that seen in the first quarter.  The ongoing frenzy has duly pushed a trio of high-profile entrants further into the financial stratosphere as the third quarter winds down.

Thus, The Information reports that OpenAI rival Anthropic is sounding out investors on a new funding round which could value the Claude chatbot creator at up to $40 billion, more than double the startup’s price tag achieved early this year.  That provisional figure would represent roughly 50 times Anthropic’s in-house projection for annualized gross revenues, while helping infuse some much-needed capital; the startup anticipates upwards of $2.7 billion in cash burn across 2024, the Information likewise relays.

Fellow decacorn (i.e., startups valued at $10 billion to $99 billion) CoreWeave is likewise arranging a sale of existing shares at a $23 billion valuation, Bloomberg reported on Sept. 13, as the AI-themed cloud computing firm looks to quickly exceed a $19.1 billion price garnered four months ago and more than treble the $7 billion figure logged in December.

Meanwhile, the brightest constellation in the AI galaxy enjoys a full-scale bidding war, as OpenAI works to wrap up a super-sized $6.5 billion funding transaction valuing Sam Altman’s outfit at $150 billion. That’s up some 75% from the $86 billion seen during a tender offer conducted early this year. 

As the Financial Times pointed out Friday, the ChatGPT developer’s mushrooming valuation presents a quandary for home run-seeking venture capitalists, who often write smaller checks to nascent startups in hopes of earning windfalls equivalent to 10 to 100 times their initial outlay.  To achieve such an outcome, OpenAI would need to grow to $1.5 trillion and beyond, which would eclipse the likes of Berkshire Hathaway and Meta. OpenAI’s annualized revenues currently register at roughly $4 billion, while annual cash burn remains north of $5 billion. “How would you ever get a venture-style return on an investment of this sort?” one U.S. foundation chief investment officer rhetorically asked the pink paper. “I’m not sure what the math is there, or if there is any math.”

One thing’s for sure: a lynchpin of the bygone venture capital boom and bust is leaning headlong into the AI revolution. Citing data from PitchBook, CNBC relayed Sunday that Middle Eastern sovereign wealth funds have increased their funding for AI-related projects in the year-to-date by five-fold relative to 2023, while the United Arab Emirate’s new AI-focused fund MGX is among investors “looking to get a slice” of OpenAI during the ongoing funding round.  The New York Times likewise reported this spring that Saudi Arabia’s Public Investment Fund – which famously poured $90 billion into SoftBank’s Vision Fund and its sequel – is “creating a gigantic fund to invest in AI technology,” with a proposed $40 billion size sufficient to render Saudi Arabia “the world’s largest investor in artificial intelligence.”

Short rates continued to tumble as two-year Treasury yields logged another multi-year low at 3.49% compared to 3.57% Monday, while stocks enjoyed another push higher with the S&P 500 gaining 0.25% and the Nasdaq 100 managing a 50-basis point advance, as Nvidia rode a sharp late-morning rally to a 4% gain. WTI crude rebounded above $71 a barrel, gold maintained its momentum at $2,659 per ounce, bitcoin advanced past $64,000 and the VIX settled just above 15. 

- Philip Grant

At least the in-flight entertainment was free. From Agence France-Presse:

A mouse that crawled out of a passenger’s meal has forced an SAS flight to make an 
unscheduled landing, the company said on Friday.

The incident occurred during Wednesday's Oslo to Malaga flight, forcing the plane to land in Copenhagen. Airlines usually strictly prohibit rodents on board because the animals can chew through electrical wiring, key to the operation of a plane.

"Believe it or not. A lady next to me... opened her food and a mouse jumped out," wrote one passenger, Jarle Borrestad, on his Facebook page, along with a photo showing him smiling  next to two other women, also smiling. A spokesman for SAS, Oystein Schmidt, told AFP that "in line with our procedures, there was a change of aircraft" and the passengers were flown to Malaga on another flight.

Everybody into the pool! “Investment advisors are urging clients to dump hefty cash allocations” in response to the Federal Reserve’s half-point rate cut Wednesday, Reuters reports. Retail money market fund assets stood at $2.6 trillion on Wednesday, up 80% since the start of 2022 prior to the Fed’s aggressive, belated post-pandemic tightening campaign.

Further downward pressure on the compensation for those outsize cash holdings appears in the offing, as interest rate futures point to a 4.08% Fed funds rate by year end, compared to the current 4.75% to 5% range.  The odds of another 50-basis point cut at the Federal Open Market Committee’s Nov. 7 gathering stand slightly above 50%. 

“You’re going to have to shift everything. . . further up in the amount of risk that you’re accepting,” Jason Britton, founder of Reflection Asset Management, told Reuters. “Money market assets will have to become fixed-income holdings; fixed-income will move into preferred stocks or dividend-paying stocks.” 

Such a migration is well underway in the speculative grade credit realm, as option-adjusted spreads on the ICE BofA US High Yield Index reached 310 basis points Thursday, down from 346 basis points as recently as Sept. 10 and fast approaching the 301-basis point pickup seen at the end of 2021, the tightest reading of the post-crisis era.  

Bloomberg’s high-yield gauge in turn wrapped up a 12th consecutive week of gains today, its longest winning streak since the start of 2021, while the triple-C-rated portion of that index now sports a 664-basis point OAS, down 100 basis points over the past three weeks and well inside the roughly 830 average pickups seen over the past five-, 10- and 20-year periods.  Meanwhile, the spread differential between triple-C and single-B-rated bonds has edged below 400 basis points, compared to nearly 550 basis points in early July. 

Fast-eroding premiums in the riskiest corners of fixed income complement a rampaging stock market which gathered a net $31.7 billion over the seven days through Wednesday per EPFR-compiled data – its highest inflow in nine weeks – and is now arguably priced for perfection. 

Thus, FactSet relays that Wall Street analysts collectively anticipate 15.2% earnings growth for the S&P 500 across calendar 2025 against a 5.9% year-over-year uptick in revenue, while penciling in a bottom-line acceleration to 15% year-over-year growth in the fourth quarter from the 4.9% guesstimate for the current period ending Sept. 30. 

Even considering those great expectations, the S&P now sports a 21.4 times 12-month forward earnings multiple, comfortably above the 19.5 and 18 average price tags seen over the past five and 10 years, respectively. The broad index changes hands at 36.8 times its cyclically adjusted Shiller price-to-earnings ratio, up nearly eight turns from this time a year ago. 

“It takes one generation to forget the dangers of a bubble, and it is Groundhog Day versus the 1990s Tech Bubble,” Stifel Nicolas chief equity strategist Barry Bannister wrote yesterday. “Just as countries that go rogue become almost un-investable, investors caught in the grips of a speculative fever become almost unanalyzable.”

The show goes on.

Muted trading action characterized the final trading day of summer, as stocks took a breather following yesterday’s post-ease euphoria with the S&P 500 ticking lower by 0.2%, while two-year yields dropped four basis points to 3.55%, establishing fresh post-2022 lows. WTI crude finished little changed at $71 a barrel, gold remained white hot at $2,620 per ounce, bitcoin edged lower at $62,700 and the VIX settled just north of 16. 

- Philip Grant

From Bloomberg:

Bankrupt trucker Yellow Corp. and its hedge fund owners lost a key court ruling over $6.5 billion in debt that pension funds claim the defunct company owes them, likely wiping out most recovery for shareholders.

U.S. Bankruptcy Judge Craig T. Goldblatt sided with pension funds over how to calculate the penalty Yellow must pay for canceling workers’ retirement plans when the company shut down last year. The ruling, issued last week, means there is little chance the company will have any cash left for shareholders like hedge fund MFN Partners after Yellow finishes selling its real estate portfolio and paying the pension penalty. . .

The Pension Benefit Guaranty Corp., which regulates retirements funds like those set up for Yellow’s union workers, argued that other companies with traditional pension plans would have an incentive to cancel their retirement benefits if Yellow won since shareholders wouldn’t be forced to pay a hefty penalty. Yellow claimed it was unfair to make it pay the penalty since federal grants made the pensions solvent for decades. 

This big band needs a conductor: The artificial intelligence craze is spurring an unwelcome side effect in the form of global copper shortages, as the rapid buildout of energy-ravenous data centers will serve to boost worldwide demand to 52.5 million tons by 2050, BHP chief financial officer Vandita Pant predicted to the Financial Times Monday. That’s up 72% from the 30.4-million-ton figure logged in 2021.  

The economically sensitive red metal, which has seen spot prices ebb lower by 15% since May thanks in part to weak Chinese demand, helps supply power to the server-laden venues, while also featuring in their cooling systems and processors. “Today, data centers [account for] less than 1% of copper demand, but that is expected to by 6% to 7% by 2050,” she said. “There is a lot of copper in data centers.”

Even beyond the copper category, recent developments underscore BHP’s concerns over AI-related resource constraints. The Telegraph relayed over the weekend that “the electricity grid in the West London cluster, home of the biggest collection of data centers outside of the U.S., is at full capacity and unable to connect any new sites.” As a result, 14 of the planned facilities are now on hold, with expansion-minded firms facing a multi-year delay. Access to the so-called Slough Availability Zone, the final site offering current data center connectivity, “is being [bid] on by every operator under the sun, including us,” one tech executive told the Telegraph.

While a power paucity continues to bedevil contestants in the explosive AI arms race, longstanding political spats likewise strain key pockets of the commodity complex. On Sunday, China announced new export controls on an array of minerals including antimony, which is used by the U.S. for high-tech military equipment including night vision goggles, infrared missiles and nuclear weapons, “in order to safeguard national securities and interest, and fulfill international obligations such as non-proliferation,” as the Ministry of Commerce put it.  The Middle Kingdom accounted for 63% of domestic antimony metal and oxide imports last year per the U.S. Geological Survey, leaving number two player Belgium in the shade at 8%.

Diplomatic explanation and all, that announcement came just days after the Biden administration finalized increased tariffs on an assortment of Chinese goods including electric vehicles, semiconductors, solar cells and battery parts, with the bulk of those hikes to take effect at the end of next week. The FT likewise reports that the U.S. and Japan are finalizing an agreement to curtail chip-related exports to the world’s second-largest economy, despite Tokyo’s concerns that China could retaliate by cutting off its own supply lynchpin minerals including gallium and graphite. “Clients need guaranteed supplies and those guarantees are now becoming very difficult,” one higher-up at a trading house specializing in those crucial, niche components told the pink paper. 

The question before the house: might a series of supply snafus across the resource realm presage an unwelcome broader resurgence in price pressures? With the Federal Reserve waiting in the wings to begin its easing cycle Wednesday, Wall Street sure doesn’t appear prepared for such an outcome. 

Thus, Bank of America’s September Global Fund Manager Survey finds that the share of institutional investors reporting an overweight allocation to the commodity complex reached a seven-year low, below that seen in spring 2020 after WTI crude futures famously printed at minus $37 per barrel in April. See the current edition of Grant’s Interest Rate Observer for more on the risks of a supply-driven inflationary revival, along with one way to potentially profit from such a dynamic.

Stocks briefly kissed new highs on the S&P 500 before returning to unchanged ahead of tomorrow’s rate cut extravaganza, while bonds came under some modest pressure with two-year yields rising three basis points to 3.59% and the long bond ticking to 3.96% from 3.94% Monday. WTI crude rose above $71 a barrel, gold edged lower at $2,570 an ounce, bitcoin sat north of $60,000 and the VIX approached 18. 

- Philip Grant

Gambling on further gambling legalization seems like a sure winner. From Politico:

Americans are about to vote with their wallets in a big way.

Financial exchange startup Kalshi on Thursday got the green light to begin offering day traders, wannabe political pundits and financial institutions the chance to wager thousands of dollars on whether Democrats or Republicans will control Congress next year. Some financial firms will be allowed to bet as much as $100 million.

The Silicon Valley-backed company debuted the first fully regulated election-betting markets in the U.S. shortly after District Judge Jia Cobb in Washington rejected a bid by Wall Street regulators to temporarily block the company from launching them. The Commodity Futures Trading Commission, the top U.S. derivatives cop, says the markets violate federal and state law.

The best offense is a good defense - or is it the other way around?  Safety-minded trades are all the rage these days, The Wall Street Journal and Financial Times each pointed out Friday, as the S&P 500’s consumer staples sector last week posted its best one-week showing relative to the broad average since March 2020.  Shares of Wal-Mart, Target and Clorox have logged 14.8%, 9.1% and 15.6% respective gains over the month through Thursday, each lapping the S&P 500’s 4.5% figure, while utilities are up 23% in the year-to-date, trailing only tech’s 26% showing for the index’s top performing group. 

“It’s really been something to see,” David Bahnsen, chief investment officer and eponym of the Bahnsen Group, marveled to the WSJ.  Next week’s Federal Open Market Committee Meeting, with a rate cut of either 25 or 50 basis points looking like a 50/50 proposition, duly informs that dynamic. “Historically, defensives like consumer staples have done well in the lead up to [an easing cycle], which tends to come once there’s enough evidence the economy is slowing,” Irene Tunkel, chief U.S. equity strategist at BCA Research, told the pink paper.

Suffice it to say, evident risk aversion remains in short supply elsewhere. Strategists at Deutsche Bank laid out the case for further stock market upside this morning, painting the bullish picture thus: “[share] buybacks are larger and rising along with earnings, [while] inflows have been robust and boosted by strong risk appetite.” The S&P 500 changes hands at 36 times its cyclically adjusted price-to-earnings ratio and nearly three times sales, price tags representing the 95th and 99th percentiles, respectively, going back to 1950 according to data compiled by Hulbert Ratings.  

Animal spirits likewise abound in fixed income, as evidenced by the fact that the triple-C-rated portion of the Bloomberg U.S. High Yield Index today put the finishing touches on an 11th consecutive weekly rally, its longest such winning streak since the 2021 bacchanal. Meanwhile, speculative-grade municipal bonds have delivered a 7.23% total return in the year-to-date, Bloomberg relayed Wednesday, far above the sub-2% figure for its broader muni gauge. 

Finally, cryptocurrencies collectively command a $2.08 trillion market capitalization by Coinmarketcap.com’s count following a recent pullback, still up an even 100% year-over-year. On form, that heady price appreciation spurs conspicuous behavior from wealth-seeking degens, as a Friday headline from tech publication Wired illustrates: “People are setting themselves on fire and getting punched in the face to pump their crypto coins.”

More anything? More everything! 

Friday the 13th was another lucky day for the bulls, as the S&P 500 tacked on another 0.5% to finish with a steep 3.2% advance to swiftly erase the bulk of last week’s selloff in a similar fashion to that seen in early August. Treasurys rallied as well with two-year yields diving another seven basis points to a fresh year-to-date low of 3.57%, while the long bond ebbed to 3.98% from 4% Thursday. WTI crude ticked above $69 a barrel, gold remained red hot at $2,581 per ounce, bitcoin jumped to near $60,000 and the VIX settled south of 17. 

- Philip Grant

You’ve got to give the people what they want: Apollo Global Management is laying the groundwork for a private credit-themed ETF in a partnership with State Street, the firms announced Tuesday, provisionally marking the latest milestone for the mushrooming asset class (if the regulators confer their blessing). 

“We believe investors will increasingly supplement their portfolios with private fixed income and equity strategies as they seek to build resilient and diversified portfolios to serve their retirement and investment needs,” commented Apollo CEO Marc Rowan. As Bloomberg notes, the firm is cooking up other ways to infuse liquidity into the (arguably, by design) infrequently transacted securities, including by building out a trading desk to foster a secondary market for direct loans.

Apollo and State Street aren’t alone in their efforts to market closely held assets to the well-heeled masses. Brookfield Asset Management likewise detailed plans on Tuesday to launch a private equity product tailored towards wealthy individuals. “We did it in credit, we did it in real estate, and now we’re doing it in private credit,” crowed Brookfield global client group CEO David Levi at the firm’s investor day in New York. 

When Wall Street speaks, Washington, D.C. listens. The Federal Reserve will drastically scale down a planned increase in capital requirements for the U.S. banking system, with vice chair for supervision Michael Barr unveiling a revised proposal calling for the eight largest lenders with at least $250 billion in assets to increase reserves by 9%.  That’s down from a 19% uptick floated in July 2023, and likewise exempts smaller institutions from most of the so-called Basel III endgame rules. 

“There are benefits and costs to increasing capital requirements,” Barr commented in a Brookings Institution speech Tuesday. “The changes we intend to make will bring these two important objectives into better balance, in light of the feedback we have received.”  Indeed, the shift follows an intense lobbying effort by the industry, reflecting “a shift in the balance of power between big banks and their regulators, turning the page on an era in which the Fed held the upper hand,” as The Wall Street Journal puts it.

Yet the afterglow of that victory proves short-lived for a pair of industry mainstays. JPMorgan Chase &. Co. is set to disappoint Wall Street in its bread-and-butter loan and deposit business, as president Daniel Pinto declared Tuesday that sell-side expectation for about $90 billion in net interest income next year is “not very reasonable” and that profits from that segment “will be lower.” JPM shares slid by as much as 6.8% in response, the largest intraday decline since June 2020.

Then, too, Goldman Sachs delivered some unwelcome news to investors Monday, with CEO David Solomon telling listeners-in to a Barclays conference that trading revenues are on pace to slip 10% year-over-year in the third quarter given "a more challenging macro environment, particularly in the month of August.”  Goldman shares dropped by a bit more than 4% on Tuesday, extending their post Aug. 30 pullback to 8.5% after the investment bank had enjoyed a 32% year-to-date advance. 

You win some, and you lose some.

Another lurch lower in short-dated Treasurys left the two-year yield at 3.59%, down more than 30 basis points from the start of the month, while stocks settled higher by 0.5% as the bulls took control late in the day after a mid-session downdraft and ahead of tomorrow’s August CPI data.  WTI crude was hammered again to $66 a barrel, gold logged modest gains at $2,517 per ounce, bitcoin rose to $57,800 and the VIX retreated towards 19. 

- Philip Grant