the-next-bullish-catalyst-for-oil-markets

The Next Bullish Catalyst For Oil Markets

Despite the devastation caused by Hurricane Ian, oil markets have been relatively unaffected by hurricane season this year. The next real catalyst for oil prices, short of a significant geopolitical development involving Russia over the weekend, will be next week’s OPEC meeting, which has the potential to send oil prices climbing again.

Oilprice Alert: This month’s Intelligent Investor column, now available for Global Energy Alert members, compares two giant oil companies to see which currently presents more value. If you’re an investor in the energy space then now is the time to sign up for Global Energy Alert.

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Friday, September 30th, 2022 

It is not unusual to see oil prices spike in late September as hurricanes ravage the US Gulf of Mexico, yet, despite the horrendous damage done to Florida and other south-eastern states, Hurricane Ian has failed to become a notable factor for crude. And whilst some pricing upside came from US stock draws, a new batch of Iranian sanctions, and marginal weakening of the US dollar, the next big catalyst for oil prices will be the OPEC+ meeting taking place on October 5th. With production cuts being discussed as a means of maintaining palatable prices, an upward run towards $100 per barrel might be on the cards for ICE Brent.

OPEC+ Seems to Be Serious About Cuts. According to OPEC+ sources, members of the oil group have started talks about potential oil production cuts in November 2022 as Russia has already suggested a 1 million b/d target reduction for the October 5th meeting.

Russia Calls Nord Stream Leaks State-Backed Terrorism. After four separate leaks in the Nord Stream 1 and 2 pipelines continue to spout methane into the Baltic Sea, Russia’s government called the still unidentified attacks an act of “state-sponsored terrorism”, a thinly veiled allusion to the US.

EU Finalizes Eighth Batch of Russia Sanctions. The European Commission has formally proposed an eighth round of sanctions against Russia, with new measures ranging from individual blacklisting, further restrictions on technology exports as well as a ban on EU citizens sitting on boards of Russian companies.

Australia Strikes Deal with Gas Exporters. Australia’s government will not limit gas exports from its three east coast LNG projects (Queensland Curtis LNG, Australia Pacific LNG, and Gladstone LNG) in return for their pledges to offer an extra 157 petajoules of gas to the domestic market in 2023.

US Slaps Further Sanctions on Iran Oil Trade. The Biden Administration targeted 6 companies in India, Hong Kong, China, and the UAE for allegedly enabling the sale of Iranian crude and products into South and East Asia, as most Iranian exports still sail towards Chinese buyers.

IEA Warns of LNG Tightening in 2023. The head of the International Energy Agency (IEA) Fatih Birol warned that LNG markets in 2023 might be even tighter this year amidst higher demand from China, India, and other parts of Asia, as stronger Asian growth ramps up the need for more gas.

A Caveat Appears in the UK Licensing Drive. The UK oil industry group Offshore Energy UK claimed that projects arising from the upcoming 33rd oil and gas licensing round, to be launched in a week, will not compromise the country’s climate plans and will have to comply with existing emissions reduction targets.

China Hints at Product Export Flexibility. As the Asian markets are widely expecting the release of this year’s fifth batch of Chinese fuel export quotas of up to 15 million tons, sources indicate Beijing might be open to extending the export allowance into 2023 to boost domestic demand.

Europe’s Industry Shut-Ins Now Move to Lead. Commodity giant Glencore (LON:GLEN) is considering shutting its lead operations at its Portovesme plant in Italy after high electricity prices made production commercially unsustainable, potentially seeking to develop an EV battery recycling plant there.

Warren Buffett Really Likes Occidental. Warren Buffett’s Berkshire Hathaway (NYSE:BRK.A) bought another 5.99 million shares of Occidental (NYSE:OXY) worth 352 million this week, boosting its stake to 20.9% after the US energy regulator gave Berkshire the permission to buy up to 50% of the firm’s common stock.

Taliban Signs Fuel Deal with Russia. According to the head of Afghanistan’s Industry Ministry, the Taliban have signed a provisional deal with Russia for the supply of 1 million tons each of gasoline and diesel as well as 2 million tons of wheat, to be delivered by road and rail.

Enbridge Sells Pipeline Stakes to Indigenous Groups. The largest pipeline operator in North America Enbridge (TSE:ENB) sold 11.57% minority stakes in seven Alberta oil pipelines to a group of Indigenous communities for some $820 million.

EU Dissatisfied With Its Gas Benchmark. Seeking to supplant TTF as the main spot gas trading benchmark, the European Union is working on a new transaction-based benchmark for LNG that would no longer reflect pipeline gas developments, with Brussels saying the new index is to be used voluntarily.

LME Might Ban Russian Metals. The London Metal Exchange (LME) is considering a consultation with market participants on whether it should continue trading Russian metals such as aluminum, copper, and nickel in 2023 amidst fears that Russian firms might just offload their production into LME warehouses.

By Michael Kern for Oilprice.com

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Flood Insurance Fell in Florida Before Hurricane Ian Struck

SANFORD, Fla.—Florida homeowners had reduced their flood insurance coverage in the years before Hurricane Ian dumped up to 15 inches of rain on the state, inundating coastal and inland areas.

Only a small number of residences in two of Florida’s hardest-hit inland counties are covered by flood insurance. The percentage of  protected homes is higher in coastal areas that sustained the most damage, but still, is over 50% in just one of the affected counties, according to an analysis by Neptune Flood, a private-sector flood-insurance provider. 

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a-huge-number-of-‘zombie’-companies-are-drowning-in-debt.-this-ceo-sees-a-reckoning-as-interest-rates-soar

A huge number of ‘Zombie’ companies are drowning in debt. This CEO sees a reckoning as interest rates soar

Zombies are real. Well, at least “zombie companies” are real.

Loosely defined as economically unviable firms that need to borrow to stay alive, an era of cheap money and high-risk investing has fueled the rise of the walking dead in the business world over the past decade.

David Trainer, the CEO of the investment research firm New Constructs, believes there are now roughly 300 publicly-traded zombie companies.

And with interest rates soaring, money isn’t as cheap as it used to be, which means zombie companies are facing a reckoning that will affect both investors and the economy as a whole as recession fears mount.

“When economic reality hits these companies, and they do go to zero or close to it, which we’re going to see in spades, a lot of investors are going to get crushed,” Trainer told Fortune. “We’re going to see a potentially huge impact on consumer demand…there’s going to be a lot of people that are ticked off.”

What is a zombie company?

What exactly makes a zombie company, and how many there are in the U.S., is a matter of debate.

Goldman Sachs recently estimated that some 13% of U.S.-listed companies “could be considered” zombies, which it called “firms that haven’t produced enough profit to service their debts.”

But in a study last year, the Federal Reserve found that only roughly 10% of public firms were zombie companies in 2019 using slightly more rigorous criteria. And in an even more confusing turn,Deutsche Bank Strategist Jim Reid conducted a study in April 2021 that found that over 25% of U.S. companies were zombies in 2020.

For comparison, in the year 2000, only about 6% of U.S. firms were in the same situation, according to Reid’s findings.

Trainer, who has made his name with a few prescient predictions about zombie companies in recent years, also believes that the number of these failing firms in the U.S. has risen dramatically over the past few decades.

But he defines zombie companies using a more holistic method. In Trainer’s view, zombies are firms with less than two years of “lifeline” available based on their average free cash flow burn that also struggle to differentiate themselves from competitors, have poor margins, and lack options for future profitable growth.

“So there’s a very low likelihood that the cash burn is ever going to get better,” he said.

Trainer and his team have built a list of roughly 300 publicly-traded zombies that they closely track, and while most of them are smaller firms, some have been in the public eye of late.

Stocks like the online car retailer Carvanaand the once-high flying stationary bike maker Peloton made the list, along with the meme-stock favorites AMC and GameStop.

Carvana declined Fortune’s request for comment. AMC, Peloton, and GameStop did not immediately respond to requests for comment.

In Trainer’s view, many of these zombie companies will eventually see their stock prices drop to $0 as the market recognizes they can’t survive rising interest rates.

The Federal Reserve has raised rates five times this year to combat near 40-year high inflation, leading to soaring borrowing costs for corporations. That affects zombie companies, who are already struggling to pay their interest expenses, far more than most.

But while the potential downfall of zombie companies could be painful for investors and the economy in the short term, Trainer made the case that it won’t be the worst thing in the long run.

Instead, he argued it represents a necessary cleansing of the financial system.

The rise of zombies and their effects on the economy

How did this zombie invasion happen in the first place?

In the years following the Great Financial Crisis of 2008, central banks around the world were desperate to reignite economic growth and reduce unemployment. To do this, many decided to slash interest rates and institute other loose monetary policies designed to spur lending and investment.

It was the beginning of an era of “free money” that put cash in the hands of speculators, who quickly turned around and bought risky financial assets, sending them to new heights.

The S&P 500, for example, rose more than 545% between its post-GFC low in Feb. 2009 and its Nov. 2021 high. And over the same period, the average sales price of U.S. homes jumped nearly 110%, while cryptocurrencies transformed into a trillion-dollar-plus asset class.

The speculative era hit its peak in 2021, after stimulus checks fueled a boom in retail investing, according to Trainer. At the time, cryptocurrencies like Bitcoin were soaring, the IPO and SPAC markets were on fire, and meme stock traders were pushing zombie companies’ stocks like AMC and GameStop ever higher.

Trainer believes that this era of speculative investing increased the number of zombie companies in the U.S. dramatically, hurt productivity, and made the economy more vulnerable during recessions.

“I think, long term, zombies have caused a meaningful reduction in growth and prosperity,” he said. “Because effectively, what a zombie stock is, is a waste of capital. To the extent that the capital is wastefully employed in these businesses that have actually never produced any real economic value, we are losing the opportunity to invest that in more productive areas.”

Echoing Trainer’s comments, Deutsche Bank Strategist Jim Reid said last year that zombie companies weaken economies by minimizing the growth of firms in the industries in which they operate.

“The survival of zombie firms is likely a drag on productivity growth as these firms congest markets and divert credit, investment, and skills from flowing to more productive and successful firms,” he said in his 2021 study, referencing data from the BIS.

Trainer goes a step further than Reid, arguing that the survival of zombie companies is a threat to the U.S. in an increasingly competitive global economy.

“If we don’t have efficient and productive capital markets, we lose probably one of the biggest competitive advantages that we have as a country, which is our ability to allocate capital more efficiently and rapidly to its highest and best use,” he said. “And that’s part of the problem. People forgot that this is what the capital markets are about. They’re about allocating capital to its highest and best use, period, end of paragraph.”

The fall of the zombies and lessons for investors

The era of zombie companies may be coming to an end as interest rates rise, forcing unprofitable firms to burn more and more cash. But according to Trainer, the downfall of zombie companies will ultimately be beneficial for the economy and help teach younger investors who have lived through an era of speculative excess about the importance of risk management.

“There’s been an environment where people have grown up and they don’t understand risk. Take meme stocks for God’s sake,” Trainer said, referencing the Reddit favorite AMC. “You’re buying a movie company whose biggest competitor just went bankrupt…Then you see all of the competitive forces squeezing margins, and management is talking about buying a goldmine and how they’re going to sell popcorn at grocery stores? Yeah, I’m sure they’re gonna build a competitive advantage around popcorn.”

The CEO went on to make the case that the young investors who pumped zombie stocks during the pandemic would benefit from understanding the difference between speculating and investing, which was so eloquently laid out by Warren Buffett’s mentor, Benjamin Graham, in his 1949 book “The Intelligent Investor.”

Graham distinguished between investors, whose “primary interest lies in acquiring and holding suitable securities at suitable prices,” and speculators, who merely care about “anticipating and profiting from market fluctuations.”

He also warned, over 70 years ago, of the dangers of allowing speculation to run rampant in the stock market.

“The distinction between investment and speculation in common stocks has always been a useful one and its disappearance is a cause for concern. We have often said that Wall Street as an institution would be well advised to reinstate this distinction and to emphasize it in all its dealings with the public. Otherwise, the stock exchanges may someday be blamed for heavy speculative losses, which those who suffered them had not been properly warned against,” Graham wrote.

Trainer argues we are seeing the impact of ignoring Graham’s warning today with the rise (and coming fall) of zombie stocks.

This story was originally featured on Fortune.com

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mortgage-rates-recently-hit-their-highest-level-since-2007.-here’s-what-5-economists-and-real-estate-pros-say-will-happen-next-with-rates

Mortgage rates recently hit their highest level since 2007. Here’s what 5 economists and real estate pros say will happen next with rates

Updated: Oct. 1, 2022 at 10:47 a.m. ET

Some pros say it’s likely mortgage rates may keep rising

Where will mortgage rates go from here? Getty Images

Since the start of the year, mortgage rates have been trending upwards — and according to many experts, this trend will likely continue through October. So far this year, mortgage rates have climbed from about 3% to nearly 7%, the highest level since 2007, MarketWatch recently reported. And those rate increases could continue: “Until inflation shows a material moderation, the risk is for further increases in mortgage rates,” says Greg McBride, chief financial analyst at Bankrate.  See the best mortgage rates you may get here.

Echoing that sentiment, Kate Wood, home expert at NerdWallet, says interest rates for 30-year fixed-rate loans appear to be staying over 6% and products like the 15-year fixed and the 5-year ARMs are averaging over 5%. “Though the Federal Reserve’s latest rate increase wasn’t as dramatic as some expected, that hike plus the two more that will likely occur this year will probably keep mortgage rates elevated,” says Wood.

Following the recent Federal Reserve meeting where Chair Jerome Powell made it clear that fighting inflation is the central bank’s first priority, the updated projections from members of the Fed’s rate-setting committee show that they expect short-term rates to continue to both climb higher and remain so for longer than previously expected, says Realtor.com chief economist Danielle Hale.

“This will put upward pressure on mortgage rates that could be offset by weaker economic growth, which is also anticipated. For now, it’s smart for buyers to prepare for the possibility of higher mortgage rates, especially when considering their home shopping budget,” says Hale. Shoppers can rate-test their budgets by trying out the impact of higher rates on their scenarios by using a mortgage calculator. 

See the best mortgage rates you may get here.

Though Hale points out that there aren’t any Fed meetings in October, she says Fed speakers are out and about addressing various audiences, which will undoubtedly create room for investors to parse what they’re saying for additional policy insights. “The next Fed meetings in November and December are likely to be eventful. With investors and mortgage rates both anticipating further short-term rate hikes in these meetings, there is the potential for surprise in either direction,” says Hale.

“Three factors mainly affect today’s market: expectations on inflation, economic growth and the Fed’s policy … As inflation remains stubbornly elevated, the Federal Reserve will continue to raise interest rates in its efforts to curb high inflation,” says Nadia Evangelou, director of real estate research at the National Association of Realtors (NAR). But concerns about economic growth can put a damper on the pace of mortgage rate increases, she adds.

And Jeff Tucker, senior economist at Zillow says rates changing this quickly means buyers can feel frozen as what they can qualify for can change week to week. “This is having a chilling effect on both first-time buyers and move-up buyer-sellers,” says Tucker.

The advice, recommendations or rankings expressed in this article are those of MarketWatch Picks, and have not been reviewed or endorsed by our commercial partners.

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Alisa Wolfson is a reporter for MarketWatch Picks.

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big-selling-wave-in-stocks-makes-for-a-buying-opportunity,-says-baron-manager-who-has-20%-of-his-fund’s-assets-in-tesla

Big selling wave in stocks makes for a buying opportunity, says Baron manager who has 20% of his fund’s assets in Tesla

Institutional investors have been clearing out of stocks. They sold $42 billion worth in the five weeks ending Sept. 21.

That followed $51 billion in sales during the five weeks ending Sept. 7 — the biggest selling wave this year, says S&P Global Market Intelligence. Bank of America clients favored defensive names over cyclicals last week, another good contrarian signal telling us it is time be bullish and buy. 

“This is a pretty good buying opportunity,” says David Baron of Baron Focused Growth Fund  BFGFX, -0.76%. “Even if there is a slowdown next year, a lot of stocks are pricing in pretty draconian earnings.”

No one knows for sure what the future will bring. But Baron is worth listening to, judging by his record. His fund beats its mid-cap growth category and Morningstar U.S. mid-cap broad growth index by 14 percentage points annualized over the past five years, according to Morningstar Direct. That’s big outperformance.

The catch is that it may be a stock pickers’ market.

“Not everything is going to work together,” says Baron.

Here are three ways to deal with this.

1. You can solve this problem by leaving the driving to someone else, such as Baron. His fund gets five stars from Morningstar, the highest, and it charges 1.3% in expenses.

2. You can take a peek inside his portfolio for stock ideas. “A slowdown does not change our thesis on our stocks. Our companies continue to innovate and continue to grow,” says Baron.

3. Better yet, take the “meal for a lifetime” approach and consider what you can learn from him about investing.

I tackled the last two approaches in a recent chat with Baron about his investment approach and his biggest — and most recently purchased — positions.

Here are five key lessons that might help you improve your returns, with stock examples for each.

1. Hold concentrated positions

This one is not for everyone. A lot of investing is about managing risk, and big positions increase your risk considerably because if they go bad, you lose a lot of money. But time and again, I notice that investors who outperform often do so via large position size. (Read this other column I wrote.) Talk to a financial adviser to see if this is right for you. But Baron has little doubt when it comes to his own fund. In a world where many managers cap their portfolio exposure to single names at 2% to 3%, at Baron’s fund, over 56% of the portfolio is in eight stocks. Each of those is a 4.5%-or-more position.

The biggest concentrated position, by far, is Tesla TSLA, -1.10%, at 20.4%. Baron Funds famously took a large position in Tesla before it went parabolic, and then stuck with it despite the vitriolic skepticism toward Tesla CEO Elon Musk.

Following the stock’s big move in 2020, the fund trimmed it a bit, but Baron is keeping a huge position.

“We see so much potential, we don’t want to sell,” says Baron. “Of all the companies I cover and [those] analysts come pitch to me, the company I feel the most confidence in is Tesla.”

Baron thinks the stock could still triple in less than a decade. What will get it there?

Tesla has created a strong brand with no marketing, and it has a 25% market share in electric cars, which are still in the very early stages of adoption. Only around 4% of vehicles are electric.

“People think we are going into a slowdown but demand for their cars has never been better,” he says.

Tesla delivered a million cars last year. It will deliver two million next year, and that’ll hit 20 million a year by the end of the decade, Baron predicts. Tesla produces high gross margins in the upper 20% range because cars that sell for around $50,000 cost around $36,000 to make. Baron thinks Tesla’s battery business could ultimately be as big as the car business.

The next four big concentrated positions are the privately held Space Exploration Technologies (also run by Musk), the insurer Arch Capital Group ACGL, -0.63%, Hyatt Hotels H, -0.47% and the real estate market analytics company CoStar Group CSGP, -1.47%, at 5% to 6% each. (Holdings are valid as of the end of June.)

2. Invest in growth

Baron pays attention to valuations, but the portfolio has a growth bias.

This brings big exposure to the gaming and lodging sector, which makes up 20% of the portfolio. Baron, who was once a gaming analyst at Jefferies Group, expects solid growth as people continue to want to break free of pandemic lockdown life.

“People realized in the pandemic that life is short, and they want to get out and do things,” he says.

Baron tilts his exposure to gaming and lodging companies that serve higher-income consumers.

Baron thinks that even in a recession, these companies should still generate cash flow above 2019 levels. Wealthier customers will cut back less on spending in any recession. These companies have gotten more efficient by better targeting their marketing and trimming some customer perks. Holdings here include Hyatt, Red Rock Resorts RRR, -1.58%, MGM Resorts International MGM, -0.90% and Vail Resorts MTN, +0.98%.

Baron also cites Krispy Kreme DNUT, +0.61% as a name with growth potential, as it continues to increase its presence in the marketplace, which Krispy Kreme calls “points of sale.” This includes things like prominent displays in convenience stores and supermarkets. Baron thinks Krispy Kreme could post 20% annual earnings growth, producing a double in the stock over the next three to four years.

3. Invest alongside founders

Academic research confirms that founder-run companies tend to outperform. Think Amazon.com AMZN, -1.57% and Facebook parent Meta Platforms META, -0.54%, which vastly outperformed the market.

A lesser-known name from Baron’s holdings that fit the bill is Figs FIGS, -6.99%. The company sells scrubs, lab coats and related health-care sector apparel designed for comfort, style and durability. Figs stock has fallen sharply to under $10 from highs of around $50 shortly after its May 2021 initial public offering.

Baron likens Figs to Under Armour UAA, -9.77%, the popular sports apparel company. “People love their product,” he says.

He thinks sales could double to $1 billion in three years. The company is run by co-founders Heather Hasson and Trina Spear. This is a new position for Baron as of the second quarter.

Another founder-run company in Baron’s portfolio is CoStar, which offers research and insights on commercial real estate trends and pricing. The company has a competitive advantage because it has the largest research team in the field, and it’s been in business for over 20 years. The company is expanding into residential real estate market analysis. This could help CoStar quadruple revenue or more over the next five years, says Baron. Founder Andrew Florance is the CEO.

4. Look for large market opportunities

Tesla is a good example, with its 25% share of the EV business that only makes up 4% of the overall vehicle market. So is another Musk company: Space Exploration Technologies.

SpaceX has two businesses, its Starlink internet service supported by a constellation of satellites, and its rocket launch business. Starlink has big potential because 3.5 billion people in the world are without internet access.

“This could be a trillion-dollar revenue business with extremely high margins,” says Baron.

Starlink recently signed on Royal Caribbean RCL, -13.15% and T-Mobile US TMUS, -0.35% as customers. The rocket business has big growth potential because SpaceX can launch at one-tenth the cost of NASA.

Baron thinks SpaceX could be a 10-bagger over the next seven to 10 years. The problem for regular investors is that SpaceX is still private, and it may be years before it goes public because it doesn’t need cash, says Baron. Unless you are an accredited investor, it’s tough to get privately listed shares. For exposure to this one, owning Baron’s fund is one way to go.

5. Have some ballast

A risk with high-growth names is that their stocks can fall hard if growth stumbles a bit. Momentum investors in growth names are quick to sell.

To offset the risk of high-growth companies like Tesla and SpaceX, Baron likes to hold potentially safer names like Arch Capital Group in insurance and reinsurance. Arch Capital’s stock looks reasonably priced at 1.5 times its $31.37 book value. Second-quarter insurance sector net premiums grew 27.5%, year over year. Baron thinks the stock could double in four or five years.

Michael Brush is a columnist for MarketWatch. At the time of publication, he owned TSLA, DNUT, AMZN, META and RCL. Brush has suggested TSLA, RRR, MGM, DNUT, AMZN, META and RCL in his stock newsletter, Brush Up on Stocks. Follow him on Twitter @mbrushstocks.

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jack-dorsey-rips-twitter’s-‘terrible’-board-in-texts-to-elon-musk

Jack Dorsey rips Twitter’s ‘terrible’ board in texts to Elon Musk

If Twitter cofounder Jack Dorsey was hoping to see a culture change in the company’s top brass, Elon Musk would certainly fit the bill.

But the Tesla CEO’s first foray into the social media space may prove short-lived. After striking a $44 billion deal last April to buy Twitter, Musk has been attempting to pull out of it since July, citing the unverifiable number of spam accounts on the platform.

With his court date set for next month in Delaware, details continue to emerge about those turbulent few months, including Musk agreeing to sit on the company’s board before abruptly changing his mind and opting instead to buy out all of Twitter’s remaining shares to take the company private.

Musk made it clear that if he had become the sole owner of Twitter—or, now, if a judge compels him to go through with the purchase anyway—he would bring about some big changes to the social media network and how the company is run. And new evidence reveals just how much Twitter cofounder and former CEO Jack Dorsey, who stepped down from the company’s board last May, wanted to see those changes happen.

“The board is terrible,” Dorsey wrote to Musk in a text message, one of many that were collected and disclosed this week as part of a pretrial discovery process.

Dorsey’s text—dated April 5, the day Twitter announced Musk as a new board member—spared only company CEO Parag Agrawal, who Dorsey called “an incredible engineer.”

But as the takeover deal dragged on and tensions emerged between Musk and Twitter’s board, Dorsey made his true feelings about Agrawal and the rest of Twitter’s board known in a series of messages that criticized the board’s cautious behavior, while painting Musk as the savior the company had been waiting for.

Dorsey and Twitter’s board

In texts sent to Musk last March, Dorsey revealed that he had tried to get him approved by the board as early as 2020, which the board refused. Dorsey criticized Twitter’s board for being too “risk-averse” and said they had refused to bring on a figure like Musk because they felt it would create “more risk” for the company.

It wouldn’t be the last time Dorsey criticized Twitter’s board in his text exchanges with Musk.

On April 25, Dorsey defended Agrawal as being “great at getting things done when tasked with specific direction,” but the next day, seemingly after a board meeting, Musk texted to Dorsey that the two of them were in “complete agreement” over Agrawal, specifically that the Twitter CEO had been “moving far too slowly and trying to please people who will not be happy no matter what he does.”

Dorsey answered around two hours later: “It became clear that you can’t work together. That was clarifying.”

Unpredictable Musk

As CEO and founder of Tesla and SpaceX, Elon Musk made a name for himself as a hard, unforgiving, and at times even rash boss.

Last June, Musk mandated that all of Tesla’s white-collar staff return to the office full-time, warning that those who didn’t could “pretend to work somewhere else.” He expects long work hours, willingly working for upwards of 120 hours a week himself, and once allegedly worked a 24-hour day—on his birthday.

Musk’s unique leadership style has gotten him into hot water with his own companies at times. A single foray on Twitter can send Tesla stock prices plunging or cryptocurrencies soaring, and shareholders of his businesses have even asked judges to muzzle his Twitter feed.

Musk’s unpredictability as a person and as a boss left some Twitter employees concerned last spring that him taking over would mean a complete culture change, including a return to the office and a more demanding work environment overall.

But while Twitter employees worried, Jack Dorsey appears to have been eagerly awaiting Musk getting involved at Twitter for quite some time. Last April, shortly after the takeover deal had been announced, Dorsey heavily criticized Twitter’s board, saying “it’s consistently been the dysfunction of the company.”

A week later, Dorsey publicly vouched for Musk as the right person to take the company forward by first taking it private. “Elon is the singular solution I trust. I trust his mission to extend the light of consciousness,” Dorsey wrote.

This story was originally featured on Fortune.com

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the-bear-market-may-not-be-over-but-some-corporate-insiders-are-acting-like-it-is

The bear market may not be over but some corporate insiders are acting like it is

It’s premature to declare the bear market is over, but it’s not too early to start constructing your buy list of stocks for when conditions are more favorable.

That’s the conclusion I draw from an analysis of recent insider transactions from Nejat Seyhun, a finance professor at the University of Michigan and one of academia’s leading experts on the behavior of corporate insiders. The last time I checked in with him, in early May, I reported that insiders were aggressively bearish, “likely portend[ing] additional price declines.”

I reached out to Seyhun this week for an update, given that the S&P 500 SPX, -1.51% is now about 12% lower than where it stood when that early-May column was published, while the Nasdaq Composite COMP, -1.51% is almost 13% down. As he has done every time I have interviewed him over the years, Seyhun referred me to an insider sentiment index that he calculates. This index tracks the monthly percentage of publicly traded companies that experience net insider-buying from corporate officers and directors.

Note carefully that this index does not reflect transactions made by the third category of investors that are legally considered insiders: a corporation’s largest shareholders, those owning at least 10% of outstanding shares. Seyhun doesn’t include them in his analysis because he has found from his research that, on balance, they do not have any privileged insight into where a company’s stock is headed.

The chart above plots the three-month moving average of Seyhun’s index, and as you can see it has declined over each of the last three months. Ominously, it is significantly lower than where it stood in June, even though the overall market is trading in the vicinity of where it was at its June lows.

(When I reported on Seyhun’s index in previous columns, I received numerous inquiries about how the public can access the data. Seyhun’s son, Jon Seyhun, has created a paid subscription website, InsiderSentiment.com, that provides daily updated values of the index. I receive no compensation from this site.)

‘Green shoots‘

Given these discouraging trends in overall insider sentiment, it might seem like overreaching to find anything positive to say. But in the interview Seyhun pointed out that several individual sectors are experiencing net insider buying — what he referred to as “green shoots.” Those sectors with the most positive insider signals currently include Information Technology, Industrials, Financials, Real Estate, Communication Services and Consumer Discretionary.

Seyhun notes that these sectors are particularly sensitive to the trend of interest rates. So insider confidence in these cases has significance above and beyond just the companies in the sector, but also for the likely course of interest rates. His interpretation is that “insiders take the [Federal Reserve’s] current forward guidance and path of future interest rates (peaking around 4.75% in the middle of 2023 and coming down to 4.5% by the end of 2023) to be fairly sufficient to control inflation and bring the economy back in balance. Hence, insiders feel we are not likely to get additional surprises on the interest rate area from the Fed.”

The following table contains two companies from each of these interest-rate sensitive sectors that have experienced heavy net insider buying over the past three months.

Stock Sector AUDACY. INC. (AUD) Communication Services Globalstar. Inc. (GSAT) Communication Services Luminar Technologies. Inc./DE (LAZR) Consumer Discretionary VOXX International Corp (VOXX) Consumer Discretionary B. Riley Financial. Inc. (RILY) Financials Rocket Companies. Inc. (RKT) Financials APi Group Corp (APG) Industrials Applied Blockchain. Inc. (APLD) Industrials Bridgeline Digital. Inc. (BLIN) Information Technology CalAmp Corp. (CAMP) Information Technology American Assets Trust. Inc. (AAT) Real Estate BRT Apartments Corp. (BRT) Real Estate

Source: InsiderSentiment.com

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com

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Ukraine Egg King Faces $1 Billion Fraud Case in the Cowboy State

(Bloomberg) — Tucked below news of the Vienna zoo’s newborn orangutan, Austria’s top-selling newspaper carried a notice in June this year that would have been easy to miss.

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The announcement on page 17 of Kronen Zeitung, however, wasn’t for everyone. It was aimed at just one man: the Egg King of Ukraine, Oleg Bakhmatyuk.

“Gramercy Funds Management LLC and related funds and accounts claim that Oleg Bakhmatyuk and others committed fraud that affected Gramercy as the largest bondholder in UkrLandFarming and Avangardco,” it read.

The plainly-worded text in German and Ukrainian in a box under the picture of the baby ape was the latest twist in a sprawling battle that’s touched the Mediterranean island of Cyprus and the corn fields of Ukraine and is likely headed for a courtroom in the US’s least-populous state.

Gramercy, the emerging markets focused investment firm chaired by Mohamed El-Erian, alleges that Bakhmatyuk and his accomplices used complex schemes to siphon off almost $1 billion in assets from UkrLandFarming Plc to Cyprus and Wyoming, keeping them out of the reach of bondholders.

Bakhmatyuk, the 48-year-old owner of UkrLandFarming — one of the largest egg producers in Europe — filed a motion to dismiss the case, his first public acknowledgment of the proceedings.

The motion was rejected this month, and Gramercy also succeeded on Sept. 19 in getting a Cypriot court to grant a worldwide freeze-order on the assets. That potentially sets up a court battle in Cheyenne, Wyoming, between one of Ukraine’s most controversial oligarchs and the Greenwich, Connecticut-based money manager.

The case comes against the backdrop of a bloody war, with Ukraine — the breadbasket of Europe and a vital cog in global food supply — struggling to cope with disruptions in its agricultural production after Russia’s invasion. Several UkrLandFarming managers have been killed in Sumy in northern Ukraine and in Kyiv, a company spokesperson said in March.

The Bakhmatyuk side in an emailed response to questions said Gramercy was seeking to use vulture-fund tactics by going after the company that has been ravaged by war, noting that the fund was trying to jump ahead of other secured and unsecured creditors. Bakhmatyuk last week filed an appeal with the US Court of Appeals for the Tenth Circuit, arguing that the case was without merit and attempting to bring an end to the litigation.

‘Down with Sytnyk!’

Gramercy’s notice was placed in an Austrian newspaper because Bakhmatyuk moved to Vienna from Ukraine after being accused of embezzling 1.2 billion hryvnia ($32.8 million) in stabilization loans provided for VAB Bank, a lender he owned.

He has said those charges are politically motivated, with a press release from his company in April last year noting that they were fueled by the desire for “personal revenge” by Artem Sytnyk, then director of Ukraine’s anti-corruption bureau. UkrLandFarming accused Sytnyk of hurting its business through forced closures. For Easter last year, UkrLandFarming said it would send a billion eggs to supermarkets with the slogan “Down with Sytnyk!.”

Bakhmatyuk’s troubles with Gramercy, meanwhile, are rooted in Russia’s 2014 annexation of Crimea. That conflict complicated operations for Ukrainian agricultural companies that had Crimean units. UkrLandFarming’s subsidiary, Avangardco, was hit by the fighting in Crimea, where it had farms.

Before Russia’s annexation of Crimea, UkrLandFarming was Ukraine’s biggest farm company, managing an area the size of Delaware, and on the cusp of an initial public offering. The annexation of Crimea and the subsequent devaluation of the Ukrainian currency caused Bakhmatyuk’s companies to lose half their value, according to the defendants’ statements. Russia’s invasion this year resulted in the loss of millions of chickens at one of Avangardco’s poultry farms, the largest in Europe, the Wall Street Journal reported.

Gramercy, which has about $5.4 billion in funds under management, started buying bonds in Bakhmatyuk’s companies in 2011, and six years later held more than 41% of Avangardco notes and 28% of UkrLandFarming’s. The face value of the notes and unpaid interest, issued with a maturity date of 2018, is more than $360 million, the money manager said in its suit.

Worthless Bonds

Gramercy’s complaint is that in the years after 2014, assets were transferred from UkrLandFarming to shell companies in Wyoming and Cyprus. In the asset manager’s telling, around 66% of the company’s assets were moved out of the entities that issued bonds and into Wyoming trusts. When Gramercy went to claim its collateral after not being paid back by the company, it found there was little there, the fund said.

Unusually for a battle between debt holders and issuers, Gramercy is suing Bakhmatyuk in Wyoming under the Racketeer Influenced and Corrupt Organizations, or RICO, Act.

The law was passed in 1970 to deal with organized crime, and has been used to indict Italian-American mobsters, bond trader Michael Milken and several people affiliated with FIFA, the governing body of world soccer. In the Gramercy case, the defendants argue that it’s a garden variety business dispute that belongs in the London Court of International Arbitration instead of Wyoming.

So why the Cowboy State?

Sparsely populated, Wyoming — with fewer than 600,000 people — is in the Mountain West region of the US known for its wide open spaces, rugged terrain and geysers. License plates in the state feature a rider struggling with one hand to stay on a bucking horse while his cowboy hat is raised in the other.

‘Cowboy Cocktail’

A lesser-known fact, however, is that Wyoming has a curious company-structure legislation that allows corporate entities to obscure their ownership.

The “Cowboy Cocktail”, as the International Consortium of Investigative Journalists dubbed it in an article last December, is an arrangement of company and trust structures that help to cover up the true ownership of assets. A dozen clients who created Wyoming trusts were identified in the leaked Pandora Papers, according to the ICIJ.

Also named in Gramercy’s suit is a Cody, Wyoming-based businessman named Nicholas Piazza. The website for his firm, SP Capital Management, notes he was “included on the Kyiv Post’s list of Wealthiest and Most Influential Expats in 2012 and was named one of the Top 25 Trailblazing Business Leaders in Ukraine in 2016.” Part of his business is dedicated to using Wyoming’s company laws to help Ukrainians move assets to the state with near-total anonymity.

“Wyoming prides itself on its corporate protection and those structures have been used by American citizens for years,” Piazza said by telephone. “We find it kind of funny that Gramercy, based out of the Cayman Islands, is somehow directing shade at us for operating in Wyoming.”

While Gramercy’s headquarters are in Greenwich, a number of its investment structures named in the Wyoming suit are based in the Cayman Islands.

In the suit from Gramercy, Piazza is described as integral to Bakhmatyuk’s scheme and a longtime associate. The fund alleges that the two men conspired to rip assets out of UkrLandFarming and Avangardco, placing subsidiaries into a Cypriot group called Maltofex and Piazza’s TNA Corporate Solutions LLC in Wyoming.

“The defendants expropriated assets worth millions of dollars from UkrLandFarming for their personal benefit and thought they could hide them behind a veil of secrecy in Wyoming,” the asset manager’s suit says. “Gramercy intends to use the full force of the law to expose the wrongdoing of Bakhmatyuk and his accomplices.”

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Fed Officials Begin to Split on the Need for Speed to Peak Rates

(Bloomberg) — Sign up for the New Economy Daily newsletter, follow us @economics and subscribe to our podcast.

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Federal Reserve officials are starting to stake out different views on how fast to raise interest rates as they balance hot inflation against rising stress in financial markets.

With Fed target range now at 3% to 3.25% and only a few moves from reaching their forecast peak, officials are starting to speak differently about the urgency with which they need to get there.

Hawks like Cleveland Fed chief Loretta Mester say they must keep raising rates aggressively to win the battle against inflation even if that causes a recession. Vice Chair Lael Brainard has offered a slightly softer assessment while continuing to stress the need to tighten policy.

Brainard’s speech Friday — the first from Fed board leadership since officials met last week — said policy will need be restrictive for some time and avoid the risk of prematurely pulling back.

But she injected a note of caution about how fast they need to go, while discussing a number of ways in which the global rate-hiking cycle could spill over on the US economy.

Her San Francisco colleague Mary Daly also highlighted the cost of doing too much — as well as too little — to cool prices.

Their comments injected a slight variation into what has been a uniformed stream of insistence from regional Fed presidents declaring unflinching resolve to crush inflation.

The potential costs to the economy of are already being telegraphed in the form of falling asset prices. The S&P 500 declined 9.3% in September in the steepest monthly decline since March 2020 as Covid-19 spread.

Bank of America Corp. says credit stress is at a “borderline critical level” beyond which dysfunction begins. That’s something the Fed wants to avoid because market breakdowns are difficult to control and can accelerate downturns.

The divisions among officials showed up in their forecasts released Sept. 21 that showed 8 officials estimating they would finish the year with rates in a 4% to 4.25% range while nine were a quarter point higher.

One of the dividing lines, said Derek Tang, an economist at LH Meyer in Washington, is differing views on longer-run inflation expectation, with those taking more comfort in the stability of those gauges now saying the committee can take a step-by-step approach in getting to peak rates. Policymakers see that at 4.6% next year, according to their median estimate.

Brainard cautioned that it will take time for the full extent of tightening to bite down broadly across the economy, another way of arguing for some patience starting now.

“Uncertainty is currently high, and there are a range of estimates around the appropriate destination of the target range for the cycle,” she told a conference hosted at the New York Fed on financial stability. “Proceeding deliberately and in a data-dependent manner will enable us to learn how economic activity and inflation are adjusting to the cumulative tightening.”

That contrasts sharply with Fed hawks. In fact, Mester has argued aggressively against down-shifting into more deliberative policy, as officials have done in past tightening cycles when high uncertainty lead the central bank to inch rates up a quarter-point at a time.

At a time when inflation is too high, and the direction of inflation expectations is hard forecast, overshooting is better than undershooting, Mester says.

“Some results in the literature suggest that when policymakers confront more uncertainty either in their data or in their models, they should be more cautious in acting, that is, be more inertial in their responses,” she said in a Sept. 26 speech. “Subsequent research has shown that this is not generally true.”

“It can be better for policymakers to act more aggressively because aggressive and pre-emptive action can prevent the worst-case outcomes from actually coming about,” she added.

The debate about how quickly to get to peak rates is not a discussion about reversing course: Not a single official is talking about easing rapidly once they get there. Labor markets are strong with forecasters estimating another 250,000 jobs added in September, while the latest inflation report was discouraging.

Commerce Department data Friday showed the central bank’s preferred gauge rose 6.2% in the 12 months through August, down from 6.4% in July, but defying forecasters’ expectations for a greater moderation to 6%.

What ultimately determines the pace might be just whether markets remain orderly or not.

“They have made the decision they are going to tighten more rather than less, which guarantees they will over-tighten. How are we going to see it? You are going to see it in financial conditions,” said Julia Coronado, founding parter at MacroPolicy Perspectives.

“I don’t think they really understand” the risk of chaotic market breakdowns, she added. “When you say we are hellbent on being the fastest car on the road, that encourages a lot of positioning that is one way.”

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What all that stealing says about America

I recently went to my neighborhood drug store in New York City to buy some Tylenol and saw it was locked up on a plastic shelf—as was much of the store’s stock.

We’re used to seeing expensive jewelry secured behind glass or a few items behind convenience store counters, but lately the amount of seemingly ordinary items—soap, ice cream, detergent—locked up in stores—CVS, Best Buy, Home Depot, etc—is increasing. If you don’t see this where you live yet, you might soon. Or you might visit parts of America where it has become commonplace.

Is stealing from stores really increasing, and if so, by how much? Turns out hard data is tough to come by, but nationally, the problem might not be as bad as it seems. According to the 2022 National Retail Federation’s Retail Security Survey, the average “shrink rate” — otherwise known as inventory loss — last year was 1.4%, or roughly $94.5 billion out of $6.6 trillion in total retail sales. That’s roughly the same percentage as the last five years, the report found.

In the greater scheme of things, skeptics say that’s no big deal.

Maybe those shocking organized theft videos or the railroad bandits of LA make the problem feel overblown. But I don’t think it’s that simple. First of all, a significant portion of retail crime goes unreported. Another point is that these are broad-brush numbers. While in some localities shoplifting rates are flat, in others, i.e., New York, San Francisco, they may be soaring.

‘Organized retail crime has definitely been ticking up’

Who’s doing the stealing? “Three categories,” says Lisa LeBruno, senior executive vice president of the Retail Industry Leaders Association. “There’s the opportunistic shoplifter, the persistent habitual offender and then organized retail crime gangs or ORC,” she says.

What’s getting stolen? “CRAVED,” says Mark Mathews, vice president of research development and industry analysis at the National Retail Federation. “Which stands for items that are concealable, removable, available, valuable, enjoyable, and disposable.”

Companies used to be tight-lipped about thieving as it scares off Wall Street, customers and employees. Not so much anymore.

“Organized retail crime has definitely been ticking up over the last few years,” says Mike Combs, director of asset protection, organized retail crime and central Investigations team at The Home Depot. “During the pandemic, many would have thought it may have gotten better, but it actually got worse. It certainly affects the bottom line.”

Best Buy CEO Corie Barry said on an earnings call last November that the pressure from retail theft was showing up in the company’s financials, the Wall Street Journal reported.

Then there’s this from Rite Aid’s CFO this week, as reported by Fox Business: “I think the headline here is the environment that we operate in, particularly in New York City, is not conducive to reducing shrink…” Rite Aid reported a tough quarter on Thursday and its stock plummeted 28% that day. The company said that store closures, driven in part by excessive theft, were a factor.

And below is from a Target store in San Francisco per Yahoo Finance’s Brian Sozzi.

Locked up Tide

Locked up Tide

“We take a multi-layered approach to combating organized retail crime,” Brian Harper-Tibaldo, senior manager of crisis communications for Target, told Yahoo Finance. “This includes in-store technology, training for store leaders and security team members, and partnerships with local, state and federal law enforcement agencies as well as retail trade associations.”

Why are people stealing these days? That’s a tough one. To some degree it’s a reflection of our times. Simply put, America’s social contract is straining. Until recently we’ve been able to lay out goods—often in mammoth, big box stores with only a handful of employees. When our social contract is strong—i.e people are getting a fair shake—it’s a model that works. Now it seems more people are stealing instead. (BTW, our stressed social contract may be capping how far we can push this people-light, technology-heavy model. Last month Wegman’s ended its scan-and-go shopping app. Why? Shrinkage of course.)

I think wealth inequality has everything to do with all this. Think back to the so-called Public Enemies era in the 1930s, when bank robbers ran rampant across the land. That also coincided with the Great Depression. Less money in the hands of poor people and more stealing. Seems like cause and effect to me.

Also exacerbating the situation are some additional factors: The opioid crisis, a dearth of employees and now inflation. More stealing may make matters worse.

“This is a problem for all of us, because it raises prices for all of us,” says Mark Mathews, of the National Retail Federation. “This is an industry with very low margins, often below 2%. So, when you’re losing goods, the cost of that gets passed onto the customer.”

And locking up goods has its own downside for retailers as it can reduce impulse buying. If you have to wave down an employee to unlock the door, you might be less inclined to grab that Häagen-Dazs.

Does anyone benefit here? Online marketplaces benefit as consumers switch to e-commerce because shopping in stores with locked merchandise is too much of a hassle.

Who else benefits? Companies such as Indyme, InVue, RTC and Vira Insight, which produce among other things, those systems with clear plastic shelving, locks and buttons to summon employees. Also makers of turnstiles, security cameras, mirrors and security guards. Business is brisk here.

Yes, there are places in America where you can leave $5 at an honor-system farm stand for a dozen eggs, but in other places you need to get a store clerk to unlock a $5 tube of Crest. Like so many things in America these days, our social contract doesn’t seem well distributed.

This article was featured in a Saturday edition of the Morning Brief on Saturday, Oct. 1. Get the Morning Brief sent directly to your inbox every Monday to Friday by 6:30 a.m. ET. Subscribe

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