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Maasvlakte Light, Maasvlakte, Netherlands
This lighthouse is inactive located in Rotterdam, the lighthouse stands at 216 feet tall and is the worlds second largest concrete lighthouse. The site is now accessible to the public, but the tower is closed.
Świnoujście Lighthouse, West Pomeranian Voivodeship, Poland
This Polish lighthouse remains active today. It stands at 212 feet. It is the tallest brick lighthouse in the world. The first lighthouse at this location was built in 1828.
*Feel free to send us your photos of Lighthouses to be featured in our weekly market observations. *
U.S. gets a second downgrade
Just days after a credit rating agency stated that Canada’s credit rating would suffer with current spending plans, the U.S. got a downgrade. Over the weekend, Moody’s downgraded the U.S. government’s credit rating to Aa1 from Aaa (the highest possible). Moody’s cited the growing burden of financing the federal debt and budget deficit as major reasons for their decision. Moody’s was the last credit rating agency to downgrade America’s credit rating from the top to the second highest. In 2011, the S&P downgraded the U.S., and in 2023, Fitch downgraded America’s credit rating. Moody’s had warned investors that the U.S. would eventually get a downgrade in its rating if it did not solve its debt issues in 2023.
Originally, this downgrade caused some panic as futures sold off. However, when markets opened on Monday, futures had turned green.
This downgrade from Moody’s drove up interest rates even further as they hit their highest levels since October 2023 on Monday. Investors and consumers have not been the only groups that have felt the pain of higher rates. The government has been forced to issue debt at higher rates after the recent interest rate increases. According to Moody’s, interest payments could account for 30% of the federal government’s revenue by 2035 compared with 9% in 2021.
We have stated over the last few years that this should be a worry for many investors, and it was a reason we remained on the sidelines when it came to long-term bonds. We think the trend could continue especially if tariffs impact consumer prices and inflation finds its second wave.
While psychologically jarring, history suggests the downgrade will have little impact on stock returns in the longer term. Instead, investors should focus on corporate earnings. It is also important to remember that this was the third credit rating agency to downgrade the U.S., not the first. We think it’s more symbolic and not a reason to panic.
Big news for Nuclear
This week, Germany, which long opposed mass nuclear energy adoption pivoted their positioning. Germany officially dropped their opposition to nuclear energy as they agreed to remove anti-nuclear bias from European Union legislation. This is huge win for nuclear energy and its biggest supporter in the EU, France. Berlin will reportedly treat nuclear energy on par with renewable energy moving forward.
We think that moving forward, this will have a massive impact on the uranium industry. This will keep nuclear reactors online in Europe for longer and potentially restart power plants in Germany that have been offline for a long time.
This pivot from Germany is strategic as the EU seeks to decrease its reliance on Russian energy and decrease its domestic energy prices. After Germany’s pivot, this only leaves Austria, which is opposed to nuclear energy in the EU.
In other European nuclear news, Spanish power plants that were set to close will reportedly remain online if the government allows for it. Many believe that the government could be forced to extend these reactors due to recent grid issues across the country.
Collateralized burritos and T-shirts
In past editions of this publication, we have talked about buy-now, pay-later services. This service has popped up all over the world in recent years. Essentially, consumers buy a product or service now and pay for it in weekly, monthly, or even bi-monthly installments. These companies providing these services offer 0% or near 0% interest rates for many online purchases, including fast food deliveries and consumer goods, including Lululemon and many other retailers. The use of this service has been surging as consumer balance sheets continue to deteriorate. If you utilize the service properly and there’s no interest, the service makes sense, but how is that a business model for the company, especially when there are no assurances that consumers will pay back their microloans?
On Tuesday, buy-now-pay-later provider Klarna announced that its customers are struggling to repay their loans. According to the firm, American households owe a record $18.2 trillion in various forms of debt and have begun using their services for the basics. Consumers are struggling to get by after numerous years of elevated inflation and interest rates, and current economic uncertainty being driven by tariffs. The same can be said for consumers across other developed nations, including across Europe, Canada, and other countries.
Back to Klarna. The company reported that consumer credit losses grew to 17% in the first quarter, hitting a record $136 million. The company reported a net loss of $99 million, significantly worse than last year’s loss. Revenue for the firm increased 13% year over year, and the firm now has over 100 million active users globally.
These poor numbers will more than likely lead Klarna to continue its hold on its IPO plans. Last month, the SoftBank-backed firm paused its IPO plans due to market turbulence (other firms like StubHub also put their IPO plans on ice). Klarna seeks a valuation of $15 billion. Last year, Klarna raised capital at a valuation of $14.6 billion, up from a valuation of $6.7 billion in mid-2022 but down from a $45.6 billion valuation in a 2021 funding round.
According to the company’s CEO, they have been able to reduce their headcount by 40% due to investments in artificial intelligence. Details on this headcount change were not provided to the public, but we assume that redundancies were eliminated and Klarna is focusing on efficiency ahead of its IPO.
Klarna’s largest competitor in the space is Affirm Holdings, which trades on the Nasdaq. The firm has a market capitalization of $16 billion. Shares have decreased 23% this year despite an increase in demand for this service from consumers.
We will continue to watch firms in this space and see how they continue to innovate. For now, we think these companies are sitting on some risky loans, and it’s a huge stay away from us.
Keep clipping those dividends
This past Wednesday morning, the internet and Wi-Fi for over 100,000 Canadians went out. Bell customers across Ontario and parts of Quebec had no service. This mass outage comes nearly three years after a massive Rogers outage that impacted all of Canada. We bring this up not to make fun of the Canadian telecommunication companies, but it reminded us to take a look at Bell and its recent earnings.
We do not own Bell shares, we are not interested in acquiring shares, and we think there could be more pain ahead. Over the last few years, Bell has loaded up on debt to finance its operations and dividends. Over the same period, shares have collapsed. They were recently (2 weeks ago) forced to cut their dividend and last year were forced to sell one of their crown jewel assets, the Toronto Maple Leafs, and their stake in Maple Leafs Sports and Entertainment. Bell is a reason investors should not purely chase and focus on dividends. While investors have clipped, their dividend shares have continued to decline. The pain is not over for shareholders, the balance sheet remains a mess, and the turnaround will be more drawn out than many presume. We also believe that many shareholders have lost confidence in Bell’s current leadership team.
In Bell’s recent earnings, they reported a decline in revenue year-over-year, but a jump in earnings per share. Management cut their quarterly dividend by 56% as a part of this earnings release.
We know many investors like to attempt to buy the bottom; however, in this case we would warn against doing so. Take a look at the chart, there looks like a bunch of bottoms over the last 5 years.
Crypto summer?
On Wednesday, Bitcoin hit a new all-time high above $109,000. The latest surge in the price of Bitcoin is due to bullish regulatory developments. On Monday, the U.S. Senate advanced a Bill for stablecoins. The Bill aims to regulate stablecoins through legislation. Although the Bill will not impact Bitcoin or other major cryptocurrencies, it is a positive movement and sentiment for the overall cryptocurrency asset class. In other news, the Texas House of Representatives voted to approve a Bitcoin reserve on Tuesday. The Texas Bill creates a framework for the state to create a strategic Bitcoin reserve. The legislation will have to be signed into law by Governor Greg Abbott.
We think these bullish news pieces will continue to roll out. There are politicians on both sides of the aisle who support the adoption of Bitcoin and other cryptocurrencies.
Even Wall Street continues to pile into the action. On Tuesday, Jamie Dimon, JPMorgan’s CEO, announced the bank will allow clients to buy Bitcoin and other select cryptocurrencies. Dimon reiterated his long-held skepticism on the asset class in the announcement. JP Morgan joined Morgan Stanley in allowing this offering to select clients.
However, it will not be smooth sailing; Bitcoin and cryptocurrencies will continue to be highly volatile.
We have allocated a small portion of capital to the overall cryptocurrency asset class over the last few months through a fund that offers diverse exposure to the asset class. For now, the position (EXPAAM) remains small and inside our Alternative Asset Trust.
U.S. bond auction
A U.S. 20-year government bond auction sent markets lower on Wednesday due to weak demand from investors. The auction led to Treasuries reaching new lows in 2025 as yields moved higher.
The Treasury Department sold $16 billion of newly issued 20-year bonds. This auction is not a new revelation, as the Treasury often borrows to fund the government. However, due to overall economic uncertainty, investors worried that demand could be soft at this auction, and they were right.
The auction saw investors accept a yield of 5.047%, the first 20-year auction above 5% since October 2023. Since the auction, yields jumped to 5.1%, pushing bond prices lower. The weak demand reflects the Treasury having to entice investors with higher yields.
Funny enough, investors tend to ignore the 20-year as they prefer the 10 or 30-year instrument, and 20-year yields often are weirdly higher than their counterparts.
The credit market continues to screech. Is now the time for Powell and the Federal Reserve to start slashing?
Auctions are increasingly in focus as investors are wary that demand might be weak given greater uncertainty about the outlook. Fiscal worries have intensified as a Republican Congress marches toward a new tax bill that could add $3.3 trillion to the national debt. Republicans are aiming to move the bill through the House of Representatives before Memorial Day, allowing the Senate to consider it over the summer.
Canadians pile into U.S. indirectly
Despite growing tensions between the U.S. and its closest ally, Canada, Canada’s pension plan is increasing its exposure to U.S. assets. Nearly half of the CPP’s assets are invested in the U.S., despite pressure from government officials to invest more domestically.
The CPP is not dumb, they know Canada is struggling economically and investing in the market in volume is currently a poor choice like it has been on a relative basis for a few years.
The CPP manages $714 billion (CAD) in pension assets, 47% of which is invested in the U.S. Last year, the number was 42%, in 2023, it was 36%. Canadian executives have been lobbying for a few years now to force the CPP to invest more at home. The CPP are doing the opposite despite this pressure. Over the last 5 years, the CPP’s U.S. assets have produced an annual return of 9.6% versus a 5.8% return for its Canadian holdings.
Why is our country’s largest pension plan going to purposely seek lower returns especially as pension obligations increase. We will also warn our readers that the exposure to U.S. assets being overweight makes sense as the U.S. accounts for approximately 70% of global capital markets.
MacNicol & Associates Asset Management                                                            Â
May 23, 2025
The Weekly Beacon -May 23 2025
