Private Wealth

Weekly Research Briefing: A Different Climate in Jackson Hole

August 22, 2023

Not only will the temperatures be half from what many economists and Fed members are used to during the month of August, but today's current set of stats is wildly different from that of a year ago. At last year's gathering, the economy was slowing, inflation was running hot, and Jerome Powell said that rates were headed higher for longer, which led to a 20% selloff in the S&P 500 through the October low. This year, the economy is accelerating, inflation is slowing, and the market is near the same 430-440 level as last year's fishing and s'mores fest. With the July minutes revealing a mix of inflation hawks and doves, will the Fed chairman lean Friday's talk in either direction? With the increasing economic slowdown in China and with consumer prices still falling in the U.S., it would be easy for him to tip his cowboy hat toward future Fed Fund rate cuts. That sure would send risk assets flying. But maybe he doesn't want to influence short term rates and the yield curve. We will have to wait and watch for Friday's release and the pre-whiskey question and answer period.

In the meantime, the current economic datapoints do not disappoint. Retail Sales, Industrial Production and forward-looking components of the Empire and Philly Fed all came in jumping last week. The Atlanta Fed's GDP nowcast measure popped to 5.8% which launched Treasury yields into thin air and emboldened the bond bears. It was too much for beach lounging equity investors who rolled their eyes and turned to the next page in their paperback. This week will be another good week of data: Home Sales, PMI Services, Durable Goods, Nvidia earnings and then Jackson Hole. Long duration stocks are feeling the most pain from the month long move in rates. ARKK, TSLA and the XBI are the tickers to watch to see if the market changes its mind about fast growing non-earners.

Enjoy your final run this summer. Still waves and fish to catch or kids to move in. September and cooler temps will be here soon enough.

The July FOMC minutes showed that the Fed is becoming more evenly split toward further rate hikes...

This should indicate that the last of the Fed Fund rate increases are now behind us. Now let’s focus our attention on future rate cuts as inflation continues to dive.

“A number of participants judged that, with the stance of monetary policy in restrictive territory, risks to the achievement of the Committee’s goals had become more two sided, and it was important that the Committee’s decisions balance the risk of an inadvertent overtightening of policy against the cost of an insufficient tightening.”

Federal Open Market Committee

Jerome Powell will have the whiskey bottles popping Friday if he takes Ed Yardeni's advice...

If Powell wants to calm the bond market down, he should acknowledge that inflation has moderated significantly and say that if it continues to do so, the Fed will probably lower interest rates next year. That would be consistent with the FOMC's June Summary of Economic Projections showing the federal funds rate at 5.6% this year, 4.6% in 2024, and 3.4% in 2025.

Yardeni Quick Takes

The bottles must have been popping in Bentonville last week for those good looking Wal-Mart comps...

Walmart US SSS +6.3% (ex fuel) v +4.0%e, Average comp ticket +3.4%


A bit more broadly, U.S. Retail Sales surged across the board in July...

BofA Global

Consumer retail strength is winding up economic forecasts. First J.P. Morgan...

@carlquintanilla: JPMORGAN: “Today’s US retail sales report confirmed that consumers are continuing to translate real income gains and moderating inflation into spending... We think real consumer spending could increase 3-4% ann. rate this quarter, and see upside risk...”


And then Goldman Sachs...

Spending: Real consumer spending growth ticked up in June (+2.4% yoy; +2.9% 3-month avg. annualized rate). More recent data have also been strong, as nominal retail sales increased by 0.7% mom in July due to Amazon Prime day and stronger restaurant sales. Core retail sales (ex-autos, gasoline, and building materials) also increased by 1.0% in nominal terms and 1.2% in real terms. We continue to see consumer spending as a source of strength in the economy and forecast real spending growth of 3.0% in 2023Q3 and 1.4% in 2023Q4 for overall growth of +2.5% (Q4/Q4 basis) in 2023.

Goldman Sachs

On it's conference call, Home Depot said that supplier requests for price increases are "negligible"...

And lumber prices continue their free fall to every builder’s delight.

"Deflation from core commodity categories negatively impacted our average ticket growth by approximately 160 basis points during the second quarter driven by deflation in lumber. During the second quarter, we saw a significant decline in lumber prices relative to a year ago. As an example, on average, framing lumber was approximately $420 per 1,000 board feet compared to approximately $715 in the second quarter of 2022, representing a decrease of over 40%." - The Home Depot Executive Vice President William Bastek

The Transcript

Right now, the U.S. economy looks as if it going to tap the flight deck doing 500 mph...

Atlanta Fed

Wall Street economists continue to inch ahead their growth outlooks...


US manufacturing output nicely topped expectations...

The Daily Shot

And while survey data has been less reliable, some of the forward-looking trends are showing more optimism. First the state of New York...

The Daily Shot

And then Philadelphia...

The Daily Shot

Of course, the lifting U.S. economy is akin to screaming shark at a beach full of Treasury bond investors...

No doubt the wrong sided traders want out of their longs and the shorts are increasing their positions through this big ETF.


Interesting to see that even in the short-term Treasuries the traders are still massively short...

@LizAnnSonders: Large speculators/hedge funds haven't pulled back on their net short positions in 2y Treasury bonds ... still hovering near multidecade low

On the other side of the table, investors are increasing their Treasury positions as rates increase...


This BofA Global survey shows the same. More bonds and less stocks...

BofA Global

You don't see too many articles about how higher rates help consumers and businesses, but here is one...

For consumers and businesses, higher short-term interest rates are giving them a chance to do something they haven’t since the days before the 2008 financial crisis: park money in safe places and get paid well for it.

“I can earn 5% on cash doing nothing, versus risking losing a bunch in the market,” said Yaacov Teplow-Phipps, a 42-year-old who works in real estate in Briarcliff Manor, N.Y.

The high rates on offer from many financial institutions, together with the recent decline of interest rates and the home-refinancing wave of 2021, mean that U.S. consumers are better off than they have been in some time. That fact helps to explain why the economy continues to perform months after many economists and investors confidently predicted a 2023 recession, which for now seems to be on hold.

Similar to many Americans, Teplow-Phipps said he locked in a low rate on his mortgage years ago. He’s still spending money, dishing out cash for things such as camp for his children and fixing up the windows on his home.

“We’re not cutting back,” Teplow-Phipps said.


Credit looks pretty solid and is benefitting from the improvement in the economy...

The Daily Shot

In March, the financing deal for the largest tech deal ever looked dead. Now it has been secured...

Broadcom Inc. has secured up to $28.4 billion in new debt commitments to fund its purchase of VMware Inc. and replace a shorter-term loan it had snagged as it awaits regulatory approval for the deal.

The commitments are split between two $10.7 billion term loans and a $7 billion term loan, according to a Wednesday filing. The loans which can be increased by as much as $2 billion will replace a $32 billion bridge loan that Broadcom entered into last year to fund the acquisition. Bank of America Corp. is acting as the administrative agent for the agreement.

The new financing for what could be one of the largest technology deals in history gives Broadcom more time to decide when to turn to the high-grade debt market for its funding needs. Its proposed $61 billion takeover of VMware is undergoing a lengthy regulatory approval process. While the UK’s antitrust watchdog gave the deal interim clearance in July, Broadcom is still waiting for the US Federal Trade Commission, which is yet to decide whether to litigate on it.


Also, something you don't see in a broken credit market: Bankruptcy garage sales that payoff all of the lenders...

Old Dominion Freight Line stepped up competition for bankrupt trucker Yellow’s sprawling North American real-estate holdings, outbidding a rival operator with a $1.5 billion offer for the properties.

The bid surpasses a $1.3 billion proposal by Estes Express Lines and signals a potentially spirited bankruptcy court-supervised auction for the network of 169 truck terminals that would provide Yellow with more than enough money to roughly cover the loans the company accumulated before its chapter 11 filing this month...

A lawyer for Yellow said earlier this month in bankruptcy court that the company had received formal expressions of interest in Yellow’s assets from almost 100 parties. Executives at several rival trucking companies have said they would be interested in buying some of Yellow’s locations...

The carrier’s bid would more than cover the $1.2 billion Yellow owes its biggest lenders, including the U.S. government, which is seeking repayment of a $700 million loan.


As we have discussed, regulated banks exiting lines of business continues to provide opportunity for private credit investors...

KKR portfolio acquisition highlights opportunities for alt asset managers. Last week, KKR announced the acquisition of $373 million of prime auto loans from Synovus. This is not a large transaction for either party—the auto portfolio represents about 0.89% of KKR’s total asset-based finance AUM, and 0.84% of Synovus’ total loans (though 31% of Synovus’ non-mortgage, non-credit card consumer loans). While stressed situations such as at PacWest may produce private equity opportunities, however, this transaction is more reflective of the majority of opportunities alternative asset managers are likely to find in the banking system. Whether driven by a desire to deleverage the balance sheet, manage interest rate risk, or reshape credit exposure (while this was a prime portfolio, COVID and its sequelae have left the auto finance complex in a very strange place, and there is good reason to believe that loans will not perform in the next downturn in the way historical models might predict), banks are likely to continue to offer opportunities to private credit funds.


And again...

Fortress Investment Group is making one of the biggest bets on New York City offices in recent memory, buying up approximately $1 billion of loans from Capital One.

The private lender’s purchase of the debt portfolio unfolded this week, the Commercial Observer reported. The makeup of the loan portfolio wasn’t reported, but a large portion of it is said to revolve around office loans in the Big Apple. It’s also unclear if Fortress bought the debt at a discounted price, but it often buys loans “at near par,” a source told the publication.

The Real Deal

As capital continues to accelerate through the financial world, big M&A deals are again returning...

After a muted start to dealmaking in Q1 (-45% YoY), M&A activity steadily improved in Q2 as the macro environment stabilized and the financing markets opened, fueling increased momentum across industries and a kick-start to sponsor activity.

Most notable was the rise of large-scale M&A, with 10 announced deals $10bn+ in Q2 , as well as a meaningful sector shift from growth to old economy following a prolonged, post-Covid growth cycle. Across the Americas, the natural resources sector in particular picked up steam (+50% YoY), accounting for the largest contribution to overall volumes at 30%. Healthcare, technology, media and telecom (TMT) and industrials contributed a combined 48%.

Goldman Sachs

Speaking of big deals, Ball Corp finally becomes a packaging pure play by selling its satellite unit to an aerospace expert...

Aluminum-can maker Ball agreed to sell its space operations to an aerospace and defense giant, ending the surprising, long-running investor question, “Ball makes satellites?”

Ball’s aerospace division accounted for about 14% of sales, and 15% of operating profit in the second quarter.

U.K.-based BAE Systems is buying the unit for $5.6 billion. Net of a tax benefit, the cost to BAE is about $4.8 billion.


A top pipeline company bulks up...

Billionaire Kelcy Warren’s Energy Transfer LP will buy Crestwood Equity Partners LP in a $7.1 billion all-equity deal that will create a major expansion of its pipeline networks across the US.

The deal will extend Energy Transfer’s position in the Williston basin of Montana and North Dakota and the Permian Basin of West Texas and New Mexico, while providing entry into Wyoming’s Powder River Basin, according to a statement Wednesday. Crestwood’s system includes about 2 billion cubic feet a day of gas gathering capacity and 340,000 barrels a day of crude oil gathering capacity...

The US energy sector has seen dealmaking heat up after booming profits in recent years left producers flush with cash. Pipeline operators have been part of the activity as the transition to renewable energy makes it unlikely that major new infrastructure will be built even as demand for offtake remains robust as shale producers seek to preserve top-quality drilling locations. In May, Oneok Inc. agreed to buy Magellan Midstream Partners LP in an $18.8 billion cash-and-stock transaction that’s awaiting shareholder approval.


DuPont streamlines in selling its resin unit to a private equity expert in chemical companies...

DuPont de Nemours Inc. has agreed to sell a controlling stake in Delrin to private equity firm The Jordan Company in a deal valuing the resins unit at $1.8 billion.

Wilmington, Delaware-based DuPont will sell 80.1% of Delrin, with the transaction expected to close around the end of the year, according to a statement on Monday that confirmed an earlier Bloomberg News report. DuPont will hold the remaining interest.

Jordan prevailed over firms Lone Star Funds and Platinum Equity, which had also been competing for the asset, Bloomberg News previously reported...

The divestiture underscores DuPont’s refocus on electronics, automotive and water and industrial technologies. Under Breen, the company merged with Dow Chemical Co. in 2017 and then reorganized into three independent businesses with the bulk of its mobility and materials arm sold to Celanese Corp in 2022.


And in energy production, two Permian basin plays team up...

US shale operator Permian Resources announced on Monday it will buy Earthstone Energy in an all-share transaction valued at $4.5bn including debt, as dealmaking picks up among upstream producers in search of better inventory.

The acquisition of the oil and gas producer will strengthen Permian’s operations in the Texas shale patch and in New Mexico, increasing its assets by more than 400,000 acres and production by 70 per cent to 300,000 barrels of oil equivalent per day.

The deal will consist of 1.446 shares of Permian’s common stock for each of Earthstone’s common stock.

The announcement comes as the flow of mergers and acquisitions returns to the upstream oil and gas sector, with producers sitting on record levels of cash looking to shore up more drilling sites.

Financial Times

Capital is even finding ways back into building retail stores again...

Retailers are on track to open 1,000 net new stores in the U.S. this year as retail availability hits record lows, in fresh signs of the sector’s resilience despite turmoil in commercial real estate.

Landlords say demand for retail space has remained robust this year, defying inflation pressures, high interest rates and liquidations including Bed Bath & Beyond and Christmas Tree Shops.

Retail’s strength is largely the result of a sharp drop in retail construction since the 2008-09 financial crisis, which allowed the oversupplied sector to digest its existing real estate. Retailers, meanwhile, started using online sales data and analytics technology to pinpoint locations for successful stores.

Also, predictions that internet sales would wipe out physical retail failed to materialize. Digitally native companies are opening bricks-and-mortar locations after reaching the limits of online customer acquisition. Shoppers flocked back to stores and restaurants as pandemic restrictions eased.

As of mid-August, retailers had announced plans to open nearly 4,500 new locations while shutting about 3,500, according to advisory and research firm Coresight Research. Nationwide, the rate of available retail space fell to 4.8% in the second quarter, the lowest level in the 18 years the data has been tracked by real-estate-services firm CBRE...

Shopping-center owners, particularly in the suburbs, have benefited from the rise of remote work since the onset of Covid-19 in 2020, as consumers visit local grocery stores and other shops more often during the workweek. In response, some fast-casual restaurants and other retailers have shifted from urban business districts to the suburbs.

“Suburbanization, work from home, all these things happened at the same time that there was no new supply,” said John Kite, CEO of shopping-center real-estate investment trust Kite Realty Group Trust. “That gives us better pricing power.”

While retail landlords in some areas, including large cities, have been forced to lower rents since the start of the pandemic, the overall average asking rent for retail space in the U.S. has increased 6.3% since the second quarter of 2020. Asking rents now average more than $23 a square foot, according to CBRE, the highest level in at least a decade.


This popular chart, that we included in last week's publication, is the first chart in our Chart of the Week Series. Here you can see new private market content every single week - check it out...

#ChartoftheWeek: Expecting more muted public market return performance? If so, now may be the time to invest in private markets. History shows that private equity's relative outperformance of public markets tends to be at its greatest during periods of more mediocre or negative public market returns. Learn more:

Source: Hamilton Lane

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Private equity (or PE) is a broad term used to describe any fund that offers equity capital to private companies.

The S&P 500 Index tracks 500 largest companies based on market capitalization of companies listed on NYSE or NASDAQ.

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