Private Wealth

Weekly Research Briefing: Festival of Colors

March 07, 2023

Very timely that the celebration of Holi begins next week because any chart of the S&P 500 Index today is showing a crashing of red, green, blue and yellow as the big stock index collides and bounces at its major moving averages and trendlines. The fact that the graphed data are all converging illustrates the current uncertainty of investors. While long term investors want to invest in companies benefiting from economic growth, top strategists are warning that a future slowdown will make prices cheaper in the future. An increase in bankruptcies has shown those companies whose businesses are structurally challenged in a post-COVID, work from anywhere environment. Rising interest rates have also given investment allocators other options than equities. Buyers of credit continue to have a healthy appetite, while issuers continue to fill the buffet with plenty of new issuance. A functioning credit market is a very good thing, and it is bound to put pressure on many of the bearish strategists and economists in the coming weeks.

The markets have a busy two weeks ahead. The Fed Chairman will testify to Congress this week so we will be watching if he stays the course on "slow and steady" rate hike communications or tips off any potential changes to the March 22 FOMC meeting. Right now, the market is betting on 3-4 Fed Funds rate hikes of 25bps in the upcoming meetings. It is still difficult to imagine a March jump of 50bps after slowing the recent pace to 25bps. For now, the world will let the ECB keep pulling the 50bp lever as it moves to tackle its economic and inflation strength. This Friday will be the release of the monthly U.S. jobs data and the estimates are coming in at +200-300k for non-farm payrolls. Economists have been low every month for the past year so let's see if their models do a better job this week. Equally important will be the CPI and PPI figures which drop on the 14th and 15th. The next two weeks will give the Fed plenty of data to act on for the next policy meeting. And don't forget that the Morgan Stanley technology and Cowen healthcare conferences are this week, thus giving two big groups of investors something to think about as we are two-thirds through the first quarter.

It is also a very big time of the year for Hamilton Lane as our 2023 Market Overview drops this Thursday in both a virtual presentation and narrative format. As a result, I will give the team a week off from publishing the Weekly Research Briefing so that all of us can digest the newest bible written on the private markets. If you are an investor in any private market strategy, then make sure that you reach out to our team to get a copy and join one of our calls. I spent the weekend studying my early copy and found dozens of charts and tables that I plan to share in upcoming weeks and months. Have a great couple of weeks.

Some massive investors were getting long high yield credit last week...

When Junk Bonds outperform Treasuries, I want to be long risk assets. So last week, my appetite reached for the menu.

The global high yield credit markets are too big and liquid to be ignored...

Think insurance companies, pension plans, sovereign wealth funds and the biggest hedge funds.

The credit market is trying to tell us something. But what, exactly? Look at it almost any way, and credit is available at rates that imply no particular risk of default, and very little risk of recession. In both the euro zone and the US, high-yield bonds are looking misnamed. After a brief and sharp rise last year, their spreads over equivalent five-year government bonds are right back to a level that suggests all is quiet:


Healthy high yield credit markets have allowed junk-rated companies to resume borrowing...

The good news for leveraged companies is that the low yields in 2021 allowed them to lock in financing through 2025 and beyond...


Another sign of increasing risk appetite: Weak balance sheet companies stocks have outperformed strong balance companies sheets over the last six months...

This suggests that the stock market is less concerned about a severe break in the economy and hit to earnings. Private company performances and estimated valuations also reflect more future stability than Wall Street strategists expect.


Did Friday's ISM Services numbers just call the bottom in stock prices?

Do not forget that the ISM Index is the best historical data stream to coincidentally time the bottom in stock prices. Services are over two-thirds of the U.S. economy. So was Friday's bounce in equities and credit the start of a bigger buying wave in risk assets? Did anyone see Michael Cembalest of J.P. Morgan smiling ear to ear this weekend?


  • Business Activity Index: 56.3 v 60.4 prior
  • New Orders Index: 62.6 v 60.4 prior
  • Employment: 54.0 v 50.0 prior
  • Inventories: 50.6 v 49.2 prior
  • Prices Paid: 65.6 v 67.8 prior


The Daily Shot

"January was not just a warm weather blip"...

The ISM Services Prices Paid component is also giving the Fed a big hand...

That is a two-year low in the prices paid survey.

The Daily Shot

The typical seasonal demand for lumber has gone into hiding this year as prices fall to pre-COVID levels...

Looks like the tree farming industry overestimated single family home demand post-COVID.

Calculated Risk

Meanwhile, U.S. farmers have produced an abundance of wheat for cookies, cakes and crackers this year...

So, the cost of your next party has just fallen as long as you avoid the trays of deviled eggs. (But those are also in freefall now.)

The Daily Shot

Costco is also luring you with lower food prices...

"Feb year-over-year inflation for food and sundries and fresh foods, while still elevated, were at their lowest levels in nearly a year, with food and sundries inflation dropping to the high single digits and fresh foods to the low to mid-single digits."

Costco Wholesale Co.

And Tesla decided to help you with a cheaper car over the weekend...

"One of the things we weren't sure about was the price elasticity of demand for Teslas... we found that even small changes in the price have a big effect on demand. Very big" (@elonmusk)


But even with all this deflation, inflation is not going down as fast as the Fed would like...

Checking the crib sheet: Bostic is not a voter. Waller is a voter.

“We must determine when inflation is irrevocably moving lower. We're not there yet. That's why I think we need to raise the federal funds rate to between 5-5.25% and leave it there well into 2024…there is more work—in the form of interest rate increases—to do." - Atlanta Fed President Raphael Bostic

"Fortunately, we will get the next employment report and CPI release ahead of the March 21–22 FOMC meeting, information that will affect my assessment of the appropriate next step for monetary policy. If job creation drops back down to a level consistent with the downward trajectory seen late last year and CPI inflation pulls back significantly from the January numbers and resumes its downward path, then I would endorse raising the target range for the federal funds rate a couple more times, to a projected terminal rate between 5.1% and 5.4%. On the other hand, if those data reports continue to come in too hot, the policy target range will have to be raised this year even more to ensure that we do not lose the momentum that was in place before the data for January were released." - US Federal Reserve Governor Christopher Waller

The Transcript

Time for a change? Earnings estimates stopped falling last week...

Earnings Scout

Stock market bears grind their teeth once more...

Another mega-cap technology company gets rattled by hedge fund activist investors, makes major fixes in a few months’ time and the stock launches higher on improved earnings.

Salesforce co-founder and chief executive Marc Benioff said the company was moving quickly to “reassess” its strategy and focus on profits as it faces growing pressure from activist investors.

In a bullish call following a better-than-expected earnings report, Benioff on Wednesday told analysts: “We hit the hyperspace button since we last spoke a quarter ago. Changes that used to take months are taking weeks.” Salesforce shares were up more than 12 per cent in early trading on Thursday.

Salesforce has faced an onslaught from activist investors in recent months, after its share price dropped about 40 per cent from its coronavirus pandemic peak. Many of those activists have been critical of its dealmaking and spending.

Benioff’s preference for growth over higher profits also came under scrutiny, as have his takeovers of data analytics groups Tableau and Slack, the workplace chat app it bought at the height of the pandemic for $28bn.

Benioff spoke to those concerns on Wednesday’s analyst call, saying “profitability is truly our number one strategy”, and describing operating margins as the company’s “north star”. He predicted adjusted margins would hit 27 per cent in 2024, ahead of its original forecast to meet that mark in 2026.

“We’ve never had an efficiency focus at the company before because we’ve had 24 years of just grow, grow, grow . . . we’re looking at this moment to reassess,” Benioff said.

Finanical Times

But weren't technology earnings going to collapse?

30-year-old networking hardware, software and services company beats top, bottom-line estimates and raises guidance.

[Ciena Corp] Reports Q1 $0.64 v $0.36e, Rev $1.06B v $959Me - Adj Non-GAAP gross profit margin 43.7% v 46.2% y/y

  • Adj Non-GAAP Op margin 12.6% v 11.8% y/y
  • Adj. EBITDA $155.1M, +25.4% y/y
  • Inventories $1.18B +24.6% y/y; product inventory turns 1.7x
  • CEO: "We delivered record revenue in the first quarter, reflecting continued gradual improvement in the supply chain environment and strong customer demand for our market-leading technology," said Gary Smith, president and CEO of Ciena. "With strong momentum across our business, supported by robust fundamental drivers and visibility provided by our backlog, we remain confident in our ability to continue to take market share."
  • Raises FY23 Rev +20-22% y/y (prior +16-18% y/y; implies $4.36-4.43B v $4.25Be), affirms adj gross margin 42-44%
  • Affirms 3-yr (2023-2025) Rev CAGR 10-12%
  • Orders for the year are off to a 'pretty good start'; Expect to finish year with backlog higher than historical levels but lower y/y
  • Remain positive about fundamental drivers as they relate to demand; Have strong visibility provided by our backlog

The Transcript

Other things that don't happen during an economic slowdown...

[Ford Motor Company] Preparing to launch all-new versions of four significant vehicles in 2023: Super Duty, Ranger, Mustang and Escape; Increasing production of popular vehicles including EV, gas, and hybrid

Had a strong start to 2023 sales and we are moving to fast-track quality productions


Just a 90 billion Euro market cap stock (and the 8th largest stock in the German DAX) jumping 10% on better top and bottom-line earnings and outlook...

[VOW3.DE] Reports final FY22 Net €15.8B v €15.4B y/y, Op €22.5B v €20.1B y/y, Rev €279.2B v €250.2B y/y

Guides initial FY23 Rev +10-15%, Op RoS 7.5-8.5%

Guides initial FY23 deliveries 9.5M +11.7% y/y, due to high order backlog of 1.8M vehicles as well as an easing situation in the semiconductor supply and the logistics chain in the course of the year


The color green is taking over the global manufacturing map. Is your portfolio ready?

@RyanDetrick: Yes, China Manufacturing PMI was the story yesterday, but looking under the hood things are improving across the globe. 13 out of 20 countries we track increased last month, with 9 out of 20 above 50 (vs. 7 last month). Has manufacturing bottomed? Very well could have.

Looking at the list of large cap stocks making all-time highs lets us know what the biggest equity investors are thinking...

The anti-diabetes, weight loss, alcohol avoidance drug maker, Novo-Nordisk leads the list followed by a long list of economically sensitive industrials, materials and consumer discretionary companies. Portfolio managers want cyclicals as the global economy continues to pick up speed. Another indication that the stock market is sticking its tongue out at the majority of Wall Street strategists.

Higher low following a higher high? Interesting...

Many advisors are waiting on the sidelines to allocate to private equity on the next pullback in public stocks...

But what if private equity companies were more stable and better managed than the average public company as indicated by the KKR chart below. You might be able to time your purchase if your crystal ball is correct, but wouldn't you want to own more companies in your portfolio that have higher growth and less volatility?

Private Equity general partner will have different approaches and philosophies on value creation. Clear and effective value creation playbooks include repositioning companies, optimizing operations, expanding into new markets, corporate carve-out or roll-up strategies, improving working capital, and fostering employee engagement and aligning incentives (which may include broadening equity ownership to a portfolio company’s workers, not solely to senior managers). In our experience, this value creation toolkit leads to better improvements in the operating performance of companies under Private Equity ownership than those in the public markets (Exhibit 13).


And if higher inflation is in your outlook, then you have no reason to avoid a big slug of private equity ownership...

Private Equity typically outperforms Public Equities in all environments except the ‘low inflation/ low growth environment, which is a period where significant multiple expansion in the Public Markets often can outweigh the benefits of operational improvements in Private Equity. In Exhibit 16, which shows performance across different economic regimes, one can see that PE generates an approximately 6% excess return above public stocks in high inflation environments. Excess returns in inflationary/rising rate environments are partially driven both by a Private Equity manager’s ability to enact operational improvements – such as revenue/cost optimization to protect and grow margins – as well as sound financial management on the right side of the balance sheet.


It is going to take a major life change to get homeowners with less than 4% mortgages to sell their homes...

@NewsLambert: Goldman Sachs: 99% of borrowers have a mortgage rate lower than the current market rate

I was asked three times this weekend about the change in California drought levels since all of these storms...

@breakingweather: The frequent storms seen this winter have brought immense drought relief to California, with a large portion of the state no longer experiencing drought conditions:

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