Private Wealth

Weekly Research Briefing: Significant Reversals

November 15, 2022

We knew that there would be a few meaningful events last week, but the magnitude of directional change was much more than we would have ever guessed. Besides the CPI and U.S. mid-term election results, the market threw a few other new curves onto our track. By the end of the week, the market had digested it all, gave a gloved thumbs up and ripped to important new levels.

Taking the trophy was the much better than expected core CPI which came in lower than any Wall Street forecast. Not only was core goods inflation better, but so was a big reversal in medical cost inflation and further signs of non-acceleration in the shelter/housing component. If there was any case that peak inflation is now in the rearview mirror, this was the report that proved it. With better inflation news in hand, bond and stock investors bought aggressively while the U.S. dollar was sold to buy elsewhere in the world. Treasury investors moved to real in the December FOMC hike to +0.5% and the February hike to +0.25-0.50%.

Besides the CPI, investors also shifted into good news from Ukraine, China and the U.S. elections. First in Ukraine, Russian forces abruptly retreated from Kherson thus giving back its most important take since the invasion began. Meanwhile behind the scenes, conversations between Russia and the U.S. are increasing thus hopefully indicating some future resolution for the conflict. In China, the government continues to retreat from its hard COVID policies as inbound travel restrictions are eased and significant new efforts to support the property sector are launched. Today's gift was a three-hour meeting between Biden and Xi. The Chinese markets have moved sharply higher as a result.

As for the political environment, the markets love gridlock, and they could not have been handed a bigger game of Rush Hour than the one that they received on Tuesday. Pre-election robocall polling clearly failed to capture any young voters who turned out in force to vote blue and surf the red wave. While the numbers are still being dissected, it looks like most voters were fine with the strong but uncertain economy and preferred it over a politically extreme candidate. The New York and Florida GOP surge as well as the Democrats’ success in Michigan showed that political moderation is a preferred position. Both parties now have two years to figure out what worked, what didn't and who to nominate.

The markets cleared some big hurdles last week, while also keeping a side eye on the meltdowns in crypto and at Twitter. More than $30 billion was quickly lost at crypto exchange FTX as it was learned that customer funds were used to invest in many speculative investments and acquisitions. With FTX being the class act in the crypto space with a topflight list of investors, it will likely be years before institutional money finds its way back into crypto currency investing. Over at Twitter, it looks as if the advertising revenue model has died following the skittishness of many of its advertising clients. With the senior debt of the company now trading at 60% of par, Twitter might be looking at an enterprise value of $20-30 billion less than where the company was bought originally. Not a big deal for the billionaire equity investors in the company, but this will leave a mark on the lenders who wrote the checks for the buyout.

We have a decent week of economic data ahead of us: the Philly, Empire and Kansas City Fed business surveys, retail sales, several housing stats, and the PPI inflation report. Also, the major retailers hit the earnings tape along with a few off-month tech companies. Have a great week and enjoy the last of those fall leaves.

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The core CPI last week beat all expectations...

The Daily Shot

The core CPI ex-shelter went negative last month...

Expect this decline to accelerate as supply chains open, energy impacts move past Russia shock, commercial rents moderate and labor costs recede for most full-time industries.


And we know that shelter costs will soon be in retreat due to falling home prices and rising apartment builds...

Shelter Inflation to Peak in the Spring - The second reason we expect core inflation to fall is a peak in shelter categories, which we forecast this spring in year-over-year terms. As shown by the left panel of Exhibit 7, strong multi-family fundamentals have already catalyzed a supply response, and there are 1 million apartments currently under construction or permitted—the largest pipeline since 1974 and some of which will come to market in 2023. As shown by the right panel, rental vacancy rates are already starting to rebound, and real estate data provider CoStar forecasts a return to pre-pandemic occupancy next year.

Goldman Sachs

A monthly 0.2-0.3% core CPI print will take the year over year level to 3-4% by summer...


And further evidence from corporate reports that inflation and wages are slowing...

"Jon, we expect inflation to come down slightly in the fourth quarter, right? We started to see that trend in the third quarter already, right? We had 15% commodity inflation that was following about 19% commodity inflation in quarter 2. On the labor side, we also got a slight improvement. We were -- labor inflation was a little bit north of 6%. Last quarter, we were sitting in the 11% to 12% range." - Wendy's CFO Gunther Plosch

"...what we’ve seen, and we have a survey, research that came up this summer that showed that our customers were affected by the financial tightening or felt that the fiscal tightening would affect them. And what happened is that happens with – starting seeing that mid-June through July and then through the summer. Our guests started feeling the pinch on gasoline prices, utility prices, and food in the grocery store -- we also saw that some of those guests returned when gasoline prices went down in the fall. I assume there is somewhat of a correlation as they came back, and we saw the return to a little bit more normalized attendance in October and November." - Six Flags Entertainment CEO Selim Bassoul

"Like all of you, our concern is, do competitors start to do irrational things on the promotional pricing side? -- I mean, Techtronic likes to have high levels of inventory -- .they have roughly 220 days of inventory today -- That's a lot of inventory." - Stanley Black & Decker CEO Donald Allan

"So besides reducing the flight frequencies, we'll be parking aircraft temporarily as we don't need as much lift as we anticipated going into the year -- At Ground, we -- the last couple of years had explosive growth in demand and added capacity to grow with our customers. At this point, it's fair to say we've got a little more capacity than was anticipated, given the demand we're seeing -- as I said, we're projecting a lower demand outlook for the foreseeable future here." - FedEx CFO Michael Lenz

The Transcript

FedEx, Shopify, Meta and Amazon are all feeling the reversion to the mean in ecommerce...

$SHOP CEO @tobi in July: "I bet that channel mix...would permanently leap ahead by 5 or even 10 years...that bet didn’t pay off"

$META today: "Many people predicted this would be a permanent acceleration (of ecommerce)..I did too...I got this wrong"

Excellent chart from $SHOP:


Even the largest U.S. retailers are going to bat for U.S. consumers on pricing...

America’s biggest retailer has a new message for its suppliers: We’re not going to pay higher prices anymore.

Walmart Inc. Chief Executive Doug McMillon delivered the warning in person last month in an appearance before companies that produce products sold by the company’s Sam’s Club chain. Inside a hotel auditorium, he said Walmart would be pushing back against suppliers’ efforts to raise prices, according to people familiar with the situation. Innovative products will spur more purchases, he added, according to these people.

Walmart, long known for its ability to lower prices by squeezing vendors, is once again showing its muscle as a slowing economy and an inventory glut upend a power dynamic between retailers and suppliers that took hold during the pandemic, when demand surged for everything from paper towels to patio furniture.

Its rivals—from Target Corp. to Inc.—are AMZN adopting a similar posture. Large retailers are canceling orders, resisting price increases and in some cases asking suppliers to provide discounts. This puts pressure on product makers that are struggling to adapt to shifting consumer demand. It could also contribute to a slowing of inflation.


The market moves to project +50bps for December 14 FOMC meeting and then split on +25bps or +50bps for the February 1 meeting...

CME Group

Fed's Waller thinks the markets got a bit too excited about Thursday's CPI number...

While one data item change to the models should not have impacted the markets values by such a large amount, what it does show is how pent up the demand to buy risk assets is right now. The CPI may have just been the straw that broke the camel's back. And don't forget, equity portfolio managers get incented to outperform their benchmarks on some combination of rolling timeframes. So, if the major indexes attempt to put on a big move into the year end, tens and hundreds of billions will be looking to buy and chase those moves higher.

Federal Reserve Governor Christopher Waller said “we’ve still got a ways to go” before the US central bank stops raising interest rates, despite good news last week on consumer prices.

While officials could moderate the size of their rate hikes to 50 basis points at their next meeting or the one after that -- after a string of 75 basis-point moves -- Waller cautioned that officials were not close to a pause.

“These rates are going to stay -- keep going up -- and they’re going to stay high for a while until we see this inflation get down closer to our target,” Waller said Monday at a UBS Group AG conference in Sydney. “We’ve still got a ways to go. This isn’t ending in the next meeting or two.”...

“It’s good finally that we saw some evidence of inflation starting to come down,” Waller said. “We’re going to need to see a continued run of this kind of behavior on inflation slowly starting to come down before we really start thinking about taking our foot off the brakes here.”


Tom Lee notes that the U.S. dollar is a very trending asset and once it breaks to a new direction, it typically begins a new trend...

USD has been relentless in 2022. But it looks like it might have peaked:

6D decline in USD is one of the largest ever declines and exceeds that seen in March 2020

USD decline is a support for EPS as strong USD was a headwind

history shows USD likely sees further declines 6M and 12M ahead

this is supportive of equities


10-year Treasury yields also reverse significantly and make a lower low...

Now let's see if bond yields can trend in a new direction.


China still wrestles with COVID but must be feeling better about the future if they are now pushing banks to rescue the property sector...

BEIJING, Nov 13 (Reuters) - Chinese regulators have told financial institutions to extend more support to property developers to shore up the country's struggling real estate sector, two sources with direct knowledge of the matter said on Sunday.

A notice to the institutions from the People's Bank of China (PBOC) and the China Banking and Insurance Regulatory Commission (CBIRC) outlined 16 steps to support the industry, including loan repayment extensions, in a major push to ease the deep liquidity crunch which has plagued the property sector since mid-2020.


The Daily Shot

A big Ukrainian win in Kherson leaves Putin with little to show for eight months of conflict...

Ukraine’s military accomplished its most important mission before the coming of wintertime and forced Russia out of the only regional center it managed to seize after Feb. 24.

The loss of Kherson means Russia’s chances to seize Mykolaiv and Odesa were killed. A humiliating defeat for the Kremlin, which a month back claimed sovereignty over Kherson and the region.

The Battle of Kherson is the most far-reaching Ukrainian success since the Battle of Kyiv. It is also the heaviest blow to Russian pride, morale, and Russian President Vladimir Putin’s leadership throughout the war.

Kyiv Independent

CPI, Ukraine, China, midterm elections and the S&P 500 is back above 4,000...

But also note that the German DAX beats the S&P 500 to rise above the August highs...

Could the better-than-expected energy environment be helping Euro sentiment?


Biotech also surpassing the August highs...

As they benefit from being a long duration asset during a peak in interest rates. Also, big pharma companies are flush and still looking to buy/partner on new drugs giving them an attractive M&A angle.

While Morgan Stanley is still cautious on corporate earnings, they do think that falling interest rates and bond volatility can help equities in the near term...

MORGAN STANLEY: “While the lower end of our prior target for this rally (4000-4150) was achieved on Friday, we think the upper end of that range will be reached, and we would not rule out even higher prices should 10year UST yields fall more precipitously – i.e., 3.25%.” [Wilson]


With many hurdles being cleared last week, do not forget that the market is entering a very favorable window of the presidential cycle...


Crypto currencies are done as an institutional asset class for this market cycle...

“FTX going down is not good for anyone in the industry. Do not view it as a win for us. User confidence is severely shaken. Regulators will scrutinise the exchanges even more. “Licenses around the globe will be harder to get" - Binance CEO Changpeng Zhao

“In recent days, a liquidity crunch has created solvency risk for FTX. The full nature and extent of this risk is not known at this time. Based on our current understanding, we are marking our investment down to $0” - Sequoia Capital

"There's going to be regulatory headaches galore. I'd say Sam Bankman-Fried spent more time than anyone in Washington so regulators will take a new look at this. And so that's frustrating. Confidence in institutions, and so I'm not trying to be pollyannaish. This makes the operating environment more challenging for the next period. But I want to emphasize I have not lost any of my medium and long-term belief that this space is inevitable -- What's painful about this is that Sam spent so much time in D.C., And it wasn't that what he said was crazy. It's just that the messenger now looks like he ran his ship into an iceberg. We'll see why that happened. It's just going to anger the people he spent time with, and I think it will slow them down some." - Galaxy Digital CEO Michael Novogratz

The Transcript

I have never seen a destruction in value of this size in such a short time frame...

A sovereign wealth fund, a public pension fund, and dozens of venture capital firms invested $2 billion in FTX, propelling its valuation to $32 billion in January. FTX’s chapter 11 bankruptcy filing on Friday will likely wipe out the value of the equity stakes. Already several prestigious investment firms that backed it are marking their stakes to zero.

The Information

It's almost as if gold was waiting to breakout the minute that crypto imploded...

Something went very wrong with Twitter last week...


Eli Lilly provided the best example as to why big advertisers will leave Twitter...

The nine-word tweet was sent Thursday afternoon from an account using the name and logo of the pharmaceutical giant Eli Lilly and Co., and it immediately attracted a giant response: “We are excited to announce insulin is free now.”

The tweet carried a blue “verified” check mark, a badge that Twitter had used for years to signal an account’s authenticity — and that Twitter’s new billionaire owner, Elon Musk, had, while declaring “power to the people!” suddenly opened to anyone, regardless of their identity, as long as they paid $8.

But the tweet was a fake — one of what became a fast-multiplying horde of impersonated businesses, political leaders, government agencies and celebrities. By the time Twitter had removed the tweet, more than six hours later, the account had inspired other fake Eli Lilly copycats and been viewed millions of times...

By Friday morning, Eli Lilly executives had ordered a halt to all Twitter ad campaigns — a potentially serious blow, given that the $330 billion company controls the kind of massive advertising budget that Musk says the company needs to avoid bankruptcy. They also paused their Twitter publishing plan for all corporate accounts around the world.

“For $8, they’re potentially losing out on millions of dollars in ad revenue,” said Amy O’Connor, a former senior communications official at Eli Lilly who now works at a trade association. “What’s the benefit to a company … of staying on Twitter? It’s not worth the risk when patient trust and health are on the line.”

Washington Post

Meanwhile over at Tesla, their electronic car models are now falling faster in trade-in-value than the stock price...

Finally, before you gather up with family and friends next week, you really want to grab a flu shot this week...

Flu season is here — and early red flags suggest it’s on track to be very, very bad. The latest data from the Centers for Disease Control and Prevention’s (CDC’s) Flu View report show extraordinarily high numbers of positive flu tests reported to the agency from labs around the US. As of November 5, nearly 14,000 positive flu tests had been reported, as shown in the orange line on the below chart. That’s more than 12 times the number reported at the same time in 2019 (shown in the black line).


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