What’s Doing Today?  Plus, a Look At Privates

This was a relatively strange morning for me.  I tend to receive far more questions about market activity on big down days, but this morning’s modest decline somehow spurred a series of requests for comments. Perhaps there were fewer than usual sources for journalists to consult because it is a popular school vacation week.  Fortunately, there are some useful topics to consider today, even as stocks search for direction this morning, though with a modest “risk-off” bias.  As I type this, the S&P 500 (SPX) has basically just given back yesterday’s decent bounce off the lower end of this month’s trading range. 

The continued saber-rattling about Iran has led to another bump in crude oil prices, which has in turn led to Energy being the best performing SPX sector, but has also put a bit of a damper on the market’s mood.  Other than Energy, no sector was a standout to the upside.  The only other sector besides Energy with a +/-1% move in either direction is Financials, which brings us to one of today’s more important news stories.

Reports that Blue Owl (OWL) halted redemptions at one of its private credit funds is being treated as problematic by at least some investors.  This brought to mind comments from Jamie Dimon, JPMorgan’s (JPM) CEO, when he warned of “cockroaches” in the US economy after some high-profile bankruptcies in October.  Mohammed El-Erian did nothing to assuage concerns when he wrote, “Is this a ‘canary-in-the-coalmine’ moment, similar to August 2007?” on X this morning.  Unpleasant reminders of the beginnings of the Global Financial Crisis are not helpful to investors’ psyches, even if they are indeed important reminders about risk in a market that still features a bias toward returns over risks.

Changing perceptions about Walmart’s (WMT) guidance helped stocks come off their pre-market lows.  The guidance was originally perceived as weak, but then investors remembered that WMT often offers conservative guidance to start the year.  That’s a very different reaction from what we have seen with most other companies, where subpar guidance has led to some significant post-earnings pullbacks.  WMT, however, has a long record of underpromising and overdelivering.  Investors are choosing to give them the benefit of the doubt.  The stock’s 44 P/E is a sign of investors’ positive sentiment about WMT’s prospects. 

It is also not unreasonable to expect markets to be relatively cautious ahead of tomorrow’s PCE and GDP reports.  Either can move markets, with PCE being particularly crucial after yesterday’s FOMC minutes.  The committee does not seem inclined to cut rates unless circumstances dictate, so a non-consensus number in either direction could shift perceptions about the likelihood of rate cuts this year.  A reading above the 0.3% consensus expectation for month-over-month Core PCE would reduce the likelihood of near-term cuts; a reading below that level would increase the likelihood. 

I was also asked a series of interesting questions about individual investor demand for exposure to private companies.  Since at least some of you are individual investors with similar questions, here is what I wrote to a journalist:

1. Is there an appetite for such investment among retail investors? — It’s clear that there is public demand for access to well-known private companies, “ultra-unicorns,” for lack of a better term.  The start of the current bull market in November 2022 almost perfectly coincides with the launch of ChatGPT, and enthusiasm about AI has clearly played a key role ever since.  OpenAI and Anthropic have been key catalysts for the phenomenon despite their private-company status.  It is quite logical that individual investors might want the same sort of access that large institutions have.  The same logic applies to SpaceX, but with the added factor that Elon Musk has a broad and devoted following among individual investors, particularly those who were early investors after TSLA went public and were richly rewarded for their faith.  It’s quite understandable why they would want access to that company.
2. Is it easy to get a piece of these companies? – Not at present.  There is talk about tokenizing these securities to improve access, but this is not available to US investors.  For now, one needs to be a qualified investor (a specific SEC requirement) at a minimum, but the harder part is getting access to the company.  The companies might also want to limit the number of investors, making it difficult even with access.
3. Is this a good time to get on board? — I can’t say because I have no ability to formally analyze their financial statements.  These companies’ valuations have clearly been rising in recent months, so no current investor is finding an undiscovered diamond in the rough.  One also needs to reckon with the huge cash needs of some of these companies.  OpenAI, for example, has at least $500 billion in investment commitments over the coming few years, but their 2025 revenues are believed to be around $20 billion.  They either need to grow incredibly fast, borrow immense amounts of money, sell huge amounts of stock, or all of the above to accomplish that spending.
4. What are some of the pitfalls of investing in private companies for retail investors? – It is important for individuals to understand that while it is easy to focus on the potential rewards for investing in companies like these, there is no shortage of risks:
5. Financial data for private companies is limited.
6. Professional investors have teams of skilled analysts who can request and properly interpret a private company’s financial statements.  And they get it wrong sometimes too – there are recent examples of companies going public with valuations below their most recent round of private funding (can’t recall them offhand though).
7. Liquidity is, by definition, limited.  Institutional investors understand that their ability to exit these investments can be quite difficult, so they are prepared to hold them for long periods of time.  Individual investors, particularly those with near-term liquidity needs, could find themselves stuck.
8. Their track records are short and their technologies cutting edge.  The latter offers huge potential opportunities, but technological change is unpredictable at best.  And the former means that we have little upon which to judge their management’s abilities once a company shifts from being an entrepreneurial disruptor to an established large entity.