Private Wealth

Weekly Research Briefing: A New Risk

October 10, 2023 | 11 min read

The horrific violence in Israel this weekend has added another element of risk to the financial markets for investors to consider. If Iran is involved in the attacks, then the Middle East could get ripped open causing energy prices to surge as oil shipping lanes are blocked or closed. Increasing military activity in the region should push the U.S. dollar higher. And an uncertain risk environment should push investors into government bonds putting an end to the parabolic increase in risk-free rates.

For the Fed and other global central banks, a new geopolitical global risk will likely soften any pressure to raise their key interest rates. The parabolic move higher in long Treasury yields was already weighing heavily on future economic growth bets. But now with a second new global conflict in the world, future global rate hikes are finished for now.

Friday's jobs data were more solid than expected with non-farm payrolls growing while wages paid slowed. Pretty much a perfect hand for any investor playing for a soft-landing scenario. This week we get three big inflation cards turned up with the PPI on Wednesday, the CPI on Thursday, and the University of Michigan inflation expectations on Friday. Maybe we will even see some progress between the UAW and the U.S. auto companies.

The M&A markets have slowed a bit as interest rates broke higher the last three weeks. But some activity occurred in the last week with Exxon approaching Pioneer Drilling which caused Conoco and Chevron to re-examine the global energy chess board for their next move. Bristol Myers will pay $4.8B cash for Mirati Therapeutics. Prosperity Life is buying National Western Life for $1.8B in cash. Birkenstock will go public this week. And Nelson Peltz will get very active with Disney management after taking a $2.5B equity stake.

As for the markets, earnings begin this week with the big banks leading the early reports. Investors are in a wait and see mode for earnings given the higher valuations of stocks versus bonds right now. And with the new war in the Middle East combined with no leadership in the House of Representatives, there is little reason to hit the risk-on buy button for public equities right now. Best to wait and see what cards are turned up next. Many prayers and peace to all.

Did the U.S. job picture decide to stop slowing down?

The non-farm payroll definitely did on Friday, but the household survey did show some weakness. So, let's call it stronger but mixed for now and move onto what reporting companies say about their employee counts and hiring intentions.


Some further thoughts from the experts on Friday's jobs data...

@CapEconUS: “.. Overall, the report suggests the labour market is enjoying a soft landing.. with wage growth and price inflation rapidly fading and the rise in long yields triggering a significant tightening in financial conditions, we still think the Fed is done hiking.”

@RenMacLLC: The things growth pessimists have been focusing on over the last several months don't exactly back them up today. Revisions? Those were up. "Cyclical" payroll growth? That has picked up too. No jobs report is perfect, but there is no sign of a sharp deceleration here.

@bencasselman: Markets obviously don't like today's report, and I understand why. But if your main concern was about the economy falling into a recession, seems like this report should be comforting. And if your main concern was a reacceleration in inflation, the earnings data was good news.

@LizAnnSonders: In month/month terms, average hourly earnings growth was fairly tame at +0.2% vs. +0.3% est. & +0.2% in prior month

Wage growth slowed across the board versus previous months...

BofA Global

On Monday, a Fed hawk said the recent surge in long-term Treasury yields may reduce need for further rate hikes...

Federal Reserve Bank of Dallas President Lorie Logan said the recent surge in long-term Treasury yields may mean less need for the US central bank to raise its benchmark interest rate again.

“Higher term premiums result in higher term interest rates for the same setting of the fed funds rate, all else equal,” Logan said Monday in remarks at the National Association for Business Economics meeting in Dallas.

“Thus, if term premiums rise, they could do some of the work of cooling the economy for us, leaving less need for additional monetary policy tightening.”

In bond investing, the term premium is often defined as the extra compensation that investors require for bearing interest-rate risk over the life of the bond. Logan said “there is a clear role for increased term premiums in recent yield curve moves,” though “the size and persistence of the contribution are subject to uncertainty.”


There will be even more dovish commentary being discussed as this long week of Fed talk goes on...

@SpecialSitsNews: Federal Reserve Speakers this Week. Wow.

The bond markets were closed on Monday but maybe Tuesday will be the start of a new trend...

@WalterDeemer: "Parabolic advances usually carry further than you think, but they do not correct by going sideways." -- Bob Farrell

If this is the peak in Fed rate hikes, then now may not be the time to buy that ladder of CDs from your local bank...

If you want almost nil downside risk, then investing under the FDIC limits into CDs is still the easy play. But as past peak rate cycles show, there are some much better places to invest your liquid money over the next 12 months.

J.P. Morgan

Speaking of the biggest, broadest U.S. bond index, it now yields > 5.6%...


Still difficult for asset/liability managers to hit the buy button on stocks when bonds yields trade at a premium to stock earnings yields...

@tracyalloway: Yields on BBB corporate bonds now exceed the expected earnings yield of the S&P 500 for the first time since 2009. Citi: For pension funds "targeting on average around 7-8% annual returns" these higher corporate bond yields "offer a less risky way" of hitting the target vs stocks

How will this gap close?

J.P. Morgan also highlights the disconnect between 10-year yields and U.S. P/E multiples.

J.P. Morgan

BofA Global dials it in further to show another dislocation between 10-year yields and the price of the Nasdaq 100...

Again, how will the gap close? Bonds up or stocks down? Or maybe a healthy mix of both?

BofA Global

It was a big week for the S&P 500 which rebounded off its 200-day moving average as well as its lower trendline...

A pull back in interest rates should be supportive for the index, unless actions in the Middle East spiral into a bigger theater. For the next three weeks, earnings will play a heavy hand in stock moves. Then in November, Washington D.C. will move back to center stage as budget talks accelerate.

Yardeni Research

If your stock portfolio is not keeping up this year, you have plenty of company...

@GunjanJS: Roughly half of the stocks within the S&P 500 are down for the year --Piper Sandler

The S&P 500 equal-weight index looks better and better everyday versus owning the market capitalization weight index...

The forward price-to-earnings (P/E) ratio suggests the S&P 500 isn’t cheap. This premium is found in a smaller share of the constituents of the index. Reflecting a similar dynamic, a low participation of stocks in this year’s rally of the S&P 500 also raises worry over concentration risk. An optimistic take is that a larger portion of the index is not as expensive compared to history. A diversification opportunity may exist, and cheaper Value-oriented segments of the Equity market may be beneficial, in particular if the rally ultimately broadens out, as the economy successfully absorbs tightened monetary policy at a limited cost to growth.

Merrill/BofA Global

Here we go. Bring it on. Just do it...


What did we learn last week from the few earnings reported?

The French fry attachment rate is still steady which is a positive economic sign...
"The global frozen potato category continues to be solid with overall demand and supply balanced. Fry attachment rates, which is the rate at which consumers order fries when visiting a restaurant or other food service outlets across our key markets have remained largely steady and above pre-pandemic levels" - Lamb Weston Holdings President of Commercial Foods Thomas Werner

The leading blue jeans manufacturer showed that inventories are in good shape...
"Adjusting for this change, inventory increased just 1%, representing a 17-point deceleration from last quarter. Inventory in the U.S. is already below last year's level, and we expect to continue to make progress in Q4 with overall inventory below prior year levels by year-end on a comparable basis. Though inventories are now in line with expected revenue growth and by Q4 end will be down year-over-year we are working to further optimize inventories and improve turns and working capital." - Levi Strauss CFO Harmit Singh

The Transcript

The rise in small company bankruptcies is worth keeping an eye on...

The new provision, Subchapter V, allows us to look at the number of smaller business failures in the U.S. Plenty of various reasons as to why this figure is rising including post-COVID cross currents of supply issues and inflation, but the recent acceleration might be a newer, meaningful datapoint.

Small-business bankruptcy filings are rising this year, a signal that increased interest rates, tighter lending standards and higher operating costs are straining entrepreneurs. At the same time, some government aid programs that helped entrepreneurs through the Covid-19 pandemic have ended...

The Federal Reserve’s efforts to slow inflation by raising interest rates have been particularly painful for small businesses, which tend to operate with thinner profit margins and smaller cash reserves than larger companies.

The increased bankruptcies are coming from filings under Subchapter V, a newer provision in federal bankruptcy code that makes it easier for financially stressed small businesses to restructure.

Nearly 1,500 small businesses filed for Subchapter V bankruptcy this year through Sept. 28, nearly as many as in all of 2022, according to the American Bankruptcy Institute.


I am guessing that a few Wall Street analysts are now taking GLP-1 drugs because all of a sudden investors are very focused on the future impacts...

We have seen studies of smaller waistlines impacting airplane fuel consumption to shopping basket items in recent weeks. Not sure if now is peak hysteria or just the eye of the hurricane but it is sure causing an impact on Consumer Staples stocks.

Big food companies and investors are watching as Ozempic and other similar weight-loss drugs flow to millions of people, upending America’s diet industry and raising new questions about how consumers will eat...

The drugs, which suppress patients’ appetites, have exploded in popularity in the U.S., straining manufacturing capacity. Morgan Stanley has projected that 24 million people, or nearly 7% of the U.S. population, will be taking such medications in 2035.

Those people could cut their daily calorie consumption by as much as 30%, according to the firm, which surveyed over 300 patients. For a person on a 2,000-calorie diet, that could mean eliminating a one-ounce bag of salted potato chips, a bottle of soda and more each day.

Carolyn MacBain-Waldo said she is eating significantly less since she started taking Eli Lilly’s Mounjaro—her family orders from restaurants less often and their grocery bills have dropped by as much as 20%. The 50-year-old, who works as a senior director in retail, said the drug makes her feel full more quickly and that she is far less likely to overeat when stressed.

“I still have a fully stocked kitchen, there’s chips and pretzels in there,” MacBain-Waldo said. “I don’t find it tempting.”


It sounds like the RV industry has gotten out of whack with supply/demand...

RV manufacturers are discussing a post-Thanksgiving prolonged shutdown as the industry seeks to right-size inventory amid a steep drop-off in demand, D.A. Davidson analysts Brandon Rolle and Griffin Bryan say in a note. Orders from dealerships were weak last week at the Elkhart RV Dealer Open House, and big dealerships have canceled orders for new models, the analysts say. "Given the excess inventory around Elkhart and the low probability that dealer orders/retail demand accelerate over the next 3 months, our contacts indicated the industry is discussing the possibility of a prolonged production shutdown from Thanksgiving through mid-January," they write.


I would have never guessed that a cyberattack on Clorox would have shut down the company and wiped out its quarterly earnings...

[CLX] Reports prelim Q1 adj EPS -$0.40 to $0.00 v $1.42e, organic sales -26% to -21%, gross margins to decline y/y; Due to the impacts of the recent cybersecurity attack

  • Net sales are expected to decrease by 28% to 23% from the year-ago quarter. Organic sales are now expected to decrease by 26% to 21% for the quarter, compared to the Company's prior expectations of mid-single-digits growth as provided in the Q4 earnings remarks. This is due to the impacts of the recent cybersecurity attack that was disclosed in August, which caused wide-scale disruption of Clorox's operations, including order processing delays and significant product outages. Shipment and consumption trends prior to the cybersecurity attack were in line with the Company's prior expectations.


A much more likely candidate for a crippling cyberattack would have been a global casino company...

Probably a good time to call your insurance broker and double check your company's cyberattack insurance coverages. And triple the number of IT security tests to your employee base.

MGM Resorts International refused to pay a hackers’ ransom demand in a September cyberattack that threw its Las Vegas Strip resorts into chaos and crippled its properties and technology nationwide, according to a person familiar with the matter.

Service disruptions from the attack and efforts to resolve the issue will cost the company more than $100 million in the third quarter, MGM said in a regulatory filing Thursday.

The cyberattack was detected on Sept. 10 and forced MGM to shut down IT systems in response. The shutdowns hobbled slot machines, interrupted online hotel bookings and required hotel workers to check-in guests using pen and paper for days, among other impacts. The company said Thursday that guest-facing operations have returned to normal.


Owning a car has become brutally expensive when it challenges a person's rent/mortgage expense...

I wonder how many households could get by with one fewer automobile and save all that money.

According to AAA, the average annual cost in the first five years of new-car ownership rose to $12,182 this year, from $10,728 last year, reflecting increased purchase prices, maintenance costs and finance charges. That’s 16 percent of the median household income, before taxes. (The figure includes depreciation.)


Speaking of automobiles, this is an amazing chart...

Helps to explain how BYD has now become one of the top EV companies in the world passing even Tesla.


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The author has current equity ownership in: Chevron Corp. and ConocoPhillps.

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