Private Wealth

Weekly Research Briefing: Some Thanksgiving Week Continuity

November 23, 2021

Thankfulness comes a few days early for Fed Chairman Powell as Biden gives him another term. Lael Brainard will become the Vice Chair. While both choices would be considered dovish picks, the continuity aspect of keeping Jerome Powell in the seat eliminates uncertainty for President Biden and Congressional Democrats. Certainty in Washington, D.C. is needed now as the White House moves on to a game of four-dimensional chess with the Senate Republicans and Senators Manchin & Sinema.

Unfortunately repeating itself is another wave of COVID in certain countries and U.S. states. And like before, new cases might be soaring, but hospitalizations are more slowly following. Expect to see more mobility restrictions, vaccine encouragements and test kit sales. While some may miss out on the U.S. Thanksgiving gatherings, the hope is that the virus can be battened down for the December holidays. Incredible new studies on teenage vaccine effectiveness should help get shots into younger arms over the next month. This will no doubt save thousands of older lives. The new Merck and Pfizer pill therapies also promise to keep the infected out of the hospitals. But unfortunately, Q1 office re-openings may be impacted further. Last week Apple pushed their 3-day a week restart back to February. Expect December to bring a wave of pushback announcements.

It is a short week in the U.S. markets, but still lots of data to look through as the global supply chains mend and retailers ready for a very big and profitable holiday season. For those in the U.S., enjoy the time with your families this week.

The choice of Powell over Brainard should do little for investor bets on future Fed Funds rate hikes...

Investors are still lining up one or two hikes for 2022.

Investors expect one and a half rate hikes in 2022



Here comes the new COVID wave...

Germany shows the world what this new wave could look like. With only 2/3rds of German's vaccinated and waning effectiveness of past vaccines, the country's daily COVID cases are reaching new highs. And while severe hospitalizations are also on the rise, they are coming in at lower levels than the past waves thanks to increased immunity and more available therapies. Germany and other countries in Europe are moving to more severe lockdown periods ahead of the holidays, which should create more vaccines in arms and mask wearing helping to slow the COVID spread in December and January. The U.S. will probably follow these COVID trends and actions given our equal vaccination status to Germany. While stocks should continue to look past these new COVID waves, expect some bumpy days as new outbreaks occur.

Germany daily confirmed cases


Germany weekly ICU patients


The 100% perfect COVID vaccine for teenagers...

This new random trial showing a perfect score will help get shots into younger arms this holiday season which will make 2022 a better year.

Pfizer and BioNTech announced Monday that their Covid-19 vaccine was 100% efficacious in preventing infections in 12- to 15-year-olds, measured from seven days to four months after administration of the second dose of the vaccine.

The companies said the new data — a longer-term analysis of a Phase 3 trial conducted in 2,228 participants — will form the basis of an application to the Food and Drug Administration for an extension of their Covid-19 vaccine license to cover youths in the age group.

“These are the first and only disclosed longer-term data demonstrating the safety and efficacy of a Covid- 19 vaccine in individuals 12 to 15 years of age,” Ugur Sahin, CEO and co-founder of BioNTech, said in a statement. “The growing body of data we have compiled from clinical trials and real-world surveillance to date strengthen the base of evidence supporting the strong efficacy and favorable safety profile of our Covid-19 vaccine across adolescent and adult populations.”


Vaccinate adolescents


Retail store managers should be smiling wide right now...

The holiday shopping season looks to be off to an early start with retail sales in October leaping 1.7%. That was the largest gain since the last round of stimulus checks were deployed in March and beat expectations. Non-store retailers (i.e., e-commerce) led the charge with a 4.0% sales increase last month. Holiday sales were already on track for an impressive increase this year, and the October data put sales up a whopping 14.8% over last December. However, there are a couple of reasons to be more incredulous about where the final tally will land and what that means for the all-important U.S. consumer.

First, the ubiquity of reports on struggling supply chains and low inventories likely led many shoppers to get an earlier-than-usual start to their holiday shopping this year. Some sales were likely pulled forward from November and December as a result. The trend toward an earlier buying season has been in place for a few years now, as "Black Friday" deals are now common well before Thanksgiving and shoppers account for the delivery times of online ordering. But the seasonal factors that take into account the holiday buying spree have been slow to keep up; in three of the past four years retailers have seen holiday sales tumble in the month of November or December. This year could see a similar loss of momentum.

Holiday Sales


J.P. Morgan retail analysts expect low teens sales growth for this holiday season...

Here is a list of large, public retailers and how important the Q4 selling season is for them. Electronics and sporting good sales must happen in the holiday period, auto parts and home improvement, less so. The weather is looking favorable for 2021 sales versus last year. And selling prices should be firm with little discounting as a result of tight inventories. So all-in-all, it is setting up to be a pretty jolly selling season for the big retailers.

Holiday Matters Most to the Discretionary Set


As you guessed, gift cards will be the top present this season...

Gift cards, toys and games and apparel are most popular gifts

(Goldman Sachs)

The big retailers say they are ready and full of inventory for the big selling season...

Target—like Walmart Inc., Home Depot Inc. and others—has pulled forward some shipments of goods and chartered its own vessels to counteract transportation disruptions heading into the holiday season when most retailers earn a significant portion of annual revenue.

Walmart and Home Depot reported strong sales Tuesday. Walmart said its inventory position is strong heading into the holidays.

Target said inventory for the quarter rose 17.6% compared with the same period last year. It has focused on keeping prices lower than competitors, as prices rise generally for a host of goods, said Mr. Cornell. “We think value is going to be a critically important battle,” he said.

TJX said its inventory as of Oct. 30 was at $6.6 billion, up from $6.3 billion in fiscal 2020. “We are in an excellent inventory position, with most of the product needed for the holiday season either on hand or scheduled to arrive at our stores and online in time for the holidays,” said CEO Ernie Herrman.


The carrots (high freight rates) and sticks (non-moving container fines) are having their desired effect in the Port of L.A....

The historic traffic jam at the Port of Los Angeles has eased slightly as ocean carriers face fines for letting cargo linger and “sweeper ships” arrive to haul off empty containers.

The number of import containers at the nation’s largest port has fallen by one-quarter to 71,000 since last month, when it and the rival Port of Long Beach announced a plan to assess a fee of $100 a day on containers overstaying their welcome. While the ports have since delayed penalizing ocean carriers, the threat of the fines has helped clear their yards some.

The number of containers at the L.A. port lingering long enough to trigger the fines -- nine days or longer -- has fallen 29%, port Executive Director Gene Seroka told reporters Tuesday in a virtual press conference with Transportation Secretary Pete Buttigieg.

“That gives us a little more room on the terminal tarmac to bring in empties and exports, but they have to be loaded against the vessels -- we cannot let those empty containers dwell for long periods,” Seroka said. “There’s much more work to be done on this front, but great progress by our dockworkers, shipping lines, truckers, marine terminal operators and railroad partners.”


And as the Port of L.A. gets more normal, freight prices are falling...

Evidence is accumulating that the process of supply chain normalization has begun. After peaking at the end of September, the Drewry World Container Index of the average cost to ship a standard 40-foot cargo container across eight East-West routes had declined by 12% during the past six weeks (as of Nov 18th). Ford said its supply of semiconductors had improved markedly from the second quarter. It expects the constraints on chips will remain fluid through 2022 and could extend into 2023, but the severity of the bottleneck should reduce. General Motors also sees a better flow of semiconductors, and most of its assembly plants in North America are now back to running regular production, including Mexico. Retailers including TJX and WMT this week announced quarterly results and noted strong inventory availability as we enter the post-Thanksgiving holiday shopping season.

(Goldman Sachs)

Freight rates peaking


Improving supply chain news out of Vietnam...

In Vietnam, factory owners in the country’s southern manufacturing hub said production is far smoother than it was several months ago, but challenges remain, including high shipping costs and labor shortages, as many workers that had returned to their villages during the Covid-19 wave have yet to return.

Do Xuan Lap, the head of Vietnam’s Timber and Forest Products Association, said that the situation is improving and that medium-size furniture factories, with around 200 to 500 workers, are operating at around 80% capacity. But larger furniture makers, with up to 3,000 workers, were missing more laborers and operating at around 65% capacity.


Honda joins Toyota in firing up its Japanese factories...

TOKYO, Nov 18 (Reuters) - Honda Motor Co (7267.T) said on Thursday its Japanese car factories will return to normal operations in December, after working at around 90% capacity this month due to a shortage of chips and supply disruptions from COVID-19 lockdowns overseas.

The two domestic production sites will return to normal capacity in the first half of December, Honda said in a statement.


Restarting global auto factories beginning to put a dent in recent used car price gains...

@carlquintanilla: “The Surge in Used Vehicle Auto Prices is Starting to Slow. .. The underlying story here probably is that the improving inventory picture in the new vehicle market, at the margin, has reduced demand for used cars.”

Are Auction Price Gains Past Their Peak

Even the giant global technology player, Cisco, noted on their conference call that the supply chain has improved...

Cisco was hit by supply chain woes in the Oct Q, but mgmt. on the call said conditions stabilized in the back half of the quarter and they see this stabilization continuing into the Jan quarter before improving starting in February. “We saw better visibility to components from some of our suppliers in terms of when they could deliver. We saw fewer (supplier) decommits come in during the quarter, another sign of stabilization. And memory costs are actually beginning to decline a bit, meaning that market is coming more into balance as well. So, we're seeing signs of stabilization”.

(Vital Knowledge)

Just show me a chart of a broad semiconductor index and it will tell me what is happening to the global supply chains...

This chart tells me to worry less. Widgets are moving and semi sales are rising once more.

iShares PHLX Semiconductor ETF Index

All this talk of a SPR release helping lower energy prices makes little sense...

The chart below clearly shows that the U.S. has been tapping the reserve constantly with no impact on high prices. I'd expect any announcement this week to do nothing. But prices of oil are high right now because the industry has spent less on drilling and capex while taxes and fees on gasoline have risen. Oil and gas prices have actually done very little over the last 30 years on their own.

The DOE data of the past two weeks shows surprisingly large draws from the Strategic Petroleum Reserve (SPR) in excess of 3 million barrels (charts below). The last time there was a weekly draw in excess of 3 million barrels was 2017. Prior to that one needs to go back a decade to 2011. There is speculation that a “stealth” SPR release may be occurring. The key problem with that theory is that politicians would be publicly trumpeting their actions taken to lower oil prices, and we have not heard that yet. Nonetheless, we are all well aware that an SPR release would not even be a short term fix, it would simply be mere politics. The US consumes approximately 20 million barrels per day. The entire SPR is a 1 month supply of the nation's oil.

DOE Strategic Petroleum Reserve

(Jones Trading)

If NetJets and FlexJet have stopped selling hourly jet cards, then you know the private jet industry is sold out...

More than 4.2m private jet flights have taken place this year, according to aviation data provider WingX, with a record number in each of the past six months. In the first week of November they were up 54 per cent on the same period last year, and up 16 per cent on 2019.

Flexjet’s chief executive “pretty much spent the last nine months shopping for aircraft”, said the fractional ownership company’s European managing director Marine Eugene.

Industry executives say rising wealth among the rich, particularly in the US, has also stoked the private flying boom.

Demand is so high that Flexjet has stopped taking on new customers for its entry-level Jet Card programme. So has NetJets, which has reported the highest demand for flying in its near 60-year history and is investing about $2.5bn in 100 new aircraft.

Used jet inventories are at historic lows, according to Jefferies, with just 861 aircraft for sale in October, half the number available a year previously.


airplane photo


The payment industry is getting more chaotic as electronic players throw around their weight...

Amazon on Wednesday notified customers it would stop accepting UK-issued Visa credit cards starting next year and offered affected customers £20 off their next purchase using an alternative payment method. The retailer also said it was weighing dropping Visa as the partner for its co-branded card in the US...

Amazon considers it unreasonable for Visa to levy additional fees to guard against fraud in online sales, given the retailer’s reams of data and insight into consumers. “Amazon invests heavily to protect our customers from fraud and abuse,” a spokesperson said. “Yet Visa’s pricing remains high, while merchants remain responsible for fraud.”

The showdown with Amazon is the latest problem for Visa as it contends with mounting threats to its core business of routing payments.

“These are not the most happy days for Visa,” said Mizuho analyst Dan Dolev. “They’re getting attacked on multiple fronts.”

Visa and Mastercard have held an effective duopoly on global payments for decades because of the popularity of cards as a payment method. However, fintech competition and geopolitical pressures are threatening to weaken their influence.

Amazon’s move against Visa is only the latest example of merchants seeking to lower interchange fees. They cite studies showing the cost of processing transactions has fallen sharply but the fees they are charged have stayed the same. Payment networks and issuers enjoy profit margins of 30 to 50 per cent while retail margins are about 3 per cent, according to consultancy CMSPI...

Merchants have railed against transaction fees for decades, but they are gaining leverage in negotiations because of the proliferation of alternative payment methods.

Account-to-account payments, for example, operate on new payment rails — as opposed to the traditional card systems of Visa and Mastercard. They are growing in popularity — accounting for 13 per cent of checkouts in Europe, according to a new Accenture report — and Visa and Mastercard have also been delivering account-to-account payment services of their own.


Visa and Mastercard have been incredibly outperforming stocks for the last decade...

But with 20-25% underperformance over the last four months, maybe the stock market is sending us a signal about the performance outlook for the next decade.

Visa, Mastercard and S&P 500

Visa and Mastercard have historically been long-time hedge fund favorites...

But plenty of misses in hedge fund performance land this year as the industry puts up a Detroit Lions like year.

The most popular hedge fund long positions have suffered a record stretch of underperformance this year. Since February, our Hedge Fund VIP list of the most popular hedge fund long positions (GSTHHVIP) has lagged the S&P 500 by 16 percentage points (+6% vs. +22%), exceeding the period in 2015-2016 as the basket's worst on record. China ADRs weighed on long portfolios earlier in 2021 while several popular growth stocks have created recent drags.

Hedge Fund VIP List

(Goldman Sachs)

Hedge Funds also tend to add much value when smaller tech bottle rockets put up big numbers...

But as this chart shows, it is the largest caps in the Nasdaq 100 that are putting up the points. Go look at the underperformance in biotechs this year.

Nasdaq 100 Index


So which assets do portfolio managers think will outperform in 2022?

The very contrarian emerging markets takes the top pick. None of the rest of this are contrarian at all except for maybe gold which is fighting to keep its correlation to inflation and a stronger economy.

EM equities and S&P 500

Overheard in the halls of Hamilton Lane: Primary LBO Funds expecting a massive year of fundraising in 2022...

Fifteen is the current tally of managers that want to raise at least $15bn in 2022. There are at least a handful that have the aspiration to be north of 20bn and even cross the 30bn. Assuming all of them “only” raise 15bn this would still be more than 55% of all 2020 buyout fundraising.

This chart is from our Hamilton Lane 2021 Mid-Year Market Update…

It shows the total fundraising for all global private markets. The global LBO/Buyout slice alone will be about one-third of the estimated 2021 column. GPs might be looking for a significant increase in fundraising for 2022, but even if they do achieve a 50% increase in funds raised in previous years, it will still only amount to about 3% of the global market cap of public equities.

Global Private Markets Fundraising

Great answer from Mohamed El-Erian in a recent interview...

Allison Nathan: In the midst of the current inflationary pressures and associated policy actions, equity markets, especially in the US, have been hitting new highs. What’s behind that, and do you see a risk of a correction given your concerns about the economic outlook?

Mohamed El-Erian: What’s happening in the equity market was recently captured perfectly by the legendary investor Leon Cooperman, who, when asked how he was positioned, responded that he's a “fully invested bear”. He's bearish on the fundamentals—with the view that valuations are too high—but he's fully invested in terms of technicals, and liquidity technicals in particular.

The equity market is in a rational bubble; investors are fully aware asset prices are quite high, but they’re in a relative valuation paradigm in which it makes sense to be invested in equities rather than in other assets. The fixed income market is distorted and one-sided in terms of risk-return, dominated by technicals, and an unreliable diversifier in the current environment where its long-standing correlation with other financial assets has broken down. Many investors can’t invest in private credit, venture capital, or private equity, and are hesitant to delve into crypto. That leaves the equity market as the “cleanest dirty shirt” for investors. That works very well as long as the paradigm is a relative valuation one rather than an absolute valuation one, and markets will likely remain in this paradigm for a while. But investors need to respect that they’re riding a huge liquidity wave thanks to the Fed, and that wave will eventually break as monetary stimulus winds down. So investors should keep an eye on the risk of an abrupt shift from a relative valuation market mindset to an absolute valuation one, or an environment in which you stop worrying about the return on your capital and start worrying about the return of your capital. That’s a risk to watch because not only would it mean higher volatility, but also, and most critically, an undue hit to the real economy.

(Goldman Sachs)

What happens when a public company fails at two-thirds of E, S & G?

The details of the California lawsuit are beyond terrible. The extent of sexual harassment at the company was clearly widely known if the company is receiving claims of up to 5% of its current employee base. Over the weekend, 17% of the employees signed an online petition calling for the CEO to step down. The CEO then let it be known that if he can't quickly fix the culture at the company, then he will leave.

The ESG risk rating of Activision Blizzard by Morningstar was at a 'Low' score with a 'High' controversy level before this lawsuit. You can only guess that both scores will explode with the next update. The stock is now 45% off its 2021 highs with a still $50+ billion dollar market cap so clearly some investors think that the long-term valuations of the Call of Duty, World of Warcraft and Diablo franchises will be able to offset future settlement liabilities.

Can the company survive on its own going forward? Not impossible, but difficult. The entire Board of Directors and most Senior Management team will likely be dismissed. Internal investigation into the heads of any unit with filed complaints will keep the company without new game leadership for some time. Many employees will likely exit either due to their loss of faith in the company or their lack of financial upside in the surviving entity. It is unknown if sales of future products will be affected by the disclosures of past harassment activities. Customers and partners will be able to dictate all terms until Activision gets through this distraction which will be a financial negative. A possible scenario would be that some brands or development units would be sold to competitors. Or maybe a much bigger entity with a solid ESG halo (think Apple, Microsoft or Sony) could enter the picture and clean house. Keep an eye on the largest holders of the stock as they will dictate the outcome of this video game. Right now, that list is a who's who of the top of the mutual fund industry. However, if the stock falls another 40%, it will be the activists who will be calling the shots.

Moringstar Direct


Many analysts came to the same conclusion on ATVI last week…

Financially analyzable, but impossible to recommend a rating given all the uncertainty. If this was an industrial company with physical assets, it would be easier to recommend a 50% valuation sell-off. But at Activision, the main asset is people, and those employees are ready to leave forever. Why wouldn't they? This is the best job market in our lifetime. Watch the Santa Monica new business formation listings go to the moon in 2022.

We are moving to a Neutral rating on ATVI from Overweight. While we are reluctant to downgrade after the stock has already underperformed (-23% over the prior 3 months vs. S&P +5%), and we still have longer-term conviction in its pipeline and brands, we think recent negative headlines introduce a significant amount of uncertainty into this story. The duration of this risk factor is also not know at this time, with additional negative headlines from partners like Sony only adding more apprehension to this story.

We remain positive on the company’s core games and pipeline, and in a vacuum still like the risk/reward, with the stock trading on a 15x trough multiple against this year’s guided EPS of $3.76. However, we don’t expect shares can outperform until there is clarity on this issue. We await more information on these matters to revisit our rating, particularly if the stock remains attractively valued against peers.

(JP Morgan)

Is this time different for residential real estate valuations?

Investor buyers have never been this large a percentage of U.S. home sales. Sure, the Zillow algos crashed like a Dave Letterman dropped bottle of ketchup, but can the recent frenzy of investor buyers continue or is this a sign of a top? Stay tuned.

Investors are snapping up homes at an unprecedented pace across the country, including in metro Denver, resulting in more competition for individual buyers trying to find a place of their own in an undersupplied market.

Investors purchased a record 18.2% of the homes sold nationally in the third quarter, or 90,215 homes worth $63.6 billion, according to a study from the Seattle-based real estate brokerage Redfin. That is up significantly from 50,051 homes representing 11.2% of all sales that investors claimed in the third quarter of 2020 and above pre-pandemic levels, including during the housing bust when investors actively scooped up foreclosures.

More than three in 10 homes purchased in Atlanta and Charlotte, N.C., went to investors in the third quarter. Metro Denver tracked closer to the national averages, with investors accounting for 17% of home sales, up from their 9% market share in the same quarter a year earlier. That represents 2,831 homes of the 16,811 sold during the most recent quarter, up from 1,646 homes of the 17,577 sold in the third quarter of 2020, according to the study.

“Investors are expecting rents to increase in the coming years,” said Redfin Chief Economist Daryl Fairweather. “Even though home prices are high, they are waiting for rents to grow and there are no signs that prices will decline.”


Explore Hamilton Lane:


All Private Markets – Hamilton Lane’s definition of “All Private Markets” includes all private commingled funds excluding fund-of-funds, and secondary fund-of-funds.

MSCI World Index – The MSCI World Index tracks large and mid-cap equity performance in developed market countries.

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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