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Market Values for Soccer Clubs Have Fallen.

Manchester United said the controlling Glazer family was considering a possible sale of the soccer club.

The timing could be better. At its 2018 peak, New York-listed Manchester United Ltd. had a market capitalization of more than $4.2 billion. While the stock surged Tuesday, it remains way below its pinnacle, closing with a market cap of slightly less than $2.5 billion, according to Refinitiv data. Other listed soccer clubs have also traded down in recent years.

Another complication: potential competition for bidders, with news earlier this month that Fenway Sports Group is exploring a full or partial sale of rival Liverpool FC.

Still, it is hard to estimate sale prices for trophy assets like this, given their rarity and their potential appeal to deep-pocketed buyers who may not be thinking entirely in financial terms.

Earlier this year one of the team's main English Premier League rivals, Chelsea Football Club, sold for more than $5 billion to a group led by Los Angeles Dodgers part-owner Todd Boehly. Man Utd. didn’t mention any potential buyers. There will likely be a long list of prospects, though Russian oligarchs are presumably out of the picture.  

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Rising Rates Squeeze Bond Funds

January’s market turmoil hit even the safest bond funds. Some of those that held up best strayed from their traditional investing grounds, or concentrated on the shortest maturities.

Only a few U.S.-based funds that focus on investment-grade taxable debt have earned a positive return or traded flat through January, when including interest payments and price swings, according to data compiled by Morningstar Direct. More than 300 others posted total losses ranging from minus 0.1% to minus 3.6% over the same period.

These bond funds, known on Wall Street as “core” and “core-plus” funds, typically hold some combination of relatively safe assets such as investment-grade corporate bonds, mortgage-backed securities and Treasurys. The pandemic’s bond rally helped power total returns on some core funds as high as 18% just two years ago.

Now, investors have ramped up bets that the Federal Reserve will raise short-term interest rates in 2022 to fight inflation, sending yields to their highest levels since early in the pandemic while sparking wild swings in the stock market and other riskier Wall Street bets. Even municipal-bond funds suffered declines.

Investors this year have withdrawn more than $1.6 billion on net from U.S. core, core-plus and mortgage bond funds combined, according to data compiled by Refinitiv Lipper through Jan. 26.

Among the funds that held up best against the shift: Putnam Mortgage Securities Fund Class A from Putnam Investments. The fund invests in a mix of securities-backed commercial and residential mortgages, and returned 1.5% to investors last month. That beat a minus 1.49% return on the Bloomberg U.S. mortgage-backed securities index over the same period. The fund charges annual fees of 0.89%, or $89 on a $10,000 investment.
Duration is typically higher for longer-term bonds because the greater time it takes for investors to get their money back means greater exposure to swings in value. As a rule of thumb, a one-percentage-point increase in interest rates causes a decline in an asset’s price equal to its duration. For example, a fund with a duration of five years will suffer a 5% decline with a one-percentage-point rise in rates.

Duration is also higher for lower-coupon bonds, which provide less cash flow to buffer those swings. Other measures of duration may account for the impact of interest-rate changes on bonds that can be paid back before their maturity date.
The Putnam fund’s duration stood at around 3.9 years at the end of 2021, compared with roughly 5.3 years for the Bloomberg U.S. mortgage-securities index.

One opportunity that helped the fund’s recent performance was designing an investment vehicle to help provide residential mortgages, then buying the mortgages in bundled securities, he said. Securitized real estate debt struggled during much of the pandemic and has recently started to improve, helping bolster the fund’s returns.  

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Supply-Chain Chaos Is Great for Warehouse Stocks

For most companies, today’s dysfunctional supply chains are a headache and a cost. 

Global air and sea freight routes have become more expensive and less reliable during the pandemic. In March, just 7% of sea shipments from Asia to North America arrived on time, while 6% were on time for the Asia-to-Europe route, eeSea data shows. Even big companies with bargaining power can expect to pay contract freight rates around five times higher than in 2019. 

That points to stockpiling, which should boost demand for warehouses. Companies need to hold more goods so they don’t miss out on sales because of freight delays. Based on what they are hearing from tenants, big logistics landlords think inventories will eventually settle 10% to 15% higher than prepandemic levels.

Consumer spending was so strong last year that companies haven’t yet had a chance to build up extra supplies. In the U.S., the ratio of inventories to sales for all businesses is currently 1.25, according to the U.S. Census Bureau, below the average since 1998.

Stockpiling could therefore create additional demand for supply that is already constrained. Companies raced to lease more warehouse space as shoppers moved online during pandemic lockdowns. In the U.S., vacancy rates for logistics property fell below 4% for the first time on record in 2021, JLL data shows. Vacancy rates in Europe fell from 5.1% to 3.5% over the course of last year, according to Savills. For most companies, today’s dysfunctional supply chains are a headache and a cost. 

Global air and sea freight routes have become more expensive and less reliable during the pandemic. In March, just 7% of sea shipments from Asia to North America arrived on time, while 6% were on time for the Asia-to-Europe route, eeSea data shows. Even big companies with bargaining power can expect to pay contract freight rates around five times higher than in 2019. Fresh Covid-19 lockdowns in China and coming wage negotiations with West Coast dockworkers in the U.S. spell further trouble ahead.

That points to stockpiling, which should boost demand for warehouses. Companies need to hold more goods so they don’t miss out on sales because of freight delays. Based on what they are hearing from tenants, big logistics landlords think inventories will eventually settle 10% to 15% higher than prepandemic levels.

Consumer spending was so strong last year that companies haven’t yet had a chance to build up extra supplies. In the U.S., the ratio of inventories to sales for all businesses is currently 1.25, according to the U.S. Census Bureau, below the average since 1998.

Stockpiling could therefore create additional demand for supply that is already constrained. Companies raced to lease more warehouse space as shoppers moved online during pandemic lockdowns. In the U.S., vacancy rates for logistics property fell below 4% for the first time on record in 2021, JLL data shows. Vacancy rates in Europe fell from 5.1% to 3.5% over the course of last year, according to Savills. 

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Tight supply means industrial landlords have a much better chance of negotiating inflation-beating rent increases than owners of other commercial real estate such as malls or offices. In the U.S., warehouse rents increased by 11% last year, comfortably ahead of the rise in consumer prices. Prologis expects to raise rents by the same amount again in 2022. In parts of London, where supply is especially tight, rents increased by as much as 30% last year, according to European warehouse owner Segro. The market is so strong that logistics landlords want to avoid offering long-term contracts to tenants or inflation-indexed leases that would cap their upside.

One much-discussed trend that could damp the excitement is a shift in production closer to home. This would be a solution to supply-chain problems, but a drastic and expensive one. For example, companies would need to invest $1 trillion over five years to relocate all foreign manufacturing based in China that is not destined for the Chinese market, according to estimates from Bank of America. And this doesn’t factor in the higher cost of operating in higher-wage markets.

Labor shortages in the U.S. and rising energy prices in Europe may deter big moves for now. Global trade reached a record high in 2021, according to United Nations data, so there is little evidence of a move to domestic manufacturing yet. 

Oil Frackers Brace for End of the U.S. Shale Boom

The end of the boom is in sight for America’s fracking companies.

Less than 3½ years after the shale revolution made the U.S. the world’s largest oil producer, companies in the oil fields of Texas, New Mexico and North Dakota have tapped many of their best wells.

If the largest shale drillers kept their output roughly flat, as they have during the pandemic, many could continue drilling profitable wells for a decade or two, according to a Wall Street Journal review of inventory data and analyses. If they boosted production 30% a year—the pre-pandemic growth rate in the Permian Basin, the country’s biggest oil field—they would run out of prime drilling locations in just a few years. 

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Shale companies once drilled rapidly in pursuit of breakneck growth. Now the industry has little choice but to keep running in place. Many are holding back on increasing production, despite the highest oil prices in years and requests from the White House that they drill more.

The limited inventory suggests that the era in which U.S. shale companies could quickly flood the world with oil is receding, and that market power is shifting back to other producers, many overseas. Some investors and energy executives said concerns about inventory likely motivated a recent spate of acquisitions and will lead to more consolidation.

Some companies say concerns about inventories haven’t factored into their decisions to keep output roughly flat. For several years before the pandemic, frustrated investors had pressured companies to slow production growth and return cash to shareholders rather than pump it back into drilling. Companies have promised to limit spending, though some executives recently said high prices signal a need for them to expand again this year.

U.S. oil production, now at about 11.5 million barrels a day, is still well below its high in early 2020 of about 13 million barrels a day. The Energy Information Administration expects U.S. production to grow about 5.4% through the end of 2022.

Big shale companies already have to drill hundreds of wells each year just to keep production flat. Shale wells produce prodigiously early on, but their production declines rapidly. The Journal reported in 2019 that thousands of shale wells were pumping less oil and gas than companies had forecast. Many have since marked down how many drilling locations they have left.

Some shale companies will eventually have to start spending money to explore for new hot spots, executives and investors said, and even then, those efforts are likely to add only incremental inventory. Few are currently doing so.

Many drillers say they will never return to pre-pandemic production growth levels of up to 30% a year, in part due to rising costs for raw materials and labor, a lack of available financing and the enormous number of new wells it would require.

Companies learned that newer wells drilled too closely to older ones often caused interference with the original wells’ oil production or caused new wells to perform worse than expected. They eventually spaced wells farther apart, cutting into estimates of how many they had left to drill.

Since the end of 2016, the number of remaining top-tier drilling locations across five major U.S. oil regions has been cut from more than 68,000 to less than 35,000, Rystad estimates. 

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Rystad figures include only the most profitable 25% of each region’s remaining inventory. In core areas of the Eagle Ford and Bakken, the most prolific acreage has already been drilled up, Rystad and Bernstein noted.

The Permian is expected to be the longest-lived U.S. oil region and is home to more than 80% of the country’s remaining economic drilling locations, according to Wood Mackenzie. The energy consulting firm projects production growth will plateau there by 2025.

One company exploring new places to drill is EOG, the spinoff once known as Enron Oil and Gas and the fourth-largest U.S. oil company by market capitalization. EOG developed some of the earliest shale techniques, pioneering fracking and horizontal drilling to unlock oil from tight rock formations.

EOG is now one of the few companies trying to find new places to frack for oil and gas within the U.S. under new Chief Executive Ezra Yacob. The 45-year-old, who previously led the company’s exploration division, said EOG’s exploration isn’t motivated by concerns about running out of inventory, but rather is constantly looking to increase returns by scouting out the most lucrative drilling locations.

Some analysts believe companies’ concerns about shrinking sweet spots motivated a recent spate of multibillion-dollar corporate acquisitions and land sales. In early November, Continental said it would pay about $3.3 billion for land in the Permian Basin from Pioneer. 

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Valuations on U.K. stocks and bonds are at historical lows

U.K. stocks and bonds are trading at their lowest levels in decades. That hasn’t been enough to entice investors back into the market.
Investors yanked a net total of $3.7 billion from U.K. stock mutual and exchange-traded funds in September—an all-time monthly record, according to fund-flow tracker EPFR. And redemptions in October haven’t slowed so far.FTSEETF

Meanwhile, a September survey from BofA Global Research showed fund managers are the most underweight U.K. stocks in nearly two years. Sentiment also isn’t looking much better for the British pound, which has seen continued bearish wagers against it.
Investors had already been retreating from U.K. assets in recent months as they weighed risks building in the economy. These include decades-high inflation, growing risk of a recession and a looming energy crisis.
Still, investors and strategists say they are bracing for more uncertainty. The Bank of England wrapped up its government bond purchase program Friday, marking the final opportunity for pension funds to unload long-dated bonds to the central bank. Some market-watchers said they were worried that could stir volatility anew.

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U.K. Crisis Spills Into U.S. Junk Debt

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Once a niche product, CLOs are now widely held by investors around the world, including the British pensions, insurers and funds that got caught by the recent crash in U.K. currency and government-bond markets. Many of them sold CLO bonds to meet margin calls, sending prices of the securities tumbling well below their intrinsic value, analysts and fund managers said. Some U.S. investment funds rushed to snap up the bonds at what they considered incredible bargains.

Pension Funds Chase Returns in Private-Market Debt

The New York State Common Retirement Fund, which serves state police among other public workers, is moving money out of high-yield bonds and bank loans into private-credit investments. Retirement funds are clamoring to invest in private-market loans, hungry for an asset that can beat public markets while at the same time throwing off cash to help pay benefits.

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Two of the nation’s three biggest pension funds—those serving public workers in New York and California—have added private-credit allocation targets in the past two years. Across the U.S., state and local retirement funds with private-credit portfolios are expanding them faster than any other alternative investment, from an average allocation of 3% to an average target of 5.7%, according to analytics company Preqin.

For decades, U.S. pension funds have been scaling back on bonds, bank loans and other types of publicly traded debt as yields dropped. Now the retirement savings of firefighters and school bus drivers are helping fuel an investing boom in private loans to borrowers ranging from private-equity managers overhauling companies to consumers buying on layaway.
U.S. pension funds’ private-credit holdings now amount to tens of billions of dollars, though the exact total is hard to track because many funds don’t report those investments separately from other alternative assets. Canadian pensions, earlier adopters of private credit, also have tens of billions in the asset class.
Alongside sovereign-wealth funds, endowments and insurers across the world, pension funds have helped bring total private-debt assets under management to $1.5 trillion in 2021, nearly twice as much as five years ago, according to Preqin. The figures include money that investors have committed to private debt funds but that managers have yet to collect.
Many pension funds are turning to the same group of managers who invest their private-equity portfolios, firms such as Ares Management Corp., Blackstone Inc., and Oaktree Capital Management LP, that have received massive inflows in recent years from retirement systems’ steady march into alternative investments. Federal regulators last Wednesday proposed landmark new rules for those private markets.
Returns on private-credit investments tend to be lower than private equity, but so is the risk; creditors get paid before equity investors in a bankruptcy. Private credit typically locks up money for less time, about five to seven years, managers said. During that time the investment throws off interest, generally at floating rates, an advantage at a time when benchmark interest rates are rising. 

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Morgan Stanley downgraded American Express

Morgan Stanley downgraded American Express (NYSE:AXP) to Equal Weight from Overweight to reflect rising recession risk.

Morgan Stanley analysts reminds investors that a recession is only 37% priced in on a P/TBV basis. The downgrade call, as well as lowered price target to $143 from $223, is reflecting lowered estimates.

“Taking our 2023 EPS down median 7% and target multiples down median 8%, resulting in a median 15% cut to price targets. Our Base Case bakes in slowing economic growth, while our Bear Case bakes in a recession with trough multiples,” MS told clients in a note.

Slower consumer spending is expected to negatively impact American Express as “inflation takes a larger share of household disposable income.”  “Out of our coverage, AXP skews highest to high-end consumers, with the highest FICO skew among card lenders and subprime loans comprising only 5% of its card loan book. AXP also derives ~60% of its revenues from transaction fees on spending volumes, vs. 10-20% for most card issuers,” Morgan Stanley said. The slowing growth will also reduce multiples that will ultimately impact the AXP stock price.

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