Binance Is In The Hot Seat

Delinquencies spiked in May on mortgage bonds tied to offices. Vacancy rates on office space across the U.S. has hit a record +16%.

LA is at +30% vacancy for downtown office space.

Yikes.

Market

Prices as of 4 pm EST, 6/5/23

Macro

Gary Gensler and the SEC are coming after Changpeng Zhao and Binance.

In a 136-page complaint filed yesterday, the agency accuses Binance of breaking securities laws, misusing customer funds, and misleading investors and regulators.
Among the claims, the SEC says Binance engaged in manipulative wash trading that inflated the exchange’s volumes.
It also points to the commingling of customer assets between third parties owned by Zhao as well as the listing of unregistered securities, including BNB, BUSD, Solana, Cardano, and Polygon, among others.
Binance has denied the allegations.
The regulator has called for a federal judge to freeze Binance’s assets and appoint a receiver to track and preserve user funds.

Commercial real estate landlords have some $1.5 trillion in commercial mortgages coming due over the next 3 years.

Most of these—88% as of 2021—are interest-only loans, meaning borrowers make only interest payments during the life of the loan before paying off the principal in a lump sum at the end.
Owners usually obtain new loans or sell the building to pay off this debt.
Now, however, with rising borrowing costs, lenders aren’t keen on refinancing.
This means the CRE market–particularly office owners where an estimated 83% won’t be able to refinance–could be headed towards a wave of defaults.

The US services sector expanded for a 5th consecutive month in May, but the pace of expansion is slowing.

ISM Services PMI dropped to the lowest since December as services employment dipped into contraction while business activity and new orders also fell.
Respondents suggested stable business conditions but pointed to concerns about a slowing economy.
In welcome news for inflation, however, prices paid by businesses (green) dropped sharply in May to the lowest level in 3 years.

@macro84

Stocks

Apple unveiled its first major new product in a decade at its Worldwide Developers Conference yesterday.

The long-awaited mixed-reality headset, officially dubbed Vision Pro, has been in development for over 7 years and will be available for purchase early next year for the low-low price of $3,499.
Investors were less than thrilled: shares reached new all-time highs ahead of the unveiling before making a U-turn to finish red on the day.
The conference’s biggest winner may have been Unity Software—with whom Apple announced a partnership as part of the headset release—which saw shares jump over 17%.

The S&P 500 touched bull market territory yesterday in relation to its October lows.

Two Morgan Stanley Analysts, however, are betting the rally will be short-lived.
Mike Wilson and Andrew Sheets are bucking the consensus of 1.8% earnings growth in 2023, calling for a 16% drop.
Their year-end price target for the S&P 500 is 3,900—approximately 9% below the current level.
Looking out further, the pair expect a dramatic rebound in earnings with growth of 23% and 10% in 2024 and 2025, respectively.

Meanwhile, leadership remains exceptionally narrow with the top 7 stocks accounting for virtually all of the S&P 500’s gains YTD (chart).

But that isn’t stopping investors from piling into stocks: equity funds saw their biggest inflows of the year last week, including record inflows into tech funds.
Optimism is also being reflected in the use of call options, where volume reached the 6th highest on record last week with tech call options nearing levels last seen in the post-pandemic boom.
To watch: CBOE Volatility Index (VIX) is down at levels that have historically preceded a sharp reversal.

Energy

Concerns about global economic growth are outweighing the effects of Saudi Arabia’s announced production cuts.

Worries about a possible recession and the potential impact of higher interest rates are souring demand.
According to a note from Citi, these factors are likely to keep oil prices from reaching the sustained range of high $80s to low $90 Saudi Arabia would like to see.
Meanwhile, money managers are largely ignoring production cuts.

@jkempenergy

Earnings

Yesterday’s highlights:

GitLab Inc GTLB: $-0.06 EPS (vs. -$0.14 expected), $126.9 million in sales (vs. $117.8 million expected).

Customers representing $5,000 and $100,000 of annually-recurring revenue increased 43% and 39% YoY, respectively.
The company guided earnings and revenue for the current quarter above market expectations.

What we’re watching today:

Ferguson PLC FERG
JM Smucker SJM
Casey’s General Stores CASY
Ciena CIEN
Core & Main CNM
Thor Industries THO
Academy Sports ASO
ABM Industries ABM
Cracker Barrel CBRL
Renew Energy RNW
Hello Group MOMO
Dave & Buster’s PLAY
Yext YEXT
Couchbase BASE

Top Headlines

Presidential run: Former VP Mike Pence has filed paperwork to run for the 2024 Republican presidential nomination.
Dam destroyed: Russia and Ukraine are blaming each other for the destruction of a major dam in Kherson which has caused serious flooding.
Surprise hike: The Reserve Bank of Australia unexpectedly its benchmark interest rate to its highest since April 2012.
Factory orders: New orders for manufactured goods in the US unexpectedly shrank in April, falling to their lowest level since October 2020.
Room to run: Quants at Citigroup expect the AI-driven rally in tech stocks to continue as the Fed considers a pause to interest rate hikes.
Equity fund flows: Despite the rally in tech, investors have withdrawn $77.5 billion from equity funds year.
Retail buying: Net purchases of US stocks by retail investors reached almost $1.5 billion on May 30 and 31–the highest daily total in 3 months.
PSA: Cramer says the Dow is poised to lead the market following the debt ceiling resolution.

Crypto