Private Wealth

Weekly Research Briefing: The Unrealized Capital Gains Tax Plan

October 26, 2021

It doesn't matter if this goofball tax plan is aimed at billionaires, millionaires, or little green men, but if Congress is now grasping for handholds, then the super-sized stimulus plan is dead. Congress had better just try and get a $1 trillion stimulus package now before they crash that car also. What a wreck and waste of everyone's time this has become.

That said, the market loves it. No tax increases to either corporations or capital gains was a signal to buy stocks. And buy they did. Oversold to overbought in three weeks would have Marty Zweig saying "Breadth Thrust" to Lou Rukeyser on Friday night. A lower tax burden has saved the market from weakened forward earnings expectations.

As we dig through Q3 earnings releases, plenty of comments about inflationary pressures and the supply chain. But on the positive side, robust demand remains. Ignore those calling for stagflation because if Proctor and Gamble is seeing solid unit volume growth, then it must remain in most every company's earnings release.

It is peak earnings week with 28% of the names in the S&P 500 reporting. More important is that over 45% of S&P 500 earnings will be reporting this week, including most of big tech. So back at it. Have fun reading and highlighting.

Also, if you’ve not yet taken the time to explore our website, I invite you to do so. Here you can learn about Hamilton Lane and our 30 years in the private markets, the global investment strategies we offer and read additional insights from our investment team.

The best hand at the card table, and it looks like they could emerge with no chips at all...

“Nationally, Democrats are growing concerned that the split between moderate and progressive Democrats is resulting in no legislation passing,” wrote Fundstrat strategist Thomas Block in a note on Monday.

Democrats also have sparred over the best ways to pay for the plan. Last week, Biden conceded he didn’t have all the votes needed to raise the corporate tax rate to 28%, which was the original proposed funding method.

Treasury Secretary Janet Yellen said Sunday lawmakers were considering taxing the unrealized capital gains of billionaires. Yellen said the tax wasn’t a wealth tax, but would help target “an extraordinarily large part of the incomes of the wealthiest individuals” that isn’t taxed until those assets are sold.


Goldman sees a 5% bump to S&P 500 earnings from no hike in the corporate tax rate...

The latest news reports from Washington, D.C, suggest the prospect of a statutory corporate tax rate hike has diminished. The prediction market probability of no hike has soared from 25% at the start of this week to more than 70% today. Our current 2022 EPS estimate assumes the statutory rate rises from 21% to 25% alongside an additional hike to taxes on foreign income. Under constant corporate tax policy, we would instead forecast 7% growth to $222 rather than our baseline forecast of 2% growth to $212. The bottom-up consensus is currently $221.
(Goldman Sachs)

Here comes peak earnings week...

Most Anticipated Earnings Releases


Stocks following earnings...

The best performances this month have come from the sectors with the best forward earnings hikes like energy, financials and materials.

EPS Guidance Scorecard


Otis gave a pretty solid read on the world economy today...

Elevators are everywhere. So, when Otis raises top line sales for each region of the world, you have to pay attention.

2021 organic sales outlook


Johnson & Johnson earnings encapsulated the entire earnings season this week: Better top line, worse margins...

JNJ - Organic sales growth of 4% beat the FactSet consensus estimate of 2.5% and came in at the high end of the 3-4% range most investors we spoke with expected. Gross margins, however, fell short with 370 bps of YoY compression (vs. Street -230 bps) as commodity costs surged to a 350 bps headwind, suggesting a 7.5% rate of inflation as a percent of COGS vs. 3% last quarter.
(Goldman Sachs)

And here in the U.S., gasoline usage has returned to normal pre-COVID levels...

@RenMacLLC: On the road again. Motor gas demand appears to have fully recovered, according to data from the Energy Information Administration. Over the last 4 weeks, motor gasoline demand has averaged about 9.5mb/d. Perhaps people are using cars as opposed to mass transit to get back to work?

US Finished Motor Gasoline Product Supplied

But plenty to worry about as Brinker International commented on last week...

Remember that they have 1,600 Chili's restaurants under their brand.

Brinker Int'l reports prelim Q1 $0.34 v $0.69e, Rev $859.6M v $877Me amid COVID surge - Reports prelim Q1 restaurant op margin 10.4% v 11.6% y/y - The primary drivers of the decline in Restaurant operating margin were 150 bps of higher restaurant labor costs and 60 bps of higher commodity costs. Restaurant labor costs increased due to market rate and merit increases. Temporary incremental overtime and training costs also contributed to the increase.

CEO: "Brinker's first quarter delivered positive sales and continued to significantly outpace the industry in traffic," said Wyman Roberts, Chief Executive Officer and President. "But the COVID surge starting in August exacerbated the industry-wide labor and commodity challenges and impacted our margins and bottom line more than we anticipated. We are responding to these COVID headwinds with increased focus on hiring and retention efforts, and working with our partners to gain further stabilization of the supply chain environment. In addition, we have taken immediate incremental pricing actions, increasing our full year target to 3.0-3.5%, to offset inflationary costs and protect margins as we move forward."


KeyBanc had some interesting comments on their home furnishing company meetings...

Our main takeaways were: 1) demand has slowed since Labor Day; 2) promotional levels are expected to remain benign; 3) supply chain challenges remain prevalent in Asia, while North America has generally improved; and 4) cost inflation remains, which is being partially offset (on a lagged basis) by price increases.

Whirlpool saw the highest inflation increase ever this quarter...

"In this Q3, also as we expected, we probably saw the highest inflation increase ever year-over-year. I mean 6.5% which is sitting in the Q3 P&L. Frankly, in 22 years, I never had a single quarter with that kind of inflation...going forward, we don't expect that the inflation will quickly fall off and will be short term. But by definition that it will carry over into next year." - Whirlpool (WHR) CEO Marc Bitzer

Cautionary inflation comments also from a legendary hedge fund manager and a Fed official...

This morning, billionaire hedge fund manager Paul Tudor Jones said in a CNBC interview that inflation could be "much worse" than feared…it's probably the single biggest threat to certainly financial markets and probably I think to society just in general.”

Fed Reserve official Quarles said he expected elevated inflation pressures to decline without requiring a more aggressive response by the central bank next year -- but warned of growing risks to that forecast, including from additional government spending being contemplated by the Biden administration. Quarles said “if inflation stays at 4% next spring, the Fed "might have to reassess" rate rise path.

Read more about our views on inflation >

Many other key earnings comments...

Paychex Inc (PAYX): …supply chain issues continue to provide challenges to businesses of all sizes to find new ways to compete and increase efficiency. Wages have also seen solid growth with the scarcity of the resources, well over 3% wage increases in some sectors like leisure and hospitality, pushing much higher over 8% on an hourly wage basis to attract talent in their openings.

Prologis management stressed industrial demand is so strong that space in select markets is essentially sold out due to supply chain difficulties. Rent grew 7.1% in US markets in 3Q21 and pre-leasing in US pipeline hit a record 70% in 3Q21. We believe this is evidence of the breadth of demand, and encouraging for the sustainability of space absorption and rental growth.
(Goldman Sachs)

"…in the near term, the light vehicle outlook will mainly be determined by the evolution of the situation around semiconductors. In North America, the industry continues to struggle to meet consumer demand for new vehicles due to the shortage of semiconductors. Inventory of new vehicles in the U.S. ended September below 1 million units, the lowest level seen for at least 35 years."
- Autoliv (ALV) CFO Fredrik Westin


What chip shortage? GM plans on having all auto plants open by November 1st...

General Motors Co. will take its Silao, Mexico, truck plant down next week, but expects no plants to be down from the global chip shortage come Nov. 1.

GM first started taking down plants in February as the effects of the shortage started to show. Throughout the year, the Detroit automaker has tried to protect its most profitable products — trucks and full-size SUVs — as it idled plants.

The Silao plant where the Chevrolet Silverado 1500 and GMC Sierra 1500 are built will be down the week of Oct. 25 but production is expected to return Nov. 1.

“The scheduling adjustment is due to a temporary supply constraint caused by the global shortage of semiconductors," GM said in a statement. "However, this period will provide us with the opportunity to complete unfinished vehicles at the plant and ship those units to dealers to help meet the strong customer demand for our light-duty pickup trucks."


Wonder how long the returning auto production will take to flatten used car prices...

Tweet from @lisaabramowicz1

Some Philly-area manufacturers thinking the supply chain will ease in six months...

@LizAnnSonders: Some hints of easing supply chain worries in 6m outlook for unfilled orders in October @philadelphiafed Manufacturing Index … component plunged to -18.1, lowest since 1998.

Philadelphia Fed

But why are so many quitting their jobs?

"I think the transparency around wages is very high. So workers know exactly what they're being paid today and what opportunities they have nearby that would pay more. And that's why you see this increase in quit rates because workers are looking at the opportunities." - ManpowerGroup (MAN) CEO Jonas Prising

Tweet from @JoeGuszkowski

This was in my backyard this weekend. Looking for 1,000 employees and only 100 people showed up...

The enthusiasm was a mile high at Empower Field on Saturday, and not for just another Bronco's game.

"We've got a very lofty goal to see about 5,000 people show up today," Denver Concessionaires Association (DCA) President Dennis Deslongchamp said.

His team and Denver International Airport's leadership helped organize a job fair at the United Club. It featured representatives from nearly 170 concessions, like stores and restaurants.

"We've got anything from entry-level positions all the way up to top executive management available out here," Deslongchamp said.

The goal was to hire about 1,000 workers to fill jobs at the airport, especially now that concessions have to return to their standard hours of operation come Nov. 1...

Deslongchamp says about 100 people showed up to the job fair, but he doesn't consider it a failure. Instead, it's a stepping point for bigger and better ones with, hopefully, better turnouts.


Why aren't people looking for jobs?

@bencasselman: This survey from @indeed supports this idea. Most common reasons unemployed workers give for not searching "urgently" are related to other forms of support (spouse's job, financial cushion). But care responsibilities, Covid still up there.

Having an employed spouse

Rising fuel prices beginning to bite income statements...

"In terms of some of the pressures year-over-year. I mean, it really is a lot driven by fuel. The cost per gallon and if I'm looking at it year-over-year is going to be up anywhere from call it 75 to 80%. And that's just very tough to overcome, especially with flat volumes, because that's essentially how we're looking at things and you think about our volume guidance in the 5% for full year."
- Union Pacific (UNP) CFO Jennifer Hamann

"…the key headwind for the fourth quarter, aside from just inefficiencies, as we continue to ramp up as a significant increase in jet fuel prices."
- Southwest Airlines (LUV) Incoming CEO Bob Jordan

Blackstone warning their privately-owned companies to prepare for higher inflation...

Private equity group advises portfolio companies to expect continued supply chain disruptions. The world’s largest alternative asset manager Blackstone is advising its private equity portfolio of about 100 companies around the world to prepare for higher inflation and continued supply chain disruptions.

“We are talking to our companies now about having their supply chains closer to home, and keeping more inventory on-site,” Blackstone’s president Jonathan Gray told the Financial Times in an interview. From port backlogs to semiconductor shortages and soaring commodity prices, bottlenecks threaten the global economic recovery and have seen consumer groups like Unilever, Nestlé and paint company Akzo Nobel increasing how much they charge their customers.

“Our expectation is that we will see higher levels of inflation,” said Gray, who is advising chief executives to budget for higher energy, food and labour costs. “This is going to stick with us.”


38% of portfolio managers now think inflation will become permanent...

38% of investors think inflation is permanent


Your bread will soon become more expensive...

Minneapolis Red Spring Wheat Futures

As will your copper...

Global Copper Stocks


And garbage dump prices were running way before the CPI began to tick higher...

Landfill Price Growth


Your winter energy bill is going to see a big jump...

According to the Energy Information Administration, nearly half of U.S. households that warm their homes with mainly natural gas can expect to spend an average of 30% more on their bills compared with last year. The agency added that bills would be 50% higher if the winter is 10% colder than average and 22% higher if the winter is 10% warmer than average.

The forecast rise in costs, according to the report, will result in an average natural-gas home-heating bill of $746 from Oct. 1 to March 31, compared with about $573 during the same period last year.

The forecast is part of the EIA’s winter fuels outlook, which projects that U.S. households will spend more on energy this winter than they have in several years. The agency attributed its forecast to rising energy prices—natural-gas futures have this year reached a seven-year high—and the likelihood of a more frigid winter than what most of the country saw last year.


Average household spending on natural gas

Jeff Currie nails it here...

Don't blame COVID for inflation. Instead blame all the financial and intellectual capital spent on building social media companies.

It is tempting to blame today’s shortages in the “old economy” — everything from energy to other basic materials, and even agriculture — on a series of temporary disruptions driven largely by the Covid-19 pandemic.

But outside of a few labour issues, these bottlenecks have little to do with Covid-19. Instead, the roots of today’s commodity crunch can be traced back to the aftermath of the financial crisis and the following decade of falling returns and chronic under-investment in the old economy.

As infrastructure aged and investment waned, so did the old economy’s ability to supply and deliver the commodities underpinning many finished goods. After years of neglect, today’s rising gas prices, copper supply shortfalls and China’s struggles with power generation are the “old economy’s revenge”.


Old economy stock underperformance

Halliburton reiterates the lack of spending in the energy patch...

"Look, I think broadly if I look out at the improvements, it's really a function of the tightening macro, and what we see and so. I think supply is clearly short. I mean, this underspending that's been happening for really 7 years is starting to have an effect on the supply side, and that drives clearly urgency, but it's harder to do." - Halliburton (HAL) CEO Jeff Miller

The new board at Exxon is also putting every new project under the microscope which could impact future spending...

Exxon board members are weighing the fate of future projects as the company is facing pressure from investors to restrain fossil-fuel investment to limit carbon emissions and return more cash to shareholders. Environmentalists and some government officials are also pressuring the company to produce less oil and gas.

The discussions are taking place as part of a review of the oil company's five-year spending plan, on which the board is set to vote at the end of this month, the people said. It isn’t clear whether the board will make a final call on the Mozambique or Vietnam projects during the current review, according to the people.

Both projects face potential political obstacles, and some Exxon board members have expressed concerns about whether they would return the billions in upfront investment they would require, some of the people said. The board meetings have been cordial, the people said...

As part of the review, Exxon is analyzing the expected carbon emissions from each project and how they would affect the company’s ability to meet pledges to reduce emissions, people familiar with the matter said. The annual projected emissions from the Mozambique and Vietnam projects were among the highest in Exxon’s planned pipeline of oil and gas projects, according to a pre-pandemic internal analysis by Exxon, which was viewed by The Wall Street Journal.


About that container ship pig in the python. Goldman sees it getting better in 2022...

The backlog of ships is the result of both extremely elevated demand for goods — as imports have surged to keep up with goods consumption that is 14% above the pre-pandemic level — and constraints on inland shipping capacity — including shortages of labor, warehousing, and equipment — that have limited the industry’s ability to expand.

Commentary from both our analysts and industry leaders suggests that backlogs and elevated shipping costs are likely to persist at least through the middle of next year because no immediate solution for the underlying supply-demand imbalance at US ports is available. But pressures should soon begin to ease slightly as we pass the ongoing seasonal peak in shipping demand ahead of the holiday season, and should ease more meaningfully after Chinese New Year when the number of inbound shipping containers is historically near its seasonal low for a couple months.

Port volumes


Mayor of Long Beach is jumping into help...

Tweet from @RobertGarcia

Non-Southern California ports are taking share...

The Port of Savannah achieved its busiest September ever, moving 472,000 TEUs (twenty-foot equivalent) container units, a 14.5% increase. Port officials say the facility’s Garden City Terminal “has seen steady improvement in the speed of cargo moving from dock to destination.”

Total cargo for September reached 3.3 million tons, up 250,000 or 8%. Truck traffic remains fluid at Garden City Terminal, where single container moves during the past month averaged 38 minutes and dual import-export moves 60 minutes. The port’s truck gates are averaging 70,000 moves per week, counting both import and export cargo, while intermodal containers take less than two days to move from vessel offload to departing rail. Partnering with importers to clear long-dwelling containers, the Port has achieved a 55% reduction in the number of import boxes that have been on Garden City Terminal for longer than four weeks. The average dwell time for import containers is now 7.19 days, while exports average 6.96 days. The Georgia Ports Authority (GPA) has also adjusted its container receiving window “to provide greater predictability for export customers.”

GPA will soon roll out two major capacity enhancements: completion of the Mason Mega Rail Terminal, and Phase I of the Peak Capacity project. With the Mason Mega Rail Terminal fully operational by the end of October, the Port of Savannah’s annual rail capacity will be 2 million TEUs.

“The Port of Savannah is averaging less than two days from vessel offload to departing train, and Norfolk Southern and CSX have untapped capacity to destinations such as Atlanta, Memphis, Charlotte and Birmingham,” GPA said. “We are encouraging port customers to transfer containers from truck to rail in order to expedite cargo and reduce carbon emissions. The authority is also making more room for on-terminal container storage.”


Here is a big disconnect...

Lucky that the portfolio managers stayed long this month.

FofA FMS disconnect


Because they got the benefit of this powerful rush back to stocks caused by the failure of Congress...

@mark_ungewitter: 20-day thrust, anyone?

S&P 500 Large Cap Index

Greed in the public markets has been dialed back up...

Fear & Greed Index


Ditto what Helene said...

@hmeisler: Bondaleros. Yield on the 10 yr. Such a big level.

CBOE 10-Year US Treasury Yield Index

And we know that financial stocks like to follow bond yields...

Plus, their earnings were good. Now if they could just get some loan growth.

KBW Bank Index


Here is a company that you can't own in the public markets: AeroSafe Global...

This is a private company that Hamilton Lane helped our clients invest into in 2019. The company makes packaging materials for the temperature sensitive shipping market. Even before COVID, there was a rapid acceleration in the growth of cold chain product growth as pharma and biotech companies increased their use. So, in addition to investing in a company with a product with 10x the outperformance of the average cold ship product, AeroSafe Global was also signing up their customers to multi-year contracts. Big growth and increased financial security wrapped in a preferred security instrument that offered our clients added downside protection.

Image from AeroSafe Global


AeroSafe Global


Your holiday travel tip: First thing you do is rent the car. Then airfares and hotels...

Americans who plan to rent cars for holiday travel this year should book soon, or risk facing scarce options and high prices.

Rental-car companies sold off their fleets earlier in the Covid-19 pandemic. They have since struggled to replace their inventories because of the global computer-chip shortage.

Now, those diminished fleets are a potential problem for anyone who expects to rent a car. Holiday travel this season is expected to be robust. About half of the respondents to a holiday-outlook survey from PricewaterhouseCoopers said they expect to travel for the holidays this year, up from about one-third in years past.

“Folks may get lulled into a false sense of complacency that the rental-car shortage is over, and that’s definitely not the case,” says Jonathan Weinberg, founder and chief executive officer of AutoSlash, a website that finds rental-car deals.


Read more from our CEO, Mario Giannini, as he shares a COVID-19 & Market Update with the latest on the pandemic and the public and private markets.

Explore Hamilton Lane:


The author has current equity ownership in: Johnson & Johnson and Exxon Mobil.

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.

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