Private Wealth

Weekly Research Briefing: Getting Better

February 14, 2023

The soft landing/no landing scenarios continue to gain traction in the markets. The consumer economy is picking up strongly. The financial markets have improved. Even the corners of many CEO's mouths are lifting a few millimeters. Falling energy prices worldwide is having a positive impact on inflation psychology. Savers can now earn 4-5% rates on their low-risk cash holdings. Higher minimum wages and Social Security payments are now running through many American's wallets.

The upturn in better fortunes is now pointing the Fed's terminal rate north of 5% (so 2-3 hikes of 25bps in store) and a reduced outlook for any Fed cuts in 2023. This is a big week of data that will give us many clues about inflation and recent economic activity. We get the January CPI on Tues, the PPI and Philly Fed on Thurs, and Housing Starts, the NAHB, Retail Sales, and Industrial Production data throughout the week. And another 5-10% of the S&P 500 will report this week.

Stocks and credit remain in an upward trend. The capital markets are unfreezing and M&A is picking up. U.S. Treasuries took a break last week as investors began to envision a U.S. without a recession. Economists and strategists are slowly becoming more optimistic about the financial markets but there remains a big wall of worry causing many investors and advisors to remain on the sidelines. It will be interesting to see if the market bears emerge before the black bears wake up next month. Have a great week.

About that U.S. recession...

Economists rang in the year debating whether the Federal Reserve’s aggressive interest-rate increases would steer the highflying U.S. economy into a hard or soft landing—forcing inflation down through either a painful recession or a gentler slowdown in growth.

Surprising strength in hiring and consumer spending last month, together with signs that demand for autos and housing might be stabilizing after a decline, now have some economists pointing to a third scenario that seemed improbable just a few weeks ago: an economic growth upturn.

“A ‘no-landing’ scenario is a present-day reality,” said Neil Dutta, an economist at the research firm Renaissance Macro. While many Fed officials said they still expect the economy to slow this year, Mr. Dutta said he sees “a huge reluctance to admit the obvious, which is that the economy is reaccelerating, full stop.”


Increasing confidence among the Fed on avoiding a recession...

Philadelphia Fed President Patrick Harker said the odds of the Federal Reserve being able to control inflation without triggering a recession are growing, but that the key interest rate must get above 5% and stay there to ensure price pressures ease.

“We actually are increasing the odds — we can get a soft landing. That doesn’t mean we’re out of the woods,” Harker said in an interview on Wharton Business Radio Friday. “It’s still possible, but I think we can avoid that by just being prudent.”

He said he favors “a couple more” 25 basis-point increases.

“We need to get above five — we’re really close to that right now — and then pause,” Harker said. “How much above five? We’ll see.”...

“We just can take our time. See how things work out again, if the inflation numbers continue in trajectory they’re on right now, which would be great,” Harker said.


The market now expects the Fed to send the overnight rate near 5.2% before ending the tightening cycle...

The Daily Shot

Here is how the Fed's expected rate path now looks after the strong jobs report...


Last week's Consumer Confidence data showed us the consumer feels much improved about the current conditions...


  • Current conditions: 72.6 v 68.5e
  • Expectations: 62.3 v 63.1e
  • 1 year inflation expectations 4.2% v 4.0%e
  • 5-10 year inflation expectations 2.9% v 2.9%e


The Daily Shot

The strength in the consumer was very evident across earnings and credit/debit card reads last week...

"Look, the consumer demand, especially if we use kind of our in-store experience right now, looks to be there. Especially as you look at the higher-income consumer, their purchase frequency has actually gone up" - Chipotle Mexican Grill CEO Brian Niccol

"We continue to view the health of our customers as strong, supported by extremely low unemployment and robust growth in wages over the past 2 years." - O'Reilly Automotive Co-President Brad Beckham

"The demand trends here and now are really strong. And while there's a lot of noise out there…the reality is we're not seeing it." - Hilton Worldwide CEO Chris Nassetta

"Overall, we continue to see robust demand, financially healthy, highly engaged consumers that are excited to sail on our brands…Growth in cruise search has outpaced general vacation searches, resulting in double the number of visits to our websites compared to 2019…the seven biggest booking weeks in our company's history all occurred since our last earnings call. Our commercial apparatus is full speed ahead, and all channels are delivering quality demand above 2019 levels." - Royal Caribbean Cruises CEO Jason Liberty

"We're seeing pretty good -- very strong ordering patterns throughout the portfolio, both at our premium X line all the way through our midline and NXT models. So -- and the consumers continue to option up the boats and put different features on.“ - MasterCraft Boat Chief Revenue Officer George Steinbarger

"Consumer spending remains resilient in the first few weeks of 2023. Mastercard SpendingPulse insights show that the overall retail story remains largely positive with January posting a solid month of growth across the country…U.S. retail sales excluding automotive were up +8.8% year-over-year in January.” - Mastercard Senior Advisor Steve Sadove

The Transcript

Better jobs data, rising minimum wages, social security payments +8.7% and consumers are ramping spending...

(US) BofA Institute: Jan credit and debit card spending per household +5.1 y/y v Dec +2.2% y/y

  • BofA card spending data revealed a meaningful increase in spending during the weeks after Christmas, suggesting consumers could have held back holiday spending to maximize savings from post-holiday promotions and discounts.
  • Households continue to feel headwinds from rising costs like rent and food inflation, areas which have a greater impact on lower-income consumers. It seems unlikely, however, that a tipping point in spending will be reached in the near term. Consumers continue to have elevated savings, even adjusting for inflation, suggesting they have not yet reached their financial limits.


Bank of America

CEOs are even feeling a little bit better...


Which is being reflected in their quarterly conference call comments...

Bank of America

Goldman Sachs sketches out how a soft-landing scenario can occur...

All four steps of the rebalancing process needed to tame inflation are now underway. Monetary and fiscal policy tightening slowed demand growth to a below-potential pace over the last year, which has given supply time to catch up. The jobs-workers gap has narrowed in a very favorable way, driven by a rebound in labor supply and a decline in job openings rather than an increase in the unemployment rate. Wage growth has slowed from 5½% to a sequential pace of 4¼%, nearly two-thirds of the way to the 3½% pace that we think is compatible with the Fed’s 2% inflation target, in part because of the decline in the jobs-workers gap but also likely in large part because temporary labor market policies expired and temporary inflation shocks faded, reducing demands for cost-of-living adjustments. The inflation news has turned brighter too: the sequential pace has slowed, a long-awaited deflationary impulse from the goods sector has finally arrived and has room to run, alternative leading indicators of rent inflation have collapsed, and short-term consumer inflation expectations have fallen meaningfully.

Goldman Sachs

Recent immigrants to the U.S. are doing just fine taking unfilled jobs that keep the economy moving up and to the right...

Cooks, dishwashers, warehouse jobs, construction workers, painters, cleaning staff, farm workers, etc. All jobs essential to making a good economy great.

“The difference is remarkable,” said Josué Morillo, a Honduran migrant who crossed the border into the U.S. undetected two years ago. His first job upon arriving paid about $13 an hour. He said he now makes $18 an hour assembling shelves in warehouses in Florida. He also receives more benefits, including lodging, as job assignments take him to New York, New Jersey and Kansas. “It’s a significant saving,” he said.

Migrant construction laborers in the Washington area made on average $120 a day before the pandemic. That has since risen more than 60% to about $200 a day, said Lenin Cálix, an Ecuadorean migrant who belongs to the United Workers of Washington D.C., which provides training and legal support and aims to ensure newly arrived migrants aren’t paid below market rates. Hourly pay for all U.S. construction workers has risen about 15% since late 2019, according to the Labor Department.

When he arrived in the U.S. 15 years ago, Mr. Cálix began working as a helper for other construction workers. He now has work authorization, and specializes in electrical and remodeling work, owns a pickup truck loaded with construction tools and hires other migrants for jobs that he lands through his own webpage.


The Truck Transportation Employment Component has always peaked ahead of a recession...

No signs of recession here, as Trucking Employment continues to rise to record levels.


Even Canada is seeing an economic jump...

Canada’s January employment report massively exceeded expectations across a broad number of industries as their unemployment rate fell to 5%.

The Daily Shot

As the geographic data widens, airline travel is seeing a global surge...


Greece is a very tourist centric economy. So when global growth runs, their economy and stock market benefits...

@psarofagis: Greek stocks just won't stop going up. 4th best performing market in the world this year

A great interview with one of the world's top energy traders...

Russian president Vladimir Putin has “lost the energy war” and the worst of the European gas and power crisis has passed, according to Pierre Andurand, one of the world’s top-performing traders in the sector.

Andurand, whose energy focused hedge funds have enjoyed three bumper years of returns during the coronavirus pandemic, said he had closed out all his positions in natural gas markets because last year’s price surge to record levels was unlikely to be repeated, with Europe learning rapidly to live without Russian gas.

Deep cuts to Russian gas exports in retaliation for western support for Ukraine drove the European benchmark price above €300 a megawatt hour in August, more than 10 times its normal level. But in recent months it has tumbled back to about €50/MWh — still historically high but far more manageable for European economies mired in a cost of living crisis.

“I think Putin lost the energy war,” Andurand said in an interview with the Financial Times. “Very high natural gas and power prices in Europe were extremely bad for the world economy but now they have come back to a more reasonable level. If gas prices stay here there will be much less worry about inflation and interest rates rises. There’s no more fear of an energy crisis.

“Now that Europe is getting used to living without Russian gas why would they ever go back?” he added.

Financial Times

Looking at U.S. housing new listings shows a big drop off from a year ago...

Calculated Risk

Fewer listings and continued purchase activity is leading to lower U.S. housing inventory...

Calculated Risk

But once again, why would anyone want to move and give up their 2-3% mortgage interest rate?

I’m part of the problem.

Selma Hepp was talking about the housing market: how house prices remain wildly expensive compared to where they were a few years ago, how the inventory of homes for sale is still low. As the chief economist for CoreLogic, a real estate data and consulting firm, Ms. Hepp’s day job is to predict the course of rent and home sales with the math of charts and data. But instead of hard numbers she was describing her weekend home search.

Ms. Hepp lives in Los Angeles, where she and her partner rent an apartment in the Mid City neighborhood. They are looking to buy, and despite making a barrage of offers they keep getting outbid on homes in the area.

Their problem has an obvious remedy: Ms. Hepp owns a house in Burbank that she rents to other tenants. She could sell if she wanted, and use the cash to spruce up the next bid. Asked why she doesn’t do this, Ms. Hepp answered: “Why would I?”

The rental income more than covers the mortgage, she explained, which carries a 2.8 percent interest rate that despite the recent dip is still less than half current rates. Besides, she added, the homes she’s seen on the market are so unremarkable that it doesn’t seem worth walking away from a stream of income.

“I’m part of the problem — and the solution,” she said. “I don’t want to give up my inventory until I see other inventory available.”


Conor has the new U.S. retirement plan figured out...

With little outlook for a housing price crash, U.S. net worth for the bottom quartiles should remain strong...

@LynAldenContact: From 2007 to 2011, the net worth of the bottom 50% of the population fell from $1.5 trillion to $260 billion. Almost completely wiped out. From 2019 to 2022, the net worth of the bottom 50% of the population increased from $2.1 trillion to $4.5 trillion, or a 114% gain.

Did someone say IPO?

The IPO market finally showing signs of reopening as 7 deals worth a combined $900 million are expected to price this week per Bloomberg. That would mark the busiest week since the $990 million raised in late October (and for reference only 2 weeks in the last 10 months have seen $500mm or more price).

Vital Knowledge

This LiDAR products company did well in its listing: Hesai (HSAI) 10M share IPO priced at $19.00...

This Wells Fargo strategist gets it: Stocks follow credit spreads...

The bear market that wiped out as much as $12 trillion in US equity values is over, according to Chris Harvey at Wells Fargo & Co.

The head of equity strategy says the recent pullback in the yield of investment-grade corporate bonds has been “inconsistent” with the prevailing fear that the S&P 500 will renew a selloff and take out its October lows. Moreover, healthy balance-sheets at both the corporate and consumer level suggest a subdued level of systemic risk, meaning the catalyst for an extended market downturn is largely absent, he adds.

“Bear markets often end when we see sharp tightenings and healthy issuance similar to what we have experienced over the last several months,” Harvey wrote in a note Monday. “When bear markets go ‘next level’ spreads widen, not tighten, as they have today. IG spreads support our views on systemic risk.”


So if the cost of put options are very expensive, then you know what to do...

Bloomberg noting the cost for downside protection is spiking, as hedging via options for a 10% downside move in the S&P (put/call skew) is 1.7x the cost for 10% upside (highest since August ’22 when the index sold off 8.1% in the last two weeks of the month).


You also know what to do after very long periods of pessimism...

@WillieDelwiche: Stocks don't usually suffer after persistent pessimism fades.

A simple way to add value to any public equity portfolio: Own the Golden Cross (50d > 200d moving average)...

@RenMacLLC: Below are the distributions of Sharpe Ratios in a golden-cross vs buy-and-hold environment. It's pretty clear (to us at least) that this simple technique can add value to anyone who cares about risk-adjusted returns. It turned positive last week on $SPX

The private capital markets are improving according to the head of this global investment bank...

"I think the sponsor dialogue has been improving pretty significantly as of the start of the year. There is an opening in the financing markets…Last week in the beginning of the year, a lot of the market has taken it to mean party on and started to get fairly optimistic, at least part of the market. But I think it remains volatile. As I said, the indication that we are all waiting around for a single individual statement to me is an indication that the market is not healthy. We hadn’t done that for 5 years before that. It’s probably not a good indication. But again, the activity level I would have to characterize is getting more active over the last 3 or 4 weeks than 8 weeks prior and maybe significantly so, at least in conversation, I might even say significantly so, but we will see if the markets hold long enough to complete some of these." - Moelis & Company CEO Kenneth Moelis

The Transcript

The largest M&A adviser by deal count in 2022 is going private...

Just no reason to be a public company if your stock is undervalued, you won't ever issue public equity and you don't have a reason to ever focus on short term results.

“You can’t be half pregnant,” de Rothschild told the Financial Times. “It was clear that we had reached the limit and full potential of the listing. Our DNA is much better suited to being a private company.”...

Its shares trade at more than half the price to earnings multiple of their US-listed peers and none of the group’s three divisions — global advisory, wealth and asset management, and merchant banking — need to access capital from the public equity markets.

Meanwhile internally, there was growing frustration that its strong operational performance — all three businesses had a record year in 2021 and overall revenues grew 11 per cent year on year in the first nine months of last year — was not adequately reflected in its share price performance. Before Monday’s announcement, Rothschild & Co’s stock was up about 10 per cent over the past 12 months and had gained 25 per cent over the past five years.

In short, the family thought the listing brought Rothschild & Co no real benefits and its leadership saw an inherent contradiction in a public company held captive by quarterly reporting advising clients to think long-term.

Financial Times

Artificial intelligence heading into the search advertising business has become all the rage this month...

Google's first unveiling of its product did not go smoothly. I'm guessing its next release will do better.

Google’s announcement of AI enhancements to its search engine is its latest counteroffensive in a tit-for-tat AI battle. Microsoft said Tuesday that it would integrate ChatGPT technology into its Bing search engine, allowing users to pose questions in natural language and receive direct responses. Microsoft said last month it is making a multiyear, multibillion-dollar investment in OpenAI, maker of ChatGPT and other AI tools such as the Dall-E 2 image-generation software.

Google said Monday it was rolling out a new ChatGPT-like AI service called Bard to a select set of testers, with a broader public launch in coming weeks. The new experimental service generates textual responses to questions posed by users, based on information drawn from the web. Bard, unlike the initial version of ChatGPT, can access information from the real world through Google Search, according to a screenshot of a response by Bard viewed by the Journal.

Those developments are part of a fast-spreading AI war over the commercial potential of so-called generative AI—artificial intelligence that can create content in response to short user inputs—since OpenAI moved to release ChatGPT publicly late last year. Microsoft has promised to integrate capabilities from generative AI tools from OpenAI across all of its products quickly, as well as making them available to outside developers.

Others are jumping into the fray as well. China’s Baidu Inc. is developing an AI-powered chatbot similar to ChatGPT called “Ernie bot,” which it plans to launch next month.


But in the meantime, that is a pretty big penalty box that Google has been placed in by investors...

@carlquintanilla: “.. P/E spread between $MSFT - $GOOGL .. Microsoft now a ~11x premium to Google right now, matching the widest spread dating back to the formation of Alphabet.”

- Goldman desk #AI #ChatGPT

Another NFL season is in the books. Congrats to both the Chiefs and Eagles on a great game...

If you need an incredible read for the offseason, here is one of the best sports writings that I have ever come across. Joe is the man. Enjoy.

MY LATE FATHER bought me a Joe Montana jersey when I was a boy. Home red with white stripes. I don't remember when he gave it to me, or why, but I'll never forget the way the mesh sleeves felt against my arms. The last time I visited my mom, I looked for it in her closets. She said it'd been put away somewhere. On trips home I half expect to still see my dad sitting at the head of the long dining room table, papers strewn, working on a brief or a closing argument. He was an ambitious man who had played quarterback in high school and loved what that detail told people about him -- here, friends, was a leader, a winner, a person his peers trusted most in moments when they needed something extraordinary. Lots of young men like my father play high school quarterback, roughly 16,000 starters in America each year. Only 746 men have ever played the position in the modern NFL and just 35 of them are in the Hall of Fame. What my father knew when he gave me that jersey was that only one of them was Joe Montana.

Tom Brady Sr., bought his son, Tommy, a No. 16 jersey once, too. They sat in the upper deck of Candlestick Park together on Sundays. They looked down onto the field and dreamed. Tommy enrolled as a freshman at Michigan the year Joe Montana retired from football. Forced out of the game by injuries, Montana left as the unquestioned greatest of all time. His reputation had been bought in blood and preceded him like rose petals. Everybody knew. But over time the boy who sat in the upper deck idolizing Montana delivered on his own dreams and built his own reputation. Here, friends, was a threat. The boy, of course, went on to win his own Super Bowls. A fourth, a fifth, a sixth and a seventh. Parents now buy their children No. 12 jerseys because there can only be one unquestioned greatest of all time. No. 16 is no longer what it once was. Joe Montana now must be something else.


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The author has current equity ownership in: United Parcel Service, Inc.

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