Weekly Research Briefing: The Halfway Point

June 25, 2024

Fifty percent of 2024 will be in the books by this weekend. As of now, the S&P 500 is up about 15% which is better than I (and many others) would have guessed six months ago. The economy has been strong in this first half which has led to a reluctance by the Fed to cut the Fed Funds rate. Inflation has been sticker with core goods falling as expected, but housing has been sticky and insurance prices have been extreme like the weather that is influencing it.

This is a big week for the Fed as their favorite inflationary data series (the PCE) drops to earth on Friday. Give us a core month over month reading less than +0.15% and the markets will be happy. Drop a number closer to zero and investors could turn into the orange emotion Anxiety character from 'Inside Out 2' as they feel total FOMO (fear of missing out). Of course, one number should not make a difference, but... insert orange emotion here.

It seems like half of the market talk is about the narrowness of the market. It is true that big technology stocks are extended, but that is where the earnings growth has been strongest and where investors have been crowding into. At the same valuation of $3 trillion, would you rather own Nvidia which earned over $42.6 billion in the last 12 months, or all 2,000 companies that make up the Russell 2000 index which earned only about $30 billion? Stop saying that small cap companies are cheap. Some might be cheap, but when you put 2,000 of them together in a basket that trades at nearly 100x trailing earnings, that is expensive. Small companies used to go public because they needed access to capital, but that is no longer the case. In times of stress, it has been the private capital markets that have been the best providers of capital. And so, with fewer Starbucks and Deckers Outdoors entering the small company public domain, the quality of the indexes continues to deteriorate as great businesses grow up or go private and more and more money losers remain. There is a big shift in the world of equity investing right now and you have to think about how it will affect your portfolio choices in the future.

With another holiday week hitting next weekend, my keyboard will remain silent so that everyone can enjoy the 4th of July. Have a great week and holiday.

Chris Williamson summed up the U.S. economy well last week along with their release of the PMI data...

“The early PMI data signal the fastest economic expansion for over two years in June, hinting at an encouragingly robust end to the second quarter while at the same time inflation pressures have cooled. 

“The PMI is running at a level broadly consistent with the economy growing at an annualized rate of just under 2.5%. The upturn is broad-based, as rising demand continues to filter through the economy. Although led by the service sector, reflecting strong domestic spending, the expansion is being supported by an ongoing recovery in manufacturing, which so far this year is enjoying its best growth spell for two years. 

“The survey also brings welcome news in terms of job gains, with a renewed appetite to hire being driven by improved business optimism about the outlook.

“Selling price inflation has meanwhile cooled again after ticking higher in May, down to one of the lowest levels seen over the past four years. Historical comparisons indicate that the latest decline brings the survey’s price gauge into line with the Fed’s 2% inflation target.”

S&P Global Market Intelligence

The Daily Shot

And hold my whiskey, even Texas manufacturers are becoming more optimistic...

@RenMacLLC: The manufacturing outlook in the Dallas Fed District appears to be improving. While current conditions remains sluggish, in negative territory since May 2022, the six-month general business activity index rose to +12.9, the highest since February 2022.

The Atlanta Fed remains at a 3% target for the Q2 GDP estimate...

@AtlantaFed: On June 20, the #GDPNow model nowcast of real GDP growth in Q2 2024 is 3.0%

And if you have been to an airport this month, you can tell that the airplanes are running full out...

@dailychartbook: "The growth in US airport passenger traffic this year suggests a continued recovery in business travel, which in turn should boost demand for hotels and the hospitality sector in general." @MacrobondF

The consumer remains flush which has led to solid spending growth...

@carlquintanilla: JPM DESK, on retail sales:

".. Americans spent more than $700bn last month; in 2019 that number was closer to $500bn.

"The [compound annual growth rate] for retail sales in the 4 years post-COVID is roughly double what it was in the 4 years into COVID. .. This is occurring in a backdrop of household net worth up more than $41 trillion, up almost 38% since 2020.

"Consumer cash (checking, savings, and [money market funds]) are up more than $5T, +33%, including checking accounts that have more than tripled from $1.5T to $5T."

And many of those dollars have been used this month to visit Hollywood's summer blockbuster...

Caterpillar is selling lots of yellow to the U.S. construction industry...

"The U.S. has remained strong, and particularly on the construction side. and that is a bright point for us, particularly on the machine side." - Caterpillar CFO Andrew Bonfield

The Transcript

Forget about office buildings. The construction industry is busy enough with data centers, chip fabs and single family homes...

The twin tech-driven investment booms of the moment — data centers for AI and chip fabrication plants — are helping contribute to the most consistently strong job market for construction workers since the home-building frenzy of the early 2000s.

Numbers from May show that the industry added 21,000 jobs, with the majority of that growth (+13,000) coming from specialty contractors working in the non-residential sector. Since 2021, the industry has added jobs in all but two months. In the last year, construction jobs have grown by 250,000.

The steady pace of growth is a far cry from the painful stagnation seen in the sector after the housing bust, which was followed by the financial crisis of 2008 and one of the deepest recessions in recent memory.


Speaking on new home costs, lumber is 15-20% of the total cost of a new home so this will help in the future... 

The Daily Shot

If you need four reasons to be optimistic on falling inflation, the Fed's Kugler has your list...

Federal Reserve governor Adriana Kugler said she continued to anticipate it would be appropriate for the central bank to lower interest rates this year.

Kugler offered four reasons for optimism on inflation in a speech Tuesday. Among them:

  • Consumers appear to have become choosier shoppers, limiting the ability of businesses to pass along higher prices.
  • Businesses are facing slower growth in costs, including less pressure from higher wages as labor-market conditions return to normal.
  • Productivity growth, or output per hour worked, appears to be picking up, potentially reflecting the gains of higher business-startup rates.
  • Higher interest rates are slowing economic activity and hiring.


Don't also forget to consider the strong US$ effect on falling inflation...

@mbrushstocks: This is one of the most powerful disinflationary forces that no one is talking about. Decreases price pressure from demand for our products both at home and abroad.

Who sees a potential air pocket in new car prices?


New all-time highs last week for the big index which is surprising given the number of bears in my market windshield...


Is history repeating itself to the last time that we had a soft landing?

@SethCL: Goldman Sachs: "We think this year has 1995 flavor to it. 1995 was last soft landing. Fed cut from 600bps to 525bps. $SPX made 77 ATHs...and that was just the appetizer w/epic run through 1999. YTD SPX already has 29 ATH closes and best start to an election year ever"

Wall Street continues to raise their price targets for the S&P 500...

The lack of negative revisions during the first half of 2024's reporting seasons as well as the increased AI earnings contribution to the big technology companies are the main reasons.

Yahoo Finance

Not too hot and not too cold...

@mark_ungewitter: “When everybody is bearish, they’re probably going to be wrong; when everybody is bullish, they may be right for a while.” – Burton Crane, as conveyed by @WalterDeemer

Isolating the indexes for the 2022-2024 window shows a recovery in the S&P 500...

This has been driven by the mega-caps as seen by the equal weight measure gaining only 1/3 of the total S&P 500 index return. The aggregate bond index is down as one would expect with the increase in rates. The outlier is the small-cap stock index which is still negative.


Why is the small cap index such a dog right now?

I updated my all-in P/E numbers for the major public US equity indexes last week. Below are the updated statistics. What it shows is that the Russell 2000 index (US small caps) is now trading at 98x trailing earnings when you include all money losing companies. (Recall that most indexes exclude the money losers and only look at the remaining profitable companies to calculate their fact sheet P/E ratios.)

The 98x trailing P/E figure has expanded from 68x in December which I had to dig into further. I expected that there were many more money losers, but that was not the case. In fact, the net losses from the money losers stayed pretty constant at about ($110) billion. It was actually that the profitable small caps are making less in the last twelve months: down $10b to total only $142b. And so $3.0T divided by $31b gets you 98x. (I was even being generous in my calculations by booting Lumen Technologies’ massive writedowns out of the small-cap figures.) Now guess what will happen when Super Micro Computer and some of the other current high earners in the R2000 graduate to the R1000 and take their big earning streams with them?

So bottom line is that the Russell 2000 continues to evolve into a less desirable gathering of money losing companies. Gone are the days when great growth company like Starbucks or Deckers Outdoor needed money, went public, and became great components of the R2000. Instead, great companies find alternative financing, wait until they are ready to go public and then just skip right to midcap or large cap status. Or some companies, like Stripe, may have made the decision to never go public.

NVIDIA looks undervalued as compared to the Russell 2000 given that it earned 1.4x what the 2,000 small cap companies made in the last 12 months..."

@SamRo: "...all 2,000 stocks in the Russell 2,000 combine for a market cap of just $2.99 trillion."


Private market activities continue to ramp with several new exits for their investors...

KPS Capital Partners has agreed to sell its Eviosys packaging business to manufacturer Sonoco Products nearly three years after it acquired the provider of aluminium containers for aerosols and foodstuffs like cat food, tuna and sardines. The deal, announced on Monday, will generate a windfall of nearly $2bn for KPS.

In 2021, KPS carved Eviosys out of Crown Holdings, a larger rival selling cans to food and beverage giants, for $2.7bn...

KPS was able to earn a swift and large windfall for Eviosys by increasing its profitability by about 50 per cent, according to a source briefed on the matter, and by identifying a larger corporate buyer that would find value in its specialised packaging operations.

Sonoco, a century-old South Carolina company which first made paper textile cones for the garments industry but now sells container for brands like Pringles chips and Bush’s Best baked beans, will pay $3.9bn for Eviosys.

Howard Coker, chief executive of Sonoco, has in recent years divested business lines focussed on recycling and industrial foam to simplify its operations.

The acquisition will generate a $1.8bn gain for KPS and its investors, or about 3.2-times their initial equity investment because they used debt to finance the deal, according to the source. KPS declined to comment on its returns.

Financial Times

Another sizable monetization for private equity...

Honeywell International has struck a roughly $2 billion deal to buy aerospace and defense technology company CAES Systems from private-equity firm Advent International.

The all-cash deal was announced Thursday, confirming an earlier report by The Wall Street Journal.

CAES, formerly known as Cobham Advanced Electronic Solutions, designs, develops and tests electronics ranging from antenna systems to communication networks for aerospace and defense companies.

The transaction would expand Honeywell’s defense technology offerings. It is a small bite for the industrial giant, which has a market capitalization of nearly $140 billion.


Even one in the energy private equity space...

EnCap Investments scored the latest private-equity exit deal in the oil patch, inking a nearly $2 billion asset sale to Matador Resources as publicly traded energy companies strive to expand before they become acquisition targets themselves.

Dallas-based Matador said Wednesday that it agreed to buy a unit of Ameredev II Parent, an EnCap-backed oil and gas producer that operates in the Permian Basin in West Texas and southeastern New Mexico. EnCap and its managers formed the company in 2017 with a $400 million commitment.

As part of the deal, Matador is acquiring roughly 33,500 net acres in the Permian’s Delaware Basin with a daily output of as much as 26,000 barrels and 431 well sites. The buyer also gets a 19% stake that Ameredev II owns in Piñon Midstream, an operator of natural gas processing plants and pipelines that is also backed by private-equity firm Black Bay Energy Capital.


And another S&P 500 decides to shed a non-core business to a smaller player in the transportation industry...

United Parcel Service is selling its freight-brokerage business to rival middleman RXO for $1.025 billion.

The sale of Coyote Logistics announced Sunday falls far short of the $1.8 billion UPS paid for the business in 2015, but it advances UPS CEO Carol Tomé’s strategy of shedding the delivery giant’s less-profitable business units to streamline the company’s structure.

Tomé said the sale “allows an even greater focus on our core business.”

Coyote Logistics generated about $3.2 billion in revenue in 2023 with about $470 million in gross margin and roughly $86 million of adjusted earnings before interest, taxes, depreciation and amortization.

RXO said the acquisition would make it the third-largest broker in the country, after C.H. Robinson Worldwide and Total Quality Logistics.


I was unaware that digital comics were such a big business. And now the largest PE deal in Japan for 2024...

Blackstone on Tuesday said it would launch a tender offer for Infocom, reportedly valuing the online comic company at about $1.8bn. Other comic fans will be paying attention: a deal could set the tone for rivals looking to list.

Infocom operates MechaComic, which is Japan’s largest digital distribution platform for comics. Net profit at the company, where digital comics account for nearly three-quarters of its sales, nearly doubled in fiscal 2023.

Digital comics, historically popular in Asia, have been gaining traction in other markets such as the US in recent years. Webtoons, a type of digital comic that originated in South Korea, in particular have been winning over a global readership. These are short comics that are read vertically by scrolling down on a smartphone.

Webtoons are an especially lucrative business. That is because they have a diversified business model: users pay per episode they read using micropayments, while advertising adds a boost. Later, sales of print copies of the webtoons, merchandising and licensing rights for film adaptations continue bringing in revenues years after the webtoon is uploaded.

Financial Times

Several other big deals of corporate asset shuffling and activist investor pressures hitting the markets...

  • Boston Scientific (BSX - $112b mkt cap) has struck a deal to buy medical-device maker Silk Road Medical (SILK - $1b mkt cap - Russell 2000 component) for about $1.26 billion, adding a technology for stroke prevention to its vascular portfolio. Boston Scientific on Tuesday said it would pay $27.50 a share in cash for Silk Road, a 27% premium to Monday’s closing price of $21.67 for the Sunnyvale, Calif., company. Including Silk Road’s roughly $100 million cash position, the deal carries an enterprise value of about $1.16 billion, Boston Scientific said. The Marlborough, Mass., medical-technology company said the acquisition adds a platform of products to prevent stroke in patients with carotid artery disease through a minimally invasive procedure called transcarotid artery revascularization. WSJ
  • Kirin Holdings plans to acquire Japanese cosmetics and dietary-supplement maker Fancl for more than US$1.4 billion as part of efforts to expand its health business. The Japanese beer maker said Friday that it would spend 220.72 billon yen (US$1.41 billion) to purchase shares in Fancl that it didn’t already own through a tender offering. Kirin holds a stake of about 33% in the cosmetics and supplement maker. The planned acquisition follows Kirin’s move in August to buy Australian nutritional supplement maker Blackmores for 1.88 billion Australian dollars (US$1.25 billion) in a bid to expand its supplement business. WSJ
  • Toronto-based Fengate Asset Management has acquired control of a data-center services provider in one of the biggest privately-led Canadian deals of the year. Fengate, an alternative-asset manager, will hold over two-thirds of the equity in eStruxture Data Centers through a transaction totaling 1.8 billion Canadian dollars, or the equivalent of $1.3 billion, marking a big bet on increasing demand for storage capacity with the growing use of artificial intelligence. Two-thirds, or C$1.2 billion, of the capital is in equity, and the remainder accounts for debt, Fengate said. WSJ
  • Private credit lender Castlelake will buy up to $1.2 billion in consumer installment loans from fintech firm Upstart, opens new tab to expand its foothold in the retail lending space, it said on Thursday. The deal underscores how investment firms are increasingly pushing into businesses that have traditionally been dominated by banks as high interest rates and the fear of defaults force lenders to hesitate. Reuters
  • Private equity firm Bain Capital has made an unsolicited takeover offer for Australian automotive parts retailer Bapcor Ltd. that values the business at more than A$1.83 billion ($1.21 billion). Bapcor, which is the parent company of car parts outlet Autobarn, as well as servicing chain Midas among other brands, announced Tuesday it had received an unsolicited and conditional A$5.40 per share cash offer from the US buyout firm last Friday. The company’s board will weight the offer, Bapcor said. Bloomberg
  • Carlyle (CG) will form a new Mediterranean-focused oil and gas company led by former BP (BP.L) CEO Tony Hayward after the private equity fund agreed to acquire Energean's (ENOG.L) assets in Egypt, Italy and Croatia for up to $945 million, the companies said on Thursday. The deal will allow Carlyle to tap into the eastern Mediterranean gas market that has grown rapidly in recent years as gas demand in Egypt soars and Europe seeks alternatives to Russian gas. Carlyle International Energy Partners (CIEP), the fund's non-U.S. energy investment arm, said the new company will initially produce up to 47,000 barrels of oil per day in the three countries. Reuters
  • Activist investor Starboard Value has bought a roughly $500 million stake in Autodesk (ADSK - $52b mkt cap) and is pushing for changes at the design-software maker, the Wall Street Journal reported on Sunday, citing people familiar with the matter. Starboard believes the company should improve its margins and make changes to its board, the report said without mentioning details, adding that the activist investor recently met with Autodesk executives to discuss concerns related to operations, corporate governance and the handling of a recent accounting probe that tanked the stock. Reuters

Various news sources

Not a good sign for a public market exchange when one of the activist demands is to 'go and list somewhere else'...

Nelson Peltz’s Trian Fund Management has amassed a significant stake in UK-based pest-control company Rentokil.

It’s the latest move by the activist investor, who most recently dominated business headlines over his endeavours at Disney and sits on Unilever’s board.

Peltz’s Trian confirmed Bloomberg’s scoop late yesterday, saying it reached out to Rentokil to “discuss ideas and initiatives to improve shareholder value.” (Just brainstorming, I guess.)

“Go and list somewhere else” has been among activists’ most common messages for London-listed companies — and it doesn’t take much imagination to think the topic might be brought up at Rentokil as well, especially given that more than half of their revenue comes from North America.


Not just a Brexit thing...

Too many rules and regulations and little support from the U.K. domestic pensions.

Financial Times

Henry McVey had a good chart in his mid-year outlook highlighting the outperformance of private equity during times of low liquidity (referring to low IPO issuance)...


If the Fed lowers interest rates in September and December like the markets expect, there will be plenty of fuel available for M&A and refinancing activities to surge higher...


And if the Fed cuts rate while the S&P 500 is near its highs, then the market could have a big tailwind...

@RyanDetrick: Fed has cut rates with $SPX within 2% of an all-time high 20 times since 1980.  Each time this has occurred, SPX was higher a year later with an avg. return nearly 14%. Not shown = 2019 rate cuts, which qualify as well.

A good thread on the impact of low commercial real estate construction...

"So the other good thing that's happening in real estate is people have stopped building. So almost every asset class is down somewhere between 40% new construction and 70%. So real estate is a simple business. It's just about supply and demand. And if you stop building and the economy keeps growing out a few years, which will get real shortages and you'll have rents really pop and you'll make a tremendous amount of money. So I've only been in this movie numerous times. And so what also continues is the people who write articles about this because they keep seeing these office problems, keep saying that real estate is an awful thing. And that continues on because you'll have problems with the debt in real estate for years to come, so you'll be manufacturing bad headlines. And in the meanwhile, to the extent that people have a generalized feeling that real estate isn't so wonderful, it provides amazing opportunities for us because we're the best capitalized real estate buyer in the world." - Blackstone CEO Stephen Schwarzman

The Transcript

Analysts should hide this new white paper from their CIO...

Synopsis: University of Chicago published a paper of a study comparing the accuracy of financial estimates & stock picking performance of Equity Analysts vs LLMs. The study concluded LLMs are better than Human Analysts even with no industry background/context. However the paper does show that Human Analysts often have qualitative and broader context that can help inform estimates in a better way, & that GPT needs to have the right prompts to initiate humans in order to get usable results.


  • “Even without any narrative or industry-specific information, the LLM outperforms financial analysts in its ability to predict earnings changes. The LLM exhibits a relative advantage over human analysts in situations when the analysts tend to struggle.”
  • “We find that the analysts…3 & 6 month ahead forecasts achieve a meaningfully higher accuracy of 56% and 57% respectively, which is intuitive given that they incorporate more timely information.
  • “A "simple" non-CoT prompt GPT-based forecasts achieve a performance of 52%, which is lower compared to the analyst benchmarks, which is in line with our prior. However, when we use the chain of thought prompt to emulate human reasoning, we find that GPT achieves an accuracy of 60%, which is remarkably higher than that achieved by the analysts.”

University of Chicago

Also in new AI usage news...

"We have 1,000 wildfire cameras in the state of California, and of the 1,000, 600 of them exist in our footprint. AI was enabled on all 1,000 cameras last year and the results are tremendous. AI is picking up wildfire hits faster than the human. AI can see them. Imagine sitting there and trying to monitor 600 cameras versus AI doing it. It's so effective that CAL FIRE, the state fire department for California is actually dispatching their crews to fires off of AI hits. They're not relying on a phone call. Hey, there's a fire at this intersection or over here. They are actually dispatching right off of AI hits, and I will tell you, they have several examples where a call was never received and they're knocking these fires down under an acre, 2 acres and if left unsuppressed and waiting for a phone call, this could have been more catastrophic. So that's a very effective post-ignition layer of protection that we intend to move forward and install more cameras" - PG&E SVP of Wildfire & Emergency Operations Mark Quinlan

“Oracle is very involved with taking biopsy slides and using microscopes to read biopsy slides, recording those images and then using AI to diagnose cancer from these biopsies. It's one of the projects we're working on on the medical side of our business. And these large language models, strangely enough, are also looking at biopsies. They're not just reading things language. They're also looking at images and interpreting images. So that is actually a bigger and more complicated problem than understanding language." - Oracle CTO Lawrence Ellison

The Transcript

If you are a listener to the 'Acquired' podcast, then you already know the Hermes story...

What the article doesn't address is that the Birkin bag, as well as the Kelly bag, are among the finest crafted leather goods in the world. They are handmade by individual craftsmen/women who build the bag from start to finish. No assembly line or batch process involved. You get what you pay for which has caused others to want it even more because of the restricted supply.

You could double your money in five minutes by buying a Birkin handbag at your local Hermès boutique and then flipping it. But getting your hands on the world’s most sought after purse is a lot more complicated than it sounds.

A basic black leather Birkin 25 costs $11,400 before tax at the Hermès store. Buyers can walk out and immediately give it to a handbag reseller like Privé Porter in exchange for $23,000 in cash. Privé Porter will then sell the Birkin on Instagram or at its Las Vegas pop-up store, possibly on the same day—box fresh, with receipt—for up to $32,000. All this for a bag that analysts estimate costs Hermès around $1,000 to make.

The unusual economics of the Birkin have upended the normal balance of power between shopper and store worker. At the Hermès boutique, it is the buyer who kowtows. Some of the wealthiest women in the world have brought homemade cookies to the store to cozy up to their sales assistant. They have offered tickets for Beyoncé concerts, trips to the Cannes Film Festival in a private jet and even envelopes stuffed with cash—all to get their hands on a Birkin.


This could be the only bear that you see this summer...

And I could not more highly recommend the show. Especially if you have ever worked in the fine dining industry.


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The author has current equity ownership in: NVIDIA Corp. and Caterpillar Inc.

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