Weekly Research Briefing: Cruising into Fed Week

June 11, 2024

The markets expect little action by the FOMC this week, especially given last week's strong job report. Investors will be sorting through Wednesday's meeting announcement and Fed Chair Powell's press conference, but all eyes are on the horizon for future Fed actions. The markets and economists are now fixated on a potential September or November rate cut. But if the economy keeps cruising along at a steady pace while inflation fears remain below the water line, will future rate hike expectations get pushed out again?

That was a strong May employment report as nonfarm payrolls added +272,000 jobs and wage growth came in at +0.4%. The household survey was weak putting the UE rate up at 4.0%, but it is a volatile monthly measure that misses several groups who do not respond to phone surveys. (Watch what they do, not what they say.) The consumer remains healthy as shown by Costco's May U.S. comp store (ex-gas) sales which accelerated to +5.7% from +4.6% in April.

In addition to the FOMC news on Wednesday, the markets will also get a look at new CPI data. The bulls would like a less than +0.3% m/m figure for the core May data. The pullback in gasoline prices could make for an interesting reading in the total CPI print. Not much else going on this week but for a few investor conferences and Monday's big Apple developer conference. I'd expect offices to start looking a bit thinly staffed as investors take advantage of the light news flow to get away. The 2nd quarter earnings season will start up again in July which is when the desks will fill up again. Find some good flip-flops for the month and let us know if we can help with anything footwear or financial market related.

Friday's solid job report for May quickly made us forget about April's weakness...

@WhiteHouseCEA: Today’s employment report shows the U.S. economy added 272,000 jobs in May, well above expectations. Revisions to prior months’ estimates were relatively small on net. Through May, the average three-month gain in payrolls was a very healthy 249,000.

The job report's strength led most Fed followers to push their interest rate cut forecasts out once more...

@NickTimiraos: JPM and Citi scrapped their calls for a July rate cut after last Friday's jobs report. Most sell-side economists and other professional Fed watchers now anticipate one or two rate cuts this year in either September or December.

Consumers continue to enjoy the stock market, the housing market and 5% interest rates on their deposits...

US household wealth reached a fresh record to kick off 2024, powered by another jump in the value of Americans’ stock holdings.

Household net worth climbed $5.1 trillion, or 3.3%, in the first quarter to $160.8 trillion, a Federal Reserve report showed Friday. The value of equity holdings increased about $3.8 trillion, while the value of real estate held by households rose about $900 billion to a record high...

The Fed’s report also showed that consumers and businesses increased their borrowing during the first quarter, even as the Fed kept its benchmark rate at a two-decade high.

Business debt outstanding rose at a 4% annualized rate, while consumer non-mortgage credit rose 1.8%. Meanwhile, mortgage debt rose 2.1%. In the public sector, state and local government debt rose 3% after declining in the prior two quarters.



"Consumers are still strong" was the message from several presenting financial companies last week...

"...on the consumer side, it's just continued more of the same. Consumer is generally strong, high spend levels continue. We can talk about credit some more, but the short answer is not a whole lot of difference in terms of the trends that we're seeing." - Wells Fargo CEO Charlie Scharf

"When you look at the spend patterns by different income segments, as you called it, the trends have been relatively unchanged for several quarters" - Visa CFO Chris Suh

"...the consumer is spending, the consumer is spending." - President Frank Bisignano

“...then on the consumer side, the consumer has just been resilient than any of us would have ever thought. I mean I think you can look at any quarter and say, gosh, this is the quarter, maybe it was going to be the season -- the holiday season, whatever it may be that are going to start slow spending." - Truist Financial CEO William Rogers

The Transcript

Dairy Queen is going to have to raise its summer sales forecasts...

Financial advisors in Florida have a new client base to start targeting...

Housekeepers in Palm Beach and South Florida are cleaning up, with salaries often topping $150,000 and bidding wars between mansion owners becoming common, according to staffing companies.

The mass wealth migration to Florida from New York and other high-tax states has created record demand for household staff in elite Florida enclaves — especially Palm Beach. Demand for butlers (now called “hospitality managers” or “estate managers”) as well as nannies, chefs, drivers and personal security has surged, according to staffing agencies.

It’s the shortage of housekeepers, however, that has created the biggest mess for wealthy homeowners. Many of the wealthy emigres to Florida bought big homes and now need people to clean them. Hotels, resorts and businesses are also vying for cleaning staff. The result: Typical pay for housekeepers has rocketed from about $25 an hour in 2020 to $45 or $50 an hour today, according to some agencies.


Corporate cash flows to service debt have never looked better...

@GunjanJS: It's rarely been this easy for U.S. corporations to make debt payments. Net interest payments as a share of profits hovering around a record low going back to 1970.

With 98% of Q1 earnings in the books, forward S&P 500 earnings guidance continues to move higher...

Despite Q1’s small decline in earnings per share from its record high at the end of last year, most company managements’ forward guidance provided on Q1 earnings conference calls has been positive. We can see that in the analysts’ consensus earnings-per-share estimates for 2024, 2025, and 2026. All three rose as the earnings reporting season progressed, with the latter two rising to new record highs.

Yardeni Research

For most investors, buying the market at all-time highs is a good idea...

Stock market strength tends to be persistent and should carry through to most other risk classes.

J.P. Morgan

I had a question last week about market breadth and thought this was a good chart...

As the numbers show, a rising concentration in the top names does not have to be a bad thing for returns.


Speaking of market concentrations, if you or your firm uses sector ETFs to weight your equity allocation strategies, make sure that you are aware of the construction differences...

This year there is a big difference in the NVIDIA weighting among the top Technology sector funds. iShares and Fidelity are tracking the NVIDIA weighting along with the stock’s current market cap. But the largest Tech sector fund, Vanguard is using a 2/3 NVIDIA weight and the SPDR Tech fund is using a 1/3 NVIDIA weight. Thus, the year-to-date performances are significantly different as NVIDIA has significantly outperformed both Microsoft and Apple.


And after twenty-four years, the Russell small-cap index has no longer added value over the larger cap weighted S&P 500...


One big reason for continued small-cap index underperformance might be that it is a deteriorating set of companies...

Profitable growth companies either grow up to become a component of a larger-cap index, or they get bought out if their valuation does not reflect their economic value. Thus, today's small-cap index is stuck with a basket of companies where 40%+ are unprofitable with the average stock trading at a trailing multiple north of 75x earnings.

J.P. Morgan

Food delivery companies’ best customers this summer will be the M&A driven banking industry...

@dailychartbook: "Buyout firms have announced $91 billion of listed-company takeovers this year through May, up 16% from the same period in 2023."

Speaking of private markets buying public companies, here is PowerSchool going to recess...

PowerSchool Holdings (PWSC - $4.5b mkt cap - R2000 component) has agreed to be acquired by private-equity firm Bain Capital in a deal that values the education-software provider at $5.6 billion, including debt...

PowerSchool, which had a market capitalization of $4.55 billion based on Thursday’s closing price, said current investors Vista Equity Partners and Onex Partners will continue to hold minority stakes upon completion of the deal, slated to close in the second half of the year...

The deal by Boston-based Bain, which has about $185 billion in assets under management, continues an upswing in private-equity M&A activity this year. Private-equity firms have struck more than $99.7 billion of leveraged buyouts so far in 2024, compared with $71.9 billion in the same period last year, marking a 39% increase, according to data provider Dealogic.


And successful Idealista is finding a new home...

Private equity firm Cinven is in exclusive talks with Swedish rival EQT to buy Spain's largest online real estate company Idealista, Spanish newspaper Expansion reported on Thursday, citing unidentified market sources.

The negotiated value of Idealista is close to 3 billion euros ($3.26 billion), the newspaper said.

EQT, which has controlled Idealista since 2020, has hired investment bank Morgan Stanley to sell its majority stake, people familiar with the matter told Reuters in February.

EQT bought a majority stake from fund Apax Partners and the company's management in 2020 in a deal that valued the company at about 1.3 billion euros.

Founded in 2000, Idealista operates in Spain, Portugal and Italy, and allows real estate agents to advertise their properties in exchange for a recurring subscription fee. It also provides online advertising, mortgage brokerage and data analytics services for real estate agents.


But when the customers, employees and shareholders are not happy, it is time for a change...

Guessing that a focus on profitability will mean fewer routes and even more difficulty being able to use those frequent flier miles.

Elliott Investment Management has built a stake of nearly $2 billion in Southwest Airlines and plans to push for changes aimed at reversing the airline’s underperformance.

The activist is one of Southwest’s largest investors, according to people familiar with the matter.

Elliott plans to engage with the management team at Southwest, which has a market capitalization of $16.6 billion. Other details of Elliott’s plans couldn’t be learned.


It looks like HanesBrands just sold 20% of its revenues for more than half the value of its market cap...

HanesBrands (HBI - $1.8b mkt cap - S&P 600 component) said on Wednesday it would sell its sportswear brand Champion to Authentic Brands Group in a deal valued at $1.2 billion, as the company looks to streamline business and focus on its innerwear categories.

Shares of HanesBrands surged 15.6% in premarket trading.

The deal could reach up to $1.5 billion through an additional contingent cash consideration of up to $300 million based on achievement of performance thresholds.


Another good IPO sidetracked by an investor with a better offer...

European buyout shop Nordic Capital was focused on a public listing for portfolio company Sunrise Medical when an enticing option presented itself: Platinum Equity was ready to buy the German wheelchair maker outright. The announcement on Wednesday of the sale to Beverly Hills, Calif.-based Platinum came barely a week after Sunrise Medical disclosed its plans for an initial public offering of shares in Frankfurt.

“We were very focused on the IPO,” Nordic Partner Fredrik Näslund said, adding the planned listing had been well received in early talks with prospective investors. Näslund said the only concerns raised revolved around Sunrise Medical’s market capitalization, which would have been on the smaller side at less than $5 billion. Smaller IPOs typically face more hurdles to attract investors in numbers sufficient to buoy issue prices.

Plans for an IPO were made public by Sunrise Medical on May 28. The company said it aimed to raise €240 million, or roughly $261 million, through private placements. The planned IPO also featured a secondary sale by a Nordic-controlled seller, Cidron Liberty Systems. The shares were expected to start trading this summer.

Näslund said the discussions between Nordic and Platinum had been ongoing for some time but didn’t specify when they started. He said that at the point when the IPO plans were revealed, “we did not foresee that we could get, sort of, over the line with Platinum.”

He didn’t say what led to the rapid conclusion, adding Platinum’s offer was an “attractive alternative.” The sale to Platinum offers a full exit to Nordic, which has scored windfalls from past sales of companies it backed, and its fund investors, some nine years after first backing Sunrise Medical. In outlining its IPO plans, Sunrise Medical said it has about 2,800 employees and revenue rose 12% in the first nine months of its current fiscal year, reaching about €516 million. The maker of wheelchairs and other “assistive mobility solutions,” such as scooters, said its adjusted pretax earnings rose 32% in the first nine months of its current fiscal year to about €108 million.


And in other M&A deal news...

Cognizant Tech Solutions (CTSH - $32b mkt cap) confirms to acquire Belcan for $1.3B in cash-stock; Expected to deliver >$100M in annual revenue synergies within three years and to be accretive to 2026 EPS; Announced it has signed a definitive agreement to acquire Belcan, LLC ("Belcan"), a portfolio company of AE Industrial Partners and a leading global supplier of Engineering Research & Development (ER&D) services. Belcan is an established player in ER&D that provides mission-critical digital engineering services for a long-standing customer base across the commercial aerospace, defense, space, marine and industrial verticals, primarily in North America and the United Kingdom (UK). (TradetheNews)

SAP agreed to buy Nasdaq-listed WalkMe (WKME) for about $1.5 billion, in a deal that seeks to bolster the German software group’s business artificial-intelligence offerings. The group behind the travel and expense management platform Concur is stepping up its efforts to cash in on AI, but has mostly sought to boost its exposure to the technology through partnerships and minority investments. The acquisition of WalkMe complements SAP’s business transformation-management portfolio, the companies said Wednesday. Israel-based WalkMe is a software-as-a-service company that specializes in digital-adoption platforms for business customers. (WSJ)

Noble Corp. (NE - $6b mkt cap - R2000 component) reached an agreement to acquire Diamond Offshore Drilling (DO - $1.4b mkt cap - R2000 component) in a stock plus cash transaction, the latest deal in the oil sector... “Diamond’s five conventional deepwater and midwater rigs have averaged above 85% utilization over the last 3 years and currently have strong forward contract coverage,” Noble CEO Robert Eifler said in a statement. (Barron's)

Databricks said on Tuesday it would buy data-management startup Tabular for more than $1 billion, as the privately held analytics platform looks to attract customers by helping them develop custom artificial intelligence (AI) applications. The announcement comes at a time when companies are doubling down efforts to build an ecosystem for clients to use open-source AI models, in a bid to gain market share from rivals such as Snowflake and Cloudera, among others, in a highly competitive market. Tabular, founded by Ryan Blue, Daniel Weeks and Jason Reid in 2021, provides an independent and universal storage platform to its customers. (Reuters)

Various news sources

Here is a look into our newly released Private Wealth Survey which shows continued interest in Private Market Assets...

Hamilton Lane Private Wealth Survey Finds 70% of Advisors Globally Planning to Increase Allocation to Private Markets, As Need for Education Continues

  • Global survey of more than 230 investment advisors highlights diversification and performance as key drivers of private wealth interest in the asset class
  • Ninety-two percent of respondents currently allocate client capital to private markets, with more than two-thirds planning to increase allocation
  • Opportunity to continue educating private wealth investors, as advisors cite a knowledge gap between them and their clients

Conshohocken, PA – June [6], 2024 – More than 90% of survey respondents currently allocate client capital to private markets, with essentially all of them (99%) planning to allocate some portion of client portfolios to the asset class this year, according to a recent independent survey conducted by leading global private markets investment management firm Hamilton Lane (Nasdaq: HLNE).

Hamilton Lane

Interesting to learn that restaurants are the newest hot tenant for landlords...

Property owners have long seen restaurants as risky tenants with a high rate of failure. Now, with Americans dining out more than ever, the restaurant business is emerging as the hottest corner of retail real estate.

Food services accounted for more than 19% of all retail leases last year, rising in recent years to the highest proportion for any category since data firm CoStar Group began tracking the statistic in 2007.

The uptick reflects how Americans are spending more time and money at restaurants, from fine-dining hot spots to fast-casual chains. Low unemployment, rising wages, the ascent of “foodie culture” and millennials’ tendency to marry and have children later than previous generations have likely contributed to increased restaurant spending in recent years, analysts say. Single households are less likely to grocery shop than families.

It is a far cry from the depths of the pandemic, when tens of thousands of restaurants permanently closed. Four years later, robust restaurant leasing has helped power the retail-real-estate sector to its strongest position in years...

The average household spent nearly 53% of its food budget on food away from home last year, a record-high proportion and up 10 percentage points from 2003, according to the U.S. Agriculture Department’s Economic Research Service.

Total restaurant sales have never been higher. They are on track to top $1.1 trillion this year, a 5.4% increase from 2023’s record-high level, according to the National Restaurant Association, an industry group.


Fires, earthquakes, and pandemics could not beat San Francisco...

Home sales jumped 22% in April to the highest monthly count since mid-2022, according to property brokerage Compass Inc. And after lagging badly last year in a closely followed measure of foot traffic, the city is now posting gains that place it in the top 10 nationwide.

Investors calling a bottom on real estate aren’t the only ones betting on a comeback. Visa Inc. is opening swanky new offices this week near Oracle Park, the San Francisco Giants’ baseball stadium.

Nintendo recently chose the city’s Union Square neighborhood as the site of its second US retail store, a sign of optimism in a shopping district so distressed that the owners of its largest mall gave up the property to lenders.

Anchor Brewing Co. is reopening in its home city, a year after the former owners blamed the pandemic and falling sales for putting the oldest US craft brewery out of business. The new owner, New York billionaire and Chobani yogurt founder Hamdi Ulukaya, said he’s betting not just on the company but also on San Francisco.


And for your AI story of the week: How AI helps create "Just In Time" pizza at Domino's...

"So some of the things we're doing now is we make pizzas before people order them. You start your order online, at some point, our algorithm figures out, you're ready to order, and we start making it. We will bring it out to -- our delivery driver used to have to find a spot, park the car, come in, get pizza. We now -- because of GPS, we know where the pizza is and we run it out to them. And so that means we're making your pizza sooner. It means we're bringing out to the delivery driver quicker. It means more run for them, more tips. It means faster delivery for you, and that brings people back. And so that's not the most sophisticated futuristic Star Trek-like algorithm, but man, is that helping the business right now. At some point, we're going to get to the point where more just-in-time pizza making, where the computer may be smart enough to say, "Hey, you know what, we don't have enough delivery drivers now. Let's not actually make those pizzas because they'll just be cold. Let's actually call up more delivery drivers to then handle that volume." And so instead of a manager having to make those decisions, him or herself, the computer will start to -- so you won't even see the orders if you're not supposed to make the order." - Domino's Pizza COO & President of the Americas Russell Weiner

The Transcript

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The author has current equity ownership in: Costco Wholesale Corp., NVIDIA Corp. and Hamilton Lane Inc

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