What we’re reading (2/26)
“ESG And Alpha: Sales Or Substance?” (Institutional Investor). “Trillions of dollars are now invested in light-green ESG funds, and there is little evidence that they will deliver planetary impact or the promised higher returns. What harm will this do?”
“The Case For Bitcoin As ‘Digital Gold’ Is Falling Apart” (CNBC). “With inflation at historic highs, you’d expect this would be bitcoin’s time to shine — U.S. consumer prices last month rose the most since February 1982, according to Labor Department figures. Instead, the cryptocurrency has lost almost half of its value since reaching an all-time high of nearly $69,000 in November. That’s led analysts to question whether its status as a form of ‘digital gold’ still rings true.”
“What Would Paul Volcker Do?” (The Hill). “Volcker would quickly surmise that inflation is undesirably high, similar to the inflation of the late 1960s but less severe than the late 1970s. The Fed would be required to tighten monetary policy — raising rates and unwinding a portion of the Fed’s balance sheet — but by how much? Volcker would keep his eye on the Fed’s longer-run objective of low inflation as the foundation for sustained economic expansion and maximum employment. He would apply lessons learned from the past, in both policies and communications.”
“Russia's War And The Global Economy” (Nouriel Roubini, Project Syndicate). “A major risk now is that markets and political analysts will underestimate the implications of this geopolitical regime shift. By the close of the market on February 24 – the day of the invasion – US stock markets had risen in the hope that this conflict will slow down the willingness of the US Federal Reserve and other central banks to raise policy rates. But the Ukraine war is not just another minor, economically and financially inconsequential conflict of the kind seen elsewhere in recent decades. Analysts and investors must not make the same mistake they did on the eve of World War I, when almost no one saw a major global conflict coming. Today’s crisis represents a geopolitical quantum leap. Its long-term implications and significance can hardly be overstated.”
“Ukraine Could Turn Boomflation Into Stagflation” (Axios). “Russia's invasion of Ukraine creates a new wrench in the gears of the global economy that will simultaneously worsen inflation pressures and damage growth prospects. That makes it a stagflationary shock, essentially making things worse on all economic fronts at once.”
What we’re reading (2/25)
“Putin’s Ukraine Slaughterhouse” (Wall Street Journal). “Ukraine’s forces are putting up brave resistance despite being overwhelmed in firepower. One soldier sacrificed himself to blow up a bridge to stop a Russian tank column. Another offered an expletive to a Russian gunboat demanding surrender before he and a dozen others were killed by shelling. Europe and the U.S. should be ashamed for not doing more to help Ukrainians defend themselves.”
“Russian Forces Advance On Kyiv” (The Economist). “‘Moscow’s thinking on this war seems to have been coloured by war optimism,’ says Michael Kofman of cna, a research group. ‘It looked as though Russian forces were expecting a quicker [Ukrainian] military collapse and easier gains.’ British defence intelligence said that it was unlikely that Russia had achieved its ‘its planned Day 1 military objectives’, noting that “Ukrainian forces have presented fierce resistance across all axes of Russia’s advance.”
“U.S. To Impose Sanctions On Vladimir Putin And Top Aide, White House Says” (CNBC). “The United States will impose a slate of sanctions on Russian President Vladimir Putin and Foreign Minister Sergey Lavrov, the White House announced Friday. The United Kingdom and the European Union had announced similar sanctions earlier in the day. Putin and Lavrov join a growing list of elite Russian government officials the U.S. has sanctioned in response to Russia’s actions in Ukraine.”
“Sanctions And Consequences” (DealBook). “The conflict has whipsawed markets as governments impose more sanctions and companies scramble to ensure the safety of workers in the region. The initial fall in stocks and rise in energy prices after Russia’s invasion has moderated, but the world remains on edge as the broader geopolitical implications of the war take shape.”
“Russian Billionaires Lose $39 Billion In A Day On Ukraine Attack” (Bloomberg). “The damage was across asset classes. Russia’s benchmark MOEX Russia Index closed 33% lower in Moscow, the fifth-worst plunge in stock market history in local currency terms. It marked the first time since 1987’s Black Monday crash that a decline of that magnitude hit a market worth more than $50 billion.”
What we’re reading (2/24)
“Russia's Attack On Ukraine Means These Prices Are Going Even Higher” (CNN Business). “Economists are racing to assess the impact of the attack, which could spark the biggest war in Europe since 1945. The conflict is unlikely to tip the global economy back into recession, they say, but market tumult, the threat of punishing sanctions and potential supply disruptions are already pushing up the wholesale price of energy and some agricultural products. Consumers will pay more for gasoline and food as a result.”
“A Simple Model Of What Putin Will Do For An Endgame” (Marginal Revolution). “In my simple model, in addition to a partial restoration of the empire, Putin desires a fundamental disruption to the EU and NATO. And much of Ukraine is not worth his ruling. As things currently stand, splitting Ukraine and taking the eastern half, while terrible for Ukraine (and for most of Russia as well), would not disrupt the EU and NATO. So when Putin is done doing that, he will attack and take a slice of territory to the north. It could be eastern Estonia, or it could relate to the Suwalki corridor, but in any case the act will be a larger challenge to the West because of explicit treaty commitments. Then he will see if we are willing to fight a war to get it back.”
“Putin’s Attack On Ukraine Echoes Hitler’s Takeover Of Czechoslovakia” (Washington Post). “In March 1938, during the run-up to World War II, Hitler had first engineered the Nazi takeover of Austria, which already had strong pro-Nazi sympathies. Seven months later, he was plotting the seizure of part of Czechoslovakia, claiming that ethnic Germans in the Sudeten regions bordering eastern Germany were being mistreated.”
“Russia-Ukraine Crisis Shakes Markets, But Long-Term Outlook Is Better” (New York Times). “Riding out a storm in the stock market has been a good strategy over the long term. One year after the 1941 bombing of Pearl Harbor, the S&P 500 gained 15 percent. A year after the U.S. invasion of Iraq in 2003, it was up 35 percent. History shows that just one year after most stock-market-shattering crises, the S&P 500 stock index has risen.”
“Citadel Is Further Paring Back $2 Billion Melvin Investment” (Wall Street Journal). “Citadel LLC is further paring back its $2 billion investment in Melvin Capital Management after the hedge fund stumbled in its effort to recover from a near collapse triggered by surges in GameStop Corp. and other ‘meme stocks’ early last year.”
March picks available soon
We’ll be publishing our Prime and Select picks for the month of March before Tuesday, March 1 (the first trading day of the month). As always, we’ll be measuring SPC’s performance for the month of February, as well as SPC’s cumulative performance, assuming the sale of the February picks at the closing price (at the mid-point of the closing bid and ask prices) on the last trading day of the month (Mon., February 28). Performance tracking for the month of March will assume the March picks are bought at the open price (at the mid-point of the opening bid and ask prices) on the first trading day of the month (Tuesday, March 1).
What we’re reading (2/23)
“Putin Goes To War In Ukraine” (The Economist). “Russia was not threatened by NATO or Ukraine. Its invasion of the sovereign state next door is a war of choice, conjured out of nothing by Mr Putin. History will judge him harshly. If, after a rapid advance, Russia is drawn into a long-lasting partisan war, so will the Russian people.”
“Russian Military Operation in Ukraine Roils Markets” (Wall Street Journal). “Investors rushed for safety, pushing down stocks and lifting the prices of oil, gold and government bonds, after Russia launched a military operation in Ukraine and a Ukrainian official said, ‘The invasion has begun.’”
“How Markets Are Thinking About The Ukraine Battle Lines” (DealBook). “Energy markets are on edge. Crude oil futures are down slightly from yesterday, given that the initial round of sanctions didn’t directly hit Russian energy producers, aside from Germany pausing certification of a major gas pipeline. But oil remains near $100 a barrel, reflecting fears that a prolonged crisis could damage the global supply; analysts say oil could easily rise another $20 a barrel, reaching levels last seen a decade ago. (It’s worth noting that roughly one in 12 barrels that the U.S. imports comes from Russia.)”
“Oil Hits $100, US Stock Futures Slide After Putin Announces Military Operation In Donbas” (CNN Business). “Brent crude oil hit $100 a barrel and stock futures fell sharply late Wednesday after blasts were heard in Ukraine and Russian President Vladimir Putin announced a military operation in Donbas.”
“Ukraine Conflict: President Zelensky Warns Russia: We Will Defend Ourselves” (BBC). “‘As you attack, it will be our faces you see, not our backs,’ the Ukrainian president said.”
What we’re reading (2/22)
“The Economic Stakes Of The Ukraine Crisis” (DealBook). “The global economic implications of the conflict remain hard to figure, with Western sanctions on Russia potentially ramping up in response to how far and how aggressively its troops push into Ukraine. Stock markets fell sharply and the price of commodities like oil soared in early trading today, but these moves moderated in the [later] hours, as investors tried to assess what it all means.”
“Heavily Hedged Traders Have Been Awaiting A Stock-Market Storm” (Bloomberg). “Whatever happens in Ukraine or how it affects Federal Reserve policy, the outcome will land in markets where investors have had time to prepare for the worst. It may be one reason the worst has so far been avoided. They’ve been steadily boosting bets against equities, shaking off a reluctance to short tracing to last year’s meme stock upheaval. Bearish bets on the largest exchange-traded fund tracking the S&P 500 have surged, while put open interest on bond-focused products has risen to historic levels. Meanwhile, professional managers have been hedging their credit exposures.”
“Why This Economic Boom Can’t Lift America’s Spirits” (Wall Street Journal). “[C]onsumers say they feel as bad as they did in the financial-crisis year of 2009, a recent Gallup poll showed. For the first time, Americans who say they are ‘not too happy’ outnumber those who say they’re ‘very happy,’ according to a survey from the nonprofit group NORC at the University of Chicago.”
“Bitcoin Losing Out To Gold Has Analysts Eyeing $30,000 Level” (Bloomberg). “Bitcoin traded near a more than two-week low as fears of a possible Russian invasion of Ukraine prompted some analysts to predict the largest cryptocurrency could slide toward the key $30,000 level.”
“The Chip Shortage Is So Bad GM Dropped Heated Seats In Winter” (CNBC). “General Motors had to temporarily drop heated seats as an option on vehicles in response to the chip shortage. But the largest U.S. automaker is not alone. The move is another sign of how automakers are having to respond to a crisis that has been cratering dealer inventory, spiking prices and delaying orders.”
What we’re reading (2/21)
“Rouble Sinks, Stocks Plunge As Russia Recognises Ukraine Breakaway Regions” (Reuters). “The rouble tanked on Monday, slipping past 80 against the dollar, while stocks plunged to their lowest in over a year as Russian President Vladimir Putin called for the immediate recognition of two breakaway regions in eastern Ukraine.”
“Dow Futures Drop More Than 400 Points As Tensions Between Russia And Ukraine Brew” (CNBC). “Stock futures fell sharply on Monday night, as traders continue to monitor brewing tensions between Russia and Ukraine. Futures tied to the Dow Jones Industrial Average were down by 476 43 points, or 1.4%. S&P 500 futures slid 1.7%, and Nasdaq 100 futures were off by 2.2%. The U.S. stock market was closed Monday due to the President’s Day holiday. Oil prices rose, with West Texas Intermediate futures jumping 3.6% to $94.30 per barrel.”
“JPMorgan Strategists Say Stock Pessimism Is ‘In Vogue,’ But Wrong” (Yahoo!Finance). “‘We believe one should look through the widespread ‘slowdown’ calls that are currently in vogue, and stay bullish on banks, mining, energy, insurance, autos, travel and telecoms,’ [JPMorgan Chase & Co. strategist Mislav] Matejka and his team wrote in a note on Monday. Over the past six months, and in direct contrast to bearish predictions, ‘the internals became more bullish again,’ they said.”
“Is There A Way Out Of America’s Impossible Housing Mess?” (Slate). “It’s not surprising that there are restrictive zoning rules in lots and lots of localities because that’s what current voters want. And their elected officials are essentially providing policies that respond to their voters. Moving things up to the state level offers some opportunities to make things better because the state sees the larger picture, particularly for things like regional labor markets.”
“Peloton’s New C.E.O. On The Tough Road Ahead” (DealBook). “At Peloton, Mr. McCarthy’s immediate task is to right the ship — the company’s chief financial officer said it wanted to save at least $800 million annually, on the same day Peloton announced it would lay off 20 percent of its corporate work force. But he also needs to fend off constant sale speculation, curtail frequent leaks and determine a postpandemic strategy.”
What we’re reading (2/20)
“The Stock Market Is Lower Priced, But It Isn't Cheap” (Briefing.com). “The stock market is sporting its lowest forward 12-month P/E multiple in nearly two years, yet that doesn't necessarily mean that it's ‘cheap.’ On the Contrary[,] [w]hen 2022 began, the S&P 500 was trading at 21.3x forward 12-month earnings. Today it trades at 19.2x forward 12-month earnings. Sounds like a nice discount, yet it is still a premium to the 5-year average of 18.6x and the 10-yr average of 16.7x.”
“Mohamed El-Erian Details ‘Fundamental Change To The Marketplace’ As The Fed Moves” (Yahoo!Finance). “‘When... the most reliable buyer with its own printing press and an incredible willingness to buy – when they step out of the market, that is a fundamental change to the marketplace,’ Mohamed El-Erian, president of Queen’s College at Cambridge University and Chief Economic Advisor at Allianz, told Yahoo Finance Live this week…‘So it shouldn't come as a surprise that [stock prices] are lower, because $120 billion a month of asset purchases are disappearing.’”
“Members Of Congress Should Not Be Trading Stocks, Ever” (New York Times). “It has been a decade since Congress last made a significant effort at policing itself in this area. The Stock Act of 2012, among other measures, made it illegal for lawmakers to trade based on access to nonpublic information. The reforms were well intentioned but inadequate. In practice, there are too many legal shades of gray. A clearer, brighter line needs to be drawn.”
“Carl Icahn Nominates Two To McDonald’s Board” (Wall Street Journal). “At issue is McDonald’s suppliers’ use of so-called gestation crates, which are small cages used to constrain pregnant pigs. In 2012, McDonald’s pledged to stop buying pork by 2022 from producers who use the crates. Few knew at the time that Mr. Icahn quietly had pushed for the changes behind the scenes. Now, 10 years later, Mr. Icahn and the Humane Society are arguing that McDonald’s failed to follow through and changed its interpretation of the pledge. McDonald’s now often has its producers move pigs out of the containers only after confirming they are pregnant, which many wait to do so until the sows are four to six weeks into their 16-week pregnancies.”
“Family Behind Fatburger Under Investigation For Alleged Fraud, Money Laundering, Records Show” (Los Angeles Times). “Federal authorities have been investigating Andrew Wiederhorn, chief executive of the company that owns the Fatburger and Johnny Rockets restaurant chains, and examining one of his family member’s actions as part of an inquiry into allegations of securities and wire fraud, money laundering and attempted tax evasion, court records show.”
What we’re reading (2/19)
“Crypto Will Devour The Stock Market” (RiskHedge). “ALL stocks will move onto a blockchain in the next few years. You won’t be buying Apple ‘stock’ on the NYSE anymore. You’ll be trading Apple ‘tokens’ on a blockchain…[t]okenized stocks are just getting started on places like FTX today. Barely anyone has heard of them. A decade from now, hundreds of billions of dollars of tokenized stocks will trade hands each day.”
“Here’s Why A Whole Group Of Men Is Being Overlooked In The Workforce” (CNN Business). “Criminal records are keeping certain workers from finding good jobs. This is particularly true of men in their 30s. More than half of that group has a history of criminal conviction or arrest that keeps them from fully participating in the labor market, a study from nonprofit research group RAND Corporation released Friday found. As of January, just over one million men between the ages of 24 and 35 were counted as unemployed, the biggest group of jobless males, according to the Bureau of Labor Statistics.”
“Gas-Station ATMs Are A Banking Battleground” (Wall Street Journal). “Banks are cutting off small-business owners who run the independent ATMs found in America’s gas stations, bars and bodegas. ATM operators say it is getting harder to find a bank willing to hold the funds needed to keep their machines stocked with cash. The banks that will work with them, ATM operators say, are jacking up their fees.”
“After Expanding In 2021, Fast Fashion May Be Squeezed Again” (The Economist). “Fashion retailers’ success last year was driven by unusual circumstances that will not last. Pent-up demand triggered a wave of “revenge buying” when shops reopened at last, in particular for “occasion wear” (jargon for pricey stuff). Shoppers’ pockets were lined with infusions of government cash. And the pandemic was the final nail in the coffin for some weaker firms, reducing competition in the crowded market; Topshop, Laura Ashley and tm Lewin went under in Britain, and Ann Taylor, Brooks Brothers and J. Crew did in America.”
“It Has Stopped Being A Good Thing To Be Friends With Morgan Stanley’s Block Trading Head” (Dealbreaker). “For the most part, it’s great to be on an equity syndicate desk chief’s Rolodex, especially if that chief is running the block trades at Morgan Stanley…It's less great to be on said equity syndicate desk chief’s Rolodex, however, when the powers that be decide that block trading may be insider-trading, and that Rolodex gets subpoenaed and the conversations flowing from it get picked over by prosecutors and the Securities and Exchange Commission.”
What we’re reading (2/17)
“Value Stocks Are Back — At Least For Now” (Institutional Investor). “In January, value subfactors outperformed the U.S. market by an average of nearly 3 percent, ‘some of the highest outperformance [we’ve seen] on a monthly basis for factors,’ according to the latest factor performance report by Investment Metrics. Meanwhile, only one growth subfactor — dividend growth — slightly beat the market in January.”
“The Inflation Hedges Haven't Hedged” (Morningstar). “[One] interpretation is that although inflation’s arrival caught market forecasters unawares, it did not surprise investors. They did not know when inflation would surface, any more than did the forecasters, but they knew that sooner or later, the bad news would arrive. Consequently, they had already bid up the prices of inflation hedges. Thus, when inflation did appear, gold and TIPS failed to react, because their values already anticipated the event.”
“Fed's Bullard Repeats Call For 1 Percentage Point In Rate Increases By July 1” (Reuters). “‘We are missing our inflation target on our preferred measure... and policy is still at rock bottom lows and we’ve still got asset purchases going on,’ Bullard said in a television interview with CNN. ‘This is a moment where we need to shift to less accommodation.’”
“Infinity Q Investment Adviser Faces Securities Fraud Charges” (Wall Street Journal). “Federal prosecutors charged James Velissaris, the former chief investment officer of Infinity Q Capital Management, on Thursday with securities fraud and obstruction of justice following the collapse of the investment firm…Prosecutors said he orchestrated a massive scheme to inflate the value of securities in his portfolio at Infinity Q. The Securities and Exchange Commission and Commodity Futures Trading Commission also filed civil complaints against Mr. Velissaris, saying he inflated the value of assets at the firm by more than $1 billion.”
“Mortgage Rates Jump To Nearly 4%” (CNN Business). “Mortgage rates increased again, rising to a level not seen since summer 2019. The 30-year fixed-rate mortgage averaged 3.92% in the week ending February 17, up from 3.69% the week before, according to Freddie Mac. It has not been this high since May 2019 when it was at 3.99%.”
What we’re reading (2/16)
“Fed To Raise Rates 25 Bps In March But Calls For 50 Bps Grow Louder” (Reuters). “The U.S. Federal Reserve will kick off its tightening cycle in March with a 25-basis-point interest rate rise, a Reuters poll of economists found, but a growing minority say it will opt for a more aggressive half-point move to tamp down inflation…now that the economy has recovered its pre-pandemic level, all 84 respondents in a Reuters poll taken Feb. 7-15 expected the Fed to raise the federal funds rate by at least 25 basis points at its upcoming March 15-16 meeting.”
“Note to the Federal Reserve: Don’t Panic About Inflation” (The New Yorker). “Contrary to what many people seem to believe, the Fed doesn’t have a magic wand to bring down inflation quickly and painlessly. It can’t unclog the ports, procure more semiconductors, or persuade millions of Americans who have dropped out of the labor force during the pandemic to return to work….[w]hat the Fed does have the capacity to do fairly quickly, if it gets things wrong, is crash the housing market, the stock market, and the economy.”
“Financial Issuers Are Storming The Bond Market With Floating-Rate Sales” (Bloomberg). “Large banks are tapping the investment-grade bond market in droves, selling floating-rate securities that are in high demand as the Federal Reserve prepares to raise interest rates…[t]he sales come as rapidly rising Treasury yields have caused steep losses for longer-duration bonds. That’s driving investors toward debt that pays interest that can increase, an appealing quality as the Fed looks ready to hike rate beginning in March.”
“Expect A Return To More ‘Normal’ Investing Where Stock Picking Is Rewarded, Goldman Sachs Says” (CNBC). “‘We believe that we are entering a new environment where the influence of technology is rapidly broadening to impact virtually every industry,’ [Paul Oppenheimer] the [Chief Global Equity] strategist [at Goldman Sachs] said. ‘Moving forward it will become less easy to differentiate between what is and what is not a technology company, and this should broaden out the opportunities across more sectors.’”
“Charlie Munger Expects Index Funds To Change The World—And Not In A Good Way” (Wall Street Journal). “Charlie Munger doesn’t think Larry Fink should be running the world. Mr. Munger, the billionaire vice chairman of Berkshire Hathaway Inc. and Warren Buffett’s business partner, said the rise of index funds like those run by Mr. Fink’s BlackRock Inc. has resulted in an ‘enormous transfer’ of the power to sway corporate decision making. That shift will ‘change the world,’ he said, and not for the better.”
What we’re reading (2/14)
“Fed’s Bullard Says The Central Bank’s ‘Credibility Is On The Line,’ Needs To ‘Front-Load’ Rate Hikes” (CNBC). “Bullard rattled markets last week by saying he thinks the Fed should raise its benchmark short-term borrowing rate a full percentage point by July. The position, in a Bloomberg News interview, sent stocks on a volatile ride and caused futures markets to price in as many as seven quarter-percentage point hikes by the end of 2022.”
“Junkiest Debt Acts Like Treasuries As Fed Risk Stirs Up Markets” (Bloomberg). “It’s become tough to love bonds these days as investors face the harsh reality of a more hawkish Federal Reserve. Yet, the junkiest junk bonds are holding up relatively well -- a sign that, for all the angst in markets nowadays, investors aren’t very worried about the state of the economy.”
“Regulators Probe Block Trading At Morgan Stanley, Goldman, Other Wall Street Firms” (Wall Street Journal). “Federal investigators are probing the business of block trading on Wall Street, examining whether bankers might have improperly tipped hedge-fund clients in advance of large share sales, according to people familiar with the situation.”
“A Dark Moment For Goldman Sachs Goes To Trial” (DealBook). “Ng is said to have introduced Goldman colleagues to Jho Low, the businessman accused of masterminding what Ng’s own lawyers called ‘perhaps the single largest heist in the history of the world.’ According to prosecutors, Low, Ng and the onetime star banker Tim Leissner conspired to pay $1 billion in bribes to government officials, in order to win Goldman mandates for $6.5 billion in bond offerings for 1MDB. Money meant for the fund was then spent on a Beverly Hills hotel, a mega-yacht, a transparent grand piano, financing for ‘The Wolf of Wall Street’ and more.”
“The Downfall Of The SPAC: Why One CEO Called It Quits And More Will Follow” (Fortune). “With tech stocks performing poorly on the Nasdaq and interest rates on the rise, the number of IPO filings has, unsurprisingly, skidded to a halt.”
What we’re reading (2/13)
“Fed Rush To Catch Up On Inflation Raises U.S. Recession Risks” (Bloomberg). “Economists from both sides of the political spectrum see rising risks of a recession. Former Fed Governor Lawrence Lindsey, who served in the White House under Republican President George W. Bush, puts the odds of a downturn by the end of next year at above 50% -- triggered by a meltdown on Wall Street.”
“Inflation Is Everywhere, Including Places You Might Not Expect” (Wall Street Journal). “A Wall Street Journal analysis of 280 companies that had reported quarterly earnings as of Feb. 4 showed that 79% had some discussion of inflation in their conference calls. For some companies, the increased costs are contractual. Marlboro cigarette maker Altria Group Inc. expects that inflation will increase the amount it pays from a 1998 landmark tobacco settlement, it said last month. The settlement hit cigarette makers with legal liabilities that led to $200 billion in costs over the years.”
“Car Dealers Are Raising Prices. Automakers Are Pushing Back. Consumers Are Stuck In Between.” (Washington Post). “Ford and General Motors recently upbraided dealers for ignoring the manufacturer’s suggested retail price, or MSRP, a practice that was practically unheard of a year ago and GM calls “unethical.” They’ve threatened to withhold deliveries of their most popular offerings, including Ford’s buzz-generating F-150 Lightning pickup, and other forthcoming electric vehicle models.”
“Investors Appear Poised to Continue Private Credit Allocations, Data Shows” (Institutional Investor). “Virtual data room provider SS&C Intralinks polled 111 investors, 60 percent of whom had more than $1 billion in assets under management, about their views on the debt capital markets. The results showed that these investors are increasing allocations to the debt market generally — not just to private credit. The investors polled included family offices, pension funds, and insurers, among others.”
“The Risks And Rewards Of Investing In The Metaverse Real Estate Boom” (CNBC). “There’s a land rush happening — and it’s not in New York City or Beverly Hills. Early speculators, professional real estate agents, and celebrities are buying up land that doesn’t even exist in the real world. They are investing in metaverse real estate, a concept mind-boggling to most people.”
What we’re reading (2/12)
“After The Great Resignation, Tech Firms Are Getting Desperate” (Wired). “Amazon, PayPal, Intel, and Pinterest acknowledged that rejecting remote work will cost them dearly in the fight for talent, particularly as Facebook, Twitter, and Shopify have made it the norm. In Japan, where remote working still isn’t common, Yahoo has announced employees can work from anywhere in the country and it will pay for their flights if they ever need to come into the office.”
“Deals Are Booming, But Antitrust Scrutiny Has Deal Traders Worried” (Wall Street Journal). “Merger-arbitrage traders seek what is supposed to be safe money: They buy shares after deals are announced, hoping to capture the final bit of upside when the transaction closes. Delays associated with antitrust challenges hinder their ability to make a quick return, and hedging strategies run up their costs.”
“We Found The Real Names Of Bored Ape Yacht Club’s Pseudonymous Founders” (Buzz Feed). “Artistic value aside, the people behind BAYC are courting investors and running a business that is potentially worth billions.”
“Systemic Risk Regulation And The Myths Of The 2008 Financial Crisis” (Cato Institute). “In general, the large increase in securitization—issuing securities whose value is tied to pools of other assets, such as mortgages or consumer loans—that started in the late 1980s was driven primarily by [regulated commercial] banks. In 2012, a Federal Reserve report affirmed that ‘banks are by far the predominant force in the securitization market,’ and that banks were ‘a significant force in these shadow banking segments related to securitization all along.’”
“Is The Modern, Bank-Light Financial System Better Than The Old One?” (The Economist). “Robert Shiller of Yale University, who won a Nobel prize for his work on financial bubbles, sees parallels with the go-go years before the crash of 1929. Back then, ‘there was an explosion of fun things to do with stocks. I think we’re in a similar situation now.’ According to Mr Shiller’s surveys, over the past year the share of individual investors who think the market is overpriced has been higher than at any point since the turn of the millennium, before the dotcom bubble burst…[y]et at the same time their belief that stocks will rally if there is ever a fall has never been so high. This contradictory combination of fear of overvaluation and fear of missing out mirrors the dynamic in 1929.”
What we’re reading (2/11)
“Stocks Slide And Oil Surges On Renewed Fears Of Russia Invasion Of Ukraine” (CNN Business). “Stocks fell sharply Friday after the White House said Americans should leave Ukraine "immediately" due to worries about an imminent invasion by Russia. The Dow Jones Industrial Average fell a little more than 500 points, or 1.4%, after the Biden administration said it would be ready to respond if Russia invades. The S&P 500 and Nasdaq ended the day down 1.9% and 2.8%, respectively.”
“Fed Should Hold Immediate Meeting To End Asset Purchases, Summers Says” (Bloomberg). “‘The Fed should have a special meeting, right now, to end QE,’ Summers told Bloomberg Television’s ‘Wall Street Week’ with David Westin. ‘It is nothing short of preposterous that in an economy with 7.5% inflation, that in an economy with the tightest labor market we’ve seen in two generations, that the central bank is still as we speak growing its balance sheet.’”
“The Trouble With A Stock-Market Bubble” (Wall Street Journal). “We don’t have as much of the past as it seems. Prof. Shiller’s 10-year averages begin in 1881, providing only 14 nonoverlapping 10-year periods (1881 to 1890, 1891 to 1900, 1901 to 1910, and so on). What feels like such a long historical vista, then, is a small sample, full of noise. Yes, on average, stocks have delivered low future returns for 10-year stretches after their CAPE valuation was high, and superior performance after periods of low valuation—but not always.”
“Elizabeth Holmes Is the Exception: More Women On Boards Lead To Less Corporate Wrongdoing” (ProMarket). “Our forthcoming study…provides empirical evidence of the positive effects on corporate behavior of gender balancing in the boardroom. We examined 660 public corporations listed on the Tel Aviv Stock Exchange (TASE) between 2005 and 2017. During that period, the corporations or their top executives were involved in a total of 149 criminal or administrative violations of the law. Our analysis shows that corporations with a higher representation of women on the board were significantly less likely to be involved in corporate wrongdoing.”
“What Happens If A Cryptocurrency Exchange Files For Bankruptcy?” (Credit Slips). “[W]hat happens to a customer if an exchange files for bankruptcy? I think it ends very badly for the customers…I do not think customers understand the legal nature of the custodial relationships, and exchanges have no incentive to make the legal treatment clear to customers. In fact, the exchanges are lulling the consumers with language claiming that the consumer ‘owns’ the coins, when in fact the legal treatment is quite likely to be different in bankruptcy. In bankruptcy, it is likely to be treated as a debtor-creditor relationship, not a custodial (bailment) relationship. That means that customers are taking on real credit risk with the exchanges, which is a particular problem because of the opacity of the exchanges and their lack of regulation.”
Tell me the stock market is pretty efficient without telling me the stock market is efficient
From the WSJ:
Affirm closed down 21% at $58.68, a huge reversal from its performance earlier in the day, after the company accidentally tweeted some key quarterly results early. At one point, shares were up more than 12% at nearly $84…Investors initially cheered the abbreviated results, which seemed to punctuate Affirm’s breakout year [disclosing a 77% quarterly revenue jump and a big increase in transaction volume]…Investors were less impressed after they saw the full report, sending the shares down as much as 33% in afternoon trading. The company reported a wider loss in the latest quarter, and analysts raised concerns about the company’s profit margins and financial guidance.
What we’re reading (2/10)
“America's Annual Price Increase Was Worse Than Economists Had Forecast” (CNN Business). “A key measure of inflation climbed to a near-40-year high last month. Economists are hopeful that America will reach the peak of the pandemic-era price increases in the early months of 2022. Here's to hoping. The consumer price index rose 7.5% in the 12 months ending January, not adjusted for seasonal swings, the Bureau of Labor Statistics said Thursday. It was the steepest annual price increase since February 1982 and worse than economists had forecast.”
“Astra Stock Drops 26% After NASA Mission Fails Mid-Launch” (CNBC). “Shares of rocket builder Astra fell sharply Thursday, after the company’s latest mission failed to reach orbit. Astra’s stock fell 26% to close at $3.91 a share. The company confirmed there was an issue mid-flight that prevented the rocket from delivering a set of four cube satellites to orbit on a NASA-funded mission.”
“Brookfield Considers Spinning Off Its Asset Management Business” (Financial Times). “Brookfield Asset Management, one of the world’s largest alternative investment groups, is weighing a spin-off of its asset management business into a separate public company that one analyst said could be valued at more than $75bn. The manoeuvre would simplify the structure of the sprawling Toronto-based company, separating the division that manages $364bn in fee-bearing assets across real estate, infrastructure, renewable energy, credit and private equity on behalf of institutional investors from Brookfield’s $50bn of directly-owned net assets.”
“What Would Happen If Financial Markets Crashed?” (The Economist). “The mix of sky-high valuations and rising interest rates could easily result in large losses, as the rate used to discount future income rises. If big losses do materialise, the important question, for investors, for central bankers and for the world economy, is whether the financial system will safely absorb them or amplify them. The answer is not obvious, for that system has been transformed over the past 15 years by the twin forces of regulation and technological innovation.”
“SEC To Reduce The Number Of Things Private Equity Firms Can Lie About” (Dealbreaker). “So what exactly are those regulations that the alternative investments lobby thinks are so unnecessary and harmful. Well, for one, it would make it much more difficult for them to lie to their investors about performance and fees by requiring some standardized disclosures which the SEC would audit. But they would also be barred from charging some of those fees they so often like to elide the truth around.”
What we’re reading (2/9)
“Hipster Couple Charged In $4.5 Billion Crypto Heist Is Even Weirder Than You Think” (Daily Beast). “Bitcoin. NFTs. A PPP loan. And a rapping tech entrepreneur. A New York City couple were arrested Tuesday morning by federal agents on charges of laundering some $4.5 billion stolen in a massive 2016 cryptocurrency exchange breach. As might be expected in 2022, the latest federal law enforcement takedown features the buzziest of buzz-worthy themes—as well as some pretty awful rap lyrics.”
“Business Rapper Was Bad At Bitcoin Laundering” (Matt Levine, Money Stuff). There is a strange debate about crypto and money laundering. Crypto skeptics will often say ‘Bitcoin is mostly useful for money laundering’; crypto proponents…will instead say ‘no, Bitcoin is useless for money laundering because it creates a permanent public record of all transactions and why would you want to launder money that way.’ You might think that a federal criminal indictment for $4.5 billion of Bitcoin money laundering would be vindication of the ‘Bitcoin is for money launderers’ side, but I want to tell you: No it is not! What allegedly happened here is that hackers stole $4.5 billion of Bitcoin from a crypto exchange (and stealing from exchanges absolutely is a major function of crypto), and then they had a horrible time laundering it.”
“Pelosi Buckles, Pushes Stock-Trading Ban” (Axios). “House Speaker Nancy Pelosi (D-Calif.) is moving to ban stock trading on Capitol Hill, after having consistently opposed such a measure, Punchbowl News reports…Pelosi's imprimatur follows building momentum in both parties: Some progressive Democrats and MAGA Republicans have united on a proposal to ban sitting lawmakers from trading individual stocks, Axios reported last month.”
“Zillow: Our 2022 Housing Forecast Is Way Off—Home Prices Now Set To Spike 16%” (Fortune). “Back in December, the home listing site predicted that U.S. home values would climb 11% this year. Economists at Zillow now say that forecast is too conservative. Their latest forecast finds home prices are set to spike 16.4% between December 2021 and December 2022. If it comes to fruition, it would mark another brutal year for home shoppers.”
“SEC Seeks To Bolster Disclosure Rules For Private Equity And Hedge Funds” (Financial Times). “The Securities and Exchange Commission on Wednesday voted in favour of a string of proposed rules that would require annual audits of private funds, ban certain fees that buyout shops charge and prohibit preferential terms for certain investors. The watchdog also advanced a proposal that would accelerate the time it takes for stock and bond trades to be finalised.”
What we’re reading (2/8)
“Investors Gobble Up Dividend Stocks During Market Turbulence” (Wall Street Journal). “Boring companies have been hot during the stock market’s winter swoon. An early-year tumble in major U.S. stock indexes has some investors searching for safety by dumping shares of high-growth technology stocks for stodgier businesses that pay shareholders cash, including banks, oil companies and telecoms.”
“VC Valuations Climb Higher Still As Hedge Funds And Other Nontraditional Investors Pile In” (Institutional Investor). “Early-stage valuations, which includes series A and series B, have gotten so high that they are beginning to resemble the late-stage valuations of previous years. In 2021, the median early-stage pre-money valuation reached $45 million, a 50 percent increase from 2020, PitchBook said in its annual U.S. VC valuations report.”
“Peloton Is Replacing Its CEO And Cutting 2,800 Jobs” (CNN Business). “‘This restructuring program is the result of diligent planning to address key areas of the business and realign our operations so that we can execute against our growth opportunity with efficiency and discipline,’ the company said in a press release. Layoffs also begin Tuesday.”
“Tyson Foods Loves Inflation” (Financial Times). “$32bn Tyson Foods — America’s largest producer of chicken, pork and beef — announced its first-quarter results before the bell Monday morning. And they were blow out. Revenues grew 24 per cent year on year, coming in at a shade under $13bn, versus analyst’s expectations of $12bn. While earnings per share tripled to $3.70, comfortably exceeding the $1.94 Wall Street’s finest had pencilled in. In early trading, the shares are up 12 per cent at $98.64.”
“Netflix Economics And The Future Of Netflix” (Marginal Revolution). “Of course the company is still worth quite a bit, so my own view is no more or no less optimistic than what the market indicates. Still, it is worth asking what the equilibrium here looks like. There is also AppleTV, Disney, Showtime, HBOMax, Hulu, AmazonPrime, and more. I don’t think it quite works to argue that we all end up subscribing to all of them, so where are matters headed?”
What we’re reading (2/7)
“Bank of America Strategists Warn Fed Hikes In Pricey Market To End Poorly” (Bloomberg). “While U.S. equities saw positive returns during previous periods of rate increases, the key risk this time round is that the Federal Reserve will be ‘tightening into an overvalued market,’ the strategists led by Savita Subramanian wrote in a note. ‘The S&P 500 is more expensive ahead of the first rate hike than any other cycle besides 1999-00,’ they said.”
“Seven Hikes? Fast-Rising Wages Could Cause The Fed To Raise Interest Rates Even Higher This Year” (CNBC). “‘If I’m the Fed, I’m getting more nervous that it’s not just a few outliers’ that are driving wage increases, Ethan Harris, Bank of America’s head of global economics research, said in a media call Monday. ‘If I were the Fed chair ... I would have raised rates early in the fall. When we get this broad-based increase and it starts making its way to wages, you’re behind the curve and you need to start moving.’”
“Expect Markets To Be On A Wild Ride Until The Fed Really Starts Raising Rates” (CNN Business). “The dynamics behind this dilemma have been building for years. Between late 2008 and late 2015, the Fed kept interest rates at or near 0%, while pumping new cash into the banking system on Wall Street. These policies had the desired effect. All those new dollars were forced to find any new investment that would provide a good return (there was, after all, very little incentive to save the money when the Fed was holding interest rates so low). Wall Street speculators chased after a wide variety of assets in search of yield, bidding up prices for things like tech stocks and commercial real estate.”
“Earnings Are Driving The Market But It’s Not Clear Where” (New York Times). “[W]ith the market and the economy in shaky positions, the corporate comments during earnings calls are setting off sharp movements in individual shares and in the overall market. ‘The whiplash, and the extreme movements that we’re seeing, particularly on days when companies report earnings, is less about any extreme thing that is happening with those earnings and more about the background that the market lives in right now,’ said Liz Ann Sonders, chief investment strategist at Charles Schwab.”
“Peter Thiel To Retire From Meta Board Of Directors At 2022 Annual Shareholder Meeting” (Meta Platforms, Inc.). “Meta (NASDAQ: FB) announced today that Peter A. Thiel, Partner at Founders Fund and PayPal co-founder, has decided not to stand for re-election to the Board of Directors of the Company at the Company's 2022 Annual Meeting of Stockholders. Thiel has been a member of the company's board of directors since 2005 and will continue to serve as a director until the date of the Annual Meeting.”