WHEN WILL EQUITY MARKETS TROUGH?

Headline:
An Obsessive Investor Focus…Naturally.

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The Short Answer To The Title’s Question =

When EXPECTATIONS For U.S. Interest Rate Increases + Federal Reserve Balance Sheet “Run-Off” PEAK.

Because Higher Rates + Balance Sheet “Run-Off” = Reduced Financial Market Liquidity.

And Reduced Financial Market Liquidity = Universally Lower Financial Asset Prices [Equities + Fixed Income + Real Estate].

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The Monthly Price Chart Of The S&P 500 [see above]…Especially Since The Spring Of 2009….Steeply Ramped…

Without Much Of A Meaningful Capital Draw-Down…As The Fed Frequently + Quickly Modulated The Quantitative Easing Dials…Whenever It Deemed Necessary…To Stimulate U.S. Economic Activity.

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But Then…Without A Doubt + Collectively

…U.S. Domiciled Publicly Traded Corporations Are The Most:

1. Dominant +
2. Innovative +
3. Profitable Companies

…In The World.

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But Do Not Confer A Company’s Equity Performance Strictly To Operational Acumen…As A Much More Explosive Element…To Share Price = Market Liquidity.

Because Since The Spring Of 2009…The Liquidity Hose Of The Federal Reserve Has…For The Most Part…Run At Close To 100% Capacity…

Toggling Between “Flow” And/Or “Stock” Of Printed Dollars…Without Much Of An Abolute Liquidity Draw-Down…

Versus The Current Federal Reserve Plan To Shrink The Balance Sheet At $95B/Month…Which Is Much More Dramatic Than The 2015-2019 Episode [see chart below].

Further Complicating Matters…A Challenging Inflationary Backdrop + Slowing U.S. Economy.

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For Now…The “Flow” Of The Federal Reserve’s Balance Sheet Has Quickly Reverted To Zero…Soon Becoming Negative.

And The Balance Sheet’s “Stock” Has Most Definitely Crested.

Equity + Fixed Income Investors/Traders…Cower + Flee In Anticipation…As The Cliched “Wall Of Worry” Has Rarely Been More Fortified…

Hence…That “Wall” Could Be Climbed + Negotiated + Scaled…But Only…Very Carefully.

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Contact The Author: Dominate@GlobalSlant.com

FIXED INCOME MARKETS SLAUGHTERED BY FED “FLIP”…WHAT NEXT FOR BONDS + RATES?

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Headline:
Wealth Effect In Jeopardy.

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The Bond Market Was Destroyed In Q1 ’22.

The Worst Quarter For Fixed Income In Nearly 40 Years.

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So After 1 Year Of Determined Inflation Denial…The Fed Suddenly Flipped + Folded To A Hawkish Monetary Position.

The Fixed Income Sell-Off That Followed Was Well Deserved…As Investor Complacency Was Deeply Rooted In All Products…Private + Public…Including:

1. Investment Grade Corporate Bonds +
2. High Yield Corporate Bonds +
3. Municipal Bonds +
4. U.S. Treasury Bills + Notes + Bonds…

Thanks To A 13 Year Federal Reserve Policy Of Ultra Easy Money…Punctuated By A Capitulative Dollar Printing Binge To Address Covid’s Detrimental Economic Impact.

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Now…Liquidity…The Primary Short Term Catalyst For Asset Prices…Is Being Sharply Reduced.

Naturally…The Bond Market’s Greatest Fears Have Come True…As The Sell-Off In Q1 ’22 Was Both Merciless + Relentless [see above chart].

Interest Rates Sharply Ramped Early In The Quarter…Even Further…After It Was Indicated The Severely Bloated $9T Federal Reserve Balance Sheet Will FINALLY Be Culled…By $95B/Month [see below chart].

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Nevertheless…There Is Much Market Chatter About…POSSIBLE…Peak Fed Hawkishness.

Perhaps…In The Near Term…As The Sell-Off Has Been So Rapid…& Fixed Income Sentiment Is So Bearish…That A Counter-Trend Rally Is Plausible.

Still…Consider The Following…Inflation Grips With An “8” Handle & The Current Fed Funds Rate Target = Just 25-50 Basis Points.

Historically…In Order To Tame A Sharp Inflationary Impulse…The Fed Funds Rate Ought To Be ABOVE The Annualized Rate Of Inflation.

Obviously…We Are Not Anywhere Close To That Level…Even If You Halve The Normalized Inflation Rate To 4%…And Fed Governors Have Acknowledged As Much.

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Of Course Capital Markets Are Well Skilled At Discounting Future Expectations…And Current Expectations Are For Short Term Interest Rates To Approximate 2.48%…By The End Of Calendar ’22.

That’s A Lot Of Actual Fed Tightening In The Next 8 Months…Just To Catch-Up With Real Time Market Pricing.

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Anyway…The Most Critical Unanswered Bond Market Question =

In Order To Dramatically Slow Inflation…Must The Fed Move Beyond The Perceived Terminal Fed Funds Rate…That Is…The Interest Rate That Is Neutral…Neither Stimulating Nor Restricting U.S. Economic Activity…In Order To Dampen Inflation?

And Therein…Lies The Answer To Future Bond Market Pricing…

Because Right Now…Though The U.S. Economy Is Indeed Slowing…The Fed’s Current Monetary Policy Is Still Massively Stimulative.

Despite The Steep Q1 Sell-Off…Market Actors…For Now…Presume A Terminal Interest Rate Of Just 2.50-2.75%.

But That Presumption Will Vacillate With Forthcoming Inflation Data…

And If/When The Market Merely Senses That The Terminal Interest Rate Might Reside At A Much Higher Level…Then…

…The Fixed Income Market Rout Will Resume.

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Furthermore…Much Intellectual Capital Has Been Recently Spent Comparing/Contrasting Inflation Of The 1980’s To Today’s Inflation…

And 1 Item To Seriously Contemplate…Regarding This Issue…Is That Inflationary Measures Have Adjusted…Quite A Bit…In The Last 40 Years.

If One Were To Apply The Same…More Liberal…Inflation Measuring Criteria To The 80’s…As Is Now Calculated In 2022…That 14% Inflation Rate In The ’80’s Currently Translates To Around 9.5%.

So Inflation…No Doubt…Is Currently Perched Near Generational Highs.

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As To How Inflation Evolves…Here Are Some Crucial Facts To Ponder:

1. The War In Ukraine = Inflationary
As Global Supplies Of Agricultural Commodities + Commercial Fertilizers + Industrial Metals + Oil Are Curtailed.

2. Global Supply Chain Bottlenecks = Inflationary
As The Uncertainty Of Input Supply Leads To Over-Ordering + Purchasers Aggressively Adjusting To Diminished + Unreliable Allocations.

3. The “Green Agenda” = Inflationary
Primarily Because The Implementation Is Too Fast…And Discourages Oil Production Despite Still Robust Global Petroleum Demand.

4. Global Central Bank Balance Sheet Volumes = Inflationary
vis-a-vis Richly Valued Financial Assets + Real Estate.

5. Tight Labor Markets = Inflationary...
As Demand Continues To Dramatically Outstrip Supply

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So…How To Combat This Daunting List Of Inflationary Challenges?

First Things First…The Fed Has Zero Control Over #1 & #2 Listed Above.

As For The Green Agenda [#3]…That’s A Political Issue…That Only Pivots If The U.S. Executive Branch Reverses In The Next U.S. Presidential Election.

So…Tactically…The Only Flanks For The Fed To Attack Are #4 & #5.

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In The Meantime…Fed-Speak Is As Hawkish As Ever…Though Never Precise.

But If You “Read Between Their Ambiguous Lines”…It Is Quite Clear That They Intend To…At The Very Least…Severely Dent The U.S. Residential Real Estate Market…

As Its 12 Year Bull Run Almost Perfectly Mirrors The Fed’s Balance Sheet Expansion…And Has Strongly Contributed To Legacy Based Goods Inflation + Financial Asset Inflation Too.

Consider This…

Existing Home Sale Prices…On A Year/Year Basis…Have Increased EVERY MONTH For The Last 120 Months/10 Years.

And The Price Increases Are Primarily Well Distributed Nationally & Ridiculously Exceed GDP Growth.

Thus…Residential Real Estate Is Classic “Low Hanging Fruit” For The Fed To Harvest“…In Its Attempt To Bring Inflation Down.

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And What Makes Residential Real Estate An Even More Obvious Target Is That…Generally…It Is A HIGHLY LEVERED “LONG” TRANSACTION…

And While Leverage…

Amplifies Gains In A…

Rising Price Environment

It Inversely Amplifies Pains In A…

Decreasing Price Environment.

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Residential Real Estate Is Even Further Levered As New Home Construction & Development Is Debt Financed.

And Real Estate Development Consumes Many Commodities… That Have Contributed To Goods Based Inflation…Such As…Concrete + Gypsum Board + Lumber + Metal + Plastics [Chemicals].

Even Then…Developers Compete For These Commodities With Existing Homeowners [a much larger market]…Further Driving Prices Upward…As The Lure Of High Home Prices + Low Financing Costs…Provide Great Incentives To Improve + Remodel Existing Dwellings.

So This Connection Between Housing Prices + Inflated Materials Cost = Highly Elastic…And Easily Susceptible To A Higher Interest Rate Regime.

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Moreover…Rock Bottom Interest Rates…While Encouraging New Home Purchases Also Stimulate Home Refinancing For Existing Homeowners

Placing Even More Disposable Income In Their Pockets…Though That Has Already Reversed Quite A Bit [see Mortgage Bankers Association weekly data].

And Do Not Forget That Homeowners Also Spend Much Discretionary Income On Home Goods + Furnishings [Indoor & Outdoor]…Adding Another Stimulant To Aggregate Demand…That Ought To Wane With A Slowing Residential Real Estate Market.

So The Beautifully Levered Multiplier Effect Of Real Estate…That So Stimulates The U.S. Economy…Transmitted Through Developers + 1st Time Home Buyers + Existing Homeowners…Will Be …In All Likelihood…Harshly Slayed…As The Positive Feedback Loop Steeply Reverses.

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The Second Piece Of The Previously Mentioned “Low Hanging Fruit” For The Fed To Harvest…In Order To Fight Inflation Is:

Financial Asset Prices…Beyond Fixed Income + Real Estate…So Equities.

And The Cornerstone Of Equity Price Appreciation = Low Interest Rates…Combined With The Expectation That Rates Will Remain Low…

Obviously….That Investment Ethos Has SHARPLY INVERTED.

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For Equities…Generally…Higher Interest Rates Are Not Friendly To Share Prices…Especially Those That Do Not Generate Any Free Cash Flow.

Even Then…Higher Interest Rates Depress Valuation Metrics Almost Universally…Despite Free Cash Generation.

Plus…The Valuation Set-Up…After 13 Years Of QE + ZIRP…Is Not Compelling…

As Metrics Are Still Broadly Stretched…Especially In The Top Heavy Technology Sector…Predominant In Most Major Equity Indices.

And As Earnings Expectations Reset Lower In A Slowing Economy…Valuation Metrics Will Likely Get Clipped Further As Interest Rates …Ironically Rise…Thanks To The Fed’s Much Tardy Application Of Inflation Fighting Tools.

Finally These All Important Metrics Will Likely Overshoot To The Downside As Investor Anxiety Continues To Build.

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So This Troika-ed Wealth Effect Comprising:

EQUITIES + FIXED INCOME + REAL ESTATE =

Under INCREASINGLY INTENTIONAL PRESSURE…

And Ought To Remain So Until The Current Inflationary Impulse Is Quashed…And That Will Take Some Time…And Maybe Some Luck Too.

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Contact The Author: Dominate@GlobalSlant.com

C3.ai: ABSURD + EGREGIOUS INSIDER SELLING



Headlines:
1. Executives Focused On Selling Stock…Rather Than Software.
2. No Stock Sales Price Is Too Low.
3. Insiders Take NO Risk….Why Should Investors?

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AI = Both An Acronym For “Artificial Intelligence” And The Stock Symbol For Software Company C3.ai…Which Despite Its Brief History…Already Fascinates.

However, The Fascination Is NOT C3.ai’s Business Model…Which
1. Burns Cash
2. TTM Revenues = $183.2M
3. TTM Revenue Growth Rate = 17%
4. Equity Cap = $5.891B = 32.20x TTM Revenue

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So For Now…C3.ai Seems To Be Just Another Richly Valued Technology Stock…With Excellent CEO Pedigree [Tom Siebel]…A Sexy Corporate Name…And A Well Stocked Board of Directors…Featuring Condoleezza Rice.

The Post IPO Price Launch Has Reversed Quite Substantially [Peak to Trough = 74.32%]…And Seems To Be Deserved…As Company Fundamentals…While Decent…Are Not Extremely Compelling…

At Least According To Deutsche Bank’s Research Analyst…Who Recently Commented…

The artificial intelligence market in the enterprise remains nascent, with companies slow to expand AI use beyond initial pilots and science projects.

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Anyway…The Fundamentals At C3.ai Are Really Just A Sideshow.

Because What C3.ai Really Seems To Be…Rather Than A Software Company…Is A Publicly Traded Entity Providing Extreme Affluence [via aggressive insider share liquidations] To It’s Board Of Directors And Senior Executives…Despite…To Date…Not Much Commercial Market Success.

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Of Course…It Is No Secret…That Serving On A Board Of Directors = Akin To Getting Paid For Not Doing Too Much…Other Than Typically “Rubber Stamping” Mundane Corporate Administrative Matters.

Frankly…It’s An Exclusive Club That We’d All Like To Join.

Especially Because The Compensation…For Participating In A Handful Of Quarterly/Annual Meetings…Is Very Handsome…$250K/Year = Not Unusual…As Well As…In Most Cases…Very Attractively Priced Stock Options.

And This Is Where The Story At C3.ai Becomes Increasingly FASCINATING.

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As The Above Weekly Price Chart Indicates…The Dollar Value Of Recent Insider Selling [the first since the IPO] = MASSIVE...As Insiders Have Already Reaped 46% More Dollars For Their Accounts Than The Company Raised In Its IPO.

To Be Precise…$567M For ALL Directors + Senior Executives…As Well As A Combined $333M For Client/Investor BKR [Oil Service Giant Baker Hughes] And Investor/Board Represented TPG [Texas Pacific Group].

And All This Selling Occurred In Just Two 2 Brief /Legitimate Time Windows Within The Past 4 Months [3.10.21 – 4.23.21 & 6.10.21 – 6.22.21].

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For Perspective…The Combined Dollar Value Of Insider Stock Sales Equates To 4.91x C3.ai’s TTM Revenues…And These Revenues…As A Reminder… Generate No Free Cash Flow.

That A Cash Burning + Relatively Slow Growing “Growth” Company…Such As C3.ai…Can Generate Almost $1B Of Income/Wealth For Insiders = Very Good For Them…But Very Bad For Public Market Investors Of C3.ai…As The Insider Selling…No Doubt…Has Further Weighed On The Share Price of C3.ai.

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Naturally…There Is Even More Intrigue To This…Primarily…INSIDER SELLING MACHINE.

#1. No Sales Price Is Too Low.

Insider Selling Was Initiated In March ’21 With The Share Price Already Down 53.77% From It’s All Time Price High And Near Its Lowest Trading Level…Since The IPO.

But Those Low Prices Did Not Deter…As Insider Sales Were Boldly Executed…Until Pausing…At A Further Depressed Level In Late April.

The Insider Selling Window Opened Again In Early June…With The Stock Down Even Further From Late April…And Another Torrent Of Shares Hit The Market.

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In All…Over 12.5M Shares Were Aggressively Dumped Into The Market… Generating Roughly $951M Of Proceeds For Insiders.

#2. Insiders Take NO Risk.

That Old Cliche…No Risk = No Reward…Certainly Does Not Apply At C3.ai…

As The Cost Basis For Most Of These Share Sales = Effectively Zero …According To SEC Form 4 Filings.

Thus…With A Cost Basis Of Zero…There Is No True Risk…As You Can Effectively Lose Nothing?

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#3. No Optimism.

A Captivating Feature Of These Share Sales Too = Most Insider Stock Was Sold On The Same Day That It Vested…Even With The Price Down Significantly From It’s December ’20/February ’21 Price Peaks.

So…The Urgency To Sell…While Not Unusual For Somebody With Much At Risk…Is Peculiar For “Insiders” Without Much Financial Risk…Given The Cost Basis Of Their Shares Was Close To Zero.

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Plus…With The Share Price Down So Dramatically…In A Very Short Period Of Time [see above price chart]…It Seems That None Of These Directors/Insiders So Much As Even Paused…For A Nano-Second…To Think…

Perhaps I Should Just Hold On To My Stock For A While And Then Liquidate If The Shares Bounce Back Up A Bit“…

Especially Since The Company Does Position Itself As A Pure-Play In A Hyper-Growth Technology Sub-Sector…And Who Would Know That Better Than Top Insiders At The Company?

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#4. Institutional Shareholders Are The Current “Bag-Holders.”

While Insiders [including EVERY MEMBER OF THE BOARD OF DIRECTORS] Liquidated Large Share Positions…Resulting In Ridiculously Risk-less Profits + A Tanking Stock…

They Sold To Institutional Investors…Who Paradoxically…Have Much At Risk.

Thus…The Perceived Alignment Of Interests That Most Institutional Investors Seek…Between Company Executives/Insiders + Public Shareholders…Certainly Does Not Exist At C3.ai.

Actually…There Appears To Be Quite A Bit Of Market Conflict…Especially With Shares Continuing To Move Down And To The Right…

As Almost All Investors That Acquired Shares Of C3.ai…AFTER The IPO Started Trading…Have Lost Money…Other Than Short-Sellers “Covering” Their Positions.

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The Insider Selling Will Likely Continue At C3.ai…Without Pause…No Matter The Conflicting Optics Between Company Cash Burn + Insider Cash Build.

However…As The Size-Able Insider Selling Continues At It’s Current Pace…

C3.ai’s “Totally Cool” Corporate Name…Might Take On An Entirely New Meaning…As In…

C3 = “See” You In “3” Weeks/Months For More Insider Selling.
ai = “a”dios “i”nvestors…As Lopsided Insider Compensation Agitates.

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Contact The Author: Dominate@GlobalSlant.com