Timely links to external news and articles, usually valuation related, with occasional commentary. Most recent items shown below - for more, check the archive in the sidebar.
The two-year Treasury yield was 48 basis points above the 10-year rate on Wednesday, after coming within a whisker overnight of touching the 50-basis-point milestone last seen in August 2000. That’s based on expectations the Fed’s rate will peak at around 3.5%, from a current range of 2.25%-2.5%, according to the strategist.
If the expected peak rises a half point to 4% with no change in the market’s assessment of the neutral rate of monetary policy, the curve inversion has scope to widen to 85 basis points, Swiber wrote.
Despite the current rally, these indicators still point in the direction of upcoming weakness. Seems like we still have a long ways to go before we're out of the woods.
Many Americans enjoy free checking accounts on the backs of the fees paid by poor people. Customers who pay overdraft fees again and again—who typically have no more than a few hundred dollars in the bank—are responsible for over half the profits from mass-market consumer checking accounts at the biggest US lenders.
For their part, bank executives see it differently, saying that customers who never make good on their overdrafts force them to write off millions of dollars. The fees, they argue, enable them to shoulder the costs and offer a lifeline to customers.
It is trivially easy for a bank to just disallow NSF charges, and they routinly do it when it serves their interest. But if they can instead bleed people dry with fees, they will. Wells Fargo, in particular, has proven time and again to be a leech on the American consumer.
Great article, with terrific graphics.
When the Fed announces a higher target range for the federal-funds rate (currently 1.5% to 1.75%), it implements its decision by raising what it pays both on reserve balances (currently 1.65%) and on reverse repurchase agreements (currently 1.55%). Money to pay for these interest expenses comes out of the Fed’s interest earnings on its own portfolio.
The tricky situation the Fed now faces is that its own net interest income—$116.8 billion in 2021, of which 93% was remitted to the Treasury—will soon be exhausted by the higher interest rates it intends to pay on those combined cash funds. A target federal-funds range of 3.25% to 3.5% by year-end would have the Fed shelling out more than $195 billion annually to maintain both reserves and reverse repurchase agreements at current levels. The Treasury will have to advance funds to cover the gap.
So far this reporting season, shares of companies in the S&P 500 that have missed Wall Street’s earnings expectations have slipped 0.1% on average in the two days before their report through the two days after, according to FactSet. That compares with the five-year average of a 2.4% decline.
Tesla Inc. made waves this week when it announced that it had dumped the bulk of its Bitcoin stash. Selling 75% of its cryptocurrency gave the company a one-time cash infusion, Elon Musk’s electric car company said, but the battered value of its remaining Bitcoin also dinged profits.
Exactly how crypto helped and hurt Tesla’s bottom line is difficult to disentangle, however, based on what it told the public on earnings day. Current accounting rules—or lack thereof—play a big role.
“I’m anxious to see the actual filings—to see if they disclose the date that they sold, the price that they sold at,” said Aaron Jacob, head of accounting solutions at TaxBit, a cryptocurrency software company. “They may not disclose any of that.”
Tesla isn’t compelled to do so. No part of US generally accepted accounting principles spells out how companies must account for cryptocurrency or other digital assets, nor do they mandate the type of information companies must reveal in their footnote disclosures.
These kinds of gaps in reporting standards seem like exceptionally ripe territory for earnings manipulation, which is generally aligned with lower long-term value.
Tesla in February 2021 announced that it had bought $1.5 billion worth of crypto and that it would accept Bitcoin as payment for cars. Two months later, it sold 10% of its stake, generating $101 million from the sale. CEO Musk has touted the value of Bitcoin and cryptocurrency in general.
“This should not be taken as some verdict on Bitcoin,” Musk told analysts on Wednesday. “It’s just that we were concerned about overall liquidity of the company given the Covid shutdowns in China.”
It is absolute malpractice on the part of corp FP&A and Treasury to invest cash long-term and then need to pull it a year later due to highly-foreseeable liquidity issues. To have invested that cash into the most volitile possible asset class is unthinkable. This should have been sitting in a money market fund. Shareholders would riot about this at any other company.
More than 100 million Americans were in the path of a dangerous heat wave Wednesday, from the West to the Northeast, officials said.
The temperature was forecast to break the triple digits in states across the country, from California to Texas to New York, shattering records in some places, according to the National Weather Service.
July has been a relentlessly hot month in Europe, too, where a record-breaking heat wave has been blamed for hundreds of deaths across the continent. The heat and a drought fueled wildfires across swaths of Southern Europe, forcing thousands of people to evacuate their homes.
What do you think will happen to global economies and corporate valuations as this inevitably gets worse? Do mass evacuations, property destruction, infrastructure destructions, and natural resource destruction raise valuations?
Microsoft Corp. is eliminating many open jobs, including in its Azure cloud business and its security software unit, as the economy continues to weaken.
I'd put this one down in the "we're not at the bottom, yet" column...
The Biden administration’s international tax agenda suffered a setback when Sen. Joe Manchin rejected a 15% minimum tax on multinational companies this past week, dimming prospects of turning last year’s global tax agreement into reality.
Now the administration must try to urge other countries to go first and hope that momentum, pressure and the potential for lost revenue can compel a future Congress to act.
Last October’s deal had two key pieces. One, the minimum tax, would put a 15% floor under corporate tax rates. It was designed to help countries raise revenue and prevent companies from shifting profits into low-tax jurisdictions. It was designed to be optional but with mechanisms that encourage nations to join once a critical mass of countries have implemented the tax. That is the part that Mr. Manchin blocked this past week.
Global tax inconsistencies are such a drain on productivity, and hurt medium sized companies the most (though, multinational mega-corps would surely love to pare down their multi-thousand-headcount tax departments, I'm sure). This deal is a real opportunity to make progress on this front.
Economists increasingly expect the Federal Reserve, in its efforts to push down inflation, to raise rates enough to trigger a recession, with many worrying the central bank will go too far.
Economists surveyed by The Wall Street Journal now put the chance of a recession sometime in the next 12 months at 49% in July, on average, up from 44% a month ago and just 18% in January.
There are hints that higher rates are already starting to bite. In addition to falling home sales, the two-year Treasury yield has risen above the 10-year Treasury yield, what economists call a yield-curve inversion. Yield-curve inversions signal that investors expect higher interest rates in the short run to lead to declining economic activity and future rate cuts—and historically have preceded recessions by 12 to 18 months. However, Mr. Berson cautions that downturns occur only after other short-term rates (such as the federal-funds rate) also rise above longer-term rates, and that hasn’t occurred yet.
Recessions are bad, and a lot of people get hurt during them. But at this point the alternative to a recession may be quite a bit worse...
The booming world of exchange-traded funds is about to get even more crowded after the very first single-equity ETFs launched Thursday
The eight products from AXS Investments look like the start of a coming invasion of amped-up strategies that will seek to enhance or invert the performance of volatile companies.
“We’re gonna see the floodgate absolutely open with new product launches in this arena,” said Nate Geraci, president of The ETF Store, an advisory firm. “So I think we’re gonna see ETF issuers blanket the market with all varieties of these ETFs: leverage, inverse, options overlays, you name it.”
Commissioner Crenshaw warned about putting the ETFs in the hands of retail traders in particular, saying that it would be challenging for investment advisers to recommend the products while honoring their fiduciary duties.
This is like the moment where you can see a car accident is about to happen. These things are going to be absolutly poisenous for retail traders, but a lot of them are going to eat this up.
If investors get in at a peak chasing fad portfolio construction techniques, the returns can be much worse.
The Bloomberg Commodities Index is a good illustration. On a spot basis, it is up 351% in the past two decades, a respectable 7.8% compound annual growth rate that’s just slightly behind the S&P 500 Index’s 9.3%. But that’s not what investors earn when they invest through financial instruments because it doesn’t account for the cost of rolling such futures contracts. Among other things, there’s a sizable cost associated with storing barrels of crude oil, tanks of natural gas and bushels of wheat. In part because of these additional costs, the total return version of the same index — based on financial instruments that track the commodities — is up only 50% in the same period (a meager 2% compound annual growth rate).
Chasing fads pretty much everywhere and always results in lower performance over the long term than a simple diversified buy-and-hold strategy.
Investors bet that the Fed is more likely than not to raise interest rates by 100 basis points when it meets July 26-27, which would be the largest increase since the Fed started directly using overnight interest rates to conduct monetary policy in the early 1990s. Americans are furious over high prices, and critics blame the Fed for its initial slow response.
Rip off the bandaid.
Goldman Sachs Group Inc. economists put the risk of such a slump in the US in the next year at 30%. A Bloomberg Economics model sees a 38% chance in the same period, with the risks building beyond that time frame. But for many it already feels like it’s here. More than one-third of Americans believe the economy is now in a recession, according to a poll last month by CivicScience.
The worries among small business owners, consumers and others are illustrated by so-called Misery Indexes, which blend unemployment and inflation rates. The gauge for the US is already 12.2%, similar to levels witnessed at the start of the pandemic and in the wake of the 2008 financial crisis, according to Bloomberg Economics.
Yield curve is still surprisingly neutral on recession odds - but at some point once there are X many "Are we in a recession?" headlines, the answer itself seems moot.
US consumer spending expanded in the first quarter at the softest pace of the pandemic recovery, marking a surprise sharp downward revision that suggests an economy on weaker footing than previously thought. Outlays on goods and services rose an annualized 1.8%, compared with a 3.1% pace in the previous estimate, according to Commerce Department data out Wednesday.
Of the nine justices sitting on the current court, five – all of them in the majority opinion that overturned Roe – were appointed by presidents who initially lost the popular vote; the three appointed by Donald Trump were confirmed by senators who represent a minority of Americans. A majority of this court, in other words, were not appointed by a process that is representative of the will of the American people.
And now, this court, stacked with far-right judges appointed via ignoble means, has stripped from American women the right to control our own bodies. They have summarily placed women into a novel category of person with fewer rights not just than other people, but than fertilized eggs and corpses. After all, no one else is forced to donate their organs for the survival of another – not parents to their children, not the dead to the living. It is only fertilized eggs, embryos and fetuses that are newly entitled to this right to use another’s body and organs against that other’s will; it is only women and other people who can get pregnant who are now subject to these unparalleled, radical demands.
This raises a fundamental question: can a country be properly understood as a democracy – an entity in which government derives its power from the people – if it subjugates half of its population, putting them into a category of sub-person with fewer rights, freedoms and liberties?
The global trend suggests that the answer to that is no.
If you think economic health, market performance, and portfolio values will be unaffected by the US sliding into authoritarian rule, it's time to wake up.
The most basic argument of the Dobbs decision is that, in 1868, states did not consider abortion a fundamental right. That is accurate, as the magisterial dissent, co-authored by Justices Stephen Breyer, Sonia Sotomayor and Elena Kagan, acknowledges.
But in 1868, there was also no clearly established right to contraception. There were no Miranda rights to protect arrestees. There was no right to choose your own sexual partner, let alone to marry the person you love. And there is no definitive historical evidence that the people who ratified the 14th Amendment thought that doing so prohibited segregation. If you take Dobbs’s logic seriously, all the landmark decisions establishing these rights are wrong.
Will the court now undertake a major effort to revisit these core rights?
Alito’s majority opinion, which is not significantly different from his leaked draft, tries to suggest the court will not do that. Its only basis for that suggestion is to say that abortion is “unique” because it involves life. Justice Clarence Thomas, in a separate concurrence, called openly for revisiting rights to sexual freedom and gay marriage. The dissenters argued cogently that it is now open season on those and similar basic rights.
Teri Ijeoma, whose “Trade and Travel” course has taught over 28,000 students, says inexperienced traders should stay on the sidelines.
This is the worst article I've seen on Bloomberg in recent memory. It reads like an adertisement for Ijeoma's $5,000 day trading course. The article presents Ijeoma as some kind of expert, advising investors/traders to be cautious during a tough market, and prominently links directly to her course website/signup form.
Here is but a small sampling of headlines taken directly from Ijeoma's website:
This is awful -- a $5,000 webinar that encouraging people with no market experiance at all that they can gamble their way to millions, effortlessly.
Bloomberg knows that day trading, particularly among unexperienced retail investors, is categorically a money-losing proposition. It's worse the playing the lotto, and much more addictive. Shame on Bloomberg for publishing this trash.
Bankers, lawyers, and sponsors all said, “It’s different this time.” But it wasn’t.
Incredible lead in, and great overview of what's happening in the SPAC market right now.
 Better Valuations, Better Future Returns – stock valuations are more attractive today vs. where they were at the beginning of the year. As valuations improve, so does the outlook for expected returns. According to FactSet, the S&P 500 trades at a forward P/E of 15.8, which is below its five- and ten-year averages. The implied earnings yield (i.e. the inverse of the P/E) is 6.3%, so that is still well above the rate you’ll get on a 10-year Treasury bond.
Great piece from Saleha Mohsin today, but an absolute blunder by whichever editor came up with the headline for it.
Janet Yellen’s stint as Treasury secretary threatens to become a stain on a storied career.
On May 31, Yellen took matters into her own hands and did something that caught the White House by surprise. She admitted to the American public on CNN that she “was wrong” about the path inflation would take. The administration had thus far been relentlessly trying to paint the surge in consumer prices as temporary.
With her statement, Yellen broke ranks with Biden’s inner circle—which doesn’t include her—and exposed the dysfunction at the heart of an administration that’s botched its communications around the country’s economic problems.
Yellen’s most tangible accomplishment so far is the progress she has forged on an international tax agreement designed to halt a global race to the bottom on corporate tax rates, a goal that has eluded negotiators for nearly a decade.
I don't know, that sounds pretty good!
Like her former colleagues at the Fed—including Jerome Powell, who succeeded her as chair—Yellen initially characterized inflation as transitory, a byproduct of tangled supply chains and temporary shortages of essential goods such as chips used in cars.
By September 2021, her thinking had changed, and her staff shared fresh analysis with the White House, where it was largely disregarded, showing that price pressures were more widespread and more stubborn.
Rather than stay quiet, Yellen is now publicly contradicting some of the most powerful officials in the White House, including Biden. On June 9, she flat-out rejected their contention that corporate greed is feeding inflation. Blaming big businesses for price gouging has been one of the administration’s most consistent talking points, and the president returned to it on June 10 as he accused Exxon Mobil Corp. and other oil companies of exploiting high gasoline prices to pad their bottom line.
One person familiar with the matter says Yellen did express concern over the size of Biden’s first major initiative as president. Her misgivings were ignored at the White House, where aides, including Deese, argued a too-small stimulus would doom the US to a slow, grinding recovery, as happened after the financial crisis.
I don't want to quote the whole article - go read it - it's quite clear and well reported. But I very, very strongly disagree with the headline. Framing Yellen as 'struggling' makes her sound inept. Her only ineptitude in the body of the piece though is her reluctance to prioritize good political optics for the administration over sound economic policy for the country.
It’s a good time to take advantage of “dollar-cost averaging,” which means you invest the same amount of money regularly regardless of the ups and downs in the market.
Good advice is always good advice.
We talked last month about Redbox Entertainment Inc., a company that (1) went public in October 2021 by merging with a special purpose acquisition company at $10 per share, (2) traded as high as $17.93, (3) then traded down to $5.60, (4) then agreed to be acquired by Chicken Soup for the Soul Entertainment Inc. for about $0.69 per share in stock, an 88% discount to its trading price, and (5) then traded down to $2.58 per share. That was weird!
Incredible stupidity that must be read to be believed. I just cannot stomach that this is the world we live in. This is a picture perfect arbitrage scenario, but it's actually too risky to arbo because retail meme traders are collectivly more stupid than the market has liquidity to bear.
Apple Inc. will handle the lending itself for a new “buy now, pay later” offering, sidestepping partners as the tech giant pushes deeper into the financial services industry.
A wholly owned subsidiary will oversee credit checks and make decisions on loans for the service, which is called Apple Pay Later. The business -- Apple Financing LLC -- has necessary state lending licenses to offer the feature, though it operates separately from the main Apple corporation, the company said.
The move marks the first time Apple is handling key financial tasks like loans, risk management and credit assessments. It’s a significant shift for a company that got its start selling computers. Until now, Apple’s financial services have been backed by third-party credit processors and banks. The Apple Card credit card, for instance, relies on Goldman Sachs Group Inc. for lending and credit assessment.
The company is also working on a longer-term “buy now, pay later” program called Apple Pay Monthly Installments, Bloomberg has reported.
Hugely dissapointing to see this. Buy now, pay later (BNPL) is an aggressivly harmful practice encouraging consumers to spend more than they can afford. For years Apple has been under pressure to raise recurring services cash flows - bummer to see them continue leaning into these predatory practices, otherwise unbecoming of their strong brand.
Even as central bankers raise rates, more economists are coalescing around the idea that peak inflation is behind us -- though there will be a lag before the lower costs of raw materials filter through to the prices shoppers see.
The Efficient Market Hypothesis is a hypothesis in financial economics that states that asset prices reflect all available information.
A direct implication of the EMH is that it is impossible to "beat the market" consistently on a risk-adjusted basis since market prices should only react to new information. Developed independently by Samuelson and Fama in the 1960s, the EMH has become a holy grail for investors and academics alike.
I personally think there's more to this market thing than the net present value of future cash flows, and markets certainly don't seem to efficiently digest new information.
Today I am publishing my rebuttal. Ladies and gentlemen, I give you the Inefficient Market Hypothesis: 25 Instances That Prove Samuelson and Fama Wrong.
CAPM, meet CAP MEME
I did my undergrad thesis on why the Efficient Market Hypothesis was wrong, but it wasn't nearly as funny as this.