Call it a charm offensive.  From NBC-4 New York:

A Bronx tax preparer known as "the Magician" was arrested by IRS Criminal Investigations agents in an alleged $100 million dollar tax rip-off scheme. 

Rafael Alvarez was charged Monday morning on federal tax and conspiracy counts. Federal prosecutors said the 60-year-old engaged in a scheme to submit thousands of false tax returns for more than 10 years, stealing more than $100 million. Alvarez grossed more than $15 million for his Atax New York firm, according to the feds. . . A representative with Atax New York said Alvarez had "retired" and no longer worked at the firm. She hung up when asked about the tax fraud allegations.

The “last mile” of disinflation must be a country mile. Federal Reserve vice chair Philip Jefferson observed to listeners-in at a Washington D.C. event Tuesday morning that “recent readings on both job gains and inflation have come in higher than expected.”   

Jefferson, who holds a vote on the rate-setting Federal Open Market Committee, went on to predict that the core personal consumption expenditures price index will show a 2.8% annual increase in March, ahead of the 2.7% economist consensus and the Cleveland Fed’s 2.74% Nowcast. In turn, Fed chair Jerome Powell declared this afternoon that “it is now appropriate to allow restrictive policy further time to work.”  

Such a dynamic – illustrated by a trio of hotter than expected CPI prints over the first three months of 2024 – is duly forcing a financial rethink, as interest rate futures now price 42 basis points of rate cuts by year-end, down an even 100 basis points from the anticipated pace of easing at the start of 2024.  

“The majority of analysts have been wrongfooted” on that score, Aspect Capital CEO Anthony Todd told the Financial Times today, while Apollo chief economist Torsten Sløk added that “it is very clear that the narrative is changing. Uncertainty about. . . where we’re going in rates is the source of why things are so turbulent at the moment.” 

Though the prospect of delayed gratification has thrown Wall Street for a loop, might a lingering spell of substantive borrowing costs serve to grease the wheels of commerce?  As Bloomberg documents today, some observers are making the case that the post-pandemic leap to a 5.33% Fed Funds rate from near zero serves to bolster interest income, burnishing consumer spending with attendant implications for economic growth (output will rise at a 2.9% seasonally adjusted annual rate in the first quarter, guesstimates the Atlanta Fed’s GDPNow tracker, up from 2% early last month).  

“The reality is that people have more money,” Kevin Muir, former RBC derivatives trader turned publisher of The MacroTourist newsletter, told Bloomberg. “Higher rates are doing less economic damage than in times past,” added Moody’s chief economist Mark Zandi.  

That hypothesis may be put to the test soon enough, UBS strategists wrote Monday: “If the expansion remains resilient and inflation gets stuck at 2.5% or higher, there would be a real risk that the FOMC resumes raising rates again by early next year, reaching a 6.5% Fed Funds rate by [mid-2025].” Such a development may prove a less-than serendipitous one for investors, the UBS team believes. “In a high inflation scenario, we would expect both government bonds to sell off and credit spreads to widen, making for a big catch down in [valuation] multiples.” 

Stocks took a breather after several days of pronounced volatility, with the S&P 500 settling slightly south of unchanged in narrow-range trading, though Treasurys remained under pressure with two-year yields matching the year-to-date high of 4.97% and the long bond rising to a five-plus-month peak at 4.77%. WTI crude held north of $85 a barrel, gold edged higher at $2,389 per ounce and the VIX retrenched a bit to 18 and change. 

- Philip Grant

Buying the dip goes global: overseas investors backed up the truck in the Land of the Rising Sun last week, purchasing a net ¥1.18 trillion ($7.7 billion) of stocks per data from the Japan Exchange Group. Instructively, that shopping spree – the largest since 2013 – took place as the Nikkei 225 logged a 3.4% decline over the five days through Friday, its largest weekly decline since December 2022. 

Evidence of financial regime change in the world’s fourth-largest economy is in no short supply following a decades-long torpor, as headline CPI accelerated to a 2.8% year-over-year in February (that compares to an average 0.5% annual reading over the past two decades), while the yen has slipped to 153 per dollar, its weakest level since the aftermath of Japan’s colossal stock-cum-real estate bubble in 1990.  That combo may prove just the ticket for shareholders, if recent price action is any indication.   

Thus, Japan’s benchmark index sits higher by 18% this year in local terms and 9.5% in dollars, edging past the 8.1% return for the S&P 500. A pair of Grant’s Interest Rate Observer picks-to-click have likewise accelerated into high gear of late, leaving Mitsubishi Corp. (8058 in Tokyo) and the Nippon Active Value Fund PLC (NAVF in London) with 218% and 82% dollar-denominated gains since a bullish analysis in the Feb. 7, 2020, edition, compared with a 65% return for the S&P 500. 

“The number of incoming requests to my teams has [grown] exponentially in the last few months,” Shinji Ogawa, co-head of Japan cash equities sales at JPMorgan told Reuters in late February. “It’s overwhelming how much interest there is in Japan at the moment.” The dynamic may have plenty of room to run, the Tokyo-based observer believes. “If I was going to put it in terms of a baseball analogy, I think we’re still in the second inning,” Ogawa added. 

On that score, Bloomberg reports that the likes of Morgan Stanley and Bank of America have ramped up Japan-centric marketing efforts in response to growing client interest, while Citigroup is organizing “Japan Day” conferences across the globe to highlight investment opportunities in the country.  Consulting firm Coalition Greenwich likewise relays that institutional investors plan to increase their consumption of Japan-themed research this year, reversing a downward trend which had been in place since 2019. 

Will such a sentiment shift translate into durable results for Japan bulls?  “What would happen after the initial learning stage by investors runs its course depends on whether the market can maintain its appeal,” writes Bloomberg analyst Hideyasu Ban.  

In other words, we’ll know more later. 

Stocks lurched lower as the S&P 500 logged a 1.4% decline to wrap up its second consecutive weekly loss, while Treasurys pared their recent losses 2- and 30-year yields settling at 4.88% and 4.61%, respectively, down five and four basis points on the session but up from 4.73% and 4.54% last Friday.  WTI crude gave back a sharp early advance to remain just below $86 a barrel, gold reached $2,427 per ounce before violently reversing to $2,344  and the VIX settled north of 17, up more than two points on the day. 

- Philip Grant

Zero-commission trading, reimagined. From the Financial Times:

Fidelity plans to start charging investors $100 per trade to buy exchange traded funds whose sponsors have not agreed to make “support payments” to the firm. The proposed increase in the cost of buying ETFs runs against a long-term trend in which trading and investment costs have dropped sharply and could ultimately stifle the development of new ETFs while squeezing smaller providers and their investors.

Fidelity is understood to be asking ETF sponsors to pay 15% of total fund revenue to avoid the $100 charges, said multiple people with knowledge of the support payment agreements. Fidelity declined to comment on the size of the support payments.

“We’re just getting hammered, and this is just another hammering,” said David Young, founder and chief executive at southern California-based Regents Park Funds, which is one of the nine ETF firms Fidelity has put on notice. “The next ETF we come out with, we’re going to go to the market with the maximum fee we can justify.”

One size hits all: Treasury had some trouble placing its latest slug of obligations Tuesday, as this afternoon’s auction of three-year notes priced at 4.548%, well above the 4.528% when-issued yield on offer at the 1pm ET deadline to mark the largest such tail in 14 months.  The bid-to-cover ratio (i.e., submitted demand relative to quantity sold) likewise slipped to 2.5 from an average of 2.58 over the prior six such sales and 2.69 across 2023.

Today’s auction, described as “horrible” by Saxobank head of fixed income strategy Althea Spinozzi, may have been influenced by general unease over the outcome of tomorrow’s CPI print for March. Uncle Sam’s spendthrift ways could likewise factor in, as today’s $58 billion in supply matched the pandemic-era record, while more than doubling the average $28.1 billion three-year auction seen over the five years through 2019.  

If at first, you don’t succeed. . . takeover speculation surrounds L’Occitane Group (973 in Hong Kong) once more, as Bloomberg relays that billionaire chairman Ronald Geiger is “nearing” a take-private transaction for the Luxembourg-headquartered beauty products purveyor. Geiger, who already controls upwards of 70% of shares outstanding, has arranged debt financing for the purchase via Blackstone, Bloomberg adds.

The provisional bid, which follows similar scuttlebutt in early February and an aborted chairman-led LBO attempt last September, may take place at HKD$31.20 ($3.98) per share, representing a 20% premium to the firm’s pre-deal chatter levels two months ago and a 36% dollar-denominated increase from a bullish analysis in the Sept. 29 edition of Grant’s Interest Rate Observer (the S&P 500 and Hang Seng returned 22% and minus 5%, respectively, in dollar terms over that stretch). 

Might a pivot from the watchful eye of Mr. Market help the skincare concern smooth out its blemishes? L’Occitane will generate $3.1 billion in revenue over the year ending next March if the sell-side consensus is on target, up 41% over the 12 months through March 2023. However, thanks in part to a $100 million plus marketing campaign geared towards the Chinese customer, projected Ebitda for that fiscal 2025 registers at just $568 million, down from $625 million two years prior. 

Yet a still inviting valuation relative to industry peers speaks to the opportunity at hand. Geiger’s outfit – which was halted Tuesday at HKD$29.50 per share – changes hands at an enterprise value of 11 times that fiscal 2025 Ebitda guesstimate.  For reference, rivals L’Oreal SA and Estee Lauder Cos (which trimmed its guidance on a quartet of occasions over the 12 months through November), are projected to post two-year sales growth of 13.8% and 7.5%, respectively, while sporting EVs equivalent to 20 and 18.7 times their respective fiscal 2025 Ebitda bogeys.

A sharp mid-day downdraft couldn’t keep a good bull down, as the major indices rebounded smartly this afternoon to leave the S&P 500 just north of unchanged for a second straight session. Treasurys managed to rebound despite this afternoon’s soft three-year auction as yields settled lower by roughly five points across the curve, while WTI crude retreated towards $85 a barrel and gold pushed ahead once more to $2,354 per ounce. The VIX settled just below 15%, roughly 1.5 points below its mid-morning peak. 

- Philip Grant

Behold, the incredible vanishing stock market.  Net share issuance from MSCI All Country World Index components stands at minus $120 billion in the year-to-date, relays the Financial Times, citing data from JPMorgan. That figure, which compares to a $40 billion downtick in 2023 and stands to mark the largest such drop since at least 1999, contrasts with JPMorgan’s November prediction of $360 billion in net new supply for 2024.

Persistent share buybacks – on pace to match the $1.2 trillion pace logged over the past three years – along with a relative dearth of equity offerings and a still-spotty IPO market have helped drive that dynamic, as have secular developments. “You don’t have many companies going public because of the growth of private equity,” David McGrath, chief equity strategist at Oakworth Capital Bank, noted to the FT.  On that score, the tally of listed U.S. companies now stands at fewer than 4,000 per index provider Wilshire, down from 7,000-plus at the turn of the century, with comparable retrenchments seen in the U.K. and continental Europe.  

Might a similar dynamic be on tap for the speculative vehicle of our time?  The $2.5 trillion, 13,000 token cryptocurrency category is primed for M&A, Alex Dreyfus, CEO of blockchain firm Chiliz told CoinDesk, arguing that “there are already too many tokens and too many ‘projects,’ for not enough adoption and utility.”  

Digital assets featuring strong liquidity and passive management teams are ripe for the picking, predicts Oleg Fomenko, co-founder of decentralized app Sweat Economy, as are so-called meme coins: “I foresee the emergence of ‘ShibaPepes’ and ‘FlokiDoges’ in no time,” he said, referring to hypothetical combinations of such existing contraptions as Dogecoin and the Shiba Inu token. 

In the spirit of national reconciliation, how about a JeoBoden-DolandTremp tie-up?

This week’s seemingly ceaseless barrage of commentary from Federal Reserve officials renders the policy outlook as clear as mud. Thus, a majority of Federal Open Market Committee members view rate cuts as “likely to be appropriate. . . at some point this year,” chair Jerome Powell said Wednesday.  

Fellow FOMC decision makers Loretta Mester and Adriana Kugler offered concurring opinions, while peers Michelle Bowman and Rafael Bostic took a more cautious tack, advocating for a continued wait-and-see approach.  Minneapolis Fed President Neel Kashkari, who does not wield an FOMC vote this year, mused to Pensions & Investments Thursday that “if we continue to see inflation moving sideways, then that would make me question whether we need to do those rate cuts at all.” 

Unsurprisingly, such a muddled message leaves investors guessing.  Interest rate futures now price a 54% chance of a rate cut at the June 12 FOMC meeting, little changed from a week ago and down from 82% odds as of early February.  Mr. Market now envisions 64 basis points of easing through Dec. 31, leaving the benchmark funds rate at 4.64%. That compares to a 4.19% year-end guesstimate two months ago. 

Not everyone on Wall Street is hedging their bets, however. Goldman Sachs chief economist Jan Hatzius told CNBC this morning that “under our forecast, I would be quite surprised if we didn’t get rate cuts this year. Quite surprised.” Hatzius added that the timing of such a move remains dependent on near-term data.

Then again, there’s no time like the present.  Bloomberg relayed Thursday that Goldman’s consumer banking Marcus unit has trimmed the annual percentage yield on offer in its high-yield savings account to 4.4% from 4.5%, its first such cut since 2020. 

Another strong payrolls report helped the bulls shake off yesterday’s late snafu, as the S&P 500 and Nasdaq 100 rose 1% and 1.2%, respectively, to each settle lower by about 1% for the week, while Treasury yields backed up across the curve with the 2-year note climbing eight basis points to 4.73% and the long bond closing at 4.54% from 4.47% Thursday. WTI crude tested $87 before retreating a bit below that bogey, gold snapped back to another closing high at $2,324 per ounce and the VIX ticked only modestly lower, finishing at 16. 

- Philip Grant

From the New York Times:

The Metropolitan Transportation Authority has quietly demanded roughly $750,000 a year from the organization that runs the New York City marathon, to make up for the toll revenue that the authority loses when it closes the Verrazzano — North America’s longest suspension bridge — to vehicular traffic. 

The organization, the New York Road Runners, has yet to acquiesce, prompting the M.T.A. to play hardball. The authority initially threatened to restrict runners to the bridge’s shadowy lower deck during the 26.2-mile race in November. But in recent weeks, the M.T.A. slightly relented and said the race could use the upper level if the Road Runners preferred it to the lower level.

And from KCTV-5, Kansas City:

Jackson County voters have resoundingly voted against a sales tax extension to fund stadium projects for the Chiefs and Royals. Question one on the Jackson County April 2 ballot would extend a stadium sales tax to go toward building a new stadium for the Kansas City Royals and renovating Arrowhead Stadium for the Kansas City Chiefs.

With 100% of its precincts reporting, Kansas City voted 30,791 for No, and 22,399 for Yes. Jackson County voted along the same lines: no: 47,561, yes: 34,207.

Get your unicorns in a can: qualified investors can now access the late-stage venture capital universe in one fell swoop, as Tuesday marked the launch of the Forge Accuidity Private Market Index, a collection of 60 of the most liquid privately held firms. The market cap-weighted gauge, which features Elon Musk’s SpaceX as its top holding with a 6.41% allocation, is accessible to those with a net worth of at least $5 million and includes a minimum outlay of $250,000. 

“Companies used to go public much earlier in their life cycle and now they’re staying private for longer, keeping the access out of the public market,” Accuidity founder and co-president Vince Gubitosi told Bloomberg, noting that “companies like Forge [can] provide a marketplace for employees and early investors to transact in their shares.”  

The new vehicle “is the gateway to get more assets into [this] space” added Howe Ng, Forge’s executive vice president of innovation and investment solutions. Referencing the rousing debut of various bitcoin-focused ETFs, he added that “this is just the first step towards democratizing the private market. . . but there’s the liquidity issue to resolve. It took bitcoin many years to solve that, it’ll take less time for private market assets.” 

Yet it’s fair to contrast the state of play in VC with the buoyant bid seen in cryptocurrencies ahead of the mid-January bitcoin ETF launch. Global venture capital fundraising from university endowments, institutional investors and other limited partners registered at just $30.4 billion over the three months through March, data compiled by PitchBook show, tracking 35% below last year’s annualized pace.  In turn, the $188 billion sum raised during 2023 marked the weakest full-year tally since 2016, and a fraction of the $555 billion bumper crop logged during the salad days of 2021. 

“We want to be there for our [VC] partners, but we don’t want to put ourselves in a hole,” one U.S.-based chief investment officer explained the Financial Times, adding a striking prediction: “I would be very surprised if, in five years, the industry hasn’t shrunk by half. The returns aren’t there. . . usually the depth of the downturn is in proportion to the magnitude of the bubble, which would imply that we’re in for a brutal time.” 

Accordingly, VC sets its sights on the artificial intelligence realm, hoping that the hot pocket can help “overcome the sins of 2020 to 2022,” as Menlo Ventures partner Venky Ganesan told the pink paper. “Every venture firm is chasing the AI unicorn. Some are going to get it and will thrive, and those who don’t will be sent to the dustbin of history.”

Some startups in that field appear all too aware of their advantageous position.  Dan Siroker, co-founder and CEO of software firm Rewind AI, took to social media on Feb. 29 to lay out conditions for a powwow with would-be investors: “We can’t meet with everyone so, to make sure you are serious and it’s a good use of our time, we are requiring a $100 payment to meet. First come, first served.” Upwards of 1,000 investors expressed interest during a spring 2023 series A fundraising pitch, Siroker relayed to Business Insider last month, with 170 VCs ultimately vying to participate in the round.  

Stocks edged higher as low-key trading took hold following yesterday’s whiff of volatility, while Treasurys likewise breezed through an inert session headlined by a two-basis point decline in two-year yields, to 4.68%.  Precious metals however continued their eye-catching advance with gold marking its fifth straight record finish just below $2,300 and silver approaching $27 per ounce, up 22.5% from Valentine’s Day.  WTI crude ticked higher again to $85.6 a barrel, and the VIX retreated back towards 14.

- Philip Grant

What’s the opposite of a quiet period? Policy observers will have plenty of rhetorical grist on which to chew over the coming days, with Federal Reserve officials scheduled to deliver 20 public appearances over the next six days. 

Fed chair Jerome Powell’s Wednesday address at Stanford University’s Business, Government, and Society Forum highlights the week’s slate. Federal Open Market Committee voting members Loretta Mester, Thomas Barkin and Adriana Kugler are likewise set to ruminate Thursday. 

No sticker shock here:  the stock market’s torrid rally over the past six months leaves the S&P 500 at a 17 times price to earnings ratio on an equal-weight basis, strategists at Goldman Sachs relayed last week. That figure represents a 13% premium to the investment bank’s fair-value guesstimate and is equivalent to the 92nd percentile of p/e observations dating back to 1985.  

Yet similarly rich price tags have not augured automatic pain in recent decades, as the broad average has tended to generate positive six-month returns from such lofty starting points. “Overvaluation alone has not historically been cause for imminent concern,” the Goldman team concludes. “Periods of overvaluation often persist for nearly a year and are typically benign if the subsequent economic growth environment is healthy.”

Corporate America indeed looks to be humming along, as the sell side has trimmed first quarter earnings-per-share estimates by 2.5% since Dec. 31, FactSet finds, comfortably below the average 3.7% intra-quarter downtick seen over the past five years.  The broad index is now projected to grow its bottom line by 3.6% year-over-year over the three months through March, which would mark its third consecutive quarter of positive earnings growth, on its way to generating upwards of 12% growth in operating EPS for full-year 2024. 

“Valuations are a little stretched, but as earnings growth continues, which we’re expecting will happen, they’ll appear a little more reasonably priced,” Gina Bolvin, president and eponym of Bolvin Wealth Management, tells Bloomberg. “When the market reaches new highs, we generally see it continue to reach new highs – momentum begets momentum.” 

Yet momentum of a different ilk is on display within a lynchpin data series. As the Financial Times points out today, non-farm payrolls collected by the Bureau of Labor Statistics have been revised lower on seven occasions since the start of 2023, often by substantial quantities: employment growth registered at 519,000 across December and January, the BLS now finds, well below the 686,000 figure first reported.

Eroding participation from the public helps explain that apparent downtick in data quality, as preliminary survey response rates to the BLS slipped to a 20-year low of 57.5%, Bianco Research finds, down from 79.4% as recently as 2015. 

Might a downshifting labor market, obscured by data collection trouble, serve to disrupt the economic momentum now on display? Canaccord Genuity chief market strategist Tony Dwyer made the case for such an outcome on CNBC Thursday, urging the Federal Reserve to commence its easing cycle post-haste: “I’m not saying they have to go back to zero, but they have to be more aggressive. One of the most [prominent] topics that I talk to clients about is how bad the incoming data is.” 

Call it a financial Rorschach test. 

A bruising day in the bond pits left long-dated Treasurys near their worst levels of 2024 as 10- and 30-year yields settled at 4.33% and 4.47%, respectively, each up 13 basis points on the session.  Stocks finished little changed on the S&P 500 and Nasdaq 100, though the VIX rose nearly a point to approach 14, while gold notched a record $2,278 per ounce overnight (subsequently pulling back to $2,246) and WTI crude logged fresh five-month highs near $84 a barrel. 

- 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

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

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

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