Weekly Research Briefing: April Showers

@carlquintanilla: UBS: “.. Investors attribute the run in mega cap stocks to animal spirits and the impact of AI; however, our work indicates that surging earnings momentum .. fueled this upside. Unfortunately, this momentum is collapsing, with Big 6 EPS growth expected to decline from 42% to 16% over the next year ..” [Golub]

@LizAnnSonders: Last Friday was best day for equal-weighted S&P 500 relative to cap-weighted S&P 500 since March 2021

@edclissold: Market coming off an all-time heater. $SPX surged 25% in 5M for 7th time since WWII. Previous dates should sound familiar for end of major bears (2/75, 11/82, 7/09, 8/20). 3/86 is an exception. Fed cut 11 times from 11/84-8/86. Note '86 case had worst 6m returns. @NDR_Research

@lisaabramowicz1: Yields on 10-year Treasuries have been above the S&P 500 earnings yield for three straight weeks. This is the first time we're seeing this since 2002: JonesTrading's Michael O'Rourke

@philadelphiafed: Manufacturing activity in the region continued to expand this month, according to the firms responding to the April Manufacturing Business Outlook Survey. https://bit.ly/3Q9plrj

The best way to gauge this is by looking at the Bureau of Labor Statistics’ monthly Job Openings and Labor Turnover Survey, and focusing on the professional and business services category that encompasses roles such as corporate managers, accountants, lawyers and technical workers. The hiring rate here, which looks at how many people found jobs in a given month compared with the number employed in that industry, stabilized in the back half of 2023 from a year earlier after significant declines in late 2022 and early 2023. It’s now recovered to be slightly positive on a year-over-year basis. You see the same pattern in the finance and insurance group.

@carlquintanilla: BMO: “.. . New York City office is one of the few REIT subsectors seeing improved demand. $SLG continues to exhibit strong leasing momentum .. We see positive leading indicators for #NYC office including higher utilization, and increasing market share for relocating tech workers and college grads.”

...Barkin also highlighted elevated shelter prices for more recent hotter-than-expected inflation readings. While the Fed’s preferred inflation gauge is back to 3% overall, shelter costs as measured by Owners’ Equivalent Rent (OER), are still up nearly 6% year-over-year. That’s well above the 3.2% pace that we saw on the eve of the pandemic.

“I’m open to housing coming down and there are folks who’ve done models that suggest that with new rents coming down the way they have, we’re just minutes away from shelter inflation coming down as well, and that would be great,” he said.

@LizAnnSonders: Looking at Cleveland Fed's New Tenant Repeat Rent Index (blue), looks like rent growth has eased considerably ... yet owners' equivalent rent (OER) in CPI (orange) is still moving higher by 5.9% year/year

@knowledge_vital: $BX - From the Blackstone earnings call - "“In terms of inflation, despite the recent U.S. CPI readings, we're seeing decelerating wage growth and minimal input cost increases across many of our companies. In real estate, we see shelter costs moderating, contrary to government data"

@KevRGordon: Thru April, @ManheimAuto Used Vehicle Value Index has now fallen by 22.7% from its all-time high ... by far the worst drawdown in the index's history #deflation

@TimmerFidelity: For equities, the lack (or delay) of a meaningful Fed pivot comes at a time when earnings are starting to do more of the heavy lifting. This is good, and a welcome change from a year ago when earnings were still falling and the market needed relief from lower rates to justify its 40% P/E-expansion.

Valuation is all about the present value of future cashflows, with earnings in the numerator and the cost of capital in the denominator. When earnings are weak, changes in the denominator pack a bigger punch, and vice versa. That’s especially the case when the discount rate has a low starting point, as it did in 2022. Convexity is not just for bond geeks!

@eWhispers: #earnings for the week of April 22, 2024

"Looking at the full year 2024, macroeconomic and geopolitical uncertainty persists, potentially further weighing on consumer sentiment and end-market demand. We thus expect the overall semiconductor market, excluding memory, to experience a more mild and gradual recovery in 2024. We lowered our forecast for the 2024 overall semiconductor market, excluding memory, to increase by approximately 10% year-over-year, while foundry industry growth is now forecast to be mid- to high-teens percent, both are coming off the steep inventory correction and/or base of 2023." - TSMC CEO C. C. Wei

Chip makers aren’t rushing to prepare for the next wave of growth, based on a first-quarter update from lithography giant ASML.

Europe’s most valuable tech company reported orders worth the equivalent of just €3.6 billion, equivalent to $3.8 billion, for the three months through March. That was well below expectations, and was the second-lowest number since 2020...

ASML sells what are probably the world’s most complex and expensive mass-produced machines to chip makers such as Intel, TSMC and Samsung. These companies' equipment orders are a bellwether for the industry’s confidence.

That said, orders of such large, pricey gear can be lumpy. The fourth-quarter number was a record €9.2 billion, so taken together, the last six months have still been strong.

"Credit quality remained solid. Net charge-offs were $81 million or 29 basis points of average loans, below our target of 30 to 40 basis points for the full year 2024. Delinquencies increased just 2 basis points this quarter and non-performing loans increased 15% but remained low at 60 basis points of period-end loans" - KeyCorp CFO Clark Khayat

"Credit remains strong and net charge-offs move even lower this quarter. Both non-interest income and non-interest expenses were impacted by notable items." - Comerica CEO Curt Farmer

"Well, what I would say on that is the broad credit quality is still very good. So if you look at our C&I book, that’s in really good shape." - Citizens Financial Group CEO Bruce Van Saun

"Credit quality was stable as debt charge-offs improved by 1 basis point from the fourth quarter to 30 basis points. We are sustaining momentum and growth of our primary bank relationships, with consumer and business increasing by 2% and 4% respectively year-over-year." - Huntington Bancshares CEO Stephen Steinour

"Although inflation and mortgage interest rates remain elevated, our net sales orders increased 46% for the first quarter and 14% from the prior year quarter as the supply of both new and existing homes at affordable price points is still limited and the demographics supporting housing demand remained favorable. Homebuyer demand during the spring selling season thus far has been good despite continued affordability challenges." - D.R. Horton CEO Paul Romanowski

We expect cash M&A will grow by +15% in 2024. Cash M&A grew by 34% to $384 billion in 2023, the highest level since 2018. Announced M&A among S&P 500 firms in 2024 has remained healthy. $111 billion in previously announced but not yet closed cash M&A among S&P 500 acquirors is expected to close in 2024. However, the cash component of announced M&A has dropped to just 42% of total consideration in 1Q 2024 (vs. 58% in 2023). Because S&P 500 valuations rank in the 84th percentile vs. the past 30 years and interest rates have surged, history suggests firms will increasingly use shares as a form of compensation in transactions.

• Int'l Paper (IP - $12b mkt cap - S&P 500 holding) agreed to all-share deal to buy British packaging firm DS Smith (SMDS.uk) in a deal valued at 5.8 billion pounds ($7.22 billion); on closing of the deal, DS Smith shareholders would own ~33.7% of the combined company and IP shareholders will own the rest.
• Schneider Electric (SND.ger - 116b mkt cap) is in talks about a potential deal with engineering software maker Bentley Systems, in what would be one of the biggest takeovers of a US company by a French corporation.
• Blackstone said on Saturday it had made a proposal to acquire the UK-listed music rights investment company Hipgnosis (SONG.uk) for $1.24 per share in cash, which would trump Concord Chorus’s offer on Thursday of $1.16.
• Matterport (MTTR - $540m mkt cap - R2000 holding) to be acquired by Costar (CSGP - $34b mkt cap - S&P 500 holding) at $5.50/shr in $1.6B cash and stock deal. Founded in 2011, Matterport pioneered the development of the first 3D capture solution to deliver dimensionally accurate, photorealistic virtual tours or “digital twins” for any type of property.
• Wintrust Financial (WTFC - $6b mkt cap - R1000 holding) to acquire Macatawa Bank (MCBC - $500m mkt cap - R2000 holding) in an all-stock transaction as the aggregate purchase price to Macatawa shareholders is currently estimated to be approximately $510.3M, or $14.85 per share.
• Aramco to buy $1.5 billion stake in China's Hengli Petrochemical.
• Erik Nordstrom and Pete Nordstrom, the company’s CEO and president, respectively, recently told the department store chain's board they are interested in exploring a deal to take the company private. (JWN - $3b mkt cap - R1000 holding)
• Blackstone Inc.’s Strategic Partners unit sold a $1.1 billion portfolio of private equity fund interests to Ares Management Corp.

In a double debut Thursday, digital marketing software firm Ibotta ended its first day as a public company up 17%, while gas and electric infrastructure services company Centuri gained 10%. The listings brought the total raised via IPOs on US exchanges since Jan. 1 to more than $12 billion—triple last year’s pace.

"Where we stand today, it's clear we're in the early stages of reopening of the capital markets with the first few months of 2024 seen in reinvigoration in new issue market access. For example, there were a number of large IPOs across geographies, and the strong reception across transactions, including the IPO for Galderma, Reddit and Rank is the latest sign that investors' risk appetite is growing. The debt capital market's tighter spreads have contributed to a constructive issuance environment and investment grade with volumes hitting a record for the first 3 months of the year. Additionally, refinancing was a major theme with robust high-yield and institutional loan refinancing volumes. Given a more accommodative issuance backdrop as well as the potential for increased acquisition financing alongside higher M&A activity, we expect solid levels of debt underwriting activity to continue." - Goldman Sachs CEO David Solomon

In the first quarter, Blackstone more than doubled the amount of investments it made to $25bn from $11bn a year ago. Add in $15bn in pending deals and Stephen Schwarzman and Jonathan Gray’s deal machine is revving into full force.

On an earnings call, they said Blackstone has a number of chunky privatisations in the works and are not waiting for an “all clear” sign to put their roughly $200bn in cash to work.

Gray likened the current opportunity to the years immediately after the financial crisis when Blackstone ploughed billions into PE and commercial real estate bets as the financial fallout of 2008 continued to surface.

The long-concealed market value of Tokyo’s largest skyscrapers is being unveiled by activist investors.

In Japan, there’s a huge gap — 22 trillion yen ($143 billion) by one estimate — between how companies value their real estate assets on their books, versus what those same properties would fetch if sold in the current market. That comes from two factors: First, many of the island nation’s firms have held onto properties for decades, each year writing down the cost of fixed assets due to annual depreciation, a common accounting practice. But at the same time, property prices have soared.

The result is that billions in value can be unlocked by pressuring companies to sell off these holdings, a tactic that activist funds are now employing. This was illustrated last week when Japan developer Mitsui Fudosan Co. announced it would aim to sell off 2 trillion yen in real estate assets over the next three years as part of a new business plan — just two months after news that New York-based activist hedge fund Elliott Management Corp. had built a stake in the company.

Elliott’s campaign is partly focused on realizing the value of Mitsui’s properties — including prized skyscrapers across Tokyo — by selling them off, a point the investment firm has discussed with the developer, according to a person familiar with the matter.

It’s a strategy that more activist funds could turn to this year, as they work with Japanese corporations under pressure to change and increase value. Japan is now one of the world’s hottest markets for activist investing, with government agencies and institutions like the Tokyo Stock Exchange asking companies to better manage their balance sheets and focus their business strategies to boost returns for shareholders.

@TSOH_Investing: "The Kirkland Signature battery is probably the most successful private label venture... Duracell said 'We can do what we can on the [Duracell branded] batteries, but how about we make the Kirkland Signature batteries for you, and we make them 40% cheaper?' That's what happened. It's the same battery out of the same plant... There is nothing different, it's just a label." (Peter Malizia, Costco Canada)