A daily market update from FS Insight — what you need to know ahead of opening bell

“Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.” — Paul Samuelson

Overnight

U.S. consumer confidence slides to lowest level since 2022 (Semafor)

Biden administration aims to reclassify marijuana as less dangerous drug (WSJ)

Cocoa plunges most ever with trader exodus sparking huge moves (BBG)

Starbucks shares plunge after sales, earnings miss (WSJ)

A drought of treasury bills risks muddying end of Fed’s balance-sheet tightening (BBG)

FTC targets ‘junk’ patent listings on Ozempic and other drugs (WSJ)

PG&E nears deal with KKR for stake in power business spinoff (WSJ)

Amazon sales urge as company trains focus on Artificial Intelligence (WSJ)

Amazon beat Q1 EPS and revenue estimates as profit more than tripled on cost-cutting efforts and growth in advertising and cloud computing; it nonetheless missed on Q2 forecast (CNBC)

AMD shares fell ~7% despite reporting better-than-expected Q1 EPS and revenue and meeting Q2 guidance estimates (CNBC) 

Starbucks tumbled ~12% after reporting weaker-than-expected Q2 EPS and revenue, fueled by a surprise decline in same-store sales (CNBC) 

Eli Lilly rose ~6% on a Q1 beat-and-raise thanks to a big forthcoming increase in production capacity for its diabetes and obesity drugs (CNBC) 

PE is largely absent from U.S. IPO market recovery (BBG)

VCs increasingly adding ‘portfolio sale clauses’ in funding rounds (SFT)

Capital markets union plan gets backing from European funds body (FT)

Eurozone exits recession as inflation steadies (RT)

JPMorgan broadens roles for sales execs (RT)

Commodity ETFs pull in most cash since 2022 on sticky inflation (BBG)

Walmart launches a premium brand to compete with Whole Foods (WSJ)

Traders scramble for U.S. storage as distillates demand disappoints (RT)

Walmart to shut U.S. health clinics over lack of profitability (RT)

Caterpillar will delist from two European exchanges (RT)

Edtech stocks tank over 10% on ChatGPT popularity (CNBC)

Pot stocks ride high on report that the DEA is set to reclassify marijuana (BBG)

Google CEO Sundar Pichai nears billionaire status powered by AI Boom (BBG)

HSBC’s Noel Quinn ends 37-Year CEO dream with surprise departure (BBG)

Founder of Binance, world’s largest crypto firm, sentenced to four months (WSJ)

Disclosures of U.S. identities in spy reports nearly tripled last year (WSJ)

Dave Rowntree, drummer for the 90s-era band Blur, is running as a parliamentary nominee for U.K.’s opposition Labo(u)r Party in Mid Sussex, typically a Conservative stronghold (TG)

First news

• Millennials doing not at all badly financially
• ARR-based loans created a landscape of never-profit companies milking their lenders for more cash; what next?

Chart of the Day

MARKET LEVELS

MORNING INSIGHT

Good morning!

On the last trading day of April, the S&P 500 fell -1.6% and the Nasdaq down -2%, bringing total losses to -4%. Over the past 40 years, the only worse April return was 2012 (debt downgrade / peripheral Euro-area crisis). And after a strong first 3 months of 2024 (+10% gain), many wonder if the decline in April is the start of a broader “payback” period where stocks languish. In our view, May will ultimately prove to be a positive month for stocks.

Click HERE for more.

TECHNICAL

The relentless push higher in rates continues to be an important factor that’s spooking the stock market, preventing a more material bounce off the lows. These next few days will be important to ascertain the Treasury funding levels and the possibility of Powell producing a more dovish message given that 50 bps of rate cuts have already been removed from the market. Trends remain bullish from 4/19 lows, yet some backing and filling is certainly possible if/when rates push higher in the short run, before these both reverse. Pullbacks should create a very favorable risk/reward opportunity for Equities into mid-May but some relief on this recent spike in rates is thought essential for Equities to continue higher.

Click HERE for more.

CRYPTO

In yesterday’s video we revisit our perspective on the significant impact that the QRA and FOMC could have on the crypto market. We also detail the key factors we are monitoring closely.

Click HERE for video.

FIRST NEWS

Double, Double, Toil and Savings. Only three countries in the world don’t use the metric system – the United States, Liberia, and Myanmar – preferring the imperial way of approaching measurements instead. It’s a quite a club to be in. (The U.K., which uses both metric and imperial, doesn’t quite make the cut.)

Only the United States and Canada observe Labor Day on the first Monday of September – and it’s not because the rest of the world are posh toffs who despise manual labor. It’s because the rest of the world tends to celebrate Workers’ Day on May Day, May 1, i.e. today.

Workers also tend to get paid for their labor. Many of them even manage to put some of that money aside and, per a new analysis from the Center for American Progress, it turns out that household wealth for those under 40 in the U.S. is up 49% from its pre-pandemic level.

Young households haven’t seen wealth growth like this since the Fed started tracking this data in 1989. Millennials, born between 1981 and 1996, have seen their wealth double over this period.

When we say wealth, we mean the value of a household’s assets, including stocks, bank accounts, and real estate, minus its liabilities, e.g. mortgages and student loan debt.

^{Data: Center for American Progress analysis of Federal Reserve data; Chart: Axios Visuals}

Those under 40 have seen big asset gains and were even able to reduce some liabilities, with average housing wealth rising $22,000, along with growing homeownership and soaring home prices. Liquid assets also climbed on the back of higher wages and thanks to savings remaining from pandemic relief, with the average value of the group’s financial assets (stocks and mutual funds, for the most part) increasing by $31,000. In the liabilities column, non-housing debt fell by $5,000 as, with more money in their pockets, people were able to pay off credit cards (the student loan moratorium didn’t hurt either) or – and it can happen to the best of us – not take that debt on at all.

The Fed data looked at average wealth, which raises the question: Are these gains widely distributed? Pointing to separate (but less timely) data from the Fed’s survey of consumer finances that shows a 140% increase in median wealth for households under 35 from 2019 to 2022, CAP says these gains are broad-based.

Of course, older Americans, i.e. Baby Boomers, are still far wealthier, but we know that the process of transferring that wealth to, among others, millennials, has begun. Our latest Signal From Noise report covers this very topic – millennials and their spending and investing habits. Make sure to check it out HERE for more insights. Axios

ARR We Having Fun Yet? Over the last half-decade or so, money-losing tech companies convinced lenders with looser standards to lend them billions against the promise of runaway growth. The bill is now coming due.

Post-pandemic, private credit funds eager to put stores of dry powder to work were content to swap a bedrock component of lending philosophy, namely the truism that cash flow is king, with a Silicon Valley embrace of quick growth via sticky subscriptions (enabled by quick-rise-Play-Doh stock markets), and so loans rooted in revenue rather than profits came into vogue in 2021 and 2022.

Based on annualized recurring revenue, or ARR, these loans generally carried tripwires requiring borrowers to turn a profit within 2-3 years or risk a default or even potential bankruptcy. Lenders assumed that companies would either keep growing, with debt staying cheap and plentiful, or that a non-selective IPO market would bring in fresh cash to repay them. None of those things happened.

Rising interest rates have made these loans more expensive at the very moment as growth at tech companies has slowed. IPO markets that shut in 2022 haven’t reopened, leaving companies relying on more private money, dispensed with an increasingly stingy hand. Lenders are adding more time for companies to repay the loans rather than sully a good track record; private-equity owners are quietly injecting new cash into money-losing companies.

Per the IMF, more than $1 trillion had gone into private credit funds since 2019. With so much cash chasing borrowers, terms inevitably grew looser. Firms first offered to lend companies $2 for every dollar of recurring revenue (more often than not, software subscriptions) but by 2022, it was closer to $4.

In an instance of clear moral hazard, some lenders waived their triggers entirely, creating a handful of ‘ARR for life’ loans whose borrowers now had fewer reasons to ever be profitable. In a recent S&P survey of companies with recurring-revenue loans, the average had $7 million in pre-tax, pre-interest earnings and $191 million in debt.

Like many standards of financial prudence, the idea that only mature and profitable companies could handle debt started to go out of fashion in the 2010s. On the one hand, the IMF continues to find that companies that tap private credit markets instead of bank loans or bonds are smaller, weaker, and more vulnerable to rising interest rates and economic downturns – and yet startups such as Uber and Airbnb, operating at a loss and in need of more cash to push into new markets, had, because they had been private for so long, largely exhausted the pool of equity investors in Silicon Valley. This last group understandably didn’t want their stakes to be diluted even further.

Firms found that borrowing was the answer. Both companies each borrowed upwards of $1 billion from investors in 2016. It was also a profitable strategy for lenders: A 2018 study found the 10-year returns for venture debt were slightly better than those of venture equity.

As with any set of assumptions, underwriting models are only as good as the values for variables that they are fed, and the values behind ARR loans have turned out to be flawed, with the flaws becoming obvious without a major economic cycle. All it took was corporate buyers of expense-management and hiring software to pull back on purchases, and for IPO investors to sit on their hands for a year.

When the market sees a credit cycle, it will probably uncover some things we don’t like. On the other hand, Wall Street’s doom-mongers spent years warning that private lenders would be the next bubble to burst when central banks tightened policy. Instead, two years into rising interest rates, these loans have held up better than bank debt. Semafor