HP lowers hopes of quick recovery in PC market

Stocks rallied yesterday after the job vacancies number showed less job openings than anticipated, hinting that the labor market is cooling off. Investors took that as a sign that the Fed may be able to extend its late summer recess and nod-off throughout next month’s FOMC meeting – a little catnap can be very refreshing.

Spread out. Today, I would like to follow up with yesterday’s topic. I am sorry if you missed it. But in a nutshell, I expounded upon a chart which I shared from Bloomberg showing the huge ramp-up in high yield debt maturing starting in 2024 and beyond. My thesis was that the acceleration would put significant stress on corporations who must either pay back owed principal or refinance at higher rates. The subtext for my argument was that there is a time lag between when the Fed’s monetary policy was enacted and when that restrictive policy will take effect. If you agree with me and NOBEL PRIZE WINNING SUPERSTAR ECONOMIST MILTON FRIEDMAN, who first proposed that lag theory sometime in the 1970’s, you would likely be thinking “hmm, if the Fed agrees, it is likely to keep rates higher for longer in this restrictive zone in order for its handywork to well… um, work.” If, indeed, you were thinking that you are probably correct ✔. So, what does that mean for bond yields?

Assuming that the Fed is done hiking… better yet, assume that the Fed hikes another +25 basis points before the end of the year, though futures only gives that a 1 in 3 chance. Now, add our assumption from the prior paragraph that the Fed will keep those rates elevated for the next, say, 12 to 18 months and then slowly bring them down to some neutral level somewhere around 3% by 2026/2027. The first implication would be that all treasury maturities 5 years and out which recently gained yield are probably fairly valued. In plain language that means buying the dip on those if you are looking to score within the next 2 years is riskier than it may appear on the surface. Pro tip: buying the dip for the sake of buying the dip is a poor strategy in any security . HOWEVER, if you like yields at these levels and you plan on holding bonds until maturity, you should not care where bonds go, and 10-year yields have not been this high since 2007. If you do hold these and the Fed begins to ease in 2024/2025, your bonds may go up in value, providing an opportunity to sell at a profit, although if you plan on using the sale proceeds to buy more bonds, you will be getting lower yields.

On the other side of the card are those unfortunate borrowers which I highlighted yesterday. If yields remained at these current levels through 2026, what does that mean for corporate borrowers who need to refinance? Well, it depends on when the companies initially sold the bonds, but if a BBB/Baa (that is the lowest investment grade before junk) company issued a 10-year bond in 2015 when spreads were around +200 basis points, they would have paid around 4% based on the 10-year Treasury yield of around 2% at the time (you just add them). If those bonds mature in 2025 and we think that 10-year yields remain around these levels (between 4% and 4.25%) and spreads remain constant (+150 to +200 basis points), those companies will have to pay between 5.5% and 6.25% to refinance the maturing debts. Like I said yesterday, THERE IS HOPE. Treasury yields can come down quicker if we hit some unexpected economic bumps and the Fed starts to cut rates sooner. Additionally, spreads on BBB/Baa corporate bonds have been trending tighter (that’s “lower” in lingua franca), and the tighter they get, the less those companies will have to pay to refinance. Don’t worry if this all sounds confusing to you, the real burden is on corporate treasurers who have surely cornered the market on stomach antacids as they sit on the edges of their seats hoping that yields will come down before 2025.

WHAT’S UP… OR down THIS MORNING

HP Inc (HPQ) shares are lower by -8.19% in the premarket after the company announced that it beat EPS but missed revenue targets last quarter. The company lowered full-year EPS and cash flow guidance stating that the market for its products has not improved as quickly as the company anticipated. Dividend yield: 3.34%. Potential average analyst target upside: -2.9%. WHY IS THIS NEGATIVE? Because the stock’s current price is above the median analyst target price. Though that may imply that the stock is overvalued, it does not mean that the stock cannot go higher.

Texas Instruments Inc (TXN) shares are lower by -2.08% after Bernstein cut the company’s rating to UNDERPERFORM stating that the company is expensively priced based on its inventory and capex. Dividend yield: 2.90%. Potential average analyst target upside: 8.8%.

YESTERDAY’S MARKETS

NEXT UP

• ADP Employment Change (August) is expected to show an addition of +195 jobs, lower than the prior month’s +324k gain.
• Annualized Quarterly GDP (Q2) is expected to come in at +2.4% in line with the prior estimate.
• Pending Home Sales (July) may have slipped by -1.0% after the prior month’s slight +0.3% gain.
• After the closing bell earnings: Okta, Crowdstrike, Veeva Systems, Five Below, Chewy, and Salesforce Inc.