Weekly Research Briefing: Red Light, Green Light

October 05, 2021

Not to be outdone by Netflix, Congress has elected to begin their own "Squid Game" involving the U.S. debt ceiling, the bipartisan infrastructure bill and the reconciliation spending bill. With one party in control of Congress and the Executive Office, this should be a very quick game. But as has happened in the past, when one party holds all the cards, some sub-groups overreach for more, which brings down the entire house of cards. If the negotiations and deals don't begin to come together this week, I'd expect that some members of Congress will be lined up and removed by their voters in the next election.

October brings us to a key earnings month as companies begin to update their outlook into year end and into 2022. In a week, the small stream of earnings reports will quickly ramp into a firehose of information, and we will have plenty of data and comments to evaluate. The timing could not be better as supply chain disruptions and inflation worries seem to be dialed up to '10' right now. September's cautionary comments and earnings pre-releases have been filtering their way into forward earnings estimates, which has been a concern for some stock prices. If this is truly the short-term peak in margins and earnings gains, then equities could have a bigger new battle on their hands.

Go molnupiravir! Good news on the COVID front with Merck/Ridgeback having major success with a pill therapy that has reduced hospitalization or death by 50% in COVID-19 positive patients. Not only is the drug highly effective, but it is also a fraction of the cost and easier to make than the intravenous therapies that are currently given to COVID positive patients. The global and U.S. virus datapoints continue to move in the right direction while at the same time more geographies are opening to travel and less social distancing. (See the weekend’s TSA numbers and Delta's positive commentary today for more proof.) As more people get fully vaccinated and kids become eligible for their first shots going into the holidays, there is hope that we will not see another wave of cases like the one we just witnessed.

Poll of the day: Should U.S. government policy makers be allowed to actively trade their investment portfolios?

[  ] Yes

[  ] No

The red light...

See the T-Bill market twitch? That is what happens when Congress prioritizes a foot doctor appointment above the fiscal stability of our nation.

T-Bill Maturing on 10/21/21

So, are the ranges of the spending bills narrowing?

Maybe. Leadership looks invisible right now, but this thought is correct in that a deal could come together in no time (if key members of Congress wanted it to).

There WAS some very important progress on the reconciliation front over the last few days (this progress was one of the main drivers behind the Friday rally). Manchin formally provided his headline ceiling ($1.5T) and (more importantly) it sounds like the Democratic leadership (without substantial pushback from progressives) has come down toward ~$2T (from $3.5T). Biden suggested people like Manchin and Sinema would be willing to countenance a ~$2T figure (although that’s just conjecture at this point), which could result in a deal being reached relatively quickly.

(Vital Knowledge)

Meanwhile, James Bullard is throwing more inflation grenades into the markets...

Yesterday, the Fed’s Bullard said, “we are going to have more inflation than we are used to for some time and high inflation may not dissipate back to the Fed's 2% goal, while concerned that inflation risks are to the upside” (not exactly the “transitory” inflation the Fed has been speaking of the last few months).

(Hammerstone Report)

The Fed funds rate is moving higher...

Here is the outlook: bump one at the end of 2022, a few bumps in 2023 and a few more in 2024.

The Fed and interest rates


Thoughts of higher interest rates are beginning to challenge the high valuations of growth and mega-cap stocks...

Style and Size

(Goldman Sachs)

Speaking of growth stocks...

Tweet from @charliebilello

A blended stock/bond portfolio saw its first negative return in nine months...

Bonds and stocks could remain correlated if higher interest rates lead to falling growth stock prices.

An important relationship between equities and government bonds broke down during September and inflicted the largest losses for diversified investment portfolios since the pandemic market rout of last year.

Signs that inflationary pressure may become more entrenched have weighed on consumer and business sentiment. That helped prompt the first monthly loss in the S&P 500 since January. Treasury bond yields have risen, as investors anticipate the US central bank may act to tame rising inflation pressure next year.

Losses in the two major asset classes resulted in a typical 60/40 portfolio containing US equities and government bonds falling 3.5 per cent in September. Not since a decline of 5 per cent in March of 2020 has the 60/40 mix suffered such a large loss, according to FT calculations.

Investors suffer as both equities and bonds fall in value


For the first time since the start of COVID, earnings estimates are beginning to fall across all future quarters...

Time to find out if stocks follow earnings. (My 30-year crib sheet points to 'yes'.)

Rising EPS growth expectations


And as we begin to look at the companies reporting early Q3 earnings, their Q4 guidance is no longer a net positive...

Current next quarter EPS estimates


Good luck finding any car to buy today...

Eight out of the 10 Chevrolet Silverados had been sold even before they arrived at Katie Coleman’s car dealership this month. The other two disappeared a few hours later.

That is how fast vehicles have been selling as the chip shortage continues to grip the auto industry. Coleman’s typical 90-day inventory has dwindled to less than two. Her dealership, Bowman Chevrolet outside Detroit, has even sold a fleet of “loaner” vehicles that had previously been lent to customers whose cars were being repaired…

The semiconductor shortage that has disrupted the global car manufacturing industry is touching every player in the chain of businesses supplying, building, selling and disposing of cars and trucks in the US, a country with 276m registered vehicles. Even junkyards struggle to replenish inventory…

Bowman Chevrolet usually sells about 5,000 new vehicles and 1,200 used cars each year, managers at the Michigan-based dealership said. This year the volume on both has more than halved…

Scarcity at dealerships has fed into markets where wrecked, damaged and worn-out vehicles are sold. Consumer prices for used vehicles were up 32 per cent year on year in July, government statistics show, while prices of new vehicles rose more than 7 per cent from a year earlier.


Time to monetize Mater...

If you know someone with a clunker gathering rust, find them any bid and free up that garage space.

US Domestic Auto Inventories


Just tow Mater into any CarMax, as they likely have a bid waiting for you...

@conorsen: CarMax’s average selling price for used vehicles was up 30.8% YoY:


Salesforce sees a similar price effect impacting holiday shopping this year...

Online shoppers will be buying less this holiday season, but spending more.

Holiday e-commerce could rise 7% during November and December to reach a record $1.2 trillion globally, according to a Salesforce forecast released on Wednesday.

While the actual amount of dollars spent is seen rising, shoppers will likely be purchasing fewer items. That’s because inflation will make gifts as much as 20% more expensive compared to last year, according to Salesforce. The quantity of orders, meanwhile, is expected to fall 2% worldwide.


Both Sherwin-Williams and Bassett Furniture had comments about the supply chain last week...

“In addition to the significant supply challenges, raw material pricing remains highly elevated, and we are increasing our full-year raw material inflation outlook to be up a high-teens percentage compared to last year. We continue to combat these elevated costs with pricing actions across all of our businesses,” - Sherwin-Williams CEO John G. Morikis


"As with our competitors in the transportation space, the labor shortage has caused a massive backup of transportation equipment that has been sitting on yards waiting to be unloaded throughout the country. An additional response that we have made has been leasing several hundred trailers on the open market to keep goods moving, albeit at a higher expense than originally contemplated. The logjam of freight has also backed up our manufacturing schedules as we have simply run out of room in our facilities to store goods before shipment.” - Bassett Furniture Industries CFO J. Michael Daniel


Meanwhile, Barron's magazine is calling the peak in supply chain fears...

Virus trends have taken a promising turn in recent weeks. Critical overseas manufacturing centers are reopening. Consumers are only slowly returning to spending on experiences after a huge shift in preference toward household goods, but that reversal will continue and even pick up speed as new Covid cases fall and vaccines become available for children. Even those backed-up ships could be hiding good news.

“You’ve heard it here first: Christmas will happen on Dec. 25,” says Gene Seroka, executive director of the Port of Los Angeles. “Many of our savvy retailers and importers advanced their orders. We started seeing Christmas goods arrive on our shores back in June of this year. Normally, that arrival would take place at the end of August, beginning of September.”

Barron's cover


Is an energy crunch next on deck? China is not waiting to find out...

China’s central government officials ordered the country’s top state-owned energy companies to secure supplies for this winter at all costs, according to people familiar with the matter.

The order came directly from Vice Premier Han Zheng, who supervises the nation’s energy sector and industrial production, and was delivered during an emergency meeting earlier this week with officials from Beijing’s state-owned assets regulator and economic planning agency, the people said, asking not to be named discussing a private matter. Blackouts won’t be tolerated, the people said.

The emergency meeting underscores the critical situation in China. A severe energy shortage crisis has gripped the country, and several regions have had to curtail power to its industrial sector and some residential areas have even faced sudden blackouts.


The global rush to lock in energy supplies ahead of winter is causing some interesting price action...

@jsblokland: Another day, another high in European #NaturalGas prices. #energycrunch

Natural Gas Future

Once again, the U.S. energy industry is staying away from new production, which will only make prices more uncertain...

US oil producers are not able to increase supply to tame soaring crude prices that remain “under Opec control”, according to the shale patch’s biggest operator.

Brent crude jumped to a three-year price high above $80 a barrel last week, sparking fears of a deepening global energy crunch that has already pushed natural gas and coal prices in Europe and Asia to record highs.

But Scott Sheffield, chief executive of Texas-based Pioneer Natural Resources, said America’s once-prolific shale producers would keep using their burgeoning cash piles to pay shareholders, not fund new drilling.

“Everybody’s going to be disciplined, regardless whether it’s $75 Brent, $80 Brent, or $100 Brent,” Sheffield said. “All the shareholders that I’ve talked to said that if anybody goes back to growth, they will punish those companies.”

“I don’t think the world can rely much on US shale,” he said. “It’s really under Opec control.”


Higher prices across the energy complex have led to an improved earnings outlook for most every company in the sector, including the giant...

Exxon provided color on its Q3 earnings and said higher oil will benefit results by ~$400MM vs. Q2, higher gas prices will benefit by ~$700MM, higher downstream margins will benefit by ~$600MM, and chemical margins will be hurt by $300MM. Scheduled maintenance changes will benefit earnings by ~$900MM in aggregate vs. Q2. Other Q3 headwinds amount to ~$300MM vs. Q2. Bottom Line: the company guided for a ~$2B benefit in Q3 over Q2’s $4.7B, implying earnings of ~$6.7B in total vs. the St consensus of ~$5.8B.

(Vital Knowledge)

As housing prices begin to outrun income growth, we must revisit this chart that brought down the house in 2006...

Housing is another area in which prices have picked up meaningfully. While home building is gaining momentum, data released this week showed home prices rising at their fastest year-over-year rate on record. The month-over-month increases have started to moderate at the margin as more inventory comes available, but the housing market remains hot. Pending home sales, which measure signed resale contracts, jumped 8.1% in August, marking the biggest increase in three months. Though strength in home sales may be somewhat difficult to maintain given low inventory and high prices, the underlying demand drivers remain intact and low mortgage rates as well as rising incomes should help offset some affordability concerns.

House Price to Median Income Ratio


Speaking of housing prices, go Phoenix!

US house prices up


And just as we expected, NYC apartment inventory has returned to normal...

@LizAnnSonders: That was quick: number of apartments available for rent in NYC is at lowest since pandemic began … in week ending 9/26, there were 15,541 available, a decrease from 48,753 in late-September 2020 (@streeteasy)

US house prices up

But while many are happy to return to live in NYC, not as many are happy to return to an office environment...

@carlquintanilla: Very weird dynamic developing in #NYC: apartment rents are soaring, up +11.7% — but OFFICE rents down -7.5%, “as vacancy remains near record high of 11.7% in 3Q21.” (per Morgan Stanley)

Manhattan Apartment Rent

Working from home will become a permanent shift...

“The phenomenon that I see happening globally is not as many employees are coming back into their offices locally as any CEO expected. You’re really starting see some very low attendance numbers in offices because employees are so productive at home” - Salesforce (CRM) CEO Marc Benioff


And PwC decides to go all-in on allowing employees to work remotely…

It will be interesting to see if other major services firms follow and equally interesting to see how the company evolves its 79-office footprint in the U.S., which is very downtown centric.

PwC has told 40,000 staff in the US that they can work remotely from anywhere in the country but risk a pay cut if they move to locations with a lower cost of living.

The decision to allow staff to work remotely on a permanent basis is the most radical response from a Big Four firm to the changes wrought by the Covid-19 pandemic.

Under the plan, client-facing employees will be allowed to opt in to “virtual” roles, working from home except when they are occasionally needed in an office for team meetings, client visits or other key events, PwC said.

Staff who choose to work remotely would be required to come to the office no more than three days a month, Yolanda Seals-Coffield, PwC’s deputy US people leader, told Reuters, which first reported the move…

PwC expects 30 to 35 per cent of eligible staff to opt in to permanent remote working. Partners managing staff who come to the office regularly will not be allowed to work completely remotely.


The capital markets have never been so hot…

Companies across the globe have tapped investors for trillions of dollars in debt and equity this year, taking advantage of rallying stock markets and rushing to exploit the easiest borrowing conditions in decades before the Federal Reserve and other major central banks start to withdraw their support.

The feeding frenzy, including more than $1tn worth of share sales and nearly $4tn of bond issuance, involves the biggest names in the corporate world, including Apple, Walmart, Baidu and Volkswagen. And even though bankers are racing to ink loans and finalise initial public offerings, the backlog of deals still to be done remains daunting…

Some $8.7tn has been raised across equity sales, bond offerings and loan deals — including loans syndicated and held by banks — at a record pace, according to the data provider Refinitiv. The ferocious pace has exhausted the fund managers who must decide if they are willing to invest, but it has not yet sated their demand, even though markets wobbled at the end of September.

Companies acrosse the globe race to tap markets


The S&P 500 has become a most concentrated index…

Which one of today's top 5 will be the first to exit the top 10 by loss of market cap? I know which one the Wall Street Journal and 60 Minutes would pick today.

S&P 500

(Goldman Sachs)

While the Evergrande situation remains far from settled, one investor is buying its debt...

Marathon Asset Management is buying debt issued by troubled developer China Evergrande Group, according to the investment firm’s co-founder and Chief Executive Officer Bruce Richards.

The distressed-debt specialist purchased Evergrande debt for the first time this week and will continue doing so at the current low prices, Richards said in a Bloomberg Television interview on Wednesday. Evergrande 10% bonds due in 2023 led declines in the U.S. high-yield market on Wednesday, dropping 2.375 cents to 23.875 cents on the dollar.

Evergrande will eventually need to be restructured, although the company may “kick the can” by making some debt payments in the short term, Richards said. Homebuyers, suppliers and Chinese bondholders are going to be paid before offshore investors, he added.

There are “absolutely opportunities” stemming from Evergrande, Richards said during the TV interview with Alix Steel and Guy Johnson. “It is a problem for China, problem for its housing market. A problem for the whole segment that relies on this. There’s a lot of jobs related to this and a lot of commerce related to this.”


Nice job Alaska...

The State has done so well in their investment portfolio that they are looking to rebalance their exposures by cutting private assets which returned 65% last year. How nice to be able to rebalance out of a position of strength.

The $81bn sovereign wealth fund is considering hiring an adviser to feel out pricing in the secondaries market, CIO Marcus Frampton said on Tuesday. Alaska Permanent Fund Corporation, the US state’s $81 billion sovereign wealth fund, is mulling a secondaries sale amid an overallocation to private equity.

The fund is considering hiring a broker to "look at a secondary sale later this year", said chief investment officer Marcus Frampton at Tuesday's meeting of the state investment committee, while emphasising that any sale would be opportunistic in nature.

"We don't want to be selling from a position of weakness," said Frampton. Secondaries Investor reported in July 2020 that Alaska had sold $1 billion of infrastructure stakes to Strategic Partners, a deal Blackstone chief operating officer Jon Gray described as the "largest ever" in infrastructure secondaries.

It also brought private equity stakes to market though opted not to sell due to unfavourable pricing, Frampton said. The sovereign wealth fund sold two $750 million private equity portfolios to Ardian in 2017 and 2018, respectively, Secondaries Investor reported.

Alaska currently deploys $1.6 billion a year. Fund commitments make up about three-quarters of that amount, with the rest in co-investments. It is overweight in private equity by 3 percent and bumped its allocation to 16 percent from 15 percent on 1 July.

Due to the hot IPO market, about a quarter of Alaska's private equity exposure is listed, either through private funds or held directly. Were those positions to be liquidated, the private markets allocation could find itself underweight, Frampton said.

The pension will switch to reviewing its investment pace once a quarter rather than once a year, he added. Alaska's private equity portfolio for the fiscal year returned 65 percent over a benchmark of 54 percent. This drove the returns of the fund overall, which outperformed its benchmark by 1.29 percent, or $1.1 billion.

Pricing in secondaries has returned to pre-covid levels. The average high bid across all strategies sat at 92 percent of NAV at the end of the first half of 2021, the highest level since 2018, according to Greenhill's most recent mid-year report.


In 15 years, the global market cap share of the U.K. has fallen by 60%. Wow.

In 2006 companies with shares listed in London were worth 10.4% of the global equity market. Today, that share is 3.6%. London has lagged behind even the laggards: its share of Europe’s total market value has declined from 36% to 22% over the same period. Less than one-fiftieth of the FTSE 100’s value comes from tech companies, compared with almost 40% of the S&P 500 index of American firms. Equities are a crucial part of any claim to be a global financial centre. Listed firms exert a pull on other financial activities, and on the accounting and legal services that cater to them. The financial-services industry is Britain’s most successful, contributing 6% of GDP and about a tenth of tax revenue...

The City has also suffered as global firms with international capital-raising options have drifted off. London’s revival after the “Big Bang”—reforms in 1986 that deregulated trading—relied in part on the stock exchange becoming a venue for mobile global businesses. Recent weeks have seen Prudential, an insurance giant, choose a share offering in Hong Kong and bhp, one of the largest London-listed companies, announce plans to have its sole primary listing in Australia. London’s aspirations to be a hub for European businesses have been dealt a blow by Brexit.

The City’s final weakness is a dearth of startups that choose to list in London. In 2005 London hosted one-fifth of the world’s initial public offerings; today, it hosts one-twenty-fifth. A stock exchange that continually fails to attract exciting new firms will come to resemble a museum.


The average age of a VC/Tech company IPO continues to lengthen...

A good whitepaper here showing the stats on venture cap/growth companies that have gone public over the last forty years. Easy to see the ages of the company going public lengthened into the double digits the last ten years. This is due to not only the complexity and burdens of being public, but also the greater access to capital by companies outside of a public listing. So as companies wait longer to go public, more value is accruing to their private owners.

Tech company IPOs


Some great comments from the former CEO of Unilever about the need for impact investing today…

One of the things that stood out when I joined Hamilton Lane was their commitment to ESG. While some investment firms might have ESG as a product area, at HL it runs through every investment that we consider. And yes, we do have investment areas specifically focused only on impact investing for those that want a concentrated exposure.

MM: You call this the greatest business opportunity in history. How do you see it just not threatening current profit models but actively boosting profits?

PP: You can look at it for every industry. In the food business, if you see [new entrants like] Oatly, Impossible Foods and Beyond Meat being valued at [billions of dollars], all the value creation is there. The value creation for the big companies, even Unilever, has been fairly dismal. If you look at energy, all the value creation is in clean energy. In transport, it’s all in green transport. All the incumbents are relatively under pressure and all the newcomers are getting incredible valuations. Companies see the market shifting, the financial markets shifting, the cost of capital shifting, the risk equation shifting. The good companies see the opportunities in that…

MM: Are we entering a new chapter of the ESG story where stakeholders are demanding to see more impact? Is there more of a “show me” mood?

PP: Not only “show me” but “show me now”. What you do between now and 2030 is going to be crucial . . . We can solve the majority of these [climate] issues by 2030 if we wake up to it. There’s a gap between what people think is possible and what is possible . . . [which] makes this the most wonderful opportunity. If you want to invest for the long term the best way to do that is to protect your company from things like climate change; otherwise there isn’t going to be a longer term. Even diehard shareholder primacy believers — and I don’t think there are many of them — would conclude that I need to do that to maximise my return. 


Finally, Denver's top restaurant is closing 15% of its weekly capacity...

If the best restaurant in Denver cannot perfectly slice the current labor crisis, imagine how the rest of the industry is doing?

Sushi Den opened in 1984, and has since operated 362-days a year (closed 4th of July, Thanksgiving and Christmas Day) for almost 37 years. As the hospitality industry lost 50% of its workforce during the pandemic, there has been a critical shortage of restaurant workers nationwide. Independent restaurants are still struggling with the labor shortage and our team has worked tirelessly through the past year and a half under very stressful situations. Toshi and I greatly value our team members, many who have been with us for decades. In an effort to give our deserving staff more time off, we will close Sushi Den and Izakaya Den one day a week, Mondays beginning October 4.

Sushi Den Denver



The author has current equity ownership in: Sherwin-Williams Corp. 

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.

Enjoy the WRB? Subscribe today.

Recent Content


Weekly Research Briefing: Downtrends Everywhere

As investors continue in their risk avoidance, assets seem to be for sale almost everywhere. Sure a bounce like the one on Friday will make everyone feel good for a day, but as soon as the joy is gone, we return to earnings misses met with collapsed stock prices, lowered price targets caused by multiple compression on stocks that beat earnings, and continued lowering of global GDP targets because of China/Ukraine/Russia/Inflation/Interest Rates/Growth pulled forward during COVID/etc.

Read the Research Article

Weekly Research Briefing: Not a time to stick your neck out

With massive volatility continuing across all financial market assets and significant selling volumes outpacing significant buying ones, now is a time for equity investors to play defense.

Read the Research Article

2022 Private Markets Dashboard

As one of the largest investors and allocators of private markets capital globally, we occupy a unique position within our asset class, partnering with premier GPs from around the world. The Private Markets Dashboard captures the opinions and expectations of a broad group of those managers, offering insight into where the global investment community believes the markets are headed.

Read the Research Article

FPO We use cookies to improve user experience, and analyze web traffic. For those reasons, we may share your site usage with our analytics partners.

Learn More