🔬Good News is Bad News for Markets, Crypto ETFs Pending, and Much More
"Inflation is taxation without legislation"
- Milton Friedman
“I care not who controls a nation’s political affairs, so long as I control her currency”
- Mayer Amschel Rothschild
The big US markets closed up for the first time in 2024 on Friday, although not by much (S&P 500 +0.18%, Nasdaq +0.09%)
8 of 11 sectors closed in the green with Financials (+0.5%) and Utilities (+0.4%) leading the way. Staples - one of the best performing sectors this year - was the worst at -0.2%.
Non-farm Payrolls grew 216k vs. 160k consensus showing resilient labour demand. This was offset by the December ISM Services Index print came in at 50.6, below the 52.6 consensus and November's 52.7.
Gold was down a smidge, while WTI Crude was up 2.2%.
Street Stories
Bad News Is Good News (and Vice Versa)
One of the benefits of being married to someone who spent a decade and a half on the trading floor is sweet little messages like this at 9:04AM on Friday.
Beyond her elegant femininity, my dearest darling was sharp enough to know immediately that the market was going to, well, ‘have a bad day’ following the US jobs report Friday. Why? Not because it was bad, but because it was really good.
[Non-farm Payrolls grew 216k vs. 160k consensus. Average hourly earnings were also hotter than expected at +4.1% year-over-year vs. Wall Street estimate of +3.9%]
I thought I would do a bit of an explainer here, and use it to introduce the idea of a ‘goldilocks zone’ of expectations. See, it’s not that job growth is bad (it’s great, actually) but its all these second and third derivatives that come and bite you in a$$ in the stock market. Simply put, a great jobs report implies that: (1) the US economy is healthier than previously believed; and (2) That a tighter job market might add to inflationary pressures through higher wages. Both of these can put pressure on JPow and the US Federal Reserve to raise interest rates (or at least keep them higher for longer), since a stronger economy can better endure higher rates and because inflation is the whole reason we’re in this mess in the first place. Ipso facto; interest rates bad, stocks go down.
So, with the stock market down everyday in 2024, surely this Non-farm print was enough to round out the week with four trading days (Monday was a holiday) in the red bucket? Nope. Why? Because the ISM Services Index got released at 10:00AM - and it was terrible (yah!?)
Markets are weird.
[The print for December ISM Services came in at 50.6, below the 52.6 consensus and November's 52.7 (below 50 imply economic contraction). This was the lowest headline since May 2023.]
Sustainability-Linked Bonds(SLBs) Decline
Once the hottest trend in ESG investing, global sales of sustainability-linked bonds (SLBs) dropped 22% in 2023 to $67.8 billion, the steepest decline since their inception in 2019, amid investor skepticism and concerns about companies failing to meet environmental targets and greenwashing. In contrast, Green Bonds, where the proceeds are only used for specific sustainable projects, remained strong with $528.4 billion in sales in 2023, just shy of the 2021 record, signaling a mixed landscape in sustainable finance. (Bloomberg has the full story)
Explainer: SLBs pay an interest rate that is variable, based on predetermined Key Performance Indicators (KPIs) linked to the issuing company reaching certain sustainability or other ESG objectives. If the company performs well, from a KPI perspective, the interest rate they pay is lower. If they miss their objectives, they pay a higher rate of interest. Their popularity stemmed from belief that it helped align incentives for companies and ESG conscious investors. A Bloomberg study indicated that 43% of SLBs are ‘off target’ and thus paying higher interest cost on their bonds.
Chinese Shadow Banking in the Limelight: Zhongzhi's $64 Billion Vanishing Act
China’s Zhongzhi Enterprise Group, a major player in China's shadow banking industry, has filed for bankruptcy after a Beijing court acknowledged its inability to pay debts, with liabilities reaching $64bn against assets of $38bn (for context, that $26bn equity hole is the same that Lehman Brothers had when it failed). The firm, which provided substantial funding to real estate companies, faces investigation for "suspected illegal crimes" amidst a wider crisis in China's property sector. This bankruptcy raises concerns about further economic instability in China, following similar struggles by major property developers like Evergrande, impacting a sector that constitutes a third of China's economic output. As I’ve written before, the financial contagion is spreading beyond the real estate sector.
Bitcoins and Bureaucracy: The Countdown to Crypto ETFs Begins
U.S. firms seeking to launch spot-Bitcoin ETFs are nearing regulatory approval, with the SEC staff indicating readiness for final document submission, including 19b-4 filings for rule changes on exchanges. The SEC is expected to vote on these filings next week, with approvals for both 19b-4 and S-1 filings required before the ETFs can begin trading and last week issuers including BlackRock Inc. and Fidelity updated their S-1 filings. I did a nice update on Bitcoin ETFs a few weeks back which adds a bit more context to things. (Bloomberg has more on the ETF approval process)
Joke Of The Day
What's the difference between an investment banker and a pig? The pig doesn't turn into an investment banker when it's drunk.
Seriously though, as a former IB, I know we are the LIFO the party.
Hot Headlines
Reuters | China to sanction 5 US manufacturers over arms sales to Taiwan. Why, oh, why wouldn’t they want that?
AP News | Two companies will attempt the first US moon landings since the Apollo missions a half-century ago. Pittsburgh’s Astrobotic Technology has a planned liftoff of a lander Monday while Houston’s Intuitive Machines will launch in mid-February aboard a flight with SpaceX. Hope it works out better than the recent Russian one. And Japanese one. And Israeli one. 🚀💥
CNBC | The 2023 U.S. economy, in a dozen charts.
Axios | Radio giant Audacy files for bankruptcy. The company is the second-largest radio broadcaster in the country.
Reuters | Panel flies off the side of Boeing 737 MAX 9 at 16,000ft. The US has ordered a temporary grounding of all 171 aircraft.
Trivia
This week’s trivia is on famous financial dynasties. Today is on the Rothchilds.
In which city did the Rothschild banking dynasty originate?
A) London
B) Paris
C) Frankfurt
D) ViennaWhen did the Rothschild banking dynasty begin?
A) 1600s
B) 1700s
C) 1800s
D) 1900sThe Rothschild family played a significant role in financing which major historical event?
A) The construction of the Suez Canal
B) The American Civil War
C) The French Revolution
D) The Napoleonic Wars
(answers at bottom)
Market Movers
Winners!
Southwestern Energy (SWN) [7.5%]: Nearing a merger with Chesapeake Energy, estimated at about $17B as per reports, with a potential deal announcement expected next week.
Elanco Animal Health (ELAN) [6.2%]: Receives an upgrade to buy from hold by Stifel, highlighting revenue growth, better margins, favorable valuation, and improved balance sheet potential.
Losers!
Medical Properties Trust (MPW) [-29%]: Shared updates on recovering uncollected rents from Steward Health Care System, but no guarantee of recovering all deferred rents and loans; faces downgrade by KeyBanc due to this uncertainty.
agilon health (AGL) [-28.6%]: Reduced FY23 revenue forecast due to rising expenses from more specialist visits, Part B drugs, and outpatient surgeries; anticipates these higher costs will persist into 2024, and announced CFO Bensley's planned retirement later this year.
NuScale Power (SMR) [-8.7%]: Reportedly laid off 40% of its workforce, as per HuffPost, citing escalating costs and the cancellation of its first power plant, leading to depleted cash reserves.
Market Update
Trivia Answers
C) The Rothchild’s banking empire originated in Frankfurt.
B) The dynasty was founded in the 1700s.
D) The Rothchild’s played an important role in the Napoleonic Wars, through lending and more directly by providing the physical coinage for soldiers’ wages. Famously Nathan Rothchild is reported to have heard the result of the Battle of Waterloo a day before everyone else, and netted a tidy profit trading in the market as a result.
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