Three Things (9/11)

The watered down Basel Endgame

The Fed and other regulatory agencies made the decision to water down their original proposal to increase capital requirements for big banks. Capital requirements determine how much liquidity a bank must keep on hand to fund loans and honor withdrawals. The regulatory overhaul known as the Basel Endgame would have required a ~19% boost in capital requirements, but instead, it’s been revised to a 9% increase.

The original proposal was an attempt to remedy fears and create safeguards following the 2008 global financial crisis. However, banks, business groups, and lawmakers were quick to push back, as Jamie Dimon argued the proposed changes could make loans more expensive and harder to access, which would draw business to non-bank lenders. While it’s important that there are laws in place to protect consumers and boost their confidence in the banking system, a ~19% increase in capital requirements would make business so challenging that it could lead to even further consolidation amongst banks.

Drive to dealmaking

Formula 1 finalized a $2.55 billion loan package, which will help finance its parent company Liberty Media Corp.’s acquisition of a motorcycle racing company called MotoGP World Championship. The deal was initially set up as an $850 million leveraged loan but was refinanced later to add on a $1.7 billion term loan. The refinance was driven by a decrease in the cost of new debt, as interest rates have steadily declined this year.

There’s been a surge in leveraged loan deals following Labor Day, a sign that dealmaking is heating up again and one of the many trickle-down effects of lower interest rates. It’s economics 101 - lower borrowing costs means companies are more likely to invest in M&A ventures or refinance existing debt obligations for better rates, both of which create higher transaction revenues and benefit investment banks. Formula 1’s new deals are a move in the right direction, but it will take time to see the full effects of lower interest rates ripple across the economy.

Tech takes the S&P

Palantir and Dell joined the S&P 500 this week, as Palantir replaced American Airlines and Dell replaced Etsy. In order to join the S&P 500, a company has to report a profit in its latest quarter and have cumulative profit over the last four most-recent quarters. After being added, Palantir surged ~14%, which is not unusual given many portfolio managers that track the index buy the newly added stocks to update their portfolios.

The news is another indication that tech companies are progressively taking up a greater share of the S&P 500. The Nasdaq is traditionally known as the index with the highest concentration of tech, but the S&P 500’s Magnificent Seven companies have grown in value so much in recent years that tech performance can sway the index’s returns. Despite signs that investors are shifting away from what has been winning (tech) and into value names that have lagged, the new additions show that tech investing isn’t a fleeting trend.

Disclosures:

As of writing, Palantir is a 1.17% holding in the ARK Venture Fund.

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