Only Time Will Tell and Bill Ackman Battling Back

Bill Ackman

This will be a rather short blog following up on last week’s focus on key levels for the 2 and 10-year Treasury yields. 

I’m a bit tired as last night (Thursday), I had a flight connection through D/FW Airport to return home to Orange County. John Wayne Airport in Orange County has a curfew barring planes from landing after 10:30 pm with some exceptions allowed until 11:00. My flight from Dallas was scheduled to leave at 9:08 central time. Everyone was on board, and it looked like everything was set for an on-time departure. Then, out of the blue, passengers who use the American Airlines app suddenly got a notification that the flight wouldn’t leave until 10:15. There was an audible buzz throughout the cabin. It soon became clear that the flight attendants didn’t know what was going on. After another notice further delaying the flight to 10:45, one of the flight attendants came on the loudspeaker and said they were not exactly sure what was going on, but they were told that the pilot for this flight decided he wasn’t going to fly this plane tonight so they now had to wait for another pilot to land from another flight. Shortly after that, the notification changed, showing the flight would now not leave until 2:45 a.m. The curfew was clearly blown, and the next announcement said this flight would leave at 6:00 a.m. and everyone would be given hotel vouchers. I have never experienced a pilot bailing on his passengers before.

I deplaned and saw a big line had formed to get to the counter for people to get their vouchers. Only one person worked the counter, and only after 90 minutes in line, and four people away from reaching the counter, did two more people come to help. I got vouchers for the Comfort Inn Suites, two taxi rides, and $12 in airport food credit, and I was off to the hotel. It was an easy check-in, and I got to bed at midnight, only to get up at 4:00 a.m. to catch a 4:30 a.m. cab to the airport. Oh, the joys of traveling.

Now to the matter at hand. Last week I discussed how the 10-year Treasury yield had been holding a pretty firm grip on 4.00% or below and was still not very close to having tested this cycle’s high of a 4.25% close and 4.33% intraday peak. So much for my theory as last week, a strong ADP private payroll report, Japanese yields breaking through threshold levels set by the Japanese Central Bank and which required intervention to bring them back down again, and Bill Ackman announcing he was betting against the 30-year Treasury bond all conspired to push the 10-year easily through 4.00%.

One can see from this chart that the 10-year went up approximately 0.25% over a four-day period from trough to peak and closed at 4.19% on August 3rd, which was too close for my comfort to the previous closing high reached on October 24, 2022. Nevertheless, it still didn’t breach that level. It seems to want to, but only time will tell.

Yield 4.08% August 2023

And like the previous month, when the ADP report came in hot, and the Establishment Survey for non-farm payrolls came in cooler, the bond market rallied, and yields came down, albeit still above 4.00%, which is also a bit disconcerting.

The 2-year yield, on the other hand, did not move nearly as much and could indicate that the Fed is done hiking rates or at most has one more bullet left in the chamber.

Fed Officials Tout Job-Market Slowdown, Seen to Pivot From Hikes August 4, 2023 Steve Matthews Catarina Saralva

Here is a chart showing the persistent slowdown in job growth. The last six months have been revised lower.

Change in Nonfarm Payroll Employment Jan 2021 - July 2023

The 2-year only went up 8 basis points from last week’s trough to peak and is now back below where it started, unlike the 10-year. This has resulted in the 10 minus 2 yield curve steepening from its most inverted level of negative 108 basis points on July 3rd to negative 74 basis points as of this writing. I have written about this before, but to reiterate, recessions tend to ensue after the yield curve has become positive again. I honestly did not expect it to steepen with the 10-year going materially higher. I thought it would almost all come from the 2-year dropping. Only time will tell what path it will take. Perhaps it will be a combination of the two. We shall see.

4.814% Yield August 4, 2023

Fortunately, the 2-year peak of last week of 4.93% is still somewhat below the cycle high of 5.07%, close on March 7, 2023, and the intraday high of 5.09% on the same day.

I’ll close it off by showing what Bill Ackman tweeted about his bet against the 30-year Treasury bond. Initially, most people thought he was shorting it, but he clarified it with a second tweet saying he’s using options so that he can sleep better at night. He famously got crushed on his short of Herbalife so I think he learned his lesson there. More on this below.

Whatever you might think of Ackman, there is no question that he is clearly a very bright and thoughtful person. He is an excellent writer and does a great job of clearly articulating his thoughts, as this X post (formerly Twitter) shows.

Bill Ackman @BillAckman

He makes some very valid points. I still think that the odds of an economic contraction and financial problems materializing are rising due to the Fed’s unrelenting hiking campaign and balance sheet reduction, which will result in rates coming down, particularly on the short end. He could still be right about the 30-year yield going materially higher while the short-end drops, although this is not my base case.  Once again, only time will tell who will be right. 

Ackman’s clarifying tweet is that he is not shorting the 30-year bond.

Bill Ackman @BillAckman August 2, 2023

Never forget the sleep-at-night test!

Addendum: Icahn vs. Ackman

Ackman lost the Herbalife fight against Carl Icahn, who was long the stock and very publicly denigrated Ackman for shorting Herbalife. Icahn clearly won that battle, but Ackman may end up winning the war as Icahn’s net worth has been getting decimated as a fairly well-publicized short-seller released a report strongly critical of Icahn’s publicly traded partnership, Icahn Enterprises Partners, L.P. (IEP) The share price got hammered and went down by 60% after the report was released. And while the shares subsequently regained 50% (resulting in a 40% drop from the release of the report), more pain was inflicted last week after Icahn announced the partnership’s results which seemed to validate many of the concerns the short seller articulated. The stock dropped approximately 24%, so that it is now down 55% from when the short seller released his report. Icahn also cut the dividend by 50% with the prospect that more cuts may be on the horizon. 

Carl Icahn's Wealth Falls $2.7 Billion as Dividend Cut Batters Shares

It turns out that Icahn has used a large number of partnership units as collateral for personal loans. He was forced to put up additional collateral by his lenders and come up with a repayment plan over the next few years. Clearly, Icahn, one of the most aggressive and ferocious activist investors in modern Wall Street history, has his back against the wall and is feeling the type of pressure he is used to exert on others. It’s definitely Schadenfreude for many.

This is what Ackman tweeted after the Hindenburg report was released, articulating why Hindenburg was shorting IEP.

Bill Ackman @BillAckman May 24, 2023



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