Weekly Research Briefing: Best of Both Worlds

February 06, 2024
I want the best of both worlds, 
And, honey, I know what it's worth 
If we could have the best of both worlds, 
We'd have Heaven right here on Earth, ooh

(Songwriters: Sammy Hagar / Edward Van Halen / Alex Van Halen / Michael Anthony)

Grammy award winning artist, Van Halen, sang it and now the U.S. economy is living it: solid economic growth with slowing inflation. This type of economic condition has a name, but we won't call it here because we don't want to jinx it. But, maybe you will come across it tonight when reading your child a bedtime fairy tale.

Last week was a big one for data (economic and earnings) as well as an update from the Fed. The full week of strong earnings and economic reports would have given the market enough to scratch its head about a March Fed rate cut. But we didn't have to see it all because Jerome Powell let it strongly be known on Wednesday that a March cut is off the table. Did he know much about Friday's labor data ahead of time, or did the FOMC have enough meaningful conversations with business leaders to tell them that the U.S. economy is re-accelerating? We do know now that the Fed wants further proof that inflation is falling, but also that they won't wait for it to get to 2% before they begin to lower rates. So bottom line, we know that the Fed will be cutting rates this year, but the game to determine when they will cut just moved from a 2D board to a 3D one.

The economic data shifted up a gear last week. The non-farm payrolls for January surprised with a +353k print which was double what the economists were thinking. The previous two-month revisions added another +126k jobs. The ISM Manufacturing and Services index also both surprised to the upside led by very strong new orders growth. As for earnings, there was something for everyone. Among the important themes, I saw:

  • Companies that trimmed their payrolls in 2021/2022 posted surging margins this quarter.
  • Many companies are accelerating their cloud/data/AI spending which should cause continued rabid demand for all hardware and software going into those environments.
  • Big industrial manufacturers see cost pressures easing. Now the question of how much to give back or keep?
  • Biggest hospital player confirms what others have mentioned: hospital and surgery utilization is on the rise.
  • Biggest food distributor to restaurants surprised on volumes.

This week will be a low volume one for U.S. economic data. But we will get the final big batch of U.S. large cap earnings to keep us busy. The Fed speaking circuit should be in full force as FOMC participants give their two cents about the need to weigh inflation versus the recent strength in the economy. Expect stock prices to become a little more volatile as the bond market tries to pick its next direction. A 3.5% 10-year Treasury yield might be a challenge to hit if recent economic strength continues. Have a great week.

Friday's jobs data was definitely worth a look...

@carlquintanilla: BMO: “.. There's really no sign of a slowdown at all in these latest numbers .. In fact, the January jobs report and revisions were so good, analysts will likely be pushing up their Q1 GDP growth estimates and markets will be pushing out their initial rate-cut forecasts to later in the year, more in-line with our current forecasts ..”

The visual of the data is also striking...

@Lvieweconomics: Too big to be JUST seasonal factors distorting the upside surprise…

Even the leading staffing firm, Robert Half, acknowledged the positive hiring sentiment...

“...the tone of client discussions has improved in the last 90 days due to some combination of lower inflation, a more favorable interest rate policy, fewer predictions of pending recession and newly approved staffing levels resulting from the annual budget cycle. These factors contribute to a more positive backdrop heading into 2024 than we saw a year ago." - Robert Half CFO M. Keith Waddell

The Transcript

Well look at that, the business surveys are now clearly turning higher...

The January ISM Manufacturing Index has clear upward momentum, especially in the New Orders component.

The Daily Shot

The January ISM Services also surprised to the upside and now makes December's print look like a mistake...

@LizAnnSonders: January ISM Services PMI up to 53.4 vs. 52 est. & 50.4 prior; new orders up to 55 vs. 54.8 est. & 53.3 prior; employment rebounded sharply to 50.5 vs. 49.4 est. & 43.8 prior

Speaking of services, the leading supplier to restaurants, Sysco, confirmed last week that sales volumes are solid...

Sales in the U.S. food service segment, which accounts for roughly 70% of the company’s revenue, grew 3.2% to reach $13.5 billion. International sales increased by 9.6% to $3.6 billion.

The gains were mostly driven by stronger sales volume rather than higher prices. In the latest quarter, Sysco’s product costs increased just 1.1% from a year ago, while the volume of goods sold in the U.S. rose by 3.4%.

The relatively robust increase in sales volume should help address concern among investors that demand for restaurant meals is weakening.

Higher sales volumes and effective management of product costs has led to improving profits.

Sysco’s gross profit, up 4.9% at $3.5 billion, grew at a faster rate than its operating expenses for the fifth consecutive quarter. That means the company has been succeeding at generating new income by increasing revenue.


And in healthcare, the nation's largest hospital chain confirmed last week that hospital utilization is very strong sending its stock up sharply...

@wallstengine: $HCA | HCA Healthcare Q4 2023 Earnings:
Q4 EPS: $5.90 (Est. $5.05)
Q4 Sales: $17.3B (Est. $16.5B)
Same Facility Admissions: +3.9% YoY
FY'24 Outlook:
Sees FY'24 EPS: $20.5 (Est. $19.4)
Sees FY'24 Revenue: $67.75B-$70.25B (Est. $67.67B).

Among other services earnings, strength in advertising and air travel...

Ad demand has improved...
"What we’re really seeing in Q1 so far has been a reflection of the generally strong and broad-based advertiser demand that we saw in Q4, and that was spread across verticals, but particularly within online commerce and gaming for us." - Meta Platforms CFO Susan Li

Consumers continue to spend on travel...
"...demand for premium products remains elevated. For example, domestic premium revenue grew 13% year-over-year in Q4, over double the rate of coach, another data point validating our strategy. While we remain focused on monetizing our growing premium capacity, we also remain committed to Basic Economy. Domestic Basic Economy revenue was up nearly 20% in the fourth quarter versus last year." - United Airlines SVP-Network Planning, Alliances & Sales Andrew Nocella

The Transcript

Now for something to keep an eye on from the same surveys: rising prices. Maybe Red Sea disruption fears?

@RenMacLLC: Not something we want to see. The ISM services prices index jumped 7.3pts to 64 in January. The data are noisy, and it is too soon to say if recent progress will actually reverse, but does support the notion that inflation is still sticky beyond expected slowing in core goods.

The Conference Board’s consumer confidence index showed further improvement this month...

The Daily Shot

And in the same survey, consumers are feeling much better about job availability...

@GunjanJS: The share of consumers saying jobs were "hard to get" fell to 9.8%, the second-lowest in records dating back to 1978 -- Conference Board

Also, a significant improvement in consumer's current financial situation...

The Conference Board

With all the forecasters behind the data, the economic surprise index is now surging...

@lisaabramowicz1: Citi's US economic surprise index has risen to its highest since November. @TFMkts put it this way: "This is the first time in months that I’ve felt the need to step back & see if I’m not giving the economy enough credit...I certainly wasn’t betting on escalation and expansion!"

U.S. economic surprises have lifted the Atlanta fed's GDPNow estimate to +4.2% for the Q1 2024...

Next update will be on Wednesday and include the much better than expected jobs data from Friday.

Atlanta Fed

Now for the Fed, here is Jerome Powell on Wednesday...

@NickTimiraos: Powell gives a hard shove *against* a March cut:
"I don't think it's likely that the committee will reach a level of confidence by the time of the March meeting to identify March as the time to [cut], but that's to be seen."

And then on Sunday during prime-time (but taped on Thursday)...

Federal Reserve Chair Jerome Powell said the central bank has shifted its focus toward deciding when to begin cutting interest rates, but that solid economic growth means officials don’t have to rush that decision.

Given recent economic strength, “we feel like we can approach the question of when to begin to reduce interest rates carefully,” Powell said during a rare television interview broadcast on CBS on Sunday night.

Powell, speaking on “60 Minutes,” said officials were trying to balance the risks of leaving rates too high for too long, which could cause an economic slowdown, and of cutting rates too soon and allowing inflation to settle above the Fed’s 2% goal. The interview was taped Thursday from the Fed’s Washington headquarters.

“There is no easy, simple, obvious path,” Powell said. “We think the economy’s in a good place. We think inflation is coming down. We just want to gain a little more confidence that it’s coming down in a sustainable way.”


With the busy week in the rear-view mirror, the market has shifted to a May cut from March...

Still betting toward 125 basis points in cuts through the December meeting. But now, much less consensus on how they get there.

CME Group

Wall Street pushes out their Fed Funds rate hike forecasts after Jerome Powell's comments Wednesday combined with the stronger jobs data on Friday...

Expect plenty of Fed talk this week. Here is Kashkari in one corner...

Federal Reserve Bank of Minneapolis President Neel Kashkari said policymakers have time to gauge incoming data before lowering interest rates, pointing to shifts in the post-pandemic economy.

“It is possible, at least during the post-pandemic recovery period, that the policy stance that represents neutral has increased,” Kashkari wrote in an essay published on the bank’s website Monday. “It gives the FOMC time to assess upcoming economic data before starting to lower the federal funds rate, with less risk that too-tight policy is going to derail the economic recovery.”...

Supply-side factors, rather than monetary policy, have done the “heavy lifting” to cool inflation to near the Fed’s 2% target, Kashkari wrote. Evidence for that includes resilient growth and a strong labor market.

That said, interest-rate increases have played an “enormously important” role in keeping long-run inflation expectations low, he said.


And Goolsbee in the other...

Federal Reserve Bank of Chicago President Austan Goolsbee reiterated that he’d like to see more of the favorable inflation data published in the past several months but did not explicitly rule out the potential for an interest-rate cut in March.

“We’ve had seven months of really quite good inflation reports, right around or even below the Fed’s target,” Goolsbee said Monday in an interview on Bloomberg Television with Michael McKee. “So if we just keep getting more data like what we have gotten, I believe that we should well be on the path to normalization.”

Goolsbee repeated that he doesn’t want to commit to a specific decision with weeks to go before the Fed’s March meeting. He also said he doesn’t want to speculate on the possibility of a larger, half percentage point cut at some point.


As the market argues about future rates, investor cash hoards pile up just waiting to be invested…

@carlquintanilla: A “sideline cash” update:
1. Private equity: “record dry powder”
2. Mutual funds: elevated cash vs AUM
3. US households: $18 trillion in cash
(via B of A)

This is the final big week of large cap U.S. earnings...


Last week, Meta/Facebook put up "Beat" across the board and the stock reacts wildly...


In fact, the stock rose so much that it set a single day record...

For measure, $200 billion is worth about 50 Twitter/X's.


Amazon's earnings were also notable as the margins exploded higher...


Amazon stock had a good week rising 8% helped by its earnings report...


But with the 2024 earnings estimates rising by 14%, Amazon actually ended the weak cheaper on a P/E valuation basis...


There remains an insatiable demand for GPUs as these earnings comments reveal...

"In the data center, we see 2024 as a start of a multiyear AI adoption cycle with the market for data center AI accelerators growing to approximately $400 billion in 2027. Customer deployments of our Instinct GPUs continue accelerating, with MI300 now tracking to be the fastest revenue ramp of any product in our history, and positioning us well to capture significant share over the coming years." - Advanced Micro Devices CEO Lisa Su

"Overall, I feel very confident that this AI boom will continue for another many quarters if not many years. And together with the related inferencing and other computing ecosystem requirements, demand can last for even many decades to come, we may call this an AI revolution..To address this immediate capacity challenge, we are adding two new production facilities and warehouses near our Silicon Valley headquarters, which will be operating in a few months..our only constraint is supply. However, the good news is, supply is improving. And so to your point, we have to be somewhat conservative, because we are constrained still by supply." - Super Micro Computer CEO Charles Liang

"We expect capital expenditures to increase materially on a sequential basis, driven by investments in our cloud and AI infrastructure." - Microsoft CFO Amy Hood

"CapEx will go up in 2024. I'm not giving a number today, but we do -- we're still working through plans for the year, but we do expect CapEx to rise as we add capacity in AWS for region expansions, but primarily the work we're doing with generative AI projects…. the trend for most of the large percentage of the spend will be in infrastructure is going to continue into 2024." - Amazon CFO Brian Olsavsky

The Transcript

Remember the Small Cap indexes largest component, Super Micro?

Three weeks ago, it pre-announced and jumped 20% higher. Last week it reported those earnings and jumped another 20%. On Monday it rose another 14%. Say hello to your newest $40b+ small cap stock.

StockCharts.com and iShares.com

The animal spirits were busy this weekend...

$15 billion in M&A announced. One S&P 500 company and two Russell 2000 companies will be leaving the indexes.

[EVBG] Everbridge to be acquired by Thoma Bravo at $28.60/shr in $1.5B cash deal (32% premium)
[HAYN] Haynes Int'l to be acquired by Acerinox for $61.00/shr in cash at EV of $970M; Acerinox to support Haynes with additional $200M investment over the next 4 years in newly combined North American Business
[CTLT] Catalent to be acquired by Novo Nordisk's Novo Holdings for $63.50/shr in cash at EV of $16.5B
[MOR.DE] MorphoSys reportedly Novartis in late stage talks to acquire cancer drug developer MorphoSys
[ELAN] Divests its Aqua unit to Merck Animal Health for $1.3B in cash; Enables Elanco to accelerate debt paydown by $1.05B to $1.1B


This $50b market cap industrial touches most manufacturers in the U.S., so when it hits new all-time highs you pay attention...

W.W. Grainger distributes approximately 1.5 million maintenance, repair, and operating products that are sourced from over 4,500 suppliers. The company serves about 5 million customers through its online and electronic purchasing platforms, vending machines, catalog distribution, and network of over 300 global branches.


But not just W.W. Grainger, look at these other large cap U.S. industrials hitting highs on Friday...

Tough to believe in all those poor regional manufacturing surveys when this is occurring. Stock prices were clearly leading the ISM Manufacturing survey to come out of its doldrums.


What everyone wants to talk about...

Goldman Sachs

Something that I have never seen in a risk disclosure...

Don't worry, I have given up all of my high-speed road cycling descents. The Weekly Research Briefing has many years to run.

As you would guess, the Mag 7 has also influenced the performance differences in the global indices...

BofA Global

After a good month of stock performance and earnings, here is how the S&P 500 forward multiple sits...

@FactSet: The forward 12-month P/E ratio for $SPX of 20.0 is above the 5-year average (18.9) and above the 10-year average (17.6).

Now for a great white paper from the team on Portfolio Construction and Private Market Assets…

Private market assets are one of the fastest growing components of investors’ portfolios in recent years. Your firm may or may not be using private equity or private debt in client portfolios, but it is worth your time to see for yourself why so many others are moving into the space. Bryan wrote this piece to help put the key discussion points in front of you.

Portfolio Construction Vol. I: A Foundation for Success
January 31, 2024
Bryan Jenkins, Co-Head of Portfolio Management Group

Executive Summary:

  • Private markets occupy a growing share of investors’ portfolio, with investors attracted to the asset class by the opportunity set and the potential to generate premium returns.
  • The growing choice available to private markets investors provides more opportunity for customization but also risks that must be managed through thoughtful portfolio construction.
  • Constructing a private markets portfolio challenges investors to make active management decisions on asset allocation, diversification, investment pacing, and exposure management, which can have a meaningful impact on portfolio risk and return.
  • These portfolio construction challenges can be addressed through access to high quality data and rigorous quantitative analysis of the asset class.

Hamilton Lane

If you are interested in more value-added Private Market content, the HL analytic team dives weekly into our proprietary databases to find gems like the one below. Sign up by clicking subscribe on this LinkedIn link to begin collecting them.


Away from the markets, this article made me think that several small U.S. cities will be calling the mayor of Topeka for their playbook this month...

TOPEKA, Kan.— While many American cities are struggling with large numbers of newly arrived migrants, Topeka is inviting anyone and everyone with permission to work in the U.S. to come its way.

Like a lot of smaller cities, the Kansas capital is grappling with near-stagnant population growth and an unemployment rate well below the national average, according to city and economic-development officials. Finding people to fill its roughly 6,600 open jobs has been a struggle, they say.

The Greater Topeka Partnership, an economic-development group, has been trying to sell people on the city with its “Choose Topeka” marketing campaign, which it started in 2019. Last year, it decided to direct those efforts toward immigrants, especially those from Spanish-speaking countries...

The initial marketing push to immigrants included printing welcome and moving guides in Spanish. The campaign took off in the fall when Telemundo ran a segment on the effort and the benefits of moving to Topeka. TikTok videos about the segment have racked up thousands of views and likes.

Since the news story in Spanish-language media was published, the Greater Topeka Partnership has received nearly 10,000 résumés of people looking for job-placement help to move to the region...

Jay Ives, one of three owners of the Blind Tiger Brewery and Restaurant in Topeka, said he supports any effort to lure new residents. His business, he said, has about six to eight openings among a staff of about 80, and is constantly in search of new hires.

“We’ve got empty jobs here in Topeka, so bringing people to fill them is how we grow,” the Topeka native said as he sipped one of his brewery’s beers on a recent weeknight.


If you are a healthcare investor, you already know about VX-548...

For everyone else, Vertex's newest drug is a non-addictive pain killer. Fingers crossed that this one will be the end of all opioids. You can see on the chart below where the positive phase 2 study results were released in December. The market is excited about the drug and has increased the company's market cap by over $20 billion. Stay tuned.

Vertex Pharmaceuticals of Boston announced Tuesday that it had developed an experimental drug that relieves moderate to severe pain, blocking pain signals before they can get to the brain. It works only on peripheral nerves — those outside the brain and the spinal cord — making it unlike opioids. Vertex says its new drug is expected to avoid opioids’ potential to lead to addiction.

The company reported that it had completed two randomized studies, the first in 1,118 people who had abdominoplasties and the other in 1,073 people who had bunion surgery. The two procedures are commonly used in studies of people with acute pain, the temporary kind that is brought on by something like a surgical procedure and is likely to ease with time.

In its clinical trials, Vertex measured the drug’s effect with a standard pain scale in which patients rated pain severity from 1 to 10, with 10 the most severe. Those taking its drug had a statistically and clinically meaningful reduction in pain, it reports. A third study looked at safety and tolerability of the drug in people experiencing pain from a variety of conditions.

Buoyed by the results, which are yet to be published or presented at a meeting, Vertex plans to apply to the Food and Drug Administration by midyear for approval to market the drug, a pill that, for now, is called VX-548.

NY Times


The future arrived last week...

You likely won't own the Apple VP1, but the Apple VP6 might be difficult to avoid.

"This was as far from a VR headset as a kid’s Schwinn bicycle is from a Gulfstream G800 private jet. Just as when I scrolled my finger around the wheel of the first iPod or used my finger and thumb to zoom into an image on the first iPhone. With the Vision Pro, I could look at an app icon and simply tap my fingers together, and the app would open. And then it was hanging in front of me. In the clearest resolution I’d ever seen in my life. I could swipe through images with my hands, move things with my fingers. Unlike other VR headsets, where you have to use a controller that feels like you have lobster claws for hands, with the Apple Vision Pro your eyes become the mouse absolutely seamlessly. “It’s mind-blowing,” Cook said to me when I told him about my experience. “We live in a 3D world, but the content that we enjoy is flat.”

During that first demo I went to the iconic Mount Hood stratovolcano in Oregon, and I could hear and see a million raindrops falling into Mirror Lake, so much so that I felt like I was there, and the only thing missing was the earthy scent of rain-soaked soil. I interacted with graphics in midair that were crisper than anything I’d ever seen before. And I touched them all with my fingers, not a mouse or keyboard. I saw spatial videos for the first time. To say this feature is astounding is an understatement. You actually feel like the person is in front of you and you can reach out and touch them. I saw clips of movies that were 100 feet wide, sharper and clearer than any IMAX. But most importantly, I saw the world around me. That very room. I didn’t feel closed off or claustrophobic. I was there. I was everywhere, all at once.

I left the Apple offices that day and went to a nearby coffee shop, and when I opened my laptop, a relatively new computer, it felt like a relic pulled from the rubble of a Soviet-era power plant."

Vanity Fair

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