Private Wealth

Weekly Research Briefing: Change is Coming

September 19, 2023 | 15 min read

Driving through the west coast hills, I saw plenty of changing colors over the weekend. And with snow starting in the Colorado mountains, the green aspen trees will soon turn to gold. While nature's hues shift as September moves toward October, I wonder if some new headwinds in the economy will begin to influence the price change colors on my stock market screens.

The UAW strikes began on a more aggressive note than initially indicated. Away from the initial automakers and plants struck, it is estimated that a total of six to eight million jobs could be affected as supply chains backup. Increased jostling in Washington D.C. is causing the threat of a U.S. Government shutdown to rise. Recall that the market was not a fan of the 2018 closing. Now throw in rising energy prices, still higher interest rates and a month-long corporate stock buyback blackout period and you can see how the markets could easily squirt yellow and crimson onto your Bloomberg screens. Never mind that Microsoft and NVIDIA are down 7% and 11% to start off September. Didn't mega cap tech stocks only go up?

This week has a full plate. There is a toolbox full of housing stats to be released along with the Philly Fed and another closely watched Jobless Claims figure. The FOMC meets Tuesday and reports Wednesday on its September activity. Watchers are heavily betting on a pause in rates this month with everyone looking at the tea leaves for the November 1st meeting. The U.S. Fed will be joined by 10 other central banks meeting around the world this week. Pay attention to any differences of opinion and the reasons why.

Arm Holdings did its job in setting the table for a year end IPO feast last week. Instacart is on deck for this week with others recently filing their paperwork to launch. And the credit markets remain active with plenty of issuance up and down the risk spectrum as corporations refinance and push out their maturities. So far, investors are taking it all in but let's see how the markets navigate some of these new emerging drafts and whiffs to economic growth. Stay tuned.

Some good soundbites on the Q3 consumer economy from the many corporate presentations last week...

"From a macro standpoint, I think what we're seeing is consistent with what you're hearing from other banks, which is the consumer remains strong" - US Bancorp CEO Andrew Cecere

"I'll tell you by the consumer, but there's a big but. So I want to be -- it's pretty good. They have more money than they've had. Home price has gone up for the last 15 years. Asset prices have gone up. Their balance sheet is in great shape. Their incomes have gone up. They've got more cash in their checking accounts than pre-COVID. It was a lot more, and it's been coming down so that excess -- we call it excess savings seems to be normalizing. Wages are going up, particularly at the low end. It's pretty good, which is why you have a pretty good economy." - JPMorgan Chase CEO Jamie Dimon

"So broadly, the consumer is still pretty strong. They carried over some savings from COVID that are still on their balance sheets, and their credit scores are still above 2019, which is a good sign. So when we look forward, that's a real positive." - Equifax CEO Mark Begor

"In the US, things are better than I would have expected them to be when we started the year. I was concerned about the amount of inflation in categories like dry grocery and consumables, and how that would impact discretionary purchases. Had an eye on the consumer balance sheet, all those things that we were all thinking about at the beginning of the year. But things have held up better than I would have guessed."

"I'm feeling pretty good about where the consumer is in the US and encouraged by what happened with back to school. As we reported at the end of the second quarter, back to school started off strong and normally that means that the holiday is going to be good. So I feel pretty good about the back half and our position in it...Food and consumables have still gone up as a percent of the total, and I think that'll continue through the year." - Walmart CEO Douglas McMillon

The Transcript

It makes sense that the consumer economy is strong given continued retreat in jobless claims...

@LizAnnSonders: Initial jobless claims at 220k vs. 225k est. & 216k in prior month; continuing claims at 1.688M vs. 1.693M est. & 1.679M in prior week … greatest increases in IN (+2.7k), FL (+606), & KY (+321); greatest decreases in OH (-3.5k), MO (-3.3k), & NY (-3k)

Also helping the consumer economy is the confidence being felt by a surge in home equity values...

If there’s one reason to remain optimistic on household spending, it’s that the “excess savings” framework doesn't capture the full picture of household balance sheets. Adjusted for income, household net worth remains near a record high. That's driven, importantly, by the surge in home values and home equity levels during the pandemic. Additionally, there’s no reason to think consumers will shift back to the caution and elevated savings rates of 2019 — activity patterns in 2023 are closer to what we should expect going forward.

The capacity of households to spend doesn’t stop when savings built up during the pandemic dwindle back to the pre-pandemic trend. Overall household wealth matters too. In the second quarter of 2023, household net worth stood at 7.75 times the level of disposable personal income, from 7 times in the fourth quarter of 2019, according to last week’s Financial Accounts of the United States report released by the Federal Reserve. Relative to income levels, households are wealthier now than they were at the peak of the dot-com bubble in the spring of 2000 or the peak of the subprime mortgage housing boom in the mid-2000s.

Most of this increase has been driven by the surge in home equity during the pandemic — home equity as a percentage of disposable personal income is above the highs seen in the mid-2000s, and is rising again as home values recover after a brief decline in late 2022.


But while housing prices remain high, today's NAHB showed that new activity may be slowing...

Blame the fall seasonality, lack of supply, high prices and 7% mortgage rates for the pullback. Time to keep a closer eye here.

@dailychartbook: The NAHB Housing Market Index dropped again in September to 45, the lowest in 5 months and below expectations of 50.

Among businesses, there was a surge of optimism in the N.Y. Fed region even before the Giants rose from the desert ashes on Sunday...

The Federal Reserve Bank of New York’s general business conditions index for September increased nearly 21 points to 1.9, data showed Friday. A reading above zero indicates growth, and the latest figure was well above the minus 10 median estimate in a Bloomberg survey of economists.

The index has been subject to large month-to-month swings over the last two years. Manufacturing more generally has struggled for momentum this year as producers contend with weak export markets and efforts by companies to better align inventories with sales.

However, the report’s forward-looking measures also indicated greater optimism about future demand. The Fed bank’s expected business conditions index advanced to the highest level since March 2022.

The New York Fed’s index of current new orders jumped by 25 points to 5.1, the highest reading since April. The shipments gauge increased by nearly that much.


The Daily Shot

Could the NY Empire Fed district have a concentration in the defense and space industries?

@boes_: The American military machine is really kicking into high gear. Industrial production of defense and space equipment surged 3.5% to a new record in August. It's now up almost 30% annualized over the last three months, the biggest such advance in 16 years

It was another big week of inflation data that came in nearly as expected...

@carlquintanilla: B of A: “.. The August #CPI, PPI & retail sales data leave our core views unchanged. Disinflation is on track and the consumer is resilient. The Fed's message .. is likely to be balanced.”

Consumers are continuing to reduce their inflation expectations...

The Daily Shot

Commodity prices are again worth keeping a closer eye on...

The Goldman Sachs Commodity index made a new 52-week high last week. This index is half energy components which account for most all of this surge as agricultural and metals prices have been flat to down over the last year.

A big reason for the current run in energy prices has been the recent global production declines...

@dailychartbook: "Global oil markets face a supply shortfall of more than 3 million barrels a day next quarter — potentially the biggest deficit in more than a decade — as Saudi Arabia extends its production cuts." @Bloomberg

But while gas prices are higher, their impact on U.S. consumers is lower because we are buying less fuel...

More conservation, more EV's, a continued WFH, more streaming all to credit as reasons.

@BobOnMarkets: There's been a fascinating divergence this year between gasoline prices (blue line) and spending on gasoline and energy as a % of personal consumption expenditures (white line). Maybe rising gasoline prices don't mean as much to American consumers as they used to?

The bond market continues to do the Fed's bidding...

10-year Treasury yields have remained stuck at highs even as inflation has fallen and job growth has moderated. The Fed will likely stay put on the Fed Funds interest rate this week while it lets the free markets put pressure on the economy.

But while risk free rates are high, financial conditions continue to improve allowing for companies to access the credit and equity markets...

@LizAnnSonders: U.S. Financial Conditions Index tracked by Bloomberg still hovering near its easiest/loosest since before Fed started hiking rates in 2022

Outperforming credit markets are allowing both low-risk and high-risk investors to tap the markets for financing...

Debt sales launching against this backdrop are finding hungry investors. Restaurant Brands International Inc., which owns fast-food chains including Burger King and Popeyes, sold a $5.175 billion loan this week.

The size of the deal was increased twice and the issuer is paying less to borrow than initially discussed, highlighting the demand. It was both the largest loan sale since early 2022 and the largest refinancing deal this year, according to data compiled by Bloomberg.

Even lower-rated borrowers are benefiting from the rally. ProAmpac PG Borrower LLC, a maker of packaging materials rated six notches below investment grade, came to market Thursday with a $2.085 billion amend-and-extend transaction, suggesting growing confidence among lower-rated issuers.

It’s a signal that borrowers are seizing an opportunity to tap into renewed demand, a contrast with the first half of the year when the market was all but shut to lower-rated names.


Looking over at the public equity markets, it is disappointing to see the number of NYSE stocks making new 52-week lows rising...


While the S&P 500 has had good performance in 2023, the returns have not been broadly based...

As we have written extensively, much of the performance has been concentrated in the largest capitalization technology-based companies.


As Torsten Slok noted over the weekend, the top 10 of the S&P 500 is now the most concentrated in 23 years...

Apollo Academy

All of the top ten P/E multiples are now greater than the average of the remaining 490 stocks...

In other words, imagine all diversified public equity managers secured to a medieval torture rack screaming in unison. If this narrowing of the market continues, many mutual funds (and even some hedge funds) will not make it to 2024.


One of the reasons for the sprint in top ten S&P 500 stocks is because the short- and long-term earnings growth estimates for the Mega cap tech stocks have quickly accelerated higher...

Twelve months ago, the 5-year earnings growth estimate was near 12.5% but today it is above 35%. With the 2023 recession outlook taking a dirt nap, and AI dropping into the picture, the analysts have gotten very excited with their models. Could earnings expectations get any higher for the largest technology stocks in the U.S. market?

Yardeni Research

And guess what the most crowded trade in the market remains?

BofA Global

Looking at the other sectors in the market and you can find some more reasonable valuations...

@dailychartbook: On a NTM P/E basis, most sectors are undervalued relative to $SPX. (via Goldman Sachs)

Zooming in on the Energy sector...

With free cash flow margins at highs and the sector significantly deleveraged, the group looks ripe for a revaluation either by investors buying undervalued cash flow streams or strategic investors buying entire companies with their own gushing cash flow streams. If oil prices remain high, expect this group to appear in more portfolios as we head into year end.

Morgan Stanley

As you would expect, the public markets do not care for U.S. small cap companies either...

@dailychartbook:"US small caps have hit a 22-year low relative to large caps." @johnauthers

Your personal and company insurance costs are going higher...

"Overall, it's still a tough environment for our insurance risk-bearing partners. They are grappling with stubbornly high loss cost inflation and more catastrophe losses at higher reinsurance attachment points. So when I roll it all together, we are not seeing and don't expect a meaningful slowdown in primary P/C rate increases. And thus, we remain steadfast and focused on helping our clients navigate and mitigate premium increases." - Arthur J Gallagher CEO Patrick Gallagher

The Transcript

The insurance brokerage industry is in the sweet spot right now...

Look at the charts of the five largest pure play insurance brokers. They are not only near their 52-week highs, but they are also near their all-time highs. Why? Increased customer demand to navigate rising property premiums. The twenty year moves of the big four have been 10-20x returns. This Rip Van Winkle/Desert Island trade just continues. Incredible.

More conference speak from last week: The capital markets are opening up...

"There's no question that the environment for capital markets activity is improving. It's still way, way off what I'll call cycle averages but definitely improving. Just before I came up here, I met with the ARM management. It's the middle of their IPO. From everything I hear, that's going well. We have a handful of other very significant IPOs in the market. It's been quite a while since I could say to you we have a handful of very significant IPOs in the market. That's an improvement." - Goldman Sachs CEO David Solomon

"I would say we are more confident now than any time this year about an improved outlook for 2024. I think it's clear to us now that the first half of the second quarter was probably the low point in sentiment around capital markets and M&A. And I think what we're seeing now versus July is that we've moved from maybe sentiment shift or backlog building to early action and some real data points in the market. And we're also seeing improved execution quality across the capital markets and M&A. And so I think that leads us to believe that 2024 should be meaningfully improved versus last year and that we're in the midst of a sustainable recovery….So there's no doubt that there's increased confidence among corporation PE firms." - Morgan Stanley Head of Investment Management Dan Simkowitz

The Transcript

Want to launch an IPO that will outperform? Have bigtime sales growth and get profitable in year two or three...

In 'What Matters for IPOs' we analyzed nearly 5,000 IPOs completed during the past 25 years. Based on these data, we recommend investors focus on identifying firms capable of growing sales at a fast clip and achieving profitability in their first years as a public company. While most IPOs underperform, deals that outperform share two characteristics: Greater than 40% annualized sales growth in their second and third years after flotation and positive net income by their 8th quarterly earnings report. Two thirds of IPOs with these characteristics outperformed the Russell 3000 in their first three years with the typical company outperforming by 22 pp (Exhibit 5).

Goldman Sachs

Now that Arm Holdings has fired, it's time to lock and load Instacart...

Instacart, the largest grocery-delivery business in the US, raised the price range for its upcoming initial public offering following a strong trading debut for chip designer Arm Holdings Plc.

The company and existing shareholders are now seeking to raise as much as $660 million, according to a filing on Friday. They are marketing 22 million shares at $28 to $30 apiece, up from a previously indicated range of $26 to $28 each, Instacart said in the filing.

The decision comes a day after SoftBank Group Corp.-owned Arm soared on its debut in New York, having priced its shares at the top of a range in the year’s biggest IPO. Instacart’s new target may value the company at anywhere from $9.3 billion to $9.9 billion based on the fully diluted equity listed in its filings.


Next you can try on some shares along with those new Birks...

Birkenstock has filed for an initial public offering in New York, in another sign of the allure US equity markets hold for European firms seeking a valuation uplift.

The German footwear maker, whose sandals are worn by hippies and preppies alike, will continue to be controlled by private equity firm L Catterton, according to a filing on Tuesday. The company will disclose the proposed terms of the share sale in a later filing with the US Securities and Exchange Commission.

The IPO could value Birkenstock at more than $8 billion, Bloomberg News reported previously. Goldman Sachs Group Inc., JPMorgan Chase & Co. and Morgan Stanley are leading the offering, which comes more than two years after L Catterton and the family investment company of billionaire Bernard Arnault acquired a majority stake in Birkenstock, valuing it at about €4 billion ($4.3 billion).


Softbank also has a depressive disorder focused biotech to take public in a U.S. IPO...

Drug company aims to capitalize on thaw as Instacart and Arm prepare for offerings

Neumora Therapeutics, backed by Amgen and Japan's SoftBank, is seeking a valuation of up to $2.74 billion in its U.S. initial public offering as the biopharmaceutical company looks to ride a revival in stock market listings. Neumora, which is developing drugs for brain disease, is offering 14.7 million shares at $16 to $18 apiece, its filing showed, potentially raising $264.8 million at the top end of the range.

Watertown, Massachusetts-based Neumora's announcement comes as grocery delivery service Instacart, SoftBank's chip designer Arm and marketing automation firm Klaviyo prepare for their IPOs, signaling a thaw in the market. The IPO market was frozen for the past two years, partly because the Federal Reserve's rate hike campaign to tame rising prices triggered fears of a recession, denting investor appetite for new issues.


Meanwhile in the world of real estate, as large tenants look for space and vulture buyers pick up properties, San Francisco RE is looking closer to a price bottom...

After a long stretch when the city’s office buildings couldn’t attract buyers even at cut-rate prices, sales are slowly materializing. Investors have purchased or agreed to purchase five major office towers in recent months, already making 2023 the most active year for sales since 2019.

Office transactions are resuming largely because some sellers are at last surrendering, accepting prices that would have been laughable four years ago. A local investment group, for example, purchased 350 California Street for $61 million, or about a fifth of what the building was valued at before the pandemic. Other recent sales have gone for half or less of the office property’s prepandemic value.

As painful as those deals are to the sellers—and to other San Francisco office owners whose property values will reflect the recent fire sales—investors and landlords said periods of capitulation are the critical first steps toward recovery of real-estate markets that have been in free fall.

These first few sales are helping determine the value of San Francisco’s office stock. That knowledge tells landlords which price tags to put on their properties if they want to sell. It informs investors of how big a discount to expect.

The recent sales activity “is part of the adjustment that we’ve been waiting for,” said Ted Egan, San Francisco’s chief economist. “The market-moving is healthy.”


If you spend any time at a computer, then here is an easy way to free your body from future pain...

I switched over about 5 years ago and would never go back to an old-fashioned mouse.

It's easy to blame an achy neck, stiff shoulder or twingy elbow on bad posture. But on many desks, experts agree, the quiet culprit is your mouse.

“There are a lot of delicate body parts involved in mousing,” explains Cameron Stiehl, a San Francisco-based ergonomic assessment specialist certified by the Back School, a training institute in Atlanta. “When you’re at the computer for hours at a time, having a mouse that doesn’t fit properly or is positioned incorrectly can cause soft-tissue injuries in the fingers, wrists, hands, elbows and even in the shoulder.”

A flat, standard mouse can sometimes encourage mousers to plant their wrist on the edge of the desk while they move the cursor around. Over time, Stiehl warns, this pivoting of the wrist and elbow can cause tendinitis or carpal tunnel syndrome. “There should be a straight line from the elbow to the middle finger, with no upward or downward bending,” she said. Countless ergonomic mouse models promise improvement. If you’re ready for a level up, here are four mice that will give you a hand.


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