We would like to humbly offer our respect and condolences to all Gold Star families this Memorial Day weekend. And we extend the same to those who lost a friend along the way.
Interesting Fact:
Investors have added a net $3.7 billion into junk-bond funds thus far in 2024, the first inflows over the same period since 2020.
World According to Boyar Upcoming Release
This week, I had the honor of interviewing Thomas Peterffy, the founder of Interactive Brokers, on The World According to Boyar podcast. Thomas’s life exemplifies the American Dream: When he came to the United States from Communist Hungary in 1965, virtually penniless and with no knowledge of English, he immediately began teaching himself computer programming while saving up for a seat on the American Stock Exchange. Using technological advances, he himself helped pioneer, Thomas established a successful market making business, paving the way for his biggest financial success: Interactive Brokers, which has a market capitalization north of $50 billion and where he is by far the biggest shareholder. Stay tuned for the release of my discussion with Mr. Peterffy—I think you’ll find it as educational as it is inspiring.
The May 2024 Opportunity Report
This week, we plan on releasing our latest Opportunity Report.
The Company being featured just completed a transformational acquisition with substantial cost synergies that may well pale in comparison to the potential revenue synergies over the long run. Along with ongoing divestitures of non-core businesses, the remaining entity is becoming a pure play in an extremely attractive industry with multiple tailwinds. The combined business generates virtually all its revenue from replacement and/or recurring sources, providing meaningful revenue and cash flow visibility. Although post-transaction leverage has creeped up modestly, management believes that it will be able to rapidly delever and resume share repurchases later this year. Shares are up more than fourfold since being spun off in 2020 and we see strong share price appreciation in the coming years as it benefits from its recent acquisition and capitalizes on multiple industry tailwinds.
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A Recap of the Week
In the lead up to Nvidia’s eagerly anticipated FY 1Q 2025 earnings, we heard frequent commentary suggesting that NVDA (which due to its rapid ascent has become a significant weighting in the S&P 500 index) was going to be the impetus that either perpetuated the recent market rally or stalled the advance. The outcome defied that theory—at least on the first day of trading following the AI behemoth’s latest earnings blowout—as NVDA shares did surge higher, yet the broader market price action was abysmal. Breadth was overwhelmingly negative: technology was the sole sector in positive territory with the other 10 sectors trending lower, especially rate-sensitive real estate. The Dow Jones index (where Boeing was a significant detractor) closed >600 points lower, or 1.5%, on Thursday, its worst performance since March. Even the S&P 500 failed to muster a gain (down 0.7%) despite the uplift from NVDA adding over $200 billion to its market cap (considerably more than the market capitalization of once mighty Intel) in the session. So why such a disparity? Because the Fed’s influence remains the overarching theme of the market.
Investors’ expectations for an interest rate cut were dimmed after a stronger than expected PMI report that showed an uptick in private-sector domestic economic activity from April to May. While an upturn in U.S. economic production is favorable, the “good news is bad news” narrative reemerged. Manufacturers also reported rising input prices, implying inflation remains sticky. With a lack of further inflation progress in recent months, key members of the FOMC were noted to strike a hawkish tone with a willingness to keep monetary policy restrictive or even tighten further if inflation were not to cooperate in coming down closer to the 2% target. After the Fed once again poured cold water on near-term rate cut hopes, market participants are now pricing in <40bps of rate cuts for this year (fewer than two 0.25% interest rate cuts). Data from CME FedWatch Tool now shows less than a 1% chance of a rate cut in June, and only a 10% chance for July. While expectations of rate cuts continue to be pushed out, as of now, the probability of a least one cut by the end of the year remains fairly strong, at ~81%. Meanwhile, despite some chatter of possible rate increases, interest-rate traders evidently do not see that as a likely outcome and are pricing in only a minuscule 0.2% chance of higher rates by the end of the year.
Notable Reads:
Risky Bonds Join the Everything Rally
https://www.wsj.com/finance/investing/risky-bonds-join-the-everything-rally-3ca8b318
If the U.S. economy is headed for trouble, no one told the junk-bond market.
The premium that investors demand to hold debt from sub-investment-grade companies instead of relatively safe Treasurys has shrunk to near pandemic-era lows, a sign of dwindling worries about an economic slowdown that would cause a big jump in defaults and bankruptcies.
Low-rated debt has been swept up in a broad market rally fueled by signs of cooling inflation and hopes for interest-rate cuts…
Investors and analysts closely watch junk bonds because companies with weaker credit ratings tend to be hit by economic problems first. Strong demand there—along with a recent surge in profits among S&P 500 companies—boosts hopes that the economy will cool enough for rates to come down, without sliding into a recession.
“Markets continue to buy in that there will be a soft landing,” said Matt Brill, head of North America investment-grade credit at Invesco. “The all-in yields are enticing buyers to invest, and there are few concerns about a declining economy.”
Boyar’s Take: Investors who are buying sub-investment grade companies should be aware of how little they are being compensated for purchasing “riskier debt.” Investors should be asking themselves if 5-year US Treasuries are currently yielding 4.5%, is it worth it to take so much additional risk for only a few percentage points of additional yield?
Starwood Capital Limits Redemptions in Struggling $10bn Property Fund
https://www.ft.com/content/2b375114-049e-49f4-814a-2abce846f99d
A $10bn property fund managed by Barry Sternlicht’s Starwood Capital is strictly limiting its investors’ ability to exit their investments as it preserves liquidity and avoids a fire sale of assets in what it believes are poor markets.
The fund, known as Sreit, on Thursday told investors it would restrict their liquidity rights by more than 80 per cent, limiting redemptions to 0.33 per cent of its net assets a month from as much as 2 per cent — the amount it has allowed them to redeem since its inception in 2018.
Sreit’s portfolio spans apartment blocks in Arizona, logistics centers in Norway and a large loan it provided to Blackstone for the acquisition of Australian hotel and casino group Crown Resorts.
Boyar’s Take: This is something certainly worth monitoring (especially for those invested in this particular fund!). Before investing it is critically important to look at a funds redemption policy, as these vehicles may not be as liquid as one might think.
A $444 Billion ‘Fat Finger’ Trade Crashed Stocks. Now Citigroup Is Paying the Price.
https://www.wsj.com/finance/investing/citigroup-global-markets-fined-by-u-k-watchdog-over-1-4-billion-trading-error-3a9df297
Call it the $78 million typo.
That is how much Citigroup agreed to pay U.K. regulators for a trader’s fat finger when typing in an order to sell shares, an episode that caused a brief “flash crash” in European stocks.
In May 2022, the unnamed trader in Citigroup’s global markets unit was working from home in London on a public holiday, The Wall Street Journal previously reported.
He planned to sell a basket of shares worth $58 million, but made an “inputting error” when punching in the order in the bank’s computer system, the U.K.’s Financial Conduct Authority said Wednesday, entering the value of the stocks into the wrong field.
Boyar’s Take: $78 million reasons why working from home could be quite costly!
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Important Information: Performance Information. Past performance does not guarantee future results. The reports in this sample are for informational purposes only and the performance of the stocks selected is not indicative of the performance of all the stocks profiled in Boyar Research. The performance of the stocks selected and the performance of the stocks in Boyar Research may in fact diverge materially. Additional information regarding the performance of other companies featured in Boyar Research is available from Boyar Research upon request. This information is not a recommendation, or an offer to sell, or a solicitation of any offer to buy, an interest in any security, including an interest in any investment vehicle managed or advised by affiliates of Boyar Research. Any information that may be considered advice concerning a federal tax issue is not intended to be used, and cannot be used, for the purposes of (i) avoiding penalties imposed under the United States Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter discussed herein. Clients of an affiliate of Boyar Research and employees of Boyar Research own shares in Interactive Brokers.