Private Wealth

Weekly Research Briefing: Spring Has Sprung

April 04, 2023

Seeing fields of daffodils this weekend reminded me that the wet and cold March weather does have its upside. Ditto for the financial markets where a March banking crisis led to massive government intervention that shot risk assets higher. Risk free rates are 50-100 basis points lower than a month ago. Bank deposit outflows are not accelerating, no new banks have run into trouble, and financial stability worries appear to have not affected consumer spending. Even the high yield debt market reopened last week with Multi-Color Corporation issuing 5-year debt at 9.5% which they are using to finance an acquisition. Oh, and the VIX has an 18-handle again. Forget spring flowers, the financial markets are witnessing a spring botanic garden.

So looking at the market positives, we see no expanding banking crisis, lower market risk-free rates, and a nearing to the end of Fed tightening. Earnings will be a big factor and so far, the early reads have pointed to the positive. Not only have most of the companies reporting in March done better than expected, but weekend checks on Apple's iPhone biz sounded solid across multiple Wall Street firms. Lululemon crushed it last week with no signs of a sales slowdown and inventories that were kept well under control. And on Monday, PPG Industries pre-announced sharply higher earnings due to better sales in coatings across all segments (building, aerospace and autos) combined with better margins. With the market at 18x forward S&P 500 estimates, it will most likely take a great earnings reporting season to move stocks higher. I am just not sure how multiples could expand further given the slowdown in the economy and the still tightness in the credit/lending markets.

This will be a short week in the markets due to the Good Friday holiday combined with Easter and Passover activities. The U.S. will still report jobs data on Friday, but only the bond traders will be at their desks for a half day to impact the markets. Non-farm payroll estimates are in the +200-250k range. Another twist to the markets this week will be the oil price changes due to the OPEC+ surprise cut of 1m bbls/day. Oil is up 7% on Monday but let's watch to see if it sticks. Let's also hope that the White House bought call options at $65 two weeks ago when SVB was going under. Have a great short week and get ready for corporate earnings to begin next week.

Global asset returns were almost a complete inverse of 2022 returns...

Deutsche Bank

While everyone is looking at the NASDAQ, take note that Gold had its highest quarterly close on record...

My only explanation is flight to safety due to SVB, but why it kept its highs is a mystery to me.

Another item to note, Europe is beating the U.S. and breaking out...


March madness...

SVB set the lows and then all the companies across the street from their branches launched the market higher. Tech companies thank the isolated event in crushing interest rates causing a market rotation.

Here are the S&P 500 companies which gained 40%+ in value during the Q1...

In looking at the Q1 sector performances, Tech & Consumer Service/Discretionary took home all the chips...


With the market valuation at 18x forward EPS, where does it go from here?

J.P. Morgan

Which large cap stocks have the current market mojo?

TThe rear-view mirror looked great. Will April repeat as best month of the year?

Bespoke notes Over the last 20 and 50 years, April has been the strongest month of the year for stocks. Over the last 50 years, the Dow has averaged a gain of 2.09% in April with positive returns 66% of the time. Over the last 20 years, the Dow has averaged a gain of 2.18% in April with positive returns 85% of the time.

Jones Trading

Bespoke shows that when the previous year is red and the Q1 green then April and the rest of the year is always positive...

@bespokeinvest: Since WW2, we've seen the S&P decline in the prior year and then gain in Q1 ten times. April and the rest of the year were positive all ten times.


Ryan Detrick notes that a strong Q1 leads to ongoing strength in the market...

@RyanDetrick: The S&P 500 gained 7.0% in Q1. Does this suggest more strength? It appears to. When >5% or more, the rest of the year has been higher 15 out of 16 times and up nearly 10% on average.

Sure to make the Fed happy, the ISM Manufacturing Index hit a May 2020 low on Monday...

@LizYoungStrat: Mar ISM Manufacturing came in weaker than expected at 46.3 vs the est of 47.5. Components were weak across the board, with Employment taking a notable step down. Prices Paid (not in chart) also fell from 51.3 to 49.2. Treasury yields down on the print.

Also pleasing the Fed will be a continued decline in one of its most watched inflation measures...

The Daily Shot

The labor market has ebbed for new white collars, but remains in a scramble for all aged blue collars...

It’s an odd moment for the U.S. labor market, especially for companies that employ both white- and blue-collar workers. While the effect of the Covid-19 pandemic on the job market is waning, many lower wage or service-industry jobs are still going unfilled—yet college grads face increased competition for knowledge-worker roles.

Jim Fish, chief executive of Waste Management Inc., described the situation this way: “We can’t hire a truck driver to drive a trash truck for $90,000 in Houston, Texas, but I can hire an M.B.A. from a small school for $60,000, and I can get them all day long.”

“The world seems to have flipped on its head,” Mr. Fish says.

At Villanova University in Pennsylvania, the number of entry-level, full-time jobs that companies posted via the school’s career center between Jan. 1 and March 14 declined by 7%, compared with the same period last year. But not every employer is tapping the brakes on hiring. Drops in Villanova’s listings for software, financial services and biotech jobs were partially offset by growth in sectors like tourism, education and government, according to the career center.


PPG released a nice pre-announcement which lifted its stock 5% on Monday...

[PPG] Raises Q1 $1.52-1.58** (prior $1.10-1.20)

CEO: “The pace of our operating margin recovery accelerated during the quarter, driven by higher sales volumes and additional selling price capture,” said Tim Knavish, PPG president and chief executive officer. “Our stronger sales volume performance compared to our guidance was led by the aerospace and automotive original equipment manufacturer coatings businesses. In addition, we delivered higher year-over-year earnings across most of our business portfolio including Europe."


U.S. oil companies won't have an issue with OPEC+ decision to cut 1m bbl/day out of future production...

With WTI jumping to $80+ a barrel, they will be pressured by Washington D.C. to poke more straws in the ground and keep prices in balance. All good news for the American energy industry with a new well breakeven at about $60 a barrel.

Dallas Fed

Hopefully your companies have locked in their copper supplies this year...

Goldman Sachs expects the world to run out of visible copper inventories by the third quarter of this year if demand in China continues to power ahead as strongly as it did in February.

Chinese copper demand was up 13 per cent year on year last month, according to the bank, after activity picked up after the lunar new year, which took place earlier this year than last. It forecasts that copper could hit $10,500 a tonne in the near-term, before reaching $15,000 by 2025.

“The forward outlook is extraordinarily positive,” said Jeffrey Currie, global head of commodities research at Goldman Sachs.

Financial Times

We can only hope that the SVB execs responsible will not even be allowed to get a future lemonade stand license...

Flush with cash from a booming tech industry, Silicon Valley Bank executives embarked on a strategy in 2020 to juice profits that quickly triggered an internal alarm.

In buying longer-term investments that paid more interest, SVB had fallen out of compliance with a key risk metric. An internal model showed that higher interest rates could have a devastating impact on the bank’s future earnings, according to two former employees familiar with the modeling who spoke on the condition of anonymity to describe confidential deliberations.

Instead of heeding that warning — and over the concerns of some staffers — SVB executives simply changed the model’s assumptions, according to the former employees and securities filings. The tweaks, which have not been previously reported, initially predicted that rising interest rates would have minimal impact.

The new assumptions validated SVB’s profit-driven strategy, but they were profoundly misplaced...

The episode shows that executives knew early on that higher interest rates could jeopardize the bank’s future earnings. Instead of shifting course to mitigate that risk, they doubled down on a strategy to deliver near-term profits, displaying an appetite for risk that set the stage for SVB’s stunning meltdown.

“Management always wanted to tell a growth story,” one former employee involved in the bank’s risk management said. “Every quarter, there was always this pressure to deliver earnings.”

Washington Post

An incredible piece in the FT last week analyzing the continued decline in U.S. life expectancy versus other developed nations...

Not just due to COVID, but also young deaths due to drugs, gun violence and driving.

Financial Times

The new movie Tetris on AppleTV+ is well done. I hope that you never have to close a deal as complex and risky as theirs...

In 1989 the world watched transfixed as the blocks came tumbling down. In Berlin it was to the sound of sledgehammers and cheers, but in Japan, the US and soon the world over, the only noise was the tap-tapping of Game Boy buttons as Tetris mania took hold. At the time no one would have drawn a connection between the two, the only traces of the puzzle game’s Soviet origins being Kremlinesque onion domes on the intro screen and a Russian folk ditty remixed as 8-bit muzak. Now Tetris’s improbably Le Carré-ish back-story is told in Apple’s effervescent and mostly entertaining film of the same name.

Financial Times

(Nikita Efremov, left, and Taron Egerton in ‘Tetris’)

The worst chess move ever?

If a country's leaders take an eraser to one of the best pens covering it, what will happen the next time that a natural disaster or national crisis hit it. How will the world know the truth if no one is there to report it? Evan loved his parents country and now he is in jail and being used as a political pawn. Just when you think that the Kremlin has made a bad play, they do worse. #FreeEvan

Mr. Gershkovich, 31 years old, is the American son of Soviet-born Jewish exiles who had settled in New Jersey. He fell in love with Russia—its language, the people he chatted with for hours in regional capitals, the punk bands he hung out with at Moscow dive bars. Now, espionage charges leave him facing a possible prison sentence of up to 20 years.

His employer, colleagues and the Biden administration all deny Russia’s claim that he was spying on behalf of the U.S., and have called for his immediate release. Diplomats and legal experts see little hope Mr. Gershkovich, a reporter accredited by the Russian foreign ministry, will immediately be freed, given that espionage trials in Russia are conducted in secret and almost always end in a conviction.

Five and a half years earlier, Mr. Gershkovich showed up in Russia as media freedoms were fading. He spent his weekends chatting about music, politics and the news in the banya, or sauna, and was always ready to help competing journalists. His Russian friends knew him not as Evan, but Vanya.

When forest fires swept through the remote Siberian region of Yakutia in 2021, he slept in a tent in the woods for four days, long after other reporters jetted back to the capital. He won the trust of freshman medical students by sitting with them in Covid-19 wards as they revealed that they’d been enlisted, after only a few weeks of training, to treat a flood of patients.

“I just want to get the story right,” he would tell friends.


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