Private Wealth

Weekly Research Briefing: Bring on the April Blossoms

April 05, 2022

Now, that was a first quarter for the record books. War. Inflation. First U.S. Fed funds increase. Final act of U.S. COVID. Seven million JOLTS. Inverting yield curves. It was definitely a quarter to forget for fixed income and growth stock investors. Let's see if those cherry blossoms will bring some sharp reversions to the mean. The good news for equity losers is that April tends to be the most positive month of the year. And the market is still riding on the strength of its very positive breadth from the March lows as well as a Volatility Index reading less than 20. With the S&P 500 now less than 5% off of its all-time high and back above its 200-day moving average, the market is telling us that it is Ukrainian tough and ready for anything that gets thrown at it. U.S. growth might slow on the margin due to some higher prices or supply chain issues, but this economy looks way too strong with 500,000+ jobs being created monthly. I will worry about the inverted yield curve if job growth heads toward a flat line and the credit markets begin to break. Until then, keep my risk on the table and set aside a white board to start drawing up all the different ways that I can invest into rebuilding Ukraine.

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March's NFP came up a bit short, but that February revision hit like a McConaughey chest thump...

@TBPInvictus: 14 month NFP average: 565k.

March NFP

One more time, anyone that wants a job, gets a job: 7m job openings.

US job vacancies rate


The United States of America has not been this short of workers...

The Tightest Labor Market in Postwar US History

Goldman Sachs

After the jobs strength was reported, the markets again bid up the Fed's future work to cool it down...

Market pricing for the number of 25 bps Fed rate hikes

The Daily Shot

Yield curve inversions are causing much angst, but the S&P 500 has shown that it is okay with the worries for now...

We note that even post inversion, equity markets usually peak in about a year’s time and the recession itself starts a further six months later.


SPX move from yield curve invesion to the market peak


The datapoint that really gets under everyone's skin is the 1973 inversion, which was painful but also had an interesting environment around it...

@FerroTV: "S&P 500 has typically posted positive returns in the 24 months following yield curve inversion... But the early 1970’s experience, when the S&P 500 entered into a bear market, offers an example of the downside risk to equities amid the current high inflation environment"

Wide distribution of outcomes after historical yield curve inversions

Goldman Sachs

While the jobs machine is not slowing down, the ISM data is showing a recent slowing in orders and production...

The spike in prices, rates, and new supply chain disruptions no doubt helped the pause. It will be important to see how the next few months develop.

ISM Manufacturing PMI

The Daily Shot

Earnings call notes are giving a mixed read...

Sounds like a slowing on big ticket consumer goods, but not post-COVID services spending. Meanwhile, industrial spending continues up and to the right.

"Looking at current trends, we have seen a deceleration in sell-through at retail over the last several weeks coinciding with these growing pressures on the consumer and are assuming a continuation of these trends in our 2022 revenue guidance. These dynamics will disproportionately impact first quarter revenue growth, which is our strongest growth quarter last year."
- Traeger (COOK) CFO Dominic Blosil

"While first quarter sales and margin trends remain healthy due to the ongoing relief of our backlog, we have experienced softening demand in the first quarter that coincided with Russia's invasion of Ukraine in late February and the market volatility that followed"
- RH (RH) CEO Gary Friedman

"If you’re planning to take a summer trip, right now prices are going up. I don’t think it’s going to turn around at all -- When you have two years of people not traveling the way they want to travel and you have a lot of savings built up in that time period, prices can be really high and people are saying, ’I don’t care. I just want to travel. I want to go somewhere"
- Booking (BKNG) CEO Glenn Fogel

" COVID cases declined and the operating environment normalized, sales improved throughout fiscal February, and we had strong results that exceeded our internal expectations. Sales strength has continued into March. Quarter-to-date, our average weekly sales are slightly ahead of our February actuals"
- Darden Restaurants (DRI) CEO Gene Lee

"Turning now to the external landscape. The story remains largely unchanged: strong underlying demand, tight supply chain constraints, even tighter labor constraints and rapid inflation. All of this is evidenced in public indices such as IP readings, which remain at mid-single-digit growth levels, sentiment surveys like the MBI and feedback from our customers. With some very limited exceptions like automotive, the order backlog and outlook for most customer segments remains robust."
- MSC Industrial Direct (MSM) CEO Erik Gershwind

The Transcript

Jamie Dimon went through a few wells of ink in his Annual Letter to Shareholders. Here are a few important tidbits related to the economy...

  • In today’s economy, the consumer is in excellent financial shape (on average), with leverage among the lowest on record, excellent mortgage underwriting (even though we’ve had home price appreciation), plentiful jobs with wage increases and more than $2 trillion in excess savings, mostly due to government stimulus. Most consumers and companies (and states) are still flush with the money generated in 2020 and 2021, with consumer spending over the last several months 12% above pre-COVID-19 levels. (But we must recognize that the account balances in lower-income households, smaller to begin with, are going down faster and that income for those households is not keeping pace with rising inflation.)
  • During 2020 and 2021, many aberrant things also happened: 2 million people retired early; the supply of immigrant workers dropped by 1 million due to immigration policies; available jobs skyrocketed to 11 million (again unprecedented); and job seekers dropped to 5 million. Wage growth accelerated dramatically, particularly in low-income jobs. We should not be unhappy that wages are going up — and that workers have more choices and are making different decisions — in spite of the fact that this causes some difficulties for business. House prices surged during the pandemic (housing became and still is in extremely short supply), and asset prices remained high, some, in my view, in bubble territory. Inflation soared to 7%; while clearly some of this rise is transitory due to supply chain shortages, some is not, because higher wages, higher housing costs, and higher energy and commodity prices will persist (more to come on this later). All these factors will continue in 2022, driving further growth as well as continued inflation. One additional point: Consumer confidence and consumer spending have diverged dramatically, with consumer confidence dropping. Spending, however, is more important, and the drop in consumer confidence may be in reaction to ongoing fatigue from the pandemic shutdown and concerns over high inflation.
  • I do not envy the Fed for what it must do next: The stronger the recovery, the higher the rates that follow (I believe that this could be significantly higher than the markets expect) and the stronger the quantitative tightening (QT). If the Fed gets it just right, we can have years of growth, and inflation will eventually start to recede. In any event, this process will cause lots of consternation and very volatile markets. The Fed should not worry about volatile markets unless they affect the actual economy. A strong economy trumps market volatility.


I see over $2 trillion just waiting to be spent on summer vacations, dining out and upcoming concerts at Red Rocks...

@bencasselman: Still, Americans are still collectively sitting on a LOT of money saved up during the pandemic. Although that money is of course not at all evenly distributed.

Cumulative personal savings in the pandemic

With so much ink and video being used discussing rising gasoline and grain prices...

Here is a chart showing that the total spend on food and energy is only 12% for the average household.

Consumer spending on energy and food


While the U.S. economic activity may be slowing, Canada's is moving due north...

Markit Canada Manufacturing PMI

The Daily Shot

Canada can thank its vast commodity industries that are now being called on to replace Russia...

Canada, which shares similar climate and geographical features, produces many of the same commodities as Russia. Both countries are among the world’s largest producers of crude oil, uranium, nickel and potash. Along with Ukraine, they are among the world’s largest wheat exporters. Buyers are turning to Canada to replace the energy, food and minerals that are being blocked because of the war and international sanctions on Russia.

Even some countries that have sufficient domestic crops are calling on Canada for additional imports to build reserves as insurance against further geopolitical or climate disruptions.

“The whole world is coming to Canada,” said Murad Al-Katib, chief executive of AGT Food and Ingredients, which buys grains and pulse crops from Canadian farmers and ships them to 120 countries. He said demand for Canadian crops is surging in countries such as Turkey, Algeria and Tunisia...

The province of Alberta, which receives most of its revenue from the oil-and-gas industry, expects a budgetary surplus for the coming fiscal year, its first in eight years, as revenues are boosted by higher oil prices.

Canada Natural Resources Minister Jonathan Wilkinson said officials from a handful of countries approached him in Paris last week during International Energy Agency meetings with inquiries about substituting Russian imports with Canadian potash, uranium and agrifood products.

“I would expect that there will probably be more items that countries identify that Russia currently supplies and perhaps Canada may be able to assist with either now or in the long term,” said Mr. Wilkinson.

Increasing demand for Canadian resources prompted Pavilion Global Markets, a Canadian investment advisory firm, to tell clients in a note last week that it expects Canada’s stock market, which lists many materials and commodity stocks, to emerge as one of the biggest beneficiaries from global efforts to isolate the Russian economy.


Canada is not the only commodity beneficiary of Russian woes as the equity market performances of the Latin America countries below show...

@the_chart_life: Heck of a Q1 for Latin America...


If allocating to equities, it is still difficult to not overweight the international allocations right now...

Price to earnings


Of course, the Q1 was the best year ever for commodities...

And in the mirror image, bonds are putting in one of their worst years on record.

Best Year for Commodities

BofA Global Investment Strategy

For as long as I can remember, investor flows into bond funds have been a positive number...

Let's see if the recent performance will change the long-term trend to one of outflows rather than inflows.

After the Flood


Looks like some of those retreating bond flows must be going into high yielding utility stocks...

Dow Jones Utility Average


The high yield credit markets have recovered half of their YTD spike which is a VERY important sign...

Without this, the S&P 500 is not back near its highs.

Bloomberg US Corporate High Yield

The Daily Shot

The market might have returned near its highs, but its forward P/E is 10-15% lower than where it was to start the year...

This is due to the fact that higher multiple stocks have been hit the most while lower multiple stocks have done well. But for the averages, it means, the market has a better chance at a positive return over the next five years than where we started 2022.

Forward P/E and subsequent 5-yr annualized returns


We used to think that tax-driven allocations into IRAs & 401ks led to the April outperformance. But maybe that is no longer the case, and it has just become a historical bias of some form...

@Lvieweconomics:Since 2006, the S&P 500 has risen on all but one April, making it the strongest month seasonality-wise!
What will this April have in store for us?

S&P 500

It was a very tough quarter for growth stocks relative to value stocks...

S&P 500 Growth/Value Ratio QoQ

The Daily Shot

No doubt the collapse in growth equity multiples shut the IPO door in the Q1...

Now we will see if more stable prices will allow companies to try and go public.

US IPO Proceeds and Activity


Of course, if one reads Jamie’s letter, they might think twice about going public...

Possibly more important: the role of public companies in the global financial system is also diminishing.

In addition to banks’ shrinking global role, you can see that the number of public companies, which should have grown substantially over the past decade, is remarkably reduced. Instead, U.S. public companies peaked in 1996 at 7,300 and now total 4,800. Conversely, the number of private U.S. companies backed by private equity companies has grown from 1,600 to 10,100 — a remarkable increase.

This migration is worthy of serious study. The reasons are complex and may include public market factors, such as onerous reporting requirements, higher litigation expenses, costly regulations, cookie-cutter board governance, less compensation flexibility, heightened public scrutiny and the relentless pressure of quarterly earnings.

It’s incumbent upon us to figure out why so many companies and so much capital are being moved out of transparent public markets to less transparent private markets — and whether this is in the country’s long-term interest. We do need to ask some questions: Do we want public companies? Are we okay with more and more of our capital markets being private and, therefore, less regulated? If I were a shareholder of a company, I would ask myself, do I really think that all the rules we impose on public companies actually make them better? Finally, we need to consider, is it a good thing that many investors won’t have the opportunity to invest in these companies if and when they are private?

There are good and bad reasons why capital is going private. For example, private companies can raise money more easily now than in the past. Private companies’ boards and management teams can focus primarily on the business, and private investors can be more patient with capital — they are not necessarily worried about short-term results.

We need to study this public market diminishment thoughtfully and deeply — particularly since more regulation is coming that will affect this trend. This is a good time to think through and create the outcomes we want — and not just let multiple, often well-meaning but uncoordinated legal, regulatory and policy decisions take us where we do not want to go.


Our personal lives are returning to normal after COVID. But our ‘five days a week in the office’ work life is not...

Really? Are we going to be stuck below 50%? I could almost believe that we will. When I drive through the Tech Center of SE Denver, it is easy to see that less than half the floors of most buildings are occupied. And for those companies in offices, I doubt that 100% of their employee base is showing up daily. Who wants to go to a 75% empty office building in the suburbs with few surrounding attributes or amenities?

National average office occupancy level


The reduction in worker spending at office buildings is meaningful...

#WFH is cutting city center retail spending
Impacts could include
1) Retail spending down 10% to 30%
2) Retail rents down similar amounts
3) City centers emptier and cheaper
Losers: retail property owners
Winners: employees who get to WFH

Reduction of person days on business premises


Big city downtown commercial real estate is no longer the problem. Instead, look into the neighboring suburban office parks to see where the future write-downs will occur...

@lohplaces: Today, to satisfy my curiosity, I updated this table. Downtown vacancy rates have ticked up, especially in Houston and Miami. But 👀: downtown is now the most vacant submarket in only ONE metro area, and the sub/exurban vacancy rates are astronomical.

Suburban office parks

On the residential real estate side, if you know a short-term investor in Austin housing, you might want to hand them this chart and suggest it is now liquidation and vacation time...

@RickPalaciosJr: Flippers are 14% of ALL housing transactions in #Austin, and have shot up 70% YOY (TTM). Definitely one of those markets where risk antennas are going up as rates spike.

Flipped Home Transacations

It will be interesting to see what card Netflix plays next...

I remember the owner of Blockbuster Video, Wayne Huizenga, telling me thirty-plus years ago that the day to sell his stock was when the video stores started discounted pricing. As the movie rental business was in its hyper growth mode during the late 1980’s, there was no reason to compete on price. But as market saturation began in the early 1990’s, the stores turned to pricing to compete. And with the movie studios not moving to cut their pricing, you can guess what happened to video rental store margins. Wayne was right about his Blockbuster Video. He was also right to be worried about the threat of new technologies and the internet which is why he sold the company to Viacom in 1994. But I wish he were still around today so that we could ask him about Netflix. With Netflix’s sub-growth slowing, the streaming competitive environment dialed up to '11', management putting costs under the microscope, and the company looking closer at streaming advertising and eliminating password sharing to increase revenues, I wonder what Wayne would say about the outlook for the stock. He would probably throw out a big laugh and recommend selling it to Viacom again.

In two separate meetings over the past few weeks, Netflix executives cautioned employees to be more mindful about spending and hiring, according to three people familiar with the discussions. The comments, made at an employee town hall on Monday as well as during a management offsite held last month in Anaheim, Calif., come as the streaming giant grapples with sharply slowing subscriber growth…

Netflix has also been pondering steps that could help offset the revenue impact of the subscriber slowdown, including cracking down on people sharing the passwords to their accounts. While Netflix has long allowed such password sharing, it has become more common in the U.S. and other parts of the world than executives anticipated, the people said. This effort has been underway for about a year, however, well before the slowdown became apparent.

The Information


Will the #1 and #2 hydro-electric lakes in the U.S. both go dry this year?

Those lakes are of course Mead and Powell and they provide much power to the Southwest. We are going to get close to picking and choosing time unless we get a Noah's Ark rainfall in April. Do we want power or food or swimming pools or lawns or golf courses? You only get to pick three so choose wisely.

NOAA issued its U.S. Spring Outlook today and for the second year in a row, forecasters predict prolonged, persistent drought in the West where below-average precipitation is most likely. NOAA’s Climate Prediction Center — part of the National Weather Service — is also forecasting above-average temperatures for most of the U.S. from the Desert Southwest to the East Coast and north through the Midwest to the Canadian border from April to June.


Spring 2022

EV car models and sales are about to enter 'ludicrous' mode...

New cars sold in 2026 will need to average 40 miles per gallon. Today that average is 24 mpg. The only way to get there is to shift up the number of electronic units because there is no way that an ICE F-150 is going to hit 40 mpg. Keep your eyes on the lookout for any great EV investment. And probably time to put on an order for a future car because the backlog is 1-2 years for most of the top models.

EV Models Will Double

Visual Capitalist

Good news for coffee lovers: Daily coffee may benefit the heart

Drinking two to three cups a day was associated with greatest heart benefits
Date: March 24, 2022
Source: American College of Cardiology
Summary: Drinking coffee -- particularly two to three cups a day -- is not only associated with a lower risk of heart disease and dangerous heart rhythms but also with living longer, according to recent studies. These trends held true for both people with and without cardiovascular disease. Researchers said the analyses -- the largest to look at coffee's potential role in heart disease and death -- provide reassurance that coffee isn't tied to new or worsening heart disease and may actually be heart protective.

Science Daily

If you are a fan of Wordle, then this will be the funniest thing that you see today...

(Warning: Not for little ears as it does contain a few five letter words that you will not want repeated in kindergarten.)

Wordle Video

The New Yorker

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The author has current equity ownership in: J.P. Morgan Chase & Co.

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