05.24.2024
Tail Number

Call it human/canine pari passu. From the New York Post:

BARK Air, the first airline catered to dogs, has officially taken off. The airline’s first-ever flight departed from New York at 4 p.m. EST Thursday and touched down in Los Angeles.

According to BARK Air’s booking site, the inaugural flight was completely sold out. One ticket cost $6,000, and each ticket includes one dog and one human companion. If two humans want to travel, two tickets will need to be purchased.

It’s unclear whether the high-flying beasts chipped in for their portion of the fare, though the absence of opposable thumbs presents a plausible justification for failure to remit payment. 

Endless Summer
Time for a pre-beach temperature check.

Time for a pre-beach temperature check. The protracted, potent post-October bull run has served to fling the financing window wide open across a mélange of asset classes, as the following trio of examples demonstrates:

Staples, Inc. completed a king-sized financing this morning, selling $2.37 billion in senior secured notes due 2029 and priced-to-yield 11%, along with a $1.6 billion five-year term loan at a 575-basis point pickup to the Secured Overnight Funding Rate. That dual track deal forms part of a multi-pronged “liability management exercise,” which also includes a debt exchange of 10.75% notes due 2027 for new, 12.75% junior lien secured notes maturing in 2030. 

The single-B-minus-rated office supplies distributor, acquired by Sycamore Partners in 2017 for $6.9 billion in cash, last sold junk debt in 2019 to help finance a $1 billion dividend to that private equity firm, notes the International Financing Review. Outstanding debt now tops $7.5 billion, equivalent to more than six times Ebitda, while that liberally-defined earnings metric covers interest expense by less than 1.5 times according to Moody’s Investors Service.

“Although we expect Staples’ profitability and credit metrics to improve [thanks to] lower costs and significant expense reduction, modest top-line growth and debt reduction [from asset sales], interest coverage will remain weak,” the rating agency wrote May 16.

Adventurous conditions in speculative-grade credit appear downright staid relative to certain corners of the venture capital realm. Elon Musk’s artificial intelligence startup is all the rage in Silicon Valley, as Bloomberg relays that X.AI is on track to complete a funding round at a $24 billion post-money valuation, with as much as $6.5 billion in fresh capital set to tumble into the firm’s coffers. That fundraising figure is upsized from a $6 billion bogey as of a few weeks ago and stands far above the $1 billion that X.AI was seeking to scare up early this year. 

Such a drastic shift in scope is par for the course these days. Nvidia-backed cloud computing startup CoreWeave attained a $19 billion valuation in a late April funding, nearly triple the $7 billion figure achieved only five months prior, while The Wall Street Journal reported on May 9 that Paris-based Mistral AI is wrapping up a fresh round valuing the firm at $6 billion, likewise trebling from December. 

Today’s torrential capital downpour, like God’s own rain, falls on the just and on the unjust. Alibaba Group managed to sell $4.5 billion of convertible bonds per a Friday announcement from the e-commerce behemoth, easily the largest dollar-denominated sale by an Asian company on record. Proceeds from the securities – which sport a $105.04 per share strike price (just over 30% above current levels) and 0.5% coupon with a 2031 maturity date – will help fund share buybacks along with a derivatives transaction designed to limit investor dilution should shares trade to the conversion price. The deal was oversubscribed by six times, Bloomberg relays, with an order book spanning some 250 investors.

“Basically, they are issuing equity at a high price in the future to immediately buy back their shares at a cheaper price,” John Choi, analyst at Daiwa Capital Markets, told the Financial Times. “On the one hand, investors understand it, on the other hand it’s unsettling. Alibaba [already] has a ton of dollars on their balance sheet, but they seem to see their investors as an ATM.”

The cash machine is indeed humming. 

Recap May 24
Stocks got right back on the horse after yesterday’s stumble, with the S&P 500 pushing higher by two-thirds of a percent to wrap up the week little changed. Treasurys stayed close to home with the long bond ticking lower by one basis point to 4.57% and the two-year note rising to 4.93% from 4.91%, while gold likewise digested its recent selloff at $2,334 per ounce. WTI crude and bitcoin rebounded towards $78 a barrel and $68,900 a token, respectively, and the VIX turned lower once more to wrap up the final trading session before T+1 settlement south of 12. 
05.23.2024
The Bell Pepper Tolls for Thee

Farewell, sweet prince. From NBC New York:

Takeru "Kobi" Kobayashi, the six-time Nathan's Hot Dog Eating Contest champion, announced he is retiring from competitive eating over concerns of the damage he is doing to his body, he announced in a new film. . . Kobayashi said he thinks he's eaten 10,000 hot dogs during his career. In addition to the famous Nathan's event on Coney Island, which he last won in 2006, he's also participated in other competitive eating competitions, including ones involving pizza and hamburgers.

Policy Game
As Omaha turns:

As Omaha turns:  Last week’s revelation that Berkshire Hathaway has snapped up a 6.7% stake in Chubb duly made waves on Wall Street, as shares of the property-casualty insurer jumped by nearly 9% over the subsequent two trading days, with average trading volume over that period more than doubling from its baseline over the past five years. 

Value investor Bill Nygren captured the zeitgeist in an interview with Barron’s Monday, ruing that Warren Buffett’s firm had opted for Chubb rather than peer American International Group: “We were hopeful it might have been AIG.”  

Nygren, whose Oakmark Select mutual fund has generated a near 12% annual return from its 1996 inception, outperforming the S&P 500 by more than 2 points per year over that stretch, noted that AIG is “quite a bit cheaper than Chubb,” with shares priced at about 8.5 times sell side guesstimates of 2025 operating income, compared to nearly 11 times for its rival.

Of course, an appealing price tag is only part of the equation. “It’s got to be a good business. . . run by people that understand how to drive share value,” Nygren said, adding of top executive Peter Zaffino, who took over as CEO in 2021: “He’s the best.” 

Indeed, a management-led turnaround initiated by predecessor Brian Duperreault following the 2008 calamity and subsequent operating woes helped underpin a bullish verdict in the Sept. 16, 2022, edition of Grant’s Interest Rate Observer. Shares have since generated a 49% total return, compared to a 39% gain on the S&P 500 after accounting for reinvested dividends.  

Driving that strong performance, AIG’s general insurance unit posted a combined ratio (i.e., total operating and claims-related expenses as a percentage of premiums earned) south of 90% in each of the past two quarters, down from a post-crisis peak of more than 117% in 2017. Meanwhile, the firm agreed to offload a 20% stake in Corebridge Financial to Japan’s Nippon Life Insurance last week for $3.8 billion, trimming its stake to about 33% and continuing Zaffino’s plan to reduce exposure to the life and retirement spinout. The executive previously indicated that proceeds from that initiative would be allocated towards share repurchases. 

More broadly, Berkshire’s latest foray underscores potential opportunity in the insurance realm, which exhibits its own cyclical cadence and continues to enjoy solid pricing power. U.S. composite insurance prices rose 3% year-over-year during the three months through March per data from Marsh & McLennan Cos. Though well below the double-digit gains logged from late 2019 through mid-2022, that first quarter figure marked the 21st consecutive such annual increase. 

Might value seekers be well served in following Buffett et al.’s well-trodden path?  See the May 10 edition of Grant’s Interest Rate Observer for a look at one diversified industry player presenting an arguably attractive investment profile. 

QT Progress Report
A $44.7 billion weekly decline in Reserve Bank credit leaves the Fed’s portfolio of interest-bearing assets at $7.266 trillion. That’s down $102 billion over the past four weeks and 18.6% below the March 2022 high-water mark. 
Recap May 26
Nvidia’s latest stellar earnings print provided little further help for the fat-and-happy bull crowd, as stocks settled lower by 0.7% on the S&P 500 thanks to some pronounced afternoon weakness (the average nursed modest gains as of lunchtime).  Treasurys likewise came under pressure with 2- and 30-year yields rising five and three basis points, respectively, to 4.91% and 4.58%, as did gold, which slumped just over 2% to $2,332 per ounce.  WTI crude slipped below $77 a barrel, bitcoin retreated to $67,300 and the VIX rose half a point to near 13. 
05.21.2024
Whisker Number

We’ve got tail risk. From industry publication Mining.com (via reader Ryan Korby at Third Avenue Management):

Gold Fields may see its $1 billion Salares Norte mine in northern Chile affected again after the country’s environmental watchdog (SMA) said there was no certainty the miner had captured and relocated a population of 25 critically endangered chinchillas living in the area as asked. 

The regulator’s latest order, issued late on Wednesday, forces Gold Field to stop activities around the mine plant area. The miner has 10 days to present [proof] of the absence of chinchillas in the rocky area or may face sanctions.

Chilean authorities stopped the initial rescue operation, launched in 2020, after two of the first four rodents being relocated died shortly after. SMA laid charges against the South African gold producer and asked it to a[djust] the original plan to guarantee the safety of the [remaining] short-tailed chinchillas.

The regulator approved the new strategy late last year, and “Operation Chinchilla” resumed in February. Since then, however, Gold Fields has been unable to locate any.

Cup and Handle
Time for un petit coup de leverage?

Time for un petit coup de leverage? Robinhood Markets announced this morning that it will slash the interest rate it charges on margin loans, furthering its mission to democratize investing by encouraging customers to borrow against their portfolios. 

The millennial- and Gen Z-friendly trading app now offers 6.75% financing on balances up to $50,000, with that rate dropping to 5.7% on accounts of $50 million and above.  That compares to prior margin loan rates ranging from 8% to 12%, and the 11.83% to 13.58% borrowing schedule on offer at rival brokerage Charles Schwab. 

“People use [margin investing] episodically when they see a great opportunity or love a specific investment,” Robinhood chief brokerage officer Steve Quirk told MarketWatch. “But I think where the opportunity lies is, in addition to our current customers, we’re seeing a whole lot of new customers that are more frequent margin users with larger balances.”  The firm’s margin book stood at $4.1 billion last month according to data released last week, up 32% from April 2023, while total assets under custody registered at $123.3 billion, up 59% year-over-year. 

More broadly, such speculative activity remains on the hop: aggregate margin debt outstanding registered at $775.5 billion at the end of April according to FINRA. That’s up 23% from the same period last year and equivalent to 2.8% of 2023 GDP, roughly matching the output-adjusted figure logged at the peak of the late 1990s dot.com bubble. 

Yet total margin debt remains below the $936 billion reached in the fall of 2021. Equivalent to 3.43% of GDP, that borrowing binge remains the highest output-adjusted figure since the Roaring Twenties heyday, per data compiled by Steve Keen of University College London and a distinguished research fellow at the Institute for Security and Resilience Studies.  For a closer look at that effervescent financial epoch, along with potentially instructive similarities to the current state of play, see the analysis “The view from 1928” in the March 29 edition of Grant’s Interest Rate Observer.

Recap May 21

Stocks remained on cruise control as the S&P 500 rose by one quarter percent, good for fresh highs as the broad index now enjoys year-to-date gains of slightly more than 12%. Long bond yields ticked lower by three basis points, leaving the 10- and 30-year Treasurys at 4.41% and 4.45%, respectively, with the two-year note holding at 4.82%. WTI crude slipped below $79 a barrel, gold ticked modestly lower at $2,422 per ounce, bitcoin came under some pressure this afternoon to change hands at $69,500 and the VIX ticked back below 12. 

- Philip Grant

05.20.2024
Portion Control

We all want to eat sometimes. From the Financial Times:

The European Central Bank is facing union calls to introduce nationality quotas for recruitment after an Irish member of the bank’s executive board urged Dublin to preserve his country’s outsized presence among the bank’s staff. 

Union representatives wrote to the ECB board to raise concerns after chief economist Philip Lane warned a minister in Ireland’s government that the country risked its share of bank employees being diluted. He said few of his countrymen were applying to join the ECB and many — including Lane himself — would retire over the next decade. 

The staff committee’s letter, seen by the Financial Times, said: “It is very disturbing to see that a member of the executive board is not aiming at achieving an overall balanced representation of nationalities within the ECB, but only at having the representativeness of his own country/government addressed.” 

ECB employees are supposed to put their national interests aside when they join the Frankfurt-based central bank, but the issue of whether some countries are over-represented still raises political hackles. 

The staff committee said: “The role played by nationality in hiring and promotions should be monitored and made transparent via adequate statistics.”

Sleep Number
Buy in May then hit the hay?

Buy in May then hit the hay?  Mr. Market remains well rested of late as the major indices linger near record highs following a torrid six-plus month stretch. The Cboe’s VIX index, which measures implied volatility on the S&P 500 over the next 30 days, marked a fresh post-pandemic low on Friday, settling south of 12 for the first time since November 2019. 

That figure is muted even by bull market standards.  Bloomberg’s Cameron Crise finds that, since 1990, the gauge has averaged 14.8 with a median 13.2 reading when the S&P 500 closed within 25 basis points of its high-water mark. Looming first quarter results Wednesday from Nvidia, the epicenter of the artificial intelligence craze worth just over 5% of the market cap-weighted SPX, likewise renders the VIX’s current carefree levels “a little bemusing,” Crise writes. 

Imminent, substantial renovations to the financial edifice likewise color today’s preternatural calm. Beginning on May 28 – the first trading session following the Memorial Day long weekend – U.S. stock transactions will settle in one business day rather than the current two, in accordance with Securities and Exchange Commission requirements imposed in February 2023.  Bourses in Canada and Mexico will likewise switch to next-day settlement as of next week. 

The reforms, partially enacted in response to operational snafus seen during the first meme stonk mania in spring 2021, "will make our market plumbing more resilient, timely, orderly, and efficient,” said SEC Chair Gary Gensler.

Time will tell on that score, as the tightened settlement interval raises the specter of an uptick in failed trades (in which the buyer or seller do not render funds or securities, respectively, in a timely fashion) along with other operations snafus. “There’s a lot of anxiety even just around the technology and the actual way by which settlement will take place,” Amy Hong, head of market structure and strategic partnerships at Goldman Sachs, warned at a Bloomberg-hosted conference last month. “There are going to be some mismatches around funding, there are going to be some FX-related issues that we’re going to need to work out.”   

Only 9% of sell side firms polled by consultancy Coalition Greenwich this spring anticipate a smooth transition to T+1. Some 38% express concern over inadequate buy side preparation, while 28% flag potential problems with trading venues and nearly 20% fret over the prospect of broad-based “severe issues.” 

Tellingly, perhaps, most respondents assert confidence in their own company’s readiness for the new settlement regime. “The sell side thinks that there will be issues, but it will be someone else’s fault,” Jesse Forster, senior analyst of market structure and technology at Coalition Greenwich, told Bloomberg. “We could be in for a lot of finger-pointing over the coming months.” 

In any event, Wall Street’s readiness, or lack thereof, for that truncated schedule will be put to the test in short order. On May 31, index provider MSCI will conduct its quarterly rebalancing, setting the stage for what should be one of the busiest sessions of the year a mere three days after the introduction of one-day settlement. Global equity turnover jumped 120% from its long-term daily average during the prior such event, data from Northern Trust show. 

“This really is the rubber hitting the road immediately after T+1 goes live,” Gerard Walsh, head of the global capital markets solutions group at Northern Trust, tells Reuters, noting that the index rejiggering impacts “thousands of funds, ETFs, portfolio structures. . . it’s a big deal.” 

Recap May 20
Stocks finished just slightly higher on the S&P 500 after the broad index gave back the bulk of its early advance, while Treasury yields mostly ticked higher by a couple of basis points, with the two-year to 4.82% from 4.83% Friday to represent the outlier. WTI crude held above $79 a barrel, gold settled at $2,425 per ounce after notching a fresh intraday high above $2,450 this morning, bitcoin jumped nearly 5% to $69,400 and the VIX ticked just above 12. 
05.17.2024
Remote Control

From the Financial Times:

U.K. engineering group Arup lost HK$200 million ($25 million) after fraudsters used a digitally cloned version of a senior manager to order financial transfers during a video conference, the Financial Times has learned. 

Hong Kong police previously revealed what is one of the world’s biggest known deepfake scams, but did not identify the company involved. The FT has confirmed it was Arup, which employs about 18,000 people globally and has annual revenues of more than £2bn. . . 

Hong Kong police acting senior superintendent Baron Chan told local media in February that a member of staff at the targeted company had received a message purporting to be from the UK-based chief financial officer regarding a “confidential transaction”. 
After a video conference joined by the company’s digitally cloned CFO and other fake company employees, Chan said, the staff member made a total of 15 transfers to five

Hong Kong bank accounts before eventually discovering it was a scam upon following up with the group’s headquarters. The police said investigations into the case continued, with no arrests so far.

Image is Everything
There's always a bear market somewhere.

There’s always a bear market somewhere.  Though the post-pandemic crypto winter has long since melted away, conditions remain downright frosty in the adjacent realm of non-fungible tokens.  

Witness a recent lawsuit filed against Dolce & Gabbana USA in Manhattan federal court: As Bloomberg reports, complainant Luke Brown alleges that the luxury retailer was multiple weeks tardy in delivering NFTs imbued with various special benefits, while digital outfits designed for wear in the metaverse “could [only] be used on a platform. . . with barely any users,” adding that he lost $5,800 on the venture, nearly all the $6,000 outlay. 

Brown’s sub-optimal investment outcome is no outlier. NFT sales registered at $11.6 million over the first three months of the year per digital data firm Dapps, up modestly from the fourth quarter’s $10.3 million figure but a fraction of the $25 billion and $23.74 billion seen across 2021 and 2022, respectively. Roughly 2,500 of the contraptions changed hands on a given day last month, Statista-compiled data show, down from more than 87,000 daily average volume back at the start of 2022. Meanwhile, upwards of 95% of the 73,257 NFT collections reviewed by blockchain analysis firm dappGambl hold zero market value.

Might help be on the way for those rug-pulled ranks of NFT enthusiasts? Last week, presumptive Republican presidential nominee Donald Trump held a fundraiser at Mar-a-Lago, offering an apparent endorsement of cryptocurrency at large: “I’ll say this, I’m fine with it. I want to make sure it’s good and solid and everything else but I’m good with it,” per remarks reported by CoinDesk.  “If you’re in favor of crypto you’re going to want to vote for Trump, because [Democrats] want to end it.”

Attendees who purchased at least $10,000 worth of Trump’s “Mugshot Edition” tokens enjoyed VIP status, likewise receiving a piece of the suit Trump wore last summer during his post-arrest photography. As for the broader state of the digital keepsakes, the former Commander-in-Chief applied his customary humility: “We did [the Trump collection] when NFTs were not hot, and we made NFTs hot again.”

Recap May 17

Buoyant price action in commodities characterized the early stages of Friday’s session, as spot silver jumped 3.3% this morning to mark an 11-year high at $30.55 per ounce, while copper likewise sits near its March 2022 peak following another 3% advance and gold approached its own record established last month north of $2,400 an ounce (better tee up those rate cuts!).  

Stocks sat little changed on the S&P 500 as of lunchtime, when your correspondent *had* to leave, while long-dated Treasurys came under moderate pressure, bitcoin pushed back above $67,000, WTI crude held above $79 a barrel and the VIX remained stuck near 12. 

05.16.2024
Kyle Direct Club

A tradition unlike any other. From the New York Post:

Thousands of Kyles will travel for miles to their namesake Texas city this weekend in hopes of smashing the Guinness World Record for the largest gathering of people with the same first name.

The “Kyle Fair A Tex-Travaganza” will need at least 2,326 people named Kyle — with that particular spelling — to break the record, a goal festival organizers have set their sights on for half a decade. . . The Kyle cabal — fittingly taking place at Lake Kyle Park — is looking to dethrone the group of 2,325 Ivans who gathered in Bosnia and Herzegovina in July 2017.

The effort will mark the Kyles’ fifth attempt at topping the record, first starting with 100 people in 2017, when the rules were slightly more lenient and allowed similar names like Kyler and Kylie, or people whose middle names are Kyle, to participate.

Wash Trade
When the music's over, turn out the LED lights:

When the music’s over, turn out the LED lights: the environmental, social and governance investing phenomenon is on the wane, at least if recent trends in the exchange traded fund realm are any indication.   

Thus, at least 27 ESG-focused funds in the U.S. have wound down in the year to date, Bloomberg analyst Shaheen Contractor relayed Wednesday, representing nearly 30% of all ETF closures and approaching the 36 ESG liquidations seen throughout 2023.  Similarly, only two ESG funds launched during the first quarter, with that pair charging a modest 21 basis point expense ratio on average. For context, 249 new ETFs debuted during 2021 and 2022, with the median expense ratio registering at 50 basis points. 

Total U.S.-listed ETF assets allocated to that theme stood at $102 billion as of March 31 per data from Morningstar, down from $117 billion at year-end 2021. “ESG has become a political lightning rod,” Todd Rosenbluth, head of research at consulting firm VettaFi, noted to the Financial Times earlier this week. “Many asset managers are less eager to offer a broad suite of products as they were in the past. It is less likely that the style returns to be a hot area in the near term.”

Beyond partisan squabbles, increasing scrutiny of puffed-up claims of ESG conformity, i.e., greenwashing, could play a role in that shift. On Tuesday, the European Securities and Markets Authority released guidelines governing the use of sustainability-related terms in investment fund marketing materials. 

Those new strictures come months after New York State Attorney General Letitia James filed a lawsuit against the U.S. unit of JBS SA for violations of local consumer protection laws, alleging that the meatpacking giant made “fake sustainability claims to boost sales,” and “admit[ting] that it made its ‘Net Zero by 2040’ commitment without having calculated the vast majority of greenhouse gas emissions from its supply chain.”

That legal challenge could prove the tip of the melting iceberg. Natalie Runyon, director of ESG content and advisory services at the Thompson Reuters Institute, concludes in a March 5 analysis that a global increase in disclosure mandates pertaining to ESG issues “will drive greenwashing litigation in 2024 and beyond.” 

Shifting financial fashion likewise figures in ESG’s ebbing prominence, as Mr. Market’s infatuation with artificial intelligence – itself a growing source of greenhouse gas emissions owing to copious energy consumption (Grant’s Interest Rate Observer, April 12) – takes center stage. Citing data from Bowmore Financial Planning, London-based business publication City A.M. relayed Tuesday that 560 U.K.-based companies have promoted their AI usage to shareholders over the past year, up 75% from spring 2023.  “There are going to be many use cases that are completely pointless using this technology [and] people just want to be part of the hype cycle,” Lewis Liu, co-founder and chief executive of AI research firm Eigen Technologies, told City A.M.

Such a dynamic may likewise be taking shape on this side of the Atlantic. On March 18, investment advisors Delphia and Global Predictions settled charges from the Securities and Exchange Commission of making false statements concerning their AI bona fides, agreeing to fork over $400,000 in civil penalties and cease the correspondence in question, without admitting or denying guilt. 

“As more and more investors consider using AI tools in making their investment decisions or deciding to invest in companies claiming to harness its transformational power, we are committed to protecting them against those engaged in ‘AI washing,’” said Gurbir S. Grewal, Director of the SEC’s Division of Enforcement. On that score, Grewal and co. could have their work cut out for them: 41% of S&P 500 component companies mentioned AI on their first quarter earnings call, analysts at Goldman Sachs find, up from roughly 10% at the end of 2022. 

QT Progress Report
Reserve Bank credit ticked lower by $7.9 billion over the past week, leaving the Fed’s holdings of interest-bearing assets at $7.31 trillion. That’s down $78 billion from this time last month, and 18% below the March 2022 peak. 
Recap May 16
Stocks cruised through a low-key session, with the S&P 500’s modest 0.2% decline tellingly representing the index’s worst showing in two weeks.  Short-dated Treasurys came under pressure with two-year yields rising five basis points to 4.78%, though the long bond held steady at 4.52%, while WTI crude edged above $79 a barrel, gold pulled back to $2,377 per ounce, bitcoin retreated to $65,100 and the VIX remained south of 13. 
05.15.2024
Style Guide

Long live the Canadian tuxedo. From CNBC:

A renaissance in Western styles can boost stocks that specialize in denim, according to TD Cowen.

Analyst Oliver Chen hailed the jean-fabric category as a strong performer that should be able to keep up momentum through at least the end of 2024. While positive on stocks across the space, he specifically pointed to Boot Barn, Levi Strauss and Ralph Lauren as key plays on the trend.

Too Live Crew
Obligation is a relative term.

Obligation is a relative term. Altice France SA threw its creditors for a loop this morning, as Bloomberg reports that the sprawling telecommunications firm has designated a trio of subsidiaries as “unrestricted,” or beyond the purview of existing debt covenants. 

Such a maneuver sets the stage for a so-called liability management transaction, in this case, likely borrowing against the collateral that existing creditors thought was their own.  In response to that bulletin, Altice France’s euro-pay term loan due August 2028 slipped two points to 72 cents, with its second lien, 4 3/4% bonds maturing January 2028 retreating below 60 cents from 62.4 Tuesday. 

That development was long in the works, as Altice chairman Patrick Drahi channeled his not-quite-namesake Mario Draghi last summer, declaring that he would do “whatever it takes,” to de-lever his firm. To that end, CFO Malo Corbin warned in a late March analyst call that it will seek “creditor participation” in “discounted transactions” to help whittle down its liabilities, or else face a “long road” of organic debt reduction.

“The [creditor participation] announcement came out of the blue and was perceived as very aggressive – we have received numerous inbound calls,” one French restructuring attorney told CreditSights. “Funds are now seriously concerned, and I have been approached by several of them already,” added another. 

Of course, such sleight of hand is old hat stateside, as the infamous 2018 J. Crew trapdoor, in which the clothing retailer shifted intellectual property to an unrestricted subsidiary beyond creditors grasp and then used those assets to raise fresh capital, ushered in a contentious new era in distressed debt.  

Late last month, a group of Dish Network bondholders filed a lawsuit in New York State Supreme Court seeking to block a series of “brazen” collateral transfers by parent company EchoStar earlier this year, which shunted wireless spectrum and other assets valued at a combined $14 billion out of their control.  Following that January gambit, Bloomberg reported that several private credit firms approached Dish with potential financing, with one lender offering to furnish more than $1 billion in new capital backed by the transferred assets. 

Fittingly, the zero-rate era helped usher in the current wave of creditor-on-creditor violence as a thirst for yield helped foment increasingly lax covenant protection. In turn, its end puts the hurt on weaker borrowers: the issuer-weighted speculative-grade default rate reached 5.8% over the 12-months through March per data from Moody’s Ratings, the highest in three years. The dollar value of defaulted debt registered at $33 billion over the three months through March, up sharply from $19 billion seen in the fourth quarter and a quarterly sum topped on only a handful of occasions over the past decade. 

A dwindling cushion of subordinated obligations adds further urgency to that dynamic.  The proportion of second-lien debt within the Morningstar LSTA Leveraged Loan Index stood at just 2.4% at the start of the year per data from Barclays, down from more than 5% in 2014.  

Similarly, Moody’s found last week that the proportion of junior debt residing below first-lien loans slipped below 30% last year from a long-term average north of 40%. Accordingly, in the event of default, “first-lien loan recoveries will persistently fall short” of the 75% plus long-term historical average.   

How might conscientious fiduciaries navigate today’s treacherous state of play? See “Creditors turn predators” in the April 26 edition of Grant’s Interest Rate Observer for more on the rise of liquidity management transactions and its implications.   

Recap May 15

S&P 36,000?  Stocks remained on the rampage following a largely in-line reading of April CPI, as the broad average rose 1.2% to extend its May gains to 5.3% less than halfway through the month. Treasurys likewise enjoyed a strong bid with 2- and 30-year yields settling at 4.73% and 4.52%, respectively, down eight and nine basis points on the day, while WTI crude rebounded to near $79 a barrel, gold rallied to $2,387 per ounce, bitcoin ripped 7% to $65,900 and the VIX settled south of 12.5, at the cusp of a year-to-date closing low. 

 

05.14.2024
Freestyle Rep

From the New York Post:

Mayor Eric Adams on Tuesday suggested migrants should be hired to fill the city’s lifeguard shortage — because “they’re excellent swimmers.”

Hizzoner dropped the comment after being asked during a City Hall briefing about lifeguard staffing at the city’s beaches and pools, which have increasingly had issues in recent years, ahead of Memorial Day.
 

State of Nature
Up, up and away – and then what?

Up, up and away – and then what?  The return of substantive interest rates could spur a long-lasting shift in investor psychology, Trump-era economic advisor Gary Cohn contended in a Bloomberg Television interview Tuesday, as the 5% plus yields on offer in short term Treasurys serve to pry funds from more speculative ventures, such as Silicon Valley startups, which enjoyed a deluge of cash during the bygone ZIRP era. 

“We have changed the whole mentality of the way people think about holding capital, investing capital, recirculating capital,” said Cohn, former president and chief operating officer at Goldman Sachs prior to that D.C. stint and now vice chair at IBM. “A little bit of the natural cadence of capital moving in and out of risk assets has changed both because of fiscal and monetary policy.”

To that point, total assets parked in dollar-denominated money market funds registered at $6.03 trillion as of last Wednesday per the Investment Company Institute, up 130% from the summer of 2017 and 65% from the eve of the pandemic. 

Yet as recent events demonstrate, old habits die hard. Retail investor favorite GameStop logged a 120% intraday rally this morning following a 78% advance during Monday’s session, while peer AMC Entertainment likewise doubled early Tuesday after announcing it had completed a $250 million at-the-market share offering in the wake of yesterday’s 74% upside lurch (the pair finished higher by 60% and 32%, respectively, at the close of regular trading hours).  

Spurring that ebullient price action: a series of cryptic social media posts from Keith Gill, a.k.a. “Roaring Kitty.”  Gill, whose X account had been idle for nearly three years prior to Sunday evening, reportedly turned a $58,000 options outlay into a $50 million windfall during the initial 2021-era meme stonk frenzy. 

Lathered up individual punters likewise search farther afield in search of their next big score.  As CoinDesk documents this morning, a GME-inspired digital token embarked upon a lunar lift-off with its market capitalization jumping to as high as $127 million from less than $4 million as of Sunday evening.  Fellow meme coins Pepe, floki, popcat and mog likewise rose by as much as 30% Monday. 

“[Gill’s] return was perceived as bullish for meme coins because the market remembered that much of the GameStop mania from 2021 spilled over to DOGE and [peers],” mog developer Shisui told CoinDesk. “While we are far from being in a true risk-on environment, the price movements after Roaring Kitty’s comeback hint at which assets will outperform when frothy conditions return.”

Professionals are likewise loaded for bull, if a pair of institutional polls released today are any indication. Thus, the latest Bank of America Global Fund Manager Survey finds that bullish sentiment stands at its most pronounced since November 2021, with 80% of respondents anticipating a rate cut in the second half of the year in tandem with ongoing economic growth.  Average cash levels among that contingent stand at 4%, the lowest level in three years, while equity allocations stand at their highest since the first days of 2022. 

In a similar vein, S&P Global’s Investment Manager Index shows risk appetite at its highest levels since late 2021, with a majority of polled investors anticipating stock market gains over the next 30 days, the first such positive near-term outlook of 2024 thus far.  “Investor sentiment toward shareholder returns has rebounded, with growing optimism about dividend growth despite concerns over higher interest rates,” commented Mohammad Hassan, equities dividend forecasting director at S&P and co-author of the report. 

Indeed, the higher-for-longer backdrop has yet to inflict more than passing duress upon Mr. Market, as the S&P 500 has returned 15% since July 26, when the Fed last hiked rates to the current 5.33%. For context, the broad average has generated a 16.5% annualized total return since the financial crisis lows of March 2009. 

More anything? More everything!

Recap May 14
Stocks jaunted higher by half a percent on the S&P 500 as the broad index logged its eighth green finish in nine tries ahead of tomorrow’s April CPI print, while Treasurys likewise caught a moderate bid with yields settling lower by three to four basis points across the curve. WTI crude slipped to $78 a barrel, gold rebounded to $2,357 per ounce, bitcoin retreated to $61,600 and the VIX settled a bit north of 13. 
05.13.2024
Protein Shake

Tastes like savings. From The Wall Street Journal:

Chicken is reprising its role as the star of Americans’ dinner plates.

Stung by the rising price of beef, diners are buying more wings at fast-food chains and frozen tenders at grocery stores. Meat giants like Tyson Foods and Pilgrim’s Pride, in turn, are bringing in higher profits from poultry as demand rises for their products and costs fall for livestock feed.

Retail sales volumes of all U.S. chicken products were up about 3% for the 52 weeks ended April 21 compared with the prior year, according to market-research firm Circana. Pork and beef were each down slightly.

Masking Tape
We are so back, China edition:

We are so back, China edition:  Beijing’s Ministry of Finance is gearing up to sell RMB 40 billion in 30-year bonds Friday, kicking off a supersized RMB 1 trillion ($138 billion) offering of long duration debt over the next six months, its fourth so-called special sovereign bond issuance over the past 26 years. 

“The bond sale is a critical part of the concerted efforts to support significant, urgent and challenging projects that are essential for the modernization of the economy,” commented Liu Sushe, deputy head of the National Development and Reform Commission, at a public hearing last month.  Proceeds from the offering are earmarked for a suite of infrastructure projects sufficient to boost 2024 GDP by as much as one percentage point, Xing Zhaopeng, senior China economist at Australia and New Zealand Banking Group, estimates to Bloomberg. 

The imminent spending spurt follows a series of investor-friendly signals from Xi Jinping and friends, as the Politburo issued a statement on April 30 pledging steps to help tackle the nation’s moribund, supply-saturated housing market and manage interest rates in service of boosting economic activity. 

Bloomberg likewise reported Thursday that regulators are reviewing a plan to waive a 20% tax on dividend income from Hong Kong-listed stocks levied on individual investors in the mainland, a move which could serve to “spike” trading volumes on the bourse per a Friday note from JPMorgan. 

On the heels of a vicious bear market, which included a 60%, two-year drawdown in the MSCI China Index, Mr. Market has duly taken note of that prospective policy pivot. The Hang Seng Index has now bounced 28% in dollar terms from its Jan. 22 lows, while a trio of Hong Kong- and Shanghai-listed firms have enjoyed an average 37% USD-denominated levitation since Grant’s Interest Rate Observer had its bullish say just under three months ago (“Commie value play,” Feb. 16).  

Helping burnish that momentum: sell-side analysts bumped earnings per share estimates for CSI 300 Index constituents higher on balance in April, data from Bloomberg show, breaking a six-month string of downshifting expectations that marked the longest such stretch since 2008 into 2009. “Investor sentiment towards mainland China has turned on the back of supportive policy announcements and resilient earnings,” HSCBC strategists wrote Friday. “Cheap valuations, policy support and no major downside surprises on the earnings front should keep the risk vs. reward [proposition] for the market compelling.”

Yet as the world’s second-largest economy continues to slog through the aftermath of its debt-driven economic miracle-cum-titanic housing bubble, policymakers put their best foot forward – with Chinese characteristics.  Thus, aggregate financing fell by nearly RMB 200 billion in April from the prior month, data released over the weekend show, marking the first outright contraction in that metric of broad credit availability in nearly two decades.  

True to form, the government looks to sweep those inconvenient figures under the rug, as Bloomberg relays that seven separate research notes from local brokerages commenting on that data release were scrubbed from the WeChat social media platform as of this morning. 

Then, too, regulators have switched off live trading data showing foreign investment flows on the mainland Shanghai and Shenzhen exchanges via the Stock Connect trading link. That move, which was telegraphed in an April announcement, follows word that foreign direct investment registered at just $10.3 billion during the first quarter, down 56% from the over the first three months of 2023. 

Recap May 13

The return of meme-stonk mania in the form of respective 74% and 78% jumps in GME and AMC obscured an otherwise dull session for equities, as the S&P 500 finished little changed in narrow range trading ahead of Wednesday’s release of April CPI. Treasurys mostly ticked lower by one to two basis points across the curve, while WTI crude climbed back to $79 a barrel, bitcoin rose above $63,000 and gold pulled back to $2,336 per ounce. Belying the largely quiet backdrop, the VIX snapped back to near 14, up just under one point on the day. 

- Philip Grant

05.10.2024
Volatility Simile

Don Draper, call your office. From Ad Age:

Apple apologized Thursday for a new iPad Pro commercial that was met with fierce criticism from creatives for depicting an array of creative tools and objects—from a piano, to a camera, to cans of paint—being destroyed by an industrial crusher. The tech giant no longer plans to run the commercial on TV.

The spot, created in-house and unveiled Tuesday, was intended as a metaphor to suggest how much creative potential is packed inside the latest edition of its signature tablet, and to promote how thin the tablet is. (At 5.1 millimeters, it’s Apple’s thinnest product ever.)

But many viewers had a more chilling interpretation, seeing the spot as a grim representation of technology crushing the history of human creativity—something the creative industry is already existentially worried about with the rise of AI. . . 

“Creativity is in our DNA at Apple, and it’s incredibly important to us to design products that empower creatives all over the world,” said Tor Myhren, the company’s VP of marketing communications. “Our goal is to always celebrate the myriad of ways users express themselves and bring their ideas to life through iPad. We missed the mark with this video, and we’re sorry.”

The Waiting Game
Talk about a public nuisance.

Talk about a public nuisance. The potent post-October rally in stocks has yet to awaken moribund new issue markets, as the Covid-era issuance bacchanal and subsequent hangover continue to reverberate.  Domestic IPO proceeds reached just $15.8 billion across 2023 by S&P Global’s count, down nearly 25% year-over-year and a pittance relative to the $287 billion logged in 2021.  

New entrants raised a combined $5.7 billion last month, the best such showing since last September, but a more durable pickup in listing activity may not take shape until 2025. “The companies that go public this year will need a strategic reason [to do so], not just as another financing event,” Insight Partners managing partner Ryan Hinkle told Bloomberg last week. “If you don’t need the financing, you shouldn’t do so until there is more activity.” 

Today’s rigid conditions are complicating life in some corners of the private equity realm, as evidenced by a fast-growing backlog of assets waiting to be listed. Citing data from Preqin, Bloomberg relayed Thursday that industrywide holdings of yet-to-be-exited holdings reached $3.2 trillion as of Dec. 31, up 14% year-over-year and far above the $2 trillion logged in 2020.  
In tandem with that portfolio pile-up, outgoing cash slowed to a relative trickle. Buyout firms dished out the equivalent of 11.9% of net asset value in distributions last year per data from Raymond James Financial, far below the 33.9% achieved two years prior and the weakest share of investor payouts since 2009 (see the analysis “Prayers for IPOs” in the March 29 edition of Grant’s Interest Rate Observer for more on the distribution drought and its potential implications).

Yet while conventional sources of public liquidity remain hard to come by, recent developments may provide solace for cash needy p.e. players and their limited partners.  Thus, this week brought the return of special purpose acquisition companies to the fore, as nuclear systems developer Oklo, Inc. – which features AI kingpin Sam Altman as its chairman – merged today with Altman-backed blind pool AltC Acquisiton Corp., completing a deal which valued Oklo at $850 million as of July 2023. 

Mr. Market has duly rolled out the red carpet for that combo, as Oklo (née AltC) stock changed hands at $18.23 as of Thursday’s close, nearly double the $10.41 which shareholders would have received if they opted to redeem their holdings at Tuesday’s merger vote.  

Though shares pulled back sharply on Friday, that transaction marks a noteworthy revival for a listing strategy seemingly left for dead after the Covid-era bubble. Upwards of 20% of the nearly 500 SPACS which came public since 2020 now change hands below $1 by Bloomberg’s count, i.e., down 90% from the typical $10 per share debut price, including half of the components of a Grant’s Interest Rate Observer-compiled gauge of picks-not-to-click (“Short this index,” Dec. 25, 2020).  Nevertheless, the tally of SPAC mergers stands at near 40 in the year-to-date. 

Then, too, animal spirits are on display once more in the private markets following the recent hibernation. Bloomberg reports that Elon Musk’s xAI startup is wrapping up a monster $6 billion funding round, which will value the 11-month-old architect of the Grok chatbot at $18 billion. As one prospective LP relayed to TechCrunch late last month, xAI initially sought $3 billion in capital at a $15 billion pre-money valuation, before abruptly upping the ante: “We all received an email that basically said, ‘it’s now $6 billion on $18 billion, and don’t complain because a number of other people want in.’”

Signed, "HAL"? 

Recap May 10
Stocks settled just north of unchanged on the S&P 500 as the broad average wrapped up a relatively placid week with a 1.4% gain, while Treasurys came under some pressure with the two-year yield rising to seven basis points to 4.87% and the long bond climbing to 4.64% from 4.6% Thursday. WTI crude pulled back towards $78 a barrel, gold kept its momentum with a push to $2,364 per ounce, bitcoin retreated to one-week lows at $60,700 and the VIX finished at 12.6, testing fresh year-to-date lows. 
05.09.2024
Franchise Tag

Call it a purity test. From CNBC:

A new strategy has emerged in the battle to ban smoking in casinos: the shareholder vote.

Shareholders at Boyd Gaming, Bally’s Entertainment and Caesars Entertainment will put on the ballot at the respective casino companies’ proposals to force them to study the costs associated with permitting smoking indoors — and whether going smoke-free could save money.

The proposals are sponsored by Trinity Health, a nonprofit health care network, and the Americans for Nonsmokers’ Rights Foundation. Trinity Health, based in Livonia, Michigan, has used its shareholder status to fight for various health initiatives despite the fact that it owns a tiny fraction of these companies. For example, public records show Trinity owns just 440 shares of Bally’s stock, which represents 0.001% of the company.

Taking it to the Streets
There's a party in global credit, and (almost) everyone is invited.

There’s a party in global credit, and (almost) everyone is invited.  Investment-grade firms priced some $53 billion of bonds from Monday through Wednesday per Bloomberg compiled data, the busiest three-day period since 2021.  Junk supply likewise registered at a healthy $11 billion over that stretch, marking the most active week since February with two sessions to spare, while European high- and speculative-grade borrowers priced roughly $23 billion despite an array of holidays on the Old Continent. 

Lenders and borrowers alike are living their best lives these days, as credit spreads for both junk-rated and high-grade firms sit near their tightest of the post-crisis era, while meaty all-in rates relative to the ZIRP-era norm helps drive investor interest.  

Underscoring the serendipitous state of play: single-B-rated Citrix Systems parent Cloud Software Group sold $1.8 billion in eight-year bonds yesterday at an 8.25% yield, Bloomberg relays, with ravenous demand serving to balloon the offering from an initial $1 billion. Wednesday’s result marks a diametric shift from the aftermath of Citrix’s January 2022 Elliott Investment Management and Vista Equity Partners-led leveraged buyout, in which syndicate banks eventually ate a $1.5 billion loss after struggling to offload the cloud computing firm’s debt for months during the post-Covid bond market swoon. 

Today’s free and easy conditions likewise extend to leveraged loans, long a key cog in the private equity machine. Dollar denominated issuance over the first four months of the year reached $395 billion according to Fitch Ratings, already topping the $377.6 billion in volume seen throughout last year and far above the $250 billion logged in calendar 2022. Refinancing and repricing transactions accounted for more than 80% of activity from the start of January through April.

Ravenous risk appetite and all, Mr. Market has his limits.  As former New York Sun managing editor Ira Stoll highlighted in a Thursday Substack column (to which the editor of Grant’s is a paid-up subscriber), Harvard University appears to be receiving a chilly investor reception from would-be creditors.  Thus, the pride of Cambridge announced in a Feb. 26 filing that it planned to raise $900 million in a tax-exempt bond offering, contingent upon “market conditions,” with the Massachusetts Development Finance Agency (MDFA) endorsing an upsized fundraising target of $2 billion at a March 14 board meeting. 

Yet, following an inquiry from Stoll to the MDFA earlier this week, Harvard posted a document to its website noting that issuance from the offering registered at just under $735 million, some 18% south of the initially floated figure and less than half the $2 billion approved by state regulators. What’s more, the provided figure includes funds earmarked to purchase and retire previously issued bonds and commercial paper, meaning that new fundraising falls even farther short of the mark.

It's almost enough to make you want to protest. 

QT Progress Report
A $25 billion weekly decline in Reserve Bank credit leaves the Fed’s portfolio of interest-bearing assets at $7.318 trillion. That’s down $84 billion over the past month, and 18% south of the peak notched in early 2022. 
Recap May 9
Another low volume session suited the bulls just fine, as the S&P 500 grinded higher by 0.6% to settle within striking distance of its late-March highs, while Treasury yields ticked lower by three to four basis points across the curve. WTI crude advanced to near $80 a barrel, gold jumped to $2,345 per ounce, bitcoin rose 2% to $62,400 and the VIX settled at a multi-month low south of 13. 
05.07.2024
Insight Unseen

Call it the electric Kool-Aid crypto test. From Columbus NBC News affiliate WCMH: 

The person selected to speak at Ohio State University’s commencement ceremony for its spring graduates hasn’t minced details on how he made the controversial script.

Days before the Sunday ceremony, OSU’s chosen speaker Chris Pan announced on LinkedIn that he had taken the psychedelic drug ayahuasca to write his first drafts. “Got some help from AI (Ayahuasca Intelligence) this week to write my commencement speech for 60,000 grads and family members at Ohio State University next Sunday,” Pan wrote. “Tried ChatGPT but [it] wasn’t that good.”

The resulting speech and an on-stage demonstration with OSU President Ted Carter drew audible booing from the audience in the university’s livestream, as Pan tried to encourage graduates and attendees to buy cryptocurrency. 

“Saving is not enough because inflation exploded after the pandemic which is why everything got so expensive … I see Bitcoin as a very misunderstood asset class,” Pan said. “It is decentralized and finite which means no government can print more at will.”

Take the Long Way Home
Off to sea once more:

Off to sea once more: Global trade is on the upswing, as the Organization for Economic Co-operation and Development pencils in 2.3% growth in worldwide commerce this year, accelerating to a 3.3% advance in 2025. Last year, that lynchpin metric expanded at a plodding 1% pace. 

A “cyclical recovery” in international output is responsible for that brightened outlook, OECD chief economist Clare Lombardelli tells the Financial Times, pointing to rebounding activity in east Asia and Europe, as Germany managed a 3.2% sequential uptick in export activity during the first quarter. “We do see some green shoots in global trade,” concurs Neil Shearing, chief economist at Capital Economics, adding that the manufacturing slowdown seen in 2023 has “now run its course.” 

The brightening economic picture is not without its blemishes, however, as geopolitical impediments remain front-and-center. Late last month, Iran-backed Houthi rebels unleashed a drone attack on the Oman-bound container ship MSC Orion in the Indian Ocean, some 375 miles off Yemen’s coast. That broadside, the first such deep-sea assault since the militia began its campaign last fall in response to the Israel/Palestine conflict, demonstrates that the Houthis are capable of striking targets far afield of the Strait of Hormuz, notes the Associated Press. 

Though the MSC Orion sustained minimal damage with no human casualties, April’s development could inflict plenty of commercial pain. Industry bellwether A.P. Moller-Maersk warned Monday that it will accordingly reroute all applicable maritime traffic southbound via Africa’s Cape of Good Hope “for the foreseeable future.”

Thanks to the additional time and expense associated with that circuitous route, which include bottlenecks, traffic congestion, equipment shortages and a near 40% uptick in average fuel costs, Maersk will present customers with “relevant surcharges on [their] latest invoices.” The operator now anticipates that global capacity on the Far East to Northern European shipping market will drop by as much as 20% in the second quarter from its prior outlook.

Prices are duly responding to that one-two punch of percolating activity and tightening supply. “Spot rates are shooting up rapidly,” a U.K.-based shipping coordinator told freight and logistics publication The Loadstar on Friday. “This could be just the beginning as demand is stronger than expected and capacity is absorbed by [Houthi-related] diversions.” A peer likewise groused that “carriers are definitely taking advantage of the situation, and we’ve already seen issues with restricting allocations on our long-term contract deals.”

How might investors profit from the current state of play? See the April 12 edition of Grant’s Interest Rate Observer for a bullish analysis on a NYSE-listed, diversified transport vessel operator sporting strong revenue visibility, a relatively sturdy balance sheet, bountiful cash generation profile and inviting valuation. 

Recap May 7
Modest strength in long-dated Treasurys headlined a snoozer of a session, with 10- and 30-year yields dropping two and three basis points, respectively, to 4.47% and 4.61%, while stocks settled just north of unchanged after remaining in a narrow range. WTI crude remained near $78 per barrel for a fourth straight day, gold pulled back a bit to $2,314 per ounce and the VIX settled slightly north of 13. 
05.06.2024
Relationship Counseling
Time for another "Fed listens" tour?

Time for another “Fed listens” tour? John Q. Public maintains a jaundiced view towards Jerome Powell, as only 39% of respondents to the annual Gallup Economy and Personal Finance poll expressed either a great deal or a fair amount of confidence in the Federal Reserve chair to do the right thing for the economy.  

Though that’s up three percentage points from last year’s survey – which marked the lowest reading on record dating to the turn of the century – Powell’s approval rating remains well below the 50.2% average figure logged over the five years through spring 2022, prior to the aggressive, belated rate hike campaign in response to inflation that has proven a bit more than “transitory.”

Then, too, broader perception of the central bank remains in a secular bear market. Thus, nearly three-quarters of respondents to Gallup’s 2001 poll trusted Alan Greenspan to deftly steer the American economic vessel, with that figure remaining at 65% two years later in the aftermath of the dot.com bubble and subsequent recession. 

Successor Ben Bernanke, who famously told Congress that problems surrounding subprime mortgages were “contained” ahead of the global financial crisis, logged a 49% approval rating in 2009. 

Book Report
Choose your fighter:

Choose your fighter: Hedge funds are girding for rough financial seas, as April net purchases of consumer staples, utility and health care stocks reached their highest levels since summer 2023 according to the Goldman Sachs prime brokerage division. In tandem with that portfolio shift towards typically lower risk sectors, funds acted as net sellers of global stocks for the first time this year last month, downshifting equity exposure as the S&P 500 absorbed a 4% pullback following the near-uninterrupted, 27% rally over the five months through March. 

“It makes sense that hedge funds would be more defensive,” Keith Lerner, co-chief investment officer at Truist Wealth, told Bloomberg. “You had a big first quarter, and now we’re seeing more choppiness and volatility around interest rates and inflation.”  

The portfolio shift isn’t exactly momentum driven, as those three industry groups returned 0.9%, minus 2.4% and minus 4.7%, respectively over the 12 months through Wednesday. The S&P 500 logged a 25% advance over that period. 

But with Friday’s softer-than-expected April jobs report helping revive market expectations of policy easing in 2024, might the conditions for a reversal be taking shape?  Reviewing data back to 1970, Evercore ISI chief equity and quantitative strategist Julian Emanuel concludes to Bloomberg that “when the Fed is cutting [rates] because an economic slowdown is on the horizon, the stock price outperformance is very skewed toward these defensive sectors.”

As hedge funds batten down the hatches, other constituencies opt for a different approach.  Citing data from VandaTrack, the Financial Times relays that retail investors poured a net $5.2 billion into leveraged exchange traded funds in April, a sum topped on only a handful of occasions in late 2021 and early 2022 and far above the sub-$1 billion monthly baseline seen prior to the pandemic.  

“Market timing is often the Achilles heel of day traders, and this time was no different,” Bryan Armour, director of passive strategies research at Morningstar, told the pink paper. “Most of the top ETFs by March and April inflows had their worst monthly performance of the year in April.”
 

Recap May 6

Another 1% rip on the S&P 500 pushed the broad index back within 1.5% of its late March highs, as Treasurys saw more muted price action with two-year yields ticking to 4.82% from 4.81% Friday and the long bond declining two basis points to 4.64%. WTI crude edged back towards $79 a barrel after last week’s wipeout, gold jumped 1.4% to $2,325 per ounce and the VIX finished at 13.5, little changed on the day.

- Philip Grant

05.03.2024
Topic Thunder

There should be lots to talk about during the next episode, at least. From USA Today:

Milwaukee Bucks guard Patrick Beverley chucked a basketball twice at Indiana Pacers fans with seats behind the Bucks bench late in the fourth quarter of the Pacers’ series-clinching 120-98 victory in Game 6. . .

Beverley's antics did not end on the court. During his post-game media scrum in the Bucks' locker room, according to a video clip posted on social media, Beverley interrupted one question and turned to someone holding an ESPN microphone. 

"Excuse me, do you subscribe to my (podcast)?" Beverley asked. The person replied no. (Beverley has a podcast, "The Pat Bev Show," that airs on the Barstool Sports network.) "You can't interview me then. No disrespect," Beverley said.

Perhaps the intrepid reporter prefers more highbrow audio fare, such as Grant’s Current Yield (advt).

A Day in the Strife
Labor disquiet crosses the border:

Labor disquiet crosses the border:  Nearly 10,000 employees at Canada’s two largest railroads could walk off the job beginning May 22, after more than 95% of union employees voted to authorize a strike Wednesday following months of fruitless discussions with operators Canadian National Railway and Canadian Pacific Kansas City. 

Safety-related matters loom large in the dispute, as the union contends that carriers mandate unpredictable work schedules, while depriving staffers of sufficient rest between shifts. Negotiators are “seeing little to no engagement from the companies” in contract talks, Teamsters Canada Rail Conference President Paul Boucher said.  

The companies retort that they are offering significant wage increases with scheduled time off provisions in accordance with local regulations, with Canadian National stating that the union has made “very few concessions” during five months of negotiations “and has been unclear on what it is seeking for employees.” 

Merits of that dust-up aside, any extended impasse could mark an ill wind blowing from the Great White North, the United States’ largest trading partner. “We simply don’t have the capacity to replace the movement of goods by rail,” Pascal Chan, senior director for transportation, infrastructure and construction at the Canadian Chamber of Commerce, told The Wall Street Journal. A potential strike at both railways would all but curtail bulk grain shipping, Western Grain Elevator Association executive director Wade Sobkowich likewise warned Reuters: “There is no plan B because, as we’ve said for decades, there are no competitive alternatives.”  

Whale Watch
We're all gonna be rich!

We’re all gonna be rich!  Retirement funds are sniffing around the crypto complex, Fidelity Digital Assets vice president Manuel Nordeste told attendees at a London conference Wednesday, in remarks reported by DL News.

“We’re starting to have conversations with the larger, real money institutional investor types, and we’re getting some of those clients [on board],” he said.  That contrasts with the unit’s 2018 launch, when interest in crypto was largely confined to “family offices, small, specialized asset managers and hedge funds.” Only 7% of pension funds polled by Fidelity Digital Assets have invested in the nascent category, compared to 48% of high-net-worth individual respondents.  

Count some stateside politicians as among the vanguard. Earlier this year, the Arizona State Senate advanced a resolution “encouraging” the Arizona State Retirement System and Public Safety Personnel Retirement System, which collectively control some $ 70 billion in assets, to evaluate the newly minted suite of bitcoin exchange traded funds for potential investment. The measure, which awaits review from the state legislature, received the full-throated endorsement of blockchain advocacy group the Chamber of Digital Commerce: “the potential for portfolio diversification and returns is too significant to ignore,” the firm wrote. 

One of biggest fiduciary fishes of them all may likewise be nibbling. Japan’s Government Pension Investment Fund, the world’s largest such outfit with $1.4 trillion in assets under management, declared on March 19 that it will conduct due diligence on a suite of relatively exotic assets including bitcoin. That announcement came weeks after Japan’s Cabinet approved a bill adding crypto to the list of approved destinations for investment by state-affiliated entities. 

With the crypto category enjoying a $2.29 trillion aggregate valuation per Coinmarketcap.com, up some 100% over the past year, the prospect of wider institutional adoption further tantalizes the bull crowd. Demand from pension funds could foment “a constant uptake” of digital ducats, Darius Tabai, former global head of metals trading at both Merrill Lynch and Credit Suisse, told DL News.

Call it the eternal bid. 

Recap May 3
A softer-than-expected April payrolls report spurred a comprehensive bull stampede, as the S&P 500 jumped 1.25% to edge back into positive territory for the week after Tuesday’s wipeout, while the VIX settled below 14 for the first time since late March.  Treasurys were likewise bid as 2- and 30-year yields each dropped six basis points on the day to 4.81% and 4.66%, respectively, WTI crude slipped to $78 a barrel and gold remained at just over $2,300 per ounce.   
05.02.2024
Closed Caption
Let's see if this melodrama features a Hollywood ending.

Let’s see if this melodrama features a Hollywood ending: Sony Pictures and Apollo have submitted a non-binding $26 billion bid for Paramount Global, The Wall Street Journal reports this afternoon, marking the private equity giant’s second attempt to snap up the media conglomerate at that $26 billion price point. 

Thursday’s news represents the latest plot twist for Paramount, which entered deal talks with production company Skydance Media last month, opening an exclusive negotiating window set to expire tomorrow. That April 3 proposal “infuriated” minority investors, the WSJ notes, as it included a hefty premium for controlling shareholder Shari Redstone while leaving others with stock in the combined company.

Of course, more mundane factors might have contributed to that foul mood, as Paramount’s class-B shares (ticker: PARA) have fallen 68% over the past five years, including a 38% decline since Grant’s Interest Rate Observer had its bearish say on March 10, 2023 (a Nov. 23 follow-up withdrew that negative analytical stance in anticipation of potential M&A).  Free cash flow will sum to a combined $824 million over the two years through 2025 if sell side consensus is on point, a fraction of the $1.97 billion logged in 2020, while net debt stands at $13.4 billion, only moderately below the $18.6 billion seen in that plague year.

Investors responded to today’s bulletin by bidding PARA higher by 13%, leaving its market capitalization at $9.7 billion. That valuation remains well below the $12 billion equity component of Apollo’s initial bid. 

Yawn of a New Day
"Banking should be boring,"

“Banking should be boring,” Wells Fargo financials analyst Mike Mayo tells Bloomberg Businessweek. “It should be like turning on the faucet and seeing water run out.”  Indeed, the industry now treads the straight and narrow following the cascading collapse of Silicon Valley Bank just over 13 months ago, as bank executives and analysts have mentioned the word “boring” upwards of a dozen times on earnings calls in the year-to-date, doubling the term’s usage during all of 2022, Businessweek finds. Frequency of that term, along with “cautious” and “conservative,” stands at the highest combined total in at least a decade. 

Underscoring the shift, regional lender PNC Financial Services Group rolled out a televised ad campaign in March deeming itself “brilliantly boring.” CEO William Demchak told viewers that “banks. . . [that] do their basic job tend to leapfrog the banks that are trying to be heroic in an industry that doesn’t need heroes.”

A bruising business backdrop colors that instructive sentiment shift, as the post-pandemic lurch higher in benchmark borrowing costs pressures commercial real estate holdings and obliges lenders to pay up for deposits, while an inverted yield curve likewise crimps banks’ bread-and-butter business model of borrowing short and lending long. First quarter profits fell sharply across the regional banking complex on a year-over-year basis, with U.S. Bancorp’s bottom line shrinking 24% and Citizens Financial Group seeing a 38% contraction. Comerica reported $131 million in net income, down 59% from the first three months of 2023. 

“I’m worried about a handful of [banks],” Shelia Bair, chair of the Federal Deposit Insurance Corp. during the 2008-era crucible, told CNBC earlier this month. “I think some of them are still overly reliant on industry deposits, have a lot of concentrated commercial real estate exposure, and then I think the larger picture really is the potential instability of their uninsured deposits even for the healthy ones if we have another bank failure.”

To that end, consulting firm Klaros Group identified 282 lenders out of the 4,000 U.S. banks in its analytical purview facing the one-two punch of material exposure to commercial real estate along with interest rate-related losses. “Most of these banks aren’t insolvent or even close to insolvent,” Klaros co-founder Brian Graham told the financial news network Wednesday. “They’re just stressed.”

Yet smaller lenders have largely avoided the CRE pitfalls that now bedevil their mid-size rivals. “When a community bank says, ‘We have an office loan,’” Ben Mackovak, co-founder and managing member of Strategic Value Bank Partners, apprised Grant’s Interest Rate Observer last week, “it’s a two-story suburban office building where the owner has their small business on the second floor and maybe there’s a dentist on the first floor. It’s not the 40-story building that sells for 10% of replacement cost.” 

Might some of those financial minnows fit the bill for discerning value seekers?  See the current edition of GIRO dated April 26 for an upbeat analysis of a trio of such candidates. 

QT Progress Report
A $24.4 billion decline in Reserve Bank credit leaves the Fed’s portfolio of interest-bearing assets at $7.343 trillion. That’s down 17.7% from the March 2022 peak and $84 billion over the past four weeks.  The Fed will curtail its roll-off of Treasurys to a $25 billion monthly ceiling from the current $60 billion pace beginning June 1, while maintaining a $35 billion per-month maximum for mortgage-backed securities. 
Recap May 2
Stocks shook off yesterday’s late selloff to race higher once more, as the S&P 500 jumped nearly 1% with the Nasdaq 100 enjoying a 1.3% advance, while Treasurys continued to respond to Fed chair Jerome Powell’s dovish Wednesday rhetoric with two-year yields settling at 4.87%, down 17 basis points over the past 48 hours. WTI crude remained stuck below $79 a barrel, gold retreated to $2,302 per ounce and the VIX finished at 14.6, off a bit less than one point.  
05.01.2024
Nobody Beats the Fiz

To paraphrase Alan Greenspan, you can’t identify a bubble until after the fact. From the New York Post

Perrier, which has been marketed as French mineral water for more than a century, is actually soda — and can therefore be taxed, a Pennsylvania court ruled. 

Perrier’s classification has been under fire since 2019, when thirsty patron Jennifer Montgomery was taxed 24 cents on a 16-ounce Perrier bottle at a Sheetz convenience store in Pennsylvania, Fortune earlier reported.

Montgomery then filed two petitions with the Pennsylvania Department of Revenue Board of Appeals seeking a refund for the sales tax since mineral water was not supposed to be taxable in the U.S. 

Bottled water has traditionally been exempt from sales tax because water is necessary for survival. However, when manufacturers start adding sugar or other flavors and sweeteners, water goes from an essential to an optional item, and can therefore be slapped with a tax.

Gavel Guide
Talk about silver linings.

Talk about silver linings. Tuesday’s sentencing hearing went about as well as possible for crypto magnate Changpeng Zhao (CZ), with U.S. District Judge Richard Jones levying a four-month stay as a guest of the government for violations of the Bank Secrecy Act. That’s comfortably below the three-year stint requested by prosecutors and a 12- to 18-month term under federal sentencing guidelines. 

As CoinDesk notes, a barrage of more than 160 written testimonials in support of the Binance boss helped pave the way for that lenient ruling, as Jones declared that “I don’t think I’ve ever seen [such] a volume of letters,” adding that “everything I see about your history and characteristics [are] of a mitigating nature.” 

Though CZ must fork over $50 million in personal fines with Binance obliged to cough up a further $4.3 billion to settle allegations pertaining to the anti-money laundering statutes, the executive prepares for the hoosegow with an estimated $43 billion fortune, a sum that Bloomberg deems “likely to grow even further as Binance business accelerates amid crypto’s latest bull run.”  The exchange reports that it added 40 million users worldwide in calendar 2023. 

Will another fixture of the digital asset boom prove as fortunate?  The Department of Justice announced yesterday that crypto investor Roger Ver – a.k.a. “Bitcoin Jesus” – was arrested over the weekend in Spain on charges of mail fraud and tax evasion, with prosecutors set to request extradition to the U.S. to stand trial. Ver allegedly failed to report ownership of some of his 131,000-stong bitcoin stockpile back in 2014, when the early adopter renounced his U.S. citizenship and hit the bricks for the Caribbean nation of St. Kitts and Nevis.  Over that decade long stretch, the value of those ducats has swelled to some $7.5 billion from about $112 million. 

Render unto Caesar what is Caesar’s…

Raise the Roof
No soft landing in this verbal smackdown.

No soft landing spotted in this verbal smackdown. Treasury Secretary Janet Yellen took the gloves off in Tuesday’s House Ways and Means Committee hearing, dismissing speculation from predecessor Lawrence Summers that still-higher interest rates may be required to beat back the seemingly relentless post-pandemic inflation surge. 

“He’s a person who’s been wrong in the past,” she said, adding that Summers “said that it would absolutely take a recession to bring inflation down, and that turned out to be a serious misjudgment.” Indeed, price pressures will presently recede without undue tumult in the labor market, Yellen predicted. 

Data released shortly prior to those remarks may complicate Washington’s quest for pain-free disinflation. Thus, the Employment Cost Index registered at a 1.2% seasonally adjusted sequential advance over the first three months of the year according to the Bureau of Labor Statistics, accelerating 30 basis points from the fourth quarter and well above the 1% FactSet consensus.  Year-over-year wage gains remained at 4.2%, topping the 4% economist guesstimate to remain only moderately below the 5.1% cyclical peak logged in mid-2022. 

There may be more where that came from. A Tuesday Haver Analytics analysis from Joseph Carson, former director of global economic research at Alliance Bernstein, highlighted the Employer Costs for Employee Compensation (ECEC) gauge, a separate BLS-compiled wage indicator that incorporates job changes among occupations and industries, data which fall outside the ECI purview.  Accordingly, employment migration towards higher-paying positions will generally push the ECEC above its peer metric, and vice versa. 

To that end, the proportion of private-sector job openings to unemployed workers stood at 1.3 in March, the BLS finds.  Though that’s well below the early 2022 peak of 2.1 openings per idled employee, that reading remains well above its pre-pandemic norm, which included a sub-1:1 ratio from the turn of the century to 2017.  

“Based on the still-high number of job openings and low jobless rate, the first quarter rise in the ECEC index should exceed the ECI, adding to current fears of higher labor costs feeding into inflation numbers,” Carson concludes.  That data point is set to be released on June 18.

Recap May 1
Stocks rode their post-FOMC rollercoaster, with the S&P 500 jumping some 1% by mid-afternoon on the heels of dovish rhetoric from Fed chair Jerome Powell before turning tail into the close to settle lower by 0.3%. Treasurys managed to finish lower by four to eight basis points across the curve, though likewise giving back some of their gains late in the day, while WTI crude slumped to multi-week lows near $79 a barrel following a surprise inventory build and gold settled at $2,314 per ounce, up 1% on the session but well off its mid-afternoon highs. The VIX finished north of 15 after touching 14.5 during Powell’s press conference.  
04.30.2024
Ping Pong Parlay

Step aside, FanDuel and DraftKings. From CNBC:

Arcade giant Dave & Buster’s is taking its games to a new level by offering social wagering on its app.

Customers can soon make a friendly $5 wager on a Hot Shots basketball game, a bet on a Skee-Ball competition or on another arcade game. The betting function, expected to launch in the next few months, will work through the company’s app. . .

Dave and Buster’s is using technology by gamification software company Lucra. . . “We’re creating a new form of digital experience for folks inside of these ecosystems,” said [Michael] Madding, Lucra’s chief operating officer. “We’re getting them to engage in a new way and spend more time and money,” he added.

Time Value of Money
Better late than never?

Better late than never? Stock market activity is increasingly concentrated in the final 10 minutes of the day, Bloomberg reports, citing data from BestEx Research, with roughly one-third of average daily S&P 500 component volumes logged after 3:50pm eastern in March. That’s up from a 27% share just three years ago.  A similar dynamic is on display in Europe, as closing auctions now account for 28% of daily turnover on average per trading analytics firm big xyt, up from 23% in spring 2020. 

The rise in passive investing helps explain that migration, as index funds typically transact at day’s end to match their benchmarks. The global tally of passive assets reached $15.1 trillion at year-end per LSEG Eikon, topping the $14.3 trillion in actively managed funds. As of 2016, those figures stood at roughly $6 trillion and $10 trillion, respectively.  

Yet while investor capital coalesces around day’s end, a venerable trading venue leans in the opposite direction. Thus, the Financial Times relayed last week that the New York Stock Exchange is gauging interest in a potential move to open for business around the clock, matching the 24/7 format seen in the cryptocurrency realm.  “There’s demand for 24-hour trading, but it’s not necessarily from the entire marketplace,” one institutional trader told the pink paper, pointing out that staffing such a comprehensive schedule would prove no easy task.

In the meantime, those looking to score some quick profits have just the ticket: the zero-days-to-expiration (0DTE) category continues to enjoy mushrooming growth, with daily derivatives tied to the S&P 500 logging $862 billion in notional trading volumes during April according to Bloomberg, up 74% from this time last year. While the index’s 20% year-over-year increase partially explains the jump in dollar values, contract trading volumes are likewise up 40% from April 2023, far above the 7% uptick in broad options activity over that stretch. 

As for the outcome of those short-term speculations, a December 2023 study suggests that individual punters may be well advised to take a pass. A trio of researchers at the University of Münster finds that the growing popularity of zero-day options has served to tighten bid-ask spreads, resulting in lower trading costs. Nevertheless, retail investors lost an average of $241,000 per trading day from February 2021 (when the meme stonk mania took center stage) through last September.  Following the introduction of a Monday-through-Friday expiration calendar in May 2022, daily losses increased to roughly $350,000, a conservative estimate that excludes potential broker commissions along with regulatory and clearing fees. 

“Retail traders have a strong preference for high-risk, lottery-like assets, and have found the perfect asset class to satisfy this demand in 0DTE options,” the academics wrote. That is, at least until Dave and Busters app-based “social wagering” came along. 

Recap April 30

Hotter-than-expected wage data this morning left Mr. Market in a rude mood, as stocks sank 1.6% on the S&P 500 to wrap up April with a 4% loss, shaving year-to-date gains to about 6%.  Treasurys came under broad based but moderate pressure with two-year yields rising seven basis points to 5.04% (matching the highest finish since mid-November) and the long bond ticking to 4.79% from 4.75%, while gold retreated nearly 2% to $2,290 an ounce, bitcoin tumbled 6.5% to $59,600 and WTI crude slipped below $82 per barrel.  Standing apart from that sea of red, the VIX advanced to 15.65, up one point on the day. 

The Federal Open Market Committee is set to render a rate decision tomorrow afternoon, with investors anticipating a stand-pat outcome.  

04.29.2024
Masters of the Air

From The Wall Street Journal:

Disney said it spent almost $800,000 for Bob Iger to use company aircraft for personal trips in the last fiscal year. Taking similar trips at his own expense would have cost the chief executive more than $2 million, a Wall Street Journal analysis found.

The same is true for other executives. Netflix co-founder Reed Hastings took personal flights on company aircraft in 2022 that would have cost him about $2.2 million by Journal estimates; the company reported spending about half as much. Chief Executive David Calhoun’s personal flights on Boeing’s tab would have cost him $1.25 million, more than double what the company said it spent. . .

“It’s one of the few status symbols you don’t get tired of,” said Christopher Hewett, a retired public-company executive who helped draft flight-perk disclosures as a corporate attorney and enjoyed his own trips on company planes.

Spending on the perk has doubled since 2019 at companies that reported providing it last year, outpacing the overall growth in business-jet travel.

Capitol Idea
Let's see how this sausage gets made.

Let’s see how this sausage gets made.  Pending legislation in the Empire State could carry major implications for the global bond market, as New York lawmakers are set to weigh the Sovereign Debt Stability Act upon the legislature’s return next week.  

That bill could usher in material changes to future restructurings by limiting private creditor recoveries to what the U.S. government would receive “under the applicable international initiative.” In other words, pandemic-era agreements under the International Monetary Fund and World Bank umbrellas designed to mitigate the debt burden of emerging market borrowers. The tally of outstanding EM dollar-pay debt covered by New York law stands at some $800 billion, roughly half the global total. 

The plan enjoys vocal support in some quarters, as Bloomberg relays that a group of 65 public figures penned an open letter to Governor Kathy Hochul and lawmakers urging the law’s passage. Signatories including Nobel Laureate economist Joseph Stiglitz and actor Marc Ruffalo (who portrayed the Hulk in the Marvel comic book series) argued that the change would “protect the most vulnerable around the world from abusive and unfair lending practices.”  

Taking the other side of that debate, a March 26 whitepaper from Cleary Gottlieb Steen & Hamilton LLP, warned that the proposed statute “assumes that jurisdictions outside of New York could enact similar laws, and purports to apply across such jurisdictions, although it is unclear how this would work in practice.  Instead, the effect could be a migration of sovereign debt away from New York.” 

Borrowers may likewise find such an arrangement to be sub-optimal, contends the multinational law firm, which has advised both sovereigns and bondholders in prior restructurings: 

Market participants may require that sovereigns issuing new debt (or seeking relief under existing debt) do so under the laws of non-New York jurisdictions.  The out-of-pocket costs of making such a switch could be considerable and are likely to hit sovereigns who have never defaulted on their debt, as well as others that may be more vulnerable to future defaults.

One way or the other, Albany’s decision will reverberate. Total sovereign issuance is projected to reach $11.5 trillion this year per a Feb. 27 analysis from S&P Global Ratings, up 8% from 2023 and more than 50% above the pre-pandemic baseline.  Similarly, the worldwide stock of sovereign debt will reach 67.8% of GDP this year, down from the 74% peak in the plague year but well above the sub-60% readings logged in 2018 and 2019.  Some 14.8% of worldwide sovereign obligations are short-term in nature, up from a 9.5% share five years ago.  

Meanwhile, a growing share of sovereign borrowers rated single-B-minus and below “pose contagion risk for other emerging markets and [could] affect their borrowing costs,” S&P warned, noting that the likes of Egypt, Pakistan, Sri Lanka and India (which continues to enjoy investment grade status with a triple-B-minus rating) each face annual interest expenditures equivalent to more than one-third of government revenues. “For countries with large debt stocks and reliance on foreign currency borrowing, high interest bills represent a noteworthy risk,” the rating agency wrote. 

In more ways than one, perhaps. 

Recap April 29
Stocks enjoyed a modest lift to build on last week’s stellar showing, with the S&P 500 grinding out a 0.35% advance, while Treasury yields mostly ticked lower by a few basis points apart from the two-year note, which edged to 4.97% from 4.96%. WTI crude pulled back below $83 a barrel, gold finished little changed at $2,337 per ounce, and the VIX slipped below 15. 
04.26.2024
Forever 21

Four more years! From the Daily Mail:

A drunk businesswoman who glassed a pub drinker after he wrongly guessed her age has been spared jail after a female judge said 'one person's banter may be insulting to others.’

Mother-of-one Joanne Dodd, 39, flew into a rage and attacked Carl Cooper after he suggested she was 43 in the beer garden of the Unicorn pub in Manchester city center on September 9 last year.

Mr. Cooper fled to the toilet in a bid to get away from the heated situation, but when he came out Dodd ran towards him and twice shoved her wine glass in his face.

Good Enough for Government Work
Risk free, or must flee?

Risk free, or must flee? Ten-year Treasury yields approached a six-month high of 4.7% Thursday, up 80 basis points since the start of February. The iShares 20+ Year Treasury Bond ETF, which sports a hefty $44 billion in assets under management, has absorbed a 49% downdraft since August 2020, remaining only 6.5% above its post-crisis lows.  

“Inflation is not coming down like the Fed thought it [would],” Arthur Laffer, president and one-half of the eponym of Laffer Tengler Investments, told Reuters, predicting that long-dated yields could reach 6%. “You’re not getting paid to take risk in the bond market right now,” he added.

Yet blue-sky sentiment elsewhere in credit marks a stark contrast with that dreary backdrop. Thus, Bloomberg relays that investors are flocking to property-backed debt in droves, purchasing $24.6 billion of new commercial mortgage-backed securities since the start of 2024. That’s up 170% from this time last year.  

Percolating risk appetite is likewise on display in the more speculative cordon of the market, as CMBS bonds rated triple-B-minus have seen spreads shrink by more than 250 basis points year-over-year, analysts from Citigroup found on Monday, placing that subset among the strongest performers in the fixed income universe over that stretch.  That rally is just the ticket for some cash-hungry players. “Borrowers have been holding out for an opportunity to refinance debt with short-term maturities and now they are seizing on lower spreads to do it,” Raviv Shtaingos, head of structured credit at ORIX Corp., told Bloomberg.

Corporate funding markets likewise remain wide open, as investment grade firms raised a record $538 billion over the first three months of the year, representing 40% of the anticipated supply for all of 2024 according to research firm Informa Global Markets.  

Yet thanks in part to robust demand from insurance companies – U.S. annuity sales registered at $113.5 billion in the first quarter according to LIMRA, up 21% year-over-year, following last year’s record $385 billion pace, up 23% from 2022 – option-adjusted spreads on the ICE BofA U.S. Corporate Index stand at 92 basis points, among the narrowest pickups on offer since Lehman bought the farm. By the same token, some 40% of the U.S. high-yield bond market changes hands at a sub-200 basis point pickup to Treasurys, strategists at Bank of America relay this morning. That compares to an average 151 basis point OAS for the ICE BofA investment grade gauge going back to the end of 1996. 

Those historically fertile corporate borrowing conditions have manifested in a telling manner. Citing data from BondCliQ, MarketWatch pointed out yesterday that a pair of bonds issued by Apple and Microsoft maturing early next year have each changed hands at negative spreads versus Treasurys, i.e., investors perceive those securities to be sounder than U.S. government obligations. “That’s possible only because of the demand for credit,” Rich Familetti, head of U.S. total return fixed income at SLC Management, commented to MarketWatch, adding that his firm would normally reduce exposure to credit with spreads at current levels, but that the strong technical backdrop leaves SLC “willing to remain more invested than we would normally.” 

As for the other side of that coin, what to make of the market’s dim relative appraisal of Uncle Sam’s creditworthiness?  See the analysis “Long live the worrywarts” in the brand-new edition of Grant’s Interest Rate Observer for more on this essential topic. 

Recap April 26
Stocks ripped higher to the tune of 1% on the S&P 500 and 1.5% on the Nasdaq 100, as the bulls managed to answer last week’s rout with a 2.1% and 3.5% respective rebound for those major indices. Long-dated Treasurys enjoyed a bounce as 30-year yields settled at 4.78%, down four basis points on the day and six basis points above last Friday’s finish, while WTI crude stayed near $84 a barrel and gold edged higher at $2,339 per ounce. The VIX retreated to 15, more than three points south of Monday’s early levels. 
04.25.2024
Rest Easy
"Broadly speaking, the effects of higher rates have been quite good,"

“Broadly speaking, the effects of higher rates have been quite good,” Stripe president and co-founder John Collison told CNBC yesterday. “The period where money was free was not a healthy time in Silicon Valley. . . [It’s] not good for dynamic capital allocation in the broader economy. You want people to be working on the most valuable ideas, and not on the marginal ideas.”

The privately held online payments firm, which garnered a $95 billion valuation in 2021, nearly triple that seen a year earlier, agreed to cash out some employees at a $65 billion price tag earlier this year according to The Wall Street Journal. “Valuations are a product of interest rates,” Collison commented to the financial news network regarding those fluctuations. “We’re not losing sleep over it.” 

Same Old Jets
This corporate fanbase seems to live in perpetual disappointment.

This corporate fanbase seems to live in perpetual disappointment.  Boeing Co. suffered a blowout-related loss yesterday, reporting that first quarter free cash flow registered at minus $3.9 billion in the wake of January’s harrowing in-flight fuselage breach of an Alaska Air-operated 737 Max aircraft.

Though that’s marginally better than the company’s March guesstimate of a $4 to $4.5 billion first quarter deficit, management noted “sizable” cash use over the three months through June, piling the pressure onto the back half of the year to reach last month’s prediction of “low single digit” billion in positive free cash flow generation for 2024. 

To date, the bond market has evinced only modest concern with the situation. Boeing, the subject of a bearish credit analysis in the Jan. 19 edition of Grant’s Interest Rate Observer, saw its senior unsecured 5.15s of 2030 change hands at a 162-basis point pickup to Treasurys this morning, wider by 53 basis points over the past three months and change. During that stretch, the ICE BofA U.S. Corporate Index has tightened to 92 basis points over Treasurys from 101. 

Somewhat muted price action aside, Boeing’s position in that high-grade cohort is an increasingly tenuous one. Moody’s downgraded the company one notch to Baa3 – the final stop before junk – alongside a negative outlook Wednesday, citing the “inadequate performance” of its commercial aircraft division and darkening cash generation picture. 

Boeing, which faces $4.3 billion in maturing debt next year with a further $8 billion due in 2026 and which saw cash and cash equivalents shrink to $7 billion at the end of March from $16 billion three months earlier, likely requires new debt issuance to meet those obligations, the rating agency believes. 

A return to business as usual surely wouldn’t hurt, but the timetable for such an outcome is anybody’s guess. Global 737 Max deliveries numbered 24 last month, down from 52 in March 2023 and well below the 38 aircraft ceiling imposed by the Federal Aviation Administration in the wake of the Alaska Air incident. Boeing will present a “comprehensive corrective action plan” to the regulators at the end of May.  In the meantime, “we’re not going to let them [increase production] until they have satisfied the FAA that they can do it safely,” Transportation Secretary Pete Buttigieg said yesterday. 

On that score, industry players are tapping their feet.  Southwest Airlines now expects to take delivery of only 20 of the 737 planes this year, instead of the 46 previously anticipated.  Thanks in part to that disruption, the carrier will cease operations at a quartet of U.S. airports and part ways with 2,000 staffers by year end.  Peers United and Alaska, meanwhile, have reduced their mid-year global capacity outlook by 6% relative to January projections. “I suspect a lack of 737 Max [supply] is a key driver of that,” Fitch Ratings analyst Joe Rohlena told the Financial Times

“Lower deliveries can be difficult for our customers and for our financials,” Boeing CEO Dave Calhoun acknowledged on yesterday’s earnings call, adding that “safety and quality must and will come above all else.” Calhoun, who will vacate his post at year’s end with a successor yet to be named, maintained a $10 billion free cash flow target for 2026, a bogey which will require some 50 737 jet deliveries per month, double the current pace. “That’s the bet we’re making and I’m confident we can get there,” he said. 

Some observers take that optimism with a grain or two of salt. “If there is one thing that has been consistent about Boeing over our many years of covering the company, it has been its hopelessly optimistic timetables for improvement,” warned Vertical Research Partners Rob Stallard in a Wednesday missive. “We think this will again be the case. . . with management seemingly nonchalant about the regulatory, legal, contractual, customer, competitive, supply chain and internal employee pressures that it faces.” 

QT Progress Report
A $20.2 billion sequential decline in Reserve Bank credit leaves the Fed’s portfolio of interest-bearing assets at $7.368 trillion. That’s down $94 billion from the last week of March, and 17.4% south of the high-water mark logged in early 2022. 
Recap April 25

Stocks rebounded from early losses to leave the S&P 500 weaker by only 0.4% on the day, with the broad average poised to rally Friday following stronger-than-expected post-market results from Google and Microsoft. Treasurys absorbed moderate selling across the curve as 2- and 30-year yields settled at 4.96% and 4.82, respectively, up seven and four basis points on the day, while WTI crude broke higher at nearly $84 a barrel and gold advanced to $2,332 per ounce. The VIX settled south of 15.5, two points below its highs. 

- Philip Grant

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