Month: July 2023

The Week Ahead –  With Few Economic Stats, Earnings Reports Will Take on Added Importance

Posted on by phoffman@channelchek.com

The Trading Week is Light on Data and Heavy On Quarterly Earnings Reports

After last week’s lower-than-expected CPI and PPI inflation readings, the markets are far less certain what the FOMC will decide at their policy meeting July 25-26. Clarity is not going to come from addresses by any Fed Presidents as they enter a blackout period where they are forbidden to speak on the subject between July 15 and July 27. One report that the markets will be focused on during the week involves unemployment, which, if up, may cause the markets to rally – remember we are still in a period where bad economic news causes a positive stock market reaction.

Investors looking for direction may find it in the earnings reports as major banks, metals producers, and closely followed tech companies will be releasing their quarterly earnings reports.

Monday 7/17

•             8:30 AM ET, The New York State Manufacturing Index is expected to drop to negative 7 for June after unexpectedly climbing 38 points to +6.6 in May 2023, from a four-month low of -31.8 in May.

Tuesday 7/18

•             8:30 AM ET, The consensus for Retail Sales for June is up 0.4% after unexpectedly rising 0.3% month-over-month in May, following a 0.4% increase in April, which beat forecasts of a 0.1% decline. It’s clear the ability to forecast has been economic numbers, especially consumer activity has been difficult.

•             8:55 AM ET, The Johnson Redbook Index is forecast to show a year-over-year, same week, increase of 1.1%, for the week ending July 15. This would follow a 1.6% increase the prior reading. The Redbook is a sample of large US general merchandise retailers representing about 9,000 stores. By dollar value, the Index represents over 80% of the equivalent ‘official’ retail sales series collected and published by the US Department of Commerce.

•             9:15 AM ET, Industrial Production is expected to have risen by 0.1% in June, after declining by 0.2% from a month earlier in May.

•             9:15 AM ET, Manufacturing Production is expected to be flat month over month for June after rising 0.1% in May.

•             9:15 AM ET, Capacity Utilization is expected to have remained in a non-inflationary low 79.5% rate during June. When industries are bumping up against capacity, costs will increase as operations become less efficient because less effective resources are called on to produce, thus increasing the cost of each unit of production.

•             10:00 AM ET, Federal Reserve Vice Chair for Supervision Michael S. Barr will be speaking on fair lending practices at the National Fair Housing Alliance National Conference. The Fed is in a blackout period this week, so it is expected that there will be no discussion of monetary policy.

Wednesday 7/19

•             8:30 AM ET, Building permits consensus forecast for June is for 1.505 million after May’s strong 1.486 million.

•             8:30 AM ET, Housing Starts month over month for May increased by 21.7%, the forecast is for a decline of 10.2% for June.

•             10:30 AM ET,  The Energy Information Administration (EIA) provides weekly information on petroleum inventories in the US, whether produced here or abroad. The inventory level impacts prices for petroleum products.

Thursday 7/20

•             8:30 AM ET, Initial Jobless Claims are expected to have increased the week ended July 15 to 245,000 from 237,000 the prior week. Employment data ahead of the July 25-26 FOMC meeting, in the absence of any fresh inflation data until the 28th has the potential to move markets.

•             10:00 AM ET, Existing home sales in the US, which include completed transactions of single-family homes, townhomes, condominiums, and co-ops, is expected to decline by 1.2% month over month for June. This would follow a small increase of 0,2% the previous reading.

Friday 7/21

•             No major economic releases scheduled.

What Else

The FOMC meeting is Tuesday and Wednesday during the last full week in July. The Fed can do one of three things, lower rates, raise rates, keep rates unchanged. Like all good multiple choice questions, one of these answers can be eliminated. On Thursday of last week (July 13), Federal Reserve Board Gov. Christopher Waller said he was not swayed by June’s benign consumer inflation data and said he wants the central bank to go ahead with two more 25-basis-point rate hikes this year. “I see two more 25-basis-point hikes in the target range over the four remaining meetings this year as necessary to keep inflation moving toward our target,” Waller said this in an address to The Money Marketeers on NYU, a bond market club with some of the most powerful fixed income professionals as members. If the Fed is data dependent and there is little new data since the last inflation readings, Waller’s position is not likely to change.

Paul Hoffman

Managing Editor, Channelchek

Comtech Telecommunications (CMTL) – New Contract Awarded

Posted on by cpereira@noblefcm.com


Friday, July 14, 2023

Comtech Telecommunications Corp. engages in the design, development, production, and marketing of products, systems, and services for advanced communications solutions in the United States and internationally. It operates in three segments: Telecommunications Transmission, Mobile Data Communications, and RF Microwave Amplifiers. The Telecommunications Transmission segment provides satellite earth station equipment and systems, over-the-horizon microwave systems, and forward error correction technology, which are used in various commercial and government applications, including backhaul of wireless and cellular traffic, broadcasting (including HDTV), IP-based communications traffic, long distance telephony, and secure defense applications. The Mobile Data Communications segment provides mobile satellite transceivers, and computers and satellite earth station network gateways and associated installation, training, and maintenance services; supplies and operates satellite packet data networks, including arranging and providing satellite capacity; and offers microsatellites and related components. The RF Microwave Amplifiers segment designs, develops, manufactures, and markets satellite earth station traveling wave tube amplifiers (TWTA) and broadband amplifiers. Its amplifiers are used in broadcast and broadband satellite communication; defense applications, such as telecommunications systems and electronic warfare systems; and commercial applications comprising oncology treatment systems, as well as to amplify signals carrying voice, video, or data for air-to-satellite-to-ground communications. The company serves satellite systems integrators, wireless and other communication service providers, broadcasters, defense contractors, military, governments, and oil companies. Comtech markets its products through independent representatives and value-added resellers. The company was founded in 1967 and is headquartered in Melville, New York.

Joe Gomes, Managing Director, Equity Research Analyst, Generalist , Noble Capital Markets, Inc.

Joshua Zoepfel, Research Associate, Noble Capital Markets, Inc.

Refer to the full report for the price target, fundamental analysis, and rating.

Troposcatter Contract. Yesterday, Comtech announced that the Company was awarded a contract from Fairwinds Technologies, LLC. The contract is for $30 million in which Comtech will provide the Company’s next-generation Troposcatter Family of Systems (FOS) in support of U.S. Army tactical communications. Under the contract, Comtech will be providing leading software-defined Troposcatter FOS to enhance U.S. Army Beyond-Line-of-Site communications across all domains. No timetable was given for the completion of the contract. The new contract complements the existing award from the U.S. Marines, in our view.

Fairwinds Technologies Overview. Fairwinds Technologies is a systems integrator and engineering services firm that designs and integrates communications, networking and information technology solutions to serve defense and civilian agencies around the world. Recent customers for the company include the U.S. Army and Defense Information Systems Agency.


Get the Full Report

Equity Research is available at no cost to Registered users of Channelchek. Not a Member? Click ‘Join’ to join the Channelchek Community. There is no cost to register, and we never collect credit card information.

This Company Sponsored Research is provided by Noble Capital Markets, Inc., a FINRA and S.E.C. registered broker-dealer (B/D).

*Analyst certification and important disclosures included in the full report. NOTE: investment decisions should not be based upon the content of this research summary. Proper due diligence is required before making any investment decision. 

New SEC Rules Could be Costly for Investors

Posted on by phoffman@channelchek.com

Do New SEC Rules Bubble Wrap Money Market Funds?

What if you bought a new home in what has historically been a trouble-free neighborhood? You are not one to take big risks with your family or belongings so you also pay extra for what are expected to be the best locks, install a security camera, motion detector lights, and build a state-of-the-art fence behind which sits your German shepherd named Patton. The first week after you move in, a town representative comes by and tells you that they are worried about your safety, so you and everyone else in town must also spend a little money each month on an alarm system they approve of. To you, even this small amount of money is a waste as Patton is generally always on the job, you have ample protection in other ways, and the extra money is better spent on dog food. 

This is what many investors feel the SEC has just done by changing the already extremely low-risk rules for money market funds this week. These investors believe they already had ample safety in the “cash” allocation and may have already given up return in order to secure that safety. So the forced added layer of protection to MM funds, which have in over five decades only seen two funds in the asset class inch down in value, is an example of a regulator forcing them to pay for the protection they don’t need.   

Money Market Fund Background

Money market funds are governed by the SEC under rule 2a-7 of the Investment Company Act of 1940. These rules are very specific in defining the underlying assets in the fund. The most common use of MM funds, and the restrictions governing the holdings, is to provide a very liquid alternative that can be viewed as cash among your other investments. Fund families at times use their MM funds as a funnel or gateway investment from which they hope to have investors venture beyond to other higher fee offerings.

Money market funds, typically purchased through a broker, are not insured, but the extremely high credit quality of underlying securities required by the SEC, along with the very short average maturity required by the SEC, along with the amount each fund is required by the SEC to hold in overnight investments, has provided investors with a very low-risk harbor for balances that may be used as savings, or as a parking place while waiting for more aggressive investment opportunities.

Unlike other mutual funds, where investors buy shares and over time the share price changes, money market funds shares are valued at $1.00. When the underlying investments accrue or pay interest, the non-fee portion of income is credited to account holders as a share dividend, always valued at $1.00. In this way it is designed to feel like a bank savings account. This minimal risk, savers to the tune of trillions of dollars, endure in exchange for higher returns than available in a bank passbook account, and the convenience of transferring money to purchase other investments.

What is the risk of a 2a-7 money market fund breaking the buck? You can count on two fingers. Since the first money market fund came to market in 1971, it has briefly occurred in two funds, and no investors lost money.  

The first time a MM fund broke the buck was in 1994, a fund named Community Bankers U.S. Government Money Market Fund saw it’s NAV plummet from $1.00 to $0.96. This was after financial engineers at top Wall Street investment banks created derivative instruments that were far from liquid, and stopped accruing interest if markets didn’t perform as expected. Imagine being the first MM fund manager in history to drop below $1.00 because you disregarded prudence.   

The second time was in 2008. The Reserve Primary Fund held Lehman Brothers commercial paper (very short-term notes). On September 16th of that year the fund company announced it had suffered losses in the fund to the extent that assets fell below $1.00 per share to $0.97.

The U.S. Treasury Department guaranteed the $1.00 share price in 2008 to prevent a run on MM funds. And in both occurrences, fund companies, in order to restore faith in their other products, made sure money fund holders were whole by redeeming shares when requested at $1.00.

SEC New Rules for Money Funds Beginning October 2023

In 2010 The SEC created new rules to enhance transparency, liquidity, and bolster the credit quality of MM funds. Despite having only experienced two brief brushes with breaking the buck.

The new rules for 2a-7 SEC-regulated money funds (any fund with “money” in the title is regulated under 2a-7) included that daily maturities must equal at least 10% of the fund. And further, each week at least 30% of the fund notes need to mature. The weighted average maturity of all holdings in any non-government MM fund can not extend longer than 60 days, down from 90 days. The rules essentially were a safe cash alternative and made it super safe, and along the way, they rduced average return to the investors.

A reminder, there has not been an incident since the new rules, but there was some concern in 2020 as the financial system took measures in response to the novel coronavirus.

On July 12, 2023 the SEC announced it has decided that investors in MM funds need to be protected even better. Or perhaps it is better protecting the fund industry by adding extra safety measures that they all have to play by, giving none a real competitive advantage, and increasing their competitiveness against FDIC insure bank money funds. Either way, it is sure to lower, once again, the interest rates paid on the average MM fund. Considering interest rate compounding and the time value of money, investors this coming October will begin “paying” more for protections than they are probably worth.

The SEC explained its reasons for the added protection.“Money market funds – nearly $6 trillion in size today – provide millions of Americans with a deposit alternative to traditional bank accounts,” said SEC Chair Gary Gensler. “Money market funds, though, have a potential structural liquidity mismatch. As a result, when markets enter times of stress, some investors – fearing dilution or illiquidity – may try to escape the bear. This can lead to large amounts of rapid redemptions. Left unchecked, such stress can undermine these critical funds. I support this adoption because it will enhance these funds’ resiliency and ability to protect against dilution. Taken together, the rules will make money market funds more resilient, liquid, and transparent, including in times of stress. That benefits investors.”

The SEC finalized the most recent amendments to Rule 2a-7 on July 12, 2023. The amendments are designed to improve the resilience and transparency of money market funds by:

  • Requiring money market funds to impose a mandatory liquidity fee of 2% when daily net redemptions exceed 5% of total assets.
  • Increasing the minimum daily liquid asset requirement from 10% to 15% of total assets
  • Increasing the minimum weekly liquid asset requirement from 30% to 35% of total asset
  • Giving money market fund boards the discretion to impose a liquidity fee if daily net redemptions exceed 2.5% of total assets.

Beginning in October 1, 2023, money market funds will also disclose more information about their liquidity risk, including the daily and weekly liquid asset requirements, the amount of liquidity fees imposed, and the reasons for imposing liquidity fees.

What Could the Impact Be?

In economics, everything has an impact. To address redemption costs and liquidity concerns, the amendments will require institutional prime and institutional tax-exempt money market funds to impose liquidity fees when a fund experiences daily net redemptions exceeding 5 percent of net assets, unless the fund’s liquidity costs are de minimis. This alone could cause investors to try to be first to the door if trouble is perceived thereby increasing the number of runs on these low-risk funds. The shorter average maturity, and higher percentage of holdings held maturing in one day and seven days will also reduce earnings in a normal sloping yield curve environment.

In addition, the amendments will require any non-government money market fund to impose a discretionary liquidity fee if the board determines that a fee is in the best interest of the fund. This could be perceived as the funds management punishing investors for expecting a MM fund to provide liquidity on demand. It could also have the impact of funds taking more chances, as the fund manager knows that if a sudden withdrawal spree occurs and a large percentage of their holdings have gone down in value, they can charge customers for wanting their money. 

Take Away

When it comes to investing, risk versus return is a top consideration. Many investors know this and are concerned that regulatory bodies try to protect investors from the downside of risk. By doing this they shield investors from the benefits of risk. It can be argued that some IPOs may not be suitable for every investor, but should ultra-safe money market funds be further shored up at an ongoing cost in return, to reduce the unlikely day when they may lose 3 cents a share? Write to me and let me know what you think.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.sec.gov/rules/proposed/2021/ic-34441-fact-sheet.pdf

https://www.investor.gov/introduction-investing/investing-basics/glossary/money-market-fund

Harnessing the Power of Microglia

Posted on by phoffman@channelchek.com

Immune Cells in the Brain May Reduce Damage During Seizures and Promote Recovery

Seizures are like sudden electrical storms in the brain. Seizure disorders like epilepsy affect over 65 million people worldwide and can have profound effects on a person’s quality of life, cognitive function and overall well-being. Prolonged seizures called status epilepticus can cause lasting brain damage.

Specialized immune cells in the brain called microglia are activated during seizures to help clean up the damage. Researchers don’t fully understand exactly how these cells are involved in seizures. Some studies have found that microglia promote seizures, while other studies show the opposite.

This article was republished with permission from The Conversation, a news site dedicated to sharing ideas from academic experts. It represents the research-based findings and thoughts of, Synphane Gibbs-Shelton, Ph.D. Candidate in Pharmacology, University of Virginia.

I am a scientist who studies the roles that microglia play in seizures. My colleagues and I at the Eyo Lab at the University of Virginia wanted to investigate the possible protective function microglia serve during seizures and how they affect recovery.

We induced seizures in mice using three different methods – chemical, hyperthermic and electrical – and temporarily removed their microglia. In all three cases, we found that seizures worsened when these cells were absent. Mice without microglia also experienced significant weight loss and decrease in mobility compared with mice with microglia.

Our findings highlight the importance of microglia in safeguarding the brain during seizures and promoting recovery; but they also raise important questions about how these cells provide a protective rather than detrimental effect.

While removing all microglia allowed us to better understand their overall effects on seizures, it meant we were unable to fully assess their contributions in specific brain regions and how they interact with other cells. This is because removing microglia also affects the function of other brain cells. Future studies that more selectively modify microglia or alter their function in a controlled way could help researchers gain a more nuanced understanding of the role these cells play in seizures.

This video shows microglia moving in cell culture.

Researchers also don’t fully understand what specific molecules and signals microglia use to protect the brain during seizures. How well our findings apply to seizure disorders like epilepsy is also unclear. These knowledge gaps highlight the complexity of seizure disorders and the need for continued study.

Identifying strategies to harness the beneficial functions of microglia can help researchers develop better treatments that prevent long-term brain damage and enhance the quality of life of people with seizure disorders.

Release – Comtech Awarded $30 Million Troposcatter Contract to Support US Army Communications

Posted on by aweinsoff@channelchek.com

Research News and Market Data on CMTL

COMTECH – JUL 13, 2023 | 2 MIN READ

Comtech’s Troposcatter Systems to Enhance U.S. Army BLOS Communications Across All Domains

MELVILLE, N.Y. –
July 13, 2023– Comtech (NASDAQ: CMTL) announced today that the company was recently awarded a $30 million contract from Fairwinds Technologies, LLC to provide Comtech’s next-generation Troposcatter Family of Systems (FOS) in support of U.S. Army tactical communications.

Under this contract, Comtech will provide its leading software-defined Troposcatter FOS to enhance U.S. Army Beyond-Line-of-Site (BLOS) communications capabilities across all domains. With the most deployed Troposcatter communications systems in the world, Comtech’s feature rich FOS can be seamlessly integrated with other communications systems to provide the U.S. Army with integrated, resilient, and flexible network architectures that can be used to significantly enhance the situational awareness picture in nearly every environment.

“This award further demonstrates Comtech’s global leadership in turnkey Troposcatter communications technologies as well as the value of our battle-proven FOS, which can deliver robust, high capacity BLOS capabilities when and where they matter most,” said Ken Peterman, President and CEO, Comtech. “Through this award, we believe Comtech will become the leading provider of next-generation Troposcatter systems for the U.S. Army.”

Comtech’s portfolio of defense and security technologies, including its next-generation Troposcatter FOS, are designed to deliver the integrated communications capabilities needed to enhance Combined Joint All Domain Command and Control (CJADC2) operations. Comtech has extensive experience developing and deploying customized, interoperable, robust, and resilient communications systems and services for all branches of the U.S. Department of Defense, as well as coalition forces.

Comtech’s Troposcatter FOS are squarely positioned to support military operations, disaster response situations, emergency communications restoration events, and other government and commercial applications. With software defined technologies embedded at the core, Comtech’s Troposcatter systems can continuously evolve over time to meet emerging government and commercial use cases as well as support future smart-enabled networks across a variety of global markets and geographies.

Headquartered in Annapolis, Maryland, Fairwinds Technologies designs and integrates communications, networking, and information technology solutions to serve defense and civilian agencies around the world.

About Comtech

Comtech Telecommunications Corp. is a leading global technology company providing terrestrial and wireless network solutions, next-generation 9-1-1 emergency services, satellite and space communications technologies, and cloud native capabilities to commercial and government customers around the world. Our unique culture of innovation and employee empowerment unleashes a relentless passion for customer success. With multiple facilities located in technology corridors throughout the United States and around the world, Comtech leverages our global presence, technology leadership, and decades of experience to create the world’s most innovative communications solutions.For more information, please visit www.comtech.com.

Forward-Looking Statements

Certain information in this press release contains statements that are forward-looking in nature and involve certain significant risks and uncertainties. Actual results and performance could differ materially from such forward-looking information. The Company’s Securities and Exchange Commission filings identify many such risks and uncertainties. Any forward-looking information in this press release is qualified in its entirety by the risks and uncertainties described in such Securities and Exchange Commission filings.

View source version on businesswire.com: https://www.businesswire.com/news/home/20230712232860/en/

Comtech Contacts:

Investor Relations

Robert Samuels

631-962-7102

robert.samuels@comtech.com

Media Relations

Jamie Clegg

480-532-2523

jamie.clegg@comtech.com

Release – Direct Digital Holdings Announces New $5 Million Revolving Credit Facility with East West Bank

Posted on by aweinsoff@channelchek.com

Research News and Market Data on DRCT

July 13, 2023 9:00am EDT

HOUSTON, July 13, 2023 /PRNewswire/ — Direct Digital Holdings, Inc. (Nasdaq: DRCT) (“Direct Digital Holdings” or the “Company”), a leading advertising and marketing technology platform operating through its companies Colossus Media, LLC (“Colossus SSP”), Huddled Masses LLC (“Huddled Masses”) and Orange142, LLC (“Orange142”), is pleased to announce it has entered into a $5 million revolving credit facility (the “Credit Facility”) with East West Bank.

In addition to the principal amount of up to $5 million, the Company has access to up to an additional $5 million uncommitted incremental revolving facility, which may increase the aggregate principal amount of the credit facility to $10 million. Loans under the Credit Facility mature on July 7, 2025, unless the Credit Facility is otherwise terminated pursuant to its terms.

Mark D. Walker, Chairman & Chief Executive Officer of Direct Digital Holdings, commented, “We are excited to begin our relationship with East West Bank and are appreciative of the financial flexibility and liquidity that this partnership provides. We look forward to continuing to invest in and grow our businesses through this new source of non-dilutive capital.”

For more information, please view our Form 8-K filed with the Securities and Exchange Commission at www.sec.gov.

About Direct Digital Holdings

Direct Digital Holdings (Nasdaq: DRCT), owner of operating companies Colossus SSP, Huddled Masses, and Orange 142, brings state-of-the-art sell- and buy-side advertising platforms together under one umbrella company. Direct Digital Holdings’ sell-side platform, Colossus SSP, offers advertisers of all sizes extensive reach within general market and multicultural media properties. The company’s subsidiaries Huddled Masses and Orange142 deliver significant ROI for middle market advertisers by providing data-optimized programmatic solutions at scale for businesses in sectors that range from energy to healthcare to travel to financial services. Direct Digital Holdings’ sell- and buy-side solutions manage approximately 153,000 clients monthly, generating over 100 billion impressions per month across display, CTV, in-app and other media channels. Direct Digital Holdings is the ninth black-owned company to go public in the U.S. and was named a top minority-owned business by The Houston Business Journal.

Forward Looking Statements

This press release may contain forward-looking statements within the meaning of federal securities laws, including the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and which are subject to certain risks, trends and uncertainties.

As used below, “we,” “us,” and “our” refer to Direct Digital Holdings. We use words such as “could,” “would,” “may,” “might,” “will,” “expect,” “likely,” “believe,” “continue,” “anticipate,” “estimate,” “intend,” “plan,” “project” and other similar expressions to identify forward-looking statements, but not all forward-looking statements include these words. All statements contained in this release that do not relate to matters of historical fact should be considered forward-looking statements.

All of our forward-looking statements involve estimates and uncertainties that could cause actual results to differ materially from those expressed in or implied by the forward-looking statements. Our forward-looking statements are based on assumptions that we have made in light of our industry experience and our perceptions of historical trends, current conditions, expected future developments and other factors we believe are appropriate under the circumstances. Although we believe that these forward-looking statements are based on reasonable assumptions, many factors could affect our actual operating and financial performance and cause our performance to differ materially from the performance expressed in or implied by the forward-looking statements, including, but not limited to: our dependence on the overall demand for advertising, which could be influenced by economic downturns; any slow-down or unanticipated development in the market for programmatic advertising campaigns; the effects of health epidemics, such as the ongoing global COVID-19 pandemic; operational and performance issues with our platform, whether real or perceived, including a failure to respond to technological changes or to upgrade our technology systems; any significant inadvertent disclosure or breach of confidential and/or personal information we hold, or of the security of our or our customers’, suppliers’ or other partners’ computer systems; any unavailability or non-performance of the non-proprietary technology, software, products and services that we use; unfavorable publicity and negative public perception about our industry, particularly concerns regarding data privacy and security relating to our industry’s technology and practices, and any perceived failure to comply with laws and industry self-regulation; restrictions on the use of third-party “cookies,” mobile device IDs or other tracking technologies, which could diminish our platform’s effectiveness; any inability to compete in our intensely competitive market; any significant fluctuations caused by our high customer concentration; any violation of legal and regulatory requirements or any misconduct by our employees, subcontractors, agents or business partners; any strain on our resources, diversion of our management’s attention or impact on our ability to attract and retain qualified board members as a result of being a public company; our dependence, as a holding company, of receiving distributions from Direct Digital Holdings, LLC to pay our taxes, expenses and dividends; changes in the overall credit market or our creditworthiness; and other factors and assumptions discussed in the “Risk Factors,” “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” and other sections of our filings with the SEC that we make from time to time. Should one or more of these risks or uncertainties materialize or should any of these assumptions prove to be incorrect, our actual operating and financial performance may vary in material respects from the performance projected in these forward-looking statements. Further, any forward-looking statement speaks only as of the date on which it is made, and except as required by law, we undertake no obligation to update any forward-looking statement contained in this release to reflect events or circumstances after the date on which it is made or to reflect the occurrence of anticipated or unanticipated events or circumstances, and we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

Contacts:
Investors:
Brett Milotte, ICR
Brett.Milotte@icrinc.com

View original content to download multimedia:https://www.prnewswire.com/news-releases/direct-digital-holdings-announces-new-5-million-revolving-credit-facility-with-east-west-bank-301876597.html

SOURCE Direct Digital Holdings

Release – FAT Brands Inc. Announces Third Quarter Cash Dividend on Class A Common Stock and Class B Common Stock

Posted on by aweinsoff@channelchek.com

Research News and Market Data on FAT

JULY 13, 2023

LOS ANGELES, July 13, 2023 (GLOBE NEWSWIRE) — FAT (Fresh. Authentic. Tasty.) Brands Inc. (NASDAQ: FAT), a leading global franchising company and parent company of iconic brands including Round Table Pizza, Fatburger, Marble Slab Creamery, Johnny Rockets, Twin Peaks, Fazoli’s and 11 other restaurant concepts, announced today that its Board of Directors has declared the Company’s fiscal 2023 third quarter cash dividend of $0.14 per share on each outstanding share of Class A common stock and Class B common stock. The dividend is payable on September 1, 2023 to holders of record of Class A common stock and Class B common stock as of the close of business on August 15, 2023.

The declaration and payment of future dividends, as well as the amounts thereof, are subject to the discretion of the Company’s Board of Directors. The amount and size of any future dividends will depend upon the Company’s future results of operations, financial condition, capital levels, cash requirements and other factors. There can be no assurance that the Company will declare and pay dividends in future periods.

About FAT (Fresh. Authentic. Tasty.) Brands

FAT Brands Inc. (NASDAQ: FAT) (the Company) is a leading global franchising company that strategically acquires, markets and develops quick service, fast casual and casual dining restaurant concepts around the world. The Company currently owns seventeen restaurant brands: Round Table Pizza, Fatburger, Marble Slab Creamery, Johnny Rockets, Fazoli’s, Twin Peaks, Great American Cookies, Hot Dog on a Stick, Buffalo’s Cafe & Express, Hurricane Grill & Wings, Pretzelmaker, Elevation Burger, Native Grill & Wings, Yalla Mediterranean, Ponderosa and Bonanza Steakhouses and franchises and owns over 2,300 units worldwide. For more information, please visit www.fatbrands.com.

Forward Looking Statements
This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to significant business, economic and competitive risks, uncertainties and contingencies including, but not limited to, uncertainties surrounding the severity, duration and effects of the COVID-19 pandemic, many of which are difficult to predict and beyond our control, which could cause our actual results to differ materially from the results expressed or implied in such forward-looking statements. We refer you to the documents we file from time to time with the Securities and Exchange Commission, such as our reports on Form 10-K, Form 10-Q and Form 8-K, for a discussion of these and other risks, uncertainties and contingencies. We undertake no obligation to update any forward-looking statement to reflect events or circumstances occurring after the date of this press release.

Investor Relations:
ICR
Michelle Michalski
IR-FATBrands@icrinc.com
646-277-1224

Media Relations:
FAT Brands Inc.
Erin Mandzik
emandzik@fatbrands.com
860-212-6509

Alliance Resource Partners (ARLP) – Evolving into a Diversified Energy Company

Posted on by cpereira@noblefcm.com


Thursday, July 13, 2023

ARLP is a diversified natural resource company that generates operating and royalty income from coal produced by its mining complexes and royalty income from mineral interests it owns in strategic oil & gas producing regions in the United States, primarily the Permian, Anadarko and Williston basins. ARLP currently produces coal from seven mining complexes its subsidiaries operate in Illinois, Indiana, Kentucky, Maryland and West Virginia. ARLP also operates a coal loading terminal on the Ohio River at Mount Vernon, Indiana. ARLP markets its coal production to major domestic and international utilities and industrial users and is currently the second largest coal producer in the eastern United States. In addition, ARLP is positioning itself as an energy provider for the future by leveraging its core technology and operating competencies to make strategic investments in the fast growing energy and infrastructure transition.

Mark Reichman, Managing Director, Equity Research Analyst, Natural Resources, Noble Capital Markets, Inc.

Refer to the full report for the price target, fundamental analysis, and rating.

Refining estimates. While our 2023 EBITDA and EPU estimates are largely unchanged, we have made some quarterly adjustments lowering our second quarter EPU estimate to $1.30 from $1.35 and increasing our fourth quarter EPU estimate to $1.40 from $1.35. We have increased our coal sales volumes in the fourth quarter and modestly reduced our coal volumes and revenue per ton in the second quarter due in part to lower coal export prices during the second quarter which we think will strengthen during the second half. Second quarter crude oil prices were modestly lower than our estimates while natural gas prices were higher. We have trimmed our 2024 EBITDA and EPS estimates to $1.10 billion and $5.65 from $1.11 billion and $5.70, respectively, to reflect modestly lower coal volumes and prices compared to previous estimates.

Strong cash flow facilitates debt reduction. On July 25, Alliance will redeem $50.0 million of its 7.5% senior notes due 2025, representing 14.7% of the $339.2 million in aggregate notes outstanding. In March, the partnership purchased $26.6 million of its outstanding 2025 senior notes in the open market slightly below par. Alliance can call all or any part of its senior notes at par value and management intends to prioritize purchases with available cash flows in 2023 and 2024.


Get the Full Report

Equity Research is available at no cost to Registered users of Channelchek. Not a Member? Click ‘Join’ to join the Channelchek Community. There is no cost to register, and we never collect credit card information.

This Company Sponsored Research is provided by Noble Capital Markets, Inc., a FINRA and S.E.C. registered broker-dealer (B/D).

*Analyst certification and important disclosures included in the full report. NOTE: investment decisions should not be based upon the content of this research summary. Proper due diligence is required before making any investment decision. 

How the US and the UK Intend to Improve Capital Markets

Posted on by phoffman@channelchek.com

Why Issuer-Sponsored Research Has Become a Priority in the UK (and US)

Why are the United Kingdom, The United States, and other countries providing an atmosphere that helps promote company-sponsored research?

Last year the SEC issued a report that was required by Congress on issues affecting the investment research of small companies. Last week the UK accepted, in its entirety, a recommendation on issuer-sponsored research. Both countries recognize the needs of investors, issuers, and the overall economy. Investors and issuers ought to be particularly interested in these changes and how they’ll improve the financial system.

Investment Research

Research is like the grease in the capital markets that keeps money from being stuck. It can be categorized into three types: sell-side research, buy-side research, and independent research.

Sell-side research is provided by full-service broker-dealers for clients to consume.

Buy-side research is created by institutional money managers for in-house use to help them make investment decisions on the money they manage.

Independent research is provided by firms that are neither broker-dealers nor institutional money managers, this service is paid for by investors or at no cost to investors as the company that has issued the security has sponsored the analysis.

Analysts often specialize in a specific industry and will regularly provide research on companies within that industry. This research includes written reports that discuss market developments, financial projections, target prices, and overall ratings or recommendations (such as buy, hold, or sell). The specific content and terminology used in research reports will vary.

These research reports can be published at any time, especially in response to important corporate events like earnings releases. While sell-side and buy-side research may have limited distribution, independent research is more widely available to money management firms and individual investors.

Research helps investors gain clarity about a company and its prospects. It can provide interpretations of significant events related to the company, such as media coverage or predictions from other analysts. Individual investors can also benefit from research reports by using them as part of their overall investment decision-making process.

In addition to producing written research reports, research providers may also assist issuers by arranging meetings or conference calls between investors and the senior management of companies. These roadshows help allow better understanding and communication between investors and the companies they may be interested in.

Overall, research is essential in the capital markets, it provides valuable information and insights that help investors make informed decisions about their investments. It helps reduce uncertainty and allows investors to assess the potential risks and rewards associated with different investment opportunities.

Analysts can also introduce or express their opinions about specific of covered companies using other forums such as video interviews, print media, or investor/issuer conferences. Additionally, sell-side analysts who work for broker-dealers that offer investment banking services may, within regulatory guidelines, be involved in investment banking transactions.

Benefits to Issuer

Research helps investors by discovering and delivering important information about companies. Well-rounded investors consider research an important part of the information they use to make investment decisions, including staying up to date on analyst forecasts for the company and industry, management forecasts, earnings announcements, and SEC filings. This fosters improved liquidity, which benefits price discovery and execution on demand.

According to the Congressionally mandated SEC report titled Staff Report on the Issues Affecting the Provision of and Reliance Upon Investment Research Into Small Issuers, research coverage of a company positively affects the liquidity of its stocks. When a company loses analyst coverage, its stock liquidity can decrease. This decrease in liquidity is more pronounced for smaller companies with fewer analysts covering them. Research coverage also helps investors recognize and pay attention to companies, which affects their value. Investor attention can be gained by engaging research and analysis firms to initiate coverage to gain investor attention.

Excerpt from the Securities and Exchange Committee Report, February 2022, (page 11):

“Studies have shown that research coverage of an issuer is positively related to its stock liquidity and that a reduction in research coverage of an issuer may reduce its stock liquidity. For instance, one study found that issuers that lose analyst coverage for at least one year suffer a ‘significant deterioration in bid-ask spreads, trading volumes, and institutional presence.’

Other studies have found that the reason for this deterioration is that decreases in analyst coverage increases information asymmetry, which can cause issuers to switch to financing that is less sensitive to information asymmetry, including decreasing their use of equity and long-term debt, or cause issuers to decrease their total investment (e.g., capital, research and development and acquisition expenditures) and financing. This decline in liquidity was shown in one study to be more significantly pronounced for smaller issuers, issuers with relatively less analyst coverage, and issuers with a bigger increase in information asymmetry resulting from the loss of an analyst.”

According to the SEC report, research analysts also serve as a comfortable third-party mechanism by monitoring a company’s management. Their scrutiny increases transparency and makes it harder for managers to engage in self-dealing activities. Analysts monitor financial statements, ask questions during earnings announcement conference calls, and distribute information to investors, helping detect any misconduct by management.

When a company loses analyst coverage, according to an SEC review, markets anticipate an increase in agency costs, such as the misuse of cash reserves by managers. The number of analysts covering a company is related to the compensation of chief executive officers and the likelihood of value-destructive corporate acquisitions. Decreased analyst monitoring is also associated with increased earnings management by companies.

The UK Goes All In

On July 10, 2023, the UK formally announced they are on a mission to improve capital markets. A large segment of the new, self-imposed mandate includes the consensus that investment research is an important part of the UK public capital markets and that the availability and quality of expert analyst research is significant in attracting (and retaining) issuers and investors. The Chancellor of the Exchequer is adopting seven action items aimed at “protecting and developing the UK as a centre of excellence for investment research.”

Source: UK Investment Research Review , July 10, 2023 (page 5)

The report states that introducing a research platform to help generate research would help improve research coverage and would help promote a greater interest in smaller cap companies where there is currently a scarcity of research coverage.

The plan is to allow additional optionality for paying for investment research. And would address some of the unintended consequences of the MiFID II unbundling requirements, this aims to increase choices regarding payment for research to permit asset managers to pay for research on a bundled basis and to ensure that UK investment managers remain able to procure research from elsewhere, particularly from the US.

Retail investors have always been at a disadvantage, the UK mission supports greater access to investment research for retail investors, helping to level the playing field.

In developing a research platform open to all, the UK wishes to involve academic institutions and explore situations to strengthen the collaboration between universities and the capital markets ecosystem.  

By providing rules, boundaries, and guidelines, the UK believes it can support issuer-sponsored research by implementing a code of conduct.

The Uk wishes to clarify aspects of the UK regulatory regime for investment analysis or better define it to help simplify access to investment research.

And the last on the UK’s “To Do” list is to review the rules relating to investment research in the context of IPOs with the following points to consider:

  • Changing the FCA Conduct of Business Rules, introduced in 2018, designed to encourage unconnected research analysts to produce research in connection with IPOs. These rules have not had the desired effect of increasing IPO coverage by unconnected analysts but have consequentially extended the UK IPO timetable, putting the UK at a competitive disadvantage.
  • Making IPO-connected analyst research available on a basis similar to the prospectus so that all investors can access the same information.
  • Lower the current restrictions on analysts meeting potential IPO candidates prior to an investment bank being mandated on the IPO are also seen as putting the UK at a disadvantage to other listing venues.

Take Away

Investor access to investment research is important to the capital markets system as it helps money to flow much more easily where needed. Offerings that are better understood and have an additional layer of third-party oversight can attract more needed capital. This reality has been echoed by the SEC and the UK regulatory bodies.

Third-party investment analysis particularly helps smaller companies that may be less understood, as studies show, research coverage improves liquidity among small cap stocks. Investors, particularly retail, benefit from unbiased research and are more likely to make decisions on companies they believe they have a firm understanding of.

All in all, the UK and US authorities understand research provides valuable benefits to investors and the market as a whole. It enhances stock liquidity, increases investor recognition of companies, and serves as an external governance mechanism by monitoring and deterring managerial misconduct.

To have free access to small and microcap company research from the veteran equity analysts at Noble Capital Markets, sign-up here. If you are responsible for the investor relations of a company that may benefit from well-respected coverage, please contact Channelchek here for more information on company-sponsored research.  

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.cfainstitute.org/-/media/documents/code/other-codes-standards/analyst-issuer-guidelines.ashx

https://www.sec.gov/files/staff-report-investment-research-small-issuers.pdf

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1168719/UK_INVESTMENT_RESEARCH_REVIEW_-_RACHEL_KENT_10.7.23.pdf

https://www.lexology.com/library/detail.aspx?g=d36aa9a5-d058-4ddc-93d1-ef430dbe3fe7

Will Defining Current Laws to Fit AI, Artificially Stifle its Growth

Posted on by phoffman@channelchek.com

The Legal Problems AI Now Creates Should Pave the Way to a Robust Industry

Is artificial intelligence, or more specifically OpenAI a risk to public safety? Can ChatGPT be ruining reputations with false statements? The Federal Trade Commission (FTC) sent a 20-page demand for records this week to OpenAI to answer questions and address risks related to its AI models. The agency is investigating whether the company engaged in unfair or deceptive practices that resulted in “reputational harm” to consumers. The results could set the stage defining the place artificial intelligence will occupy in the US.

Background

The FTC investigation into OpenAI began on March 2023. It resulted from a complaint from the Center for AI and Digital Policy (CAIDP). The complaint alleged that OpenAI’s ChatGPT-4 product violated Section 5 of the FTC Act. Section 5 prohibits unfair and deceptive trade practices. More specifically, CAIDP argues that ChatGPT-4 is biased, deceptive, and a risk to public safety.

The complaint cited a number of concerns about ChatGPT-4, including:

  • The model’s potential to generate harmful or offensive content.
  • The model’s tendency to make up facts that are not true.
  • The model’s lack of transparency and accountability.

The CAIDP also argued that OpenAI had not done enough to mitigate these risks. The complaint called on the FTC to investigate OpenAI and to take action to ensure that ChatGPT-4 is not used in a harmful way. The FTC has not yet made any public statements about the investigation. OpenAI has not commented publicly on the investigation.

It is not clear what action, if any, the FTC can or will take.

Negligence?

With few exceptions, companies are responsible for the harm done by their products when used correctly. One of the questions the FTC asked has to do with steps OpenAI has taken to address the potential for its products to “generate statements about real individuals that are false, misleading, or disparaging.” The outcome of this investigation, including any regulation could set the tone and define where responsibility lies regarding artificial intelligence.

As the race to develop more powerful AI services accelerates, regulatory scrutiny of the technology that could upend the way societies and businesses operate is growing. What is difficult is computer use generally isn’t isolated to a country, the internet extends far beyond borders. Global regulators are aiming to apply existing rules covering subjects from copyright and data privacy to the issues of data fed into models and the content they produce.

Legal Minefield

In a related story out this week, Comedian Sarah Silverman and two authors are suing Meta and OpenAI, alleging the companies’ AI language models were trained on copyrighted materials from their books without their knowledge or consent.

The copyright lawsuits against the ChatGPT parent and the Facebook parent were filed in a San Francisco federal court on Friday. Both suits are seeking class action status. Silverman, the author of “The Bedwetter,” is joined in her legal filing by authors Christopher Golden and Richard Kadrey.

Unlike the FTC complaint, the authors’ copyright suits may set a precedent on intelligence aggregation. The sudden birth of AI tools that have the ability to generate written work in response to user prompts was “taught” using real life work. The large language models at work behind the scenes of these tools are trained on immense quantities of online data. The training practice has raised accusations that these models may be pulling from copyrighted works without permission – most worrisome, these works could ultimately be served to train tools that upend the livelihoods of creatives.

Take Away

Investing in a promising new technology often means exposing oneself to a not yet settled legal framework. As the technology progresses, the early birds investing in relatively young and small companies may find they hold the next mega-cap company. Or, regulation may limit, to the point of stifling, the kind of growth experienced by Amazon and Apple a few short decades ago.

If AI follows the path of other technologies, well-defined boundaries, and regulations will give companies the confidence they need to invest capital in the technology’s future, and investors will be more confident in providing that capital.

The playing field is being created while the game is being played. Perhaps if the FTC has a list of 20 questions for OpenAI in ten years, it will just type them into ChatGPT and get a response in 20 seconds.

Paul Hoffman

Managing Editor, Channelchek

https://www.ftc.gov/news-events/news/press-releases/2022/06/ftc-report-warns-about-using-artificial-intelligence-combat-online-problems

https://www.reuters.com/technology/us-ftc-opens-investigation-into-openai-washington-post-2023-07-13/

RCI Hospitality Holdings (RICK) – 3Q23 Club and Restaurant Sales

Posted on by cpereira@noblefcm.com


Wednesday, July 12, 2023

With more than 60 units, RCI Hospitality Holdings, Inc., through its subsidiaries, is the country’s leading company in adult nightclubs and sports bars/restaurants. Clubs in New York City, Chicago, Dallas-Fort Worth, Houston, Miami, Minneapolis, Denver, St. Louis, Charlotte, Pittsburgh, Raleigh, Louisville, and other markets operate under brand names such as Rick’s Cabaret, XTC, Club Onyx, Vivid Cabaret, Jaguars Club, Tootsie’s Cabaret, Scarlett’s Cabaret, Diamond Cabaret, and PT’s Showclub. Sports bars/restaurants operate under the brand name Bombshells Restaurant & Bar.

Joe Gomes, Managing Director, Equity Research Analyst, Generalist , Noble Capital Markets, Inc.

Joshua Zoepfel, Research Associate, Noble Capital Markets, Inc.

Refer to the full report for the price target, fundamental analysis, and rating.

3Q23 Club and Restaurant Sales. RCI reported sales for the Nightclubs and Bombshells restaurants of $76.4 million for the fiscal third quarter ended June 30th. This is an 8.9% y-o-y increase, driven by acquisitions which was partially offset by a decline in Same Store Sales across both segments. We had projected full revenue for the quarter of $77.7 million and consensus was $77.6 million. Recall the $76.4 million does not include non-core operations, which typically can add some $0.5-$1.0 million to the final quarterly total.

Nightclubs. Revenue rose 14.1%, y-o-y, or $7.7 million, to $62.0 million, driven by acquisitions and two reopened/reformatted clubs, which added $13.3 million of revenue combined. Segment SSS declined 7.3%, the first SSS decline in nine quarters. While the Nightclub business is recession resistant, the sharp SSS decline is surprising. In the most recent quarters, management had noted some localized weakness but no discernable, overall softness in the business. Openings of new and remodeled clubs should benefit 4Q23.


Get the Full Report

Equity Research is available at no cost to Registered users of Channelchek. Not a Member? Click ‘Join’ to join the Channelchek Community. There is no cost to register, and we never collect credit card information.

This Company Sponsored Research is provided by Noble Capital Markets, Inc., a FINRA and S.E.C. registered broker-dealer (B/D).

*Analyst certification and important disclosures included in the full report. NOTE: investment decisions should not be based upon the content of this research summary. Proper due diligence is required before making any investment decision. 

Forget About Gold and Silver, the Junior Miners’ Performance is Startling

Posted on by phoffman@channelchek.com

Why are Precious Metals Spiking?

The better-than-expected inflation numbers are having a positive impact on precious metals (PM) prices. And, depending on how one is invested to provide exposure to gold or silver, the performance varied by a wide margin.  Gold commodity prices jumped by 1.3% and silver by 4.5% after the CPI report on Wednesday July 12. With even better performance were mining stocks. What is causing the leap in prices, and is there a preferred category of investment taking preference over the others?

Why the Spike in Precious Metals?

A slowing inflation trend is reviving talk of the Federal Reserve pausing or completely halting rate hikes. The market had already built two rate hikes into prices. At about the same time the U.S. CPI report was released, The Bank of Canada raised its interest rates by 25bp. The EU raised its rates on June 15, meanwhile the U.S. central bank opted not to raise rates in June.

In reaction to a difference in rates available in the U.S. compared to outside in other currencies, the $U.S. dollar tumbled 1% to a low not seen in more than a year against major peers. This made PMs, including gold and silver, a more attractive asset to preserve wealth outside the U.S. And rates have dropped, the 10-year U.S. Treasury that had been trading at 3.94% before the print, and 4.08% as recently as last week, was yielding 3.86% by mid-afternoon.

Performance of PM Related Assets

Looking out since the beginning of July, we find that both gold and silver dipped to their lows last Friday. Additionally, gold mining stocks and silver mining stocks, using GDX and SIL ETFs as proxies, had the most dramatic dip, while gold and silver (expressed in $US dollars) barely went negative on the month.

What we also see is that when gold and silver rise, or fall, there has been an amplification of the move among the mining stocks. On the upside, the magnification of the trend was even more pronounced among junior mining stocks.

Source: Koyfin

While silver junior miners are the top performers MTD at 8.42%, they are closely followed by the gold junior mining stocks at 8.42%. Larger gold mining company stocks returned 5.96%, while gold itself, only returned 2%. Silver edged out the major mining stocks returning 5.92% compared to 5.35% over the 12 day period.

The patten of performance held during the one-day of trading that CPI was released with the gold majors swapping places with silver. And gold, the commodity, up significantly in one trading day but trailing the others by a wide margin.

Source: Koyfin

Choosing PM Investments

Investing in the commodities gold or silver is fairly straightforward and can be done with most brokerage accounts today. ETFs are also as easy to trade as a stock. However, the owner receives the weighted average of all the ETFs holdings, less fees.

While individual stock pickers run the risk of reduced diversification among miners, with some understanding of the differences in companies, they may also be able to perform above the average of a broad swath of companies within an ETF for gold, silver, or both.

There are places to look for information on mining companies, the more challenging information to acquire is of the smaller junior miners – the group that have been outperforming. Channelchek can help you discover these companies and provide data, research, and videos, to help build a better understanding before committing to an investment.

Or, to really jump-start your understanding of a host of mining companies, along with those in other exciting but more difficult-to-assess industries, consider coming to Florida in early December for NobleCon19, an investment conference where you can immerse yourself in the information provided directly from Sr. management of many junior miners and along with companies of other exciting industries.  

Learn more about NobleCon19 and presenters here.

Paul Hoffman

Managing Editor, Channelchek.com

Sources

https://www.channelchek.com/c-suite-interviews

https://app.koyfin.com/share/eecfbd6ad8

https://www.bankofcanada.ca/2023/07/fad-press-release-2023-07-12/

https://www.bankofcanada.ca/2023/07/fad-press-release-2023-07-12/

https://www.reuters.com/markets/commodities/gold-rises-softer-dollar-yields-ahead-us-inflation-data-2023-07-12/

Is this the Soft Landing They Told Us Could Not Happen?

Posted on by phoffman@channelchek.com

Weighing in on Powell’s Chances of a Hard Landing

Is the U.S. economy headed toward a soft landing? While rare, the numbers are beginning to argue in favor on the side of a soft landing versus a hard one. An economic soft landing is a situation in which the Federal Reserve is able to slow economic growth without causing a recession. A hard landing, on the other hand, is a situation in which the central bank’s efforts to slow down economic growth lead to a recession. Recent inflation reports, employment numbers, and economic growth figures are looking more and more like monetary policy over the past year and a half, may be defying past performance; the U.S. might be able to avoid a situation where the economy shrinks (negative growth).

Background

The Federal Reserve has been facing a difficult challenge for almost two years as inflation spiked well above the Fed’s 2% target. In fact increases in prices were at a 40-year high as inflation began to soar toward double-digits. Fed monetary policy, which effectively controls the money in the economy, that in turn impacts interest rates, has been acting to raise rates to bring inflation under control. Less money increases the cost of that money (rates), which dampens economic activity.

There has been, and continues to be, a risk that the Fed raises interest rates too high or too quickly, this is the hard landing economic path. The hard landing scenario is more common than soft landings.

The Federal Reserve has a miserable record of achieving soft landings. There have been a few occasions when the Fed has been able to slow down economic growth without causing a recession. One example of success is 1994-1995. During this period the Fed raised interest rates by 2.5% from a starting point of 4.25% in order to bring inflation under control. However, the economy continued to grow during this period, and there was no recession.

Today’s Scenario

The current state of the U.S. economy is uncertain. Inflation is at a 40-year high, and the Fed has been raising interest rates in an effort to bring it under control. However, there is a risk that the Fed will raise interest rates too high or too quickly, which could lead to an economic hard landing, with job losses and negative growth. In fact, after an FOMC meeting in November, Fed Chair Powell said it would be easier to revive the economy if they overtighten, than it would be to lower it if they don’t tighten enough. So to the Fed Chair, a hard landing is better than no landing at all.

There has been a high level of concern amongst stakeholders in the U.S. economy.  One reason is that the U.S. economy is already slow. GDP growth in the first quarter of 2023 was 2.0%, and it is expected to slow in the second quarter. Maintaining  growth while pulling money from the system to reduce stimulus is a difficult maneuver. In fact, it usually ends as a hard, undesirable economic landing.

Another factor that is of concern this time around is the state of the housing market. Home prices rallied with low interest rates during and post pandemic. A fall-off in housing would have a ripple effect throughout the economy, leading to job losses and lower consumer spending. So far, housing has held up as new home sales are strong, and demand for existing homes remains elevated as homeowners with low mortgage rates are deciding to stay put.

Where from Here?

On Monday (July 11), Loretta J. Mester, president and CEO of the Federal Reserve Bank of Cleveland, warned during an address in San Diego that the central bank may need to keep hiking rates as inflation has remained “stubbornly high.” Fed governors go into a blackout period on July 15 as they always do before an FOMC meeting. That meeting will be held on July 25-26. So there is no telling if the voting FOMC members are going to dial back their hawkishness in light of this week’s more favorable CPI report that shows yoy inflation at 3%.  

The Fed’s favored inflation gauge is PCE. The next PCE report is not to be released until July 28, after the July FOMC meeting. The previous report showed that in May, inflation was running at 3.8% over 12 months.

The banking system, which showed some cracks back in March, seems to be shored up; although some problems still exist, a full-scale banking crisis does not seem likely. The Fed would obviously like to keep it this way.

Employment gains were the smallest in 2-1/2 years in June, however the unemployment rate is close to historically low levels and wage growth is still strong, so although wages are not fully working their way into the final cost of goods or services, the industries having to pay the higher wages are likely absorbing some of the cost, which could pull from profits.

Part of the Fed’s tightening has been the less talked about quantitative tightening. This reduces the Fed’s balance sheet which swelled as part of the reaction to the pandemic.  Reducing this in a meaningful way will take time, but even if the Fed remains paused on rate hikes, there is still $90 billion scheduled to be pulled from the economy each month as maturities will be allowed to mature from the Fed’s holdings without being rolled. This my eventually cause U.S. Treasury rates and mortgage rates to tick up as increased Treasury borrowing, and decreased Fed ownership may put downward pressure on prices.

Take Away

The recent CPI report is causing some that argued a soft landing is achievable to celebrate and those that thought it impossible to consider it a possibility. The chances appear greater, and a soft landing is certainly a desirable outcome for stock prices and U.S. economy stakeholders. From here, there are a number of factors that can increase the risk of a hard landing, they include the pace of additional interest rate hikes, and the behavior of the housing markets. We’re entering a period where we will not hear any commentary from Fed governors, and the next major inflation indicator comes after the FOMC meeting, so markets will be on the edge of their seats until July 26 at 2 PM Eastern.

Paul Hoffman

Channelchek, Managing Editor

Sources

https://www.macrotrends.net/2015/fed-funds-rate-historical-chart

https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20220126.pdf

https://www.bea.gov/data/gdp/gross-domestic-product#:~:text=Real%20gross%20domestic%20product%20(GDP,real%20GDP%20increased%202.6%20percent.

https://www.pionline.com/economy/cooling-inflation-gives-investors-momentary-breather-asset-managers-say

https://www.bea.gov/data/personal-consumption-expenditures-price-index#:~:text=The%20PCE%20price%20index%2C%20released,included%20in%20the%20GDP%20release.