WSJ : Search Continues for Source of TerraUSD Crypto Bank Run

Search Continues for Source of TerraUSD Crypto Bank Run
In decentralized finance, it isn’t easy to understand who provides money for loans, where the money flows or how easy it is to trigger currency meltdowns

Cryptocurrency investors are still trying to figure out what led to May’s spectacular meltdown of a pair of digital tokens that were worth more than $40 billion earlier in the month.

Last week, analytics firm Nansen pointed to lending firm Celsius as one of a handful of users that contributed to the collapse of the luna and terraUSD cryptocurrencies. While Celsius disputes the account, the search for information about the cause of the wreckage highlights the opacity of the world of decentralized finance.

In DeFi, it isn’t easy to understand who provides money for loans, where the money flows or how easy it is to trigger currency meltdowns. This is one reason regulators are concerned about the impact of DeFi on investors and the broader financial system.

Many investors put their assets in crypto products that offer healthy returns; those services then lend out the funds to others. The value of assets held on DeFi platforms, termed “total value locked,” skyrocketed from $600 million at the beginning of 2020 to a peak of $317 billion on Dec. 26, 2021, according to the website DeFi Llama. It is now down to about $106 billion, falling in tandem with a decline in prices in the overall cryptocurrency market.

The Anchor Protocol was a popular service for terraUSD holders because it offered users a 19.5% interest rate on loaned crypto. But in May, a flood of investors started pulling their money out of Anchor, which ultimately led to the fall of terraUSD and luna. It is unclear who prompted the selling and whether they meant to trigger the collapse.

Nansen’s report argues that Celsius was one of a handful of users that first withdrew hundreds of millions of dollars from Anchor early, possibly triggering the broader selloff on the platform.

Celsius said that its risk-management group recognized “shifts in the stability” of the platform that prompted it to remove its assets only for the sake of protecting its customers’ money. The company didn’t profit from the instability, it said.

Celsius accepts customers’ deposits and then lends that money out to other users, like exchanges and market makers. It collects a fee for the service and then passes on that revenue to its users as an interest payment. Celsius offers users yields of up to about 14%, so Anchor’s 19.5% yield was attractive to the firm.

“It’s similar to traditional securities lending,” said Steven Ehrlich, the chief executive of Voyager Digital, a Canadian-listed company that offers a variety of crypto-focused financial services, some of which offer a stated yield. “It’s almost identical to what happens in the traditional world.”

But these products and services aren’t operated like traditional financial services.

“It’s being marketed as a better savings account and it’s not,” said Cory Klippsten, chief executive of crypto-services firm Swan Bitcoin.

There are no standards for issues of custody, risk management, or capital reserves. There are no transparency requirements. Investors often don’t know how their money is being handled or who the counterparties are.

“What you really are doing is, you’re an unsecured lender,” Mr. Klippsten said. “They’re gathering retail loans and investing it out the back end in lightly regulated activities.”

For instance, it wasn’t clear to investors that their money in a Celsius account might have been invested in the Anchor platform. Celsius, Voyager and others in the industry don’t usually disclose their counterparties.

Regulators have increasingly been uneasy about the risks of these lending platforms. In April, Celsius, pressed by regulators, stopped accepting new interest-earning deposits from nonaccredited investors in the U.S. A similar program planned by Coinbase was dropped after opposition from U.S. regulators.

Also, unlike traditional bank accounts, there is no deposit insurance. If a DeFi service collapses or gets hacked—and they are notorious for getting hacked—users are largely on their own.

“In the world of crypto, anyone and their dog can release a product,” said Michael Rosmer, the founder of DeFiYield, which publishes software for auditing DeFi projects. “We discovered very quickly you have this plethora of complex instruments and products, and there’s no vetting.”

>>> US Close Dow - 1,05% S&P -1,63% Nasdaq -2,47% Russell -0,77%

Closing Market Summary

The stock market retreated on Friday, sending the major averages back into negative territory for the week. The Nasdaq (-2.5%) underperformed throughout the session, surrendering 1.0% for the week, while the S&P 500 (-1.6%) and Dow (-1.1%) lost a respective 1.2% and 0.9% since last Friday. Small caps held up a bit better with the Russell 2000 (-0.8%) giving back 0.3% this week.

Equity indices had to contend with weak sentiment from the open after it was reported that Tesla (TSLA 703.55, -71.45, -9.2%) CEO Musk sent an email to other executives at his company, expressing concern about the economy. Mr. Musk said that he has a "super bad feeling" about what is ahead, and that Tesla's workforce needs to be reduced by about 10%.

In addition to the warning from a prominent CEO, the market received a better than expected jobs report for May, which didn't offer much of an argument for a slowdown in the Fed's rate hike plans. That said, employment in retail trade declined by 61,000 in May and the number of persons employed part time for economic reasons increased by 295,000 to 4.3 million, reflecting an increase in employees whose hours were cut due to slack work or business conditions.

Ten out of eleven sectors finished the day in negative territory with cyclical groups like consumer discretionary (-2.9%), technology (-2.5%), and communication services (-2.4%) spending the day at the bottom of the leaderboard.

The discretionary sector lagged after showing relative strength earlier this week with Tesla making a significant contribution to today's underperformance. Top component Amazon (AMZN 2447.00, -63.22, -2.5%) finished a bit ahead of the sector but still lost more than 2.0%. The stock will begin trading on a split-adjusted basis on Monday.

Like the consumer discretionary sector, top-weighted technology was also pressured by some of its largest components. Apple (AAPL 145.38, -5.83, -3.9%) slid from this week's high back to its opening level from last Friday after Morgan Stanley expressed concern about weak May revenue growth in the company's App Store, which could be setting the stage for a disappointing quarter for the company's services division.

Micron (MU 69.94, -5.94, -7.2%) was the worst performer in the tech sector, falling back below its 50-day moving average (72.09) after being downgraded to Underweight with a $70 price target at Piper Sandler. The downgrade also invited notable weakness in NVIDIA (NVDA 187.20, -8.72, -4.5%) since the company buys memory chips for its products from Micron.

The commodity-sensitive materials sector (-1.0%) could not avoid a lower finish while energy (+1.4%) showed continued resilience. The sector returned toward its high from Monday, aided by a higher price of oil. WTI crude rose $2.40, or 2.1%, to $119.22/bbl, pushing past Monday's high (119.98) in electronic trade that followed today's pit close.

Treasuries finished a down week on a lower note with the 10-yr yield rising four basis points to 2.96%. The 2s10s spread ended the week at 28 bps, unchanged from last Friday as yields on the 2-yr note and the 10-yr note increased by 22 bps during the abbreviated week.

Reviewing today's economic data:

  • May nonfarm payrolls increased by 390,000 (consensus 325,000). The 3-month average for total nonfarm payrolls decreased to 408,000 from 516,000. April nonfarm payrolls revised to 436,000 from 428,000. March nonfarm payrolls revised to 398,000 from 424,000.
    • May private sector payrolls increased by 333,000 (consensus 301,000). April private sector payrolls revised to 405,000 from 406,000. March private sector payrolls revised to 385,000 from 424,000.
    • May unemployment rate was 3.6% (consensus 3.5%), versus 3.6% in April. Persons unemployed for 27 weeks or more accounted for 23.2% of the unemployed versus 25.2% in April. The U6 unemployment rate, which accounts for unemployed and underemployed workers, was 7.1%, versus 7.0% in April.
    • May average hourly earnings were up 0.3% (consensus 0.4%) versus an unrevised 0.3% increase in April. Over the last 12 months, average hourly earnings have risen 5.2%, versus 5.5% for the 12 months ending in April.
    • The average workweek in May was 34.6 hours (consensus 34.6), versus 34.6 hours in April. Manufacturing workweek was unchanged at 40.4 hours. Factory overtime dipped 0.1 hours to 3.2 hours.
    • The labor force participation rate increased to 62.3% from 62.2% in April.
    • The employment-population ratio increased to 60.1% from 60.0% in April.
  • The ISM Non-Manufacturing Index for May decreased to 55.9% (consensus 56.6%) from 57.1% in April. The dividing line between expansion and contraction is 50.0%. The May reading marks the 24th straight month of growth for the services sector, but it is the lowest reading since February 2021.
    • The key takeaway from the May report is that business activity for the non-manufacturing sector slowed for the second straight month as businesses continued to grapple with pricing pressures, supply chain issues, and labor supply constraints.
  • The IHS Markit Services PMI dipped to 53.4 in the final reading for May from 53.5 in the preliminary reading.

There is no economic data on Monday's schedule.

  • Dow Jones Industrial Average -9.5% YTD
  • S&P 400 -11.2% YTD
  • S&P 500 -13.8% YTD
  • Russell 2000 -16.1% YTD
  • Nasdaq Composite -23.2% YTD

WSJ : Mike Novogratz’s Crypto Comeback Faces a Trial by Fire

Mike Novogratz’s Crypto Comeback Faces a Trial by Fire
The Wall Street star became so enamored with cryptocurrencies he had one of them tattooed to his arm. Then the market crashed. ‘I’m arguing the system is gonna hold.’

Seven years after heavy losses shuttered his hedge fund, Mike Novogratz was in his SoHo office watching his computer screen flicker prices of cryptocurrencies, his new favorite investments. They were all collapsing.

The former college wrestler who once worked for Goldman Sachs Group Inc. GS -1.72% and Fortress Investment Group had reinvented himself as one of Wall Street’s biggest digital-currency proponents, a cult figure for thousands of amateur investors who followed his appearances on television, social media and the conference circuit. His new venture, Galaxy Digital Holdings Ltd. GLXY -4.07% , sells crypto-investment funds, handles trades for other big investors and advises digital-asset companies on acquisitions.

But now markets were once again turning on Mr. Novogratz. One of Galaxy’s most prominent recent bets—an upstart cryptocurrency called Luna that inspired a tattoo of a wolf that Mr. Novogratz had applied to his left biceps—lost 99% of its value in just three days. Bitcoin and other cryptocurrencies also fell sharply as inflation and rising interest rates rattled the markets for digital assets. Shares in Mr. Novogratz’s firm, which is publicly traded in Canada, are down 69% this year.

The crypto crash is testing investors of all sizes who piled into digital assets. Mr. Novogratz’s Galaxy averted disaster with skillful trading, adopting the kinds of risk-management techniques employed by traditional investment banks. It sold certain crypto positions, including at least part of its Luna stake, before the selloff deepened in May, according to securities filings and people close to the matter. Mr. Novogratz remains a billionaire based on his stake in Galaxy and his other investments, according to some of these people.

His earlier public bullishness, however, attracted attention once Luna collapsed. One investor who lost money said Mr. Novogratz’s endorsement of Luna encouraged him to make a disastrous bet on TerraUSD, a related token that also tumbled in May. On Twitter, one post replaced Mr. Novogratz’s arm tattoo with the image of a chart tracing Luna’s stunning decline.

In an interview, Mr. Novogratz said that while he had been publicly optimistic about the future of Luna and other cryptocurrencies, he made sure to include words of caution. “It’s painful to me that too many people lost too much of their earnings” in Luna and TerraUSD, Mr. Novogratz said. “I always said don’t put too many eggs in one basket.”

Digital currencies will rebound before stocks and the current downturn will prove healthy, he added. “It washes out people who came late, testing the system,” he said in the interview. “I’m arguing the system is gonna hold.”

A true convert
Long before Mr. Novogratz’s emergence as a crypto convert, the 57-year-old billionaire had a Wall Street career marked by successes and setbacks.

A standout wrestler at Princeton University, Mr. Novogratz made friends easily in college and relished the spotlight, said Pete Briger, a fellow Princeton alum who later worked alongside Mr. Novogratz at Fortress.

Mr. Novogratz served in the New Jersey National Guard before heading to Goldman, one of the biggest investment banks on Wall Street, and quickly made his mark in finance as a so-called macro investor trading on economic and geopolitical trends. Mr. Novogratz became a Goldman partner at age 33 and by 2000 had left the firm. He later joined Fortress, a hedge-fund giant, where he was one of the firm’s principals when it went public in 2007.

Then, as now, he stood out for his willingness to champion outside interests. Mr. Novogratz once organized a match between U.S., Russian and Iranian wrestlers in New York’s Grand Central Terminal to help persuade the International Olympic Committee to keep the sport in the Games. He donates freely to organizations aimed at reforming the criminal-justice system, and chairs the Bail Project, which posts bail for detainees who otherwise couldn’t afford it. He also was an early investor in companies involved in psychedelics.

Mr. Novogratz learned about bitcoin from Mr. Briger, Fortress’s co-CEO, and others. During his time at Fortress, Mr. Novogratz and his partners bought cryptocurrencies for their own personal investment accounts, said people familiar with the situation.

His most serious career stumble came in 2015, when Mr. Novogratz’s macro fund suffered deep losses on investments on Brazilian and other investments and closed. He quit Fortress to start a firm to invest his own wealth. He kept investigating bitcoin and other cryptocurrencies, becoming more serious about the investments.

Over time, Mr. Novogratz came to see them as a “really cool new technology” that was likely better capable of storing value amid rising inflation than alternatives, he said at a recent conference. Soon, he was a true convert, buying $10 million of bitcoin and another cryptocurrency called ether partly because he sensed a lack of trust in global currencies, he said.

In 2018 Mr. Novogratz merged his family office into Canada’s Bradmer Pharmaceutical to create Galaxy, a crypto-focused firm catering to institutions and companies rather than individual investors. Mr. Novogratz’s portfolio of personal crypto investments moved onto the publicly-traded Galaxy’s balance sheet.

Galaxy came to handle many tasks for the crypto world. It sells crypto-investment funds to institutions, and its investment-banking division advises digital-asset and blockchain companies on financings and acquisitions. The firm’s trading desks handle orders from more than 800 investors, and Galaxy’s Principal Investments arm has stakes in 93 portfolio companies. The firm has more than $2 billion of digital assets on its balance sheet.

Mr. Novogratz was not shy about expressing his optimism publicly. He became a vocal fan of the fast-growing Terra blockchain network, the platform underpinning a number of cryptocurrencies. These included Luna and TerraUSD, a so-called algorithmic stablecoin designed to maintain its value at $1 per coin and not backed with traditional assets. In March 2021, Mr. Novogratz tweeted: “Pumped to be an Anchor investor,” referring to the Anchor Protocol, a kind of crypto bank based on Terra’s network. Anchor attracted billions of dollars of investors’ money by offering annual yields of nearly 20% on deposits of TerraUSD.

“My role—because I can’t stop talking—has been to preach,” he told a major bitcoin convention in Miami in early April.

‘I’m officially a Lunatic’
The confidence Mr. Novogratz and a few other well-known investors expressed in crypto encouraged others to make similar bets.

Kevin Newby, a former information-technology worker outside of Detroit, said Mr. Novogratz’s endorsement was one of the reasons he overcame his initial skepticism about the Anchor Protocol and put money in it. Mr. Newby lost over $200,000 when TerraUSD collapsed in May.

Mr. Newby had earned hundreds of thousands of dollars from crypto investing. He and his wife dreamed of buying vacation homes in the U.S. Virgin Islands and moving to the Caribbean. But those dreams ended in May. Mr. Newby had kept most of his crypto profits in TerraUSD deposited in Anchor Protocol, attracted by the high yields.

Now, he is planning a return to the workaday world. “I’m back to square one, polishing my résumé and looking for a job,” Mr. Newby said.

One of the Galaxy bets that attracted attention from the outside world was Luna. It first invested in late 2020, when the price was well under $1, becoming one of Luna’s most prominent backers. The value of the investment had risen to roughly $400 million in December of last year.

Mr. Novogratz tweeted to his followers on March 26, 2021, that he would get a tattoo if Luna hit $100. Galaxy began to take profits on its gains last year as Luna climbed, according to people familiar with the situation.

Mr. Novogratz followed through on his tattoo pledge in January of this year. That was not long after Luna surged as high as $103.33 in late December, according to data provider CoinMarketCap. An image he tweeted in January showed a tattoo of a wolf howling beneath a moon and a “Luna” banner. “I’m officially a Lunatic!!!” the tweet said. Luna hit a record of $119.18 in early April, according to CoinMarketCap data.
At a bitcoin conference in Miami, two days after Luna hit an all-time high, Mr. Novogratz told thousands of attendees that “we’re moving to a digital world” with nations and others adopting cryptocurrencies. He said TerraUSD will be a “part of that,” while adding “it’s not without risk.” He also said he was confident about the future of the stablecoin and was complimentary of Do Kwon, the creator of TerraUSD.

Robert Bogucki, a Wall Street veteran who is Galaxy’s co-head of trading, became concerned by the level of enthusiasm demonstrated by the attendees of the same Miami bitcoin convention as well as the impact of the Federal Reserve’s decision to raise interest rates. Soon, he was taking bearish positions in Galaxy’s trading account on various cryptocurrencies, though not TerraUSD or Luna, according to people familiar with the trades. Those moves paid off for Galaxy, which also saw gains from lending activities generated by a group run by Jason Urban, the firm’s other co-head of trading, according to those people.

Starting on May 7, TerraUSD dropped below its $1 peg, prompting investors to withdraw billions of dollars from Anchor in the crypto equivalent of a bank run. That in turn prompted a selloff of Luna, which had helped back TerraUSD’s value. The collapse of the two cryptocurrencies wiped out around $40 billion in value within days.

Galaxy reported on May 9 that it sold at least part of its Luna stake during the first quarter of 2022. Realized gains on sales of Luna and other assets totaled $355 million in the period ending in March, the firm said. Galaxy hasn’t said if it was still holding any of the currency when it lost nearly all its value in May.

Mr. Novogratz praised his team during a May 9 earnings call for navigating the broader crypto selloff during the first quarter. “The balance sheet team did an excellent job of outperforming the drawdown in the overall market,” he said. “Lost some money, but minimal relative for the volatility we saw. “

On May 18, Mr. Novogratz issued a letter assuring investors that “crypto is not going away,” though the setback for the sector was significant. He said the experience had reinforced “a few core tenets of investing” including the need to keep a diversified portfolio and “take profits along the way...Galaxy did all of these with regards to our investment in LUNA.” He didn’t address the selling of any positions in his recent letter.

When Mr. Novogratz posted his letter on his Twitter feed on May 18, some of the more than 1,000 replies reminded him of earlier bullishness. One tweet asked: “Do you feel regret and shame shilling luna to small retail investors who lost their life savings in it?”

Mr. Novogratz remains upbeat about cryptocurrencies, he said in the recent interview. As for his Luna tattoo, he’s keeping it. “It’s a good reminder that not everything you do works out,” he said.

FT : Roman Abramovich-owned UK telecoms group to be sold for £1 to tech entrepre

Roman Abramovich-owned UK telecoms group to be sold for £1 to tech entrepreneurs
Future of Truphone — valued at £410mn in 2020 — thrown into doubt after sanctions imposed on Russian billionaire

British telecoms group Truphone, owned by Russian oligarch Roman Abramovich and his associates, is being bought for £1 by two European tech entrepreneurs.

Truphone appointed restructuring specialist FRP Advisory to conduct a sale of the assets of the company after sanctions imposed on the Russian billionaire by UK and European authorities threw the group’s future into doubt.

The company was valued at £410mn in 2020 and has received more than £300mn in investment from Abramovich and his two Russian business partners Alexander Abramov and Alexander Frolov.

Hakan Koç, a German businessman who co-founded the used car company Auto1, and his business associate Pyrros Koussios, a former telecoms executive and private equity investor, will own 90 per cent and 10 per cent of the company, respectively.

The fire sale gives an early indication of the fate that is likely to befall companies that have become enmeshed in Russia’s invasion of Ukraine.

Companies across the west that had imposed sanctions on individuals on their board, or among their owners and investors, have battled a litany of problems since the invasion in February, including a loss of customers, difficulty accessing finance and damage to their public reputations.

Abramovich has been forced to sell Premier League football club Chelsea after being hit by sanctions, with a £4.25bn deal agreed last month.

Truphone, in which Abramovich holds a 23 per cent stake and Abramov and Frolov most of the rest, has recorded 15 consecutive years of losses, including £16mn in 2020.

The telecoms group sells contracts to corporate customers including banks that want a secure network and to avoid roaming charges for employees. It also provides embedded sims to a range of technology companies, including Apple.

Koç listed Auto1, formerly backed by the Japanese conglomerate SoftBank, on the public market in Germany last year, raising €1.8bn and valuing the company at €10bn.

Though Auto1 previously received funding from Target Global, a venture capital firm formerly run by Frolov’s son, Koç says that neither he nor Koussios have a direct relationship with any of Truphone’s current owners, and have never met them.

As part of the sale, which is expected to complete this month, the current owners have committed to invest more than £10mn into the business, and will take on certain contractual liabilities, according to people familiar with the deal.

One-off payments and debts — including a $660,000 fine from the US regulator the Federal Communications Commission linked to a misrepresentation of the company’s ownership structure — will be paid by Truphone’s existing owners.

Under the arrangements of the sale, if the company performs well and crystallises its value through a market listing or capital raise, the current Russian owners will receive up to a third of the original funds that they invested, said people briefed on the deal. If Abramovich remains sanctioned at that time, he will not receive those funds.

The proposed sale of Truphone to Koç was first reported by The Times.

FT : Google co-founder Sergey Brin’s airship start-up grows rapidly

Google co-founder Sergey Brin’s airship start-up grows rapidly
San Francisco-based Lighter Than Air Research prepares to trial 120 metre-long aircraft after ramping up spending


Google co-founder Sergey Brin’s secretive project to build huge electric airships is scaling up rapidly, as Lighter Than Air (LTA) Research prepares its first major test flights later this year.

The tech billionaire is hiring hundreds of aerospace engineers in Silicon Valley and Akron, Ohio, at a site made famous by the Goodyear blimp, to build airships intended to run humanitarian missions to remote areas or disaster zones.

LTA was incorporated in 2014, before Brin stepped down from executive duties at Google’s parent company Alphabet in 2019. The start-up’s headquarters are at Moffett airfield in the San Francisco Bay Area, a Nasa-owned facility a short drive from Google’s headquarters that the US space agency began leasing to the tech company in 2015.

LTA’s payments to Google for the use of Moffett have risen more than tenfold in the past three years, according to parent company’s Alphabet’s most recent annual proxy filing, which has disclosed the “arm’s length” transactions with Brin’s company since 2017.

After starting at just $131,000 five years ago, those payments rose from $1.1mn in the year to March 2019 to $10.9mn in the most recent period ending in March 2022, suggesting that LTA is accelerating its development.

LTA hopes to reinvent the blimp for the 21st century with “zero emissions” flights. The company’s first full-sized airship, the 120 metre-long Pathfinder 1, is scheduled to begin test flights over Silicon Valley this year.

An even bigger dirigible, Pathfinder 3, is in development at the air dock in Akron, which became the world’s largest building when it was completed in 1929 and remains one of the world’s largest aerospace facilities today. A recruitment drive in Akron will double LTA’s total headcount to more than 400 people over the coming months.

Alan Weston, a former Nasa programme director who has led LTA since 2016, told local news reporters in Ohio in May that the company was building “the largest air vehicle on earth” in Akron. The 185 metre-long Pathfinder 3 will eventually be capable of carrying up to 96 tons across a range of up to 10,000 miles, or 16,000km, when it is completed next year, Weston said.

Pathfinder 3 is 60 metres shorter than the ill-fated Hindenburg-class airships that promised to revolutionise passenger flight in the 1930s until a disastrous accident in New Jersey killed 36 people and shattered the industry’s ambitions.

Brin’s day-to-day involvement at LTA is unclear but he is one of 13 inventors named on a key US patent granted to the company in April last year. The patent covers “methods and apparatus for constructing airships”, using 3D printing and carbon-fibre tubing to reduce costs and speed up production.

Weston said: “We believe lighter than air technology has the capacity to speed up humanitarian aid by reaching remote locations with little infrastructure, and to lower carbon emissions for air and cargo transportation.”

Among the many open positions for which LTA is hiring is a “flight test engineer” in Silicon Valley with “experience with first flight efforts of experimental aircraft”. Advertised perks include free lunches, “swag and the occasional airship ride”.

Barrons : Eaton Looks Ready for an Electrifying Recharge. Its Stock Could Jump 3

Eaton Looks Ready for an Electrifying Recharge. Its Stock Could Jump 30%.

An environmentally friendly future of electric-powered transportation, factories, and home heating depends on a large and resilient power grid. In the U.S. and elsewhere, the grid simply isn’t ready for the job. Getting there will cost hundreds of billions of dollars.

Eaton (ticker: ETN), a Dublin-based manufacturer founded in the U.S., is one of the leading companies in the field, and it’s seeing demand ramp up well beyond its own expectations. The backlog in its electrical segment, which accounts for over two-thirds of its revenue, rose 76% in the latest quarter, more than ever before.

“It’s the fastest demand that I’ve seen in any business that I’ve been associated with in my professional lifetime,” Eaton CEO Craig Arnold, who has worked at industrial companies for nearly 40 years, tells Barron’s.

At a time when rising interest rates and weak consumer confidence are hurting most U.S. industries, Eaton has been propelled by a megatrend that is likely to persist, regardless of conditions in the near-term economy. To combat climate change, more services that were once powered by fossil fuels will have to be converted to electricity.

The market has already rewarded consumer-facing companies such as Tesla (TSLA) for their role in shifting the world toward that electric future. Eaton’s stock also has risen in the past five years, but not nearly as much, and the company gets a fraction of the credit as its flashier brethren.

This year, Eaton stock has fallen 19%, five percentage points more than the S&P 500SPX –1.63% , weighed down in part by supply-chain issues. Shares of the big manufacturer now trade at 17.5 times its expected earnings over the next year—in line with the broader market but a discount to rivals such as Quanta Services (PWR) and ABB (ABB).

Morgan Stanley analyst Joshua Pokrzywinski thinks the company, with a market value of $56 billion, deserves to trade at a premium to peers, given how well-positioned it is to benefit from the electrification trend. He values the shares at 20.75 times expected earnings, resulting in a price target of $180—nearly 30% above its recent price of $140. Eaton also offers a 2.3% dividend yield.

Some of the equipment that Eaton makes, like the circuit-breaker boxes in homes, is commonplace enough to seem rudimentary. But much electric gear has become so sophisticated—such as software that allows for remote control of complex electric operations—that the field’s top companies have major competitive advantages and high barriers to entry. “This is a consolidated industry with exceptional pricing power using proven technology required to connect and control all manner of electric sources, uses, and storage,” Pokrzywinski recently wrote.

Says Arnold: “We don’t really make standard items. Everything that we do is pretty technical, highly differentiated.”

It has been that way since Joseph Eaton co-founded the company in 1911 to sell a new kind of specialized truck axle. Eaton still makes equipment for vehicles, but that has become its smallest division, after electricity and aerospace, both of which are experiencing accelerating growth. The company is set to earn $7.53 per share this year, a 14% increase from last year’s figure, on $20.6 billion in revenue. Analysts’ earnings estimates for Eaton, unlike those for most big industrial companies, have climbed, rather than shrunk, since the start of the year.

That trajectory should last. Eaton sells equipment for almost every aspect of electricity generation, other than for high-voltage transmission from power plants themselves. Once the wires enter corporate office parks, military bases, or residential neighborhoods, the company’s products become ubiquitous. Its transformers distribute power, and systems it builds guide everything from electric-vehicle charging stations to data centers, power meters, lighting systems, and surge protectors.

It’s as crucial as ever that customers get the everyday benefits of electricity; the lights must go on when a switch is flicked. But now the systems need to be cyber-secure, backed-up, and sustainable. New forms of energy need special equipment to make them reliable and secure.

Demand for high-tech gear will help the company’s results, but their most powerful ally is simple math: Countries are accelerating investments today that will pay off over decades.

Neighborhoods served by one transformer and currently with only a handful of electric cars might need to upgrade sooner than they realize. “As soon as that neighborhood goes from three or four to 20 or 25, the electrical infrastructure—the transformers that support that enablement—have to be upgraded,” Arnold says. “There’s not enough power coming into that neighborhood to allow people to come home at night, plug their cars in, and charge.”

That’s likely to put a charge into Eaton’s stock, too.

Barrons : Stellantis: The Former Chrysler Is Now an Overlooked Star

Stellantis: The Former Chrysler Is Now an Overlooked Star

Automotive investors in the U.S. used to focus on the Detroit three: General Motors , Ford Motor , and Chrysler. Then, Chrysler morphed several times in various mergers and is now Stellantis , without any reference to Chrysler in its name.

That’s a shame. “The large base of brands might actually have resulted in greater visibility,” says Pedro Palandrani, director of research at Global X ETFs. “Clearly, the three American marques, Dodge, Ram, and Chrysler, could have helped with this.”

Stellantis (ticker: STLA) is a holding in the Global X Autonomous & Electric VehicleDRVE –2.17% (DRIV) exchange-traded fund. The three largest providers of ETFs in the U.S.—Vanguard, State Street (STT), and BlackRock BLK –1.45% (BLK)—own roughly 5% of Stellantis’ shares outstanding. Those three own almost 20% of both General Motors (GM) and Ford (F).

The U.S. just doesn’t pay much attention to Stellantis. That’s a shame, too, because investors are overlooking a star with strong global market position and a competitive plan to win in electric vehicles.

The lack of fund ownership might be one reason shares trade at a big discount to GM and Ford. Stellantis stock trades for just 3.2 times estimated 2023 earnings per share of about $4.86. Ford and GM stocks trade for about 6.4 times and 5.7 times estimated 2023 earnings, respectively.

Traditional automotive stocks never trade for big multiples. But Stellantis stock is trading at just 70% of its five-year average price/earnings ratio. Ford and GM stocks are trading closer to 80% of their five-year average.

What’s more, the trio is trading at a 70% discount to the S&P 500 index P/E ratio. Over the past few years, the average discount is 65%.

No matter what valuation stats investors look at, Stellantis seems incredibly cheap. But cheapness alone isn’t a reason to buy in. Investors have some concerns about the company.

There is the double whammy of inflation and rising interest rates. Inflation threatens profit margins because costs rise. And rising interest rates threaten new-car demand. Most cars are purchased with financing.

Investors are also concerned about EVs. “Investors continue to believe that Ford’s accelerated F-150 Lightning development and GM’s proposed electric Silverado launch will significantly hurt [Stellantis],” said Morgan Stanley analyst Harald Hendrikse in a recent report. He says those fears are overblown and that Stellantis won’t cede all of its North American truck share to GM and Ford. “We do not think [its] strategy is far behind its peers, as some investors believe.”

Stellantis plans to be all-electric in Europe, and 50% electric in the U.S., by 2030. The goal is to sell roughly five million EVs a year by then.

And the company is planning to build three battery factories to power EVs by 2025. One new location will be in Windsor, Ontario, just across a river from Detroit. Stellantis plans to spend more than 30 billion euros ($32 billion) developing its EVs from 2021 to 2025.

EV perception isn’t the only thing that can go right at Stellantis. Synergies between FCA, the company formed between Italian auto maker Fiat and Chrysler, and later, with Peugeot owner PSA, “are yet to be fully accomplished, which could be a positive tailwind,” Palandrani says.

If Stellantis could close the gap with GM and Ford, its shares could rise some 90%, putting the stock at about $28. That is about $2 north of the average analyst price target on Bloomberg. Even if the stock trades at historical valuation levels, shares would still rise about 50%.

It doesn’t seem like it will take a lot to send Stellantis stock to the moon.

Barrons : ‘Busted’ Convertible Bonds Look Good for a Ride Now. Here Are 10 to Co

‘Busted’ Convertible Bonds Look Good for a Ride Now. Here Are 10 to Consider.

Convertible securities are somewhat complex instruments that are unfamiliar to most investors. Now could be a good time to learn about them.

Converts are bond/stock hybrids that can offer the security of bonds and the upside of stocks. They’ve historically generated strong returns—gaining about 50% in 2020.

But the $280 billion market has been stung this year and is now worth a look. The selloff has pushed yields to 10% or more on the convertible debt of former highfliers like MicroStrategy MSTR –7.05% (ticker: MSTR), Beyond Meat BYND –8.54% (BYND), Peloton Interactive PTON –4.86% (PTON), Wayfair W –8.58% (W), and Redfin RDFN –2.92% (RDFN). These unloved securities seem like an appealing alternative to the issuing company’s depressed common shares.

Bitcoin owner MicroStrategy, for instance, has a zero-coupon convertible bond due in 2027 that trades around 55 cents on the dollar with a yield-to-maturity of 13%. It looks like an attractive Bitcoin play. Beyond Meat has a $1.15 billion, zero-coupon convertible due in 2027 trading for 41 cents on the dollar and yielding 19.5%. Peloton’s $1 billion zero-coupon convert due in 2026 trades around 69 cents on the dollar and yields more than 10%.

Investing in these “busted” converts can be difficult for retail, or individual, investors. Convertible-bond mutual funds and exchange-traded funds don’t offer much exposure to busted converts, which make up about 20% of the convertible market, because they tend to focus on lower-risk convertibles with more current income and equity sensitivity.

And it can be tough for retail investors to purchase individual convertibles. Most were originally sold as rule 144A private placements to institutions. The securities listed in the accompanying table have “unrestricted” Cusip numbers—the identifiers for bonds—that should allow broader ownership. It may be easier to buy them from full-service brokerage firms with big bond trading desks than from pure online brokers.

There’s risk in these bonds. Most have junk credit ratings or none at all and most of the companies are losing money. At Goldman Sachs, there are investor suitability protocols that govern the purchase of high yield and unrated securities.

Investors can get bond pricing history by inputting the Cusip numbers on Trace—the Trade Reporting and Compliance Engine—which was developed by the Financial Industry Regulatory Authority to provide visibility into the opaque over-the-counter trading in bonds.

The market’s losses this year reflect a big selloff in convertibles issued during the frothy convertible market of late 2020 and 2021, when investor demand allowed hot growth companies to get interest rates as low as zero. The allure was that investors got an option to convert the debt into the issuer’s stock if it continued to rally and win big—as Tesla (TSLA) convert holders did in 2020 when the stock rose eightfold.

But as the underlying stocks have cratered, the convertibles have been hit and many now trade anywhere from 40 to 80 cents on the dollar. They’re a rarity in financial markets because they now amount to low-interest or zero-coupon corporate bonds.

The chances of investors profiting from the equity conversion feature is remote since that would require huge gains in the stock. The Peloton convertible, for instance, is convertible into stock at more than $200 a share, versus the recent share price of $13.

“There is a limited appetite for zero-coupon with high conversion premiums from growth companies with little or no earnings,” says Michael Youngworth, head of convertibles strategy at BofA Securities. “There could be some defaults but also some great opportunities.” The conversion premium refers to the percentage gain in the stock needed for investors to realize value from the equity option in a convertible.

The good news for investors is that the convertible bond is often the only debt on company balance sheets and interest costs can be minimal. For investors to win, the companies simply need to survive and pay off debt. If that becomes an issue, companies often will reach deals with bondholders to extend maturities and boost interest rates, notes David King, a manager of the Columbia Convertible Securities fund (PACIX).

With the market selloff, convertible issuance has slowed sharply this year. Through May, there was $6.6 billion of new deals, down 87% from the same period of 2021. For all of last year, issuance was $84 billion, following $106 billion in 2020. The $4 billion SPDR Bloomberg Convertible Securities (CWB), the largest convertible ETF, is down 17%.

Here’s a look at some converts:

The MicroStrategy issue now trading around 55 cents on the dollar amounts to a lower-risk Bitcoin play. The company owned over 129,000 Bitcoins on March 31 that are now worth about $3.9 billion, with Bitcoin around $30,000. It also has a software business that could be worth $1 billion.

The convertibles look like a good bet since MicroStrategy’s debt is $2.4 billion, half its estimated asset value. Bitcoin likely would have to fall below $15,000 to impair the debt, and that assumes a low $500 million value for the software business, which has about $500 million in annual revenue.

The Beyond Meat convertible looks like a good alternative to the company’s common shares. The $1.15 billion issue is the only debt on the company’s balance sheet, and there was over $500 million in cash and equivalents on March 31. The bonds trade for just 40 cents on the dollar.

Beyond Meat’s stock is down 80% in the past year to $27 and its losses have widened with eroding pricing. But it is a category leader in meatless alternatives with the Beyond Burger, and it could have strategic value. At the current convert price, investors essentially are buying the company for less than $500 million (0.4 times $1.15 billion), or around one times annual sales.

Peloton’s convertible also amounts to a lower-risk alternative to its common stock, which is down nearly 90% in the past year to $13. The bonds, at around 70, yield over 10%. The $1 billion convertible is its only debt outstanding. The company is losing money but has nearly three million subscribers, $4 billion of annualized revenue, and could become a takeover target.

King is partial to a convertible from 2U (TWOU), the education company that owns edX, which offers online courses from universities like Harvard and MIT. The 2U 2.25% converts due in 2025 trade around 77 for a yield of 11%. King also likes converts from 1Life Healthcare (ONEM), which operates the One Medical primary-care practices. Its 3% issue due in 2025 trades at 83 for a 9.5% yield.

“Both of these are growth companies that have generally been hitting their milestones but the stocks have declined sharply anyway,” King says. “Each company has a valuable franchise—cost-efficient medical care delivery and remote learning—with meaningful growth potential. Both companies are burning cash now but could become cash generative, in our view, merely by dialing back growth initiatives.”

Paul Latronica, a managing director at Advent Capital Management, likes lower-yielding convertibles from Snap (SNAP) and Block (SQ), formerly Square.

The Snap zero-coupon issue due in 2027 is more of a bond proxy with the equity component out of the money. It trades around 74 for a 6.2% yield. The Block zero-coupon issue due in 2026 trades at 85 for a 4.2% yield. This issue has more equity sensitivity, with the conversion premium at about 200%.

Converts historically haven’t been mainstream investments, but the downdraft this year has created unusual opportunities.

(ZH) When Will This Bear Market End?

When Will This Bear Market End?

When will the bear market end? That is the question to which everyone wants an answer. While there is no specific answer to that question, there are indicators and technical measures that provide some guidance. From the portfolio management perspective, those are the parameters we must operate from to minimize capital destruction and limit emotionally driven mistakes.
2022 has been a year unlike many investors have seen in their investing lifetimes. While there are some that went through the 2008 bear market, there are fewer still who lived through the “Dot.com” crash. Such is the nature of “real” bear markets that tend to destroy investors and drive them from investing in the financial markets permanently.
While there are many “buy and hold” practitioners suggesting investors just dollar-cost-average their way through a downturn, reality tends to be far different. When markets decline enough, there is a point where every investor changes from “Buy The F***ing Dip” to “Get Me F***ing Out.”
When it comes to investing, most armchair portfolio management systems work great as long as markets rise. However, when the eventual correction comes, the psychology of “loss aversion” disrupts the best-laid plans.
It is also important to understand that “bear markets” are just the natural completion of a “full market cycle.” During bull markets, excesses are built which are reflected in valuations as investors overpay for assets on expectations for infinite growth. Obviously, since the business cycle is not infinite, the ensuing bear market is the reversal of those excesses. While “bear markets” often surprise investors, they are the logical conclusion of the preceding advance.
So, with a potential bear market at hand as the Fed hikes rates, inflation remains high, and the economy continues to slow, let’s get to the question at hand:
“When will this bear market end?”
Evidence Of The Bear
There is considerable technical evidence that U.S. financial markets are in a “bear market.” The NYSE Composite (US stocks + ADRs + bond ETFs) has broken below its 100-week moving average. In the past 25-years, every recession and/or crisis has coincided with a break of that long-term moving mean.
As noted above, bear markets are not uncommon and follow preceding bull market excesses. Over the last 120-years, there have been 14-bear markets that averaged roughly a 33% decline from peak to trough.
As I discussed recently,the price action of the market in 2022, has a lot of similarities to what we witnessed in 2008 prior to the collapse of Lehman Brothers.
“The head and shoulders topping pattern is quite evident. The break of the rising neckline was the first warning of a recessionary bear market. The subsequent rally to, and failure at, the neckline confirmed the topping process was complete.”
We see the same market action in 2022.
Again, we see the topping process, the clear break of the neckline, and a failed test of the neckline, turning it into resistance. While the market sits on critical support, any failure will confirm a recession, and a bear market is underway.
The technical data is only confirming what we are already seeing economically as well. The EOCI (economic composite output index) is contracting quickly as the Leading Economic Index (LEI) confirms the data trend. While the negative Q1-GDP may reverse slightly in Q2, such will not change the eventually recessionary outcome.
The Bear Market Will End…Eventually
There are certainly many technical and economic supporting negative market views, however, it is crucial to remember that bear markets end, eventually. Yes, while such seems to be tautological, investors tend to extrapolate current market trends indefinitely into the future.
The question is how will we know when the current bear market cycle is over? Given that financial markets lead economic cycles, the market can provide several clues as to when things may be turning more positive from an investment view.
The first is the most obvious; asset prices stop going down. Using our 2008 analogy, coming out of a bear market stock prices begin to establish a series of higher highs and lows. More importantly, begin to see momentum measures establish a more positive trend as well and moving averages slope upward.
Notably, the economy did not exit the recession until June of 2009, but financial markets began to rally in anticipation.
Furthermore, during the last four recessions, and subsequent bear markets, the typical revision to consensus EPS estimates prior to the onset of a recession ranged from -6% to -18% with a median of 10%. Coming out the recession, analysts start to increase estimates markedly. Currently, we are only just starting the negative revision phase, but the reversal of that trend will be key in identifying the bear market end.
While there are many other indicators worthy of watching to denote an end to the bear market phase, the most critical aspect of investment outcomes is remaining disciplined in your process.
Stick To Your Process
There is a sizable contingent of investors, and advisors, who have never been through a real bear market. After a decade-long bull-market cycle, fueled by Central Bank liquidity, it is understandable why mainstream analysis believed the markets could only go higher. What was always a concern to us was the rather cavalier attitude they took about the risk.
“Sure, a correction will eventually come, but that is just part of the deal.”
What gets lost during bull cycles, and is always found in the most brutal of fashions, is the devastation caused to financial wealth during the inevitable decline.
Therefore, it remains important to follow your investment discipline. If you don’t have one, here is the process that we follow during tough markets.
7-Rules To Follow
  1. Move slowly. There is no rush in making dramatic changes. Doing anything in a moment of “panic” tends to be the wrong thing.
  2. If you are overweight equities, DO NOT try and fully adjust your portfolio to your target allocation in one move. Again, after big declines, individuals feel like they “must” do something. Think logically above where you want to be and use the rally to adjust to that level.
  3. Begin by selling laggards and losers. These positions were dragging on performance as the market rose and they led on the way down.
  4. Add to sectors, or positions, that are performing with, or outperforming the broader market if you need risk exposure.
  5. Move “stop-loss” levels up to recent lows for each position. Managing a portfolio without “stop-loss” levels is like driving with your eyes closed.
  6. Be prepared to sell into the rally and reduce overall portfolio risk. There are a lot of positions you are going to sell at a loss simply because you overpaid for them to begin with. Selling at a loss DOES NOT make you a loser. It just means you made a mistake. Sell it, and move on with managing your portfolio. Not every trade will always be a winner. But keeping a loser will make you a loser of both capital and opportunity.
  7. If none of this makes any sense to you – please consider hiring someone to manage your portfolio for you. It will be worth the additional expense over the long term.
I hope this helps.