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The FSA Spy market buzz – 6 October 2023

Ether Futures come to ETFs, BlackRock is fence sitting, Yum China is going beserk, active ETFs gather pace, the yield curve gets scary, Ponzi schemes, ancient wisdom and much more.

Spy had a call with a New York-based venture capitalist this week. She admitted that the number of companies within her primary portfolio that have missed their quarterly sales targets had risen alarmingly in the last six months. “The pain is spreading rapidly”, she told Spy. “It is not that my portfolio companies have poor products, but the customers they serve with tech are having a torrid time.” How important are profits to VC investors right now, Spy asked her. In a flash she replied, “That is the only game in town. Period.”

Does anyone actually want an ETF to hold Ether futures? Van Eck, ProShares and Bitwise all seem to think so. They launched new funds this week to track the value of Ether, the second largest cryptocurrency. The result was hardly a stampede. Investors seem to yawn and move on without adding much real money to any of the funds. It is not a cheap exercise, the typical expense ratio of these ETFs is 0.95% This seems like a solution looking for a problem, for Spy.

Spy spotted BlackRock’s quarterly outlook this week. You can read the entire thing here, if you wish. The report is an exercise in fence sitting. BlackRock’s forecasters are sticking to the middle ground, almost rigidly. There is not a single asset class in this quarter’s forecast that their strategists are prepared to back with any conviction beyond a touch overweight. As the report puts it, “The difficult macro environment keeps us underweight the broad US equity market on a tactical horizon of six to 12 months: stocks don’t fully reflect higher-for-longer rates and the ongoing activity stagnation we expect. With the Q3 earnings season starting soon, analysts now see a mild contraction in broader Q3 earnings after having eyed growth earlier in the year, LSEG data show. We are getting closer to turning more positive on stocks given the recent retreat – but we’re not quite there yet.”

With the culture war raging between China and the West, Spy was rather fascinated to read a report on Yum China, this week. From humble beginning of a single KFC in 1987, the firm has grown to become the largest restaurant company in China with over 13,600 stores in more than 1,900 cities across the Mainland. Their brands include KFC and Taco Bell, among others. Last month, Yum China revised their guidance for local restaurant expansion in 2023 to expand by 1,400 – 1,600 stores, or about 4 new stores per day. This was up from the previous guidance of about 1,100 – 1,300. The firm aims to grow to about 20,000 stores by the end of 2026. Surely, if this tell us anything, it is how much we all have in common? Perhaps we need a bout of KFC diplomacy. Détente over a chicken wings bucket?

How is the “active” ETF space doing wonders Spy? Quite well, it seems. In September 2023, there were about 800 actively managed equity ETFs available in the US. The funds manage only 5% of the equity ETF asset base, however they have gathered 32% of the fund flows in the first nine months of 2023. As the public has become used to and comfortable with the idea of investing in ETFs, it makes perfect sense for the traditional mutual fund industry to play in this space.

If Spy had a dollar for every time he had heard the words “steepening yield curve” of late, he would at least be able to buy a better quality bottle of wine. The bursting of the long end of the curve is being compared to the Dot Com meltdown, which happened in the early 2000s. The losses are truly catastrophic. The US long bond market is now down about 46%. This will be playing havoc with insurers and pensions funds. Just remember, hyper conservative Austria sold a 100-year bond in the middle of 2020. The exciting coupon offered? A massive 0.85%! This was deemed a decent deal and the government received about €16bn ($16.9bn) of demand. Enough investors thought that for 100 years, rates would not rise above 1%. If anyone thinks this will end well, Spy has a chocolate teapot to sell you.

How the world changes! Did you know that in 1989, Japan accounted for over 40% of the MSCI World Index? This was the height of all things Rising Sun mania. Today, Japan’s weight in the MSCI World Index is a mere 6.2%. The USA currently holds a weight of 69.9% in the Index.

Spy is constantly amazed at where people will take their financial advice from. They take their hard-earned money and then listen to any old smooth talker online who styles themselves as a guru. Just this week, a podcaster, Matt Motil, who called himself “The Cash Flow King”, has been accused of running an $11m Ponzi scheme. Spy’s advice, if anybody gives themselves a grandiose title, especially online, sprint away, don’t just walk. 

Spy’s quote of the week comes from the ancient Greek know-it-all, Socrates. “The secret to change is to focus all of your energy, not in fighting the old, but on building the new.” In all fairness to the crazy coot, he was not wrong.

Until next week…

Part of the Mark Allen Group.