This week's interesting finds

This week in charts

Interest rate cuts

Unemployment rates

Manufacturing GDP Per Capita

T-bill issuance

December Nonfarm payroll above expectations

S&P 500 sector performance by political outcome

30-year government bond yields

U.S. 10-year yields before and after rate cuts

Equity market concentration

Magnificent 7 market cap

2024 price return performance

S&P 500 price-to-earnings ratios

2-year calendarized S&P 500 performance since 1928

Car companies have an infuriating software problem

Last month, my car went into the shop for its third software-related recall in six months. Once again the friendly guys at the dealership were unable to install the necessary update on their own. Instead our now-undriveable SUV sat on their lot, awaiting its turn with experts at BMW headquarters. The queue took four days.

That delay was both painful and pointless. Automakers learned long ago to have the necessary parts and labour on hand before calling in a vehicle for a physical recall. Surely a company that claims to have 9mn fully upgradeable cars on the road already can set up an equivalent process for software.

Managing such updates is only going to grow more important with the spread of electric vehicles and increasingly sophisticated digital information and safety systems in petrol-driven cars. Software fixes made up 15 per cent of US recalls last year, up from 6 per cent five years ago, according to National Highway Traffic Safety Administration data.

BMW’s three US software recalls last year put it ahead of many rivals, NHTSA records show. Ford had the most overall with 19, followed closely by Chrysler. Tesla had the highest share with 50 per cent of its 16 recalls requiring a software fix. That is not surprising given that electric vehicles rely far more on software and have fewer parts than internal combustion engines.

Software woes have delayed recent launches at Volvo and General Motors, among others. Volkswagen executives grew so frustrated with their internal software development that they signed a $5bn tie up with Rivian last summer.

Traditional carmakers struggle with updates for the same reason big banks have spent billions modernising back office technology: sprawling legacy systems. While Tesla started with a clean slate, incumbent carmakers have to wrangle old electrical systems and production lines, cross firewalls and integrate software code written by suppliers.

The rewards for getting this right are considerable. As more cars offer snazzy screens and infotainment systems, and EV battery technology improves, carmakers will need to find new ways to differentiate themselves from their rivals.

Luxury goods makers have already shown that making customers feel they are getting something special is crucial to convincing them to pay extra. Done properly, software updates can strengthen the ties between carmaker and customer, maintaining the regular contact that oil changes and maintenance checks used to provide.

This week’s fun finds

For the first time at EdgePoint, a partner created their own hot sauce for others to try. The two orange habanero sauces were less spicy with a sweet mango flavour, while the two green habaneros brought the heat (an unlabelled bottle not pictured). We’re hoping she’ll bring in more for the office fridges!

We also sampled two hot sauces from Truff. Neither were incredibly spicy, but the truffle flavour really came through.

When we lose weight, where does it go?

The world is obsessed with fad diets and weight loss, yet few of us know how a kilogram of fat actually vanishes off the scales.

Even the 150 doctors, dietitians and personal trainers we surveyed shared this surprising gap in their health literacy. The most common misconception by far, was that fat is converted to energy. The problem with this theory is that it violates the law of conservation of matter, which all chemical reactions obey.

This week's interesting finds

This week in charts

Global debt levels

Sources of return

2024 style box performance

Private equity

Yield curve impact on small & mid caps

Intra-year declines vs. calendar year returns

Stocks outperforming the S&P 500

Gold

Returns by asset class

Will weight-loss drugs lead to upheaval in the sugar market?

So-called glucagon-like peptide-1 receptor agonists (GLP-1s) contained in such drugs as Wegovy, Mounjaro and Ozempic curb users’ appetites and are being hailed as game changers for tackling obesity and potentially a range of other conditions, from diabetes to addiction. They could also lead to an upheaval in sugar markets.

Fears that Americans on GLP-1s will stop buying treats have already spooked businesses and investors. Mondelez and PepsiCo stocks took a hit after Walmart chief executive John Furner reported that customers on these drugs were buying fewer groceries. Hershey has also acknowledged experiencing a “mild impact” on sales, attributed to the growing use of GLP-1 medications.

Sugar traders, for now, are brushing off concerns about weight-loss drugs’ potential to dent demand. Perhaps they’re battle-hardened — decades of sugar-is-bad campaigns have not made a dent in global consumption, which has quadrupled in the past 60 years, according to Professor Paul Behrens of the British Academy. Sweet treats still fly off the shelves in most markets, and until recently sugar prices have been riding high on weather woes and rising production costs.

There are other reasons for traders’ nonchalance. So far, Ozempic and other drugs are pricey and only available to a small segment of wealthy consumers in developed countries. Even if these appetite-suppressing drugs do start reducing demand, the thinking goes, it’ll be a slow burn, giving markets and sugar producers plenty of time to adjust.

That “yet” looms large. In the UK, for example, the government plans to roll out Mounjaro on the NHS. Prices are likely to drop elsewhere too, especially as pharmaceutical companies race to sell compounded versions of drugs, circumventing patents.

If prices fall and access broadens, the ripple effects could reach middle-income and even developing markets. The obesity epidemic and slew of health conditions that come with it are not limited to rich western nations. In India, the world’s biggest sugar consumer, rates of diabetes and obesity are soaring. Indians consume a staggering 29mn tonnes of sugar annually — 15 per cent of global demand. Even a modest uptake of GLP-1s there could shake the market in ways that traders might find hard to ignore.

Tracking sugar consumption is notoriously tricky, though. There’s a real risk, therefore, that these trends could develop under the radar before the industry wakes up to what’s happening.

Sugar’s adaptability — it can be repurposed into ethanol for fuel or bioplastics — might provide a cushion, especially as demand for low-carbon fuels and renewable materials grows. Yet this transition won’t happen overnight.

The week’s fun finds

The chart of everything

How do you fit everything in the universe on a chart?

This chart shows every object that has ever existed, and raises a question: is the universe a black hole?

This week's interesting finds

 

This week in charts

S&P 500 outperformance

Magnificent 7

2025 interest rate cuts

Foreign exchange reserves

Imports from China

Tariffs

Household balance sheets

U.S. stock & bond correlation

Defaults on leveraged loans soar to highest in 4 years

US companies are defaulting on junk loans at the fastest rate in four years, as they struggle to refinance a wave of cheap borrowing that followed the Covid pandemic.

Defaults in the global leveraged loan market — the bulk of which is in the US — picked up to 7.2 per cent in the 12 months to October, as high interest rates took their toll on heavily indebted businesses, according to a report from Moody’s. That is the highest rate since the end of 2020.

The rise in companies struggling to repay loans contrasts with a much more modest rise in defaults in the high-yield bond market, highlighting how many of the riskier borrowers in corporate America have gravitated towards the fast-growing loan market.

Because leveraged loans — high yield bank loans that have been sold on to other investors — have floating interest rates, many of those companies that took on debt when rates were ultra low during the pandemic have struggled under high borrowing costs in recent years. Many are now showing signs of pain even as the Federal Reserve brings rates back down.

In the US, default rates on junk loans have soared to decade highs, according to Moody’s data. The prospect of rates staying higher for longer — the Federal Reserve last week signalled a slower pace of easing next year — could keep upward pressure on default rates, say analysts.

Many of these defaults have involved so-called distressed loan exchanges. In such deals, loan terms are changed and maturities extended as a way of enabling a borrower to avoid bankruptcy, but investors are paid back less. 

Portfolio managers worry that these higher default rates are the result of changes in the leveraged loan market in recent years.

Despite the rise in defaults, spreads in the high-yield bond market are historically tight, the least since 2007 according to Ice BofA data, in a sign of investors’ appetite for yield.

Still, some fund managers think the spike in default rates will be shortlived, given that Fed rates are now falling. The US central bank cut its benchmark rate this month for the third meeting in a row.

Some analysts blame loosening credit restrictions in loan documentation in recent years for allowing an increase in distressed exchanges that hurt lenders.

This week’s fun finds

The best music written about winter

In C.S. Lewis’s “The Lion, the Witch and the Wardrobe”, Mr Tumnus, a faun, laments that the White Witch has made Narnia “always winter, but never Christmas”—implying that only Christmas makes winter bearable. But the season offers other pleasures: skiing, if you enjoy elaborate dressing rituals; snowshoeing, if walking is not slow and cumbersome enough; or, best of all, staying inside and admiring the gelid landscape through thick windows, with a cup of something steaming. Here’s what to listen to during the short, frosty days and long nights (and not a carol on the list).

This week's interesting finds

This week in charts

MSCI EMU Index vs S&P 500 Index (minus NVIDIA) 

Equity allocation - U.S. vs. Eurozone 

Fund Manager Survey cash allocation

S&P 500 Index – Top 10 concentration 

EV/Sales greater than 10x

Tariffs

10-year yield move on FOMC Days

S&P 500 Index historical returns

Central bank tracker

Manufacturing vs. services

Monthly interest expenses

US Yield Curve Is Steepest Since 2022 After Fed’s Rate-Cut Shift

Longer-dated US Treasuries weakened Thursday, propelling the yield curve to steepen to a level last seen about 30 months following the Federal Reserve’s hawkish interest-rate easing and projections for fewer rate cuts next year.

The two-year yield was lower by 4 basis points to 4.31%, while the 10-year rose some 8 basis points to a session high of 4.59%, and was trading around the highest level since late May. That divergence in yields saw the two-year trade as much as 0.27 percentage points below the 10-year — a level previously seen in June 2022, with the yield curve steeper by some 11 basis points on the session.

The so-called steepening has been driven by a reticence among investors to own longer-dated Treasuries given sticky inflation and a resilient economy after the Fed has cut policy rates by 1 full percentage point in recent months. 

The benchmark 10-year note’s yield surged above 4.5% on Wednesday after the Fed indicated a pause was likely in the cutting cycle early next year and officials saw only two quarter-point rate cuts for all of 2025, given the lack of progress in bringing inflation down to their 2% target.

Reticence for Treasuries beyond the front end also extended to the inflation market. A $22 billion sale of five-year Treasury inflation protected securities at 1pm in New York attracted weak demand from non-dealers. The auction cleared at 2.121%, up sharply from a level of 2.05% leading into the bidding deadline.

The latest losses in the 10-year Treasury built on a steady losing streak that has driven its yield up from a low of 3.60% in mid-September. In that time, the 2s10s yield curve has turned positive after a prolonged period of inversion. 

The trend of preferring the short-end at the expense of the 10- and 30-year yields Thursday was maintained after data showed a slightly higher-than-expected upward revision to economic growth in the third quarter and after weekly initial jobless claims were weaker than forecast.

This week’s fun finds

After a successful term, our interns, Renae, Arrangan and Ramneek (not shown in the photo), served up a delightful flapjack breakfast for all their new friends at EdgePoint. We wish them all the best in the new year.

B.C. man drops camera into ocean, accidentally captures 'breathtaking' whale video

Before it turned into an extraordinary day, Peter Mieras says it began being quite ordinary.

The underwater videographer with Subvision Productions was trying to see if he could tie his new camera to an old fishing pole, so he could reel it in and out of the water. But then the line broke and the video camera sunk to the bottom of the ocean.

But before he could dive down to fetch it, a flock of birds and a herd of sea lions started feasting on a school of anchovies, just a few meters from the dock.

But then he captured the unexpected arrival of a humpback whale joining the hunt.

After two hours of witnessing in the wonder that was unfolding above the water, Peter retrieved that camera that had sunk, and was shocked to see what had been recorded under the sea.

“Failure is just another step towards success,” Peter says.

So why get frustrated when things don’t go according to plan? Things might just turn out even better than you could conceive.