The Weekend Edition # 55

Welcome to another issue of the Weekend Edition.

Happy September and Happy Long Labor Day Weekend to all who are celebrating!

Thank you to all who’ve read and subscribed to the newsletter this week!

Here’s what we cover:

• Market Recap - The Bears are Back

• Macro - Update on the Private Equity Market

• Earnings Results Summary

• Premium Post of the Week - An Update on Soft Commodities

• The Week Ahead - Economic & Earnings Calendar

• Closing Thoughts

Let’s dive in ⬇️

Market Recap - Aug 29 - Sep 02, 2022

The bears are back in control for now, it would seem. The market saw quite a correction over the past week, with the VIX and VXN spiking. The Jobs report on Friday a bit of a turnaround but by the end of the day, sellers took over.

The S&P had rallied 17% from its June lows and it was time for a correction. In fact, the rally was exacerbated by the short squeezes in smaller stocks and this wasn’t in the cards. September has historically been one of the worse months for stocks and this year doesn’t look like it’s going to be any different.

The Fed Chair already promised more pain to come and this is bound to translate to the stock market. What’s more is we’re seeing the exact situation play out from the beginning of the year. Yields are soaring and bonds are tanking.

US bonds (orange) have fared better than Global bonds (purple) and understandably so. The global bond index has a fair weighting of emerging market debt. However, what’s interesting is that Investment Grade bonds (green) have performed the worst while High Yield bonds (blue) have performed even better than the Global Aggregate. It would seem as though people have been loading up on risk even though we are in a bear market, quite possibly not appreciating the macroeconomic environment.

Macro of the Week - A note Private Equity (PE) Markets

It should come as no surprise that fundraising in the Private Equity Markets reached an 18-year high in 2021. Ample liquidity in the economy made its way to every sector of the financial markets. More than half of the assets under management were in vehicles targeting North American investments.

Despite these levels of “dry powder” activity has started to slow considerably. Raising funds in the current environment has become tricky with the high levels of inflation, increase in rates and the Fed’s implementation of QT.

Not only is debt becoming more expensive but, banks are becoming more cautious about lending to PE, as well. According to Bain and Co, the PE market’s momentum has been waning in 2022 and will be hard pressed to keep up in H2, 2022.

According to Pitchbook, industry IRRs have already come down to c. 6.8% from levels as high as 14%, seen previously.

How does private equity affect the markets?

PE firms have a holding period for investments after which point they need to exit. If the valuations in the private sector are compromised, this will lead to poor valuations if exits are done through public markets, i.e., IPOs.

PE firms also tend to take up investments in companies that are not ready for the public market. These could be VC backed new firms or large infrastructure deals. They are necessary to the global financial system and a drop off in activity definitely puts pressure on the global investment community, and even governments to a large extent.

A lot of tech projects are getting shelved because of the lack of investment. And there have been drastic decreases in valuations in the private space for tech companies. This could lead to even further rounds of failed fundraising.

Private funds are also a major investor in real estate. Fewer funds are looking at investing in the housing market and while this has been conducive to bringing down housing prices to curb inflation, it could also leave the economy with a serious housing shortage.

Earnings of the Week

Factset Earnings Round up:

Premium Post - An Update on Soft Commodities

The Week Ahead - The Market is Closed on Monday

Economic Calendar

It’s a lean week although we do have the Fed Chair Speaking on Thursday Sep 08, 2022 at the Cato Institute’s 40th Annual Monetary Conference and we have the Vice Chair speaking the day before that on Economic and Monetary Policy.

Earnings Calendar - Looking forward to RH and Kroger.

Closing Thoughts

While we’re almost through earnings season, I still think we are in uncharted waters with the market. With the QT cap doubling in September, the Fed now has a higher threshold to pull liquidity from the market. The previous three months saw reductions of approximately $17B per month, far below the cap of $47.5B, mainly because the thresholds weren’t met.

The global financial markets are gradually seeing a meltdown. We have Central Banks tightening aggressively in the hopes of controlling inflation. We have the risk of defaults in Emerging Markets. We have Covid, drought and factory closures in China. We have a war in Europe and a raging energy crisis.

To top it all off, the OPEC+ came out today with production cut in oil by 100,000 barrels / day, taking production levels down to August level. While not extremely significant, this is nonetheless symbolic of the way the cartel is thinking, where keeping prices elevated for member countries is definitely an important goal.

Although a short week, I do think this will bring about turbulence in the market and we may have quite a choppy week ahead with a bearish overlay.

Here’s wishing you a happy weekend and safe investing. 

Please take a moment to share and subscribe, if you found this newsletter useful.

Sincerely yours,

Ayesha Tariq, CFA

There’s always a story behind the numbers

None of the above is Investment Advice. I may or may not have positions in any of the stocks mentioned. I have no affiliation with any of the companies that are mentioned.