Private Wealth

Weekly Research Briefing: Hurricane of Bouncing Balls

June 07, 2022
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After firing up the financial markets two weeks ago at the J.P. Morgan analyst meeting, our favorite tennis playing NYC weatherman Jamie "Stormy" Dimon talked about hurricanes at the Bernstein conference. The markets were less than amused and caught playing deep off the baseline given the breakout in energy prices and the increasing hawkish comments out of FOMC members. With the Fed in its now self-imposed blackout period going into the June 14/15 meeting, we can only conclude that a 50-basis point increase will be the next hike to the Fed Funds rate. Expect another plus 50 bps at the July meeting. This week the CPI will give us some insight into the current inflation picture and possibly help to set up the action at the September FOMC meeting. Inflation should slow, but by how much? And at this point, aren't job and wage figures more important to the direction of the Fed? If so, the Fed is gaining some small assists out of the labor market as last week's trends indicate.

Last week's more hawkish commentary and the lobbing of any talks of a September pivot sent Treasury bonds lower last week. Stocks floundered while credit continued to inch higher. The VIX continues to trade in the mid-20s which is higher than healthy markets would like, but what do you expect given all the cautionary comments and rapidly changing weather forecasts from your favorite financial services CEO? The only constant trends right now might be in the world of sports where age, experience and franchise history seem to dominate. Nadal at the French Open. The NY Yankees at Yankee Stadium. The Golden State Warriors in the NBA Finals. And hopefully the team with the best remaining record in the NHL will secure this year's Stanley Cup. Enjoy the balls, sticks and pucks. A fun month to be a sports fan, which is better than being a market fan right now.


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Watch as the financial seers all become meteorologists...

“...look, I'm an optimist. I said there's storm clouds, they're big storm clouds, they're -- it's a hurricane It's, we -- right now it's kind of sunny, things are doing fine, everyone thinks the Fed can handle this. That hurricane is right out there down the road coming our way. We just don't know if it's a minor one or Superstorm Sandy or -- yes, Sandy or Andrew, or something like that." - JPMorgan Chase (JPM) CEO Jamie Dimon
The Transcript

"So I'm going to try not to use any weather analogies, but I would say the following. I think this is among, if not the most complex dynamic environment I've ever seen in my career. We've obviously been through lots of cycles. But the confluence of the number of shocks to the system, to me, is unprecedented--we're seeing it actually relatively orderly so far. So while it's painful to watch and investors are not performing as well as they would like to perform for sure, it actually has been relatively orderly so far." - Goldman Sachs (GS) President & COO John E. Waldron
The Transcript

@jeannasmialek: "So, I don't see a hurricane, but we have to realize that the risks of a recession have gone up," Loretta Mester from the Cleveland Fed says in an interview with CNBC.


Slightly bad news for the economy is good news for the Fed...

US job vacancies rate

Goldman Sachs


But the ADP report slowed a bit too quickly for comfort last week...

Private sector employment in the ADP report rose by 128k in May (mom sa), below consensus expectations for a 300k gain. Employment in the services sector increased by 104k, led by a 46k increase in the education and health services industry. Employment in goods-producing industries increased by 24k, as the manufacturing (22k) and natural resources and mining (5k) subindustries increased, while construction (-2k) decreased. The pace of April job growth was revised down by 45k to 202k.

Goldman Sachs


Friday's jobs data showed a safer, slowing glidepath for Chief Pilot Powell to land this big U.S. economy...

@bencasselman: The pace of job growth has slowed a bit, to about 400k/month over the past three months, from 600k a few months ago. But that is arguably a good thing given the Fed's concerns about the labor market overheating.

Market pricing for the number of 25 bps Fed rate hikes

Equally important to the Fed is that it is slowing wage growth...

@jasonfurman: Average hourly earnings growth remains moderate relative to last year, shifting from a ~6% pace to a ~4.5% pace.
That's the most important number in this release for inflation and it's mostly reassuring. (Note these numbers adjusted to hold industry-level composition constant.)

Market pricing for the number of 25 bps Fed rate hikes

Tesla isn’t the only tech company planning for layoffs...

Tech companies are downshifting their hiring plans quickly. Buckle up Austin and San Francisco.

Last month, Fortune reported that the tech industry’s 2021 hiring boom seemed to be slowing down. One month later, it’s clear that the boom is over.

Amid rising inflation rates and slowing demand, tech and crypto companies cut more jobs in the month of May than in the previous four months combined, according to outplacement firm Challenger, Gray & Christmas, as first reported by MarketWatch.

There were 4,044 job cuts in the tech industry in May, compared to around 500 through the first four months of the year and the most in one month since December 2020, according to the Challenger, Gray & Christmas figures. Crypto and other companies in the fintech industry cut 1,619 jobs in May, compared to 440 in January through April.

Fortune


Consumer card spending at Bank of America refuses to slow...

"...so on debit and credit card spending, just debit and credit card spending and that's about 20-odd percent, 25% of the way consumer spends money. For the month of May, the dollar volume is up 9% to 10%, the transaction up 7% to 8%--Memorial Day weekend was a record. It was -- it's 30% over Memorial Day in '19 to give you a sense and so up year-over-year double digits, et cetera. So the spending on debit credit cards was strong through the end of the month. - Bank of America (BAC) CEO Brian Moynihan

The Transcript


Or at Chase Bank...

Wide distribution of outcomes after historical yield curve inversions

J.P. Morgan


Travel and entertainment companies are seeing the benefit from all those card charges...

Hyatt Hotels kicked off the summer travel season with a bang, becoming the latest travel company to tout a return to business as normal.

Travel trends during the Memorial Day weekend helped produce the strongest revenue per available room, or RevPAR, in any individual month since November 2019, the hotel chain said in an update Monday.

During the Memorial Day weekend, RevPAR in the Americas was approximately 24% above Memorial Day weekend 2019, continuing to emphasize the return of leisure travel, management added.

“Our operational metrics in May serve as further evidence of continued recovery with comparable systemwide RevPAR improving from April, and systemwide RevPAR outside of Asia Pacific actualizing 3% above 2019 levels for the second consecutive month,” said Hyatt CEO Mark Hoplamazian. “As we look forward, we anticipate a busy summer travel season ahead.”

Barrons


It is unlikely that new household goods are going to see the same consumer spending benefit as housing slows...

@LizAnnSonders: Spike in mortgage rates driving weaker sentiment related to housing … buying conditions for homes due to higher rates measured by @UMich have fallen to lowest since 1980s

Wide distribution of outcomes after historical yield curve inversions

Auto insurance costs are a big ticket for many households, so these increases will hurt...

Car owners need to buckle up: Higher premiums are starting to arrive as insurers get state approval for rate increases to offset inflation and an increase in serious crashes.

Rates are rising as much as 20% in some locations, as insurers seek increases to compensate for what they believe will be more sustained inflation. Consumers are starting to see the impact when their policies, which typically run for six months, come up for renewal.

Some state insurance departments, including California’s, are pushing back or going slow on approving the increases.

“These cost increases are going to be here for a while,” said Allstate Corp. Chief Executive Tom Wilson, speaking about inflation in repairing and replacing vehicles. “So we’ve been raising prices pretty aggressively, as well as reducing our expenses.”

Car insurers have struggled as driving and accidents have rebounded from pandemic lows. Car repairs and replacement vehicles are more expensive. Insurers are paying for longer rental periods than they used to, amid shortages of body-shop technicians and delays in getting repair parts, among other cost pressures. In addition, traffic fatalities surged in 2021 to a 16-year high.

During the first quarter, Allstate increased rates in 28 states an average of 9.3% for its Allstate car-insurance brand.

Wide distribution of outcomes after historical yield curve inversions

WSJ


It's inflation week so the markets will be looking for the height of this next bar...

We think the May data point will shrink, but will core CPI come in below 6%?

Cumulative personal savings in the pandemic

Jones Trading


While the Fed will be watching the inflation data closely this week, it sure doesn't sound like they are ready to pause the rate hikes in September...

"Right now, it’s very hard to see the case for a pause--We’ve still got a lot of work to do to get inflation down to our 2% target. We’re certainly going to do what is necessary to bring inflation back down. That’s our No. 1 challenge right now." - US Federal Reserve Vice Chair Lael Brainard

“I support tightening policy by another 50 basis points for several meetings. In particular, I am not taking 50 basis-point hikes off the table until I see inflation coming down closer to our 2 percent target” - Fed Member Christopher J. Waller

The Transcript


Due to last week's hawkishness, the markets are lining up for a third +50 basis-point hike in September...

Wide distribution of outcomes after historical yield curve inversions

CME Group


Speaking of 50 bps, a new Federal Reserve paper shows that a $2.5 trillion balance sheet cut maps to just over a half percentage point-rate rise...

Substitutability between Balance Sheet Reductions and Policy Rate Hikes: Some Illustrations and a Discussion
This note explores the substitutability between policy rate hikes and reductions in the size of the Federal Reserve's balance sheet for the removal of policy accommodation. We do so using a version of the FRB/US model augmented to incorporate the effects of changes in the Federal Reserve's asset holdings on term premiums. We illustrate how the equivalence between policy rate hikes and balance sheet reductions in the model depends on assumptions about the evolution of the balance sheet over an extended period. Overall, the model predicts that reducing the size of the balance sheet by about $2.5 trillion over the next few years, as opposed to maintaining the size at its peak level, would be roughly equivalent to raising the policy rate a little more than 50 basis points on a sustained basis. However, this estimate is associated with considerable uncertainty.

Federal Reserve


But will the Fed continue to raise rates if the credit markets get upset?

@TheIdeaFarm: On Investment Grade spreads
"Looking back over history, the Fed has raised rates only twice when IG spreads were at or above 140 bps (2015 & 2018). At present, IG spreads are at 134 bps… shockingly close to the Fed’s historic pain point."

Best Year for Commodities

Big pharma finds value in the 80% off public company biotech bin...

The public markets trash can be another investors treasure. Expect more big deals as the markets remain unsettled.

Bristol-Myers Squibb Co. said it would acquire biotechnology company Turning Point Therapeutics Inc. for $4.1 billion, an effort to deepen the biopharmaceutical giant’s position in lung-cancer treatments.

The purchase price of $76 a share in cash is more than double Thursday’s closing price of $34.16 for Turning Point, but well below the trading price of the San Diego-based company before biotechnology stocks dropped starting last fall.

Bristol, of New York, said it would use cash on hand to fund the acquisition, which it expects to complete in the third quarter.

Turning Point’s lead experimental drug, called repotrectinib, is a so-called tyrosine kinase inhibitor targeting the ROS1 and NTRK genes in patients with non-small cell lung cancer and other tumors.

The drug showed promising results in early-stage testing this year, and Bristol said it could be approved by U.S. regulators in the second half of 2023.

WSJ


If you are looking for a reason to mark a bottom in the public markets...

Valuations might still be rich in some areas of the S&P 500, but at least the median company in the index is in an improved financial condition. Net leverage is lower and interest coverage is higher. It would take a wicked economic slowdown to reverse this.

Best Year for Commodities

Goldman Sachs


There is a rapidly growing Pac-Man in the shipping industry...

@juokaz: 39% of packages shipped in the US originated on Amazon. Amazon delivered half of it itself, handing off the rest to UPS, Fedex.
Amazon Logistics is already larger than FedEx, and soon will be as large as UPS. Will it eventually be larger than USPS? Sure.

Best Year for Commodities

Energy stocks are to this market as Nadal is to Roland Garros...

S&P 500

@bespokeinvest


John Roque points out that energy's outperformance vs. tech may continue...

@daChartLife: Relative ratio was up 16% in May. Who knew the pink curves would be so helpful?

S&P 500

Crude oil seems to have eclipsed the 2011-2014 highs. Now what about 2008?

@LMT978: Crude oil #WTIC > 118 and pending a 14-year weekly closing high, if over 116. Also, breaking above long-term resistance at 110-115. Over 100 keeps a strong upside bias. $USO $XLE

S&P 500

As energy stocks continue to run circles around mega cap tech, it is a great time for active managers to compete against the biggest equity index...

With political, social and investor demands on energy companies to not spend money on development or capex, will the energy sector become the biggest cigar butt investment of all-time?

S&P 500

@LizAnnSonders


At the end of the day, performance matters most...

This year’s weak performance by US stocks has forced many investors to recalibrate their portfolios. And they’re fleeing do-good strategies.

After more than three years of inflows, investors are now pulling cash out of US equity exchange-traded funds with higher environmental, social and governance standards. May saw $2 billion of outflows from ESG equity funds, according to data from Bloomberg Intelligence -- the biggest monthly cash pullback ever.

S&P 500

Bloomberg


Time to revisit small cap equities?

If you don't think a mean recession is on deck, then it is unlikely that small cap stock valuations will forever remain at these lows.

S&P 500

J.P. Morgan


A glance at the P/E declines among the major markets...

The U.S. is still the most expensive. Blame its concentration toward mega cap Tech.

S&P 500

J.P. Morgan


Now time for some Jubilee meme fun for my private market followers...

@LadyFOHF: Direct lending, venture, buyout, crypto.

S&P 500

Private equity buyout and direct credit managers love the current dislocation in the public markets...

"For Apollo, this is about as good a prime-time slot as we get," Scott Kleinman, co-president of Apollo Global Management Inc., said at this week's AllianceBernstein LP conference in New York. He added that his firm's current PE fund, a $25 billion vehicle, is "essentially fully invested" and that the New York firm has a strong deals pipeline. Executives at the conference said their firms have a big advantage: plenty of available capital to clinch deals.

"If you're sitting there with $115 billion to put to work, it's great news," said Scott Nuttall, co-chief executive of KKR & Co., referring to the buyout firm's capital available to invest. While that may sound like a lot of money, Mr. Nuttall said, "we are still short capital and long opportunity."

Volatility is driving opportunities in the credit and secondary investment segments of private markets, Carlyle Group Inc. Chief Executive Kewsong Lee said. Over the past decade, liquidity drove valuations, conference participants said. Now investors face paying the piper, Mr. Kleinman said, referring to the highest inflation rate in 40 years gripping the U.S. economy.

Private-equity executives touched on a valuation disconnect between buyers and sellers, and a reset of asset-price expectations prompted by slumping public markets and resulting adjustments.

"In liquid markets, that happens instantaneously, which is why it's so much fun to watch television every day to see whose ox is being gored," Blackstone Inc. Chief Executive Stephen Schwarzman said of asset values, which tend to be less volatile in nonpublic markets. "In the private world, it happens slower."

WSJ


Hawaii showing the rest of the U.S. how to get 'green' quickly...

HONOLULU — Toddi Nakagawa, who lives in a suburb of Honolulu, has spent years battling her family’s high electricity bills, which once topped $500 a month, by gradually buying more solar panels. After accumulating more than 70 panels and three stacks of batteries, she has gotten her family’s monthly bill down to just $26.

Ms. Nakagawa is not alone. Nearly a third of Hawaii’s single-family houses have rooftop solar panels — more than twice the percentage in California — and officials expect many more homes to add panels and batteries in the coming years.

Even before energy prices surged globally this year, homeowners, elected leaders and energy executives in Hawaii had decided that rooftop solar panels were one of the best ways to meet demand for energy and tame the state’s high power costs. Russia’s invasion of Ukraine has only strengthened the state’s embrace of renewable energy. Electricity rates in Hawaii jumped 34 percent in April from a year earlier because many of its power plants burn oil, about a third of which came from Russia last year.

While Hawaii faces unique challenges, the state’s reliance on solar carries lessons for other states and countries looking to fight climate change and bring down energy costs. The state has increased the use of renewable energy in large part by getting electric utilities to accept rooftop solar rather than fight it, as energy companies in California, Florida and other states have been doing.

“In Hawaii, we’ve come to the recognition that rooftop solar is going to be an important part of our grid, has to be part of our grid,” said Shelee Kimura, president and chief executive of Hawaiian Electric Company, the state’s largest power provider. “Some people think we’re crazy. Some people think we’re pretty amazing.”

S&P 500

The New York Times


If the kid wants to be a lifeguard, feel free to encourage it…

S&P 500

Statista


Based on this new coffee drinking study, the Rocky Mountain Hamilton Lane office will be immortal...

That morning cup of coffee may be linked to a lower risk of dying, researchers from a study published Monday in The Annals of Internal Medicine concluded. Those who drank 1.5 to 3.5 cups of coffee per day, even with a teaspoon of sugar, were up to 30 percent less likely to die during the study period than those who didn’t drink coffee. Those who drank unsweetened coffee were 16 to 21 percent less likely to die during the study period, with those drinking about three cups per day having the lowest risk of death when compared with noncoffee drinkers.

Researchers analyzed coffee consumption data collected from the U.K. Biobank, a large medical database with health information from people across Britain. They analyzed demographic, lifestyle and dietary information collected from more than 170,000 people between the ages of 37 and 73 over a median follow-up period of seven years. The mortality risk remained lower for people who drank both decaffeinated and caffeinated coffee. The data was inconclusive for those who drank coffee with artificial sweeteners.

“It’s huge. There are very few things that reduce your mortality by 30 percent,” said Dr. Christina Wee, an associate professor of medicine at Harvard Medical School and a deputy editor of the scientific journal where the study was published. Dr. Wee edited the study and published a corresponding editorial in the same journal.

S&P 500

The New York Times


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DISCLOSURES

The author has current equity ownership in: J.P. Morgan Chase & Co. and Amazon.com, Inc.

The information presented here is for informational purposes only, and this document is not to be construed as an offer to sell, or the solicitation of an offer to buy, securities. Some investments are not suitable for all investors, and there can be no assurance that any investment strategy will be successful. The hyperlinks included in this message provide direct access to other Internet resources, including Web sites. While we believe this information to be from reliable sources, Hamilton Lane is not responsible for the accuracy or content of information contained in these sites. Although we make every effort to ensure these links are accurate, up to date and relevant, we cannot take responsibility for pages maintained by external providers. The views expressed by these external providers on their own Web pages or on external sites they link to are not necessarily those of Hamilton Lane.

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