Clash of the Titans

The unstoppable artificial intelligence force meets the immovable venture capital object. From PitchBook:

AI-powered precision medicine company Tempus AI priced its IPO on Thursday at $37 per share to raise nearly $411 million at a fully diluted market capitalization of $6.38 billion—a 38% discount from its $10.25 billion valuation set in 2022, according to PitchBook data.

While a great result for many investors, the pricing is a tough pill to swallow for others like Google, which bought into the healthtech company at a valuation above $8 billion in 2020. 

Heavy Lifting
Beijing passes the baton:

Beijing passes the baton: The People’s Bank of China stepped to the sidelines in the gold market in May, abstaining from purchases of the precious metal for the first time in 18 months, state-furnished data show.  The PBOC – earth’s largest institutional buyer per the World Gold Council after accumulating 225 tons across 2023 – tapered net purchases to 60,000 troy ounces in April from 160,000 and 390,000 over the preceding two months, respectively, before that outright pause. 

Sticker shock may explain the downshift, as spot gold prices have advanced by 14.5% over the past six months, nearly keeping pace with the effervescent Nasdaq 100’s 19% rip. Indeed, the PBOC is “just waiting and watching” WGC CEO David Tait told Reuters Monday. “If prices correct to the $2,200 per ounce level [some 5.5% south of current prices], they will resume again” he predicted.

In the meantime, others in the Far East duly pick up the slack.  Bruce Ikemizu, chief director of the Japanese Bullion Market Association, told Bloomberg Thursday that interested buyers continue to outpace sellers in the Land of the Rising Sun, recent record prices notwithstanding. “This never happened in the past,” he pointed out.  Retail gold consumption in Vietnam is pegged to grow 10% year-over-year over the first six months of 2024, while Chinese consumers snapped up 106.3 tons of gold bars and coins in the first quarter, up 27% from the same period last year and accounting for roughly one-third of global demand.  

It’s a different story among Western investors, as substantial outflows continue to predominate despite healthy price action. Thus, the 100-week rate of change in gold exchange traded fund holdings reached minus 21% as of Wednesday, strategists at Bloomberg find, the worst such losing streak since the ferocious 2013 precious metal bear market, which featured a 28% drawdown to mark gold’s worst full-year showing since 1981.

With prices rallying by some 35% during the ongoing near-two-year outflow, the Bloomberg team speculates that “divergent strength” could mark a bottom in ETF holdings, leaving the yellow metal “in the early days of a bull-market breakout.”  ETF investors have sold a net 13 million ounces of gold equivalents since the end of 2022, while central banks have collectively added 50 million ounces over that stretch. 

A sluggish supply picture may likewise serve to burnish the bull case. First quarter mine production rose at a 4% healthy annual clip, the World Gold Council finds. Yet “the bigger picture,” as WGC chief market strategist John Reade told CNBC last week, shows that output “plateaued around. . . 2018, and we’ve seen no growth since then.”  Untapped deposits of the yellow metal are dwindling, the industry veteran relayed, while rising costs and red tape add to a daunting backdrop for producers. “It’s getting harder to find gold, permit it, finance it and operate it.”

Nobody goes there anymore, it’s too crowded.  

Recap June 14

Another round of mega-cap dominance saw the Nasdaq 100 higher by 0.5% while the S&P 500 settling flat and small-cap were hammered to the tune of 1.6% on the Russell 2000, pushing gauge to six-week lows. Treasurys continued their brisk rally as the long bond dove a further six basis points to 4.34%, its lowest since late March, while WTI crude again remained at $78 a barrel, gold rallied to $2,331 per ounce and bitcoin slipped to $65,600. The VIX bounced a bit to 12.5, up half a point on session. 

- Philip Grant

The Next Degen

To boldly go, where no ape has gone before. . . From CNBC:

GameStop’s annual shareholder meeting was disrupted by computer problems Thursday, as servers crashed under overwhelming interest in the stream, a customer service representative for the company hosting the stream told CNBC. . .

According to a YouTube stream from an unaffiliated user purporting to reproduce the feed, the annual meeting was brought to order at 11:48 a.m. ET and was “immediately adjourned ... due to technical difficulties that have prevented stockholders from accessing the meeting.” GameStop said it would provide an update “as soon as possible” as to when the event would be rescheduled, according to that feed.

GameStop shares wrapped up the day with a 14% gain, logging virtually all of that advance following the aborted conclave.  

Capital Call
Score a pair of big wins for big business:

Score a pair of big wins for big business: This morning, the Supreme Court sided with Starbucks over the National Labor Relations Board, rendering a 9-0 decision to limit the agency’s ability to win temporary reinstatement of fired union activists. 

Thursday’s result comes one day after the U.S. Court of Appeals for the Second Circuit threw out a NLRB-granted cease-and-desist motion against Amazon.com, which likewise barred the e-commerce behemoth from sacking organizing staffers. 

This week’s one-two punch could usher in a new, litigation-heavy day. Attorney Christopher Foster, who represents employers in labor-related matters, told the Washington Post those recent developments “vindicate the strategy of going to the courts, and not accepting the NLRB’s decision on any given matter.” 

Inside Baseball
Sometimes you need to wait for your pitch.

Sometimes you need to wait for your pitch. Investors will soon be able to ride Congress’ coattails via one-stop shopping, as Tuttle Capital Management filed SEC paperwork Tuesday for an active management ETF tracking the savviest public servants.  

The nascent Tuttle Capital Congressional Trading fund will invest based on 45-day old disclosure data gleaned under the 2012 STOCK (Stop Trading on Congressional Knowledge) Act, identifying up to 50 equity positions based on lawmakers’ investment performance, seniority and committee positions. That targeted approach contrasts with a pair of funds from startup provider Unusual Whales, which track all publicly disclosed stock investments made by Democrat and Republican legislators and their respective families.

Perhaps informing that considered approach, a September 2022 New York Times analysis determined that at least 97 then-current members of Congress had transacted in stocks, bonds or other financial assets “that intersected with the work of committees on which they serve” during the three years through 2021 (the partisan split among that cohort was roughly 50/50).  

Analyzing disclosures compiled by data firm 2iQ Research, the NYT likewise found that all but six of the 50 most actively transacting lawmakers “bought or sold securities in companies over which their committee assignments could give them some degree of knowledge or influence.”  

“Generally speaking, there is a group of Congresspeople who have generated amazing returns [which] put them in the top echelon of all money managers, and they’ve been able to do that while working a full-time job,” marveled Tuttle Capital Management founder and eponym Matthew Tuttle to ETF.com. “Given that they have to publicly report their trades, keeping an eye on what specific members of Congress are doing should be interesting given their uncanny returns.” 

QT Progress Report
Reserve Bank credit remained at $7.22 billion following a virtual stand-pat week featuring less than $1 billion of roll-off.  Interest bearing assets on the Fed balance sheet are down $89 billion from the middle of May, and 19.1% below their early 2022 peak.
Recap June 13

Stocks fluttered higher by 20 basis points on the S&P 500 as outsized strength in the mega-cap tech complex offset broader weakness (only 185 members of the broad index finished higher on the day), while Treasurys maintained their pronounced momentum with 2- and 30-year yields each dropping a further seven basis points to 4.68% and 4.4%, respectively. WTI crude remained near $78 a barrel for a third straight day, gold ticked lower to $2,303 an ounce, bitcoin slipped to $66,700 and the VIX fell below 12. 

- Philip Grant

Split Bun

It’s a Cyclone-worthy tale of betrayal and revenge, via the New York Post:

The hot dog news from Coney Island is hard to swallow. Joey Chestnut, perennial winner of the annual July 4th Nathan’s Hot Dog Eating Competition, is out of this year’s beef barf over a deal he made to represent a different wiener brand, The Post has learned.

The brand is Impossible Foods, according to sources. The leading maker of meatless “meats” is known for its Impossible Burger which contains a laboratory-synthesized substance called heme. . .

The Nathan’s contest at the corner of Stillwell and Surf Avenues, one block from the famous Boardwalk, has been a Coney Island tradition since 1916. California-born Chestnut has won it 16 times, including every year since 2016.

He gobbled a world record 76 dogs and buns in 2021 and kept his title with a paltry 62 down the hatch last year.

Strange Bedfellows
There's always next year.

There’s always next year. MSCI, Inc. announced today that it will not add debt sold by the European Union to its suite of government bond indices, maintaining the organization’s classification as a supranational rather than sovereign issuer pending another review in spring 2025.  

The former designation includes state-run development banks and multilateral lending institutions such as the World Bank, a niche category in the fixed income universe relative to lynchpin government bonds.  

Perhaps reflecting that dynamic: triple-A/double-A-plus-rated EU bonds maturing in 2034 currently change hands at a 3.07% yield, well above the 2.53% for triple-A-rated, 10-year paper issued by Germany, the bloc’s largest member.  A Brussels-commissioned investor survey last year found that index inclusion represented “the single most-important remaining step in order for EU bonds to trade and price similarly to European government bonds.”

MSCI’s verdict “is pretty disappointing after so much speculation,” Pooja Kumra, head of European rates strategy at TD, told Bloomberg. “This certainly means steeper EU curves – the long end should suffer the most.” Yet the decision is arguably intuitive, as political divisions within the Old Continent, including with respect to joint debt issuance itself mark an awkward contrast with those sovereign aspirations. Witness the German constitutional court’s December 2022 ruling that “it would be manifestly impermissible for the European Union to borrow on capital markets to provide general financing for its budget.”

Meanwhile, the yield on French zero coupon 10-year government bonds reached 3.226% yesterday, topping Portugal’s equivalent borrowing costs for the first time since 2005. At the height of the sovereign debt crisis in late 2011, Portugal’s 10-year debt fetched upwards of a 10-percentage point premium to France.  

That landmark shift, which comes despite a still-healthy gap in the nations’ respective credit ratings (France is assessed at double-A-minus, compared to single-A-minus for its peer to the southwest), accompanies a potential sea change in the halls of power. French President Emmanuel Macron called snap elections beginning June 30 in response a decisive defeat for his party in European Parliamentary elections over the weekend. 

“This was a healthy reminder that politics and the fiscal outlook still matter,” Jan von Gerich, chief analyst at Nordea Bank, told Bloomberg. “Political risk seemed to have been almost forgotten in the euro bond markets.” 

Recap June 12

Stocks raced higher on the strength of a cooler-than-expected May CPI print, though retrenched a bit late in the day to leave the S&P 500 0.85% in the green, as the broad average now sports year-to-date gains of near 15%. Treasury yields likewise gapped lower but lost some steam this afternoon, leaving the 2- and 30-year at 4.75% and 4.47%, respectively, each down six basis points on the session. WTI crude edged above $78 a barrel, gold ticked modestly higher for a third straight day at $2,321 an ounce, bitcoin finished little changed at $67,500 and the VIX fell nearly a point to 12. 

- Philip Grant

Spinning Wheels
You only live once, China edition:

You only live once, China edition: Speculative appetite is waxing in the Middle Kingdom, at least by one metric. Thus, annual lottery ticket sales grew at a 37% annual pace last year, Bloomberg relays, citing government-compiled data. 

That builds on a 14% year-over-year uptick logged in 2022 and an average 9% annual growth rate over the four years through 2019.  At the same time, growth in average disposable income within the world’s second-largest economy waned to 5.7% during 2022 and 2023 from an 8.8% clip in the four years preceding the pandemic. 

Utilizing local marriage registrations as a representation of long-term economic confidence, analysts at Bloomberg find that regions with a lower rate of matrimonial tie-ups have exhibited stronger growth in lottery sales, while the share of scratch-off tickers – a format popular with younger punters – reached 25% of total sales as of the first quarter, compared to less than 5% in 2018.  

Marginal Safety
Behold the potent fixed-income tailwind:

Behold the potent fixed-income tailwind: Serendipity reigns in the high-grade U.S. corporate bond realm following the post-Covid updraft in benchmark rates, as aggregate coupon income is set to rise some 15% year-over-year in 2024, strategists from Bank of America project.  

“That extra coupon cash should help keep investment-grade technicals stronger for the remainder of 2024,” the BofA team concludes, as projected interest payments of $220 billion from June to December easily outpace the $89 billion in anticipated net supply over that period. Options-adjusted spreads on the ICE BAML U.S. Corporate Index crouch at 90 basis points over Treasurys, roughly half their late 2022 levels and representing the narrowest pickup of the post-financial crisis era outside of brief interludes in summer and fall 2021. 

Yet signs of fundamental deterioration accompany that heady backdrop, as median net leverage among non-financials and utilities investment-grade issuers ticked to 2.09 turns of Ebitda as of March 31 from 1.96 times three months earlier, BofA finds, representing double its post-crisis deleveraging lows and a figure exceeded only during the Covid crucible over the past two decades. 

Elevated all-in borrowing costs are likewise beginning to sting in some corners, the investment bank relays, as the share of triple-B-rated bonds (i.e., the lowest full rung in the high-grade category) sporting a negative outlook reached 5.7% as of late May, double the proportion seen at year-end 2023. Conversely, only 5.3% of that cohort features a positive outlook, compared to 7.9% at the outset of this year. 

A trio of high-profile players with ample outstanding debt are helping drive that dynamic, as Charter Communications, Paramount Global and Boeing each stand at or near the precipice of junk while sporting a negative outlook. 

Boeing, the subject of a bearish credit analysis in the Jan. 19 edition of Grant’s Interest Rate Observer, faces a “material degree of execution risk in [its] plan to restore compliance and higher quality to its commercial aircraft assembly operations,” warned Moody’s Investors Service in an April 24 note in which the rating agency trimmed its rating to Baa3 (equivalent to triple-B-minus) and applied a negative outlook.  Peers S&P and Fitch each maintain the same assessment.

As a spate of high-profile mechanical failures continues to bedevil the Arlington, Va.-headquartered manufacturer, reputational damage and regulatory scrutiny serve to further complicate an aggressive capital structure. Thus, Boeing represents an “outlier” in the investment grade category as net debt relative to Ebitda towers in the “mid-teens,” Fitch analyst Nicholas Varone apprised the Financial Times Monday, adding no small urgency to the company’s task of swiftly bolstering cash generation. Varone projects net leverage to recede to four turns of Ebitda by 2026 on the strength of improved production and delivery metrics over the next six to 12 months.

Subsequent developments underscore the challenge at hand. This afternoon brought news that Boeing delivered 24 commercial jets last month, down more than 50% from the same period last year and matching the two-dozen logged in April.  

That puts the manufacturer behind the eight ball for the current reporting period, as Wall Street consensus calls for 91 deliveries over the three months through June.  Deliveries of the 737 Max jet numbered 19 for the month, representing only half of a Federal Aviation Agency imposed limit in the wake of the Alaska Air-operated mid-flight fuselage blowout early this year. 

While customers ordered 27 new aircraft from chief rival Airbus in May, Boeing’s new mandates numbered only four, bringing its three-month average to 41 planes. In the fourth quarter, that metric stood at 203. 

More turbulence ahead? 

Recap June 11

A 7% rip in Apple shares helped drive the tech-heavy Nasdaq to a sturdy 70 basis point advance, though the S&P 500 managed to finish higher by only a quarter percent on the day. Treasury yields snapped lower by five to eight basis points across the curve, with this afternoon’s stellar auction of 10-year notes headlining the proceedings, while WTI crude held near $78 a barrel, gold advanced to $2,316 per ounce and bitcoin pulled back to $67,300. The VIX maintained its customary position south of 13. 

- Philip Grant

Into the Breach

From TechCrunch:

Security researchers say they believe financially motivated cybercriminals have stolen a “significant volume of data” from hundreds of customers hosting their vast banks of data with cloud storage giant Snowflake.

Incident response firm Mandiant, which is working with Snowflake to investigate the recent spate of data thefts, said in a blog post Monday that the two firms have notified around 165 customers that their data may have been stolen.

It’s the first time that the number of affected Snowflake customers has been disclosed since the account hacks began in April. Snowflake has said little to date about the attacks, only that a “limited number” of its customers are affected. The cloud data giant has more than 9,800 corporate customers, like healthcare organizations, retail giants and some of the world’s largest tech companies, which use Snowflake for data analytics.

So far, only Ticketmaster and LendingTree have confirmed data thefts where their stolen data was hosted on Snowflake. Several other Snowflake customers say they are currently investigating possible data thefts from their Snowflake environments.

Wisdom of the Crowd
Ringing the bell is overrated:

Ringing the bell is overrated: the Nasdaq is laying the groundwork for so-called private initial public offerings, as Bloomberg reports that the exchange plans to offer venture capitalists and private equity promoters the option to monetize portfolio company positions via regularly scheduled auction, sidestepping a still-shaky capital markets backdrop in the process. 

Proceeds from conventional IPOs in the U.S. stand at $15.4 billion since the start of 2024 according to data from Renaissance Capital, representing more than half of the $27.1 billion raised over the prior two full years but still a fraction of 2021’s $142.4 billion bumper-crop. Meanwhile, the global backlog of closely held firms tipped the scales at $3.2 trillion as of Dec. 31 per Preqin. 

“VCs and PE are [each] frankly grappling with the same liquidity challenges for many of their larger portfolio holdings,” Nasdaq Private Market CEO Tom Callahan told Bloomberg. “One of the largest PE firms in the world recently told me that it’s causing them to fundamentally rethink their whole business model of relying on M&A or IPIOs as their only paths to liquidity.”  

The pronounced post-October upturn in asset prices has likewise changed the game for unlisted firms. “For the last couple of years, companies were not focused on employee liquidity at all . . . [as] many, frankly, were in survival mode,” Callahan said. “I think there is a broad sense that the world is a safer place right now. So, employee liquidity has returned as a priority.” 

Cash-hungry general partners and employees find no shortage of willing counterparties. Some 62% of family offices undertook at least a half-dozen direct investments in unlisted firms in 2023, a recent survey from BNY Mellon Wealth finds, with the share of respondents planning to do so this year ticking to 71%.  “Successful private market deals capture the illiquidity premium, meaning that they can potentially achieve significantly higher returns than are available through public markets or even [through] pooled private market investments,” the BNY team writes. 

Some startups turn to a different source of funds. As The Wall Street Journal documents today, firms like three-wheeled solar car manufacturer Aptera Motors and miniature homes maker Boxabl have each scored upwards of $100 million from crowdfunded individual investors over the last several years, utilizing a Securities and Exchange Commission-approved exemption known as Regulation A which permits business to raise up to $75 million per annum with “lighter touch rules” relative to an initial public offering. 

The pair, which each utilized splashy social media campaigns marketing their products, have not translated their fundraising prowess into operational success. Aptera has yet to deliver a vehicle, burning through $25 million last year to wrap up 2023 with $17 million in cash on hand, and subsequently issuing a “going concern” warning. Both external directors on its board have tendered their walking papers during the past 12 months. 

Las Vegas-based Boxabl, meanwhile, boasts a purported 175,000-strong waitlist for its fun-sized, 360-square foot dwellings yet has delivered only 223 units over the past four years, with a single bulk order from the U.S. navy composing most of that sum. The firm, which absorbed a $40 million net loss last year, conducted a $75 million regulation A offering in 2022 with a two-tiered approach, pricing shares at $0.80 for most investors but filling some insiders, including the wife of chief marketing officer Galiano Tiramani, at about $0.01 per share. Boxabl’s auditor resigned last month, citing material weaknesses in the company’s valuation practices relating to stock-based compensation, while the SEC is investigating the company’s financial disclosures.

“I advise approaching these unproven investments with the same caution as responding to a flashing check-engine light – if you choose to proceed, do so with extreme caution,” Marquette University finance professor David Krause told the WSJ

Recap June 10

Stocks edged gradually higher throughout a low-wattage summer Monday session, leaving the S&P 500 some 30 basis points in the green, though long-dated Treasurys remained under pressure with the long bond rising to 4.59%, up a further four basis points following Friday’s noteworthy selloff. WTI crude rebounded sharply towards $78 a barrel, gold bounced back to $2,309 per ounce, bitcoin stayed near $69,400 and the VIX settled just south of 13. 

- Philip Grant

Five and Dime

Your hands – they’re quite exquisite! From Nine News Queensland:

The man chosen for a unique A$100 ($66) an hour Domino’s Pizza job which went viral has been revealed. Queensland schoolteacher Matt Strain was chosen by the fast-food company to be their next hand model after a nationwide search for the coveted role was announced in May.

Domino’s first put the call out in May for someone with “18+ years in pizza holding experience” and who had hands “so clean and soft you could butter garlic bread with them, and can lift a maximum of four pizza slices per hand.” 

After hundreds of applicants put their video reels into the company, Mr. Strain, 39, was chosen as the next model. Speaking to 9 News Queensland about the role, he joked his hands were “unblemished by hard work.”

A worthy successor to industry legend George Costanza. 

The Bulled and the Beautiful
Let's see what these bots can do:

Let’s see what these bots can do:  The rubber may soon meet the road for artificial intelligence, as Meta Platforms announced plans Thursday to offer free chatbot capabilities for businesses on its WhatsApp platform. That initiative, which will include features helping vendors organize and respond to customer queries as well as generate advertisements, represents a highly anticipated effort to eventually parlay the budding technology into actual revenues. 

“They need to find a way to show investors with some degree of conviction that there is a there there,” Bernstein analyst Mark Shmulik told The Wall Street Journal. “An AI-powered chatbot inside of business messaging feels like a great place to deploy it. You might be able to find product market fit sooner than you will on [virtual reality] smart glasses.” 

As one big-tech pillar makes its monetization move, industry peers forge ahead with R&D efforts to drive the technology beyond today’s chatbot-centric state of play.  Executives from Nvidia and other chip industry mainstays gathered in Taiwan this week for the annual Computex conference, unveiling an array of AI-enabled personal computers along with no small dose of heady rhetoric. 

“When I think about the PC market, this is the most exciting moment since the arrival of WiFi,” gushed Intel CEO Pat Gelsinger in remarks reported by the Financial Times. Qualcomm’s boss Cristiano Amon likewise deemed AI PCs the industry’s most consequential development since Microsoft’s landmark Windows 95 operating system. For its part, the Bill Gates-cofounded firm will begin selling PCs powered by in-house Copilot AI assistant later in June, which will include a “recall” function that snaps regular screenshots to help build a searchable database of previous actions taken by a given computer. 

So-called AI agents likewise take their turn in the spotlight.  Back in February, buy-now, pay-later outfit Karna proclaimed that its OpenAI-powered assistant had assumed the workload of 700 full-time agents after only one month of use. That development may mark a “ChatGPT moment” (i.e., portending a wider breakthrough) for the application, Echo AI CEO Alexander Kvamme told CNBC.  Those advanced bots – typically customized on large AI models and designed for specific functions – boast the ability to complete tasks and make decisions “without a human in the loop,” Kvamme added. 

As torrents of capital pour forth – with generative AI-themed venture capital funding reaching $29.1 billion in 2023 according to PitchBook, up more than 260% year-over-year – Wall Street represents a fitting use case for the space.  Thus, the FT reported Monday that “asset managers are increasingly using artificial intelligence to guide investment decisions,” with JPMorgan’s money management division preparing to “expand the use of a generative AI tool that flags questionable decisions by portfolio managers, such as potentially selling top-performing stocks too soon.”

Now that’s machine learning. 

Recap June 7

A hotter-than-expected headline payrolls print for May stoked a major selloff in Treasurys, as 2- and 30-year yields jumped 15 and 12 basis points respectively to 4.87% and 4.55%. Stocks again finished little changed on the S&P, leaving the broad average higher by a bit less than 1% for the week against the cacophonous backdrop of the Gamestonk circus.  WTI crude edged lower towards $75 a barrel, gold tumbled nearly 4% to $2,288 per ounce, bitcoin slipped 2% to $69,100 and the VIX wrapped up the day just north of 12. 

- Philip Grant

Now and Then

From Reuters:

British paratroopers recreating an airdrop behind German defenses to mark the 80th anniversary of D-Day were met by French customs officials at a makeshift border checkpost.

Moments after the paratroopers had hit the ground and gathered up their chutes, they formed an orderly queue and handed over their passports for inspection by waiting French customs officials in a Normandy field. . .

Since Britain left the European Union, its citizens no longer have the right to move freely within the bloc and face stricter immigration checks.

Cornered Case
No landing necessary:

No landing necessary: The American public maintains a sanguine bent with respect to future price pressures, the Kansas City Fed determined last week, as a May 31 whitepaper concluded that long-term inflation expectations “appear to remain well anchored.” 

The researchers compared the relationship between nominal government yields and Treasury inflation-protected securities (TIPS) since the Fed adopted its 2% annual inflation target back in 2012, finding that so-called pass-throughs from core inflation surprises to long-run consumer expectations have generally trended lower over that dozen year stretch and remains below its pre-pandemic levels. That’s despite the fact that measured inflation has remained north of the Fed’s self-assigned 2% bogey for over three years, with core CPI topping economist consensus on 17 occasions since March 2021 while surprising to the downside only nine times.  

“Maintaining anchored inflation expectations helps ensure that high inflation does not become embedded in the economy through forward-looking pricing decisions and wage negotiations,” Ph.D. economists Brent Bundick and A. Lee Smith wrote, with the pair concluding that the muted public outlook “should help return inflation to the FOMC’s 2% target over time.” 

One high profile labor-market development makes for an unwieldy pairing with that upbeat conclusion. Flight attendants for American Airlines rejected the carrier’s offer of an immediate 17% pay hike and increased profit-sharing yesterday, rebuffing an approach that CEO Robert Isom characterized as “increased pay for all flight attendants [without] asking your union for anything in return.”  The two sides are scheduled to conduct “last ditch” negotiations on June 10, with the first domestic airline strike in 14 years looming in the event of continued impasse. 

“We’re going to hold our CEO to his word when he said that we will be an industry leader [in] wages,” Association of American Flight Attendants national president Julie Hendrick told the Dallas Morning News earlier this week. 

Across the Atlantic, meanwhile, an institutional uptick in inflation expectations elicit an instructive response:  the European Central Bank trimmed its benchmark deposit rate to 3.75% from 4% this morning, simultaneously increasing its core CPI guesstimates for full-year 2024 and 2025 to 2.8% and 2.2%, respectively, from 2.6% and 2.1% in March, after that metric logged a 20-basis point sequential increase last month to 2.9% year-over-year.  

Referencing a spate of dovish recent rhetoric from ECB President Christine Lagarde and peers prior to today’s outcome, Aviva Investors senior economist Vasileios Gkionakis declared on Bloomberg Television that the easing move is “almost exclusively driven by it being too embarrassing for the Governing Council to back-pedal. It doesn’t make sense.” Dirk Schumacher, former ECB official turned head of European macro research at Natixis, concurred to The Wall Street Journal: “They cornered themselves.” 

Anchors aweigh!

QT Progress Report
Reserve Bank credit declined by $37.7 billion over the past week, leaving the Fed’s portfolio of interest-bearing assets at $7.223 trillion. That’s down $120 billion from the start of May, and 19% from the early 2022 peak. 
Recap June 6

Stocks treaded water to consolidate yesterday’s heady advance ahead of the May payrolls report Friday morning, while Treasurys managed to maintain their momentum with yields mostly ticking lower by one to two basis points. WTI crude bounced back above $75 a barrel, gold rose to $2,373 per ounce, bitcoin edged lower at $70,600 and the VIX remained south of 13. 

- Philip Grant

Picture in Picture

Who needs rock stars anyway? Here’s Nvidia CEO Jensen Huang and an admirer in Taipei (via X user Dylan Patel):

Now that’s some (three) trillion-dollar penmanship. 

Under the Bridge
And we're back, sort of.

And we’re back, sort of. Stateside depository institutions raked in $64.2 billion of first quarter net income, the Federal Deposit Insurance Corporation found in its May 29 Quarterly Banking Profile, up 79.5% from the final three months of 2023 and back within range of its Covid-era baseline of roughly $60 billion to $80 billion.  

That rebound represents something of a return to normalcy following last year’s kerfuffle, as FDIC special assessments levied in the wake of the spring 2023 collapse of Silicon Valley Bank and a handful of peers served to hamper profitability. 

Yet torrents of red ink meanwhile continue to flow across industry balance sheets, as unrealized losses on available for sale and held-to-maturity assets – which are marked to market and carried at amortized cost, respectively – registered at a combined $517 billion during the first quarter. That’s up $39 billion on a sequential basis and marks the ninth consecutive period of “unusually high unrealized losses” since the Federal Reserve began its belated, aggressive tightening cycle in mid-2022, crimping fixed-income assets accumulated during the zero-rate era.   

Lenders likewise continue to confront a “material deterioration” in commercial real estate, as “weak demand for office space is softening property values, [while] higher interest rates are affecting the credit quality and refinancing ability of office and other types of CRE loans.” Indeed, the rate of noncurrent loans within non-owner occupied CRE assets stands at 1.59%, its highest since late 2013. 

The regulator identifies little in the way of systemic strain, however, as the tally of firms on the FDIC Problem Bank List (i.e., those sporting a composite “4” or “5” rating under its in-house CAMELS supervisiory ratings criteria) stood at 64 as of March 31, up from 52 three months earlier but representing only 1.4% of U.S. institutions. That remains firmly inside the 1% to 2% long-term average seen during non-crisis periods.

Might a bout of further weakness in the CRE realm, catalyzed by an uptick in price discovery, put the FDIC’s sanguine assessment to the test?  The Commercial Observer reported Monday that a growing number of underwater loans tied to the sagging sector have come to market of late. 

“There are literally multiples of [loan acquisition] opportunities compared to what we saw last year,” InterVest Capital Partners CEO Michael Gontar apprised the publication. “Things are definitely trading. It’s a much more active market.”  While 2023 was characterized by a yawning bid-ask spread, that dynamic is evolving into a buyer’s market. “In the last six months, we’ve seen [conditions] thaw quite a bit,” Gontar relates. “Sellers are taking losses where they need to, which is basically everywhere.” 

That development could spell trouble for large swaths of the banking sector. CRE loans account for roughly one third of total assets among smaller lenders (i.e., those with $10 billion of assets and below), data compiled by Bloomberg’s Simon White show, up from less than 26% in late 2021 and far above the 6.5% asset weighting for large institutions. At the same time, the median share of held-to-maturity assets (not marked-to-market) among regional banks stands at roughly 6%, more than double that seen in late 2020, while the average operating income within the regional banking sector over a rolling four-quarter basis has slumped to pre-pandemic levels, off one-third from the spring 2023 SVB event.

See “The case of the fragile 27%” in the March 24 edition of Grant’s Interest Rate Observer for a closer look at the dual interest rate and CRE-related risks bedeviling America’s 4,623 depository institutions, along with attendant implications. 

Recap June 4

The bulls managed to flex their intraday muscles once more, as the S&P 500 shook off a mid-day downturn to power back into the green for a third consecutive session, while bonds continued their rally with 2- and 30-year yields dropping five and seven basis points, respectively, to 4.77% and 4.48%. WTI crude logged fresh four-month lows near $73 a barrel, gold slipped to $2,326 per ounce, bitcoin popped back above $70,000 and the VIX remained near 13

- Philip Grant

Rise of the Machine

We’re getting the band back together. From Barron’s:

It’s as if John D. Rockefeller is reaching out from the grave to reassemble his old Standard Oil monopoly. ConocoPhillips’ $22.5 billion all-stock acquisition of Marathon Oil  —  both former pieces of Standard Oil — is the latest consolidation deal in the oil patch, as companies look to bolster their reserves in a fossil-fuel industry still raking in profits despite growing climate-change concerns.

The deal follows Exxon Mobil ’s $60 billion takeover of Pioneer Natural Resources and Chevron’s $53 billion purchase of Hess, part of $250 billion in oil and gas mergers-and-acquisitions activity in 2023.

Nearly every deal involves companies that were at one time part of Rockefeller’s oil empire. At its height, Standard Oil controlled 90% of the U.S. market. But accusations of monopoly dogged it, and in 1911 regulators broke it up into 34 smaller companies.

Running Gag
Repetition is an essential comedic device:

Repetition is an essential comedic device: Sunday’s social media appearance from retail punter extraordinaire “Roaring Kitty” duly fanned the speculative flames, as shares of GameStop jumped nearly 100% at the cash open – settling higher by 21% – after the Reddit WallStreetBets mainstay delivered a “YOLO update” detailing large equity and call option positions in the retailer. Today’s move comes less than a month after a series of posts from the financial influencer catalyzed a 179%, two-day rally in GME, a move which quickly reversed after the firm responded with $933 million in supply via an at-the-market stock offering.

Thanks to those undaunted meme-stonk aficionados, GameStop now sports a market capitalization of nearly $10 billion, yet is projected to generate only $3.7 million in net income over the 12 months through January 2025, with revenues pegged to shrink to $4.7 billion from the $6.1 billion logged three years prior. “The lemmings who believe in Roaring Kitty might buy more stock at these prices, but there is nothing fundamental to support a valuation at this level,” Wedbush Securities analyst Michael Pachter told Bloomberg. 

GameStop’s star turn underscores the percolating animal spirits on display in the current bull backdrop.  Bloomberg’s U.S. equity momentum factor model (composed of names which have outperformed the broader benchmark over the past year) accounted for roughly two-thirds of the S&P 500’s year-to-date gains through last Wednesday, Bianco Research points out, posting its best such performance since the early aughts.  Wall Street professionals are positioned accordingly, as net exposure to the strategy within hedge fund U.S. equity portfolios stands at its highest in at least two decades, analysts at Goldman Sachs find. 

The proliferating popularity of lottery-ticket trades likewise illustrates the current speculative fervor. Citing data from Cboe Global Markets, the Financial Times reports that so-called penny stocks represented seven of the top 10 most actively traded U.S. equities last month, with the volume share of such securities changing hands at less than $1 topping 14% in the year-to-date. That compares to just over 6% in 2021. “Penny stocks are not the same as the meme stock phenomenon, but let’s say they rhyme,” Interactive Brokers chief market strategist Steve Sosnick told the pink paper. “It’s people willing to put fundamentals aside and chase returns.”

The show goes on.

Recap June 3

Stocks consolidated Friday’s rip as the S&P 500 finished little changed after opening higher then coming under some mid-session pressure, while some weaker-than-expected economic data helped Treasurys enjoy a strong rally, with the long bond dropping 10 basis points to 4.55%. WTI crude tumbled to a four month low at $74 a barrel, gold jumped back above $2,350 per ounce, bitcoin topped $69,200 and the VIX edged above 13. 


Lift the Offer

Five-finger discounts abound. Here’s commentary from Dollar General’s management on Thursday’s first quarter earnings call (via @TheTranscript):

Shrink continues to be our most significant headwind and was 59 basis points worse in Q1 compared to prior year. . . we now expect this headwind to be greater in 2024 than what was originally contemplated. 

Dual Track Mind
It's choose your own adventure in

It’s choose your own adventure in the speculative-grade, floating-rate bank debt category: a gusher of opportunistic deal flow has been on display of late, as leveraged loan issuance reached $160 billion in May, easily topping January’s $140 billion figure to mark the heftiest monthly sum in Bloomberg’s data set dating to 2013. 

Upwards of 80% of that supply deluge comes in the form of repricings, i.e., amendments to an existing deal which typically serve to lower interest expense. For context, repricing volume throughout the freewheeling first quarter of 2021 reached $124.3 billion according to Debtwire Par, roughly equivalent to May’s tally.

Tellingly, creditors largely opt to go with the flow, acceding to diminished interest income rather than hitting the bricks. “Not only has the pace of repricings and refinancings become even more frenzied in the last few months, but there have also been even fewer drops by existing lenders,” Scott Macklin, head of U.S. leveraged finance at Obra Capital, told Bloomberg. “That tells you the extent to which investors are holding on to loans for dear life even as pricing is becoming skimpier.”

At the same time, “a dearth of new-money deals has helped push secondary-market prices to two-year highs,” as Bloomberg’s Maria Clara Cobo puts it (hat tip to private credit on that score).  

Illustrating the current state of play, double-B-minus rated Simply Good Foods USA, Inc. managed to place a $250 million fungible three-year first lien term loan earlier this week at just 250 basis points over the secured overnight financing rate and with no original issue discount to help finance its $280 million acquisition of protein shake brand Only What You Need. That compares to initial price talk of 99.5 cents on the dollar. 

Yet as Mr. Market rolls out the red carpet for firms on fair financial footing, a rising portion of creditors face a rocky road ahead. Rating agency loan downgrades registered at 1.82 times the frequency of upgrades last month, up from a 1.64:1 ratio in March and representing the 22nd straight reading north of 1.5:1. 

Relief-needy firms likewise head to the negotiating table in droves.  Inclusive of distressed-exchange transactions, the trailing 12-month share of leveraged loan defaults by issuer count reached 4.33% in April, PitchBook’s LCD unit finds, easily the highest figure since at least 2017 barring a brief, Covid-related spike and more than quadruple the ratio logged two years ago.  The dollar volume of conventional defaults registered at $2.5 billion in April, its highest monthly total since June of last year. 

Such an outcome is an increasingly painful one for investors.  First-lien recovery rates are tracking at a paltry 50% since the start of last year, Judah Gross, senior director at Fitch’s leveraged finance group, relayed to The Wall Street Journal on May 14.  That compares to an average 74% during 2021 and 2022. 

Recap May 31

Stocks wrapped up the month in fitting fashion, as a ferocious late rally pushed the S&P 500 from the red to a near 1% advance on the session, extending May’s gains to north of 5%.  Treasurys enjoyed a moderate bid across the curve, with 2- and 30-year yields declining by three and four basis points, respectively, to 4.89% and 4.65%, while WTI crude fell to $77 a barrel, gold retreated to $2,328 per ounce and bitcoin edged lower at $67,600. The VIX tumbled below 13 from 14.5 Thursday, perhaps presaging the afternoon rip in stocks with pronounced weakness early. 

- Philip Grant

Xi Said It

No need to wonder what’s powering the Middle Kingdom’s AI ambitions. From the Associated Press:

China’s latest artificial intelligence chatbot is trained on President Xi Jinping’s doctrine, in a stark reminder of the ideological parameters that Chinese AI models should abide by. China’s cyberspace academy earlier this week announced the chatbot trained on Xi Jinping Thought, a doctrine which promotes “socialism with Chinese characteristics.”

The chatbot was trained on seven databases, six of which were mostly related to information technologies provided by China’s internet watchdog, the Cyberspace Administration of China, or CAC. Xi Jinping Thought was the seventh database that the chatbot was trained on, according to a WeChat messaging service post by CAC’s magazine about the AI model.

Glut Feeling
If you build it, they will come?

If you build it, they will come?  A veritable cash pileup is on display in the mushrooming $1.7 trillion private credit industry, where dry powder (i.e., committed but undeployed capital) reached some $477 billion as of September, data from Preqin show. That’s up from $400 billion at year-end 2022 and 83% above its pre-pandemic level. 

A series of recent deals perhaps reflect those overflowing coffers. Last month, a group of lenders helped finance EQT AB’s buyout of software firm Avetta at 450 basis points over the secured overnight financing rate, marking one of the narrowest spreads on record, while, in early May, KKR-backed tank transportation firm Depot Connect International scored a direct loan at 99.75 cents on the dollar, establishing one of the smallest original issuer discounts logged within the asset class.

“Because of this supply-demand imbalance you’re starting to see this behavior shift. . . into a bit of an auction for the tightest terms,” former Apollo partner turned head of family office Achilles Management Sachin Khajuria commented on Bloomberg Television last week. “That means weaker underwriting standards due to competition.” 

Such concerns have yet to deter a trio of Wall Street’s leading lights. Ares Management revealed its ambitions last week to gather $750 billion in total assets by 2028, a bogey 75% north of current levels. The Los Angeles-based private credit stalwart, which employs 3,000 individuals across 40 offices worldwide, will ramp up headcount in service of that goal per CEO Mike Arougheti.

Goldman Sachs likewise recently scared up $21 billion for proprietary private credit investments, marking the investment bank’s largest fund-raising effort focused on the asset class. “I’ll go anywhere in the world where people want to talk to me,” Marc Nachmann, head of Goldman’s money management operations, told Bloomberg. “[Investors] all view this as a super interesting asset class. When you go back 10 years, none of them had big allocations to direct lending.”

Then, too, Apollo CEO Marc Rowan detailed plans to market its self-originated private credit assets to retail investors at a Bernstein-conference Thursday, pointing to his firm’s buildout of third-party insurance business and similar initiatives: “You will watch us do this in retail, you will watch us do this in interval funds, you will watch us do this in ETFs.” 

Others opt for a different tack. HPS Investment Partners has capped cash inflows to its $10 billion corporate lending fund HLEND, Bloomberg relayed on May 21, with the firm limiting new contributions from primary distributor JPMorgan Chase to roughly $175 billion per month from a prior monthly influx of up to $500 billion. In exchange for foregone fee income, HPS gains additional flexibility to walk away from less attractive deals with an eye toward improving returns.  Investors left out in the cold – primarily well-to-do individuals – will be placed on a waiting list.

The non-institutional cohort indeed plays a growing role in the direct lending revolution, as retail investor-oriented funds accounted for roughly 15% of total private credit assets as of mid-2023, a Thursday report from Moody’s Investors Service finds, up from 10% share five years prior, with further relative growth likely in the offing.  

That may prove a mixed blessing. As Moody’s notes, individuals perform limited due diligence and can exhibit a lower financial pain threshold, potentially spurring the unbullish prospect of increased redemption requests during downturns. What’s more, “new fund structures that target the wealth channels and allow for some access to liquidity have not been tested over several periods of severe market stress.”

JPMorgan boss Jamie Dimon struck a similar note at the Bernstein event Wednesday: 

Do you want to give access to retail clients in some of these less liquid products? The answer is – probably, but don’t act like there’s no risk with that.  You have illiquid products, maybe they are not properly marked, they have not been properly stress tested.

Do people really understand about interest rates affecting what these things are worth? And if a little old lady finds out she can’t get her money back … retail clients tend to circle the block and call their senators and congressmen. 

Place your bets. 

Recap May 30

A $5.1 billion weekly decline in Reserve Bank credit leaves the Fed’s portfolio of interest-bearing assets at $7.26 trillion. That’s down $107 billion from the end of April and 18.6% below the early 2022 peak. 

Beginning next week, the monthly QT target pace throttles back to $60 billion from the current $95 billion. 

Recap May 30
Another round of moderate weakness left the S&P 500 lower by two-thirds of a percent at day’s end, as poorly received results and guidance from software giant Salesforce (-20%) did not help the bull cause.  Treasurys managed a bounce following persistent recent weakness, with 2- and 30-year yields settling at 4.92% and 4.69%, respectively, down four and five basis points on the session. WTI crude tumbled below $78 a barrel, gold edged higher at $2,342 per ounce, bitcoin rose to $68,200 and the VIX held just above 14. 
Aggregate Demand Superhero

And what are you doing to spur economic growth? From the New York Post:

Confessions of a sleeping shopaholic. One English woman opted out of counting sheep for sleep and instead is adding items to online shopping carts during late-night spending sprees.

Kelly Knipes, 42, confessed that she spent more than $3,800 on shopping while snoozing due to a rare sleep disorder. . . Over the years, Knipes has awoken to packages she’s ordered while sleeping, such as a full-sized plastic basketball court including a net, pole and backboard.

She’s even ordered tins of paint, books, salt and pepper pots, a children’s playhouse, fridges, tables and hundreds of Haribo candies.

Gavel Road
This afternoon's $44 billion auction

This afternoon’s $44 billion sale of seven-year Treasurys printed at 4.65%, well higher than the 4.637% logged immediately prior to mark the largest such tail since December.  Total bidding interest covered supply, which was upsized from an average $41.5 billion over the past six auctions, only 2.43 times over, the weakest ratio in just over a year.  

Today’s soggy result follows Tuesday’s two- and five-year placements at 4.917% and 4.553%, respectively, each pricing more than a basis point above their when-issued levels.  Those $70 billion and $69 billion sales, both roughly 12% larger than their respective averages over the prior half-dozen instances, likewise saw bid-to-covers shrink to 2.41 and 2.3 from their 2.59 and 2.41 six-auction baselines. Overall, May’s slate of sales established the weakest monthly bidding interest for coupon auctions since 2021 per Bloomberg’s Cameron Crise. 

Might the bond market’s pronounced lack of interest portend wider trouble? “Not only are yields rising again in the U.S., but they are moving higher in other parts of the world,” Matt Maley, chief market strategist at Tabak + Co., told Bloomberg. “That’s not good news for a stock market that is trading at 22 times forward earnings.” 

Not from Concentrate
The big get bigger:

The big get bigger:  Artificial intelligence juggernaut Nvidia’s latest post-earnings push to the stratosphere has likewise lifted the mega-cap technology complex to new heights.  Thus, the “magnificent seven” of Apple, Amazon, Tesla, Alphabet, Meta and Microsoft along with Jensen Huang’s outfit command 31.4% of the S&P 500’s market capitalization.  That’s a record share per data from Bank of America, topping the 29% logged in late 2021 and double the group’s representation in the broad index at the end of 2017.   

The cohort collectively delivered a 50% year-over-year increase in first quarter profits by Bloomberg’s count, helping drive a 23% increase in earnings for the S&P 500’s Information Technology Index. For context, that’s equivalent to more than four percentage points for the wider S&P 500, more than half of the blue-chip gauge’s 7.4% annual EPS growth. Information Technology is now priced at just over 29 times projected forward 12-month earnings, its richest price tag since the aftermath of dot.com bubble in 2002, while the magnificent seven currently changes hands at some 33 times earnings per share guesstimates through March 2025. 

A Wednesday Barron’s bulletin deftly illustrates today’s top-heavy state of play. Thus, a slate of prominent exchange traded funds has posted relatively disappointing recent results, with the Select Sector SPDR ETFs tracking the communications services, information technology and consumer discretionary sectors returning 35%, 32% and 16%, respectively, over the past year.  That compares to 42%, 40% and 20% gains for the S&P 500 sub-indices that the trio tracks.

As Ned Davis Research points out, Internal Revenue Service rules governing mutual fund diversification explain that underperformance, as no one stock may represent more than 25% of a given fund’s holdings, while positions weighted at 5% or greater cannot compose more than 50% of total assets. 

As a result, Nvidia accounts for less than 5% of the tech ETF, rather than the 17% theoretical position which would correspond to its market capitalization within the underlying sector. Amazon and Alphabet are likewise heavily underweight in their respective SPDR sector ETFs on a cap-weighted basis. 

Give the people what they want, Uncle Sam!

Recap May 29
Stocks came under pressure with the S&P 500 logging a 0.7% decline to mark the worst session of a bulled-up May with two days left in the month. Another bear-steepening selloff left 2- and 30-year yields at 4.96% and 4.74%, respectively, up two and eight basis points on the day, while WTI crude retreated to $79 a barrel, gold slipped to $2,337 per ounce and bitcoin slumped to $67,200.  The VIX jumped one point and change to a four-plus week high north of 14. 
Footlong Financing

Even the cucumbers are encumbered, From Bloomberg:

Sandwich chain Subway is selling $3.35 billion of asset-backed securities to help fund its buyout, marking the largest securitization of its kind on record. The sandwich maker is selling a whole business securitization, where a company pledges most of its assets as collateral, including franchise fees, according to people with knowledge of the deal. . . 

Whole business securitizations have been a natural source of capital for businesses with large networks of franchised stores. The WBS structure allows investors to give borrowers cheaper financing terms in exchange for more control of the assets, making it attractive for restaurants chains and gyms. This year, seven other deals have priced including Zaxby’s, a chicken finger restaurant chain, and Nothing Bundt Cake, a series of bakeries. . .

ABS sales have been running about 27% higher this year compared to the same point in 2023, with traditional collateral like auto loans and unusual collateral such as data centers driving issuance to a record start. 

Tokyo Drift
A monetary post-mortem in the Land of the Rising Sun:

A monetary post-mortem in the Land of the Rising Sun:  European Central Bank executive board member Isabel Schnabel offered a less than full-throated endorsement of quantitative easing Tuesday, declaring at a Bank of Japan-hosted conference that policymakers “need to carefully assess whether the benefits of asset purchases outweigh the costs.”  

Though the strategy – deployed in force following the 2008 financial crisis and again in response to Covid and accompanying lockdowns – “played an important role in stabilizing markets at times of stress,” Schnabel cited “accompanying costs that might be higher than those of other policy instruments.”

Such costs are now on display, as the post-pandemic updraft in inflation and subsequent rate hike cycle colors the zero- (or, in this case, negative-) rates era shopping spree in a bright red hue. The ECB posted a €1.3 billion ($1.38 billion) net loss in 2023 after releasing its entire €6.6 billion of financial risk provisions, marking the first full-year operating deficit since 2004 and spurring the suspension of dividend payments to member central banks. Germany’s Bundesbank suffered a €21.6 billion shortfall over the 12 months through December, burning through its €19.2 billion in provisions to help cushion that blow. 

“These losses need to be viewed against the profits. . . made before the rise in interest rates, but they may still be weighing on central banks’ reputation and credibility,” Schnabel said. 

Stateside peers likewise hedge their rhetorical bets.  Federal Reserve Governor Michelle Bowman took a nuanced approach to the central bank’s post-2008 response in Tokyo this morning, deeming the large-scale asset purchases in the wake of Lehman’s failure a “success,” which “helped support the economic recovery” through “further easing of financial conditions after the federal funds rate had reached its effective lower bound.”

Yet the Fed’s QE reprise in the wake of the Covid crucible, which served to push reserve bank credit to nearly $9 trillion in early 2022, double its pre-virus footings, stands as a more questionable endeavor. “To what extent did such a strong balance sheet response contribute to the buildup of inflationary pressures and the post-pandemic inflation surge?” the central banker mused, highlighting the Fed’s buildup of agency mortgage-backed securities through late 2021 against the backdrop of a buoyant housing market, along with a “strongly accommodative fiscal backdrop” which arguably lessened the need for such strenuous monetary exertions.   

Accordingly, the Fed “would likely have benefited from an earlier. . . decision to begin tapering and subsequently end asset purchases in 2021 given the signs of emerging inflationary pressures,” Bowman concluded.  

Indeed, the results of that low-yielding asset splurge are on weekly display in the Fed’s weekly H.4.1 data. Accumulated operating losses (which are not to be confused with unrealized markdowns on the carrying value of its portfolio) stood at $170.3 billion as of May 23, up 172% from the same period last year and far above the central bank’s $43.1 billion in stated capital.  

Instructively, those figures are recorded as negative remittances to Treasury, reflecting the pre-2022 state of affairs in which virtually all Fed operating profits accrued to government coffers. Instead, taxpayers indirectly foot the bill for the Fed’s underwater portfolio via a sort of intragovernmental bar tab, as reflected in the form H.4.1 line item “liability for earnings remittances due to the U.S. Treasury.”

How might thoughtful investors evaluate the theoretically apolitical central bank’s evident entanglement with Uncle Sam? See the analysis “Suppressed for longer” in the May 10 edition of Grant’s Interest Rate Observer for more on this subtle, crucial development.  

Recap May 28
Another unchanged finish on the S&P 500 featured an uptick in intraday volatility, as the broad index came under some pressure in mid-afternoon before reversing higher into the bell, though Treasurys had no such luck as yields rose across the curve with today’s two- and five-year auctions both seeing soggy demand. WTI crude pushed above $80 per barrel for the first time in nearly a month, gold ticked higher at $2,360 per ounce, bitcoin slipped to $68,300 and the VIX rose half a point to near 13. 
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. 
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. 
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

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. 
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. 

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. 
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