Nuclear Reactor

Money never sleeps, but sometimes it naps. From MarketWatch:

During the height of uncertainty over Israel’s retaliatory attack against Iran late Thursday, users of the Robinhood trading platform say they were unable to trade.

Shortly after news of the Israel attack hit newswires, a number of users on X, the social media platform formerly known as Twitter, shared screenshots purporting to show that Robinhood had suspended 24-hour trading.

Green Energy
Like a Phoenix, rising from Arizona:

Like a Phoenix, rising from Arizona: venture capital’s demise has been greatly exaggerated, at least if Destiny Tech100’s recent public floatation is any indication.  The closed-end fund, which holds stakes in prominent startups such as SpaceX, Stripe, Epic Games and OpenAI, debuted on the New York Stock Exchange on March 26 (ticker: DXYZ) to a rapturous greeting, with shares doubling from their $9 listing price on the first trading day and briefly extending above $99 on April 9.  

DXYZ – which charges 2.5% per annum in management fees, double the median closed-end fund according to a 2021 analysis from data firm Interval Fund Tracker – retrenched to $28 a share as of Friday’s close, still nearly six times its $4.84 per share net asset value as of Dec. 31, the most recent calculation.  For context, the average closed-end fund changes hands at a 7.5% discount to NAV, Morningstar finds, with only 14% of funds under its purview enjoying a premium to their respective bogeys. 

That high-wire price action represents a “discovery process,” for public investors, Destiny CEO Sohail Prasad told Bloomberg Television last week, “as the market is figuring out ‘wow, this is possible for the first time to have access to these kinds of companies.’” He added that “there will be more participants in the market and more stability over time.” 

Further contextualizing Mr. Market’s red carpet-rollout: Destiny acquired the bulk of its positions during the effervescent annum of 2021, shelling out $87.3 million in total portfolio investments according to filings with the Securities and Exchange Commission. As of year-end, those positions were marked at $53.2 million (its SpaceX shares are valued at $18.6 million, up from a $14.1 million cost basis).  

Against that buoyant backdrop, it is perhaps little surprise that Prasad rang the register to the tune of 162,500 shares for $5.4 million in proceeds earlier this month, with the company itself selling a further 200,000 shares for $5.8 million. 

Destiny’s rousing debut, meanwhile, provoked skepticism from one noteworthy corner. As Bloomberg noted yesterday, ARK Investment Management took to social media earlier this week to muse that DXYZ “might be too good to be true,” adding that “investors have been paying a massive premium to get access to the companies in Destiny’s portfolio.” 

Perhaps coloring that critique: the closed-end ARK Venture Fund (ticker: ARKVX), which seeks to “democratize venture capital” via access “to the most innovative companies throughout their private and public market lifecycles” and sports a 2.75% annual management fee, has returned minus 7.3% in the year-to-date through Thursday. Nearly half of those losses have been logged since Destiny’s debut late last month.  

Recap April 19

Tech stocks were drubbed to the tune of 2.1% on the Nasdaq 100 with Bloomberg’s Magnificent 7 gauge absorbing a 3.4% loss, far outpacing the S&P 500’s 0.9% decline. Treasurys managed only a feeble bounce as 2- and 30-year yields settled at 4.97% and 4.72%, respectively, down one and two basis points from yesterday but well above the 4.88% and 4.61% seen last Friday. WTI crude held at $82 a barrel following an overnight spike and reversal, gold tested $2,400 before settling at $2,388 per ounce and the VIX rose towards 19. 

- Philip Grant

Land and See
“Everything, by and large, is going right in the U.S. economy,”

“Everything, by and large, is going right in the U.S. economy,” Evercore founder Roger Altman told CNBC last week. “The economy is outpacing every single forecast one could have put up from six months ago or nine months ago. Arguably, the soft landing has already happened,” he added.

To that end, the International Monetary Fund upgraded its full-year global growth guesstimate to 3.2% from 3.1% earlier this week, with similar expansion on tap for 2025. Pierre-Olivier Gourinchas, the outfit’s economic counsellor and director of research, likewise sounded the all-clear in a CNBC spot Tuesday: “the chances that we would have something like a global recession [are] fairly minimal. At this point, it would take a lot to derail this economy.” 

Wall Street is counting on it.  A mere 7% of respondents to the latest Bank of America Global Fund Manager Survey anticipate a hard landing scenario for the world economy over the next 12 months, while 36% expect no landing at all. That represents a near-complete inversion from the October poll, which showed 30% of managers predicting a hard landing with only 5% in the no landing camp. 

Such a growing consensus should arguably provide pause. As Bianco Research president and eponym Jim Bianco pointed out earlier this week, BofA’s December survey showed 62% of fund managers anticipating lower bond yields over the subsequent 12 months, the highest share in the survey’s 20-plus-year history.  

Suffice it to say, such positioning has proved less than lucrative, as Bloomberg’s Global Aggregate Index (which comprises government, investment grade corporate and securitized, fixed-rate bonds from both developed and emerging markets) has returned minus 4.29% this year through Wednesday, exceeded by only the 2022 fixed-income wipeout for the worst performance since at least 1990. 

Physical Challenge
Meta Platforms fired the latest salvo in the AI arms-race this morning,

Meta Platforms fired the latest salvo in the AI arms-race this morning, rolling out its latest large language model, dubbed Llama 3.  The new iteration, which will appear in the search functions of Facebook, Instagram and other platforms under the corporate umbrella, boasts the ability to summarize the contents of a given link, along with upgraded image recognition abilities and enhanced ability to respond (or not) to given user queries.

“Based on the benchmarks we’re looking at today, this is going to be the most intelligent and best performative model of its kind that’s freely available,” Meta chief product officer Chris Cox commented to The Wall Street Journal, adding that “it’s going to be a lot more powerful and a lot more intelligent,” than the Llama 2 edition, which debuted in July. 

As Silicon Valley players jostle for the upper hand in that nascent technological realm, a sea-change in capital allocation may present significant implications for the stock market.  Thus, Microsoft, Meta, Amazon and Google will collectively shell out some $180 billion towards capital expenditures this year per a mid-March tabulation from Bank of America, up from $142 billion in 2023. That $38 uptick is equivalent to nearly 80% of the quartet’s projected year-on-year increase in earnings, leaving fewer marginal resources available for other, investor-friendly moves such as share buybacks. 

More broadly, the information technology segment of the S&P 500 will allocate some 36% of earnings before interest and taxes to capex this year, BCA Research strategist Juan Correa-Ossa relays, up from some 27% in 2022 and nearly matching the 40% share for the broader index. That development is noteworthy because tech’s stellar performance over the past decade is partly attributable to its relatively capital-light structure, permitting industry mainstays to parlay their monopoly power into outsized profit margins. Yet thanks to the AI revolution, that advantage relative to the rest of the market has diminished for the time being. 

See the analysis “Return of the tangible” in the June 16, 2023, edition of Grant’s Interest Rate Observer for more on the unfolding secular shift in global investment trends, and its potential implications. 

QT Progress Report
A $13.6 billion weekly decline in Reserve Bank credit leaves the Fed’s portfolio of interest-bearing assets at $7.388 trillion. That’s off $105 billion over the past four weeks, and 17.2% below the March 2022 peak. 
Recap April 18

Stocks were unable to hold early 1% gains on the S&P 500 as the broad index settled 0.2% south of unchanged for its fifth consecutive red finish, its longest losing streak since October. Treasurys likewise came for sale with the two-year yield logging a year-to-date high of 4.98% and the long bond rising three basis points to 4.74%. WTI crude slipped below $82 a barrel, gold ticked higher to $2,378 per ounce and the VIX settled at 18. 

- Philip Grant

Yes, Backsies

Shoppers think twice in the Middle Kingdom. From Bloomberg: 

During China’s biggest online shopping festival last November, orders poured in for upscale labels on the mainland’s dominant luxury e-commerce platform, Alibaba Group Holding Ltd.’s Tmall. 

But within days, brands including Burberry Group Plc and Cie Financière Richemont SA’s Net-A-Porter saw up to 75% of that sales value vaporize as consumers returned or cancelled purchases in droves, people familiar with the matter said, asking not to be identified discussing private data. 

For context, a 20% to 30% return rate is typical within the luxury goods realm, analysts from Sanford Bernstein report.  

Haul in the Family
This rig is laboring uphill.

This rig is laboring uphill. Trucking giant J.B. Hunt offered little in the way of good news in yesterday’s first quarter earnings report, disclosing a 9% year-over-year decline in gross revenue per load to leave earnings per share at $1.22, down 35% from the same period last year and trailing the sell-side consensus of $1.53. 

As those figures might suggest, president and incoming CEO Shelley Simpson painted a bleak picture on Tuesday’s earnings call, advising that the post-Covid malaise has proven “more severe in terms of depth and duration” than prior downturns, with little visibility as to “when the current environment will change.”

That gloomy update is no outlier, as peer Knight-Swift Transportation Holdings, Inc. followed suit Wednesday by slashing first and second quarter EPS guidance to $0.115 and $0.28 per share, respectively (using the midpoint of the provided range), from its prior outlook of $0.39 and $0.55.  

Helping to drive the stark reassessment: ongoing pressure from the cost- and inventory-conscious shipping industry spurred Knight-Swift to forego business rather than accept what it believes to be “unsustainable contractual rates.”  The subject of a bearish analysis in the Nov. 11, 2022, edition of Grant’s interest Rate Observer, Knight-Swift shares have since slipped by 7%, with fellow picks-not-to-click Werner Enterprises, Inc. and engine-maker Cummins, Inc. down 12% and up 22%, respectively.  The S&P 500 has advanced by 29% over that stretch (all figures are inclusive of reinvested dividends).

Industrywide supply saturation helps explain today’s state of play, as the tally of new trucker registrations surged to roughly 10,000 per month during late 2020 and 2021 according to FTR Transportation Intelligence, triple its pre-pandemic pace. In the wake of that capacity updraft, the average contract rate stands at $2.47 per mile for April thus far per analytics firm DAT Solutions, down 6.5% from the start of 2024 and well below the $3.09 per mile seen in early 2022. 

“Carriers are under real pressure right now to balance filling trucks and maintaining contract rates,” FreightWaves CEO Craig Fuller pointed out on social media today.  To that end, Paul Svindland, CEO of Bensenville, Ill.-based STG Logistics, relayed to The Wall Street Journal Monday that his firm is trimming contract rates by “low single digits” to preserve last year’s level of freight business. “The floor keeps getting lower,” he marveled. Shreveport-based AFS Logistics CEO Tom Nightingale added that “we are seeing the most prolonged bouncing around the [cyclical] bottom that I’ve seen in my 30-plus years in the industry.” 

Might today’s gloomy backdrop sow the seeds of an industry revival? Signs of capacity right-sizing are taking shape, as monthly trucking certificate revocations have grown to nearly 7,500 from 2,500 during the Covid era, FTR finds, while new carrier registrations have dipped back below a 5,000 monthly pace.  Meanwhile, preliminary net trailer orders registered at some 13,600 units last month, ACT Research reports today, down 24% from March 2023 to mark the 14th instance of year-over-year declines in the past 15 tries.   

Let the value restoration expedition continue apace. 

Recap April 17

Another red day saw the S&P 500 settle near 5,000 following a 0.6% retreat, leaving the broad average 4.3% south of its March 27 closing levels, though Treasurys enjoyed a rebound headlined by a well-received 20-year auction to leave yields lower by two to eight basis points across the curve. A larger than expected weekly inventory build helped spur a 3% pullback to WTI crude to just below $83 a barrel, gold slipped half a percent to $2,372 per ounce, bitcoin fell to about $62,000 and the VIX settled near 18 after testing 19 intraday.  

- Philip Grant

Sorcery of Funds

Call it a charm offensive.  From NBC-4 New York:

A Bronx tax preparer known as "the Magician" was arrested by IRS Criminal Investigations agents in an alleged $100 million dollar tax rip-off scheme. 

Rafael Alvarez was charged Monday morning on federal tax and conspiracy counts. Federal prosecutors said the 60-year-old engaged in a scheme to submit thousands of false tax returns for more than 10 years, stealing more than $100 million. Alvarez grossed more than $15 million for his Atax New York firm, according to the feds. . . A representative with Atax New York said Alvarez had "retired" and no longer worked at the firm. She hung up when asked about the tax fraud allegations.

Endless Highway
The "last mile" of disinflation must be a country mile.

The “last mile” of disinflation must be a country mile. Federal Reserve vice chair Philip Jefferson observed to listeners-in at a Washington D.C. event Tuesday morning that “recent readings on both job gains and inflation have come in higher than expected.”   

Jefferson, who holds a vote on the rate-setting Federal Open Market Committee, went on to predict that the core personal consumption expenditures price index will show a 2.8% annual increase in March, ahead of the 2.7% economist consensus and the Cleveland Fed’s 2.74% Nowcast. In turn, Fed chair Jerome Powell declared this afternoon that “it is now appropriate to allow restrictive policy further time to work.”  

Such a dynamic – illustrated by a trio of hotter than expected CPI prints over the first three months of 2024 – is duly forcing a financial rethink, as interest rate futures now price 42 basis points of rate cuts by year-end, down an even 100 basis points from the anticipated pace of easing at the start of 2024.  

“The majority of analysts have been wrongfooted” on that score, Aspect Capital CEO Anthony Todd told the Financial Times today, while Apollo chief economist Torsten Sløk added that “it is very clear that the narrative is changing. Uncertainty about. . . where we’re going in rates is the source of why things are so turbulent at the moment.” 

Though the prospect of delayed gratification has thrown Wall Street for a loop, might a lingering spell of substantive borrowing costs serve to grease the wheels of commerce?  As Bloomberg documents today, some observers are making the case that the post-pandemic leap to a 5.33% Fed Funds rate from near zero serves to bolster interest income, burnishing consumer spending with attendant implications for economic growth (output will rise at a 2.9% seasonally adjusted annual rate in the first quarter, guesstimates the Atlanta Fed’s GDPNow tracker, up from 2% early last month).  

“The reality is that people have more money,” Kevin Muir, former RBC derivatives trader turned publisher of The MacroTourist newsletter, told Bloomberg. “Higher rates are doing less economic damage than in times past,” added Moody’s chief economist Mark Zandi.  

That hypothesis may be put to the test soon enough, UBS strategists wrote Monday: “If the expansion remains resilient and inflation gets stuck at 2.5% or higher, there would be a real risk that the FOMC resumes raising rates again by early next year, reaching a 6.5% Fed Funds rate by [mid-2025].” Such a development may prove a less-than serendipitous one for investors, the UBS team believes. “In a high inflation scenario, we would expect both government bonds to sell off and credit spreads to widen, making for a big catch down in [valuation] multiples.” 

Recap April 16

Stocks took a breather after several days of pronounced volatility, with the S&P 500 settling slightly south of unchanged in narrow-range trading, though Treasurys remained under pressure with two-year yields matching the year-to-date high of 4.97% and the long bond rising to a five-plus-month peak at 4.77%. WTI crude held north of $85 a barrel, gold edged higher at $2,389 per ounce and the VIX retrenched a bit to 18 and change. 

- Philip Grant

Procrastinators Dilemma

There’s always next year. From The Wall Street Journal:

H&R Block said it was experiencing technology outages on Monday, preventing thousands of last-minute tax filers from sending in their returns. Some people who bought and downloaded the H&R Block software on their computers have been unable to electronically file their returns. Those who use the company’s software through a web browser or who work directly with its tax professionals aren’t affected, H&R Block said.

The outage started around 9 p.m. Sunday. As of early afternoon on Monday, H&R Block said it didn’t have an update on when the issue would be resolved. A spokeswoman for the company said: “We are working to resolve the issue quickly and ask clients to please try again later today or print and mail their return if that is more convenient.”  

The filing deadline for tax returns in all but two U.S. states is 11:59 p.m. on Monday. Millions of Americans rely on online tax preparation services to help them fill out the appropriate forms and send them to the Internal Revenue Service.

Now and Then
The more things stay the same, the more they change:

The more things stay the same, the more they change: 10-year Treasury yields reached 4.66% in late morning Monday, up 78 basis points so far this year to mark the highest benchmark borrowing costs since Nov. 2.  

Over that sub six-month stretch, the S&P 500 has churned out an 18% return, leaving the broad gauge perched at 26 times trailing 12-month earnings per share, FactSet finds, compared to 21 times in early November.  Similarly, the index now changes hands at 20.6 times forward earnings, up from 17.5 last fall. 

Go Your Own Way
Beijing rolls down the blinds:

Beijing rolls down the blinds: China will no longer publish live investment flow data from Hong Kong into the mainland Shenzhen and Shanghai exchanges, the bourses collectively announced Friday evening, as a key barometer of foreign investor sentiment goes by the wayside. 

That change brings the Middle Kingdom in line with other major economies, as the exchanges noted that “there is no intraday real-time data on the trading of a certain group of investors in European, U.S. and other developed markets.”  

Yet as Bloomberg points out, the decreased transparency “may mark another attempt by Chinese policymakers to prop up a market that has suffered from both a loss of retail confidence and the withdrawal of foreign money managers over the past year.”  Indeed, foreign investment flows registered at RMB 21.5 billion ($30 billion) across January and February, down 19.9% from the same period last year, following an 8% annual decline in inbound investment during full-year 2023.

More broadly, foreign direct investment and trade flows between U.S.-aligned nations and those within China’s sphere of influence have declined by some 20% and 12%, respectively, since Russia’s early 2022 invasion of Ukraine, researchers from the International Monetary Fund found earlier this month, warning that “the magnitude of the decline is both economically and statistically significant.”  

Rising geopolitical tensions and accompanying trade fragmentation could serve as a material growth headwind, the IMF report warned, potentially erasing as much as 7% of global output.  For an early look at that crucial dynamic, see the analysis “Splitsville for East and West” in the March 18, 2022, edition of Grant’s Interest Rate Observer

Recap April 15

A hotter-than expected reading of March retail sales spurred broad-based pressure on the Treasury complex, as 2- and 30-year yields jumped to 4.93% and 4.74%, respectively, from 4.88% and 4.61% Friday, while stocks suffered a sharp reversal with the S&P 500 settling lower by 1.25% after trading solidly in the green through mid-morning. 

WTI crude rebounded from early weakness to finish near $86 a barrel, gold shook off Friday afternoon’s downdraft with a near 1% advance to $2,384 per ounce and the VIX logged fresh year-to-date highs above 19, up four points over the past week. 

- Philip Grant

Torn and Frayed
As they say, symmetry is everywhere in nature. Here’s BlackRock boss Larry Fink on CNBC this morning: 
Inflation has moderated and we’ve always said inflation is going to moderate. But is it going to moderate to that terminal rate the Federal Reserve is looking for? I feel doubtful. . . Do I believe that we could get a stable inflation between 2.8% and 3%? I’d call it a day and a win.
A short time later, the Federal Reserve posted the following on social media:
#FedFAQ: Do you have damaged or mutilated currency? Consumers should not send any currency directly to the Federal Reserve.
For-profit Education
Buying the dip goes global:

Buying the dip goes global: overseas investors backed up the truck in the Land of the Rising Sun last week, purchasing a net ¥1.18 trillion ($7.7 billion) of stocks per data from the Japan Exchange Group. Instructively, that shopping spree – the largest since 2013 – took place as the Nikkei 225 logged a 3.4% decline over the five days through Friday, its largest weekly decline since December 2022. 

Evidence of financial regime change in the world’s fourth-largest economy is in no short supply following a decades-long torpor, as headline CPI accelerated to a 2.8% year-over-year in February (that compares to an average 0.5% annual reading over the past two decades), while the yen has slipped to 153 per dollar, its weakest level since the aftermath of Japan’s colossal stock-cum-real estate bubble in 1990.  That combo may prove just the ticket for shareholders, if recent price action is any indication.   

Thus, Japan’s benchmark index sits higher by 18% this year in local terms and 9.5% in dollars, edging past the 8.1% return for the S&P 500. A pair of Grant’s Interest Rate Observer picks-to-click have likewise accelerated into high gear of late, leaving Mitsubishi Corp. (8058 in Tokyo) and the Nippon Active Value Fund PLC (NAVF in London) with 218% and 82% dollar-denominated gains since a bullish analysis in the Feb. 7, 2020, edition, compared with a 65% return for the S&P 500. 

“The number of incoming requests to my teams has [grown] exponentially in the last few months,” Shinji Ogawa, co-head of Japan cash equities sales at JPMorgan told Reuters in late February. “It’s overwhelming how much interest there is in Japan at the moment.” The dynamic may have plenty of room to run, the Tokyo-based observer believes. “If I was going to put it in terms of a baseball analogy, I think we’re still in the second inning,” Ogawa added. 

On that score, Bloomberg reports that the likes of Morgan Stanley and Bank of America have ramped up Japan-centric marketing efforts in response to growing client interest, while Citigroup is organizing “Japan Day” conferences across the globe to highlight investment opportunities in the country.  Consulting firm Coalition Greenwich likewise relays that institutional investors plan to increase their consumption of Japan-themed research this year, reversing a downward trend which had been in place since 2019. 

Will such a sentiment shift translate into durable results for Japan bulls?  “What would happen after the initial learning stage by investors runs its course depends on whether the market can maintain its appeal,” writes Bloomberg analyst Hideyasu Ban.  

In other words, we’ll know more later. 

Recap April 12

Stocks lurched lower as the S&P 500 logged a 1.4% decline to wrap up its second consecutive weekly loss, while Treasurys pared their recent losses 2- and 30-year yields settling at 4.88% and 4.61%, respectively, down five and four basis points on the session but up from 4.73% and 4.54% last Friday.  WTI crude gave back a sharp early advance to remain just below $86 a barrel, gold reached $2,427 per ounce before violently reversing to $2,344  and the VIX settled north of 17, up more than two points on the day. 

- Philip Grant

Dancing in the Dark

Call it stock-based consternation.  From the Financial Times:

TikTok workers in the U.S. have been saddled with millions of dollars in tax liabilities on shares they are unable to sell, at a time when the Chinese-owned video-sharing app is battling a potential U.S. ban. 

ByteDance, the app’s Beijing-based parent, is facing a backlash from U.S. employees over a stock awards program that blocks them from cashing in their shares while leaving them exposed to a large potential tax bill, according to interviews with more than a dozen current and former workers. 

The frustrations pit some of TikTok’s US workers against the company at a sensitive time for its leadership. The U.S. Senate is weighing a bill that would force the sale of the app over national security concerns, or have it banned. 

Nnete Matima, who in August left her job as a TikTok sales executive, said she was on the hook for a “potentially substantial” tax bill. “There are people who have a six-figure tax liability on [income] that they have never received,” she said.

Knives Out
We all have to eat now and then.

We all have to eat now and then. Creditors of WeightWatchers parent WW International are banding together, Bloomberg reported Monday, retaining law firm Gibson Dunn & Crutcher and drawing up a formal cooperation agreement. 

Negotiating leverage is front-of-mind for that cohort, which hold a majority of WW’s $500 million in first-lien dollar bonds due 2029 and $945 million term loan maturing in 2028.  With triple-C-plus-rated Weight Watchers beset with faltering operating performance and existential threats from the Ozempic craze, those securities last changed hands at roughly 40 and 44 cents on the dollar, respectively.

Coloring that united front: the proliferation of covenant-lite deal documentations during the zero-rate era, a development which opened the door for all sorts of financial sleight-of-hand. Witness J. Crew’s infamous “trapdoor” maneuver to shunt intellectual property assets to an unrestricted subsidiary, beyond their lenders’ grasp (Grant’s Interest Rate Observer, July 13, 2018). 

The clothing retailer fittingly ushered in the latest financial fashion, as so-called creditor-on-creditor violence is now de rigueur.  Bloomberg relays that distressed borrowers including Rackspace Technology and Apex Tool Group have recently turned to “non-pro rata uptiering” transactions, or below-par debt exchanges at varying price points, bestowing favorable financial terms and stronger covenants on some creditors in return for fresh funding while leaving others in the cold.  

“With fewer true recovery investing opportunities in the market, distressed investors and private capital providers have been aggressive about playing offense and offering deals to companies for their own benefit. . . at the expense of others,” Scott Macklin, head of U.S. leveraged finance at Obra Capital, told Bloomberg.  That dynamic has been duly impressed upon other players.  “The fear of being left behind is now causing some lenders who don’t like [the terms of] a proposed liquidity management exercise transaction to support it anyway,” added David Orlofsky, partner and managing director at AlixPartners. “They would rather be part of it than [risk] being left out and adversely impacted.”   

Though the zero-rate backdrop which helped usher in today’s pugnacious state of play has gone by the wayside, old habits die hard. Thus, average investment carve-outs – or terms permitting borrowers to shift cash or assets to unrestricted subsidiaries – for newly issued leveraged loans have appeared at a near 50% greater frequency this year relative to 2020, Covenant Review found last month. 

Meanwhile, negotiated restructurings continue to grow in popularity, as distressed exchanges accounted for 52% of leveraged loan defaults over the 12 months through February per data from LCD, up from just 10% in 2019.  

Sharp elbows may prove increasingly useful in the years to come, as LCD likewise finds that the buffer of subordinated debt in last year’s crop of leveraged buyouts fell to a 6% share of total borrowings, down from 18% in 2022 and roughly 25% in 2015, while second-lien loans backed just 0.1 turns of total leverage within the 2023 LBO vintage, down from 0.8 turns during the prior two years and the lowest reading since 2010. “A thinning debt cushion has historically reduced the recovery rate of senior debt in the event of default,” LCD notes. 

QT Progress Report
A $25 billion weekly decline in reserve bank credit leaves the Fed’s portfolio of interest-bearing assets at $7.401 trillion.  That’s down $105 billion from four weeks prior, and 17% south of its early 2022 peak. 
Recap April 11

You just can’t keep a good bull down: stocks shook off yesterday’s post-CPI selloff with a 0.75% advance on the S&P 500 to leave the broad index roughly unchanged for the week so far, though Treasurys remained on the back foot with the long bond edging higher to 4.65% and the two-year note settling at 4.93%, up from 4.5% and 4.74%, respectively, as of Wednesday’s close. WTI crude pulled back below $86 a barrel, gold logged another new high at $2,376 per ounce and the VIX retreated to just below 15. 

- Philip Grant

No Fee Lunch

Zero-commission trading, reimagined. From the Financial Times:

Fidelity plans to start charging investors $100 per trade to buy exchange traded funds whose sponsors have not agreed to make “support payments” to the firm. The proposed increase in the cost of buying ETFs runs against a long-term trend in which trading and investment costs have dropped sharply and could ultimately stifle the development of new ETFs while squeezing smaller providers and their investors.

Fidelity is understood to be asking ETF sponsors to pay 15% of total fund revenue to avoid the $100 charges, said multiple people with knowledge of the support payment agreements. Fidelity declined to comment on the size of the support payments.

“We’re just getting hammered, and this is just another hammering,” said David Young, founder and chief executive at southern California-based Regents Park Funds, which is one of the nine ETF firms Fidelity has put on notice. “The next ETF we come out with, we’re going to go to the market with the maximum fee we can justify.”

Threes Company
One size hits all:

One size hits all: Treasury had some trouble placing its latest slug of obligations Tuesday, as this afternoon’s auction of three-year notes priced at 4.548%, well above the 4.528% when-issued yield on offer at the 1pm ET deadline to mark the largest such tail in 14 months.  The bid-to-cover ratio (i.e., submitted demand relative to quantity sold) likewise slipped to 2.5 from an average of 2.58 over the prior six such sales and 2.69 across 2023.

Today’s auction, described as “horrible” by Saxobank head of fixed income strategy Althea Spinozzi, may have been influenced by general unease over the outcome of tomorrow’s CPI print for March. Uncle Sam’s spendthrift ways could likewise factor in, as today’s $58 billion in supply matched the pandemic-era record, while more than doubling the average $28.1 billion three-year auction seen over the five years through 2019.  

Smelling Salts
If at first, you don't succeed. . .

If at first, you don’t succeed. . . takeover speculation surrounds L’Occitane Group (973 in Hong Kong) once more, as Bloomberg relays that billionaire chairman Ronald Geiger is “nearing” a take-private transaction for the Luxembourg-headquartered beauty products purveyor. Geiger, who already controls upwards of 70% of shares outstanding, has arranged debt financing for the purchase via Blackstone, Bloomberg adds.

The provisional bid, which follows similar scuttlebutt in early February and an aborted chairman-led LBO attempt last September, may take place at HKD$31.20 ($3.98) per share, representing a 20% premium to the firm’s pre-deal chatter levels two months ago and a 36% dollar-denominated increase from a bullish analysis in the Sept. 29 edition of Grant’s Interest Rate Observer (the S&P 500 and Hang Seng returned 22% and minus 5%, respectively, in dollar terms over that stretch). 

Might a pivot from the watchful eye of Mr. Market help the skincare concern smooth out its blemishes? L’Occitane will generate $3.1 billion in revenue over the year ending next March if the sell-side consensus is on target, up 41% over the 12 months through March 2023. However, thanks in part to a $100 million plus marketing campaign geared towards the Chinese customer, projected Ebitda for that fiscal 2025 registers at just $568 million, down from $625 million two years prior. 

Yet a still inviting valuation relative to industry peers speaks to the opportunity at hand. Geiger’s outfit – which was halted Tuesday at HKD$29.50 per share – changes hands at an enterprise value of 11 times that fiscal 2025 Ebitda guesstimate.  For reference, rivals L’Oreal SA and Estee Lauder Cos (which trimmed its guidance on a quartet of occasions over the 12 months through November), are projected to post two-year sales growth of 13.8% and 7.5%, respectively, while sporting EVs equivalent to 20 and 18.7 times their respective fiscal 2025 Ebitda bogeys.

Recap April 9

A sharp mid-day downdraft couldn’t keep a good bull down, as the major indices rebounded smartly this afternoon to leave the S&P 500 just north of unchanged for a second straight session. Treasurys managed to rebound despite this afternoon’s soft three-year auction as yields settled lower by roughly five points across the curve, while WTI crude retreated towards $85 a barrel and gold pushed ahead once more to $2,354 per ounce. The VIX settled just below 15%, roughly 1.5 points below its mid-morning peak. 

- Philip Grant

Stop Breaking Down
Stocks take a licking and keep on ticking:
Stocks take a licking and keep on ticking:  A rise in ill omens helps usher in first quarter earnings season, which commences in earnest Friday with figures from a spate of megabanks.  
Seventy-nine S&P 500 members have issued negative guidance as of Friday by FactSet’s count, a tally topped only once since 2006 and well above the 5- and 10-year quarterly averages of 58 and 62, respectively. Similarly, Bianco Research’s Company Offered Guidance Index, which tracks positive updates relative to downbeat and neutral ones over a given three-month period, has slipped into negative territory for the first since 2022.   
Such signs of waning corporate momentum stand in contrast with elevated investor expectations, as the S&P 500 changes hands at 21.4 times 12-month forward earnings, nearly one standard deviation above its 30-year average.  With benchmark interest rates once more on the hop, “the case for equities on a valuation basis will remain challenging,” Bianco writes. 
Mighty momentum and sunny sentiment have indeed helped Mr. Market overlook those foibles to the tune of a 10% year-to-date advance for the S&P 500, though there are exceptions to that generous bent.    
Thus, Grant’s Interest Rate Observer pick-not-to-click Tesla (Sept. 30, 2022, and July 14, 2023) has had a year to forget, with shares off 34% from Dec. 31 through Friday, the worst performance in the S&P 500 over that stretch. Elon Musk’s pride and joy, the 13th largest index constituent with a 1.05% share of the market cap-weighted gauge, managed only 386,810 electric vehicle deliveries in the first quarter, down 8.1% year-over-year and well below the 414,000-figure representing the lowest of 11 analyst guesstimates tabulated by FactSet. 
By way of response – and hours after Reuters reported that Tesla is scrapping plans for a low-cost EV model – Musk took to social media Friday evening to trumpet the unveiling of a self-driving Robotaxi on Aug. 8.  
The announcement, which served to ignite a 5% share price rebound Monday, likewise raised eyebrows among observers familiar with the CEO’s penchant for big talk (in fall 2016, Musk predicted that Tesla would be capable of a fully autonomous, cross-country journey without the need for battery charging within 15 months). 
“There tends to be a wide chasm between hype/speculation and reality,” Adam Crisafulli, founder of analysis firm Vital Knowledge, told Bloomberg. “This seems to be an example of Tesla trying to distract from the current EV market conditions, which are very weak at the moment.” 
Great expectations further color Musk’s predicament. The sell side anticipates an adjusted Ebitda acceleration to $21.6 billion in calendar 2025 from the $13.6 billion logged last year. Recent weakness and all, TSLA remains priced at a princely 45 times next year’s forecasted earnings per share.   
Recap April 8

Compelling celestial developments left little room for financial excitement on planet Earth, as the major indices snoozed through a flat session with little intraday volatility, while Treasurys remained on the back foot with 2- and 30-year yields rising five and one basis point, respectively, to 4.78% and 4.55%. WTI crude pulled back below $87 a barrel, gold marked another new high at $2,338 per ounce and the VIX retreated towards 15. 

- Philip Grant

Shrink Rap
Behold the incredible vanishing stock market.

Behold, the incredible vanishing stock market.  Net share issuance from MSCI All Country World Index components stands at minus $120 billion in the year-to-date, relays the Financial Times, citing data from JPMorgan. That figure, which compares to a $40 billion downtick in 2023 and stands to mark the largest such drop since at least 1999, contrasts with JPMorgan’s November prediction of $360 billion in net new supply for 2024.

Persistent share buybacks – on pace to match the $1.2 trillion pace logged over the past three years – along with a relative dearth of equity offerings and a still-spotty IPO market have helped drive that dynamic, as have secular developments. “You don’t have many companies going public because of the growth of private equity,” David McGrath, chief equity strategist at Oakworth Capital Bank, noted to the FT.  On that score, the tally of listed U.S. companies now stands at fewer than 4,000 per index provider Wilshire, down from 7,000-plus at the turn of the century, with comparable retrenchments seen in the U.K. and continental Europe.  

Might a similar dynamic be on tap for the speculative vehicle of our time?  The $2.5 trillion, 13,000 token cryptocurrency category is primed for M&A, Alex Dreyfus, CEO of blockchain firm Chiliz told CoinDesk, arguing that “there are already too many tokens and too many ‘projects,’ for not enough adoption and utility.”  

Digital assets featuring strong liquidity and passive management teams are ripe for the picking, predicts Oleg Fomenko, co-founder of decentralized app Sweat Economy, as are so-called meme coins: “I foresee the emergence of ‘ShibaPepes’ and ‘FlokiDoges’ in no time,” he said, referring to hypothetical combinations of such existing contraptions as Dogecoin and the Shiba Inu token. 

In the spirit of national reconciliation, how about a JeoBoden-DolandTremp tie-up?

Poker Face
This week's seemingly ceaseless barrage of commentary from Federal Reserve

This week’s seemingly ceaseless barrage of commentary from Federal Reserve officials renders the policy outlook as clear as mud. Thus, a majority of Federal Open Market Committee members view rate cuts as “likely to be appropriate. . . at some point this year,” chair Jerome Powell said Wednesday.  

Fellow FOMC decision makers Loretta Mester and Adriana Kugler offered concurring opinions, while peers Michelle Bowman and Rafael Bostic took a more cautious tack, advocating for a continued wait-and-see approach.  Minneapolis Fed President Neel Kashkari, who does not wield an FOMC vote this year, mused to Pensions & Investments Thursday that “if we continue to see inflation moving sideways, then that would make me question whether we need to do those rate cuts at all.” 

Unsurprisingly, such a muddled message leaves investors guessing.  Interest rate futures now price a 54% chance of a rate cut at the June 12 FOMC meeting, little changed from a week ago and down from 82% odds as of early February.  Mr. Market now envisions 64 basis points of easing through Dec. 31, leaving the benchmark funds rate at 4.64%. That compares to a 4.19% year-end guesstimate two months ago. 

Not everyone on Wall Street is hedging their bets, however. Goldman Sachs chief economist Jan Hatzius told CNBC this morning that “under our forecast, I would be quite surprised if we didn’t get rate cuts this year. Quite surprised.” Hatzius added that the timing of such a move remains dependent on near-term data.

Then again, there’s no time like the present.  Bloomberg relayed Thursday that Goldman’s consumer banking Marcus unit has trimmed the annual percentage yield on offer in its high-yield savings account to 4.4% from 4.5%, its first such cut since 2020. 

Recap April 5

Another strong payrolls report helped the bulls shake off yesterday’s late snafu, as the S&P 500 and Nasdaq 100 rose 1% and 1.2%, respectively, to each settle lower by about 1% for the week, while Treasury yields backed up across the curve with the 2-year note climbing eight basis points to 4.73% and the long bond closing at 4.54% from 4.47% Thursday. WTI crude tested $87 before retreating a bit below that bogey, gold snapped back to another closing high at $2,324 per ounce and the VIX ticked only modestly lower, finishing at 16. 

- Philip Grant

Reverse Engineering
That was a day.

That was a day. The late-session wipeout in stocks was one for the books, as the S&P 500 settled at a 10-day closing low after hovering at what would have been a record close earlier in the session.

SentimentTrader founder Jason Goepfert relays that such a dynamic has been seen on only four occasions since 1993.  A pair of those took place during the choppy financial seas of summer 2011, with the other two – in 2014 and 2016 – passing uneventfully. 

Cumulative Cloud
Grocery prices as measured by the food-at-home

Grocery prices as measured by the food-at-home CPI subcomponent showed a 1% rise in February from the prior annum, the Labor Department finds. That’s the smallest 12-month increase in nearly three years and far below the (hopefully) blow-off cyclical top of 13.5% logged in August 2022. 

Yet such pronounced second-derivative improvement may provide limited consolation for price-conscious shoppers.  Citing data from NielsenIQ, The Wall Street Journal relays today that an archetypal basket of foodstuffs which cost an average $100 over the year ended March 2020 fetched some $137 during the past 52 weeks, with staples such as beef, sugar, cooking oil and mayonnaise seeing a 50% plus increase over that stretch. 

By way of response to persistent price pressures, packaged food companies increased their promotional volumes by 150 basis points relative to 2023 during the four weeks through March 23, analysts at Jefferies found yesterday, marking the 21st consecutive four-week stretch featuring a year-over-year increase in markdowns. 

Some 30.4% of total equivalized volume featured promotional pricing over that four-week period, the highest since at least 2019 and up from an average 28.3% logged over the same period during the past four years. Yet despite that uptick in discounting, Wall Street expects the S&P Food Products Industry subindex to post a 9.5% operating margin for 2024, well above the 8.3% seen over average over the past half-decade.

Then, too, the food-away-from-home portion of the CPI grew at a 5.8% annual clip over the four years through February, virtually matching measured inflation for in-house dining.  That rapid price growth is putting the squeeze on the dining industry, as Darden Restaurants CEO Rick Cardenas observed on his firm’s fiscal third quarter earnings call on March 21 that lower income consumers “appear to be pulling back,” with business from those earning $75,000 and below coming in “much lower than last year.”  

Frozen potato purveyor – and lynchpin McDonalds supplier – Lamb Weston likewise revealed today that net sales over the 12 months through May will likely foot to $6.57 billion with $5.58 in adjusted earnings per share, using the midpoint of management’s range, down from a prior outlook of $6.9 billion and $5.93 a share, respectively.  That downshift, which helped send the stock lower by 19% and surprised LW’s chorus of Wall Street admirers (each of the 14 analysts tracked by Bloomberg said “buy”), was partly attributable to “softer than expected restaurant traffic trends in North America and key international markets,” per chief financial officer Bernadette Madarieta. 

Importantly, those data points have yet to dull analyst optimism regarding industry pricing power. The S&P 500 Restaurants subindex will achieve a 25.6% operating margin for calendar 2024, the sell side believes, the fattest such figure since 2018 and comfortably wider than the average 23% over the previous five years.

Someone has to pay. 

QT Progress Report
Reserve Bank credit declined by $36 billion over the past seven days, leaving the Fed’s portfolio of interest-bearing assets at $7.427 trillion.  That’s down $74 billion over the past four weeks, and 16.8% below the March 2022 peak. 
Recap April 4

The bulls got a jolt ahead of tomorrow’s March jobs report, as stocks tumbled by 1.2% on the S&P 500 and 1.5% on the Nasdaq 100 while the VIX surged more than two points to 16.5, its most elevated finish of 2024. Treasurys caught a bid with 2- and 30-year yields settling at 4.65% and 4.47%, respectively, down three and four basis points on the day, while WTI crude pushed to fresh year-to-date highs near $87 a barrel, gold reversed back to $2,289 per ounce after reaching $2,303 in mid-day and bitcoin hovered near $67,500, up 2% over the past 24 hours. 

- Philip Grant

When the Levy Breaks

From the New York Times:

The Metropolitan Transportation Authority has quietly demanded roughly $750,000 a year from the organization that runs the New York City marathon, to make up for the toll revenue that the authority loses when it closes the Verrazzano — North America’s longest suspension bridge — to vehicular traffic. 

The organization, the New York Road Runners, has yet to acquiesce, prompting the M.T.A. to play hardball. The authority initially threatened to restrict runners to the bridge’s shadowy lower deck during the 26.2-mile race in November. But in recent weeks, the M.T.A. slightly relented and said the race could use the upper level if the Road Runners preferred it to the lower level.

And from KCTV-5, Kansas City:

Jackson County voters have resoundingly voted against a sales tax extension to fund stadium projects for the Chiefs and Royals. Question one on the Jackson County April 2 ballot would extend a stadium sales tax to go toward building a new stadium for the Kansas City Royals and renovating Arrowhead Stadium for the Kansas City Chiefs.

With 100% of its precincts reporting, Kansas City voted 30,791 for No, and 22,399 for Yes. Jackson County voted along the same lines: no: 47,561, yes: 34,207.

Crowd Control
Get your unicorns in a can:

Get your unicorns in a can: qualified investors can now access the late-stage venture capital universe in one fell swoop, as Tuesday marked the launch of the Forge Accuidity Private Market Index, a collection of 60 of the most liquid privately held firms. The market cap-weighted gauge, which features Elon Musk’s SpaceX as its top holding with a 6.41% allocation, is accessible to those with a net worth of at least $5 million and includes a minimum outlay of $250,000. 

“Companies used to go public much earlier in their life cycle and now they’re staying private for longer, keeping the access out of the public market,” Accuidity founder and co-president Vince Gubitosi told Bloomberg, noting that “companies like Forge [can] provide a marketplace for employees and early investors to transact in their shares.”  

The new vehicle “is the gateway to get more assets into [this] space” added Howe Ng, Forge’s executive vice president of innovation and investment solutions. Referencing the rousing debut of various bitcoin-focused ETFs, he added that “this is just the first step towards democratizing the private market. . . but there’s the liquidity issue to resolve. It took bitcoin many years to solve that, it’ll take less time for private market assets.” 

Yet it’s fair to contrast the state of play in VC with the buoyant bid seen in cryptocurrencies ahead of the mid-January bitcoin ETF launch. Global venture capital fundraising from university endowments, institutional investors and other limited partners registered at just $30.4 billion over the three months through March, data compiled by PitchBook show, tracking 35% below last year’s annualized pace.  In turn, the $188 billion sum raised during 2023 marked the weakest full-year tally since 2016, and a fraction of the $555 billion bumper crop logged during the salad days of 2021. 

“We want to be there for our [VC] partners, but we don’t want to put ourselves in a hole,” one U.S.-based chief investment officer explained the Financial Times, adding a striking prediction: “I would be very surprised if, in five years, the industry hasn’t shrunk by half. The returns aren’t there. . . usually the depth of the downturn is in proportion to the magnitude of the bubble, which would imply that we’re in for a brutal time.” 

Accordingly, VC sets its sights on the artificial intelligence realm, hoping that the hot pocket can help “overcome the sins of 2020 to 2022,” as Menlo Ventures partner Venky Ganesan told the pink paper. “Every venture firm is chasing the AI unicorn. Some are going to get it and will thrive, and those who don’t will be sent to the dustbin of history.”

Some startups in that field appear all too aware of their advantageous position.  Dan Siroker, co-founder and CEO of software firm Rewind AI, took to social media on Feb. 29 to lay out conditions for a powwow with would-be investors: “We can’t meet with everyone so, to make sure you are serious and it’s a good use of our time, we are requiring a $100 payment to meet. First come, first served.” Upwards of 1,000 investors expressed interest during a spring 2023 series A fundraising pitch, Siroker relayed to Business Insider last month, with 170 VCs ultimately vying to participate in the round.  

Recap April 3

Stocks edged higher as low-key trading took hold following yesterday’s whiff of volatility, while Treasurys likewise breezed through an inert session headlined by a two-basis point decline in two-year yields, to 4.68%.  Precious metals however continued their eye-catching advance with gold marking its fifth straight record finish just below $2,300 and silver approaching $27 per ounce, up 22.5% from Valentine’s Day.  WTI crude ticked higher again to $85.6 a barrel, and the VIX retreated back towards 14.

- Philip Grant

Ink Stained Adhesive

From the BBC:

Journalists have been told to stop stealing souvenirs from US President Joe Biden's official aircraft. An inventory check on Air Force One after Mr. Biden's visit to the US west coast in February found several items were missing from its press section.

Branded pillowcases, glasses and gold-rimmed plates are among the items that have allegedly vanished from the jet. The White House Correspondents' Association warned that taking items from the plane was forbidden.

Delay of the Land
Talk about altitude sickness:

Talk about altitude sickness: An eye-catching deal came to light in the Mile High City Monday, as real estate investment manager Cress Capital told Bloomberg that it has acquired the $113 million mortgage on a 24-story downtown Denver office tower from an affiliate of Ares Management.  

Though Cress kept its counsel on the ultimate price tag, managing partner Ryan Parkin relays that his firm secured “a major discount,” paying a sum “approaching or at the pre-Covid land value” for the recently renovated property.  Instructively, 28.7% of office space in the greater Denver area was available for lease as of year-end per data from Savills, up from a 20% vacancy rate on the eve of the pandemic. The preliminary national rate approached 20% in the first quarter, Moody’s Investors Service finds, topping the 18% seen in the aftermath of 2008.  

As the bruising bear market in commercial real estate grinds on to the tune of a 21%, two-year nationwide price decline per data from Green Street, might such opportunistic transactions pave the way for better days ahead?  Blackstone chief operating officer Jonathan Gray made the case on a March 14 Bloomberg television spot: “the perception is so negative and yet the value decline has [already] occurred, so when you get into this bottoming period, that’s when you want to move.” 

Lenders and borrowers alike are counting on that optimistic view proving out. Some $2 trillion in commercial property debt is scheduled for maturity by the end of 2026, brokerage and advisory firm Newmark finds, with sharply higher borrowing costs awaiting those who opt to refinance their obligations.  Indeed, upwards of 70% of the $929 billion in CRE debt due this year is “potentially troubled,” Newmark estimates, while CEO Barry Gosin told the Financial Times yesterday that “anyone who invested in office in the last five years will have a problem.” 

Ebbing odds of imminent rate relief further complicate life for that cohort, as derivatives markets now price 65 basis points of easing from the 5.33% Fed funds rate by year-end, down from 75 basis points less than two weeks ago. 

Other observers fret over potential contagion risks. A Tuesday bulletin from Fitch Ratings warns that the ongoing downturn presents problems across a “wide dispersion within the financial system,” impacting “commercial mortgage-backed securities (CMBS), banks, life insurance companies, non-bank financial institutions and public finance issuers.”  

The rating agency guesstimates that CMBS defaults will accelerate to a 4.9% rate next year from the 2.3% rate logged in February and that 75% of U.S. conduit office loans maturing in 2024 likely face restructuring. Complementing that dire figure: only 26% of the $35.8 billion of office CMBS loans that matured last year were actually paid off in full, data firm Cred IQ finds, as loan modifications jumped 150% from 2022’s level. 

A mushrooming slate of extend-and-amend deals may do little to usher in the market’s long-awaited rebound, as new, lower-cost leases take the place of expiring long-term arrangements. The late Dale Hemmerdinger, former chairman of ATCO Properties and one-time head of the Metropolitan Transportation Authority, described the commercial landlord’s plight to Grant’s Interest Rate Observer on April 24, 1992, as the Big Apple slogged through a retreating rental price backdrop:  

Costs are front-end loaded. Even if the market turns tomorrow (which it won’t), it will take me a long time to get rid of my free rent, of my. . . work letters, and I’ve got to get my rents up.  In the meantime, my costs are going up. 

For a contemporary analysis of the ongoing risks and emerging opportunities on offer in the essential, famously slow-moving CRE realm, see the current edition of GIRO dated March 29.

Recap April 2

Stocks and bonds both came under sharp early pressure before paring their losses in the afternoon, as the Nasdaq 100 settled 0.9% in the red following an early 1.4% decline while the 10-year yield finished the day at 4.36% after reaching fresh 2024 intraday heights near 4.4%. WTI crude climbed above $85 a barrel for the first time since the fall, gold notched a fresh peak at $2,276 per ounce and the VIX closed at 14.6 after topping 15 shortly after the opening bell. 

- Philip Grant

Chat PhD
What's the opposite of a quiet period?

What’s the opposite of a quiet period? Policy observers will have plenty of rhetorical grist on which to chew over the coming days, with Federal Reserve officials scheduled to deliver 20 public appearances over the next six days. 

Fed chair Jerome Powell’s Wednesday address at Stanford University’s Business, Government, and Society Forum highlights the week’s slate. Federal Open Market Committee voting members Loretta Mester, Thomas Barkin and Adriana Kugler are likewise set to ruminate Thursday. 

Dot Blot
No sticker shock here:

No sticker shock here:  the stock market’s torrid rally over the past six months leaves the S&P 500 at a 17 times price to earnings ratio on an equal-weight basis, strategists at Goldman Sachs relayed last week. That figure represents a 13% premium to the investment bank’s fair-value guesstimate and is equivalent to the 92nd percentile of p/e observations dating back to 1985.  

Yet similarly rich price tags have not augured automatic pain in recent decades, as the broad average has tended to generate positive six-month returns from such lofty starting points. “Overvaluation alone has not historically been cause for imminent concern,” the Goldman team concludes. “Periods of overvaluation often persist for nearly a year and are typically benign if the subsequent economic growth environment is healthy.”

Corporate America indeed looks to be humming along, as the sell side has trimmed first quarter earnings-per-share estimates by 2.5% since Dec. 31, FactSet finds, comfortably below the average 3.7% intra-quarter downtick seen over the past five years.  The broad index is now projected to grow its bottom line by 3.6% year-over-year over the three months through March, which would mark its third consecutive quarter of positive earnings growth, on its way to generating upwards of 12% growth in operating EPS for full-year 2024. 

“Valuations are a little stretched, but as earnings growth continues, which we’re expecting will happen, they’ll appear a little more reasonably priced,” Gina Bolvin, president and eponym of Bolvin Wealth Management, tells Bloomberg. “When the market reaches new highs, we generally see it continue to reach new highs – momentum begets momentum.” 

Yet momentum of a different ilk is on display within a lynchpin data series. As the Financial Times points out today, non-farm payrolls collected by the Bureau of Labor Statistics have been revised lower on seven occasions since the start of 2023, often by substantial quantities: employment growth registered at 519,000 across December and January, the BLS now finds, well below the 686,000 figure first reported.

Eroding participation from the public helps explain that apparent downtick in data quality, as preliminary survey response rates to the BLS slipped to a 20-year low of 57.5%, Bianco Research finds, down from 79.4% as recently as 2015. 

Might a downshifting labor market, obscured by data collection trouble, serve to disrupt the economic momentum now on display? Canaccord Genuity chief market strategist Tony Dwyer made the case for such an outcome on CNBC Thursday, urging the Federal Reserve to commence its easing cycle post-haste: “I’m not saying they have to go back to zero, but they have to be more aggressive. One of the most [prominent] topics that I talk to clients about is how bad the incoming data is.” 

Call it a financial Rorschach test. 

Recap April 1

A bruising day in the bond pits left long-dated Treasurys near their worst levels of 2024 as 10- and 30-year yields settled at 4.33% and 4.47%, respectively, each up 13 basis points on the session.  Stocks finished little changed on the S&P 500 and Nasdaq 100, though the VIX rose nearly a point to approach 14, while gold notched a record $2,278 per ounce overnight (subsequently pulling back to $2,246) and WTI crude logged fresh five-month highs near $84 a barrel. 

- Philip Grant

Peel and Heat
It’s one banana, Michael, how much could it cost?

It’s one banana, Michael, how much could it cost?  The going rate is $0.23 at Trader Joe’s, up from the $0.19 which had been in force since 2001, the year the prominent grocery chain began selling bananas one-by-one. 

“We only change our prices when our costs change, and . . . we’ve reached a point where this change is necessary,” a company spokesperson told USA Today yesterday. Trader Joe’s sports 587 locations across 43 states and U.S. territories per data firm Scrapehero.

While one notable consumer brand breaks from tradition, another forges ahead into the brave new world. Dollar Tree will add scores of new items to its shelves over the course of 2024 at price tags ranging as high as $7, management announced on its March 13 earnings call. The discount retailer, which imposed a $5 price cap only nine months ago, first “broke the buck” in fall 2021, bumping its primary price point to $1.25 from the $1 which stood for 35 years. 

“Over time, you will see us fully integrate multi-price merchandise into our stores, so our shoppers will find $5 bags of dog food next to our traditional pet treats and toys, and our $3 bags of candy will be found in the candy aisle,” CEO Rick Dreiling told listeners-in earlier this month.

Perhaps a corporate rebranding to *Dollars* Tree is on the docket. 

What's in a Name
“Our default rate on these types of loans is three tenths of one percent,”

“Our default rate on these types of loans is three tenths of one percent,” Blackstone boss Steve Schwarzman told Bloomberg this morning, referring to his firm’s chunk of the $1.7 trillion private credit industry. “I don’t know if there’s a bank around that has a default rate that’s lower.”

Indeed, the post-Covid surge in borrowing costs has seemingly inflicted little pain on that charmed cohort, as law firm Proskauer Private Credit Index showed a 1.7% default rate across 2023, less than half the 3.6% rate for global speculative-grade credit tracked by Moody’s Investors Service.  Leveraged loans have defaulted at a 6.22% clip over the 12 months through February, TD strategist Hans Mikkelsen finds.

Simple semantics may help explain that yawning gap, thanks to private lenders’ ready willingness to engage in so-called liability management exercises.  As investment bank Lincoln International found last fall, 425 private equity-backed companies – equivalent to 15% of the firms under its analytical purview – managed to amend their credit agreements over the first half of 2023, extending maturities and/or reducing the amount owed in return for stronger legal language protecting their creditor(s), i.e., amend-and-extend and distressed exchange transactions, respectively.  

Crucially, such maneuvers are typically considered an event of default by the rating agencies (see the Oct. 13 edition of Grant’s Interest Rate Observer for more on this dynamic).

Noting that leveraged buyouts account for roughly three quarters of defaults within the public credit realm, Moody’s head of leveraged finance Christina Padgett expounded on the advantages and drawbacks of the liability management trend at the Grant’s private credit event in Manhattan earlier this month: 

[Promoters] will use distressed exchanges as a way to resolve their balance sheet issues. They preserve their equity and live to fight another day. About half of these distressed exchanges result in another default and sometimes a Chapter 11[filing].  

Of course, such often-opaque negotiations can likewise leave investors in the dark, occasionally spurring those information-hungry constituents to independent research.  As Bloomberg documents today, some limited partners have taken to hiring private investigators to help gather information on closely held assets. 

The value underlying loan collateral stands as a particular point of interest, according to Jason Wright, senior managing director at financial crimes, risk and regulatory advisory firm K2 Integrity. “There’s a lot of discretion used by the managers of these portfolios and the biggest questions that we’re fielding now are about recoveries in these assets,” Wright told Bloomberg. “What’s the true value of the debt here?”

We’ll know more later. 

QT Progress Report
A $30.8 billion weekly decline in Reserve Bank credit leaves the Fed’s portfolio of interest-bearing assets at $7.463 trillion.  That’s down $77 billion from the end of February, and 16.3% south of the March 2022 high-water mark. 
Recap March 28

A well-earned rest was in order for Mr. Market as stocks stayed flat to wrap up the first quarter with a hearty 10% on the S&P 500, its best start to the year since 2019.  Short-term Treasurys came under some pressure with the two-year yield rising five basis points to 4.59% while the long bond edged to 4.34% from 4.36% Wednesday, while WTI crude reached a fresh five-month high at $83 a barrel, gold notched a record $2,225 per ounce intraday price and the VIX crawled back above 13.  

Both the stock and bond markets are closed tomorrow for Good Friday, but a full slate of data is on tap including the personal consumption expenditures deflator for February.  That inflation gauge will show a 2.5% year-over-year rise on the headline figure and a 2.8% increase on a core basis, if the consensus guesstimate is on target. 

- Philip Grant

Aluminum Sighting

Step aside, meme coins and Trump Media & Technology Group. From Business Insider:

A party venue with a difference in Florida's Tampa Bay is up for sale for $14.2 million. Pine Key is an island in the middle of Tampa Bay, created by a state dredging project. It stretches some 69 acres, though only nine of these are above water, and boasts photogenic white beaches and surrounding blue waters.

It is commonly known as 'Beer Can Island' for the beer cans left behind by boaters but it has been transformed into one of Florida's party hot spots in the last seven years. It was purchased by four entrepreneurial friends in 2017 for $63,650.

Spring Gleaning
Green shoots galore:

Green shoots galore: The near-uninterrupted post-Halloween levitation puts the equity market in rarified air, as the S&P 500 will log its fifth consecutive monthly advance in March, barring a 2.4% drop during the next two trading days.  

Such a winter winning streak – last seen in 2013 – has reliably portended further good tidings. Jeffrey Hirsch, editor of the Stock Trader’s Almanac, finds that each of the 11 prior instances of uninterrupted monthly gains from November through March dating to 1950 were followed by a further advance into year end, with the broad index tacking on a further 11% over the following nine months on average.

“Well, this [fact] sure isn’t bearish and typically is a strong sign of an extended bull market,” Hirsch told Bloomberg. “There’s potential for a pause in stocks soon after [this] massive run, but nothing bad.”

Americans are counting on it.  U.S. households have allocated 35% of their financial assets to equities, Bloomberg found earlier this month, topping the 33% share logged at the dot.com bubble peak and the 25% seen in 2013, when the S&P first managed to push back above its pre-2008 high-water mark.  

Another key constituency, meanwhile, opts for a different approach. Citing data firm Verity, the Financial Times relayed Monday that the ratio of insider sellers to buyers in the lynchpin technology sector stands at roughly 13:1 in the quarter to date, a ratio topped only twice in the past decade and comparing to less than 5:1 throughout 2022 as the market endured its post-Covid downshift. 

“We do view [corporate insider sales] as a negative data point that investors should be aware of,” Ben Silverman, Verity’s vice president of research, told the pink paper. “We are also seeing a number of the big names in this space with insider selling that is not typical.”

Indeed, several captains of industry have opted to ring the register since the start of 2024:  Amazon.com founder Jeff Bezos and CEO Andy Jassey have collectively offloaded $30 million in company shares, while Meta CEO Mark Zuckerberg cashed out $135 million worth of stock, Palantir co-founder Peter Thiel parted with $175 million and outgoing Snowflake CEO Frank Slootman hit the bid to the tune of $69.2 million. 

“Insider sales by high level executives of large amounts of stock are never a good sign, it’s quite simple,” added Charles Elson, chair of corporate governance at the University of Delaware. “It means they have found a better place to deploy their assets than the businesses they’re running.”

Recap March 26

Treasury yields ticked a bit lower across the curve as this afternoon’s five-year Treasury auction enjoyed brisk demand, while stocks came under some modest pressure into the bell to leave the S&P 500 with a 0.2% decline on the day. WTI crude edged back below $82 a barrel, gold climbed to $2,175 an ounce and the VIX stayed just above 13. 

- Philip Grant

Door Number Three

From the Hill:

A teacher and Army veteran in North Richland Hills, Texas — formerly named Dustin Ebey — told WFAA88 he legally changed his name to “Literally Anybody Else” and is running for president under that name. He told the outlet he is hoping the name will send a message. “This isn’t about me, ‘Literally Anybody Else,’ more so as it is an idea. We can do better out of 300 million people for president,” he told WFAA88.

Ebey showed [a] new driver’s license to the outlet, on which his name is listed as “Literally Anybody Else.” Federal Election Commission records show he has filed with the commission under the name.

Split the Bit
Who needs FanDuel?

Who needs FanDuel?  As FTX founder Sam Bankman-Fried is set to be sentenced later this week in connection with his November conviction for fraud, conspiracy and money laundering, legal-minded punters look to make it interesting.  Thus, predictions platform Polymarket permits users to wager on Thursday’s outcome, collecting some $430,000 worth of action thus far.  

The outfit assigns 27% odds of a 20- to 30-year incarceration, with similar probabilities for a 30- to 40- and a 40- to 50-year timeframe, which matches the duration suggested by prosecutors.  Polymarket takes a dim view of defense arguments for a five-to-seven-year sentence, ascribing a 2% chance that SBF will be a guest of the government for less than a decade. 

Compression Algorithm
Spring selling season is officially underway in the primary junk bond market:

Spring selling season is officially underway in the primary junk bond market: at least six U.S borrowers came to market Monday by Bloomberg’s count to the mark the busiest session in some 15 months, following $5 billion of fresh supply on Friday, the heaviest by dollar volume in roughly six weeks. Year-to-date supply stands at roughly $78 billion, more than double that seen in the first quarter last year and representing 28% of the aggregate sum across 2022 and 2023.

That barrage has helped substantially whittle down what had been an imposing principal repayment schedule for speculative-grade borrowers.  Bank of America relayed Friday that U.S. issuers of junk debt and broadly syndicated loans have managed collectively to reduce debt maturities though 2026 by $329 billion over the past year, equivalent to 40% of that maturity wall. 

Yet the repayment date reshuffle – which “represents one of the most aggressive instances of maturity extension in the history of leveraged finance,” per BofA credit strategist Oleg Melentyev – has largely been confined to more creditworthy firms. “Lowest quality market access remains substantially constrained,” he added. Speaking to that dynamic:  global corporate defaults registered at 29 over the first two months of the year, S&P Global finds, marking the highest January & February total since 2009. 

Nevertheless, the bifurcated backdrop evinces little concern for Mr. Market, thanks to the heady combination of a 5.33% benchmark funds rate with hopes for imminent policy easing and ravenous risk appetite. Thus, option adjusted spreads on Bloomberg U.S. High Yield Index stand at roughly 200 basis points over those on offer in investment grade credit, just over half the average 340 basis point premium seen over the past 20 years.

What’s more, creditors evince little concern for those dicey financing conditions towards the deeper end of the speculative grade pool. Single-B-rated rated firms, i.e., those “more vulnerable to adverse business, financial and economic conditions but currently ha[ve] the capacity to meet financial commitments” by S&P’s lights, change hands at a 161-basis point spread premium to triple-B issues, Bloomberg relays today. That’s less than half the differential on offer at this time last year and a level undercut only once (briefly, in June 2018) since the 2008-2009 financial crisis.  

Recap March 25

Stocks edged a bit lower in forgettable trading with the S&P 500 wrapping up 0.3% to the red, while long-dated Treasurys likewise came under modest pressure with 10- and 30-year yields settling at 4.25% and 4.42%, respectively, each up three basis points on the day. WTI crude rebounded towards $82 a barrel, gold finished little changed at $2,172 per ounce and the VIX ticked above 13. 

- Philip Grant

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