Private Wealth

Weekly Research Briefing: Coming into Balance

April 18, 2023

Let me stack these rocks. Bank earnings better than expected. Inflation data coming in weaker than expected. Economic data is surprising to the upside. Credit spreads in an improving trend. The VIX traded at a 16 handle today. The S&P 500 just had its highest weekly close in SEVEN months and international markets are outperforming the U.S. Our stack of rocks still has plenty of headwinds but the longer it can stay put, the more time we have to get some mortar on it to keep that next bad bank executive, commercial RE loan default wave or geo-political event from pushing it over. There are still so many bears out there planning on a 20-30% pullback to save their 2023 forecast, but what if it never occurs?

J.P. Morgan crushed it on Friday. We thought that the wind would be at their back as customers ran away from SVB, Signature and Credit Suisse, but wow, what a blowout. Employees will be rushing back to the office now so that they can get the face time in hopes of a bigger piece of the 2023 bonus pool. Other bank earnings at Citigroup, Wells Fargo, and M&T Bank looked solid also. Blackrock beat at the AUM and EPS. And Hermes and Delta Air continued to outperform in the consumer space. We are only in week one, but so far, so good for corporate earnings.

So where do we go from here? Interest rates should continue to slide as inflation falls and the economy slows. The credit and equity markets suggest that the slowdown will be manageable for both banks, lenders and their borrowers. M&A is returning to the markets. Just look at all the target activity in the last week: National Instruments, Triton Int'l, Prometheus Bio, TECK Resources, Network Int'l, THG plc, Rovio Entertainment, Manchester United, Wood Group and Dechra Pharmaceuticals. The credit markets have been slowly re-opening. IPO and equity issuance should not be too far away. U.S. stocks are not cheap but performing well. Technology stocks are really not cheap and are performing even better. Go figure. Are the earnings estimates wrong or is the discount rate? Maybe a bit of both.

This week we get more housing data, the Philly Fed Manufacturing data & the U.S. & Global PMIs. Also, plenty of fed speak and a much bigger wave of earnings. If you are long risk, grab the mortar. If you are a bearish Wall Street strategist, wind up your best shot because it might be the last chance that you get at taking down this stack of rocks.

The March CPI came in light helped by energy, food and shelter prices...

@LizYoungStrat: Mar inflation came in soft-ish: headline slightly below est at 5.0%, core was bang on at 5.6%. Notables: Energy was negative y/y and m/m, Food was finally flat m/m (first flat print since Nov '20), but core > headline for first time since Jan ' still a big part.

After months of talking about shelter prices, they finally broke...

@bencasselman: We've all been waiting for the slowdown in rental inflation that we saw in private-sector data to show up in official statistics. Well (with the usual caveats around reading too much into one month of data), it's here: steep drop in the pace of rent increases in March.

And better inflation data is leading to a reduced need for the Fed to hike rates...

According to live rental data, the shelter component should trend even lower going forward...

The median U.S. asking rent fell 0.4% year over year to $1,937 in March. That’s the first annual decline since March 2020—when the coronavirus was declared a pandemic—and the lowest median asking rent in 13 months. By comparison, rents were up 17.5% one year earlier, in March 2022.


Just wait until shelter deflation hits the Government stats...

Penn State researchers developed an ACY Marginal Rent Index, which measures the real-time cost of rents, rather than BLS’s lagged “shelter” measurement. Using this index, Core CPI MoM is currently NEGATIVE and 3M SAAR is -7% and -0.8% YoY.

Penn State

The March PPI came in much lower than expected falling -0.5% in March versus an expected flat report...

@LizAnnSonders: March PPI +2.7% year/year vs. +3% est. & +4.9% prior (rev up from +4.6%); core PPI +3.4% vs. +3.4% est. & +4.8% prior

The Empire Fed data was a positive blowout on Monday...

The Empire manufacturing index increased by 35.4pt to +10.8 in April, well above expectations for a more moderate increase and the highest reading since July 2022. The underlying composition was firm, as the shipments (+37.3pt to +23.9) and new orders (+46.8pt to +25.1) components surged into expansionary territory and the employment component increased slightly (+2.1pt to -8.0). The improvement is consistent with the rebound in East Asian industrial activity. The prices paid measure declined 8.9pt to +33.0, and the 6 months-ahead business conditions index increased by 3.7pt to +6.6.

Goldman Sachs

Monday also showed another uptick in the major residential housing survey...

@LizAnnSonders: April @NAHBhome Housing Market Index up to 45 vs. 45 est. & 44 in prior month … 4th straight monthly improvement as limited resale inventory helped drive demand for new homes … share of builders reducing home prices fell to 30%; share using incentives ticked up to 59%

But we still have headwinds as indicated on the banking conference calls on Friday...

"I wouldn't use the word credit crunch if I were you. Obviously, there's going to be a little bit of tightening. And most of that will be around certain real estate things. You've heard it from real estate investors already. So I just look at that as a kind of a thumb on the scale. It just means the finance conditions will be a little bit tighter and increases the odds of a recession. That's what that is. It's not like a credit crunch." - JPMorgan Chase CEO Jamie Dimon

"After starting the year on a strong footing, Bank of America aggregated credit and debit card spending per household moderated in March to 0.1% YoY growth, the slowest pace since February 2021." - Bank of America

"It was pretty small when you look at that change. So I wouldn't read too much into it. I think people are still -- there's still a lot of activity out there and consumers are still out spending both on the debit side and the credit side. So I wouldn't read into a couple of weeks...Customer activity is still relatively strong" - Wells Fargo CFO Michael Santomassimo

The Transcript

But just maybe, it is safer to say that the worst of the 2023 banking crisis is behind us...

@IvanTheK: Now trading at a premium in the secondary market.

The FOMC minutes showed that the Fed is highly concerned about the impacts of the banking credit tightening...

The minutes to the March FOMC meeting noted that “all” participants agreed that a 25bp hike was appropriate. “Many” participants noted that the recent bank stress had led them to “lower their assessments of the [funds rate] that would be sufficiently restrictive.” The Fed staff now expects the economy to enter “a mild recession” later this year, reflecting its “assessment of the potential economic effects of the recent banking-sector developments,” although it noted that the uncertainty around its growth projections “was much greater than at the time of the previous forecast.” FOMC participants expected GDP to grow “at a pace well below its long-run trend rate” in 2023, with risks “weighted to the downside.” Participants once again characterized inflation as “unacceptably high” and the minutes dropped February’s reference to a “welcome reduction” following upward price revisions and firmer monthly readings. Participants also observed “less evidence” of slowing inflation in core services ex-housing.

Goldman Sachs

The market is betting on a +25 basis point Fed Funds rate increase at the May 3rd FOMC meeting...

Thus, positive economic surprises > a weaker CPI/PPI + a potential credit crunch.

The Daily Shot

Financials led the market last week as J.P. Morgan and other big banks beat earnings...

Many more banks to report this week, but now joined by companies from most other industries...


Looking at last week's results, Hermes continues to remain unaffected by any global economic uncertainty...


And Novo Nordisk raised its numbers significantly driven by stronger Wegovy/Ozempic sales...

NVO] Reports prelim Q1 Rev +25% y/y; Raises FY23 Rev +24-30% y/y (prior +13-19% y/y), Op profit +28-34% y/y (prior +13-19% y/y)

  • Prelim Q1 Op +28% y/y Comments: Sales outlook for 2023 is raised, primarily reflecting Wegovy prescription trends in the first quarter and higher full-year expectations for sales of Wegovy in the US. Furthermore, a second contract manufacturer is now ready to begin production, thereby increasing Wegovy supply capacity.
  • Updated sales outlook also reflects higher full-year expectations for Ozempic sales, mainly in the US, following accelerated volume growth of the GLP-1 class.


If you are a growth stock investor, then you are likely now an expert in the new class of weight loss drugs...

Your team has likely been studying up on them since 2017 when Ozempic was approved for diabetes which got you looking forward to the day when the drugs might get a broader approval for weight loss. Ozempic became Wegovy and got the approval in 2021 which led to the massive outperformance in Novo Nordisk. And now Eli Lilly's Mounjaro is on deck for release. What a great time to be a pharma analyst and be able to make so much money for your clients as two of the biggest drugs in the world hit the marketplace.

Over the last year, the injectable diabetes medication Ozempic steamrollered through TikTok, talk shows and tabloids as people raved about using it off-label to lose weight. Then the hype intensified this fall around Wegovy, a similar medication approved for weight management.

Another diabetes drug, called Mounjaro, is now gaining attention, with many people using it off-label to lose weight. Some research has found that Mounjaro may be even more powerful than either Ozempic or Wegovy. One major study comparing these drugs found that taking tirzepatide, the active ingredient in Mounjaro, led to sharper reductions in blood sugar levels and greater weight loss than the other drugs.

However, that study compared different doses of semaglutide and tirzepatide, making it tricky to determine how these medications stack up head-to-head, said Dr. Dean Schillinger, a professor of medicine and diabetes expert at the University of California, San Francisco. It was also sponsored by Eli Lilly, the company that manufactures Mounjaro.

Mounjaro is currently approved by the Food and Drug Administration to treat only Type 2 diabetes. “Mounjaro is not a weight loss drug,” the official website for the medication reads, under larger, bold purple letters proclaiming that people taking it have lost up to 25 pounds. But there is some speculation that the F.D.A. could authorize the medication for weight management soon; Eli Lilly announced in October that the F.D.A. had fast-tracked its process of examining and approving tirzepatide for adults who are obese or overweight.

The New York Times

A dream for active and concentrated large cap growth stock managers...

Between Novo Nordisk and Eli Lilly, you are looking at $650 billion in market cap that is significantly outperforming.

Elsewhere in big pharma-land, Merck is paying almost $11 billion cash to expand into autoimmune drugs...

Prometheus is also a front runner in using machine learning to develop drugs which Merck also hopes to leverage.

In an early Sunday morning release, Merck (ticker: MRK) said it has agreed to purchase Prometheus (RXDX) for $200 per share in cash, or roughly $10.8 billion. The deal helps Merck build its autoimmune drug portfolio adding Prometheus’ star drug PRA023—a treatment for ulcerative colitis, Crohn’s disease, and other autoimmune conditions—to its lineup. The drug has yet to be approved but mid-phase trial data late last year were positive.

Citi analyst Andrew Baum and his team sent a note to their clients estimating up to $20 billion in peak sales for PRA023 after approval and a boost of 15% to 30% to long-term earnings, when stripping out one-off items.


And over in industrials, one of the largest Test, Measurement & Instrumentation companies sells for 20x EBITDA...

Yesterday morning, Emerson and National Instruments announced that Emerson will acquire NI for $60/share at an equity value of $8.2 bn, following NI’s strategic review process which involved competing interest from Emerson, Fortive and Keysight Technologies as per press reports... The transaction values National Instruments at 24x CY23 consensus EPS and 20x CY23 consensus EBITDA, although post-synergies the transaction is estimated by Emerson to be closer to ~15x forward looking EBITDA.

J.P. Morgan

And Brookfield pays $13b to buy a major intermodal container leasing portfolio for their infrastructure unit...

[TRTN] To be acquired by Brookfield Infrastructure at $85.00/shr in ~$13.3B cash-stock take-private deal; Triton shareholders will be able to elect to receive the mixed cash/stock consideration or all-cash or all-stock consideration

  • Triton common shareholders to receive consideration valued at $85 per share, including $68.50 in cash and $16.50 in class A shares of Brookfield Infrastructure Corporation
  • Represents a 35% premium to Triton's closing share price on April 11, 2023 and a 34% premium to the 30-day volume-weighted average share price.


Half of the large-cap stocks making all-time highs on Friday were Healthcare companies...

And so did the un-healthcare company, McDonald's, whose stock has been on a 3 week rip upwards to new all-time highs...

Higher highs and higher lows as the U.S. stock market repairs itself...


But not cheap as Ed Yardeni shows...

@yardeni: Our Blue Angels framework shows that the S&P 500 has been fluctuating between a forward P/E of 16 and 18 since the end of last year's bear market, despite falling forward earnings.

Demand for equities continues to exceed supply of equities...

The equity market has been supported this year by a re-acceleration in net equity withdrawal by corporates themselves as buybacks and LBOs picked up relative to the previous two quarters, while IPOs/equity offerings stayed low for a fifth straight quarter in Q1 2023.

J.P. Morgan

The supply of high yield bonds is also shrinking just as investors look to increase their holdings...

As interest rate hikes got underway last year, borrowers picked leveraged loans over junk bonds to finance many deals because their floating rate nature and typically shorter maturities were seen as more attractive to investors. At the same time, many buyouts — including multi-billion deals like Zendesk Inc. — were funded by private credit firms offering rates below those available in the volatility-lashed public markets.

Other companies are skipping the bond market altogether, opting instead to pay down debt while interest rates are elevated. Cruiseline operator Carnival Corp. plans to use its available liquidity to pay down the roughly $4.5 billion in debt it has coming due later this year and next instead of coming to the high-yield market.

Credit upgrades to investment grade — so-called rising stars like Nokia Oyj — has also been a reason for the shrinking high-yield market.

A smaller universe means less supply to go around to investors that are eager to put money to work in high-yield debt. Funds that invest in US corporate bonds saw additions of $5.6 billion in the week ended April 5, including the largest inflow into high-yield funds in nearly six months, according to Refinitiv Lipper data.


Demand > Supply means higher prices for Junk Bonds and tighter credit spreads versus Treasuries...

The improving credit markets and better economic stability has led Private Equity buyers to accelerate their digging into public market valuations...

Private equity firms are back scouring Europe’s public markets for bargains, with nearly $20 billion of potential takeover deals emerging in the last few weeks alone.

EQT AB is in talks to buy Dechra Pharmaceuticals Plc for £4.6 billion ($5.7 billion) in what would be the UK’s biggest take-private this year. News of the possible transaction emerged Thursday just hours after another London-listed firm, the £1.6 billion payments processor Network International Holdings Plc, confirmed Bloomberg reporting on takeover interest from CVC Capital Partners.

Blackstone Inc. then announced a final agreement Friday to acquire urban warehouse owner Industrials REIT Ltd. for £511 million. Apollo Global Management Inc. has separately been in talks with John Wood Group Plc over an improved takeover offer of £1.7 billion for the Scottish engineering company.

“Every time we see valuations fall, PE is there to analyze, and that’s what we’re seeing now,” Miguel Hernández, chief executive officer of investment banking at Alantra Partners SA, said by phone Friday. “Valuations of listed companies are quite attractive now, particularly for mid-sized and small-cap firms.”


Sometimes it pays to follow what the most knowledgeable investors are doing...

A break in the credit markets and forced selling of debt/loans by banks is allowing private companies and their GPs to buy back debt at reduced prices.

Some of the world’s top private equity firms are scooping up the debt of their own portfolio companies from banks at steep discounts as they seek juicy returns amid a lull in deal making.

Advent International Corp. recently bought a portion of a loan that helped fund its buyout of a Royal DSM unit, while Clayton Dubilier & Rice has purchased debt supporting at least two of its deals over the past year. Just last week Elliott Investment Management snapped up a $550 million chunk of bonds backing its acquisition of Citrix Systems Inc. at 79 cents on the dollar, following a similar move in September.

The trades come as banks have stepped up efforts to offload billions of dollars of debt stuck on their balance sheets — the product of a sharp repricing of risk assets last year that upended underwriting pledges. With Wall Street willing to realize significant losses in some cases to shed the risk, buyout firms coming off the weakest quarter for M&A since 2020 are finding the often double-digit yields on debt of companies they’re already well acquainted with too good to pass up.

“A lot of these private equity firms are smart buyers of debt when the time is right,” said Steven Messina, head of the banking group at Skadden, Arps, Slate, Meagher & Flom LLP in its New York office. “Right now, we’re in a situation where private equity firms generally are flush with cash and have the ability to take advantage of situations where the debt is trading at a discount.”


U.S. stocks enjoying the weaker U.S. Dollar...

The U.S Dollar index printed its lowest close in a year last week and is now >10% off its September highs.


While big foreign local stock indexes make new highs....

Walter Deemer/

Forget about 52-week highs, France's CAC index is making new all-time highs...

If you need an updated EU GDP chart...

Visual Capitalist

Global Technology P/E relative to the Market nearing 20-year highs, but still away from the 2000/2001 peaks...

Tech has been helped by big cap revenue stability, cost-saving moves to maintain margins and of course falling interest rates which are good for long duration investment assets.

J.P. Morgan

The IRA/Chips act is a win for public/private partnership in America...

For proof, look no further than the number of foreign companies now building plants in the U.S.

Companies have committed more than $200bn to US manufacturing projects since Congress passed sweeping subsidies last year, as president Joe Biden’s effort to spark a new industrial revolution gains momentum.

The investment in semiconductor and clean tech investments is almost double the commitments made in the same sectors in the whole of 2021, and nearly twenty times the amount in 2019, according to data compiled by the Financial Times.

While the FT identified four projects worth at least $1bn each in these sectors in 2019, there were 31 of that size after August 2022.

There has been more than $40bn in planned capital spending since the start of the year. Asian giants LG, Hanwha, and LONGI have all announced deals in the past month, taking total large-scale investments to $204bn on April 14.

“We see right now the tectonic plates are shifting with respect to investment in the United States,” said US energy secretary Jennifer Granholm this week, referring to the surge of investment in recent months.

Financial Times

If looking at Commercial Real Estate, remember to focus on the building's age if you are looking for valuation stability...

Our property-level analysis of Office REIT properties showed that the characteristics which do hold informational value are building age, level of reinvestment into properties, and LEED Platinum certifications. CoStar's universe of office properties shows that newer properties (built between 2008 and 2018) have experienced just 100 bps of occupancy loss since 4Q19 while older buildings have seen 590 bps of occupancy loss.

Goldman Sachs

Hank Paulson is an expert on China. So, this read is a valuable one if you have exposure...

“This is a very different China to even a few years ago,” says Paulson. “The US-China relationship is on the brink. Communications have ground to a halt. There’s a lot going on in the world that’s troubling but to me it’s the US-China relationship that is the most worrying.”

I ask who is to blame. “What we’re seeing right now is Biden waiting to have a sorely needed call with Xi and meanwhile Xi’s everything-but-America strategy is a whirlwind of activity,” Paulson says. “Xi is playing the global statesman, meeting with heads of state around the world and in China. The Chinese are arguing that the US is trying to contain them and the Chinese people definitely believe that. They’re putting out to the world, and to American CEOs, that China is open for business again. If America goes too far in curtailing trade and investment with China and we go far beyond what our allies and partners want to do, the result will be to isolate the US.”

Financial Times

So easy to see how solar will continue to be one of the fastest growing industries in the world for many years, if not decades...

Solar photovoltaics (PV) have become one of the cheapest sources of electricity. Lazard’s estimate of unsubsidized levelized cost of energy (LCOE), the average cost of electricity generated over a plant’s lifetime, has utility scale solar PV cheaper than anything except completely depreciated natural gas plants and wind in the very windiest locations. Data from the Energy Information Administration (EIA) likewise shows that new solar PV plants in the US generate electricity cheaper than anything else except wind power in the best locations.

Solar PV’s low cost is the result of it steadily falling in price over many decades. In 1957 solar PV electricity cost roughly $300,000 per megawatt-hour in 2019 dollars. By 2019, in the sunniest locations that had fallen to roughly $20 per megawatt-hour, 15,000 times less. And it's still getting cheaper. In 2021, the DOE set a goal to reduce the cost of solar PV by another 50% by 2030.

Because of its low cost, while solar PV is still a small fraction of overall electricity generation (around 6% in the US), it’s an increasingly large fraction of new electricity generation capacity. Of the 151 gigawatts of planned electricity generating plants tracked by the EIA, 49% of them are solar PV projects.

Construction Physics

What do the following companies have in common?

A leading North American lessor of trailers, marine chassis, and containers. A developer of large utility-scale renewable energy focused on solar and battery storage projects in the Western U.S. A B2B focused digital marketing service company. A small-scale LNG liquefaction facility and bunkering barge operation. They are all examples of deals that Hamilton Lane has been invested in over the last 18 months.

Hamilton Lane

Nothing better than finding a broken roulette wheel on a casino floor...

Most all non-digital systems can be beat. This is a great article. Good persistence by the journalist for tracking down the winner and learning the truth.

But the way Tosa and his friends played roulette stood out as weird even for the Ritz. They would wait until six or seven seconds after the croupier launched the ball, when the rattling tempo of plastic on wood started to slow, then jump forward to place their chips before bets were halted, covering as many as 15 numbers at once. They moved so quickly and harmoniously, it was “as if someone had fired a starting gun,” an assistant manager told investigators afterward. The wheel was a standard European model: 37 red and black numbered pockets in a seemingly random sequence—32, 15, 19, 4 and so on—with a single green 0. Tosa’s crew was drawn to an area of the betting felt set aside for special wagers that covered pie-sliced segments of the wheel. There, gamblers could choose sections called orphelins (orphans) or le tiers du cylindre (a third of the wheel). Tosa and his partners favored “neighbors” bets, consisting of one number plus the two on each side, five pockets in all.

Then there was the win rate. Tosa’s crew didn’t hit the right number on every spin, but they did as often as not, in streaks that defied logic: eight in a row, or 10, or 13. Even with a dozen chips on the table at a total cost of £1,200 (about $2,200 at the time), the 35:1 payout meant they could more than double their money. Security staff watched nervously as their chip stack grew ever higher. Tosa and the Serbian, who did most of the gambling while their female companion ordered drinks, had started out with £30,000 and £60,000 worth of chips, respectively, and in no time both had broken six figures. Then they started to increase their bets, risking as much as £15,000 on a single spin.

It was almost as if they could see the future. They didn’t react whether they won or lost; they simply played on. At one point, the Serbian threw down £10,000 in chips and looked away idly as the ball bounced around the numbered pockets. He wasn’t even watching when it landed and he lost. He was already walking off in the direction of the bar.

It wasn’t the amount of money at stake that made the Ritz security team anxious. Customers routinely made several million pounds in an evening and left carrying designer bags bulging with cash. It was the way these three were winning: consistently, over hundreds of rounds. “It is practically impossible to predict the number that will come up,” Stephen Hawking once wrote about roulette. “Otherwise physicists would make a fortune at casinos.” The game was designed to be random; chaos, elegantly rendered in circular motion.


Finally, your big city babysitter benchmarks...


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The author has current equity ownership in: Own Merck & Co. Inc., J.P. Morgan Chase & Co., M&T Bank Corp.

The information presented here is for informational purposes only, and this document is not to be construed as an offer to sell, or the solicitation of an offer to buy, securities. Some investments are not suitable for all investors, and there can be no assurance that any investment strategy will be successful. The hyperlinks included in this message provide direct access to other Internet resources, including Web sites. While we believe this information to be from reliable sources, Hamilton Lane is not responsible for the accuracy or content of information contained in these sites. Although we make every effort to ensure these links are accurate, up to date and relevant, we cannot take responsibility for pages maintained by external providers. The views expressed by these external providers on their own Web pages or on external sites they link to are not necessarily those of Hamilton Lane.

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