Private Wealth

Weekly Research Briefing: Downtrends Everywhere

May 17, 2022

As investors continue in their risk avoidance, assets seem to be for sale almost everywhere. Sure, a bounce like the one on Friday will make everyone feel good for a day, but as soon as the joy is gone, we return to earnings misses met with collapsed stock prices, lowered price targets caused by multiple compression on stocks that beat earnings, and continued lowering of global GDP targets because of China/Ukraine/Russia/inflation/interest rates/growth pulled forward during COVID/etc. Six straight down weeks for stocks and we are heading into the summer recess where investors will have lots of camelback humped charts to wade through. With the long list of uncertainties ahead for 2022, it will be tough for stock investors to return to their buying ways. But if China can turn on a few economic switches, the equity market could put in a decent bounce and possibly stabilize if inflation and interest rates continue to roll over. Until then, expect more ugly sets of economic data like today's Empire Fed Manufacturing and fewer reasons for investors to step into the ring.

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Very few positives in Monday's Empire Fed Manufacturing for May...

The only nice thing that we can say was that prices fell a bit and the future looks brighter than today.

The Empire manufacturing index decreased by 36.2pt to -11.6 in May, its second lowest level since May 2020. The underlying composition was weak, as the new orders (-33.9pt to -8.8) and shipments (-49.9pt to -15.4) components fell sharply into contractionary territory, while the employment component increased moderately (+6.7pt to +14.0). The delivery times component decreased by 1.6pt to +20.2—implying that delivery times lengthened for a smaller share of respondents—and the prices paid component declined (-12.7pt to +73.7). The 6 months-ahead business conditions index increased by 2.8pt to +18.0.

Goldman Sachs

As U.S. and global economic activity slows, expect to see more retreats in prices like we saw in the PPI and CPI last week...

US job vacancies rate

The Daily Shot

The Univ. of Michigan consumer sentiment index dropped to the lowest level since 2011…

Consumers remain wary of higher purchase prices, growing uncertainties, rising interest rates, (and falling stock prices?).

Market pricing for the number of 25 bps Fed rate hikes

The Daily Shot

Big ticket purchases seem to be off the table for the time being...

Market pricing for the number of 25 bps Fed rate hikes

The Daily Shot

Stock and bond fund purchases are also being sidelined along with houses and cars...

@MorningstarInc: Investors pulled a record amount of cash from diversified U.S. stock funds during April:

Market pricing for the number of 25 bps Fed rate hikes

The sell-off in risk has the U.S. stock market suggesting a 70% chance of a recession...

However, the more stable fixed income markets are pricing in only a 15% to 45% chance of a recession. Not to offend the equity geeks, but the debt markets tend to have a better track record.

Wide distribution of outcomes after historical yield curve inversions

J.P. Morgan

Dialing into the high yield markets further shows that the investors are paying attention, but not yet showing significant concern...

Wide distribution of outcomes after historical yield curve inversions

J.P. Morgan

Could this crisis just be "crypto"?

John Roque breaks down the sacrifices around previous ten-year yield spikes. I am sure many tech investors would be in favor of throwing crypto/NFTs under the bus for the 2022 event.

Wide distribution of outcomes after historical yield curve inversions

22V Research

We found where all those selling proceeds are being invested...

Wide distribution of outcomes after historical yield curve inversions

BofA Global Research

That money now flooding the Treasury market is now rolling over the two-year yield...

Wide distribution of outcomes after historical yield curve inversions

Deemer Chart List

Whatever you do, do not annualize, and then analyze the 60/40 portfolio returns...

That red bar is impressive and while it could always be possible that the -40% return could occur for 2022, I would consider it highly unlikely.

Cumulative personal savings in the pandemic

BofA Global Research

Justin, I have an answer for you...

@TimmerFidelity: With growth stocks under pressure, it begs the question: What will happen to the mega-growth leadership of the past 8 years?

Cumulative personal savings in the pandemic

But is it that large caps are expensive, or are small/mid-caps cheap?

Wide distribution of outcomes after historical yield curve inversions

Maybe the two years of energy/tech outperformance will turn into something more...

Wide distribution of outcomes after historical yield curve inversions


If you are still equity market cautious and looking for a less expensive defensive sector to invest into...

Goldman Sachs notes that pharmaceutical stocks are the only defensive sector still trading at a discount relative to the S&P and also versus its own history, making it more attractive against other defensive groups.

Wide distribution of outcomes after historical yield curve inversions

Goldman Sachs

We all want to know when the bottom for stocks will be put in...

@Lvieweconomics: The key question as to when markets find a floor is where will we start to hit 'seller exhaustion'.

This chart shows the number of S&P 500 stocks making new 52-week lows - which is starting to approach key levels from the past 15 years!

Best Year for Commodities

Looking at past market returns during recessions for a guide...

Across the 12 recessions since WWII, the median S&P peak-to-trough decline has been 24% (and the average has been 30%). From the highs of nearly 4800 earlier this year, a 24% decline would bring the S&P 500 to about 3600, and a 30% decline would bring the index to 3400. These declines averaged about 15 months from peak to trough.

Best Year for Commodities

Goldman Sachs

And while many of us get excited about 90% upside volume days, they are not as interesting when preceded by multiple down 90% days...

@mark_ungewitter: 90% upside volume following multiple 90% downside days is no silver bullet. It is, however, an important indication of demand, alerting us to the potential for sustained thrust, breadth recovery, or a reversal in price momentum.

After the Flood

But if future earnings can deliver, on a valuation basis the market is now trading below its 10-year average...

@FactSet: The forward 12-month P/E ratio for $SPX of 16.6 is below the 5-year average (18.6) and below the 10-year average (16.9).

S&P 500

Looking at the forward P/E in drawdown form suggests that we are about to challenge some big pullbacks...

@LizAnnSonders: Decline in S&P 500's forward P/E approaching 30%, near low reached during pandemic bear market in March/April 2020

S&P 500

Only 8% of Manhattan office workers are back in 5 days a week...

The best-laid plans for a full-time return to the office remain bedeviled by Covid-19 case rates and a work force reluctant to go back to their commutes, according to data published this week by the Partnership for New York City, a business advocacy group.

Just 8 percent of Manhattan office workers are back in the office five days a week, and 28 percent are still fully remote, according to the group’s new survey of more than 160 major employers in New York. On the average weekday, 38 percent of Manhattan office workers are in the office, a figure that employers expect will rise to 49 percent by September. In the group’s January survey, many employers said they thought daily attendance would exceed 50 percent by April.

The new survey’s most significant finding, according to the partnership’s president, Kathryn Wylde, is that 78 percent of workplaces have adopted a hybrid model, allowing a mix of remote and in-person work. That’s a leap from 6 percent before the pandemic.

“It’s a complete turnabout. It’s quite revolutionary,” Ms. Wylde said. “The employers have come kicking and screaming to this position. They’re not thrilled. They think being in the office is how people learn.”


Employees might not be returning to the office full-time, but according to Hyatt, they are accelerating their travel plans...

Management is not seeing any signs of consumer recession. They are actually seeing the opposite: an acceleration. If there were to be a recession, Hyatt's exposure to still recovering group and urban segments could cushion downside in a pullback while its focus on the higher end consumer should enable greater sustainability of pricing.

Goldman Sachs

If you were looking for a sign of pullback in consumer spending, Mister Car Wash has one for you...

Potential retail demand softening - Thus far during 2Q there are signs of potential demand softening on the retail side of business, and management noted that the headwinds appear to be industry wide. Although the company was not able to pinpoint any particular reason for the softening trends, management noted that it could be due to the overall macro environment which the retail side of the business is more exposed to.

Goldman Sachs

And your favorite double drive through coffee drink store, Dutch Bros, also had some eyebrow-raising comments last week...

Macroeconomic headwinds tempered strong trends mid-March with gas prices believed to impact system SSS by ~2%. April SSS at down 3.7% leads to a 2Q22 guide of “flat to slightly negative” versus our previous 4.8% estimate and F22 revised from MSD to ~flat. Typical seasonality sees volume start to build in the spring and peak towards the end of May, however, concerns have risen as sales trends remain muted. Notably, in March when gas prices jumped – “We saw an immediate flip on our daily sales, if gas prices stay inflated it will continue to influence us… regionally the biggest differential we’ve seen is where energy prices are elevated, we’ve seen more of this lack of sales growth and points to the discretionary income of the low-end consumer”. Moreover, the company notes the largest decline in sales has occurred from 10am to 6pm but notes an uptick in the pre-10am business which may be indicative of a broader behavior-based shift in lower income younger customer cohorts.

J.P. Morgan

Speaking of coffee, Starbucks has 2% of their market cap and 5% of their annual sales sitting in the bank...

@Lvieweconomics: Starbucks, a bank paying no interest? Starbucks has around $1.8 billion in stored value card liabilities outstanding. This represents the sum of all physical gift cards held in customer's wallets as well as the digital value of electronic balances held in the Mobile App. $SBUX

US IPO Proceeds and Activity

In the world of crypto, there will be no FDIC or SPIC to the rescue...

So not only does an investor need to believe in the value of their crypto investment, but now they must also believe in the credit worthiness of Coinbase. And COIN credit is now trading for 68.5 cents on the dollar...

Coinbase held $256bn in custodial fiat currencies and cryptocurrencies on behalf of customers at the end of the first quarter, according to the filing. And as it further pointed out, crypto assets are not insured or guaranteed by any government or government agency.

"Moreover, because custodially held crypto assets may be considered to be the property of a bankruptcy estate, in the event of a bankruptcy, the crypto assets we hold in custody on behalf of our customers could be subject to bankruptcy proceedings and such customers could be treated as our general unsecured creditors."

In other words, should Coinbase go bankrupt then customers may lose their money they’d entrusted to the exchange for safekeeping.

Financial Times

Some unprofitable growth companies are now being told to slow their growth plans to slow capital spending...

Craft Ventures last Friday met virtually with 165 portfolio companies executives to help them navigate the upside down environment for tech companies.

The big message: If your company needs to raise new funding within the next two years, conserving cash should trump growth...

"If a company needs to raise, they need >2x growth to attract capital," argues Craft Ventures general partner Jeff Fluhr. "But it's even better if you don't have to raise for the next 24 months. So if growing 3x means you will have only 12 months of runway, but you can extend runway to 24+ months by only growing 2x YOY, I would strongly encourage the latter."

Craft believes a recession is more likely than not over the next two years, but this is more about prudence than prediction.


2,500 employees were laid off at Carvana last week. Expect the trend to continue as unprofitable companies try to survive in a world with less capital...

“It’s a full-scale, complete puke of tech, a full-fledged eject button,” he said. “Less than a year has gone by and all high-growth software companies are now evil with no profits. I think it’s a wholesale shift out of tech into defensive sectors, energy and utilities.”

Tech companies are reacting by tackling the basics — cutting costs, reducing cash burn and focusing on the fundamentals.

“I’ve been talking about free cash flow more than I think I have since I took my first accounting class, it’s kind of wild,” said one person at a major public tech company.

Similarly, at Uber, with its stock down 45 per cent this year, chief executive Dara Khosrowshahi told staff in a memo last weekend: “The goalposts have changed. Now it’s about free cash flow.”

Cumulative personal savings in the pandemic

Financial Times

And in an opposite corporate universe, energy companies have too much free cash flow and nowhere to invest it in their core business...

America’s shale oil companies are enjoying a cash bonanza, as soaring oil prices and months of capital restraint transform the fortunes and balance sheets of a sector once notorious for debt-fuelled drilling sprees.

Operators will rake in about $180bn of free cash flow — operating income minus capital and maintenance outflows — this year at current crude prices, according to research company Rystad Energy. That compares to huge losses amassed during a decade of fast supply growth that crashed to a halt just before the pandemic.

And the amount of cash generated by operators this year will be greater than the total earned over the past 20 years, according to S&P Global Commodity Insights.

“It’s a tsunami of cash,” said Raoul LeBlanc, head of S&P’s North American oil and gas division. “The companies have almost finished the balance sheet repair.”...

Shale executives insist they will stick with plans to keep capital spending — and drilling — in check, instead spending their windfall on dividends, debt repayment and share buybacks.

“What’s different today than the past . . . is that we are allocating capital in a way that maximises returns to shareholders, rather than maximising [production] growth,” said Nick Dell’Osso, chief executive of Chesapeake Energy, which filed for Chapter 11 protection in mid-2020 under the weight of debts amassed during years of rampant drilling...

Analysts say listed shale producers are now earning so much cash — and equity valuations remain so discounted after years of investor flight — that share buybacks could eventually take some of them private.

It amounts to a “pretty phenomenal outcome”, said Matt Portillo, head of research at investment bank Tudor, Pickering, Holt & Co.

“If investors don’t return to the space, companies will slowly but surely privatise the entire capital stock.”

Cumulative personal savings in the pandemic

Financial Times

As public stock prices continue to retreat, private market investors and public companies were attempting to spend $70b on acquisitions last week...

Pfizer buys Biohaven for $11.6 billion in cash...

The success of Pfizer’s Covid-19 vaccine resulted in a once-in-a-lifetime cash windfall for the company. Now it is putting the bounty to use.

The US drugmaker on Tuesday agreed to buy migraine treatment developer Biohaven Pharmaceuticals for $11.6bn in cash. At $148.5 a share, the offer represents a 79 per cent premium to Biohaven’s closing share price on Monday. That looks rich — until you remember Pfizer acquired a 2.6 per cent stake in the company last November at $173 a share.

Indeed, Pfizer’s profit surge comes at an opportune time for deals. Rising interest rates and inflation have sent investors scrambling out of risky growth stocks. The Nasdaq biotechnology index has shed nearly 27 per cent of its value this year. Prior to Tuesday’s deal announcement, Biohaven’s shares had fallen 40 per cent since January...

Biohaven will be Pfizer’s biggest acquisition in five years. Best known for its migraine treatment Nurtec, Biohaven is expected to pull in $913mn in sales this year. This means Pfizer will be paying nearly 13 times sales for the business. Just last summer, Biohaven was trading on a multiple of more than 70 times forward revenues.

Financial Times

Philip Morris Int'l buys Swedish Match for $16 billion...

Philip Morris International Inc. plans to re-enter the U.S. market through a $16 billion acquisition of Swedish Match AB and challenge its partner, Altria Group Inc., in the race to dominate smoke-free tobacco products.

Smokeless tobacco maker Swedish Match said Wednesday that its board agreed to a 161.2 billion Swedish krona cash offer, equivalent to $16 billion, from Philip Morris.

In the U.S.—Swedish Match’s largest market, followed by Scandinavia—the smokeless tobacco company’s Zyn nicotine-pouch brand dominates a category that includes rival offerings from Altria and British American Tobacco PLC.


Prologis wants to buy Duke Realty for $23.7 billion in stock...

US warehouse landlord Duke Realty Corp. responded to a $24 billion takeover offer by Prologis Inc., saying the all-stock proposal is “insufficient.”

Prologis went public Tuesday with its bid to acquire Duke in a deal it said valued the company at $61.68 a share, a 29% premium to the company’s closing price on May 9. Duke investors would receive 0.466 shares of Prologis for each Duke share they own...

San Francisco-based Prologis, a giant global warehouse owner with a stock-market value of about $93 billion, said it first approached Duke about a potential combination in November and that its smaller rival spurned a series of offers.


Switch is being taken private for $11 billion...

DigitalBridge Group Inc has agreed to buy data center operator Switch Inc for $11 billion, including debt, marking the latest deal in the digital asset sector that has attracted large private equity firms and infrastructure funds.

Boca Raton, Florida-based DigitalBridge and Australian infrastructure investor IFM Investors are teaming up to take Las Vegas-based Switch private for $34.25 a share, the companies said on Wednesday. That represents a premium of 15% to Switch's closing price on May 9 when talks of the deal were first reported.

The data center industry has emerged as a hotbed of consolidation activity thanks to its key role in cloud computing infrastructure and a strong growth outlook underpinned by the increasing digital presence of businesses.

Switch is among the last remaining major data center operators listed on U.S. stock exchanges after several others including CyrusOne and QTS Realty Trust were acquired over the past few quarters.

CyrusOne last year agreed to be taken private in a $11.49 billion deal with KKR & Co Inc and Global Infrastructure Partners, while Blackstone snapped up QTS Realty Trust for $10 billion. Another large data center operator, CoreSite, was bought by American Tower Corp for $7.5 billion in November.


The founder of ManTech decides to sell out for $3.9 billion...

Carlyle Group Inc. agreed to acquire ManTech International Corp. in a deal valuing the US government contractor at about $3.9 billion.

The buyout firm will pay $96 per share in cash, according to a statement Monday, which confirmed an earlier Bloomberg News report. The offer represents a 32% premium to ManTech’s closing price on Feb. 2, the last trading day before reports on a potential sale of the company...

ManTech would be the latest listed company to leave public markets in what’s been a busy period for private equity takeovers. Dealmaking by buyout firms has been a bright spot this year, even as overall M&A slows compared to 2021’s record-breaking pace.


Private equity would like to buy Ryder Systems for $4.4 billion...

Activist investor HG Vora Capital Management LLC is offering to acquire Ryder System Inc. in a $4.4 billion deal that would take the fleet management and supply-chain operator private.

HG Vora owns a 9.9% stake in Ryder and said in a regulatory filing Thursday it is proposing to buy the rest of the transportation and logistics company’s outstanding shares at $86 a share, a 20% premium to its closing price Thursday.

Ryder’s shares, which fell as much as 25% from late March to mid-April amid growing inflation and other signs of weakness in the U.S. economy, rose more than 18% in trading Friday to $83.77 following a trading pause for volatility around the announcement of the acquisition proposal.


Pension funds would like to increase their allocations into the private equity and debt markets...

Pension funds around the U.S. are upping their allocations to private equity after a year of record-breaking returns. According to data obtained from Preqin, the average public pension’s allotment to private equity increased to 8.9% in 2021. In contrast, the average allocation was just 6.5% in 2012.

New York City’s pensions are among those that may see an increased allocation to the asset class in their portfolios should a new law pass. Currently, New York State implements a “basket clause,” which prevents public pensions from investing above 25% of their total portfolios in investments considered higher risk, including real estate, infrastructure, hedge funds, international equities, and private equity. The proposed law would increase that allocation to 35% for all pension funds in the state. If the law passed, the boards of New York City’s five public pensions would vote on whether to increase the “basket” for their own pension funds...

“The outperformance of the private markets has been consistent and proven,” says Schardt. “You could effectively pick nearly any point over the last thirty years, and the historical outperformance of the private markets over public asset classes is apparent.”

He also says that in some ways, private investments can be less risky since they typically have lower observed volatility than public markets.

“Our data shows that the observed volatile utility, which private markets tend to report on a quarter-to-quarter basis, is genuinely half or less than the observed volatility in daily public market pricing,” Schardt says.

Schardt admits that the past year’s performance was unusually high and the returns are likely to come down in the upcoming years. However, he points to internal data that shows that private equity outperforms the public markets by an even more significant margin when the stock market is down. “This is why so many institutional investors like the asset class,” says Schardt. “When public market returns are down or more pedestrian, that’s actually when the relative outperformance of private markets can be greatest.”

Data from Preqin seems to be in line with the data from Hamilton Lane. In 2008, the height of the Great Recession, the median private equity returns were 12.4% for public pension funds in North America. At that same time, the S&P returned -38.49%. However, given that the data for private equity only goes back about 30 years or so, it’s difficult to predict if this trend will continue going into the future.

Chief Investment Officer

Private debt is getting a more attractive look due to its floating rate feature...

With interest rates at record lows for a decade, investors have been piling into private debt to get a bump in yield over corporate bonds by taking on liquidity risk. But now with inflation spiking, a different feature is luring in investors: floating rates, which rise in line with interest rates.

With few investments that naturally benefit from rising rates, it’s not surprising that the category has grown. Assets in private credit funds reached a record $1.6 trillion in assets as of March 2022, according to a new report by Intertrust Group, a trust and corporate management company based in the Netherlands. That’s a 53 percent increase from five years ago, according to the report.

“There was a time when [private debt] sounded more exotic to institutional investors, but now, it’s a standard part of the conversation,” according to Randy Schwimmer, senior managing director at Churchill Asset Management. In fact, the private credit industry is growing so rapidly that the bigger players are already squeezing the smaller ones out of the market.

One reason behind the rise of private debt recently is that the instruments can protect investors against rising interest rates, which have been killing traditional bond portfolios since the central bank started signaling rate hikes in December.

Institutional Investor

You can only choose one: A) green grass or B) drinking water...

Las Vegas plays first. The rest of the West/Southwest U.S. is on deck to pick next.

LAS VEGAS — It was a perfectly decent patch of lawn, several hundred square feet of grass in a condominium community on this city’s western edge. But Jaime Gonzalez, a worker with a local landscaping firm, had a job to do.

Wrangling a heavy gas-powered sod cutter, Mr. Gonzalez sliced the turf away from the soil underneath, like peeling a potato. Two co-workers followed, gathering the strips for disposal.

Mr. Gonzalez took little pleasure in destroying this patch of fescue. “But it’s better to replace it with something else,” he said. The ground would soon be covered with gravel dotted with plants like desert spoon and red yucca.

Under a state law passed last year that is the first of its kind in the nation, patches of grass like this, found along streets and at housing developments and commercial sites in and around Las Vegas, must be removed in favor of more desert-friendly landscaping.

The offense? They are “nonfunctional,” serving only an aesthetic purpose. Seldom, if ever, walked on and kept alive by sprinklers, they are wasting a resource, water, that has become increasingly precious.

Outlawing grass is perhaps the most dramatic effort yet to conserve water in the Southwest, where decades of growth and 20 years of drought made worse by a warming climate have led to dwindling supplies from the Colorado River, which serves Nevada and six other states, Native American tribes and Mexico.

Cumulative personal savings in the pandemic


There is no inflation just inside and to the right of any Costco store...

@baldridgecpa: The only remaining stablecoin

Cumulative personal savings in the pandemic

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The author has current equity ownership in: Starbucks Corp.

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