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S&P 500 stock correlations to the market

Top 10 weights in the S&P 500 Index

Tech stocks

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Negative real bond returns

World stock markets

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60/40

Correlations

U.S. Large caps

Distressed Property Buyers Seek Out ‘Exceptional Bargains’

Distressed investors see one of the best opportunities in a generation to buy troubled US real estate assets as the commercial property crash continues to roil the market.

Private equity firms are already positioning to take advantage. About 64% of the $400 billion of dry powder that the industry has set aside for property investment is targeted at North America, the highest share in two decades, according to data compiled by Preqin.

The fear elsewhere is that a strong US bias will mean other parts of the world won’t draw the same demand, delaying the work out of troubled loans and properties there.

Shrinking Pool

While the US looks attractive to private equity buyers, the overall pool of PE capital for CRE has shrunk. That will throw up some problems for credit investors, for example.

The amount of money set aside for real estate debt strategies globally by the firms shrank by 26% to $56.1 billion through May from the end of 2021, Preqin data show. That could, for example, limit buyer interest in non-performing CRE loans from Korea to China as loans sour.

Investors shun riskier junk bonds as bankruptcy filings jump

Investors are selling out of the riskiest US junk bonds in favour of higher-quality debt, amid a surge in bankruptcy filings and concerns over how the weakest corners of corporate America will survive a prolonged period of high interest rates.

The move highlights how traders are growing increasingly concerned about weaker companies potentially losing access to funding and defaulting on their debt as borrowing costs stay high, and are instead opting to buy the debt of stronger companies for the yields on offer.

Analysts and investors said higher-grade borrowers typically have more flexibility to handle interest rates at their current 23-year highs, while lower-quality names are more vulnerable. 

This week’s fun finds

The Legacy of the Unforgettable ‘Beverly Hills Cop’ Theme Song

One of the most infectious earworms in movie history is back:

Doo, dah, doo-ba-dee doo-dah…

The zigzag synthesizer tune was the hit sound of “Beverly Hills Cop” and a signature Eddie Murphy character in 1984. Then it became a fixture in pop culture—quoted, sampled and remixed repeatedly over the decades, including in a mid-aughts ringtone craze. Now those bouncing, burbling ditties can be heard again in a new “Beverly Hills Cop” sequel, released July 3 by Netflix, and in a theme song performed by Lil Nas X.

The man who wrote and performed the original hooks was a pioneer of synthesizer music in film scores and helped define the sound of the ‘80s. He earned millions of dollars in royalties from “Axel F,” the theme song named for the character Murphy made famous. These days, composer Harold Faltermeyer is content if people just know that he, too, played a role in making “Beverly Hills Cop” memorable.

Stampede Pancake Breakfast - a Calgary tradition

Investment Team intern Shayan caused a "stampede" in the office with his moai. In honour of his hometown's tradition, he organized a pancake breakfast for the Toronto office so that those of us who couldn't make our way to Calgary could enjoy.

This week's interesting finds

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Inventory 

S&P 500 performance 

Momentum

U.S. equities

U.S. small caps

Mortgage renewals

Emerging markets vs. developed markets

IPOs

Government debt

Green Deal fatigue? How the European Parliament elections could affect EU climate policies.

The European Union (EU) likes to present itself as a decarbonization pioneer. Its ambition to make Europe the first climate neutral continent by 2050 has been translated into bold measures that challenge the economic and social status quo. The European Green Deal, as the cornerstone climate project of the past European Commission approved in January 2020, set in motion key energy and environmental legislations and established strategies for different sectors. 

But now, climate-skeptic voices and opposition to climate efforts are gaining political weight, as shown by recent trends in the European Parliament election results earlier this month. While Europeans still see climate change as a major challenge, discontent with financial developments and concerns about defense and security rank even higher in their priorities, according to the latest Eurobarometer polling. 

The risk of a replay of the lost decade in US stocks

No economic model would have predicted stocks would be at all-time highs and credit spreads would be very narrow after the Federal Reserve raised its benchmark interest rate by 5.25 percentage points since early 2022. Yet, that is exactly what has happened.

The Fed seems ready to declare victory in its fight against inflation, but the outperformance of highly speculative investments suggests that even such a sharp increase in interest rates hasn’t been a big enough mop to soak up the excess liquidity sloshing around the financial markets.

There is evidence that speculation could again be curtailing the Fed’s inflation-fighting power, but the central bank seems blind to this. Investors shouldn’t be.

This week’s fun finds

What Competitive Eating Does to the Body

Some may see the annual Coney Island, N.Y., contest as an act of defiance, capturing the holiday spirit. When the British taxed our sugar, we fought for independence. When modern-day doctors tell us to eat fewer carbs that turn quickly into blood sugar, we devour as much as possible on ESPN—and walk away seemingly unscathed. 

But this gastric rebellion could damage the body, during competition and over the long haul.

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This week in charts 

Equities 

Real estate

Corporate taxes

China

Macro

Leveraged loans 

Japanese yen falls to weakest level since 1986

The Japanese yen has fallen to its weakest level against the US dollar since 1986, putting traders on alert that officials might again be forced to step in to support the ailing currency. 

The yen slipped 0.4 per cent against the dollar to ¥160.3 on Wednesday, past the level it reached in late April before Japan’s finance ministry spent a record ¥9.8tn ($62bn) to boost the currency. 

Analysts expect Japanese officials to intervene again if the yen continues to decline, but warn that they will be reluctant given the cost of intervention and the relatively shortlived impact of previous efforts. 

Japan’s government will not want to let the currency fall too much further because the weak yen has pushed up living costs and Prime Minister Fumio Kishida will be keen to garner support ahead of his Liberal Democratic party’s leadership election in September, Halpenny added. 

The yen has fallen 12 per cent against the dollar this year as investors scaled back their expectations for Federal Reserve interest rate cuts, driving the US currency higher. Although the Bank of Japan ended eight years of negative interest rates in March, it has been cautious about the prospect of further increases in Japanese borrowing costs. 

Japanese officials have said that they do not defend the currency at a specific level, and have tended to intervene following sharp rather than gradual declines. Some analysts expect they may wait to intervene until after upcoming elections in France and the release of US data that could support the yen if there is further evidence that the world’s largest economy is slowing. 

Americans' pandemic savings are gone - and the economy is bracing for impact

The pandemic savings cushions that helped Americans weather high prices in recent years have worn through, contributing to a loss of consumer firepower that’s rippling through the U.S. economy. 

Delinquencies are rising. Executives are flagging caution among shoppers in recent earnings calls, and retail sales barely increased in May after falling the month prior. Economists forecast solid inflation-adjusted consumer spending in data out Friday, helped by lower gasoline prices, but that would follow an outright decline in April. 

The resilience of American consumers — and their willingness to spend despite rising prices and high borrowing costs — has been a pillar of the unwavering strength of the U.S. economy in recent years. A healthy labour market has played a key role, but so has the roughly US$2 trillion in excess savings Americans accumulated during the Covid-19 pandemic. 

Those excess savings have been fully depleted as of March, according to the U.S. Federal Reserve Bank of San Francisco, heightening concerns about the durability of consumer spending. 

Employers added 272,000 jobs in May, surpassing all economists’ forecasts, and layoffs are low. But the pace of hiring has cooled, and the unemployment rate has begun to edge higher. 

For now, that resilient labour market is keeping consumers afloat and giving the Fed the space to keep interest rates high to tame inflation, and economists say household balance sheets overall are healthy. But policymakers, including Fed Governor Lisa Cook earlier this week, acknowledge the growing financial strain in some pockets of the economy. 

It doesn’t help that borrowing money isn’t likely to get cheaper anytime soon. Fed officials have signaled they plan to keep interest rates at current levels, a more than two-decade high, until they gain more confidence inflation is continuing to cool. 

This week’s fun finds 

Maya’s moai was the schnit(zel) 

Member of Compliance Maya didn’t break any rules when she shared her schnitzel, falafel and other dishes from her favourite café! 

Wild elephants may have names that other elephants use to call them 

Wild elephants seem to address each other using distinctive, rumbling sounds that could be akin to individual names. 

That’s according to a provocative new study in the journal Nature Ecology & Evolution, which was inspired by earlier work showing that bottlenose dolphins have signature whistles. 

Elephants’ trumpeting is well known, but [Cornell University biologist Mickey] Pardo says trumpeting is an abrupt noise that’s more like screaming or laughing. He figured that if elephants had names, they’d be somehow encoded in elephants’ constant, low-frequency rumblings. 

“The rumbles themselves are highly structurally variable,” says Pardo, who conducted this research while working at Colorado State University. “There's quite a lot of variation in their acoustic structure.” 

And elephants make these particular noises in all kinds of contexts — everything from greeting family members to comforting a calf to staying in touch with relatives over long distances. 

So Pardo and some colleagues analyzed recordings of 469 rumbling calls that wild African elephants had made to each other in the Amboseli National Park and Samburu and Buffalo Springs National Reserves in Kenya between 1986 and 2022. 

For every recorded call, the researchers knew the identity of the elephant making the rumble as well as, based on the context, the elephant that was being addressed. 

If elephants had names, not every call would be expected to contain one — just like people don’t use each other’s names every time they speak to each other. 

Still, the research team used machine learning to see if the rumbles contained identifying information — essentially, a “name” — that their computer model could learn to use to accurately predict the receiver of a call. 

What they found is that their model was able to identify the correct elephant recipient of the call 27.5% of the time, which is much better than it performed during a control analysis that fed it random data, says Pardo. 

This indicates, he says, that “there must be something in the calls that's allowing the model to figure out at least some of the time who that call was addressed to.”

This week's interesting finds

Investment Team 2024 summer reading and listening list 

School’s almost out and we wanted to make sure everyone’s ready for the summer with book, blog and podcast recommendations from our Investment Team. The list has biographies, histories of humanity and financial markets, self-improvement tips and all you could ever want to know about the business of semiconductors. We’ve even included some podcasts to make those summer road trip kilometers fly by. 

This week in charts

Wealth

10 largest companies in the U.S. 

S&P 500 Index

Renewable energy

U.S. office space

Mortgages

Momentum

Value

Rating agencies give high marks to bonds financing defaulted properties

Credit agencies have mis-rated more than $100bn of commercial real estate debt in an increasingly popular segment of the market, say mortgage veterans, including at least a dozen deals that maintain top investment-grade ratings even though the borrowers are in default.

The questionable ratings are cropping up in a portion of the mortgage bond market that has evolved in the past decade or so, in which deals are backed by one loan or mortgage on a single major office building rather than on a bundle of multiple properties.

Single-loan deals now make about 40 per cent of the nearly $700bn in outstanding commercial mortgage bonds. Developers like them because they can get better terms than simply borrowing from a bank. Investors like the deals because they tend to have floating interest charges, which has insulated them from the high rate environment of recent years. 

Early repayments shrink China’s mortgage-backed securities market by 65%

China’s residential mortgage-backed securities market has shrunk by almost two-thirds over the past year after a wave of early repayments from property owners that highlight the country’s constrained investment landscape.

In March, mortgages backing securitisations were repaid at the highest level this year, which would equate to a prepayment rate of 43 per cent on an annualized basis — about four times the typical rate.

The securitisation industry, in which assets are packaged together and sold as bond-like instruments to investors, provides a window into China’s vast Rmb38tn mortgage market at a time when the property sector has struggled to reverse a multiyear slowdown.

The nationwide pre-payment rate on residential mortgage-backed securities initially leapt as high as 63 per cent on an annualised basis in September, when major state-owned banks unveiled cuts to mortgage interest rates that analysts say drove refinancing.

The move was one of several attempts to support the property market after a funding crisis among developers emerged in 2021 that weighed heavily on construction and the wider economy.

This week's fun finds

A 342-mile journey to the best McDonald's in the world

Right now, tucked between two high desert ridges filled with scrub brush and snakes that bake away in the California sun is a McDonald’s where the food tastes better than anywhere else in the world.

To truly experience what may be the best fast food hamburger of your life, you have to start 342 dusty trail miles away in Campo, California, where the Golden State meets Mexico — and bring a good pair of walking shoes.

This week's interesting finds

This week in charts 

Electric vehicles

Rental housing 

Commercial real estate

U.S. property loans

Semiconductors

Copper production

Solar industry

Provincial migration

The Little-Known Secret to the Success of Secondaries 

Over the past decade the growth of the private equity market in secondaries — LP interests in funds sold to other investors — has skyrocketed, tripling to more than $130 billion in transactions each year. There are even funds dedicated solely to acquiring investor stakes in existing private equity portfolios, including a mammoth $22 billion one launched by Blackstone last year. 

These secondaries have also posted the highest returns of any private asset class, according to one recent analysis. But critics suggest this action is due to a sleight of hand — the ability for buyers to mark up such assets almost immediately after purchase.

But secondaries have another, little discussed, advantage for buyers since the market began to take off in 2015. That year, the Financial Accounting Standards Board decided in a new rule that after purchasing LP interests at a discount, investors can mark them up to the NAV of the private equity fund. 

The surge of interest in secondaries has happened at a time when investors are strapped for cash as they are receiving more capital calls from private equity firms than they are getting back in distributions from funds, according to a Preqin analysis reported by the Financial Times. It has also been spurred by the growth of evergreen funds, which have no finite end date and provide only limited distributions. 

Chinese companies rush to tap US convertible bond market 

Big Chinese companies are turning to the convertible bond market as a way of raising cheap cash from US hedge funds while circumventing investor concerns about political tensions between the two countries.

Traditional US equity fundraising routes such as initial public offerings and follow-on share sales have been almost completely shut to Chinese companies since the disastrous listing of rideshare group Didi in 2021, which delisted the following year after regulatory scrutiny.

In recent weeks, however, a string of large Chinese technology groups have raised billions of dollars through issuing convertible bonds. Such debt typically pays a lower coupon than conventional bonds, but can be converted into stock if a company’s valuation rises to a pre-agreed level. 

This week’s fun finds 

EdgePoint celebrates Philippines Independence Day with a Filipino moai 

Wednesday, June 12, was the Philippines Independence Day. To celebrate, Juan and Miguel treated the team to some rich and flavourful Filipino dishes.

Filipino food is one of the original fusion cuisines, with influences including Spanish, Malaysian, Chinese and American traditions.

Here’s some quick Tagalog vocab that resonates well with EdgePoint:

Pamilya: family
Barkada: a group of friends or clique 

Denmark recalls Korean ramen for being too spicy 

Denmark has recalled several spicy ramen noodle products by South Korean company Samyang, claiming that the capsaicin levels in them could poison consumers.

It's unknown if any specific incidents in Denmark had prompted authorities there to take action. 

*Note – In 2019, we tried some spicy Samyang noodles in the office. Take 1 went awry as we left too much water in our bowls and it wasn't spicy at all. We followed the instructions on Take 2 and, while we were sweating, we're surprised the heat levels would merit a recall.