It’s one banana, Michael, how much could it cost? The going rate is $0.23 at Trader Joe’s, up from the $0.19 which had been in force since 2001, the year the prominent grocery chain began selling bananas one-by-one.
“We only change our prices when our costs change, and . . . we’ve reached a point where this change is necessary,” a company spokesperson told USA Today yesterday. Trader Joe’s sports 587 locations across 43 states and U.S. territories per data firm Scrapehero.
While one notable consumer brand breaks from tradition, another forges ahead into the brave new world. Dollar Tree will add scores of new items to its shelves over the course of 2024 at price tags ranging as high as $7, management announced on its March 13 earnings call. The discount retailer, which imposed a $5 price cap only nine months ago, first “broke the buck” in fall 2021, bumping its primary price point to $1.25 from the $1 which stood for 35 years.
“Over time, you will see us fully integrate multi-price merchandise into our stores, so our shoppers will find $5 bags of dog food next to our traditional pet treats and toys, and our $3 bags of candy will be found in the candy aisle,” CEO Rick Dreiling told listeners-in earlier this month.
Perhaps a corporate rebranding to *Dollars* Tree is on the docket.
“Our default rate on these types of loans is three tenths of one percent,” Blackstone boss Steve Schwarzman told Bloomberg this morning, referring to his firm’s chunk of the $1.7 trillion private credit industry. “I don’t know if there’s a bank around that has a default rate that’s lower.”
Indeed, the post-Covid surge in borrowing costs has seemingly inflicted little pain on that charmed cohort, as law firm Proskauer Private Credit Index showed a 1.7% default rate across 2023, less than half the 3.6% rate for global speculative-grade credit tracked by Moody’s Investors Service. Leveraged loans have defaulted at a 6.22% clip over the 12 months through February, TD strategist Hans Mikkelsen finds.
Simple semantics may help explain that yawning gap, thanks to private lenders’ ready willingness to engage in so-called liability management exercises. As investment bank Lincoln International found last fall, 425 private equity-backed companies – equivalent to 15% of the firms under its analytical purview – managed to amend their credit agreements over the first half of 2023, extending maturities and/or reducing the amount owed in return for stronger legal language protecting their creditor(s), i.e., amend-and-extend and distressed exchange transactions, respectively.
Crucially, such maneuvers are typically considered an event of default by the rating agencies (see the Oct. 13 edition of Grant’s Interest Rate Observer for more on this dynamic).
Noting that leveraged buyouts account for roughly three quarters of defaults within the public credit realm, Moody’s head of leveraged finance Christina Padgett expounded on the advantages and drawbacks of the liability management trend at the Grant’s private credit event in Manhattan earlier this month:
[Promoters] will use distressed exchanges as a way to resolve their balance sheet issues. They preserve their equity and live to fight another day. About half of these distressed exchanges result in another default and sometimes a Chapter 11[filing].
Of course, such often-opaque negotiations can likewise leave investors in the dark, occasionally spurring those information-hungry constituents to independent research. As Bloomberg documents today, some limited partners have taken to hiring private investigators to help gather information on closely held assets.
The value underlying loan collateral stands as a particular point of interest, according to Jason Wright, senior managing director at financial crimes, risk and regulatory advisory firm K2 Integrity. “There’s a lot of discretion used by the managers of these portfolios and the biggest questions that we’re fielding now are about recoveries in these assets,” Wright told Bloomberg. “What’s the true value of the debt here?”
We’ll know more later.
A well-earned rest was in order for Mr. Market as stocks stayed flat to wrap up the first quarter with a hearty 10% on the S&P 500, its best start to the year since 2019. Short-term Treasurys came under some pressure with the two-year yield rising five basis points to 4.59% while the long bond edged to 4.34% from 4.36% Wednesday, while WTI crude reached a fresh five-month high at $83 a barrel, gold notched a record $2,225 per ounce intraday price and the VIX crawled back above 13.
Both the stock and bond markets are closed tomorrow for Good Friday, but a full slate of data is on tap including the personal consumption expenditures deflator for February. That inflation gauge will show a 2.5% year-over-year rise on the headline figure and a 2.8% increase on a core basis, if the consensus guesstimate is on target.
- Philip Grant
Step aside, meme coins and Trump Media & Technology Group. From Business Insider:
A party venue with a difference in Florida's Tampa Bay is up for sale for $14.2 million. Pine Key is an island in the middle of Tampa Bay, created by a state dredging project. It stretches some 69 acres, though only nine of these are above water, and boasts photogenic white beaches and surrounding blue waters.
It is commonly known as 'Beer Can Island' for the beer cans left behind by boaters but it has been transformed into one of Florida's party hot spots in the last seven years. It was purchased by four entrepreneurial friends in 2017 for $63,650.
Green shoots galore: The near-uninterrupted post-Halloween levitation puts the equity market in rarified air, as the S&P 500 will log its fifth consecutive monthly advance in March, barring a 2.4% drop during the next two trading days.
Such a winter winning streak – last seen in 2013 – has reliably portended further good tidings. Jeffrey Hirsch, editor of the Stock Trader’s Almanac, finds that each of the 11 prior instances of uninterrupted monthly gains from November through March dating to 1950 were followed by a further advance into year end, with the broad index tacking on a further 11% over the following nine months on average.
“Well, this [fact] sure isn’t bearish and typically is a strong sign of an extended bull market,” Hirsch told Bloomberg. “There’s potential for a pause in stocks soon after [this] massive run, but nothing bad.”
Americans are counting on it. U.S. households have allocated 35% of their financial assets to equities, Bloomberg found earlier this month, topping the 33% share logged at the dot.com bubble peak and the 25% seen in 2013, when the S&P first managed to push back above its pre-2008 high-water mark.
Another key constituency, meanwhile, opts for a different approach. Citing data firm Verity, the Financial Times relayed Monday that the ratio of insider sellers to buyers in the lynchpin technology sector stands at roughly 13:1 in the quarter to date, a ratio topped only twice in the past decade and comparing to less than 5:1 throughout 2022 as the market endured its post-Covid downshift.
“We do view [corporate insider sales] as a negative data point that investors should be aware of,” Ben Silverman, Verity’s vice president of research, told the pink paper. “We are also seeing a number of the big names in this space with insider selling that is not typical.”
Indeed, several captains of industry have opted to ring the register since the start of 2024: Amazon.com founder Jeff Bezos and CEO Andy Jassey have collectively offloaded $30 million in company shares, while Meta CEO Mark Zuckerberg cashed out $135 million worth of stock, Palantir co-founder Peter Thiel parted with $175 million and outgoing Snowflake CEO Frank Slootman hit the bid to the tune of $69.2 million.
“Insider sales by high level executives of large amounts of stock are never a good sign, it’s quite simple,” added Charles Elson, chair of corporate governance at the University of Delaware. “It means they have found a better place to deploy their assets than the businesses they’re running.”
Treasury yields ticked a bit lower across the curve as this afternoon’s five-year Treasury auction enjoyed brisk demand, while stocks came under some modest pressure into the bell to leave the S&P 500 with a 0.2% decline on the day. WTI crude edged back below $82 a barrel, gold climbed to $2,175 an ounce and the VIX stayed just above 13.
- Philip Grant
From the Hill:
A teacher and Army veteran in North Richland Hills, Texas — formerly named Dustin Ebey — told WFAA88 he legally changed his name to “Literally Anybody Else” and is running for president under that name. He told the outlet he is hoping the name will send a message. “This isn’t about me, ‘Literally Anybody Else,’ more so as it is an idea. We can do better out of 300 million people for president,” he told WFAA88.
Ebey showed [a] new driver’s license to the outlet, on which his name is listed as “Literally Anybody Else.” Federal Election Commission records show he has filed with the commission under the name.
Who needs FanDuel? As FTX founder Sam Bankman-Fried is set to be sentenced later this week in connection with his November conviction for fraud, conspiracy and money laundering, legal-minded punters look to make it interesting. Thus, predictions platform Polymarket permits users to wager on Thursday’s outcome, collecting some $430,000 worth of action thus far.
The outfit assigns 27% odds of a 20- to 30-year incarceration, with similar probabilities for a 30- to 40- and a 40- to 50-year timeframe, which matches the duration suggested by prosecutors. Polymarket takes a dim view of defense arguments for a five-to-seven-year sentence, ascribing a 2% chance that SBF will be a guest of the government for less than a decade.
Spring selling season is officially underway in the primary junk bond market: at least six U.S borrowers came to market Monday by Bloomberg’s count to the mark the busiest session in some 15 months, following $5 billion of fresh supply on Friday, the heaviest by dollar volume in roughly six weeks. Year-to-date supply stands at roughly $78 billion, more than double that seen in the first quarter last year and representing 28% of the aggregate sum across 2022 and 2023.
That barrage has helped substantially whittle down what had been an imposing principal repayment schedule for speculative-grade borrowers. Bank of America relayed Friday that U.S. issuers of junk debt and broadly syndicated loans have managed collectively to reduce debt maturities though 2026 by $329 billion over the past year, equivalent to 40% of that maturity wall.
Yet the repayment date reshuffle – which “represents one of the most aggressive instances of maturity extension in the history of leveraged finance,” per BofA credit strategist Oleg Melentyev – has largely been confined to more creditworthy firms. “Lowest quality market access remains substantially constrained,” he added. Speaking to that dynamic: global corporate defaults registered at 29 over the first two months of the year, S&P Global finds, marking the highest January & February total since 2009.
Nevertheless, the bifurcated backdrop evinces little concern for Mr. Market, thanks to the heady combination of a 5.33% benchmark funds rate with hopes for imminent policy easing and ravenous risk appetite. Thus, option adjusted spreads on Bloomberg U.S. High Yield Index stand at roughly 200 basis points over those on offer in investment grade credit, just over half the average 340 basis point premium seen over the past 20 years.
What’s more, creditors evince little concern for those dicey financing conditions towards the deeper end of the speculative grade pool. Single-B-rated rated firms, i.e., those “more vulnerable to adverse business, financial and economic conditions but currently ha[ve] the capacity to meet financial commitments” by S&P’s lights, change hands at a 161-basis point spread premium to triple-B issues, Bloomberg relays today. That’s less than half the differential on offer at this time last year and a level undercut only once (briefly, in June 2018) since the 2008-2009 financial crisis.
Stocks edged a bit lower in forgettable trading with the S&P 500 wrapping up 0.3% to the red, while long-dated Treasurys likewise came under modest pressure with 10- and 30-year yields settling at 4.25% and 4.42%, respectively, each up three basis points on the day. WTI crude rebounded towards $82 a barrel, gold finished little changed at $2,172 per ounce and the VIX ticked above 13.
- Philip Grant
The Fed listens, but not to you. Your image of the day, via X account @Northmantrader:
Behold the unstoppable, shape-shifting exchange traded fund: worldwide industry assets reached a record $12.25 trillion at the end of last month, research and consulting firm ETFGI finds, nearly double that seen on the eve of the pandemic. Nearly 70% of that sum resides in the U.S., with the $8.5 trillion in domestic ETF assets standing equivalent to 16% of the stock market’s aggregate market capitalization as measured by the Wilshire 5000 Index.
Seemingly insatiable demand helps spur those striking figures. Just over $116 billion found its way into the category in February, marking the 57th consecutive month of net inflows, while the two-month net influx of $253 billion likewise tops the $224 billion logged in 2021 to mark the strongest start to the year on record.
A buoyant bull market and metronome-steady stream of investor cash spurs no shortage of financial innovation, as the tally of worldwide exchange-traded products reached 12,063 as of Feb. 29, up from roughly 5,000 just five years prior. Three thousand have debuted in the past 15 months alone, nearly matching the 3,700 companies listed on U.S. exchanges as of last summer per the Center for Research in Security Prices.
Among the spate of newcomers: those seeking to profit from placid financial waters. Citing data from Global X ETFs, Bloomberg relayed last week that funds targeting low volatility strategies by selling options on single stocks and equity indices have amassed $64 billion in assets, nearly quadrupling over the past two years. For context, the VIX-shorting products that went to financial heaven in the early 2018 “volmageddon” risk spasm collectively oversaw $2.1 billion.
“The short-vol trade and its impact is the most consistent question we have gotten this year,” relays Chris Murphy, co-head of derivatives strategy at Susquehanna International Group.
Notably, today’s slate of low-vol products largely sell options against an underlying long position rather than issuing outright wagers against the VIX. Nevertheless, Bloomberg points out, the pallets of cash chasing such strategies “are suspected of suppressing stock swings, which invites yet more bets for calm in a feedback loop that could one day reverse.”
Some bull-minded participants take a more direct tack. Back in December, the Bank of Montreal launched the MAX S&P 500 4X Leveraged ETN, permitting punters to capture a fourfold enhancement of the broad index’s daily gyrations in what stands as the highest leveraged exchange traded product on offer in the U.S. per research firm CFRA. That contraption, which changes hands under ticker symbol XXXX and charges 0.95% in annualized fees, has been the place to be in 2024’s virtually uninterrupted bull jaunt, sporting a 35% year-to-date gain and seeing fund assets reach $117 million as of Thursday, up more than 200% over the past two months.
Of course, that AUM is a mere pittance compared to the princely sums shunted to the crypto game. BlackRock’s iShares Spot Bitcoin Trust reached $10 billion in assets under management on March 10, achieving that feat fewer than two months after launch to mark a land-speed record in the ETF realm.
Building on its momentum, the asset management goliath on Wednesday unveiled the BlackRock USD Institutional Digital Liquidity Fund. The investment product, which is located on the Ethereum network, will “tokenize” traditional assets like cash and Treasury bills onto to the blockchain, allowing investors to generate yield in a fashion-forward manner.
Such initiatives represent a noteworthy departure from BlackRock’s prior stance, as CEO Larry Fink famously remarked in fall 2017 that “bitcoin just shows you how much demand for money laundering there is in the world.” Commercial considerations may explain Fink’s second thoughts, as analysts at Citigroup predict that the tokenization market could reach $5 trillion by 2030. More urgently, rival Vanguard is nipping at his firm’s heels: the pair each control roughly 29% of U.S. equity ETF assets, data from Bloomberg show, whereas in 2019 BlackRock owned a 35% to 25% market share edge.
Nevertheless, BlackRock’s embrace of the digital asset revolution marks something of an incongruous milestone. The Feb. 19, 2021, edition of Grant’s Interest Rate Observer pointed out that “the more that bitcoin conforms to the standards of regulated finance, the less it remains decentralized, autonomous and anonymous. The chipping away at anonymity may prove especially troublesome to the original business model.”
Stocks cruised through the day little changed as the S&P wrapped up the week with a healthy 2.2% advance, its best such showing since mid-December. Treasurys rallied again with 2- and 30-year yields settling at 4.59% and 4.39%, respectively, down three and five basis points on the session, while WTI crude stayed just below $81 a barrel, gold slipped to $2,166 per ounce and the VIX ticked back above 13.
- Philip Grant
Learning by doing, crypto style. From CoinDesk:
Kyle Davies, the co-founder of the now-defunct Three Arrows Capital (3AC), has stated that he is not sorry for the crypto hedge fund going bankrupt. Davies was speaking on an episode of the Unchained Podcast on March 19.
“Am I sorry for a company going bankrupt? No, like companies go bankrupt, almost every company goes bankrupt, right?” Davies said [in response to] public sentiment that he had not shown remorse. “It’s how you build or what you do about it. We’re definitely trying our best. We can add value in various ways. At a minimum, we can even tell the next Three Arrows how to do things better when they go bankrupt.”
Deuces are wild: Yesterday’s dovish tour-de-force from the Federal Reserve – sticking to a three-rate cut plan for 2024 even after upgrading their inflation and GDP growth forecasts – sent the legacy monetary asset into orbit. Spot gold briefly touched $2,222 per ounce early this morning, marking its fifth record high so far this month while duly spurring bullish tidings on Wall Street. A $2,300 near-term spot price represents a “reasonable technical target,” muse analysts at Macquarie, while peers at Bank of America reckon that the rally could extend towards $2,600 an ounce, adding that "gold is still one of our favorite trades for 2024 as an attractive portfolio hedge for equity investors."
Firms unearthing the yellow metal likewise lean into the tailwind. As The Wall Street Journal documented Monday, gold miners are opting to forego hedges designed to lock in a given level of revenue, a strategy routinely utilized by commodity producers of all stripes.
But with previous efforts going pear-shaped during bull markets of yore (Barrick Gold was obliged to cough up more than $5 billion to close unprofitable hedges back in 2009) total industry hedges stand at just 192 metric tons according to the World Gold Council, down from some 3,000 tons of hedged product at the turn of the century. “Our policy is very clear: we do not hedge gold,” Tom Palmer, CEO of Newmont Corp., the world’s largest miner, told the WSJ. “When gold goes for a run, we get the full advantage of it.”
Yet, with respect to crypto evangelist Matt Damon, fortune doesn’t always favor the brave. The VanEck Gold Miners ETF remains virtually unchanged in this year of pronounced asset levitation, while the Philadelphia Gold and Silver Index, a market cap-weighted gauge of 30 mining company stocks, changes hands at a mere 0.055 times the price of bullion, far below the 0.19 average ratio going back to 1983.
That’s not to say that no diamonds have emerged from the financial rough: shares in midsize Canadian outfit Wesdome Gold Mines have returned 42% in dollar terms since Grant’s Interest Rate Observer has its bullish say in the Sept. 29 issue, while Kinross Gold Corp. has enjoyed a 62%, 18-month rally after unveiling a $300 million share buyback program at the urging of shareholder Elliott Management.
Could a broader revival within that moribund cohort finally be in store? The Financial Times reported last month that Elliott is establishing a new venture which seeks to snap up mining assets valued at $1 billion and above under the auspices of former Newcrest Mining CEO Sandeep Biswas. The pink paper likewise relays that a “wave” of private equity outfits including Orion Resource Partners and Appian Capital have turned their attention to the mining business, “as they attempt to provide capital to a sector that needs to spend trillions of dollars to meet surging global demand for metals.”
While bargain-minded shareholders wait for the worm to turn, the precious metal itself retains its pivotal position in the modern economic edifice. The Jan. 19 edition of Grant’s Interest Rate Observer put it this way:
[Gold] is a haven—the haven, we would say— from the periodic misfirings of a highly leveraged financial system. Such leverage produces a crisis, the crisis a monetary intervention, the intervention an inflation of one kind or another. Gold preserves purchasing power over the cycle, and will continue to do so whether or not the winner of the 2028 presidential election turns out to be the leader of the now uncontemplated Gold Remonetization Party.
To be clear, we are banking on no such monetary miracle. What we observe is that humanity has an ancient, perhaps inextinguishable if sometimes unconscious, affinity for the metal about which your college economics professor had not one good thing to say.
Stocks assumed their typical green hue with the S&P 500 and Nasdaq 100 settling higher by some 0.3% and 0.5%, respectively, though each backed off some from their intraday highs, while Treasurys finished little changed with the long bond ticking to 4.44% from 4.45% Wednesday and two-year yields bouncing to 4.62% to give back one-third of yesterday’s post-FOMC rally. WTI retreated below $81 a barrel, gold reversed sharply from this morning’s rip to settle at $2,182 per ounce and the VIX settled just south of 13.
- Philip Grant
Tired of reaching for your phone when it’s time to spice up tonight’s game? Behold the latest in athletic innovation, via Sports Business Journal:
Subscribers to the NBA’s League Pass out-of-market streaming package will be able to place wagers through league sponsors FanDuel or DraftKings, while keeping up with spreads and odds on their screens through a new “emBet” integration that data distributor Sportradar will roll out today.
Viewers must opt-in to gain access to the watch-and-bet overlay, just as they do game stats and other features. In states that haven’t legalized [gambling], they will see odds, but won’t be able to bet. . . Bet types will be limited to point spread, over-under and money line at the start, with Sportradar working to develop more markets and greater personalization.
“As more of our fans consume content on digital platforms it unlocks new ways for them to interact with our games,” said Scott Kaufman-Ross, EVP of media and gaming for the NBA. “In this case, it’s a step toward integrating the experience of watching and betting together, in an opt-in fashion, which we think will be great for engagement.”
The godfather of AI dutifully showers attention on his various corporate wards: Nvidia CEO Jensen Huang helped send shares of conglomerate Samsung Electronics higher by 6% earlier today, after suggesting at Tuesday’s GPU Technology Conference that his firm may approve Samsung’s high-bandwidth memory (HBM) chips for use in its own graphics processing units (GPUs).
“HBM memory is very complicated, and the value added is very high,” Huang said in remarks first reported by Nikkei Asia. “Samsung is very good, a very good company.”
The Nvidia boss’s ringing endorsement comes two days after Samsung rival SK hynix announced it has commenced mass production of its own next gen HBM3E chips, with Reuters relaying that Nvidia will take delivery of those crucial AI components later this month.
Yet as CLSA’s Korea analyst Sanjeev Rana points out to Bloomberg, capacity constraints at hynix and U.S.-based peer Micron Technology, Inc. have helped spur Nvidia’s supply chain diversification push. “I value our partnership[s] with SK hynix and Samsung very incredibly,” Huang diplomatically put it yesterday.
Perhaps, the breakneck pace of AI-induced spending leaves plenty for everyone. DRAM producers will allocate 14% of their total manufacturing capacity to HBM products by year-end to help drive 260% annual supply growth for 2024, if estimates published this week by data firm TrendForce are on the beam. That would push HBM’s share of total DRAM revenues to 20% this year from 8.4% and 2.6%, respectively, in 2023 and 2022.
“Buyers eager for sufficient supply will need to lock in their orders earlier thanks to HBMs longer production cycle of over two quarters from wafer start to final packaging,” TrendForce senior vice president Avril Wu wrote Monday. “[We have] learned that most orders for 2024 have already been submitted to suppliers and are non-cancellable unless there are failures in validation.”
Rapid growth and exciting technological innovation typically don’t come cheap, and AI is certainly no exception. Witness Nvidia’s 500% post-2022 share price rally, or semiconductor connectivity outfit Astera Labs pricing its upcoming Nasdaq IPO at $36 per share Tuesday, far above the $27 to $30 a share range marketed just one day earlier. Back in January, AI-infused voice generation firm ElevenLabs reported to Crunchbase that it raised a hefty $80 million in series B funding at a “unicorn valuation” (typically meaning $1 billion-plus, though the company didn’t disclose the actual figure), a mere seven months after a series A financing valued the Brooklyn-based startup at $99 million.
Such fancy price tags can, of course, pose a less-than-lucrative value proposition for the johnny-come-latelies. “Companies with high valuations often struggle to grow into their multiples regardless of realized growth rates,” analysts at Goldman Sachs noted Monday.
How might cost-conscious investors looking to brave this new world avoid such an outcome? See “AI on the cheap” in the current edition of Grant’s Interest Rate Observer dated March 15 for a bullish analysis on one relevant South Korea-based firm offering a potentially attractive value proposition.
Bargain hunters looking beyond the AI arms race may find a target-rich environment in the friendly neighbor to Kim Jong Un, as 67% of companies within the Korean Composite Stock Price Index change hands south of book value, compared to 37% in Japan’s Nikkei 225 and a mere 3% for the S&P 500. See “discount to a discount” in the March 1 edition of GIRO for a closer look.
When doves fly: Word that the Federal Reserve still anticipates three rates cuts this year despite increasing its 2024 inflation and GDP forecasts catalyzed the latest rip in stocks, with the S&P 500 jumping nearly 1% and the Nasdaq 100 enjoying a 1.2% advance. Short term Treasurys likewise rallied with the two-year note settling at 4.59% from 4.68% Tuesday, while the long bond edged higher at 4.45% and gold pushed to $2,187 per ounce, up 1.3% on the day. WTI crude retreated below $82 a barrel, bitcoin rebounded above $66,000 and the VIX tumbled to 13.
- Philip Grant
Back out from the looking glass. Today’s decision by the Bank of Japan to bump short term rates to 0% to 0.1% from a prior minus 0.1% bogey brings the curtain down on the negative interest rate era, as fellow practitioners at the Riksbank, European Central Bank and Swiss National Bank have each abandoned the policy in recent years.
The global stock of nominal, sub-zero yielding debt now slipped to $330 billion Monday by Bloomberg’s count, a fraction of the $18 trillion seen as of December 2020. Could that dynamic be poised to reverse once global price pressures dutifully recede? Don’t count on it, according to the central banker’s Swiss bank. “The days of ultra-low rates are over,” Agustín Carstens, general manager of the Bank for International Settlements, declared in a speech yesterday.
Nothing stops this train: investors poured a net $56 billion into U.S. equity funds over the seven days through Wednesday, data from EPFR Global show, topping the $53 billion figure seen in March 2021 to mark a record weekly inflow. Technology focused funds accounted for $22 billion of the haul, likewise the strongest seven-day sum on record. Accordingly, Bank of America’s latest Global Fund Manager Survey finds that equity allocations stand a two-year high, with risk appetite among professional investors at its highest since the heady days of November 2021.
As the major indices linger near their respective highs and raucous animal spirits pervade in the AI and crypto realms, more quotidian considerations fall by the wayside. Thus, interest rate futures now price 72 basis points of easing from the 5.33% effective Fed funds rate this year ahead of tomorrow’s rate decision, half the pace of anticipated pace at the start of 2024. “For stocks, that shift in perception never seemed to matter,” Mike Zigmont, head of trading and research at Harvest Volatility Management, observed to the Financial Times.
Though the prospect of belated rate relief has taken no spring from Mr. Market’s step, other constituencies tap their feet. Some two-dozen progressive lawmakers penned a letter to Fed chair Jerome Powell asking for a “clear and rapid timeline for reducing interest rates, ideally beginning at the May Federal Open Market Committee meeting,” Bloomberg reported yesterday.
Signatories, including Sens. Elizabeth Warren (D-MA) and Bernie Sanders (I-VT), argued that “with inflation already having come into line with the Federal Reserve’s target, today’s excessively contractionary monetary policy needlessly worsens housing market imbalances and the unaffordability of home ownership, creates risks for banking stability, and could threaten the achievements of strong employment and wage growth and its attendant reductions in economic and racial inequalities.”
While that political bloc puts a line under the employment portion of the Fed’s mandate, Powell et al. face the prospect of renewed pressure elsewhere. Thus, the six-month annualized core personal consumption expenditures index, recently “a favorite metric of the ‘cut rates now’ crowd” per Bianco research founder and eponym Jim Bianco, slowed to a 1.89% growth rate at year-end from a near 6% figure as of summer 2022. Yet, following hotter-than-expected readings of CPI and PPI to begin the year, economist estimates compiled by The Wall Street Journal’s Nick Timiraos suggest a six-month core PCE may snap back to 3% when the latest data are released next week.
Deleterious base effect dynamics likewise present an obstacle to an improving inflation picture, as relatively benign prints seen in the back half of 2023 go by the wayside: sequential core PCE topped 0.15% only once during the back half of 2023 after averaging just over 0.3% from January to June. With February’s reading projected to grow by 0.3% following the 0.5% jump logged in January, annualized six-month core PCE could be sporting a 4% handle by this summer, Bianco predicts.
On the bright side, annual core PCE grew by just over 2% on average over the past two decades, virtually matching the Fed’s target. Perspective is everything.
Stocks enjoyed another 0.6% rise in the S&P 500, though tech lagged a bit with the Nasdaq 100 edging into the green only late in the day. A strong 20-year bond auction this afternoon helped Treasurys rally by a few basis points across the curve ahead of tomorrow’s Fed statement and press conference, while WTI crude logged fresh multi-month highs near $83 a barrel, gold stayed little changed at $2,158 per ounce and bitcoin slumped to a two-week low near $64,000. The VIX retreated back below 14.
- Philip Grant
Talk about tipping the scales of justice. From NBC-4 New York:
An ailing alligator was seized from an upstate New York home where it was being kept illegally, state officials said. Environmental conservation police officers seized the 750-pound, 11-foot-long alligator on Wednesday from a home in Hamburg, south of Buffalo.
The home's owner built an addition and installed an in-ground swimming pool for the 30-year-old alligator and allowed people, including children, to get into the water with the reptile, according to the state Department of Environmental Conservation.
You’ve got to give the people what they want: Corporate America dropped Wall Street’s favorite term in near-record frequency in recent weeks, as 179 management teams within the S&P 500 mentioned artificial intelligence during their fourth quarter earnings calls, FactSet finds. That nearly matches the 181 member peak logged in the second quarter of last year and more than doubles the five-year quarterly average of 73.
Such popularity is understandable, considering Mr. Market’s pronounced predilection towards that forward thinking cohort. S&P 500 firms discussing AI last quarter enjoyed an average 28.6% return over the 12 months through Friday, FactSet notes, far outpacing the 16.8% figure for those keeping mum on the topic.
Though the stellar showing from technology firms at large since early 2023 helps shape the AI performance gap, C-suites likewise remain attuned to financial fashion, as evidenced by Friday’s call hosted by manufacturing servicer Jabil, Inc. (hat tip to Peter Boockvar).
After one analyst mentioned to chief financial officer Michael Dastoor that he had unsuccessfully attempted to keep count of the total mentions during the event, the CFO helpfully replied thus: “Just to be clear, I said AI 21 times in my report, so I did count." Yet, that diligent tabulation wasn’t enough to carry the day, as Jabil shares wrapped up the session with a 17% decline.
Relief is at hand for the yield-thirsty, as Americans turn to the insurance industry to capitalize on the post-pandemic rise in interest rates. Citing data from the Life Office Management Association, Apollo chief economist Torsten Slok observed over the weekend that sales of annuity products reached $385 billion last year, topping 2022’s record sum by 23% and representing upwards of a 50% increase from the pre-pandemic baseline.
Fixed annuities alone accounted for three quarters of 2023’s figure, topping total annuity volumes in all years prior to 2022, as wage earners looked to lock in higher interest rates in the wake of the Federal Reserve’s post-pandemic tightening campaign.
That burst of demand has duly reverberated across the bond market, Slok notes, underpinning a formidable supply response. Investment grade issuance across January and February reached a record $381 billion, nearly 30% above last year’s pace and nearly double the average output for that period from 2019 to 2022. At the same time, option-adjusted spreads on the ICE BofA U.S. Corporate Index shrank to 93 basis points over Treasurys Friday, nearly half of the 164-basis point pickup on offer a year ago and approaching the post-crisis low of 87 basis points logged in summer 2021.
Yet as taxpayers help high-grade borrowers fund themselves on the (relative) cheap, today’s elevated-rate regime has proven a less-than bountiful dynamic for U.S. households awash in floating-rate credit obligations. Citing data from the Bureau of Economic Analysis, Bloomberg relays today that nationwide net interest income has sunk to just below $700 billion from roughly $900 billion two years ago, approaching its lowest levels since the ZIRP-era was in full swing. Such a decline is likewise unprecedented in recent history, as previous Fed tightening cycles during the past 50 years coincided with rising net interest income among consumers.
A manic session for stocks saw mega cap tech lift to the tune of near 1% on the Nasdaq 100 following reports of an AI-related Apple and Google tie-up, while small caps lurched lower by 0.6% on the Russell 2000 to leave that gauge at its lowest finish in just over two years. Treasurys remained under pressure with 2- and 30-year yields tick higher by one and three basis points, respectively, to 4.73% and 4.46%, while WTI crude pushed above $82 a barrel and gold edged higher to $2,160 per ounce. The VIX stayed put north of 14.
- Philip Grant
From The Wall Street Journal:
Boeing advised airlines to check the cockpit seats on 787 Dreamliner jets after a seat mishap likely pushed a pilot into the controls, causing a sudden, terrifying plunge on a flight to New Zealand this week.
A Latam Airlines flight attendant hit a switch on the pilot’s seat while serving a meal, leading a motorized feature to push the pilot into the controls and push down the plane’s nose, according to U.S. industry officials briefed on preliminary evidence from an investigation. The switch, on the back of the chair, is usually covered and isn’t supposed to be used when a pilot is in the seat.
Never would have happened with this guy at the controls:
Behold, the sputtering Chinese credit engine. New bank loans registered at just RMB 1.45 trillion ($201 billion) in February, state-compiled data released today show, down nearly 20% from the prior year and below the RMB 1.5 trillion consensus of analysts polled by Reuters. Total outstanding local-currency loans grew at a 9.7% annual clip, the first sub 10% reading for any month going back to at least 2003.
Though seasonal factors surrounding the Lunar New Year holiday cloud those figures, a RMB 342 billion year-over-year decline in new loans across January and February paint a clearer picture. Noting that the People’s Bank of China nevertheless opted to keep benchmark rates unchanged this morning, Bloomberg economist Eric Zhu writes: “The credit data suggest that wasn’t optimal. What’s needed is a strong dose of stimulus to lift confidence and spur growth.”
Troubles both micro and macro bedevil the world’s second-largest economy, forcing amply encumbered, high profile firms such as Fosun International and Alibaba Group into retrenchment mode. “Some Chinese conglomerates are now accelerating their asset disposals because some are faced with liquidity issues,” Samson Lo, co-head of Asia Pacific M&A at UBS, told Bloomberg. “Those groups are under increasing pressure to raise cash and repay debt.”
Tellingly, perhaps, fundraising efforts are largely taking shape outside China’s borders. “International and good quality assets are easier to offload as there is a healthy level of interest from global buyers,” Lo adds. “The real problem is finding buyers for the local assets as many bidders, both private equity funds and strategic [investors], are still evaluating their investments in China.”
On that score, the Financial Times relays that a quartet of U.S. pension plans are preparing to delay redemptions from China-focused private equity vehicles approaching the end of their planned 10-year life.
Tense bilateral relations – aggravated by Congressional efforts to pry social media phenomenon TikTok from Beijing-based ByteDance – have helped drive that unwelcome delay, as have crackdowns from the Communist Party regulatory apparatus, which has imposed onerous restrictions on local firms attempting to list their shares overseas. Only five U.S. p.e.-promoted Chinese firms have gone public on the New York Stock Exchange since the start of 2022, compared to 18 in 2021 alone.
That inability to cash out is putting the hurt on some managers, as the $2.2 billion Warburg Pincus Fund, which launched in 2016, has seen its net internal rate of return sink to 7.9% as of September from 25.5% two years prior. “China has been a place where you could deploy capital, but getting it out is harder,” Allen Waldrop, director of private equity investments at the Alaska Permanent Fund Corporation, observed to the pink paper. “Investors are not really going to have much of a choice,” adds Niklas Amundsson, partner at p.e. placement agency Monument Group. “They just have to keep rolling over the [investment].”
Call it: not paid to wait.
The Ides of March and triple-witching options expiration posed a tough combo for the bulls, as stocks fell by 0.7% on the S&P 500 and 1.2% for the Nasdaq 100 to leave each in the red for a second straight week. Treasurys remained under pressure at the short end with the two-year yield rising another four basis points to 4.72%, while the long bond managed to edge lower to 4.43%. WTI crude stayed at $81 a barrel, gold ticked lower at $2,158 per ounce and the VIX settled near 14.5 after pushing above 15 intraday.
- Philip Grant
Ring fencing this portfolio may require some deft risk management. From NHL.com:
The Pittsburgh Penguins announced today that the shipment carrying the Jaromir Jagr bobbleheads for tonight’s game against the San Jose Sharks has been stolen after its arrival in California. As a result, the bobbleheads are not in Pittsburgh and will not be distributed at tonight’s game but will be distributed at a later date.
The Penguins learned that they were victims of cargo theft after failing to receive the shipment as scheduled. The team worked with the manufacturer and transportation companies to alert the appropriate state and federal authorities who are currently working to locate the cargo.
FOMO is on the docket: Claimants on defunct crypto exchange FTX are getting creative, as the supersonic boom in digital asset prices presents an ever-brightening backdrop. Bloomberg reports today that investment funds possessing claims on the doomed outfit “have also sought to buy preferred shares in the closely held company in recent months,” employing brokers to source the securities from existing hodlers in hopes that equity investors will see a return after creditors are made whole.
Claims are now changing hands at some 90 cents on the dollar according to data firm Cherokee Acquisition, up from 10 cents early last year (see “Pennies on the dollar” in the March 10, 2023 edition of Grant’s Interest Rate Observer for what proved a timely review of that opportunity, along with “Crypto Lazarus act” in the Feb. 16 issue for an updated look at the state of play).
That dramatic turn in fortune is not lost on incarcerated co-founder Sam-Bankman-Fried. Lawyers for the former CEO petitioned U.S. District Judge Lewis Kaplan on Feb. 28 to impose a prison term of no more than 6.5 years at his upcoming sentencing, rather than the 100 years recommended by U.S. probation officials, arguing in part that brightening recovery prospects should tilt the scales towards leniency. Defense attorneys likened SBF to former Drexel Burnham Lambert junk bond king Michael Milken, writing thus:
The genius of both men is undeniable, their contributions were vast, their wealth and fame were unplanned, their means and methods were questioned by prosecutors and their downfall was swift and tragic.
Ok then! Yesterday produced a soundbite to remember, courtesy of Palantir Technologies, Inc. CEO Alex Karp on CNBC:
I love burning the short sellers. Almost nothing makes a human happier than taking the lines of cocaine away from these short sellers, who are going short on a truly great American company — not just ours — they just love pulling down great American companies so that they can pay for their coke.
And the best thing that can happen to them is, we will provide — we will lead their coke dealers — to their homes, after they can’t pay their bills. . . go ahead, do your thing, we’ll do our thing.
Yet those unloved skeptics have plainly exerted a dwindling hold on “great American companies” as the titanic bull market unfolds. Median short interest as a percentage of market capitalization within the S&P 500 (which does not include Palantir) stood at 1.7% last month per Goldman Sachs, down from roughly 2.6% as of 2016 and 3% as the financial crisis ebbed in 2010.
Karp’s business software concern has likewise shed its share of nonbelievers during its near 300%, post-2022 stock price rally, which has pushed its market cap to $54 billion. As Jim Chanos points out on X, short sellers have indeed helped furnish that levitation, purchasing a net 60 million shares since March 2023 as the short interest has receded to just under 5% of the float from 8% over that stretch.
Conversely, Palantir management has taken the other side of the order book, ringing the register with relish. Insiders sold $274 million of stock over the past three months, more than all but six of the 265 U.S. tech firms tracked by Bloomberg. Yesterday, co-founder Peter Thiel filed paperwork with the SEC to sell a further 7 million shares, equivalent to nearly $175 million in proceeds at current levels.
Ongoing dilution has helped furnish that lucrative activity: Share-based compensation registered at $1.82 billion during the three years through 2023, easily topping Palantir’s $1.11 billion of cumulative net income over that period. The company’s class-A common share count stood at 2.11 billion as of Feb. 13, up just over 20% from three years prior.
A hotter than expected February PPI reading threw Treasurys for a loop, as yields jumped across the curve with the two-year note approaching its year-to-date highs at 4.68%, up 45 basis points from the final trading day of 2023. Stocks came under modest pressure on the broad averages, though the small-cap Russell 2000 sank by nearly 2%, while bitcoin retreated towards $70,000 and the VIX jumped back above 14. WTI crude topped $81 a barrel for its best finish since the fall, and gold slipped to $2,163 per ounce.
- Philip Grant
We’ve got good news and bad news. The February CPI excluding food and energy prices rose by 3.8% over the past 12 months, data released today show, matching the lowest reading since spring 2021. Bloomberg’s Ye Xie writes that, with the effective Fed funds rate remaining north of 5.25% and the central bank’s guesstimate of so-called neutral real rates at 0.7%, current policy stands at its most restrictive since 1989, meaning the print “leaves room for the [Fed] to cut rates.”
Of course, the imminent easing cycle takes place against an incongruous backdrop. Today’s reading marks the 35th consecutive month featuring year-over-year core CPI topping 3%, the longest such streak in upwards of three decades.
Overall price levels as measured by Core CPI have expanded by a cumulative 16.5% during the past three years, a period beginning shortly after Fed chair Jerome Powell introduced so-called flexible average inflation targeting – which seeks to offset periods of modest price pressures with hotter inflationary epochs to help spur economic growth.
The European Central Bank is packing its bags, announcing plans to relocate to Frankfurt’s Gallileo tower from its current dwellings in the nearby, 40-floor Eurotower by the end of 2025, when the lease on that skyscraper expires.
Next year’s move “will allow for a more flexible cost structure,” said yesterday’s press release, thanks to diminished space requirements. Staffers at the institution are permitted to work remotely for 110 days each year, equivalent to roughly half of their time on the clock, per a policy enacted at the start of 2023. Then, too, more modern amenities at the Gallileo building, which was constructed in 2003, compared to 1977 for the Eurotower, will serve to “decrease the ECB’s total energy consumption, supporting its energy efficiency initiatives.”
Such initiatives have recently taken center stage in instructive fashion. Thus, as Politico first reported last month, ECB executive board member Frank Elderson made waves in an internal meeting by grousing, “I don’t want these people anymore,” in reference to employees insufficiently dedicated to the bank’s environmentally forward stance. The civil servant went on to rhetorically ask “why would we want to hire people whom we have to reprogram, because they came from the best universities [and] still don’t know how to spell the word ‘climate?’”
Representatives of those on the receiving end of that reproach were less than thrilled. The Financial Times relays that the nine-member ECB Staff Committee wrote last week that “many colleagues were shocked by the choice of words and the viewpoints of Mr. Elderson,” as the notion of “reprograming” individual perspectives “[is] in direct contradiction of the democratic values that the ECB and European Union stand for.”
Parliamentarians on the Old Continent likewise raised their “grave concern” over those remarks, reminding the ECB to maintain “an undeterred focus” on its single mandate of maintaining price stability (now defined as a 2% annual rate of inflation per its July 2021 strategy review) and emphasizing “the importance of pluralism for the ECB’s institutional culture.”
For his part, Elderson – who recently warned 20 banks under his regulatory purview as vice chair of the ECB’s Supervisory Board that they must take imminent action to assess and address climate related risks, on pain of daily fines for noncompliance – clarified in a memo that staff needed additional “training” on the matter rather than “reprogramming.”
Stocks roared once more in the face of February’s spry CPI data as the S&P 500 and Nasdaq 100 now sit higher by 9.3% and 10.1%, respectively, in the year-to-date, while Treasury yields likewise climbed by five to seven basis points across the curve, as this afternoon’s 10-year note auction priced slightly weaker than expected. WTI crude held near $78 a barrel, gold retreated to $2,157 per ounce, bitcoin slipped below $71,000 and the VIX fell below 14, down a point and change on the day.
- Philip Grant
Pay to wait? Elon Musk’s corporate pride-and-joy may be stuck in neutral for the time being, as analysts at Evercore write today that “Tesla increasingly is a 2027 growth story.” They warn that the electric automaker may prove slow out of the gate in introducing its next low-cost vehicle. Production of the tentatively titled Model 2 will reach 500,000 units in 2026 under a best-case scenario, the investment bank reckons, far below Wall Street’s collective one million-plus guesstimate.
Other observers express more immediate concerns. Analysts at Deutsche Bank sounded the alarm over next month’s first quarter earnings report, opining that Tesla could miss expectations “by a wide margin” while trimming its estimated deliveries for the period by some 10% thanks to low production of the Model 3, a sluggish ramp up of Cybertruck sales “and overall pressure globally from weak EV demand.” Gross margins, which retreated to 17.6% in the fourth quarter from 23.8% during the last three months of 2022, “will slide deeper on a quarter-over-quarter basis with limited improvement throughout the year,” DB believes.
The sell side at large is far from smitten with the automaker. Only 20 of the 59 analysts tracked by Bloomberg rate the stock a “buy,” as TSLA – the subject of bearish analyses in the Sept. 30, 2022, and July 14, 2023 editions of Grant’s Interest Rate Observer – is down 24% in the year-to-date to extend a post-July drawdown to 38%. Yet shares change hands at a princely 58.5 times full-year 2024 adjusted earnings per share estimates. That compares to 35 times forward EPS for Nvidia Corp.
Through the economic looking-glass: Friday’s jobs print for February provided fodder for bull and bear alike, as headline payrolls grew by 275,000, topping the 198,000 consensus estimate to mark their 38th consecutive month of expansion (only five of those registered below the 200,000 mark) while a 0.1% sequential advance in average hourly earnings trailed the 0.2% consensus as the Federal Reserve awaits its chance to commence rate cuts. In turn, headline unemployment lurched to 3.9% from 3.7% in January to reach its highest level in 25 months.
“It’s got literally a data point for every view on the spectrum,” Liz Ann Sonders, chief investment strategist at Charles Schwab, commented to CNBC. “[Whether] the economy is plunging into a recession to Goldilocks, everything is fine, nothing to see here. It’s certainly mixed.”
Yet as Sonders highlights today on X, one feature of that release stands out as potentially ominous. The tally of domestic temporary help employees slipped to a three-plus-year low of 2.748 million down from 3.181 million as of March 2022. That 14% decline has been exceeded on a percentage basis on only three occasions since the early 1990s, with each (during the early aughts, the 2008 epoch and Covid crucible) coinciding with a recession.
Data collected outside the Department of Labor’s purview also raise the possibility of a cyclical turning point. Nationwide layoffs summed to 84,638 last month according to outplacement firm Challenger, Gray & Christmas, marking the largest February sum since 2009. The Federal Reserve Bank of New York’s Survey of Consumer Expectations for February likewise finds that respondents assign a 14.5% chance of losing their job on average, the highest ratio since spring 2021 and up substantially from the 11.8% figure logged in January.
Stocks fluttered a bit lower following last week’s spurt of volatility and ahead of tomorrow’s February CPI data (economists expect a 0.4% sequential advance for the ex-food and energy metric to bring year-over-year growth to 3.7%), as the Nasdaq 100 settled 40 basis points south of unchanged. Two-year yields rose to 4.51% from 4.48% with the long end of the curve finishing little changed, while WTI crude marked time at $78 a barrel and gold likewise held at $2,181 per ounce to digest its eight-session winning streak. The VIX rose towards the upper end of its year-to-date range north of 15.
- Philip Grant
Training wheels up: Monday marks the end of an era, as the Federal Reserve’s Bank Term Funding Program will cease to issue new loans.
The facility, formed a year ago in the wake of last year’s Silicon Valley Bank failure to support regional lenders caught wrong-footed by the post-pandemic jump in interest rates, held $164 billion worth of loans outstanding as of Wednesday, data from the central bank show. That compares to an average of $109 billion over the past year and sits just below the peak of $168 billion logged in late January.
From the bulging financial innovation files: Roundhill Investments announced the launch of its S&P 500 and Nasdaq 100 0DTE Covered Call Strategy exchange traded funds yesterday (tickers XDTE and QDTE, respectively). The products, which debuted today, target 100% overnight exposure to those benchmark indices while selling out of the money 0DTE calls each day to generate income while participating in any intraday upside to the given strike price.
“XDTE and QDTE offer investors the potential for high levels of income on a weekly basis,” said Roundhill chief strategy officer Dave Mazza. “Both ETFs allow investors to potentially benefit from structural mispricings inherent in the short-term options market, while maintaining exposure to major equity indices.”
Roundhill’s entry underscores a growing preoccupation with short-term speculation. Zero-day options now command a 48% share of total S&P 500 index derivative volume per data from the Chicago Board Options Exchange, up from 20% at the end of 2021 (the CBOE expanded S&P 500 expiration to a daily schedule from thrice weekly in spring 2022).
Yet the craze has proven to be of dubious value to individual, uh, investors. Researchers at the University of Munster in Germany found last spring that retail punters had collectively lost an average $358,000 per trading day on 0DTE products since the introduction of daily S&P options.
One prominent former watchdog, likewise, takes a grim view of the 0DTE apparatus. Jay Clayton, Trump-era SEC chairman turned lead independent director at Apollo (as well as an advisor to crypto v.c. firm Electric Capital and digital asset custodian Fireblocks), described the products as “gambling” at a Wall Street Journal-hosted conference Wednesday, responding in the negative when asked if they should be permitted by regulators.
As 0DTE gathers assets and scrutiny in seemingly equal measure, speculators looking to cash in on the raging bull market expand their horizons. Total single-stock option volumes among Philadelphia Semiconductor Index component companies averaged more than $145 billion per day during the month of February, data collected by Bloomberg show, up 100% over two months and roughly seven times above the average turnover seen in February 2023. Unsurprisingly, perhaps, AI juggernaut Nvidia Corp. itself accounted for nearly 80% of last month’s activity.
On form, even more ferocious animal spirits are on display in the crypto realm. Take it away, CoinTelegraph:
Memecoin traders are flocking to a new fad in degenerate tomfoolery — a breed of Solana-based tokens based on “poorly drawn” celebrities and political figures.
Newly-listed memecoins such as “Jeo Boden” and “Danold Tromp” — with intentionally janky art to match — have gained 174,900% and 59,900%, respectively, after their launch. One trader even claims to have made some serious returns on these tokens despite the coins themselves having no public founder, no roadmap and offering nothing in the way of utility.
In a March 6 X post, a pseudonymous crypto investor called “Barkery” claims to have turned an initial sum of just $260 into $42,000 in two days by purchasing 11.73 million tokens of “Jeo Boden” sporting the ticker “BODEN” — themed a poorly drawn version of United States president Joe Biden.
Stocks suffered a steep intraday reversal as the S&P 500 and Nasdaq 100 erased early gains to finish lower by 0.6% and 1.4%, respectively, while Nvidia settled some 10% below levels seen at 10AM ET. Treasurys mostly consolidated their recent rally with the two-year yield edging lower to 4.48% from 4.5%, while WTI crude slipped below $78 a barrel, gold advanced to $2,178 per ounce for its eighth straight green finish and bitcoin briefly topped $70,000 before retreating a bit. The VIX wrapped up the day just below 15 after testing 15.5 at lunchtime.
- Philip Grant
This evening’s State of the Union Address may feature an unpleasant surprise for corporate America, as CNBC reports that President Biden plans to propose a 4% tax on share buybacks, a quadrupling of the excise introduced in the 2022 Inflation Reduction Act. The White House purportedly reasons that an increased tax schedule will serve to allocate commercial resources towards hiring and capital expenditures rather than financial engineering.
If not, the oft-tapped federal coffers could receive a sorely needed inflow. Buybacks will jump 13% to $925 billion this year, if estimates from Goldman Sachs are on the beam, with a further 16% increase to $1.075 trillion potentially on tap for 2025.
What’s in a name? That the stock market’s inexorable upward momentum has reached historic heights is hardly in doubt: witness the S&P 500’s ongoing, 13-month streak without a single-session 2% decline, the longest uninterrupted run in more than six years, as well as its 16 weekly advances in its past 18 tries, a feat unmatched since 1971 (a 17th green week is in store barring a 0.4% or greater decline Friday).
Despite that buoyant backdrop, prominent Wall Street figures see no signs of undue effervescence. Citing recent weakness in a trio of magnificent seven components, R.W. Baird strategist Michael Antonelli argued thus to Bloomberg: “Apple selling off pokes a gigantic hole in the bubble argument, and so does Alphabet and Tesla with their shares also struggling right now. . . this is a healthy sign for how bull markets get extended.”
UBS chief strategist Bhanu Baweja similarly writes that “there’s no bubble ready to go pop” citing relatively strong corporate profit margins and free cash flow, along with muted IPO and M&A activity relative to the late 90s dot.com episode.
Skylar Montgomery- Koning, senior global macro strategist at T.S. Lombard, likewise contends that a proper bubble requires not only tangible fundamental tailwinds and a compelling growth narrative, but also outsized levels of liquidity and/or leverage. Though the mania surrounding AI arguably satisfies the first two conditions, “leverage is not yet at worrying levels. . . margin debt and options open interest suggest that it’s not speculation driving the rally.”
The dreaded ‘b-word’ may not be applicable to today’s stock market, but that’s not to say that today’s blue-sky backdrop sets the stage for many happy returns. Thus, Bank of America calculates the S&P 500’s normalized price to earnings ratio at roughly 25, a figure topped only in late 2021 and the dot.com era during the past 75 years and representing a 60% premium to its average valuation since 1987.
Accordingly, BofA head of U.S. equity & quantitative strategy Savita Subramanian foresees annual returns of just 3% over the next decade, a fraction of the per annum 12.7% figure – inclusive of reinvested dividends – seen since March 2014.
Stocks roared higher once more ahead of tomorrow’s February payrolls report, with the S&P 500 gaining 1% and the Nasdaq 100 ripping 1.5% to push Wednesday’s selloff further into the rear-view. Two- and 10-year yields fell by five and two basis points, respectively, to 4.5% and 4.09%, with each settling at their lowest levels in nearly a month. WTI crude remained at $79 a barrel, gold rose to $2,159 per ounce to mark its seventh straight daily advance and the VIX finished little changed near 14.5.
- Philip Grant
Some do it for the love of the game. From ESPN:
Joey Chestnut calls himself the "world's greatest eater" for good reason. He's a 16-time Nathan's Hot Dog Eating Contest champion and has been ranked number one by Major League Eating, an organization that oversees professional competitive eating events around the world, since 2022.
On Tuesday, he flexed his muscles [gullet?] in a pierogi-eating contest during halftime of the Boston Celtics-Cleveland Cavaliers game. Chestnut downed 39 in two minutes, defeating the combined score (22) of three other contestants.
Stocks stood at attention ahead of tomorrow’s State of the Union Address, rising by 0.5% on the S&P 500 to recoup roughly half of yesterday’s decline, while the long bond declined by three basis points to 4.24% with 2-year yields ticking to 4.55% from 4.54%. WTI crude pushed back above $79 a barrel, gold jumped to $2,148 per ounce, bitcoin rebounded above $66,000 and the VIX remained at 14.5.
- Philip Grant
No rest for the wary: Next Tuesday’s release of the February CPI is causing angst in some corners of Wall Street, after last month’s print saw the headline and core components log year-over-year increases of 3.1% and 3.9%, respectively, topping the 2.9% and 3.7% consensus.
“Historically, a hot January CPI tends to be followed by a hot February CPI,” Fundstrat Global Advisors head of research Tom Lee told Business Insider yesterday, adding that “the residual seasonality that tends to drive a higher January [figure] often spills” into the following month.
Citing data from economist Jens Nordvig, Lee relays that annual corporate price hikes undertaken in late January are typically not reflected until the next month’s data, potentially paving the way for an upside surprise one week hence. “It seems like the Fed cannot ignore the optical issue of two CPI prints that appear to be breaking the downtrend,” Lee cautions.
For context, the Federal Reserve Bank of Cleveland’s Inflation Nowcast (a real-time forecast updated daily as relevant data come to the fore) point to 3.12% and 3.7% respective annual advances in headline and core CPI for February, with annualized price increases of 3.6% and 4.04% during the first quarter of 2024. One month ago, those first quarter estimates stood at 2.56% and 3.77%, respectively.
A similar conundrum may be taking shape on the Old Continent. Annual February CPI rose 2.6% on a headline basis with a 3.1% uptick in the core metric, data released Friday show, topping the 2.5% and 2.9%, respectively, anticipated by economists.
Though those figures have moderated substantially from the 10.6% annual headline increase logged in the fall of 2022, February’s data included a 0.6% sequential advance, marking the fastest monthly increase since last spring and representing “a very worrying sign,” T. Rowe Price economist Tomasz Wieladek tells the Financial Times.
Then, too, the services component registered a 3.9% year-on-year uptick, barely moderating from the 4% reading seen over the previous three months. Those less-than-reassuring developments will spur the European Central Bank to “minimize the risk of being caught on the wrong foot with an upward surprise in inflation, all the more as the Fed became more hawkish of late,” Martin Wolburg, economist at Generali Investments in Italy, predicts to the pink paper.
The key question: might a shifting inflation composition serve to further crimp investor dreams of easier money ahead? A Monday whitepaper from the Bank for International Settlements points out that the 2021-era explosion of price pressures primarily stemmed from the food, energy and durable manufactured goods categories.
But as the Covid-cum-lockdown-related distortions have gradually abated, the services realm has emerged as inflation’s primary driver. Non-goods inflation is less sensitive to energy prices, entails a higher component of labor and wage costs and saw a “substantial deviation” relative to goods during the pandemic, with the attendant possibility of further reversion to the long-term trend. Accordingly, broader “inflationary pressures [may remain] more stubborn in the near term,” the central bankers’ own Swiss bank warns, with the attendant consequence that “monetary policy may need to remain tight for longer.”
Stocks took a tumble ahead of Fed chair Jerome Powell’s appearance on Capitol Hill tomorrow, with the S&P 500 dipping 1% and the Nasdaq 100 absorbing a 1.8% pullback, while bitcoin tumbled some 7% after briefly logging fresh record highs north of $69,000. Treasurys meanwhile caught a strong bid with 2- and 30-year yields declining seven and nine basis points, respectively, to 4.54% and 4.27%, while WTI ticked lower towards $78 a barrel and gold logged another fresh high at $2,128 per ounce. The VIX settled at 14.5, up one point on the day.
- Philip Grant
From crypto-focused site Blockworks:
With bitcoin nearing its all-time high, eye watering nonfungible token sales appear to be cropping back up. A CryptoPunk just sold for 4,500 ether, worth over $16 million at current prices.
That’s the second largest sale ever for the blue-chip NFT collection, trailing only a $23.7 million CryptoPunk purchase made in Feb. 2022. CryptoPunk 3100, the one that sold Monday morning, sold for $2,127 in 2017 before changing hands again for $7.58 million in 2021.
There are 10,000 unique CryptoPunks. Each punk has randomly generated attributes, like differing glasses or hairstyles. Punk 3100 is one of nine so-called alien punks that have blueish skin. The rareness of this attribute has made alien punks the most sought-after CryptoPunks.
It’s the choice of a new generation: Private credit remains the coveted flavor within speculative-grade fixed income. The latest Bloomberg Markets Live Pulse survey finds that 43% of respondents predict that the category will outperform other fixed income categories over the next 12 months, compared to 31% and 11%, respectively, for junk bonds and leveraged loans. Investors anticipate annual returns “in the high teens” from direct lending – topping the 12% generated from both high yield and syndicated loans over the past year – while avoiding the price volatility inherent in publicly-traded securities.
Yet recent fundraising dynamics belie that bullish stance. Citing data from Preqin, the Financial Times relayed Friday that domestic private credit funds accumulated just $11.4 billion in January and February, a fraction of the $30.4 billion gathered over the first two months of last year. Then, too, full-year 2023 fundraising of $123.1 billion trailed the $150.8 billion tally seen in the prior annum.
The sharp post-2021 updraft in borrowing costs has helped usher in some choppy weather for private credit borrowers, as average interest coverage ratios within that cohort fell to two times Ebitda as of the third quarter from 3.1 times as of mid-2022 per a Feb. 23 analysis from the Federal Reserve, “indicating weakening debt service capacity.”
As the heretofore-mushrooming private credit market undergoes some growing pains, investors turn to the leveraged loan market once more. Issuance of collateralized loan obligations – i.e., packaged and securitized collections of loans – reached $32.7 billion in the U.S. during January and February by Bank of America’s count, topping the $24.6 billion issued in the first two months of 2021 to mark the fastest start to a year on record.
That supply surge bodes well for broader loan demand, as CLOs held 70% of all leveraged loans as of September per Guggenheim Investments, up from 52% five years earlier. At the same time, domestic supply of new money loans has registered at just $105 billion this year according to Bloomberg, off 15% from last year’s pace to mark the weakest such output in a decade.
Crucially, the contraptions offer an á la carte risk profile. “Safety is a CLO design feature rather than a characteristic of the loans themselves,” notes the current edition of Grant’s Interest Rate Observer, as cash flows from coupon and principal payments flow from the top, triple-A-rated tranche down to higher-yielding, more speculative segments. Conversely, any losses accrue at the bottom before impacting the triple-A segments, which currently sport floating-rate yields of nearly 7%, some 200 basis points above those on offer from the Bloomberg U.S. Aggregate Bond Index.
See the analysis “Triple-A by design” in the March 1 issue of GIRO for an upbeat assessment of the opportunities on offer in the CLO realm, along with a review of investment vehicles offering arguably attractive risk-adjusted returns.
Stocks settled modestly lower thanks to a late lurch to the downside, but that didn’t keep bitcoin from ascending above $67,000 following a 7% rally during the past 24 hours. Treasurys came under pressure with 2- and 30-year yields to 4.61% and 4.36%, respectively, up seven and three basis points on the day, while WTI crude slipped below $79 a barrel and spot gold ripped another 1.5% to a record $2,116 per ounce. The VIX edged higher to 13.5.
- Philip Grant
From the New York Post:
A Greenland start-up is being accused of doing titanic damage to the environment by shipping ice from glaciers over 100,000 years old to be used in cocktails served at high-priced bars in Dubai.
Arctic Ice, which started this year, touts its product as the “oldest and purest” ice in the world as it is harvested from icebergs in Greenland — a distance of more than 4,730 miles from the Middle Eastern megalopolis.
Though the makers say they hope to highlight global warming’s effects on ice sheets with their business model — and even stop sea levels from rising — the scheme is getting a frosty reception. “Guys. This is nuts,” one person wrote in the comments section on Arctic Ice’s Instagram page in response to a promotional video. “The planet is freaking burning.”
“Rates are pretty restrictive,” Chicago Fed president Austan Goolsbee told attendees at a Princeton University-hosted event Thursday. Referencing the tandem of today’s 5.33% effective funds rate and 2.8% rise in the core personal consumption expenditures index over the 12 months through January, Goolsbee rhetorically asked: “the question is, how long to remain this restrictive?”
Peer policymakers have echoed that sentiment in recent days, as New York Fed president John Williams told Axios that “at some point, I think it will be appropriate to pull back on restrictive monetary policy, likely later this year.” Cleveland Fed president Loretta Mester, in turn, relayed to Yahoo! Finance that “if inflation expectations. . . continue to move down then I think we’re in a good spot where we could consider an easing of the restrictive level that we’re in.”
Yet no one seems to have clued in Mr. Market. The S&P 500 ripped higher by 5.3% last month, marking its best February showing in nearly a decade, while the broad Nasdaq Composite Index reached a record high Thursday for the first time since 2021.
As Bloomberg documents today, the bull stampede has spurred Wall Street into catchup mode. Strategists at Piper Sandler, UBS and Barclays each raised their year-end price targets for the S&P during the past week, while Goldman Sachs and UBS have upped their guesstimate twice since December. “I’ve been doing the strategy job for 20 years, and this is the first time I’ve ever done something like that,” UBS chief U.S. equity strategist Jonathan Golub confides.
Rarified air is certainly at hand, as the Wilshire 5000 Index – a comprehensive gauge of U.S. equity market cap – stands at roughly 183% of GDP. Though that’s down from 199% as of late 2021, the so-called Buffett indicator stands at double its average ratio going back to 1970 and remains well above the 145% figure seen during the climax of the dot.com bubble.
Attendant with that princely price tag: elements of speculative frenzy seen during the 2021-era salad days. Thus, Wednesday brought news that Cayman Islands-based online trading venue Webull plans to list its shares on the Nasdaq via a merger with special purpose acquisition company SK Growth Opportunities, targeting a $7.3 billion valuation in the deal. Overall, 33 pending blank check IPOs have taken shape over the first two months of 2024 according to SPAC Research, surpassing the 31 seen throughout last year.
Animal spirits likewise enjoy free rein in the digital asset realm, as the price of bitcoin hovered near $63,000 this morning, up some 22% from Sunday morning (good old 24/7/365 trading) and nearly 50% in the year-to-date. BlackRock’s iShares Bitcoin exchange traded fund reached the $10 billion assets under management threshold yesterday after gathering a net $604 million Thursday, marking the vehicle’s 34th consecutive session of inflows. CoinDesk, meanwhile, relays that open interest in Dogecoin futures reached a record $1 billion yesterday, “indicative of strong interest in the tokens” and up 54% from one day earlier. The so-called meme coin, which was conceived as a joke at its launch just over a decade ago, is up nearly 60% this week to push its fully diluted valuation above $19 billion per Coinmarketcap.com.
Then there’s the resurgent mergers-and-acquisitions realm. Nine corporate transactions of $10 billion or more were announced during January and February per data from the LSE Group, equaling 2018’s record tally for so-called mega-deals at this time of year. Issuers have sold some $50 billion in high-grade debt to finance M&A over the past two weeks, data from Bloomberg show, helping investment grade supply reach a record $385 billion in the year-to-date through Thursday. Option-adjusted spreads on the ICE BofA U.S. Corporate Index reached 94 basis points over Treasurys last week, approaching the narrowest such pickups of the post-crisis epoch.
“The ability to lock in historically low spreads to appeal to investors who are more motivated by yield – all while the economy is saying that we’re in great shape – is a perfect storm to compel borrowers to step in and take advantage of the backdrop,” Meghan Graper, co-head of debt capital markets at Barclays, told Bloomberg last week.
Imagine an accommodative monetary stance!
Green screens pervade once more as the S&P 500 tacked nearly 1% and the Nasdaq 100 enjoyed a 1.5% rally to kick off March in appropriate fashion, while 2- and 30-year Treasurys settled at 4.54% and 4.33%, respectively, down 10 and 5 basis points on the day. WTI crude tested $80 a barrel to approach four-month highs, gold jumped 2% to $2,083 per ounce and the VIX retreated to near 13.
- Philip Grant
Behold the following pair of headlines from Bloomberg this morning:
Fed’s Preferred Inflation Metric Increases by Most in a Year
Yields Drop as In-Line PCE Supports Dovish View: Markets Live
Talk about a lead trial balloon. Wendy’s Co. (ticker: WEN) performed a corporate pirouette Wednesday, ruling out the potential introduction of Uber-style “surge pricing” on its suite of fast-food offerings. “We have no plans to do that and would not raise prices when our customers are visiting us the most,” the company stated on its website.
CEO Kirk Tanner sent customers into a tizzy following the fast-food chain’s Feb. 15 earnings call, after telling listeners-in that “we will begin testing. . . dynamic pricing and daypart offerings along with A.I.-enabled menu changes” beginning early next year. That commentary spurred widespread consternation on social media, with Sen. Elizabeth Warren (D-MA) taking to X to declare Wendy’s plans “price gouging, pure and simple,” while peer Burger King announced it will dole out free Whopper sandwiches for purchases over $3 tomorrow, conspicuously adding that “we don't believe in charging people more when they're hungry.”
Beyond the public outcry, that aborted initiative likewise earned the reproval of industry insiders. Roger Lipton, president and eponym of restaurant and retail-focused Lipton Financial Services, put it this way in a Tuesday commentary:
Every restaurant operator knows that prices will be taken up over time, to mirror the inevitable rise in operating expenses [i.e., the dollar’s ever-deteriorating purchasing power -ed.]. He or she also knows enough not to be perceived as a leader in this regard, because some customers will blame the messenger.
Yet Tanner et al.’s decision to dig deep into the corporate playbook is understandable. Wendy’s will generate $536 million in adjusted Ebitda this year if Wall Street consensus is on point, up only modestly from the $504 million seen in 2019. Shares have managed a 20% return after accounting for reinvested dividends over the past five years, far below the 82% logged by the S&P Restaurant Index during that stretch.
Then, too, goosing the sluggish stock price through further financial engineering may prove easier said than done, after the company undertook some $2.9 billion on share buybacks over the decade spanning 2023, equivalent to nearly 80% of today’s $3.7 billion market capitalization.
In the wake of that shopping spree, single-B-plus-rated Wendy’s sports an adjusted leverage ratio of nearly six times Ebitda, analysts at S&P Global calculate. That compares to five turns of leverage for Burger King’s double-B-rated parent firm Restaurant Brands International by the rating agency’s lights, and just over three turns for triple-B-plus-rated McDonalds.
The first leap year trading day since 2016 brought more good tidings for the bulls, as the S&P 500 and Nasdaq 100 rose 0.5% and 0.9% respectively to each sit higher by some 7% for this still young 2024. Treasurys stayed steady on the short end with two-year yields remaining at 4.64% while the long bond declined two basis points to 4.38%, WTI crude held above $78 per barrel and gold advanced to $2,043 an ounce. The VIX remained slightly above 13.
- Philip Grant