Weekly Research Briefing: Summertime

June 04, 2024

Higher for longer? Time to cut? Or maybe it's just time to suit up and go to the beach? While the discussions over economic strength and inflation continue, let me pour you an Aperol Spritz or maybe a Juicy Banger IPA because this could take some time. Hard economic data continues to come out fine while survey data looks less than fine. Consumers are enjoying their financial situation while they think their neighbor's situation is terrible. Inflation data as described in the media is sky high, while prices at home are running well below wage and income growth. Time to unplug, roll out the blanket, catch some rays, and relax.

Things look very good right now. The U.S. economy is solid, prices are easing, consumer piggy banks are full, corporate margins are huge, and the credit markets are stellar. For sports fans, the NHL and NBA finals are about to start. For kids, school is done, and summer has begun. Market volumes have begun to slow as offices look a bit thinner on Mondays and Fridays. The M&A markets remain active as big stock prices and bulging cash hordes are pushing executives to transact. Let's see what big deals happen this week.

The corporate earnings season is now in its very last leg as we enter the third month of the quarter. But this is a big conference week as analysts and companies’ cross paths to compare notes on how the Q2 is progressing. I see 800+ companies presenting across 6 major Wall Street firm conferences this week. So, expect some updates on the tape to coincide with a calendar full of economic data. All eyes will be focused on Friday's jobs data. A cooler non-farm payroll number would be better for the stock and bond bulls as worries on higher inflation are currently greater than a slowdown in economic growth. Have a great week.

The economic survey data remains mixed and useless right now...

Recent economic data is beginning to cool the Atlanta Fed's Q2 GDP estimate...

Latest estimate: 1.8 percent -- June 03, 2024

The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2024 is 1.8 percent on June 3, down from 2.7 percent on May 31. After recent releases from the US Census Bureau and the Institute for Supply Management, the nowcasts for annualized second-quarter real personal consumption expenditures growth and real private fixed investment growth declined from 2.6 percent and 3.1 percent, respectively, to 1.8 percent and 1.5 percent.

Atlanta Fed

Friday's core PCE price index came in near expected about 0.25%. Housing & Services inflation remain stubbornly sticky...

@NickTimiraos: Friday's inflation data show little near-term change to its composition on a 12-month basis. Goods: Mild deflation, back to prepandemic trend. Housing: Slowly crawling lower from mid 5s. Was around 3.5% before the pandemic. Nonhousing services: Moving sideways in the mid 3s.

Costco remains one of the best reads on inflation and last week they confirmed that it has flatlined...

"As inflation has leveled off, our members are returning to purchasing more discretionary items and growth in the category was led by toys, tires, lawn & garden and health and beauty aids…On the inflation front, it's more of the same from last quarter. Across all core merchandise, inflation was essentially flat in Q3. And with Fresh foods close to 0 and slight inflation in food and sundries being offset by some deflation in nonfoods. The deflation in nonfoods was led by hardware, sporting goods and furniture all still benefiting from lower freight costs year-over-year." - Costco CFO Gary Millerchip

The Transcript

Also helping the consumer, Amazon is following WalMart and Target and lowering the pricing of their goods...

Amazon is slashing grocery prices by up to 30% in hopes of luring inflation-weary customers — following in the footsteps of other major retailers such as Target and Walmart. The company said that it will reduce prices of 4,000 items at its Amazon Fresh grocery stores online as well as at its handful of brick-and-mortar locations. Amazon Fresh shoppers will be offered discounts on meat, seafood, frozen food, dairy and cheese, beverages, snacks and pastas, the company said on Friday. The price reductions will apply to national brands as well as Amazon-owned private label products.

NY Post

America's largest restaurant company reminds consumers that the price of a Big Mac has not doubled since 2019...

Recently, we have seen viral social posts and poorly sourced reports that McDonald’s has raised prices significantly beyond inflationary rates. This is inaccurate. And for a brand that proudly serves nearly 90% of the U.S. population every year, we feel a responsibility to make sure the real facts are available.

I can tell you that it frustrates and worries me, and many of our franchisees, when I hear about an $18 Big Mac meal being sold - even if it was at one location in the U.S. out of more than 13,700.

More worrying, though, is when people believe that this is the rule and not the exception, or when folks start to suggest that the prices of a Big Mac have risen 100% since 2019.

The average price of a Big Mac in the U.S. was $4.39 in 2019. Despite a global pandemic and historic rises in supply chain costs, wages and other inflationary pressures in the years that followed, the average cost is now $5.29. That’s an increase of 21% (not 100%).


The U.S. consumer is fine if Wagyu steaks are getting a shoutout on the Costco Warehouse conference call...


Also helping future inflation will be falling oil prices, as this weekend's OPEC production cuts look to be standing atop of a water slide on a hot summer day...

After relentlessly pursuing $100-a-barrel oil, the OPEC+ cartel has all but thrown in the towel. Whether the U-turn is a tactical retreat, or a strategic shift, is still unclear. But for now its impact would be the same: Oil prices would be somewhat lower and global inflation would ease.

Over the weekend, the group, led by Saudi Arabia and Russia, announced a deal that, on paper, prolongs its complex layers of cumulative production cuts well into 2025. But read the fine print, and the agreement looks different. Under the pact, OPEC+ members will be able to start adding more barrels into the market from October, with significant increases next year.

Based on the path published by Saudi officials, OPEC+ output would be more than 500,000 barrels a day higher by December than now, and about 1.8 million higher by mid-2025. That’s a lot of extra barrels to try to spin the deal as a bullish surprise. By my book, more oil production typically means lower prices, not the opposite.


Is it time to short residential homeowner moving activities?

95% of mortgage borrowers have interest rates below the current market rate and 30% of homeowners own their home outright. For current homeowners, these are good times. Watching wages and interest income rise while physical housing cost stays flat.

Goldman Sachs

Even with ignoring household investment portfolios and savings accounts, the average household is quite flush right now...

American households have:
$32 trillion in home equity
$6 trillion in money markets
$4 trillion in checking accts
$2-3 trillion in CDs
The piggy banks are full if & when we finally have a slowdown


Ignore Tony Pasquariello at your peril...

Two pretty good reads on private company health...

"We have more than 2,000 non-investment-grade borrowers in our corporate credit area, and our default rates were still only 36 basis points. So, those are pretty healthy signs.” - Blackstone COO Jonathan Gray

“so when we look at the portfolio companies today, there's nothing flashing there that says imminent recession. There's nothing flashing there that says inflation is going to cool immediately to 2%. EBITDA growth is high single digits." - Carlyle Group CEO Harvey Schwartz

The Transcript

Yes, profit margins are doing very well right now. Just wait until the AI cost benefits kick in...


In need of a new AI cost savings example? Tom Siebel has you covered...

"Let's take a law firm, for example, there's one law firm that is -- that all of you know, that takes a lot of companies public that you guys are following…what we've done is we've loaded for this law firm, the corporates of sec.gov, EDGAR, okay, and through a language model. So this is every S-1, every 10-K, every 10-Q and that's what we use to train the language models…When you need to write the S-1, you put in the name, you put in the financials, you put in the first few risk factors, keep the carriage return and 45 minutes later, you have 200 pages of the first draft of the S-1 written. That's two weeks' worth of work done right now. I mean, what's the productivity increase? It's huge." - C3.ai CEO Tom Siebel

The Transcript

Credit investors ordered a box of Subway footlongs as demand for risk among fixed income investors remains insatiable...

Subway, the restaurant chain with the most locations in the US, has sold $3.35 billion of asset-backed bonds to help fund its buyout by Roark Capital Group, in what is the largest securitization of its kind on record.

The sandwich maker priced the largest portion of its whole business securitization — where a company pledges most of its assets as collateral, including franchise fees — at spreads of 150 basis points above the benchmark, according to people with knowledge of the deal. The jumbo transaction is the largest among other multi-billion dollar franchise-backed deals from well-known chains like Dunkin’ Brands Group Inc., Taco Bell and Wendy’s. Dunkin’ was the holder of the previous record WBS deal, at around $2.5 billion in 2015.

Investors placed $19 billion of orders for the $3.35 billion of bonds for sale, signaling demand outstripped supply, said the people, declining to be identified as the details are private. Spreads tightened at least 30 basis points across the capital stack from guidance, another indication of significant investor interest...


And the big investment banks would like their customers back from the private credit markets...

Investment banks including Goldman Sachs Group Inc. are pitching broadly syndicated refinancings of some of the riskiest types of private credit, in the latest sign that Wall Street is trying to poach back business from direct lenders.

Bankers in Europe are speaking with buyout firms about options for private payment-in-kind debt their companies took on when broadly syndicated markets were much more volatile and expensive. Now that conditions have improved, institutional lenders are becoming increasingly assertive.

“A lot of sponsors have been doing PIK but in the private market,” said Luke Gillam, co-head of EMEA credit capital markets at Goldman Sachs. “This is now the chance to use the public markets to refinance those instruments, which are much cheaper than private credit.”


New low vol environments tend to stick around for a while which is very good news for many risk takers...

@mark_ungewitter: Low-volatility regimes can last longer than you think.

A look at Cyclicals outperformance tells us that the market wants more risk...

Goldman Sachs

With the May 2024 public market index stats now in the books, is it time to discuss removing the oldest index?

The Dow Jones Industrials is hanging onto its relevancy by a 25-year-old number. Does anyone still care about a 30-stock index that has a knack for buying high and selling low? Exxon Mobil kicked out at $40? Ouch.


For election seasonals, it can't get any better than the next three months...

@MikeZaccardi: Strongest election-year 3-month stretch? June-August. 75% hit rate, up 7.3% on average.

BofA Global

Another big couple of weeks of deal activity led by a major energy merger...

ConocoPhillips (COP - $140b mkt cap) confirms to acquire Marathon Oil Corporation (MRO - $15b mkt cap - S&P500 component) in all-stock ~$22.5B (incl debt) transaction implying ~$30.3/shr; Expected to be immediately accretive to earnings, cash flows and return of capital per share; Provides shareholder distribution update, to raise dividend and sees share buybacks to be over $20B in the first three years after close. (TradetheNews)

Waste Management (WM $84b mkt cap) struck a deal to buy medical-waste-disposal company Stericycle (SRCL - $4.8b mkt cap - R1000 component) for roughly $5.8 billion. Waste Management said Monday it would acquire Stericycle for $62 a share in cash. The deal also includes about $1.4 billion of Stericycle’s net debt... Stericycle’s operations would complement Waste Management’s and give the bigger company a deeper foothold in the medical-waste-disposal sector, which enjoyed a sharp uptick in demand during the heights of the Covid-19 pandemic. Waste Management is one of the biggest players in the U.S. trash business. The Houston company has the biggest landfill network in North America, numbering more than 250, according to its website. (WSJ)

US Cellular and Telephone and Data Systems confirm to sell US Cellular's wireless operations and select spectrum assets to T-Mobile for $4.4B, including a combination of cash and up to ~$2B of assumed debt; T-Mobile to enter into new MLA and be a long-term tenant on at least 2,600 of UScellular's towers. (TradetheNews)

Edwards Lifesciences (EW - $52b mkt cap) said it has agreed to sell its critical care products unit to Becton Dickinson (BDX - $67b mkt cap) in an all-cash deal valued at $4.2 billion to sharpen focus on its heart devices business. Edwards is no longer pursuing the planned spin-off of the critical care unit, which develops and sells advanced blood and heart monitoring systems that are used in surgical and intensive care settings, announced in April... Becton Dickinson said the deal was consistent with the company's 2025 M&A strategy, which seeks "growth-enhancing and value-creating tuck-ins."... New Jersey-based Becton expects to fund the all-cash transaction with about $1 billion of cash and $3.2 billion of new debt. (Reuters)

Energy Transfer (ET - $52b mkt cap) to acquire WTG Midstream in a $3.25B cash and stock transaction Energy Transfer will acquire WTG Midstream Holdings LLC in a transaction valued at approximately $3.25 billion from affiliates of Stonepeak, the Davis Estate and Diamondback Energy, Inc. Consideration for the transaction will be comprised of $2.45 billion in cash and approximately 50.8 million newly issued Energy Transfer common units. (TradetheNews)

Merck (MRK - $317b mkt cap) agreed to buy privately held biotech EyeBio for as much as $3 billion, as it looks to diversify its portfolio of experimental drugs with treatments for eye diseases. The drugmaker agreed to pay $1.3 billion in cash and another $1.7 billion in future milestone-based payments for EyeBio, and will gain access to its retinal disease drug Restoret as part of the deal. The deal is the latest in a string of recent acquisitions by Merck to reduce its reliance on blockbuster immunotherapy Keytruda, which is expected to face rivals by the end of the decade when it is set to lose patent protection. Merck had said in February it was in the market for deals of up to $15 billion. Its recent acquisitions include a $10.8 billion deal for Prometheus Biosciences in 2023 and the purchase of Elanco's (ELAN.N), opens new tab aqua business for $1.3 billion in February this year. (Reuters)

Activist investor Elliott Investment Management has taken a $2.5 billion stake in Texas Instruments (TXN - $177b mkt cap) and is pushing the chip maker to improve its free cash flow generation. The firm sent a letter to Texas Instruments' board on Tuesday disclosing the stake and criticizing the underperformance of the company's stock relative to its peers. Texas Instruments shares touched an all-time high of $206 in early trading on Tuesday. Elliott said that ever since Texas Instruments launched a substantial ramp-up in capacity in 2022, its free cash flow has declined by more than 75%, and shareholders have been given limited visibility or guidance on when free cash flow per share will return to its historical norm. (WSJ)

Atlantica Yield (AY - $2.5b mkt cap) to be acquired by Energy Capital Partners led consortium for $22.00/shr in cash (~19% premium). Bidco is controlled by Energy Capital Partners ("ECP"), a leading investor across energy transition, electrification and decarbonization infrastructure assets, and includes a large group of institutional co-investors. (TradetheNews)

Biogen (BIIB - $32b mkt cap) said on Wednesday it had agreed to buy privately held Human Immunology Biosciences for up to $1.8 billion, bulking up on rare disease medicines as its older multiple sclerosis drugs face tepid demand due to rising competition. Human Immunology's (HI-Bio) felzartamab has completed mid-stage studies for a type of kidney disease called primary membranous nephropathy, and in patients with a disease where the immune system makes antibodies that damage their transplanted organ. (Reuters)

Asahi Kasei (3407.T) offered to buy Swedish drugmaker Calliditas Therapeutics (CALTX.ST) for around $1.1 billion on Tuesday as the Japanese maker company looks to turn itself into a global player in pharmaceuticals. A maker of specialised chemicals, including those used in batteries, the firm is best known in Japan for its building materials, such as insulation used in housing. It has a pharma division but is not heavyweight in the industry... Asahi Kasei said it would offer about 11.8 billion Swedish crowns ($1.1 billion) for Stockholm-based Calliditas, in a deal approved by the boards of both companies. The offer of 208 crowns per share represents an 83% premium on Calliditas' closing price of 113.6 crowns on Monday. (Reuters)

APM Human Services International (APM.AX), opens new tab said on Monday it would be bought by U.S.-based private equity firm Madison Dearborn Partners in a deal valuing the Australian company's equity at A$1.3 billion ($865.2 million). The Australian employment services firm has been a takeover target since February this year as it battles a labour crunch amid concerns around higher wages and increasing rent, and higher drawn debt balances. Under the scheme with MDP, APM shareholders will receive A$1.45 in cash per share, representing a premium of about 16% to the stock's last close of A$1.25 on May 30. (Reuters)

Atrion (ATRI - $800m mkt cap - R2000k component) to be acquired by Nordson (NDSN - $13b mkt cap) for $460/shr in cash in ~$800M deal - This reflects a valuation of 15X Atrion’s 2024 full-year estimated EBITDA, inclusive of synergies Nordson expects to generate in the first two years of its ownership. The acquisition expands Nordson’s medical portfolio into new markets and therapies, supported by long-term secular growth trends. (TradetheNews)

Surmodics (SRDX - $500m mkt cap - R2000 component) to be acquired by GTCR for $43.00/shr in cash - Under the terms of the agreement, affiliates of GTCR will acquire all outstanding shares of Surmodics. Surmodics shareholders will receive $43.00 per share in cash, for a total equity valuation of approximately $627 million. The per-share acquisition price represents a 41.1% premium to Surmodics’ 30-trading day volume-weighted average closing price through May 28, 2024 (TradetheNews)

Various news sources

Who said the IPO market is weak?

The public markets have now rewarded last year's hot restaurant concept, Cava, with a valuation per store 30% higher than Chipotle's.

@carlquintanilla: JPMORGAN: $CAVA "has landed an impressive ~$33m valuation per store on its 328 current store base. .. this level of valuation is unprecedented in the group. Stock at $92.55 sits too far above our $77 price target for us to hold onto an [overweight] .." Cuts to Neutral.

Time for Shein to Shine?

Online fashion firm Shein is preparing to file a prospectus with Britain's Financial Conduct Authority for approval ahead of a potential London float which could value it around 50 billion pounds ($63.70 billion), Sky News reported on Sunday. The confidential filing could take place as soon as the coming week, the report added, citing sources.


And another major AI Cloud company lining up to go public...

Cloud computing startup CoreWeave, one of the biggest beneficiaries of the artificial intelligence boom, is now planning an IPO in first half of 2025 according to a report in The Information, noting the company was last valued at $19B.

Hammerstone Markets

Sanofi is going to test both the public market and the private market for its consumer spin-off...

Sanofi will press ahead with plans for a spin-off of its consumer division, which could be one of Europe’s biggest deals this year, adding bankers to work on a sale process and preparations for a public listing expected to value the business at about €20bn.

Goldman Sachs and Morgan Stanley will work alongside BNP Paribas and Bank of America on a sale and potential float expected to take place as soon as the end of the year, according to people familiar with the matter.

The processes will run in tandem, a common deal structure known as a “dual track”. Rothschild has also been working with Sanofi since the start of the process.

The consumer division, which accounts for 10 per cent of Sanofi’s sales, has drawn interest from potential private equity bidders, the people said. Analysts at Jefferies estimate the consumer care spin-off could be worth between €18bn and €20bn.

The step-up in preparations come as the European IPO market has shown signs of recovery this year, with a strong listing from Swiss skincare company Galderma, though the debut of German beauty retailer Douglas flopped in March.

Financial Times

Financial Services Industry headline of the week...

The Telegraph

A more serious topic for financial advisors and families to consider for some of their older clients...

Long before people develop dementia, they often begin falling behind on mortgage payments, credit card bills and other financial obligations, new research shows.

A team of economists and medical experts at the Federal Reserve Bank of New York and Georgetown University combined Medicare records with data from Equifax, the credit bureau, to study how people’s borrowing behavior changed in the years before and after a diagnosis of Alzheimer’s or a similar disorder.

What they found was striking: Credit scores among people who later develop dementia begin falling sharply long before their disease is formally identified. A year before diagnosis, these people were 17.2 percent more likely to be delinquent on their mortgage payments than before the onset of the disease, and 34.3 percent more likely to be delinquent on their credit card bills. The issues start even earlier: The study finds evidence of people falling behind on their debts five years before diagnosis.

“The results are striking in both their clarity and their consistency,” said Carole Roan Gresenz, a Georgetown University economist who was one of the study’s authors. Credit scores and delinquencies, she said, “consistently worsen over time as diagnosis approaches, and so it literally mirrors the changes in cognitive decline that we’re observing.”

New York Times

Talk to anyone in the Electric Utility industry and ask them about the wait times for a new transformer...

You may’ve never noticed one of those grayish metal boxes on street corners or hanging on electrical lines. These everyday parts of modern electrical infrastructure, called transformers, often stick out only when they get painted and become street art.

There are over 60 million transformers in the US, and they’re essential to everyday life. New housing developments and subdivisions, desperately needed across the country, require them to open. The proliferation of energy-hungry data centers powering our digital lives depend on them.

And the global transition toward renewable power, EVs, and a greener grid will slow down without a more robust stockpile.

But the skyrocketing demand for transformers is outstripping supply — and the shortfall is wreaking havoc on vital industries across the economy.

“They're critical to pretty much every component of the electrical transmission and distribution infrastructure across the globe,” said Benjamin Boucher, a senior analyst at Wood Mackenzie, an energy-research firm. “The shortage is going to be one of the biggest talking points as it pertains to the energy transition and electricity markets for the foreseeable future. There’s no real end in sight, and it’s going to get a lot worse before it gets better.”

Sherwood News

Your next heating/cooling system will be a heat pump and you will love it...

If you’re one of the 100 percent of humans who lives somewhere warmer than –460 Fahrenheit, we’ve got good news: You probably qualify for a heat pump. Instead of generating heat, this emissions-slashing superhero transfers warmth from even freezing outdoor air into your home. If the air is warmer than –460 F, or absolute zero, it’s got thermal energy in it.

“Just because it feels cold doesn’t mean there’s no energy available,” says Jan Rosenow, who studies heat pumps at the Regulatory Assistance Project, a policy NGO for the energy community. “There’s actually a lot of energy still in the air.”

Obviously, no heat pump is designed to operate anywhere near absolute zero. But the toughest among them can certainly operate far below 0 degrees Fahrenheit. Even in extra-cold places, heat pumps can use additional electric elements—space heaters, basically—to provide backup heat for a home. So let’s bust one of the most persistent myths about modern heat pumps: that they become worthless as soon as it gets chilly out.

If heat pumps don’t actually work in frigid weather, no one told the Nordic nations, which endure Europe’s coldest climates, with average winter temperatures around 0 degrees Celsius (32 degrees F). As of 2021, Norway had heat pumps in 60 percent of households. In 2022, Finland installed more of the appliances per capita than any other country in Europe, while Sweden has similarly gone all-in on the technology. In the United States, heat pumps are selling like hotcakes in Alaska, and last year Maine announced it had reached its goal of installing 100,000 of the devices way ahead of schedule. These places ain’t exactly perpetually sunny California. (US-wide, heat pumps now outsell gas furnaces.)


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The author has current equity ownership in: Energy Transfer LP, Merck & Company, Costco Warehouse, McDonald's Corp and ConocoPhillips.

The information presented here is for informational purposes only, and this document is not to be construed as an offer to sell, or the solicitation of an offer to buy, securities. Some investments are not suitable for all investors, and there can be no assurance that any investment strategy will be successful. The hyperlinks included in this message provide direct access to other Internet resources, including Web sites. While we believe this information to be from reliable sources, Hamilton Lane is not responsible for the accuracy or content of information contained in these sites. Although we make every effort to ensure these links are accurate, up to date and relevant, we cannot take responsibility for pages maintained by external providers. The views expressed by these external providers on their own Web pages or on external sites they link to are not necessarily those of Hamilton Lane.

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