Shaky Tether and Non-transitory Inflation | The Daily Peel | 12/13/22

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• It happened. Scum Bag-Fraud vs. the SDNY is officially going down as a US attorney files criminal charges
• The average 30-year fixed mortgage rate has chilled out recently, continuing its decline for the fourth week in a row
• Investors rushed out of global equity funds last week, but it was nothing compared to the simultaneous ditching of US equity funds
• “Fight! Fight! Fight!” - The Pentagon to the Big 4 cloud providers

Rates, Inflation, and Yields - Oh My!

2022 has been the year the Fed pivoted…and I don’t mean from C-19 era monetary policy; I mean a total vibe shift not seen since pre-2008. We talk about it a lot, but with the most consequential CPI and Fed meeting yet (until the next one) coming up this week, it’s worthwhile to take a walk down memory lane.

Believe it or not, we entered this year with an effective Fed Funds rate of 0.08%. Right now, it sits at 3.83%—a 4,687.5% increase—in just 11 months!

If that was a stock, we’d all be rich. Unfortunately, all it has done is tank our stocks, murder the housing market, and make me cry on more than one occasion. Was it worth it?

Probably. Inflation began creeping up as far as last summer, and almost immediately, analysts and (surprisingly) economists rightly called that inflation was absolutely not transitory. The Fed needed a few minu—months to think about it and only stopped actively buying mortgages in March of this year.

CPI peaked at a median of about 9.22%, a level not seen since the pre-Volcker days of the high inflation early ‘80s. Like him, JPow declared war and went to work, jacking up the FFR at a rate never before seen in the history of the central bank.

Now, mortgage rates sit at well over 6%. Just a few months ago, that same rate was well below 3.5%. For context, a $350k house at 3.5% is $1,225/month. At 6%? That’s $2,100/month.

But despite all that demand destruction in housing, Powell has struggled to have that coincide with the real target: labor markets. The cost of labor (by wages) in the US has spiked since the pandemic began, a rare winner in the world of viral infestations. Still, this only serves to moon inflation even stronger.

And while last month we got a mild reprieve, with CPI falling to 7.7%, your guess is as good as mine for what gets dropped today at 8:30 am. Regardless, all signs point to another rate hike following on Wednesday. The question of a 50 bps hike vs. a 75 bps hike would’ve seemed ludicrous just a year ago. But then again, so would a bullish reaction to nearly 8% annual inflation. But hey, oil went negative, so…I guess anything is possible.

Source

Horizon Therapeutics ($HZNP) ↑ 15.49% ↑

• Through a field of acquisitions yesterday, Amgen’s (-0.67%) $27.8bn buyout of Horizon Therapeutics stole the spotlight as the top story.
• The far larger Amgen has been eyeing this deal for some time, looking to integrate Horizon’s rare disease drug repertoire into its own bottom line. Amgen faces expiring patents on key drugs like Otezla over the next few years, so the timing here is as clutch as David Ortiz in 2004.
• And investors weren’t even mad. Usually, after an acquisition, the buyer’s share price plummets, usually due to overpaying. Here Amgen’s 20% premium only led to a less than 1% fall, while Horizon spiked 15.5%. Can’t be mad.

Coupa Software ($COUP) ↑ 26.67% ↑

• Speaking of acquisitions, Coupa Software’s sellout to PE giant Thoma Bravo got investors excited too. Thoma Bravo plans to pay a massive 30% premium at $8bn to take the firm private, so we’ll just wish them luck.
• Shares of the cloud-based business management platform Coupa exploded during the pandemic. But since then, it’s been ugly. But but, this price decline is likely exactly what provoked deal-hungry Thoma Bravo to swoop in, and after today’s over 25% gain, no one’s complaining.
• Are all these acquisitions announced yesterday, including BDT’s buyout of Weber Inc, a sign of companies calling the bottom? No…it can’t be…