FT : Inside the fastest-growing sports private equity fund

Inside the fastest-growing sports private equity fund
The digital future of sports trading cards, Novak Djokovic’s detention, leadership change at Manchester United, and more.

Inside Arctos Sports fund — can an empire grow indefinitely?

At the height of the early pandemic, when virtually the entire world was in some form of lockdown, an unlikely pair of finance and sports executives declared their new private equity fund open for business.

Since its launch in April 2020, Arctos has become the fastest-growing collector of minority sports stakes, amassing passive investments in 16 professional teams across the US and Europe. Its first fund closed in October 2021 with more than $2.1bn raised, spurring a spending spree as Arctos took on investments in baseball’s Boston Red Sox, football’s Liverpool FC, basketball’s Golden State Warriors and Sacramento Kings, and a trio of National Hockey League clubs just last month.

The Arctos co-founders, former private equity executive Ian Charles and former Creative Artists Agency and Madison Square Garden chief Doc O’Connor, explain their philosophy behind the firm and their investment strategy in the FT, which is well worth a read here.

Perhaps the biggest question hovering over the group is what potential future exits from their holdings might look like. Typical private equity firms might hold from five years to a decade, When do their limited partners, who contributed the billions in funds to amass these sports stakes, hope to see returns?

Charles and O’Connor say any future exits will probably mirror those of other secondary private equity markets — Charles built his career at a series of funds building expertise on illiquid markets. Neither would give a timeline for approximately when, if ever, investors would want returns.

Rob Tilliss, founder of the advisory firm Inner Circle Sports, told Scoreboard that exits can take shape in a few ways: Arctos could sell if and when a control owner ever sold, or sell directly to their own investors, to name two. Other sports investors raise eyebrows at their fast-acquisitive streak — one said privately that Arctos “is like a vacuum, hoovering up every piece of lint they see”. 

For now, private capital has a few distinct benefits: because most league rules insist institutional ownership be passive, more control flows to the majority owners. Minority stakeholders can turn to funds preapproved by professional leagues for quick sales — as was the case for basketball legend Shaquille O’Neal, who sold his small position in the Kings last year to Arctos, rather than go through a lengthy due diligence process to sell to an individual buyer.

Fanatics: the company spending $500m on trading cards
Accelerated by the pandemic, New York-based digital sports retailer Fanatics has expanded from US sports to European football teams and Formula One, and was valued at $18bn in a fundraising backed by high-profile investors including SoftBank and SilverLake last August, making an even wealthier man out of founder Michael Rubin.

Now, Fanatics is accelerating its expansion by going . . . analogue. This week, it announced a $500m acquisition of Topps’ trading cards business, a brand synonymous with producing collectible Major League Baseball cards. The MLB itself was also an investor in last year’s $325m fundraising. But the deal does not include Topps’ candy and gift cards arm.

The takeover comes just months after a new venture set up by Fanatics won the exclusive rights to produce MLB cards, ending Topps’ longstanding MLB deal and a plan to go public via a special purpose acquisition deal at a valuation of $1.3bn.

So why buy now? For one, interest in baseball cards boomed during the pandemic, and the deal also means Fanatics can get started far earlier than 2026, when the earlier MLB deal was meant to kick in.

Furthermore, the acquisition comes with a back catalogue of cards and intellectual property going back 70 years, while also ensuring that Fanatics can continue to use Topps branding to appeal to traditionalist collectors.

But one person close to the company says the revolution could go beyond simply bringing techniques refined in digital retail to trading cards, with the company also eyeing opportunities in the fast-growing world of non-fungible tokens. NFTs, which run on blockchain technology similar to that underpinning bitcoin and other cryptocurrencies, grew into a $41bn market in 2021. Topps has already made a start with collectible baseball NFTs but the person said it was yet to take advantage of the historic catalogue.

The deal also shows that Fanatics — and Rubin — are unafraid of aggressive but shrewd moves to shake up the established order.

Fanatics’ next challenge is to live up to its rapidly rising valuation by realising its ambitions.

>>> Apple's Tim Cook Officially A Billionaire After Massive Windfall In 2021

Apple's Tim Cook Officially A Billionaire After Massive Windfall In 2021

Just days after becoming the first publicly-traded company to see its valuation cross the $3 trillion mark, Apple released its proxy statement ahead of its annual meeting, which is set for early March, which offered some interesting insights about its executive compensation.

The statement revealed that thanks to his stock-based compensation, Apple CEO Tim Cook earned nearly $100M during 2021, which is more than 1,400x the median pay at Apple (in 2021, median pay rose to $68,254, up from $57,783 during the prior year. Apple said the change was due to changes in hiring and compensation).

The massive payday helped push Cook's net worth past the $1 billion mark. Here's the breakdown, courtesy of Reuters.

Cook's salary remained at $3M, but he received $82.3M in stock awards, $12M for hitting Apple's targets and $1.4M for air travel, 401(k) plan, insurance premiums, a vacation cash-out and other compensation. In total, he earned $98.7M, compared with $14.8M in 2020.

But as Apple Insider pointed out, Cook's biggest windfall wasn't even included in his pay package: In August 2021, he vested the maximum amount from a performance-based incentive package. He vested the maximum amount, and in August he received 5M shares, worth $754M at the time.

These two major windfalls pushed Cook's personal wealth north of $1 billion, Apple Insider said.

Not all of this massive award in restricted stock will vest right away: it's expected to vest in annual installments between 2023 and 2025. Although the non-performance-based portion of this compensation will vest even if Cook leaves the company.

Judging by movements in the company's share price since Cook took over in 2011 (just months before Apple founder Steve Jobs died), his massive compensation is worthwhile: shares have risen more than 1,000% since then.

The big difference-maker for Cook: In September, the Apple chief received 333,987 restricted stock units in his first stock grant since 2011. The award was part of a long-term equity plan which will see him awarded the next chunk of stock in 2023.

American CEOs were paid 351x more than their typical worker in 2020, according to a report by the Economic Policy Institute. The study also showed that the compensation of top CEOs grew roughly 60% faster than the stock market from 1978 to 2020, eclipsing the slow 18% growth in a typical worker's annual pay.

BArrons : Is Tesla Stock Headed to $1,400 or $67? Why Predicting Auto Makers’ Pe

Is Tesla Stock Headed to $1,400 or $67? Why Predicting Auto Makers’ Performance Is Tricky.

Who needs parody cryptocurrency when car stocks are this exciting? Ford Motor , General Motors , Tesla , and Rivian Automotive each had price swings of more than 10% during the first trading week of the year. This, after some heady gains for the group last year.

Predicting performance from here won’t be easy. I recently spoke with one analyst who says Tesla stock (ticker: TSLA) is headed to $1,400, and another who says $67. You know what they say: Sometimes you have to agree to disagree by a factor of 20.

Tesla made the first big move, jumping 13.5% on Monday after the company reported fourth-quarter deliveries of 308,600 vehicles, trouncing estimates and its own record. Next, Ford (F) gained 11.7% on Tuesday after it announced that it would raise production of its first electric pickup, the F-150 Lightning, to 150,000 units a year.

By that point in the week, General Motors stock (GM) was already up 12% in anticipation of its Chevy Silverado electric pickup truck unveiling, planned for Wednesday at the Consumer Electronics Show. But on the day of the announcement, shares slipped. Maybe investors were disappointed in the delivery timing, or maybe it was because the broad market tanked on signs that interest rates could rise sooner than expected.

What the Ford and Chevy pickups have in common is that they will target workers as well as suburban preeners in unblemished Carhartt jackets. Early versions will be priced around $40,000 and $100,000.

The Chevy wins on electric specs—longer battery range and faster charging. But Ford wins on bringing its truck to market this spring. Chevy buyers will have to wait until spring 2023 for the cheaper truck and fall 2023 for the decked-out one. GM will also debut electric Chevy sport utility vehicles in 2023, including an Equinox that will start at $30,000.

Pickup trucks could be the key to America’s electric-vehicle uptake. Last year, EVs hit an estimated 4% of total U.S. sales, up from 2%. But Europe and China are well ahead, with penetration rates in the low teens. Americans have so far had few electric choices for the types of vehicles they like to buy. Last year, the Ford F-150 led U.S. new-vehicle sales, as always. The only surprise was that the Ram 1500 pickup pulled ahead of the Chevy Silverado 1500 to be No. 2.

An electric Ram will take until 2024, according to owner Stellantis (STLA), a roll-up of American, Italian, and French brands. Start-up Rivian (RIVN) says it will ship electric pickups this year, but that stock slid 11% this past Wednesday after early backer Amazon.com (AMZN) said it’s putting in an order with Ram for delivery trucks. Tesla’s Cybertruck was expected last year, but has been delayed.

Pent-up vehicle demand, meanwhile, suggests that a boom is coming. Amid shortages last year, U.S. light-vehicle sales were an estimated 15.1 million units, versus closer to 17 million a year before the pandemic. Average transaction prices have soared 30% from prepandemic levels, and incentives as a percentage of prices are at record lows.

This year, expect unit sales to rise only modestly, but by next year, when showrooms are full and pricing has eased, units could jump to 18 million, Credit Suisse says. EV penetration in the U.S. will double again this year to 8%, and top 50% by 2030, it adds.

One risk for legacy car makers is that they will run to stand still—that they must ramp up EV units with low profit margins for now to offset coming losses in high-margin gasoline models.

On the other hand, car makers could shift capacity from gasoline vehicles to electric ones ahead of customers’ willingness to make the switch. That could leave gas vehicles with high prices and profit margins, creating a long, lucrative “farewell tour,” as Morgan Stanley analyst Adam Jonas puts it.

Valuations appear undemanding. Ford goes for 12 times projected earnings, despite doubling in price last year. GM sells for nine times.

The bull case on Tesla is that it will do big things in both cars and adjacent markets. Philippe Houchois, who covers the stock for Jefferies, sees 35% upside from recent levels, to $1,400. Tesla lags behind legacy rivals on things like build quality and finish, but those are solvable problems, he says. It leads on software, batteries, and autonomy, which are durable advantages. He sees Tesla using software to extend the usefulness and profit potential of vehicles.

Most versions of the Tesla bear case assume that the company will do well in cars, but not well enough to justify a market value above $1 trillion. For example, J.P. Morgan’s Ryan Brinkman calls his price target of $295 “not ungenerous,” even though it implies a 70% stock plunge, because it values Tesla slightly ahead of world leader Toyota Motor (TM), despite producing a tenth as many cars for now.

Then there’s Gordon Johnson. He worked at large investment banks before starting GLJ Research, where he covers 20 stocks. He’s bullish on uranium stocks and bearish on cannabis, but all anyone wants to talk about, he says, is his $67 price target on Tesla. “I’ve gotten death threats,” he says. “Now I don’t even answer the phone when I have unknown calls.”

In Johnson’s view, there’s no reason to assume Tesla will do well in adjacent businesses. “You could take McDonald’s and say they’re going to start selling Nikes and chairs and pianos and add those valuations,” he says. In cars, he calculates that the stock price implies a production ramp-up that no car maker could achieve. “Selling cars is not selling iPhones or shirts,” he says.

If Tesla’s three-year stock gain of nearly 1,400% has shaken Johnson’s confidence, it doesn’t show. After walking me through his valuation model, he said he’s concerned that his price target might be too high.

Barrons : Rio Tinto Is Building Its Lithium Business. The Move to Green Energy W

Rio Tinto Is Building Its Lithium Business. The Move to Green Energy Will Boost the Stock.

A fat dividend and a robust pivot toward clean-energy products should make United Kingdom–based diversified miner Rio Tinto a good bet for investors. Those with a hefty appetite for risk could see total returns approaching 30% within 12 months, experts say.

In December, the company—which currently gets three-fourths of its earnings before interest, taxes, depreciation, and amortization, or Ebitda, from iron ore—announced that it would buy the Argentina-based Rincon lithium project for $825 million. The deal, which needs regulatory approval, would make Rio Tinto a major battery-grade lithium producer.

“What’s interesting is that they have proactively gone out and found this deal, and they will continue to look for similar opportunities,” Sophie Lund-Yates, a senior equity analyst at U.K.-based broker Hargreaves Lansdown, tells Barron’s. “Not everyone has the firepower to make those changes.”

In other words, Rio Tinto (ticker: RIO) has the desire and the financial strength to pull off the green switch.

For sure, mining and care for the environment would have seemed a strange pairing a few years ago. But the growing need for specialty minerals required for decarbonization has changed things.

Specifically, the need for materials required for clean energy is now powering up, and will help burnish the company’s already better-than-average mining image. Unlike some other diversified miners, Rio Tinto doesn’t produce any fossil fuels such as coal.

The Rincon project adds more green: Lithium is used to make electric-vehicle batteries. Demand for the metal is expected to almost triple by 2025 to 1.5 million metric tons, industry experts say. Last year, increased demand propelled prices for lithium carbonate higher by more than fourfold, up 413%, to $32,600 a metric ton, according to S&P Global. And a forecast deficit this year means prices could go even higher.

The increased bet on serving green goals is only part of the story. Rio’s American depositary receipts have outperformed peers recently, producing annualized returns of 22.9% over the three years through Jan. 3, besting the industry average of 20.2%, according to Morningstar. The company is valued at 6.7 times forward earnings, versus an average forward multiple of 9.3 over the past five years.

Research organization CFRA has a 12-month target price on the U.K.-listed shares of 58 pounds sterling ($78.50) or about 18% higher than their recent price of £49.36. “We like Rio for its best leverage profile among peers [with net cash since the middle of last year],” states the recent CFRA report. “The better balance-sheet profile will provide support for the company to weather macro uncertainty.”

The cherry on the top is the 10% projected dividend for 2022. Together with the potential stock price gains, investors could walk away with a 28% gain this year.

There are some substantial risks with this investment. Iron-ore demand is heavily dependent on demand from Chinese steel makers, which require the ore. The bursting of China’s real estate bubble could lead to further drops in iron-ore demand and prices. Iron-ore prices fell to $116 recently, down from a high above $225 a metric ton in May, according to TradingEconomics.

If the price falls further, profits could be dramatically squeezed, putting pressure on the company’s dividend, says RBC Capital Markets analyst Tyler Broda.

Still, China’s economic troubles are widely acknowledged by investors, which suggests that worries about a collapse in iron-ore demand may already be reflected in Rio Tinto’s stock price, making the stock worth the bet.

Barrons : Proterra Stock Sank in the SPAC Selloff. Now the Electric Bus Maker Lo

Proterra Stock Sank in the SPAC Selloff. Now the Electric Bus Maker Looks Like a Bargain.

Proterra would seem to have a lot going for it. The electric-vehicle technology company operates in a hot sector and has avoided head-on competition with a crowded field, including, Tesla . It already has products and sales, unlike many EV companies, and profits should come reasonably soon. In fact, it’s the leader in a niche that it has almost to itself: electric buses.

Yet, for all of that, 2021 was a bumpy road for the Burlingame, Calif.-based company, whose stock, at around $9, is down 20% for the past year, compared to a drop of 9% for an index of small-cap growth stocks.

Proterra (ticker: PTRA) has one big problem: It merged with a SPAC in mid-June in order to go public, and has seen its share price tumble as investors sold off SPACs at the end of the year. Proterra dropped 21% last month, hitting a 52-week low on Dec. 20. The shares now trade below their $10 price at the SPAC merger. That often signals deeper troubles, but at Proterra, it may spell opportunity for investors.

Proterra’s main business is electric city buses, the kind used in short-distance bus services, often in urban areas, a growing market with only a few competitors, such as NFI Group’s (NFI.Canada) New Flyer. Proterra has about 50% of the developing market.

The company produced its first bus in 2010 and delivered 52 in the third quarter of 2021, up from 33 a year earlier. Roughly 5,000 to 6,000 transit buses are sold annually in North America, so there’s upside as battery-powered vehicles take market share. The company’s sales in 2021 should amount to about $243 million, with some 80% coming from buses. Fourth-quarter sales, due to be reported in early 2022, are estimated at $69 million. Sales in 2022 and 2023 are expected to grow to $407 million and $784 million, respectively.

Proterra has two other viable businesses that generate the rest of its revenue. First, it makes battery systems for other bus and truck makers—a big strategic plus, giving Proterra technical know-how and relationships with battery suppliers.

The auto industry is currently scrambling to secure battery supplies for the expected EV boom, and Proterra already has its foot in that door. BofA Securities analyst Sherif El-Sabbahy calls the company’s battery technology core to his investment thesis, and likens Proterra to Cummins (CMI) and its role supplying diesel engines. He rates the shares a Buy, with a $15 price target.

The company has two battery-production facilities with an annual capacity of about one gigawatt hour, enough to make a few thousand commercial EVs a year. Proterra announced plans for a third battery-pack facility in December, which would be its biggest, with “multiple gigawatt hours of annual production capacity,” Proterra says.

In the third quarter of 2021, Proterra delivered 78 battery packs to commercial customers, including Daimler Trucks subsidiary Thomas Built Buses, known for its yellow school buses. Proterra’s battery output rose 95%, year over year, in the period.

Proterra also provides electric-charging stations for commercial fleet operators. It’s a growing business, creating a mini-EV ecosystem that enables Proterra to sell an EV, an EV powertrain, and EV charging equipment and software to customers.

“We view Proterra as having some unique positives versus emerging EV peers already,” wrote Vertical Group analyst Jon Lopez in a November report. He likes its position in an expanding market and sees “compelling opportunities for growth and diversification outside their core transit market.”

And other possibilities are brewing. In October, Proterra announced that it had essentially turned electric school buses into rolling electric generators in Massachusetts. School buses, which are utilized only a few hours a day, provided power back to the grid while they were parked.

“We need to look at the electrification of commercial vehicles for the opportunity that it is. And that’s more than just transportation,” says Gareth Joyce, who took over as CEO on Jan. 1, after serving as president. “What you see in this application is innovation.”

Vertical Group’s Lopez, for his part, rates Proterra a Buy. His $24.75 price target is the highest on Wall Street, implying gains of some 170%. That’s based on 20 times his 2025 estimated Ebitda, or earnings before interest, taxes, depreciation, and amortization, of about $440 million. That figure works out to about $40 a share in 2025, or a fair price of around $25 today. The multiple might seem aggressive, but the Russell 2000 Growth Index trades for roughly 17 times estimated 2021 Ebitda.

The average target price among six analysts is about $16, almost 70% above recent levels. That alone would be an attractive return, but investors typically demand more from newer, more speculative stocks.

There are risks, of course. The biggest is how fast commercial vehicle makers go electric. Lopez doesn’t doubt that they will, but he’s unsure of when. With Proterra, he says, “you have a far more established business that keeps the lights on, while you’re waiting for your secular, more attractive [battery] opportunity to kick in.”

True, Proterra still isn’t profitable, though Wall Street projects that it will generate positive Ebitda in 2023. That makes it a speculative stock, albeit one with more than $700 million in cash. With cash burn running at about $40 million a quarter, it has enough money to implement its business plan.

So, at the current stock price, investors can afford to be patient, holding the shares as the business develops.

>>> US Close Dow -0.01% S&P -0.41% Nasdaq -0.96% Russell -1.20% VIX 18.76 -4.33%

Closing Stock Market Summary

The S&P 500 declined 0.4% on Friday, as money continued to flow away from growth stocks and into value stocks as the 10-yr yield hit 1.80% intraday. The latter was catalyzed by the December employment report, which depicted tight labor market conditions with a slowdown in hiring and strong wage gains. 

The growth/value divide was loosely represented by the steep underperformance of the Nasdaq Composite (-1.0%) versus the Dow Jones Industrial Average (unch). More clearly, the Russell 3000 Growth Index fell 1.1% while the Russell 3000 Value Index rose 0.2%. The small-cap Russell 2000 declined 1.2%.

From a sector perspective, the S&P 500 information technology (-1.0%) and consumer discretionary (-1.7%) sectors underperformed in negative territory. Conversely, the energy (+1.5%) and financials (+1.2%) sectors rose more than 1.0%, extending their weekly gains to more than 10.0% and 5.0%, respectively. 

Specifying the key employment figures, December nonfarm payrolls increased by just 199,000 ( consensus 440,000), the unemployment rate remarkably declined to 3.9% ( consensus 4.1%), and average hourly earnings rose 0.6% ( consensus 0.4%). 

The report reaffirmed expectations for the Fed to be more assertive in normalizing policy, even though jobs growth missed expectations and the labor force participation rate held steady at 61.9% (below pre-pandemic levels).

December still capped an impressive rebound for the labor market in 2021, and it appears to be approaching the Fed's goal of maximum employment. Furthermore, the Fed has suggested it's more attuned to keeping inflation pressures in check, and it wouldn't want the robust wage growth to exacerbate inflation pressures. 

The 10-yr yield, as mentioned, hit 1.80% in the hours following the employment report, but ended the session at 1.77%, or four basis points above yesterday's settlement. The 2-yr yield decreased two basis points to 0.87%. The U.S. Dollar Index fell 0.6% to 95.75. WTI crude futures fell 0.6%, or $0.46, to $78.94/bbl.

For what it's worth, the S&P 500 closed just above its 50-day moving average (4675), which is a key technical level that has attracted dip-buying efforts in the past. 

Reviewing Friday's economic data:

  • December payrolls growth was quite weak, but that shouldn't remain the case as we get past the Omicron hurdle. The unemployment rate fell to an astounding 3.9%, although the labor force participation rate did not improve. It held steady at 61.9%. Average hourly earnings were up a stronger than expected 0.6%.
    • December nonfarm payrolls increased by 199,000 ( consensus 440,000). The 3-month average for total nonfarm payrolls decreased to 365,000 from 425,000 in November. November nonfarm payrolls revised to 249,000 from 210,000. October nonfarm payrolls revised to 648,000 from 546,000.
    • December private sector payrolls increased by 211,000 ( consensus 420,000). November private sector payrolls revised to 270,000 from 235,000. October private sector payrolls revised to 714,000 from 628,000.
    • December unemployment rate was 3.9% ( consensus 4.1%), versus 4.2% in November. Persons unemployed for 27 weeks or more accounted for 31.7% of the unemployed versus 32.5% in November. The U6 unemployment rate, which accounts for unemployed and underemployed workers, was 7.3%, versus 7.7% in November.
    • December average hourly earnings increased 0.6% ( consensus 0.4%) versus a 0.4% increase in November. Over the last 12 months, average hourly earnings have risen 4.7%, versus 5.1% for the 12 months ending in November.
    • The average workweek in December was 34.7 hours ( consensus 34.8), versus a downwardly revised 34.7 hours (from 34.8 hours) in November. Manufacturing workweek decreased 0.1 hours to 40.3 hours. Factory overtime decreased 0.1 hours to 3.2 hours.
    • The labor force participation rate held steady at 61.9%.
    • The employment-population ratio increased to 59.5% from 59.3% in November.
      • The key takeaway from the report is that it shows the Fed is close to meeting its objective of maximum employment and that wage growth in a tight labor market risks feeding into more persistent inflation pressures that will need to be addressed with a tighter policy position.
  • Consumer credit increased by $39.9 bln in November. The prior month saw a downward revision to $16.1 bln from $16.9 bln.
    • The key takeaway from the report is that increase in consumer credit in November was the largest monthly increase December 2010.

Looking ahead, investors will receive Wholesale Inventories for November on Monday.

  • Dow Jones Industrial Average -0.3% YTD
  • S&P 500 -1.9% YTD
  • Russell 2000 -2.9% YTD
  • Nasdaq Composite -4.5% YTD

(ZH) The Surge In Real Yields Is The Story So Far In 2022, But What Does It Mean

The Surge In Real Yields Is The Story So Far In 2022, But What Does It Mean

Something remarkable has happened in just the past 7 days: whereas real Treasury rates had been trading at multi-month lows on the last day of 2021, hitting a low of -1.13% - an indication that markets viewed the economy's future prospects as dismal and indicative of a chronic disbelief in the Fed's ability to decisively raise rates - in the four trading days since New Year's Day, real rates have surged to -0.788%, the highest level since June, while breakevens have slumped despite the surge in oil.
The result has been a sharp move higher in nominal rates, which today hit 1.75%, surpassing the highest level last year, in March 2021, and the highest since pre-covid, because the drop in breakevens has been more than offset by the surge in real rates.
So what is going on here? Has the market, in just four short days, reversed its dour outlook on the economy's prospects and now sees far more growth upside in the coming years?
That's also the question other strategists are tackling today: in his note from this morning, Nomura's Charlie McElligott writes that he cares little about the sharp move in nominals but is instead focused on Real Yields—where as he noted yesterday, "much of the recent move higher (less negative) in Reals has been driven by market confidence that US economic growth can withstand a short hike-cycle via such a low terminal/neutral rate (much lower than implied by Fed Dots)."
Extending on this, CME today writes that yesterday’s FOMC Minutes did indeed "crystalize and even accelerate the full-circle “hawkish pivot” of the Fed from the post-COVID response era, to now", an FOMC which is:
  • 1) not only going to lift-off sooner upon wrap-up of Taper (with the March mtg priced ~80% now)…but now too with
  • 2) the market moving closer to 3.5 hikes in ’22 (likely going to 4 all-in), and
  • 3) most critically from a “4Q18 QT Risk-Asset Scar Tissue” perspective, will too now likely begin a simultaneous balance-sheet runoff, starting mid-year 2022
Meanwhile, as we discussed extensively overnight, whereas Powell’s prior testimony at the Dec meeting laid the hawkish groundwork — the recent introduction from Waller and Daly (post the Dec Fed meeting) of support for balance-sheet runoff alongside policy rate hiking (as an alternative to “over-hiking” which would also help avoid yield curve “over-flattening” as well) has emerged as “a new battlefront” for traders according to
So, Charlie continues, after 2021 proved to be such a vicious P&L year for many (particularly in back-half of ’21) in the Rates / Macro space, "I do want to reiterate my view that much of this “bearish Rates / USTs” move in 2022 is effectively “pent-up” Flow / re-positioning which was waiting for the new year’s “risk-budget” to be deployed….and here we are..."
As such, yesterday’s uber hawkish minutes were the final “green light,” where:
  1. the FOMC was even more explicit about broken supply chains taking longer to solve (extending deep into this new year);
  2. FOMC commentary was that Omicron, on the margin, is potentially a further inflation catalyst;
  3. that several Fed members believe we are already near “full employment”; and of course...
  4. the aforementioned “smoke signal” on their comfort with balance-sheet unwind going simultaneously as rate hikes
So as Treasurys broke to new local lows/Yields to new highs, this time it wasn’t driven by the recent “confidence on growth” from perception of a short-tightening cycle in conjunction with a world getting more comfortable “living with COVID” as an endemic; instead, according to the Nomura quant, "it was outright risk-premium being added back into Real Rates on this multi-fronted FOMC attack on easy “financial conditions” to rein in their (now politically bipartisan) inflation problem, which has them effectively “boxed-in”
This is how Nomura's rates analysts summarizes the dynamic suggested by the Fed:
Altogether, we believe the comments on rates are consistent with our expectation of March liftoff, followed by three additional hikes in 2022 (June, September and December), before slowing to a pace of two hikes per year in 2023 and 2024. However, the minutes also underscore upside risk to our policy rate forecast. If inflation does not moderate as we expect this year, the Fed may ultimately hike rates more quickly – resulting in more than four rate hikes in 2022 – and to a higher terminal rate relative to our expectation of 2.00-2.25%.
Then there is pure muscle memory, of course: as Charlie notes, traders (especially Equities folks) do not like the backtest of QT (balance sheet runoff, but alongside liftoff / policy rate hikes, e.g. 4Q18) as it pertains to the risk-asset environment and enhanced trading swings & volatility.
And this is where further nuance in yesterday’s minutes gets even more interesting, because as Nomura Economist Rob Dent stated last night, “A sizeable faction appears to prefer a May runoff announcement and a more aggressive runoff path for MBS…”
Curiously, when one looks at Nomura’s original analysis of impact from the Fed balance sheet unwind upon cross-asset markets from the “last QT” (back in 2017/2018) in comparing UST, MBS and combo SOMA balance-sheet reductions (the bank's original study was Oct ’17 through Jul ’18 of QT weeks vs non-QT weeks)—the eye-opening ‘hard data’ takeaway (beyond the usual ‘anedcotes’) was that “…when there is a MBS or MBS/UST QT–unwind week, those periods on average see larger moves, in particular to the downside for broader risk assets.”
Yes, "truly shocking" that the market hates liquidity drains. How does McElligott rationalize this observation? His explanation:
My finger-in-the-air theory is that MBS is a risk-asset with a massively outsized portion of the market being “held” by the Fed, and when we widen there (likely because of the “source of demand” transfer from “price-insensitive Fed hands” back to private investors—which will require far-greater “price-discovery”), it can negatively impact everything from other spread products (i.e. Credit), to reverberating into the collateral chain, to spill-over into the cost of capital & leverage
So putting it all together, the now rubber-stamped from the FOMC “outright QT/balance-sheet runoff” path (one that may favor “…more aggressive runoff path for MBS”) alongside simultaneous rate hiking—is absolutely an escalation of risks to Interest Rates, according to McElligott, hence building-in greater risk premium, and with that, a cross-asset “risk,” as formerly placid “easy financial conditions” are set to inflect into something which risks “putting back” Vol into the market instead of previously “absorbing” it
Translation: the Fed has just sown the seeds of the market's next destruction (which will inevitably lead to even more stimulus down the road but we'll cross that bridge when we get to it) and as McElligott concludes, in his eyes, this is the largest part of why yesterday saw said knee-jerk “correlation 1” de-risking in Equities (meaning a “risk parity” or 60/40 fund type “deleveraging cascade” potential) off the back of a good ole-fashioned “financial conditions tightening tantrum.”
Expect more pain until stocks once again approach the strike price of Powell's put, which could be a while: as Morgan Stanley estimated in mid-December, this time around, the Fed put will be 20% below the highs, compared to just 10% on all previous occasions.

FT : Star hedge fund manager Chris Rokos still burning bright

Star hedge fund manager Chris Rokos still burning bright
Media-shy macro trader raises $1bn despite hefty loss during bumpy 2021 for bond markets

There are few hedge fund managers who could raise $1bn shortly after losing investors a quarter of their money. But Chris Rokos is one trader whose star appeal still more than makes up for short-term performance losses.

The media-shy billionaire, a former top fund manager at Brevan Howard before launching $13bn-in-assets Rokos Capital Management in 2015, has endured one of his worst periods of performance during a bumpy 2021 for bond markets.

As the highest-profile casualty of a vicious sell-off in short-dated bonds during the autumn, he suffered a bruising October and posted his firm’s biggest annual loss, losing 26 per cent — or roughly $4bn.

Yet his London-based firm has quickly taken in $1bn from external investors in recent days and is looking to add more. That fundraising was helped by Rokos sporting one of the industry’s best long-term track records, including big gains early in the pandemic. Notably, it comes as many rivals struggle to attract cash.

“[Rokos] earned a lot of brownie points by delivering stellar returns in the torrid environment of 2020,” said Amin Rajan, chief executive of consultancy Create Research. “Investors are willing to give him the benefit of the doubt, despite the subsequent reversal.”

Personable and engaging according to those who know him, Rokos, who declined to speak to the Financial Times, is known for his direct manner and for a mathematical approach to problem-solving that can come across to some as geeky.

Born in London, he went to state school until he was 11, before winning a scholarship to Eton College and then taking a first at Pembroke College, Oxford, to which he is a major donor and where a quad now bears his name. After stints at Goldman Sachs and Credit Suisse First Boston, where he worked alongside trader Alan Howard, he co-founded Brevan Howard — one of the biggest names in macro trading — becoming the “R” in Brevan.

A specialist in trading government bonds and options and in betting on the so-called yield curve — the interest rates offered by different maturities of debt — he made billions of dollars of profits for investors during his time at the firm.

In 2007 he generated $1.1bn, or 27 per cent of the total profits of Brevan’s flagship Master fund, according to court filings, and in 2011 he made nearly $1.3bn, or 30 per cent of its profits — a result he viewed as a “perfect year” of performance, according to a person familiar with his thinking. During his time at the firm he personally earned around $900m.

Rokos is one of the world’s most skilful managers at running very large positions in debt and options, said one industry insider who knows him. “When he gets it right, he gets it really, really right,” the person added.

At Brevan he was one of the most prominent voices in the firm’s morning investment meetings. He advocated a tough approach to fund management, arguing that underperforming traders should be fired quickly and that the first year of a trader’s employment should be viewed as a job interview, the person familiar with his thinking said.

But in 2012 he left Brevan following a dispute with co-founder Howard over his payout for the previous year’s performance, according to a person familiar with the matter. Tensions with the firm escalated when Rokos was prevented from launching his own fund management firm by a five-year non-compete clause.

This turned into a messy legal stand-off as Rokos challenged the clause in a Jersey court in 2014. In court filings, his lawyers argued that stopping him from running a hedge fund would mean “the public . . . will be deprived of [his] skills and hard work”.

Despite the battle, Rokos and Howard remained on friendly terms, people familiar with them said. A high-profile court case was avoided when the dispute was resolved early the following year, allowing Rokos Capital to launch. Howard, who had not wanted Rokos to leave without getting anything in return, according to a person familiar with his thinking, would invest some of his own money in the new fund, while Brevan would take a stake in Rokos’s firm.

Boosted by inflows from large investors including Blackstone, it has grown into one of the world’s biggest macro funds. A return of 44 per cent in 2020 helped him and his partners to profits of more than £900m.

His estimated personal fortune stands at £1.25bn, according to the Sunday Times Rich List. This has at times thrust him into the public view, such as in 2007, when plans to install a 16ft-deep pool and high diving board under his Notting Hill house generated headlines, and more recently when it was reported he is suing Deloitte and US law firm McDermott, Will & Emery over tax advice he received.

A supporter of Britain remaining in the EU and previously a major donor to the Conservative party, Rokos several years ago explored investing in British political magazine Standpoint, before deciding the publication’s “rightwing direction of travel” was at odds with his “more centrist views”, a spokesperson said at the time.

In a sector that has for years struggled to attract new cash because of often-lacklustre performance, Rokos’ ability to raise funds highlights the pulling power that a few star traders still command, even when short-term performance is poor.

But some warn investors’ patience is limited. “If . . . he has another bad year, all bets are off,” said Create Research’s Rajan.

FT : Profit warning at Aston Martin

Profit warning at Aston Martin
Plus, strong demand for private jets, and Lookers expects record profit

Aston Martin Lagonda warned that underlying earnings will miss expectations after a shortfall in shipments of its Valkyrie supercar.

Just 10 Valkyrie and Valkyrie AMR Pro vehicles were shipped in the fourth quarter following “an extensive and challenging development and testing schedule,” Aston Martin said. Accordingly, adjusted ebitda will be around £15m lower than expected. The carmaker said it was solely a timing issue, however, as 2022 production was on schedule and all Valkyrie Coupes remained allocated to customers with significant deposits.

Aston said its recently-launched DBX model had taken a 20 per cent share of the luxury sport utility vehicle market with 3001 units shipped to wholesale markets in the first year of production. Lawrence Stroll, executive chair, stuck by a long-term pledge to hit £2bn of revenues and £500m of adjusted ebitda.