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

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

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

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

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

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

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

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

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

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

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

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

- Philip Grant

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

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

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

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

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

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

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

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

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

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

- Philip Grant

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

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

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

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

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

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

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

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

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

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

- Philip Grant

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

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

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

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

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

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

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

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

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

- Philip Grant

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

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

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

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

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

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

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

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

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

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

- Philip Grant

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

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

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

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

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

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

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

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

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

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

- Philip Grant

Spotted in lower Manhattan this afternoon:
 

The Vanguard ad blitz continues apace. 

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

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

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

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

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

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

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

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

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

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

- Philip Grant

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

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

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

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

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

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

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

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

- Philip Grant