Private Wealth

Weekly Research Briefing: Puddle time

October 19, 2021

As we reflect on the first week of third quarter earnings, the results came in strong as expected. The many conference calls and commentary gave us plenty to chew on for our future models and valuation updates. Unfortunately, future assumptions require inputs about global supply chains and labor costs, as well as one's outlook for fuel prices. Ironically, the easiest component of the income statement is unit volume demand, which remains up and to the right. It is nearly every other assumption in our models that has become a volatile guess. While this increase in uncertainty has led to a near daily reduction in forward earnings estimates, it has done less to negatively impact U.S. stock prices. It is this picture of a pickle that equity investors now face.

For investors with a front seat on the 'Inflation is Transitory' train, the ride is becoming increasingly uncomfortable. Exponential rises in commodity costs seem to be everywhere today as stories of logistical disruptions and rising fuel costs put supply constraints on many materials. Meanwhile, Amazon is pushing the U.S. minimum wage to $18-21 per hour with a $3,000 new employee signing bonus to try and find workers for the holidays. Wal-Mart, Target, UPS and FedEx will not be too far behind as the battle for bodies accelerates. Even the Social Security department is helping to keep things hot by moving to increase the 2022 COLA by +5.9%. This will be the highest increase since 1982 and will serve to keep the wind at the back of prices for goods and services next year.

Temperatures are rising in Washington. Collars are being loosened at the Fed as they look at material price charts and hear ongoing examples of business difficulties from their member banking districts. The bond markets continue to dial up on the forward rate increases that the Fed will need to make to reel in the inflationary pressures. At the other end of Constitution Avenue, Congress is watching the need for another stimulus package evaporate as national job openings run higher along with wage inflation. We will know soon enough if Congress made a mistake when they didn't pass the trillion dollar infrastructure deal that Mitt Romney handed them on a silver platter. So close we were to mega spending on our roads, bridges and other necessary infrastructure.

Back to earnings, we have about one half of the S&P 500 reporting over the next two weeks so there will be little else to do but look through earnings datapoints and outlooks. Expect much more of the same for U.S.-based businesses: immense demand with much complaining about supply chains, transportation costs and labor availability. Good luck with the clouds.

It’s been six months since Hamilton Lane’s acquisition of 361 Capital and if you’ve not yet taken the time to explore our website, I invite you to do so. Here you can learn about Hamilton Lane and our 30 years in the private markets, the global investment strategies we offer and read additional insights from our investment team.

The U.S. does not have a demand problem as shown by last week's retail sales figures...

Americans stepped up their spending in September, a sign of resilient demand and rising inflation as consumers head into the holiday shopping season.

Sales at retail stores, restaurants and online sellers rose a seasonally adjusted 0.7% in September from the previous month, the Commerce Department said Friday. The rise in sales reflects persistently strong demand and higher consumer prices.

Consumers, armed with stimulus payments and rising wages, have stepped up spending this year, shrugging off the Delta variant of Covid-19, the end of enhanced unemployment benefits and emerging supply constraints. The retail sales, which aren’t adjusted for inflation, rose 13.9% in September from a year earlier. Consumer inflation increased 5.4% in that time, according to the Labor Department...

Several rounds of government stimulus have left households sitting on roughly $1.6 trillion in savings, representing 9.4% of their disposable income, well above pre-pandemic levels, according to the Commerce Department. Private-sector hourly wages were up 4.6% in September over the previous year, according to the Labor Department.


US Retail Sales

(The Daily Shot)

These banking execs also foresee solid U.S. economic growth in the 4th quarter and into next year...

"While there's been some discussion around the slowdown, I'll just note that the U.S. economy is now as large as it was in the pre-pandemic. Our own research team, not being in transition at all, expects the U.S. economy to grow 5.5%-plus this year and 5.2% next year. These growth rates are more than twice the growth rates that many of the – that occurred in the pre-pandemic decade or longer.” - Bank of America (BAC) CEO Brian Moynihan

"In regard to our view of the overall economy, after somewhat slower growth during the third quarter of 2021 due in part to the Delta variant and supply chain problems, we expect GDP to accelerate to above 6% annualized in the fourth quarter." - PNC Financial Services (PNC) CFO Rob Reilly

If you are planning on gifting an iPhone 13 Pro for the holidays, you had better make that purchase soon...

@carlquintanilla: Lead times shrinking just a bit for iPhones — even at the high end.

US iPhone Availability Tracker

The good news if you can't find that special present this holiday season... Gift cards will never run out of supply.

In an economy hamstrung by all types of global supply-chain snarls, mounting product shortages — even Apple is reportedly slashing production — are making giving gift cards a fail-safe way to ensure there are presents under the Christmas tree. Shoppers plan to boost spending on them by 27% this holiday season to about $270 per person, according to a survey by payment service Blackhawk Network. Those gains will push cards to about 40% of their total gift purchases.

“This holiday season is going to be huge” for gift cards, said Saumil Mehta, general manager for Square Inc.’s point-of-sale division. They aren’t “as free-form as just handing someone a wad of cash. But it's not so specific either. It kind of comfortably sits in the middle.”...

The global prepaid card industry surpassed $2 trillion last year thanks to gains in gift cards, according to estimates by Global Industry Analysts. With that accelerated growth, the market should hit $4.1 trillion by 2027, about 50% higher than the firm’s pre-pandemic estimate.

Retailers are also playing a role, increasingly using gift cards to attract new customers and push shopping past December into the lulls of January and February, according to Zhang, the marketing professor. Gift cards create a sales lift, too, because shoppers often spend more than the card is worth. And if they don’t redeem all of the value, that’s good for a retailer’s bottom line, he said.

On average, consumers spend 40% more than the value of a gift card, said Theresa McEndree, Blackhawk’s global head of marketing.


A global 100 company sums up the current business environment this morning in four quick bullets...



Plenty of other thoughts on inflation last week from these earnings calls...

"As you read about in the paper and as I've seen in some of the write-ups and I've seen from some of our peers and some of our other industries, the product and shipping cost inflation is not just high, it's brutally high. The chaos and the impact, not just from a financial perspective, but from the toll it takes on our human capital, is immense." - Fastenal (FAST) CEO Dan Florness

“It’s not transitory. I’ve never seen a greater divergence between what’s defined as transitory and what’s being seen day in and day out. Most CEOs I talk to today are very concerned about supply chain, very concerned about import costs, whether they’re materials, commodities and increasingly labor” - Goldman Sachs (GS) President John Waldron

"Inflationary trends are appearing more than transitory, reflecting structural changes, including a shift from consumerism to job creation, rising wage growth, and the energy transition. As I said in a speech to the G20 in July, society needs to rapidly invest in innovation to offset inflationary pressures associated with the transition to a net 0 economy." - BlackRock (BLK) CEO Laurence Fink

“Inflation is clearly not temporary...The Fed is starting to indicate it’s time for them to move” - Bank of America (BAC) CEO Brian Moynihan


But some evidence that the supply chain situation could be showing improvements...

Reports in the last 72 hours suggested Toyota is planning to ramp output in Q4 because of improved auto parts availability while companies operating in Vietnam are normalizing manufacturing as that country emerges from its COVID shutdown. Rates on China-US shipping lanes have come off their highs. The White House this morning announced a deal whereby the ports of Los Angeles and Long Beach, the largest in the US, have agreed to run operations 24/7, a shift that should help alleviate supply chain constraints (while FDX, UPS, and WMT also announced actions to ease supply chain strains).

(@Vital Knowledge)

As for the labor situation, every U.S. employer now competes directly with Amazon for workers...

Amazon continues to provide diverse employment opportunities for people of all backgrounds and skill levels, announcing today 150,000 seasonal jobs are now available across the U.S. All Amazon jobs in the U.S., including seasonal roles, have an average starting pay of $18 per hour, sign-on bonuses up to $3,000 and an additional $3 per hour depending on shifts in many locations.


The shortage of residential construction labor has caused Zillow to pause their rapidly growing flipping of home line of business...

Zillow Group Inc. is taking a break from buying U.S. homes after the online real estate giant’s pivot into tech-powered house flipping hit a snag.

Zillow, which acquired more than 3,800 homes in the second quarter, will stop pursuing new home purchases as it works through a backlog of properties already in its pipeline.

“We are beyond operational capacity in our Zillow Offers business and are not taking on additional contracts to purchase homes at this time,” a spokesperson for Zillow said in an email. “We continue to process the purchase of homes from sellers who are already under contract, as quickly as possible.”...

The iBuying process is powered by algorithms and large pools of capital, but it’s also reliant on humans. Before Zillow signs a contract to buy a house, it sends an inspector to make sure the property doesn’t need costly repairs. After it buys a property, contractors replace carpets and repaint interiors.

Finding workers for those tasks has been challenging during a pandemic that has stretched labor across industries. Staffing shortages have been exacerbated by Zillow’s willingness to let customers set a closing date months into the future, meaning it could agree to buy a house in August and begin renovating it in November.


Zillow could be fine just by sitting on its housing portfolio if past trends continue...

@Not_Jim_Cramer: Zillow releases September Home Value Index - YOY% growth hits another record high.

September Zillow Home Value Index

Did the Fed anticipate workers leaping to greener grasses so quickly?

I saw a stat this morning that 7% of hospitality workers are leaving their jobs monthly. I guess self-serve hotels will now become a permanent thing which could do amazing things for their margin structures.

This is a problem for the Fed


These mega-cap financial CEOs see interest rates heading in one direction... higher.

"We do expect the Federal Reserve will begin tapering soon, and that will be followed by increasing rates in 2022--You’ve got to prick this bubble a little bit. Money is a bit too free and available right now--I think the market has digested that the Fed will have to move, not just on tapering, but rate increases. And by the way, we are 10 rate increases away from what would be considered normal." - Morgan Stanley (MS) CEO James Gorman (Check)

"…if you look at what's happening in inflation and with tapering coming and we still think that there's more risk to upside on rates than there is downside at this point." - Wells Fargo & Company (WFC) CFO Michael Santomassimo


The bond market now has two rate hikes fully baked in for 2022...

Global inflationary trends (combined with robust U.S. consumption) are causing the market to reevaluate the Fed’s actions over the next few years. The market is increasingly convinced that the Fed will be forced to hike twice next year.

Probability of 2 Fed rate hikes by the end of 2022


Looking at longer-term interest rate structures makes me think that you have seen the lows in fixed mortgage rates...

So, if you plan on having your home for a couple of decades, you know what to do with that ARM or un-financed housing asset.

Mortgage 30 year


Rising rates are typically good news for financial stocks, especially when there are not credit problems on the horizon...

@StocktonKatie: If you think Treasury yields are going to continue to work higher, like we do, you should be overweight financials #fairleadstrategies

Financial SPDR vs S&P 500 Index

Big bank and brokerage earnings last week helped the financials break out to a new all-time high last week...

Financial Select Sector SPDR Fund


Another one of the more interesting breakouts last week. Supply chains on the mend?

@hmeisler: Transports. Now everyone is onboard.

Dow Jones Transportation Average

About half of the S&P 500 will report earnings over the next two weeks. Here is a fraction of this week's slate...

Most Anticipated Earnings Releases


As we noted, forward quarter earnings estimates continue to slide as uncertainty builds...

S&P 500 EPS growth expectations


Big moves in commodity prices will help some companies (Alcoa) and hurt others (Delta Airlines)...

"We had another strong quarter bolstered by aluminum prices that are higher than we've seen in more than a decade. The LME aluminum price is the highest it has been in 13 years and has doubled relative to the low point in the second quarter of 2020. In addition, regional premiums are being influenced by higher transportation costs into deficit markets, such as North America and Europe. The continued economic recovery in the tightness of supply has continued to support this LME rally and high regional premiums." - Alcoa (AA) CEO Roy Harvey

"...While demand continues to improve, the recent rise in fuel prices will pressure our ability to remain profitable for the December quarter" - Delta Air Lines (DAL) CFO Dan Janki


Goldman expects supply shortages to continue for several commodities in 2022...

@carlquintanilla: GOLDMAN: Commodity market demand growth “is being constrained with supply chains so severely depleted. .. The rolling impact of smaller, frequent shocks on a stretched system generates .. persistent physical price inflation – the start of which we are beginning to see.”

We expect most markets to continue to draw next year

Oil prices continue to surprise...

ICE Brent

(The Daily Shot)

In China, coal is the major energy fuel input that is sending those prices soaring...

ZCE Thermal Coal Futures

(The Daily Shot)

China crude steel production crashed by more than 20% YoY in September as COVID supply chain disruptions and reduced housing demand met with increasing fuel prices...

China Crude Steel Production YoY


As expected, the Chinese economy slowed sharply in the third quarter...

BEIJING, Oct 18 - China's economy hit its slowest pace of growth in a year in the third quarter, hurt by power shortages and wobbles in the property sector, highlighting the challenge facing policymakers as they seek to prop up a faltering recovery while reining in the real estate sector.

Gross domestic product expanded 4.9% from a year ago, missing forecasts, as attempts by Beijing to curb lending to the property sector exacerbated the fallout from electricity shortages which sent factory output back to levels last seen in early 2020, when heavy COVID-19 curbs were in place.

The world's second-largest economy had staged an impressive rebound from last year's pandemic slump but the recovery has lost steam from the blistering 18.3% growth clocked in the first quarter.


China GDP YoY


Housing demand is in a sharp retreat as customers become worried about deliveries...

Home sales in China are seizing up as curbs on lending and worries about developers’ financial health deter house buyers, casting a pall over an industry that is central to the Chinese economy.

In recent days, numerous big developers have reported lower sales figures for September, with many showing year-over-year declines of more than 20% or 30%. That is a stark drop-off for a month that leads up to China’s Oct. 1 National Day holiday, whose promotions usually make this one of the strongest selling periods of the year.

If sustained, the sharp downturn could have serious economic consequences. Real estate has played an outsize role in China’s economy in recent years, compared with its importance in many other countries, and Chinese families have much of their wealth tied up in homes and in investment properties. Slower sales could spill over into investment and construction, potentially hurting growth, employment and local government finances. Discounting to spur sales could hurt home prices and hit household wealth.

Developers such as China Evergrande Group are very publicly struggling to adapt to a series of changes, including rules dubbed the “three red lines” that were introduced last year to curb debt growth at financially weaker companies, as well as caps on banks’ property lending. Some have missed interest payments, and stock and bond prices have dropped sharply across the industry. The news has alarmed home buyers, especially as developers sell many apartments before they are built.

The sales slowdown was partly a result of tighter government policy on mortgages and waning confidence among home buyers, said Cheng Wee Tan, a senior equity analyst at Morningstar. Customers are worried that developers won’t be able to complete their projects, and media reports about unfinished Evergrande constructions have added to those fears, he said.


Farmers continue to innovate and are now using their acres to improve yields while generating power...

Why not stick a solar array in a field and plant crops underneath? It’s a new scientific (and literal) field known as agrivoltaics—agriculture plus photovoltaics—and it’s not as counterintuitive as it might seem.

Yes, plants need sunlight, but some need less than others, and indeed get stressed by too many photons. Shading those crops means they will require less water, which rapidly evaporates in an open field. Plus, plants “sweat,” which cools the panels overhead and boosts their efficiency.

“It is a rare win-win-win,” says Greg Barron-Gafford, an earth system scientist at University of Arizona who’s studying agrivoltaics. “By growing these crops in the shade of solar arrays, we reduce the amount of that intense sunlight that bakes off the water and stresses out the plant.” Barron-Gafford is among the recipients of a new $10 million grant from the USDA’s National Institute of Food and Agriculture to research agrivoltaics for different regions, crops, and climates.

Barron-Gafford has been running experiments to quantify several variables—like growth, water use, and energy production—to determine which crops might benefit most. For instance, he’s grown salsa ingredients—cilantro, peppers, and tomatoes—and found that they grow just as well, if not better, under solar panels than in the open. They also only use half the water. (“Think if you spilled your water bottle in the shade versus the sun,” says Barron-Gafford.) He also found that the panels significantly reduce air temperatures, which would benefit farmworkers tending to the plants. His work suggests that the panels might act as a protective bubble to shield crops from extreme heat associated with climate change, which overwhelms crops and decreases their yields...

Barron-Gafford also points out that agrivoltaics need not be limited to the kinds of crops people eat. A farmer might let native grasses grow wild under the panels, providing food for livestock, which would also benefit from the shade. Or they might promote the growth of plants for native pollinators like bees. With the right management, that land could pull double duty as a synthetic forest—just because it’s shaded, doesn’t mean life can’t flourish underneath.

“I think everything likes a little bit of shade,” says Kominek. “There's quite a variety of crops that enjoy it. And when it's 100 degrees outside, I enjoy the shade.”

Image of crops


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The author has current equity ownership in:, FedEx Corp., J.P. Morgan Corp., Bank of America Corp, PNC Financial.

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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