Weekly Research Briefing: Eyes on Kyiv

Fossil fuels produce the bulk of Russia’s foreign income. Last year, Russia’s natural gas exports brought in $55.5bn — mostly from Europe. That was the highest since 2013. European natural gas prices have quintupled over the past year. Tellingly, the futures curve has now flattened, says consultancy Rystad Energy. Fears of Russian supply disruption have forestalled the typical spring and summer price slide.

Annexing the whole of Ukraine would strengthen Russia’s grip on western Europe’s energy supply. Ukraine would no longer be a transit country able to cut off exports via its ageing pipeline system.

In the short term, Putin has the whip hand. Autocrats can contemplate hardship for their compatriots more cheerfully than democratic politicians. The west is unlikely to impose a full export ban on gas. Germany has few other energy choices. Conventional sources, such as coal and nuclear, are politically unpalatable with the Green party, a member of Scholz’s coalition government.

Longer-term, Germany must build up alternative gas supplies. It should finally heed US warnings and mothball Nord Stream 2 permanently. It should invest in terminals to import liquefied natural gas. It has none operating and only one under construction.

Growth of private sector output in the US gained considerable momentum in February as companies reported a notable recovery in demand from COVID-related disruptions at the start of the year. Services firms led the rise, although manufacturers likewise registered a stronger increase in output, buoyed by a slight easing of supply bottlenecks. However, February also saw a survey record rise in average prices charged for goods and services.

Rising from an 18-month low of 51.1 in January to 56.0 in February, the seasonally adjusted IHS Markit Flash US Composite PMI Output Index indicated a substantial expansion in private sector output that outpaced the long-run series average. Both the manufacturing and service sectors recorded stronger expansions in output, with companies linking growth to substantial gains in new business, employees returning from sick leave, increased travelling and greater availability of raw materials.

February data highlighted a sharp and accelerated increase in new business among private sector companies that was the fastest in seven months. Firms mentioned that sales were boosted by the retreat of the pandemic, improved underlying demand, expanded client bases, aggressive marketing campaigns and new partnerships. Customers reportedly made additional purchases to avoid future price hikes. Quicker increases in sales were evident among both manufacturers and service providers.

OpenTable's measure of seated diners increased from a low of 69% of 2019 levels in January to an average of 82% so far in February, suggesting restaurant spending has bounced back over the past month. Furthermore, subway usage in NYC rebounded from a low of 43% of the seasonal norm in January to 57% today.

Reopen: (1) DIS drops mask mandate for fully vaccinated guests to US theme parks; (2) Marriott disclosed that CRM hosted its largest corporate meeting since the start of the pandemic held in NYC; (3) Coachella + Stagecoach drop all COVID safety precautions.

Travel: (1) SABR said 'February month-to-date global GDS bookings are on pace to reach a similar level of recovery versus the same period in 2019 as November 2021, which was the best month since the onset of COVID-19. For these reasons, we believe 2022 is shaping up to be a year of recovery and progress', (2) Marriott said that Leisure travel remained strong in the Q, business transient + group travel continued to pick up, and new bookings have rebounded to pre-Omicron levels.

Among 37 states with a population greater than 2 million, Michigan is No. 1 based on equally weighted measures of employment, personal income, home prices, mortgage delinquency, state tax revenue and the stock market performance of its publicly-traded companies, according to data compiled by Bloomberg.

Michigan, whose 10,077,331 population is 2% greater than 9,883,640 in the 2010 census, was perennially near the bottom of the U.S. during the past two decades. Whitmer’s first year in the governor’s mansion marked the beginning of the biggest manufacturing boom since the recovery from the 2008 recession. Non-farm payrolls since April 2020 surged 25%, almost double the 14.3% U.S. average and leading every state in the nation. Michigan unemployment is 5.6%, down from a pandemic high of 23.6%.

The increase in tax receipts for the same period also was best in the U.S. as home values, mortgage health, personal income and publicly-traded equity of Michigan-based firms appreciated more than the U.S. average, according to data compiled by Bloomberg.

Michigan under Whitmer has become a standout for investors. In the market for local government debt, the state’s AA-rated bonds returned 5.6% (income plus appreciation) since April 2020, outperforming neighboring Wisconsin (4.3%), Indiana (4.7%) and Ohio (4.7%) as well as the entire municipal market (5.3%), according to data compiled by Bloomberg. Bonds issued by the Michigan Strategic Fund returned 15% while those of the Detroit Downtown Development project gained 14%, according to data compiled by Bloomberg.

“New construction activity had a robust year in 2021 and would have been even stronger if unimpeded by labor availability and supply chain inefficiencies. -- with all-time record low existing housing inventory in the U.S., inventory is turning over nearly as fast as it is becoming available. There are simply not enough homes to purchase”
- Fortune Brands Home & Security (FBHS) CEO & Director Nicholas Ian Fink

"Today, we’re announcing a multi-year initiative to build the Privacy Sandbox on Android, with the goal of introducing new, more private advertising solutions. Specifically, these solutions will limit sharing of user data with third parties and operate without cross-app identifiers, including advertising ID...The Privacy Sandbox on Android is an important part of our mission to raise the bar for user privacy while giving developers and businesses the tools they need to succeed on mobile. We look forward to working with the industry on this journey."
- Alphabet (GOOG) VP, Product Management, Android Security & Privacy Anthony Chavez

"Google plans to adopt new privacy restrictions to curtail tracking across apps on Android smartphones, following Apple in putting restraints on an advertising industry that has covertly collected data across billions of mobile devices.

"Google’s plans for Android could hasten an end to more than a decade of advertising practices across smartphones in which companies including Meta Platforms Inc.’s Facebook layered their code into hundreds of thousands of apps to track consumer behavior.

"Apple’s changes, which went into effect last year, have already upended the digital-ad industry and contributed to a wipeout of more than $300 billion from Meta’s market value.

Martha Krueger, who runs a gift-basket business called Giften Market, used to spend her entire advertising budget on Meta Platforms Inc.’s Facebook and Instagram. She picked up a new customer for every $14 she spent.

When Apple Inc. introduced a privacy feature for mobile devices last year that restricts user tracking, she said, her costs to acquire such customers rose 10-fold. In October, she shifted her whole ad budget to search ads on Alphabet Inc.’s Google.

Lots of other companies that depend on e-commerce sales, including makers of nutritional powders, eyebrow stencils and toilet sprays, are taking a look at their bottom lines and deciding the same thing. They are slashing their spending on Facebook and Instagram and sending their ad money to Google, Amazon.com Inc., Snap Inc. and other platforms, according to ad buyers and e-commerce companies.

The privacy change is hitting the heart of Meta’s business: its ability to target ads at users with precision and prove to marketers that the ads generate sales. Earlier this month, Meta said it expects a roughly $10 billion hit to sales this year as the result of the Apple change, which requires apps to ask users for permission to track their activity and share it.

“It kind of feels like the end of an era with Facebook’s targeting ability,” said Ms. Krueger.

"I suspect we are currently entering a sustained new market environment for valuations, where the cost of capital will return closer to historical norms and a risk premium will return and stay for a while."

DraftKings Inc. shares fell their most in almost two years after the company added fewer new customers in the fourth quarter and projected a wider loss this year than Wall Street had expected.

The company said Friday that an average of 2 million monthly unique paying customers engaged with DraftKings during the fourth quarter. Analysts were looking for 2.1 million monthly payers, according to estimates compiled by Bloomberg. The company also forecast an adjusted loss excluding some items in the range of $825 million to $925 million this year, steeper than analysts expected.

“In the present environment where tech investors have displayed zero tolerance for large losses, the 2022 Ebitda guidance is going to be a disappointment,” Vital Knowledge analyst Adam Crisafulli said.

In a market that has turned brutal for richly valued tech companies, investing in growth over profits didn’t go down well.

“In essence, Roku is going to grow revenue at a slower than expected pace in combination with a massive ramp in expenses, into potentially a global economic slowdown with increasing levels of competition,” wrote Pivotal Research Group’s Jeff Wlodarczak, who downgraded Roku’s shares to a sell rating on Friday. Even more positive analysts were taken aback; Michael Pachter of Wedbush maintained his outperform rating but called the full-year earnings guidance “shocking” and predicted that the stock would “remain in the penalty box with investors for some time.”

Roku also has to contend with a market that has grown decidedly less friendly to streaming businesses. Netflix and Spotify both have lost more than one-third of their value just since the first of the year in part due to disappointing subscriber-growth projections. And Paramount Global —the company once known as ViacomCBS—has shed more than a fifth of its value just since its analyst meeting last week where the company sharply boosted its projected spending on streaming content for the next few years.

Crude prices hurtling toward $100 a barrel typically would spark a frenzy of new drilling by independent explorers in shale fields from the desert Southwest to the Upper Great Plains -- but not this year. Influential players like Pioneer Natural Resources Co., Devon Energy Corp. and Harold Hamm’s Continental Resources Inc. just pledged to limit 2022 production increases to no more than 5%, a fraction of the 20% or higher annual growth rates meted out in the pre-pandemic era.

The timing couldn’t be worse for consumers. Outside of OPEC, which has rejected U.S. President Joe Biden’s pleas to accelerate production increases, domestic shale fields are the only other source of crude that can quickly respond to supply shortfalls. Shale executives have been shunning the Biden administration’s entreaties to pump more barrels since late last year. Together with fast-rising global consumption, American drillers’ conservatism is likely to keep oil prices elevated for some time to come.

“Whether it’s $150 oil, $200 oil, or $100 oil, we’re not going to change our growth plans,’’ Pioneer Chief Executive Officer Scott Sheffield said during a Bloomberg Television interview. “If the president wants us to grow, I just don’t think the industry can grow anyway.’’...

But the message from shale country is loud and clear: the independents won’t repeat the mistakes of the past by flooding the world with cheap oil. Record cash flows will go right back to investors through dividends and buybacks, CEOs are saying. That means U.S. drillers are leaving a lot of crude in the ground.

Responding to a steep sell-off in technology stocks, some hedge funds and other investment firms with large public stock portfolios have been turning away from investing in the most mature startups, reducing what’s been a crucial source of funding for the better part of two years. Instead they are focusing on buying beaten-down public tech stocks or investing in younger startups.

Tiger Global Management told its investors in a webinar earlier this month that it would no longer focus on backing large, late-stage startups preparing to go public, said a person with direct knowledge of the discussion. Instead, partner Scott Shleifer said the New York hedge fund would focus on investing in younger firms in Series A and B rounds, the person added. Shleifer did not elaborate on the reason behind the shift in strategy, but it followed the sharp decline in tech stocks over the past three months.

Other hedge funds including D1 Capital Partners, which invested in dozens of startup deals in the past couple of years, and smaller firms such as Octahedron Capital also have slowed down the pace of new late-stage private investments, according to three people with direct knowledge of the matter. These firms, also known as crossover funds, are instead focusing on buying shares of public tech companies that have sunk in value compared to the all-time highs they traded at last year.

An average of 11.4 million viewers watched the Beijing Olympics on NBCUniversal platforms each night — the smallest prime-time audience on record for any Winter Games and well off the 19.8 million nightly viewers for the Pyeongchang Games in 2018.

More than two weeks of coverage, starting with the frigid opening show on Feb. 4 and ending Sunday, drew 160 million total viewers across the NBC television channel, the Peacock streaming service and other platforms, NBCUniversal said on Monday.

Paul Farmer, a physician, anthropologist and humanitarian who gained global acclaim for his work delivering high-quality health care to some of the world’s poorest people, died on Monday on the grounds of a hospital and university he had helped establish in Butaro, Rwanda. He was 62...

Dr. Farmer attracted public renown with “Mountains Beyond Mountains: The Quest of Dr. Paul Farmer, a Man Who Would Cure the World,” a 2003 book by Tracy Kidder that described the extraordinary efforts he would make to care for patients, sometimes walking hours to their homes to ensure they were taking their medication.

He was a practitioner of “social medicine,” arguing there was no point in treating patients for diseases only to send them back into the desperate circumstances that contributed to them in the first place. Illness, he said, has social roots and must be addressed through social structures.

His work with Partners in Health significantly influenced public health strategies for responding to tuberculosis, H.I.V. and Ebola. During the AIDS crisis in Haiti, he went door to door to deliver antiviral medication, confounding many in the medical field who believed it would be impossible for poor rural people to survive the disease.