Weekly Research Briefing: I See Cardboard

July 27, 2021
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And plastic totes, as well as stacks of monitors and miles of copper and fiber cables. Not to be outdone by our Conshohocken headquarters, the Denver office also moved this weekend to improve our footprint and to take advantage of the post-COVID lease rates.

COVID watching has moved front and center for the U.S. as we watch the 4th wave of case and hospitalization accelerations. We all hope that this U.S. wave will follow the recent U.K. Delta wave which ripped higher and then fell off as new vaccinations and safety practices took hold. While this new spike remains unlikely to derail the manufacturing economy, it is again disrupting travel and social gatherings, and could impact school and return to work plans. Over the weekend, Goldman Sachs even moved to adjust lower their second half of 2021 GDP forecasts.

Economic data continues in fits and starts. Manufacturing data remains better while some of the service data is slower to recover. Housing is beginning to throw curve balls as higher prices are discouraging buyers. Of course, the new building inventory could be good for future house hunters. Washington continues to dance for an infrastructure deal. Once one side figures out its hand of cards strength, they will lay down a deal. But, cards are still being dealt this week.

It is peak earnings week for stocks. We will get the majority of the S&P 500 numbers in the door by this Friday. While top- and bottom-line beats remain strong, the level of future earnings increases has slowed versus previous quarters. And companies that most benefitted from COVID and stay at home now seem to be less interesting and rewarded by investors. (See Netflix and Samuel Adams last week.)

Finally, the Tokyo Olympics are off and running, swimming and skateboarding. From what NBC and their variants have thrown my way, it is looking like a great show. China leads in the medal count with the U.S. and Japan close behind as of last night. But while China leads in athletic performance, something has gone wrong with their stock market. Each passing week is giving investors more angst as the government moves toward increased regulation and restrictions. I am not sure where all of this is heading, but the stocks are not a fan of the action. If you still own Chinese stocks, you might need to stretch your time horizon out and turn the financial channel to the Olympic games.

The next two weeks for COVID case growth in the U.S. will be important if the U.K. is any guide…

Here is a chart from Fundstrat comparing previous peaks between the U.K. and the U.S. Let's hope ours follows theirs soon.

Peak COVID Cases

(Fundstrat)

The problem areas of the U.S. are in some states with very low vaccination rates...

COVID Hot Spots

(NYTimes)

The top five U.S. states leading in hospitalization spikes are all very big summer tourist states...

If Las Vegas doesn't come under control soon, it will be difficult to restart the fall conference and convention season. And I want to see my Raiders get paid for being on the field for every game.

COVID Hospitalizations by state

(NYTimes)

It is easy to see how virus spikes have caused past concerns in consumer confidence. Expect it again if the spike does not end...

Uptick in cases could be taking a bit out of confidence

(@RenMacLLC)

Las Vegas Sands is betting on Vegas to be fixed while they wait for Asia to reopen...

"We remain confident in the eventual recovery in travel and tourism spending across our markets. Demand for our offerings from customers who have been able to visit remains robust, but pandemic-related travel restrictions in both Macao and Singapore continue to limit visitation and hinder our current financial performance”.

(Las Vegas Sands)

U.S. manufacturing data remains solid...

Markit US Manufacturing PMI

But U.S. services data has cooled...

Markit US Services PMI

As a result of the data, Goldman Sachs today cooled on their future GDP forecast...

Tweet from @JimPethokoukis


Housing threw a wrench at us yesterday with a surprise slowdown in new sales...

Sales of new single‐family houses in June 2021 were at a seasonally adjusted annual rate of 676,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 6.6 percent below the revised May rate of 724,000 and is 19.4 percent below the June 2020 estimate of 839,000.

New Home Sales and Recessions

(CalculatedRiskBlog)

As a result, the U.S. housing inventory rose 3% wk/wk, and is now 31% above the April low...

In fact, you have to go back to the 2008 Global Financial Crisis to find more new single family homes for sale. Months supply also building rapidly.

New One-Family Homes for Sale

(HoranAssociates)

Should the Fed still be a buyer of $40 billion monthly in U.S. mortgage debt? The market looks far from broken from where I sit.

@C_Barraud: The average for a 30-year fixed-rate U.S. #mortgage declined to 2.78% from 2.88% last week, according to Freddie Mac data released Thursday, marking a fourth straight weekly decline and the lowest level in more than five months - Bloomberg

Cheaper Home Loans

My many friends in the multi-family housing industry might like you to consider renting versus buying right now...

U.S. Observed Rent vs Home Values

(@Not_Jim_Cramer)

When a top U.S. auto dealer tells you that inflation is temporary, you listen...

"I agree with the Federal Reserve. I think inflation is in principle, we have a transitory situation here, and things will look different by the end of the year." - AutoNation (AN) CEO Mike Jackson

(@TheTranscript_)

A top U.S. airline is now going to hire even more pilots...

American now expects to hire 350 pilots this year, up from 300, and more than 1,000 additional pilots next year, up from about 600 previously planned, its vice president of flight operations Chip Long said in the memo.

(Reuters)

The Cleveland Cliffs CEO talked up the outlook for steel on its call last week...

Cleveland Cliffs CEO

(@SehrLangsam2)

Lumber prices may have cracked, but many other commodities are keeping the index at highs...

@bespokeinvest: Note the breakout in the Bloomberg Commodities Index yesterday.

Broad Commodity Prices Make New Highs

Like coffee...

@C_Barraud: Arabica #coffee traded >$2 per pound for the first time in more than 6 years after severe frost ravaged fields in top grower #Brazil - Bloomberg. *The variety, used in high-end beverages by coffee makers like Starbucks Corp., ⬆ >27% this week, the biggest jump since 1999

Coffee Craze

Climate change is pushing one company in California to create up to $20 billion in future wages…

PG&E Corp. said Wednesday that it plans to bury 10,000 miles of power lines to reduce wildfire risk throughout Northern California at an estimated cost of up to $20 billion, reversing its earlier stance that doing so would be prohibitively expensive.

The utility company, which serves about 16 million customers in northern and central California, said the effort will substantially reduce the likelihood of its power lines sparking wildfires as drought and climate change heighten the risk of large, fast-moving blazes.

“We know that we have long argued that undergrounding was too expensive,” Chief Executive Patti Poppe said. “This is where we say it’s too expensive not to underground. Lives are on the line.”…

The proposed work constitutes only a fraction of the PG&E’s electrical system, which includes roughly 80,000 miles of lower-voltage distribution lines and 20,000 miles of higher-voltage transmission lines, many of which run through areas at high risk of wildfire.

Still, the company called the scope of the work unprecedented within the industry. It plans to devise a way to prioritize the work to target high-risk areas in the coming months. It will focus initially on burying distribution lines and may later consider doing the same with transmission lines.

(WSJ)

Q2 earnings look great...

With a quarter of S&P 500 companies reporting, 88% have beaten consensus EPS expectations and 86% have beaten consensus revenue expectations.

(J.P.Morgan)

But future estimate hikes are slowing...

Current next quarter EPS estimates

(@EarningsScout)

Confusion abounds for semis after the Texas Instruments earnings call...

In the latest sign of concern over demand, Texas Instruments Inc., one of the largest makers of chips, warned that revenue for the third quarter could fall short of some analysts’ estimates. Sales will be $4.4 billion to $4.76 billion in the period ending in September, the company said, compared with analysts’ prediction of $4.59 billion. Shares fell about 5% in early trading before U.S. markets opened.

The forecast was particularly puzzling because it came after the largest maker of analog and embedded processors reported a 41% surge in second-quarter revenue. It led to a barrage of questions from analysts on why the company isn’t more optimistic and whether we’re seeing the first signs of a slowdown in the notoriously cyclical industry.

Management cautioned that it couldn’t anticipate whether demand is peaking or whether growth at the current levels is sustainable.

(Bloomberg)

Bespoke shows us the hits and misses this earnings season as told by their stock prices...

@bespokeinvest: Snap $SNAP is so far the top performing stock on earnings this season.

Screen Results

Boston Beer $SAM so far the worst:

Screen Results

This is the biggest week of the season for large cap earnings...

Most Anticipated Earnings Releases

(@eWhispers)

Stocks do not look disappointed in the earnings season...

S&P 500 Large Cap Index

(@hmeisler)

A certain sign of the times when the top cruise ship company refinances debt 750 basis points lower in 15 months...

Carnival Corp. sold $2.4 billion of new junk bonds Wednesday to refinance debt the cruise ship company took on last year, when it was forced to pay high interest rates amid doubts about its ability to weather the pandemic.

The company sold the seven-year secured notes with a coupon of 4%, in the low range of pricing discussions, and reflects the strong demand for high-yield bonds as investors hunt for bigger returns. That will slash borrowing costs for Carnival because the proceeds will fund an offer to buy back about half of the 11.5% coupon debt the company issued in April 2020.

(Bloomberg)

J.P. Morgan highlights the capital discipline in the energy sector these days...

Despite a significant increase in the cal 2021 oil strip to $67 per bbl from $48 per bbl at the start of the year, shale discipline at the hands of public operators has continued to hold. In 2Q21, the industry added 50 rigs in the U.S., but 47 of the rigs were added by Privates vs. only 3 net rig adds by Public E&Ps and Majors. Instead of reinvesting the windfall profits from high oil prices subsidized by OPEC+, E&Ps have prioritized debt reduction and other forms of cash return…

...nearly half of our coverage group, including a large mix of bigger cap stocks, have embraced maximum reinvestment rate targets ranging from 50-80% of CFO, which should not only lead to more moderate production growth from U.S. shale, but more cash return to investors. For example, COP recently provided a 10-year outlook based on a 50% reinvestment rate that includes ~$65 billion in distributions to shareholders (~$24 billion in dividends and ~$42 billion in buybacks) assuming a $50 per bbl oil price in real terms.

(J.P. Morgan)

Not to be outdone by Hellman & Friedman, Carlyle Group is looking to raise the largest PE fund ever...

Carlyle Group Inc. is seeking to raise as much as $27 billion for its latest flagship fund, in what would be the industry’s largest-ever private equity pool.

The firm is in discussions with investors about the size of the fund, according to people familiar with the matter, and the total could change. Should it meet its goal, Carlyle would surpass Blackstone Group Inc.’s $26 billion record from 2019. The fund would also be 46% larger than its previous flagship pool from 2018.

Private equity firms are gathering billions of dollars as demand for alternative assets surges among yield-hungry investors. This month, Hellman & Friedman raised $24.4 billion for its latest flagship fund, the firm’s biggest to date. Private equity funds took in $514 billion in the first half of this year, 70% more than the same period in 2020, according to data provider Preqin.

(Bloomberg)

Early birds are still getting decently priced worms...

Later venture cap investors are paying higher prices to make their investments, but it will all be small change if the worm turns into a unicorn.

US Annual median valuation per round

(@CBinsights)

Speaking of unicorns, Ken Moelis had an interesting comment last week...

"I read somewhere, I think, yesterday, that we're up to 900 unicorns. If you would have asked me 6, 7 years ago, 5, 6 -- 5 years ago, 4 years ago maybe, what was our coverage for venture capital, I would have said really not our client base. But when you have 900 unicorns that I think have a market capitalization now of $3 trillion, that's another asset class that will do something. Some might go public, but some will M&A" - Moelis & Company (MC) CEO Ken Moelis

(@TheTranscript_

I hope all the seed investors in this new company are rewarded with the biggest unicorn ever created...

A four-year-old startup says it has built an inexpensive battery that can discharge power for days using one of the most common elements on Earth: iron.

Form Energy Inc.’s batteries are far too heavy for electric cars. But it says they will be capable of solving one of the most elusive problems facing renewable energy: cheaply storing large amounts of electricity to power grids when the sun isn’t shining and wind isn’t blowing.

The work of the Somerville, Mass., company has long been shrouded in secrecy and nondisclosure agreements. It recently shared its progress with The Wall Street Journal, saying it wants to make regulators and utilities aware that if all continues to go according to plan, its iron-air batteries will be capable of affordable, long-duration power storage by 2025.

Its backers include Breakthrough Energy Ventures, a climate investment fund whose investors include Microsoft Corp. co-founder Bill Gates and Amazon.com Inc. founder Jeff Bezos. Form recently initiated a $200 million funding round, led by a strategic investment from steelmaking giant ArcelorMittal SA, one of the world’s leading iron-ore producers.

Form is preparing to soon be in production of the “kind of battery you need to fully retire thermal assets like coal and natural gas” power plants, said the company’s chief executive, Mateo Jaramillo, who developed Tesla Inc.’s Powerwall battery and worked on some of its earliest automotive powertrains.

(WSJ)

China is forcing all equity investors to reassess each one of their holdings right now...

The new tutoring rules, published by state media, would force tutoring services teaching school subjects to students through compulsory years of education to be run as not-for-profit operations. They also would introduce fee standards, ban the companies from capital raising and foreign ownership and forbid teaching during weekends and public or school holidays.

While regulators aren’t concerned about inflicting losses on investors in educational stocks, the rules aim primarily to restore order to the sector, given high fees and other issues, said Hong Hao, chief strategist at Chinese state-owned bank BoCom International.

“The purpose is to ensure that kids get proper education,” he said. “It’s not to wipe out the entire market and destroy everyone’s portfolios.”

He said authorities could later turn their focus to other areas that they consider out of control, such as healthcare and property. “These sectors are areas where the most painful reforms have to be done,” he said.

A previous clampdown on peer-to-peer lending effectively shut down the fintech experiment, though some companies survived by diversifying into other business lines. Late last year a top banking regulator said China’s peer-to-peer industry had been “zeroed out.”

(WSJ)

Stock prices will often predict the future...

$20 in February to below $2 today. Many knew that these actions were coming which is why you worry about any stock you own that dives and then re-dives below its 200 day moving average. (Or as Walter prefers below, the 63-week exponential moving average.)
@WalterDeemer: Did anyone happen to notice what this looked like *before* Friday's implosion?

New Oriental Education and Technology Group Inc

Chinese technology stocks have now underperformed the U.S. Nasdaq 100 Index by 50% since February…

Hang Sang Tech Index

(Jones Trading)

Was the Facebook app just a warmup to the metaverse?

"I think all of these different initiatives that we have at Facebook today will basically ladder up together to contribute to helping to build this metaverse vision. And my hope, if we do this well, I think over the next five years or so, in this next chapter of our company, I think we will effectively transition from people seeing us as primarily being a social media company to being a metaverse company...you can think about the metaverse as an embodied internet, where instead of just viewing content — you are in it. And you feel present with other people as if you were in other places, having different experiences that you couldn’t necessarily do on a 2D app or webpage.“

(@TheTranscript_)


Finally, I know how you are watching...

Netflix's subscriber growth may have slowed significantly last week post the COVID bump, but the company continues to have a good lead over the rest of the playing field.

Where Americans Get Their Steam On

(Statista)

The author has current equity ownership in: Texas Instruments, ConocoPhillips, Facebook Inc.


Disclosure

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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