Weekly Research Briefing: New Year, Same Puzzle

January 09, 2024

Welcome back. The tree is down, the puzzles are boxed, and the leftovers are gone, but our study of the markets continues. Some interesting developments in the weeks that we were away. Most importantly, the soft-landing scenario continues forward as the consumer economy picks up a bit of speed. December's confidence surveys, Costco's December sales and the credit card companies holiday spending data all showed improvements. The weekly jobless claims are hitting 50-year lows while Friday's job and wage data was a perfect bowl of porridge for Ms. Goldilocks.

The business surveys remain a bowl of broken spaghetti with ISM Service hiring intentions down the limit, but with many signs of optimism in the individual comments for the ISM Manufacturing survey. At least most every company is recognizing falling input and output prices through their business models. This week will bring the closely watched CPI/PPI data on Thursday and Friday. This will be the first of three reports before the March FOMC so we will have a lot of inflation data to review before the Fed makes its next rate decision. Also joining the news flow for the next four weeks will be most S&P 500 earnings. The big banks will kick us off and I would expect decent commentary given the 1% retreat in risk free rates from the Q3 as well as continued good trends in credit quality. Keep an ear open for potential lending growth in residential mortgages or even commercial lending activity as few are expecting that.

The equity markets in 2024 have started out as a mirror image of what happened in 2023. Of course, there would be some tax selling as January started for those that owned the 'Magnificent Seven' into year end. On the flipside, the underperforming dividend payers (drugs, banks, utilities) are now generally outperforming. Treasury yields have backed up a bit as have credit spreads. But this is early days for the 2024 market. The big trends of falling inflation, a solid economy and a healthy banking system remain intact. Business hiring sounds weak, but CapEx spending is good. The longer financial conditions remain where they are, the more anxious business owners will be to compete, which could include hiring new employees. If they choose not to, then their margins will explode higher if their business continues strong. For consumers, they are seeing 3-4% wage growth and making 4% on their risk-free investments. Prices are falling allowing them to spend and save more. If this keeps up, they might even buy a new home or even an IPO. Good times.

For investors, the major S&P 500 equity index does not look cheap here at 19-20x. If you rip out the FANG/Mag7, the forward P/E falls toward 15x. Cheaper, but still not a bargain. For stocks to notch double digit gains in 2024, it is going to take a surge in earnings growth because another multiple expansion will be tough to grab. Outperformance will come to those investors who can find the sub-sectors, geographies and market caps that can beat the S&P 500. That was near impossible to do last year. But if the economy continues to grow and the market broadens out, this will be an easier year to outperform in equities. But if you really want to tilt the playing field in your favor, spend some time looking into the much bigger world of private companies. Not all the best business models to invest in trade daily on a stock exchange with a ticker.

Jumping into the data, consumer confidence really jumped in December...

No doubt the surging financial markets and falling gasoline gave consumers extra reasons to be excited.

The Daily Shot

Market leading retailer, Costco, doubled its December sales estimates driven by +6.5% traffic in the U.S...

Costco Wholesale - Reports Dec Total SSS +8.1%** y/y (ex-gas and FX); US SSS +7.4%** (ex-gas and FX) - Dec E-commerce SSS +17.4% (ex-gas and FX) - Dec Net sales $26.15B, +9.9% y/y.


Even niche mall retailers, American Eagle and Crocs had a great year end...

American Eagle Outfitters; raised its Q4 outlook to a gain of low double digits, following a successful holiday season as now sees operating profit of about $130M, up from previous guidance of $105M-$115M.

Crocs Inc; raises its Q4 revenue outlook to over 1% y/y (vs. prior view -4% to -1%) citing successful holiday season with market share gains for both brands and sees prelim FY23 Rev $3.95B vs. est. $3.94B.

Hammerstone Markets

Conagra and Carnival also had positive notes about recent sales trends...

Conagra Brands CEO: "Despite an ongoing challenging macro environment, we saw several positive signs in Q2. In particular, volume trends in our domestic retail business improved substantially, as inflation-driven volume declines were cut in half compared to Q1"

"We reached an all-time high in booking volumes for the 2 weeks around Black Friday and Cyber Monday and ended the year in the best-booked position we have ever seen on both price and occupancies setting 2024 off to an amazing start. We now have nearly 2/3 of the business on the books for 2024 and at considerably higher prices." - Carnival Corp CEO Joshua Weinstein


This Wells Fargo survey of CIOs should give comfort to tech stock investors...

Why did consumers feel so good about spending for the holidays?

Maybe it was the extra billions rolling thru their banking accounts now that those MMF deposits actually earn something.

Investors parking cash in money-market funds reaped around $300 billion in interest income—more than in the prior decade combined, according to estimates from Crane Data. That gave many Americans’ wallets a boost in 2023.


Friday's headline job numbers were big, but under the hood, the data was more muted...

Less than hot data is not a bad thing for the bond and stock markets.

December’s 216,000 rise in payrolls was stronger than Wall Street expected, and the unemployment rate stayed at a very low 3.7%; Wall Street expected an increase. And yet the overall picture shows the job market is not heating up again, but maintaining a healthy tempo. With October and November revised down, private payrolls growth averaged just 115,000 in the last three months. That’s tied for the lowest since mid-2020, but still above the long-run equilibrium rate given underlying demographics. And while healthcare, government, leisure and hospitality again accounted for the lion’s share of job growth, 59.6% of all private industries added workers, a relatively healthy breadth. —Greg Ip


The greatest concern for the Fed in the December report was accelerating wage growth...

Good for Main Street, but not for Wall Street. That is unless inflation cools at a faster rate.

The Daily Shot

But the best news for all is that the U.S. economy is getting further away from a future recession...

Generally, the employment market has a tendency to weaken slowly and then crack. That allows economists to build very strong indicators of recession based on the trend in employment growth. A steady deterioration can reach a threshold where sweeping layoffs become inevitable. The best known example of the genre is the Sahm Rule, named for Bloomberg Opinion colleague Claudia Sahm. If the three-month moving average of the national unemployment rate (U3) rises by 0.5 percentage points or more relative to its low during the previous 12 months, the rule holds that a recession is starting. Three months ago, it looked as though joblessness was moving rapidly towards the 0.5 threshold. Not any more.


The credit markets don't suggest any signs of a future recession...


And financial conditions are the best since before the Russian invasion of Ukraine...

Belief in Goldilocks is strong. And that’s important because the market, by betting on Goldilocks, has made it easier for such a scenario to happen. Rising prices for stocks and bonds tend to ease financial conditions. Judging by Bloomberg’s own measure for the US, they are now their easiest (expressed in positive territory in the chart below) in almost two years, since before Russia’s invasion of Ukraine.


The markets are still pointing toward 5-6 rate cuts this year starting in March...

Likely driven by the collapse in inflation rather than a collapse in the economy. But there are still some bears out there.

CME Group

If the market is right in a March FOMC rate cut, then Treasuries should be looking at a few good months of performance...

Falling rates tend to boost overall bond returns. Since the 1970s, the 10-year Treasury yield has slid an average of 0.9 percentage point in the three months leading up to the Fed’s first cut of an easing cycle, according to Ned Davis Research. Roughly $22.9 billion has flooded into a fund tracking long-dated Treasurys in the past year, according to FactSet.

To the extent that there is a mystery here, the question is whether bond prices have risen high enough that buying safe bonds is now a slightly riskier, at least for the near term, act than it typically is.

The 10-year yield dropped from 5% in October to below 4% after the Fed signaled its willingness to cut rates in the new year, convincing some investors that a new dawn for bonds lies ahead.


The ISM Services employment survey remains difficult to understand...

If employers are so negative about the outlook for hiring in their businesses, then future margins are going to explode higher if GDP continues to remain solid. Competitors who are expanding now are going to take home all the marbles.


Where the ISM Services data fell short, the ISM Manufacturing responses showed many positive comments...

@RenMacLLC: The comments from the December ISM were relatively positive given the sub-50 headline with a number of industries reporting a pick-up in demand and solid business conditions.

Mission accomplished?

Consumers hate inflation as much today as they did seventy-six years ago...

A great history lesson this weekend showing how Harry Truman in 1948 fought the same battle as Joe Biden is doing today.

In the era of modern consumer confidence data, there has never been an economy quite like this recent one — with prices rising so high and unemployment staying so low.

But just a few years before the consumer sentiment survey index became widely available in 1952, there was a period of economic unrest that bears a striking resemblance to today: the aftermath of World War II, when Americans were near great prosperity yet found themselves frustrated by the economy and their president.

If there’s a time that might make sense of today’s political moment, postwar America might just be it. Many analysts today have been perplexed by public dissatisfaction with the economy, as unemployment and gross domestic product have remained strong and as inflation has slowed significantly after a steep rise. To some, public opinion and economic reality are so discordant that it requires a noneconomic explanation, sometimes called “vibes,” like the effect of social media or a pandemic hangover on the national mood.

But in the era of modern economic data, Harry Truman was the only president besides Joe Biden to oversee an economy with inflation over 7 percent while unemployment stayed under 4 percent and G.D.P. growth kept climbing. Voters weren’t overjoyed then, either. Instead, they saw Mr. Truman as incompetent, feared another depression and doubted their economic future, even though they were at the dawn of postwar economic prosperity.

The source of postwar inflation was fundamentally similar to post-pandemic inflation. The end of wartime rationing unleashed years of pent-up consumer demand in an economy that hadn’t fully transitioned back to producing butter instead of guns. A year after the war, wartime price controls ended and inflation skyrocketed. A great housing crisis gripped the nation’s cities as millions of troops returned from overseas after 15 years of limited housing construction. Labor unrest roiled the nation and exacerbated production shortages. The most severe inflation of the last 100 years wasn’t in the 1970s, but in 1947, reaching around 20 percent.


Here is a look at where the large cap U.S. public market ended 2023...

J.P. Morgan

Looking at 2022 and 2023 together showed that only 3 stocks provided all of the markets return...

NVIDIA + Microsoft + Eli Lilly.


Time for Wall Street to create some "What is an IPO?" content for their TikTok channels...

Small cap stocks also surged the last two months. The data below shows that the strength in small caps tends to be persistent in future months. This is good news for those private companies looking to go public in 2024 as well as the private equity funds that own them.


Q4 earnings begin to drop in size at the end of this week...


A couple of thoughts on where earnings might be headed...

Deutsche Bank: “Q4 2023 Earnings: Set Up For Big Beats… Robust growth and extremely weak consensus point to well above average beats. Our Q4 EPS forecast for the S&P 500 is at 60.1 and compares with consensus at 55.3, implying strong beats of 8.7% in aggregate, well above the 5.0% average historically.”

Goldman Sachs: “The bar ahead of 4Q results is higher than in recent quarters, but we expect S&P 500 firms in aggregate will beat analyst forecasts. Consensus expects 90 bp of sequential margin contraction, which appears too pessimistic. Our baseline 2024 forecast is S&P 500 EPS rises by 5% year/year to $237. We are already above the median strategist estimate ($231).”


Quarterly results have come in much better than expected for the last three quarters...

Let's see if the analysts will be a bit closer to the end result this quarter.

Goldman Sachs

Scott Galloway has some predictions for 2024. Here is an easy one as inflation and mortgage rates fall...

We’re in for a series of aftershocks, and the most consequential will occur in housing. In the past 40 years, we’ve experienced a doubling in housing prices, while household income has risen just 20%. In 2024 expect to see a boom in housing sales volume.

The runup in housing prices has been a perfect storm of choked volume: Low interest rates on existing mortgages have locked people in, people are living longer, Nimbyism has restricted new construction, and household earnings aren’t keeping pace with housing prices. The result: Home ownership is increasingly sequestered to the olds. Housing in America over the past four decades has been a proxy for economic policies writ large, a concerted transfer of wealth from young to old. Reduced interest rates, coupled with pent-up demand (new jobs, kids, life events), will drop like prunes through the colon of housing in 2024.

State legislatures and zoning boards have (sort of) gotten the memo that more housing is desperately needed. Unemployment is low, and young workers are facing historically strong prospects. A sweetener? The real estate agent cartel might finally break, reducing transaction costs for buyers and sellers.

The Prof G Media

Am I the only one drooling at the current mortgage to treasury spread?

With treasuries getting a lid placed on them, refinances dead in the water and the homeowning economy in a better state, how does the mortgage to Treasury spread not normalize? The liquidation of banks owning long mortgage-backed securities (MBS) while funding with short term deposits should be in the rear-view mirror. AAA rated MBS paper seems like a good place to hunt if an asset liability manager needed a top-quality fixed income vehicle right now. If I was still running the Balanced Fund at my old shop, I would be spending extra time with my mortgage analyst right now.

J.P. Morgan

While 2023 was a good year for public equity returns, public fixed income investors also did well after a rough start...

Barron's had the hot hand in calling the top in yields in October so we will return to look at their comprehensive list for 2024. Dividend stocks could work on an underperformance bounce after a tough 2023. And pipeline MLPs are still moving even larger amounts of liquids and gas.

This year, we favor high-dividend stocks in the U.S. and abroad, as well as pipelines and electric utilities. We’re less enthusiastic about municipal bonds after a big drop in yields over the past two months. Here’s a look at a dozen income-generating sectors and specific ways to gain exposure to them.


Preferred stock yields still look excessive to me given how well the banking industry made it through the March mini-crisis...

Also, the regulators have pushed the industry to de-risk further by raising capital costs and tightening the screws of balance sheet interest rate bets. Less risk is a good thing for their credit outlooks.

J.P. Morgan

U.S. office vacancy rates return to their late 1980 highs. Time to bulldoze those 50-year-old office parks?

America’s offices are emptier than at any point in at least four decades, reflecting years of overbuilding and shifting work habits that were accelerated by the pandemic. A staggering 19.6% of office space in major U.S. cities wasn’t leased as of the fourth quarter, according to Moody’s Analytics, up from 18.8% a year earlier. That is slightly above the previous records of 19.3% set in 1986 and 1991, and the highest number since at least 1979, which is as far back as Moody’s data goes, Konrad Putzier writes...

Many office parks built in the 1980s and earlier struggle to find tenants as companies cut back on space or leave for more modern buildings.

“The bulk of the vacant space are buildings that were built in the 1950s, ’60s, ’70s and ’80s,” said Mary Ann Tighe, chief executive of the New York tri-state region at real-estate brokerage CBRE.

And just as in the early ’90s, it is the overbuilt South that is hit hardest. Today, the three major U.S. cities with the country’s highest office-vacancy rates are Houston, Dallas and Austin, Texas, according to Moody’s.


The Mergers & Acquisitions pipelines were active over the break, especially in the healthcare space...

Goldman Sachs - M&A co-chief Feldgoise: The M&A pipeline is as robust as we have ever seen, there is a lot of pent up M&A demand - media interview

Southwestern Energy - Reportedly Chesapeake nearing deal to acquire Southwestern Energy in $17B merger deal, nearer to end

Callon Petroleum CPE - To be acquired by APA Corp in $4.5B all-stock transaction at implied value of $38.31/shr; APA expected to issue ~70M shares of common stock in the transaction; Estimated overhead, operational and cost-of-capital synergies to exceed $150M/yr

Karuna Therapeutics - Confirms to be acquired by Bristol Myers for $330/share in cash in ~$14.0B deal; Expects to finance the deal with primarily new debt issuance; Expected to be dilutive to BMY’s non-GAAP diluted earnings per share by ~$0.30 in 2024

Rayzebio - To be acquired by Bristol Myers Squibb for $62.50/share all-cash in ~$4.1B deal; To be dilutive to BMY’s non-GAAP diluted EPS by ~$0.13 in 2024

Gracell Biotechnologies - To be acquired by AstraZeneca in ~$1.2B deal; Gracell shareholders to receive $2.00/share (equivalent to $10.00/ADS) in cash at closing, plus a non-tradable CVR for up to $0.30/shr


Axonics - BSX announced it will acquire AXNX for the purchase price is $71 in cash per share, reflecting an equity value of approximately $3.7B and an enterprise value of approximately $3.4B.

Ambrx Biopharma - JNJ agreed to buy the drug developer for $2B to gain access to its portfolio of targeted cancer therapies.

Harpoon Therapeutics - MRK to acquire HARP in proposed deal for equity value of $680M, paying $23.00 per share in cash as the board of directors of harpoon has unanimously approved transaction.

Hammerstone Markets

As this chart shows, M&A has a long way to go to recover its trend...

The bankers and lawyers must be itching to do deals right now.

Goldman Sachs

Investors and journalists should not be worried about the growth in private credit the last few years...

As these numbers show, they are just too small to matter. Bank lending and IG lending have grown by trillions of dollars over the same span. The market share gains by the private markets into credit have been a small scratch of market share. But the big banks are scared for the long term as they should be. 2023 proved that their deposit base is no longer solid or free of cost. Regulators have increased risk controls and costs to borrow deposits. And even borrowers have discovered the ease of borrowing from a private market lender.


Marc Rowan defends private credit at the Goldman Sachs conference last month from an attack made by the chairman of UBS...

In other words, the growth of private credit is not a systemic risk to the global financial system. Actually, in some respects, it is making the financial world a less risky place by better aligning borrowers with investors.

"Everything that is on a bank balance sheet is private credit. Let’s start with that. Every dollar, every euro that moves off of a regulated bank balance sheet de-risks the system. And the room was like gasping. And I said, well, isn’t it, everything on a bank balance sheet is levered 10 to 12 times. When you move it to a mutual fund, it gets zero leverage. When you move it to an institutional client, it gets zero leverage. When you move it to a BDC [business development company], it gets 1.5 times leverage. And so on and so on and so on. So, every time you move something out of a banking system, you de-lever the system."

Financial Times

Just a reminder, that we are talking about being in the first inning of this baseball game...

Private credit is less than a quarter of the below private markets bar. Private Equity, Real Estate and Infrastructure make up the bulk of the $13 trillion figure. The private credit ballgame has years to run and take share from banks and the other capital market players.


This major Japanese insurance company sees the private markets as a way to raise its returns...

TOKYO -- Japan's Meiji Yasuda Life Insurance plans to invest about 600 billion yen ($4.2 billion) in domestic and overseas private assets over the next three years, aiming to expand beyond government bonds and stocks in a bid to raise returns. "We will actively invest in long-term assets that are compatible with life insurance, focusing on private equity and private debt," President Hideki Nagashima told Nikkei.

The diversification of assets under management will be one of the pillars of Meiji Yasuda's new three-year, medium-term management plan that will start in April. The insurer plans to use asset management startups to help expand its investments in new classes of assets. The selection will be based not only on their track record, but on whether their philosophy and methods match its objectives.

Nikkei Asia

A new generation of investment products are making private market investing available to a much larger universe of investors…

As you can see in the chart below, the new investor categories are not small and their asset shift into the private markets will cause large ripples for the historic asset management giants in the mutual fund and ETF space. But with fewer companies choosing to go public and more companies tapping the private credit markets for borrowings, the trend of investor money moving to private market vehicles will only increase in future years.

Historically, private equity investing has been largely limited to the very upper end of the wealth scale due to regulations which only permit qualified purchasers (QPs) to invest directly into traditional, closed-end drawdown funds. These closed-end investment vehicles generally have a fixed term of 10 years and come with the complexities of a J-curve (capital calls and distributions). High investment minimums and operational hurdles also created barriers to the accredited investor (AI) market, which represents an estimated $24.5 trillion across approximately 17 million households, excluding QPs (Exhibit 1). Yet, as private market allocations within the institutional channel (e.g., pension funds and endowments) have begun to plateau, many established managers have made tapping into the $60 trillion U.S. wealth channel a top priority. Today, a new generation of evergreen funds, or flexible investment vehicles which allow investors to enter and exit the fund on a periodic basis, are transforming the market, with established managers leveraging technology and employing teams of dedicated product specialists to educate wealth advisors and their clients.


Here is a good look at the investments used by most advisors in client portfolios...

Evergreen funds could help expand private market assets into the portfolios of investors.

Visual Capitalist

So many good articles about the GLP drugs over the break...

Here is an important survey showing which food categories are getting cut back and increased.

Deutsche Bank

Nice sale Mr. Cuban?

The average NBA franchise valuation has risen from $500m to $4b in the last 10 years. Regular season viewership, however, has fallen over 40%. International viewership is likely growing but the U.S. TV contracts are still today's big revenues.


Finally, a thank you to the Wall Street Journal reporter for tipping me off to the best nights of sleep I may have ever had over the Christmas break...

In search of a sleep-focused staycation, I looked close to home. The team at Equinox Hotels, which opened its first outpost in New York City in 2019, spent two years working with experts to create temperature-regulating mattresses, soundproof walls and a program of wind-down exercises for its rooms. Meditation videos come preloaded on the TVs, and a “Sleep Well Menu” includes drinks imbued with ashwagandha (a substance that purportedly improves sleep) and charcoal (ditto). If all that doesn’t knock you out, you can raid the health-centered minibar for CBD and magnesium cream, or pull out the yoga mat and fold into a child’s pose.

Chris Norton, the CEO of Equinox Hotels, said his team primarily focused on making rooms cool, dark and quiet—the holy trinity for quality shut-eye, according to the National Sleep Foundation. “Sometimes you turn off hotel lights and you find yourself with 20 little blinky red, green and blue lights attached to the TV,” he said. At Equinox Hotel, one button turns your room pitch black, and the air conditioning system doesn’t “clonk in and out all night,” Norton said.


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