From The Wall Street Journal:

A U.S. official told top global semiconductor makers he wanted to revoke waivers they have used to access American technology in China, people familiar with the matter said, a move that could inflame trade tensions.

Currently, South Korea’s Samsung Electronics and SK Hynix as well as Taiwan Semiconductor Manufacturing enjoy blanket waivers that allow them to ship American chip-making equipment to their factories in China without applying for a separate license each time. . .

If carried out, the move could be disruptive both diplomatically and economically. Earlier this month, the U.S. and China agreed to a fragile trade truce in London. Part of the deal involved each country agreeing to hold off from introducing new export controls and other measures designed to hurt the other.

Out with the old, out with the new:  The Securities and Exchange Commission is undertaking a comprehensive policy pivot under new broom (and former crypto lobbyist) Paul Atkins, the Financial Times relays today, “throwing out more than a dozen rules proposed by his predecessor” Gary Gensler. Regulatory initiatives governing cybersecurity-related risk disclosures, artificial intelligence and, of course, cryptocurrencies are on the chopping block, as Atkins – “a champion of light touch regulation” – draws up a new playbook for digital assets.

“As the chairman has said, we are getting back to our roots of promoting, rather than stifling, innovation,” an SEC flack told the pink paper. “The markets innovate, and the SEC should not be in the business of telling them to stand still.”

A cryptocurrency mainstay is set to put the regulator’s laissez-faire bona fides to the test. Coinbase is seeking SEC approval to offer tokenized equities, meaning digital representations of stocks transacted via the blockchain, chief legal officer Paul Grewal told Reuters Tuesday, adding that the project is a “huge priority” for the digital exchange.

Last month, rival bourse Kraken announced it will launch xStocks tokens, which track U.S. equities, in select overseas markets, but a stateside initiative will likely require the SEC to issue a “no action letter” indicating it does not object. “With a no-action letter, an issuer of a tokenized equity. . . can have some confidence, some comfort, that the SEC has adopted its view of why this product is important,” Grewal told Reuters. “It’s that confidence that has been lacking so far, and I think [has] really held back a lot of the institutional adoption” of crypto.

As digital asset purveyors push await the regulatory green light, malefactors across the globe unveil their latest innovation: citing research firm Cisco Talos, CoinDesk relays today that “North Korean hackers are targeting top crypto firms with malware hidden in job applications.”

It’s a kind of progress.

Stocks settled slightly lower on the S&P 500 after an initial upside burst ran out of steam, while Treasurys put in a mixed showing with two-year yields dipping four basis points to 3.89% and the long bond edging to 4.89% from 4.88% Wednesday. WTI crude settled at $74 a barrel, gold traded sideways at $3,369 per ounce, bitcoin ebbed below $104,000 and the VIX dropped below 21.

- Philip Grant

From Reuters:

Spanish lender BBVA is advising wealthy clients to invest up to 7% of their portfolio[s]  into cryptocurrencies, an executive said on Tuesday, in the latest sign some banks are warming to a sector long avoided by mainstream finance because of its risks.

BBVA's private bank advises clients to invest 3% to 7% of their portfolio in cryptocurrencies depending on their risk appetite, Philippe Meyer, head of digital & blockchain solutions at BBVA Switzerland, told the DigiAssets conference in London. . .

While many private banks execute client requests to buy cryptocurrencies, it is relatively unusual for them to advise them to actively buy them.

“Obscure Chinese stock scams dupe American investors by the thousands,” splashed a Monday headline in The Wall Street Journal. As the piece detailed, an array of Middle Kingdom-based outfits have flocked to U.S. exchanges, with promoters utilizing social media and WhatApp to hype a given company’s prospects while manipulating shares higher prior to the ultimate rug-pull.  The Justice Department “is now involved with fighting the fraud,” the WSJ relays.

Nearly 60 firms based in mainland China have launched small IPOs (raising $15 million or less) on the Nasdaq exchange over the past five years according to FactSet, with more than one-third of that cohort suffering one-day price drops of 50% since mid-2023.  An additional 17 Hong Kong-headquartered, Nasdaq-listed outfits have seen half their market capitalization disappear during a single session.

Back in November 2022, the Financial Industry Regulatory Authority warned that such China-based, U.S.-listed small fry often allocate the bulk of their IPO shares to Hong Kong broker dealers and nominee accounts, in which a U.S. broker holds securities on behalf of foreign nationals. FINRA likewise flagged “possible centralized control” over those nominee accounts, including similar customer contact information, bank data and IP addresses.

For its part, the Nasdaq has implemented a perhaps-belated tightening of its listing protocols, obliging firms from China and other so-called restrictive markets to raise at least $25 million. “The idea is that when there are enough shares in the market, it reduces the likelihood of wild price swings,” Daniel McClory, head of equity capital markets at Boustead Securities, told the Journal.

Yet enhanced regulatory scrutiny on the small-cap China cohort runs headlong into the renewed rampage in animal sprits. To that end, shares of Hong Kong-based Regencell Bioscience Holding Ltd. (ticker: RGC) rose an additional 30% Tuesday after ripping 288% a day ago on the strength of a 38:1 stock split. Following year-to-date gains of 59,900%, the firm now sports a $38.5 billion market cap. That figure tops 16 components of the blue-chip Nasdaq 100 Index.  

Regencell, which was founded in 2014 and debuted on the Nasdaq in 2021, is in the business of developing Chinese herbal medicine treatments for childhood attention deficit hyperactivity disorder, though the firm has yet to generate revenue or apply for any regulatory approvals and posted a $4.4 million loss over the 12 months through June 30.   As Bloomberg notes today, CEO Yat-Gai Au owns 86% of shares outstanding, vaulting his paper wealth beyond the likes of SoftBank boss Masayoshi Son and Dallas Cowboys owner Jerry Jones.

Referencing Regencell and its affiliated foundation, the company website describes the CEO thus: “Both entities are Gai’s passion projects, and he will continue to invest his personal funds to defend what he believes in. He has literally put his money where his mouth is by investing over $9 million in RGC to demonstrate his personal belief and commitment.”

Stocks and yields both dropped Tuesday, with the S&P 500 shedding 0.8% to maintain its recent ping-pong price action, while 2- and 30-year Treasurys ebbed to 3.94% and 4.88%, respectively, from 3.97% and 4.96% Monday. WTI crude rallied to $73.50 per barrel, spot gold finished little changed at $3,384 per ounce, bitcoin sank below $105,000 and the VIX jumped to 21.5, up more than two points on the session.   

- Philip Grant

Liquidity, provided. From Financial Times:

Jane Street has struck one of Hong Kong’s largest prime office leases since before the Covid-19 pandemic, underlining how the New York-based trading firm has emerged as a challenger to Wall Street’s biggest banks.

Under the deal, which relates to a central business district complex still under development, Jane Street will pay an estimated rent of more than HK$30 million per month ($3.8 million) for a five-year lease of six floors starting in 2028. . .

Henderson Land said that the lease “marks the largest single office leasing transaction for Hong Kong’s Central Business District in decades.”

Summer’s approach has brought no thaw to the largely frozen U.S. housing market, as pending home sales dipped 1.1% year-over-year over the four weeks through June 8 to 87,720 units according to Redfin. That’s a record low for this time of year in data spanning to 2015.

With benchmark mortgage rates stuck near 7% and median sales prices reaching a record high of $441,500 in May, that punishing affordability picture takes a heavy toll.  Just over 28% of U.S. housing transactions took place above the asking price, the data firm finds, down from 53% at this time in 2022 and the lowest springtime share since Covid-addled 2020.  The number of would-be sellers outpace buyers by nearly 500,000 nationwide, the largest gap in at least a dozen years.  

Today’s forbidding backdrop is likewise on display within new dwelling development. Housing starts retreated to a 1.36 million annualized clip in April from 1.82 million three years earlier, while the National Association of Homebuilders’ sentiment gauge matched the lowest reading since late 2022 last month.  Investors are, in turn, steering clear, with the S&P Homebuilders Select Industry Index returning minus 12% over the last year, lagging the broader blue-chip gauge by two dozen percentage points.

One countervailing dynamic takes the sting out of that slowdown for some operators. Last week, Bloomberg highlighted boomtime conditions in home equity financing bonds, whereby, in return for ceding a portion of their home’s equity, borrowers receive cash upfront to pay for remodeling and renovation projects.

Some $18 billion of the bonds came to market last year per data from Deutsche Bank, triple that seen in 2023. Sales of those instruments are tracking at a similar pace to 2024 in the year-to-date. Aggregate nationwide home equity stood at $34.5 trillion as of March 31 per the Federal Reserve, down from the record $35.6 trillion logged last summer but up 71% over the prior five years.

To that end, analysts at Barclays wrote Monday that “home improvement remains one of the few discretionary [spending] categories doing well year-to-date that’s not under the trade-down label, perhaps suggesting that trends can continue to diverge” from the soft housing market.

See the May 23 edition of Grant’s Interest Rate Observer for a bullish analysis of a construction products mainstay poised to benefit from those repair-and-remodel tailwinds, while enjoying notable insider share purchase activity (three insiders have splashed out a combined $56 million on company stock over the past five weeks) alongside a valuation stuck at “submarket multiples on depressed earnings.”

Risk aversion reigned following Israel’s overnight attack on Iran, with WTI crude oil vaulting towards $74 per barrel, up 8% on the session and 13% on the week, while the S&P 500 retreated 1.1%, finishing near session lows. Gold jumped nearly 2% to $3,433 per ounce, bitcoin retreated to $105,300 and the VIX advanced three points to 21.  Notably, Uncle Sam’s obligations proved no port in the storm, as 2- and 30-year Treasury yields each rose six basis points to 3.96% and 4.9%, respectively.

- Philip Grant

Call it verdant oasis leave. From the Financial Times:

European banks have spent more than €1.1 billion ($1.27 billion) on axing senior staff since 2018, underlining the extent of the restructuring the industry has undergone in recent years. . .

The largest single severance payment to a European banker was €11.2 million, awarded by Santander in 2021. Deutsche [Bank] also made two individual payments of €11 million in 2018 and 2019.

One senior financial services recruiter said: “It’s much harder to get on these [severance] lists than you might think. Some senior people who have been there a long time want to get out but can’t pull off lucrative exits.”

“The packages are also much more attractive today than they used to be,” they added.

What’s the catalyst?  With gold hovering a bit below its $3,505 per ounce high water mark in recent weeks, a less prominent peer has taken up the bull mantle. Thus, the price of platinum advanced nearly 5% this morning to $1,268 per ounce, bringing year-to-date gains towards 40% and leaving the precious metal at its best levels since early 2021.

Shares of Valterra Platinum Ltd. (VAL in Johannesburg, VALT in London and ANGPY on the U.S. pink sheets), formerly known as Anglo American Platinum Ltd., are up 43% in dollar terms following a bullish analysis in the Aug. 2, 2024 edition of Grants’ Interest Rate Observer. That compares to a 14% total return for the S&P 500.   A follow-up piece in the Dec. 6 edition of GIRO preceded 58% returns for Valterra, compared to minus 1% for the blue-chip gauge.

Platinum and a quintet of other elements – palladium, rhodium, ruthenium, iridium, and osmium – compose the platinum group metals (PGM) category, which help clean exhaust from internal combustion engines by utilizing so-called autocatalytic properties, i.e., facilitating a chemical reaction without destroying the underlying substance. Importantly, the rise of battery-powered electric vehicles, which do not utilize PGMs, has long threatened a primary use case for the category, helping keep platinum prices stuck near $950 per ounce over the past 10 years.

Yet the electric revolution has hit a pothole in recent quarters, opening a lane for enhanced PGM demand.  EV’s share of U.S. new vehicle launches during the 2026 to 2029 model years will ebb to 34% from 40% last year and 44% in 2023, Bank of America predicted Monday, while hybrids (which utilize similar PGM loadings to conventional gas-powered vehicles) will account for 28% such debuts compared to 20% in 2024 and 17% in the prior annum. “It should be noted that these implied hybrid penetration rates appear to undershoot the relative hype that has been building in response to the stall in EV sales,” the BofA analysts add.

That development would burnish an already sturdy fundamental picture. Global platinum demand will register at 7,965 thousand ounces (koz) this year if May estimates from the World Platinum Investment Council are on target, up from the outfit’s 7,850 koz February projection and comfortably above its 6,699 koz supply forecast. “The platinum market is in structural deficit, irrespective of the uncertainties posed by today’s geopolitics,” WPIC CEO Trevor Raymond commented last month. “At the same time, it is widely recognized that platinum mine supply continues to face downside risks.”

With spot prices near the top end of their decade-long range, might platinum’s bull run have room to continue?  One commodity-focused investment firm answers in the affirmative: “the time has come, we believe, to turn serious attention – and capital – towards the PGMs and their related equities,” Goehring and Rozencwajg concluded late last month.

Underpinning that assessment: a potentially erroneous investor consensus that inexorable EV market share gains will render internal combustion engines obsolete. Indeed, Rob West at research consultancy Thunder Said Energy projects that even if annualized global EV sales vault to 40 million by 2030 from 14 million in 2023, total ICE sales would hold steady at 90 million units, only slightly south of the 95 million pre-pandemic peak.

On the other side of the coin, “mounting structural constraints” bedevil the South African PGM mining complex (which accounted for 71% of global refined production last year per the WPIC) as “decades of underinvestment, coupled with geological depletion, meant that even sharply higher prices may fail to unlock new volume.”  Persistent demand, shrinking supply and a potentially-misplaced narrative of imminent EV domination, G&R believe, present “the textbook setup for a bull market to begin.”

A cooler-than-expected CPI and further China trade-related trumpets from the Trump administration weren’t enough to keep the S&P 500 from a modest 0.3% dip, though 2- and 10-year Treasury yields declined by seven and six basis points, respectively, to 3.94% and 4.41%. WTI crude remained on the march at $68 a barrel, gold advanced to $3,347 per ounce following a late rally, bitcoin consolidated near $109,000 and the VIX toggled back above 17.

- Philip Grant

From CNBC:

Wherever Nvidia CEO Jensen Huang goes, excitement follows — this time, all the way to London Tech Week.

The Nvidia boss — whom Wedbush analyst Daniel Ives dubs the “godfather of A.I.” — is more like a rockstar these days, given his wide-spanning effect on the A.I. industry.

“The amount of infrastructure required for A.I. wouldn’t be possible without that man,” one attendee at London Tech Week said. “He’s like Iron Man,” the attendee added, referencing the popular Marvel superhero who is a tech billionaire inventor under the name of Tony Stark.

Come on in, the water’s warm:  business is picking up across the junk bond realm, as U.S. issuers floated $13 billion in new supply over the five days through Friday. That’s the largest weekly sum in over a year and easily surpasses the $8.6 billion logged during all of April.

Percolating primary markets permit highly speculative borrowers to finance themselves, with triple-C rated Uniti Group preparing to sell $600 million of seven-year unsecured notes tomorrow according to Bloomberg.  That prospective deal would mark a relative rarity, with only a handful of such low-rated issuers coming to market in recent months. Single-B-minus/triple-C-plus rated Planet Financial Group managed to sell $125 million of senior unsecured, five-year notes Thursday at a 10.5% coupon and 98.5 cents on the dollar.  For context, the triple-C-rated portion of Bloomberg’s junk gauge now sports an 11.31% yield-to-worst, down some150 basis points over the past two months.

Will creditors’ suddenly hearty risk appetite extend beyond the rating agency menu? Early last week, Morgan Stanley began marketing a $5 billion debt package for Elon Musk’s xAI to help finance the construction of new data centers.  Per a weekend bulletin from The Wall Street Journal, MS had projected roughly 12% interest rates on a mix of loans and senior secured notes for the unrated artificial intelligence outfit, which posted a $341 million Ebitda shortfall over the three months through March.

Notably, that floated figure preceded Thursday’s spectacular blowup between Musk and President Trump, in which the Tesla boss took to his X social media platform to contend that the commander-in-chief “is in the Epstein files” (Musk has since deleted the missive).  

That episode duly alarmed some on Wall Street, with a pair of firms downgrading their Tesla ratings to “hold” from “buy” this morning. “The recent incident between Musk and President Trump exemplifies key-person risk associated with Musk’s political activities,” wrote Baird analyst Ben Kallo, predicting that “brand damage” will “persist” in the wake of that high-profile dustup.

Yet no such concern predominates among xAI’s would-be lenders. Indeed, the Journal relays, demand for the debt offering “has actually increased” following the brouhaha.  

Stocks floated through an unchanged showing on the S&P 500 in a low-voltage session, allowing the broad index to consolidate its potent recent rally, while Treasurys managed to recoup a piece of Friday’s selloff with 2- and 30-year yields ticking lower by three and two basis points, respectively, at 4.01% and 4.95%. WTI crude maintained its recent momentum with a rally to near $65 a barrel, gold rose to $3,326 per ounce, bitcoin jumped to near $109,000 and the VIX edged back above 17.  

- Philip Grant

“I’m very disappointed in Elon,” President Trump told the press this afternoon, in response to the Tesla boss’s recent criticisms of the One Big Beautiful Bill Act. “I’ve helped Elon a lot.” 

Disputing that characterization, Musk took to X soon after: “Without me, Trump would have lost the election. . . such ingratitude.”

The Commander-in-Chief then appeared to repurpose his Department of Government Efficiency towards the Department of Getting Even, tapping the following onto Truth Social: “The easiest way to save money in our Budget, Billions and Billions of Dollars, is to terminate Elon’s Governmental Subsidies and Contracts. I was always surprised that Biden didn’t do it!”

Wasting no time, Musk returned to X to deliver what will surely not be the last words on this matter:

Time to drop the really big bomb:  @realDonaldTrump is in the Epstein files. That is the real reason they have not been made public. Have a nice day, DJT!

Mark this post for the future. The truth will come out.

The Fed navigates by the stars under cloudy skies once more: Staffing shortages at the Bureau of Labor Statistics are potentially muddying key data, The Wall Street Journal reported yesterday, with a heavy proportion of educated guesswork informing the April Consumer Price Index. 

As UBS economist Alan Detmeister pointed out, 29% of price data inputs in that key inflation gauge were derived via “different-cell imputation,” meaning from less comparable products or geographic regions than the norm. That’s nearly double the previous monthly high over the past five years.

“They’re having to turn to less effective methods to fill in the blanks,” Omair Sharif, economist at advisory firm Inflation Insights, told the WSJ. “We don’t know if this is a big issue or a small issue, but we just know that directionally, it’s making things worse,” Detmeister added.

The CPIs waning signal-to-noise ratio may serve to thrust alternative metrics into the analytical spotlight. To that point, the not-for-profit Institute for Supply Management delivered some eye-catching data Wednesday, with its May Purchasing Managers’ Index showing a prices-paid component of 68.7 (readings above 50 indicate expansion). That’s the hottest print since fall 2022 and a 7.2-point uptick from March, marking the fastest two-month acceleration since the onset of the inflationary conflagration in spring 2021.

A collection of prominent anecdotes points to a similar dynamic, as the Federal Reserve’s freshly released Summary of Commentary on Current Economic Conditions (a.k.a., the Beige Book) relayed thus: “There were widespread reports of contacts expecting costs and prices to rise at a faster rate going forward. A few districts described these expected cost increases as strong, significant or substantial.”

President Trump’s trade levies loom large in that dynamic, as the reports from each of the central bank’s dozen districts “indicated that higher tariff rates were putting upward pressure on costs and prices.”  Yet, perhaps instructively, “a heavy construction equipment supplier said they raised prices on goods unaffected by tariffs to enjoy the extra margin before tariffs increased their costs,” the New York Fed finds.

Persistent price pressures are taking their toll on growing swaths of the consumer economy, if recent reports from cut-rate retailers are any indication.

Dollar General CEO Todd Vasos told analysts Tuesday that higher-income households frequented the business at their busiest clip in four years over the three months through early May.  “We saw a meaningful traffic increase from customers with household incomes of more than $100,000” during the same stretch, Mike Creedon, CEO of peer Dollar Tree likewise relayed on yesterday’s earnings call, with the bulk of the firm’s 2.6 million new shoppers hailing from higher-income brackets.  The pair have enjoyed 50% and 27% stock price advances in the year-to-date, respectively.

Call it Mr. Market’s own data center.

Reserve Bank credit stands at $6.626 trillion following an $11.1 billion decline over the past week. The Fed’s portfolio of interest-bearing assets is down $40 billion from the first week of May and 25.8% from its early 2022 peak.

Stocks came under some moderate pressure this afternoon to leave the S&P 500 lower by half a percent, while the Treasury curve flattened with two-year yields backing up five basis points to 3.92% and the long bond ticking to 4.88% from 4.89% Wednesday. WTI crude consolidated just above $63 a barrel, gold pulled back to $3,355 per ounce, bitcoin remained under pressure at $101,000 and the VIX climbed nearly one point to 18 and change.

- Philip Grant

The worst they can say is no, via The Wall Street Journal:

Federal authorities are investigating a clandestine effort to impersonate White House chief of staff Susie Wiles, according to people familiar with the matter, after an unknown individual reached out to prominent Republicans and business executives pretending to be her. . .

Some of the calls featured a voice that sounded like Wiles, people who heard them said. Government officials think the impersonator used artificial intelligence to imitate Wiles’s voice, some of the people said.

In some of the text messages, people received requests that they initially believed to be official. One lawmaker, for example, was asked by the impersonator to assemble a list of individuals who could be pardoned by the president.

It became clear to some of the lawmakers that the requests were suspicious when the impersonator began asking questions about Trump that Wiles should have known the answers to—and in one case, when the impersonator asked for a cash transfer, some of the people said. 

Spring fever takes hold in the municipal bond market: State and local government debt issuance has swung into high gear following a tariffs and legislation-induced lull, as strategists at JPMorgan anticipate a “mega-calendar” of $17.7 billion in tax-exempt debt sales over the next five days. That sum would mark the third-busiest week on record.

June supply may reach $60 billion, peers at Bank of America reckon, after May’s $50-plus billion tally marked the busiest showing for the month since at least 2014 by Bloomberg’s lights.

Conversely, “there’s a tremendous amount of new money needs out there,” Jock Wright, managing director and senior municipal underwriter at Raymond James, told Bloomberg. Redemption and coupon payments will register at $73 billion in June, BofA estimates, with principal and interest payment reallocations back into the market potentially underpinning demand.

Munis managed to outperform both Treasurys and investment-grade corporate bonds in May, Bloomberg analysts led by Eric Kazatsky relayed Monday.  That’s the first such single-month win of 2025, as the potential demise of tax exemption under the Trump administration had helped crimp relative performance. That risk has seemingly gone by the wayside after the “The One Big Beautiful Bill” – that is the formal name – passed by the U.S. House of Representatives on May 22 maintained muni’s tax-advantaged status (the sprawling legislation now moves to the Senate, with further tweaks forthcoming).

Enhanced clarity on the tax picture would help bring a solid relative value proposition to the fore: Bloomberg’s broad muni gauge sports a 6.83% yield-to-worst on a tax equivalent basis, Kazatsky et al. point out, a “clear advantage” over the 5.21% on offer for the Bloomberg U.S. Corporate Index. That 162-basis point premium compares to a sub-100 basis point gap at the end of last year.

Of course, with upwards of 55,000 different issuers across the $4 trillion-plus category, the highly fragmented muni market presents no shortage of idiosyncratic opportunities for income-seeking investors. See the current edition of Grant’s Interest Rate Observer dated May 21 for a pair of “very particular” ideas presenting high-single-digit and low-double-digit tax equivalent yields.  

Bulls continue to feel their oats as stocks once again erased early losses then broke higher into the bell to finish with a 0.4% gain for the S&P 500, extending year-to-date returns to nearly 4%. Treasurys enjoyed no such luck as 2- and 30-year yields rose five and seven basis points, respectively, to 3.94% and 4.99%, while WTI crude advanced above $63 a barrel and gold ripped nearly 3% to $3,382 per ounce. Bitcoin remained little changed just below $105,000 while the VIX ebbed towards 18.  

- Philip Grant

From the Financial Times:

French business schools are fast-tracking or extending application deadlines for foreign students who fear being caught by the Trump administration’s curbs on visas.

Fouziya Bouzerda, head of the Grenoble School of Management, encouraged students unable to study in the US to consider the French Alps.

“If you’re an international student affected by the suspension of visa interviews in the U.S., we’re here to help you continue your academic journey without interruption,” she wrote on LinkedIn.

Bid wanted? Bid commanded!  The United Kingdom laid down the law for public fiduciaries Thursday, announcing it will instruct local pension funds to “set binding allocation targets” for British private market outlays.  

Chancellor of the Exchequer Rachel Reeves telegraphed such a mandate earlier this month, after a consortium of 17 pension providers collectively pledged to earmark at least 5% of their portfolio for closely-held assets based in the U.K.

Unsurprisingly, some observers take a dim view of such strictures. The “threat of government telling trustees how they should invest is a step too far,” Laura Myers, partner at consulting firm LCP, told Bloomberg. “Trustees draw on professional expertise to. . . best meet the needs of members, [and this should] never be overridden by the political priorities of the government of the day.”

An opposing set of capital constraints, meanwhile, takes shape across the Atlantic. Private equity firm Clearlake Capital Group plans to block nearly 100 would-be lenders from purchasing the debt of troubled portfolio company Pretium Packaging, Bloomberg reports. 

Typically, such so-called blacklists may range “from a handful of shops to a few dozen,” the outlet relays, but one would-be investor seeking control of Pretium “got close to acquiring a significant chunk of the company’s debt via a block trade,” spurring Clearlake to aggressively wield its black pen.

With a Pretium loan maturing in 2028 languishing near 56 cents on the dollar, the promoter’s choosy approach spells further bad news for existing lenders.

“When [disqualified buyer] lists get too broad, they risk restricting secondary market liquidity and leaving par holders stranded in the debt, limiting options in a restructuring,” Shorecliff Asset Management founder and CIO Grant Nachman noted to Bloomberg. “The potential result is ending up with creditors in bankruptcy who cannot sell and do not want to own the company or inject new equity,” he added

Bid verboten!

Reserve bank credit stands at $6.64 trillion following a $6 billion decline over the past seven days. The Fed’s portfolio of interest-bearing assets is down $42 billion from the final week of April, and 25.6% from its early 2022 highs.

Stocks staged a volatile session following a court-ordered curtailment of the Trump tariffs, with the S&P 500 gapping higher by 1.5% in the pre-market before reversing to unchanged then finally settling 0.4% in the green. Treasurys enjoyed solid gains across the curve as 2- and 30-year yields dipped four and five basis points, respectively, to 3.92% and 4.92%, while WTI crude slipped below $61 a barrel and gold advanced to $3,318 per ounce. Bitcoin continued to cool off at $106,000 and change, while the VIX remained at 19.

- Philip Grant

From CNBC:

Set your alarm. Southwest Airlines customers have only one day to go before the company starts charging to check bags for the first time in more than half a century.

Starting Wednesday, Southwest will end its blanket “two bags fly free” policy and charge $35 for a first checked bag and $45 to check a second, with some exceptions.

It was a perk that was sacrosanct among customers and the airlines’ longtime executives alike, setting the airline apart from competitors. But baggage fees brought in nearly $7.3 billion for U.S. airlines last year, according to federal data, and Southwest executives who have long vowed to hold onto the policy have been under pressure to raise revenue.

One-stop shopping remains the financial fashion in the wake of President Trump’s headline-hogging tariffs agenda: Vanguard Group’s S&P 500 ETF (ticker: VOO) gathered a net $20.1 billion last month, the largest influx in the $665 billion fund’s 15-year history. Year to date inflows reached $65 billion on May 21 per VettaFi, comfortably on pace to surpass 2024’s $116 billion figure (which itself more than doubled the prior full-year peak).

“During that period of tumult in early April, we saw a five-to-one buy-to-sell ratio,” Vanguard chief investment officer Greg Davis advised The Wall Street Journal over the weekend. Investors “know that if things are on sale, it’s time to put money to work.”

While the blue-chip, capitalization-weighted gauge guzzles torrents of cash, other corners of the market appear positively parched. Bloomberg equity strategists led by Christopher Cain relayed last week that the valuation gap between cheap and expensive stocks “show[s] some of the deepest dislocations in decades.” 

Thus, median price-to-sales ratios among the bottom 20% of Russell 1,000 constituents register at 0.88, while the median member of the top fifth changes hands at 6.58 times trailing revenues. “This implies [that] cheap stocks are valued at just 8.8% of their expensive counterparts, a 2^nd percentile reading since 2000,” Cain et al. found.  

Similarly, the bottom 20% of that cohort command a median enterprise value equivalent to 8.38 times Ebitda, one third of the 25.06 EV-to-Ebitda multiple seen at the top of the heap. That ratio stands in the 8^th percentile since the turn of the century. “Historically, such discounted valuations [within the] value basket has preceded strong long/short factor returns over the following year,” the Bloomberg team finds.

The technology sector is rife with particularly compelling bargains, one knowledgeable observer believes. Speaking at the Grant’s Interest Rate Observer distressed investing conference late last month, Hale Capital Partners founder and eponym Martin Hale detailed a striking state of play: “Since 1980, deciles one through three [i.e., the smallest tech concerns] have never been this cheap. They approached it once, in the fourth quarter of 2008.”   

Outsized volatility remains the law of the land in tech, with more than two-thirds of industry players enduring 70% stock price drawdowns at one point or another. Yet dramatic recoveries of 10-fold and above are surprisingly common. “It’s mind boggling how often this happens,” Hale said.

See the May 9 issue of Grant’s Interest Rate Observer for more on Hale’s downtrodden tech strategy, including a trio of potentially compelling names languishing within that cohort (a fourth long idea has since jumped like a scalded cat).

Another tariffs delay along with reports of curtailed long-bond issuance by the Bank of Japan set asset prices bounding Tuesday, with the S&P 500 logging a 2% gain, while 2- and 30-year yields dropped 8 and 10 basis points, respectively, to 3.92% and 4.94%. WTI crude ebbed to $61 a barrel, gold pulled back to $3,305 per ounce, bitcoin ticked below $110,000 and the VIX retreated below 19.  

- Philip Grant

Behold the soap opera-worthy drama at Kohl’s Corp. (ticker: KSS). Earlier this month, the apparel purveyor announced the dismissal of CEO Ashley Buchanan after less than four months on the job, accusing the executive of directing millions of dollars’ worth of business – on “unusual” terms – to a coffee startup helmed by his longtime girlfriend.

As interim CEO Michael J. Bender marks the fourth inhabitant of the big seat since December 2022, Kohl’s directors find themselves under the microscope. An 8-K filing issued May 8 disclosed the departure of board member Christine Day, adding that her exit was “not due to any disagreements. . . related to the company’s operations, policies or practices.”   

One day later, a follow-up filing detailed Day’s emailed response to that characterization: “There is simply no way the board could have interpreted my resignation as having no conflict issues.”  She added thus: “My departure. . . is based on disagreements regarding adherence to protocols and processes which guide conversations and ensure full transparency and accountability. When mistakes are made, reflection of accountability and root causes should be rigorously examined, not smoothed over.”  For its part, Kohl’s said it “strongly disagrees with the assertions in Ms. Day’s emails.”

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Grant’s Interest Rate Observer deemed the Wisconsin-based retailer a pick-to-click in the Jan. 25, 2013 edition. Informing that conclusion: a fast-shrinking share count and fat operating margins relative to industry peers, with selling, general and administrative costs equivalent to 22% of revenues over the preceding five full fiscal years. That compared to an average of 28.9% from J.C. Penney, Macy’s, Dillard’s, Saks, Nordstroms and Bon-Ton Stores.  

KSS shareholders reaped an 80% return during the 26 months after Grant’s laid out the bull case, but it’s been rough sledding from there as managerial missteps have aggravated a secular squeeze applied by the likes of Amazon. SG&A, for instance, ballooned to 34% of the top line during the 12 months through Feb. 1, while persistent stock repurchases – flagged as a concern for creditors in the Oct. 20, 2017, edition of GIRO – have piled further pressure on the balance sheet. Kohl’s now sports net leverage equivalent to 4.5 times trailing Ebitda, compared to 1.4 turns in early 2013.

Last week, Moody’s slapped a two-notch downgrade on Kohl’s to B2 (equivalent to single-B, or five notches below investment grade), predicting that “operating performance will weaken in the second half of 2025 more than we had previously anticipated, given the increased pressures on the company’s core value-oriented consumer.”  Five-year credit default swaps now top 1,400 basis points, triple that seen last summer, while the senior unsecured, 4 5/8s of 2031 issued in spring 2021 now change hands at 63 cents on the dollar for a 14.65% yield-to-worst.

In the midst of today’s turmoil, a potentially attractive risk-adjusted opportunity lingers on the clearance rack. Last week, Kohl’s priced $360 million of senior secured five-year notes at a 10% coupon to refinance 4.25%-yielding paper coming due this summer.

The newly issued debt, which is backed by real estate assets and sports an unconditional guarantee from a Kohl’s subsidiary “PropCo,” would generate a 90% to 100% creditor recovery in the event of default, a May 13 analysis from S&P Global concludes.  The 10’s traded this morning at 101.5 cents on the dollar, delivering a 541-basis point pickup over five-year Treasurys. That compares to the ICE BofA US High Yield Index’s 325 basis point option-adjusted spread.

Reserve Bank credit stands at $6.64 trillion following a $21.5 billion decline over the past week. The Fed’s portfolio of interest-bearing assets is down $37 billion from this time last month, and 25.6% from its March 2022 peak.

Stocks flopped and chopped to the tune of a flat finish on the S&P 500 after Wednesday’s steep selloff, while long-dated Treasurys managed only a modest rebound with 30-year yields dropping three basis points to 5.05%. WTI crude slipped below $61 a barrel, gold retreated to $3,293 per ounce, bitcoin jumped above $111,000 and the VIX settled just above 20.

- Philip Grant