Weekly Research Briefing: Let the Games Begin

July 20, 2021


Surfing became an official Olympic sporting event this year. If you have ever surfed, you know the demands of the sport and are right to wonder why it took so long to make it to the big show. Could there even be a more international sport for all nations that touch an ocean? Of course, for the Tokyo Olympics, the athletes not only need to meet the physical demands of their sport, but also navigate the scientific gauntlet of not testing positive for COVID. With a Delta variant transmission rate in the mid-single digits, the virus could race through several teams and sports. Who will be the first medalist to thank Pfizer, Moderna or J&J in their post-event press conference? Congrats to the athletes—wish we could be there in person to cheer you on.

For investors, the waves might be getting too big to surf this summer. Peaking inflation levels continue to batter every economic release. At the same time, the Fed speakers, led by chairman Powell, remain dovish while stressing the 'transitory' inflation theme. It will be interesting to see what occurs in August when all of the Fed members are in Jackson Hole together with fishing gear and tumblers of whiskey. Ignoring inflation is the bond market, which saw 10-year yields trade below 1.2% on Monday as COVID slowdown fears accelerated. Now about that Delta variant, case growth is clearly accelerating globally among the non-vaccinated. But while hospitalizations are increasing, it is nothing like in January when many fewer were vaccinated. Expect the surge in cases and resumption of mask wearing to again have a minor psychological impact as Olympic athletes are sent home, a few cruise itineraries are cancelled and movie theaters remain sparse. The economic impact of a new Delta wave should remain small, however, as those who are vaccinated want to move forward.

Second quarter earnings started out on the right foot ready to reward investors, but, unfortunately, the macro environment took control. The big banks did and said what they could, but they couldn't buy a positive stock reaction with treasury yields falling like big rain drops. And speaking of rain, this month we are getting too much where we don't need it and too little where the Northern Hemisphere could use it. Climate change deniers are going to need ear plugs this year. Need another 10-foot-high wave? The White House is really upset with China this month. Now have fun investing for the rest of the third quarter.

It is Freedom Day in the United Kingdom today...

COVID cases are soaring toward the January peak as the UK moves to open the country on Freedom Day. Hospitalizations are rising, but less so than in the January peak which is good news. However, the global stock markets are watching the new COVID waves in the UK, in Japan and in the U.S. and are beginning to get cold feet about risk taking. Stay tuned.

Daily New Cases in the United Kingdom

(Jones Trading)

The inflation data jumped last week, but most of it was concentrated in a few areas...

U.S. CPI jumped 0.9% on both the headline (vs. est. 0.5%) and core rates (above est. 0.4%) in June, both much hotter than expected. The June headline is the largest surge since the 1.0% jump in June 2008, while core MoM reading ties April for biggest gain since late 1981. Driving inflation: Car rental 87.7% (y/y change), Used cars 45.2%, Gas 45.1%, Laundry machines 29.4%, Airfare 24.6%, Moving 17.3%, Hotels 16.9% and Furniture 8.6%.

Tweet from @WhiteHouseCEA

It will be interesting to see what happens to inflation data once the 'hot' areas of auto and travel normalize...

Tweet from @FerroTV

"If prices drop as quickly as they rose, we can't rule out zero or even negative core CPI prints in the fall:” Pantheon Macro

Here in My Car

Surging prices had a definite impact on Friday's University of Michigan consumer sentiment surveys...

University of Michigan consumer sentiment surveys


July's NAHB survey came in at 80, which was cooler than expected as both sales activity and model home traffic decline...

“Builders are contending with shortages of building materials, buildable lots and skilled labor as well as a challenging regulatory environment. This is putting upward pressure on home prices and sidelining many prospective home buyers even as demand remains strong in a low-inventory environment,” said NAHB Chief Economist Robert Dietz.


Again, higher prices are having an impact on potential buyers...

Zillow Home Value Index-June


Sawmills might even be thinking about pulling back now that prices are down on the year...

@charliebilello: Lumber futures are down 69% from their peak just 2 months ago. They were up 130% on the year in May, adding $35,872 to the cost of an avg new home. Now down 25% on the year & home prices are still at record highs and rising, with extra margin going to homebuilders.


Investors are watching the data and also reeling in their inflation expectations...

Tweet from @carlquintanilla

While the bond markets scream, "I told you so!"

@jsblokland: BREAKING! The 10-year US Treasury #yield drops below 1.20%, the lowest level in over five months.

10-year US Treasury Yield

Let the earnings season begin!

Q2 earnings results started off with a bang as nearly 90% of reporting companies beat their revenue and earnings estimates. And while guidance has also been positive, with more than a quarter of companies lifting forward numbers, the rate of increase has been lower than in previous quarters. Only 8% of the S&P 500 has reported numbers so we still have much more to look at over the next few weeks.

S&P 500 EPS growth expectations continue to rise


This Q2 will see a big peak in earnings...

S&P 500 earnings growth will peak in 2Q and then decelerate

(Goldman Sachs)

If you expected Pepsi and Frito Lay to slow down post the pandemic, you were wrong...

Truly amazing execution. The bottle and bag consumption must be following consumers outside of their homes and back into the office and elsewhere. I would have guessed for certain that they would have seen a post 'stay at home' slowing.

Continued solid execution paired with a faster than expected away-from-home recovery led to significantly better top-line than even management anticipated (organic sales +12.8% vs. cons. +7%). The fact that at-home demand remained elevated in spite of this recovery is particularly encouraging. We are raising our FY'21 organic sales estimate to +6.2% and EPS to $6.21.


Two-thirds of S&P 500 earnings will drop over the next two weeks...

S&P Q2 '21 earnings season calendar


This week's slate...

Most anticipated Earnings Releases


A re-look at U.S. equity valuations shows little room for disappointments...

Absolute and relative valuations for equitites differ

(Goldman Sachs)

As Schwab notes, it is challenging to produce positive forward returns at this valuation...

@LizAnnSonders: Worth noting that S&P 500’s real earnings yield is now in lowest decile historically (back to 1954); only zone where forward 1y return for S&P 500 was negative

S&P 500 real earnings yield by decile

Even the sell side analysts are moving to the sidelines on their stock recommendations...

Percent of buy recommendations from the sell side.

TIM Group Market Sentiment


New BofA Portfolio Manager survey shows long tech is now the most crowded trade...

Long Tech again the most crowded trade

And if long tech is the favorite trade, then that can only mean the market breadth is narrowing...

@TimmerFidelity: Looking at the tape & getting that not-so-great feeling about the narrowness of the advance to new all-time highs? It makes sense. Breadth has narrowed significantly with secular growers in the lead. Only 30% of SPX constituents are trading above their 50-day moving average:

Price vs Breadth

Another breadth chart to get long investors to loosen their collars...

@Not_Jim_Cramer: S&P 500 Correlation With Equal Weighted S&P 500 Collapses To Lowest In At Least 30 Years

S&P 500 Index vs Equal Weighted S&P 500 Index

Even small caps have given back their brief run in outperformance versus large caps...

@Not_Jim_Cramer: Small Cap - Large Cap Forward P/E Valuation Spread is getting very stretched

Large Cap vs Small Cap Forward Valuation

High beta has outperformed from the COVID low point, but that is now being challenged...

@StrategasRP: First new multi-month low for High/Low Beta since last March.

S&P 500

One key high beta component is the airline stocks, but tough to keep the stocks going with a new wave of COVID cases...

@LizAnnSonders: S&P 500 Airlines in another bear market relative to peak a few months ago

S&P 500 Airlines Industry Index

Dividends don't lie...

When a board of directors sits down to change its dividend policy, it is a big deal. Management and directors do not ever want to lower a dividend which is why they are so cautious in raising them. The banks and capital market companies have been dealing with the Federal regulators during COVID on their dividend policies and now that the U.S. economy is more or less in the clear, they have been given the go ahead to resume dividends to their desired payout levels. So, I thought it was interesting last week when Goldman Sachs chose a $2/quarter dividend level, which implies a near 2.3% yield going forward. Below is Goldman's dividend yield and stock price for the last 20 years. You can see that during normal, good times, the yield has averaged about 1%, so this is a decent pickup in payout. In addition to the dividend, Goldman will continue to opportunistically repurchase their stock as well as allocate capital to M&A and investing in their new and existing businesses. The big dividend hike tells me that the management team and board feel like the company has the wind at its back right now.


Big news last week in the world of lending as private debt takes one away from the big banks...

Expect this trend to continue as private debt managers continue to gather new investor flows and put the money to work. Private asset managers now have the size to compete for the debt financing of these big multi-billion-dollar financings and can typically act faster than bank syndicates can.

Private equity group Thoma Bravo’s $6.6bn acquisition of Stamps.com last week came with a surprising twist in the deal documents: the absence of a traditional bank financing the leveraged buyout.

Large debt-financed takeovers by the private equity world have historically been underwritten by household names on Wall Street, institutions such as JPMorgan Chase, Goldman Sachs and Bank of America.

Thoma Bravo’s private equity funds will stump up $4bn for ownership of Stamps.com, a mailing and shipping business with $758m in revenue last year.

To get its deal over the line, the group turned to four private lenders to provide the $2.6bn in debt financing. Ares, Blackstone and PSP Investments will provide the majority, with Thoma Bravo’s own lending arm making up the difference, according to people familiar with matter.

The deal underscores the massive firepower private credit funds have amassed and how they are putting that cash to work to finance bigger takeovers, according to people involved in recent deals.

Cash sitting in such funds has grown to a whopping $364bn globally, according to data from Preqin, and more than $80bn has been raised so far this year, as low interest rates send investors hunting for higher yields in private markets...

Private credit funds proffer that companies are turning away from bank financing for increased confidentiality and greater certainty of receiving the funds, along with a faster turnround time between agreeing the deal and securing the cash.

“In large take private transactions like Stamps.com, companies find that scaled private capital providers such as Ares offer several significant competitive advantages versus using a syndicate of banks,” said Kipp deVeer, head of credit at Ares Management.


And another milestone for the private asset industry as a top PE Buyout manager raises over $24b for its newest fund...

Hellman & Friedman has raised one of the biggest-ever pools of private equity capital, after investors committed $24.4 billion to its latest flagship fund.

The U.S. buyout firm pledged $1.8 billion to Hellman & Friedman Capital Partners X, which was “significantly” oversubscribed, according to a statement Thursday. The closing of the fund brings its total assets under management to more than $80 billion.

The fund is Hellman & Friedman’s biggest to date and ranks among the largest raised by a private equity firm...

The size of Hellman & Friedman’s new fund, and broader pressures to deploy capital, could lead to bigger deal-tickets in the buyout world.

Private equity firms have spent $623 billion in transactions this year, Bloomberg data show, more than double the amount at this point in 2020. Hellman & Friedman has been involved in acquisitions valued at almost $40 billion this year, including a mammoth bid to buy medical supply company Medline Industries Inc.


For scale purposes, you can see that this new Hellman & Friedman buyout fund would amount to nearly 8% of 2019’s category fundraising…

Buyout and Growth Equity Global Fundraising

Consumers credit metrics are looking stellar right now...

New Delinquency Lows in All Categories


Guess who is returning to the Bay Area...

The pandemic was supposed to lead to a great tech diaspora. Freed of their offices and after-work klatches, the Bay Area’s tech workers were said to be roaming America, searching for a better life in cities like Miami and Austin, Texas — where the weather is warmer, the homes are cheaper and state income taxes don’t exist.

But dire warnings over the past year that tech was done with the Bay Area because of a high cost of living, homelessness, crowding and crime are looking overheated. Mr. Osuri is one of a growing number of industry workers already trickling back as a healthy local rate of coronavirus vaccinations makes fall return-to-office dates for many companies look likely.

“I think people were pretty noisy about quitting the Bay Area,” said Eric Bahn, a co-founder of an early-stage Palo Alto, Calif., investment firm, Hustle Fund. “But they’ve been very quiet in admitting they want to move back.”

Bumper-to-bumper traffic has returned to the region’s bridges and freeways. Tech commuter buses are reappearing on the roads. Rents are spiking, especially in San Francisco neighborhoods where tech employees often live.


Canadian farmers, ranchers and fisherman are having a brutal weather year...

“There’s a lot of crop that’s going backwards right now,” said Lewis, who grows canola, cereal grains and pulses at his farm in Gray, Sask. “In many cases, it’s beyond the point of no return. There’ll be acres in Western Canada that will have zero crop come off, zero yield.”

His best guess, at this point, is that crop yields in Saskatchewan will fall by 25 per cent compared to last year. If the plus-30-degree heat continues as forecast, those losses might be as bad as 50 per cent.

“That’s billions of dollars of revenue,” he said.

Sustained record-breaking heat, droughts and wildfires across the Prairies and British Columbia this month are wreaking havoc on food production in Canada, with farmers reporting stunted crops, cherries cooking on trees and 80-per-cent mortality rates at some commercial shellfish operations.

Burnt pastures have left ranchers with little for their cattle to graze, forcing them to dip into winter feed stocks and consider shrinking their herd by sending cattle, even prized breeding cows, to slaughter.


Cartoon of the week...

Flying Cartoon


Has everyone watched Ted Lasso more than once ahead of this week's season two release?

I watched it once and loved it, like everyone else, but feel like I am in the minority on number of viewings. Anyway, if you haven't watched it yet, we are all jealous of you. And if you don't understand the British or Kansas language, then use your subtitles.

In fact, this is close to something Ted says, by way of Walt Whitman, in one of the first season's most memorable episodes: Be curious, not judgmental. I will confess I get a little emotional every time I watch the scene in which he says this, which uses a game of darts in a pub as an excuse to both stage a philosophical discussion about how to treat other people and to re-create the climactic moment of every sports movie you've ever seen. It's a somewhat strange experience, being moved to tears by a guy with a bushy cartoon mustache and an arsenal of capital-J jokes (“You beating yourself up is like Woody Allen playing the clarinet: I don't want to hear it”), talking about humanity and how we all might get better at it. But that's kind of what the experience of watching the show is. It's about something that almost nothing is about, which is: decency.

In the pilot episode, someone asks Ted if he believes in ghosts, and he says he does, “But more importantly, I think they need to believe in themselves.” That folksy, relentless positivity defines the character and is perhaps one of the reasons Ted Lasso resonated with so many people over the past year. It was late summer, it was fall, it was in the teeth of widespread quarantine and stay-at-home orders. People were inside watching stuff. Here was a guy who confronted hardship, who suffered heartbreak, who couldn't go home. And who, somehow, found his way through all that. Someone not unlike Sudeikis himself.

Jason Sudeikis



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