Private Wealth

Weekly Research Briefing: Who Let the Balloons Out?

August 09, 2022
  • SHARE

Just when you thought all 'meme' stocks were headed to the pennies. Surprise!

The July rebound from an oversold June shifted into a higher gear last week when the reddit/meme/unprofitable tech stock crowd came in from the beach with fists full of BUY tickets. While maybe not the most serious or sizable amount of money, it has led to a cascade of short covering which has continued to ripple outward. And not just in equities, but also see the buying of credit, both high yield and high grade. There is an increased appetite for risk right now as investors push out the idea of a sizable recession and are caught with not enough risk exposure. Also, earnings just cannot hurt stocks this Q2 reporting season. For the first time that I can remember in a long time, earnings misses have been met with buying. You must look hard to find an earnings miss that plastered a stock which stuck. The markets even had a solid week of hawkish comments from many members of the Fed and the buyers ignored all of it. Speculators/traders/investors wanted a summer party. They wanted balloons. They cut the ropes.

So, when is the Fed going to pivot? If you thought you knew the answer, it might have changed last week. It was a big week for jobs data with non-farm payrolls doubling the estimate and wages coming in hot, but offsetting was job openings which fell more than expected. Then the ISM service number surprised to the upside, with business activity and new orders showing good improvement while prices paid fell meaningfully. Speaking of prices, gasoline prices continue to fall, and the average U.S. price will begin with the number $3 this week. Many other commodity and market-based prices are falling. Inflation expectations are also gathering steam to the downside. The CPI number drops on Wednesday. Will we finally get the relief in inflation data that the market has been anticipating?

One more time, what about that Fed pivot? The next meeting is in September so plenty of room for volatile datapoints between now and then. The market is sitting at a 50-75 basis point increase for the September hike, then maybe a cooling to 25-50 bps for the November and December meetings. Last week's job strength has dampened many thoughts of a hard landing recession as the market is no longer betting on a 1H 2023 Fed Funds rate cut. Many are moving to a ‘no hike, no cut’ 2023. That might make for one very boring U.S. bond market next year. Other asset classes might love a year of interest rate stability.

Also, worth noting that it was an incredible week for M&A activity. A lengthy list of deals noted below. Across all industries and big and small companies involved. It would be unusual for a flurry of activity like this to happen unless the buyers were feeling good about the future. This quote from Loew's Jim Tisch might help to sum up how many smart investors with big binoculars are seeing the outlook right now.


How do investors access the private markets?

This interactive guide provides an overview of the private markets to those less familiar with them.

Learn More


Nearly one-half of the 2022 U.S. markets decline was erased by July's gains...

"I don't foresee a deep and debilitating recession. Rather, I can imagine that the slowdown will be relatively shallow, which would be consistent with a full employment recession. The reason I've come to this conclusion is that we don't seem to have too many excesses in the economy or our financial institutions. There hasn't been ramping investment in housing and the financial institutions are in reasonably good shape and are seemingly not overextended." - CEO Jim Tisch

The Transcript


Like a bad zombie sequel, but an important read on the market's appetite for risk...

@danny_kirsch: MEME stocks are back


I guess the limit for consecutive quarterly declines in unprofitable tech stocks will be four...

@LizAnnSonders: After four straight quarterly declines, non-profitable tech basket (tracked by @GoldmanSachs) is having its best quarter (so far) since 4Q2020


8 Reasons Private Equity Deserves Advisors’ Attention

A dollar of investment in publicly traded stocks in 2018 is worth on average $1.53 today, while a dollar invested in private equity at that time is worth $2.36.

Learn More


Speaking of unprofitable companies, Carvana is +130% in one month...

Sure, keep in mind that it just suffered a 90%, one-year drawdown. Those are both crazy moves. Many others just like it in this current environment.

Stockcharts.com


Just no way that hedge funds are going to sit on the sidelines with all these big rips higher. Expect them to be causing some of the big moves as they chase gainers...

@Macro_Hive: Unconvinced by July’s rally, hedge funds are shorting the S&P 500 in greater amounts than even during the Covid crash.

Real money also prefer to be net underweight the S&P 500.


Now to last week's data, this does not look like a recession...

The market was expecting +250k for the NFP and it came in more than twice the estimate. And very broad based. If you want a new job, now is still the time to go and get it.

The Daily Shot


Finally past COVID job losses...

WSJ


Still the weirdest recession ever...

@charliebilello: The US Unemployment Rate moved down to 3.5% in July, back to pre-pandemic levels which are the lowest we've seen since 1969.


Wage growth surprised to the upside, adding fuel to the FOMC’s hawkish sentiment...

The Daily Shot


Goldman's Jan Hatzius sees a narrow tightrope to get inflation from 4% down to 2% due to the strength in the labor market...

Unemployment is low, but the employment-to-population ratio remains below pre-crisis levels. And wages have accelerated significantly, but are still lagging inflation by quite a bit.

To Hatzius, the data point that really tells the story -- and it’s also one that Fed Chair Jerome Powell is also looking at closely -- is job vacancies, which remain far above their historical norms even though they’ve come down significantly from the peak.

“We still have close to 11 million open positions and less than 6 million unemployed workers,” he said. “That’s still a very large gap, basically unprecedented, both in absolute terms and relative to the size of the population in post-war history.”

The dream soft-landing scenario is to close this imbalance between job openings and unemployed workers by tapping the brakes on the economy just enough that vacancies keep declining significantly, but not so hard that we get a significant number of layoffs.

Bloomberg


Market is now leaning toward a 75bp hike in the September Fed funds rate after Friday's strong jobs numbers...

S&P 500

CME Group


But while employment numbers remain strong, expectations for future inflation continue to fall from their peaks...

@RenMacLLC: More ammunition for a monetary policy pivot? According to data from the New York Fed, three year ahead median inflation expectations fell to 3.18, the lowest since April 2021. In the short-run, much of the drop in expectations driven by food and gasoline.

S&P 500

Inflation datapoints are slowing as reported by many execs on their Q2 conference calls...

"The interesting thing that we are seeing now is that most of our commodities, most of the things that go into a Tesla -- not all, but more than half -- the prices are trending down in 6 months. The trend is down, which suggests we are past peak inflation" - Tesla CEO Elon Musk

"No, I don't expect that we will see 2% inflation in the coming 12 months. But I can foresee that there will be a significant reduction in inflation in the coming 6 to 12 months and that we might be able to avoid the truly damaging wage-price inflation spiral that was so problematic in the 1970s" - Loews CEO Jim Tisch

"To set some context, we continue to see high freight costs impact first quarter profitability. Though we are now seeing signs that supply chain disruptions could find some balance from this point as we move through the rest of the year." - Under Armour CFO David Bergman

The Transcript


Speaking of deflation, the average U.S. gasoline price will have a $3-handle by the time you read this...

@GasBuddyGuy: Average US #gasprices currently stand at $4.016 per gallon. We're less than 24 hours away from the national average falling back to the $3s for the first time in 155 days.

Best Year for Commodities

Prices falling sharply for steel which is a major input into commercial goods as well as housing and automobile...

Best Year for Commodities

The Daily Shot


Good for housing that lumber has now fallen to its one-year lows...

Best Year for Commodities

Finviz


Falling earnings estimates usually hurt stock prices. But not this quarter...

Best Year for Commodities

@EarningsScout


Even earnings misses are being rewarded with stock gains...

Best Year for Commodities

@TruistNews


As Henry McVey highlighted in his recent note, stock prices lead earnings recoveries by six to nine months...

So maybe stocks are trying to tell us to forget about 'the now' and focus on 2023 when corporate earnings will be re-accelerating higher.

Best Year for Commodities

KKR


If you want to get really bulled up, look at the action in the credit markets...

@Lvieweconomics: US high yield spreads have pushed below their 50-day moving average in the past few trading sessions.

S&P 500

Even some euphoria being exhibited in the credit default swaps markets (where lower is better)...

@conorsen: IG and HY CDX indices ripping tighter, back to late April/early May levels:

S&P 500

And you knew that rising prices for credit would cause inflows to return to bond funds...

S&P 500

BofA Global Research


Bankruptcy filings among middle-market and larger firms have been relatively low this year...

If you felt good about the 2022-2024 economic outlook and the banking system, why wouldn't you take advantage of the much wider spreads in the credit markets?

S&P 500

S&P Global


Few signs of a recession seen in Mastercard's U.S. spending data as growth continues both over 2021 and 2019 levels...

S&P 500

Mastercard Spending Pulse


More positive comments on the consumer and economy from last week's earnings...

"While we are closely monitoring consumer and macroeconomic trends, we have yet to see signs of a slowdown in global lodging demand. On the contrary, the pent-up demand for all types of travel, the shift of spending towards experiences versus goods, sustained high levels of employment and the lifting of travel restrictions and opening borders in most markets around the world are fueling travel." - Marriott International CEO Tony Capuano

"We have seen, so far, no change in consumer behavior, and we have seen, so far, that no slowdown in overall consumer demand." - Hugo Boss CFO Yves Muller

"...while there is uncertainty surrounding the economy at large, we have not seen it. Travel is robust, and our key indicators support this certainly throughout the summer as customers, both leisure and commercial are dedicating their share of wallet to us." - Avis Budget Group CEO Joseph Ferraro

"...yes, we see that there is been some moderation, but I will repeat, July gross bookings, 35% on a constant currency basis. That’s pretty strong. And yet we know that the recovery is not fully done yet" - Booking CEO Glenn Fogel

The Transcript


Vegas is still booming...

Despite inflation at a four-decade high, and jitters over a looming recession, people are flocking to the entertainment and gambling oasis. Executives with Caesars Entertainment Inc. and MGM Resorts International this week reported record-high performances for their Las Vegas properties in the latest quarter.

Older consumers are returning to the Strip, shaking off pandemic concerns. International travelers began coming back in recent weeks and the convention calendar looking ahead is getting busier, executives said.

“There are not strong enough words to convey how well it’s going in Vegas for us,” said Caesars Entertainment Chief Executive Tom Reeg on an investor call this week.

WSJ


Some good news for hospitals and the healthcare system as big elective surgeries have returned...

Zimmer Biomet Q2 shows that big surgery demand has returned:

  • Knees: Reported sales of $705M was nicely ahead of Street's $665M, despite FX headwinds. WW Knee growth of +11.2% (organic) drove an acceleration in the 3-year CAGR from -1.2% in 1Q to +1.2% in 2Q. The sequential improvement in US/OUS were similar with US at +1.5% (vs -0.4% in 1Q) and OUS at +0.7% (vs -2.1%).
  • Hips: Reported sales of $487M was also above Street's $460M. WW Hip growth of +8.6% (organic) drove an acceleration in the 3-year CAGR from -1.8% in 1Q to +1.7% in 2Q and is the first time back in positive territory since the pandemic began. Here too, the sequential improvement (in organic 3-year CARG) was helped by both geographies, with US moving from -0.4% (1Q) to +1.9% (2Q) while OUS had even more impressive gains accelerating from -3.0% to +1.5%.

Goldman Sachs


Today's Large Cap all-time new high list shows a diverse, multi-industry list of companies not indicative of a soon to be hard landing economy...

S&P 500

Barchart.com


While August should be a slow month for M&A, many companies had other ideas last week. Here is CVS lining up to spend $4.7b to get into home-health care...

CVS Health Corp. CVS is seeking to buy Signify Health Inc., according to people familiar with the matter, as the drugstore and insurance giant looks to expand in home-health services.

Signify Health is exploring strategic alternatives including a sale, The Wall Street Journal reported this past week. Initial bids are due this coming week and CVS is planning to enter one, some of the people said. Others also are in the mix, they said, and CVS could face competition from other managed-care providers and private-equity firms.

There is no guarantee any of them will reach a deal for Signify, which has a market value of around $4.7 billion after its shares rose on the news of a potential sale...

Signify went public in February 2021. Even after rallying recently, the shares, which closed Friday at $19.87, are below their $24 IPO price. In July, the company said it planned to wind down one of its units after changes to a government-payment model and focus on more-profitable businesses.

WSJ


And then Atlas Air looking to go private in a $5.2b deal...

Airfreight company Atlas Air Worldwide Holdings Inc. said it has agreed to be bought by a consortium of investors led by Apollo Global Management Inc. in an all-cash deal...

The companies said the deal, expected to close in the fourth quarter 2022 or first quarter 2023, has an enterprise value of about $5.2 billion. An Atlas spokesman said the deal has an equity value of $3.2 billion.

The group of investors, which includes affiliates of J.F. Lehman & Co. and Hill City Capital, will pay $102.50 in cash for each outstanding share of Atlas Air, a 57% premium to the 30-day volume-weighted average trading price of Atlas Air as of July 29, the Friday before the Journal reported on the possible deal.

WSJ


Amgen looking to spend $3.7b to get bigger in immune-system disease drugs...

Amgen Inc. agreed to pay $3.7 billion in cash to acquire ChemoCentryx Inc., a biotech company with a recently approved drug to treat a rare immune-system disease.

Amgen said Thursday it would pay $52 a share for ChemoCentryx, more than twice the company’s share price at the close of trading on Wednesday...

The deal for ChemoCentryx could augur more deal making in the sector, especially after the valuations of potential targets have dropped. Merck & Co. has been aiming to purchase cancer drugmaker Seagen Inc., The Wall Street Journal has reported.

WSJ


Pfizer spending $5.4b to get a top sickle-cell disease drug...

Pfizer Inc. has agreed to buy Global Blood Therapeutics Inc. for $5.4 billion, in a deal that would give the big drugmaker a foothold in the treatment of sickle-cell disease.

Pfizer said Monday it would pay $68.50 a share in cash for Global Blood Therapeutics, which has one of the few approved treatments for sickle-cell disease. The Wall Street Journal reported Friday that the companies were in advanced talks.

The acquisition continues a string of deals for Pfizer, which is flush with cash from sales of its Covid-19 vaccine and drug. It has said it wants to add $25 billion in revenue from business-development moves like mergers and acquisitions by 2030.

WSJ


Big Brown spending hundreds of millions to get big in medical products transportation...

United Parcel Service Inc. agreed to acquire Italy’s Bomi Group, as the transportation giant looks to bolster its medical-product-distribution business.

UPS didn’t disclose the sale price. The Wall Street Journal previously reported that the deal was worth several hundred million dollars, according to people familiar with the matter.

Founded in 1985, closely held Bomi distributes a range of medical products such as imaging equipment, biological samples and pharmaceuticals to hospitals, clinics, laboratories as well as to patients’ homes. It operates in Europe and Latin America...

UPS is acquiring the business from French buyout firm ArchiMed, which together with Bomi’s founding Ruini family purchased the company in 2019 in a deal worth €100 million, equivalent to around $102 million. Since then, the logistics company has acquired more than six rivals, cementing its position as Italy’s largest transport and warehouse operator for the healthcare industry and expanding its operations in Brazil, the U.K. and Spain.

WSJ


Large cap software company Avalara decides to go private at $8.4B...

Avalara Inc. confirms to be acquired by Vista Equity Partners for $93.50/shr in cash valued at $8.4B.

  • Announced it has entered into a definitive agreement to be acquired by Vista Equity Partners (“Vista”), a leading global investment firm focused exclusively on enterprise software, data, and technology-enabled businesses, in partnership with institutional co-investors.
  • Under the terms of the agreement, Vista will acquire all outstanding shares of Avalara common stock for $93.50 per share in an all-cash transaction valued at $8.4 billion, inclusive of Avalara’s net debt. The per share purchase price represents a premium of 27 percent over the Company’s closing share price as of July 6, 2022, the last trading day prior to media reports regarding a potential transaction.
  • Founded in 2004, Avalara’s success is built up on an extensive partner network; large tax content data and repository to help customers stay up to date on dynamic tax rules and regulations; and its cloud-native, end-to-end multi-product tax compliance portfolio. In partnering with Vista, Avalara will look to build on its successful platform by refining its go-to-market strategy, expanding its international workforce, streamlining its systems architecture, and continuing to pursue value-accretive M&A opportunities.

TradetheNews.com


Whirlpool buying your garbage disposal brand from Emerson for $3B...

Whirlpool is tapping in to the home food waste disposal market by acquiring Emerson Electric’s InSinkErator business.

Whirlpool is paying $3 billion in an all-cash transaction to purchase InSinkErator. The transaction is expected to be immediately accretive to Whirlpool’s margins. It will add about $1.25 in earnings per share in fiscal 2023, the company said.

On a full-year basis, the transaction could generate sales of about $650 million and Ebitda, or earnings before interest, taxes, depreciation, and amortization, of $170 million, Whirlpool added. The deal is epected to close in the fourth quarter.

Barrons


One Florida bank buying another Florida bank for about $500m...

Professional Bank to be acquired by Seacoast Banking in stock deal valued at ~$488.6M

  • Seacoast Banking Corporation of Florida (“Seacoast”) (NASDAQ: SBCF), the holding company for Seacoast National Bank (“Seacoast Bank”), and Professional Holding Corp. (“Professional”) (NASDAQ: PFHD), parent company of Professional Bank, announced today that they have signed a definitive agreement under which Seacoast will acquire Professional. The proposed transaction will expand Seacoast’s footprint in the dynamic tri-county South Florida market, which includes Miami-Dade, Broward, and Palm Beach Counties, the largest MSA in Florida and the eighth largest in the nation.
  • Professional Bank, the sixth largest bank headquartered in South Florida, operates nine branches across Miami-Dade, Broward and Palm Beach counties, with deposits of approximately $2.4 billion and loans of $2.0 billion as of June 30, 2022. The proposed transaction is a natural continuation of Seacoast’s M&A strategy, adding a premier franchise in one of Florida’s fastest-growing markets.
  • The proposed transaction exemplifies Seacoast’s strategy of entry into and consolidation within attractive growth markets, low concentration risks, and ease of execution that does not distract from its organic strategy. Seacoast expects the transaction to be 11.8% accretive to earnings per share in 2023, and 15.4% in 2024, with modest dilution of tangible book value per share that will be earned back in 2.3 years.

TradetheNews.com


Toronto-Dominion buying Cowen for $1.3B...

Cowen confirms to be acquired by TD Bank for $39.00/shr in cash valued at $1.3B

  • Announced a definitive agreement for TD to acquire Cowen in an all-cash transaction valued at US$1.3 billion, or US$39 for each share of Cowen common stock. Through this transaction, TD Securities will accelerate its long-term growth strategy in the United States by acquiring a high-quality and rapidly growing investment bank with outstanding talent and highly complementary products and services.
  • With this acquisition, TD Securities will benefit from the addition of Cowen's 1,700 talented colleagues and its exceptional leadership team. Once the transaction closes, Jeffrey Solomon, Chair & CEO of Cowen, will join the senior leadership of TD Securities, reporting to Riaz Ahmed, President and CEO, TD Securities and Group Head, Wholesale Banking, TD Bank Group. To leverage the strength of Cowen's brand, post-closing, parts of the combined business will be known as TD Cowen, a division of TD Securities, and will be headed by Mr. Solomon.
  • The transaction is expected to be modestly accretive to TD's 2023E adjusted EPS on a fully-synergized basis and generate approximately 14% adjusted return on invested capital on a fully-synergized run rate basis.4 The purchase price represents a 1.7 times multiple of Cowen's tangible book value as of March 31, 2022 and a 8.1 times multiple of Cowen's 2023E earnings.5 TD expects to achieve US$300-350 million in revenue synergies by year three.

TradetheNews.com


Nordson expanding in test and inspection with a $380m acquisition of CyberOptics...

Cyberoptics to be acquired by Nordson for $54.00/shr in cash valued at $380M.

  • Nordson signed a definitive agreement for the acquisition of CyberOptics Corporation , a leading global developer and manufacturer of high-precision 3D optical sensing technology solutions. The acquisition enhances Nordson’s test and inspection platform, providing differentiated technology that expands Nordson’s product offering in the semiconductor and electronics industries.
  • The all-cash transaction is valued at $54.00 a share, or approximately $380 million net of cash acquired, reflecting a valuation of 18.5 times CyberOptics trailing twelve months EBITDA, and 14.5 times net of cost synergies. The transaction is expected to close in Nordson’s first quarter fiscal 2023, pending applicable regulatory and shareholder approvals.

TradetheNews.com


Amazon buying IRobot for $1.65b to add a Roomba onto your Prime subscription...

Amazon.com Inc. said it would buy IRobot Corp., maker of the Roomba vacuum, for $1.65 billion as the e-commerce giant continues its push into internet-connected home devices and robotics.

Amazon will pay $61 a share in cash for the Bedford, Massachusetts-based company, according to a statement on Friday. The offer, valued at $1.7 billion including debt, represents a premium of 22% based on iRobot’s last closing price before the announcement. Colin Angle will remain as chief executive officer of IRobot...

IRobot gives Amazon a household-name in home cleaning gadgets that may give it a leg up over its own designs. Last fall Amazon debuted a household robot that was supposed to usher in—or at least point to—a Jetsons-like future. Called the Astro, the three-wheeled device would eventually sell for about $1,450. But Astro, still in a limited rollout, hasn’t made a splash with consumers.

Bloomberg


And here was a great small deal that transacted last week and rewarded all employees of the private company with a bonus equal to a year's salary...

NEW YORK -- Swedish engineering firm Trelleborg AB has agreed to acquire Minnesota Rubber and Plastics from private equity firm KKR & Co Inc for about $1 billion in cash, the companies said in a statement on Tuesday.

The deal, which was first reported by Reuters, is expected to expand Trelleborg's polymer and plastics business in North America when it closes before the end of this year. KKR acquired Minneapolis-based Minnesota Rubber and Plastics from private equity firm Norwest Equity Partners for an undisclosed amount in 2018.

KKR stands to make more than three times its original investment on the deal, a person familiar with the matter said. Minnesota Rubber and Plastics was founded in 1941 and produces high-grade plastic components used in cars, medical devices and telecommunications equipment, with manufacturing facilities in North America, Europe and Asia.

About 1,300 rank-and-file employees of Minnesota Rubber and Plastics, who are not part of management, are set to receive on average up to a year's worth of their annual salaries when the deal closes, Josh Weisenbeck, head of industrials at KKR, said in an interview.

The employees will be paid this money to sell their stakes in the company to Trelleborg. This is because Minnesota Rubber and Plastics is part of KKR's employee-stock ownership program, which gives workers at its portfolio companies equity in addition to paying them a wage.

Reuters


With all the M&A activity continuing in the biotech sector, you shouldn't be surprised by the breakout of the 200-day moving average...

S&P 500

Semis also starting to break higher which is a big deal...

@HumbleStudent: Semiconductors are an important growth-cyclical part of the market $SOX

S&P 500

Speaking of semis, who is going to fix Intel?

Underperformed peer group significantly for the last 10 years.

Underperformed the S&P 500 for 20 years.

Any BUY or OUTPERFORM rating was lowered this week after earnings.

S&P 500

For global public equity investors, how is your Japanese exposure?

The investment team over at Wellington thinks that your time is best spent currently digging through the listings at the Tokyo Stock Exchange.

Equities: Favoring Japan and the US over Europe and emerging markets

We maintain our moderate overweight view on Japan and the US. Japan’s valuations are the most attractive among major developed market regions and its weak currency is an advantage. In contrast to many peers, Japan should benefit from higher inflation, given its secular backdrop of persistent deflationary pressure. and its market is under-owned by global investors.

With the Bank of Japan steadfast in its defense of yield-curve control even as other central banks tighten, Japan has a more supportive policy mix than other regions. Taking this into account, along with clearer evidence of improving corporate governance and low valuations, we expect Japanese equities to continue their year-to-date outperformance against other regions on a local currency basis.

S&P 500

Wellington Management


The ballast in my portfolio...

I wrote last month about my private asset holdings being core ballast in my personal portfolio. The main reason that we sold our firm to Hamilton Lane was to saddle up with a leader in private markets while the investing world opened to the growing universe of publicly-listed private asset vehicles. In the past, the private markets were only available to institutional investors (like state/corporate pension plans, university endowments) or ultra-high net worth investors (think $100m+ in net worth). But as the private market industry has grown over the last 30 years, so has the interest from fiduciaries of all channels and asset sizes. Where decade long investment time horizons, liquidity constraints and tax complexities were once major hurdles to invest into the private markets, those hurdles have been either eliminated or reduced to speed bumps. As these new 40-Act private market vehicles become available thru advisors platforms including Schwab, Fidelity and Pershing, fiduciaries will need to ask themselves why they don't spend more time researching the private markets.

Having ballast in an investment portfolio over the last six months has been critical. Neither fiduciaries nor their clients have enjoyed the daily roller coaster of the publicly-listed stock and bond markets. Bonds used to provide the ballast in a portfolio, but that ship has sailed on now that the world's central banks are now fighting inflation while also trying to keep their economies moving forward during this time of a global conflict which has significantly increased energy costs. There have been few places to hide in the public markets with even defensive stocks getting ripped around by disrupted supply chains and rising costs hitting their flight to safety driven high multiples. While I expected an increase in volatility this year, I did not enjoy watching the daily price volatility surrounding my high dividend stocks, preferred stocks, and even higher quality corporate bonds.

But through all the public market volatility this year, it was my private assets which helped my returns and kept me more comfortable. While I wished that I had a 30%+ private asset weighting like some state pension plans, I was happy to have at least a double-digit percentage weighting in my favorite private asset vehicle. With this vehicle, I get access to 47 general partners who have invested into the equity and debt of over 200 companies well diversified both geographically and by industry. When I look through this portfolio of companies, I see a lot of unrecognizable names of smaller capitalization businesses that are spread across all geographies. One of my owned companies employs the people that hold road construction signs. Another makes specialized packaging to ship very cold goods. Another makes LED digital billboards that you drive by each day. These companies are not big corporations like Apple Inc. or Ford Motor Corp., but they are more like the smaller, privately-held companies that employ many of our friends and family and that we interact with, hire or see on a daily basis. In the past, the ability for retail investors to invest into these small, private companies was next to impossible. But not anymore.

Below I charted the performance of my favorite private asset vehicle since we joined Hamilton Lane. My ballast has performed well and done everything that I have asked from it since my investment last year. While there is still the possibility that the Fed will crash the U.S. economy with its tightening and rate hikes, and my private companies will suffer a slowdown, I am less concerned today than I was earlier this year. If we instead have a mild recession with a slowdown in inflation, then I feel good that 3,000 on the S&P 500 is off the table and the average company (both public and private) will be able to grind its way through this slowdown with its business and cash flows intact. Maybe equity valuations will continue to bounce from here and my public company debt and equity will recover their values sooner rather than later. But if there is one thing that I learned from this sharp valuation correction, is that I love my private market ballast.

S&P 500

S&P Capital IQ and Hamilton Lane


There is a pot of gold waiting for whoever can replace the glass 750ml wine bottle...

Glass bottles have historically been the perfect containers for wine. They are inert and handily sealed, so wine can age and evolve for years free of influence. They are easy to transport and store. A 750-milliliter bottle is the perfect size for two people.

Yet glass bottles have never been more of a problem than they are today, at a time of global trade disruptions and climate crisis.

Many producers over the last couple of years have reported difficulties obtaining bottles and complained about higher costs. Along with the usual pandemic supply-chain problems, bottles from China, a major source for the United States, have been subject to 25 percent tariffs since 2018. Production in Ukraine, where bottles are made mostly for Europe, has effectively halted because of the war with Russia, diminishing the supply.

These are cyclical problems. Wine producers can adapt in the short term, no matter how painful. The far more urgent long-term concern is the climate crisis and related environmental challenges. Numerous audits of the carbon footprint of wine production have blamed glass bottles, from production to delivery, for the largest percentage of greenhouse-gas emissions from the industry.

This perfect container, it turns out, is a huge problem for the planet.

Making glass bottles demands an enormous amount of heat and energy, and bottled wine, with all the necessary packing materials to protect the fragile containers, are heavy loads that require lots of fuel to ship. The heavier the bottles, the more fuel burned and the more greenhouse gases produced.

The world could perhaps accept this, except for one major additional problem: Once those bottles are drained of wine, they are typically thrown away. The whole energy-demanding, greenhouse gas-emitting process must be repeated, again and again.

The New York Times



Learn more about the Hamilton Lane Strategies

Learn more




DISCLOSURES

The author has current equity ownership in: Pfizer 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.

Recent Content

insight

Weekly Research Briefing: The Light at the End of the Tunnel

You can see the light at the end, but how much risk will you take to run down to the other end? Big returns await if you can only make it to the other side. But there is always the possibility that you make it part way and the train called 'recession' interrupts your path.

Read the Research Article
insight

Weekly Research Briefing: Chop, Chop, Chop

If the stock market was a fine dining kitchen, it would currently be midday and we would all be busy at the chop block with a knife in hand and tubs of vegetables to prep. Stock prices are waiting for a signal and just biding their time. Up, down. Up, down.

Read the Research Article
insight

Weekly Research Briefing: Caught in a Loop

Just like it used to say on the back of the shampoo bottle: wash, rinse, repeat. The shampoo algorithm. That is what the current market feels like.

Read the Research Article

FPO We use cookies to improve user experience, and analyze web traffic. For those reasons, we may share your site usage with our analytics partners.

Learn More