Rowdy Markets

 

I guess jobs just do not matter much these days. I’m lost at how the non-farm payrolls put up such a bad number, 266k on an expected number closer to 1 million, and no one really cared. Maybe we’re back to whole the bad news is good news thing, because the S&P and Dow Jones closed at record highs. NASDAQ however ended the week lower for the third straight week. I think the comments by US Treasury Secretary, Janet Yellen helped put a little pressure on the Nasdaq growth names. She initially commented that “interest rates will have to rise somewhat to make sure our economy doesn’t overheat.” The Nasdaq 100 futures sold off nearly 3% in the early trading hours on Tuesday. Yellen quickly walked those comments back and growth equities recovered most of their losses.

The US said it would back a proposal to waive patents on Covid-19 vaccines, but Germany disagreed with that. The EU is up for a conversation on it. The idea behind this being that future variations would be easier to fight with more gaining access to the recipe.

Doge coin rallied again last week leading up into Elon Musk’s appearance on Saturday Night Live. However after the show ended there was a huge volume of selling and it was off more than 30% by the time I was up Sunday morning and traded down more than 40%. I tried to tell my friends that were thinking Elon would make them rich about the old saying “buy the rumor, sell the news.” However, the scam continued when Musk announced that SpaceX was launching satellite Doge-1 to the moon and it would be paid for in Doge. Doge rallied about 45% off it's lows on Sunday only continue its move lower into Monday morning.

More from the chapter of WTF, Cathie Wood told CNBC on Friday that Bill Hwang had provided seed capital for Ark’s first four ETFs. This business is the best, because you really cannot make up the stories we see happen in financial markets.

A&E had a biography marathon of professional wrestlers, and as soon I as I Roddy Piper was in the lineup. I thought of this. It really translates to financial markets these days. 

Earnings Watch

Last Week

Like the previous few weeks, there was a lot of good news from earnings, but still performance remains muted. Some names I thought did quite well were Square, Peloton, Roku, PayPal, and Caesars. A couple that really got hit to the downside were Rocket Companies and Etsy. Looking at things on an aggregate level, we’re just about two thirds of the way through the 4,000ish names that are covered by IBES in North America this quarter. Here’s a report card of how things are going. More than 70% have beat the Street estimates. Consumer Discretionary is the best of the GICS sectors, but price reaction is down because of the revisions to the future.

 

This Week

We’ve got another week of heavy reports. Over 25% of the S&P 500 names report, but we’re getting into the smaller constituents, so they’re less than 10% of index market cap. Over one-third of names in the Russell 3000 report, some of those are obvious duplicates of the S&P, but it also shows that it’s not just large caps. More than 40% of the names in the TSX report, but again it’s similar to the S&P with only 12% of the market cap weight. A couple of individual names I’m looking forward to this week are Disney on Thursday and Simon Property after the close Monday.

Equity Capital Markets

Honest Company (HNST.O) had a nice strong opening then traded up nicely then drifted lower over the next couple of sessions. It ended the week near lows, but still above the IPO price. The biggest IPO on the docket this week is out of Poland. Pepco Group’s owner, Steinhoff International, is raising $1B ($4.3 PLN) or a little less than 20% of the total value. The only other name on the schedule is Enact Holdings, formerly Genworth Mortgage, which expects to be about $500M. Nothing on the lockup expiry this week worth reporting.

Looking Ahead

I think US CPI is the headline to watch this week. We also get GDP numbers from the UK and April retail sales for the US. There's also the WSJ's 'The Future of Everything' event. Salesforce.com, Abbott Labs, Facebook, Mastercard, Nordstrom, and Mattel are all scheduled to give us some updates and forward guidance. Finally, keep an on crypto. Coming off the Doge drop after Elon's SNL appearance, SEC Commission Heister Peirce will talk on Tuesday. She's mentioned that she thinks the US is behind in setting up some regulation on this. With things so frothy, anything negative might weigh on the group.

Best of the Week:

Loved this discussion focused around Ethereum. Nikhil did a wonderful job of explaining the market structure of the halving process for Bitcoin and how that relates to an event coming for Ethereum. The basic idea he explained to why these assets rise after these events is because of a reduced selling pressure from miners with continued buying. Nikhil thinks ETH can possibly hit $150k in the next 18 months.
Behind The Markets Podcast Special: Ethereum, The Triple Halving with Squish Chaos - Listening time: 67 minutes

Best of the Rest:

New SEC Chair, Gary Gensler, made a few appearances last week. While I generally don’t share much in terms of news in this blog, I thought this news event covered a few things that can possibly lead to a few long term changes in US equity markets. While I don’t think payment for order flow is all that bad, it leaves a bad taste in the mouth of some and Mr. Gensler could rework the rules here. On the other hand, I do think short selling needs a bit of a change. Form 13F rules that dictate fund managers responsibility to report holdings was adopted in 1975. That is really well before the rise of hedge funds. In an article for Fortune in 1970, author Carol Loomis, estimates there were only about 150 hedge funds at the time. Maybe just maybe we should consider shorts being required to post their positions. Then again, synthetic shorts aren’t all that hard to create for the big firms.

Gensler Talks GameStop, Robinhood, and All Things Stonks

The person that I know that best links history to current events is the author of Investor Amnesia, Jamie Catherwood. In Jamie’s post this week, he focuses on chairman Gensler’s comments too. He takes a bunch of those and links them back to historical events that ring in all too similar.

An Age Old ‘Game’

We’ve seen a rise in the buzz around crypto assets. Some of them are more viable than others, but now the adults are getting involved. Fidelity created Sherlock and there’s also Messari. Both are running a bunch of analytics on crypto specific data.

Fidelity Targets Institutional Investors with Digital Assets Analytics Solution

The hits keep coming for Credit Suisse. Not sure if this is an Archegos aftershock or not, but the investment bank told clients it will no longer execute or custody cannabis companies with US operations. The company’s risk and compliance has had it’s issues of late, so maybe they’re just holding things a little closer to the vest. Hard to tell because they would not provide any comment.

Credit Suisse stops custodian service for some U.S. cannabis stocks, sources say

This link is behind a paywall, but it’s just the chart you see below. I wanted to give the source proper credit. Flows in Q1 were strong and followed the historical trends. As we get into the meat of Q2, we typically see outflows in May and June. Albeit small relative to the other months, it’s still like taking your foot off the gas. This is something to keep an eye on.

May and June are normally "outflow" months

This one is something that hits somewhat close to home. The two main roads I use to get into the office, in normal times, are publicly owned, but pay investors more than $600M in debt payment each year. Off their ~$1.6B in revenues. Their most recent bonds are paying 2.78%. Large asset owners have been trying to find new ways to generate more yield. The article highlights how this trend of direct investment is becoming more regular because of the high returns. CalPERs is mentioned as getting a 12.7% return on its portfolio. There’s also a link to an extremely thorough study done by Robert Poole. The article also mentions how this has been a global theme. US pensions investing both local and globally, as well as, foreign ventures investing across the global. The author highlights a Australian-Spanish joint venture purchasing an Indiana toll road out of bankruptcy. The team at Refinitv has really stepped up in this area. I saw a demo of this new-ish app recently. It really does a great job of showing key projects in many different lights. Below I just did a search for “toll roads” and found close to 400 projects. I selected a road I travelled on not that long ago in North Carolina. In the app, it’s pretty neat how you can track these projects.

How Pension Plans Are Investing Lucratively in Toll Roads

I think I heard about this on the Saxo Bank 'Market Call' podcast. It’s a nice daily market summary. They usually have something a little different than most of the US only focused market wraps have. It’s short too, only 20min (less than 10 for a fast listener like me). Anyway, this still surprised me even years after the 2015 credit crisis. Greece’s five year bonds traded at more than 30% yield then and now their lower than 30 basis points. Benchmark spreads while slightly higher than recent lows are only about 80bps. Looking at the CDS spreads as well, those have come down from the near 100% probability of default. I’ve actually held a small position in the MSCI Greece ETF since 2017. Performance of that since then has been choppy, but the last year plus it has been tremendous versus even the Nasdaq.

Greek 5-Υear Bond Issue Attracts More Than €20B in Bids

Blackstone is transforming right before our eyes. They already managed $149B in credit, but this deal will allow them to gain business from insurance companies and corporate pensions. They will now be in “more liquid, more competitive and lower fee” corporate credit. This business of traditional fixed income is about to be shaken up. There are hundreds of managers in this space and with yields and fees dropping, the bigger the better.

Why Traditional Bond Managers Should Pay Attention to This Blackstone Deal

One for the road

I wanted to leave you with a tribute to David Swensen, who was a legend among legends. This article from the FT gives some of the highlights like helping structure the first interest rate swap and making hedge funds, private equity, and venture capital investment classes via the “Yale Model.” Whoever follows him will have big shoes to fill. 

David Swensen, the Yale pioneer who reshaped investing

Thanks for reading. I hope you find the answers this week.

Michael