The Cost of Capital & The Need For Strong Balance sheets
Either Spend on CapEx or Become the Next Blockbuster
“There is a powerful case for the market mechanism, but it is not that markets are perfect; it is that in a world dominated by imperfect understanding, markets provide an efficient feedback mechanism for evaluating the results of one's decisions and correcting mistakes.”
― George Soros
Topics Covered:
FOMC recap
Cost of Capital
Companies That Will Benefit In This Regime From Our Equity Model
1.) FOMC Recap
As I mentioned Monday, “I believe Powell’s going to stick to his baseline from the “Semiannual Monetary Policy Report to the Congress” and the markets chug along.” the market did just that. The median FOMC participant continued to project three rate cuts in 2024 despite a 0.2pp increase in the median 2024 core PCE inflation projection to 2.6%. My interpretation is that Powell feels strongly about not delaying cuts for too long and is targeting either a June or July meeting for the first cut. In fact, the somewhat higher inflation forecast—which is now 0.2pp above estimates of 2.4%—lowers the bar slightly for incoming inflation data to meet the Feds expectations.
My 3 takeaways from Powell’s press conference:
Powell is not concerned about the firmer January & February inflation prints.
Powell noted the FOMC raised its 2024 GDP growth forecast meaningfully, due to the faster growth of labor supply and therefore not an argument against rate cuts.
FOMC participants think it will be appropriate to slow the pace of balance sheet runoff “fairly soon.”
I’m still a little more conservative than the street and believe we’ll get a July Cut instead of a June Cut while the S&P500 continues to rally. Take a look at the previous article for my full view.
2.) Cost of Capital
Many of you reading this most likely started your financial/Investment careers after the 2008 financial crisis and were blessed by the financial gods, with access to the lowest Fed Fund Rates and Prime Loan Rates in over 50 years.
Now let’s take a look at how good we had it in a table format with a breakdown of three distinct periods 1968-1996, 1997-2009, and 2010 -present
In the era of easy money between 2010-2022 (ending on Powell’s first rate hike), we witnessed the S&P +190% & Nasdaq +310% as well as two periods of rapid deployment of capital to China.
Storytime on how silly capital was being thrown around:
I remember doing a presentation on TSLA 0.00%↑ at Columbia University in October 2020 and the Company’s Chinese competitors…. Mind you the program was 87% foreign students from China. When I asked them if they heard of NIO 0.00%↑ or XPEV 0.00%↑ ALL of them were scratching their heads because they never heard of them! All I could remember as I was presenting was The China Hustle Documentary!
let's take a look at where they're trading now XPEV 0.00%↑ and NIO 0.00%↑
Those were my top shorts in 2022!
Back to Regular Programming
In the era of easy money, we witnessed a record number of IPOs especially in 2021 with the surge of SPACs & zombie companies that made absolutely no profits to service their debt while having access to easy financing.
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