Private Wealth

Weekly Research Briefing: Hard Landing or Soft Landing?

April 11, 2023

Friday's jobs data showed that there are still some small rays of light targeting a soft landing. Most of last week's data releases pointed towards an increasing economic slowdown (declining bank lending data, weaker ISMs and factory orders, and a rollover in JOLTs). But Friday's release of the non-farm payroll and the household survey continues to show one of the strongest job markets in decades. Fortunately, wages continued to retreat confirming other price slowdowns seen in the ISM data. While odds remain against a soft landing, there is still the small potential for one. In the meantime, a slowing economy combined with slowing prices and wages sent investors scrambling into Treasuries during the shortened holiday week. The U.S. 10-year yield neared 3.30% from over 4% five weeks ago.

Next week is a big one. The March CPI and PPI will hit along with Retail Sales and the start to the release of first quarter earnings reports. As usual, the big banks lead off on Friday but there is no better way to start than to hear how many deposits flew into the doors of JPMorgan, Wells Fargo and Citigroup at the expense of Silicon Valley Bank's blunder. The next FOMC meeting will be on May 3rd so inflation, earnings and housing data might be the best new info the Fed will get before then. Right now, the market odds are betting 2/3 on a +25bp hike to the Fed Funds rate and 1/3 on no change.

Difficult to call for a slowdown when the economy is creating 400,000 jobs a month...

The Household Survey continues to outpace the Non-Farm Payroll figures but the average of the two is still an economy in a higher gear.

The Daily Shot

Highest 25–54-year-olds working population participation rate since 2008 (including the spike in 2019)...

The Daily Shot

Wage growth has successfully fallen from the high 5% figures to the current 4.2% level with no increase in the unemployment rate...

The Daily Shot

As expected, the number of job openings has begun to retreat...

@Schuldensuehner: Feb JOLTs report bullish for stocks, w/number of job openings dropping 630k to 9.93mln, lowest since May 21, a figure Fed is likely going to be pleased with. Largest decreases in job openings in professional & business services (-278k); health care (-150k). (via @knowledge_vital)

A much weaker than expected ISM Services last week driven by big drops in New Orders and Prices Paid...

@LizYoungStrat: Mar ISM Services came in at 51.2 (neutral = 50), below the est of 54.4. All components weakened, but New Orders were particularly weak (and are the fwd looking component)--down from 62.6 in Feb to 52.2 in Mar.

We can count on further economic headwinds as bank surveys show lending volumes are retreating...

A survey of 71 banks in the Dallas Fed district done after SVB went under shows a dramatic reversal in loan volumes, see chart below. This Fed survey was carried out from March 21 to 29.


Jamie Dimon confirmed the headwinds in his annual letter to shareholders of J.P. Morgan...

"And while this is nothing like 2008, it is not clear when this current crisis will end. It has provoked lots of jitters in the market and will clearly cause some tightening of financial conditions as banks and other lenders become more conservative…We are seeing people reduce lending a little bit, cut back a little bit, pull back a little bit. It won’t necessarily force a recession, but it is recessionary." - JPMorgan Chase CEO Jamie Dimon

The Transcript

The Atlanta Fed's Q1 GDP forecast was in a lower trend for the last month but popped on Friday's bte jobs data...

@AtlantaFed: On April 10, the #GDPNow model nowcast of real GDP growth in Q1 2023 is 2.2%. #ATLFedResearch

This is a big week for inflation data...

Last week's ISM data gave us a pretty good indication that prices are falling. We know that wage inflation is falling. Now when will the weaker housing/rental prices hit the numbers? Maybe we will see signs on Wednesday and Thursday.

BofA Global

Yields are following the inflation & growth data lower...

@bespokeinvest: If it wasn't for that one month period from early February to early March, it would be looking like a pretty steady downtrend for the 2-year yield.

Earnings on deck this week...

The big banks, Delta Airlines, United Health and LVMH will start us off with some key tea leaf reads.


It looks like the last week of this month will be the monster with 42% of the S&P 500 reporting...

Goldman Sachs

Some negative pre-announcements plus new ankle weights on the banking industry are pressuring earnings estimates lower...

The earnings bar has been set low as Barron's writes there have been 81 negative preannouncements so far versus only 26 positive ones (above the long-term negative-to-positive ratio of 2.5 in data going back to 1997). Never mind that the early Q1 results have been good so far. At least expectations are low, just like three months ago.

Earnings Scout

WD-40 is a good economic bell-weather that just reported...

The company is seeing input costs stabilizing and March is looking to be a record sales month.

“I am pleased to report that we have now made it through most of the price increase related disruptions and the prospects for revenue growth in the back half of the fiscal year are looking optimistic. I am happy to report that it’s looking like the month of March, though not yet fully finalized from an accounting perspective, will be a new record sales month for the company”.


Conagra put a smile on investors faces last week as margins jumped higher...

Conagra Brands posted lukewarm results on Wednesday that should nonetheless be reassuring to investors in it and other packaged food companies.

The maker of Marie Callender’s pies and Orville Redenbacher’s popcorn said Wednesday that organic sales in its fiscal third quarter rose 6.1% from a year earlier. That was a significant slowdown from 8.6% in the second quarter, and a tad less than the 6.3% growth that analysts had penciled in, according to consensus estimates from Visible Alpha...

But the bigger story for Conagra and the broader food sector is probably the recovery in margins, as price increases have finally caught up with inflation in the cost of inputs. In Conagra’s quarter, adjusted gross margins were up more than 4 percentage points from a year earlier to 28.1%. This margin inflection began last quarter, but its continuation is a hopeful sign that the profit recovery is here to stay.

The company also tweaked its guidance for the full fiscal year, implying slightly weaker sales growth but stronger profitability. It now expects organic sales to grow 7% to 7.5%, compared with the 7% to 8% it forecast last quarter. But it also expects adjusted earnings per share of $2.70 to $2.75 for the fiscal year, up from its prior guidance of $2.60 to $2.70.


If you are looking for demand outstripping supply, find a travel and leisure company like United Airlines...

[UAL] Notes sharp increase in 'unprecedented' demand for travel outside US; March International bookings +15% y/y; Its capacity across the Pacific will exceed 2019 levels by more than 15% this summer

  • United Airlines will fly to 114 different international cities this summer and has expanded its flying by 25% versus last year to meet the sharp increase in demand for travel outside of the U.S. The airline is already the largest carrier across both the Atlantic and Pacific and this summer's schedule includes nearly 25 new routes. According to United booking data, international bookings are already 15% higher than the same period in 2022.
  • This summer, United will also be the largest airline across the Pacific, serving 27 unique destinations. Excluding Mainland China and Hong Kong, United's capacity across the Pacific will exceed 2019 levels by more than 15% this summer.
  • Exec: "With unprecedented demand for travel overseas, we'll have more service to popular cities while also adding new and unique destinations for customers to explore."


Or a cruise ship company...

"Consistent with our last business update, we remain on an upward trajectory as we further closed the gap to 2019. We are still experiencing a record wave season, which started early, gained strength and has extended later into the year..Booking volumes for our North American brands have been running in excess of record 2019 levels for the last 6 months and booking lead times are now back to peak levels…Demand trends are improving across all regions as we exit the winter period and home heating concerns fade." - Carnival Corp and Carnival PLC CEO Josh Weinsten

The Transcript

Don't blanket the construction industry with CRE banking/lending problems...

There is plenty of building to be done away from that of pure investors. The industrial and municipal space has a backlog of work that needs to get done.

The construction industry has become a pillar of strength in the U.S. economy, helping contractors offset rising expenses as they deal with labor shortages.

A building boom in industrial plants, infrastructure and other nonresidential projects is offsetting home construction in the U.S. that has been weakening under the weight of higher interest rates. Contractors said spending on nonresidential projects has stayed strong as borrowing costs rise, which usually drives up the cost of financing construction work.

Spending on nonresidential construction for February, the most recent month available, totaled $982 billion, nearly 17% higher than a year earlier and steady with January, according to the U.S. Census Bureau.

“I’ve got more work to look at and bid on than I could possibly handle,” said Jeff Harper, president of Harper Construction Co. in San Diego. “I’ve said ‘no’ to 10 jobs in the last four months.”


But if you are a CRE investor dependent upon bank financing, then that could be a problem...

@DanGreenhaus: Worrying about bank commercial real estate exposure is all the rage. So probably worth observing that on either a nominal or a % basis, we've now seen the largest two-week drop in CRE loans by banks on record (nearly 20 years). It’s "only" $30B on a nearly $3T loan book but still.

The crisis to re-finance CRE is going to be a big opportunity for the non-banks...

Almost $1.5 trillion of US commercial real estate debt comes due for repayment before the end of 2025. The big question facing those borrowers is who’s going to lend to them?

“Refinancing risks are front and center” for owners of properties from office buildings to stores and warehouses, Morgan Stanley analysts including James Egan wrote in a note this past week. “The maturity wall here is front-loaded. So are the associated risks.”

The investment bank estimates office and retail property valuations could fall as much as 40% from peak to trough, increasing the risk of defaults.

Adding to the headache, small and regional banks — the biggest source of credit to the industry last year — have been rocked by deposit outflows following the demise of Silicon Valley Bank, raising concerns that will crimp their ability to provide finance to borrowers. The wall of debt is set to get worse before it gets better. Maturities climb for the coming four years, peaking at $550 billion in 2027, according to the MS note. Banks also own more than half of the agency commercial mortgage-backed securities — bonds supported by property loans and issued by US government-sponsored entities such as Fannie Mae — increasing their exposure to the sector.


Jim Costello of MSCI notes that the future opportunities in real estate stress will occur for the expert buyers and operators...

Perhaps the most interesting point that Jim made in our conversation about commercial real estate distress is that the people who are licking their chops and sensing an opportunity are the people who know how to get their hands dirty and reposition a piece of real estate. If you know what you're doing to get a mall rezoned or can navigate turning an office building into apartments, you might be able to make a lot of money right now. But this takes local knowledge. It takes specialized knowledge.

After the Great Financial Crisis, some of the players who made a fortune were big, institutional asset managers that bought up a bunch of single family homes that had been foreclosed upon. And the main knowledge you needed to do that trade was familiarity with a spreadsheet and an understanding of finance.

This time around, spreadsheet knowledge isn't gonna cut it. And so to some extent, the story in commercial real estate is a specific instance of a more general story that the 2020s are all about the physical world. Whether it's energy, infrastructure, semiconductors, or distressed commercial real estate, the winners are likely to be the people that know how to operate something well, rather than those who just have access to cash and the ability to buy up financial assets.


Looking over into residential real estate, the number of home listings continues to fall at a significant rate year over year...


And with mortgage rates looking stable to lower, home buyers will soon fight to hoover up whatever inventory is available...

So, it is very easy to make the case that home prices could rise throughout 2023, which is what we are beginning to see right now...

@NewsLambert: After 6 straight month-over-month declines, U.S. home price growth as measured by the seasonally adjusted Zillow Home Value Index turned positive in March.

Sounds like a good time to sit down and review your Emerging Market exposures...

According to the latest report from AQR, EM stocks are now expected to generate about a 3 percent premium over developed market stocks, one of the highest levels in the past 25 years. AQR says that the rising premium is driven in part by improving fundamentals across emerging markets for decades. Between 1980 and 2020, GDP per capita in emerging markets, expressed as a share of developed markets, surged from 20 percent to over 50 percent. That means the gap between the economic output of emerging and developed markets has narrowed significantly.

The findings come at a time when many active managers have deemphasized emerging market stocks, given their relative underperformance since the global financial crisis. According to eVestment, actively managed equity funds have an average of 8.8 percent in emerging market stocks. The MSCI All Country World Index has 12.2 percent in emerging markets stocks...

“Emerging risks aren’t what they used to be,” Michele Aghassi and Dan Villalon, principals at AQR, wrote in the report. The volatility of EM stocks has come down significantly from the peak levels of the global financial crisis. The trailing five-year volatility of EM stocks now hovers around 20 percent, roughly the same volatility experienced by developed market stocks.

Furthermore, the correlation between EM stocks and developed market equities has decreased from 0.87 in 1999 to 0.77 in 2022, meaning EM stocks now offer better diversification benefits than they have in the past. “This evolution suggests that from the standpoint of portfolio risk, the case for emerging markets potentially even increased over the past decade, compared to history,” the report said.

Institutional Investor

Looking at forward valuations, it doesn't get much cheaper for equities than EM...

J.P. Morgan

If you were worried about TikTok, but own a Tesla...

The fact that Tesla's own employees are paranoid about driving their company's cars should tell you everything you need to know.

Tesla Inc assures its millions of electric car owners that their privacy “is and will always be enormously important to us.” The cameras it builds into vehicles to assist driving, it notes on its website, are “designed from the ground up to protect your privacy.”

But between 2019 and 2022, groups of Tesla employees privately shared via an internal messaging system sometimes highly invasive videos and images recorded by customers’ car cameras, according to interviews by Reuters with nine former employees.

Some of the recordings caught Tesla customers in embarrassing situations. One ex-employee described a video of a man approaching a vehicle completely naked.

Also shared: crashes and road-rage incidents. One crash video in 2021 showed a Tesla driving at high speed in a residential area hitting a child riding a bike, according to another ex-employee. The child flew in one direction, the bike in another. The video spread around a Tesla office in San Mateo, California, via private one-on-one chats, “like wildfire,” the ex-employee said.

Other images were more mundane, such as pictures of dogs and funny road signs that employees made into memes by embellishing them with amusing captions or commentary, before posting them in private group chats. While some postings were only shared between two employees, others could be seen by scores of them, according to several ex-employees.


Of course, before you spend allocated research time on EM equities, make certain that your Private Equity allocation is maxed out...

If you invested $1.00 in the stock market in 2018, it would be worth $1.23 in January 2023, while $1.00 invested in private equity over the same time frame would be worth $2.24.

The Growth of $1 Invested in Public Equities vs. Private Equities 

MSCI World used as proxy for public equities. 

Source: Hamilton Lane Data via Cobalt, Bloomberg (January 2023)1
Past performance is not an indicator of future results.

Hamilton Lane

Martin Short put Ozempic on SNL this weekend. But Eli Lilly's Mounjaro might deserve a full skit in the future...

Novo-Nordisk has doubled in two years since Ozempic/Wegovy has rolled out to a broader patient list. Mounjaro is a better weight loss drug and it is about to get its FDA release. It could become the first drug to surpass $25b in sales.

People who are overweight are flocking to the drug Ozempic to slim down. Looming is an even more powerful weight-loss treatment.

The drug Mounjaro helped a typical person with obesity who weighed 230 pounds lose up to 50 pounds during a test period of nearly 17 months.

No anti-obesity drug has ever safely made such a difference. In the coming months, it is widely expected to get the go-ahead from U.S. health regulators to be prescribed for losing weight and keeping it off, and some patients are already using it unapproved for that purpose.

AThe advance of Mounjaro, which is already on the market to treat Type 2 diabetes, has excited doctors and patients who have been waiting decades for effective treatments, while helping turn its maker, Eli Lilly & Co., into the most valuable standalone pharmaceutical company in the U.S. with a market value of more than $300 billion.


I know where all the "Shoe Dogs" were this weekend...

Rotten Tomatoes

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The author has current equity ownership in: J.P. Morgan Chase & Co.


Private Equity: A broad term used to describe any fund that offers equity capital to private companies.
Private Real Estate: Any close-end fund that primarily invests in non-core real estate, excluding separate accounts and joint ventures.
Private Credit: This strategy focuses on providing debt capital to a variety of companies. It can involve several different sub-strategies distressed debt, mezzanine, real estate debt, royalty debt, senior debt, special situations and turnaround.


MSCI World Index: The MSCI World Index tracks large and mid-cap equity performance in developed market countries.

The information presented here is for informational purposes only, and this document is not to be construed as an offer to sell, or the solicitation of an offer to buy, securities. Some investments are not suitable for all investors, and there can be no assurance that any investment strategy will be successful. The hyperlinks included in this message provide direct access to other Internet resources, including Web sites. While we believe this information to be from reliable sources, Hamilton Lane is not responsible for the accuracy or content of information contained in these sites. Although we make every effort to ensure these links are accurate, up to date and relevant, we cannot take responsibility for pages maintained by external providers. The views expressed by these external providers on their own Web pages or on external sites they link to are not necessarily those of Hamilton Lane.

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