Private Wealth

Weekly Research Briefing: Rising March Madness...

January 11, 2022

The flowers will be blooming, basketballs will be bouncing, and the U.S. Federal Funds rate will be rising. Given last week's surprisingly strong job and wage data combined with the surprise increased 'hawkishness' in the December FOMC minutes, it is now 'go time' for the Fed. The unemployment rate is below their 4% target rate and wages are on a move higher to find any and all workers. A January bump in the Fed Funds rate might be a bit too soon given COVID is still rolling around the United States. But by March, COVID should be less of a concern and the economy and jobs market could be even tighter than today, so there is a high probability that the Fed will act mid-March at their regularly scheduled meeting. Until then, they will all be talking about the impending lift-off, which should keep the value over growth equity trade in full swing and bond markets on the defensive.

Aside from the inflation/interest rate/Fed drama, corporate earnings season begins this week. Expect to hear plenty of further cries regarding supply chains and lack of workers. But keep your eye out for the companies who are executing, delivering on margins, and returning cash to investors. Those are our next winning stocks looking to be bought. Unprofitable companies trading at high valuations that miss their numbers will likely find themselves on my 'loser of the day' listing for daily performance. Stocks that miss and lower guidance this quarter could be dead money for several quarters while the market consolidates into better players. Of course, one of the issues for taxable investors is what does one do with the big X-baggers that you have in your portfolio in a market which is rotating away from your stocks? If your outlook on the long-term fundamentals of the company have changed, then you might want to sell it and pay the taxes or donate it to your favorite charity (check with your tax expert first). If you still love the company and want to own it long term, then possibly sell/donate some shares down to a level where the swings in its stock price do not upset your portfolio.

This rotation has moved a bit too quickly as the jump in market interest rates have exaggerated the moves. I'd expect a bit of a retrace at some point. But I won't be looking to step out on a limb and load up on -50% unprofitable growth stocks right now. I think that we will have more opportunity in the weeks and months ahead to buy our favorite names there. Enjoy your value stock rips. Maybe if there is a name or two that has hit their target, and that you are not in love with for the long term, it might be time to take profits on. Enjoy the moves and volatility.

One of the hottest U.S. job markets ever which is showing no signs of cooling...

The snow isn't the only reason that Colorado ski resorts are only operating 2/3 of their mountains.

One thing is certain—the labor market is exceptionally tight. The unemployment rate fell to 3.9% in December and there are a vast array of reports showing employers are scrambling to hire the workers they need. Many employers are also adjusting their business strategies to deal with persistent labor shortages, consolidating operations, reducing hours and investing in labor-saving technologies. The November JOLTS data, released earlier this week, reported a record-high 4.5 million workers quit their jobs during November. While job openings fell by 529,000 during the month, they remain exceptionally high at 10.56 million jobs, which is 51% higher than it was prior to the pandemic. Moreover, the ratio of the number of unemployed to the number of job openings fell to a record-low 0.65 in November.

Wells Fargo Economics

And with last week's jobs figures, the economy is now operating beyond the Fed's expectations...

While the 199,000 increase in payrolls was just half of Wall Street expectations, the unemployment rate plummeted far more than expected, to 3.9% from 4.2%, closing in on the 50-year low of 3.5%—where it stood just before the pandemic. It now stands not just lower than the 5% Federal Reserve officials projected in late 2020, but is now below their 4% median long-run estimate. In theory, sustained unemployment below that figure puts upward pressure on inflation. Two years ago, unemployment had reached these levels with no obvious sign of inflationary spillover. Not this time: inflation is now running at nearly 7%. To be sure, wages only account for a small part of that, but their contribution could grow as pay raises spread.

US unemployment rate


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

Read the Press Release

If the Fed needed another series of stats to look at to confirm the economy's strength, they can flip over to the 'Quits' chart...

As the number of Americans quitting their jobs has hit records in recent months, existing labour shortages have grown more acute.

More than 4.5m workers quit in November, figures from the BLS showed this week, eclipsing the previous record of 4.4m set in September and well above the 4.2m reached in October.

That has contributed to a near-record number of job openings, with 10.6m unfilled positions at the end of November, just short of the 11.1m figure reported a month earlier.

Economists have dubbed the trend the “Great Resignation”, as workers capitalise on an aggressive search for new hires that has prompted employers to raise wages to spur demand.

Tyson Foods cautioned in their latest earnings announcement that the competition for talent was “impacting our operational efficiencies”, and FedEx said that labour shortages cost it about $470m in its latest quarter.

Meanwhile Mark George, chief financial officer of Norfolk Southern, told analysts in December that a “white hot” trucking market, a strong construction market and Amazon warehouses “popping up all over the place” now meant that “people have a lot of options”.

Americans are quitting their jobs at a record pace

Financial Times

Of course, a shortage of workers and rising quits leads to faster wage growth...

The strength of wage inflation also points to growing labor scarcity. Average hourly earnings clocked an outsized 0.6% month-to-month gain in December, bringing our composition-adjusted wage tracker for Q4 to a preliminary 6.0% in quarter-on-quarter annualized terms and 4.1% year-on-year. Although the evidence continues to support our view that the expiration of pandemic jobless benefits has increased labor supply, the more important factor for overall wage growth is clearly the strength of labor demand. Price inflation also remains firm. Following the broad-based 0.5% month-to-month increase in the core PCE for November, we forecast an above-consensus 0.6% in the core CPI for December (released on Wednesday).

Our US Wage Tracker Continues to Accelerate

Goldman Sachs

Minutes of the December FOMC meeting showed an increased willingness to shrink the Fed's balance sheet...

And so, the odds are quickly increasing that the Fed will be selling paper in 2022 rather than buying it.

At their meeting last month, Fed officials approved plans to more quickly scale back, or taper, their bond-buying program to end it by March instead of June. They want to stop providing stimulus with those purchases before lifting short-term rates.

Minutes of that meeting, released Wednesday, showed most officials think the economy will reach conditions consistent with maximum employment soon, and some already believed that goal had been reached last month. Friday’s report isn’t likely to change that calculus. Officials have said they would raise rates once that condition is met.

The minutes also twice referred to labor markets as being “very tight,” which suggests greater conviction that the economy will need higher interest rates to slow down growth and prevent overheating.

“We’re making rapid progress toward maximum employment,” said Fed Chairman Jerome Powell at a news conference on Dec. 15.


Fed officials increasingly in support of normalizing the Fed Funds rate...

Several Fed officials have said the March FOMC meeting could be the time to raise short-term rates. Mr. Barkin, who had an FOMC vote last year but won’t this year due to the rotation of regional Fed bank presidents, said he agrees with that outlook.

“If you’ve got an economy that continues the levels of unemployment that we’re living through now, which of course is very healthy, with price pressures elevated, I think according to our mandate and framework, we need to move toward normalization,” Mr. Barkin said.

“I certainly think it’s conceivable” the Fed will be able to lift rates at the March FOMC meeting, he added.

Mr. Barkin also said he expects inflation pressures will ease later this year, but noted that supply chains continue to be hard hit due to the coronavirus pandemic and that may persist into 2023, adding uncertainty to the economic outlook.

For now the economy is benefiting from strong consumer demand while household debt levels are relatively low, Mr. Barkin said.


Former New York Fed President Bill Dudley pens this weekend that the Fed needs to stop drinking from the punchbowl and get busy...

I have news for those who think the U.S. Federal Reserve has turned more hawkish on inflation: It has only just begun.

True, the minutes from the Fed’s December policy-making meeting display growing concern. Officials are acknowledging that the labor market is already very tight, and that factors such as wage growth probably won’t be entirely transitory. They seem to be losing hope that more people will come off the sidelines to satisfy demand for workers. They’re looking increasingly likely to raise interest rates immediately after the Fed’s asset-purchase program ends in March — though there’s still the wildcard of how a resurgent pandemic will affect the economy.

Yet Fed officials remain incongruously dovish over the longer term. Consider their latest set of projections, released following the December meeting: In an economy with above-trend growth pushing unemployment below the level consistent with stable prices, the median forecast has inflation melting away, falling to 2.6% in 2022, 2.3% in 2023 and 2.1% in 2024. This could be justified if they expected to tighten monetary policy sharply, but they don’t. Their median projection for the federal funds rate at the end of 2024 is just 2.1%, well below the level they deem to be neutral.

This is a remarkable, even surreal forecast: Inflation won’t be a problem, even if the Fed does little to rein it in.


The financial markets have quickly moved toward four Fed Fund rate hikes in 2022...

Probability of 4 Fed rate hikes this year


Wall Street agrees...

Tweet from @RenMacLLC

"December's report underscored that workers are only likely to trickle back into the jobs market as reasons for sitting out, like financial cushions, health concerns and childcare issues do not unwind all at once." -- Wells Fargo

“It’s hard to avoid the conclusion that the labor market is very tight. We believe Fed officials are coming to the same conclusion... We now see liftoff in March, followed by a quarterly pace of hikes thereafter.” -- J.P. Morgan

"We expect liftoff in March, four hikes in 2022, and QT to start this summer. Our preliminary calculations suggest that while runoff would be $300-400bn in the second half of this year, it would be around $1tn in 2023, equal to roughly two hikes in total" -- Deutsche Bank

"The unexpected drop in the unemployment rate to 3.9% removes the last rationale for keeping rates low and we expect a first rate hike at the March FOMC meeting and four quarterly hikes in 2022" -- Citi

“We are therefore pulling forward our runoff forecast from December to July, with risks tilted to the even earlier side... With inflation probably still far above target at that point, we no longer think that the start to runoff will substitute for a quarterly rate hike. We continue to see hikes in March, June, and September, and have now added a hike in December.” -- Goldman Sachs


We received data that supply chains could be seeing some improvement...

Anything is good, but we will probably need more before companies stop talking about the disruptions.

ISM Supplier Deliveries

Wells Fargo Economics

Speaking of disruptions...

Today, one of the best retailers in the market, Lululemon, lowered their sales and earnings guidance due to the supply chain and labor situations. Not good news for the lesser retailers in the market.

LULU Cuts Q4 'low end' $3.25-3.32 v $3.33e, Rev 'low end' $2.13-2.17B v $2.17Be; due increased capacity constraints and limited staff - ahead of ICR Conf CEO: “We are closing out a strong 2021 in the coming weeks, and we’re pleased with how lululemon has delivered over the course of the year. We started the holiday season in a strong position but have since experienced several consequences of the Omicron variant, including increased capacity constraints, more limited staff availability, and reduced operating hours in certain locations. I am proud of how our teams continue to deliver for our guests, and we are excited about what the future holds for lululemon.”


And used car prices are still a thorn in the market...

Via the CPI which has a large weighting toward auto prices.

Manheim US Wholesale Used Vehicle Price Index


The public bond markets are not waiting for the Fed...

The 10-year yield is taking flight towards a 2-handle which is a big psychological level.
@WalterDeemer: Thinking this upside breakout is significant.

CBOE 10-Year US Treasury Yield

As we noted last week, rising rates could be especially difficult for long duration bond investors...

@biancoresearch: The 30-year data goes back to 1973 and last week was the worst calendar week total return in at least 49-year history! The long-bond lost 9.35%!! If this was a year, a 9.35% total return loss would be the 5-year worst year ever. Impressive for five days of work.

30-Year Bond Total Return

So, I hope that you have that mortgage purchase/refinance rate locked in...

Because we are well beyond the lows now.

Optimal Blue 30yr Conforming Fixed Rate


But as J.P. Morgan notes, rising rates do not mean the end of positive equity returns...

Just that waters for equity selection will need to be more closely navigated than in the past.

“As long as yields are rising for the right reasons, including better growth, we believe that equities should be able to tolerate the move,” Mislav Matejka and colleagues wrote in a note. “The rise in real rates should not be hurting equity markets, or economic activity, at least until they move into positive territory, or even as long as real rates are below the real potential growth.”

Signs that the Federal Reserve may tighten its policy more aggressively than previously expected have made for a bumpy start to the year for equities. The Nasdaq 100 index lost 4.5% in the first week of 2022 as rapidly rising yields dealt a blow to more expensive stocks valued on future growth expectations.

JPMorgan strategists expect yields to keep rising, not least because demand for bonds will drop as the Fed winds down stimulus and the European Central Bank tapers asset purchases. While this means that sectors such as technology will “struggle to outperform going forward,” it spells good news for banks, autos and other cyclical areas of the equity market, they say.


Here is the year-to-date sector returns through Friday. Some big winners and losers...


The S&P 500 Index has been outperforming the Nasdaq for almost a year now...

@hmeisler: SPX:Naz chart remains the one to watch IMHO. Topped in Oct 2019. Accelerated in spring 2020. Bottomed in Feb 2021. Latest move started in November (not just this week).

S&P 500 ETF/Nasdaq Composite

If you need an answer to the poor performance in stocks this year, blame the sharp move in interest rates...

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

Goldman Sachs

Growth is getting shellacked by value this month...

@LizAnnSonders: Per ⁦@Bloomberg,⁩ Pure Growth factor just had its worst week ever relative to Pure Value factor

Bloomberg Pure Value

Low sales growth stocks significantly outperforming high sales growth stocks...

@bespokeinvest: Here's a look at average YTD performance by decile of Russell 1,000 stocks based on YoY revenue growth. Lowest growth decile up 4.2%, highest growth decile down 7.2%.

Russell 1000 Decile Performance YTD Based on YoY Revenue Growth

Among most all U.S. stocks, here is the average drawdown by sector...

@bespokeinvest: The average Russell 3,000 stock is 27.2% below its 52-week high. The average Russell 3,000 Health Care stock (a lot of biotech) is 48.2% below its 52-week high.

Russell 3000 Average Stock's Distance from 52-Week High

Beware of stocks trading below their 200-day moving averages...

Or as this chart shows, most of the Nasdaq is trading below their 200d MAs.

Number of Nasdaq Composite members above 200-day moving average


Corporate earnings are beginning their announcements this week...

And while we like to have expectations low going into the earnings season, the bar is likely being raised for those stocks suffering recent painful performances. Their investors are a bit scared right now so any earnings miss could be especially painful this month.

The stakes are especially high for growth stocks, which trade at hefty multiples because they promise expanding future profits. Rising yields can hurt pricey stocks in particular because higher yields pressure the value of companies’ future cash flows. Higher yields also give investors more options as to where to park their money for a profit, making them less willing to take a risk on stocks.

Many growth stocks are found in the technology sector, which is expected to report lower earnings growth in the fourth quarter than the stock index as a whole. The tech sector traded last week at 27.1 times its projected earnings over the next 12 months, higher than the S&P 500’s multiple of 20.7 times. The energy group, by comparison, traded at 11.9 times its projected earnings and the financials group traded at 15.2 times.

During last week’s trading, the tech sector fell 4.7%, while energy rose 11% and financials added 5.4%.

“Especially given the valuations of some of the technology, there isn’t a lot of room for error here,” said Linda Bakhshian, a senior portfolio manager at Federated Hermes who focuses on value-style stocks. “So we really do need those margins to come through and their commentary to support continued performance into 2022.”


A pretty good meme of which stocks the market kills first as the tide goes out...



And as the tide recedes, will your portfolio be ready?

Below is a great interview quote regarding concerns for 2022 that I think is important for all investors and businesses to consider. Money losing companies that need capital to fund their existing operations had better think of raising money today because tomorrow it will become more expensive. If I happened to run a popcorn cooking restaurant that showed videos on a big screen , I would sell enough equity today to pay off all of my debts so that I could survive and compete into the future. No time for an intermission on this one because as soon as the markets get even slightly skeptical, money losing enterprises will see their cost of capital soar. You can see in the last two months that the public markets are aware of this and have been sending us a sign as unprofitable companies have significantly underperformed the broader indexes.

"For massively unprofitable businesses in a low interest environment, people look the other way. When rates rise, as they inevitably will, the market will apply a higher discount rate to the losses and they are at risk of having significant multiple compression. Businesses that are generally profitable will have less compression than those hemorrhaging. At some point, you'll start to see the market vote with its feet a bit.”

Jon Korngold, Blackstone

Every company in this basket had better have capital on the books and an ark built and ready to get through the Fed's rainstorm of 2022...

GS Non-Profitable Tech Basket


Also, down over 40% from their 2021 highs are the cryptocurrencies...

% below 2021 high...
Ethereum $ETH: -38%
Binance $BNB: -39%
Terra $LUNA: -41%
Bitcoin $BTC: -42%
Avalanche $AVAX: -47%
Solana $SOL: -50%
Chainlink $LINK: -50%
Crypto. com $CRO: -56%
Polkadot $DOT: -59%
Cardano $ADA: -64%
XRP $XRP: -64%
Shiba Inu $SHIB: -65%
Dogecoin $DOGE: -81%

Looks like an interesting support level for Bitcoin here...

Bitcoin to US Dollar


Remember the time that Manhattan's power grid shut down, the NYSE lost power and shut down all stock trading? Neither do I...

LONDON, Jan 6 (Reuters) - The global computing power of the bitcoin network has dropped sharply as the shutdown this week of Kazakhstan's internet during a deadly uprising hit the country's fast-growing cryptocurrency mining industry.

Kazakhstan became last year the world's second-largest centre for bitcoin mining after the United States, according to the Cambridge Centre for Alternative Finance, after major hub China clamped down on crypto mining activity.

Russia sent paratroopers into Kazakhstan on Thursday to help put down the countrywide uprising after violence spread across the tightly controlled former Soviet state. Police said they had killed dozens of rioters in the main city Almaty, while state television said 13 members of the security forces had died.

The internet was on Wednesday shut down across the country in what monitoring site Netblocks called "a nation-scale internet blackout".


As the biggest pension plans search for higher returns, they are increasing their allocations to private equity...

U.S. pension funds’ private-equity investments swelled to an average 8.9% of holdings in 2021 after three years of straight growth, according to analytics company Preqin. That amounts to roughly $480 billion of state and local pension fund assets tracked by the Federal Reserve, up from about $300 billion in 2018.

Some of the growth comes from blockbuster 2021 returns—54% for private-equity funds tracked by the data analytics firm Burgiss, not including venture capital, for the year ended June 30.

But retirement officials are also moving more money into their private-equity portfolios. California’s public worker pension fund, the nation’s largest, voted in November to add another roughly $25 billion to its target allocation...

Pension funds aren’t alone in their effort to supplement public market investments. They, alongside insurers, sovereign-wealth funds and endowments, are part of a growing wave of money washing into private equity.

Over the past two decades, retirement funds’ private-equity portfolios have swelled steadily as holdings of other alternative investments have fluctuated. Real estate and hedge funds make up about as much of the average pension portfolio as private equity, Preqin data shows. The portion of real-estate and hedge-fund investments, however, has been falling for the past three years as private equity has been rising. More recent additions to many pension portfolios, such as private debt, natural resources and infrastructure, still claim less than half of the portfolio share private equity does.

The $75 billion Los Angeles County Employees Retirement Association lifted its private-equity target to 17% of its portfolio in May from 10% while dialing back its target for stocks to 32% from 35%.

“We’re planning on being in an environment where portfolios have to work harder,” investment chief Jonathan Grabel said. “We thought that this was a prudent trade-off.” The pension fund has earned 16.6% on its private-equity portfolio from its inception in 1986 through Sept. 30, Mr. Grabel said.

Annualized returns for public and private equity


As long as the economy remains stable, Goldman Sachs foresees continued strength in global mergers and acquisitions…

More transactions means more targets for the growing pool of dry powder capital.

Bitcoin to US Dollar

Goldman Sachs

We have built a new Private Wealth Strategies page on the Hamilton Lane website...

It is an even better launchpad for educational materials and expanded information on how we are making private assets available to individual investors. Come check it out.

Hamilton Lane Private Wealth Strategies

Hamilton Lane

A great piece on the ascent of remote work last night on 60 Minutes...

“So, pre-pandemic, I think one in every 67 jobs was a remote job.”
"And now?”
“And now, it’s one in seven.”

Tweet from @60Minutes

60 Minutes

Prof Galloway puts pen to paper on the financial savings of 'Remote Work'...

It’s been well covered, but that’s because it’s a big deal. Remote work saves people and businesses time and money. Let’s do the math:

The average commute time in the U.S. is 26 minutes each way. It takes the average American around 20 minutes to get ready for work. Remote work removes that commute (52 mins), and with no suit or hairdryer to worry about likely cuts getting-ready time in half (10 mins): That’s 62 minutes saved per day. The National Bureau of Economic Research estimates the value of time to be 75% of the after-tax mean wage rate. For the typical American knowledge worker, that comes out to $30 per hour, thus saving:

$155 per week (5 hours 10 minutes)
$620 per month (20 hours 40 minutes)
$7,440 per year (10 days 8 hours)

Longer term, this trend will provide greater flexibility in housing, transportation, and workforce composition. There’s little rational basis for knowledge work to be structured like 19th century factory employment, and the remote work unlock will liberate us from that archetype. Many frontline jobs cannot be done remotely. But for those that can, the benefits are real. Remote work has unlocked time that can lead to a healthier and more prosperous life.

Prof Galloway

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