Private Wealth

Weekly Research Briefing: Parked

May 16, 2023

The S&P 500 has been parked in a 2% trading range around 4,100 for six weeks now. The VIX is stuck at 17 except on the days that the shorts make a run at the west coast banking stocks. And the 10-year U.S. Treasury yield has wiggled between 3.3% and 3.6% for two months now. It would be easy to say that summer has started early and investors have checked out, but that wouldn't explain everything. Actually, investors are lined up to make a move into the risk markets given the continued growth in their cash balances and money market funds. But given the volatility over the past year, they just want some added certainty before they hit the BUY button.

Right now the market is waiting and watching on another round of debt limit ceiling talks. The risk of default is low and you know how this is going to end, but the current silliness is once again influencing the prices of short term treasury instruments. If a deal is not reached this week, expect the worries and news flow to shift toward individuals and contractors not getting paid in the coming weeks. Then the constituents and lobbyists call their elected officials offices and let them have earfuls which gets an agreement across the finish line.

Next on the investor worry list is another bank failure, but with the government moving in with a plan to refill the FDIC's coffers, and the growing list of capital moving to buy banking assets, the days of banking shorts may be numbered. And while the Fed's quarterly Senior Loan Opinion Survey showed some tightening last week, it was not as bad as many feared. Yes, conditions are getting tighter. But as we have seen, the credit markets have reopened for business, but the price tags on borrowings are higher.

After these two items, the investor list returns to the Fed, inflation, economic growth, earnings growth, credit risk, and so on. Last week gave us some good data on the CPI & PPI showing slowing inflation. Earnings continued at a better than expected pace which has now led to analysts raising estimates for the back half of 2023 (didn't see that coming). Company bankruptcies are on the rise, but consumer credit trends for April came in better than March. Google also reminded us last week that it is not playing for second place in the AI wars and this new tech adoption is going to add significant value to all end users.

This week we get the big retailer earnings reports, economic data on retail sales, industrial production, housing and the Philly fed. Also, Powell and Bernanke are speaking together on Friday which could be interesting. Have a great week and enjoy the new weather and your sporting team's next round. (Go Nuggets!)

April's CPI put more smiles on faces as cost pressures continued to fall...

Eventually shelter and used cars will retreat so maybe we will see some negative month over month prints ahead.

The entire 0.41% increase in Core CPI MoM was due to 3 components:

  • Shelter ex-hotels +0.23
  • Used cars + trucks +0.14
  • Vehicle insurance +0.04

That’s it. Without these, overall Core CPI MoM would have netted to 0.0%


Here is the chart of the year-over-year CPI...

@LizAnnSonders: April CPI #inflation +4.9% year/year vs. +5% est. & +5% in prior month … core CPI +5.5% year/year vs. +5.5% est. & +5.6% prior

And the core PPI is nearing 3% on a year-over-year basis...

So also behaving nicely toward the fed's goals.

The Daily Shot

You knew that the Fed was going to look at changing their long-term inflation target...


Another weight on goods and services inflation is the drag on wages. Especially high earner wages...

@MylesUdland: Wage growth has been negative for two straight months for those making north of $125,000/year

As tech layoffs slow, will high tech cities see a recovery?

@RenMacLLC: This is a good example of fitting a narrative to a chart. The increase in claims can be explained by one state: Massachusetts. California and New York are okay. What we know about tech layoffs suggests some improvement, at the margin.

The hotel industry continues to outperform its historical averages...


On the downside, the Empire Fed pulls a U-turn in April...

The New York Fed manufacturing data well outperformed the Philly Fed data in April. But on Monday, the data series reversed sharply as new orders and shipments declined strongly. Could the Rangers and Knicks elimination have influenced survey participants? Just wondering.

*(US) MAY EMPIRE MANUFACTURING: -31.8 V -4.0E (biggest M/M decline since Apr 2020); Components:

  • New Orders: -28.0 v +25.1 prior
  • Shipments: # v +23.9 prior
  • Prices Paid: 34.9 v 33.0 prior
  • Employment: -3.3 v -8.0 prior
  • 6-month business conditions: 9.8 v 6.6 prior



But April was a positive surprise for consumer credit trends...

Monthly credit cards data slightly improved:

BAC credit card charge-off rate was 1.89% in April vs 1.90% in March and net charge off rate was 1.17% vs. 1.9% in March.

COF April domestic credit card net charge-offs rate 4.26% vs 4.16% in March; 30+ day performing delinquencies rate for domestic credit card 3.57% at April end vs 3.66% at March end; April auto net charge-offs rate 1.16% vs 1.30% in March.

DFS credit card delinquency rate 1.38% at April end vs 1.40% at March end; card charge-off rate 1.78% at April end vs 1.61% at March end.

JPM credit card charge-off rate 1.58% in April vs 1.62% in March; credit card delinquency rate 0.87% at April end vs 0.88% at March end.

Hammerstone Report

Equifax and Fifth Third Bancorp also see a strong consumer...

"The consumer is very strong. In the United States and most markets around the globe, they're working. Their wages are up quite dramatically. If they lose their job, they get another one quickly. And as you know, in the United States, there's more open jobs than they've ever been -- have been in history in the United States." - Equifax CEO Mark Begor

"...the consumer continues to do very well. We were -- Tim and I were looking at this last week and preparing for your Q&A on how is the consumer doing? And we're seeing the deposit balances at least within the Fifth Third portfolio is that lower segments within consumer continue to have significant amounts of excess cash. And thus far, we're really not seeing an uptick in credit trends that would be concerning." - Fifth Third Bancorp CFO James Leonard

The Transcript

With the stabilization in the credit markets, companies have returned to issuing and refinancing their debts...

Companies are seizing the opportunity to sell more bonds as rates march higher and the economy slows.

European borrowers raised the most debt in over a year as another policy rate hit a 15-year peak, while US borrowers piled in after regional banks found their feet. Last week’s spree is expected to extend as companies exit earnings blackouts, spurred to move fast before recession bites...

Funding conditions have eased since the height of financial-sector volatility in March, with US new issue concessions and average yields dropping. Strong secondary performance from the most recent batch of bonds bodes well for the streak to continue.

Another $30 billion in US high-grade bond issuance is expected next week, in line with the prior five-day period. Blue-chip US companies are forecast to raise $135 billion in May, which tends to be a busy month, up from about $70 billion last month.


If enacted, this FDIC replenishment assessment would hit big bank earnings by about 17.5% for one quarter...

While the one-time assessment will not fill up the hole, an increase in annual deposit pricing insurance cost will help them recover it all. Then the government will dial back down the annual cost. While a psychological positive for depositor mentality, it is they who will be paying for it at the end of the day.

(US) FDIC announces plan to replenish bank insurance fund where banks with over $50B in assets will pay over 95% of the fees

  • New fee to roughly equal losses incurred, estimate at $15B
  • Estimates banks with over $50B in assets would pay over 95% of the fees, no banks under $5B will pay
  • Would collect fee over eight quarters beginning June 2024, can be extended or shortened as needed
  • Estimates 113 banks would be subject to special assessment
  • Proposal would set annual special assessment rate of 12.5bps on a bank's uninsured deposits as of December 2022
  • Would replenish Deposit insurance fund after uninsured depositors are made whole


Words from the biggest banker of them all has something for everyone to grab ahold of...

[JPM] CEO Dimon: Hopeful getting to tail end of regional banking crisis; Regional banks are quite strong, despite deposit runs

  • Boards, CEO's are to blame for "banking crisis"
  • Hedged all the exposure to First Republic
  • Most of big bank size accrues to clients; Regulators should consider making consolidation easier
  • Actual default would be catastrophic but I don't think it will happen; Wish we could get rid of debt ceiling
  • Too much social engineering in IRA
  • US China investment going down in both ways
  • Reiterates worried rates could tick up even in a recession do to longer persistent inflation from fiscal spending
  • CRE losses could take a few banks down
  • Regulators should consider a short selling ban on bank stocks; Hope that SEC will look into short sellers of bank stocks


It took too long to sell SVB, but now we see that there was plenty of bidding activity for the assets which is a positive...

Ten firms bid for Silicon Valley Bank after it was seized by regulators in March, while another 10 wanted pieces of it, suggesting an auction that was more robust than previously known.

First Citizens, the North Carolina bank that won, offered the government the best price on the biggest chunk of assets, according to data quietly released last night by the Federal Deposit Insurance Corp. It bought $72 billion of loans at a 23% haircut, and took all of SVB’s deposits.

Three other firms offered less money for roughly the same pot of assets, and a handful of others bid for smaller chunks, including one steeply discounted proposal for SVB’s $1 billion in wine-related loans.


Blackstone is looking to get involved in allocating to banking assets by partnering directly with banks...

Blackstone is in discussions with large US regional banks about providing them with extra firepower to lend to companies amid signs the recent industry turmoil is morphing into a credit crunch.

Jon Gray, president of Blackstone, told the Financial Times his company was talking to regional banks about entering into partnerships, which would involve lenders making or “originating” loans that the private equity group can funnel to its insurance customers.

“The discussions we are having is to potentially partner with a regional bank,” Gray said in an interview. He declined to name the lenders involved in the negotiations but said they had between $100bn and $250bn in assets...

Apollo chief executive Marc Rowan said on an earnings call this week that he expects his group to dramatically increase lending following the banking turmoil...

“The banking system wants the client, but not the asset,” Rowan said, echoing Gray’s opinion that in many cases the lender should still have the primary relationship with customers.

Financial Times

Another private market giant is ready to allocate into the increasing return private credit markets...

@TheTranscript_: $KKR: "As the syndicated loan markets have remained choppy, new issue volumes are down over 50% YTD. Companies looking for debt capital continue to increasingly look to the private credit markets where base rates are up, spreads are wider & lender protections are more significant"

As the tide goes out, Howard Marks also has his bucket and shovel ready...

Right now he sees a fertile environment for lenders such as Oaktree to step in and provide financing where banks are further retrenching following the collapse of Signature Bank and two other US regional lenders. The Fed said this month that banks were tightening lending standards for businesses and warned of a potential credit crunch.

“Now you have some meaningful interest rates and some scarcity of capital as banks are restrained,” Marks said. “This is a good climate . . . you can get equity returns from debt now, and when you invest in debt you have a much higher level of certainty of return relative to equity ownership.”

Marks said that this contrasted with the investment landscape from 2009 to 2021, when interest rates were low and “everyone was eager to invest”.

“If everyone is eager to invest, you’re not going to get a bargain,” he said. “It’s simple supply and demand. For more than a decade it wasn’t a great time to be a lender. Now it’s a much better time.”

Financial Times

TPG is going so far as to buy an entire firm of private credit experts...

TPG has agreed to buy debt and real estate manager Angelo Gordon for $2.7bn as the US private equity group diversifies into credit based investments with its first major acquisition since going public last year...

Angelo Gordon, which manages $73bn in assets with 650 employees worldwide, has had important roles in steering recent bankruptcies like Revlon and Envision Healthcare. It also has extensive operations financing real estate...

Josh Baumgarten, co-chief executive of Angelo Gordon, said the merger would add “scale” to its investment operations during a time of strong opportunities in credit and real estate markets.

The transactions come as private credit managers increasingly replace traditional banks in financing buyouts and even in making large real estate and corporate loans. The deal adds to a wave of consolidation in private capital as asset managers look to bolster their credit investment capabilities.

Financial Times

Other firms are just looking at targeting specific private credit deals where others have walked away from...

Madison Realty Capital is loaning $585 million to wrap up construction of a luxury resort outside Phoenix, betting on projects close to completion as funding for commercial real estate deals slows.

The New York-based private equity lender is fronting the money to Five Star Development, the builder of the Ritz-Carlton Paradise Valley, The Palmeraie. The project, a 215-room hotel surrounded by private residences, retail and dining facilities on the border of Scottsdale, Arizona, is already about 80% finished and buyers have put down deposits on 80 villas valued at $300 million, according to Josh Zegen, managing principal at Madison Realty...

“There’s a very clear path to an exit at a time people are trying to understand real estate,” Zegen said in an interview. “We're looking for deals that’ve had delays or delivery issues but are almost done and near the finish line.”

“In today’s market, it’s very hard to put together a big loan from one party,” said Zegen, who declined to disclose specific terms of the loan. “You can get a premium to write a $585 million check.”


While U.S. banks might have 30-60% CRE exposures, for European banks, the number is a single digit one...

Helps to explain how Euro Banks have outperformed their U.S. peers this year.


The crazy new housing paradigm: Home prices may not fall until interest rates fall...

Prospective homebuyers need to hope for lower interest rates to increase the inventory of available homes for sale. Until then, expect the bidding wars to continue for the scraps of houses on the market.

As of March 31, nearly two-thirds of primary mortgages had an interest rate below 4%, according to mortgage-data firm Black Knight. About 73% of primary mortgages have fixed rates for 30 years, Black Knight data show. The average rate for a new 30-year fixed mortgage was 6.39% in the week ended May 4, according to Freddie Mac.

The mortgage-rate factor is leaving some people in houses that aren’t a good fit, whether it’s a growing family without enough bedrooms or aging homeowners with too much space, or dissuading people from relocating for jobs or other opportunities. Some people that wanted to sell in 2022 or 2023 shelved their plans.

As current homeowners stay put, “the movement up the ladder is sort of grinding to a halt,” said Sam Khater, chief economist at Freddie Mac. “It’s getting much harder for first-time home buyers to jump into the market because of the lack of supply.”...

It’s a “unique market condition,” said Lawrence Yun, NAR’s chief economist. “Sales are down and even prices are down in some areas, yet from a buyer’s perspective it’s hard to get that home, because they are competing with other buyers.”...

A healthy housing market has between four and six months of supply at current sales rates, economists say. The existing-home market, which makes up most of the housing market, hit a record low 1.6 months’ supply in January 2022 and stood at 2.6 months’ supply in March of this year, according to NAR.


A big mining deal this weekend as Newmont wants more copper exposure to play in a decarbonizing world...

Watch what they do, not what they say. This deal is all about getting more supply of copper before the U.S. takes its EV share from 5% to 75% like Norway has done. Plus, solar driving the electrification of the U.S. and the rest of our blue marble.

SYDNEY—Newmont said it has agreed to acquire Australia’s Newcrest Mining for $17.5 billion, concluding weeks of talks over a sweetened offer by the U.S. company that wants to complete the largest-ever M&A deal in the gold-mining industry.

Newmont’s pursuit of Newcrest illustrates how gold producers are seeking to make deals as the industry is struggling to make large discoveries of the precious metal. It also extends a battle for control among miners for commodities essential for making electric vehicles and renewable-energy infrastructure, as Newcrest’s gold mines also produce significant amounts of copper...

Copper is at the heart of the latest spending spree by miners, amid expectations that demand for the metal will rise as the world decarbonizes. Electric vehicles and wind farms use copper in much greater quantities than gasoline-powered cars and coal-fired power stations.

Tom Palmer, Newmont’s president and chief executive, said the opportunity to produce more copper had been a key attraction of a deal to acquire Newcrest along with the size of its resource base that can sustain mining for decades. The location of Newcrest’s mines in low-risk jurisdictions such as Canada and Australia also bolstered the appeal of a takeover.

“We will still be clearly known as a gold-mining company,” Mr. Palmer said in an interview. “But we’ll have a good exposure to copper and a growing exposure to copper, and certainly that rationale is landing with everyone that we engage with.”


And another public company disappears as ONEOK buys an overlapping pipeline network...

In addition to the overlap synergies, ONEOK gets a company big in refined products and with a liquid export platform. So while all carbons are not going away, their distribution is changing towards more global delivery.

Pipeline operator Oneok agreed Sunday to buy smaller rival Magellan Midstream Partners for about $14 billion, a deal that would form one of the biggest U.S. companies involved in transporting and storing energy.

The deal’s price tag, including $8.8 billion in equity and $5.1 billion in cash, amounted to a 22% premium over Magellan’s common units as of Friday. Oneok said it would assume Magellan’s $5 billion in net debt. The deal was expected to close in the third quarter, pending the approval of regulators and investors...

Magellan owns almost 10,000 miles of pipelines carrying refined products, such as gasoline, with dozens of interconnected storage facilities in Texas and Oklahoma through the Midwestern U.S. to North Dakota. It also owns marine storage facilities in the Houston area and Corpus Christi, Texas.

Oneok has a vast network of natural gas liquids pipelines, storage terminals and natural gas pipelines in many of the same regions in the Midwestern U.S., particularly in its home state of Oklahoma and in Texas.

Oneok expects it will be able to generate $1 billion of free cash flow in the first four years after the transaction closes.


As we have learned, the greater use and delivery of LNG can flatten the natural gas price spikes when a major supplier shuts down.

@Schuldensuehner: European natural gas prices dropped another 2% to €32/MWh, lowest level since Summer 2021.

So, take our Energy earnings, and the rest of the market may have seen its earnings momentum through...

@carlquintanilla: GOLDMAN: “1Q 2023 earnings season proved to be much better than feared. .. Margins in every sector surprised to the upside .. we believe the worst of the 2023 negative earnings revision cycle is now behind us.” [Flood]

The better-than-expected Q1 earning season has finally pushed analysts to lift their 2nd half 2023 earnings estimates...

Earnings Scout

Speaking of earnings, Apple's were spectacular, but is one stock really worth more than 2,000 small ones?

@WillieDelwiche: Amazing concentration. 1 > 2000.

And not just Apple, but the biggest four are all on the move higher...

Looking overseas, have you glanced at the Land of the Rising Market in a while?

The Topix is lining up to take out its 1990 highs. Are the all-time 1989 highs next?

The electric vehicle experience in Norway is truly remarkable...

Let's hope the U.S. is not far behind in our adoption. Outside of the passenger EV content, I loved how the construction companies who used EV motors could work around the clock since their machinery did not make any noise.

Last year, 80 percent of new-car sales in Norway were electric, putting the country at the vanguard of the shift to battery-powered mobility. It has also turned Norway into an observatory for figuring out what the electric vehicle revolution might mean for the environment, workers and life in general. The country will end the sales of internal combustion engine cars in 2025.

Norway’s experience suggests that electric vehicles bring benefits without the dire consequences predicted by some critics. There are problems, of course, including unreliable chargers and long waits during periods of high demand. Auto dealers and retailers have had to adapt. The switch has reordered the auto industry, making Tesla the best-selling brand and marginalizing established carmakers like Renault and Fiat.

But the air in Oslo, Norway’s capital, is measurably cleaner. The city is also quieter as noisier gasoline and diesel vehicles are scrapped. Oslo’s greenhouse gas emissions have fallen 30 percent since 2009, yet there has not been mass unemployment among gas station workers and the electrical grid has not collapsed...

Levels of nitrogen oxides, byproducts of burning gasoline and diesel that cause smog, asthma and other ailments, have fallen sharply as electric vehicle ownership has risen. “We are on the verge of solving the NOx problem,” said Tobias Wolf, Oslo’s chief engineer for air quality, referring to nitrogen oxides.


The U.S. is about 10 years behind Norway so consider this a roadmap to where sales are headed...


EV's will be big to Global GDP. But AI should be bigger...

A great big read on AI by BoA Global last week. You should ask for a copy and study it.

Q: What is the economic potential of AI?

According to Accenture, AI could double annual global economic growth rates by 2035. AI is likely to drive this in three different ways: firstly, AI will lead to a strong increase in labour productivity (by up to 40%) due to automation. Secondly, AI will be capable of solving problems and self-learning. Thirdly, the economy will benefit from the diffusion of innovation.

A study by PwC estimates that global GDP may increase by up to 14% by 2030 (or US$15.7tn) due to AI adoption via productivity gains in the manufacturing and transportation sectors, and due to businesses complementing their workforce with AI technology. This would enable the workforce to perform tasks better.

McKinsey estimates that AI may deliver an additional economic output of US$13tn by 2030, increasing global GDP by 1.2% per year. This is to come from the substitution of labour by automation and increased innovation in products and services. AI is likely to create a negative externality in the labour market whereby there is a loss of domestic consumption due to unemployment.

BofA Global

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