The Other Guys
Here’s Goldman Sachs CEO David Solomon

Here’s Goldman Sachs CEO David Solomon offering a cautious stock market outlook on CNBC this morning: 

We would expect that we’re not going to see the same rate of returns in equities and many other assets over the next few years that we’ve seen over the last couple of years.

That’s not to say there aren’t exceptions. Take shares in Goldman Sachs, for instance: 

Like any other CEO, you know, I think that my company and my stock is underappreciated and undervalued. I think the earnings power of the traditional financial services sector is quite powerful, and we get very, very low multiple on those earnings.

Flat Tire
It’s all over but the shouting.

It’s all over but the shouting.  Stricken property developer China Evergrande Group has yet to make $82.5 million in coupon payments that were due Nov. 6, leading analysts at S&P Global to determine that default is now “inevitable” with the one-month grace period come and gone.  A default by Evergrande, Asia’s most prolific issuer of high-yield debt with $19.2 billion worth of offshore bonds outstanding, would mark one of China’s largest ever debt restructurings thanks to a stack of total liabilities in excess of $300 billion.

On the bright side, the developer has plenty of company in the financial penalty box. Creditors of peer Kaisa Group Holdings issued a forbearance proposal yesterday in hopes of forestalling default on a $400 million dollar-pay bond which was scheduled to mature today. Kaisa, which stands as China’s 27th largest developer by property sales, is the industry’s third-largest issuer of dollar-denominated debt at upwards of $10 billion. More broadly, yields on an ICE BofA gauge of Chinese dollar-denominated high-yield issues reached 29% at the end of November, touching levels last seen during the 2008-era crucible. 

As credit contagion ripples through the property sector, China’s once-soaring housing market begins to float back towards Earth. Contracted sales from the top 100 developers sank to RMB 751 billion ($118 billion) in November according to the China Real Estate Information Group, down 38% from a year ago. That follows a 32% year-over-year contraction in October and 36% September downdraft.  Volume leads price:  new home prices, as measured by the Chinese Communist Party, edged lower by 0.25% and 0.08% in October and September, respectively, marking the first month-over-month declines in that series since early 2015. 

“National sales growth will remain weak for the next six to 12 months,” analysts at Moody’s forecast last week.  A Reuters poll of analysts and economists conducted last week found that respondents expect home prices to slide by a further 1% over the first six months of next year, with the consensus expectation of a 2.6% rise across 2022 down from 3.5% forecast in a prior survey conducted in August.  Any protracted slowdown will do the already flagging Chinese economic miracle no favors, as various economist estimates peg real estate’s contribution to total output at as high as 30%.  Third quarter GDP grew by just 4.9% from the same period in pandemic-wracked 2020, roughly half the average growth rate spanning 1990 to 2019.  In turn, a lasting growth slump could spell trouble thanks to China’s towering leverage profile: Bank assets in the country reached $52.7 trillion as of Sept. 30, more than double the $22 trillion for U.S. lenders and equivalent to 62% of last year’s worldwide nominal GDP. 

For now, at least, bull market psychology remains firmly entrenched. A survey conducted last week by J Capital Research of 21 apartment owners and a pair of real estate agents across the Middle Kingdom found that, despite price appreciation of as much as 1000% over the last 10 years, only one respondent expressed interest in monetizing his or her property, and that was on account of the country’s onerous social restrictions rather than an assessment of housing market considerations. Indeed, as co-founder Anne Stevenson-Yang writes:

We continue to be surprised that people who earn around $1,200 per month yet own apartments valued at over $1 million do not express interest in taking their earnings and living off the proceeds. Instead, most people say they will stick with what they have unless prices decline, or, if they have the means, buy more.

Buy the dip, with Chinese characteristics? 

Recap Dec. 7

The bulls are back in the saddle, as stocks roared higher by 2% on the S&P 500 to bring the broad average to a hefty 4.2% gain from Friday afternoon’s lows. Treasurys remained under pressure, but with the short end the focus this time, as the two-year yield jumped to 0.69% for its highest close since the onset of the pandemic, while WTI crude logged a post-Thanksgiving high of near $72 a barrel and gold rose slightly to $1,784 an ounce. The VIX fell below 22, continuing its reversal from a close north of 31 just four sessions ago. 

- Philip Grant

Giga Factory
A new day for the gig economy?

A new day for the gig economy?  Uber Technologies, Inc. managed to eke out an $8 million adjusted Ebitda profit in the three months through Sept. 30. While this marks the first quarterly showing of the black by that gussied-up metric in the 12-year history of the company, Uber CFO Nelson Chai declared in a Nov. 25 interview with The Wall Street Journal that other considerations come first. “Our current goal is to continue to improve our adjusted Ebitda, but the real focus point is focusing on the long-term growth.” 

On that score, so far, so good, as gross bookings in the third quarter rose 57% relative to 2020.  Then, too, Chai identified one lever that Uber can pull to maintain top-line momentum as the pandemic recedes and employees return to work. “We think the take rate [i.e., revenue as a percentage of gross bookings] in the U.S. will increase, and it’s largely because we’ll be able to curtail some driver incentives.” 

Raging price pressures put a two-sided squeeze on the gig workers, whom Uber and gig economy peers classify as independent contractors instead of employees in order to avoid paying out health insurance and other benefits. In particular, nationwide gasoline prices in the week through Nov. 29 jumped 59% from a year ago according to data from the Energy Information Administration, a development which “has no doubt exacerbated the driver shortage Uber and [rival] Lyft have been periodically finding themselves in,” Melissa Barry, editor at industry blog The Rideshare Guy, commented to the Financial Times last Thursday.  

Beyond elusive profits, the specter of regulatory crackdowns on the gig model looms large. Today, the U.K. Supreme Court ruled that Uber and peers “will need to amend the basis on which they provide their services,” as the ride share firms “must undertake a contractual obligation to passengers,” thus assuming more direct responsibility for each transaction.  That comes as European-based gig firms like Deliveroo plc and Just Eat Takeaway plc saw shares come under pressure today ahead of Wednesday’s release of a European Commission draft proposal governing the status of food delivery and ride share workers. “The thorny question for whether or not delivery drivers are employees is about to be answered by the EU Commission later this week and reports suggest the answer will be yes,” Danni Hewson, an analyst at investment firm AJ Bell, commented to Reuters today. 

A shift toward stricter labor laws could pose an existential risk for Uber and friends. While the ride-share companies have managed to thrive in a fair weather era of rising asset prices, negligible interest rates and bountiful capital availability, the long-term viability of the gig-economy business model remains decidedly unproven. To wit: Uber, which commands a $75 billion market capitalization compared to $48 billion on the eve of the pandemic, has generated a cumulative $17.7 billion free cash burn and $25.1 billion net income deficit since 2016.  

Perhaps tellingly, other industry players are now testing more conventional employment structures. DoorDash, Inc., the largest food delivery service in the U.S., announced today that it will hire in-house couriers for the first time under a newfangled corporate arm called DashCorps. The employees will earn $15 per hour plus tips to start. “It’s a different type of work than what an independent Dasher does,” explained DoorDash president Christopher Payne. “We do know that there’s a subset of Dashers that want more of the certainty in the schedule of full-time employment, and so we’re offering this job to them. I think it will attract new people to DoorDash.”  

Others view that departure from longstanding norms as instructive, after the company spent $50 million to advance California’s Proposition 22 last year to help maintain the status quo. “It is a major crack in their argument that they can’t classify their workers as employees,” employment rights attorney Shannon Liss-Riordan told the FT.  DoorDash, which sports a $55 billion market cap, up from a $16 billion private market valuation garnered eighteen months ago, has generated a combined negative $283 million in free cash flow and lost a cumulative $1.4 billion since the beginning of 2018. 

Recap Dec. 6

Pronounced bear steepening in the Treasury complex continued the recent spin-cycle price action, as the long bond yield jumped 10 basis points and the two-year rose four basis points to 0.63%, while stocks managed a moderate bounce with the S&P 500 gaining 1.2% to build on Friday’s late rally. WTI crude ripped higher by 5.5% to finish near $70 a barrel, gold ticked lower to $1,780 an ounce and the VIX pulled back to 27, down 11% on the day.

A pair of overseas outliers to those bull-friendly results: Shares in Japan’s SoftBank Group Corp. tumbled by 8% this morning to their lowest level since June 2020, while stricken Chinese developer China Evergrande slumped to a new lifetime low with full-fledged default now seemingly a fait accompli. 

- Philip Grant

Step Brothers
Tether released its latest quarterly attestation today,

Tether released its latest quarterly attestation today, with the controversial stablecoin declaring that the review by auditor Moore Cayman serves to “verify again that all tokens are fully backed by Tether’s reserves.” Those regular attestations were, of course, ordered by the New York State Attorney General as part of a February settlement in which the company paid an $18.5 million fine without admitting or denying wrongdoing, despite A.G. Letitia James conclusion that Tether’s longstanding claims of full dollar backing were “a lie.”

As Tether battles to prove its legitimacy, another prominent fixture in the crypto community faces its own, uh, challenges. Lending platform Celsius Network lost $54 million in a hack of the Badger Decentralized Autonomous Network (DAO) on Wednesday.  Celsius CEO Alex Mashinsky, who declined to comment on the hack, told Cointelegraph last week that he expects his company’s valuation to “double or triple” from the current $3.5 billion in the next year, after Celsius raised $750 million in an upsized series B fundraising round.  A week before that fundraising was complete, the company quietly suspended CFO Yaron Shalem after he was arrested by Israeli police on allegations of fraud and sexual assault. 

The pair are well acquainted: Bloomberg reported on Oct. 7 that Tether has loaned $1 billion to Celsius, with the lending platform paying an interest rate of 5% to 6% on those funds, per Mashinsky. 

Check Engine
Trouble in blank check paradise.

Trouble in blank check paradise. So far this year, 571 special purpose acquisition companies have come public, according to data from SPACinsider.com, raising an aggregate $154 billion. That towers over the full year 2020 total of 248 SPAC IPOs and $83 billion in total proceeds, sums which themselves exceed all SPAC formation prior to the pandemic. 

Yet investors have been left in the cold of late, as the IPOX SPAC Index has lost 7% this week and sits 33% below its mid-February top. Over that near ten-month period, the S&P 500 has gained 15%.  Then, too, the blank check realm has proved fertile ground for bears: an equally-weighted basket of 10 SPAC picks-not-to-click featured in the Dec. 25, 2020 Grant’s Interest Rate Observer analysis “Short this index” has lost 65% since publication time. 

That deal bacchanal and subsequent price hangover has spurred the requisite reflection from industry participants. “There were many companies that have, and I suspect many that will be, taken to the public via a SPAC that are not ready,” investor Betsy Cohen, who has sponsored several such blind pools, told the Financial Times in October.  Recent happenings from a trio of notable names underscore the sector’s woes.

Infamous office space concern WeWork Cos. was back in the spotlight for the wrong reasons this week, disclosing Wednesday afternoon that it would restate its results for all of 2020 and the first three quarters of this year after discovering a material weakness in its financial reporting. The snafu, related to a chunk of shares mistakenly designated as permanent equity when they “carried certain redemption features not solely within the company’s control,” can be attributed to SPAC sponsor BowX Acquisition Corp. and will have no impact on the operating entity, a WeWork spokesperson told the press. Since going public on Oct. 21 at a $9 billion valuation (a fraction of the $47 billion private market valuation garnered in a SoftBank-led 2019 funding round), WeWork has seen its market cap shrink to less than $6 billion. 

Bigger isn’t always better. Shares in Singapore-based lifestyle app Grab made a less-than grand debut on the Nasdaq yesterday, reversing early gains of as much as 20% to finish more than 20% below their debut price. Currently-unprofitable Grab, which is the largest ever company to go public via the SPAC route and which is also backed by SoftBank, snagged a record $4 billion in private investment in public equity (PIPE) financing from sponsors. Despite that poor showing, CEO Anthony Tan looked on the bright side in an interview with the Financial Times: “We got to lock in the valuation early. We got to lock in the best day-one cap table.” 

Other entrants aren’t so fortunate. BuzzFeed is finally entering the public realm, as the digital media firm closed its merger today with blank check firm 890 5th Avenue Partners. Shares will begin trading Monday under the ticker symbol BZFD.  Completing that transaction might prove something of a pyrrhic victory, as investors who had initially allocated $287.5 million to the SPAC largely opted to head for the hills, leaving BuzzFeed with a mere $16 million, or 6% of that sum (shareholders in a blank check firm have the option to redeem their funds if they are dissatisfied with the acquisition target).  

Ongoing labor strife at the 14-year old outfit may have helped spook those investors, as employees at the media group walked off the job earlier this week in a contract dispute. Intangible factors may not have helped either: BuzzFeed’s investor presentation slides featured three misspelled attempts at the word “millennials” on a single page (“millenials”) alongside eight correct spellings of the word describing the key audience demographic. 

On the bright side for beleaguered blank check investors, there should be plenty more opportunities to turn the tide. A hefty 468 existing SPACs are still in search of an operating company to merge with, per SPACinsider.  

Recap Dec. 3

Things were looking no better for the bulls today, as the major indices again nursed major losses with 30 minutes left in the session when your publisher had to leave, including a near 3% dive for the Nasdaq 100. Treasurys saw another round of dramatic curve flattening, with the 10-year yield dropping nine basis points to narrow its premium to the two-year to a 2021 low of just 75 basis points, while WTI crude gave up intraday gains to slump back below $66 a barrel and gold jumped to $1,787 an ounce to edge back into positive territory for the week.  The VIX rose 24% to 34.5, approaching the 2021 peak of 37 logged in January. 

- Philip Grant

Spread 'Em
Junk in the trunk:

Junk in the trunk: The speculative-grade bond market had a month to forget in November, with the ICE BofA U.S. High Yield Index logging a negative 1% total return, approaching its worst monthly showing since the March 2020 wipeout. Option-adjusted spreads on that gauge reached 367 basis points over Treasurys as of yesterday’s close, up from near the tightest on record at 303 basis points as recently as Nov. 8.  

That’s not to say that end times have arrived just yet.  Even after the recent selloff, high yield has delivered a 3.5% total return on the year as measured by Bloomberg, topping the minus 90 basis points logged by investment-grade corporate debt and negative 1.7% from Treasurys. Then, too, the 367 basis point pickup remains well inside the 546 basis point long term average spanning December 1996 through October 2021

Nevertheless, November’s lurch into the red duly put the scare to investors, as domestic high-yield bond funds endured a $4.2 billion outflow for the month according to Refinitiv Lipper, the largest withdrawal since the rates market was roiled back in March.  With similar price action visible across the pond, that sudden spasm of risk aversion is beginning to take a toll. This morning, a banking syndicate abandoned plans to come to market with a £6.4 billion ($8.5 billion) leveraged loan and junk bond offering to finance buyout firm Clayton, Dubilier & Rice’s takeover of U.K.-based Wm Morrison Supermarkets, Bloomberg reports.  Lenders will try again in early 2022 to complete the deal, which would mark the largest in the U.K. since the financial crisis. 

For their part, stateside corporations have made sure to strike while the iron is (was?) hot. Domestic high-yield supply reached $455 billion in the year-to-date through Nov. 22 according to S&P’s LCD unit, already topping the $435 billion full-year mark established in 2020.  For context, new supply averaged $215 billion over the five years through 2019, while the peak of the prior cycle in 2007 saw $150 billion in issuance.  With raging inflationary pressures spurring a hawkish pivot from the monetary mandarins, that sales barrage could prove well timed from the issuers’ perspective. “There is some concern that new issue supply overshot demand, particularly in the face of a less accommodative Fed,” Ryan O’Malley, fixed income portfolio strategist at Sage Advisory Services, tells Reuters. 

The question of whether high-yield investors are being adequately compensated for their risks is a fair one, as option-adjusted spreads remain well below their 541 basis point perch seen in September 2020. Empirical evidence suggests that favorable financial winds explained nearly all those gains.  Analyzing the factors behind a 226 basis point OAS tightening in the ICE BofA U.S. High Yield Index over the 13 months through Oct. 31, Marty Fridson, chief investment officer of Lehmann Livian Fridson Advisors LLC, determined in a Nov. 23 commentary that fundamental improvements within the index composition (i.e. a slightly lower share of extremely speculative triple-C-rated issues within the high yield universe) drove a mere 1.5 basis points of that spread compression.  Richer valuations, in turn with free-and-easy credit conditions, accounted for the rest. 

To that end, one key data point suggests the peak of the party may have come and gone.  According to the Federal Reserve’s latest Senior Loan Officer Opinion Survey, a net 18% of respondent banks reported increasing the availability of credit for commercial and industrial loans for middle- and large-market firms in the October quarter.

While that’s among the easier readings in the 31-year history of the data series, its far below the net 32% of officers who reported easing credit in the July survey, which stands as easily the highest such reading on record.  Then, too, that 14 percentage point thinning of the ranks of those easing credit standards is among the largest three-month changes since the financial crisis, topped only during last year’s pandemic and the brief bear market seen in the fourth quarter of 2018.


Nowhere to go but up?

QE Progress Report
A $41 billion sequential decline in Reserve Bank Credit left the Fed’s portfolio of interest-bearing assets at $8.61 trillion.  That’s up 20% year-over-year, and 115% from the late fall of 2019. 
Recap Dec. 2

Stocks enjoyed a solid rebound with the S&P 500 rising 1.4%, though the Nasdaq 100 managed only half of those gains. Treasurys sold off in bear-flattening fashion, with the two-year yield rising six basis points to 0.61% while the long bond edged to 1.76%, two basis points higher on the day, gold logged a near one-month low at $1,769 an ounce and WTI crude bounced back above $67 a barrel.  The VIX slipped to 28, on a relatively modest 10% pullback after surging by 61% over the prior five sessions. 

- Philip Grant

Fun Dip
Red means go:

Red means go: Individual investors bought a net $2.2 billion worth of equities into yesterday’s market rout per Vanda Research, the largest one-day shopping spree on record. That eclipses the prior record of $2.04 billion net purchases set during last Friday’s abbreviated post-Thanksgiving session, when stocks similarly came under heavy pressure. In both instances, the dip-buyers were promptly rewarded, as the S&P 500 enjoyed a 1.3% bounce on Monday and temporarily rebounded by as much as 1.9% this morning (the afternoon was a different story). 

Yet with internal strength in the lynchpin Nasdaq Composite Index waning, recent history suggests that those hordes of bargain shoppers would be wise not to overstay their welcome.  Charles Schwab chief investment strategist Liz Ann Sonders relays that 17% of the index logged a 52-week low yesterday, while just one-third of Nasdaq components finished Tuesday’s session above their respective 200-day moving average. The last two times that pair of indicators each traversed those levels, in October 2018 and February 2020, a bear rampage soon followed. 

Make My Day
“NFT” is the word of the year for 2021, Collins Dictionary announced on Monday.

“NFT” is the word of the year for 2021, Collins Dictionary announced on Monday. That term, an acronym for non-fungible tokens, burst into popular consciousness in March when artist Beeple managed to sell one of his digital wares for a cool $69 million, the third-largest price ever commanded by a living artist.  

Total NFT trading volume footed to $5.9 billion in the fiscal third quarter, the Financial Times notes today, citing data service NonFungible. That’s a six-fold jump from the three months through June.  Yet despite that explosion in activity, the roster of those transacting in the digital designs remains relatively narrow, as the community of NFT buyers and sellers stands at fewer than one million users worldwide, NonFungible estimates.  

A research analysis from Scientific Reports documents the extent to which a few large players dominate the still nascent market.  The Oct. 22 paper, which studied the some six million NFT transactions spanning June 2017 to April 2021, found that the top 10% of traders accounted for 85% of transactions and traded 97% of NFT assets at least one time.  What’s more, the top 10% of buyer and seller pairs performed the same number of total transactions as the other 90% of participants.  

With oversight in this corner of the financial Wild West at a minimum, the temptation for certain insiders to capitalize on their advantageous position can be too much to resist. Back in September, the head of product at NFT platform OpenSea resigned after admitting that he improperly traded the digital keepsakes using insider information.  The executive had accumulated several prominent NFTs before flipping them shortly after a general release to the public.

Then, too, that concentration of activity in a select few hands informs broader concerns regarding digital assets, as the crypto market has enjoyed a near five-fold increase in the past year to a $2.67 trillion aggregate market capitalization. 

As Twitter user @zachxbt documented on Monday, screenshots of a marketing slide deck from crypto market maker Darkpool Ventures included some eye-catching service offerings.  Namely, the firm asserted that it could “place, cancel and modify multiple orders each minute, giving the appearance of a thriving market.” That practice, typically called spoofing, is illegal on traditional stock exchanges. The slide deck also highlighted the firm’s ability to “increase the price and walk up support levels,” suggesting outright price manipulation. Last but not least, the deck boasted about Darkpool’s capability to “help increase the volume on your trading pairs to gain more visibility.” That practice of generating synthetic volume to generate interest in an asset, otherwise known as wash trading, is illegal in the United States under the Commodity Exchange Act of 1936. 

In response to this unwanted attention, Darkpool contended via Twitter that those slides were 18 months old and that the crypto market maker had erased those claims from a subsequent deck. That’s despite the “old” marketing materials making numerous references to projects that began in the current calendar year. Asked by ADG for comment, Darkpool remained mum as of press time.  

Recap Dec. 1

Bulls, avert your eyes.  Stocks suffered a precarious intraday tumble, with the S&P 500 losing its near 2% early advance and finishing lower by 1.3% for its worst two-day showing since October of last year, though the broad index remains higher by 20% year-to-date with the Nasdaq 100 holding 23% gains. Treasurys were bid in relative lockstep after yesterday’s pronounced curve tightening with the long bond dipping to 1.76% for its lowest since Jan. 5, WTI crude slipped to $65 a barrel to continue its rapid descent and gold edged higher to $1,782 an ounce.  The VIX rose to 31.5, its most elevated close since late January, bringing its cumulative five-day advance to 61%. 

- Philip Grant

Internal Combustion

From the New York Post:

A man with a Tesla face tattoo has been busted on a DUI charge after he crashed and rolled the 30-year-old minivan he was driving.

Give that man a Model 3

Debutante Ball
Some float while others sink.

Some float while others sink.  Nearly half of the 43 worldwide initial public offerings that raised at least $1 billion this year now trade below their issuance price, the Financial Times relays, citing data from Dealogic. That 49% share of so-called busted IPOs compares to 27% throughout last year and 33% across 2019.  Overall, new issues have not been the place to be in 2021: The Renaissance Capital IPO ETF (IPO on the NYSE), which tracks a market-cap weighted basket of newly public companies, has declined by 2% so far this year, badly lagging the 24% advance for the S&P 500. 

That’s not to say there are no winners to be had, as evidenced by the recent blockbuster debut of Rivian Automotive, Inc.  (RIVN on the Nasdaq). The electric truck upstart, which debuted three weeks ago after raising a hefty $12 billion to mark the largest IPO of the year thus far, saw shares accelerate higher by a cool 120% in its first five days as a public company.  Following a subsequent 32% pullback, Rivian (which has delivered only 156 vehicles in its 12-year history through October) maintains a $104 billion market cap, compared to $77 billion and $85 billion, respectively, for established rivals Ford and General Motors. 

Thanks to home runs like Rivian, a lackluster aggregate performance from the 2021 vintage has done little to dent ravenous investor appetite for new issues.  Global IPO volumes topped $600 billion in the year-to-date through Nov. 20 according to data from Bloomberg, blowing past the previous high water mark of just over $400 billion established in full-year 2007.  Then, too, the total exit value of U.S. public market listings (a category which includes blank check firms and direct listings along with conventional IPOs) has crossed the $1 trillion threshold for the first time according to Pitchbook.  That’s more than double the supply seen across 2020. 

That barrage of new entrants has helped reverse a decades-long trend. The roster of publicly traded companies in the U.S. snapped back above 4,000 this year for the first time since the financial crisis, per the Center for Research in Security Prices.  That figure, which plateaued near 3,500 in the lead-up to the pandemic, stood at more than 7,000 at the late 1990’s peak. A change in tack from a key Wall Street contingent may help explain the shift. “For a period of time, private equity and venture capital cannibalized the IPO market,” Eddie Molloy, co-head of equity capital markets in the Americas at Morgan Stanley, observed to The Wall Street Journal on Nov. 19. Conversely, those industries are “now driving the IPO market.” 

There may be more where that came from, if the grand bull run which has lifted valuations of public and private enterprises alike to lofty heights lives on. The global count of so-called unicorns, or privately-held businesses garnering a valuation of at least $1 billion, currently stands at 917, according to data from CB Insights, nearly double the pre-pandemic roster of 491 and more than triple the 269 seen at year-end 2017.  

“Many of the unicorns today are actually disrupting the world and deserve their valuations,” Dipanjan Deb, CEO of tech-focused buyout firm Francisco Partners, told CNBC earlier this month. “But probably 70% to 80% of them will have some sort of day of reckoning. They’re not all going to disrupt the world, and people are conflating growth and quality in the late stages of a bull market.” 

Indeed, one simple and intuitive indicator suggests a skeptical stance would be called for. Nearly 60% of this year’s IPO class sports negative trailing 12-month Ebitda, strategists at Bank of America relay. That figure, which excludes special purpose acquisition companies, towers over the roughly 45% share of unprofitable debuts at the peak of the first tech bubble and is double that seen in the 2007 vintage.  

Place your bets. 

Recap Nov. 30

Un-bullish price action predominated following Fed chair Powell hawkish pivot in Congressional testimony today, as stocks sank to the tune of 1.9% on the S&P 500 to continue the recent spasm of volatility while the VIX rose 19% to finish at 27, near the peak of Friday’s abbreviated session.  The Treasury curve collapsed with the two-year yield jumping seven basis points to 0.56% and the long bond diving six basis points to 1.79%, WTI crude sank to $67 a barrel to extend its five session decline to 15% and even gold failed to catch a bid, slipping to $1,771 an ounce. 

- Philip Grant

Suspension of Disbelief
The unwelcome arrival of the Omicron variant roiled

The unwelcome arrival of the Omicron variant roiled benchmark asset prices on Friday, with the S&P 500 tumbling 2.3% for its worst showing since February while the CBOE Volatility Index erupted higher by 54% to mark a nine-month high.  

That’s not to say that animal spirits went into hibernation following that spasm of risk aversion.  Citing data from Crypto.com, CoinDesk relays that OMIC, the featured coin of a decentralized cryptocurrency protocol that shares a name with the mutated coronavirus strain, enjoyed a 10-fold rally over the 48 hours through Sunday, temporarily vaulting its market value past $400 million. 

Needless to say, a gangbusters bull market has set the stage for such whimsical price action: the crypto complex now commands a $2.56 trillion aggregate market cap, off about 12% from its early November peak but up some 350% from a year ago.  That 12-month move is just the beginning, some believe.  

This morning, business software provider-turned-bitcoin speculation vehicle MicroStrategy, Inc. (MSTR on the Nasdaq) disclosed in a filing with the Securities and Exchange Commission that it snapped up 7,002 bitcoins over the last two months for $414.4 million in cash, bringing its total hodlings to 121,044 bitcoins for an aggregate cost of $3.57 billion. That cache is now worth about $7.1 billion based on current prices.  

MicroStrategy CEO Michael Saylor recently telegraphed that announcement, telling CNBC on Nov. 20 that “we are going to keep stacking [bitcoin] forever.”  As for the digital ducat’s ultimate prospects, Saylor provided a glimpse into his crystal ball: “At the end of the decade it will have flipped gold, and then it will flip monetary indexes, a little bit of bonds, a little bit of real estate, a little bit of equity, and emerge as a $100 trillion asset class. So, 100 times where it is right now.”  For context, global nominal GDP will foot to about $93 trillion this year according to Statista, while U.S. household net worth reached $142 trillion as of June 30 per the Federal Reserve. 

That optimism has served Saylor’s vessel well thus far, as MSTR now enjoys a $7.2 billion market cap after today’s 5% rise, up five-fold from year-end 2019. The company has financed that shopping spree through successively higher rungs in its capital structure, issuing a combined $1.7 billion in convertible bonds in December 2020 and February followed by a June offering of $500 million in senior secured 6 1/8% notes due in 2028.  Those maneuvers have yielded an encumbered balance sheet: B3/triple-C-plus-rated MicroStrategy now totes $2.2 billion in net debt, equivalent to just under 20 times consensus 2022 Ebitda. 

Meanwhile, the torrents of capital pouring into the crypto realm can leave investors exposed to nasty surprises. Last week, crypto lending firm Celsius Network upped its planned $400 million series B fundraising round to $750 million thanks to intense demand (Celsius Network, the crypto upstart, is distinct from Celsius Holdings, Inc., the energy drink maker). Now valued at $3.5 billion, Celsius is bound for bigger and better things, as CEO Alex Mashinsky told Cointelegraph Thursday that he expects his company’s valuation to “double or triple” in the next year. 

Subsequent revelations may complicate those plans. Digital media site Blockworks reports today that Celsius suspended Chief Financial Officer Yaron Shalem on Nov. 18, or about a week before that reopened fundraising round closed, in response to allegations of fraud and sexual assault.  Shalem, who manned the CFO post at Israeli venture capital firm Singulariteam Ltd. prior to his stint at Celsius, was one of eight individuals reportedly arrested by Israeli police earlier this month on suspicion of cryptocurrency fraud “involving hundreds of millions of shekels” (the shekel to dollar exchange rate is roughly three to one) and using those funds for illicit purposes. 

Asked for comment by Blockworks, Mashinsky replied that “We worked with [Shalem] for eight months, but we are going to let the courts decide and dig into it. . . Celsius was not involved or part of it, and we conducted a background check and everything else, and it all came clean, so there was no reason for us to suspect any criminal or pending matters as of eight months ago. We conducted an internal audit review, so nothing is missing and there’s nothing abnormal inside of Celsius, but he is suspended.”

Recap Nov. 29

What selloff?  Stocks powered higher to start the week with the S&P 500 and Nasdaq 100 rising by 1.3% and 1.9%, respectively, while Treasurys sold off in bear steepening formation with the long bond settling at 1.86%.  WTI crude managed only a feeble 2% bounce to $70 a barrel after enduring a 15% wipeout on Friday, gold held at $1,781 an ounce and the VIX pulled back to 23, off 20% on the day. 

- Philip Grant

Coming and Going
Wall Street investment banks scored $320 million in fees from

Wall Street investment banks scored $320 million in fees from AT&T’s spinoff of its WarnerMedia unit and subsequent merger with Discovery Communications, the Financial Times reports today. Telephone, which forked over $85 billion for TimeWarner three years ago, said it received $43 billion in cash and other considerations and will own 71% of the new entity upon the deal’s projected close early next year. 

That 2018 transaction proved ill-fated for AT&T shareholders and management, as the stock has since returned negative 5%, inclusive of dividends, compared to a positive 78% return for the S&P 500. The bankers made out all right, clearing $234 million in fees for that deal per Refinitiv. 

Pay to Wait
Nearly 40 high-grade corporate borrowers raised a hefty $56 billion last week, blowing past

Nearly 40 high-grade corporate borrowers raised a hefty $56 billion last week, blowing past the $35 billion dealer estimates tabulated by Bloomberg as issuers rushed to complete deals ahead of the upcoming holidays. Total supply has footed to $104 billion so far in November, topping the $100 billion full-month consensus and 10% above the November average across 2018 through 2020.  

“It’s a printing press right now,” Wendy Wyatt, portfolio manager at DuPont Capital Management, told MarketWatch. Borrowers are “getting cheaper financing than they’ve [ever seen] as a company.”  Year-to-date supply now comes to nearly $1.4 trillion, which would stand as a full-year record barring last year’s virus-spurred $1.85 trillion borrowing binge. 

Wide open capital markets, in tandem with a robust earnings recovery (S&P 500 companies managed 40% earnings growth in the third quarter from 2020 per FactSet) have helped facilitate corporate America’s prompt balance sheet recovery following last year’s short but nasty recession. 

Gross leverage across the high-grade bond market will fall to 2.25 times Ebitda next year according to Bank of America, if Wall Street earnings estimates are on point, which would be the lowest level since 2015.  By the same token, projected net leverage of less than 1.9 times trailing Ebitda would be in line with the 2016 to 2018 level, as well as that seen in the late 1990s. That’s despite a changing index composition that would seemingly serve to push those figures higher over time: Triple-B-rated bonds, or the last full stop before speculative grade, now comprise half of the Bloomberg U.S. Corporate Index, compared to 35% in 2006 and 25% in 1990.  

Rather than overextended balance sheets, growing price sensitivity to changes in interest rates stands as a more pressing concern for corporate creditors.  Measured duration now stands at a near-record high of 8.6 years, Bloomberg noted last week, up from just over 7 years in mid-2019 and just over 6 years in 2007. 

With inflation on the boil and the market rushing to recalibrate its expectations of tighter monetary policy to come, that rush to long-dated, interest-rate sensitive debt could prove prescient for borrowers and less-than-pleasant for those at the other end of the table. A report from Fitch Ratings released last Thursday put it this way:

The potential ‘bond bubble’ is vastly more sensitive to interest rate risk than credit risk for investment-grade U.S. corporate bonds. Fitch Ratings’ analysis of a stylized triple-B-rated U.S. corporate bond illustrates that even a relatively moderate interest rate increase could result in market-value losses far exceeding credit losses in even a severe default scenario. 

Fitch calculates that a 50 basis point rise in the 10-year Treasury yield, which would take us back to June 2019 levels, would equate to a 4% market value loss for a representative triple-B-rated issue. For context, the annual investment grade default rate would need to reach 6.67%, or eight times what Fitch considers a worst-case scenario, to generate the same level of losses.  

Potential spillover effects could lead a rates-driven accident to snowball, Fitch believes:

A vicious cycle of increasing market volatility and decreasing liquidity may lead investors to de-risk and rotate strategies, pressuring market prices further. Liquidity demands from redemptions, cashflow mismatches, increased collateral requirements and capital calls could inflate liquidation of positions.

The financial system’s rising interconnectedness could exacerbate knock-on effects. Market expectations that the U.S. Federal Reserve act as the backstop for market liquidity has underpinned investor confidence and increased risk taking. This makes investors’ response to market volatility more unpredictable [and] potentially beyond the Fed’s ability to stabilize. 

While the risks of an apocryphal, cascading market selloff could well turn out to be overblown, the here and now looks daunting enough for investors in the $6.6 trillion corner of the bond market. To wit: with measured inflation running at its highest level in three decades with a 6.2% annual leap in headline CPI, the ICE BofA US Corporate Index Effective Yield stands at 2.34%, below its five-year average of just over 3%. 

Recap Nov. 23

Stocks managed to recoup some early losses, with the S&P 500 eking out a small gain and the Nasdaq 100 closing within 50 basis points of unchanged following a 1.6% intraday decline, though rates remained under pressure with the 10- and 30-year yields rising to 1.68% and 2.03%, respectively.  Gold logged a three-week low at $1,790 an ounce, WTI crude responded to the Biden administration’s announced release of 50 million barrels from the Strategic Petroleum Reserve with a 3% rally to $79 a barrel and the VIX logged its fifth straight green finish with a close near 19.5.

- Philip Grant

Second Opinion
Bain Capital and Hellman & Friedman are closing in on a deal to buy healthcare software firm Athenahealth, Inc. for $17 billion including debt, The Wall Street Journal reports.  The secondary buyout transaction, in which a private equity firm or consortium buys an already p.e.-owned asset, would spell a nice payday for Athenahealth’s existing owners. Just three years ago, Veritas Capital and Elliott Management’s Evergreen Coast Capital struck a deal to take the company private in a $5.47 billion deal. 
Mission Impossible Two
White smoke was visible from the Eccles Building in Washington, D.C. this morning,

White smoke was visible from the Eccles Building in Washington, D.C. this morning, as President Biden renominated Jerome Powell for a second four-year term as Federal Reserve chair.  Fed governor Lael Brainard, a rival for the top post, will be tapped for vice chair, replacing Richard Clarida. 

Powell, who was appointed by then-President Trump after stints on the Fed Board of Governors and as undersecretary of the Treasury for domestic finance, should have a smooth path to confirmation, while Brainard would have faced stiff resistance from Republican lawmakers.  “I’m confident that chair Powell and Dr. Brainard’s focus on keeping inflation low, prices stable and delivering full employment will make our economy stronger than ever before,” Biden said. 

With that personnel reshuffle in the rear-view, a hawkish pivot takes center stage ahead of the Federal Open Market Committee’s final rate decision of the year on December 15. Fed governor Christopher Waller argued in a speech Friday that “the rapid improvement in the labor market and the deteriorating inflation data have pushed me towards favoring a faster pace of tapering and a more rapid removal of accommodation in 2022.” Colleague James Bullard (currently a non-voting member of the FOMC) struck a similar tone last week, opining that “I think it behooves the committee to go in a more hawkish direction in the next couple of meetings, so we are managing the risk of inflation appropriately.” Outgoing vice chair Clarida added Friday that the committee may be well served to debate speeding up the currently-planned $15 billion per month taper regime to its asset purchase program at the upcoming meeting.  

That’s a contrast to the tone at the top, as Powell declared last month that “we can be patient” in raising rates in order to “allow the labor market to heal,” as total non-farm payrolls remain 3.9 million below their pre-pandemic peak.  That view has the backing of the political class. “The president wanted to appoint someone who would focus on getting the economy back to full employment,” Heather Boushey, a member of the White House Council of Economic Advisors, declared on Bloomberg Television this afternoon.

But as the monetary mandarins debate their next move, might markets make the decision for them?  Bianco Research president and eponym Jim Bianco relays that interest rate derivatives are currently pricing in three rate hikes by the end of 2022, including 47% odds of a tightening move in May. That positioning reflects skepticism of the timeline laid out by Powell, who has long contended that rate hikes should commence after balance sheet tapering, a program which is currently scheduled to run through mid-June. 

The Treasury market was similarly roiled by today’s largely status-quo event, as the two- and five-year yields each jumped to their highest levels of the year at 0.59% and 1.32%, respectively, with notably soft auctions in each tranche underscoring the shifting sentiment.  Not only is the bond market anticipating a faster pace of tightening, but also that such a move may serve to hamper economic growth. The spread between the five- and 30-year Treasury yields reached 65 basis points today, its narrowest since the onset of the Covid crisis in March 2020. 

What might a swifter-than-expected cessation of near-zero rates and Fed asset purchases mean for asset prices?  Nothing too good, strategists at Bank of America reckon. Michael Hartnett writes today that a “rates shock” could be in the cards next year, in the same way that an “inflation shock” characterized 2021 and a “growth shock” shaped 2020.  While long positions in the dollar and commodities can help navigate the upcoming regime change, the “bearish” Hartnett “believes that capital preservation will grow as a theme in the year ahead.” Risk assets, particularly those predicated on ultra-low rates persisting into the future, are particularly vulnerable. “The mother of all bubbles in crypto and tech remains a ‘fat tail,’” he warns.

Since Powell ascended to the top spot in 2018, the S&P 500 has advanced by 70%, Bloomberg relays, marking the best showing under any Fed chair since the Greenspan era.  The sequel is rarely as good as the original, though. 

Recap Nov. 22

Stocks came for sale late in the session, with the S&P 500 sinking 1% in the last 45 minutes to finish moderately lower while the Nasdaq 100 retreated by 1.2% on the day, while Treasurys were hammered across the curve as the 10- and 30-year yields rose to 1.63% and 1.97%, respectively.  Gold logged its lowest finish since Nov. 4 at $1,805 an ounce, WTI crude held near $76 a barrel and the VIX popped to a six-week high at 19.25. 

- Philip Grant

Santa's Got a Brand New Bag
Pony up, John Q. Public:

Pony up, John Q. Public:  With the Black Friday shopping bacchanal set for a week from today, retailers are paring back their customary price concessions. Citing online pricing data from software firm Adobe, Bloomberg Businessweek relays that electronics have averaged an 8.7% discount from list prices this fall, compared to 13.2% over the same period last year, while sporting goods have been marked down by just 2.8% compared to 11.2% in 2020.  

Overall, Adobe forecasts that shoppers will pay 9% more on average than last year for their wares during so-called Cyber Week, the online shopping extravaganza that follows Thanksgiving weekend. That firmer pricing comes as big-box retailers began advertising Black Friday deals in early October, well before the traditional start of holiday shopping season in mid-November.

Discounts or not, shoppers may be wise to get started sooner than later, considering the fragile state of global supply chains. Per Adobe, would-be customers in the U.S. viewed a total of 2 billion out-of-stock messages online in October. That’s up 33% from a year ago and 300% above the same period in 2019.  

Crowd Surfing
A gaggle of crypto enthusiasts came up short in their attempts to

A gaggle of crypto enthusiasts came up short in their attempts to procure a prized copy of the U.S. Constitution yesterday, as Sotheby’s awarded the first-edition document to Citadel CEO Ken Griffin at a $43.2 million auction price, inclusive of fees.  Sotheby’s had attached a $15 million to $20 million estimate to the copy prior to the auction. 

The ConstitutionDAO, or decentralized autonomous organization, declared that it “broke records for the most money crowdfunded in less than 72 hours.” The cadre, which consisted of 17,437 donors chipping in a median sum of $206.26 according to the organizers, managed to raise about $47 million for the document using the power of social media, along with a shared bank account on the ethereum network.  

Nevertheless, the group was unable to mount a successful bid despite raising more than the winning figure, as auction fees and additional costs needed to “insure, store, and transport the document” would have exceeded the capital on hand.  ConstitutionDAO will refund contributors their full sum, less network fees, the organizers said.

Ironically, the crypto collective’s transparency may have served to hinder its goals, as rival bidders were able to surmise DAO’s buying power by the sum of donations received without revealing their own financial wherewithal.  The consortium did stop disclosing the size of its war-chest, but fundraising platform Juicebox continued to tally and display the information in real time. 

Then, too, the speculative and highly-volatile nature of the underlying crypto assets further complicated ConstitutionDAO’s effort.  Over the seven-day period in which fundraising for the project took place, the price of ethereum slumped by nearly 20%. 

As a fallback option, the thwarted bidders can always contact this guy: 

Ken Griffin Doppelganger? 

Marginal Buyer
Everybody into the pool!

Everybody into the pool!  Domestic margin debt rose to a record $936 billion last month, the Financial Industry Regulatory Authority finds.  That’s up by 42% from a year ago and 61% above the October average across 2018 and 2019.  As punters load up in anticipation of further good times, cash stockpiles dwindle accordingly. Jason Goepfert, chief research officer at SentimentTrader, relays that margin debt exceeds brokerage house cash available for withdrawal by $500 billion, the largest sum on record. 

To date, that aggressive stance has of course been amply rewarded, as stocks remain at their highs with the S&P 500 up 26% so far this year and 116% from its blow-off lows in March 2020.  Equity holdings accounted for roughly half of the $109 trillion in household financial assets as of June 30, analysts at Bank of America found last month, marking the highest share in 70 years.  That metric stood at 44.5% in 2000 and has averaged just under 30% going back to 1950. 

The professionals are likewise in it to win it. The Bank of America Global Fund Manager Survey for November reported the largest overweight position in U.S. equities since August 2013, with 65% of respondents expecting boom-time economic conditions and 61% convinced that the current inflation spike will indeed prove transitory. 

Recap Nov. 19

Treasurys caught a strong bull-flattening rally, with the 10-year yield declining to 1.54% and the long bond to 1.91% while the two-year held at 51 basis points, as stocks were a mixed picture with the S&P 500 edging slightly lower and the tech-heavy Nasdaq 100 notching a 40 basis point advance.  WTI crude sank to $76 a barrel, finishing the week with a 6% loss and its weakest close since Oct. 1, gold pulled back to $1,849 an ounce and the VIX rose 2% to near 18. 

- Philip Grant

Erdo' Scissorhands
The Central Bank of the Republic of Turkey trimmed its benchmark interest rate to 15%

The Central Bank of the Republic of Turkey trimmed its benchmark interest rate to 15% from 16% today, continuing its easing cycle from a 19% one-week repo rate as recently as three months ago.  The only problem:  Measured inflation rose at a 19.9% annual clip in October, the 11th sequential acceleration in the past year.  As for the wisdom of that response, investors continue to vote with their feet.  The Turkish lira declined to 10.9 per dollar, extending its year-to-date decline to 32% to mark the worst showing of any currency tracked by Bloomberg.  “It’s just crazy. There’s zero justification for this move as there’s been zero justification for the rate cuts we’ve seen this year,” Timothy Ash, emerging market strategist at BlueBay Asset Management, marveled to The Wall Street Journal

Credit (or blame) for that counterintuitive strategy can be laid at the feet of President Recep Tayyip Erdogan, who has run through four CBRT governors since 2019 in the search for one suitably dovish. “I cannot be on the same path with those who defend interest,” the strongman stated in a parliament address yesterday. “We will lift the interest rate burden from citizens,” he added.  Other burdens take their place. Erdogan has overseen a 74% lira devaluation against the greenback since mid-2016, when he tightened his grip on power following a failed coup d’état that summer.  Turkish five-year sovereign credit default swaps rose to 450 basis points today, up from 280 basis points in February and 150 basis points in early 2018. 

A silver lining: the growing prospect of a currency crisis could help spur political change in the Bosporus. The President’s approval rating sank to 38.9% in October according to MetroPoll.  That’s down from 42.4% just a month earlier and 52% in fall 2020.  

Pressing their advantage, opposition leaders Kemal Kiliçdaroglu of the CHP Party and Meral Aksener of the IYI party yesterday called for an expedited general election, currently scheduled for 2023. “We are making a clear call: You cannot run the country. Go to elections as soon as possible,” Kiliçdaroglu said in the joint press conference. “Normally, the Central Bank should deal with price stability. . . [instead] it is an institution that looks at the depreciation of the Turkish Lira and the increase in the foreign exchange as a spectator,” Aksener added.

Captain of Industry
Stairs down, elevator up?

Stairs down, elevator up?  German industrial conglomerate ThyssenKrupp A.G. (TKA on the Frankfurt exchange) will proceed with an IPO of its Uhde Chlorine Engineers unit, a world leader in the construction of renewable hydrogen gas plants, Bloomberg reports. With green energy the apple of Mr. Market’s eye, the time for a floatation appears ripe: Uhde Chlorine could fetch a €5 billion ($5.7 billion) valuation, Bloomberg relays. That’s nearly double the €2.8 billion value that analysts at Credit Suisse attributed to the division in June.  For context, ThyssenKrupp, which currently owns two-thirds of Uhde Chlorine and will seek to maintain majority control in the business, currently commands a market cap of just €6.7 billion. 

Beyond capitalizing on friendly market conditions, that prospective deal underscores ThyssenKrupp’s restructuring efforts, as the firm last year sold its elevator division to private equity buyers for €17.2 billion, followed by disposals of mining and infrastructure units this past summer. CEO Martina Merz, who took over the top spot in fall 2019, has overseen an impressive turnaround in her two-plus-year stint, streamlining a labyrinthine corporate structure and nursing a sickly income statement back to health. Today, the company projected operating income of €1.5 billion to €1.8 billion for the year ending Sept. 30, 2022, with free cash flow at roughly break-even without accounting for M&A activity. For context, earnings before interest and taxes footed to €796 million over the year ended Sept. 30, while free cash flow has been stuck in negative territory for the past five fiscal years.  “After a good two years of intensive transformation work, we can now say that the turnaround is evident,” Merz declared in today’s press release. “ThyssenKrupp is going in the right direction.” 

The market may finally be coming around to that view, as TKA has advanced by 21% this week and 33% year-to-date, though it remains 28% below its five-year average price and 77% south of its 2008 peak, when a series of poorly-timed corporate transactions went on to haunt the company and its investors. A bullish analysis of ThyssenKrupp in the June 11 edition of Grant’s Interest Rate Observer determined that “the stock trades at a commandingly cheap valuation and that management may finally be taking the steps required to set things right.” 

As for the investment public, plenty of room remains on the ThyssenKrupp bandwagon. Steven Grey, eponymous CEO of Grey Value Management, tells Almost Daily Grant’s via email that the company’s gradual turnaround has been accompanied by persistent pessimism, helping present a potentially compelling opportunity today: 

I've never seen a situation where negative sentiment was so entrenched.  Over and over, you saw developments that could only be taken as positive, and the stock would immediately go down.  It was uncanny.  If they'd announced they had found a massive diamond deposit under their headquarters, Wall Street would immediately lament the potential damage to the landscaping. 

QE Progress Report
Reserve Bank Credit rose by a hefty $68 billion from a week ago, pushing interest-bearing assets at the Fed to $8.63 trillion.  That’s up 20% year-over-year and 117% from November 2019. 
Recap Nov. 18

Stocks edged higher in quiet trading, with the S&P 500 advancing by 50 basis points for the week thus far to the cusp of new highs, while Treasurys finished little changed with the 10-year yield holding at 1.58%.  Gold pulled back to $1,862 an ounce, WTI crude bounced to near $79 a barrel and the VIX edged higher towards 18. 

- Philip Grant

Corner Case
Paging Alan Greenspan:

Paging Alan Greenspan:  In its latest financial stability review released today, the European Central Bank determined that “signs of exuberance are increasingly visible in some financial market segments, as real yields fall and the search for yield continues.”  Record levels of global junk bond issuance and ultra-tight spreads, in tandem with “overvaluation concerns” stemming from “buoyant financial asset prices,” leave bonds and stocks “vulnerable to adverse interest rate and growth shocks,” the semiannual report concludes.  In addition, the fastest growth in euro-area house prices in 16 years and accompanying “deterioration in [mortgage] lending standards” leave housing markets similarly “prone to a correction.”

As in the United States, roaring price pressures at the checkout counter now accompany financial asset inflation. Euro area CPI rose 4.1% from a year ago in October, matching the hottest reading since the ECB's founding in 1998 and marking the seventh sequential increase in the last eight months.  While that benchmark gauge now sits at more than double the 2% per annum target, the seers on the ECB Governing Council evince little concern that the phenomenon will persist once the calendar flips, suggesting no need to tighten monetary policy from the current minus 50 basis point benchmark deposit rate. 

Speaking on a television interview earlier today, ECB vice president Luis de Guindos provided a glance into his crystal ball: “The reality check is going to be the evolution of inflation next year. . . if you look at the drivers, the transitory nature of these drivers of inflation are quite clear and are going to become tangible and evident next year.” De Guindos did allow that “the decline and the intensity of the slowdown in inflation will not be as intense and as rapid as we projected only some months ago.”  Colleague Isabel Schnabel struck a similar tone in a speech today, declaring that “the conditions for raising interest rates, as set out in our forward guidance, are very unlikely to be met next year.” 

That view is shared by their boss, Christine Lagarde, who told European Parliament on Monday that “as the recovery continues and supply bottlenecks unwind, we can expect the price pressure on goods and services to normalize.” The ECB President argued that “if we were to have any kind of tightening approach to the current situation, it would actually do more harm than good. It would begin having an impact at a time when inflation is actually returning to lower levels.”  

The head of Germany’s largest financial institution by assets begs to differ.  Speaking at a Frankfurt conference on Monday, Deutsche Bank CEO Christian Sewing put it this way: “the supposed cure-all of the past year – low inflation with seemingly stable prices – has lost its effect, [and] now we are struggling with the side effects. . . The consequences of this ultra-loose monetary policy will become increasingly difficult to fix the longer central banks fail to take countermeasures.”  

Sewing may have a point. German inflation jumped 4.5% from a year ago in October, triple its 20-year average. At the same time, the ECB’s seven-year experiment with administered sub-zero rates has done the European banking system few favors.  The Stoxx 600 Banks Index trades at just 0.69 times book value and is projected to generate an 8.1% return on equity this year, far below the 1.4 times book value and prospective 12.4% RoE for the U.S. KBW Bank Index. 

While the monetary mandarins convey bountiful self-assurance regarding the future path of prices, the debt-soaked global economy may leave little room for policy maneuvers beyond jawboning inflation expectations.  Euro area government debt now stands at nearly 100% of GDP, today’s ECB financial stability review finds, up from 85% before the pandemic. At the same time, household debt registered its fastest annual growth rate in a decade, reaching 98% of output as of June 30 compared to 94% in 2019. More broadly, the Institute of International Finance relays today that global debt remained at a record high of $296 trillion in the third quarter, equivalent to 350% of worldwide GDP. While off from a peak of 362% debt-to-output peak as of March 31, today’s figures remain far above the $250 trillion debt stack and 230% global debt-to-GDP ratio on the eve of the pandemic. 

Who said hope isn’t a strategy? 

Recap Nov. 17

Treasurys enjoyed a bull flattening rally after back-to-back selloffs to start the week, with the 2-year yield dipping to 49 basis points and the long bond to 1.97%, while stocks came under modest pressure with the S&P 500 declining by a quarter percent.  A surprise drawdown in weekly crude oil inventories was no help to the energy complex as WTI logged six-week lows at $78 a barrel, gold advanced to $1,869 an ounce for its best finish since June and the VIX popped back above 17.  

- Philip Grant

In Vino Veritas
Bottoms up:  A six-liter imperial of Cabernet Sauvignon fetched a cool $1 million at a charity auction in New Orleans on Nov. 6, making it the most expensive bottle of wine ever sold.  The 2019 vintage from Setting Glass Slipper Vineyard in Napa’s Coombsville region sports a $185 list price for a more conventional 750 milliliter size, although Sonoma Magazine notes that Glass Slipper produced only 75 cases (equivalent to 900 bottles) of the libation. 
Private Party
Australian pension fund Spirit Super is trimming down an overweight position in U.S. equities,

Australian pension fund Spirit Super is trimming down an overweight position in U.S. equities, chief investment officer Ross Barry tells Bloomberg.  Historically stretched valuations, in the form of a 39.5 times price to cyclically-adjusted earnings ratio (far above the 30 times reached in 1929 and trailing only the 1990s tech bubble for most expensive ever) have spurred a rethink for the $20 billion fund. “We took the view 12 to 18 months ago that we should take a little bit more risk, but we’ve been reviewing that of late,” Barry relays.  The prospect of tightening monetary policy in response to raging inflation presents cause for caution, the CIO believes. 

Spirit Super has good reason for caution if projections from a prominent fund manager are on point.  In its most recent 7-year forecast of annual real investment returns, Boston-based GMO guesstimates that both U.S. large- and small-caps will each decline by 7% per annum through the third quarter of 2028 after accounting for inflation.  For context, the U.S. stock market has delivered a long-term positive return of 6.5% per year in real terms, GMO finds. 

Facing a high bar to generate necessary returns within the confines of public markets, the largest pension fund in the United States tweaks its own strategy in the opposite direction.  The California Public Employees Retirement System (Calpers) voted in a board meeting yesterday to upsize its allocation to private equity holdings to 13% from 8% and bump private credit holdings to 5% from less than 1%, while adding $25 billion in leverage (equivalent to just over 5% of assets) to help juice returns. Without those changes, Calpers estimates that its portfolio would generate a 20-year return of 6.2% annually, lagging the 6.8% annual bogey established this summer, which was itself lowered from 7%. 

“The times have changed since this portfolio was put together,” Sterling Gunn, managing investment director at the pension scheme, told The Wall Street Journal. That pivot towards private assets and enhanced leverage comes in response to pressure from local politicians to avoid any further decrease to that return target. 

Calpers’ embrace of more esoteric strategies in hopes of goosing performance is music to the ears of some.  Private equity executives could hardly believe their good fortune at an industry conference in Berlin last week, as the industry has undertaken $1.1 trillion worth of deals so far in 2021, blowing past full-year 2007’s prior high-water mark by 40%. “It’s the hottest market I’ve ever seen in my career,” noted Jan Stahlberg, founder of buyout group Trill Impact and 26-year p.e. veteran. 

In tandem with that feeding frenzy, deal multiples have gone “bananas” per Allstate Investments managing principal Sarah Farrell.  The white-hot conditions are making some nervous, as Apollo co-president Scott Kleinman pointed to fancy price tags indicating “a state of collective delusion.”  The median leveraged buyout took place at an enterprise value of 12.8 times Ebitda over the first nine months of the year according to data from Pitchbook, up from 10.3 times in 2007.  To help finance those LBO price tags, a spot (more) of leverage: Median debt to Ebitda reached 6.5 times year-to-date through Sept. 30, up from 5.7 times Ebitda across 2007.

Private credit, which has helped foment that boom by providing high-interest rate loans to smaller and often-less creditworthy concerns, is itself exploding in popularity, doubling in size since the end of 2014 to $1 trillion. The rating agencies have taken notice, as Moody’s Investors service warned last month of “systemic risks” in the category on account of growing borrower leverage, declining lending standards and an illiquid trading profile. “Risks that are rising beyond the spotlight of public investors and regulators may be difficult to quantify, even as they come to have broader economic consequences,” the Moody’s analysts reasoned. 

That’s not to say that some similarities with traditional financing channels aren’t apparent. For instance, borrowers are increasingly calling the tune to lenders. Citing data from investment bank Lincoln International, Bloomberg relays this afternoon that the proportion of private loans deemed covenant light for their scant legal protections for lenders reached 20% of total supply in the third quarter, double that of a year ago.  Some $128 billion of private loans have come to market over the first nine months of 2021. 

For now, at least, E-Z money and euphoric price action permit financial innovation to reign supreme. See the analysis “Bridge to growth” in the most recent edition of Grant’s Interest Rate Observer dated Nov. 12 for a look at an illuminating debt financing transaction involving a fast-growing, unprofitable p.e.-backed software firm and a speculation on its broader implications. 

Recap Nov. 16

Treasurys remained under pressure with the 10- and 30-year yields each rising to three week highs at 1.64% and 2.03%, respectively, while stocks stayed on the front foot with the S&P 500 rising 40 basis points and the Nasdaq 100 by 75 basis points to leave those indices at or near fresh highs. Gold reversed early gains to slip to $1,852 an ounce, WTI crude held near $81 a barrel and the VIX finished little changed north of 16. 

- Philip Grant

Talking Your Book
Wheeling and dealing in crypto:

Wheeling and dealing in crypto:  With digital currency valuations more than doubling since mid-July to a record $2.9 trillion total market capitalization, torrents of capital continue to pour into the fledgling category. Coinbase co-founder Fred Ehrsam and Sequoia Capital alum Matt Huang have raised a $2.5 billion venture fund, the Financial Times reports. While that marks the largest new crypto v.c. fund in the short history of the asset class and is double the fund’s original target size, Ehrsam told the FT that “it’s probably small relative to where we’re going in 10 years.” 

Duly emboldened crypto investors are likewise tapping the credit markets to fund their speculative efforts. Las Vegas-based Marathon Digital Holdings (MARA on the Nasdaq), one of the largest publicly-traded crypto miners, announced it will offer $500 million in unsecured, five year convertible senior notes to fund the purchase of additional bitcoins and digital mining equipment.  Hours later, the company disclosed receipt of a Securities and Exchange Commission subpoena over potential securities law violations concerning transactions surrounding a Montana data center last year. Shares endured a 27% swan-dive today in response but remain higher by 22-fold compared to one year ago. 

The digital gold rush is even helping to stoke demand in the decidedly analogue literary world.  The Wall Street Journal relays that entrepreneur Gary Vaynerchuk garnered more than one million preorders in a single late August weekend for his forthcoming book “Twelve and a Half: Leveraging the Emotional Ingredients Necessary for Business Success,” after promising readers a mystery non-fungible token for every dozen print copies purchased.  “We had no idea of the impact of the promotion, that it would be so huge, unbelievably massive,” Doug Jones, deputy publisher at HarperCollins, which is distributing Vaynerchuk’s tome, told the Journal. “They were staggering hourly sales numbers coming in like we’ve never seen before.”  

As for the NFT devotees snapping up copies hand over first, inventory management may present something of a challenge. Restaurant owner David Scarlatescu, who purchased 60 copies, considered handing them out to patrons at his British Columbia establishment, before thinking twice. “They’d be like, ‘ok thanks, what am I going to do with this?’” he reasoned.  Good question. 

They Sell, You Buy
Elon Musk had some more snippy remarks for a prominent politician yesterday,

Elon Musk had some more snippy remarks for a prominent politician yesterday, responding to an entreaty from Bernie Sanders (Ind.-VT) for higher taxes on the ultra-wealthy by Tweeting “I keep forgetting that you’re still alive.” Musk went on to term the Senator a “taker, not a maker” and inquired “want me to sell more stock, Bernie?  Just say the word.”  

On that score, Musk may require little encouragement.  The Tesla honcho disposed of a total $6.9 billion in company shares last week, a figure which tops the sum of all U.S. insider sales over a given week in at least the past decade, InsideArbitrage founder Asif Suria reported yesterday.  Tesla, which was added to the S&P 500 only 11 months ago, represents the fifth largest component of that broad index with a 2.1% weighting. Following an 18% pullback over the last 11 days, the automaker sports a $994 billion market capitalization, equivalent to 40 times Wall Street’s consensus Ebitda forecast for calendar. . . 2024. 

Musk was far from alone in lightening his holdings as stocks remain near their best levels on record, up 25% year to date on the S&P 500. Elon’s brother and fellow Tesla board member Kimbal Musk disposed of $109 million worth of shares last week, while key executives at household names also rang the register, including Alphabet director Sergey Brin ($247 million), Airbnb co-founder Nathan Blecharczyk ($100 million) and Carlyle Group director David Rubenstein ($116 million), pushing total domestic insider sales last week past the $10 billion threshold.  For context, that figure stood at $6.6 billion over the prior week ended Nov. 5 thanks in large part to $3.3 billion worth of sales from Amazon’s Jeff Bezos, a sum which had itself established a fresh high-water mark over at least the last 10 years.  According to InsideArbitrage, U.S. executives sold 71 times as much stock as they purchased last week, compared to 54 times over the week ended Nov. 5 and an average of 18 times over the two weeks before that. 

Recap Nov. 15

It was a rough day for Uncle Sam’s creditors as yields jumped across the Treasury curve in bear steepening formation, leaving the two-year yield at 0.52% and the long bond back above 2% for the first time since early November.  Stocks cruised to a sideways finish after giving back some modest early gains, while WTI crude continued to consolidate at $81 a barrel and gold edged lower to $1,864 an ounce to snap a seven-session winning streak.  The VIX ticked a bit higher to 16.5.  

- Philip Grant

Mobile ESG Critique

Spotted in lower Manhattan this afternoon:

The Vanguard ad blitz continues apace. 

Happy Trails
Take this job and shove it!

Take this job and shove it! Fully 3% of the non-farm U.S. workforce handed in their walking papers in September, the Bureau of Labor Statistics announced today, topping the 2.9% figure logged in August to mark the highest so-called quits rate in the 20-year data series. For context, the quits rate had never topped 2.4% over that span before the bug barged in last year. 

For now, at least, workers have definitively achieved the upper hand over their employers.  Citing data from employment site Indeed.com, The Wall Street Journal relays that U.S. job openings totaled 11.2 million as of last Friday, swamping the 7.4 million unemployed workers tabulated by the BLS in October.  

What sort of implications might this sea-change bring? See the edition of Grant’s Interest Rate Observer dated today for an in-depth analysis of those shifting labor market winds. 

Take Two
To forgive is divine.

To forgive is divine. As stocks continue their ascent towards the heavens, Mr. Market readily doles out second chances to all manner of companies laid low by corporate malfeasance or fundamentally flawed business models. Let’s review a trio of such examples:

Deposed WeWork CEO Adam Neumann offered some public contrition earlier this week, declaring at a conference Tuesday that “I’ve had a lot of time to think, and there have been multiple lessons, multiple regrets.”  Neumann, who famously engineered a $47 billion private-market valuation for the co-working concern in early 2019 before a failed IPO and spectacular collapse, added that WeWork enjoys a “bright future.”  Indeed, the company managed a belated stock market debut three weeks ago after merging with blank check firm BowX Acquisition Corp. WeWork, which posted an adjusted Ebitda shortfall of $449 million against $593 million in revenue in the quarter ended June 30, commands a $7.9 billion market capitalization.  

Ethical, uh, mishaps are likewise of little lasting concern these days. Last summer, Chinese java chain Luckin Coffee, Inc. saw its shares delisted from the Nasdaq following a 13-month stint on the exchange after the company fessed up to overstating revenues by 60% in 2019. Now trading on the pink sheets, Luckin shares have enjoyed a 71% appreciation year-to-date (including a 50% advance from its Chapter 11 filing in early February) to leave the company’s market cap at $3.8 billion. On Oct. 22, Luckin reported a net loss of $64 million on $493 million in net revenues over the first six months of the year. For context, Wall Street analysts had expected the roaster to generate $4.3 billion in revenues and $415 million in net income over calendar 2021 prior to the fraud revelations, data from Bloomberg show. 

Last week, shares in Nikola Corp. reached a four-month high at $15 per share, up 70% from mid-August. The electric vehicle hopeful, which guided full-year revenues to $7.5 million (with an “m”) last week on the strength of 25 planned truck deliveries, now sports a $5.7 billion (with a “b”) market capitalization. That comes six days after the company announced it will fork over $125 million in a series of installments to the Securities and Exchange Commission to settle allegations of misleading statements by founder and former chairman Trevor Milton.  Milton, who was also indicted on charges of fraud in July, falsely told investors that “billions and billions of dollars in orders” were in hand, the Department of Justice contends. A December 2016 event, in which a truck prototype portrayed by Milton as “fully” functional was subsequently revealed to be simply rolling down a hill instead of traveling under its own power, colors those accusations. The company has indicated it will seek reimbursement for that fine from the ousted executive.

Perhaps preparing for such a claw back, Milton liquidated just over 15 million shares in Nikola stock in early August, garnering $153.3 million in proceeds. He remains the firm’s largest shareholder with a 16% stake, worth about $900 million at the current share price. 

Meanwhile, Stacy Spikes, co-founder of defunct cinema subscription service MoviePass, purchased the company’s assets out of bankruptcy earlier this week ahead of a planned relaunch next year, providing the prospect of new life for the company which famously incinerated hundreds of million dollars after offering customers unlimited movies at a paltry rate of $9.99 per month. Spikes declared in a statement that “our pursuit to reclaim the brand was encouraged by the continued interest from the moviegoing community.”  An epic bull market doesn’t hurt, either.

QE Progress Report
A $27 billion weekly increase in Reserve Bank Credit pushed interest bearing assets at the Fed to $8.59 trillion. That’s up 16% year-to-date and 130% from the repo market seize up in fall 2019. 
Recap Nov. 12

Stocks caught a solid bid with the S&P 500 advancing 70 basis points to pull back near unchanged for the week, while the Treasury curve steepened modestly with the 10- and 30-year yields rising to 1.57% and 1.94%, respectively. Gold edged higher to $1,868 an ounce to mark its seventh straight green finish, WTI crude slipped back below $81 a barrel and the VIX slumped to near 16 after testing 20 on Wednesday afternoon.

- Philip Grant

Virtual Learning
As the art world turns:

As the art world turns: Sotheby’s will take its maiden voyage into the virtual reality realm in an exhibition set for next week, CoinDesk reports. While the 277 year-old institution has previously taken payment in crypto and held its first sale of non-fungible tokens earlier this year, the Nov. 18 auction marks another bold step into the future, taking place at the Sotheby’s virtual branch in the Decentraland metaverse rather than on analogue planet earth. 

Sotheby’s, Decentraland outpost

The venerable auction house has company in its headlong foray into the digital ether, as evinced by Facebook’s recent corporate rebranding into Meta Platforms, Inc. and $10 billion investment this year in the nascent category. What exactly is this newfangled virtual reality world? Speaking at a company event on Oct. 28, CEO Mark Zuckerberg declared that “the best way to understand the metaverse is to experience it yourself, but it’s a little tough because it doesn’t fully exist yet.” 

See the analysis “Fake land surges” in the brand new edition of Grant’s Interest Rate Observer for an illuminating look at recent happenings in Decentraland, the impact of Meta’s foray into the “space” and a speculation on Zuckerberg et al.’s eventual role in the virtual world. 

High and Dry
Liquidity in the U.S. Treasury market has dried up of late

Liquidity in the U.S. Treasury market has dried up of late, the Financial Times relays, a phenomenon exacerbating the pronounced price volatility seen recently in the government debt complex. Indeed, analysts at J.P. Morgan find that market depth is at its shallowest since the summer, while the spread between recently issued, “on the run” Treasurys and older, less actively-traded versions has widened markedly since late October. Treasury market volatility as measured by the ICE BofA Move Index reached its highest level since March 2020 last week.  

“This seems to be something that has got to be sending sort of a troubling signal to central bankers, because it is not fundamentally driven,” Subadra Rajappa, head of U.S. rates strategy at Société Générale, tells the FT. “There’s clearly some ‘position unwinds’ that are going on as we speak.”  Yesterday’s horrific 30-year bond auction, which priced at 1.94% compared to a 1.888% trading level for the conditional when-issued securities, underscores the dangerously shallow conditions in the market.

That vanishing liquidity backdrop comes despite healthy growth in the asset class, as $22.7 trillion in Treasurys are now outstanding, compared to $17 trillion in November 2019. A daunting fundamental picture may factor in, as the Bloomberg Global Aggregate Treasuries Total Return Index offers a yield to worst of 0.88%, or 530 basis points below the year-over-year growth rate in the September Consumer Price Index.  Central bank-induced malaise in government bonds is nothing new, as Japanese benchmark 10-year bonds can famously go days without a single transaction, demonstrating the extent to which the world’s second-largest government securities market is under the Bank of Japan’s thumb. 

Meanwhile, a large transaction likewise demonstrates the fragility of the cash-flush U.S. investment-grade bond market. As General Electric undertakes a $23 billion bond repurchase plan as part of its corporate restructuring, Bloomberg reported yesterday that that pending deal is gumming up the works for the yield-hungry hordes who have been piling into new issues in hopes of scrounging some income. “There is a huge imbalance between investors and investable assets,” David Knutson, head of U.S. fixed income product management at Schroders, commented to Bloomberg. “Taking out $23 billion is just going to exacerbate that technical imbalance.”  Investment grade bond issuance stands at $1.28 trillion year-to-date, down 22% from last year’s record pace but 26% above that seen at this time of year in 2019, while the Bloomberg U.S. Corporate Bond Index offers a 1.7% yield-to-worst, or 450 basis points below measured inflation.

Issuers in the speculative end of the credit pool are doing their best to help pick up the slack. Year-to-date supply of domestic junk bonds reached $432 billion on Tuesday, topping the prior annual record set nine years ago with more than six weeks remaining in 2021. That deluge comes with a 4.2% yield-to-worst on offer for the Bloomberg Barclays High Yield Index, or a minus 200 basis point real yield relative to September CPI. 

Then, too, the FT noted last month that 149 companies have tapped the U.S. high yield markets for the first time this year, easily establishing a full-year record going back to 2005, with 26 such debuts taking place in October, tying April for the busiest month for newcomers in at least the last 16 years.  “A lot of this issuance, like a lot of things we are seeing, is just a byproduct of the excess liquidity we have in the system,” John McClain, portfolio manager at Brandywine Global Investment Management, told the pink paper. “We are seeing excessive amounts of capital chasing returns and trying to find a home. I don’t think it’s going to slow down anytime soon.” 

Jay Powell, please copy. 

Recap Nov. 11

With the bond market closed in observance of Veteran’s Day, stocks managed to eke out a green finish on the S&P 500, though the broad index gave back some early gains and finished near its intraday low. Gold rose nearly 1% to $1,864 an ounce to maintain its recent bid, WTI crude remained near $81 after retreating from the cusp of fresh seven-year highs yesterday, and the VIX slipped back below 18.  

As the Federal Reserve is likewise closed for Veteran’s Day, the weekly QE progress report will run in tomorrow’s edition of Almost Daily Grant’s. 

- Philip Grant

Buy Back Better
Shareholders in SoftBank Group Corp. (9984 on the Tokyo Exchange)

Shareholders in SoftBank Group Corp. (9984 on the Tokyo Exchange) received a fall treat yesterday in the form of a ¥1 trillion ($8.8 billion) stock repurchase program. That buyback, equivalent to 14.6% of shares outstanding, is scheduled to run for 12 months, though it could be extended beyond that timeframe. Chairman and CEO Masayoshi Son, who waited nearly two hours after delivering quarterly results to announce the news, declared that he was personally “delighted” with the move as an investor. Mr. Market concurred, duly sending SBG higher by 11%. 

SoftBank bulls have a right to be excited if recent history is any guide. Thus, shares enjoyed a 50% leap over a six month stretch in 2016 as the company snapped up ¥500 billion worth of stock, during which time Japan’s Topix Index hardly budged. More recently, SoftBank rallied by 18% from February to May 2019 in tandem with a ¥600 billion buyback, Bloomberg recounts, while the Topix slid by 3% over that same three-month period. A ¥2.5 trillion buyback commenced in fall 2020 helped facilitate a trebling from its post-pandemic low. 

Investors have also experienced the flip-side of that equation. Shares lost nearly 40% from early May highs through last Friday after the most recent buyback program expired. During that time, the Topix rose by 8%. 

Of course, buybacks are only part of the story. Namely, the precipitous decline in Chinese tech stocks, as measured by a 47% drawdown in the Nasdaq Golden Dragon Index from its mid-February peak, has conferred no glory on SoftBank, whose mammoth $100 billion in-house venture capital arm the Vision Fund and $50 billion sequel remain heavily invested in the sector. The firm announced yesterday that net asset value plunged to $184 billion as of Sept. 30, down $54 billion from three months earlier. Then, too, the firm’s cornerstone position in Alibaba now stands at 28% of NAV, down from 47% in the previous quarter and 60% in fall 2020, as a crackdown by the Chinese Communist Party has cut the e-commerce behemoth down to size.  Overall, SoftBank posted a $3.5 billion net loss for the quarter, while the Vision Fund lost $7.3 billion. Terming the torrent of red ink “a major storm,” Masa assured listeners-in at yesterday’s press conference that “our risk in China is not so huge. It is within our control.”  

Might SoftBank’s efforts to support the share price come at the expense of its balance sheet? Analysts from S&P Global, which bestows a double-B-plus rating on SoftBank, warned in a research bulletin that “even if the company manages its finances with a certain amount of discipline, buybacks would likely erode the financial buffer” necessary to maintain that rating at the penthouse of speculative-grade. S&P pegs the SoftBank’s loan-to-value ratio at about 30% this past quarter, as compared to pared to a 19% company-calculated LTV estimate and up from 24% at the end of March. The rating agency has indicated a 40% LTV ratio is the threshold at which it will consider a downgrade deeper into junk status. 

Rival firm CreditSights was more forceful in its assessment, writing that “we are disappointed that SBG is putting equity holders first. The announced buyback is clearly a negative for creditors.”  The CreditSights analysts peg SoftBank’s LTV as high as 45%, compared to 34% as of June 30.  Beyond the precipitous decline in NAV during the quarter, net debt at the holding company level rose to ¥11.2 trillion from ¥10.8 trillion sequentially as SoftBank took out margin loans backed by positions in U.S. food delivery platform DoorDash and South Korean e-commerce firm Coupang (which has slumped some 40% from its post-IPO pop back in March) to help fund distributions to its Vision Fund investors.   

Meanwhile, SoftBank’s memorable foray into U.S. public markets is set to reach a forgettable conclusion. The firm announced yesterday that it will wind down SB Northstar, its vehicle for investing in the underlying securities and derivatives of self-described “highly liquid listed stocks.”  While SB Northstar’s machinations, which helped SoftBank attain the nickname “Nasdaq Whale” for the outsized price moves it purportedly influenced last year, ultimately represented a neutral result for the firm as a whole, Son personally absorbed a $1.3 billion loss from his own investment in the fund.  True to form, the personification of the investment cycle remains undaunted.  “I have lots of confidence,” Son declared yesterday. “I’m going to take risk again.” 

Recap Nov. 9

Treasurys enjoyed a strong bull flattening move, as the long bond dove six basis points to 1.82% for its lowest closing yield in six weeks, while the two-year edged lower to 0.42%.  Stocks came under modest pressure with the S&P 500 and Nasdaq 100 losing 35 and 60 basis points, respectively, leaving each index higher by about 25% year-to-date.  WTI crude rose to the precipice of fresh post 2014 highs at $84 a barrel, gold advanced to $1,834 an ounce for its best finish since mid-June and the VIX crept higher to near 18. 

- Philip Grant

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