Private Wealth

Weekly Research Briefing: Rabbit Run

January 24, 2023

A new year and a new zodiac sign. If the tiger's job last year was to hunt, kill and devour the public markets, then mission accomplished. Let's now hope that this year's rabbit will stay alert and outrun anything that might try and tackle the markets. So far, so good, as the equity and credit markets continue to outrun and climb the currently massive wall of worry built by the strategists, economists, and Fed.

Corporate earnings have begun in full. So far, the numbers have been mixed both in terms of reported and outlooks. And with only 10% of the S&P 500 reported, the resulting revisions have been marginally to the downside. The stock reactions have tended to be positive indicating that worst case scenario outlooks have been taken off the table and investors are comfortable with how their companies are operating through this slowdown. This week will give us much more to analyze with 40% of the tech, telecom and industrial sectors hitting the tape.

Alongside earnings, investors continue to focus on the economic slowdown and every inflation reading available. Last week's PPI was another positive inflation surprise to the downside. This week we will get the PCE price index on Friday which is a Fed favorite. For the economy this week, we will see data on the PMI, Durable Goods and the first read on Q4 GDP. There will be no Fed speak this week as the blackout into next week's FOMC begins. But we had plenty to listen to late in the week that seemed to suggest that a 25-basis point increase is in the cards for the February 1st meeting.

The running equity and credit markets must be increasingly seeing a perfect environment between slowing inflation and continuing economic strength. While the U.S. economy slows, both China and Europe are now on the upswing. Stocks holding together during a tough earnings period is a plus. Credit spreads continue to improve, and borrowers are hitting the market hard. This all feels good. Maybe too good? Just keep running, rabbit.

Disinflation accelerated last week as witnessed by the December PPI which came in much weaker than expected...


We also had an inflation data point from the better-than-expected Philly Fed...


Prices Paid: 24.5 v 26.4 prior (lowest since Aug 2020)

The Daily Shot

December housing starts came in slightly better, as did existing home sales, but the chart still looks abysmal...

The Daily Shot

Although the NAHB housing market index increased in January for the first time since December 2021...


Mortgage rates nearing 6% has caused a jump in mortgage activity...

@LizAnnSonders: U.S. mortgage applications spiked by 28% last week, largest % change since March 2020

And housing inventories remain very tight in absolute terms...

The Daily Shot

If anyone tells you that housing prices are going to collapse, just hand them this chart...

The homeowner vacancy rate made an all-time high just before the GFC. Today it stands just off the all-time low.

Goldman Sachs

Incoming Q4 GDP data point this week. Here is the guesstimate from the Atlanta Fed...

Latest estimate: 3.5 percent — January 20, 2023. The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the fourth quarter of 2022 remains 3.5 percent on January 20. The nowcast was unchanged after rounding following this morning's report from the National Association of Realtors.

Atlanta Fed

Do we have a bottom?

This month, economists upgraded their forecasts for US GDP growth in 2023.

The Daily Shot

Monday's LEI index continues to bet on a recession...

@LizAnnSonders: Leading Economic Index from @Conferenceboard fell again in December, -7.4% y/y vs. -6.1% in prior month … decline increasingly consistent with prior recessions.

On Sunday, the Fed whisperer wrote...

Federal Reserve officials are preparing to slow interest-rate increases for the second straight meeting and debate how much higher to raise them after gaining more confidence inflation will ease further this year.

They could begin deliberating at the Jan. 31-Feb. 1 gathering how much more softening in labor demand, spending and inflation they would need to see before pausing rate rises this spring.

In recent public statements and interviews, Fed officials have said slowing the pace of rate increases to a more traditional quarter percentage point would give them more time to assess the impact of their increases so far as they determine where to stop.

Officials called attention to how it takes time for the full effect of higher rates to cool economic activity when they stepped down to a half-point rate rise in December, following four consecutive increases of 0.75 point.

“And that logic is very applicable today,” said Fed Vice Chair Lael Brainard in remarks last week. Raising rates in smaller increments “gives us the ability to absorb more data…and probably better land at a sufficiently restrictive level.”


While the Fed positions, the market is increasingly reducing its odds of a recession...

In a week marked by fresh recession angst from Wall Street to Davos, JPMorgan Chase & Co. finds the odds of an economic downturn priced into financial markets have actually fallen sharply from their 2022 highs.

According to the firm’s trading model, seven of nine asset classes from high-grade bonds to European stocks now show less than a 50% chance of a recession. That’s a big reversal from October when a contraction was effectively seen as a done deal across markets.

Global money managers are far from bullish on the economic trajectory with the S&P 500 still assigning a 73% probability that a recession will ensue. But that’s down from as high as 98% last year and it’s consistent with an uptick in wagers on a soft landing that sparked an earlier new year rally.


If junk bonds are good, then so should be the markets...

Even high-yield borrowers came to market this week with a $1.25b, 7-year offering after pre-releasing better than expected results driven by Las Vegas occupancy strength.


The second busiest week of earnings incoming...


One of the bigger eyebrow raises last week out of earnings was the credit deterioration at Discover...

We will need to keep an eye on this to see if it hits other financial companies in upcoming quarters.

Perhaps the biggest area of concern for economy watchers overnight is on the health of consumer credit. DFS reported that delinquency rates on credit cards rose 42bp qoq to 2.53%. 2023 NCO guide leaves many unanswered questions. Rising credit card delinquencies typically come alongside deteriorating economic conditions as consumers look to put more of their financial life on loan and eventually have less money to spend on the stuff that fuels economic expansion.

Goldman Sachs

Over at Ally Financial, used vehicle prices are forecasted to decline further in 2023...

"...our forecast for used vehicle values, which has remained largely consistent for the past 12 months. In 2022, we saw a 19% decline from peak values most of which was realized during the second half of the year. We are projecting a further decline of 13% from current levels, which will result in a 30% total decline from 4Q '21 to the end of 2023 consistent with previous guidance." - Ally Financial Interim CFO Bradley Brown

The Transcript

Ally Financial

United had good things to say about travel in the U.S. And in Europe, Ryanair was equally positive...

Low-cost carrier Ryanair is not seeing any signs of recession, Chief Executive Officer Michael O'Leary said on Tuesday, pointing to two weeks of record bookings this January and a recovery in demand from Britain.

January blues helped drive holiday bookings, O'Leary told reporters in London, noting that his airline, Europe's largest airline by passenger numbers, took more than 2 million bookings last weekend, its most ever in a two-day period.

Referring to talk of a looming recession in Britain and a slowdown elsewhere in Europe, O'Leary said: "We see no signs of it at the moment."

The strongest market for those bookings was for flights from Britain to European destinations, such as Spain and Portugal over Easter and summer, he said, in a reversal from earlier in January when the airline flagged softer demand from the UK.

"There just seems to be very strong demand out there and people, I think, worrying that prices are going to rise in summer, which I think they will, and people getting in early and booking their Easter and summer travel," he said.


Tech companies are continuing to trim their workforce...

"We’ve decided to reduce our workforce by approximately 12,000 roles....Over the past two years, we’ve seen periods of dramatic growth. To match and fuel that growth, we hired for a different economic reality than the one we face today." - Google CEO Sundar Pichai

"...we will align our cost structure with our revenue and where we see customer demand. Today, we are making changes that will result in the reduction of our overall workforce by 10,000 jobs through the end of FY23 Q3. This represents less than 5% of our total employee base, with some notifications happening today." - Microsoft CEO Satya Nadella

"Although difficult, these are important decisions to get back to our 20-year roots as a focused, lean company premised on high ambitions and great execution. The changes announced today strengthen our future without reducing our total addressable market, our strategic objectives, or our ability to deliver them over time. In hindsight, similar to our technology peers, we scaled our spend too quickly over the last few years." - Wayfair CEO Niraj Shah

The Transcript

But the market is embracing the tech/growth layoffs as companies get more focused on cash flow...

Wayfair cut 10% (1,750 jobs) and the stock jumped 20 points in two days. Up $2b in mkt cap from $4b to $6b.

A group of activists is betting that mega-cap will be the next tech company to cut costs...

Activists Elliot Management and Inclusive Capital helping to increase Salesforce's market cap by $30b to over $150b in the last month.

Let's see how many six-figure salary cuts can be made without affecting revenue growth...

It is a perfect environment to issue debt and the world's governments and corporations are going for it...

The best start to a year for bond returns is helping fuel an unprecedented debt-sale bonanza by governments and companies around the world of more than half a trillion dollars.

From European banks to Asian corporates and developing-nation sovereigns, virtually every corner of the new issue market is booming, thanks in part to a rally that’s seen global bonds of all stripes surge 4.1% to start the year, the best performance in data stretching back to 1999.

Borrowers looking to raise fresh financing after getting turned away for much of 2022 are suddenly encountering investors with a seemingly endless appetite for debt amid signs inflation is cooling and central banks will call a halt to the harshest monetary tightening in a generation. For many, fixed-income assets are looking increasingly attractive after last year’s historic rout drove yields to the highest since 2008, especially as the prospect of a slowing global economy offers the potential for further gains.


A healthy credit environment is only good news for the S&P 500 as it clears its 200-day moving average...

More important might be the more cyclical bent to the market's outperformance...

Just take a look at the top and bottom two performing sectors of the S&P 500 year to date...

In other words, when the market bets on an improved economic outlook with improving interest rate stability, stocks tend to outperform...

@SethCL: In the last 82 years, the Quatro Model by @LeutholdGroup has only breached its 40-week moving average 4 times:

  • Transports, Utilities, Breadth and Bonds
  • 2019, 1984, 1940s and 1950s
  • Extremely rare signal
  • $SPX gains

The Euro area recession outlook is being cancelled...

The Daily Shot

Rebounding global growth and a falling US$ could help tech stock outperformance in the future...

While recent economic data in the US have sent mixed signals, the growth outlooks in China and Europe have improved markedly. Our economists upgraded their GDP forecasts in both regions and no longer expect a Euro area recession this winter. The shifting growth outlook should benefit international-facing sectors more than the headline index but will not be the only factor that drives performance. Foreign revenue exposure varies dramatically at the sector level. Info Tech derives the largest share of its revenues from abroad, with 15% from China and a combined 59% from non US regions. The next-most exposed sectors are Materials and Energy.

Goldman Sachs

The Nasdaq 100 has underperformed the world's equity indexes. But for how long?

J.P. Morgan

Big news from the Bank of Silicon Valley as the pace of deterioration in VC appears to be improving...

“We have seen four consecutive quarters of declining VC investment, but the pace of decline appears to be slowing…In the near-term, we expect VC investment to remain pressured, but should see the balance of client fund flows improve as clients continue to reduce cash burn." - SVB Financial Group CEO Gregory W. Becker

The Transcript

Speaking of VC, Thoma Bravo, the biggest buyer of private market software/tech, gives Barron's an update...

No one does more tech buyouts than you. What’s your edge?

We have the ability to turn creative innovators into great cash flow companies. Most companies we take private are great, but they’re usually not profitable. We have to generate 40%-plus Ebitda margins [earnings before interest, taxes, depreciation, and amortization] to make money at the prices we pay.

To drive up margins, you are slashing costs.

Yes, we take out costs, absolutely. There are times when a company is growing so fast that you can hold head count and grow into the margins. But in an environment like today—where we’re almost certainly facing a recession, and no one knows how deep—you are well served by decreasing costs.

With the selloff, has your approach changed?

There’s a lot more to buy. We just did this large fund raise, and the opportunity is many, many, many, many, many multiples of that.

Your model is to buy companies—and later sell them. How long do you own them?

We use four or five years as a guide. Our average holding period has been shorter—3.3 years. People ask how we can turn a company from zero margin to 40% with the existing management—that’s our secret sauce. You can make changes very quickly.

What are you hearing from portfolio companies about the outlook?

It’s not that bad. In the June quarter, purchasing managers were really pulling back. The September quarter was soft. But the December quarter was pretty decent. I feared the fourth quarter was going to be surprisingly bad, and it was not. I didn’t see anything nearly as bad as what we saw in the financial crisis, or what we saw in the first two quarters of Covid in Q1 and Q2 of 2020.


Bain Capital sees continued good returns for private equity...

The private equity industry is still in its “early innings” and has decades more to run as a high-return business model, said Bain Capital senior adviser Stephen Pagliuca.

“The private equity model works,” he said in a Bloomberg TV interview at the World Economic Forum in Davos on Wednesday. “It puts capital to work with experts that really help drive these companies.”

Pagliuca said private equity has “absolutely not” peaked and will still be able to deliver the standard 18% to 20% rate of return in the coming decades.

“We’ve maintained those returns now every decade for 40 years,” he said. “It’s a great business model.”


Not a risk-off data point: The biggest weekly inflow into EM assets on record just occurred...

The Big Picture: biggest inflows into EM debt & equity funds ever ($12.7bn – Chart 2) as world capitulates into China reopening; “too much, too young?”...yep, but bull trade ain’t done…China was “uninvestable” in Oct, 1.4bn people ending 2-years of lockdown… Tale of the Tape: there are bull markets…. China stocks up 52% from lows, Eurozone 33%, copper 32%, UK 29%, materials 28%, EM 23%; but no Big Bull without the Big Dog…NYSE Composite (NYA) needs to convincingly break 16200 (currently 15600).

BofA Global

And not just EM equities and EM debt yields are also in a free-fall...

J.P. Morgan

Maybe the best Colorado skiing in my lifetime being reflected in MTN's national figures...

Some ski-season-to-date metrics, from Vail Resorts:

  • skier visits: up 12.5%
  • lift ticket revenue: up 5.3%
  • ski school revenue: up 35.6%
  • dining revenue: up 58.0%
  • Retail/rental revenue: up 34.4%



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