Private Wealth

Weekly Research Briefing: Bounce Worth Noting

March 22, 2022
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We expected a volatile year in the markets with the post-COVID economic surge sparring with a FOMC going on an interest rate hike parade. Then Russia showed up in Ukraine and dialed up the VIX for all market participants. Volatility can stink when your holdings are on the wrong side of the directional move. Big swings can also create opportunities for investors to add value to their portfolios. Seven to 10 trading days ago, many oversold financial markets were looking at new corrections or even bear market pullbacks. But last week’s recovery was worth putting a gold star in your notebook. It is not often that you see a one direction advance across so many equity markets and stocks all at once. Sell-offs across the board are much more frequent due to the panic around big macro events. But one-sided buying for four days in a row without a pull back on the fifth day? That is a notable sign to me that something is up.

Could the peace talks between Ukraine and Russia be further along than we think? Could the market be looking ahead to a more peaceful post-war Europe? Or maybe even a more peaceful and trade-friendly big blue marble? It is surprising to see so many countries talking to each other about trade who had no reason to be talking before (see Venezuela and Iran). Maybe the big moves by China last week to help their property and technology sectors lit a fire under some investors. Could it be possible that equity investors loved the Fed's aggressiveness on future interest rate moves, while bond investors feared them? (The 60/40 portfolio is going to need a lot more than Daylight Savings Time to save it now.) Who knows if there was a single root cause to one of the more meaningful advances in the past 70 years? It could have just been a function of too much pessimism followed by many underweight investors who all bought at the same time. Let’s keep a close eye and hope that the market is pointing us to some great news ahead.

The war in Ukraine is now in a stalemate. The Russian invasion has mostly stopped. Fatalities and casualties are very high within its army, and some think that it no longer has the manpower to continue a ground assault. So, the country has resorted to missiles and air bombing to destroy what they cannot take. There have been many reports of peace talks with significant progress being made. President Zelensky wants to save his people. Putin wants to save face. How will they find a way to meet in the middle? Meanwhile in Russia, the flight of young professionals fleeing the country is accelerating as fast as the grocery store shelves become bare in its major cities. The economic sanctions are taking a massive toll and they are about to get even worse as the top four oil service companies in the world pull back from the country. Expect oil/gas production to go into decline which will only force the rest of the world to look elsewhere for energy. Germany didn’t wait long as the country struck a long-term energy partnership with Qatar over the weekend to reduce its dependency on Russian gas. Expect many more trade deals to happen as the world rotates away from everything Russian.

For the U.S.  markets, we will have plenty of Fed speak this week. Chairman Powell started things off today by suggesting that the Fed would easily look at a 50bp rate hike at any meeting this year if needed. While this isn’t news to anyone, it did spook the Treasury bond/note markets even further. You can guess that any and all inflation datapoints will get the spotlight from here until the May meeting. It’s two weeks until the end of the Q1, so expect some final earnings guidance to make its way from companies to the markets.


A 300-point ripper of a bounce in the S&P 500 in the last week...

S&P 500 Large Cap Index

Maybe wilder has been the recovery in the European stock indexes...

@Schuldensuehner: TOTALLY CRAZY! European stocks have now fully recovered from the shock of Russia’s invasion of Ukraine. Stoxx 600 dropped 10.6% from before invasion on Feb24th to the low point on Mar7. It is now right back where it started, after the biggest weekly rally since Nov 2020.

Stoxx 600

@Schuldensuehner


But looking right at the advance in the S&P 500 shows something quite rare and interesting...

@RyanDetrick: History was made this week.

For only the 5th time ever, the S&P 500 gained at least 1% for 4 consecutive days.

This rare occurrence is also quite bullish, as a year later it has been up more than 20% every single time with an average gain of 28.0%.

4 Strong Days Like We Just Saw Are Rare

A quick move from oversold to overbought is a rare and often profitable signal...

@edclissold: Friday's rally pushed the two breadth thrust indicators that were close over the top. 90.5% of stocks are above their 10-day moving averages. Since 1982, SPX has been higher 35 out of 36 times on year later. Past performance does not guarantee future results. @NDR_Research

S&P 500 Stock Index

Another favorite way to look at the move is in the retreat in the VIX of the S&P 500...

And it was even lower Monday with the flat/down close.

A Move Below 30

@RyanDetrick


Given the increase in future uncertainties, earnings estimates have remained very stable in previous weeks...

Earnings Estimates

@EarningsScout


The price pullback has led to a decent correction in the market's forward P/E ratio...

@FactSet: The forward 12-month P/E ratio for $SPX of 19.1 is above the 5-year average (18.6) and the 10-year average (16.8).

S&P 500 Forward 12-Month P/E Ratio

When I look at the year-to-date changes on both an absolute and risk-adjusted basis, it makes me want to make some portfolio shifts...

Over the last two weeks, I have sold four long-term energy holdings and redeployed them into other positions that have pulled back in this market drawdown. I added four semiconductors, two consumer discretionary, one financial, and one Chinese technology company.

Market Performance

J.P. Morgan notes how oversold the equity markets became last week...

Current risk positioning is very light. This is a result of high and persistent volatility, and risk aversion caused by global geopolitical developments. The AAII bull-bear indicator at -27 is near its 2020 lows and 2 standard deviations below average. Equity exposure for volatility sensitive investors – the largest and fastest group of investors (including insurance, risk parity, dynamically hedged portfolios, HF platforms, etc.) – is now in its ~5-10th percentile, and for this reason risks are skewed to the upside.

JPMorgan


The FOMC raised the Fed Funds rate +25bps last week...

More importantly, it significantly raised its projections on future rate increases.

The FOMC raised the funds rate target range to 0.25%-0.5%, as widely expected. More importantly, the median dot in the Summary of Economic Projections now shows seven interest rate hikes in 2022—up from the three projected at the December meeting—and seven participants showed more than seven hikes, which would require at least one 50bp hike at one of the six remaining meetings this year. The projected hiking path now shows a 7-3½-0 hike baseline for 2022-24—compared to the December projected pace of 3-3-2. Ten participants projected a funds rate above the median longer-run dot in 2024, with the longer-run median edging down to 2.375% (vs. 2.5% in December).

Goldman Sachs


And on Monday, Chairman Powell noted that a +50bp hike at any meeting is not out of the question...

Federal Reserve Chairman Jerome Powell said the central bank is prepared to raise interest rates in half-percentage-point steps and high enough to deliberately slow the economy if it concludes such steps are warranted to bring inflation down.

“We will take the necessary steps to ensure a return to price stability,” Mr. Powell said Monday in remarks prepared for delivery at an economics conference in Washington, D.C...

“If we conclude that it is appropriate to move more aggressively by raising the federal-funds rate by more than [one-quarter of a percentage point] at a meeting or meetings, we will do so,” he said. “And if we determine that we need to tighten beyond common measures of neutral and into a more restrictive stance, we will do that as well.”

WSJ


As a reaction to Powell's comments, the market quickly moved to a two-thirds chance of a +50bp rate hike at the next FOMC meeting...

Fed Rate Hike

CME Group


Ten-year yields went for another liftoff...

CBOE 10-Year US Treasury Yield

China pulled out the bazookas last week and decided that its equity markets had declined enough...

Following a string of dramatic interventions by Beijing, the worst selloff in Chinese markets since 2008 turned into a historic surge, catapulting the country’s U.S.-listed technology firms into a rebound not seen before. For investors who’ve been burned many times by abrupt somersaults in government policy, the question is whether the rally will hold, turning the world’s second-biggest economy into a haven for traders and a life-raft for global output amid concerns over a broad slowdown...

China’s top financial policy committee swung into action. It vowed to ease a crackdown on technology firms, support the battered real-estate market and stimulate the economy. The pledge follows a prolonged squeeze on financing for property developers and a sweeping regulatory campaign aimed at internet giants like Alibaba Group Holding and Tencent Holdings.

That was swiftly followed by the country’s central bank intervening to weaken the yuan and the government distancing itself from Russia’s attack on Ukraine to minimize the risk of drawing Joe Biden’s ire and potential U.S. sanctions. Xi then signaled a shift in a longstanding Covid-fighting strategy by pledging to reduce its economic impact.

Bloomberg


Investors hope that a recovery is in store as Chinese equities have been flat for thirty years...

MSCI China Gross Index Performance

@EconomPic


Germany makes a big move away from Russian gas imports over the weekend...

Germany said it had sealed a long-term agreement with Qatar for the supply of liquefied natural gas as Berlin seeks alternative energy suppliers to Russia.

In Doha as part of a Gulf tour, Germany’s economy minister Robert Habeck on Sunday said the deal would be a “door-opener” for the country’s economy because it would reduce its reliance on imported Russian gas, which currently accounts for more than half of annual supply.

He declined to provide details on the quantities and other terms discussed. The ministry said it would be up to individual German energy companies, the bosses of which have accompanied Habeck on the trip to Qatar, to sign deals with the Arab state’s enterprises.

“We might still need Russian gas this year, but not in the future,” Habeck was quoted as saying by DPA in Doha. “It starts like this — so he who has ears should start to listen,” he said, in a thinly veiled message to Russian president Vladimir Putin.

Financial Times


Russian economic pressures get dialed up to '11'…

What is going to happen to its #1 export if the top four global oil services companies no longer supply drilling parts, fluids or technology to its energy industry?

BKR (Baker Hughes) has suspended new investments for its Russia operations;

HAL (Halliburton) announced it immediately suspended future business in Russia;

SLB (Schlumberger) will immediately suspend new investment and technology deployment to its Russia operations; WFRD (Weatherford) placed a hold on shipments and immediately suspended making any new investments or deploying new technology in Russia

Jones Trading


Just not sure how it will be possible for Russia to become economically independent from the rest of the world...

Russia spent years trying to wean itself off imported goods to fortify its economy against Western sanctions.

Now, the impact of sanctions imposed after Russia’s invasion of Ukraine has made it clear that Moscow’s efforts didn’t work. Russia’s continued dependence on imports means it is facing a painful economic readjustment.

Parts of Russia’s auto industry are shutting down for lack of foreign parts. The country’s flagship homemade passenger jet gets its engine and other key parts from overseas suppliers. Foreign pet food and medication have disappeared from store shelves.

“Import substitution has failed to achieve its goal of making Russia less vulnerable to sanctions like these,” said Janis Kluge, a specialist in the Russian economy at the German Institute for International and Security Affairs. “The Russian ambitions were unrealistic to start with because a small economy like Russia’s isn’t able to produce complex and high-tech goods by itself. It’s just simply not possible.” Replacing the foreign products could take years, he added...

But Russia’s dependence on imports actually worsened over the years. In 2021, some 81% of manufacturers said they couldn’t find any Russian versions of imported products they needed. More than half were dissatisfied with the quality of homegrown production. Both figures were the highest recorded since the survey by Russia’s Gaidar Institute for Economic Policy began in 2015.

In 2020, imports accounted for 75% of sales of nonfood consumer goods in the Russian retail market, according to a study by the Higher School of Economics in Moscow. In some sectors the share was even higher, rising to 86% for telecommunications equipment, the study found. Imports equaled around a fifth of GDP in 2020, compared with 16% in China and higher than other big economies such as India and Brazil.

WSJ


The markets see the war in Ukraine as the top tail risk event right now...

Russia-Ukraine now the biggest tail risk

BofA Global


As manufacturing becomes more local, Intel picks Germany to host a major semi plant to feed their auto industry...

Intel has picked Germany as the site for a huge new chipmaking complex, giving the first details of a $88 billion investment drive across Europe, which is striving to cut its reliance on imports and ease a supply crunch for manufacturers.

The plan is the latest by a major semiconductor maker as the industry tries to catch up with a boom in demand for chips used in everything from smartphones to cars, though there will be no quick fix as the new German plants won't come online until 2027.

The U.S. chipmaker is spreading its investments around half a dozen countries, including boosting its existing factory in Ireland, setting up a design and research facility in France, and a packaging and assembly site in Italy.

The initial spending will total 33 billion euros ($36 billion), including 17 billion euros in Germany, where the auto industry is likely to be a prime customer for cutting-edge chips that could use technology as small as 2-nanometers.

Reuters


More local semiconductor plants are just great news for the semi equipment industry...

Chipmakers’ multibillion-dollar expansion plans will be constrained by a shortage of critical equipment over the next two years as the supply chain struggles to step up production, according to one of the industry’s most important suppliers.

The warning comes from Peter Wennink, chief executive of ASML, which dominates the global market for the lithography machines used to make advanced semiconductors.

“Next year and the year after there will be shortages,” Wennink said. “We’re going to ship more machines this year than last year and . . . more machines next year than this year. But it will not be enough if we look at the demand curve. We really need to step up our capacity significantly more than 50 per cent. That will take time.”

ASML’s machines are used to etch circuits into silicon wafers. “It is the single most critical company in the semiconductor supply chain,” said Richard Windsor, tech analyst at Radio Free Mobile. “It is the printing press of silicon chips.” 

Financial Times


U.S. airline travel is recovering quickly...

"First, very strong leisure demand, I think you've heard this from other presenters today, but really unprecedented demand, people want to get back out, they want to connect, they want to see their friends, family and in fact, they actually want to start traveling for the business. Business traffic is booming, we still have a long way to go. But we've made so much more progress than we thought earlier in Q1. So we're well on our way and we'll talk about that more in a little bit--Most importantly, business revenue which we talked about a lot, business revenues now close to 75% versus 2019, business demand is about 70%." - United Airlines (UAL) Executive Vice President Andrew Nocella.

The Transcript


Daily airline spending rises above 2019 for the first time…

An important milestone has been reached. For the first time since January 29, 2020, Chase daily card spend on air travel, indexed to 2019, has finally eclipsed 2019 levels. We consider this achievement particularly noteworthy when considering what’s excluded, chiefly, European point-of-sale (recall Chase is comparatively weak in European wallets). While the fuel narrative has understandably overtaken that of demand in recent weeks – and is likely to continue dominating the narrative at the J.P. Morgan Industrials Conference next week – demand trends continue to move in the direction where overtaking fuel’s meteoric rise, at least during the summer peak, may prove possible (though much still depends on corporate recovery, where fuel recapture potential is greatest). We do not believe this milestone should go unnoticed.

JPMorgan


Apartment rental prices are a current worry...

But given all the construction activity currently planned, future pricing increases should moderate.

High Rents and Low Vacancies

Goldman Sachs


My favorite popcorn restaurant bought a precious metals mining company last week...

Hycroft Mining is a Nevada gold and silver miner with far too much debt and far too little production. Naturally then, its new saviour is an American cinema chain.

On Tuesday, AMC Entertainment said it would invest $28mn to buy 22 per cent of Hycroft, in the belief that the miner was poised for a turnround if it got the necessary capital. AMC, the darling of the 2020-2021 meme stock movement, has mostly managed to change the subject around its own massive $8.5bn net debt load, including lease obligations. It is shouldering that while its movie business recovery limps along. For example, AMC has recently decided to sell its popcorn as a standalone consumer product.

AMC shares remain down 75 per cent from their 2021 peak. The company and its showman CEO Adam Aron still revel in the spectacle where the company’s shareholder base has become disproportionately retail traders. These apparent flights of fancy, even small ones, would be intolerable at most other companies. Yet at AMC, it may be that this is what the crowd wants.

Financial Times


Reddit is going to need a few more servers just to handle the traffic for this deal...

I have so many questions about this merger, and am not even a shareholder. But I am only here for the entertainment value.

In reviewing all of the Hycroft earnings call transcripts and company filings since it became a public company again, we’d describe the past two years as nothing short of a train wreck. One month after the SPAC deal closed, then-CEO Randy Buffington unexpectedly resigned, and the company hired the executive recruiting firm Korn Ferry to find a replacement. Two months later, the company hired Dianne Garrett to be its new CEO (we should note that Garrett has an impressive resume and seems to have earnestly attempted to make the best of a terrible situation). Less than a month after taking the reins, and only four months after completing the SPAC transaction, Garrett tapped the equity markets for more than $80 million of fresh capital.

In every quarter since the SPAC transaction, Hycroft reported operating losses, negative free cash flow, and continually managed down expectations about the viability of their “Novel Process” to economically extract gold from sulfide ores. Then, in mid-November, the company reported its Q3 2021 results with a press release that was a classic “turn out the lights” moment. The chair of the board resigned. The chief operating officer – who had just been hired in January of 2021 – resigned. Most importantly, the company came clean on the failure of the sulfide ore technology, fired half its workforce, and ceased its run-of-mine operations:

“The Company has previously discussed its strategy for developing an economic sulfide process for Hycroft. Based on the Company's findings to date, including the analysis completed by an independent third-party research laboratory and the independent reviews by two metallurgical consultants, the Company does not believe the novel two-stage sulfide heap oxidation and leach process ("Novel Process"), as currently designed in the 2019 Technical Report dated July 31, 2019 ("2019 Technical Report"), is economic at current metal prices or those metal prices used in the 2019 Technical Report. Subject to the challenges discussed below, the Company will complete test work that is currently underway and may advance its understanding of the Novel Process in the future.”

A technology miracle was needed to make the Hycroft Mine viable, and none was forthcoming. Virtually every major gold miner in the world has been working on finding economically viable ways to extract gold from refractory deposits, and to think that a decades-old mining operation that spends virtually nothing on research and development and relies on outside consultants and third-party research laboratories for their technology needs would produce a Holy Grail outcome is the height of lunacy. The stock traded below $0.30 a share, and bankruptcy seemed inevitable.

Enter Adam Aron.

Doomberg


One nice thing about the pullback in the public markets is that the amount of competition for private investment is pulling back...

Where the pullback in capital is most noticeable is with crossover investors, Harper said. In a way, the current situation is good news for VCs, who have committed capital and less competition from other types of investors.

Harper pointed out that Kin’s previous funding round–a nearly $64 million Series C last year–was led by hedge fund Senator Investment Group, while its most recent Series D didn’t have meaningful participation from crossover investors.

Many crossover investors (like hedge funds) had capital disappear with the stock market taking a dip. And instead of doing the hard work that comes with investing in a private company, they could invest in discounted stocks.

“As the public markets sort of pulled back, what we’ve sort of seen is the guys that were playing around the edges—the family offices, the hedge funds, the strategics, the foreign money—isn’t really there anymore,” Harper said.

Crunchbase


A great new chart that the team put together comparing the public and private markets...

Evolution of the Private Markets

Hamilton Lane


Farmers are now able to let their tractors go fully autonomous...

Imagine your household Roomba... but on 250 acres of grain field. (No longer available in Russia.)

As an agricultural machinery manufacturer, John Deere has raised some eyebrows after first appearing at the Consumer Electronics Show in 2019. The company has used the conference as a place to show off the latest farming hardware. This year is no exception, with John Deere revealing its first fully-autonomous tractor on the market, as reported by CNET.

The hardware for autonomous operations is packed into two pods that mount to the front and back of a John Deere 8R tractor. Six pairs of stereo cameras are used for obstacle detection and range-finding, while GPS is used for navigating the vehicle through a field. A NVIDIA GPU is charged with processing all the incoming data to help the tractor do its job.

With fields mapped out and boundaries set, the autonomous tractor can be sent off to work tilling the fields via a smartphone app, with no driver or observer required. In the event that the tractor has issues, a notification is sent to the farmer's smartphone to deal with the problem.

The Drive

Autonomous 8R Tractor

The Drive


Seven-year-old expired food is no way to improve morale on the battlefield...

Tweet from @christogrozev

Let's hope that U.S. logistical experience is making it to the front line for the Ukrainian soldiers...

If nothing else, Russia’s request for MREs provides a brutal comparison between the Russian and U.S. militaries. In World War II, as Cancian pointed out, American troops were given “hard to get” items such as chocolate and cigarettes in their rations in an effort to increase morale. And troops implicitly felt they were being prioritized.

That stands in stark contrast with the Russian troops receiving rations that expired years ago. “It gives a message that the nation is not behind them,” Cancian said.

Ultimately, the lesson for U.S. troops is simple: Thank your logisticians this week, because this is likely not something the U.S. military will ever experience.

“We forget that the United States is really really good at [logistics],” Cancian said. “We can deploy troops halfway around the world, in the middle of the Iraq desert, and feed them lobster on Sunday night. The Russians can’t even supply their troops 50 miles from their homeland, or 100 miles from their homeland, with unexpired MREs. A huge difference there.”

Task & Purpose


So, for many survivors and beneficiaries, a crypto holding at death will just become like an asset that is taxed at a 100% estate tax rate...

Settling a loved one's estate is complicated enough. I couldn't imagine trying to help someone's family corral crypto assets during those difficult months.

Rudy Steenhoek, an information manager in the Netherlands, is using a strategy that’s sometimes called the dead man’s switch. Steenhoek has given his wife a hard drive with a special type of key, and if she uses this key, Steenhoek will receive a notification. If he doesn’t respond to that notification within a certain amount of time, the tech will presume he’s incapacitated or dead, and his wife will automatically gain access to information she can use to find his crypto assets. While this sounds complicated, his wife won’t need to convince any bank, or even Safe Haven — the company providing the tech — that she’s his rightful inheritor.

Ultra wealthy people can afford an approach that isn’t as jerry-rigged, and have turned to one of their favorite ways to protect their money, like trusts and family offices. These people — most of whom have either gotten rich by investing in crypto early or have since bought crypto as part of their broader investment strategy — are storing their crypto with specialized financial institutions that focus almost entirely on managing the crypto assets of the financial elite. Hundreds of families have taken this path, Diogo Mónica, the president and co-founder of Anchorage Digital, one of the main firms providing this type of service, told Recode.

While these approaches vary, they’re all supposed to protect against the nightmare scenario: blocking families from their loved ones’ crypto forever. Without these keys, families can find themselves searching — sometimes for years — for their loved one’s digital assets. Across the internet, there are pleas for help from people looking for their loved one’s crypto. Some families have even hired digital forensic researchers to help them find the lost funds, hoping that they find a clue into where their loved one might have stored a record of their key before they died.

“If you don’t create a copy of that key and put that key in a safe place where the people that you trust can find it and know what to do with it, then the wealth that you’ve accumulated in crypto is just going to sit there,” Matthew McClintock, an attorney who specializes in cryptocurrency estate planning, told Recode. “It just is locked away, stored in its address, and nobody can get to it.”

Vox


The entire article left me speechless...

It is easy to dismiss the market for non-fungible tokens (NFTs) as a hotbed of scammers and con artists. The reality is much weirder and wilder than that.

After spending a few months lurking in the Discord chats and Twitter circles where NFT folks hang out, I have slowly come to appreciate the constant chaos, outsized personalities and close-knit communities that make trading NFTs so different to regular stocks or even bitcoin.

For most people, the very concept of an NFT — a digital artwork that uses blockchain tech to prove ownership — still feels impenetrable and the froth of speculation surrounding them is even more off-putting. But for committed NFT traders, many of whom have embraced the label “degenerates”, the mayhem is just part of the appeal.

As one owner of a Cool Cat, a collection of digital cartoon profile pictures, told me: “It is crazy how attaching an image to a blockchain entry can make some connection in the brain that wasn’t there before.”

Financial Times


Remember playing hot potato as a kid?

Interest in NFTs Has Plummeted

Statista


Reduced interest in NFTs has led to reduced trading volumes...

Trading on OpenSea in decline

Financial Times


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DISCLOSURES

The author has current equity ownership in: ASML Holdings.

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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