Daily Commentary

MarketMinder’s View: Kevin Warsh officially became Fed Chair last Friday, replacing Jerome Powell. While pundits have spilled far too many pixels ruminating on where he will try to steer interest rates, Warsh also has some ideas for broader Fed reforms. For instance, during last month’s Congressional confirmation hearings, he suggested dialing back all the press conferences and interviews. The article deems this a mixed bag. It acknowledges Fedspeak can stoke confusion instead of adding clarity, especially when policymakers veer from their prior guidance, but it also argues guidance and Fed forecasts are important policy tools. Overall, we think a more streamlined approach would be beneficial in theory, with actual results depending on the details and execution. Longer Fed statements came with a bigger balance sheet and more complicated (and convoluted) policy. The more Fed folks speak, the more opportunities there are for them to sow confusion and open the door to contradicting themselves. This is why former Fed head Alan Greenspan invented the art of Fedspeak in the first place, “mumbling with great incoherence” (as he put it) in order to avoid boxing the Fed into a corner. While this piece calls forward guidance a policy tool that can prevent bigger rate hikes, we see this opposite. By talking down the likelihood of rate hikes in 2021 and early 2022, the Fed ended up catching everyone by surprise with aggressive, steep hikes later in 2022. The U-turn, not the hikes themselves, sowed confusion and thus market volatility. The more the Fed defies its prior guidance, the more it diminishes its credibility. We see a lot of compelling evidence markets care more about credibility than transparency. So while we shall have to wait and see exactly how (and whether) Warsh amends the Fed’s communication protocols, we don’t think having fewer Fed utterances will be a net negative for investors.

MarketMinder’s View: The International Energy Agency’s head made headlines Monday warning oil shortages are days or weeks away, but what do oil-reliant companies say? As the title suggests, they are much more sanguine. European energy and airline companies are growing confident of avoiding jet fuel shortages during peak summer travel season thanks to several countries’ maximizing output, boosting energy imports and tapping strategic reserves (which reminds us, MarketMinder doesn’t make individual security recommendations). The article runs through a few examples, highlighting how business owners and government officials acted preemptively or reacted swiftly to the war’s clamping supply and sending fuel prices skyward. The EU’s decision to allow airlines to use US-produced kerosene seems to have helped greatly, with shipments already up. For investors, this helps show how prices are signals, incentivizing more production to meet high demand, or as one airline exec quoted here put it, “‘That kind of market price mobilises forces.’” Gearing a refinery to increase its kerosene yield isn’t easy, but higher margins make it well worth companies’ while, as the anecdotes here show. While this adaption isn’t necessarily news at this point, it also helps explain why forward-looking stocks began bouncing from the near-correction that accompanied war’s outbreak well before peace prospects emerged. They priced in all the worst-case scenario projections from the Strait of Hormuz’s closure, then moved on as reality gradually went better than feared.

MarketMinder’s View: There are several existing and perhaps soon-to-be publicly traded companies mentioned here, so please note MarketMinder doesn’t make individual security recommendations. Their mention is coincident to our highlighting a broader theme: With lots of buzz around a handful of high-profile Tech and Industrials firms reportedly going public soon, keep in mind “getting in early” on the next big IPO comes with its own risks. The article shows this by running through different ways investors can invest in private companies that might go public one day and explaining the potential pitfalls for each. For example, special purpose vehicles (or SPVs), private funds created to hold one specific asset, can be pricey and inefficient after management fees, upfront commissions and other costs eat into gains. ETFs boasting private assets offer more liquidity, but “federal regulations generally restrict illiquid securities to 15% of a mutual fund or ETF’s assets,” so you may end up with big sector or company concentrations, and their ETF holdings may be SPVs (see the aforementioned fees). Closed-end funds lack those regulatory limits but have a liquidity mismatch with their underlying holdings, and their market price “could vary greatly from the net value of their assets.” Some outfits tout crypto-based alternatives, but these stock “tokens” may prove invalid. And, as we have covered before, gaining early access through private markets introduces liquidity and transparency problems. All of these are worth considering before diving in. For those choosing to wait for the initial public offering (IPO), we would add that IPO often stands for “It’s Probably Overpriced.” As University of Florida Professor Jay Ritter’s research shows, most IPOs flop. Yes, there are some stories of investors hitting it big. But there aren’t many needles in that haystack. Always remember the underwriters’ goal is to maximize returns for themselves and early investors, not for people buying in on IPO day. Don’t let greed and fear of missing out on “the next big thing” push you into owning illiquid, overpriced investment vehicles. Keep your long-term goals front of mind and remember investing isn’t a get-rich-quick endeavor.