Private Wealth

Weekly Research Briefing: Hockeytown U.S.A.

June 28, 2022

For the first time in fifty years, both the Stanley Cup Champion (Colorado Avalanche) and the NCAA Men's Hockey Champion (Denver Pioneers) reside in the same city. You must go back to 1972 to find the last time that this happened when Bobby Orr's Bruins and Boston University both became number ones. Of course, Michigan hockey fans will want to say that they have most recently owned the title given their 1998 Red Wings and Wolverine championships. But for 2022 and until another city takes it away from us, Denver is now officially Hockeytown U.S.A. Congrats to the Avs, the Pioneers and all the kids in town now lacing up with some extra motivation.

Well after losing ground in 10 of its 11 last weeks, the S&P 500 showed some life with a strong positive move last week. The oversold market was waiting for a bit of good news, and it got it in the form of better-than-expected Durable Goods and Housing data. Also of big help is an ongoing rollover in many of the commodity price series, which have a strong case of recession-itis. While industrial metals are nearing a 52-week low, grains fell 10% and cotton 30% just last week. Even gasoline prices began to retreat at our local stations. Now when should we draw a line from falling commodity prices to the PPI and CPI? Even Friday's University of Michigan inflation expectation numbers saw inflation retreating from the last reading. Stocks reacted to the improved atmosphere last week and should continue to rally on weaker inflation reads until investors have a new basket of numbers to dig into (this will of course be the Q2 corporate earnings releases which erupt in two weeks). Bonds have also provided a tailwind to better sentiment as the yield on the 10-year Treasury has fallen from 3.5% to near 3.1%. The strategists seem to be lining up for a short-term bounce into the earnings period and investors would like the relief from falling stock prices.

There is still plenty to worry about as we await the next read on corporate earnings outlooks. Optimism remains high surrounding second half 2022 and 2023 operating margins. Given all the volatility in input and labor prices, it will be interesting to see if companies stick to their optimism or attempt to dial in the future guidance a bit. After the Q1 earnings season results, CFOs should know that the market is not in a missed estimates mood. But in looking through the recent market, the bulls should be happy that some of the higher risk and valued parts of the equity market are trying to make a bottom. Look at the biotech, software and IT security groups. Also, Chinese tech and internet. Even COVID favorites Zoom and Domino’s Pizza are acting differently. Could strange things be afoot at the Circle K? Or is this just another market taunt before the summer movie monster rips our portfolio apart? Only time will tell.

Have a great long weekend and Fourth of July holiday. The WRB team will take next week off and be back on July 12th.

Hamilton Lane is a leading private markets investment management firm providing innovative solutions to individual and institutional investors around the world.

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What goes up...

Most commodity prices have entered a free-fall state as the investing world increases its odds of a slowdown and/or recession. Levi's must be digging the move in cotton.

US job vacancies rate

The Daily Shot

Inflation has decoupled from commodities as service prices surge...

You know it is coming. How long until the red line pulls on the blue line.

US job vacancies rate


J.P. Morgan sees it happening soon...

US job vacancies rate

J.P. Morgan

A few insightful comments about pricing and demand hit the tape last week...

“Our ability to pass pricing on to the market as an example, because of inflation, continues to be more challenged, obviously, with consumer demand softening significantly today versus a year ago” - Winnebago Industries (WGO) CEO Michael J. Happe

"Order rates are moderating from the exceptional levels that the industry experienced beginning in late 2020, as higher interest rates and increased home prices along with other inflationary pressures are impacting current demand. Our net orders were 3,914, down 9% versus a year ago when we reported the highest second-quarter net orders in the prior 14 years." - KB Home (KBH) CEO Jeff Mezger

"It hasn't been cataclysmic. There's a huge change when you go from 20 offers on one house to five offers to one offer. But all you need is one. And what we're seeing is that about 1 in 4 homes are now being discounted that indicates that some properties aren't getting a single offer whatsoever.” - Redfin (RDFN) CEO Glenn Kelman

The Transcript

Here comes the lift in new home supply as sales fall rapidly while small inventories build...

Market pricing for the number of 25 bps Fed rate hikes

Wells Fargo

During Capitol Hill testimony, Fed Chair Powell was focused on ending inflation. Fed's Harker sounded more flexible...

“Over the coming months, we will be looking for compelling evidence that inflation is moving down. We can’t fail at that task.” - US Federal Reserve Chair Jerome Powell

"At the Fed, we understand the hardship high inflation is causing. We are strongly committed to bringing inflation back down, and we are moving expeditiously to do so." - US Federal Reserve Chair Jerome Powell

"I'm not ready to make a final decision -- exactly where I am between 50 and 75 [basis points]. If we start to see demand soften — and we are seeing some signs that demand is starting to soften in certain sectors of the economy, and if it's softening quicker than I anticipate, then it may be appropriate to go with a 50. If it's not, then it's probably appropriate to go with the 75. But let's see how the data turns out in the next few weeks." - Federal Reserve Bank of Philadelphia CEO Patrick Harker

The Transcript

Travel datapoints remain at full throttle forward...


“The confluence of a rising environment of interest rates, inflation, and fuel prices would suggest that we start to see a slowdown, but we just haven’t seen it in the data yet. The summer numbers look extraordinary, both here at home and outbound into Europe. The recovery has been led by leisure, clearly. But business transient is now down only 10 to 15 percent [from pre-pandemic levels], while it was down 30 percent at the end of last year. And group has really surprised us because it has come roaring back." - Marriott (MAR) CEO Anthony Capuano

"It is reinforcing to see the continued strength and demand for cruise. We are aggressively, yet thoughtfully, ramping up to full operations, with over 90% of the fleet now in service. And at the same time, we are driving occupancy higher on those ships that have been sailing and we are focused on improving pricing compared to pre-COVID levels -- .we are seeing success for close-to-home cruises, with many sailings achieving occupancy at or above 100%, where guests perceive far less friction than with international embarkations. In fact, our Carnival Cruise Line brand, sailing its entire fleet, is expected to reach nearly 110% occupancy during our third quarter." - Carnival Corp & Carnival PLC (CCL) CEO Arnold Donald

The Transcript

If we don't have a recession, the S&P 500 likely has an upward rip set up in it...

Wide distribution of outcomes after historical yield curve inversions

Goldman Sachs

Another visual of the biggest drawdowns and where we are today...

Wide distribution of outcomes after historical yield curve inversions

BofA Global Research

J.P. Morgan does not see a recession as the base case and thus an oversold equity market...

While the probability of recession has increased meaningfully, we do not see it as a base case over the next 12 months. In fact, we see global growth accelerating from 1.3% in the first half of this year to 3.1% in the second half. Similarly, we see inflation declining from a 9.4% annualized rate in the first half to 4.2% in the second half, which would allow central banks to pivot and avoid producing an economic downturn.

If there is no recession – which is our view – then risky asset prices are too cheap. For instance, small cap stocks in the US currently trade near the lowest valuations ever. Many equity market segments are down 60-80%. Positioning and sentiment of investors is at multi-decade lows. So it is not that we think that the world and economies are in great shape, but just that an average investor expects an economic disaster, and if that does not materialize risky asset classes could recover most of their losses from the first half. Our bullish and out of consensus view is hence a forecast of a lost year, i.e. a recovery of H1 losses in risky assets.

J.P. Morgan

Morgan Stanley also does not forecast a recession and sees a short-term bounce followed by lower prices...

One of Wall Street’s most prominent bears sees the current rally in US stocks extending -- prior to the selloff recommencing.

Morgan Stanley strategists led by Michael Wilson say the S&P 500 Index may climb another 5% to 7%, before resuming losses.

“We think US equity markets can rally further,” they wrote in a note, with a decline in both bond yields and oil prices having eased some worries around runaway inflation and helping the benchmark snap a three-week losing streak...

Wilson, who correctly predicted this year’s selloff, said a retracement of 38% to 50% of the entire decline “would not be unnatural or out of line with prior bear market rallies.” That would lift the S&P 500 to as much as 4,200 points, giving the index about 5% to 7% upside from Friday’s close, with interest-rate sensitive stocks driving the rebound, he said...

“The bear market is likely not over although it may feel like it over the next few weeks as markets take the lower rates as a sign the Fed can orchestrate a soft landing and prevent a meaningful revision to earnings forecasts,” the strategist said.

In his base case, which calls for a soft economic landing, Wilson sees the S&P 500 bottoming between 3,400 and 3,500 index points -- as much as 13% below its latest close. A recession would send the index more than 23% lower to about 3,000, he said.

Wide distribution of outcomes after historical yield curve inversions


So where is the recessionary scenario downside?

Tuesday's 15X P/E may not be real if earnings end up falling well short of our current 2023 forecast of $239 per share for the S&P 500. David Kostin illustrated the risk to earnings in a Jun-10 note, "Following 20% P/E multiple reset in early 2022, investor concerns expand from valuation to earnings." Looking at past recessions, we see a scenario where 2023 EPS could fall to $200 and a 14X P/E on those earnings would yield an S&P 500 of 3150 -- 19% lower from current levels (i.e., still a long way down).

Goldman Sachs

For Google, the last two years have been a big round trip in valuation...

Cumulative personal savings in the pandemic


One group of stocks has interestingly stopped declining: Biotechs...

Wide distribution of outcomes after historical yield curve inversions


Gas tax holidays in the U.S. A maximum price framework in France. Please stop all this government intervention non-sense!

If you want to make long-term energy prices lower, then just provide the energy industry with a long-term framework to increase production above future demand. Instead, we have done the opposite. We punished the industry for over-allocating capital into shale and losing lots of money when production went to the moon. Then COVID destroyed demand, sending oil future prices negative and nearly bankrupting the entire industry. And now we have told the drillers that carbon usage is going to zero and because of their past misuses of our capital (and also ESG), we won't pay them to invest in production. Throw in the war in Ukraine and the loss of Russian output and you have the perfect storm that we are sitting inside of now.

Take a close look at the chart. There is still little capex happening in the energy industry because investors and governments have told them 'NO'. Until this global view changes, prices for energy are going to be high and returns to the energy companies will be above average. Like tobacco leaf cigarettes, oil and natural gas usage will decline toward zero. But it is not going to happen tomorrow, so we are all going to have to live with this industry, which looks like a massive cigar butt investment. Of course, if a cost-effective revolutionary battery storage technology is unveiled tonight, disregard this message and sell all your carbon energy companies.

Energy has now ranked #1 in our tactical framework for a full year and has outperformed the S&P 500 by 44ppt. Brent remained strong above $100/bbl, but there has been no supply response from US producers – their capex as % of operating cash flow has plummeted to just 30% (vs. 80-100% in 2011-16), a record low (Exhibit 3).

Best Year for Commodities

BofA Global Research

The trend follower in Omaha used the dip in oil this month to add to his energy holdings...

Berkshire Hathaway Inc. just made another $529 million bet on big energy.

Warren Buffett’s company bought 9.6 million more shares of Occidental Petroleum Corp. in June, according to a regulatory filing released late Wednesday.

The transactions, which were made over two days, bring Berkshire’s stake in Occidental to about 16%.

Berkshire is Occidental’s biggest shareholder. It began buying shares in Occidental in late February, after Mr. Buffett said he happened to view an analyst presentation on the company. He was impressed by Occidental Chief Executive Vicki Hollub’s plans for the company, which include paying down debt, buying back shares and delivering dividend payouts to shareholders.


One of the credit markets top seers believes now is the time to start adding risk...

Oaktree Capital’s co-founder is turning aggressive after sharp market sell-off.

The time is right to snap up “bargains” in financial markets following a widespread sell-off, according to Howard Marks, one of the world’s most formidable distressed debt investors.

“Today I am starting to behave aggressively,” the founder and co-chair of Oaktree Capital Management, said in an interview. “Everything we deal in is significantly cheaper than it was six or 12 months ago,” he added, highlighting drops in the prices of high-yield bonds, leveraged loans, mortgage-backed securities and collateralised loan obligations…

Marks said Los Angeles-based Oaktree did not make investment decisions based on macro forecasts — such as how high inflation would rise or whether there would be a recession — nor try to time the market.
“I think the idea of waiting for the bottom is a terrible idea,” he said. Assets could get cheaper than current valuations, “in which case we’ll buy more”.

Financial Times

The red highlighted credit asset classes below are what the credit experts are looking at...

The absolute returns have been terrible. The risk-adjusted returns have been much worse. If we do not have a recession, the buyers today should clean up.

Best Year for Commodities

Goldman Sachs

This is a measure of credit risk versus equity risk and the current divergence...

U.S. investment-grade bond spreads (OAS) have diverted from equity vol (VIX). If past correlations stay true, credit should outperform.

Best Year for Commodities

The Daily Shot

Credit markets will find similar distress in Europe which...

S&P 500

The Daily Shot

Financial advisors would like to allocate more client assets into alternative funds...

As sinking stocks and recession fears spur interest in alternatives, fund managers and retail marketplaces are chomping at the bit for ‘mass affluent’ investors. After years of private equity firms aggressively marketing themselves to high-net-worth investors and their financial advisors, the message seems to be breaking through.

Facing a bear market and bleak economic outlook, marked by inflation, supply chain imbalances and a hawkish Federal Reserve, more RIAs and high-net-worth investors are warming up to alternative investment funds – such as private equity, hedge funds, venture capital and private debt strategies – in their search for yield, according to advisors and investment managers who spoke with Forbes…

According to a survey conducted last month at the 2022 Morningstar Conference, 84% of about 300 investment professionals and financial advisors said they now recommend qualified clients put some money into alternatives funds. The survey, conducted by private funds platform CAIS, also found that a third of advisors believe a traditional portfolio of stocks and bonds “is no longer effective”; over two-fifths said the same about the traditional 60/40 allocation between stocks and bonds…

“I think what we'll start to see now that we're seeing a downturn in the market is people looking at the historical private market returns relative to the public markets,” says Stephen Brennan, head of private wealth solutions at Hamilton Lane, who says that private equity and private credit have outperformed the public markets “in at least 19 of the last 20 years.”


Howard Marks isn't the only one ramping up to buy private debt right now...

For investors concerned about rising interest rates driven by inflation, private debt loans offer floating interest rates, frequently a floating SOFR (Secured Overnight Financing Rate) base rate plus a spread, as well as a premium spread above broadly syndicated loans. These returns are not immune to recession, and spreads have lately widened in syndicated-loan markets, reflecting concerns of rising default rates.

However, private debt’s performance has demonstrated resilience through downcycles in the past. Looking at Cliffwater’s direct lending index, since September 2004 the index’s maximum drawdown has been 8% against an average annualized return of 10%. This compares quite favorably against almost all other asset classes. Taking a slightly longer-term perspective in its 2022 market outlook, Hamilton Lane in an exhibit titled Worst comes to worst, shows private credit’s lowest trailing five-year annual return since 1995 to be 4.6% in Q1 2020 – a better showing than all other major asset classes, most of which show comparably negative returns.

Much of this resilience can be attributed to the US middle-market companies that private debt finances, particularly those with PE sponsor backing. Of course, this performance can vary significantly among private credit managers. As the private credit market has expanded in recent years, manager selection has become comparatively more important, particularly during times of stress.

The variety of strategies in the market has grown accordingly with the wider asset class. While investors have more opportunities to invest across the risk spectrum, some are still more vulnerable to recession and inflation than others. The risk of default among portfolio companies runs high during downturns, particularly among riskier strategies. And with high inflation, low interest rates are unlikely to come to the rescue. To this end, investors still need to have funds in their portfolios with loans at the top of the credit structure with strong fundamentals. While these loans may offer less in risk premiums, this credit discipline will help preserve capital throughout the market cycle. And should loans come under stress, a dedicated and experienced workout team to maximize recoveries is critical to protect the downside.

In short, if you are worried about inflation and an ensuing recession, with the right lender, private debt is not a bad place to wait it out.

Preqin Blog

S&P 500

Source: Hamilton Lane 2022 Market Overview

If your city/town/neighborhood has a problem with traffic fatalities, look at how Hoboken has kept their streets safe for four years straight...

It’s not quite the prairie, but Hoboken feels downright roomy. Wander down the wide, busy sidewalks of Washington Street, the city’s main strip, past the poke joints and (so-so) bagel shops, or through the unusually narrow side streets that run east and west, and one thing becomes clear. Specifically, oncoming traffic. A pedestrian doesn’t have to play the same perilous game of New York City crosswalk chicken, where you squint through the windows of a massive metal box to catch a glimpse of another speeding metal box whose driver doesn’t see you. Or you edge out into the street, making yourself visible and vulnerable to whatever impatient soul is behind the wheel, hoping one of you has enough time to make the right decision.

Few drivers park next to crosswalks in Hoboken, because they can’t. Those spots are blocked off with bike racks or planters or storm drains or extra sidewalk space for pedestrians or vertical plastic pylons that deter all but the boldest delivery-truck drivers. Stand at a corner, and you can see what is coming toward you, and drivers can see you too, and you don’t have to step out into the road and risk your life to do it.

This is a simple piece of street planning called “daylighting,” and according to Hoboken’s transportation-and-parking director, Ryan Sharp, it’s been among the most popular requests from residents. It’s also one of the major tools that Hoboken has used to make its streets less deadly. The city of 60,000 hasn’t had a single traffic fatality since 2018 and has consistently cut the number of crashes and injuries while — and by — aggressively installing the things that are proven to make cities safer and more efficient for everyone: bike lanes, curb extensions, bus lanes, high-visibility crosswalks, and raised intersections.

S&P 500


If you have ever worked in a high-pressure restaurant, diner or food counter, then you can relate. This show is extremely well done. And the soundtrack is five stars...

Order up.

FX’s new original series The Bear follows Carmen “Carmy” Berzatto (Jeremy Allen White), a young chef from the fine dining world, who comes home to Chicago to run his family sandwich shop – The Original Beef of Chicagoland – after a heartbreaking death in his family. A world away from what he’s used to, Carmy must balance the soul-crushing realities of small business ownership, his strong-willed and recalcitrant kitchen staff and his strained familial relationships, all while grappling with the impact of his brother’s suicide. The Bear is about food, family, the insanity of the grind, the beauty of Sense of Urgency and the steep slippery downsides. As Carmy fights to transform both The Original Beef of Chicagoland and himself, he works alongside a rough-around-the-edges kitchen crew that ultimately reveal themselves as his chosen family.

In addition to White, this half-hour series stars Ebon Moss-Bachrach, Ayo Edebiri, Abby Elliott, Lionel Boyce and Liza Colón-Zayas, with Edwin Lee Gibson and Matty Matheson in recurring roles.

The Bear was created by Christopher Storer (Ramy, Eighth Grade), who also serves as executive producer alongside Joanna Calo (BoJack Horseman, Undone), Hiro Murai (Atlanta, Station Eleven) and Nate Matteson (Station Eleven, The Choe Show) of Super Frog and Josh Senior, with Tyson Bidner (Ramy) serving as producer and Matty Matheson as co-producer. The series is produced by FX Productions.

S&P 500


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The author has current equity ownership in: J.P. Morgan Chase & Co. 

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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