Topley’s Top Ten – July 29th, 2019

Author

Matt Topley
July 29, 2019

1.S&P Sector Returns 2019

Philip van Doorn-Marketwatch

2.MJ-Pot ETF Over $1B in Assets…26% Off Highs.

MJ-Down -26% Since March.

3.Private Equity is Fueling the Boom in Non-Bank Lending.

The High-Octane, In-Demand, and Worrying World of Risky Loans

Investors love debt. But is shadow banking hiding risks that should be plainly visible?

In the worldof shadow banking, private equity firms are everywhere — and are fueling itsboom.

They’vebeen on a tear raising buyout funds that purchase companiessmall and large, relying on nonbank lenders to finance their deals. They turnto direct lending funds for acquisitions in the midmarket, and for largerdeals, ask CLOs and other investors for deal financing.

Theyalso sit on the other side of the table, creating CLOs and powering the privatecredit boom with their own direct lending funds. For example, Carlyle Groupannounced this month that it closed a $2.4 billion fund that will provide direct loans toupper-midmarket borrowers, including companies that are not backed by privateequity firms. With leverage, Carlyle Credit Opportunities Fund can invest asmuch as $3.1 billion, the firm said.

Manyof the same concerns about loose lending standards in the broadly syndicatedleveraged loan market — where Wall Street banks arrange and sell the debt toinvestors — have shown up in the smaller, but expanding, universe of directlending funds in the midmarket, often backing private equity deals. Lenders arevigilant but can’t escape the forces of supply and demand that may lead toterms favoring borrowers, according to David Lyon, co-head of private credit atNeuberger Berman.

Thatmay mean lower interest rates as well as weaker lender protections. Lyon ispaying close attention to covenants that govern how much flexibility a privateequity firm may have to take cash out of a company, a borrower’s ability toincur additional debt, and the ability to remove collateral from deals. “Thoseare bright lines,” he says. 

Yetfor all the worries about shadow banking, the expansion of private debt fundsmay actually help provide a cushion in a downturn, according to Brady of PaulHastings. 

Ascapital becomes harder for borrowers to access because banks are pulling backfrom lending in volatile markets, managers of private debt funds may show up.“I think the biggest difference between whenever the next recession hits andthe last recession is all that dry powder sitting on the sidelines,” he says.It may be “a softer landing.”

Butsome funds are avoiding midmarket buyout loans on purpose.

In acrowded market of direct lending funds focused on private equity firms, J.P.Morgan Asset Management and UBS O’Connor, to name two, are searching elsewherefor opportunities. 

FullArticle-Good Read

4.The Companies with the Most Debt in America

by Wolf Richter • Jul 26,2019 • 99 Comments • Email to a friend

The concentration of corporate debt: The top 46.

I’m counting only non-financial companies. This excludes financialcompanies such as banks that borrow money to lend money. But there are somegray areas in this distinction. This gray area includes the Number 2 mostindebted US company, Ford with $159.7 billion in debt. Its wholly-owned subsidiaryFord Credit is its financial arm and captive auto lender that borrows money tolend money. So be it. Several companies in this group have financialsubsidiaries.

Apple is Number 5 with $112.6 billion in debt,a result of its all-time record-breaking share buybacks with which it blew pastGE, another share buyback queen before its house of cards threatened tocollapse, with $111.7 billion in Debt.

Those are the six non-financial publicly tradedcompanies, each with more than $100 billion in debt.

In fact, the top 10 most indebted companiescombined have a breath-taking $1.2 trillion in debt. These days we throw“trillions” around to stay fit on a daily basis, but it’s still “real money,”so to speak. This is the outgrowth of the massive concentration of debt in theUS corporate world.

5.The Fed’s Financial Accounts: What Is Uncle Sam’s Largest Asset?

by Jill Mislinski,7/9/19

Note: We’veupdated the quiz based on this month’s release of Q1 2019 Financial Accounts ofthe United States (previously referred to as the Flow of Funds Accounts). Hint:The correct answer is the same as it was for the last quiz.

PopQuiz! Without recourse to your text, your notes or a Google search, what lineitem is the largest asset in Uncle Sam’s financial accounts?

  • A) U.S.Official Reserve Assets

  • B) TotalMortgages

  • C) TaxesReceivable

  • D)Student Loans

Thecorrect answer, as of the latest quarterly data, is … Student Loans.

Therapid growth in student debt has been an ongoing topic in the financial press.A stunning chart that continues to haunt us illustrates the rapid growth infederal loans to students since the onset of the great recession. The chart isbased on the Federal Reserve’s Financial Accounts data (available here) for government’s assets and liabilities. We’ve used alog-scale vertical axis.

Fora more dramatic look at the same data, here it is with a standard linear axis.

6.1 in 4 Americans Now Have Student Loans.

7. Why US bond yields could be going the way of Germany and Japan

https://www.ft.com/content/f1bc6ba0-aece-11e9-8030-530adfa879c2Why US bond yields could be going the way of Germany and Japan

Without a dose of ‘shock and awe’ from the Fed, long-termrates could drop below zero © AP Share on Twitter (opens new window) Share on 

Ten-year US Treasury yields could be headed to zero. This isnot a forecast. This is not a bold prediction. This is not something that wehope happens. This is an observation of what is unfolding in the markets rightin front of us. The 10-year yield peaked at 3.25 per cent in November last yearand has fallen relentlessly, to as low as 1.93 per cent earlier this month.Today, about one-third of the global government bond market and one quarter ofthe global aggregate bond market have negative yields. We should consider it awarning: that this is the path the US market is on unless there is an adequatepolicy response.

What is surprising is that the dramatic decline in yieldshas happened against a backdrop which would have suggested otherwise. The lastmove by the Federal Reserve was to raise interest rates in December. Thecentral bank is also in the process of running down its balance sheet by up to$35bn per month. Assets in US money market funds have increased steadily overthe last nine months to about $3.3tn, the highest level since the financialcrisis, when the Fed provided an unlimited guarantee to these funds. Equities,gold and cryptocurrencies have all risen strongly. Further, the US economycould be characterized as “OK”. So, what is driving the flows into USgovernment bonds, and where is the money coming from? More importantly, if allof these factors turn, where do yields go from current levels?

Quite simply, the money is pouring into the US bond marketfrom overseas. As the volume of negative-yielding debt grows across Europe andJapan, investors are seeking a safe haven that has a positive return. USinvestors have neither embraced the decline nor pushed back against it. Astrade tensions escalate, the probability of recession rises. There is also thevery real risk that inflation expectations have become unanchored and centralbanks are gradually becoming powerless. New York Fed president John Williamscaptured this risk nicely this month by saying that “investors are increasinglyviewing these low inflation readings not as an aberration, but rather a newnormal”.

While there has already been a dramatic decline in USyields, an accelerated move lower is potentially in the offing. If, asexpected, the Fed begins a rate-cutting cycle at the end of this month, moneywill be shaken out of money-market funds into bond funds in an effort to lockup a higher yield. A second vast pool would come from a return to balance sheetexpansion: the Fed is expected to end its balance sheet run-off in Septemberjust as the European Central Bank returns to quantitative easing. A third poolof money could come from de-risking. An escalation in the trade war has surelyraised the probability of recession. From current levels, the combination ofcentral bank action and de-risking would accelerate the journey of US bondyields toward zero. This is not healthy for savers who rely on a fixed incomeor for insurance companies and pension funds that have returns targets to meet.

There needs to be a policy response that is swift anddramatic enough to stop this descent in its tracks, while reigniting growth andinflation expectations. A starting point is with the central banks and the Fedin particular. It must respond at month-end with “shock and awe” to regain control.A mere 25 basis-point cut by the Fed will probably be dismissed by the markets,and investors will pile into intermediate and long duration bonds. Whetherpolicymakers cut by 25bp or 50bp, they must make it clear that they meanbusiness and will do whatever it takes from that point onward to raiseinflation expectations. For their part, the ECB and outgoing president MarioDraghi got the ball rolling on Thursday by indicating that a significant degreeof monetary stimulus is both needed and forthcoming.

While multiple significant central bank policy responses arelikely to happen, it is important to remember that monetary accommodation aloneis not enough to avoid recession this late in an economic expansion. Otherwise,we would never have recessions. Will it buy enough time for a policy responseto happen elsewhere? While there could be a de-escalation in trade tariffs, thedirection of travel over the past 18 months has not been encouraging. It wouldalso be nice to see some co-ordinated fiscal stimulus.

But which government has the courage and ability to embarkon a big spending programme? The central banks must take the lead, and theymust start this month. They must bring front-end real yields so low and sofast, that the yield curve steepens. That will cause investors to question thewisdom of holding longer maturity bonds in the face of central banks committed,on a co-ordinated basis, to reflation. Anything short of that risks the 10-yearUS Treasury remaining on the well-worn path, forged by Japan and Germany,toward zero.

Bob Michele is global head of fixed-income at JPMorgan AssetManagement

8.Keeping NFLX in Perspective.

NFLX -15%correction….It had -40% correction in December 18….It was trading at $140 inlate 2017-200 points lower.

9.The High Cost of Avoidable Hospital Emergency Department Visits

7/22/2019

Health care spending in the United States isexpected to grow from $3.5 trillion in 2017 to $6 trillion by 2027, accordingto the Centers for Medicare & Medicaid Services. As a result, the healthshare of GDP is expected to reach nearly 20 percent.

What’s driving the dramatic increase inspending? Price variation, which leads to overspending by many consumers.

However, UnitedHealth Group has conductedextensive research on the cost of care and has identified three areas wheresavings are achievable: 

  • Avoidable hospital emergency department (ED) visits

  • Hospital prices

  • High-value physicians

This article focuses on avoidable hospitalED visits. Future articles on reducing the cost of care will examine hospitalprices and high-value physicians in Medicare. 

18Million Avoidable Hospital Emergency Department Visits

According to UnitedHealth Group research,two-thirds of hospital ED visits annually by privately insured individuals inthe United States – 18 million out of 27 million – are avoidable.

An avoidable hospital ED visit is a trip tothe emergency room that is primary care treatable – and not anactual emergency. Ten common primary care treatable conditions frequentlytreated at hospital EDs are bronchitis, cough, dizziness, f­lu, headache, lowback pain, nausea, sore throat, strep throat and upper respiratory infection.

Bythe Numbers

The average cost of treating common primarycare treatable conditions at a hospital ED is $2,032, according to UnitedHealthGroup. That number is 12 times higher than visiting a physician office ($167)and 10 times higher than traveling to an urgent care center ($193) to treat thosesame conditions. In other words, visiting either a physician’s office or anurgent care facility instead of a hospital would save an average of more than$1,800 per visit – creating a $32 billion annual savings opportunitysystemwide.

What is driving the higher costs at hospitalEDs? Higher costs are driven in part by hospital facility fees, which increasethe cost of an average hospital ED visit by $1,069, and lab, pathology, andradiology services, which average $335 at a hospital ED – 10 times more costlythan at a physician office ($31).

10.How to succeed at work, according to Angela Ahrendts, who was one of Apple’s highest-paid executives

REUTERS/NoahBerger

  • Angela Ahrendts, Apple’s former retailchief, discussed the importance of leaning into your talents at work onLinkedIn’s “Hello Monday” podcast.

  • It’sa lesson that Ahrendts says she passes on to her children.

  • Understandingyour gifts and focusing on them can help you bring your most valuablecontributions to the table, Ahrendts said.

  • Visit Business Insider’s homepage for more stories.

When former Apple retailchief Angela Ahrendts started working for the technology giant in 2014, shelearned an important lesson — particularly within her first 100 days. “Ifit teaches you anything, it teaches you that they wanted you for a reason,”she said when speaking with LinkedIn’s Jessi Hempel on the company’s“Hello Monday” podcast in May. “So get in yourlane, bring your gifts to the table.”

That lesson ofunderstanding where your strengths lie and applying that to your job, even ifit’s a position in a new field you haven’t worked in before, is one thatAhrendts said she passes on her to children.

Ahrendts has a history ofworking in the fashion industry, having been the CEO of Burberrybefore joining Apple, and she held executive positions at Liz Claiborne andDonna Karan International before that. Moving to Apple represented a step intoa new industry for Ahrendts. “I tell my kids, it’s kind of likewater-skiing,” she said on the podcast. “You don’t want to be overhere, you want to be in that real smooth place, and try and get yourself there.And then life just takes off.”

Ahrendts was Apple’sretail chief overseeing the company’s strategic direction for its physical andonline retail stores. She was hired from Burberry in 2013, the year before theApple Watch was announced, and left in April for “new personal andprofessional pursuits,” according toApple. Ahrendts recentlyjoined Airbnb’sboard of directors in May.

During her tenure, she wasamong Apple’s highest-paid executives. Her total compensation for 2018 was$26.5 million, according to an Apple proxyfiling from January 2019, which was higher than CEO Tim Cook’stotal compensation of $15.7 million in 2018.

In 2017, her totalcompensation was $24.2 million, which was also higher than Cook’s compensationof $12.8 million and slightly higher that of other executives such as LucaMaestri, Apple’s chief financial officers, and Dan Riccio, the company’s seniorvice president of hardware engineering, according to a 2018 proxystatement.

Ahrendts also addressedthe subject of feeling insecure in one’s role during the podcast. While thatfeeling doesn’t always go away, Ahrendts said that getting a better grasp onyour strong points can give you the necessary assurance to succeed.

“You get stronger andmore confident in who you are and what your gifts to this world are,” shesaid. “And then you keep yourself in a narrower lane, knowing that if Istay in this lane, I will make the contribution that I’m supposed to make whileI’m on this planet.”

Are you a current orformer Apple Store employee? If you work or have worked at an Apple Store, wewant to hear from you. Contact this reporter at [email protected]