What is an Inverted Bond?

Bond market predicts a recession ahead

Inverted bond chart, also known as the yield curve inversion, is a powerful economic indicator that has garnered significant attention in recent years. In simple terms, an inverted bond chart is when the yield on short-term bonds exceeds the yield on long-term bonds. This event is considered a warning sign of an impending economic recession. In this article, we will explore what an inverted bond chart is, how it works, and what it means for investors.

What is an Inverted Bond Chart?

A bond is essentially an IOU issued by a borrower, such as a company or a government, to an investor. The bond pays interest to the investor at a certain rate, also known as the yield. The yield on a bond is determined by the prevailing interest rates in the economy and the creditworthiness of the borrower. Generally, the longer the maturity of the bond, the higher the yield investors demand. This is because investors demand a premium for lending their money for a longer period, as there is more risk involved.

An inverted bond chart is when the yield on short-term bonds exceeds the yield on long-term bonds. This is a rare occurrence and happens when investors lose confidence in the economy’s future prospects. Normally, investors expect to receive a higher yield on long-term bonds because they are taking a greater risk by lending their money for a longer period. However, when investors are worried about the economy’s prospects, they demand higher yields on short-term bonds as they are more concerned about the immediate future. This demand for short-term bonds drives down their yields and causes the yield curve to invert.

How Does an Inverted Bond Chart Work?

An inverted bond chart works by reflecting the market’s expectations of future economic growth and inflation. When investors are optimistic about the economy’s future prospects, they demand lower yields on short-term bonds as they believe that interest rates will remain low in the future. This optimism drives up the yields on long-term bonds as investors are willing to lend their money for a longer period.

Conversely, when investors are pessimistic about the economy’s future prospects, they demand higher yields on short-term bonds as they believe that interest rates will rise in the future. This pessimism drives down the yields on long-term bonds as investors are less willing to lend their money for a longer period. This creates an inverted bond chart as the yields on short-term bonds exceed those on long-term bonds.

What Does an Inverted Bond Chart Mean for Investors?

An inverted bond chart is a warning sign of an impending economic recession. Historically, every recession in the United States since 1950 has been preceded by an inverted yield curve. This is because an inverted bond chart signals that investors are worried about the future prospects of the economy and are demanding higher yields on short-term bonds. This demand for short-term bonds drives down their yields and causes the yield curve to invert.

Investors should take an inverted bond chart seriously, as it indicates that the economy is likely to experience a slowdown in the near future. This can have significant implications for their investment portfolios. During a recession, the stock market tends to perform poorly, and investors may experience significant losses if they are not properly diversified. Additionally, companies may cut dividends, leading to a decrease in income for investors who rely on dividends for income.

Investors should consider adjusting their portfolios in response to an inverted bond chart. This may involve reducing exposure to stocks and increasing exposure to bonds, particularly those with short maturities. Short-term bonds are less affected by changes in interest rates and are less volatile than long-term bonds, making them a good option for investors during a recession. Investors may also consider investing in defensive stocks, such as utilities and consumer staples, as these tend to perform well during economic downturns.

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Shares of Block lower on short seller report!

Block intends to explore legal action against Hindenburg Research

#Hindenburg Research has published a short report on Block (SQ), formerly known as Square, stating that the firm’s “2-year investigation has concluded that Block has systematically taken advantage of the demographics it claims to be helping.

The “magic” behind Block’s business has not been disruptive innovation, but rather the company’s willingness to facilitate fraud against consumers and the government, avoid regulation, dress up predatory loans and fees as revolutionary technology, and mislead investors with inflated metrics.”

The firm, which discloses that it has taken a short position in shares of Block, contends that the company “has misled investors on key metrics, and embraced predatory offerings and compliance worst-practices in order to fuel growth and profit from facilitation of fraud against consumers and the government.”

In addition, it believes “Jack Dorsey has built an empire-and amassed a $5 billion personal fortune-professing to care deeply about the demographics he is taking advantage of. With Dorsey and top executives already having sold over $1 billion in equity on Block’s meteoric pandemic run higher, they have ensured they will be fine, regardless of the outcome for everyone else.”

Block Responds

Block said in a statement: “We intend to work with the SEC and explore legal action against #Hindenburg Research for the factually inaccurate and misleading report they shared about our Cash App business today.

Hindenburg is known for these types of attacks, which are designed solely to allow short sellers to profit from a declined stock price. We have reviewed the full report in the context of our own data and believe it’s designed to deceive and confuse investors. We are a highly regulated public company with regular disclosures, and are confident in our products, reporting, compliance programs, and controls. We will not be distracted by typical short seller tactics.”

Robert Baird

Baird analyst David #Koning comments on a short report that is significantly weighing on Block shares in pre-market trading, noting that the report implies that the company’s CashApp is reasonably easy, or relatively easier than other banking services, for criminals to use and claims that CashApp is somewhat complicit in allowing this type of behavior.

However, the firm believes Block helps many underbanked access the financial markets and “like any organization probably has some clients that are criminals.” The firm views the stock as good value, but is concerned with the prevalence of any criminal activity and how this could impact investor sentiment, estimating that “in a pretty dire case” shedding 20% of accounts could impact about 8% of total gross profit. Baird has an Outperform rating and $92 price target on Block shares, which are down about 20% to $58.07 in early trading following Hindenburg Research’s short report.

KeyBanc

KeyBanc analyst Josh #Beck sees “no merit to the disparaging claims” made against Block by a “smaller outfit” that published a short report and rather views the report as “observations from a relatively novice industry outsider who is not familiar with standard operating practices and principles within the FinTech industry.”

The firm, which said Block is subject to numerous laws and regulations as a financial services provider, believes Block “fully complies with applicable regulations and laws and prevents the maximal amount of fraud possible within a business that is inherently subject to, while not immune to, any instances of fraud.” KeyBanc has an Overweight rating and $100 price target on Block shares, 

Mizuho

Mizuho analyst Dan #Dolev says Hindenburg Research’s short report “makes valid arguments,” such as the slowdown in inflows and sustainability of the instant deposit fees.

While this might increase regulatory scrutiny, other claims and risks around high, unregulated interchange fees and definition of monthly users are well known to investors, the analyst tells investors in a research note. The firm says other aspects of the report, like adding back stock based compensation after Block publicly shifted focus to include non-cash expenses in operating income, “may hold less water.”

Mizuho says the near-term bull case on Blok remains reaching better than expected profits helped by cost control. The long-term bull case remains creating a “unique” closed-loop payments network by connecting merchants and consumers, the firm adds. It has a Buy rating on the stock with a $93 price target.

Raymond James

Raymond James contends that this morning’s short report on Block issued by Hindenburg Research doesn’t include a lot of “new” news or a “bombshell” and argues that the biggest risk is potentially drawing scrutiny from regulators and politicians, which could create an overhang on the stock.

However, given the situation concerning SVB Financial (SIVB) and the current banking fallout, the firm would guess “this is way down the list of priorities” for financial regulators at this time.

The firm, which adds that “while being accused of overstating users certainly isn’t positive,” notes that there are no accusations of fraudulent accounting and the “revenue is real.” Raymond James has a Market Perform rating on Block shares.

RBC Capital

RBC Capital analyst Daniel Perlin made no change to the firm’s Outperform rating or $95 price target on shares of Block. The firm says the short report that was released today focuses on Block’s “underbanked” user base, as being a series of bad actors, enabling the overstatement of its users metrics, as well as BNPL via its acquisition of Afterpay, systematically embracing predatory pricing, the analyst tells investors in a research note.

RBC Capital’s view of the stock is unchanged, but thinks the negative overhang can persist for some time.

Shares of Block are down 20% to $58.10.

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Diversey Holdings sold for $4.6 billion

Diversey to be acquired by Solenis for $8.40 per share in cash

Solenis and Diversey Holdings (DSEY) announced they have entered into a definitive merger agreement under which Solenis will acquire Diversey in an all-cash transaction valued at an enterprise value of approximately $4.6B.

Diversey Holdings, Ltd. provides infection prevention and cleaning solutions worldwide. It operates in two segments, Institutional, and Food & Beverage. 

Upon completion of the merger, Diversey will become a private company.

Under the terms of the agreement, Diversey shareholders — other than shareholders affiliated with Bain Capital Private Equity — will receive $8.40 per share in cash, which represents a premium of approximately 41.0% over Diversey’s closing share price on March 7, 2023, the last full trading day prior to the transaction announcement, and a premium of approximately 59.0% over Diversey’s 90-day volume-weighted average price.

Bain Capital will receive $7.84 per share in cash and will rollover a portion of its shares of Diversey into an affiliate of Solenis in exchange for common and preferred units of such affiliate.

Headquartered in Wilmington, Delaware, Solenis is a manufacturer of specialty chemicals used in water-intensive industries, which was acquired by Platinum Equity in 2021.

“The merger presents a unique opportunity to enhance value and create a more diversified business with increased scale, broader global reach, and superior customer service capabilities. It will enable the combined company to grow and provide a number of attractive cross-selling opportunities, including meeting increasing customer demand for water management, cleaning and hygiene solutions,” said Phil Wieland, Chief Executive Officer of Diversey.

Solenis CEO John Panichella will lead the combined company following the transition and integration.

Diversey’s Board of Directors formed the Special Committee to evaluate and negotiate the transaction with the assistance of independent financial and legal advisors.

Following this process, the Special Committee unanimously determined that the transaction with Solenis is in the best interests of Diversey and its shareholders, and, acting upon unanimous recommendation by the Special Committee, the Diversey Board of Directors unanimously approved the merger and recommended that Diversey shareholders vote in favor of the merger.

The Special Committee negotiated the terms of the merger agreement with assistance from its independent financial and legal advisors.

In connection with the transaction, Solenis has entered into a support agreement with Bain Capital, pursuant to which Bain Capital has agreed to vote all of its Diversey shares — which represent approximately 73% of Diversey’s outstanding shares — in favor of the transaction, subject to certain terms and conditions set forth therein.

Solenis intends to finance the transaction with a combination of committed debt and equity financing, including the contribution by Bain Capital.

The merger is expected to be completed in the second half of 2023, subject to the satisfaction of customary closing conditions, including approval by Diversey shareholders holding a majority of the outstanding shares of the Company and receipt of regulatory approvals.

Upon closing of the transaction, Diversey’s ordinary shares will no longer be listed on any public market.

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North American rail traffic declined 3.4% last week

North American rail traffic down 3.4% for the week ending February 25

The Association of American Railroads, AAR reported U.S. rail traffic for the week ending February 25, as well as volumes for February 2023.

U.S. railroads originated 905,744 carloads in February 2023, down 1.6% or 15,101 carloads, from February 2022.

U.S. railroads also originated 943,979 containers and trailers in February 2023, down 8.4%, or 86,351 units, from the same month last year.

Combined U.S. carload and intermodal originations in February 2023 were 1,849,723, down 5.2%, or 101,452 carloads and intermodal units from February 2022.

“Coal, chemicals, and grain together account for more than half of all non-intermodal U.S. rail volume.

When all three are down, like they were in February, it’s very hard for total carloads not to be down too,” said AAR Senior Vice President John T. Gray.

On the positive side, several commodities including crushed stone and sand, petroleum products, steel products, grain mill and food products showed very strong performances.

Total U.S. weekly rail traffic was 459,233 carloads and intermodal units, down 5.9% compared with the same week last year.

Total carloads for the week ending February 25 were 226,435 carloads, up 0.1% compared with the same week in 2022, while U.S. weekly intermodal volume was 232,798 containers and trailers, down 11.1% compared to 2022.

North American rail volume for the week ending February 25 on 12 reporting U.S., Canadian and Mexican railroads totaled 327,221 carloads, up 2.9% compared with the same week last year, and 308,029 intermodal units, down 9.3% compared with last year.

Total combined weekly rail traffic in North America was 635,250 carloads and intermodal units, down 3.4%.

Publicly traded companies in the space include CSX (CSX), Canadian National (CNI), Canadian Pacific (CP), Kansas City Southern (KSU), Norfolk Southern (NSC), Union Pacific (UNP), Greenbrier (GBX), Trinity Industries (TRN), FreightCar America (RAIL) and Wabtec (WAB).

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