Market Brief: Companies Are Benefiting From Higher Rates
Also in today's Almost Daily Market Brief--consumers aren't worried about inflation, and an investment you can drink.
Printing Money
One of the more strange things to come out of this fresh era of higher interest rates is the fact that large corporations have (generally) not seen their earnings take a hit. The rationale for why one would expect to see profits and margin contract are simple: higher rates means a higher cost of borrowing, meaning that companies pay more to refinance debt or owe more on floating rate debt, and a higher cost of debt-slash-interest rate payments on debt naturally will eat into profits.
To be sure, companies with the most upside-down capital structures have suffered in this manner, but a huge number of companies have actually found higher rates to be a tailwind.
Why?
In short, the rapid rise of short-term rates has increased the return on cash at a faster rate than most companies need to go to the credit markets to refinance debt. The Wall Street Journal points out in an article published today (linked above), that Microsoft, for instance, carries more cash on hand than short term investments and debt, so investing this cash in short-term Treasuries has yielded a bonanza of what is essentially free money.
This doesn’t just extend to super-large corporations, however. Lots of companies that one might not expect to be beneficiaries of higher rates have posted profits that are largely due to (or inflated by) the returns generated on cash.
For example, take Palantir, a company I have written about previously over at Seeking Alpha. The company has a long track record of losses and in the last few quarters has begun posting GAAP profitability.
On a year over year basis, interest income at Palantir grew in the latest quarter from $1.4 million to $30.3 million, owing to the fact that the company has parked roughly $2 billion in cash in short-term marketable securities on which it now earns a substantial return. One can also see that with a total net income of $27.8 million for the quarter, the interest income played a pretty significant role in the quarter.
All of this creates some pretty interesting scenarios which are largely the inverse of expectations when the interest rate hikes of 2022-2023 were in full swing. At that time, investors expected that margins would be squeezed, while for many companies net profit margins have largely expanded.
Given that the market is a forward looking machine, I have to sit back and wonder just how many Investors are taking into account which companies are today printing net profit margins that are more or less unsustainable as interest rates fall (and they are expected to fall by traders in mid-2024).
Other News…
What, me worry?
The University of Michigan consumer sentiment survey (a measure of consumer confidence, but more specifically, a measure of consumer expectations regarding inflation) was released today with some positive news: consumers have lower inflation expectations today than they have for the last two years.
All of this may be cold comfort, however, if the Fed doesn’t take note, although a writer at Bloomberg speculates that perhaps it will take account of consumer sentiment in its unknowable calculus of whether to raise interest rates yet again.
A tasty investment
An article in Barron’s today profiled a fund which aims to allow investors to invest in fine wine. While not the only fund out there that offers this kind of thing, the Cask100 Fund aims to collect a minimum of $10,000 from investors for a five-year period and will invest the proceeds in fine wines and other rare spirits.
This seems particularly intriguing since buying fine wine (or whiskey, or whatever) as an investment is a niche requiring specialized knowledge that many people who would otherwise be interested in acquiring probably don’t have the time to devote to the practice or access to the wine itself, let alone the ability to negotiate and validate what a fair price is.
There’s also something alluring about having your wine investment housed somewhere other than your own home where, well, wines meant as investments are often drank. Not that I would know about that or anything.
Final Thoughts
Vietnam’s stocks are lagging its economy. TikTok gets slapped with a €354 million fine. Planet Fitness’s CEO is out after 30 years (maybe he’ll be able to cancel his membership without any issues). Instacart is set to raise its IPO target. Kids are revolting against cereal. Pricey oil is back, baby.
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