Closing Stock Market SummaryIt was another rough showing for the stock market today. It was a rough showing for the bond market, too, which was the main driver of stock market action.
The S&P 500 and Dow Jones Industrial Average both fell below their June 16th closing lows (3,666.77 and 29,688.78, respectively) and the DJIA broke below its intraday low (29,653.29) from the same day. The DJIA closed below the June low while the S&P 500 was able to climb above its June low by the close.
Treasury market volatility was the biggest headwind for equities today, followed by recession concerns. The level yields hit was worrying, but the pace at which they got there was the bigger concern. The 2-yr note yield rose as high as 4.26% (it began the week at 3.85%) and the 10-yr note yield went as high as 3.82% (it began the week at 3.45%). They settled at 4.21% and 3.70%, respectively.
A policy move out of the UK acted as another headwind today. The Prime Minister announced the biggest package of tax cuts since 1972 in order to help drive stronger economic growth. That news pushed the 10-yr UK gilt yield up 36 basis points to 3.85%, as market participants recognize it will be financed through the issuance of more debt at a time of rising interest rates. Also, there were concerns that efforts to spur stronger growth will keep inflation rates elevated.
The aforementioned policy move sent the British Pound plummeting (GBP/USD -3.4% to 1.0868 ) and the US Dollar Index on tear, up 1.5% to 112.96.
Another factor in play for participants today was Goldman Sachs cutting its year-end price target for the S&P 500 to 3,600 from 4,300, and acknowledging it sees potential downside to 3,150 in the event of a hard landing.
Price action today brought many stocks down. The advance-decline line reflected a strong selling bias. Decliners led advancers by a 7-to-1 margin at the NYSE and a 3-to-1 margin at the Nasdaq.
Small and mid cap stocks suffered heavier losses than their larger peers. The Russell 2000 closed down 2.5% and the S&P Mid Cap 400 closed down 2.1%.
All 11 S&P 500 sectors logged losses that ranged from 0.5% (health care) to 6.8% (energy). Energy fell far behind its peers as energy complex futures suffered sharp losses on concerns about a global slowdown. WTI crude oil futures fell 5.7% to $78.69/bbl. Unleaded gasoline futures dropped more than 7.0% to $2.32/gal.
Looking ahead to Monday, there is no U.S. economic data of note.
Today's economic data was limited to the preliminary September IHS Markit Manufacturing PMI reading, which came in at 51.8 (prior 51.5), and IHS Markit Services PMI reading, which was 43.7 (prior 43.7).
Dow Jones Industrial Average: -18.6% YTD
S&P Midcap 400: -21.21% YTD
S&P 500: -22.5% YTD
Russell 2000: -25.2% YTD
Nasdaq Composite: -30.5% YTD
U.S. in Talks to Build First Nuclear Subs for Australia
Proposal seeks to expedite capabilities for ally by mid-2030s, until it can build its own, in bid to counter China
The Biden administration is exploring an arrangement to expedite Australia’s acquisition of nuclear-powered submarines to respond to China’s growing military might by producing the first few subs in the U.S., Western officials said Friday.
The idea is to provide Australia with an initial nuclear-powered fleet by the mid-2030s, while a longer-term effort is under way to give Australia the capability to produce nuclear-power submarines at home.
The stopgap arrangement has been discussed among senior officials from the U.S., Australia and Britain as a way to keep the initiative on track. It is one of several ideas that has been weighed to enable Australia to more quickly field a nuclear-powered fleet, and has yet to be formally approved.
The initiative has its challenges. To carry it out, billions of dollars would need to be spent to expand U.S. submarine-production capacity and Australia would be expected to contribute to this expansion.
A final decision on how to proceed is expected in March, when the U.S., U.K. and Australia have said they would complete a joint study of how to move forward.
The three countries said a year ago that they were establishing a new security partnership in the Indo-Pacific that would enable Australia to build its first nuclear-powered subs.
Nuclear-powered submarines are far more capable than their conventional counterparts because they can operate stealthily underwater for great distances and long periods. The nuclear-powered subs for Australia would only carry conventional weapons.
The alliance is called AUKUS, an acronym for Australia, U.K. and the U.S. In addition to collaboration on nuclear-submarine technology, the countries also intend to cooperate on artificial intelligence, autonomous systems, hypersonic missiles and undersea technologies, among other areas.
The three countries reaffirmed the arrangement in a joint statement issued Friday. They provided no details on how they hope to implement the plan or when the first of the eight to 12 nuclear-powered subs that the Australians hope to acquire might be produced.
“We are steadfast in our commitment to Australia acquiring this capability at the earliest possible date,” the statement said.
Some steps have been taken. Five Australian personnel have been accepted into the U.S. nuclear propulsion program and several have been accepted into the British Navy’s nuclear courses.
Since the AUKUS alliance was announced a year ago, experts have wrestled with how to help Australia acquire the submarines given the lack of spare shipbuilding capacity in the U.S. and in Britain.
In August, the U.S. admiral in charge of building new Columbia-class ballistic missile submarines said producing nuclear-power subs for Australia would interfere with the U.S. efforts to build its own subs unless a major effort was made to expand the American industrial base.
“If we were going to add additional submarine construction to our industrial base, that would be detrimental to us right now, without significant investment,” Rear Adm. Scott Pappano told a forum hosted by the Mitchell Institute for Aerospace Studies.
But some experts say expanding U.S. capacity is the best option to expedite the AUKUS initiative as British shipyards have their hands full completing the production of seven Astute-class attack submarines and building four Dreadnought ballistic-missile submarines.
“Some very modest progress has been made on sharing sensitive naval nuclear propulsion information and inviting Australian students to American and British naval nuclear power schools,” said Brent Sadler, a former U.S. Navy captain who spent 18 years as a nuclear submariner and is now with the Heritage Foundation.
He added that much more needs to be done if Australia is to deploy the first subs in its nuclear-powered fleet by the mid-2030s.
“The clearest Australian commitment would be financing expansion of nuclear submarine construction capacity in the U.S.,” Mr. Sadler said.
The Biden administration has already proposed spending about $2.4 billion over the next several years—including $750 million in the fiscal 2023 budget that is now before Congress—to increase the ability to manufacture U.S. subs. Expanding the industrial base so it could also produce subs for Australia would require additional spending.
Australian officials haven’t publicly discussed the plan. Australian Defense Minister Richard Marles has said that it is important “to get this capability as soon as possible.”
The idea of building submarines for Australia in the U.S. would be intended as a stopgap. Submarine production would then shift to Australia over time with the U.S. and U.K. continuing to share technology and components.
Speaking at a press conference earlier this month with his Australian counterpart, British Defense Secretary Ben Wallace said the ultimate result of AUKUS may be “a collaborative sub.”
James Miller, the AUKUS coordinator for the National Security Council, didn’t provide details of what such a collaborative effort might be, but said that the U.S. and U.K. would be deeply involved in the future Australian nuclear-powered submarine program.
“We are now intensively working through the details, but there is no doubt we need to have a very close trilateral partnership going forward for many decades,” Mr. Miller said.
Research Calls
- Upgrades:
- Apollo Global Management (APO) upgraded to Neutral from Underperform at BofA Securities
- Avista (AVA) upgraded to Buy from Neutral at Mizuho; tgt $44
- Domino's Pizza (DPZ) upgraded to Outperform from Market Perform at BMO Capital Markets; tgt $430
- fuboTV (FUBO) upgraded to Outperform from Neutral at Wedbush; tgt $6
- Spero Therapeutics (SPRO) upgraded to Outperform from In-line at Evercore ISI; tgt raised to $8
- Downgrades:
- Ally Financial (ALLY) downgraded to Equal Weight from Overweight at Wells Fargo; tgt $32
- Digital Realty Trust (DLR) downgraded to Underweight from Equal Weight at Barclays; tgt lowered to $91
- Equinix (EQIX) downgraded to Equal Weight from Overweight at Barclays; tgt lowered to $674
- Iris Energy (IREN) downgraded to Market Perform from Outperform at Cowen; tgt lowered to $4.30
- Safehold (SAFE) downgraded to Neutral from Outperform at SMBC Nikko; tgt $33
- Steris (STE) downgraded to Hold from Buy at Needham
- Others:
- Appian (APPN) initiated with a Neutral at Credit Suisse; tgt $45
- AppLovin (APP) resumed with an Overweight at Morgan Stanley; tgt $35
- Asana (ASAN) initiated with a Neutral at Credit Suisse; tgt $23
- BlackLine (BL) initiated with a Neutral at Credit Suisse; tgt $75
- Boyd Gaming (BYD) initiated with a Mkt Outperform at JMP Securities; tgt $65
- Carrols Restaurant Group (TAST) initiated with an Overweight at Stephens; tgt $4
- Cheesecake Factory (CAKE) initiated with an Overweight at Stephens; tgt $38
- Chipotle Mexican Grill (CMG) initiated with an Overweight at Stephens; tgt $1900
- Chuy's (CHUY) initiated with an Overweight at Stephens; tgt $27
- Cincinnati Fincl (CINF) initiated with a Mkt Perform at Raymond James
- Coupa Software (COUP) initiated with an Underperform at Credit Suisse; tgt $60
- Cvent (CVT) initiated with an Outperform at Credit Suisse; tgt $8
- Darden Restaurants (DRI) resumed with an Overweight at Stephens; tgt $140
- Datadog (DDOG) resumed with an Outperform at Credit Suisse; tgt $145
- Datadog (DDOG) resumed with a Neutral from Underweight at JP Morgan; tgt lowered to $105
- Domino's Pizza (DPZ) initiated with an Equal-Weight at Stephens; tgt $368
- Dynatrace (DT) initiated with a Neutral at Credit Suisse; tgt $38
- E2open (ETWO) initiated with an Underperform at Credit Suisse; tgt $5.50
- Five9 (FIVN) initiated with a Neutral at Credit Suisse; tgt $90
- Flywire (FLYW) initiated with a Buy at Truist; tgt $36
- Gaming and Leisure Properties (GLPI) initiated with a Mkt Outperform at JMP Securities; tgt $53
- Kura Sushi (KRUS) initiated with an Overweight at Stephens; tgt $85
- LivePerson (LPSN) initiated with an Underperform at Credit Suisse; tgt $8
- LiveVox (LVOX) initiated with a Neutral at Credit Suisse; tgt $2.50
- McDonald's (MCD) initiated with an Overweight at Stephens; tgt $280
- Monday.com (MNDY) initiated with an Outperform at Credit Suisse; tgt $180
- New Relic (NEWR) initiated with an Outperform at Credit Suisse; tgt $78
- Noodles & Co (NDLS) initiated with an Overweight at Stephens; tgt $7
- Omega Therapeutics (OMGA) initiated with a Buy at Chardan Capital Markets; tgt $12
- The ONE Group (STKS) initiated with an Overweight at Stephens; tgt $15
- PagerDuty (PD) initiated with an Outperform at Credit Suisse; tgt $32
- Papa John's (PZZA) initiated with an Overweight at Stephens; tgt $100
- Performance Food Group (PFGC) initiated with an Overweight at Stephens; tgt $60
- ProKidney Corp. (PROK) initiated with a Buy at BofA Securities; tgt $14
- Rapid7 (RPD) initiated with a Neutral at BTIG Research
- Restaurant Brands Int'l (QSR) initiated with an Equal-Weight at Stephens; tgt $61
- RingCentral (RNG) initiated with a Neutral at Credit Suisse; tgt $40
- Ruth's Hospitality Group (RUTH) initiated with an Overweight at Stephens; tgt $22
- Smartsheet (SMAR) initiated with a Neutral at Credit Suisse; tgt $40
- Sysco (SYY) initiated with an Overweight at Stephens; tgt $90
- Texas Roadhouse (TXRH) initiated with an Equal-Weight at Stephens; tgt $90
- Twilio (TWLO) initiated with a Neutral at Credit Suisse; tgt $80
- Wendy's (WEN) initiated with an Overweight at Stephens; tgt $25
- Westrock Coffee Company (WEST) initiated with a Buy at Stifel; tgt $12
- Wingstop (WING) initiated with an Overweight at Stephens; tgt $148
- Zoom Video (ZM) initiated with a Neutral at Credit Suisse; tgt $83
Gapping down
In reaction to earnings/guidance:
- SCHL -4.4%, COST -3.2%, APEI -1.3%
Select ETFs showing early weakness:
- USO -3.2%, SLV -2.8%, IWM -1.6%, GLD -1.5%, QQQ -1.4%, SPY -1.3%, DIA -1.2%
Other news:
- EDAP -11.3% (prices offering of 2,666,667 ADSs at $7.50 per ADS)
- AORT -8.1% (follows recommendation to stop PROACT Xa Clinical Trial)
- RIOT -6.9% (supplementing its disclosures regarding the material weaknesses identified by management)
- AZN -3.6% (AstraZeneca partner Ionis Pharma provides update on development program evaluating PCSK9 antisense medicine; ION449 will not advance into Phase 3 development based on pre-specified criteria)
- IONS -3.3% (Ionis Pharma provides update on development program evaluating PCSK9 antisense medicine; ION449 will not advance into Phase 3 development based on pre-specified criteria)
- MOS -3.1% (reports August revs and sales volumes)
- DIBS -2.9% (announces 10% workforce reduction)
- ROKU -2.6% (names three senior execs as presidents)
- DOCU -2.4% (names Google exec Allan Thygesen as CEO)
- BLDP -2.4% (receives order for 14 x 200 kW fuel cell modules from Siemens Mobility)
- BJ -2.3% (in sympathy with COST earnings)
- BA -2.3% (to pay $200 mln to settle case with SEC relating to former CEO misleading statements re 737 MAX)
- KSS -2% (activist investor Ancora favors Tom Kingsbury as CEO replacement, according to Axios)
- FTI -1.9% (wins Shell contract worth $75-250 mln for Jackdaw development in the UK)
- QCOM -1.8% (automotive design-win pipeline has grown to $30 bln)
- PVH -1.5% (names new Chief Strategy Officer)
- TGT -1.5% (in sympathy with COST earnings)
Analyst comments:
- ALLY -2.8% (downgraded to Equal Weight from Overweight at Wells Fargo)
- DLR -2.5% (downgraded to Underweight from Equal Weight at Barclays)
- EQIX -1.5% (downgraded to Equal Weight from Overweight at Barclays)
Gapping up
In reaction to earnings/guidance:
- CAMP +0.6%
Other news:
- CANO +6.1% (HUM in the running to acquire CANO according to WSJ)
- CORT +4.5% (extends deal with Optime Care to March 31 2024)
- LPLA +4.1% (reports monthly activity for August)
- XRAY +3% (names new CFO)
- VXX +2.9% (trading higher with weakness in US futures)
- IMAX +1.2% (acquires streaming technology co SSIMWAVE for $20 mln in cash and stock)
Analyst comments:
- FUBO +1.8% (upgraded to Outperform from Neutral at Wedbush)
- AVA +1% (upgraded to Buy from Neutral at Mizuho)
How long can the super-prime property boom continue?
The super-rich seem to have been largely unaffected by rising mortgage rates, spiralling inflation and the threat of recession — so far
It is 10am on a bright September morning and Mayfair is buzzing. Just off Berkeley Square, a salesman in the Bugatti garage has a diary full of appointments and can’t stay to chat. Instead, he gingerly drives the showroom’s solitary car, price £3.4mn, from its steel turntable out on to the road and parks it behind a delivery van, to the delight of onlookers wielding camera phones. Next door in the Bentley showroom, there is a four-month waiting list for the popular 4x4 Bentayga.
On the square’s north end in Phillips auction house, neatly dressed workmen dismantle the mise-en-scène of the previous evening’s David Hockney print sale, which sold all 78 lots, raising £3.3mn. The auctioneer’s Louisa Earl says that attendance has grown steadily since January, when auctions resumed in person following UK lockdowns. Many are locals, some newly arrived. “They will move in nearby and it will be all white walls and they’ll come here for things to decorate them with.”
After a quiet period during the depths of the pandemic, the world’s super-rich have been returning to city centres and have been buying homes.
In London and New York, a surge in transactions in 2021 has continued into 2022. Following a record tally of super-prime purchases in New York last year, 218 sales above $10mn were agreed between January and August this year, compared with 167 in 2019 before the pandemic hit. In London, 272 homes sold for £5mn or more over the same period, up two-thirds from the same stage in 2019, according to LonRes. And in Sydney, global estate agency Knight Frank calculates that sales of homes priced above US$10mn in the first half of the year were more than double the five-year average.
However, a darkening economic outlook — and a sharp decline in sales in mainstream property markets — raises a pointed question: just how long can the super-prime boom continue?
Manhattan home sales fell 38 per cent in the three months to August compared with a year ago; total US home sales fell 20 per cent year-on-year in July. UK house sales have fallen for five months in a row, according to the Royal Institution of Chartered Surveyors. Worse may be to come for mainstream housing markets, as mortgage rates climb and homeowners grapple with spiralling inflation.
Housing analyst Neal Hudson estimates UK house prices in July were overvalued by 17 per cent compared to wages and mortgage rates. “That could quickly rise to 40 per cent overvalued if mortgage rates hit 6 per cent,” he says.
Meanwhile, storm clouds over the world’s leading economies bode ill for the super-rich who own or are employed by leading companies. In July, the IMF warned that slowdowns in the economies of the US, China and Europe could push the world to the brink of global recession. This year’s sharp falls in global stock markets, in which much of their wealth is invested, will also leave them feeling poorer: the MSCI’s index of European stocks fell 21 per cent in the year to August; the US S&P 500 was down 17 per cent.
So far, however, such headwinds have done little to damp demand for New York’s most expensive homes, says Garrett Derderian, head of research at New York estate agent Serhant. “Super-prime sales have disconnected from the realities of a broader slowdown; undeterred and uninfluenced by rising mortgage rates, inflation and recession fears.”
In London, Paul Welch, mortgage broker to the super-rich, claims to be enjoying a record year. “In 2022, I have arranged more 100 per cent mortgages for home purchases above £10mn than at any time before over my 20-year career — and September has seen no let up,” he says, adding that such loans require additional assets, such as an equity portfolio, as collateral.
Welch, who runs largemortgageloans.com, is currently arranging a £28mn loan for a US client that will fund the full price of a four-bedroom house in Knightsbridge. Last week, three banks were offering the money at a five-year variable rate of 1.5 per cent above the Bank of England base rate. “There are no equivalent 100 per cent mortgages in the standard market,” says David Hollingworth of UK mortgage broker L&C. He says the closest deal available — a 95 per cent, two-year rate, charging 2.04 per cent above the base rate — is capped at £600,000.
Banks may offer very low rates to lure the right person, from whom there is the prospect of earning fees from other lucrative services. Welch says they may even make the home loan at a loss. “You only get one shot to win over a $200mn client,” he says.
With cheap money still available to many super-rich, homes are changing hands for eye-watering sums in the world’s property hotspots.
At the end of June, a Fifth Avenue apartment in Manhattan sold for $101mn, one of four since May that have breached $50mn, according to Serhant. In July, the St Tropez home of Bernard Tapie, the French businessman and politician who died in October, sold for €81.2mn.
Back in Mayfair’s Mount Street, Wetherell says (despite having “NDAs up to my head which mean I can’t give details”) he has sold at least one home this year for more than £50mn. “If it’s the right home, interest rate changes make no difference to these buyers.”
The boom in super-prime purchases reflects the continued growth of global super-rich. The number of those worth more than $30mn increased by 9 per cent last year to 610,569, according to Knight Frank. Over the past five years, numbers have grown by 75 per cent.
Their complex financial arrangements mean they often enjoy a level of flexibility unthinkable for conventional home buyers.
Jonathan, who didn’t want to give his real name, says he made a fortune from a £500,000 bitcoin investment in 2012 and has just paid £10mn for a six-bedroom house near Notting Hill. He funded it with a £5mn mortgage secured against the home with a private bank in the UK and another £7mn loan — including money for stamp duty and new interiors — from a Swiss private bank, secured entirely against £17.5mn of bitcoin.
“For the mortgage they didn’t even look at my income,” he says; all the bank required was that he pre-pay the interest on their loans — 3.7 per cent fixed over five years, a total of £925,000 — up front. “As for [the Swiss bank], they didn’t even do a credit check on me,” he says.
Jeffrey Feinman, a New York-based accountant at DDK & Company, whose super-rich clients include several billionaires, says wealthy buyers often favour a mortgage over a cash purchase of a home because it means not having to liquidate other investments — including in capital markets or their own companies — which they are confident will earn them more than the cost of the loan.
For the mortgage they didn’t even look at my income. The Swiss bank didn’t even do a credit check
Recently, the number asking him for 100 per cent mortgages has fallen compared with earlier in the year, with growing anxieties about the global economy and rising inflation, he says. “I still do some of these loans but clients are following a more conservative approach; inflation is the magic word these days.”
But a Monaco private banker says that today’s low stock market prices have customers searching for investment opportunities, making them still keen to borrow large sums. “The level of borrowing is more or less the same [as at the beginning of the year]: while the cost of the loans is generally increasing, so are the future returns available on non-property investments,” he reasons.
In London, the pound’s weakness against the dollar — 1985 was the last time it was worth less — has increased the proportion of super-prime sales this year to buyers from the Middle East, North America and greater China, according to agents. The combined effect of price falls and a weakening pound means that prices for dollar buyers in central London today are 43 per cent lower than in 2014, according to Savills.
For those with a few tens of millions to spend on a new home, the world’s leading cities continue to appeal. “A lot of today’s London buyers made huge sums during the pandemic,” says Alex Christian, co-head of Savills’ private office in London.
One of his clients, a 40-year-old hedge fund manager, living in London, started his house search before the pandemic with a budget of £15mn. Today he has still not found the right home, but his budget has risen to £40mn.
Many newly minted are from the emerging world. These super-rich have long favoured home purchases in leading western cities as stores of wealth, for the quality of life such cities afford and to provide safety for their money and families.
One trust expert based in a UK crown dependency, who declined to give his real name, is currently helping two Chinese entrepreneurs find homes to buy in Europe. “Both are worried their assets may be seized by the government and want somewhere their wealth and family can be safe,” he says.
His Latin American clients similarly fear home governments seizing their assets. If their wealth becomes widely known in their home country, they or their family face the risk of kidnap.
How long the world’s super-prime housing markets can shrug off economic headwinds and a wider housing market slowdown is unclear. In February, the UK withdrew its tier 1 investor visa, long a popular route for the super-rich to obtain residency with their families in exchange for £2mn in investment funds. Concerned that prices are falling, Wetherell says many of his Mayfair clients are taking their homes off the market. “More homes have been withdrawn in the past few months than have sold, they’re not getting the right offers,” he says.
But a few doors down from Wetherell’s office, customers of Sautter, the celebrated Mount Street cigar shop, where the priciest smoke costs £300, show no signs of apprehension as they settle into comfortable armchairs for a lunchtime puff — a rarity since smoking was prohibited in almost all enclosed workplaces in 2007. A private equity investor from San Francisco, who is holidaying at the Connaught hotel opposite, puts down his newspaper to tell me about a recent encounter with an American visitor in the shop with whom he may soon do business.
“It has been our busiest summer in 12 years. We have so many locals,” says Magali De La Cruz, a Cuban who manages the shop, before launching into a leisurely stream of celebrity anecdotes from years gone by. “There where you are sitting was Alec Baldwin smoking with Keanu Reeves, who was [then] celebrating his 50th birthday.”
In the wood-panelled room, full of smoke and nostalgia, the economic realities outside — rising mortgage rates, spiralling inflation and looming recession — seem to belong to another world.