This week's interesting finds

This week in charts

U.S. retail bankruptcies

Inflation 3% or higher

Historical Fed cutting cycles

Average fixed income prices

BBB bonds on downgrade watch

U.S. leveraged loans

Housing affordability

Rail delays

Nasdaq 100

Big Tech exposure

Cargo Floods Into US West Coast to Beat Tariffs

The ports of Los Angeles and Long Beach, which account for roughly a third of all US container imports, have seen a surge this summer just shy of an all-time high reached in May 2021.

Back then, a wave of inbound consumer goods caused supply bottlenecks on land and a queue of cargo ships waiting for a berth offshore was getting longer by the day.

This time around, cargo is moving more smoothly through the twin ports, as businesses bring goods in ahead of potential tariff increases and the threat of a dockworker strike hangs over alternate ports.

The Port of Los Angeles processed more than 960,000 20-foot container units in August, marking the trade gateway’s busiest non-pandemic month ever. 

Canada opens new critical minerals hub in push to end China’s dominance

North America’s latest rare earth processing centre opens in the city of Saskatoon this week, part of an effort to counter China’s global dominance in the supply of the critical minerals needed for the green technology, defence and aerospace industries.

The Saskatchewan Research Council, a 75-year-old government-funded scientific research and development institute, has built the commercial venture that will process rare earth minerals from Australia, Brazil and Vietnam until large-scale Canadian mines are operating.

The SRC Rare Earth Processing Facility marks a small but important step in western countries’ efforts to undermine China’s dominance in the critical minerals industry.

China controls about 60 per cent of the world’s rare earth mining production, but close to 90 per cent of processing and refining, according to the International Energy Agency. Rare earths are a set of 17 elements commonly found in the Earth’s crust but are hard to extract affordably in large quantities.

The Saskatchewan centre’s opening comes as a slump in rare earths prices over the past two years has knocked the business case for projects that can challenge China’s dominance over the minerals essential for electric cars and wind turbines.

Over the past four years, the US Pentagon has invested close to $1bn around the world in rare earths projects through the Defense Production Act — a cold war-era tool used to guarantee the supply of materials and technologies essential to the US’s economy and defence.

Washington has invested tens of millions of dollars in rare earths projects in its northern neighbour as part of these efforts to secure vital minerals.

This week’s fun finds

The EdgePoint soccer team played its season finale, marking the end of an amazing two-year run! Over the past two years, we had participation from various departments across the company: Investments, Sales, Operations and Investment Analytics - and from a diverse range of age groups, including interns just out of school and industry veterans with 30 years of experience. Trophies and medals remained elusive, but we took the win on team culture and chemistry! Stay tuned for updates on the EdgePoint basketball and volleyball team!

This Brazilian dog is a footvolley star. He teaches beachgoers how to play their own game

Rio de Janeiro’s main beaches bustle with commotion on sunny weekends. But activity ground to a near standstill on one stretch of sand. People held up their phones to record athletic feats they’d never before witnessed, or even imagined.

The game? Footvolley, a combination of soccer and beach volleyball. The athlete? A 3-year-old border collie named Floki.

This week's interesting finds

This week in charts

Equity drawdowns

Bull markets

Median index returns

MSCI All Country World Index performance

U.S. vs. Europe outperformance

Household spending

Restaurant spending

Home improvement

Disruptive technologies

Computer processing power

Companies issue record level of US debt to avoid market turbulence and election risk

Companies issued record volumes of US debt this week as they moved to head off possible volatility from closely watched economic data, a Federal Reserve meeting and a fast-approaching presidential election.

Twenty-nine US investment-grade bond deals hit the market on Tuesday alone following the Labor Day holiday, data from LSEG shows — the highest daily number on record.

Another burst of activity on Wednesday took issuance over those two days to just under $73bn, the largest figure in LSEG records going back 20 years. More blue-chip deals followed, taking total borrowing across 60 high-grade issuers to almost $82bn — marking the busiest week since May 2020.

Recent borrowing has spanned various sectors, with a $2.5bn deal from Ford Motor Credit, a flurry of bond sales by banks, a $750,000 deal from Target and a $4bn deal from Uber, which marked its first such transaction as an investment-grade company after being upgraded last month.

Investment-grade borrowers typically rush to tap lenders in early September. But senior debt bankers said the record-breaking issuance this week also reflected a desire to get ahead of any potential volatility sparked by economic data or the US election in early November.

Interest Payments Eating Up Canadians’ Incomes by Most Since 1992

The interest-only portion of households’ debt payments represented 9.59% of their disposable incomes in the second quarter, Statistics Canada reported Thursday.

That’s the highest level since 1992, and may capture the peak impact of what’s proved one of the fastest run-ups in interest burdens in a generation — in the first quarter of 2022, the interest-only portion of households’ debt payments represented just 5.86% of income, a record low in data going back to 1990.

This week’s fun finds

Prith, a member of the finance team, spiced things up in the Toronto office this week by hosting a South Asian Moai. No need to apologize for the short notice or “late” arrival, the food was delicious.

How Dave Matthews Band Tour Photographer Sanjay Suchak Meshes His Two Loves

A perfect moment is elusive: it’s hard to predict, hard to describe, but he’ll know it when he sees it. 

Here, Sanjay takes us inside the process behind how he works, including a photograph that changed his career; how creativity is an exercise that you can practice everywhere (even in the shower); and why he believes that borrowing like an artist is critical for mastering your craft, no matter what stage you’re at in your career. 

This week's interesting finds

This week in charts

Market capitalization

International valuation discount

S&P 500 valuations

Correlation

Volatility

ChatGPT launch

Historical recessions

Money-market funds

Global junk bonds

Household allocation to stocks

Past performance is a public enemy

In 13 of the past 18 years, not a single US stock that was a top-ten performer in one year also made the top ten in the next. In four of the other five years, only one managed the feat. In the other, a barely better three did.

Even staying in the top 100 is rare. An average of 15 companies per year managed to be in the top 100 for two consecutive years.

The odds of a repeat appearance in the top ten or top 100 two or three years down the line are similarly low.

It’s not even that they still do well but drop back from the glory stakes. In 14 of those 18 years, top-ten performers dropped to the bottom half of the performance rankings in the next year, on average. They were more likely to be among the worst-performing stocks than the better ones.

The typical drop in ranking has been savage.

Similar trends exist in other markets. In both Japan and the UK, in 11 out of 18 years, top-ten performers fell to the bottom half of the performance distribution in the next year. In Germany, it happened in all but four of the last 18 years.

It’s human nature to back winners. Hype is exciting! That’s why value investing is so psychologically hard to do in practice. It involves buying the losers, the unloved stocks.

More generally, the charts above show why investors should be cautious about chasing performance. Strong gains will tend to stretch valuations relative to fundamentals like earnings. Share prices start to bake in ever more optimistic expectations. At one point, Tesla traded on a valuation of over 200 times consensus forecasts for its next 12-months’ earnings (today it is on 77x). The erstwhile Magnificent-7 collectively are twice as expensive as the rest of the market, in terms of a multiple of next-12 months’ earnings.

Some companies may be able to deliver on these expectations (identifying which is the hard part). Many will not. And it can only take a small miss on earnings or a small change in the external environment – as happened this month – for an outsized share price reaction from the “hot stocks”.

The companies that win in the long run are often not the ones that are the best performers in any one year but the ones that can grow sustainably in the long run. Several years of good results and performance can easily compound over time to deliver better investment returns, in a less helter-skelter way, than if you are tempted to chase the best performers.

Momentum has been a popular investment strategy in recent years, but naively glory hunting is likely to result in high costs and mediocre returns. Don’t believe the hype.

This week’s fun finds

Common food dye found to make skin and muscle temporarily transparent

Researchers have peered into the brains and bodies of living animals after discovering that a common food dye can make skin, muscle and connective tissues temporarily transparent.

Applying the dye to the belly of a mouse made its liver, intestines and bladder clearly visible through the abdominal skin, while smearing it on the rodent’s scalp allowed scientists to see blood vessels in the animal’s brain.

The researchers describe the process as “reversible and repeatable”, with skin reverting to its natural colour once the dye is washed away. At the moment, transparency is limited to the depth the dye penetrates, but Hong said microneedle patches or injections could deliver the dye more deeply.

This week's interesting finds

This week in charts

Interest rate sensitivity

Valuations

Capex

S&P 500 Equal Weight Index vs. S&P 500 Index

U.S. equity ownership

100 Best Companies to Work for

Entry price dictates return

Yield comparison

Investment allocations

Consumers

PBoC’s $56bn debt purchase sparks talk of bond market intervention

China’s central bank purchased Rmb400bn ($56.3bn) of long-dated sovereign bonds on Thursday, a move that traders interpreted as preparation to directly shore up bond yields in its booming debt markets.

The People’s Bank of China said it bought Rmb300bn worth of 10-year notes and Rmb100bn of 15-year notes from primary dealers, which had been sold by the Ministry of Finance to roll over maturing bonds only earlier in the day.

Analysts said the move, which stops the bonds from being traded in the market, further fuelled speculation that China’s central bank will soon intervene in the bond market to prevent an eventual snapback that could trigger Silicon Valley Bank-style losses in the financial system.

Chinese debt has rallied this year as global investors bet that Beijing will be forced to stimulate consumer demand in the world’s second-largest economy.

But the PBoC has repeatedly warned that falling yields — which move inversely to prices — risk provoking a liquidity crisis in the banking system. Earlier in the summer, the PBoC said it was ready to directly buy and sell in the market for the first time in decades to prevent a sharp fall in long-term yields.

“The PBoC is trying to engineer the yield curve”, said Wei Li, head of multi-asset investment for BNP Paribas in China, who described the buying action as a “sizeable amount”. “Now they have a lot more long-term debt on hand [because] speculators are betting against the central bank,” Li added.

Traders’ expectations that the central bank would soon buy and sell sovereign notes were fuelled by the PBoC’s creation of a new section on its website called “notices on the purchase and sale of sovereign bonds”.

Chinese authorities have been concerned about the yields on longer-dated debt as it is a source of funding for financial institutions such as pension funds. 

Analysts said that purchasing the bonds gave the central bank the flexibility to sell at a later date, influencing the prices of 10-year to 15-year bonds. Selling long-dated debt in the market would raise yields.

Buy Now Pay Later Beats Steep Discounts for Private Fund Sellers

Investors looking to offload their stakes in private funds are letting buyers push back their payments by months rather than accept a big discount on the price.

They’re increasingly using “deferrals”, which allow buyers to make part of the payment upfront and the rest at an agreed date in the future. As elevated interest rates erode returns for private equity and private credit funds, making them less attractive, buyers have been able to push for increasingly appealing terms.

“We’re seeing much more back-weighted deferred payments and terms stretch out to 18 months from a year,” said Richard Chow, managing director at PJT Park Hill, an alternative asset advisory firm. The instrument is an “extremely powerful mechanism” to help sellers get a better price, said Chow, who was speaking specifically about the private equity market.

Deferrals have become more common in the past several years and terms are now more borrower-friendly. A survey this year of 100 secondary-market participants conducted by private markets advisor Campbell Lutyens found that 63% of respondents used deferrals in 2023, up from 50% the previous year. More than half of transactions had at least 60% of the full payment deferred, a 17 percentage points increase from the 2022 figure.

The trend is a symptom of the lack of liquidity investors are suffering due to a sluggish M&A environment. Despite green shoots with some major deals this year, the private equity machine has rebounded at a slower pace than initially expected. Speakers at private equity’s big meet up this June painted a dreary picture of returns.

Private equity funds have cast around for different ways to return money to their investors, including tapping private credit for fund-level financing. However, many owners of positions in private funds are taking matters into their own hands by turning to the secondaries market, where slices of private funds can be bought and sold.

Still, pricing data indicates that the deferral strategy is effective in helping sellers avoid having to offer large discounts. The percentage of net asset value that buyers paid for private infrastructure, credit and buyout funds ticked up in the first half of the year, according to a Secondary Market Insight report published by PJT Partners.

It may also be helping to keep the market active. Secondary market volume reached $70 billion in the first half of 2024, a 40% increase on the same period the previous year, according to the PJT report, which estimates that volumes will reach $145 billion for the full year.   

This week’s fun finds

EdgePoint held this year’s fantasy football draft this week and also presented a trophy to last year’s league winner, Derek. It’s the first year of the trophy’s existence, but it lists previous winners (with room for future names).

Fruit and alcohol? Chocolate and cheese? The surprising science of food pairing

For some, recipe writing is an art, born of intuition and pragmatism. But like most disciplines, the culinary world has become susceptible to the pull of data.

In recent years, food scientists and chefs have begun studying the flavor compounds that appear in certain ingredients and searching for similarities elsewhere. Sites like Foodpairing.com even offer paid AI services to chefs looking for new combinations, as well as to customers seeking to better understand their own palates.

The results have been surprising. For example, chocolate and blue cheese share more than 70 flavor compounds (though that doesn’t mean I’ll be trying this brownie recipe anytime soon). Other combinations are perhaps more predictable: white wine and parmesan cheese, for instance, share a huge number of compounds – in fact, dairy products in general and fruits are close in flavor chemically to alcoholic drinks. Meanwhile, mushrooms, long understood as a scientific wonder, are isolated – they don’t share a statistically significant number of flavor compounds with anything.

Four researchers in the physics department at Northeastern University in Boston set out in 2011 to map out our flavor networks. They wanted to understand what patterns might appear in our food combinations and whether they can be attributed to anything other than individual taste.

They started out with two huge American recipe sites, epicurious.com and allrecipes.com. Wanting to avoid a western interpretation of “world cuisine”, they added menupan.com, a Korean site. In total, they looked at 56,498 recipes, grouped into cuisines from different geographical regions (North American, western European, southern European, Latin American and east Asian).

In the end, they found that North American and western European recipes have a lot more compound-sharing pairs than would be expected by chance alone. But in east Asian dishes, the trend was the reverse – the more flavor compounds shared by two ingredients, the less likely for them to be used together in the same recipe. Just why that might be remains a mystery – but we’re a little closer to understanding the connections our brains make when we open the fridge door.

This week's interesting finds

EdgePoint’s journey – the first 15 years

While a lot has changed over that time, our investment approach and commitment to compounding our clients’ wealth remain the same. We’re looking forward to the next 15 years helping our partners reach their Point B. 

This week in charts

Consumer spending

Apparel and grocery prices

Customers by apparel tier

Customers by restaurant tier

Electricity consumption – data centres

Electricity consumption per request

China’s population growth

Start-up shutdowns

Emerging economies

Start-up failures rise 60% as founders face hangover from boom years

Start-up failures in the US have jumped 60 per cent over the past year, as founders run out of cash raised during the technology boom of 2021-22, threatening millions of jobs in venture-backed companies and risking a spillover to the wider economy.

According to data from Carta, which provides services to private companies, start-up shutdowns are rising sharply, even as billions of dollars of venture capital gushes into artificial intelligence outfits.

Carta said 254 of its venture-backed clients had gone bust in the first quarter of this year. The rate of bankruptcies today is more than seven times higher than when Carta began tracking failures in 2019. 

The collapses are part of a painful adjustment for start-ups triggered by interest rate rises in 2022. VC investment into early-stage companies has plummeted, while venture debt has diminished following the collapse of Silicon Valley Bank last year, leaving many start-ups stranded.

Founders are now facing the hangover. The jump in bankruptcies is due to the fact that “an abnormally high number of companies raised an abnormally large amount of money during 2021-2022”, said analysts at Morgan Stanley in a recent note to clients.

Private Credit Managers Are Helping Banks Keep Risky Clients

In the market for private credit, managers are increasingly partnering with banks to help them maintain lucrative contracts with risky oil, gas and coal clients.

It’s a model that allows banks to continue doing deals in areas like commodity trade finance, where exposures might otherwise clash with European restrictions on fossil fuels and capital requirements. By sharing risky exposures with private-credit managers, banks are figuring out how to stay on the right side of regulations without losing access to lucrative commodities markets.

Banks in Europe are adjusting to the region’s shifting regulatory landscape, which has brought stricter climate rules than exist in other jurisdictions. BNP Paribas SA, the European Union’s biggest bank, and ING Groep NV, the largest lender in the Netherlands, are among financial firms to have stepped up restrictions on fossil-fuel clients in lending and bond underwriting. ING has also announced its plans to cut back its oil and gas trade finance.

This week’s fun finds

Neeti, a member of the trade operations team, treated her fellow partners to a delightful Italian Moai. Italian cuisine has always been one of her favourites — not just for its delicious flavours, but also for the rich culture and tradition behind it. From the fresh ingredients to the time-honoured recipes, Italian food has a way of bringing people together and creating memorable experiences.

Born of the Indian Ocean

Although an island, Madagascar has never been isolated. Situated in the Indian Ocean, at the crossroads of trade networks, its people have long had close ties to Asia, Africa, and Europe. Nowhere is this more visible than in their vibrant textile arts, which continually incorporate new fibres, dyes, and decoration. Traders from Indonesia settled the island from 300CE. They brought with them textile styles, colours, and techniques that are recognizably Southeast Asian.