Private Wealth

Weekly Research Briefing: Grab Your Comfy Chair

October 03, 2023 | 11 min read

The fourth quarter begins with a continued air of uncertainty for investors. While the markets dodged a big bullet over the weekend in avoiding a government shutdown, other concerns remain. The UAW strikes continue into a healthy demand environment short of new automobiles. Rising Treasury yields continue to ignore all new deflationary data both in the U.S. and abroad. And oil prices are still in the $90s but record high temperatures have paused thoughts of winter heat demand.

The equity strategists are looking for a near term bounce given September's 5% sell-off into an oversold position, the new friendliness in Congress, and an annual tailwind of strong seasonal factors that come into play for the last three months of the year. With the Fed done raising interest rates and the economy healthy, investors should be bulled up to own fistfuls of stocks. But with Treasury yields pointing at 4.7% to 5.5% this week, there is solid risk-free competition for investment dollars. And if investors want to take credit risk, how does one not get excited about the 10%+ paper being underwritten in the private credit markets where banks have vacated since the failure of SVB.

October is corporate earnings month which means investors are about to be hit with reported data and guidance from three-quarters of the S&P 500 over the next 4 weeks. You will want your most comfortable chair to sit and digest the releases, calls and reports from as many companies as possible to complete your mosaic for the future of the market. With U.S. equity market valuations in the "full" category, investors are going to need to hear incremental good news from their companies to keep them from considering other investment alternatives. The good news is that earnings estimates have been relatively stable going into this Q3 reporting season. So, with the S&P 500 down 5% into earnings, positive beats and guidance should be rewarded. Now we sit and wait for the reports.

Elsewhere this week, we will get the monthly job data drop on Friday, and it looks like non-farm payroll estimates are zooming in on a +150k-175k number. Expect lots of Fed-speak this week with continued finger pointing at the falling inflation datapoints. For the markets, most all eyes remain on the daily activity in the Treasury markets. Higher yields have taken on a life of their own. No idea when or how they will stop. Congrats to all of you locked into fixed rate mortgages and rolling T-bills. Have a great week.

The Fed's Goolsbee notes that this time may be different, and that inflation can fall while jobs do not...

Goolsbee, a voting member of the Fed committee that sets interest rates, said the economy may be behaving differently than it did in the past because of the pandemic-related supply-chain turmoil and labor shocks of many people abruptly leaving the workforce.

“The unwinding of supply shocks, the composition of demand returning to more stable patterns, and Fed credibility are central to why I think it might be possible today to reduce inflation while avoiding a deep recession,” Goolsbee said.

“Holding to the simple historical correlations of what growth and labor-market conditions mean for inflation in the face of positive supply developments is a recipe for overshooting and causing an unnecessary downturn,” Goolsbee added.


On a month-over-month basis, the August core PCE was the lowest since 2020...

The August core PCE price index rose by 0.14% month over month, below consensus expectations, and the year-over-year rate declined to 3.88%. We forecast core PCE to decline to 3.44% on a year-over-year basis in Q4.

Goldman Sachs

Costco also noted in earnings last week that inflation is slowing...

@carlquintanilla: COSTCO: "Our estimate for Q4 inflation is in the 1% to 2% range and it's actually trended downward during the quarter. So hopefully these inflation trends will continue.”


Another big data point on Monday in the ISM Manufacturing survey showing that companies are paying less...


Meanwhile, the rest of the ISM Manufacturing survey has turned the corner proving that soft data can follow hard data...

@RyanDetrick: ISM Manufacturing came in at 49.0, the highest since Sept '22. But check out some of the action under the surface: Prices paid tanked, Employment highest since May, Delivery times eased after 3 mos higher, New orders best since Aug


We know industrial factory spending is soaring. Well so are State transportation budgets for roads, bridges and other infrastructure...

The Daily Shot

Many signs of economic strength from a presentation from the Bank of America CEO last week...

[BAC] CEO: Commercial credit quality is still very strong

  • Consumer spending growth has slowed down from a year earlier
  • Fed came in late, now careful not to go too far
  • US interest rates will probably stay up for longer
  • Fed has won near-term battle on inflation
  • Consumer accounts still up; spent 4.5% more in sept y/y
  • Rent is real and tipping over in housing costs
  • Expect soft landing in US with no recession
  • Strong consumer caused the reversed calls for recession


Ditto from the Wal-Mart CFO on the economy. But he also warns on lower food consumption drop from GLP-1 drugs...

[WMT] CFO: Continues to see consumers trading down within grocery, but overall customers have been surprisingly resilient; Seeing a drop-off in food consumption from weight-loss drug customers

  • Not planning a big Capex cycle as Walmart sees rewards from past investments
  • Seeing a drop-off in food consumption from GLP-1 customers as well as improving sales in health and fitness related items like yoga mats, athletic apparel, etc. (more so with female customers) that could be related to lifestyle change recommendations that accompany prescriptions of the drug
  • Not currently betting on a big change in general merchandise trends for next year


Costco said membership growth continues at multiples of population growth...

@TheTranscript_: $COST CFO: "We ended the fourth quarter with 71.0 million paid household members, up 7.9% versus a year ago, and 127.9 million cardholders, up 7.6% and that's new openings over the past year of just under 3% increase in new locations."


And Carnival Cruise lines continues to only see demand...

@TheTranscript_: Carnival Cruise CEO on demand for cruises

"We just have not seen any sign of slowdown. The only slowdown we see is as we're running out of inventory, it has to slow down. That's it. So we feel quite good"


The demand for replacement cars is greater than the rise in prices and interest rates...

US car buyers are headed to showrooms out of sheer necessity, defying high interest rates and fat sticker prices to replace cars that on average have been on the road for more than 12 years.

High monthly payments and the early effects of a widespread strike at US carmakers didn’t stop vehicle sales from rising in the third quarter. Dealers have larger inventories than they’ve had for several years, which could attract more buyers for the rest of the year as pent-up demand fuels sales.

“You’re seeing the effects of having the oldest fleet we’ve ever had” vying with higher interest rates and inflation, Jack Hollis, Toyota Motor Co.’s US sales chief, said in an interview. “The industry is coming back to more of a normal state.”

New car sales likely rose more than 15% in the three months to Sept. 31 on a seasonally adjusted annualized rate of 15.4 million vehicles, according to research from Cox Automotive.


It was a pullback month for the U.S. equity markets...

@hsilverb: $SPX total return contributions for September & YTD 2023


Always a good quarter end visual of performance from Bespoke...

A 'Go Fund Me' page has been started for anyone long Bonds, Utilities, Hong Kong and Natural Gas. Congrats to the longs in Oil and Energy stocks.


Now for your annual reminder that we are entering a very strong period for stock returns...

BofA Global

This study goes one step further in showing that the Q4 returns look even better when August and September are weak...

@WayneWhaley1136: A 12-0 4TH QUARTER STUDY IN YRS VERY SIMILAR TO 2023, specifically Jan-July up at least 10% and then August-September Negative.

Easily the most discussed equity charts of 2023 are looking at the concentration of the mega-cap tech stocks so here is your update...

J.P. Morgan

Rising interest rates in September whacked the mega-cap tech valuations, but they are still rich to the rest of the market...

The question now is what will happen if Treasury yields back off? Will economic growth matter or is 30% of the stock market beholden to the level of interest rates?

Goldman Sachs

If you thought Arm Holdings was a hot IPO, you may not have seen anything yet...

OpenAI is talking to investors about a share sale that would value the artificial-intelligence startup behind ChatGPT at between $80 billion to $90 billion, roughly triple its level earlier this year.

The startup, which is 49% owned by Microsoft, has told investors that it expects to reach $1 billion in revenue this year and generate many billions more in 2024, people familiar with the discussion said.

The deal is expected to allow employees to sell their existing shares as opposed to the company issuing new ones to raise additional capital. OpenAI representatives have begun pitching investors on the deal, the people said, though it is possible the terms could change...

OpenAI is aiming to sell a few hundred million dollars worth of existing shares to Silicon Valley investors. In the past, venture firms such as Sequoia Capital and Khosla Ventures have purchased OpenAI shares through tender offers, though the bulk of its external funding is from Microsoft.

The transaction would immediately give Microsoft a huge paper profit. The tech giant invested billions of dollars in the startup in January to help finance the intensive computing costs necessary to train its advanced AI models. At the time, OpenAI was valued at a bit under $30 billion.


With 10-yr Treasury yields near 4.7%, 10-yr real yields are now above 2.3%...

Even the TIPS markets can forward validate a 2%+ real yield. That is a pretty interesting figure for anyone looking to specifically match future liabilities.


But let's look closer at bond market sensitivities...

We have used this chart in the past to look at the risk of an interest rate rise on our fixed income assets. But maybe it is time to flip it and consider how much will be made if interest rates fall?

J.P. Morgan

Even with the market volatility and higher interest rates, 2023 corporate bond issuance is going to pass last year's which is a positive sign of investor appetite and corporate health...

@GunjanJS: Higher-rated cos are issuing tons of debt, even with higher borrowing costs. 2023 issuance of non-financial cos on track to surpass last year's sum --S&P

It sure didn't feel like the Regional Banks outperformed in the Q3...

Thank you rising rates, a flatter yield curve, continued good credit quality and better lending volumes than expected.


Once safe and defensive, Utility stocks are now stuck between a rock (rising risk-free rates) and a hard place (state utility regulators) ...

“I made a promise: We’re going to make it safe,” Poppe said in an interview. “There are lots of places where we can and will work on affordability, but having a compromise on safety and a willingness to accept risk at a $3.40-a-month cost seems dangerous to me.”

In total, PG&E has proposed spending $5.9 billion to bury roughly 2,000 miles of power lines between 2023 and 2026, the first step in Poppe’s broader plan. Underground lines pose almost no fire risk. Burying 2,000 miles of lines would reduce wildfire risk in high-threat areas by up to 20%, the company says.

But the California Public Utilities Commission is considering two modified proposals that would reduce costs, allowing the company to bury either 200 miles or 973 miles of lines between 2023 and 2026. Each proposal directs the company to insulate the remainder with material that would reduce, but not eliminate, the risk of them sparking wildfires. If approved, the proposals would imperil the 10,000-mile goal.


Mercedes Drive Pilot is now the gold standard in full self-driving...

Offered on the electric EQS fastback and gas-powered S-Class sedan, Drive Pilot will initially launch in California and Nevada later this fall, the first two states that have approved the system. At up to 40mph in traffic jam situations on highways, Drive Pilot provides hands-free, eyes-off driving that allows the driver to look away from the road at something else, like a game or movie. That’s a big leap up from hands-free Level 2 systems — Tesla’s Autopilot and “Full Self-Driving” included — which still require the driver to be in full control, looking ahead and paying attention.

Drive Pilot can only be used when the operational design domain (ODD) is met, meaning the set of specific circumstances and criteria that are necessary for the system to work. There must be a vehicle in front of your car, reasonable road conditions with readable markings and lines, and clear weather and light conditions. Drive Pilot can’t be used at night or in the rain, and the headlights and wipers must be set to auto for it to work.

It’s also only available on freeways that have been mapped by Mercedes, with GPS positioning that is precise to the centimeter and even accounts for continental drift. Drive Pilot can’t be used in construction zones, and in addition to detecting vehicles and signs, the system gets data from local agencies so the car knows when a construction zone is ahead. More than 100,000 miles have been driven and mapped in California using Drive Pilot by Mercedes engineers, and that number will continue to grow.

Crucially, Mercedes takes full legal liability when Drive Pilot is activated, though it will depend on each individual case. That is a major step forward for autonomous tech, as Level 2 systems still hold the driver responsible for anything that happens. As long as the user operates Drive Pilot as designed, Mercedes is the one responsible. The system has been available to customers for more than a year in Germany, and Mercedes says there have been zero accidents so far.

The Verge

Congrats to the 2023 Nobel prize winner in medicine. Hopefully Penn Medicine listened to Dr. Kariko on her exit...

In 2013—after enduring multiple professional setbacks, one denied grant after another, and a demotion at the institution to which she’d been devoted for decades—Katalin Karikó, Ph.D., walked out of her lab at the University of Pennsylvania’s School of Medicine for the last time.

For decades the Hungarian biochemist had been fixated on the possibilities of mRNA, the genetic messenger that delivers DNA instructions to the protein-making infrastructure in each of our cells. Karikó—with her collaborator, immunologist Drew Weissman, M.D., Ph.D.—believed in its potential to treat stubborn and fatal conditions like strokes and even cancer, hoping that mRNA could be used to program cells to produce their own cures. The two were evangelizers, but their work attracted few converts. Those who knew about it tended to be dismissive: fanciful, nice concept, dead end.

That morning at the lab, Karikó’s old boss had come to see her off. She did not tell him what a terrible mistake he was making in letting her leave. She didn’t gloat about her future at BioNTech, a pharmaceuticals firm that millions now associate with lifesaving vaccines but was then a relative upstart in the field. Instead, the woman who had bounced from department to department, with no tenure prospects and never earning over $60,000 a year, said with total confidence: “In the future, this lab will be a museum. Don’t touch it.”


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