Trail 136 — Chop Chop
Markets Update by Aashish Singh
Business Update by Sylvia Lo
Financial markets are fascinating. They are constantly evolving, they follow no predetermined path and much like humans, their behaviour at times is completely irrational. Every day their movements are thoroughly analysed, yet their next steps are a complete mystery. They follow a random walk and therein lies their beauty. Each week I briefly recap a few stories that captured my interest.
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The US Federal Reserve announced its interest rate decision this week after a two-day meeting, leaving the benchmark interest rates unchanged at 5.25–5.5% for the 6th straight meeting, in line with market estimates. What the market was looking for was forward guidance. While ruling out any rate hikes the Fed Chair also ruled out the possibility of rate cuts resulting in sharp swings around the announcements.
Similar choppy trading continued around other economic data releases which were also giving mixed signals. For example, Labour data showed a greater than anticipated uptick in costs, while on Friday a separate report showed signs of the Labour market cooling. It’s pretty much anyone’s guess which data point to trust. I personally look at 3 measures: the US M2 supply, US home loan effective rates and the US corporate interest coverage ratios. All of these are very much in the green, so inflation is likely going nowhere in my view.
In the absence of any outsized shock event, implied vols have continued to subside. It’s another measure that seems to have lost its ability to forecast stress, with realised volatility above implied volatility on a consistent basis these days. Treasury yields whipsawed with 2-year yields pushing the 5% handle. This week, the significant market moves were in Oil and Yen. Oil prices recorded the steepest weekly loss (-6 %) in three months, pushed down by easing geo-political tensions in the Middle East and a weak demand in the US. Japanese authorities deployed tens of billions of dollars to try to prop up the weakening yen, resulting in a steep re-tracement from the 158+ level, now closer to 152 which is a key support level.
Meanwhile, Apple closed another huge share buyback as did Warren Buffett’s Berkshire Hathaway. When an innovation giant and an investment guru fail to place money and would rather return it to shareholders, it is telling of how stretched the market is in terms of valuations. It’s also emblematic of the huge cash piles currently being held by corporate America.
The only thing showing any signs of trouble is in the latest forward earnings guidance where most companies have come in below expectations. But it’s not enough to dampen the sentiment and for record cash piles to find their ways out of equities just yet. I’ll be sticking with the “high growth, high rates and high inflation” outlook for now.
Souring Profit Outlooks
Strong earnings beats from Corporate America may no longer be enough to keep the stock rally going. Profit outlooks are becoming more important. With more than 400 firms in the S&P 500 Index having reported earnings this season, 79% of them have beaten profit expectations, according to data compiled by Bloomberg Intelligence. But the median stock outperformed the index by less than 0.1% on results day — the smallest margin since late 2020.
Berkshire Cash Hoard
Berkshire Hathaway Inc.’s cash pile hit yet another record as billionaire investor Warren Buffett confronted a dearth of big-ticket deals. Operating earnings also rose, buoyed by his collection of insurance businesses.
The firm’s hoard increased to $189 billion at the end of the first quarter, topping the record it set at year-end. The company also reported first-quarter operating earnings of $11.2 billion, versus $8.07 billion for the same period a year earlier.
Markets Were Confused and Misled
Data watchers can finally turn the page on a troubling but misleading first-quarter of inflation and labour-market data. The non farm payrolls report on Friday marked the first major macro data dump for the month of April, and it suggested that the economy is still on its trajectory of rebalancing labour markets, moderating wage growth and cooling inflation. Now, let’s just hope this continues.
The Bureau of Labour Statistics reported that employers added 175,000 jobs last month, the smallest increase in six months, and the unemployment rate ticked up to 3.9%. Even more significantly, the three-month annualised pace of average hourly earnings growth slowed to 2.8%, slightly below the 2017–2019 “normal” pace of about 3%. In a market obsessed with inflation and monetary policy above all, that’s helped power a rally in 10-year Treasury notes and send the S&P 500 Index up more than 1% at the time of writing.
In The World of Business
This week, Elon Musk announced the elimination of Tesla’s Supercharger operations team, including its senior director, Rebecca Tinucci, in a move aimed at hard core cost reduction.
The All Saints Catholic College in London is implementing a 12-hour school day and public speaking lessons to address social skills deficiencies among Gen Z students, recognising the impact of the pandemic and smartphone usage on their ability to interact.
Changpeng Zhao, founder and former CEO of Binance, received a four-month prison sentence and a $50 million fine as part of a settlement with federal agencies over money-laundering violations at the exchange.
Tesla’s Supercharger Operations
Elon Musk, the enigmatic CEO of Tesla, sent shock waves through the automotive industry on Monday with the unexpected announcement of sweeping changes to the company’s Supercharger operations. In a move that stunned employees and investors alike, Musk revealed that Tesla’s senior director for EV charging, Rebecca Tinucci, along with her entire Supercharger team, will be departing from the company with immediate effect. This decision, which marks the fourth departure of a senior executive in recent weeks, signals a significant shake-up in Tesla’s leadership structure.
The decision to dismantle the Supercharger team is particularly surprising given the critical role of Tesla’s fast-charging network in alleviating range anxiety for electric vehicle (EV) owners. With over 50,000 Supercharger sites worldwide, Tesla has established a strategic advantage over competitors by owning and operating its charging infrastructure. However, Musk’s abrupt move raises questions about the company’s long-term strategy for expanding its EV charging network. As Tesla navigates these internal changes, stakeholders will closely monitor how the company adapts to evolving market dynamics and maintains its position as a leader in the rapidly evolving EV landscape.
Soft Skills Gap
The pandemic has brought significant changes to the workplace, but perhaps none more noticeable than the arrival of Gen Z workers, who are often criticised for lacking essential soft skills. Now, schools are stepping in to bridge this gap and prepare students for the realities of adult life. Leading the charge is All Saints Catholic College in London, where headteacher Andrew O’Neill has initiated a ground-breaking pilot program. Recognising that post-pandemic Gen Z pupils have become increasingly isolated and reliant on smartphones, O’Neill implemented a 12-hour school day and introduced public speaking lessons and a smartphone ban.
All Saints aims to create an environment where students can engage in meaningful activities and develop vital interpersonal skills. From cooking lessons to basketball training, students can interact with their peers and participate in activities that foster teamwork and communication. The success of the program will be measured using various metrics, including attendance levels and feedback from students, parents, and teachers.
All Saints is not alone in its efforts to prepare Gen Z for the workforce. Employers are offering incoming junior hires specialised training in areas such as networking and public speaking. As the workplace continues to evolve, initiatives like these play a crucial role in ensuring that Gen Z workers are equipped with the skills they need to succeed in their careers.
A Crypto Saga
Changpeng “CZ” Zhao, once hailed as a crypto visionary, now finds himself at the centre of a legal saga that has shaken the industry to its core. On Tuesday, a Seattle federal court sentenced Zhao to four months in prison as part of a plea deal, marking the conclusion of a tumultuous chapter for the multimillionaire CEO of Binance, the world’s largest crypto exchange.
Zhao’s journey from industry titan to convicted criminal reflects the rapid rise and fall of Binance, which soared to prominence in just six months after its founding in 2017. Despite its meteoric growth, the exchange struggled with compliance issues, culminating in a landmark settlement with federal agencies last November. While Zhao expressed contrition for his “mistakes” as CEO, critics argue that the punishment does not fit the magnitude of the violations.
With increased compliance efforts and a refocus on traditional finance, Binance aims to regain its dominance in the crypto market. Meanwhile, Zhao remains a significant figure in the industry, maintaining substantial equity in the company and embarking on new ventures like Giggle Academy, a non-profit education platform. The saga of Changpeng Zhao and Binance serves as a cautionary tale for the crypto industry, highlighting the challenges of rapid growth and regulatory scrutiny.
Until next week.
