Private Wealth

Weekly Research Briefing: Many Trends Continuing

January 19, 2022

While the total equity markets continue to bounce around the zero line this year, some trend lines are moving in their constant direction. Most notably, interest rates remain headed higher. Interest in commodities, cyclical and value stocks continues upward. Appetite for technology and growth stocks continues to wane, while interest in unprofitable companies is non-existent. The new bend in the U.S. dollar index is interesting, especially given the rise in European economic data relative to the U.S. combined with the 14 years of underperformance in non-U.S. equities. Who doesn't want to catch that Eurostar train when it leaves the station? Meanwhile, oil prices have gone in one direction. The stock leaderboards are filled with slow top line growth business and industries that most were embarrassed to show in their portfolios a year ago. Fun times!

So, it was a tough week for economic data. Omicron is everywhere as TSA data and shorter hours at Starbucks indicate. Just about everyone I know who has returned from Florida has brought back COVID, so I am assuming that the Miami and Orlando airports are just handing it out when you board the plane. We have another week or two of this disruption. But looking at the COVID case data in the U.K. and New York City suggests that Omicron will zip out as fast as it zipped in. If that is the case, then we have another messy month of January data before February numbers take off again. Please be the case.

While the short term remains uncertain, the price of oil, housing, lumber and base metals combined with the upward moves in short- and long-term interest rates tells me that the U.S. (and global) economy is going to be running again. Sure, we all know that the Fed is behind the curve and now feeling the pressure of raising the Funds rate. (Did I see Goldman go to 10 rate hikes?) I’m getting lots of questions about if higher rates will kill the market. The answer is no, higher rates will not kill equities – but bonds will get very bloodied. There’s plenty of research out there showing that equities can do well under rising rate and inflation scenarios, and plenty more research out there showing which industries and companies will benefit the most from rising prices and interest rates. We have thrown many pieces in front of you and will continue to do so in an effort to keep your cork board fully charted up with thoughts and ideas. In the meantime, find and enjoy your trends.

The two-year Treasury yield is your chart of the month...

You have to retreat two years to find the yield above the 1% level. Inflation worries pushing around the Fed are to blame. But a positive long-term outlook on the global economy is also a factor

Our US Wage Tracker Continues to Accelerate

A sample of current headlines helps to explain the move in short-term yields...

Economic growth recoveries, inflation worries, and more supply chain bumps in the Asian sourced semi/electronics product lines.

German ZEW survey for January shows a sharp jump in expectations to 51.7, well above the Street’s 32.0 forecast and up from 29.9 in Dec (Bloomberg)

Omicron burned through UK in 21 days. .. consistent with what was seen in South Africa, the Omicron surge is swift .. cases are rolling hard in London in particular. (Fundstrat)

UK job additions of +184K came in well above the St consensus of +130K for December (Reuters)

De Beers pushed through one of the largest diamond price increases in years as the company capitalizes on a surge in demand (Bloomberg)

The BOJ Tues morning raised its inflation forecast but with price increases expected to stay below 2% for years, said it wasn’t in any rush to tighten monetary policy (Reuters)

Toyota will fall short of its production guidance this year because of the ongoing chip shortage (Nikkei)


DELL + AMZN supplier Compal is halting Taiwan production for seven days on COVID. (Morgan Stanley)

China’s Xi warns the world’s central banks not to tighten policy too quickly as this could lead to economic instability (CNN)

JPMorgan earnings show that average loans were up 6% in Q4, but average deposits were up 17%. Consumers are still stockpiling cash and lending is still lagging behind.

Jones Trading

For the 10th consecutive year, Hamilton Lane was named to Pensions & Investments’ “Best Places to Work in Money Management” List

Read the Press Release

The December and January U.S. economic datapoints are going to be a mess due to Omicron...

The N.Y. Empire Fed Meeting missed badly on Monday, which followed a long string of economic misses last week that you can see below.

@bespokeinvest: Not a good end to the week for economic data, with every single reading weaker than expected.

Our US Wage Tracker Continues to Accelerate

A graphic visual of global economic growth shows Europe outperforming and the U.S. underperforming...

Exactly in line with COVID vaccination rates, so there should be no surprise here. Europe is emerging from Omicron quickly. The U.S. will hopefully be next.

Our US Wage Tracker Continues to Accelerate

Goldman Sachs

Omicron blasted through the U.K. economy faster than the Bills went through the Pats...

And as the case numbers went into free fall, the U.K. jobs and economic data rose in the opposite direction.

Our US Wage Tracker Continues to Accelerate

The CEO of Pfizer (along with many others) think that COVID is about to be downgraded...

Life may soon return to normal after two years of pandemic disruption, Pfizer Inc.’s chief executive officer said in an interview with Le Figaro.

“We will soon be able to resume a normal life,” Albert Bourla told the French paper. “We are well positioned to get there in the spring thanks to all the tools at our disposal: tests, very effective vaccines and the first treatments that can be taken at home.”

Pfizer manufactures two of those three tools. Besides making the top-selling vaccine in collaboration with Germany’s BioNTech SE, the U.S. drugmaker is introducing an antiviral pill called Paxlovid that has been shown to sharply reduce hospitalizations and deaths from Covid-19 in clinical trials.

Bourla echoed other executives and scientists who point to the omicron variant’s lower virulence and its growing dominance as signs that the pandemic could soon move into an endemic phase in which countries learn to live with the virus, much as they do with the flu.


So does the CEO of Delta Airlines...

“Based on how quickly the case counts have risen, our medical team expects cases to peak in the U.S. over the next few days, followed by a steep decline in cases. And we are already starting to see that happen amongst our own staff. Given the high transmissibility and lower severity of Omicron, this variant is likely to mark the shift in COVID-19 from being a pandemic to a manageable and ordinary seasonal virus, which should accelerate the path to a normalized environment.” – Delta Airlines CEO Ed Bastian


A downgrade of COVID in the U.S. would be a big near-term positive given how many have been reluctant to go out with Omicron reaching into nearly every American home...

Probability of 4 Fed rate hikes this year

Civic Science

But while Omicron and inflation have been weighing on the current University of Michigan Consumer Sentiment readings...

Tweet from @RenMacLLC

...Consumers are becoming more confident in the future...

ISM Supplier Deliveries

Corporate earnings commentary from last week echoes the short-term Omicron hit to business...

“We are watching the impact from Omicron on consumer spending. And while there is some softening in restaurant, travel, and entertainment in recent weeks, overall spending remained strong in the first week of January with credit card up 26% and debit card up 29% versus the same week in 2020." - Wells Fargo & Company CEO Charles Scharf

“The economy continues to do quite well despite headwinds related to the Omicron variant, inflation, and supply chain bottlenecks. Credit continues to be healthy … and we remain optimistic on US economic growth as business sentiment is upbeat and consumers are benefiting from job and wage growth…" - JPMorgan Chase Chairman & CEO Jamie Dimon

"The virus meaningfully impacted our TAG workforce, including store managers, field sales reps, and drivers, resulting in reduced staff availability, store hours, and deliveries in some districts, particularly in the last 2 weeks of the year. Multiple suppliers and customers also reported increasing rates of labor absenteeism in the quarter due to the virus. January is off to a slower start as availability and COVID headwinds are persisting" - Sherwin-Williams CEO John Morikis

“Since early January, the company has seen a softening of traffic and sales trends which it believes, in addition to adverse weather conditions, has been significantly driven by the rapid spread of the Omicron strain of Covid-19 and its impact on consumer behavior” - Big Lots President & CEO Bruce Thorn


A very big week of earnings...

Manheim US Wholesale Used Vehicle Price Index


New and used auto prices added nearly 1% to the year-over-year increase in the CPI last week...

This has been a continued theme for the last 12 months as seen in the chart below. Once Asia gets through its Omicron wave, we would hope that semiconductor and electronics manufacturing will return to normal, and the supply chains will clear.

@RenMacLLC: Over the last year, where's the growth in headline inflation coming from? This figure tells the tale. Housing, transportation, food & beverage, and apparel showing outsize growth. Education & medical care relative laggards.

CBOE 10-Year US Treasury Yield

Inflation bump for your TV remote is running about 7.5% annualized...

NFLX raises monthly subscription prices by $1-2 in the US & Canada with the standard plan now $15.49 per month vs $13.99 prior -- the last US price increase happened in October 2020 so this is consistent with NFLX's typical 18-month cadence.

Vital Knowledge

Inflation data still looks BIG, but many see the numbers as moderating going forward...

Overall, inflation is still running incredibly hot, yet several signs indicate that the sharpest acceleration in prices have already occurred and inflation is close to topping out. A softer-than-expected rise in the Producer Price Index (PPI) lends credence to that view. Factory gate prices rose 0.2% during December, a slowdown compared to the 1.0% increase registered the prior month. Along similar lines, December's NFIB Small Business Optimism Index, which edged up to 98.7 from 98.4 the month prior, revealed that a slightly smaller net share of firms are expecting to raise prices in the months ahead, the first decline since the start of the pandemic.

The surprisingly soft increase in the PPI and decline in share of firms expecting to raise prices add to the evidence that the peak of inflation is in sight. Of course, prices are still growing rapidly and even more moderate increases will not translate to lower aggregate price levels. As we recently wrote in the January update to our macroeconomic forecast, even as price pressures ease, the rate of inflation is likely to remain high relative to recent history over the next few years. While supply chain constraints should gradually dissipate over the course of the year, fully functioning distribution channels are still far out on the horizon. What's more, climbing rents and higher commodity prices mean that there is still quite a bit of inflation in the pipeline, while tighter labor markets and rising wages stand to fan the flames of inflation well into 2022.

Wells Fargo

PPI data last week suggests an improvement in future inflation...

Unprocessed wholesale goods prices declined in December, suggesting that upstream cost pressures are starting to ease.

Equities typically struggle when rates move 2+ std. dev. rapidly


The recent ISM Manufacturing data showed a similar outlook for lower potential prices...


Charles Schwab

Yeah, more of what Abby said...

"Abby Joseph Cohen: Todd and I agree on many topics, but I’d like to back up the conversation to talk more about the economy. I’m a data nerd. Many of today’s headlines, but not those in Barron’s, are just wrong. They take an overly simplistic view of what is happening. The inflation data, for one, overstate what’s going on. I recognize that there has been an increase in core inflation, and that wages are rising. But we have to recognize that much of the increase in measures like the government’s consumer price index comes from factors that are one-time events. There has been a huge increase, for example, in the price of used cars. Well, families don’t buy cars every year. There has also been an increase in home prices, but homes are not recurring purchases. We are going to see inflation data come down. Keep in mind that the CPI last year was also boosted by the sharp rise in energy prices. With crude oil already having reached about $80 a barrel, prices aren’t going to rise to that same extent this year."


The market is accelerating its Fed rate hike expectations to 100 basis points in 2022...

Equities typically struggle when rates move 2+ std. dev. rapidly

As the Fed shrinks its balance sheet, other investors will need to step up to buy new Treasury issuance which will be refinancing in size over the next few years.

Bloomberg Pure Value

Charles Schwab

Wells Fargo sees the Fed Balance sheet shrinking by $2 trillion over the next two years...

@SoberLook: Wells Fargo expects the Fed’s balance sheet runoff to start in the fourth quarter of this year.

Russell 1000 Decile Performance YTD Based on YoY Revenue Growth

The financials led last week's earnings releases. Wages and labor cost increases were a big focus...

Corporate margins have been so strong and robust for so long that investors don’t spend much time contemplating downside risks to them, but the JPMorgan expense guidance has pushed this topic close to the top of the macro debate and created doubt about EPS estimates at a time when multiples are already under pressure.

It’s never a good idea to extrapolate trends from just one or two companies to all of Corporate America, but when those companies are among the largest and best-run in any industry, it’s worth paying attention. JPMorgan’s Q4 expenses ran above expectations and (more importantly) the company guided for a large jump in 2022 spending. Citigroup on its call talked about how intense competition for talent is pushing wages higher and First Republic’s expenses overshot the St too. Finally, Blackrock on its call talked about increasing its headcount by as much as 10% with core G&A jumping 15-20%.

Vital Knowledge

Speaking of rising wages, this chart has got to worry the higher education industry...

@LizAnnSonders: U.S. workers 16-24 years old have strongest wage growth on record, +10.5% y/y

Number of Nasdaq Composite members above 200-day moving average

Not sure that a four-year degree in dog walking is even needed to pull in six-figures these days...

“Dog walking is not a job for someone with a wandering mind,” he tells The Hustle. “It requires every ounce of your attention.”

Stewart is one of America’s top-tier professional dog walkers.

In his territory of Long Island City, just across the river from Manhattan, he can often be seen wrangling up to 6 dogs at a time on nylon leashes. He’s an expert at tracking poop schedules, and he can spot a squirrel from 100 yards away.

A veteran of the trade with 15 years of experience under his doggy-bag-equipped belt, Stewart pulls in six figures from a job that many people perceive to be unglamorous and unlucrative...

“Any Joe Schmo can make $50k a year working for Rover,” says Stewart. “Someone who works for himself and can walk 2-3 dogs at once can make $100k. And if they’re really good, they can make $200k+.”

The Hustle

Your weekly reminder of what sectors do well when inflation rises...

The correlation of global sectors to inflation expectations (US 5y5y) suggests that the sectors that benefit most from higher inflation are precisely those that suffered most in the disinflationary dominated environment post the financial crisis. The worst-performing are Consumer Staples. Technology, at least large cap Technology, has tended to be relatively defensive in periods of higher inflation and interest rates.


Goldman Sachs

Banks lead the list of beneficiaries, which explains why the chart of regional banks is breaking out...

GS Non-Profitable Tech Basket


Likewise, energy stocks...

GS Non-Profitable Tech Basket


Portfolio managers are taking the research and sliding their weightings toward the inflation winners...

GS Non-Profitable Tech Basket


PMs are also running to value stocks...

GS Non-Profitable Tech Basket


PMs are sizing up value stocks since they tend to outperform before, during and after the first Fed rate hike...

GS Non-Profitable Tech Basket

Goldman Sachs

If large cap value is running well versus growth right now, then small cap value is in a Bolt-like sprint versus growth...

@edclissold: Large-cap Growth/Value continues to play catch-up on the downside to small-cap G/V's weakness thru most of 2021. Can FANMAG earnings rescue Growth?

Bitcoin to US Dollar

And for one of the first times in 14 years, PMs are backing away from the tech stock punchbowl...

GS Non-Profitable Tech Basket


As PMs become embarrassed to hold tech, let's do a valuation check on the software industry...

So, after a 25% pullback, the group is now less than 10x sales.

GS Non-Profitable Tech Basket

Speaking of old technology stocks, the Nasdaq 100 did not enjoy its Peloton ride...

Annualized returns for public and private equity

To make matters even more insulting, Peloton will be replaced in the index by a trucking company...

Bitcoin to US Dollar

The market just does not want to own unprofitable companies right now...

Amazon fell 93% back in its early, unprofitable days of 2001. Virgin Galactic could turn out equally well in twenty years, but right now, you couldn't give away free flights to space to get someone to own its stock.

Hamilton Lane Private Wealth Strategies

Look now because German 10-year yields are about to no longer be negative...

@jsblokland: Will it? It has been a while.

Tweet from @60Minutes

European financials following the German Bund yield higher...

@the_chart_life: European Financials going out at new highs...

Tweet from @60Minutes

Can you say, 'Aluminum Shortage'?

Tweet from @60Minutes


As if you needed a reminder, there are not enough single-family homes in America...

The Denver/Boulder area had almost 1,500 homes for sale at the end of December. The fire between Denver and Boulder fully destroyed 1,000 homes and damaged hundreds of others. Our housing market has become completely unhinged, which will make it very difficult for anyone wanting to relocate to our area.

@mikesimonsen: Prepare for bidding wars and intense RE buyer competition this spring. The early data is in and it's crazier than I expected. Inventory is at a new record low, 292,000 single family homes on the market. But that's not the real story this week. @AltosResearch

Tweet from @60Minutes

Following the housing shortage, lumber prices are back to new peaks...

Tweet from @60Minutes

Goldman Sachs revising Brent oil forecasts through $100 per barrel...

We expect inventory draws to narrow but persist through 1Q22, with the global surplus in 2Q22 smaller than seasonal at 0.4 mb/d. This will bring OECD inventories to their lowest level since 2000. At $85/bbl, the market would remain at such critical levels through 2023; consumers attempting to secure physical supply will first drive backwardation steeper, normalizing inventories through the combination of demand destruction and higher supply. We believe the market needs to solve for this once again, with the prospect of long-term shortages leading to near-term surpluses. We model this rebalancing will require long-dated prices rising to $90/bbl, bringing our Brent spot forecast to $105/bbl in 2023. (Goldman Sachs)



I loved reading this aerospace supplier quote about how the analysts caused a supply chain crunch at Airbus...

COVID pulled the world so negative that it became the analyst forecasts driving the production outlook of airliners and not Airbus/Boeing. Good for this key supplier that the industry is now moving back to building planes at a growing rate again.

"So Airbus maintained, they're not going below 40 per month of A320neos throughout the pandemic. And there's all these doubters and analysts say, they're going to have issues, they're going to drop. They're not going to be able to maintain it. That was really not good because people read the analyst reports. They wouldn't believe Airbus. They believed the analysts and they would ramp up their business. So it ended up making things worse from that perspective. But anyway, they never went below 40. Now they're saying, yes, 45 by the end of last year. And then they go to 64 in 2023, 70 by '24, 75 by fiscal -- sorry, I keep saying fiscal -- these are calendar years." (Park Aerospace Corp.)

Popcorn restaurant market cap now below $10 billion...

Tweet from @60Minutes

Popcorn restaurant insiders doing just fine...

Tweet from @60Minutes


Master Chief, welcome to Call of Duty (and Candy Crush for those long shuttle flights)...

As we expected in November, the Activision disaster came to a conclusion this weekend as Microsoft placed its ESG halo and $68.7 million in cash on the broken video game maker.

Earlier in the weekend, it was reported that dozens of employees with sexual harassment issues have been let go in recent months in an effort to repair the company. It was going to take a giant company with a positive reputation to save Activision from its broken cultural issues and the remaining employees and shareholders found their white knight in Redmond, WA. A good outcome for a terrible situation.

Microsoft Corp. agreed to buy Activision Blizzard Inc. in an all-cash deal valued at $68.7 billion, using its largest acquisition by far to grab a videogame heavyweight that has been roiled by claims of workplace misconduct.

The deal, if completed, would sharply expand Microsoft’s already sizable videogame operation, adding a stable of popular game franchises including Call of Duty, World of Warcraft and Candy Crush to Microsoft’s Xbox console business and its own games like Minecraft and Doom. Microsoft said the transaction would make it the world’s third-largest gaming company by revenue, behind China’s Tencent Holdings Ltd. and Japan’s Sony Group Corp.

An acquisition also would mark the latest and biggest move by Microsoft Chief Executive Satya Nadella to reshape Microsoft through a string of deals that have helped make the world’s second-highest-valued company a powerhouse in business computing and a rising giant in videogames.

The deal entails significant complications, too. Shares in Activision had been down nearly 30% since California regulators filed a lawsuit against the company in July alleging sexual harassment and gender pay disparity among the company’s roughly 10,000 employees.


Tweet from @60Minutes


EV charging stations are pricey to set up, but it looks like they can turn a quick buck given BP's new disclosure...

BP says its fast electric vehicle chargers are on the cusp of becoming more profitable than filling up a petrol car.

The milestone will mark a significant moment for BP which wants to shift away from oil and expand operations in power markets and around electric vehicles (EV).

EV charging has for years been a loss-making business as a whole for BP and rivals as they invest heavily in its expansion. The division is not expected to turn profitable before 2025 but on a margin basis, BP's fast battery charging points, which can replenish a battery within minutes, are nearing levels they see from filling up with petrol.

"If I think about a tank of fuel versus a fast charge, we are nearing a place where the business fundamentals on the fast charge are better than they are on the fuel," BP's head of customers and products Emma Delaney told Reuters.

Strong and rising demand for rapid battery chargers in Britain and Europe, has already brought profit margins close to those for traditional petrol filling, she said...

The company also said that electricity sales for EV charging grew 45% in the third quarter of 2021 from the previous quarter...

London-based BP plans to grow its EV charging business in the coming years to 70,000 charging points by 2030 from 11,000 now.


Might be a while longer for U.S. EV charging stations to get profitable while we remain committed to filling up our SUVs with liquid fuel...

Electric passenger vehicle sales are on a tear. In the first quarter of 2010, 395 EVs were sold worldwide. Last quarter, more than 1.7 million were sold — of those, more than 935,000 sold in Asia. In 1Q 2010, you would have needed three decimal places to show EVs as a percentage of global passenger vehicle sales (0.002%). Last quarter, the decimals hardly mattered: EVs were 10.8% of sales, an order of magnitude increase in little more than four years since passing 1% in the second quarter of 2017.

Those sales are not evenly distributed, however. Europe leads on a percentage basis, with 17.4% of new cars sold with a plug; Asia is second and close to the global average at 12%; the Americas are a distant third, at less than 4%.

Tweet from @60Minutes


Speaking of EVs, the global stock pickers at Artisan put pen to paper on the Tesla valuation...

How can one not like an analysis that moves a market share from zero to 100% in 10 years?

But stocks can certainly zig when we think they should zag. Tesla is perhaps the quintessential example. Many a value investor has declared Tesla the ultimate overvalued stock, and yet fortunes have been obliterated on the short side of this trade for years. The stock rose 36%inthequarter and 50%inthepastyear. But facts are instructive, if not ultimately predictive. The market cap and the enterprise value (EV) are both about $1 trillion. Tesla is barely profitable and sold a little over 900,000 vehicles in 2021. Let’s assume that number triples in short order to 3 million cars, and let’s also assume that it generates strong operating profit per vehicle of $3,500, equal to what luxury car maker Mercedes Benz has earned over the last several years. Those assumptions put the stock at an EV/EBIT of 95X. Not cheap enough for Tesla bulls? Let’s assume Tesla takes 100% of the global auto industry, selling 70 million units per year and earns that same luxury margin of $3,500 per car, which is multiples of what the industry overall earns per car. That would generate about $245 billion of operating profit, putting EV/EBIT at 4X or about 5-6X after tax earnings at some distant point in the future; after all, it should take Tesla at least a decade to put the rest of the industry out of business. Meanwhile, legacy auto original equipment manufacturers (OEMs) currently trade at around 5-6X THIS YEAR’S earnings. So, if Tesla takes over the entire world production of automobiles and earns multiples of what the industry earns on a per car basis, it is about fairly valued before adjusting for the time value of money. Mark us firmly in the skeptic’s camp. But time will tell.

Artisan Partners

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