Specialty Capital News & Views: April 12, 2024

In this week’s write up we wanted to focus on the inflation numbers released a few days ago as well as the recent litigation in the revenue based finance landscape.

CPI was released on Wednesday and came in hotter than expected with annual inflation up 3.5% YoY (vs 3.4% expected) and Core CPI was up to 3.8% (vs 3.7% expected).

This is the third monthly gain. Energy and shelter was responsible for half the rise in inflation. Services sector continues to remain strong and was up last month, consumers want to spend. Goods at grocery stores remained unchanged.

Future prices for FED rates are showing 2 cuts now instead of 3 and the likelihood of a cut in June has gone down to ~18%.

Our view on inflation is pretty much unchanged, we believe that while inflation has come down tremendously from its peak, it makes sense for it to be stubborn at these levels. Inflation is one of the most difficult indicators to forecast and we put it in “the too hard box”. We also dont think month to month changes should be put under the microscope. We use it as a metric to think about how consumers are acting with their pockets and how it can affect our pricing in the short and medium term.

Overall, it seems that the services sector remains strong, so we remain aggressive in SIC. We look for long TIB and great cash flow. On the other hand, housing remains stagnant, hence higher shelter costs. With folks not moving and staying put, we’ve seen business in the furniture SIC struggle and we have tightened up in this sector – we believe defaults will increase.

In other news, besides the NY AG going after companies with shady practices in the revenue based finance space, the Southern District of NY and Department of Justice has opened up scope and are looking more into the line of credit frauds and the lack of abiding by the reconciliation provision. We believe that there will be more indictments in the following months. Overall, this will bode well for our industry.

Happy Funding!