Weekly Research Briefing: Memorial May

“Not to take issue with a popular coffee ad, but America runs on consumer spending,” JP Morgan economist Michael Feroli wrote Friday. “And consumer spending continues to run in the right direction, as this week’s strong April retail sales report confirmed.”

“The consensus expects a recession starting next quarter, but the upside risk to this negative forecast is that consumers still have plenty of savings left,” Torsten Slok, chief economist at Apollo Global Management, wrote on Tuesday.

@LizAnnSonders: Investors still pricing in rate cuts by end of this year, but have eased up on magnitude when comparing to expectations on day of April jobs report (May 5)

@TheTranscript_: $DE CFO: "Credit quality remains well above historical averages with minimal allowances, past dues & write-offs as a percentage of the portfolio. Provisions for credit losses, ex-Russia, is forecast to be at 17 bps for fiscal '23 & remains below long-term averages"

@TheTranscript_: $JPM CFO: "Three months ago, I would've gone through this page fairly quickly, but what's happened since then serves as a reminder of the importance of our fortress principles...On the right, we remind you once again of the staggering amount of capital that we have"

Californian bank PacWest has reached a deal to sell more than $2bn in loans to real estate investment group Kennedy-Wilson at a discount, just weeks after it said it was looking at narrowing focus to its core community banking business.

Kennedy-Wilson said in a filing on Monday that it was paying $2.4bn for 74 floating rate loans with an aggregate principal balance of $2.6bn.

PacWest said in a separate filing that the deal was “consistent with the previously announced strategy of PacWest Bancorp to pursue strategic assets sales”. The deal could be expanded to include another six loans with a balance of $363mn.

@fundstrat: For those who see the equity market as expensive, it is distorted by #defensive sectors

• ex-FAANG, P/E is 14.8X
• this is distorted by Staples (20X) and by Utes (17X)

Look at P/E of rest of market = Reasonable

[GHL] To be acquired by Mizuho for $15.00/shr in all-cash $550M deal

• Mizuho Financial Group, Inc. (TSE: 8411 and NYSE: MFG) and Greenhill & Co., Inc. (NYSE: GHL) today announced a definitive agreement for Mizuho to acquire Greenhill in an all-cash transaction at $15 per share, reflecting an enterprise value of approximately $550 million, including assumed debt. Through this transaction, Mizuho will accelerate its investment banking growth strategy, building on Greenhill’s 27-year history of advising important clients on significant mergers & acquisitions, restructurings and capital raising transactions.

Chevron deepened its commitment to oil-and-gas drilling in the U.S., spending more than $6 billion to acquire a rival with sizable operations in Texas and Colorado.

In buying PDC Energy in a $6.3 billion all-stock deal, the U.S. oil major is aiming to build a bigger foothold in two prolific oil patches, particularly the Denver-Julesburg Basin that straddles Colorado and Wyoming, a region where Chevron already has a large stake.

The transaction also boosts Chevron’s position in its major U.S. onshore play, the Permian Basin of West Texas and New Mexico, the most prolific American oil patch but one where Chevron and many other companies have seen well-productivity issues over the past year...

“It delivers stronger financials, and it’s a hand-in-glove fit with our portfolio,” Chevron Chief Executive Mike Wirth said, adding that the oil major is buying a company that was trading at relatively low multiples compared with the large amounts of cash it has been generating.

Investors often ignore great investments because of a bias against fees. I see it every week. When looking at private equity versus stocks, we’ve found that private equity’s outperformance is significant and sustained over decades and this is inclusive of all fees.

What you should know

• It is true that headline fees are generally higher in private markets than in other asset classes, though this is only part of the story.
• Management fees for private equity funds average 1.5% - 2% of the committed capital per annum. Managers also earn a performance fee, typically 20% of the realized profits, provided their returns exceed a minimum threshold.
• On a net basis (after all management fees, expenses and performance fees are accounted for) private equity funds have beat public equities over most of the past 20 years — even during the recent bull market for public stocks.

The states along the Colorado River — a vital source of water and electricity for the American West — reached an agreement with the Biden administration on Monday to conserve an unprecedented amount of their water supply in exchange for about $1 billion in federal funding, according to people familiar with the situation.

After nearly a year of negotiations and multiple missed deadlines, the deal amounts to temporary solution intended to protect the country’s largest reservoirs — Lake Powell and Lake Mead — from dropping to critical levels over the next three years. These reservoirs have fallen dramatically as the warming climate and the past two decades of drought have pared down the river’s natural flow by some 20 percent.

To stabilize the river, the three states that comprise the Lower Basin — California, Arizona, and Nevada — have agreed to voluntarily conserve 3 million acre-feet of water over the next three years, which amounts to 13 percent of these states’ total allocation from the river. The Biden administration has committed to compensating the states for three quarters of the water savings — or 2.3 million acre-feet — which would amount to at least $1 to $1.2 billion in federal funds, the people familiar with the talks said. The money from the Inflation Reduction Act would pay farmers and others who voluntarily forego their supplies.

All her life, Victoria Rutledge thought of herself as someone with an addictive personality. Her first addiction was alcohol. After she got sober in her early 30s, she replaced drinking with food and shopping, which she thought about constantly. She would spend $500 on organic groceries, only to have them go bad in her fridge. “I couldn’t stop from going to that extreme,” she told me. When she ran errands at Target, she would impulsively throw extra things—candles, makeup, skin-care products—into her cart.

Earlier this year, she began taking semaglutide, also known as Wegovy, after being prescribed the drug for weight loss. (Colloquially, it is often referred to as Ozempic, though that is technically just the brand name for semaglutide that is marketed for diabetes treatment.) Her food thoughts quieted down. She lost weight. But most surprisingly, she walked out of Target one day and realized her cart contained only the four things she came to buy. “I’ve never done that before,” she said. The desire to shop had slipped away. The desire to drink, extinguished once, did not rush in as a replacement either. For the first time—perhaps the first time in her whole life—all of her cravings and impulses were gone. It was like a switch had flipped in her brain.

As semaglutide has skyrocketed in popularity, patients have been sharing curious effects that go beyond just appetite suppression. They have reported losing interest in a whole range of addictive and compulsive behaviors: drinking, smoking, shopping, biting nails, picking at skin. Not everyone on the drug experiences these positive effects, to be clear, but enough that addiction researchers are paying attention. And the spate of anecdotes might really be onto something. For years now, scientists have been testing whether drugs similar to semaglutide can curb the use of alcohol, cocaine, nicotine, and opioids in lab animals—to promising results.

Golf has spent the better part of a year locked in an exasperating, out-of-touch bicker over what it needs: a fancy new tour, competing events, better promotion, swankier perks, richer guarantees, bigger paychecks...

Turns out what golf needs is Michael Block.

I’m a Blockhead for life, and I know I’m not alone. You can have all of the PGA and LIV superstars with their flawless swings and private jet lifestyles. I’ll take the low-key 46-year-old father of two teenagers who—at least as of last week—was giving 45-minute lessons at the Arroyo Trabuco public course in Mission Viejo, Calif., for $150.

“As normal as it gets,” he called himself.

That’s Block, who captivated the PGA Championship this past weekend in Rochester, N.Y., entering Sunday in the top 10 with the entire sports world talking. He finished the tournament a career-best 15th, good enough for a $288,333 payout, plus a sponsor’s invite to this week’s Charles Schwab Challenge at Colonial, and an automatic entry into next year’s PGA Championship.

To top off the fairy tale, Block sank an astonishing hole-in-one—ker-plunk, beer pong style—on the par-3 15th Sunday while playing with a delighted Rory McIlroy, who knew it was an ace before Block did.