9/3/2024

Good Morning. 

• Markets were closed Monday for Labor Day, which celebrates the social and economic success of American workers.

• Nvidia reported earnings Thursday, beating estimates by 5.65% and posting record quarterly revenue of $30.04 billion. However this increase did not meet investors' insatiable appetite for growth, and shares dropped 5% in the aftermarket following the release. NVDA’s nearly 140% YTD  growth and its 55 PE ratio mean that investors have lofty expectations.

• CORE PCE rose .02% MoM or 2.06% YoY, further evidence that inflation is cooling and that the Fed will feel comfortable to begin cutting rates.

• The Alternative for Germany, a far-right political party, won its first regional election in Germany, the world's third largest economy. Public discontent is increasing as the economy struggles to grow, faces stagflation, and growing nationalism opposes Germany's substantial involvement on the international stage, particularly its support of Ukraine. 

In today’s newsletter we will cover:

• Warren Buffet & Berkshire Hathaway

• August market update

• AUM for leveraged and inverse ETFs 

• The implication of rate cuts for corporate cash stockpiles

Markets 

• Friday, August 30th marked Warren Buffett’s 94th birthday. He is unquestionably one of the most legendary finance figures of all time. Buffett's leadership at Berkshire Hathaway has allowed the company to surpass 1 trillion dollar market cap. If you are looking for a Warren Buffett seminar we highly recommend this one: link.

• Here is an update on what transpired over the course of August and how the rest of the year might unfold.

  • We started the month with a brief period of extreme market volatility, but it was short-lived. This volatility was sparked by investors borrowing Yen at low interest rates and then deploying the capital back into U.S. markets. A large-scale sell-off occurred as the Yen rapidly appreciated due to the BOJ rate hikes. This once again reminded us that the global markets, forex, debt, and equities are highly interconnected and that investors are willing to look amongst the various markets to source higher returns. 

  • Investors are once again rallying around the soft landing narrative. Rate cuts have already been priced in, so it is unclear how much more value can be added from the change in monetary policy. The graph below represents the historic S&P 500 performance from Labor Day to year end. Although mostly gains have been seen during this period, some very strong pullbacks have also taken place.

• It is clear that investors have been looking for areas of higher volatility to deploy capital. The bar chart below represents the AUM for leveraged and inverse ETFs, which carry higher risk than the typical index ETF product. If trends continue these products will continue to push all time highs in terms of AUM.

How will the disruption of “T bill and chill” affect corporate cash stockpiles?

The Fed has made it clear it intends to cut rates in September, marking the end of a nearly two year high-interest regime in which rates have remained at 5% since July 2023. During this era cash and its equivalents began to earn a lucrative yield for the first time in years. For investors overseeing large amounts of cash this meant large inflows into fixed income instruments, particularly U.S. treasuries. These investments have become popular because they earn a lucrative yield with minimum risk while usually remaining liquid.

Corporations benefit from the high yields they can earn investing in low-risk fixed income products; this is being dubbed as “T bill and chill.” This practice will be significantly affected when rate cuts begin and hence yields become smaller. These stockpiles play a major part in U.S. capital markets, and the disruption of this practice will have significant effects.

(Disclaimer: High yields have also benefited U.S. individuals who have increased their savings and their fixed income investments; however, this article will focus on how rate cuts will affect entities overseeing billions on behalf of investors.) 

Corporate cash stockpiles

• Money market funds which enable investors to invest in short term debt instruments yielding them 5% or more have reached over $6.4 trillion in size.

  • “Inflow of  $106 billion for the month of August” (Bloomberg)

  • These funds have grown to over $6.4 trillion with 60% coming from corporate cash reserves.

• Why are corporate cash stockpiles at record highs?

  • Uncertainty about the direction of the economy is making companies hesitant to make new investments.

  • Large cash stockpiles allow for future acquisitions which often benefit executive compensation

  • Money market funds are earning high yields and companies flush with cash need a place to put it.

  • “Nearly one in ten non-financial companies in the S&P 500 earned more from interest on their cash than they paid on their debts last quarter.”  (Finimize)

U.S. corporations’ total cash on hand in trillions (FRED)

Notable companies’ cash reserves:

Berkshire Hathaway: $277 billion

Google: $100 billion

Ford: $35 billion

Microsoft: $76 billion

When rate cuts begin it is likely that corporations will shrink their positions in money market funds. These cash reserves could potentially be used for:

• Greater investment and acquisitions

• Increased stock buybacks and dividends

• Debt refinancing, paying down debt with cash

• Increased risk appetite (investing in riskier equities to earn higher yields)

It's hard to predict what will happen to these large reserves. They could be used for many things or companies might even continue to prefer the stable and safe return that treasuries promise. What is certain is that investors should keep an eye on what companies do with their cash as rate cuts begin. According to the Carngang Group “corporate cash piles account for 16% of domestic GDP” (Bloomberg) meaning what becomes of these reserves will have enormous effects.

What to look out for this week

• (Wednesday) Dollar Tree (DLTR)

• (Thursday) Broadcom earnings (AVGO)

• (Friday) Employment and wage numbers will be released. The last report showed an unexpected increase in unemployment that sparked recession fears and led to a global sell-off. Data showing a further deteriorating labor market could force the Fed to make a rate cut of 50 basis points to promote growth in the labor market. This will be the last release of employment data before the FOMC meets in 15 days.

We are two college students on a mission to immerse ourselves in the financial industry. We are eager to learn more and make new connections. Our goal is to share exciting and informative content that provides a broad picture of current events and offers valuable insights.

Authors: Ben Banchik, Zachary Singer

If you like this newsletter check out our website for more information. Forward it to your friends!

Sign up:https://sb-cap-insights.beehiiv.com/

Want to reach out? Contact us at 

[email protected]

We welcome feedback as it is our goal to foster discussion and different points of view as we strive to improve our work.