Weekly Research Briefing: Exit Doors

March 15, 2022

Russia needs an out. The takeover of Ukraine did not go according to plan. The entire world has risen to oppose the invaders. The Russian economy is now looking at future double-digit declines in quarter over quarter GDP.  Russians with financial means are considering leaving the country. The world's military leaders are re-thinking everything that they thought of the Russian military complex. This is an incredible moment in history. As Ukraine and Russian negotiations continue to escalate, eventual exit doors will be made available for Russia to take. A door will be taken because the world is done seeing air bombed apartments, schools and hospitals, and bearing witness to the unnecessary and horrific loss of life, while at the same time Russia needs to save itself from an accelerating meltdown.

Pushed by the war in Ukraine, higher commodity prices and falling asset prices will begin to weigh more heavily on economic growth. Certainly, in Europe, but also in the United States and the rest of the world. Rising COVID cases in China combined with the country's regional economic shutdowns will not help the supply chains. But while the current data and news flow paints a bleak picture, last week’s moves in the markets may have hinted at a change in sentiment. European stocks seemed to have stopped going down. Oil prices marked a sharp reversal in their exponential trend upward. Energy stocks paused. And U.S. Treasury bonds/notes fell apart, sending interest rates upward and financial stocks higher. Technology stocks didn't find any love, but that sector is troubled by rising interest rates weighing on valuations and now less certain top line demand. But it felt like the markets were trying to send us a sign last week, so keep an eye out.

It's Fed week and the FOMC is ready to raise rates 25 basis points for the first increase in four years. The goal is to fight inflation while letting wages continue to rip higher. The Fed had a difficult task made even more tricky by the war in Ukraine. Jerome Powell will need a full bowl of Wheaties on Wednesday before he takes the microphone for his press conference. For the rest of the month of March, we will be on the lookout for any final quarter comments from companies about the Q1 earnings. And hopefully many of you will be rinsing off your flip flops for a trip to the beach with the family for spring break. If so, enjoy the sun and sand.

The ceasefire talk on both sides is increasing at an accelerated rate. This is a good sign...

March 13 (Reuters) - Russian and Ukrainian officials gave their most upbeat assessments yet on Sunday of progress in their talks on the war in Ukraine, suggesting there could be positive results within days…

Ukraine has said it is willing to negotiate, but not to surrender or accept any ultimatums.

"We will not concede in principle on any positions. Russia now understands this. Russia is already beginning to talk constructively," Ukrainian negotiator and presidential adviser Mykhailo Podolyak said in a video posted online.

"I think that we will achieve some results literally in a matter of days," he said.

RIA news agency quoted a Russian delegate, Leonid Slutsky, as saying the talks had made substantial progress.

"According to my personal expectations, this progress may grow in the coming days into a joint position of both delegations, into documents for signing," Slutsky said.


The world hopes that this think tank has the best insight into the end of the war...

Russia is heading for an outright defeat in Ukraine. Russian planning was incompetent, based on a flawed assumption that Ukrainians were favorable to Russia and that their military would collapse immediately following an invasion. Russian soldiers were evidently carrying dress uniforms for their victory parade in Kyiv rather than extra ammo and rations. Putin at this point has committed the bulk of his entire military to this operation—there are no vast reserves of forces he can call up to add to the battle. Russian troops are stuck outside various Ukrainian cities where they face huge supply problems and constant Ukrainian attacks.

The collapse of their position could be sudden and catastrophic, rather than happening slowly through a war of attrition. The army in the field will reach a point where it can neither be supplied nor withdrawn, and morale will vaporize. This is at least true in the north; the Russians are doing better in the south, but those positions would be hard to maintain if the north collapses.

American Purpose

If Russia is asking the Chinese for help with military weapons and equipment, then maybe they are just a paper tiger?

One good thing about wars—you get to learn a lot about your enemies just by watching.

On paper, there is no reason why Russia shouldn’t have taken over Ukraine in 3 days. But it hasn’t happened. These troops are underpaid, underfed, with low morale, and using equipment that doesn’t work. If this were a first-class military operation, this would have been over weeks ago. But it’s not, which I find very interesting.

And I think this is good news, because it is going to be very difficult for Russia to continue this campaign into NATO countries, which is our ultimate fear. And if we get involved on behalf of NATO, that is a war that would be over very, very quickly.

I think a lot of people underestimate U.S. military capabilities. We have such a massive technological advantage.

Yes, we are only 10 months ahead of China in terms of hypersonic missiles. And we are behind when it comes to drones. But when it comes to ground wars and tank battles, we have a huge advantage that people don’t really realize...

The Daily Dirtnap

It only took about ten days for every Fortune 1000 company to end their Russian operations...

If Putin goes on a permanent vacation aboard his 700-foot yacht, then it’s likely some of these companies will return. Otherwise, there will be many write-downs to goose eggs this year on the balance sheets.

McDonald’s led a fresh exodus of the west’s biggest consumer brands from Russia on Tuesday, with Coca-Cola, PepsiCo, Starbucks and Unilever among those halting or cutting operations in response to Vladimir Putin’s invasion of Ukraine.

The first McDonald’s to open in Moscow in January 1990 was seen as one of the markers of the end of the Soviet Union, with more than 30,000 people queueing up to buy a burger.

On Tuesday, though, McDonald’s said it would temporarily close all of its 850 restaurants in Russia and suspend other operations in the country. Hours later, Starbucks said the local licensee that operates its 130 cafés in Russia would also “pause” operations immediately.

Coke said it was “suspending its business” in Russia shortly before Pepsi, the beverages and snacks group, announced it would suspend the production and sale of drinks brands including Pepsi while maintaining sales of “essential foods”.

Unilever said it had paused all imports and exports into and out of Russia, and would stop its advertising there but that it planned to continue supplying essential food and hygiene products made in Russia.

Yum Brands, which has more than 1,000 restaurants in Russia, said on Tuesday it was suspending operations of the KFC outlets it owns and finalizing plans to suspend its Pizza Hut operations in partnership with its master franchisee.

Financial Times

With nearly all international commerce ending, the Russian economy is on track for a record GDP decline over the next two years...

@RobinBrooksIIF: We forecast Russia's GDP will fall 30% by end-2022, far worse than 2009. Sanctions are tightening financial conditions hugely (blue), which will choke off domestic demand. Russia can print money to ease this crunch, but that'll just bring a devaluation-hyperinflation spiral...

Tighter financial conditions

Tweet from @davidfrum

Any Russian who is physically able with money is considering leaving the country...

“Partisans. Burning tanks. People crowding on to train platforms. Emigration. Tell me this isn’t a film?” Anna, 47, a museum curator, stretches painfully in the chair where she has been slumped for days, doomscrolling the news. “You know what I miss most? Not the past. Which was two weeks ago. I’m nostalgic for a future I don’t have any more. That motherf------ in the Kremlin has stolen our future.”

Millions of educated, international Russians such as Anna face a stark choice – adapt to a dark, repressive world of economic collapse at home, or try to leave the country for an uncertain future abroad. The plight of millions of Ukrainians fleeing for their lives from bombardment is infinitely more acute. The stakes, for them, are life and death.

But, in some ways, Anna envies her Kyiv friends. “They have hope. The world is on their side. Europe is welcoming them,” she says, flicking through images of seas of protesters around the world waving yellow-and-blue Ukrainian flags. “When the war is over, they’ll go back to a free, European country. But Russians? Everyone hates Russians. Even most Russians hate people like us, who are against the regime.”

Every day brings more news of Russia’s isolation. One by one, the trappings of a modern, European lifestyle that many Muscovites had taken for granted fell away. Already by the first week of the war, the rouble had nearly halved in value, and bank transfers out of the country had been banned."


If Putin deserves credit for anything, it is for unifying all Americans...

Voters' views by party


And most Americans are okay with paying higher fuel and food prices to help Ukraine...

Tweet from @social_brains

Here is how energy prices affect family budgets...

@hboushey46: Energy price volatility affects lower-income families more because they spend a greater fraction of their income on energy. Families in the bottom 20% by income spend the highest share on energy—around 8.1 percent in 2020—while the top 20% spends the least.

Share of household consumption going to energy costs, 1930-present

CPI is still going to have some tough months ahead, but then we should be past the peak year-over-year prices...

Consumer Price Index

Wells Fargo

But while inflationary prices have run up, so has the number of jobs available (and at much higher wages)...

@bencasselman: There were 11.3 million job openings at the end of January. That's down a hair from the peak, but still near a record in the two decades the government has been keeping track.

Job openings per month

A pullback in Treasury yields would have concerned me. I am happy to see them resume their rise...

@lisaabramowicz1: U.S. 10-year Treasury yields are at their highest levels since 2019, at nearly 2.1%.

US 10-year Treasury Yields

FOMC week...

@LizAnnSonders: Bets for 50bps ⁦@federalreserve⁩ #ratehike have evaporated, as have expectations of no hike at next week’s March meeting @CMEGroup @biancoresearch

How Much Will the Fed Hike on March 16, 2022

The market predicts that this will be the first of seven hikes this year...

Number of Fed rate hikes priced in for 2022

The Daily Shot

Financial conditions continue to tighten as the war in Ukraine weighs on the markets...

Stocks, bonds, credit and foreign exchanges all lower creating a negative pull on risk appetites which will lead to slowing pressures on the U.S. economy as consumers possibly spend less and businesses have a more difficult time financing their operations.

The GS US Financial Conditions Index tightened by 35.7bp to 98.29 over the last week, reflecting lower equity prices, a higher 10-year Treasury yield, higher BBB credit spreads, and a stronger dollar:

GS US Financial Conditions Index

Goldman Sachs

On March 8th, at this month's low price on the S&P 500, the market was pricing in a 50% recession probability...

This seems a bit excessive given what we know about the strength of the current U.S. economy. Sure, growth rates should pull in due to higher prices from the war in Ukraine, but demand and wages are still on a very positive track.

Probability of a recession

J.P. Morgan

Could we be near the market bottom?

Below is filtered for years dating back to 1960 when SPX was down (8%) or worse at this point in the year … and then its performance from there to year-end.


BofA Securities

The market shot first and will ask questions later...

@MikeZaccardi: Largest outflow ever from European equities

Largest outflow ever from European equities

If a ceasefire is agreed upon, guess which stocks are coiled to spring?

European PE ratio relative to US


The risk appetite for China has evaporated...

@SofiaHCBBG: Yields on Chinese HY dollar debt just surpassed 25% for the first time.

Bloomberg China high yield dollar bond index

Chinese property development companies remain a thorn...

@C_Barraud: #China | A record 56% of developers’ high-yield offshore notes traded below 50 cents on the dollar, Bloomberg Intelligence analysts wrote this week. *A gauge of #property stocks has tumbled to a five-year low.

China High-Yield Developers Under 50 Cents

Chinese equities feeling extraordinary pain...

Only a year ago Chinese stocks in the U.S. were enjoying an unprecedented boom.

Now they’re mired in a 72% plunge that’s on the cusp of matching losses during the 2008 financial crisis -- and within spitting distance of the Nasdaq Composite Index’s 78% peak-to-trough slump during early 2000s dot-com bust. Alibaba Group Holding Ltd. alone has lost about $522 billion of value, the biggest wipeout of shareholder wealth worldwide.

The dramatic turnaround started last year after Xi Jinping cracked down on tech firms. Losses have accelerated amid concern Xi’s alliance with Russia’s Vladimir Putin will damage China’s global standing. The growing risk of Chinese firms delisting from the U.S. have also weighed on stocks. The rout has upended a raft of optimistic forecasts across Wall Street and raised questions about the viability of a market that has financed some of China’s most important companies.

Not So Golden


China's earnings yield now trades at a 400-basis point premium to US stocks...

@SofiaHCBBG: MSCI China’s risk premium vs the S&P 500 has surged to the highest in almost six years.

MSCI China earnings yield versus S&P 500

Speaking of broken charts...

We highlighted Docusign three months ago as a great business with a high valuation caught in a market where 10x sales target prices were no longer applicable. Well, Docusign reported last week and from the -25% pullback, it appears that investors are continuing to refuse to pay for negative earnings and 6x sales. Maybe next quarter, but for now, stock investors want big earnings today.



Finally, if you are wondering why your spring break flight to the beach is now the lowest price in years...

US airlines are redrawing the flight map of America as they cut routes that the Covid-19 pandemic rendered unviable and add new service to cities that have prospered during the pandemic.

A widespread reshuffling is under way, with less service to traditional business hubs and jets redeployed to holiday destinations and on-the-rise cities, according to domestic flight data from Cirium, an aviation consultancy. Meanwhile, some less populated regions were further isolated as carriers reduced service...

The number of domestic flights scheduled at 11 mainline US airlines was 1.63mn in the first quarter of 2022, down 12 per cent compared with the same period in 2019, a Financial Times analysis of the Cirium data showed.

The country’s largest carriers, American Airlines, United Airlines, and Delta Air Lines, together had 14.8 per cent fewer domestic flights on their rosters and 8.3 per cent fewer seats.

Persistent weakness in travel for business has led the declines. US airlines reported in recent earnings calls that business travel was running at about 60 per cent of pre-pandemic levels for United and Delta and only 40 per cent for large corporations flying on American.

Financial Times

US Airlines have reduced flights to many areas while increasing service to Florida and Texas

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