Weekly Research Briefing: Free Chicks

March 27, 2024

We are so back that you can hear Mark Knopfler and Sting singing in the background...

"Get your money for nothing. And your chicks for free."

It was such a big week for the market's expanding risk appetite. Check this out:

  • The AI connectivity platform Astera Labs goes public at $36 and now trades +130% higher.
  • Reddit follows with a high-end IPO price of $34 and now trades for double that.
  • Swiss company Galderama also priced its IPO at the high end of their range, and it is trading 20% higher.
  • Douglas AG's IPO debut in Germany disappointed, but 3 out of 4 high profile IPOs is not a bad start for the great IPO awakening of 2024.
  • High yield credit spreads continue to evaporate to two-year lows and companies are using the strength to push maturities out several years.
  • In another sign of animal spirits, Adam Newman is back and making a $500m bid for his old company, WeWork.
  • And don't miss the high-profile social media company now trading for 1,000 times revenues.

As the books close on March and the first quarter of 2024 this week, we gathered more evidence which direction the global central banks want interest rates pointed. The Swiss central bank cut rates 0.25% to 1.50% and became the first major central bank to do so. U.K. and Norway kept rates level but tipped their hats to future cuts. Meanwhile, the Federal Reserve might have tipped its hand that 2%+ inflation is okay as long as GDP continues to rip. Let's see how long positive immigration and AI can continue to accelerate U.S. GDP growth.

With the Easter holiday hitting early this year, this is a short week due to Good Friday. The equity markets will be closed on Friday with the bond market taking a half day to digest the highly anticipated PCE index data. Also, Jerome Powell and Mary Daly will be speaking together on Friday which could make for some interesting timing. Have a great holiday weekend with the eggs, bunnies, and baby chickens.

Why the markets surged after the FOMC meeting...

The answer is because the Fed is much more excited about economic growth than it is worried about inflation right now. The PCE inflation forecast for 2024 rose from 2.4% to 2.6%. New dot chart still points to 3 Fed Fund cuts of 25 bps this year. GDP forecast rose from 1.4% to 2.1%. Job growth is occurring stronger than they expected. Seeing good progress on inflation even as Jan/Feb came in a little hot. 2% inflation "over time" is still the Fed's target.

Federal Reserve

Mo El-Erian says the Fed just ended their 2% inflation mandate...

“I think we will look back on this week as the week in which central banks abandoned a point inflation target for a range,” said El-Erian, the president of Queens’ College, Cambridge, and a Bloomberg Opinion columnist. “We’re going to look back and say this was a point when they realized, in the case of the Fed, for example, it’s no longer a good idea to have 2%; let’s have 2% or 3%.”


Increasing evidence from recent data showing the economy is accelerating...

The Daily Shot

East Coast factories’ outlook improved sharply...

The Daily Shot

Even better is that the expected pickup in activity is leading to an expected increase in capital spending...

The Daily Shot

Of course, the internals of the stock market suggested to us that U.S. manufacturing was going to move higher many months ago...

The Daily Shot

But even while the economy picks up, it sure looks like short term rates are headed lower...

Treasury yield volatility broke lower after last week’s FOMC meeting. Maybe the surprise Swiss National Bank decision had an impact also. With 2-year Treasury yields having an impossible time moving higher right now, the next move is hinting lower given the fall-off in bond yield volatility.


Meanwhile, Wall Street continues to raise its market earnings projections and price targets...

@SamRo: Oppenheimer: “We are increasing our year-end target price for the S&P 500 to $5,500 (from $5,200) and raise our earnings projection to $250 from $240 for the S&P 500 in 2024. Our upwardly adjusted price target and earnings projection assume a slightly higher P/E multiple of 22x up from 21.7x with our earlier target.”

You just don't get in the way of surges in 52-week highs. Goodbye bears...

@RenMacLLC: 52wk highs on SPX hit 23% yesterday, the highest in 3-years. Rarely do we see internal highs peak with prices, they usually lead $SPX.

2020's just like the 1920's?

The 2024 IPO market just punched the nitrous button, and its ticker symbol is ALAB...

Astera Labs just went public, and it skipped right over the Small and Mid-Cap valuation range to become a $12b Large Cap company. If you were able to score IPO shares, then you are +130%. Even if you bought it on the first trade, your position is +56%. Not bad for five days work. And this is what many public equity investors will be looking at.

Astera Labs makes hardware to connect the components that you find inside of cloud data centers. Its IPO prospectus mentions AI over 250 times. It's last funding round happened in Nov. 2022 at a $3.15b valuation. Congrats to Atreides, Sutter Hill, Intel and Fidelity for writing those checks in a tricky environment. 2023 revenues were +45% to $115m which puts ALAB at 105x trailing revenues.

This IPO will make the Morgans (Stanley and J.P.) look very good and will also get IPO investors blood flow accelerating. It also will point out that much value creation is happening in the private market before it gets handed off to the Large Cap passive index funds and ETFs.

If you want to read the S-1, here is the link. And yes, the IPO cover has a black page...


Reddit provided the second boost to the market last week as its stock has doubled from its IPO price...

Congrats to all of the private equity owners who are now profitable in their stakes. Can't wait to see the next Conde Nast party details given that their parent company just turned a $10m investment into $2.8b.


Not to be left out, Europe also had a large cap IPO winner last week...

Skin-care company Galderma Group AG soared 21% on its first day of trading, delivering a much needed win for Europe’s equity capital markets.

The EQT AB-backed company closed at 64 francs in Zurich on Friday, valuing it at more than 15 billion Swiss francs ($16.7 billion), following Switzerland’s biggest initial public offering of the past two decades. Galderma had priced its IPO at 53 francs share, the top end of a marketed range...

Galderma raised almost 2 billion francs by selling 37.2 million new shares, and it plans to use the proceeds to repay and refinance debt. The rest came from the sale of existing shares, including an over-allotment option.


The Daily Shot

Even the IPO ETF is noticing the trend...


Hot or cold IPO? $8.6b revenue global ice cream business will be spun off or sold...

After more than 100 years of selling ice cream, Ben & Jerry’s owner Unilever has lost its taste for the business.

Unilever said Tuesday it plans to separate its ice-cream division—which also makes Magnum, Wall’s, Breyers, Talenti, Popsicle and Klondike—into a stand-alone business. It said listing the business as a separate entity is the most likely outcome. A sale is also a possibility...

The plan is the latest in a string of moves by new Chief Executive Hein Schumacher to simplify Unilever and boost growth at the company, which analysts say has underperformed in recent years.


While some companies are using the hot equity markets to re-arrange their business mix, others are using the hot credit markets to refinance and fortify their balance sheets...

Canadian private-jet maker Bombardier Inc. sold a $750 million junk bond Friday to help refinance debt due in 2026, raising the size of the offering and getting slightly better terms than it initially expected.

The seven-year bond deal comes with a 7.287% coupon, according to a person familiar with the matter. The Montreal-based firm had originally sought to borrow $500 million, for which a coupon of as much as 7.5% had been discussed, the person said, asking not to be identified discussing a private matter.

Bombardier’s debt sale coincided with high-yield spreads — the extra yield investors demand over Treasuries — hovering around their lowest in about two years. The company last issued debt in November, raising $750 million at the time by selling seven-year bonds with a call option after three years at yield of 8.75%.


Demand in the junk bond market remains insatiable right now...

At least six US companies are tapping the high-yield bond market Monday as the extra yield investors demand over Treasuries hovers at a two-year low.

AMC Networks Inc., MGM Resorts International and home builder The New Home Company plan to refinance their outstanding debt or conduct tender offers. Steel producer Algoma Steel Group Inc. is offering $350 million in second-lien notes to use for general corporate purposes.

Two deals have investor calls Monday and are pricing the same day, in what’s known as a drive-by sale.

Monday’s issuance blitz saw the most transactions launch since January 2023, with high-yield spreads sitting inside of 300 basis points, the lowest in roughly two years. Market sentiment was also buoyed by the Federal Reserve last week forecasting three rate cuts this year...

Several borrowers are pursuing 5-year issuances that are not callable for two years, giving them some breathing room, especially if rate cuts don’t happen as quickly as expected, Zox said. The Secured Overnight Financing Rate also remains higher than the 5-year Treasury yield, making fixed-rate debt more attractive.


With so many high yield debt issuers pushing out their maturities by 2-5 years, this is what the debt maturity curve looks like now...

BofA Global Markets

Some big institutional investment industry news last week as one of the world's largest pension funds announced plans to shift another $34b into the private markets...

CalPERS will be moving from a 13% limit on private equity to 17%-22%. And take private credit from 5% to 8%. Public equities and fixed income will be reduced to pay for it.

“Strong and ongoing growth in private equity returns is behind this measured and appropriate increase,” said CalPERS trustee David Miller, chair of the investment committee.

Buyout Insiders and CalPERS News

Which reminds me that we are still awaiting the future private equity allocation decision from the largest sovereign wealth fund in the world...


Observation of the week...

For AI to grow and flourish, the energy industry will need to find more power...

HOUSTON - Every March, thousands of executives take over a downtown hotel here to reach oil and gas deals and haggle over plans to tackle climate change. This year, the dominant theme of the energy industry’s flagship conference was a new one: artificial intelligence.

Tech companies roamed the hotel’s halls in search of utility executives and other power providers. More than 20 executives from Amazon and Microsoft spoke on panels. The inescapable topic—and the cause of equal parts anxiety and excitement—was AI’s insatiable appetite for electricity.

It isn’t clear just how much electricity will be required to power an exponential increase in data centers worldwide. But most everyone agreed the data centers needed to advance AI will require so much power they could strain the power grid and stymie the transition to cleaner energy sources.

Bill Vass, vice president of engineering at Amazon Web Services, said the world adds a new data center every three days. Microsoft co-founder Bill Gates told the conference that electricity is the key input for deciding whether a data center will be profitable and that the amount of power AI will consume is staggering.

“You go, ‘Oh, my God, this is going to be incredible,’” said Gates.

Though there was no dispute at the conference, called CERAWeek by S&P Global, that AI requires massive amounts of electricity, what was less clear was where it is going to come from.


The electricity demand figures are going to have investors sharpening their pencils...

U.S. electricity demand has been relatively flat since 2010, thanks to energy efficiency. Now, the prospect of data-center growth due to AI, as well as a Chips Act-driven nearshoring of manufacturing and the electrification of things like heating and transportation, are expected to drive electricity demand growth. McKinsey, BCG and S&P Global Commodity Insights all project electricity demand tied to data centers to increase at a compound annual growth rate of between 13% and 15% through 2030. PJM Interconnection, whose jurisdiction includes data center-heavy Virginia, expects total electricity demand to grow at an annual rate of 2.4% over the next 10 years, up from its year-ago forecast of 1.4%.

This comes as the U.S. power market has been tightening for seven straight years, notes Steve Fleishman, equity analyst at Wolfe Research. Meanwhile, the time it takes for new capacity to go from the planning stage to commercial operation has only gotten longer as grid operators face long backlogs.

A nuclear-power purchase agreement announced earlier this month between Talen Energy and Amazon.com was a clear signal that clean, always-available power can command lofty rates. Based on the announced terms, Talen Energy appears to be getting at least a 50% premium over what its nuclear power plant would otherwise get in the power market today, according to estimates from Rodney Rebello, analyst for Reaves Asset Management, which manages a utilities-focused ETF.


Who would have thought that AI could have woken up the most commodity semiconductor area imaginable: flash memory...

Speaking of the HBM market, Purdue's geek squad may have just landed a championship trophy...

South Korea’s SK Hynix 000660 4.25%increase; green up pointing triangle plans to invest roughly $4 billion to build an advanced chip-packaging facility in West Lafayette, Ind., according to people familiar with the matter, a boost to the Biden administration’s ambitions to restore America’s standing as a semiconductor power.

The SK Hynix facility, with nearby access to Purdue University, home to one of the U.S.’s biggest semiconductor and microelectronics-engineering programs, is expected to create around 800 to 1,000 new jobs, the people said. A mix of state and federal tax incentives and other forms of support are expected to be made available to help finance the project, the people said...

SK Hynix, one of the world’s largest chip makers by revenue, has seen its profile skyrocket during the latest artificial-intelligence boom. It dominates in the so-called “high-bandwidth memory,” or HBM, market, with SK Hynix currently serving as the exclusive partner to Nvidia’s most advanced graphic-processor units. The two types of chips get bundled together, enabling faster data-processing speeds critical to generative AI tools, such as OpenAI’s ChatGPT.


Finally, just when you think that you know all the chess moves...

@Thinkwert: One of the more obscure moves in chess is the 𝘦𝘯 𝘱𝘶𝘱𝘴𝘴𝘢𝘯𝘵, in which the king piece is replaced by an alert dog.

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