Private Wealth

Weekly Research Briefing: Back to the Data

August 29, 2023

No fireworks this year at Jackson Hole as Jerome Powell and the Fed stuck to their data driven playbook. As they continue to watch the economic data and inflation readings to navigate their ship through the cloudy skies, one can only wonder if they have bolted some AI onto their GPS navigation system. We know that inflation is falling quickly, the economy is slowing on the edges along with the persistent summer heat, and China is becoming a growing question mark. But for every shrinkage problem at Dick's Sporting Goods and credit card delinquency at Macy's, there is an Abercrombie & Fitch or Ross Store that hits it out of the park. NVIDIA crushed their earnings, but the stock had already tripled in 2023 so expectations were up and through the clouds. But what an awesome set of numbers for anyone who still owns it.

There is a very big week ahead of the markets with jobs data (JOLTS, ADP, NFP/UE), the PCE deflator and ISM being the biggies. At the same time, the Treasury is going to price $127 billion in new debt and a big storm is going to visit a nearly identical Florida path to Hurricane Ian just under a year ago. It is likely going to be a light week in the markets with the summer ending holiday weekend approaching and the last of the kids readying their backpacks and dorm rooms. Have a good week and be safe Florida.

An entirely data driven message given at Jackson Hole last week...

"As is often the case, we are navigating by the stars under cloudy skies. In such circumstances, risk-management considerations are critical. At upcoming meetings, we will assess our progress based on the totality of the data and the evolving outlook and risks. Based on this assessment, we will proceed carefully as we decide whether to tighten further or, instead, to hold the policy rate constant and await further data…. We will keep at it until the job is done." - Fed Chair Jerome Powell

“We are very close to a good point and then we’ll let the economy tell us when it’s time to move things down” - Cleveland Fed President Loretta Mester

The Transcript

While many economists and strategists saw fewer reasons to expect another Fed Funds rate hike, the markets edged toward the possibility of a November or December hike...

CME Group

Back to the data, last week's U.S. durable goods ex-transportation orders rose more than expected last week...

The Daily Shot

And the Kansas City Fed manufacturing production popped to a one-year high...

The Daily Shot

But it was not all up and to the right as the August S&P Global U.S. PMI report showed growth stalling for services...

Could it be because it was just too hot to go outside and work or play this month? I think most would have picked an air-conditioned office or factory to be in. Southwest Airlines can prod us when the triple digit temps go away.

The Daily Shot

But even with the outdoor heat, T.Swift, Queen Bey and Barbenheimer will add over $8 billion to the U.S. economy this summer...

Taylor Swift, Beyoncé and “Barbenheimer” fever are giving a serious boost to the US economy.

The megastars’ tours and blockbuster films are expected to add up to $8.5 billion to US growth in the third quarter, according to Bloomberg Economics. The nearly 50 US concerts the artists have scheduled could add $5.4 billion to gross domestic product, while the films Barbie and Oppenheimer are projected to add about $3.1 billion in consumer spending and exports from international ticket sales.

Taken together, that would raise annualized real personal consumption expenditures and GDP by 0.7 and 0.5 percentage points, respectively, in the July-through-September period, economists Anna Wong and Eliza Winger wrote in a note late Wednesday. The economists nearly doubled their forecast for growth in the July-to-September period, partly as a result of the spending gains.


As I tire of gloom and doomers spewing mortgage rate fears, here is one more reminder that rising mortgage rates are not going to crush the U.S. economy...

@PhilipJagd: Wondering how US households are coping with 23y high in mortgage rates... well they really are not... yet! Only homebuyers are... Chart shows average effective rate on US mortgage debt outstanding against the spot 30y jumbo rate

You know who is not disliking high mortgage rates freezing the housing stock? The U.S. homebuilding industry...

"As we start our fourth quarter, demand remains solid. August deposits are usually down 25% to 30% versus July based on long-term historical trends as summer winds down and kids return to school. So far in August, deposits are only down 11% and both physical and web traffic are up slightly compared to July. While it is only 3 weeks, this is encouraging considering the increase in mortgage rates that has occurred during this period. We attribute the solid demand for new homes, at least in part to the well-publicized shortage of existing homes for sale. Existing homeowners are clearly reluctant to give up their low-rate mortgages. And while rising rates remain a challenge for the overall industry, they further cement the lock-in effect that is kept to resell inventory at historically low levels." - Toll Brothers CEO Douglas Yearley

The Transcript

Inflation surprises continue on the downside which is great news for the Fed...

@LizAnnSonders: U.S. Inflation Surprise Index from Citi is sitting at its lowest since April 2020

One of the biggest inflation components is in housing...

And apartment rent growth is going to be negative on a year over year basis in the next couple of months.

As of July, same-store effective rents were up just 0.78% year-over-year, according to data from RealPage Market Analytics. Outside of the 2020 pandemic period, that marked the lowest figure since July 2010. At the same time last year (July 2022), rent growth measured 12.25%.


Whenever I need a good read on the health of the markets, I look to credit spreads. And all looks fine here...

@RyanDetrick: From hard landing, to soft landing, to no landing, to whatever economists call it now. We've said all year, follow the credit markets. They haven't been (nor are they now) worried about a monster under the bed. BBB spreads would be much higher if big time trouble was coming.

Stocks are not listening to credit right now. Maybe it’s a summer thing? Or maybe something is lurking ahead?

@allstarcharts: anyone who thinks a big credit event is going to have a negative impact on the stock market probably hasn't taken the time to actually look at credit markets

Sharp moves higher in Treasury yields do not always point to a future mess in the stock market...

@callieabost: "Over the last 60 years...Higher yields were more often a sign to lean into stocks, not run away from them."

Surprisingly, a bear steepening yield curve points is a good backdrop for equity outperformance...

@SethCL: A "bear steepener": 10-yr. moves up faster than 2-yr.
HIstorically, the rarest of occurrences, only happens 10% of time.
“The macro message is that economy is strengthening, ..." ~Joe KalishNed Davis Research.
Avg. annlzd. $SPX gain = 9%+

That said, stocks do look increasingly expensive relative to corporate credit...

So, either earnings need to pick up their pace or Treasury yields need to fall. Or both.

The Daily Shot

Your public stock portfolio sure is old...

The Economist

And the winner for the 'company of the year' goes to...

In the last year, NVIDIA's 2024 earnings estimate rose from a 3-handle to a 9-handle. Just incredible for a company of its size.

"We had an exceptional quarter. Record Q2 revenue of $13.51 billion was up 88% sequentially and up 101% year-on-year and above our outlook of $11 billion…Data Center compute revenue nearly tripled year-on-year, driven primarily by accelerating demand from cloud service providers and large consumer Internet companies for our HGX platform, the engine of generative AI and large language models" - NVIDIA CFO Colette Kress

"Major companies, including AWS, Google Cloud, Meta, Microsoft Azure and Oracle Cloud as well as a growing number of GPU cloud providers are deploying, in volume, HGX systems based on our Hopper and Ampere architecture Tensor Core GPUs…A new computing era has begun. Companies worldwide are transitioning from general-purpose to accelerated computing and generative AI. NVIDIA GPUs connected by our Mellanox networking and switch technologies and running our CUDA AI software stack make up the computing infrastructure of generative AI. During the quarter, major cloud service providers announced massive NVIDIA H100 AI infrastructures. Leading enterprise IT system and software providers announced partnerships to bring NVIDIA AI to every industry. The race is on to adopt generative AI" - NVIDIA CEO Jensen Huang

The Transcript

For the Q3/2024, NVIDIA is forecasting revenues of $16 billion versus the analyst estimates of $12-13 billion...


If the major tech stocks continue to outperform, mutual fund managers will be hard pressed to outperform their benchmarks...

The mutual fund underweight position in the largest tech stocks widened further in 2Q. The seven largest mega cap tech stocks outperformed the equal-weight S&P 500 by 54 pp in YTD (58% vs. 4%, Exhibit 11). As we showed last quarter, many mutual funds are underweight the largest tech stocks by default due to their diversification requirements. Funds failed to keep up with the largest tech stocks in 2Q as the average fund's underweight allocation to the group widened to 792 bp. Mutual funds in aggregate are just 490 bp underweight though the aggregate underweight also widened in 2Q and now stands at the widest level on record. The gap between aggregate and average positioning reflects higher allocations to mega-cap tech among the largest mutual funds (Exhibit 12).

Goldman Sachs

The M&A and IPO machines are accelerating as tens of billions of dollars in deals has hit the tape in the last week...

First off, Roark Capital Wins Bidding for Subway in $9 Billion Deal...

Roark Capital Group has won the race to acquire US sandwich chain Subway after seeing off a late challenge from a rival bid group led by TDR Capital and Sycamore Partners. The private equity firm has entered into a definitive agreement to buy Subway, according to a statement on Thursday. Financial details were not disclosed. Bloomberg News reported earlier today that Roark was putting the final touches on its takeover of the company.

The deal is valued at roughly $9.55 billion, people with knowledge of the matter said, asking not to be identified discussing confidential information. Roark will pay about $9 billion upfront, with the remainder coming in future so-called earnout payments, they said. Morgan Stanley, Barclays Plc, JPMorgan Chase & Co., Mizuho Financial Group Inc., MUFG, Rabobank and Wells Fargo & Co. are providing financing of around $5 billion to back the deal, the people said.


Then the $3.6 billion market cap Hostess Brands explores sale amid takeover interest...

Hostess Brands Inc , the maker of Twinkies snack cakes, is exploring a sale after fielding takeover interest from major snack food makers, people familiar with the matter said on Friday. Hostess became an acquisition target after it raised prices on some of its products to boost revenue, fueling investor concerns over its prospects. Prior to the news of the company exploring a sale, its shares were down 1% year-to-date, versus a 29% rise in the Nasdaq Composite Index.

General Mills Inc, Mondelez International Inc , PepsiCo Inc and Hershey Co are among the companies that have shown an interest in acquiring Hostess, the sources said. Hostess has hired investment bank Morgan Stanley for advice on handling the deal negotiations, the sources said. No agreement is certain and Hostess may decide against any deal, the sources added.

The sources asked not to be identified because the matter is confidential. Hostess and Hershey declined to comment, while General Mills, Mondelez, PepsiCo and Morgan Stanley did not immediately respond to requests for comment. Hostess shares rose 26% on the news to $27.89 in Friday afternoon trading in New York, giving the company a market value of close to $4 billion. Hostess also had debt net of cash of about $900 million as of the end of June.


Danaher Corp outbids Agilent to acquire Abcam and bulk up in the biotech tools needed for drug development...

[ABCM] Confirms to be acquired by Danaher for $24.00/shr in cash in $5.7B deal
- Danaher Corporation, a global science and technology innovator, announced today that it has entered into a definitive agreement to acquire Abcam plc, a leading global supplier of protein consumables, pursuant to which Danaher will acquire all of the outstanding shares of Abcam for $24.00 per share in cash, or a total enterprise value of approximately $5.7 billion including assumed indebtedness and net of acquired cash. Founded in 1998 and headquartered in Cambridge, UK, Abcam offers the scientific community highly validated antibodies, reagents, biomarkers and assays to address targets in biological pathways that are critical for advancing drug discovery, life sciences research, and diagnostics. Its technologies are used by approximately 750,000 researchers. Abcam is expected to operate as a standalone operating company and brand within Danaher's Life Sciences segment, furthering Danaher's strategy to help map complex diseases and accelerate the drug discovery process.


Kimco Realty elects to swap $2 billion in stock for 56 outdoor shopping centers...

[RPT] To be acquired by Kimco Realty for ~$11.34/shr in ~$2.0B all-stock deal; Expected to be immediately accretive to key financial and operating metrics
- Announced a definitive merger agreement under which RPT will be acquired by Kimco in an all-stock transaction valued at approximately $2 billion, including the assumption of debt and preferred stock. Upon closing, Kimco expects to have a pro forma equity market capitalization of approximately $13 billion and a total enterprise value of approximately $22 billion.Under the terms of the merger agreement, RPT shareholders will receive 0.6049 of a newly-issued Kimco share for each RPT share they own, representing a total consideration of approximately $11.34 per RPT share based on Kimco’s closing share price on August 25, 2023. This represents a 19% premium to RPT’s closing share price on August 25, 2023. At closing, Kimco stockholders and RPT shareholders are expected to own approximately 92% and 8% of the combined company, respectively. The board of directors of Kimco and the board of trustees of RPT both unanimously approved the transaction. The transaction is expected to close in the beginning of 2024, subject to RPT shareholder approval and other customary closing conditions.The transaction will add 56 open-air shopping centers, including 43 wholly-owned and 13 joint venture assets, comprising 13.3 million square feet of gross leasable area, to Kimco’s existing portfolio of 528 properties. In addition, the Company will acquire RPT’s 6% stake in a 49-property net lease joint venture. Beyond strengthening Kimco’s presence in its key markets, today’s transaction is expected to provide embedded growth opportunities, including those associated with redevelopment. Kimco has identified a limited group of Midwest properties within RPT’s portfolio that it views as not consistent with its strategy that it expects to divest over time.


Our local travel and leisure company, KSL Capital, sees now as the time to spend $1.4b cash for a portfolio of 25 luxury hotels...

PHILADELPHIA and DENVER, Aug. 28, 2023 (GLOBE NEWSWIRE) -- Hersha Hospitality Trust (NYSE: HT) (“Hersha” or the “Company”), owner of luxury and lifestyle hotels in coastal gateway and resort markets, and KSL Capital Partners, LLC (“KSL”), a leading investor in travel and leisure businesses, today announced a definitive merger agreement, entered into on August 27, 2023, under which affiliates of KSL will acquire all of the outstanding common shares of Hersha for $10.00 per share in an all-cash transaction valued at approximately $1.4 billion. The purchase price represents a premium of approximately 60% over Hersha’s closing share price on August 25, 2023, the last full trading day prior to this announcement.

KSL Capital

Elsewhere in leisure and travel, Blackstone sells one-fifth of the Bellagio to Realty Income...

Blackstone is cashing in on the recovery of Las Vegas by selling a 22% stake in the Bellagio in a deal that values the asset at $5.1 billion.

Realty Income, a company that owns over 13,000 properties in the U.S. and Europe, is paying $300 million for the 22% stake in the landmark casino and resort, which are operated by MGM Resorts International under a long-term lease. Realty Income also is investing in a $650 million preferred equity stake in the property known for its 8.5 acre lake and fountain shows along the Las Vegas Strip.

Blackstone, one of the world’s largest real-estate investors, purchased the Bellagio in 2019 from MGM Resorts in a sale-leaseback transaction that valued the property at $4.25 billion. MGM, which retained a 5% stake in the Bellagio, agreed to pay rent that steadily increases during the 30-year term of the lease and then is renewed at fair market value.


Jabil Inc sells its Chinese manufacturing operations to position elsewhere in the world and enhance its shareholder value...

The electronics arm of electric-vehicle maker BYD Co. agreed to buy Jabil Inc.’s manufacturing business in China for 15.8 billion yuan ($2.2 billion), expanding its production base in the world’s largest mobile arena.

BYD Electronic International Co., a non-wholly owned unit of one of China’s biggest EV makers, is taking over the US company’s product manufacturing business located in Chengdu and Wuxi, China, it said in a statement Monday. The pact includes the manufacturing of products for existing customers...

Jabil has been one of the largest contract manufacturers in China, hiring tens of thousands of workers in Sichuan, Guangdong and Jiangsu provinces to make and assemble parts for Apple. The company said in a separate statement the sale will allow it to “enhance our shareholder-centric capital framework, including incremental share buybacks.”


Thorne Healthtech decides after two years that it is no fun to be a public company...

[THRN] Enters into definitive agreement to be acquired by L Catterton for $10.20/shr in cash for transaction value of $680M
- Announced today that it has entered into a definitive agreement under which L Catterton, a leading global consumer-focused investment firm, will commence a tender offer to acquire all outstanding shares of common stock of Thorne for $10.20 per share in cash. The transaction value of approximately $680 million represents a 94% premium to the unaffected closing share price on July 20, 2023, and a 113% premium to the 30-day volume weighted average price as of the unaffected date of July 20, 2023. Thorne's independent Special Committee and Board of Directors have each unanimously approved the agreement and recommend that all stockholders tender their shares in the tender offer.


Standard Chartered Bank improves its bank capital positioning by selling its aircraft leasing business for $3.6 billion...

[STAN.UK] Announces sale of its global aviation finance leasing business to AviLease for $0.7B in cash, and repayment of $2.9B of debt - Sale expected to be completed towards end of 2023


US grocery delivery company Instacart and marketing automation company Klaviyo both file for IPOs...

Instacart filed for an initial public offering on the Nasdaq exchange on Friday as the US online grocery-delivery company prepares for its shares to begin trading next month. The public-market debut by San Francisco-based Instacart is expected to add momentum to an improving IPO market. It comes as Arm, the British chip designer, is also gearing up for what is set to be the year’s largest listing in September.

Marketing automation company Klaviyo, which is valued by venture investors at $9.5bn, also filed for an IPO on Friday. The listings will provide a gauge of investor sentiment after two years of turbulent markets for technology companies.

Instacart said it had secured Norges Bank, the Norwegian sovereign wealth fund, and venture capital firms including TCV, Sequoia Capital, D1 Capital Partners and Valiant Capital as cornerstone investors, purchasing about $400mn of its stock, according to the filing. It has also agreed a private placement of $175mn worth of shares with PepsiCo, which will convert at the IPO.

Financial Times

Speaking of Klaviyo, here is a recent survey of 405 cloud companies that could be on deck for a future IPO...

With the IPO train having stopped in 2022, look for cloud companies to return to the market to find future growth funding as well as private equity monetizations.

Bessemer Venture Partners

Florida looks to ban the letter "I" from its school systems...

Less than a year ago, Florida did battle with Hurricane Ian. Later this week, the same regions get to wrestle with Idalia. Time to batten down the hatches once again.

National Hurricane Center

While Florida reaches for umbrellas and sandbags, the middle of the U.S. will continue to bake in September...

The hotter temps will help to mute U.S. economic activity. Not so for natural gas or electricity production.

National Weather Service

What a great quote and string of ink...

“The running game show of the 10021 ZIP code is guessing who is on Vitamin O” — that is, Ozempic, said the writer, actress and Upper East Side native, Jill Kargman, referring to what has long been the city’s toniest ZIP code, covering much of the East 70s.


100% True...

The State of Wisconsin would like to negotiate a trade of excess milk. Does anyone have a clean supertanker for rent?

France is about to destroy enough wine to fill more than 100 Olympic-size swimming pools. And it’s going to cost the nation about $216 million.

Ruining so much wine may sound ludicrous, but there’s a straightforward economic reason this is happening: Making wine is getting more expensive due in part to recent world events, and people are drinking less of it. That has left some producers with a surplus that they cannot price high enough to make a profit. Now, some of France’s most famous wine-producing regions, like Bordeaux, are struggling.

In June, the European Union initially gave France about $172 million to destroy nearly 80 million gallons of wine, and the French government announced additional funds this week. Producers will use the funds to distill their wine into pure alcohol to be used for other products, such as cleaning supplies or perfume.

Washington Post

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