Private Wealth

Weekly Research Briefing: Time for a Warm Blanket?

January 25, 2022

If the equity markets were oversold on Friday, then was Monday's 1,000-point decline and reversal in the Dow Jones Industrials the flush? Uncertain earnings reports, rising tensions in the Ukraine, and crashing crypto prices gave investors another reason to hit the sell button on Monday. The S&P 500 VIX (volatility index) launched over 30, neared 40 and returned to below 30 before the day was over. We were already in a very oversold short-term position at Friday's close with only 3.8% of the S&P 500 Index stocks trading above their 10-day moving average (according to NDR). And it was a notable day with 6.8 billion shares trading on the NYSE, which was 20% higher than Friday's big option expiration day. So, we look through the market and take notes on what worked, what didn't, and where the buying and selling occurred, so that we can improve the portfolios in the event a short-term bottom has been made.

In the meantime, there are many macro items to consider this week. As the Q4 earnings reports continue, we wonder if companies will be able to keep their sky-high operating margins. The last two week's reports have really raised some doubts as to whether margins can overcome the creeping wage inflation. It will be difficult for companies to talk their way around this issue in the future given the extreme tightness in the labor market. And as the tech and growth names begin to report, we wonder if some companies that benefited from 'work from home' during COVID ended up stealing too much revenue growth from the future (looking at you, Netflix and Peloton). Maybe earnings estimates are just way too high for these companies. Just keep your fingers crossed that upcoming 'cloud revenue guidance' does not disappoint at the big three. Other remaining wildcards on the table are Ukraine/Russia, China Property/Econ Growth, Bitcoin/El Salvador/OBJ, and of course the disappointment of both 'Bays not advancing to the semi-finals. (But that Super Bowl halftime show is going to rip!)

While the S&P 500 Index still looks a bit rich above 20x forward earnings, the credit market remains good, which keeps us digging for equities to own and get paid in. Plenty of solid, dividend paying stocks that went from green to red on Monday. Now let's see if the big SPX index can stay above its 200-day moving average and above those last two closing lows of December and October. I am still an observer of the high-growth names until we see more bottoming in those valuations. I had a front and center seat to the unwinding of the 2000 valuation bubble. We could be in the early days of this valuation bubble. I will stick to buying stocks with free cash flows, dividends streams, and stock buybacks right now.

What a Monday close...

S&P 500 Index recovers from breaking the October low and even comes close to clearing its 200-day moving average back to the upside. This will be an interesting week for the index.

Our US Wage Tracker Continues to Accelerate

The January Markit PMI data reflects Omicron's December/January surge. So, February should see improvements...

• The DM composite flash PMI declined substantially by 3.9pt in January, reflecting a large decline in services (-4.7pt) and a downtick in manufacturing (-1.0pt).

• The manufacturing flash PMI declined in the US (-2.7pt), Australia (-2.3pt), and the UK (-1.1pt) and edged up in the Euro Area (+1.0pt) and Japan (+0.3pt).

• The services flash PMI declined in all major DMs, with the largest declines in Australia (-10.1pt), the US (-6.7pt), and Japan (-5.4pt), and more limited moves in the Euro Area (-1.9pt), and especially in the UK (-0.3pt).

Goldman Sachs

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

Read the Press Release

Many Americans will be returning to work in February as COVID goes into remission...

As a result, manufacturing and shipping delays will ease and in-stocks will improve.

Our US Wage Tracker Continues to Accelerate

As people return to work, Procter & Gamble will see improved on-shelf availability...

"Our ability to supply is relatively stable, it's stable actually. If you look at our on-shelf availability, for example, in the U.S., Last quarter, we reported that was around 94%. We're still running at around 94%, which is not where we want to be, which would be more in the 98%, 99% range, but good relative to peer group and good given, again, the overall challenges the industry is seeing, the retail environment is seeing. So -- and that is true around the world." - Procter & Gamble CFO Andre Schulten


Two important charts from a big railroad showing the economic recovery datapoints they are watching and the positive impacts on their 2022 volumes...

@bluff_capital: $UNP Union Pacific beats on eps, beats on rev.

Economic Outlook

While P&G and Union Pacific did well last week, many others left Wall Streeters scratching their heads and adjusting their models...

Disappointing guidance. Investors are very interested in forward-looking guidance from managements, and recent information on that front has been concerning. Bank executives emphasized higher operating costs in the coming year. Following the release of 4Q results, only six companies in the S&P 500 provided formal near-term guidance for 1Q 2022. Unfortunately, five of the six firms guided below consensus for next quarter, including three of the stocks that actually beat expectations in 4Q. Only Micron Technology (MU) "beat-and-raised".

The most notable firm to provide updated guidance was Netflix (NFLX). The company stunned investors by dramatically lowering its expected rate of net subscriber growth in 2022. The shares plummeted by 22% the following day and $50 billion of equity cap was erased on Friday. The stock price has plunged by 33% since the S&P 500 peaked in early January and by 41% since NDX hit its all-time high in November.

Cynical investors often quip, "Managements are the last to know." However, executives also have line-of-sight on their supply chains, customer orders, and other operating trends. Multiple headwinds exist that make providing forward guidance challenging for executives, including labor (costs, recruitment, and retention), public health (the Omicron variant and shifting local government regulations, and travel restrictions), supply chains (cost and space availability on ships, railroads, and trucks), and monetary policy (pace of Fed hikes and the path of long-term interest rates).

Goldman Sachs

Many, many more earnings reports to come this week...

Earnings Report


Keep an eye on this railroad labor negotiation breakdown...

Colorado just had a two-week grocery store strike that disrupted our lives. It settled over the weekend in part because Kroger could not find replacement workers to operate the stores and then all the pharmacies cut their hours. The decline in traffic at the largest grocer in the state was more than Kroger wanted to deal with. Plus, just too easy for their striking workers to grab a job anywhere else in the state for as much or more money. If the economy stays red hot, expect more fights over wages/benefits…and pressure on corporate margins.

Labor unions representing about 100,000 U.S. railroad workers say contract negotiations have broken down after more than two years of talks with several carriers.

The group of unions, which is negotiating on behalf of workers for railroads including Union Pacific Corp. and Berkshire Hathaway Inc.’s BNSF Railway Co., is requesting a federal mediator after “discussions completely stalled last week.” The unions are seeking wage increases of 40% over six years.

“The carriers continue to push proposals that fail to even catch up to the cost of living,” the unions, which represent the majority of about 115,000 workers involved in the talks, said Monday in a statement. “The railroads continue to demand extreme changes to our members’ current benefits and attempt to unilaterally impose work rule changes.”


Mohamed El-Erian wants the Fed to come clean this week...

Having grossly mischaracterised inflation for most of 2021 and missed one policy window after another, the persistently late Fed policy reaction risks what Powell himself warned is a “severe threat” to livelihoods. Accordingly, at its meeting this week, it should send a clear message that it is serious in addressing inflationary pressures.

This should be done via an immediate ending of QE, forward guidance on three interest rate rises and signalling that the balance of risks has tilted to tighter policies. The Fed should schedule for March the announcement of its “quantitative tightening” plan.

To make all this credible, officials must also come clean on why they so badly misread inflation for so long (as noted before, I believe this will go down in history as one of the central bank’s worst inflation calls), and explain how they are now better at incorporating a broader set of bottom-up indicators into its macro modelling and forecasts.

This is what I believe the Fed should do. I worry that it won’t, however.

Financial Times

Of course, the last time the Fed talked about shrinking the balance sheet, the market began its current 10% drawdown...

@johnauthers: If you're looking for someone to blame for the sell-off, George Saravelos of @DeutscheBank just sent this chart under the heading "Blame the Fed". Seems fair.

December FOMC Meeting

The last hour performance of the S&P 500 Index has been one for the record books...

This end of day anxiousness will help us to mark a near-term bottom as margin calls and institutional positioning become fully revealed.

January Worst Month

A glance at the year-to-date U.S. sector performances through Friday shows energy still dominating...
US Sector performance

Across the capitalizations, a different story as big, mid and small all down nearly the same...

Capitalizations performance

Small caps doing rather well even as meme-stocks return to their launchpads...

Shares of GameStop and AMC Entertainment fell sharply on Monday, continuing the meme stocks’ weeks-long plunge.

GameStop was down 9.2% Monday to $96.58, the lowest it has been since February 2021. The videogame retailer has been on a steady slide over the past nine weeks, losing nearly 35% in January alone...

Stock in AMC, the movie-theater company, was down for the eighth consecutive day on Monday, dropping 6% to $16.88.

Last week marked the first anniversary of the start of the meme-stock frenzy.


If you are seeking positive returns year-to-date, look no further than into the commodity assets...

Commodity performance

Another chart for your corkboard on why the Fed raising rates is unlikely to puncture stock prices...

History indicates that 2022 is likely to end on a better foot than it started. U.S. stocks have historically performed well during periods when the Fed raised rates, as a growing economy tends to support corporate profit growth and the stock market. In fact, stocks have risen at an average annualized rate of 9% during the 12 Fed rate hike cycles since the 1950s and delivered positive returns in 11 of those instances, according to Keith Lerner, Truist’s co-chief investment officer. The one exception was during the 1972-1974 period, which coincided with the 1973-1975 recession.

S&P 500 performance during rate hikes


How much credit does Marko Kolanovic get for turning the market higher on Monday...

@carlquintanilla: Here comes Marko... JPMORGAN: Equity bearishness “is overdone, and out of line with activity momentum, easing bottlenecks, and what we expect to be a strong earnings season. .. margins to remain resilient .. we are OW Financials.. the selloff on margin concerns appears excessive.”

Where is the current strength in this market?

Sector strengths

Now do strength by individual names...

@greatquarter: S&P 500 YTD WINNERS
15 of top 20 performers are oil companies

Energy performance

If they can't show revenue and earnings growth after two years of work-from-home business acceleration then future earnings estimates could be too high...

@VisualCap: Seeing Red: Is the Heydey of Pandemic Stocks Over?

Energy performance

Yes, and yes...

Russell 1000 Decile Performance YTD Based on YoY Revenue Growth

Work from home was great, until it wasn't...

The Covid-19 pandemic isn’t over yet, but the boom it helped create for stay-at-home stocks is vanishing.

Netflix Inc. and Peloton Interactive Inc., two of the highest-profile stars of the lockdown era, both plunged Thursday -- the latest sign that investors have moved on from the so-called pandemic trade. Netflix expects to add a paltry 2.5 million users in the current quarter, well short of estimates. Peloton, meanwhile, is slashing costs to cope with slowing demand for its stationary bikes...

The two companies are the latest darlings of 2020 to sink to levels not seen since the early days of the Covid-19 outbreak, when investors first deduced that lockdowns and easy-money policies from the Federal Reserve were going to send stocks like Netflix soaring.

Others are suffering as well. Zoom Video Communications Inc., the owner of the ubiquitous videoconferencing software, is trading at the lowest level since May 2020, as is e-signature company DocuSign Inc. Both stocks have lost more than half of their market values from record highs and slid further after Netflix’s results. Etsy Inc., the e-commerce company that saw strong pandemic demand for face masks and other products, is down more than 45% from a November peak. It closed Thursday at its lowest since May.


Microsoft rescued Activision last week. How many weeks until Apple Inc. rides off with Peloton?

Apple should have bought some or all of it in 2019 and given the bikes/treads away with an iWatch health subscription tied to health insurance credits. There would not have been any product design, manufacturing, or supply chain issues. It was a perfect fit. Try again, Mr. Cook?

@charliebilello: Peloton gained 490% from the start of 2020 through its peak in January 2021. It has now given back all of those gains after an 84% decline.

Number of Nasdaq Composite members above 200-day moving average

This investor gets it. Thanks to fear and greed, there will be plenty of time to prepare and execute on your high-growth stock buy lists...

Q. You wrote to us before the show, saying “avoid the temptation to step in and buy into the selloff in high-growth stocks.” You said, “my experience is: Once the fever breaks, it’s done for quite a while.” Historically, is there any precedent you could point to? Is it too simple to point to the dot-com bubble as a fair comparison?

A. So first of all, I just want to make sure it’s understood: I’m not a value manager, or a growth manager. I’m not trying to, you know, spin what works or what my investment philosophy is at all times. I’m just looking at what the fat pitch is. And as it pertains to this group, the reason why I believe once the fever breaks, it lasts a long time, is if you wind the clock back, if you look at some of these uber-growth funds back to where they were in early fall of 2020, that means a lot of people haven’t made money, right? Because they chased into them after they peaked.

And the reason why the dot-com analogy is correct is that that means that every time they start to go up, there’s someone that can get out even. And so there’s tremendous selling resistance at higher levels because so many people have lost money. And that to me is very similar to the dot-com bubble, and other bubbles. Once a very speculative bubble breaks, it’s not a V bottom because there’s too many people looking to get out.


Price-to-sales valuations for unprofitable tech has been cut in half...

@LizAnnSonders: Non-profitable tech cohort’s price/sales ratio has been more than cut in half from peak, which was 13 in February 2021 … ratio now at lowest since July 2020


Given the profitability of big tech today, we probably don't repeat, but we could still give back a lot of past outperformance...

@AlbertBridgeCap: Predicting anything about tomorrow is impossible, and silly. But in the context of when this happened in 2000, they hadn't seen nothing yet.

GS Non-Profitable Tech Basket

How do large caps act after suffering a quick corrective drawdown?

@RyanDetrick: The S&P 500 is about to move into a 10% correction. What stands out (as we all know) is it happened fast, really fast. Here are the only times it took less than a month to move from an ATH to down 10%. The good news is 6 months later never lower and up nearly 15% on avg.

GS Non-Profitable Tech Basket

How do small caps act after suffering a quick bear market drawdown?

History shows often a good recovery is in the cards looking out three months. And always positive out 12 months.

GS Non-Profitable Tech Basket


Long/Short equity funds have grabbed the mic...

With stocks and bonds now both posting negative returns year to date, I wanted to look at how conservative long-term public equity investing styles were holding up. Using Morningstar Direct, I grabbed the category average returns for the oldest mutual fund in each fund family (thus eliminating the multiple share classes). Long/Short Equity is a basket of funds that are both long and short equities with little-to-no bond exposure. Allocation 50 to 70% equity is where most of the big Balanced funds lie. Target Date 2030 is another very big conservative group of balanced-like funds. Then, I grabbed the large blend category, which is where most of the S&P 500 index and the largest old, giant equity mutual funds lie, for a pure equity fund benchmark.

With bonds and stocks now both losing returns in 2022, you can see below how much of a hit the Balanced and Target Date funds are taking. By comparison, the Long/Short funds are now outperforming for the one year and less timeframes. So, for investors looking for ballast for their conservative equity exposures, maybe there is another fund category to look to besides the Balanced or Target Date ones. I don't want to say that bonds are not a good option right now, but as the financial markets have looked toward a new Fed interest rate environment and become more aware of public equity valuations, the Long/Short Equity category has outperformed.

GS Non-Profitable Tech Basket

Morningstar Direct

Heard in the halls of Hamilton Lane regarding 2021 private equity fund cash flows...

Distributions for 2021 for all private markets set a new record, that record is just shy of 2x the prior high too… nearly $1.58 trillion compare that to prior high seen in 2017 at $820 billion. Q4 2021 was the largest quarter we’ve ever seen at $546 billion.

Contributions also set a new record at $1.2 trillion, given the strong distributions that make 2021 the first net cash flow positive year since 2017, with $381 billion coming back to investors in aggregate.

Adjusting the lens to a finer point, I thought we might find that VC and Growth accounted for the bulk of those 2021 distributions, but buyout was still king. Buyout funds represented 43% or $678 billion vs VC/Growth distributing 27% or $428 billion the rest going to credit and RA strategies. The ratios for the distributions largely held true for the capital calls too.


The activists were very busy last week as equity prices have declined and management teams have not executed...

Peloton's CEO is in the sights of Blackwells Capital. It wants John Foley fired and a sale explored, a person familiar said. Kohl's surged premarket after Sycamore Partners reportedly reached out about a takeover. The retailer is also fielding a $9 billion Starboard-backed offer. In Europe, Unilever jumped after people familiar said Nelson Peltz built a stake.


Was the democratization a good thing?

In May 2021, Robinhood launched a platform to give everyday investors access to IPOs. This is a list of the IPOs that they offered to their customers. IPOs and unprofitable companies have been a sore place to invest for the last nine months but seeing the pullbacks in these names makes me think the 'democratization of finance' could have used much better timing. It will be interesting to see which new companies are made available to Robinhood customers via the IPO platform in the future.

GS Non-Profitable Tech Basket


OBJ should NFT his one-handed catches...

Seriously, we saw this same phenom in 1999-2000. Athletes, celebrities and vendors were trading services for stock options and equity, paying the taxes on the income, then watching as the equity value went toward zero. Twenty years later, it is now time for 'The Brave' to work for free.

GS Non-Profitable Tech Basket

If you were looking for a +200-400% inflation data point, look no further...

As early as this month, American International Group Inc. AIG 0.24% will begin notifying about 9,000 customers in its Private Client Group that their home policies won’t be renewed this year. The change is part of a plan by AIG to cease selling home policies in California through a unit regulated by the state’s insurance department.

AIG told insurance brokers in an email late last year that some policyholders instead may be eligible for coverage via another AIG unit. The other unit operates alongside other so-called excess-and-surplus lines insurers, which have more freedom on policies’ rates and terms than do insurers in the broader, tightly overseen home-insurance market.

The policies could cost three to five times what AIG’s clients now pay, with less-generous coverage, brokers said.

“AIG is the first high-net-worth carrier to say ‘we’ve had it, we’re divorcing ourselves from California’s regulated market,’ ” said Jim Tolliver, an insurance broker in San Francisco with Woodruff Sawyer & Co., who fears others will follow suit...

In an earnings call in October, Chubb Chief Executive Evan Greenberg said the insurer’s California shrinkage was “not a small amount” in locations “both highly exposed and even moderately exposed to wildfire.” He said “someone else will have the pleasure of writing” business for which “we cannot charge an adequate price for the risk.”



The author has current equity ownership in: Microsoft Corp.

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