Private Wealth

Weekly Research Briefing: Coasting Into Summer

May 25, 2021


Our most deserved summer ever officially starts this weekend. I am guessing that many of you will be heading out to set up your permanent summer residences for the day that your kids start screaming Alice Cooper lyrics. Trading volumes will begin to evaporate quickly mid-week and may not return until September with the occasional spurt of activity around employment and inflation releases and a bit during the July earnings reporting season. The lack of volumes could add to volatility or apathy, depending upon how good the summer beach reads and hiking might be. I am most curious to see how the summer turns out. With the vaccine and now masks behind us, I bet the markets will be on the back burner for many. Seeing friends and family and getting out will take priority. Let's hope it happens.

We will have some economic data and a few big retail earnings to look at this week. Recently soaring commodity prices are taking a break as weather helps agricultural prices and China threatens any company taking advantage of price speculation. And as the supply/demand curves always told us, the best cure for higher prices is of course higher prices. Homebuilders do not want to commit to +40% material prices unless they can lock the sales price in +40%.

While input prices look set to cool down a bit, will wages follow? That is a trickier question and one that we are all watching. We see the $15, $20 and $25 per hour prices being offered, but most economic data series have yet to see it flow through. This will be key for future CPI and PPI moves because if wages go up, everything else will follow. Federal Reserve speakers are also watching inflation, and some continue to edge toward increasing talk of tapering discussions. (Looking at you last week Hawker and Kaplan.)

This should be the last week for Washington D.C., to work on a bipartisan infrastructure deal before the Democrats take control of all decisions and move to pass their own plan. Last week, the White House cut their plan to $1.7 trillion, but the GOP still wants a number less than $1 trillion with few tax increases. If Congress would only price the infrastructure package in bitcoin, then they both could get their price tag wish. Maybe even in the same weekend!

With the long holiday weekend approaching, we are going to take next week off from writing the Weekly Research Briefing. Enjoy your kickoff to the best summer ever.

Best news of the year?

Daily new COVID cases in the U.S. are heading toward the 10,000 level.

U.S. infections have not been this low in 11 months


Architects are now the busiest they have been in fourteen years...

The Midwest leads the regions. Commercial/industrial leads the sectors.

Architecture Billings Index


But sharply rising material prices have caused some plans to be put on hold...

The cost of raw materials is so high right now that the third-largest chicken producer in the U.S. is considering shelving plans to build a new processing plant -- even as the company struggles to keep up with demand.

Sanderson Farms Inc. is one of the first companies to signal it could pause plans for expansion as the price of everything from lumber to steel skyrockets, driving up construction costs.

“I need a plant to open up next week, but it is not a good time to be building,” Chief Executive Officer Joe Sanderson said. The company, which had planned to begin construction on a new facility during the first half of 2021, will “look very hard” at building costs given the market for raw materials, he said...

The timing is unfortunate, with the economic recovery also boosting demand for chicken to the point that Sanderson can’t take on any more orders without expanding.


May Services and Manufacturing data set records...

Private sector firms across the US signaled an unprecedented expansion in business activity in May. Growth was driven by the fastest service sector upturn on record, with the increase in manufacturing output also accelerating amid stronger client demand.

Adjusted for seasonal factors, the IHS Markit Flash U.S. Composite PMI Output Index posted 68.1 in May, up from 63.5 in April. The rate of expansion was unprecedented after surpassing April’s previous series record. Goods producers and service providers alike noted stronger paces of activity growth midway through the second quarter.

The rise in new orders quickened for the fifth month running in May, with improvements in demand stemming from greater customer confidence and the further reopening of the economy. Some manufacturers also noted higher order volumes from clients due to material shortages and efforts to stockpile amid rising costs. At the same time, new export business rose at the fastest pace since the series covering both manufacturing and services began in September 2014.

IHS Markit Composite PMI and U.S. GDP


But the Philly Fed came up short of projections...

Maybe that 'Prices Paid' component had something to do with it?

May Philadelphia Fed Business Outlook


Upside economic surprises are now cooling off...

Likely a combination of soaring prices, worker shortages, and expectations getting ahead of themselves.

J.P. Morgan Global Economic Activity Surprise Index


While we see plenty of stories about employment, rising wages are not yet finding their way into every set of statistics...

Atlanta Fed Wage Tracker Slowed in April

(Goldman Sachs)

That said, some bad news for roller coaster riders this summer...

Without access to foreign seasonal workers, both summer and winter vacation destinations are going to have a difficult time staffing or keeping their prices from inflating in 2021.

Cedar Point


Hourly wages below $15 an hour will soon be a myth...

Bank of America Corp. will boost its minimum hourly wage to $25 an hour by 2025 from a current $20, according to its Chief Executive Officer Brian Moynihan.

The move follows four years of pay increases that brought the company’s minimum wage to an hourly $20 in 2020 from $15. The Charlotte, North Carolina-based lender will also require its U.S. vendors to pay employees dedicated to the bank $15 per hour or more, Moynihan announced in an interview on CNN. Of more than 2,000 vendors with 43,000 employees, over 99% meet that threshold, the bank said in a separate statement.


Inflation expectations just moved from twelve-year lows to eight-year highs...

It should be expected that the equity markets are going to begin to be extra skeptical toward record high P/E multiples. Inflationary trends will need to cool for the market to keep its greater than 20x forward multiple.

Inflation expectations at their highest levels in a decade


Current inflation better be temporary or U.S. stocks might just take a big coaster ride on a full stomach...

S&P 500 vs Real Earnings Yield


As Central Bank balance sheet growth slows, equity and fixed income portfolio gains should prove to be more difficult going forward...

Diminishing liquidity via central bank tapering implies slower gains

Cyclicals remain the destination for equity inflows...

Late cyclicals outperforming tech


Big cap pharma stocks still look like a good place to invest among U.S. equities...

Why? Mid-single digit top line growth, double-digit bottom line, with no help from drug pricing, but a growing pipeline of new product launches. Healthcare reform continues to slip to the back burners of the Washington, D.C. agenda as other items take priority. The sector has many great balance sheets with above average dividend yields. As the chart shows, the U.S. pharma multiples are trading at discounts not seen in over a decade.

Pharma continues to trade at a discount to the S&P 500

Nowhere to hide if things turn south...

@SoberLook: The US stock-bond correlation is at multi-year highs (SPY = S&P 500, IEF = 7-10yr Treasury prices).

SPY-IEF Correlation

Many reasons for companies to stay private longer, but better governance is a very big one...

Gregory, your research posits that there is a cost/benefit framework in which investors and management teams balance the benefits of a lower cost of capital in public markets with the governance advantages of PE. What are those governance advantages?

“Public company ownership structures are diffused. Even the biggest institutional investors, such as Vanguard and BlackRock, may hold just 5% [of a company]. And those investors will own stakes in thousands of companies, so their ability to undertake good governance and monitoring of management is extremely limited. The other disadvantage of public ownership is the ‘free rider’ problem. Even if you spend a lot of time and effort trying to influence a company, you get just a small fraction of the benefit.

The notion that public boards and public owners are going to be well positioned to undertake difficult decisions is therefore quite a stretch. When companies have important strategic choices to make, it is far easier to do that in a private setting, where you have just one or, at most, a handful of controlling shareholders.” (Gregory Brown)

“I think PE’s advantage is the ability to focus on those things that will have real impact. You could argue that in the past this focus has been applied one dimensionally to returns. But I think the industry is maturing and firms are now taking broader stakeholder needs into account. That is far more easily achieved when the board, management team, and entire company are aligned with a single set of objectives, rather than being pulled in 10 different directions.

I would also say: do not underestimate private capital’s ability to look into the future. Private market solutions are increasingly long term. Quarterly reporting is restrictive. Public markets get tired of long-term stories in a way that private capital doesn’t.” (David Layton)

“With the PE model, the management team and investors are on the same side of the table. That allows for a direct conversation in real time. In a public company, there might be thousands of investors, as Gregory says. Anyone looking to make a significant move usually sounds out their top 20 investors to get a sense of support, but it’s very different to having that close rapport. Then there is a real regulatory burden with public ownership and potential compensation issues in some markets, too. That is particularly true in the UK, and can cause real problems with attracting and retaining talent.” (Roberto Quarta)


Greg Ip clearly doesn't see the crypto potential in RAAS (Ransomware as a Service)...

But most financial innovations finance something. England achieved global economic dominance because London’s financiers would lend to ventures when no one else would. The dot-com bubble financed internet startups. Subprime mortgages financed houses. For the most part cryptocurrencies don’t finance tangible investments.

Cryptocurrencies are supposed to be a hedge against inflation because issuance is usually restricted. But that’s only true of an individual currency. As an asset class, cryptocurrency inflation is rampant: There are now more than 5,000 coins. Gold never faced competition from dozens of new precious metals hitting the market each month.

Gold became a store of value because through most of history it was also a medium of exchange: Coins were once minted from it, and paper money was long backed by it. If crypto never finds acceptance as a medium of exchange, its usefulness as a store of value is also in doubt.


Crypto Slide


Soon to be the best-selling automobile in Texas...

An electric vehicle is, at a mechanical level, a giant battery on wheels. Ford is pitching this not only as a technical necessity but as a feature: They want you to plug stuff into the car. “Let’s say you’re at a tailgate or at work. You can set up a cement mixer, a band, or lights and draw only half the power the truck is capable of producing at a time,” Linda Zhang, the chief engineer on the Lightning, told me. Like all electric vehicles, the F-150 replaces the hefty internal-combustion engine with a much smaller electric motor, and like many EVs therefore has a storage compartment under its front hood: a “frunk.” Except the F-150 has a “power frunk”—the most marvelous three-syllable phrase American marketing has produced since “half-priced apps”—meaning that it both opens to the touch of a button and has multiple plugs for appliances.

The Lightning can store so much power that, in a blackout, it can supply a house’s normal power usage for three days, according to Ford. If the house conserves power, it can keep the lights on for more than a week, Zhang said. Talking about this feature, Ford employees and Farley himself have referenced the Texas blackouts. The Lightning is a technology of resilience, of climate adaptation.

(The Atlantic)

Truck Charges


Sports geeks take notice: Baseball is on pace for a tail event...

A number of factors are in play leading to the surge of no-hitters. Chief among them are an emphasis on power pitching and batters’ having shown a willingness to sell out contact in order to increase power. Those factors, plus surgical deployment of high-quality relievers, has resulted in strange numbers across the board.

Teams were averaging 7.82 hits per game through May 19 — the second lowest mark in baseball history behind 1908, according to Baseball Reference — and were striking out a record 8.98 times a game. As a result, batters were hitting a record-low .236 and scoring was down significantly for a second consecutive season.

Another factor that has to be considered is control. Shutouts are almost entirely a thing of the past — there have been 15 this season, and there have been fewer than 40 in each season since 2015 — but the six pitchers who have thrown a no-hitter this season have kept their pitch counts low by employing remarkable control. Turnbull walked two batters and Miley and Kluber each walked one. The other three pitchers who threw a no-hitter this season didn’t issue a single free pass.

Factor in colder weather in April and May, a new baseball, advanced defensive positioning and other changes in the game and it has seemingly become a recipe for no-hitters becoming a common occurrence.

Fast Start for No-Hitters


If you need some idle screen time over the upcoming long weekend...

I haven't binge-watched a show since "Game of Thrones", but this one is spectacular. Six episodes available with the big finale this Sunday night.

Mare of Easttown



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