Financial News Flow

Stories I am following now

I won’t be posting much for the next few weeks. I have family visiting and several weddings to attend, which won’t leave much time for writing my newsletter. But that doesn’t mean I have stopped following the financial news, and nor should you. Here are some of the stories I am following now:

The capital markets. I continue to be perplexed by the state of the capital markets. I am perplexed not so much by the high valuation levels, which I attribute largely to QE and the continuing low level of interest rates, but rather by some of the seemingly incongruous market moves (eg bond yields falling with news of a large increase in inflation) as well as the clear and continuing signs of excess in the stock market (see for example my recent posts on SPACs and meme stocks). And it seems that I am not the only one who is perplexed. See for example this recent WSJ article by James Mackintosh, “Something is Awry in the Treasury Market this Summer”. But my W&M colleague Peter Atwater has an interesting explanation for both the high valuation levels and the increased correlation among various asset classes, which traditionally provided some level of risk mitigating diversification in investor portfolios but no longer seems to do so. His explanation? Investor euphoria, plain and simple. What explains the euphoria, and how should portfolio strategists respond? I’m not entirely sure, but I encourage you all to read this thought-provoking piece by Mr. Atwater.

The Fed. I have written a lot about the Fed, and specifically about QE, which has been characterized as “the economic story of our time”. See for example my recent post on The Power of the Fed. This story is still unfolding and no one really knows how it will end. When will the Fed make its next move? I’m not sure, but read here to learn more about the Fed’s current thinking: “Fed Officials Weigh Ending Asset Purchases by Mid-2022”.

Corporate cash. A number of commentators have attributed the strong performance of the stock market and high equity valuations to the large amount of cash currently held at corporations. This makes no sense to me, and I think it is fair to say that some of the commentary is a bit confused, including this piece from the WSJ. Corporations are holding record levels of cash in large part because they borrowed it during Covid, and borrowed cash held in treasury should not in and of itself increase equity valuations. (It may however, have reduced the risk of corporate bankruptcy during the early days of Covid. This would have enhanced equity valuations relative to a “distressed” scenario, but most companies crossed this “survival” bridge quite some time ago.) Corporate revenues generally fell during the peak Covid period, in many cases dramatically, but companies responded by cutting operating expenses, capital investment, dividends and buyback programs, all of which increased cash positions but would not necessarily have enhanced equity valuations beyond the initial impact on corporate survival and sustainability. Corporations also benefited from various government bailout programs (eg PPP); this too would have enhanced values relative to a dark counter-factual scenario, but these programs have largely terminated and the financial benefits of past programs have been factored into equity valuations for quite some time now.

Perhaps the commentators are confusing the current level of cash on corporate balance sheets with investor expectations of increased future cash flow, which is of course a driver of intrinsic value along with low or falling interest rates. I am skeptical about the future prospects for corporate cash flow and bond yields, but today’s capital markets seemingly are not and their view is a lot more important and informed than mine. The markets may be discounting an extended period of “investor euphoria” as Mr. Atwater suggests, but how long this lasts may well depend on future actions by the Fed.

China. I trust that many of you are following the news flow relating to Chinese tech companies, but there is a lot going on there in the financial services industry as well. Ping An is a Chinese financial services conglomerate which operates in various industry sectors including insurance, banking, consumer lending and asset management. Ping An's current market cap is over $150bn, down 30% YTD, and it is second in size only to Warren Buffett’s Berkshire Hathaway. The stock market has recently been hammering Ping An and several of its publicly traded subsidiaries, which are down even more than the parent company, due in part to regulatory pressure from the Chinese government. You can read about Ping An here.

Used Cars. Say what? This is a blog about financial services, corporate finance and financial literacy, so why am I writing about the used car industry? I am following the used car industry because these companies generate a large portion of their earnings from customer financing, ie auto loans. And there are some very interesting things going on in the consumer finance business these days. I will be writing about this at greater length in the future, but for now you can begin by reading this article from the WSJ: Carvana’s Success Rides on Used-Car Loans.

EVs. In this case, “EV” stands for Electric Vehicles not Enterprise Value. I have written before about both topics, but for now I am thinking about the auto industry. Electric vehicles seem to be the wave of the future, but it is going to take a lot of capital raised over many years to finance the industry transition. Developments in battery technology will be key, and the industry will have to build a lot of new battery manufacturing capacity to facilitate the rollout of EVs. The leading Chinese lithium-ion battery manufacturer, CATL (Contemporary Amperex Technology), has recently proposed a capital increase of 58bn yuan ($9bn). This is a big capital raise by any standards and I will be following the story to see how it plays out. You can read about this here.

Meme stocks. I continue to believe that meme stocks are a passing fad, similar to dotcom stocks in the late 90’s, but for now at least the fad continues apace. I have written before about Robinhood, GME and other meme stocks, and most recently about the reliance of HOOD and other commission-free brokers on PFOF (payment for order flow), which is under intense scrutiny by the SEC. Fad or not, however, a number of financial services firms are adjusting their business models to address the recent increase in retail trading volume. You likely have never heard of Jump Trading Group (I had not), but they are apparently one of the world’s largest high-frequency trading firms. Jump is reportedly setting up a new business unit, a so-called retail wholesaler business, to execute individual trades for discount brokerage firms like TD Ameritrade and Robinhood. I may have my doubts about Robinhood’s future, but those who know a lot more than I do apparently believe it is going to be around for a while. You can read more about Jump here.

As noted, I will be offline quite a bit over the next few weeks, but please stay tuned to the financial news flow in my absence. The world doesn’t stop just because we do.