The firm is buying IG corporate bond debt, in the 4-7 yr horizon. Specifically, debt from globally systemic banks increasing their market share (JPM, UBS?), pharma with solid cash flows, and tech with disciplined capital allocation. The bet is that even if there is economic weakness and spreads widen, it’ll be offset by yield and a duration benefit. Also, the bet is on improving credit quality, with companies paying down debt versus increasing it. On a related note, Bloomberg reported that hedge funds extended their short positions on UST to the highest level since 2006. So, we’ll see who’s right in the medium term. Double Line 1 vs HF 0 on the short-term.
Verdad Cap is out with a piece arguing that multiples, over time, revert to the an adjusted market ave. Overall, markets should revert to a 12x multiple. So, for an individual company, you should expect a multiple in the future to revert to 12 + 0.6x(current multiple – 12). This means that a company retains 60% of its current premium or discount in three years. The point behind the math is that companies’ growth today doesn’t give it a specific multiple, and the companies rarely keep growing at that rate or better. So, as reality sits in, multiples revert. Great companies slow, and their multiples fade. Companies on the mend get better and are re-rated.
Reuters reported that Tesla plans to build a €25K car at its factory near Berlin.
Italy is going to be the first-ever country to ban synthetic food, per Euractiv. US travelers are rethinking their vacation plans.
RBC points out that small cap valuations are the cheapest seen since the dot com era, and they’re a bit below levels that have marked the low in recent years. They make the case that small cap balance sheets are better than before, and small caps often make moves before economic data. So, calling a bottom is tough when we may be headed for slower growth.
Stocks closed higher across the region Mon, with South Korea the big winner, up 5.7% on the KOSPI due to a re-imposed short selling ban. Hong Kong also with a strong day. Recently-pounded stocks with high short positions such as battery-makers and industrials surged by double-digits. As a comparison, European markets still in the negative.
Germany’s far right group, the AfD is rising in popularity and is looking to make a dent in elections. A tough economy with a surge in immigration is fueling German nationalism. The group wants to exit the euro and go closer to Putin, so the US should probably wake up and watch.
The ECB’s Lagarde says they’re going to bring inflation down to 2%, which could occur in 2025, per Bloomberg. At the same time, the EZ services PMI points to higher recession risks, per Reuters. So, that’s one way to do it. If the economy is terrible, people will reduce demand for stuff, bringing down prices.
BBG is saying that the “natural rate of interest,” or the price of money that balances saving and investment while keeping inflation stable, is going higher. They’re pegging it at 2.7% by 2050, versus a low of 1.7% in the mid-2010s. So, in nominal terms, 10-yr UST yields could settle somewhere between 4.5% and 5%. Remember, mortgages add yield on top of that…so it will be a different economic environment for folks.