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
Forget spring green shoots, crypto summer is here again: The digital asset complex continues its rampage in the wake of last month’s debut of a slew of spot bitcoin exchange traded funds, along with ravenous risk appetite. The price of bitcoin reached some $57,400 this morning per Coinmarketcap.com, up a cool 37% over the past month and nearly 250% north of its fall 2022 nadir.
As X user Arun Chopra (@Fusionpointcaptial) points out on the social media platform today, the dramatic rebound spells a measure of reputational relief for some high-profile, heretofore hapless bulls. Hollywood actor Matt Damon, who famously declared that “fortune favors the brave” in an ad for Crypto.com which ran during Super Bowl 56 on Feb. 13, 2022 – preceding a 70% swoon in bitcoin over the following nine months – has now broken even on that very public endorsement.
Number go up, residential real estate edition: Nationwide house prices logged a 5.5% annual increase in December, Tuesday’s release of the latest S&P CoreLogic Case-Shiller U.S. National Home Price Index showed, accelerating from a 5% advance in November and marking the fastest pace of annual appreciation since the final month of 2022.
Year-over-year prices grew at 19% and 10%, respectively, during the Covid- and lockdown-addled 2021 and 2020, before briefly slipping into negative territory early last year as the Federal Reserve’s belated, aggressive tightening campaign took hold. Average 30-year fixed mortgage rates reached as high as 7.79% last fall per Freddie Mac, nearly triple those seen in late 2021.
Noting that calendar 2023 price appreciation exceeded the 4.7% average growth rate seen over the past 35 years, Brian Luke, head of commodities, real and digital assets at S&P Dow Jones Indices commented that “above-trend growth should be well received considering the rising costs of financing home mortgages.”
Some constituencies may view housing’s resilience more warmly than others. Prices have logged an 8.7% annual increase since year-end 2018 per the Case Shiller data, well higher than the 4.1% and 5.3% per-annum advances in headline CPI and personal income, respectively, over that five-year stretch.
Relatively sparse inventory has helped drive that dynamic, as household formation over the decade through 2022 outpaced new single family home construction by 6.5 million units, data compiled last year by Realtor.com show. Meanwhile, fading prospects of near-term rate cuts further complicate matters for would-be homebuyers: average 30-year mortgage rates reached 6.9% of last week per Freddie Mac, up some 30 basis points from year-end 2023.
By one metric, at least, the combination of outsized relative price appreciation and macroeconomic headwinds is putting the squeeze on large swaths of the public. Thus, 54% of respondents to a survey of aspiring homeowners undertaken late last month by Bankrate.com report that their income is insufficient to afford both the requisite downpayment and closing costs required to purchase a new dwelling, up from 46% reporting a similar predicament in early 2023.
Others are making better weather of it. A poll of more than 700 professional house flippers undertaken by John Burns Research & Consulting late last year found that 49% planned to increase their activity during 2024, with only 18% planning to throttle back. That’s despite the fact that effective interest rates for the fix-and-flip industry averaged a chunky 10.1% during the fourth quarter of 2023.
A quiet session saw stocks levitate by some 20 basis points on the S&P 500 and Nasdaq 100 while long-dated Treasurys came under some pressure with 30-year yields rising four basis points to 4.44%. WTI crude logged a fresh post-November high near $79 a barrel, gold finished little changed at $2,031 per ounce and the VIX hovered below 14.
- Philip Grant
Michael Barr, vice chair for supervision at the Federal Reserve’s Board of Governors, will deliver the keynote address Tuesday at the New York Fed-hosted Conference on Counterparty Credit Risk Management in lower Manhattan.
Though that event is by invitation only, monetary policy aficionados left out in the cold will nevertheless enjoy a healthy portion of forward guidance in the coming days. An even dozen Fed speakers are set to take the stage this week, headlined by a quartet of events Wednesday featuring New York Fed President John Williams, Chicago Fed president Austan Goolsbee, Atlanta Fed president Rafael Bostic and Cleveland Fed president Lorretta Mester.
No ZIRP, no problem: Investors can’t get enough of corporate America’s debt obligations with interest rates hovering well above their post-2008 norm, as high-grade borrowers sold $60 billion in bonds over the five days through Friday. This marks the busiest week in nearly two years, helping push February supply to a record $153 billion, per data from Bloomberg, on the heels of January’s record $189 billion tally. Investment grade bond supply of $342 billion now stands some 27% above last year’s run-rate.
Fading hopes of imminent relief on the rates front have done little to curb Mr. Market’s enthusiasm. Though interest rate futures now price roughly 75 basis points of easing from the current 5.33% Fed Funds rate for 2024, compared to an anticipated 157 basis points as of year-end, spreads on the ICE BofA U.S. Corporate Index reached 93 basis points over Treasurys Friday, a level undercut only in early 2018 and mid/late 2021 during the post-crisis era.
“This price action suggests the demand for IG corporate bonds is getting unusually strong,” Bank of America strategists noted last week. “I don’t see any signs of this supply wave abating,” Meghan Graper, global co-head of debt capital markets at Barclays, added to Bloomberg.
The hotting up competition to lend to speculative-grade borrowers further demonstrates the freewheeling state of play. The Financial Times reports today that the battle between banks and private lenders to finance leveraged buyouts has swung into high gear, as private equity sponsors have turned back to the syndicated loan market to trim their interest costs.
Illustrating that shifting dynamic: single-B-rated Cotiviti, Inc., a KKR-backed health care tech firm, issued a hefty $4.25 billion term loan last week at a 325-basis point premium to the secured overnight financing reference rate. That’s not only inside of the 350-basis point spread floated during initial price talk, but far below the 525-basis point to 550 basis point pickup that was provisionally on offer in the private credit market, Bloomberg reported back in December.
“As we’ve turned the year you can see banks being more aggressive,” Chris Bonner, head of leveraged finance capital markets at Goldman Sachs, told the FT. “You have seen more stability in the ecosystem. . . As an underwriter you’re more comfortable with putting on risk positions.”
Those placid financial waters span the globe. Last week, the single-B-plus-rated, West African nation of Benin issued $750 million of 8 3/8% notes maturing in 2038 in its first ever dollar bond sale, drawing some $5 billion of investor demand in the process. Following recent offerings from double-B-minus-rated Ivory Coast and B3/single-B-rated Kenya, sovereign issuers in Sub-Saharan Africa have issued more than $4.5 billion of dollar-denominated debt since Jan. 1, already topping full-year supply forecast issued by Goldman Sachs.
Spreads on the JPMorgan EMBIG Diversified Africa Sovereign Index have compressed to some 700 basis points from more than 1,000 basis points early last year. That’s despite the fact that total sovereign defaults within the so-called emerging and frontier market categories have numbered 14 since 2020 according to Fitch, nearly matching the 19 such events seen over the prior two decades.
“For developing nations, the loosening of financial conditions and resumption of market access is unequivocally positive,” Samy Muddai, head of emerging markets fixed income at T. Rowe Price, told Bloomberg. As for the creditors, time will tell.
Stocks floated lower throughout the session to settle 0.4% lower on the S&P 500, while Treasurys likewise remained under modest pressure following a soft five-year auction as the long bond rose three basis points to 4.4%. WTI crude rebounded back towards $78 a barrel, gold ticked lower to $2,031 per ounce and the VIX held just south of 14.
- Philip Grant
Where’s the salt? President Biden is set to take aim at the food industry at the annual State of the Union address in early March, Politico reports this morning, as “painfully high grocery prices” remain front-and-center. The Commander-in-Chief recorded a video address on Super Bowl Sunday decrying so-called shrinkflation, telling listeners-in that “you might have noticed one thing, sports drink bottles are smaller, a bag of chips has fewer chips, but they're still charging you just as much.”
The topic is certainly a salient one. Consumers allocated an average 11.4% of their disposable income towards food in 2022 (the most recently available data) per the U.S. Department of Agriculture, the highest relative sum since 1991. In 2021, that ratio stood at 10%.
“If you look historically after periods of inflation, there’s really no period you can point to where [food] prices go back down,” Steve Cahillane, CEO of Kellanova – the snacks purveyor spun out of Kellogg last year – told The Wall Street Journal. “They tend to be sticky.”
Or, perhaps, more than sticky. This morning, the U.S. Department of Agriculture bumped its food inflation projection for 2024 to 2.9% from a prior 1.3% figure, after tweaking that guesstimate from a 1.2% growth rate a month ago. Those enhanced price pressures come despite help from key commodities, as soybean and corn futures each languish at their lowest levels since late 2020.
A windowless van no more? Automotive retailer Carvana Co. (ticker: CVNA) gave the people what they wanted in Thursday evening’s earnings report, posting $450 million in net income for 2023 to notch its first-ever annual profit while predicting that adjusted Ebitda will come in “significantly” above $100 million during the first quarter.
“2023 was an exceptional year for Carvana, where our deliberate focus on efficiency and profitability drove fundamental business improvements that not only led to our best-ever financial results but also increased customer [satisfaction] throughout the year,” stated founder and CEO Ernie Garcia. “Carvana is stronger than ever.”
Wall Street and Mr. Market were each duly impressed, as no fewer than eight sell-side analysts raised their price targets following the report, while shares jumped 32% Friday to reach their best levels since spring 2022.
Though CVNA remains off some 67% from when Grant’s Interest Rate Observer had its bearish say in the Aug. 7, 2020 edition, the stock sits higher by some 1,400% from early 2023 when bankruptcy concerns proliferated, pushing Carvana’s market capitalization back above $13 billion. For context, legacy retailer AutoNation, which sports a market cap of just below $6 billion, generated $1.02 billion in net income a year ago. Carvana’s $450 million in black ink likewise stemmed from an $878 million accounting gain associated with the extinguishment of roughly $1 billion in debt.
Fixed income investors, meanwhile, take a different tack from Carvana’s jubilant shareholder base. Thus, the firm’s senior secured, 10 1/4s of May 2030 changed hands this morning at 79.4 cents on the dollar, for a 15.39% yield-to-worst and 1,111-basis point spread over Treasurys. Typically, spreads north of 1,000 basis points denote a distressed credit. Carvana shelled out $632 million of interest expense during 2023, up 30% year-over-year and nearly double the $339 million in adjusted Ebitda which the company trumpeted as a record figure in its press release.
Place your bets. Or, don’t.
A strong rebound in Treasurys headlined the day’s proceedings, as the long bond dove 10 basis points to 4.37%, while stocks finished little changed on the S&P 500 and Nasdaq 100 to wrap up another banner week for the bulls. WTI crude retreated nearly 3% after logging multi-month highs Thursday, gold rallied to $2,035 per ounce and the VIX settled south of 14, more than two points below Wednesday’s intraday peak.
- Philip Grant
Here’s yet another reason to cut rates, via a press release from insurance network Delta Dental:
The slowing of U.S. inflation has trickled down to the Tooth Fairy. New Delta Dental findings from its 2024 Original Tooth Fairy Poll revealed the average value of a single lost tooth during the past year declined by 6% from $6.23 to $5.84. This represents the first year-over-year decline in Tooth Fairy giving in five years.
It’s all over but the shouting, or is it? The Financial Times documents a contentious dispute between a pair of crypto-focused players in the wake of FTX’ s spectacular collapse, as an investor in Tyr Capital Partners alleges that the fund disregarded both internal risk protocols and investor objections over its outsized exposure to the now-defunct digital exchange.
Investment manager TGT, a limited partner in the Geneva-based fund, contends that it sounded the alarm regarding FTX’s precarious position on several occasions in early November 2022, but that Tyr only attempted to recover its funds housed at the exchange on Nov. 11 of that year, the day that FTX filed for bankruptcy. The litigant seeks to wind down Tyr’s portfolio and take control of its remaining positions, including a $22 million claim against FTX that represents nearly 20% of its assets under management.
Recent developments add financial weight to that kerfuffle. Thus, FTX lawyers told U.S. bankruptcy judge John Dorsey last month that claimants against the defunct digital exchange are potentially poised to recover 100 cents on the dollar. That marks a dramatic turn in fortunes for the firm’s unsecured creditors, who were initially thought to be facing painful haircuts with roughly $9 billion in customer funds remaining unaccounted for. FTX founder Sam Bankman-Fried was convicted last fall of fraud in connection with that gaping balance sheet hole.
Yet that was then, as new FTX broom John J. Ray III and his restructuring team report that they have already recouped the bulk of those missing funds. The recent levitation in asset prices likewise assists in today’s fast-brightening picture, as bitcoin remains north of $51,000, up more than 200% from its late 2022 levels. Then, too, FTX’s 7.8% stake in generative A.I. firm Anthropic could prove lucrative for claimants, as the startup achieved an $18.4 billion post-money price tag in December, valuing FTX’s $500 million outlay at roughly $1.4 billion (yesterday’s Nvidia print should, of course, do little to slow that momentum).
Indeed, claims against the husk of SBF’s former corporate pride and joy now change hands at an 85-cent on the dollar bid and 90 cent offer as of Friday per data from trading platform Cherokee Acquisition, up from roughly 17 cents early last year. A jolt in activity accompanies that brisk rebound, as $714 million worth of FTX claims changed hands on the Xclaim digital transaction venue in December (the most recently available data), compared to just $3.6 million in turnover March of last year.
More broadly, the happy outcome for early movers in post-bankruptcy FTX (an opportunity identified in the March 10, 2023, Grant’s Interest Rate Observer analysis “Pennies on the dollar”) illustrates a noteworthy dynamic seen in various busted crypto exchanges, as a relative concentration of unsecured creditors – and a paucity of claims such as bonds or bank debt sitting senior in the capital structure – acts as a tailwind for overall recoveries. For an updated look at the state of play in this speculative niche and the potential implications for the bankruptcy investment strategy at large, see “Crypto Lazarus act” in the current edition of Grant’s Interest Rate Observer dated Feb. 16.
As for Bankman-Fried, who awaits a March 28 sentencing hearing at Kings County lockup, his skills for winning friends and influencing people apparently remain well-honed. Freelance crypto reporter Tiffany Fong got the scoop in an interview with fellow detainee “G-Lock,” who termed the ex-FTX boss “weird as shit,” but offered enthusiastic praise for his street bona fides: “He is a good guy. . . he didn’t snitch on nobody. Sam is a gangster.”
It was a day of superlatives thanks to the euphoric 17% rip for Nvidia following better-than-expected fourth quarter results yesterday evening. Thus, stocks stormed higher by 2.9% for the Nasdaq 100 to establish fresh record highs with a near 9% advance for this young 2024, while 2- and 10-year Treasurys rose to 4.69% and 4.33%, respectively, with each establishing a fresh multi-month peak. WTI crude settled at $78.50 to remain near its most elevated levels since the fall, gold stayed at $2,024 for a third straight session and the VIX pulled back below 15.
- Philip Grant
Until next time: No U.S. recession is in the offing, the Conference Board declared today, after the group’s Leading Economic Index for January showed net gains for 6 of the 10 tracked subcomponents over the past six months.
The research outfit had anticipated an imminent output contraction since July 2022, repeating that prediction as the LEI extended its string of sequential declines to 23 months and counting (representing the longest such streak since the financial crisis) to reach 102.7, its lowest since the dark days of April 2020.
No matter, as a potentially brightening growth picture, in tandem with the decline in the measured rate of inflation (January CPI notwithstanding), leaves some well-placed monetary observers feeling their oats. Princeton University economics professor and former Federal Reserve vice chair Alan Blinder put it this way in a Wall Street Journal opinion piece today:
The central bank has landed the economy so softly that some economists are referring to the drop as the “immaculate disinflation.” Break out the garlands of roses. How did Mr. Powell & Co. pull off this minor miracle? The great Yankee pitcher Lefty Gomez famously said he’d “rather be lucky than good.” The Fed has been both.
So what? So let’s dance! The S&P 500’s maiden voyage to the 5,000 mark earlier this month has stirred the masses once more, as Google search engine prompts for the term “call option” reached a two-year high last week, Bloomberg relays.
Individual investors are doing more than browsing. Those upside-focused derivatives accounted for nearly 60% of total options trading volume, strategists at Goldman Sachs found last week, approaching the highest such share since the meme stonk mania reached its zenith in early 2021.
“Single stock calls are bid,” the Goldman team additionally points out, as the average cost of one-month call options on S&P 500 components outpaces premiums for the broad average by 2.3 times, also one of the highest ratios over the past three years.
Bullish speculators are likewise coalescing around the immediate gratification strategy, as volumes for zero-days-to-expiration options tracking the S&P 500 have more than doubled over the past two years, data collected by Bloomberg show. For context, total U.S. equity derivatives activity has remained virtually unchanged during that stretch.
Beyond the options market, cryptocurrencies stand as a readily available outlet for speculation-minded punters. To that end, VanEck’s Bitcoin Trust (ticker: HODL) saw notional turnover balloon to more than $400 million Tuesday, more than a 22-fold increase from its $17 million daily average dating to its Jan. 11 debut.
Yesterday’s explosion in activity, which preceded VanEck’s downshift in its management fee to 20 basis points from 25 basis points Wednesday, was driven by the public rather than institutional “whales,” Bloomberg ETF analyst Eric Balchunas concludes, as 50,000 individual transactions hit the tape, compared to roughly 500 on Friday. "[I] still haven't figured out what happened," Balchunas said on the X social media site, speculating that social media coordination may have spurred the "retail army" into collective action.
A foundational piece of the meme stock edifice, meanwhile, prepares for its star turn in fitting fashion. The Wall Street Journal reports that social media platform Reddit will earmark share allocations to some 75,000 of its most prolific users ahead of its planned March IPO.
Such a strategy would mark a departure from convention, the WSJ notes, as investment banks in an IPO syndicate typically seek larger shareholders with a long-term orientation rather than individuals, who “are viewed as more fickle, and prone to selling at the first sign of weakness.”
Then again, such a contrarian move is in keeping with the corporate brand. “I want our users to be shareholders, and I want our shareholders to be users,” Reddit CEO Steve Huffman declared back in 2021.
A late rebound helped stocks narrow their losses to 0.4% on the Nasdaq 100 ahead of this afternoon’s Nvidia report (the chipmaker advanced some 6% as of 4:40pm eastern time after posting expectations that largely topped sell-side consensus). Treasurys had no such luck following a weak 20-year auction this afternoon, with the 2-year note settling at 4.64% and the long bond at 4.49%, each up five basis points on the session. WTI crude bounced back above $78 a barrel, gold finished flat at $2,024 per ounce and the VIX held north of 15.
- Philip Grant
Horseshoes, hand grenades and monetary policy? Here’s Bank of England governor Andrew Bailey delivering a dovish message to the Parliament’s Treasury Committee Tuesday:
We don’t need, obviously, inflation to come back to target before we cut rates. I must be very clear on that, that it’s not necessary.
Headline and core CPI in the United Kingdom advanced at 4% and 5.1% annual clips in January, respectively, with each registering near their lowest growth levels of the past two years but remaining well above the BoE’s 2% target.
It's splitsville in the junk bond market, as investors increasingly shun the most speculative borrowers in hopes of finding firmer financial ground. Thus, spreads on the triple-C-rated portion of the ICE BofA High Yield Index reached 928 basis points over Treasurys Friday, up 78 basis points from the final trading session of 2023.
Conversely, average spreads at the double-B rating threshold, i.e. near the pinnacle of junk, reached 199-basis points on Friday, down from more than 300-basis points in late October to mark the slimmest pickup over Treasurys since the bug barged in.
“Our view is that for reasonably high-quality businesses, there will be interesting ways to access capital,” Ed Testerman, partner King Street Capital, told the Financial Times yesterday. “[But] for the lowest quality companies, there will be fewer options at their disposal, which may drive more defaults.”
Indeed, the tally of such marginal borrowers unable to punch the credit ticket remains elevated. Global speculative-grade corporate defaults registered at 14 in January, data from S&P Global show, well above the long-term monthly average of nine and marking the busiest January since 2010. At the same time, new financing activity within the most speculative junk cohort remains sparse, as triple-C-rated borrowers raised just $2.96 billion in bonds last year, off 79% from 2022 to mark the weakest annual pace of issuance since 2008.
Creditors in firms forced to restructure have been obliged to endure outsized financial pain of late. Recovery rates for defaulted domestic high-yield issues averaged just 33 cents on the dollar in 2023, data from JPMorgan Chase & Co. show, down from roughly 50 cents on the dollar over the prior two years and an average 40 cent recovery rate since Y2K.
On the bright side for issuers in the bottom of the martini shaker facing that bitter cocktail of dour price action, limited financing activity and soft recovery rates, misery loves company. Thus, S&P Global’s count of so-called weakest links, or U.S. firms sporting a single-B-minus rating or lower along with a negative ratings outlook, reached 228 as of last week, up 19% from early last year.
More broadly, some 40% of debt tracked by the Bloomberg U.S. High Yield Index now features a rating in the single-B tier, strategists from Barclays led by Bradley Rogoff found earlier this month, nearly matching the 45% of the market sporting a stronger, double-B imprimatur. As of late 2021, those figures were 34% and 52%, respectively. Triple-C, meanwhile, accounts for 14.4% of the junk gauge, up from 12.2% in December 2021, “Index quality is beginning to deteriorate,” Rogoff et al. conclude.
Stocks remained under moderate pressure ahead of tomorrow afternoon’s lynchpin Nvidia earnings print, with the S&P 500 and Nasdaq 100 retreating by 0.6% and 0.9%, respectively. Treasurys enjoyed firmer footing as 2-year yields ticked lower by five basis points to 4.59% and the 10-year note settled at 4.27% from 4.3% Friday, WTI crude pulled back to $77 a barrel and gold edged higher to $2,024 per ounce. The VIX climbed above 15 to mark its second-highest close of 2024.
- Philip Grant
Necessity is the mother of invention: Vornado Realty Trust is looking far afield as it considers options for the demolished Hotel Pennsylvania site in midtown Manhattan, as promotional brochures produced by the company depict tennis and basketball courts, along with a concert venue and a large tent suitable for hosting events such as New York Fashion Week, Crains New York relays. The vacant 80,000 square-foot property, which sits across the street from Madison Square Garden and Penn Station, was earmarked for office use before the developer called an audible in 2022.
As that eye-catching bulletin suggests, rough sledding in the commercial real estate realm continues apace. Vornado CEO Steven Roth lamented a “total blacklisting of office in the capital markets,” last Tuesday as the Federal Reserve’s aggressive, belated post-Covid tightening cycle has ratcheted borrowing costs higher and crimped refinancing activity, while the rise of remote work hinders demand.
The share of office commercial mortgage-backed-security debt classified as distressed (i.e, more than 30 days past due or loans which have been transferred to a special servicer) reached 10.5% at the end of January, data from CRED iQ show, more than triple the tally seen a year ago.
Steep valuation declines can be expected to follow for those troubled assets, as a collection of office properties tracked by Cred iQ that were reappraised by a special servicer last year saw a near 50% markdown on average. “We will continue to see upticking levels of distress,” Omar Eltorai, director of research at Altus Group, predicts to Bloomberg. “It’s one of those variables that you can call early, but there’s a delay before it [manifests].”
An aggressive cadence of debt maturities adds further urgency to the dynamic, as most commercial mortgages are non-amortizing, obliging the non-delinquent borrower to either refinance or pay in full. Upwards of $1 trillion in commercial property debt is set to come due by the end of next year, data firm Trepp finds, with that figure set to reach $2.2 trillion by December 2027. For context, $541 billion fell due during 2023 – itself a record.
Risks of further pain in the sector are widespread, as those obligations are held by banks, asset managers, pension funds and life insurance companies around the world. Yet the composition of vulnerable debt on lender balance sheets is difficult to ascertain, as the fragmented and relatively opaque CRE market largely lacks granular property-by-property ownership data. “We know it’s a problem, but its hard to precisely state to what degree across lenders,” Rich Hill, senior vice president of real estate investment at Cohen and Steers, told The Wall Street Journal.
One thing’s for sure, the ranks of encumbered property players impatiently await monetary salvation from the Federal Reserve. “I think if interest rates go down, which they’re supposed to, some of these guys are going to skate through this, narrowly,” Nicole Schmidt, managing partner at Oberon Securities, told Bloomberg last week. “For commercial real estate, rate cuts can’t come soon enough,” Matthew Anderson, managing director at Trepp, likewise concluded to the WSJ in January.
What day is it again? Stocks ticked lower by 0.5% Friday on the S&P 500 (major indices in Europe and Japan each settled slightly lower Monday) with Treasurys likewise coming under pressure as 2- and 30-year yields settled at 4.64% and 4.45%, respectively, up eight and three basis points on the session. WTI crude held just above $78 a barrel, gold ticked to $2,018 per ounce and the VIX rose to near 15.
- Philip Grant