Private Wealth

Weekly Research Briefing: Snow and Bears

February 22, 2023

Too much of both right now. As soon as the piles of ice and snow melt off the driveway, another snowstorm buries us. The Rockies and Sierras are having their best ski seasons ever but for those of us who live, work and study in it, this winter has been a rough one.

While the actual bears are sleeping away from our historic snowfall, the Wall Street bears have come out in force to try and scare investors. Three months ago, there was a near consensus call for a Fed driven 2023 recession leading to lower earnings and lower stock prices. But given February's surprising economic strength, the bears have needed to adjust their calls toward higher rates for longer that will now weigh on equity valuations. The big uncertainty is how the inflation data will continue to trend. Will better global growth lead to stronger raw material and energy prices? And how hard will the U.S. shelter/rent component collapse as the trailing elevated data points leave the CPI? The market has shifted toward three Fed Fund hikes of 25 basis points toward a terminal rate of near 5.25%. Too little, too much, or just about, right? Time will tell.

While Wall Street prefers that you avoid the U.S. stock indexes, reported earnings and outlooks don't look too bad. With over 80% of S&P 500 earnings on the wire, almost 60% have beaten their sales estimate and almost 70% have beaten their EPS. While this is below the historical averages, the results have been better than feared which helps to explain the +0.5% average move in stocks post their reporting. With index valuations stretched and the economy strong, this should create a good environment for investors in individual companies. Winning investments will be those companies that are generating secular growth with growing margins and finding the best areas to invest their cash flows. Plenty of sub-industries and geographies to go hunting in right now both for public and private equity investing.

Economically, things are looking better with each passing week...

"[Our middle market clients are] trying to be careful. They're trying to make sure they can maintain margins. They're trying to make sure that they don't see a change in final demand. But most of them, honestly when you ask them, they're saying, "I thought I'd be in worse condition right now. I thought it'd be facing more pressure, and things are still fine." And so that's a conundrum because at the end of the day trying to be careful on hiring and things like that in the general sense, yet they're seeing the final demand of their products and service is strong...So I think overall, midsized companies, I'm with a group of them last week, and they all kind of don't want to say it out loud, honestly, that they're fine, they're doing fine." - Bank of America CEO Brian Moynihan

"And then if you look at the consumer, they keep spending money. And at the end of the day, we're the largest economy in the world, the consumer-driven part of it, the consumption part of it is as big as any other economy on its own. And those consumers have money, they're employed, and they're spending money and they have a lot of capacity to borrow." - Bank of America CEO Brian Moynihan

"On the credit card side, we're up at almost 20% in the month year-on-year...So the consumer side, people are out there still spending, and you can see that in your day-to-day life. Try getting a restaurant reservation in most cities these days, right? It's really hard if you want to do something last minute. And so I think we're seeing people out there." - Wells Fargo CFO Michael Santomassimo

“As we look ahead, while concerns about the macroeconomic environment persist around the world, booking trends to date remain robust and we have significant momentum in our business...January global RevPAR rose 52%, with the U.S. and Canada up 43%. We anticipate that first quarter RevPAR could increase 25% to 27% in the U.S. and Canada, 47% to 49% in international markets and 30% to 32% worldwide." - Marriott International CEO Anthony Capuano

The Transcript

As the positive economic surprises continue, the markets are betting on more Fed Fund rate hikes...

A month ago, the market was thinking just one or two more +0.25% interest rate hikes. Now they are betting on three through the June 14th meeting.

CME Group

Portfolio managers remain pessimistic, but increasingly less so...

Of course, it is at the turns where the market can provide some decent windows of outperformance potential.

BofA Global

Don't forget that we are entering year three of the Presidential cycle which has had a good tailwind historically...

@bespokeinvest: The S&P $SPY is already up 14% since Q4 2022 began, which is right about when the market has historically hit its lows of year 2 of the Presidential Election cycle. Below is a composite of the cycle back to 1928 and where we are now...

And as this long-term study shows, the S&P 500 has a good track record when it recovers from a bear market decline...


Portfolio managers have reduced their recession outlooks...

BofA Global

The Atlanta Fed is now sticking its tongue out at all recession outlooks...

Ongoing economic surprises in the U.S. have led the Atlanta Fed to raise their Q1 GDP forecast to +2.5%.

Atlanta Fed

Monday's flash U.S. PMI came in much better than expected with Services leading the charge...

@LizAnnSonders: February @SPGlobalPMI U.S. Manufacturing up to 47.8 vs. 47.2 est. & 46.9 prior; Services much stronger at 50.5 vs. 47.3 est. & 46.8 prior … Composite PMI (chart) climbed to 50.2 vs. 47.5 est. & 46.8 prior

The first regional factory report of the month (from the NY Fed) also showed a big improvement...

The Daily Shot

Could the Super Bowl loss be influencing the survey results?

The Philly Fed’s regional manufacturing report was a disaster, showing rapidly deteriorating conditions this month (diverging from the NY Fed’s report).

The Daily Shot

For one of the big areas of U.S. manufacturing, it is a very good time to be a part of the aircraft food chain as Boeing and Airbus are building as fast as they can...

@RenMacLLC: Not sure if the yield curve is going to stop Boeing from making planes. Another strong month for aircraft production, up 1.1%, the fourth consecutive monthly increase and the best level since mid-2018. If recent news on orders is any guide, more aircraft production to come.

The NAHB housing market index continued to rebound in February above consensus expectations...

The Daily Shot

Also in housing, multi-family builds are on fire. A headwind to future rental prices?

@calculatedrisk: January Housing Starts: Near Record Number of Housing Units Under Construction. Blue is for 2+ units. Currently there are 948 thousand multi-family units under construction. This is the highest level since November 1973!

An extremely strong and broad Retail Sales report last week. Weather is getting the credit but not for my state...

Retail sales and core retail sales increased by more than consensus expectations. Today’s retail sales report was likely boosted by a low seasonal hurdle due to pandemic distortions to the seasonal factors as well as higher Social Security benefits following the implementation of a large cost of living adjustment in January, which we estimate boosted personal income by around 0.5%. This morning’s retail sales report was even stronger than our previous assumptions and indicates upside to our Q1 consumption and GDP growth forecasts.

BofA Global

The Daily Shot

The sixty minutes plus wait times must be a goldmine for the restaurants alcohol sales...

@StatistaCharts: Despite the surge in consumer #prices, Americans haven't lost their appetite for dining (and drinking) out. That's according to the latest estimates from the U.S. Census Bureau, showing that monthly sales of food services and drinking places amounted to $95.5 billion in January.

Global luxury goods also remain in the highest demand according to Hermes results last week...

French luxury group Hermès shrugged off the rise in Covid-19 cases in China and increased sales by a quarter last year, with little disruption to shopper demand for products from the maker of the iconic Birkin bag even as rivals took a hit.

Hermès had an “exceptional” year with a 23 per cent jump in annual sales to €11.6bn on a comparable basis and a similar increase in the fourth quarter, exceeding expectations, thanks to demand for the brand’s leather goods, watches and jewellery.

“We were very strong in China with strong growth in our numbers regardless of the quarter and including the fourth quarter,” said chief executive Axel Dumas.

“The rebound in China for us took place as soon as Wuhan reopened in 2020,” he added. “I think sometimes we use a little bit of catastrophising about the effects of the health crisis in China to explain other things.”

Sales in the three months to December rose 22.9 per cent to almost €3bn after analysts forecast a 17 per cent sales gain.

Financial Times


No recession in Europe as Monday's data releases also showed a surge in the Eurozone PMI...

@WilliamsonChris: Flash eurozone #PMI smashes expectations at 52.3 vs consensus of 50.5. GDP likely to rise in Q1 if this can be sustained into March as this reading is consistent with +0.3% quarterly growth. Very hawkish for the #ECB especially as service sector prices still look elevated.

German companies also becoming much less negative about their current conditions and more optimistic about their future outlooks...



German economic strength sent their two-year yields to 15 year highs...

@lisaabramowicz1: German 2-year yields hit a new post-2008 high after data showing that euro-area business activity rose at the fastest rate in nine months.

Another global economic tidbit: Iron ore continues to surge on China reopening...

The Daily Shot

Looking back at last week's CPI release, housing continues to drive US core inflation...

The Daily Shot

But we know that the CPI is constructed using a very lagged housing/shelter series...

As a result, we know that the housing component within the CPI is headed for the same outcome as the Wicked Witch of the East.


Not everything is perfect. Subprime auto is starting to see a bit of stress so we must keep an eye on this...

A rising number of Americans are falling behind on their car payments. Some 9.3% of auto loans extended to people with low credit scores were 30 or more days behind on payments at the end of last year, the highest share since 2010, according to an analysis by Moody’s Analytics. Car prices jumped during the pandemic because of a shortage of vehicles. Many borrowers took out large loans to buy them, leaving little breathing room to keep up with payments if they hit a rough patch.


But luckily, total household credit leverage is well below 2008/GFC levels...

This is measured as debt versus income.


And when liabilities are measured versus assets, the ratios are the best in 40 years...

Thank you to low debt and big home equity.


Companies that went public at big valuations in 2020-2021 are now returning to the weighted blanket of the private markets...

A growing number of newly public companies are racing back to private ownership after discovering that an IPO isn’t always all it’s cracked up to be.

Of the hundreds of companies that went public in the boom years of 2020 and 2021, 10 have already agreed to sell themselves to private-equity firms, according to Dealogic. Of those that went public in 2018 or 2019, only eight have gone private in the ensuing years.

Driving the decision to opt for a buyout over remaining public in many cases is the dismal performance of the 2020-21 class of initial public offerings, the majority of which now trade below their debut prices.

That makes the companies prime targets for private-equity investors eager to put piles of cash to work and creates exit opportunities for buyout firms with residual stakes that are under pressure to return capital to their fund backers.

Grill maker Weber Inc. agreed to go private last year for $8.05 a share, well below its $14 IPO price less than 18 months earlier. Sumo Logic Inc. agreed in February to be bought by private-equity firm Francisco Partners for $12.05 a share, down from the data-analytics software company’s $22 IPO price.


You know what is likely to happen when the world does not want to invest in Venture Capital...

In 5-7 years, will investors look back and wish they had been more aggressive in this segment of the market? The bold buyers of today are probably picking up the Amazon, Airbnb and Netflix of tomorrow.

Fundraising by venture-capital firms hit a nine-year low in the fourth quarter, as the macroeconomic pressures that already weighed on technology startups began to affect the investors who underpin the industry.

Venture firms raised $20.6 billion in new funds in the fourth quarter. That was a 65% drop from the year-earlier quarter and the lowest fourth-quarter amount since 2013, according to data firm Preqin Ltd., which tracks venture-fund data. The amount was also less than half the level raised in the preceding three months, the first time fundraising volumes decreased from the third to fourth quarter since 2009, the data show.

Fund backers, known as limited partners, invested in 226 venture-capital funds in the fourth quarter, the fewest for that time period since 2012, the Preqin data show. By contrast, they backed 620 funds in the last three months of 2021, when technology stocks peaked...

Venture firms “want to be patient in this market and wait for the right opportunity to come around,” said Miguel Luiña, a managing director at Hamilton Lane, an investment firm that backs venture funds. “Managers have slowed down the pace and aren’t coming back to market.”


Now back to the local news...

If you haven't visited the western North American mountains this season, then you are no longer allowed to call yourself a skier.

Colorado ski resorts expecting fresh snow every day this week

This winter’s trend of exceptional snowfall accumulations at Colorado resorts will remain in effect this week with snowfall likely every day through Friday across the state. And another storm is due on Sunday.

By the end of the week, locations in the southern mountains can expect snowfall in the range of 20-40 inches. The central mountains could receive 12-30 inches and the northern mountains 4-12 inches, according to the OpenSnow forecasting and reporting service.

Wolf Creek, which received 29 inches over the past seven days, could see as much as 46 more by the end of the week. For the season, Wolf Creek has received more than 23 feet of snow.

Denver Post

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The author has current equity ownership in: Airbnb Inc.

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