Worries continue to mount in Japan as costs of capital soars and trouble brews for the S&P 500.

Market Catches A Little Bit Of Air
November 13 (King World News) – Art Cashin, Head of Floor Operations at UBS:  The Boeing rally on real and possible new orders is distorting the market a bit. Boeing is adding about 40 to 45 points in the Dow.  So, it is theoretically that much weaker if you subtract Boeing. 

The other thing is the yield on the ten-year.  It has waffled pretty much between the 4.60% and 4.70% area.  A kind of neutral territory.  Below 4.60%, as we said in the commentary, they are mildly bullish and above 4.70%, might put some pressure on equities.

So, for now, they continue to take their own pulse and temperature and the S&P is re-evaluating its testing of the 4400 area.  That area will be watched by traders, particularly on how we close and that may set a slightly longer tone, but for now, they are testing and retesting themselves and are indecisive.

Keep those guideposts in mind and stay very much alert and also stay safe.

Arthur

8%-12%
Peter Boockvar:  With the cost of capital for most American businesses outside of the biggest now ranging about 8-12% and investor money piling into private credit in what has become a craze, I’m on the lookout constantly for where the cracks in the economic foundation are forming as we continuously adjust to this new interest rate reality. I’ll highlight a few things of note in what I read over the past few days. 

Over the weekend in the WSJ there was an article titled “Analysts Assessing Risks of Private Credit” and talked about a recent report from S&P Global Ratings that “used the firm’s confidential credit assessments for clients to offer a rare view of roughly 2,000 private corporate borrowers with more than $400 billion in debt between them. Without identifying the companies, the firm ran stress tests to see how they might fare in varying economic scenarios.”

54% Of S&P Companies Not Generating Positive Cash Flow?
The article concluded with this from the S&P report, “Just 46% of the companies in the analysis would generate positive cash flow from their business operations under S&P’s mildest stress scenario, in which earnings fell by 10% and the Fed’s benchmark rates increased by another .5 percentage point…Private credit sponsors would be left facing difficult choices over which companies to keep supporting.” While I don’t expect any more rate hikes, an earnings shortfall of at least 10% is an easy do in any recession.

Lastly, “S&P has been lowering scores on several of its credit estimates, a move similar to a downgrade on a rated bond. The firm lowered its scores for 87 companies into its ‘CCC’ territory from the start of the year through the end of August, a heightened rate similar to the that at the start of the pandemic.” https://www.wsj.com/finance/how-risky-is-private-credit-analysts-are-piecing-together-clues-79762038

Here’s another credit related article in the WSJ titled “The Clearest Sign Yet That Commercial Real Estate Is in Trouble.” In the piece, “Lenders this year have issued a record number of foreclosure notices for high-risk property loans, according to a WSJ analysis. Many of these loans are similar to 2nd mortgages and commonly known as mezzanine loans.”…

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“The Journal analysis found notices for 62 mezzanine loans and other high-risk loans this year through October. That is more than double the number for all of last year, and likely the highest total ever for a single year, as higher interest rates and rising vacancies punish the property sector.” https://www.wsj.com/real-estate/the-clearest-sign-yet-that-commercial-real-estate-is-in-trouble-cb8dfafa?mod=hp_lead_pos2

Here is one more article to point out in today’s FT titled “Top four US banks scoop lion’s share of sector profits” in light of the credit access challenges for many small and medium sized businesses. “The four biggest US lenders grabbed almost half of all banking profits in the 3rd quarter.” These include JPM Chase, BoA, Wells Fargo and Citigroup. “Of the nation’s almost 4,400 banks, the big four made 45% of the industry’s overall profits in the 3rd quarter. That was up from 35% a year ago and well above the 10 yr average of 39%. By contrast profits at all other institutions dropped by an average 19% in the quarter, their largest fall since the early months of the coronavirus pandemic.”

A huge reason for the discrepancy was the advantage of low cost of deposits that the large banks have over the smaller ones. “The big four were paying less than 2% a year on accounts that paid interest in the 3rd quarter. That compared with nearly 3% average for regional banks. In addition, more than 40% of the deposit accounts at the nation’s four largest banks pay no interest at all. That compares with 30% for the industry overall.” https://www.ft.com/content/153b192e-5600-4b6a-9980-01c9a48f31cb

Last Legs In Japan
A few things of importance from overseas. Japan’s October PPI, much less relevant in terms of market moving relative to CPI, was a touch softer than expected, up .8% y/o/y vs the estimate of up .9%. Much of this is due to the very tough comp as October 2022 saw gain of 9.7% y/o/y which was on top of an 8.2% rise in October 2021. The 10 yr Japan inflation breakeven was little changed in response and 10 yr JGB yields were up by 2 bps. The yen though continues to weaken and is nearing 152. I believe NIRP is on its last legs in Japan, and thus globally. 

China
China reported its aggregate loan data for October and it was 100b yuan less than expected at 1.850 trillion yuan. This though comes after a huge 4.12 trillion figure seen in September and continues to reflect the slowdown in mortgage issuance to households, amongst other things. This figure came out after the Chinese close but the yuan is up a touch. Chinese stocks during their regular session did rally ahead of the Biden/Xi coffee talk this week. The Hang Seng is one of the cheapest stock markets in the world as the level of pessimism to investing there is as dour as I’ve seen toward any market I’ve analyzed and invested in all the years I’ve been doing this. 

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