1) For the first time in three years, the Federal Reserve raised its benchmark interest rate yesterday – as expected.
Here's a Wall Street Journal article with statements from Fed Chairman Kevin Warsh:
Warsh said the quarter-point move "removed a dose of accommodation." In central-bank parlance, accommodation means stimulus, so the phrase suggested officials don't think rates are restraining the economy even after lifting them.
Warsh also listed geopolitics – a euphemism for the Iran war and the energy shock it has caused – among three developments since July that led to Wednesday's decision. "There's no hiding from hot spots around the world," he said. Officials had changed their judgment about how those conflicts were likely to unfold, suggesting they no longer see the energy shock as a disruption to wait out, he said...
Warsh presented his view of policy as one the rate-setting committee shared. Warsh's framing suggested that the two hikes officials had penciled in for the year, which includes the one delivered Wednesday, are "likely a down payment on what might need to be a much more prolonged policy tightening cycle"...
In an X post on Tuesday, before the Fed meeting, Jim Bianco of Bianco Research noted, "Many argue that the Fed is about to make a mistake by hiking rates..."
But he disagreed with this view, pointing out that the current interest-rate cycle "stands apart from all previous cycles" for two reasons: It will be the only one in 50-plus years where the Fed cut rates for an extended period and where 10-year yields are higher.
Take a look at this chart from his post (the current cycle is in black):
Bianco concludes (correctly, I think):
The Fed made the mistake two years ago by cutting rates, and the market has been rejecting it through higher yields from 2-year to 30-year.
Ending this policy error could end the rise in yields.
And while the Fed raising rates can be bad for stocks, I'm not convinced that this will be the case here.
The inflation the Fed is seeking to tame is, in large part, due to strength in the economy and consumer spending – which is good for stocks.
In fact, analyst Rahul Sharma made a series of X posts that capture recent bullish comments by several companies' management teams...
... says consumer not just 'resilient' but 'strong'. Consistent spending on debit & credit week after week even if categories shift. Credit quality still excellent. Cites wage gains, strong labor market. Doesn't believe small rate rises will derail this.
... CEO highlights solid +4% consumer spend in August. Gas part of that but so is very discretionary stuff. Cites wage growth, steady jobs & credit quality normalising near 40-year lows. No signs of stress: consumer 'continues to spend'
Visa update on consumer: spending both in US & overseas remains 'strong & stable' through August, US +9% after +10% in [the second quarter]. Cross border accelerated 200 [basis points] led by web.
Mastercard (unsurprisingly) echoes Visa. August continued July trends... also keen to point out how, across board, consumers spending on experiences like eating out, movies & travel. Strength in some of the most discretionary areas.
Another part of the market is about to be transformed by a spending boom...
It all has to do with a huge shift in modern warfare – one that I've seen with my own eyes on the frontlines in Ukraine. And it will redirect a flood of lucrative government contracts to one tiny, essential corner of the defense sector.
My colleague Joel Litman, founder of our corporate affiliate Altimetry, is holding a special presentation to reveal which group of stocks will see the biggest gains from this shift. And I'll be joining him to break down these under-the-radar companies.
We're sharing all the details on Thursday, September 24, at 10 a.m. Eastern time. Click here to reserve your spot.
2) I've written extensively about aircraft-engine leasing company Willis Lease Finance (WLFC), which is the largest holding in my friend's hedge fund. (He chooses to remain anonymous.) I know his track record, and he's the smartest financial analyst I know, so I've shared his insights on the company with my readers many times.
Interestingly, I had a conversation recently with another friend – an old-school investor who has done some investing in the aircraft-engine industry – and he's super bearish on WLFC. So I shared his critiques with my bullish friend and invited him to respond.
I'll share each of my bearish friend's points on WLFC in quotes and my bullish friend's response below it, starting with: "WLFC is 5:1 levered."
This is not accurate. It would be 5:1 if you looked at their GAAP stated equity, but the fair value equity is more than double the stated number. While we also don't love excessive leverage in any business, we could easily argue that in an environment where engine values are rising so rapidly that using a bit of leverage isn't a horrible thing. Further, the shift to the asset management model will also de-risk.
"WLFC is selling assets and booking gains, but are likely cherry picking."
We are very confident this is not the case. The asset management vehicles they are selling into have defined criteria for diversifying asset types, geographies, airlines, etc. so it is not conducive to cherry picking. They have strong expertise in engines, so we view their trading business as similar to Goldman Sachs where you are always buying and selling engines based on your expertise. Lastly, if they were cherry picking their gain on sale would have been significantly larger than it was reported in the second quarter.
"WLFC's 85% utilization isn't good."
We disagree. 85% is what we would consider close to 100% for their business for two reasons. First, you always have engines coming in and out of the shop so it would be impossible to be at 100%. Further, one of the strengths of WLFC's spare engine business is that they pride themselves on always having an engine available. The situations where a spare engine is needed immediately can be very profitable for WLFC and builds their airline partnerships as the airlines know they can always deliver, even if at a premium price.
"Competitor AerCap (AER) has a 5.2% return on assets versus only 3.1% for WLFC."
We are long on AER because we think very highly of the company and the management and think the stock has significant upside. That said, they are significantly different companies at different stages of their growth so this is not an apples-to-apples comparison.
"Overhead (selling, general, and administrative expenses) as a percent of assets is 0.76% at AER versus 4.83% at WLFC."
We agree that this is an area where WLFC can improve, and in 2028 stock-based compensation should be 50% of what it was in 2026, and that is with revenues growing.
"WLFC's 2% annual depreciation of engines is laughable."
We disagree, especially in an environment where most engine values have appreciated meaningfully in recent years. Further, WLFC is 15-year straight-line depreciation down to a 55% residual value (so 3% per year). When you combine increasing engine values with leverage and the depreciated values it results in a substantial amount of hidden value that is not reflected in GAAP financials.
"I like the aircraft engine leasing business, but not with 5:1 leverage."
We generally agree that we don't love leverage, but when you have access to the asset-backed security ("ABS") market, which they have had for 25 years, we think that helps manage the overall risk to the company. Further, with the asset management business growing this will further de-risk them.
"WLFC's net asset value is burdened by $150 million per year of overhead costs, of which $125 million is excess. This reduces WLFC's value by $1 billion."
We agree expenses have been running too high, but they have also been investing significantly in growing several of their business lines. It would be impossible for a business like this to cut $125 million of the $150 million.
"I think their financials and book value are phony."
The only thing phony that we see is that the book value is massively understated given the dynamic of the engines appreciating versus the depreciation from an accounting perspective. Further, their book value does not include the deferred maintenance income (about $125 million), the value of their order book, the value of their joint venture with Mitsui, their eventual Russia insurance settlement, and several other smaller items. This statement that their financials and book value are "phony" has nothing to support it.
"WLFC is essentially a $500 million hedge fund."
Not sure what this comment means – their stated GAAP common equity is $710 million, but fair valued would be closer to $1.5 billion after-tax, and they aren't a hedge fund. We have been to several industry events and met with an extensive number of their competitors and WLFC is viewed as the gold standard in the engine business.
Thank you, my friends, for letting me share your insightful and spirited debate with my readers!
3) Another sign of an AI bubble is ridiculous financial metrics, as my old friend, legendary short seller Jim Chanos, points out in this X post:
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.