Markets Archives - Page 22 of 78

The Big Position – Michael Burry’s Holdings

Posted on May 16, 2023May 16, 2023 by phoffman@channelchek.com

Michael Burry, What He Bought, What He Sold, and What He Held

I mark my calendar for the four times a year that Michael Burry is required to make his quarterly holdings public. The founder of Scion Asset Management, who gained additional fame by the portrayal of him in the movie The Big Short, is not a follower of other investors. He does his own unique number crunching and analyzing and is often at odds with mainstream investor thinking. This week he filed his 13F with the SEC, which shows his holdings of publicly traded securities as of the close of business on March 31. It is important to note that his holdings at the close of the following trading day may not be the same.

The Dramatic Holdings Shift

There has been a conspicuous shift in the holdings in Burry’s hedge fund. For the first time that I can recall, he has taken large long positions in companies domiciled in China. This includes an increase in holdings in e-commerce company JD.com Inc. (JD) and retailer Alibaba (BABA).

These positions stood at quarter-end as the largest holdings of Scion, representing 20% of securities held. Many hedge funds have gone sour on investing in Chinese tech companies, Burry isn’t necessarily a contrarian, but it is not unusual for him to be at odds with his peers. Hedge funds’ net exposure to China has dropped to 10.5% from 13.3% in January, according to data from Goldman Sachs Group Inc.’s Prime Services unit. If other large investors are early to the party, or late, that allows him to buy into weakness, or sell into strength – if he’s right.

The Big Position

How big are his positions? After purchasing Alibaba and JD.com in the final months of 2022 as China ended its zero covid 19 policy, Burry, who had held JD.com as of the previous two 13F filings, added to the holdings. His bigger stake more than tripled to 250,000 shares, worth $11 million, or 11% of his portfolio. The report shows his holdings of Alibaba had doubled.

It is not just notable that Burry is long, but that he held larger long positions than he has in many quarters.

The report, which is a snapshot taken just a couple of weeks after Silicon Valley Bank (SVB) shook investors in financial stocks, shows that Michael Burry jumped in and bought shares of smaller banks in the first quarter – where there is fear, there are knee-jerk reactions to take advantage of. In fact, he appears to have jumped into the middle of the firestorm adding long positions of First Republic, Pacific Western (PACW), Western Alliance, New York Community Bank, and Huntington Bank (HBAN) last quarter. Burry also bought other financial stocks, specifically Wells Fargo (WFC) and Capital One (COF). There is no indication if these worked out for the investors in his fund.

Energy, Commodities, and Other Long Positions

Burry also ended last quarter with new positions in energy and commodity stocks. These may be an inflation hedge trade. Holding cash during periods of higher inflation is akin to sitting still while watching money blow away. While there is no guarantee that the investment alternative to cash will do better, the sectors have a long history that supports the trade. Scion was invested in Coterra Energy (CTR), Devon Energy (DVN), and Sibanye Stillwater (SBSW).

Burry closed out the quarter with shares in various other companies including Zoom Video (ZM), The RealReal (REAL), and Signet Jewelers (SIG).

He still maintains his long-term position in Geo Group (GEO). Geo is the world’s second largest private “prison company.” Geo Group has the honor of being Scion’s longest held position, put on sometime after the incoming administration sought to do away with privately owned prisons. Investors interested in how Geo Group navigated this challenge and is now finding other growth opportunities to utilize its assets, may wish to attend one of three no-cost roadshows in May that are part of the Noble Capital Markets and Channelchek Meet the Management Series. (Get more information here).

Closed Out and Longest Held Positions

Scion exited its positions in Wolverine Worldwide (WWW), MGM Resorts (MGM), Black Knight (BKI), Qurate Retail (QRTEA), and SkyWest (SKYW).

Take Away

The next Scion Asset Management 13F is expected to be filed on August 15^th. While current holdings are unknown, much can be discerned from what top investment managers traded at the time. This information can help guide current thinking. When he has conviction, Michael Burry is not afraid to pull the trigger, long or short. As we have seen, when he lacks conviction, he is equally unafraid to keep his powder dry and sit on the sidelines. Inflation adds a cost to sitting on the sidelines. In late March he was very long and seemed to be gravitating toward segments that were being shunned.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.goldmansachs.com/what-we-do/FICC-and-equities/prime-services/

https://www.sec.gov/Archives/edgar/data/1649339/000090514823000408/xslForm13F_X02/primary_doc.xml

https://capedge.com/filing/1649339/0000905148-23-000408/13FHR/file/2

The Reasons Veteran Investors are Now Eyeing Small-Cap Stocks

Posted on May 15, 2023May 15, 2023 by phoffman@channelchek.com

The Growing Case for Small-Cap Stocks: Is it Time to Make the Shift?

The more time that passes with small cap stocks lagging the large and mega caps, the louder very respected market voices are urging investors to move more assets to these smaller companies. The pro small cap stock outlook was reflected again in a recent Barron’s article. The piece highlighted what others continue to point out, that the large cap, S&P 500, is up nearly 8% on the year, but the gains have only been because of the performance of a few big tech stocks and the math used to measure the equity index.

A very eye-opening line in Barron’s points out that, “Apple (ticker: AAPL), Amazon.com (AMZN), Meta Platforms (META), Alphabet (GOOGL), Microsoft (MSFT), Nvidia (NVDA), and Tesla (TSLA) are up between 29% and 99% for the year.” These stocks make up a significant weighting of the large cap index, which means that much of the other large cap stocks have been negative in order to only provide an 8% return. To demonstrate how the weighting of the larger companies distorts return, just look at the Invesco S&P 500 Equal Weight ETF (RSP). This ETF weighs each stock in the S&P 500 equally. This has the effect of avoiding overweighting and one stock. This ETF is flat year-to-date. In contrast, The few tech names listed above total just under a third of the entire index.

The article also pointed out the truth that smaller names, those not in the S&P 500, have struggled. What does this mean for investors? Barron’s wrote, “They also look cheap—-and it may be time to take a nibble.” The case that others are also making is based on a number of current market setups. These include value, market history, and even macroeconomic trends that now may favor smaller companies over larger ones.

Big Tech companies like those mentioned above borrow massive amounts of money, they have been the beneficiaries of lower bond rates out on the yield curve. In addition to borrowing costs still below normal, valuing these stocks based on future earnings and comparing the expected earnings to available interest rates have caused investors to be less inclined to tie up money for ten years or more, (at 3.50%). Also, better than expected first-quarter earnings of big tech-inspired investors – product enhancements using artificial intelligence was credited with much of this.

Royce Funds’ Premier Quality Fund invests in “small cap quality.” In a recent article to investors co-lead portfolio managers Lauren Romeo and Steven McBoyle explained why, “small-cap quality looks so compelling in today’s uncertain investment environment.” The portfolio managers wrote, “Secular changes in economic trends, interest rates, and monetary and fiscal policies are creating seismic shifts in the investment landscape. The types of companies that benefited most from the past decade’s zero interest rate, low inflation, and low nominal growth regime—specifically, mega-caps and growth stocks—are unlikely to lead going forward.” Under this backdrop, the two gave their perspective which is that, “the unfolding macro environment appears to be set for quality small caps to capture and sustain long-term outperformance over large cap” through an uncertain period that is characterized by a near certain transition.

If tech stocks again falter because rates rise, advancement slows, or competition grows, the appearance of the S&P 500 large cap index stocks performing well could diminish. “Market gains continue to be dominated by uber-caps, masking the fact that 48% of S&P 500 member stocks are down year to date,” wrote Chris Harvey, chief U.S. equity strategist at Wells Fargo, on May 12.

Within the same index family (S&P), is the S&P 600, which is a small cap index. It is not currently having a positive year, and is down about 3%. Interestingly, the reverse argument can be made for this benchmark since it is overweighted in one specific sector. Financials, which have taken a beating this year is the largest sector weighting in the S&P 600. It accounts for just over a fifth of the performance. This has dragged the index lower, as regional banks have seen billions of depositor dollars walk out the door as savers and investors move assets to higher-yielding money-market funds. This, as we know, has caused liquidity problems at many banks, and caused some to fail.

2023 has been a challenging market for stocks despite the S&P 500 performance. It has been challenging for small caps too, but not as challenging as the S&P 600 performance would have one believe without looking under the hood. Small caps, independent of the high weighting of financials in the benchmark are positive on the year. One very real concern large cap investors are now facing is whether the flow into large cap funds have overly inflated the value, based on most stock valuation metrics, above where they would naturally trade if not for indexed funds.

The economy is not expected to get much stronger this year. Higher interest rates have already begun to stress the US economy, and banking problems are expected to cause tighter lending and consumer spending. And as mentioned a few times, the widely quoted S&P 500’s performance, is covering up what has mostly been a tough equity market.

But while large caps look expensive, for the reasons mentioned, respected experts say small caps look cheap. The S&P 600’s aggregate forward price/earnings multiple is just under 13 times – this compares with the S&P 500 which is 18 times. While on the surface, this doesn’t seem striking, it is! While the difference between 13 times and 18 times doesn’t sound wide, it marks a 30% difference. That is a massive discount. Historically the small cap index trades at a slight premium to its large-cap counterpart, but even in times of economic stress, it doesn’t trade at such a wide discount. In March of 2020, the height of pandemic risk aversion, its multiple was only 25% below the S&P 500.

Take Away

It has been a tougher year for stocks than the performance of the large cap S&P 500 would have one think without digging below the surface and netting out its largest sector weighting. The small cap S&P 600 is down, but largely because of its own largest sector weighting. This is one of the many problems inherent in how popular index investing has become. While stocks in general seem to be facing increasing headwinds, investors that selectively evaluate small cap names for inclusion in the equity portion of their portfolio may find the payoff is better than the alternatives.

Evaluating small cap opportunities is easy with Channelchek as the platform specializes in supplying data, information, and no-nonsense research on smaller opportunities. Please feel free to explore further by scrolling up to the search bar and typing in an industry, company name, or ticker. Channelchek is a free platform designed to help investors and opportunities find each other.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.barrons.com/articles/small-cap-stocks-big-tech-15df5779?mod=hp_LEAD_2

https://www.royceinvest.com/insights/2023/2Q23/why-the-time-looks-right-for-quality?utm_source=royce-mktg&utm_medium=email&utm_campaign=insights&utm_content=txt-3

https://app.koyfin.com/share/084b52d626

The Week Ahead – Powell Panel, Retail Numbers, Debt Ceiling Negotiations

Posted on May 15, 2023May 15, 2023 by phoffman@channelchek.com

The Market Will Experience a Barrage of Appearances by Fed Officials

This will be another week of various regional Fed Presidents speaking and setting expectations of potential adjustments to monetary policy; this includes Jerome Powell and Former Fed Chair Ben Bernanke. Retail and consumer health could come into sharper focus during the week as major retailers report earnings and April retail sales are reported early in the week. The initial results for the Russell Reconstitution of its main indexes will be released after the close of trading on Friday. Also, late week, Fed Chair Jay Powell will make an appearance on a panel with Ben Bernanke.

Monday 5/15

8:30 AM ET, The Empire State Manufacturing Index for May is expected to fall back to negative territory at minus 2.0 after April’s 35-point surge into positive ground at 10.8. This monthly survey of manufacturers in New York State is seldom market moving, but combined with other reports helps draw a picture of economic health within the region and more broadly.
8:45 AM ET, Ralph Bostic, the CEO of the Atlanta Federal Reserve, will be speaking.
9:15 AM ET, Neel Nashkari, the President of the Minneapolis Federal Reserve, will be speaking.
12:30 PM ET, Thomas Barkin, the President of the Richmond Federal Reserve, will be speaking.

Tuesday 5/16

8:15 AM ET, Loretta Mester, CEO of the Federal Reserve Bank of Cleveland, will be speaking.
8:30 AM ET, April Retail Sales are expected to rise 0.7 percent versus March’s 1.0 percent decline that, much of the earlier decline was led by declines in car sales and gasoline.
8:55 AM ET, Raphael Bostic will be speaking. Bostic is the CEO of the Atlanta Fed.

9:15 AM ET, Industrial Production is expected to be unchanged in April after March’s 0.4 percent increase that was boosted by utilities output. Manufacturing output is seen as up 0.1 percent after falling 0.5 percent in March.
10:00 AM ET, Business Inventories in March are expected to remain unchanged following a 0.2 percent build in February.
10:00 AM ET, the Housing Market Index has not been experiencing the steep declines witnessed last year. After April’s previously reported 1-point gain to 45, May’s consensus is no change at 45.
12:15 PM ET, John Williams, the President of the New York Federal Reserve, will be speaking.
3:15 PM ET, Lorrie Logan is the President of the Federal Reserve Dallas, she will be speaking.
7:00 PM ET, Raphael Bostic, will be speaking. Bostic is the CEO of the Atlanta Fed.

Wednesday 5/17

7:30 AM ET, Mortgage Applications, compiled by the Mortgage Bankers’ Association will be released. compiles various mortgage loan indexes. The index measures applications at mortgage lenders. This is a leading indicator for single-family home sales and housing construction.
8:30 AM ET, Housing Starts and Permits during March edged lower to a 1.420 million annualized rate; April is expected to slip further to 1.405 million. Permits, at 1.413 million in March and, though lower than expected, very near the starts rate, is expected to rise to 1.430 million.
10:30 AM ET, The Energy Information Administration (EIA) provides weekly information on petroleum inventories in the U.S., whether produced here or abroad. The level of inventories helps determine prices for petroleum products.

Thursday 5/18

8:30 AM ET, Jobless Claims Jobless claims for weekly period ended May 13 are expected to fall back to 255,000 after rising a steep 22,000 to 264,000 in the prior week.
10:00 AM ET, Philadelphia Fed Manufacturing Index, The Philadelphia Fed manufacturing index has been in contraction the last nine reports and very deeply so in April at minus 31.3. May’s contraction is seen at minus 20.0.
9:05 AM ET, Lorrie Logan, President of the Dallas Fed is scheduled to speak.
10:00 AM, Ecommerce Retail Sales, are sales of goods and services where an order is placed by the buyer or where price and terms of sale are negotiated over the Internet, an extranet, Electronic Data Interchange (EDI) network, or other online system.
10:00 AM, The Index of Leading Economic indicators, had plunged 1.2 percent in March, it is expected to fall a further 0.6 percent in April. This index has been in sharp decline and has long been signaling a pending recession.
10:30 AM, The Energy Information Administration (EIA) provides weekly information on natural gas stocks in underground storage for the U.S. and five regions of the country. The level of inventories helps determine prices for natural gas products.

Friday 5/19

8:30 PM ET, Import/Export Prices. Import Prices, an inflation harbinger is expected to rise 0.3 percent for April, this would end nine straight declines. Export prices are expected to rise 0.2 percent.
8:45 AM, John Williams, the President of the New York Federal Reserve, will be speaking.
10:00 PM ET, Consumer Sentiment looking at the first indication for May, which in April fell 1.5 points to 63.5, is expected to fall another half point to 63.0.
10:00 AM ET, Quarterly Services is expected is focuses on information and technology-related service industries. These include information; professional, scientific and technical services; administrative & support services; and waste management and remediation services. These sectors correspond to three NAICS sectors (51, 54, and 56). The Quarterly Services Survey produces estimates of total operating revenue and the percentage of revenue by class of customer.
11:00 AM, ET, Fed Chair Powell, is joined on a panel titled “Perspectives on Monetary Policy” by former Fed Chair Ben Bernanke.
4:00 PM ET, The FTSE Russell Index reports the first list of stocks leading to the Russell’s Reconstitution in 2023.

What Else

Investment roadshows are like getting a front-row seat to information direct from management’s mouth. The most useful investor information often comes from the unplanned responses to questions during the roadshow – either asked by you, or other interested investors.

Noble Capital Markets has an expanding and interesting calendar of roadshows during the week and month. Some are in cities that are paid less attention to than the major financial centers. This week CoCrystal (COCP) will be presenting at roadshows in Miami, and Boca Raton, FL. For more details, and a complete list of roadshows and cities, Click here.

Paul Hoffman

Managing Editor, Channelchek

Sources:

https://www.federalreserve.gov/newsevents/calendar.htm

https://www.econoday.com/

https://www.channelchek.com/news-channel/noble_on_the_road___noble_capital_markets_in_person_roadshow_series

Valuing a Stock: Can You Determine Its True Worth?

Posted on May 11, 2023May 11, 2023 by phoffman@channelchek.com

How Do I know if a Stock is Over or Under Priced?

Investors are always searching for the next great investment opportunity; one of the most fundamental factors in making an educated investment decision is determining if the market is undervaluing a specific stock. Valuing a stock involves analyzing various financial metrics and market conditions to determine the stock’s intrinsic value. This represents the true worth of the company, knowing it before others discover the value provides an investment edge and maybe above-average returns.

There are several key factors that investors should consider when valuing a stock. These include the P/E ratio (price/earnings), intrinsic value, GAAP earnings vs. adjusted earnings and other metrics and market expectations. When determining P/E and other ratios, variations that may come into play for a specific industry or economic environment are important measures as well. These could include industry comparisons of price/sales ratio, price/book ratio, and trends like industry grouping conditions improving or deteriorating.

Below we’ll look at many of the numbers that investors use as filters to create watch lists. The lists can then be used to weigh one opportunity against another based on market environments, demand trends, and competition.

P/E Ratio

The P/E ratio, or price-to-earnings ratio, is a commonly used metric for valuing stocks. It’s the ratio of a company’s stock price to its actual earnings per share (EPS). A high P/E ratio indicates that investors are paying a premium for the company’s continued earnings potential, while a low P/E ratio suggests that the company may be undervalued.

As an example, the price-to-earnings ratio (taking the latest closing price and dividing it by the most recent earnings per share) for Meta Platforms (META) as of May 10, 2023 is 23.95. That is to say that it each share is priced at almost 24 times earnings. By comparison, General Morors (GM) has a current P/E ratio of 5.11. This could indicate that the stability or growth potential of Meta (Facebook) is perceived by investors as greater than a traditional car company in an increasingly competitive environment – or that the value of one is not sustainable. This information gives the investor a foundation from which to make decisions.

Of course it is not that easy. It’s important to note that not all P/E ratios are created equal. The P/E ratio can be calculated using either GAAP (Generally Accepted Accounting Principles) earnings or adjusted earnings, which can have a significant impact on the valuation of a company. Non-GAAP financial measures exclude certain expenses. The exclusions include one-time expenses like restructuring charges, gains/losses from asset sales, and other non-operating items. The refined metric is often used by investors and analysts to assess a company’s earnings power excluding certain items that may not be representative of the company’s core business operations.

Variations of P/E Ratio

There are also several variations of the P/E ratio that investors should be aware of. The forward P/E ratio uses projected earnings instead of historical earnings to calculate the ratio, this can provide a more accurate picture of a company’s future valuation potential. Of course, this depends upon the accuracy of forecasts.

The trailing P/E ratio, on the other hand, uses historical earnings over the past 12 months to calculate the P/E ratio.

Price/Sales Ratio

The price/sales ratio is another valid measure of a stocks over or undervaluation. It represents the ratio of a company’s stock price to its sales per share. This ratio is particularly useful for valuing companies that have yet to turn a profit, as it focuses on the company’s revenue instead of its earnings.

Price/Book Ratio

The price/book ratio is a metric that compares a company’s stock price to its book value per share. Book value represents the total value of a company’s assets minus its liabilities, and it provides a measure of the company’s ability to earn per asset. A low price/book ratio may indicate that a company is efficient and undervalued, while a high price/book ratio may indicate that the company is overvalued.

Intrinsic Value

The intrinsic value of a stock represents its true worth based on the company’s underlying fundamentals, such as its revenue, earnings, and assets. Calculating intrinsic value can be a complex process that involves forecasts developed by analyzing financials, market trends, demand for product growth, and other relevant factors. The most common method for calculating intrinsic value is the discounted cash flow (DCF) method, this involves projecting a company’s future cash flows and discounting them back to their present value. Present valuing future cash flows results in what many use as the measure of intrinsic value of a company’s stock.

Business Conditions

It is always important to consider the overall business conditions when valuing a stock. This may be why GM has a much lower P/E than META. The growth in demand for tech is expected to continue to be greater than the growth in demand for cars. In other words, a company that is operating in a growing industry with strong demand may be more valuable than a company that is operating in a declining or increasingly competitive industry. Similarly, a company that is well-positioned to take advantage of new technologies or trends may be more valuable than a company that is lagging behind its competitors.

In all cases, it’s imperative that investors consider macroeconomic factors, such as interest rates, inflation, and geopolitical risks, that could impact the overall market conditions and the company’s performance.

Take Away

Self-directed investors typically have at their disposal a platform that can filter and sort through many criteria. This helps investors that are trying to determine if a stock is currently undervalued. The information that one pulls from these filters and ratio analysis is only as valid as its accuracy and completeness. But it can serve as a good starting point to avoid stocks that are currently overvalued and to uncover companies that are not getting the attention they need to have its stock trade at higher valuations.

An investor doesn’t have to be first to recognize an undervalued stock, but discovering it early and then hoping others follow may require an investor to look at companies not making headlines every week. The 6,000 small-cap stock names on Channelchek, complete with enough data to compare the ratios and other elements mentioned above, may be the only stock universe needed to help an investor create a watch list of potentially undervalued opportunities.

Paul Hoffman

Managing Editor, Channelchek

The U.S. Debt Limit and the False Sense of Security in Money Market Funds

Posted on May 9, 2023May 9, 2023 by phoffman@channelchek.com

Even a Short-Lived Default Would Hurt Money Market Fund Investors

While the U.S. Treasury is now at the mercy of politicians negotiating, positioning, and stonewalling as they work to raise the debt ceiling to avoid an economic catastrophe, money kept on the sidelines may be at risk. Generally, when investors reduce their involvement in stocks and other “risk-on” trades, they will park assets in money market funds. These investment products are now paying the highest interest rates in 15 years, which has made the decision to “take money off the table” even easier for those involved in the markets.

But, are investors experiencing a false sense of security?

Background

Money Market Funds (MMF) are mutual funds that invest in top credit-tier (low-risk) debt securities with fewer than 397 days to maturity. The SEC requires at least 10% to be maturing daily and 30% to be liquid within seven days. The acceptable securities in a general MMF include Treasury bills, commercial paper, and even bank CDs. The sole purpose of a money market fund is to provide investors with a stable value investment option with a low level of risk.

Unlike other mutual funds, money market funds are initially set and trade at a $1 price per share (NAV). As interest accrues, rather than the value of each share rising, investors are granted more shares (or fractional shares) at $1. However, the funds are marketed-to-market each day. Typically market prices don’t impact short-term debt securities at a rate above the daily interest accrual. But “typically” doesn’t mean always. Occasionally, asset values have dropped faster than the daily interest accrual. When this happens, the fund is worth less than $1 per share. It’s called “breaking the buck.”

When a money market fund “breaks the buck,” it means that the net asset value (NAV) per share of the fund falls below $1. In addition to quick valuation changes, it can also happen when the fund’s expense ratio exceeds its income. You may have gotten a notice during the extremely low interest period that your money market fund provider was absorbing expenses. This was to prevent it from breaking the buck.

Nothing is Risk Free

Just under $600 billion has moved into money-market funds in the past ten weeks. This is more than flowed into MM accounts after Lehman Brothers went belly up which set off panic and flights to safety. Currently, $5.3 trillion is invested in these funds; this is approaching an all-time record.

The Federal Reserve has been lifting interest rates at a record pace, the level they have the most control over is the bank overnight lending rate, or Fed Funds. This impacts short-term rates the most. Along with more attractive rates, stock market investors have become nervous. This is another reason asset levels in MMFs are so high – a high-yielding money-market fund that is viewed as risk-free looks attractive compared to the fear of getting caught in a stock market sell-off.

As discussed before, there are risks in money-market funds. And right now, the risks may be peaking. This is because government spending has exceeded the ability for the U.S. to borrow and pay for it under the current debt ceiling limit. The limit was actually reached last January when it was addressed by kicking the problem further down the road. Well, the road now ends sometime in June. In fact, U.S. Treasury Secretary Janet Yellen said the U.S. government may run out of cash by June 1 if Congress doesn’t act, and that economic chaos would ensue if the government couldn’t pay its obligations. Not paying obligations would include not paying interest on maturing U.S. Treasuries.

It isn’t a stretch to say the foundation of all other securities pricing is in relationship with the “risk-free” rate of U.S. debt. That is to say, price discovery has as its benchmark that which can be earned in U.S. debt which has been presumed to be without risk of non-payment.

What Happens to Money Market Funds in a Default?

In a default, the U.S. Treasury wouldn’t pay the full principle it owes on liabilities such as maturing Treasury debt – short term term government debt with extremely short average maturities is a staple of market funds. That is why the price of one-month Treasury debt has dropped recently, sending its yield up to above 5% from a 2023 low of about 3.3%. It has driven expected returns of MMFs up as well, but there is a risk that these short maturities may not get fully paid on time. Many fund providers’ money market funds would then break the $1 share price.

Breaking the buck can have significant consequences for investors, particularly those who rely on money market funds for their cash reserves. Because money market funds are considered a low-risk investment, investors may not expect to lose money on their investment. If a money market fund breaks the buck, it would diminish investor confidence in the stability of these funds, leading to a potential run on the fund and broader implications for the financial system.

Likelihood of Breaking the Buck

Money market funds breaking the buck is a relatively rare occurrence. According to the Securities and Exchange Commission (SEC), there have been only a few instances where MMFs have broken the buck in the history of the industry. The most significant of these occurred in 2008 during the financial crisis when one of the oldest money market funds, Reserve Primary Fund, dropped below $1 due to losses on its holdings of Lehman Brothers debt securities. This event led to a run on many money market funds creating significant instability in the financial system.

Since the Reserve Primary Fund incident, regulatory changes have been implemented to strengthen the money market fund industry and reduce the risk of funds breaking the buck. These changes include requirements for funds to maintain a minimum level of liquidity, hold more diversified portfolios, and limit their exposure to certain types of securities.

Take Away

Nothing is risk-free. Banks such as Silicon Valley Bank found that out when their investment portfolio, largely low credit risk, normally stable securities, wasn’t valued at what they needed it to be worth to fund large withdrawals.

Stock market investors that were drawn in invest in to rising bond yields also found that when yields keep rising, the values of their portfolios can drop just as quickly as if they were invested in stocks during a sell-off. While no one truly expects the current tug-of-war over debt levels in Washington to lead to a U.S. default, one can’t be sure at a time when there have been many firsts that we thought could never happen in America.

Paul Hoffman

Managing Editor, Channelchek

Can You Prepare for Hyperinflation?

Posted on May 8, 2023May 8, 2023 by phoffman@channelchek.com

Hyperinflation, Can Investors Protect Themselves?

Inflation in Argentina so far in 2023 is running at 126.4%. Meanwhile, its GDP has declined by 3.1%. This certainly meets the definition of hyperinflation. Can this situation occur in the U.S. economy? Hyperinflation is when prices of goods and services in the economy run up rapidly; at the same time, it causes the value of the nation’s currency to fall rapidly. It’s a devastating phenomenon that has serious consequences for businesses, investors, and households. Below we explore the causes of hyperinflation, its effects on the economy, and some ways to protect investable assets against it.

Causes of Hyperinflation

Hyperinflation can be caused by a variety of factors, but one ingredient that is most common is excessive money printing by the country’s central bank. When a central bank allows excessive cash in circulation, especially if it is during a period of low or negative growth, natural economic forces that occur when there is an abundance of currency chasing the same or fewer goods, serves to drive up prices and down currency values. This inflation can quickly spiral out of control, leading to hyperinflation. Other causes could include shortages of goods or services driving prices up as demand outstrips available supply.

Effects on the Economy

Excessive inflation is not good for anyone that holds the impacted currency. Businesses can command higher prices, but they will also be paying higher prices to run their business and receiving payment with notes with far less purchasing power. This is because hyperinflation increases costs for labor and raw materials, weighing down profit margins. Less obvious, but certainly adding to the hardship, is that businesses may have trouble securing financing and loans during hyperinflation; this can limit their ability to function or grow.

For households and individuals, hyperinflation also rapidly decreases purchasing power, as prices for goods and services jump up. This lowers living standards in the country as people are forced to pay more for the same goods and services. Additionally, hyperinflation can lead to a loss of confidence in the currency. Behavior including the belief that items should be purchased now because they will be more expensive tomorrow leads to hoarding and other actions that create shortages and drives up prices even further.

How Some Prepare for Hyperinflation

Hyperinflation is rare, yet, once the wheels start turning, such as they did in Venezuela in 2016, or Germany in 1923, it is important for businesses and individuals to take steps to prepare for the possibility. Here are ways that people have prepared for excessive inflation in their native currency.

Diversify Your Investments: While some believe it is always prudent to stay widely diversified, it may offer even more protection when the economy goes through the turmoil of excessive inflation. Preparing in this way means spreading your investments across a variety of asset classes, such as stocks, bonds, real estate, and commodities. This will help by avoiding any one particular asset class that gets hit hard. Keep in mind, stocks are often a good hedge against moderate inflation, and precious metals have historically been looked to for protection in times of extreme inflation. Earnings of companies that export are not expected to suffer as much as importers.

Hold Some Assets Denominated in Other Currencies: This can include established digital currencies, foreign stocks, bonds, that are not denominated in your own home currency. By holding assets denominated in other currencies, you can protect yourself from its devaluation versus others.

Invest in Hard Assets: Hard assets, such as gold and silver, land, and even tools can be a good way to protect yourself or your business from hyperinflation. These assets have intrinsic value and can retain their value even if the currency they are denominated in loses value. Remember that if inflation remains, it is likely to cost more in the coming months for the same piece of office equipment that helps your business run more efficiently.

Cryptocurrencies: Keeping within the guidelines of diversification, more established tokens such as bitcoin and ether are considered by some to help protect from hyperinflation. A word of caution, cryptocurrencies have little history against currency devaluation and inflation. The theory however is these digital currencies are decentralized and not subject to the same inflationary pressures as fiat currencies.

Take Away

In 2018 inflation in Venezuela exceeded 1,000,000%, proving, when the recipe for higher prices is in place, the unimaginable can happen.

While there is no consumer or investor that can proactively impact a rising price freight train, if hyperinflation is expected, there are steps one can take to reduce the negative impacts. These financial steps can be as simple as buying things today that you expect to need later, and more substantially diversifying your portfolio toward hard assets, companies that export to countries not experiencing inflation, and even bonds with either short maturities or an inflation factor as part of the return.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.nasdaq.com/articles/argentina-inflation-seen-at-126.4-in-2023-central-bank-poll-shows

https://www.pbs.org/wgbh/commandingheights/shared/minitext/ess_germanhyperinflation.html#:~:text=In%201923%2C%20at%20the%20most,surprise%20by%20the%20financial%20tornado.

https://www.theatlantic.com/business/archive/2012/03/the-hyperinflation-hype-why-the-us-can-never-be-weimar/254715/

Biotech Oncology Stocks Have Been Doing Well, Here’s Why

Posted on May 5, 2023May 5, 2023 by phoffman@channelchek.com

Image: Rendering of folate receptors on a cancer cell

Understanding ImmunoGen’s Great Performance, and Related Stocks

Discovering a company developing a novel and more effective mechanism or method of doing something, and then investing in shares, is one reason investors pay attention to small-cap stocks. Innovations that improve results of any kind are valuable and usually rewarded. Nowhere is this more true than in biotech or biopharma stocks. After all, better treatments for frightening diseases will always be in demand. However, the big difference between the biotech industry and say, computer technology, is the approval process. FDA requirements are many and approval is slow and uncertain – overall, it’s a high bar to overcome.

Is it Worth it for Investors?

Over the past two days, ImmunoGen (IMGN:Nasdaq) a U.S. based clinical-stage biotech company, has had the kind of moonshot trajectory that investors dream about. The company reported promising topline phase III data and overall survival benefits in folate receptor alpha (FRα)-positive platinum-resistant ovarian cancer patients. Immunogen plans to submit the drug for full approval in the U.S. and Europe. The company’s therapy is a is a first-in-class ADC comprising folate receptor alpha-binding antibody. The stock during the first four days of this week is up over 145%. The reason for the sudden moonshot is the company announced that it expects full FDA approval of one of its ADC candidates (Elahere). ADC, or antibody-drug conjugates, are a very targeted way to treat some solid tumor cancers, and seem to represent the “more effective mechanisms or method of doing something” mentioned above as sought after by small-cap investors.

Excitement Over ADC

An antibody-drug conjugate consists of an antibody that targets a specific antigen or receptor on cancer cells, it carries with it an impactful anticancer drug. The antibody which is linked to a toxin such as a chemotherapy drug, is found by folate receptors on the cancer cells; they will bind with the receptors on the cancer cells, the toxic payload is then delivered to the cells, which internalize it. Once in the cancer cell, the toxin is released. This therapy is designed to result in the selective killing of cancer cells while minimizing damage to healthy cells. ADCs have continued to show promising results in treating various types of cancer and are an active area of research by a few publicly traded small-cap biotechs developing alternatives in oncology.

Stock Market Behavior

As with other industries, the stocks of the peer group will often respond to news of the other. This was the case this week for the subgroup of stocks that are in various stages of researching ADC therapies against cancer.

As the chart below indicates, since May 1, the S&P 500 sank by more than 1.00%, yet cancer research biotech, which is not highly correlated to the overall market, rewarded investors in companies working with ADC technology for better cancer outcomes.

ADC Companies that Rallied this Week

Among the stocks that seemed to have gotten a boost from Immunogen’s good news are:

Ambrx Biopharma (AMAM:Nasdaq) is a clinical-stage biologics company. The company’s lead product candidate is ARX788, an anti-HER2 antibody-drug conjugate (ADC), which is being investigated in various clinical trials for the treatment of breast cancer, gastric/gastroesophageal junction cancer, and other solid tumors.

Mersana Therapeutics (MRSN:Nasdaq) is a clinical-stage biopharmaceutical company developing antibody-drug conjugates (ADC) for cancer patients with unmet needs.

Vincerx Pharma (VINC:Nasdaq) is a four-year-old clinical-stage biopharmaceutical company. VIP236, a small molecule drug conjugate that is in Phase 1 clinical trials to treat solid tumors. The company’s preclinical stage product candidates include VIP943 and VIP924 for the treatment of hematologic malignancies.

Sutro Biopharma (STRO:Nasdaq) is a clinical-stage oncology company that develops site-specific and novel-format antibody-drug conjugates (ADC). The company’s candidates include STRO-001, an ADC directed against the cancer target CD74 for patients with multiple myeloma and non-Hodgkin lymphoma, an ADC directed against folate receptor-alpha for patients with ovarian and endometrial cancers, which is in Phase 1 clinical trials.

As these biotech companies that are focused on ADC cancer treatment move their products through clinical trials, each success (or failure) is likely to impact the group. Not yet in the publicly traded group, but also being watched by those involved with ADC cancer stocks is OS Therapies.

OS Therapies (OSTX) is a U.S.-based biotech company that is developing therapies to treat specific cancers. The company completed its filing with the SEC last month to go public through an initial public offering (IPO). The biotech company hopes to list its shares on the NYSE American and trade under the symbol OSTX. It is a clinical-stage phase II biopharmaceutical company focused on the identification, development, and commercialization of treatments for Osteosarcoma (OS) and other solid tumors. There have not been any new treatments approved by the FDA for Osteosarcoma for more than 40 years.

The lead core product candidates OS Therapies is researching are OST-HER2 and the OST-Tunable Drug Conjugate (OST-TDC) platform. The company says it intends to expand its pipeline beyond osteosarcoma into solid tumors. The OST-Tunable Drug Conjugate (OST-TDC) platform could deliver the next-generation ADC technology with the intent of providing a more potent drug and better efficacy with an improved safety profile, a potential “Best-in-Class”. Importantly, OS Therapies lead ADC drug will target folate receptor alpha-binding utilizing a small molecule ligand the same druggable target to Immunogen’s (IMGN) folate receptor alpha-binding site which is something that could become extremely notable to investors and larger pharmaceutical companies. Immunogen has now proved that folate receptor alpha-binding site can work.

The next generation ADC, according to the company filing, will be targeting ovarian, lung and pancreatic cancers. “Tunable” is a term used in drug development that refers to the properties that can be influenced by chemical modifications, and “antibody-drug conjugate.”

An IPO date for OS Therapies has not yet been confirmed.

Take Away

Stocks tend to trade up or down depending on the mood of the market. The current mood is that the overall market may still be overpriced. As such, 2023 has been marked by the bulls and bears duking it out – without any clear direction.

Biotech stocks tend to be far less correlated to what is going on in other areas of the market. This makes the sector and various peer groups worth a visit in bad markets. For example, when the pandemic began to unfold, many biotech stocks rocketed during the same period the overall market was crashing.

Within biotech, companies those working on the production of related technology typically trade in rough tandem with each other. Biotech stocks developing ADC, presumed to be a breaktrough in treating many types of cancers, have gotten a lift in anticipation of the imminent success of one of their peers.

To do a deeper dive into small-cap names, scroll up to the search bar found next to the Channelchek logo, then enter a company name, ticker, or other keyword.

Paul Hoffman

Managing Editor, Channelchek

Source

https://www.ncbi.nlm.nih.gov/pmc/articles/PMC10137214/

https://www.sciencedirect.com/topics/medicine-and-dentistry/folate-receptor#:~:text=Folate%20receptors%20(FRs)%20are%20membrane,breast%2C%20bladder%2C%20and%20brain.

https://www.nature.com/articles/s41416-022-02031-x

https://www.elahere.com/

https://www.sec.gov/Archives/edgar/data/1795091/000121390023025493/fs12023_ostherapies.htm#T99001

Understanding Stock Options: A Comprehensive Guide for Investors

Posted on May 4, 2023May 4, 2023 by phoffman@channelchek.com

Stock Options Trading Explained

Stock options, sometimes referred to as derivatives, are a tool for managing risk when combined with a related equity holding, or as a means to amplify return on moves made by a stock or index. There are also related income strategies investors should know about. Newer investors often learn they could have benefited from options after it’s too late. Below we talk about stock options, what they are and how they are used to fill some investor knowledge gaps they may not even be aware they have. This discussion includes understanding what options are, why they are used, the different types of options available, and how you can use them to hedge against the market moving in the wrong direction. You’ll also discover how options can be used to amplify portfolio results.

What are Options?

Options are contracts that give the buyer the right, but not the obligation, to buy or sell an underlying asset at a specified price and date(s). The underlying asset can be anything from stocks, bonds, commodities, or even currencies, for the purpose of this article, we focus on stocks and stock indices.

There are two types of stock options: call options and put options. A call option gives the buyer the right, but not the obligation, to buy the underlying stock at a specified price and date. A put option gives the buyer the right, but not the obligation, to sell the underlying stock at a specified price and date.

When an investor buys an option, they are said to be “long” the option. When they sell an option, they are said to be “short” the option. Being long a call option is similar to being long the stock, as the investor profits if the stock rises. Being long a put option is similar to being short the stock, as the investor profits if the stock price falls.

Why Are Options Used?

Options are used for various reasons, such as speculation, hedging, and income generation. Speculators implement strategies to bet on the direction of the options underlying stock. For example, an investor that expects a stock price may rise will buy a call option. It they believe it will fall, they could get short exposure by going long a put option.

Options can also serve investors to hedge (protect) their holdings and offset potential losses in the underlying position. For example, if an investor owns XYZ Stock, they can buy a put option to protect against a potential drop in XYZ Stock. If the stock price falls, the put option will increase in value; depending on the shares controlled by the option, it can offset the decline in the stock.

Income generation using stock options is growing in usage. The scenario where this works is when an investor sells a call option against a stock they own, as part of the sale, they collect a premium for the option. If the stock price remains below the strike price of the call option, the investor keeps the premium and the stock. If the stock price rises above the strike price, the investor must sell the stock at the strike price, but still keeps the premium. This works best in a flat or declining market.

Using Options as a Hedge Against Losses

Options can be used as a hedge against the market moving against a stock position. For example, if an investor owns 100 shares of ABC Stock, currently trading at $50 per share. And the investor is concerned that the stock price may fall, but does not want to sell the stock and miss out on potential gains if the stock price rises, or in some cases, create a tax situation.

To hedge against a potential drop in ABC’s stock price, the investor may decide to buy a put option with a strike price of $45, expiring in three months, for a premium (cost) of $2 per share. If the stock price falls below $45, the put option will increase in value, offsetting the losses in the stock. If the stock price remains above $45, the put option will expire worthless, and the investor keeps the stock and the premium.

Time Decay, Intrinsic Value, and Extrinsic Value

So far, the use of options described here have been fairly straightforward. But there are considerations that might help keep this portfolio tool in the toolbox until it is most needed. The considerations are time decay, intrinsic value, and extrinsic value. Here is what is important to understand about these realities.

Time Decay:

Time decay, also known as theta, refers to the decrease in the value of an option as it approaches its expiration date. Options have a limited lifespan, and as time passes, the likelihood of the option ending up in the money decreases. Therefore, the time value of an option decreases as it approaches its expiration date, resulting in a decrease in the option premium.

Intrinsic Value:

Intrinsic value is the amount by which an option is in the money. In other words, it is the difference between the current market price of the stock and the strike price of the option. For example, if a call option has a strike price of $50 and the underlying stock is currently trading at $60, the intrinsic value of the option is $10 ($60 – $50).

Intrinsic value only applies to in-the-money options, as options that are out-of-the-money or at-the-money have no intrinsic value. The intrinsic value of an option is important because it represents the profit that an option holder would realize if they exercised the option immediately.

Extrinsic Value:

Extrinsic value, also known as time value, is the portion of an option’s premium that is not attributed to its intrinsic value. Extrinsic value is the amount that investors are willing to pay for the time left until expiration and the possibility of the underlying asset moving in their favor.

Extrinsic value is affected by several factors, including the time left until expiration, and the volatility of the underlying stock. As the expiration date approaches, the extrinsic value of an option decreases, and the option premium decreases as well.

Options Premium:

The options premium is the price that the buyer pays to purchase an option. The options premium is determined by various factors, including the current market price of the underlying asset, the strike price, the expiration date, and the level of volatility in the stocks price.

The options premium is made up of intrinsic value and extrinsic value. The intrinsic value represents the portion of the premium that is directly attributable to the difference between the current market price of the underlying asset and the strike price of the option. The extrinsic value represents the portion of the premium that is not attributable to the intrinsic value and is based on the time left until expiration, the level of volatility in the market, and other factors.

Understanding time decay, intrinsic value, and extrinsic value is crucial when it comes to trading stock options. Time decay affects the value of an option as it approaches its expiration date, while intrinsic value and extrinsic value make up the options premium. By understanding these concepts, investors can better understand their costs and make more enlightened decisions.

Take Away

Stock investors transact in stock options for various reasons. These include portfolio protection, income generation for an existing portfolio, and speculating on the direction of an asset. There are considerations associated with holding options beyond any commission or bid/offer spread. These are intrinsic premium costs for in-the-money trades, extrinsic as they relate to value and decay on the position as it approaches its expiration date.

Adding risk management using options to your investment tools to call upon when appropriate can reduce stress; speculating with the help of derivatives can be very rewarding but may have the impact of increasing portfolio swings in value along the way.

Paul Hoffman

Managing Editor, Channelchek

May’s FOMC Meeting and the Statement Pivot

Posted on May 3, 2023May 3, 2023 by phoffman@channelchek.com

The FOMC May Now Apply Less Brake Pedal to the Economy

The Federal Open Market Committee (FOMC) voted to raise overnight interest rates from a target of 4.75% – 5.00%. to the new target of 5.00% – 5.25%. This 25bp move was announced at the conclusion of the Committee’s May 2023 meeting. The monetary policy shift in bank lending rates had been expected but concerns of the impact of tightening on some economic sectors, including banking, had been called into question and left Fed-watchers unsure if the Fed would clearly indicate a pause in the tightening cycle. Inflation which had been easing somewhat going into the last FOMC held in March has since reversed direction and remains elevated.

As for the U.S. banking system, which is part of the Federal Reserves responsibility, the FOMC statement reads, “The U.S. banking system is sound and resilient. Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain.”

As for inflation which is hovering at more than twice the Fed’s target, the post FOMC statement reads, “The Committee remains highly attentive to inflation risks.” Both of these quotes can be viewed as not trying to panic markets in either direction.

There were few clues given in the statement about any next move, causing some to believe that the Fed is now going to take a wait-and-see position as previous rate hikes play out in the economy. The statement was shorter than previous releases following a two-day FOMC meeting, but it ended with the following forward-looking actions:

“In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.”

Fed Chair Powell generally shares more thoughts on the matter during a press conference beginning at 2:30 after the statement.

Paul Hoffman

Managing Editor, Channelchek

US Treasury Bonds: A Safe Haven Investment in Times of Economic Uncertainty

Posted on May 3, 2023May 3, 2023 by phoffman@channelchek.com

Are Treasuries the Safe Bet Investors Think They Are?

Are US Treasury bonds worth owning? US Treasury debt is considered one of the safest investments in the world. The securities are issued by the US government and are backed by the full faith and credit of the US Treasury – guaranteed at the same level as the dollar bills in your wallet. These bonds are a popular investment choice for individuals, institutions, and governments in times of economic uncertainty. But, as with other investments, they are market priced by the combined wisdom of the marketplace. So the return, or what is sometimes referred to as “the risk-free rate,” may not measure up to the potential that stock market investors expect.

Why Allocate to Treasuries

US Treasury bonds are considered a safe haven investment because they are perceived to have a low risk of default. This is because the US government has never defaulted on its debt, and it has the ability to raise taxes and print money to meet its obligations. In addition, the US dollar remains the world’s reserve currency, this makes US Treasury bonds highly liquid and easily tradable.

*Image: Fmr. Fed Chairman Greenspan, Meet the Press interview, August 2011*

During periods of low economic clarity, investors that are not required to invest in low-risk investments will weigh US Treasury returns against expected returns in other markets. As interest rates approach or exceed expected inflation US Treasuries become more attractive to investors, both individual and institutional. This is because they provide a reliable source of income (semiannual interest payments) at times of market volatility, and at maturity, owners know exactly what they will receive (face value plus the last interest payment). For example, during the global financial crisis of 2008-2009, investors flocked to the safety of US Treasury bills, notes, and bonds as a safe haven. This drove down yields and pushed up bond prices.

There are three main Treasury Securities, TIPS are not included below, they are T-Notes and have unique risks, so, therefore, deserve a separate presentation.

Treasury Bills:

Maturity: Typically less than one year (usually 4, 8, 13, 26, or 52 weeks)

Yield: Discounted yield, historically lower than T-notes and T-bonds

Size: Available in denominations of $1,000 or more

Treasury Notes:

Maturity: 2 to 10 years

Yield: Par plus interest historically higher than T-bills and lower than T-bonds

Size: Avaialable in denominations of $1,000 or more

Treasury Bonds:

Maturity: 10 to 30 years

Yield: Normally higher than T-bills and T-notes

Size: Avaialable in denominations of $1,000 or more

Overall, the main difference between these securities is their maturity. T-bills have the shortest maturity and are discounted at purchase to provide the yield, while T-bonds have the longest. T-notes fall in between. Additionally, their yields are calculated on an actual number of days held over the actual number of days in the year. The US Treasury yield curve, above which other bonds are priced, depends on market conditions and economic expectations.

Can Not Avoid Risk

Despite their reputation for safety, US Treasury bonds are not without risk. In December of 2021, the 10 year US Treasury note had a market yield of 1.70%. Just ten months later the same bond sold at a yield of 4.21%. This represents an actual loss over the ten month period for those selling the bond then. For those holding until maturity, when they will receive full face value, investors would have to hold more than eight years during which they will be earning a measly 1.7%. This is interest rate risk, the time period used to explain was a recent extreme example of how Treasuries still have very real risk. This is why a good bank investment portfolio manager will do stress tests and scenario analysis of the banks portfolio using extreme conditions.

Another risk is credit rating. In 2011, for example, the credit rating agency Standard & Poor’s downgraded the US government’s credit from AAA to AA+. This was the first time and continues to be the only time the US government has been downgraded. The downgrade was based on concerns about the government’s ability to address its long-term fiscal challenges, including high levels of debt and political gridlock.

Similar conditions may be playing out now as the debt ceiling has been raised quite a bit since 2009, and large buyers such as China are seeking alternative investments for their reserve balances.

Inflation is another risk that is quite real. As in the earlier example of the USTN 10-year yielding 1.7% in December 2021, during the following year, CPI rose 6.5%. this is another recent example of how investing in a low-rate environments can erode the purchasing power of the interest income and principal payments from US Treasury bonds. If the rate of inflation exceeds the yield on the bonds, investors can actually experience a negative real return.

If the government is seen as possibly not being able to pay interest on maturing securities, as is the case during debt ceiling standoffs, US Treasuries coming due may experience illiquidity problems as bids for maturing debt that may not get paid on time will be weak.

Although US Treasury bonds are highly liquid and easily tradable, there may be periods when the market for the bonds becomes illiquid. This can make it difficult for investors to sell their bonds at a fair price, especially during times of market stress or uncertainty.

How to Invest in Treasuries

Investors can buy US Treasury bonds directly from the US government (treasurydirect.gov) or through a broker. The bonds are issued and market priced at auctions on a regular schedule. Individual investors typically will bid to own securities at the average auction price. Savvy institutions and individuals may contact their broker and bid at the auction and hope to win an allotment.

Investors can also invest in US Treasury bonds through mutual funds or exchange-traded funds (ETFs). These funds don’t offer the benefit of holding to maturity or some of the tax planning strategies that can benefit those holding a security and not a fund.

Take Away

US Treasury bonds are considered a safe haven investment in times of economic uncertainty. They are backed by the full faith and credit of the US government and are considered one of the safest investments in the world. While they are not without risk, they remain a popular choice for investors seeking a reliable source of income and capital preservation. The US government’s credit rating was downgraded once, but investors continue to have confidence in US Treasury bonds due to the idea that they may not be safe, but they are likely the safest place to store savings.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.realclearpolitics.com/video/2011/08/07/greenspan_us_can_pay_any_debt_it_has_because_we_can_always_print_money.html

https://www.bls.gov/opub/ted/2023/consumer-price-index-2022-in-review.htm

US Debt Ceiling Explained

Posted on May 2, 2023May 3, 2023 by phoffman@channelchek.com

What Happens if the US Hits the Debt Ceiling?

The US debt limit is the total amount of money the United States government is authorized to borrow to meet its existing obligations. These include interest on debt, Social Security, military costs, government payroll, utilities, tax refunds, and all costs associated with running the country.

The debt limit is not designed to authorize new spending commitments. Its purpose is to provide adequate financing for existing obligations that Congress, through the years, has approved. While taxes provide revenue to the US Treasury Department, taxation has not been adequate since the mid-1990s to satisfy US spending. This borrowing cap, the so-called debt ceiling, is the maximum congressional representatives have deemed prudent each year, and has always been raised to avert lost faith in the US and its currency.

Failing to increase the debt limit would have catastrophic economic consequences. It would cause the government to default on its legal obligations – which has never happened before. Default would bring about another financial crisis and threaten the financial well-being of American citizens. Since a default would be much more costly than Congress meeting to approve a bump up in the borrowing limit, which the President could then sign, it is likely that any stand-offf will be resolved on time.

Congress has always acted when called upon to raise the debt limit. Since 1960, Congress has acted 78 separate times to permanently raise, temporarily extend, or revise the definition of the debt.

How Does this Apply Today?

According to the Congressional Budget Office, tax receipts through April have been less than the CBO anticipated in February. The Budget Office now estimates that there is a significantly elevated risk that the US Treasury will run out of funds in early June 2023. The US Treasury Secretary has even warned that after June 1, the US will have trouble meeting its obligations. The implications could include a credit rating downgrade in US debt which could translate to higher interest rates. If US Treasury obligations, the so-called “risk free” investments, does not pay bondholders on time (interest), then the entire underpinning of an economy that relies on the faith in its economic system, could quickly unravel.

What Took Us Here?

On January 19, 2023, the statutory limit on the amount of debt that the Department of the Treasury could issue was reached. At that time, the Treasury announced a “debt issuance suspension period” during which, under the law, can take “extraordinary measures” to borrow additional funds without breaching the debt ceiling.

The Treasury Dept. and the CBO projected that the measures would likely be exhausted between July and September 2023. They warned that the projections were uncertain, especially since tax receipts in April were a wildcard.

It’s now known that receipts from income tax payments processed in April were less than anticipated. Making matters more difficult, the Internal Revenue Service (IRS) is quickly processing tax return payments.

If the debt limit is not raised or suspended before the extraordinary measures are exhausted, the government will ultimately be unable to pay its obligations fully. As a result, the government will have to delay making payments for some activities, default on its debt obligations, or both.

What Now?

The House of Representatives passed a package to raise the debt ceiling by $1.5 trillion in late April. The bill, includes spending cuts, additional work requirements in safety net programs, and other measures that are unpopular with Democrats. To pass, the Senate, which has a Democratic majority, would have to pass it. Democratic Senator Chuck Schumer described the chances as “dead on arrival.”

House Speaker McCarthy has accepted an invitation from President Biden to meet on May 9 to discuss debt ceiling limits. The position the White House is maintaining is that it will not negotiate over the debt ceiling. The President’s party is looking for a much higher debt ceiling that allows for greater borrowing powers.

In the past, debt ceiling negotiations have often gone into the night on the last day and have suddenly been resolved in the nick of time. Treasury Secretary Yellen made mention of this and warned that past debt limit impasses have shown that waiting until the last minute can cause serious harm, including damage to business and consumer confidence as well as increased short-term borrowing costs for taxpayers. She added that it also makes the US vulnerable in terms of national security.

Expect volatility in all markets as open discussions and likely disappointments will heat up beginning at the May 9^th meeting between McCarthy and Biden.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://fiscaldata.treasury.gov/americas-finance-guide/

https://www.cbo.gov/taxonomy/term/2/latest

https://www.cbo.gov/publication/58906

What Investors Learned in April That They Can Use in May

Posted on May 1, 2023May 2, 2023 by phoffman@channelchek.com

Image Credit: Bradley Higginson (Flickr)

Stock Market Performance – Looking Back at April, Forward to May

Will the hawks at the Federal Reserve find their perch following the May FOMC meeting? After an aggressive year of tightening, many expect Powell will now signal a pause while the Fed keeps a sharp eye on inflation and other pests that thrive in an overly stimulated economy. Bearish investors that have pulled back are now beginning to have reasons to change their sentiment – their lack of aggressiveness or risk aversion during a solid stock market showing in April may turn their JOMO (joy of missing out) to FOMO (fear of missing out) in the coming weeks.

For a while, the markets have been paddling upstream, navigating a shaky economy with poor visibility. Once the FOMC meeting is in its wake, the stock market should have more visibility from which to make decisions.

Out of the Woods Yet?

The next scheduled FOMC meeting is May 2-3. The expectation is that they will decide to raise Fed Funds another 25bp and then just observe as higher interest rates and all-around tighter money play out in the U.S. economy. Investors will know during the first week of the month if this is what they can expect as Fed Chair Powell will offer guidance at his press conference on May 3.

If the barrage of rate hikes is over, investors will turn their focus toward other factors. These could include the U.S. debt ceiling which is expected to be reached in June, a weakening dollar which benefits U.S. exports, and whether the stock market, which has been pricing itself for a recession may have gone too far with the fear trade.

Not shown in these charts is performance since Silicon Valley Bank was closed (March 12). One might expect that this would have caused investors to run to the sidelines. Instead, the S&P 500 rose 8% since March 10. It may be that the event has served as a turning point.

Look Back

Three of four broad stock market indices (Dow 30, S&P 500, Nasdaq 100, and Russell 2000) were positive in April. The Russell Small-cap index demonstrates the caution that investors were still taking. In theory, small-cap stocks that have traditionally outperformed over longer periods, should make up for some of this lost ground at some point, and reward investors. April was not a month where the risk-on trade made this happen.

The Dow industrials, considered a more conservative index, was up nearly 2.50% during the month. The S&P 500 index was lower at nearly 1.50%, and the Nasdaq 100 rose nearly .50%.

Market Sector Lookback

Of the 5 top performing S&P market sectors (SPDR) all exceeded a 5% return on the month. Top on this list was communications stocks in the XLC SPDR; it returned 7.21%. Real Estate rallied in the XLRE to return 7.03% in April, this marks a big turnaround after months of real estate weakness.

One might think that the markets are irrational when they see the financial stocks in the XLF is the third best performer. But the index which includes large banks such as JP Morgan Chase, and Wells Fargo benefitted from investors that quickly decided that the Silicon Valley Bank failure brought financial stocks below where they should be valued.

Energy, as benchmarked by the XLE SPDR rallied as the price of oil began rising after an OPEC decision last month. The price of oil carried energy stocks with it. Lastly, consumer staples indicated by XLP moved up to perform slightly better than the overall S&P 500 Index (SPX).

Of the bottom 5, or lowest performing SPDR benchmark ETFs, all were positive performers. The worst of which is Industrials (XLI) returning 1.81%. Second from the bottom was the materials sector shown as XLB, this returned 3.60%. Consumer discretionary companies, or XLY, includes companies like Starbucks, Home Depot, and Nike. This index was third worst, but still approached the average of the full S&P 500 at 4.35%.

XLU are utilities, since utilities usually attract dividend investors, rising rates can weigh on these companies. Many utilities also find their costs increase as energy prices rise. However, the 4.59% increase in the index ETF was part of a broad-based upward move in stocks last month.

The best of the worst was the technology sector or XLK. The return of 4.63% during April shows that big tech was not favored last month. Investors have learned how this sector can roar up and also roar down, this may be causing some to diversify more broadly.

Looking Forward

Should the Fed indicate they are going to pause the tightening cycle, the yield curve may take its more natural upward slope. Fear of recession may be replaced with greater inflation fears with the Fed standing aside. This would cause market factors to reshape the longer end of rates. A positive sloping yield curve would be a positive for the earnings of lending institutions.

Rates in the very short end may begin to spike as no investor wants to be holding a maturing U.S. Treasury if the U.S. doesn’t raise the debt ceiling. This would only impact T-Bills and T-Notes coming due in weeks and months.

Will bearish sentiment turn to bullishness? Those not in the market missed a rally across all industries. This suggests that there was money flowing in as experienced investors and traders know to buy when there is a “sale,” not after the prices have already been jacked up.

Does this mean the risk-on trade is getting started? The broad S&P 500 rising in every industry could demonstrate that fears over a recession, the banking crisis, the war in Europe, and other “hide under your covers” events, were more than priced in. If that is true, strength will continue. With that strength, investors will begin to look for areas that have not participated in the rally. Perhaps this is when small-cap stocks will retake their position as the better performers.

Take-Away

The market has been given a lot to think about recently. First Republic Bank and a forced FDIC take-over, inflation trending up, debt ceiling fears, unexciting earnings, and the realization that higher interest rates on bonds does not mean total return on a bond portfolio can’t be negative. So the “guaranteed return trade” isn’t guaranteed to have a positive return.

The stock market reacts before there is complete clarity. In fact, traders don’t want complete clarity, it’s when a positive economic outlook is most certain is often when the market has peaked. The current lack of sure visibility may now be handing us the opposite effect.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://app.koyfin.com/

The Week Ahead – FOMC Meeting, FRB Bank, Employment

Posted on May 1, 2023May 1, 2023 by phoffman@channelchek.com

The FOMC Meeting is the Big Story this Week, But First Republic Will Steal Headlines

In a week full of economic releases, the markets will be most obsessed with two events.

First, the FOMC meeting on May 2-3 is expected to result in the Fed raising the Fed Funds rate by 25 basis points. Market watchers will be looking for signs the FOMC will pause. This could be conveyed in the wording of the statement from the Fed at 2pm on May 3, or during the press conference, Fed Chair Powell is expected to hold at 2:30 on the same day.

Second, inflation information will also keep some investors on edge. A few vocal Fed governors continue to signal that they believe that wage growth and other non-housing inflation warrants continued vigilance. This makes the April Employment Report of particular concern. It is not expected to change the story about a strong labor market. There may be a few more signs of the imbalances in labor supply and demand resolving, but many businesses are still hiring, and relatively few are laying off workers.

Monday 5/1

• 9:45 AM ET, Purchasing Managers Index (PMI) for April is expected to come in at 50.4, unchanged from the mid-month flash to indicate marginal economic expansion relative to March.

• 10:00 AM, The ISM Manufacturing Index has been contracting during the last five months. April’s consensus is for slight growth of 46.8 versus March’s 46.3.

Tuesday 5/2

• 9:00 AM ET, The monetary policy-setting arm of the Federal Reserve will begin a two-day meeting that will end with an announcement of any adjustments to policy.

• 10:00 AM ET, Construction Spending for March is expected to have increased at a barely detectable .1% after falling .1% the previous month.

• 9:00 AM ET, Factory Orders is an important leading indicator of economic activity. The consensus forecast for March is a solid increase of 1.2%. This follows a decline the previous month of .7%.

Wednesday 5/3

• 10:00 AM ET, Institute for Supply Management (ISM) surveys non-manufacturing (or services) firms’ purchasing and supply executives. The services report measures business activity for the overall economy; above 50 indicates growth, while below 50 indicates contraction. The number for April is expected to be above 50 at 52%.

• 2:00 PM, the Fed statement following the FOMC meeting will be released.

• 2:30 PM, Fed Chair Jay Powell will answer questions on economic policy in a post FOMC meeting press conference.

Thursday 5/4

• 8:30 AM ET, Initial Jobless Claims for the week ended April 29 is expected to be higher at 240,000 than the prior week, where it stood at 230,000 individuals claiming unemployment.

Friday 5/5

• 8:30 PM ET, the U.S. Employment Report is chocked full of data that could cause a late-week shift in inflation expectations. The survey provides estimates for nonfarm payrolls, average weekly hours worked, and average hourly and weekly earnings. For April compared to March the economy is expected to have added 180,000 new jobs versus 236,000have an unemployment rate of 3.6% versus 3.5%, hourly wages are forecast to have a second month of increases averaging .3%, and an average year-over-year hourly wage increase equalling 4.2%.

What Else

There is more concern being created in the banking sector as the FDIC is said to be preparing to take First Republic Bank into receivership until they find a suitor. The bidding process among large banks is likely to be headline news before and after.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://us.econoday.com/byweek.asp?cust=us