The devolution will be televised. From CoinDesk:

Crypto influencer Ben Armstrong has been released on bail after he was arrested during the late hours of Monday after an apparent confrontation with his former business partner, part of which was live streamed on X, formerly Twitter.

An online record at the Gwinnett County Sheriff’s Department site shows one "Benjamin Charles Armstrong" was arrested for "loitering/prowling" and for "simple assault by placing another in fear" with a bond amount of $2,600. Armstrong was apparently carrying a gun in the backseat of his car, and was traveling with one other person, a live-stream snippet on X indicated.

BEN tokens, floated by Armstrong earlier this year, dropped 30% as reports of the arrest leaked early on Tuesday.

How many happy returns, exactly? Tuesday marks an even two months since the effective Fed Funds rate topped 5% for the first time in the post-Lehman era, with the prospect of even higher borrowing costs looming as an unsettling possibility (JPMorgan boss Jamie Dimon floated the possibility of 7% benchmark rates to the Times of India this morning).  As the following trio of examples demonstrate, various constituencies are adapting to the constrictive current backdrop in their own way: 

Investment-grade firms are increasingly turning to the convertible bond market, issuing some $12 billion’s worth so far this year according to Bank of America, accounting for more than 30% of total supply for the category. That’s the highest such share in at least a decade, up from just $2 billion and 7% of total convertible issuance during all of 2022, as the contraptions are typically confined to the purview of junk-rated borrowers.  

Convertibles, which can be swapped for stock if the issuer’s share price reaches a predetermined level, allow issuers to borrow more cheaply thanks to that optionality. “Investment-grade companies need to save on coupons as well,” Bank of America strategist Michael Youngworth tells the Financial Times today, adding that convertibles can generally be sold with coupons two to three percentage points lower than conventional bonds. “They’re obviously plagued by the same higher financing cost backdrop that high-yield companies are.” 

Lacking such creative recourse, individual borrowers are suffering collective sticker shock. Fixed 30-year mortgage rates now average 7.75% per Bankrate.com, compared to less than 3% in early 2021, helping push the National Association of Realtors’ Housing Affordability Index to four-decade lows.  The median American household will likewise need to cough up 42 weeks of income to buy a new car as of August, reckons Moody’s chief economist Mark Zandi, up from 33 weeks’ worth three years ago.  New home and vehicle purchases are now “completely unaffordable for the typical American household because you’re mixing the higher borrowing costs with the higher prices,” Zandi told The Wall Street Journal.

Considering that dynamic, it is little surprise that nationwide credit card balances topped $1 trillion for the first time during the second quarter, according to the data from the New York Fed, up from less than $800 billion during the pandemic. That’s despite the fact that the average credit card carried a 20.7% interest rate in May, compared to 14.6% right before the Fed began its aggressive, belated tightening cycle early last year. Total non-housing related household debt reached a record $4.71 trillion as of June 30, up 12.2% over the prior two years. 

Investors, meanwhile, contend with the ongoing regime change in their own way. Bloomberg’s Eric Balchunas relays today that, over the past week, the iShares 20 Plus Year Treasury Bond ETF (ticker: TLT) gathered $750 million in assets, bringing its net inflow during the year-to-date to $16.3 billion, equivalent to nearly half of the vehicle’s $38.2 billion in total assets.  

That’s despite the fact that TLT wrapped up today’s session at its weakest closing price in a dozen years, down nearly 50% from its August 2020 high-water mark. Terming that relentless dip-buying “amazing,” Balchunas marveled on X that he “can't recall an ETF taking in so much money while being down so much and so consistently.”

Who said hope isn’t a strategy?

Stocks were hammered to the tune of a 1.5% drop on the S&P 500, as the broad average logged its lowest finish since early June, while the pain in Treasurys continued with the long bond reaching another cycle high at 4.7%, up three basis points on the session. WTI crude climbed back above $90 a barrel, gold retreated to $1,901 per ounce and the VIX popped to a four month high near 19.  

- Philip Grant

The Conference Board’s Leading Economic Index – which aims to capture significant turning points in the business cycle and near-term growth trajectory – fell on a sequential basis yet again in August according to data released yesterday, marking the 17th consecutive monthly downtick. 

“The leading index continued to be negatively impacted in August by weak new orders, deteriorating consumer expectations of business conditions, high interest rates, and tight credit conditions,” commented Justyna Zabinska-La Monica, senior manager of business cycle indicators at The Conference Board. “All these factors suggest that going forward economic activity probably will decelerate and experience a brief but mild contraction.”

Others express a slightly less sanguine view. Noting that the current string of declines is the second-longest on record going back to 1992, behind only 2007-2009, Société Générale strategist Albert Edwards quips thus: “It seems to me if the U.S. can avoid a bloody deep recession, it will warrant a new Christmas film entitled: ‘Miracle on Main Street.’”

Is a grand new era of electric mobility upon us? “Currently, there is not enough lithium hydroxide being produced in the world to power the growing electric vehicles demand,” Austin Devaney, chief commercial officer at Piedmont Lithium, Inc. told MarketWatch on Wednesday, referencing the availability of a key component in the batteries powering the burgeoning auto type.  

EVs accounted for 14% of worldwide auto sales last year according to the International Energy Agency, up from a 4% share in 2020. A 50% market penetration is in store by 2030, if IEA guesstimates are on the beam.

Yet Mr. Market plainly has his reservations. Spot lithium carbonate prices in China settled below RMB 173,000 ($23,700) a ton today from RMB 600,000 a ton in November of last year, following a near 10-fold run-up from the early 2020 lows. Global supply of the silvery-white metal will register at 990,065 metric tons this year, per estimates from S&P Global Commodity Insights, compared to 928,717 metric tons of demand. That 61,348-ton surplus, which compares to an estimated 10,061 of excess tonnage a year ago, will be followed by roughly 43,000 metric ton surplus in 2024, with the market not swinging into deficit until 2027, S&P believes. 

Meanwhile, legacy automakers are struggling to profitably integrate the mushrooming EV category into their conventional offerings. In late July, Ford Motor Co. increased projected operating losses in its electric division to $4.5 billion this year from a previously expected $3 billion shortfall, while pushing back its planned production schedule of a 600,000 annual pace to sometime next year from late 2023. “The near-term pace of EV adoption will be a little slower than expected, which is going to benefit early movers like Ford,” CEO Jim Farley commented on the analyst call. 

A mainstay of the EV revolution likewise looks to be curtailing its ambitions.  As Bloomberg documents today, Tesla’s Elon Musk conveyed a cautious tone in conversation with a senior Indonesian official at a Jakarta CEO forum on Sept. 6: “He gives a very clear message about what happened to the global economy, and concern also about the overcapacity today,” Luhut Pandjaitan, Indonesia’s coordinating minister for maritime affairs, detailed to Bloomberg. “So, they’re not going to do any expansion for the next one or two years.” Tesla’s inventory of unsold Model 3, Model Y, Model S and Model X vehicles reached 121,000 as of the end of the second quarter according to estimates from Bernstein, up from 79,000 on Dec. 31 and 23,000 at the end of 2021. 

Those headwinds aside, one giant in the lithium “space” proceeds apace with its capacity expansion plans. Earlier this month, worldwide number two refiner and miner by sales and Grant’s Interest Rate Observer pick-not-to-click Albemarle Corp. (ticker: ALB) announced a nonbinding agreement to buy early-stage, pre-revenue lithium mine developer Liontown Resources for A$6.6 billion ($4.3 billion) in cash, upsized from a previous $3.7 billion bid in March and representing a 97% premium to the target’s undisturbed share price prior to that early spring approach. Albemarle shares are off 13% from that April 7 analysis, compared to a 6% return for the S&P 500.

As miners grow their production capabilities during a dicey economic backdrop (see the item above), a major new find could further muddy the waters. A study published this month in the journal Science Advances trumpets a potential massive lithium discovery in the McDermitt Caldera volcanic lakebed straddling the Nevada/Oregon border.  The find is estimated at between 20 million and 40 million metric tons of lithium carbonate, likely exceeding the estimated 23 million tons housed in the salt flats of Bolivia, home of the world’s largest deposits.  

“If you believe [the scientist’s] back-of-the-envelope estimation, this is a very, very significant deposit of lithium,” Anouk Borst, a geologist at KU Leuven University who did not participate in the study, told Chemistry World. “It could change the dynamics of lithium globally, in terms of price, scarcity of supply and geopolitics.”  

A quiet session followed yesterday’s broad-based pain, as Treasurys managed a modest bounce across the curve with 2- and 30-year yields dropping two and three basis points, respectively, to 5.1% and 4.53%, while the S&P 500 settled slightly below unchanged. Gold edged higher to $1,925 per ounce, WTI crude rebounded above $90 a barrel and the VIX stayed above 17. 

- Philip Grant

Primary activity in high-yield credit has swung into overdrive of late: companies raised nearly $10 billion across 15 tranches over the past five days per data from Bloomberg, marking the busiest one-week stretch since the virus-era bull market climaxed in November 2021.  

Those newcomers received a warm welcome from Mr. Market, as all but 1 of the 15 deals that debuted this week changed hands above their respective issue price. More broadly, option-adjusted spreads on the ICE BofA U.S. High-Yield Index settled at 378 basis points Thursday, matching the tightest level since early 2022. 

Yet danger may be lurking for large swaths of the market, as this week’s hotter-than expected reading of August core CPI illustrates the potential for elevated benchmark borrowing costs to persist.  Thus, interest rate futures now price in a 4.39% Fed funds rate in January 2025, up from 3.79% two months ago.  That dynamic elicited some cautious commentary this morning from Bank of America credit strategist Oleg Melentyev: 

The Fed has no choice but to keep rates higher for longer given the inflation backdrop. The maturity wall is now a year closer, and issuers face decision time regarding what to do with their debt loads. Higher-quality names will likely choose to de-lever given their strong ability to generate cash; and lower-quality names have no other way to deal with this but to de-lever. The end result is likely less capex, hiring, M&A, and share buybacks.

We further explore our framework of fundamental impact from coupon resets in the next two years. We think that the credit market can live with a 3% CPI scenario even at current stretched valuations. A sticky 4% CPI is likely to see cumulative defaults at 10% and meaningful CCC downgrades. A re-acceleration to 5% CPI could cause a full-scale default wave.

Where we’re going, we don’t need roads.  VinFast Auto Ltd.’s shares have declined by more than 50% over the past two weeks, largely reversing an eye-watering run-up that saw the Vietnamese electric vehicle firm briefly garner a $190 billion market capitalization.  Ford and General Motors, by comparison, are valued at a combined $97 billion.   

Six-year-old VinFast (ticker: VFS), which came public on Aug. 15 via a merger with special purpose acquisition company Black Spade Acquisition Co., subsequently enjoyed a near 700% 10-day rally spurred by spotty liquidity:  VFS sports a floatation of only 7.3 million shares per data from Bloomberg compared to 2.3 billion total shares outstanding, as founder Pham Nhat Vuong controls 99.7% of shares outstanding through various entities.

More supply is on the way, as VinFast registered some 11 million shares for sale in a filing with the Securities and Exchange Commission earlier this week, with the bulk of that offering coming from the exercise of warrants from the SPAC merger. 

Though public investors will soon get the opportunity to increase their share of ownership, the closely held firm’s operations remain a family affair. Barron’s relayed Tuesday that nearly two-thirds of the 11,300 vehicles that the company delivered during the first half of the year were to Vietnam-based taxi company Green and Smart Mobility, which is controlled by local conglomerate Vingroup, VinFast’s parent company.  

The peculiar dynamics at play invite ready comparisons with a bedrock of the meme stonk craze. “This is equally as comical as GameStop,” Matt Simpson, managing partner at Wealthspring Capital and an investor in blank check firms, told The Wall Street Journal. VinFast’s run-up “was completely divorced from reality.” 

Almost Daily Grant’s will resume next Thursday, 9/21. 

Stocks came under pressure as of mid-afternoon, when your correspondent had to leave, with the S&P 500 lower by a bit more than 1% and the Nasdaq 100 nearly 2% in the red. Treasurys failed to catch a bid as two-year yields hovered near 5.03% and the long bond at 4.41%, while WTI crude tested $91 a barrel and gold advanced to $1,925 an ounce.  The VIX bounced by 8% to approach 14 after logging its lowest finish since January 2020 on Thursday. 

- Philip Grant

Call it a drive-through financing. Burger King parent company Restaurant Brands International came to market today with a monster $5.16 billion term loan, marking the largest such floating rate offering since early 2022. 

Ba2/double-B-plus-rated RBI priced the deal – which was upsized from a planned $4.16 billion – at 99.5 cents on the dollar and a 225-basis point premium to the Secured Overnight Financing Rate according to Bloomberg, tightening from initial price talk of 98.5 to 99 cents and a 250-basis point pickup to SOFR.  Proceeds will be used to refinance a term loan maturing in 2026. 

They’re here for a good time, not a long time.  Citing data from London Stock Exchange Group, the Financial Times relays that newly issued corporate bond maturities in the domestic investment grade market have averaged 10.5 years so far in 2023, the shortest such interval of the post-crisis era and down from 16 years as recently as 2020. Average maturities in the junk realm have similarly slumped to six years, the lowest on record going back to 1990. Effective yields on ICE BofA’s investment-grade and high-yield indices settled yesterday at 5.82% and 8.4%, respectively, compared to 2.35% and 4.35% at the end of 2021.  

“I think that’s just a function of how expensive it’s gotten for companies to borrow versus where it was just a year-and-a-half ago,” Matt Brill, head of U.S. investment-grade credit at Invesco, told the pink paper. “You don’t want to be paying this high coupon for any longer than you have to. . . I think most corporations feel like they’ll have a better opportunity to borrow for cheaper – meaning yields will be lower – in 2024 or 2025.”

Might Washington D.C.’s spendthrift ways throw a wrench into the works?  Yardeni Research president and eponym Ed Yardeni warned in a Monday analysis that ebbing inflation may not be sufficient to help push rates back down, as an increasingly grim fiscal backdrop could serve to hamper investor demand for government obligations.  

After accounting for distortions stemming from the Supreme Court’s decision to block the Biden administration’s student loan forgiveness plan this summer, the federal deficit will balloon to $2 over the 12 months through September according to the estimates from the Congressional Budget Office.

That’s double the $1 trillion student loan-adjusted shortfall logged in the prior fiscal year and a record sum outside the pandemic, a “highly unusual dynamic” in the context of a growing economy featuring measured unemployment near its lowest on record. Typically, the deficit rises relative to GDP during times of economic turmoil, as tax receipts decline alongside increased spending on unemployment insurance and other stimulus, while receding during good times.

Supply and demand dynamics could likewise prove problematic for low-rate aficionados, Yardeni believes. Commercial banks are letting their bond portfolios roll off, “using the proceeds to offset net deposit outflows,” while the Federal Reserve’s ongoing quantitative tightening regime, which serves to reduce its Treasury holdings by some $60 billion per month, puts the onus on households and institutional investors to soak up “the rapidly increasing supply of U.S. debt,” Yardeni notes. “They will undoubtedly do so. The only question is whether interest rates are high enough already to attract these buyers or whether rates would have to go higher to do so.”  

Stocks came under some pressure to mostly reverse yesterday’s gains, with the S&P 500 slipping a bit more than half a percent.  Treasurys caught a modest bid across the curve, though this afternoon’s 10-year auction was awarded at 4.289%, the highest yield since November 2007, while WTI crude logged a fresh year-to-date highs near $89 a barrel and gold slipped to $1,913 per ounce. The VIX crept above 14. 

- Philip Grant

Here’s some eye-catching commentary from General Mills chairman and CEO Jeffrey Harmening at an investor conference on Wednesday (hat tip to Rahul Sharma): 

As we look at the promotional environment, frequency is up a bit [year-over-year], but still down 10% versus pre-pandemic. Importantly, price points are still up dramatically.  If you look at total food and beverage, price points are up 35% since pre-pandemic. Our categories are up even more; 40%. 

Considering those striking figures, it is perhaps no surprise that the executive went on to flag slowing growth within the at-home food business, owing to “increased value-seeking behaviors from consumers.”  

Mr. Market, meanwhile, conducts his own value restoration project, as General Mills shares have declined by nearly 20% in the year-to-date after accounting for dividends, compared to a 17% total return for the S&P 500.  See the issues of Grant’s Interest Rate Observer dated January 13 and May 19 for a look at the bear case. 

Last crypto punter out turns off the lights: total trading volume across the spot and derivatives markets for digital currencies summed to $2.09 trillion in August according to CCData, down 11.5% from July and representing the second-lowest monthly total since October 2020, when bitcoin began its parabolic pandemic-era rally. Turnover on centralized exchanges registered at $5.9 billion on August 26, the single weakest one-day volume since Feb. 7, 2019, the data service likewise relays, when bitcoin changed hands south of $4,000 compared to the current $25,800 (upwards of a six-fold increase, let the record show).

That downshift comes as the long-running regulatory drama surrounding spot bitcoin exchange traded funds winds closer to conclusion. On Aug. 29, the U.S. Court of Appeals ordered the Securities and Exchange Commission to reconsider an application from Grayscale Investments to convert its eponymous bitcoin trust (ticker: GBTC) into a spot ETF, concluding that the agency’s prior rejection of Grayscale’s petition was “arbitrary and capricious,” as it has already approved such products tracking bitcoin futures. 

Though that ruling appears to clear the way for a slew of spot ETFs from household names like BlackRock and Vanguard, investors have greeted the news with a collective shrug. Bitcoin prices quickly gave back their 8% rally in response to the news, while Google search volumes for the digital ducats remain near their lowest of the past five years.  

“Just about every metric you could imagine from a trading perspective is lower,” Stéphane Ouellette, CEO of digital capital markets and advisory firm FRNT Financial, told Bloomberg last week, adding that overall activity is at “incredibly depressed levels,” particularly in North America. 

Earth’s largest crypto exchange is bearing the brunt of that slump.  According to CCData, Binance’s market share within the spot category fell for a sixth straight month in August to 38.5%, its weakest in an even 12 months, while its share of derivatives activity ebbed to 53.5%, the lowest since June 2022. 

Binance -- reportedly under criminal investigation by the Department of Justice for flouting Russian sanctions and violating anti-money laundering regulations and the recipient of 13 civil charges from the SEC for “blatant disregard of securities law,” including operating an unregistered exchange and improperly comingling customer assets – likewise faces an exodus of high-level talent. As crypto publication Decrypt documents today, a quintet of senior executives have left the firm in recent days, following suit after the bourse’s general counsel, chief strategy officer and senior vice president for compliance opted to hit the bricks earlier this summer. 

On form, Binance boss Changpeng “CZ” Zhao took to social media platform X (née Twitter) to put a sunny spin on things, characterizing concerns over “negative news/rumors, bank runs, lawsuits, closing of fiat channels, product wind downs, employee turnover” as “FUD,” i.e., fear, uncertainty and doubt.

Might apathy present a more pressing concern? 

Has the grand experiment by the Bosphorus finally concluded? Here’s a striking declaration from Turkey’s President Recep Tayyip Erdogan – long a self-described “enemy” of high interest rates – from his Ankara residence today:

With the help of tight monetary policy, we will bring inflation back down to single digits. We will maintain fiscal discipline, which we see as the foundation of confidence and stability in our economy.

Wait, maybe high interest rates really do cause inflation. 

From the beach to the Street: Corporate debt sales have resumed in full force following the typical summer lull, as more than $36 billion in domestic high-grade supply from some 20 borrowers came to market yesterday, by Bloomberg’s count, marking the busiest day so far this year by either metric.  

Relatively resilient growth, witness this morning’s updated 5.6% reading in the Atlanta Fed’s real-time third quarter GDPNow forecast, along with friendly market conditions – the ICE Corporate Index Option-Adjusted Spread sits near its lowest levels since early 2022 with a 122-basis point pickup – help form a largely placid backdrop for issuers. “The U.S. is defying the economic gravity that is pulling down China and Europe,” David Knutson, senior investment director at Schroder Investment Management, told Bloomberg. “The primary market tends to produce supply until investor appetite is satiated. Given how low volatility is and how tight credit spreads are, I would expect supply to continue until the market gets swampy.” 

Appetite within the deep end of the credit pool remains similarly brisk: speculative-grade firms will issue up to $20 billion in new bonds this month according to dealer estimates.  Primary junk supply stands at roughly $110 billion in the year-to-date, topping the $102 billion tally seen across 2022 but a fraction of the $400 billion-plus logged during the prior two full-year periods. The ICE BofAML High-Yield Index settled at a 383-basis point pickup over Treasurys Tuesday, remaining near its tightest since April of last year.  

“There’s a real hunger from high-yield investors for any kind of new issue,” John Fekete, managing director and head of capital markets at Crescent Capital Group, told Bloomberg.  Debts funding leveraged buyouts are no exception, as more than $15 billion of speculative-grade loans and bonds for that purpose are set to come to market in September, headlined by a projected $8.4 billion financing the buyout of Worldpay, Inc. as soon as next week. 

Though that’s a far cry from the $60 billion pipeline in force at this time in 2019 by LCD’s count, the current backlog marks progress for an LBO financing market that had been all but frozen of late. “The volume of conversation that we’re part of – and we’re probably not unique in that regard – is much higher than it’s been at any time this year,” Daniel Toscano, global head of leveraged finance at Morgan Stanley, relays to Bloomberg. 

Yet as Mr. Market emerges from his summer siesta, side effects from the Federal Reserve’s aggressive, belated tightening cycle in response to raging inflation continue to take shape. August commercial Chapter 11 filings registered at 634 according to data provider Epiq Bankruptcy, up 17% from July and underpinning the 13th straight month featuring some year-over-year increase in total bankruptcy petitions.  Meanwhile, six firms with assets of at least $50 million filed for Chapter 11 last week alone per data from Bloomberg, bringing the August tally to 23. “I think a lot of it is interest rates,” relays Ed Flynn, consultant at the American Bankruptcy Institute. “There have been an unusually large number of large [restructuring] cases.”

A protracted spell of relatively high borrowing costs serves to separate the corporate wheat from the chaff. A Tuesday analysis from Bloomberg’s Sebastian Boyd identifies an interesting dynamic within his firm’s gauge of the global high-yield market, as fundamental deterioration pervades the most speculative type of borrower: net leverage for the triple-C-rated cohort stood at nearly eight times Ebitda as of June 30, up from 6.4 turns in mid-2021 and just 5.1 as of June 2019.  Yet it’s steady as she goes at the penthouse of junk: the median double-B borrower featured just over three turns of net leverage as of the end of June, little changed from the middle of 2021 and 2019. 

Risk-happy investors have thus far been rewarded for shrugging off that dynamic, as the triple-C-rated portion of Bloomberg’s Global High-Yield Index has returned 13.8% in 2023 thus far, roughly double that for the single- and double-B portions. Will that charmed run continue? 

Stocks maintained a moderately weak tone with the S&P 500 and Nasdaq 100 each slipping a bit less than 1%, though the averages managed to rebound from their early-afternoon lows, while weakness at the front end of the curve headlined today’s Treasury action as the two-year note popped back above 5%. WTI crude logged fresh 52-week highs north of $87 a barrel, gold slipped to $1,917 an ounce and the VIX edged towards 14.5. 

- Philip Grant

From the San Francisco Chronicle:

Metallica had a four-legged gatecrasher at one of its record-breaking concerts last week in Southern California.

The local Animal Hope & Wellness Organization initially reported that a dog named Storm had been abandoned by its owner at the show on Friday, Aug. 25, at SoFi Stadium in Inglewood (Los Angeles County), sharing a photo on Facebook that quickly went viral showing the canine seated in the audience alongside fans. 

But it turns out Storm had independently sneaked out of her owner’s home and found her way into the venue without shelling out hundreds of dollars for a ticket. . . Storm’s owner, Arizbeth Hurtado, told PetHelpful that they live near SoFi Stadium and were surprised to learn about Storm’s musical preferences: “She is apparently a huge Metallica fan who decided to sneak out for the concert!”

Mr. Market turns over a new leaf?  Fall’s imminent arrival will usher in a capital markets revival, as a trio of noteworthy, tech-focused initial public offerings are on tap in the coming weeks. Grocery delivery concern Instacart, marketing software firm Klaviyo and SoftBank Group Corp.-owned chip designer Arm Holdings are preparing their respective debuts, with Arm set to commence its investor roadshow next week and pricing tentatively slated for Sept. 13 per Bloomberg.  

Those entrants – each of which showed positive net income over the first six months of 2023 – are taking every precaution to ensure that their listings go smoothly, working to line up so-called cornerstone investors to underpin demand for the newly public shares.  Instacart has already secured up to $400 million of stock purchase commitments from a trio of fiduciaries, the company revealed in a filing, a sum equal to 50% or more of the total offering according to The Wall Street Journal. Klaviyo and Arm are likewise reportedly working to secure their own lynchpin shareholders. 

Then, too, supply will be at a premium, as each of the trio reportedly plans to sell fewer than 10% of their shares outstanding, a downshift from the previous norm. “The market can still be pretty fragile, and companies may be de-risking this process, so they don’t stub their toe right out of the gate,” Marc Jaffe, capital markets-focused managing partner at law firm Latham & Watkins, told the Journal. 

Such caution is understandable, considering the boom-and-bust dynamics on display since the bug first barged in. Total domestic IPO volume, encompassing traditional listings as well as corporate spinoffs and special purpose acquisition companies, stands at just $14.4 billion in the year-to-date according to data from Goldman Sachs, a fraction of the $242 billion logged at this time in 2021. Meanwhile, only 22% of the 121 tech firms that launched an IPO in that boom year were profitable according to data from University of Florida finance professor Jay R. Ritter, less than half the total 47% share spanning 1980 through the end of last year. 

That raft of speculative entrants has proven to be less-than rewarding, thus far: Though the Nasdaq 100 sits only 6% south of its November 2021 peak following the index’s 42% year-to-date leap, a mere 14% of the IPO bumper crop from that year traded above their respective offering price as of Tuesday, Fortune reports, citing data from Renaissance Capital. 

“Investors are no longer willing to pay gigantic multiples against future cash flows,” Joseph Endeso, president of private investment platform Linqto, tells Bloomberg. “Those things happened in the last bull market, but I think hard lessons have been learned.”  

A bear-steepening selloff in Treasurys headlined today’s proceedings, as the long bond jumped nine basis points to 4.29%, while stocks gave back early gains for a second straight day, settling just above unchanged on the S&P 500. WTI crude powered to fresh year-to-date highs near $86 a barrel, gold stayed at $1,940 an ounce and the VIX settled at 13. 

- Philip Grant

From Bloomberg:

Mullen Automotive Inc. has accused brokerages TD Ameritrade and Charles Schwab of facilitating naked short selling and damaging the electric-vehicle company’s stock price. 

Mullen, which plans to make both commercial and passenger electric vehicles, claims the brokerage firms and around 10 individual unidentified broker dealers illegally sold over 34 million “fictitious” company shares and “fully paid-for” stock owned by Mullen shareholders. In a lawsuit filed Tuesday in federal court in New York, Mullen alleges the brokerages sold those shares without actually borrowing them in the first place.

Their “conduct injected false and misleading information into the market by indicating that there were more Mullen shares available for trading than existed,” the company said in the lawsuit. 

Mullen shares began dropping in February and are down 99% year-to-date. 

Limited partners have limits of their own: Fund managers across the private realm are laboring to conjure fresh cash from investors, as the alternative investment category (including private equity, private credit, hedge funds and real estate) has raised $740 billion in the year-to-date, Preqin finds, down 27% from last year’s pace. 

“Fundraising has been more challenging in the last 12 months than at any time over the last 15 years,” Drew Schardt, head of investment strategy at Hamilton Lane, told the Financial Times today. The dwindling investor base is likewise coalescing around larger and more-entrenched players, as the tally of new alternative funds has plunged 53% year-over-year, while the average new fund size has grown to $600 million from slightly more than $400 million during the same stretch a year ago. 

As the tide rolls out following the ZIRP-era startup funding gusher (deal value in 2021 reached $329 billion according to PitchBook, double the previous peak), corporate America abandons hope of finding the next big fish. The Wall Street Journal relayed last week that large firms with in-house venture capital arms are pulling back from startup financing, throwing a longstanding trend into reverse: Corporate venture capital (CVC) accounted for 21% of all v.c. investment as of 2021 according to Bain Capital, double the share logged a decade earlier.  

That was then, as French energy giant Total sold off minority stakes in 20 startups to v.c. firm Aster Capital Partners in June, while Microsoft’s M12 venture division came to market with a $100 million-plus portfolio of investments late last year, undertaking a strategy pivot to align with the software behemoth’s core business “more tightly” according to M12 global head Michelle Gonzalez. “CVC does not work; it’s a suboptimal system,” Thomas d’Halluin, managing partner of Airbus Ventures, told the WSJ. “If you want to do v.c., you have to be financially driven. You have to sit next to the entrepreneur, you have to fight. Early stage v.c., in particular, is tough.” 

For one Silicon Valley mainstay, at least, that pugilistic mindset is easy enough to come by. The Information reports that Chamath Palihapitiya’s investment firm Social Capital put ownership stakes in 258 startups on the auction block earlier this summer, attempting to offload the positions – collectively worth $312 million according to their most recent respective valuations – in a package deal, rather than piecemeal.  Though the ultimate outcome of that sale remains in question, the tech publication relays that Social Capital opted to keep its largest position, a $77 million stake in biotech startup MeMed, on its own books. 

Palihapitiya’s outfit may be looking to beat a retreat, but the early Facebook employee-turned-venture capitalist remains on the public relations battlefront.  Taken to task by various users of Elon Musk’s X platform last week for promoting blank check mergers with the likes of real estate firm Opendoor, Clover Health and Virgin Galactic – which each absorbed subsequent share price losses of more than 90% -- while selling down his own stakes in those so-called de-SPACs at favorable prices, Palihapitiya offered the following rejoinder: “I’m in the arena trying stuff. Some will work, some won’t. But always learning. You’re anonymous and afraid of your own shadow. Enjoy the sidelines.” 

News from the Bureau of Labor Statistics that job openings reached their lowest since early 2021 in July spurred dreams of lower rates to come, as stocks raced higher by 1.5% on the S&P 500 while two and 30-year yields dove to 4.87% and 4.23%, respectively, from 4.98% and 4.29% Monday. Gold rose to $1,938 per ounce, WTI crude advanced above $81 per barrel and the VIX settled near 14.5, its lowest since the start of the month. 

- Philip Grant