Private Wealth

Weekly Research Briefing: The Markets Say Five

October 25, 2022

That was an interesting week in the markets. While the stock market continued to digest a big slug of non-horrific earnings reports, the bond market moved the Fed's terminal rate bet for 2023 to 5%. In other terms, this would imply +0.75% next week, followed by +0.75% in December, +0.50% in February and maybe +0.25% in March. The bond markets have made a one direction move this month and have done it with authority. This to the joy of retiree savers and to the detriment of adjustable-rate borrowers.

One would have expected a spike in Treasury yields to have weighed on equities, but instead, they also ended higher by almost 5%. Credit goes to the less-than-bad earnings season as well as multiple comments about the disappearing supply chain bottlenecks. And on Friday, the reporter closest to the Fed, Nick Timiraos and the WSJ, penned a story discussing the possibility of a Fed pivot in December and beyond. While we know that many price series are headed lower, the big question comes down to whether or not the Fed will pivot before it sees the delayed downturn in the housing/shelter component. If the pivot is too early, it may not slow down the economy enough to head off inflation. But if the Fed continues on an aggressive path, then it could crash the economy. The $64,000 question remains.

Other items the market is chewing on right now. This week is an even bigger one for earnings, with over 25% of the S&P 500 reporting, including the four largest companies: Apple, Microsoft, Alphabet and Amazon. With 20% of S&P 500 earnings in the door, 72% of companies are beating numbers but forward earnings estimates continue to be cut. Corporate stock repurchases should begin returning to the market in size later this week and equity portfolio managers will continue to react to any positive market moves with a 'fear of missing out' as the seasonally strong end of year nears. Overseas, the U.K. gets a new leader. Energy prices in Europe are in freefall. And Xi shows little love for the financial markets. Much more in the notes below. Have a great week.

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Market takes the Fed Funds bet to 5% last week before backing off slightly on Friday's story in the WSJ...

This market implied graph shows the rate probability for the July FOMC meeting. So, from 3% today to 5% in the summer 2023.

CME Group

The terminal rates first touch of 5%...

The Daily Shot

The Fed whisperer, Nick Timiraos at The Wall Street Journal...

Federal Reserve officials are barreling toward another interest-rate rise of 0.75 percentage point at their meeting Nov. 1-2 and are likely to debate then whether and how to signal plans to approve a smaller increase in December.

“We will have a very thoughtful discussion about the pace of tightening at our next meeting,” Fed governor Christopher Waller said in a speech earlier this month.

Some officials have begun signaling their desire both to slow down the pace of increases soon and to stop raising rates early next year to see how their moves this year are slowing the economy. They want to reduce the risk of causing an unnecessarily sharp slowdown. Others have said it is too soon for those discussions because high inflation is proving to be more persistent and broad...

“The time is now to start planning for stepping down,” said San Francisco Fed President Mary Daly during a talk at the University of California, Berkeley on Friday.


And here are San Francisco Fed President Mary Daly's less-than-hawkish notes from her Friday speech...

(US) Fed's Daly (non-voter): We don't want to be too reactive; Can easily find yourself overtightening; More tightening is still needed for restrictive territory

  • If you keep tightening until you see lagging variables of unemployment and inflation returns to steady state, you could 'easily overtighten'
  • We don't just keep going up at 75bps increments; We will do a step down, not to pause, but to 50bps or 25bps increments at some point
  • We are at or close to neutral rate; Comfortable with 3-3.5% as a neutral estimate
  • Pent-up tightening is moving through the economy; Starting to see slowing take hold
  • Rental price inflation is beginning to slow
  • Our balance sheet policy so far has not disrupted market functioning
  • Projections show policy tightening to 4.5-5% next year
  • Sept summary of projections is a good indication of where things are looking
  • Forward guidance this time around has been very helpful
  • Slowing rate hikes should be considered at this point, though the data have not been cooperating
  • There is more uncertainty about where policy will end up
  • We have to take global factors into account; The global economic situation is quite erratic
  • If the war in Ukraine escalates, that will be a headwind against US growth; China Covid policy also has implications for US growth
  • Need to account for synchronized global central bank tightening
  • Want to make sure we don't over-tighten just as much as not to under-tighten
  • Interventions to stabilize dislocated market is very different from quantitative easing; If we had a market dislocation we could solve it even as we continue to raise rates and roll off the balance sheet


Last week's Beige Book had some important comments...


  • Employment continued to rise at a modest to moderate pace in most Districts
  • Outlooks grew more pessimistic amidst growing concerns about weakening demand
  • Contacts expect wage growth to continue as higher pay remains essential for retaining talent in the current environment.
  • National economic activity expanded modestly on net since the previous report; however, conditions varied across industries and Districts
  • Rising mortgage rates and elevated house prices further weakened single-family starts and sales, but helped buoy apartment leasing and rents, which generally remained high


The Fed's Kashkari will take rates to infinity and beyond to pop the inflation bubble...

The Federal Reserve may need to push its benchmark policy rate above 4.75% if underlying inflation does not stop rising, Minneapolis Federal Reserve Bank President Neel Kashkari said on Tuesday.

"I've said publicly that I could easily see us getting into the mid-4%s early next year," Kashkari said at a panel at the Women Corporate Directors, Minnesota Chapter, in Minneapolis.

"But if we don't see progress in underlying inflation or core inflation, I don't see why I would advocate stopping at 4.5%, or 4.75% or something like that. We need to see actual progress in core inflation and services inflation and we are not seeing it yet."…

"That number that I offered is predicated on a flattening out of that underlying inflation," Kashkari said. "If that doesn't happen, then I don't see how we can stop."


On Monday, the Fed received some good news as the U.S. economy slowed faster in October...

@SPGlobalPMI: The downturn across the US gained momentum in October, with the latest Flash #PMI Composite Output Index registering 47.3 (Sept: 49.5). Barring the initial months of the pandemic, the fall was the second-fastest since 2009.

And input prices are falling as supply bottlenecks ease...

@WilliamsonChris: An upside to the downturn was a further alleviation of supply constraints, with the incidence of delays now at the lowest since July 2020. These easing supply issues, alongside the stronger dollar, have helped cool price pressures in the manufacturing sector.

Or if you prefer a visual of supply chain improvements, here they are as described by the Pittsburgh Plate Glass Company...

@conorsen: Here’s the supply chain progress slide that $PPG has been putting out for the past few quarters — big improvement in truck availability this quarter:

Trucking companies are not having a peak season this year which is good news for shipping costs...

And auto prices continue to U-turn hard...

@lisaabramowicz1: "Used auto prices have turned sharply negative, which should be reflected in the CPI this winter. Overall auto inventories have finally started rising sharply, bolstering our view of sales price cuts in the winter and spring:" Brian Reynolds of Reynolds Strategy

Full storage tanks and a warmer weather outlook has sent European gas prices into a freefall...

@POLITlCSUK: BREAKING: European gas prices are rapidly falling due to growing stockpiles and expectations of a warmer winter. The rate has come down from around €370 to about €100 a MWh. If it sustains, then inflation and electricity prices should also come down as well.

Equity bulls are noting the rollover in price series with excitement...

@carlquintanilla: STIFEL: “.. inflation momentum has topped .. Energy, food and goods are all slowing, and together they constitute the majority of inflation above what may be an acceptable inflation rate for the Fed.”

Sees $SPX 4300 in next six months

Meanwhile, the labor markets refuse to break...

Initial jobless claims are back at multi-year lows, pointing to persistent strength in the labor market.

Also benefitting the economy is a meaningful jump in corporate capex for the Q3...

@TheTranscript_: Capex spending is up: $BAC: "Only 62 companies have reported 3Q capex so far, but capex is tracking +27% YoY, accelerating from +20% in 2Q"

Residential housing is under significant pressure due to soaring mortgage rates...

The number of homes sold dropped 25% year over year while new listings fell 22%—the largest declines since May 2020 and April 2020, respectively, when the onset of the pandemic brought the housing market to a near halt...

While the median home-sale price was down 0.5% month-over-month in September, it still rose 8% on a year-over-year basis to $403,797...

Roughly 60,000 home-purchase agreements were canceled in September, equal to 17% of homes that went under contract that month. That’s the highest percentage on record with the exception of March 2020—the month the World Health Organization declared the coronavirus a pandemic. Fewer than half (46%) of offers written by Redfin agents faced competition in September, the lowest share since the start of the pandemic.


As analysts adjust their numbers for the Q3, the outlook is for lower estimates (but not too much lower)...


Earnings beats are running slightly behind previous periods, but we expected much worse...

So far, fewer companies than usual are beating Wall Street’s earnings expectations. With about 20% of companies in the S&P 500 having reported third-quarter results, 72% have topped analysts’ consensus earnings estimates, according to FactSet. That is below the five-year average of 77%.

Investors are also punishing corporations that miss the mark. Shares of S&P 500 companies that have underperformed Wall Street’s earnings expectations have slipped 4.7% on average in the two days before their report through the two days after, according to FactSet. That compares with the five-year average of 2.2%.


This is a big week with many ginormous names on the reporting calendar. Buckle up!


The CEO of Goldman Sachs is cautious...

"I think it’s a time to be cautious, and I think that if you’re running a risk-based business, it’s a time to think more cautiously about your risk box, your risk appetite. I think you have to expect that there’s more volatility on the horizon now. That doesn’t mean for sure that we have a really difficult economic scenario. But on the distribution of outcomes, there’s a good chance that we have a recession in the United States. That environment heading into 2023 is one that you’ve got to be cautious and prepared for" - Goldman Sachs ($GS) CEO David Solomon

The Transcript

The CEO of Citizens Financial sounds much more optimistic...

[CFG] Reports Q3 $1.30 adj v $1.20e, Rev $2.18B v $2.13Be

  • ROTCE 17.0% v 15.5% q/q
  • Underlying Efficiency Ratio 54.9% v 58% q/q
  • NIM 3.25% v 3.04% q/q
  • Provision for credit losses $123M v $216M q/q
  • Total loans $156.1B v $156.2B q/q
  • CEO: “We continue to capture the benefit of higher rates, with deposit costs under control, higher net interest margin and net interest income. Our balance sheet management strategies have delivered stable deposits and attractive commercial loan growth, while rationalizing selective acquired portfolios and auto. Our integration efforts around the New York Metro acquisitions are progressing well. Credit metrics remain favorable, and we feel well-prepared for changes in the macro environment.


Airline CEOs continue to sound better than anyone. Here is United's...

[UAL] CEO: Not seeing any slowdown in bookings into Q4 despite some economic headwinds - CNBC

  • Hybrid work allows every weekend to be a holiday and it is now the new normal

[UAL] Reports Q3 $2.81 v $2.21e, Rev $12.9B v $12.7Be

  • Guides Q4 Total revenue per available seat mile (TRASM) +24-25% vs 2019, capacity -9-10% vs 2019
  • Operating margin ~10% - TRASM +25.5% vs 2019 - CASM (adj) +11.3% vs 2019
  • Load factor 87.3%, +1.2ppts vs 2019
  • Adj op margin 11.5% v -0.8% y/y v +13.2% in 2019
  • CEO Scott Kirby. "Despite growing concerns about an economic slowdown, the ongoing COVID recovery trends at United continue to prevail and we remain optimistic that we'll continue to deliver strong financial results in the fourth quarter, 2023 and beyond."


American Airlines sounds equally good...

[AAL] Exec: Guides FY23 capacity 95-100% of 2019 levels - earnings call comments

  • See no signs of travel demand slowing into 2023
  • Expect to take delivery of 19 units of 737 Max in 2023, down from 27 deliveries that were previously expected
  • Constraints facing our business today will remain in 2023
  • We will continue to size the airline for the resources we have with a focus on reliability and profitability
  • We are hiring more pilots this year than ever in our history


Pebblebrook Hotel also highlighting the rebounding business travel...

[PEB] Provides operating update: Expects Q3 RevPar and Total Rev to exceed Q3 2019; Notes it has not seen anything that would indicate recession-driven pressures on room night demand, out-of-room spend, or pricing

  • Leisure demand remained strong throughout the quarter and into October
  • For the first time since the pandemic began, on a quarterly basis, the company's Q3 2022 RevPAR and Total Revenues exceeded 2019's Q3 RevPAR and Total Revenues.
  • Business travel demand, both group and transient, continued to recover in September and October to date. Non-room spend continues to impress.
  • We have not seen anything that would indicate recession-driven pressures on room night demand, out-of-room spend, or pricing.
  • We are hiring more pilots this year than ever in our history


Hermes doesn't even know that there is an economic slowdown...

A Birkin bag will cost much more next year, Hermes International said as it provided further signs of the luxury-goods industry’s relative immunity from the cost-of-living crunch.

The French company plans to increase prices worldwide between 5% and 10% in January. This compares with an average increase of around 4% this year, Hermes Chief Financial Officer Eric du Halgouet told reporters on a call after the company posted sales that beat estimates. In previous years, the hike was typically about 2%, he added...

Hermes is maintaining its pricing power because wealthy shoppers are still splashing out on luxury goods, even as household budgets are squeezed by higher energy costs and inflation. The company said Thursday that revenue rose 24% to €3.1 billion in the third quarter, excluding currency swings…

“For the time being, we have no signs of slowdown in any of our markets,” Du Halgouet said. Hermes plans to hire another 800 workers in the second half, roughly the same number as in the first half, a spokeswoman said.

The CFO said the increases are justified due to higher wage and input costs in Europe. Price rises in Japan, following the yen’s depreciation, are likely to be higher than in the US, where the dollar is strong, he added.


Birkin Bags > Rolex?


Amex took up its reserve for future losses but noted that they aren't seeing a slowdown yet...

[AXP] Reports Q3 $2.47 v $2.39e, Rev $13.6B v $13.5Be; Have not seen changes in the spending behaviors of customers

  • Provisions for losses totaled credit $778M v -$191M y/y v -$410M q/q
  • CEO: Our credit metrics also remained strong even as we steadily rebuild loan balances, with delinquencies and write-offs continuing to be low. We have not seen changes in the spending behaviors of our customers, but we are mindful of the mixed signals in the broader economy and have plans in place to pivot should the operating environment change dramatically, as we have done in the past.
  • We continued to see high levels of customer engagement, acquisitions and loyalty across our premium Card Member base, with overall spending up 21 percent (24 percent on an FX-adjusted basis), driven by growth in both Goods & Services and Travel & Entertainment spending.
  • The demand for travel has exceeded our expectations throughout the year, with spending on T&E increasing 57 percent from a year earlier and T&E spending volumes in our international markets surpassing pre-pandemic levels for the first time this quarter, both on an FX-adjusted basis.


In fact, the Amex CEO was very worked up about the strength in his business...

"We're confident. Look, the spending speaks for itself. I mean, just look at some of these numbers. You've got goods and services up 16%. Our US consumer is up 22%. Millennial spending is up 39%. Our T&E spending is up 57%. International spending is 37%. We haven't seen any change -- we're not seeing any changes in consumer spending behavior at all. And look, that's not to say that things may not change, but I can only look at what I'm seeing right now." - American Express ($AXP) CEO Steve Squeri

The Transcript

As for oil services, while the world might have headwinds, Baker Hughes only sees tailwinds...

[BKR] Reports Q3 $0.26 v $0.25e, Rev $5.37B v $5.45Be

  • Orders +3% q/q, +13% y/y
  • CEO: “The macro outlook has grown increasingly uncertain as the global economy is dealing with strong inflationary pressures, a rising interest rate environment, and sizeable fluctuations in global currencies. Despite these economic challenges, we remain positive on the outlook for oil and gas. We believe the fundamentals remain supportive of a multi-year upturn in global upstream spending, and that elevated natural gas and LNG pricing remains constructive for future FIDs. On the new energy front, recent policy movements in Europe and the U.S. are likely to help support a significant increase in clean energy development.”

Post earnings comments:

  • Expect to see double digit up-steam spending growth in 2023
  • Expect supply constraints and production discipline to largely offset any demand weakness
  • Expect global LNG market to further tighten in 2023
  • Expect modest oilfield equipment and services (OFS) growth in North America in 2023


Ditto for Schlumberger...

[SLB] Reports Q3 $0.63 v $0.55e, Rev $7.48B v $7.14Be; Sees Q4 Rev higher and margins q/q

  • Guides Q4 'expect to deliver sequential revenue growth and margin expansion'
  • Raises FY22 Capex $2.2B (prior: $2.0B)
  • Pretax op margin 18.7% v 15.5% y/y
  • Adj EBITDA margin 23.5%, +133bps y/y
  • CEO:“The second half of the year is off to a great start with strong third-quarter results that reflect the acceleration of international momentum and solid execution across our Divisions and areas. . . While concerns remain over the broader economic climate, the energy industry fundamentals continue to be very constructive."


Robert Half is an earnings report that the Fed likes to see...

Robert Half reported weak 3Q results, with a rare across-the-board shortfall in revenue, EBITDA margins and EPS relative to our estimates and consensus. Each segment missed our revenue expectations, with notable underperformance in administrative & customer support temp staffing and Protiviti. RHI is seeing a broad-based slowdown in the pace of client hiring, longer sales cycles, more stringent hiring requirements and weakness among SMBs. We believe RHI's 3Q miss highlights a fundamental and rapid shift in the temp staffing landscape to the downside signaling reduced demand for labor given a macro slowdown, with near-term revenue visibility diminished.

Goldman Sachs

The Fed also likes to see reduced spending and investment activity at Prologis...

[PLD] Reports FFO Q3 $1.73 v $1.71e, Rev $1.75B v $1.13Be

  • Trims FY22 core FFO $5.12-5.14 v $5.12e; Affirms occupancy 97.25-97.75%
  • Cuts FY22 Realized development gains $400-500M (prior $750-850M)
  • Cash SS NOI +9.3% y/y
  • Occupancy 97.7%
  • CFO:"Our record results for the quarter point to the continued strength of our business; however, given the impact of aggressive Fed tightening and the rapid change in market sentiment, we will run our company assuming an economic slowdown. We have built our portfolio to outperform and our balance sheet to be resilient throughout cycles - we view this as a time of opportunity. We will remain patient to capitalize on growth opportunities as they emerge."


Netflix beats and notes that the competitive environment may be getting more rational...

[NFLX] Reports Q3 $3.10 v $2.11e, Rev $7.93B v $7.85Be

  • Total streaming paid net adds 2.41M v -970K q/q v +1Me forecast
  • As it’s become clear that streaming is the future of entertainment, our competitors – including media companies and tech players – are investing billions of dollars to scale their new services. But it's hard to build a large and profitable streaming business – our best estimate is that all of these competitors are losing money on streaming, with aggregate annual direct operating losses this year alone that could be well in excess of $10 billion, compared with our +$5-$6 billion of annual operating profit. For incumbent entertainment companies, this high level of investment is understandable given the accelerating decline of linear TV, which currently generates the bulk of their profit.


Winnebago sees a slowdown...

[WGO] CEO: Looking for 2023 industry RV shipments of 400-410K units, down from 490-500K y/y - conf call


A big auto lender is showing signs of much higher losses...

[ALLY] Reports Q3 $1.12 adj v $1.73e, Rev $2.09B v $2.15Be

  • Retail auto net charge-off rate of 1.05%, +78bps y/y
  • CEO: Financial results were partially depressed this quarter as a result of an impairment on a non-marketable equity investment related to our mortgage business, impacting $0.33 of EPS, and higher provisions as a result of loan growth in auto finance and a larger coverage build to ensure the company remains protected as recessionary conditions feel more likely to occur in the coming months. 


Lower auto prices and higher losses are reflected in many 52-week low stock prices...

Now compare to what stocks are at 52-week highs. Like Energy...

And Healthcare...

And defense/aerospace. Also auto parts...

Carnival put up the ships, but it moved a lot of bonds last week...

Carnival has borrowed $2bn through a bond offering that used a dozen of its ships as collateral, as it works to refinance its huge debt pile amassed during the pandemic.

The world’s largest cruise operator was able to borrow more than the $1.25bn it had initially planned to raise and at a lower interest rate than Carnival was prepared to stomach just hours earlier, according to two people briefed on the deal.

The new debt was discounted and priced with a coupon of 10.375 per cent, offering a yield to investors of 10.75 per cent. That was markedly below the 11.5 per cent yield bankers had marketed to credit investors on Tuesday morning, with the company citing “strong investor demand” for the bonds.

The issuance is the company’s first foray into the junk bond market since May, when a 10.5 per cent bond coupon spooked the stock market...

As part of the bond deal, Carnival’s parent company has transferred 12 vessels, most of which became operational in the past two years and have a combined value of $8.2bn, to a subsidiary which ultimately issued the bond, using the ships as collateral.

Financial Times

If the U.S. Treasury market continues to decline, the Navy might have to put up some ships as collateral...

@charliebilello: The 10-Year US Treasury bond is on pace for its worst year in history with a loss of 19.5%.

But was that a selling flush on Friday? Maybe a short-term bottom is near?

@hmeisler: Some pretty high volume in TLT on Friday.

Main Street is about to lap Wall Street...

U.S. retirees with a fixed-rate mortgages should be feeling very good right now...

For the first time since before the 2008 financial crisis, investors are finally able to earn some yield. Just look at how much yields have risen across the maturity spectrum for U.S. government bonds in the past year:

A Wealth of Common Sense

Equally happy would be the 32 million U.S. homeowners who do not have a mortgage and who will not be seeing rising rents...

@JosephPolitano: Pretty wild that 40% of homeowners have no mortgage, just have fully paid the thing off.

If bond yields don't correct, this headwind for stocks will continue...

@carlquintanilla: B of A: “UST 2-year yield now 280bp higher than $SPX div yield, widest since '07; investor flooding to short-duration bonds .. massive & accelerating B of A private client inflows to bonds .. past 4 weeks 36% into T-bills, 30% into CD’s, 22% into T-notes, 20% into debt ETF’s.”

Great work by Michael Cembalest here...

When bear markets occur and the investment mistakes of the prior cycle are revealed, bearish investment commentary tends to intensify. There is a confessional, self-flagellating quality to some of this research, as if its authors are trying to atone for having missed the signals and risks during the prior boom. I read around 1,500 pages of research each week and the most consistent message now is a litany of gloom on earnings, valuations, wage and price inflation, Central Bank policy normalization, housing, trade, energy, the surge in the US$, China COVID policy, etc. I am not saying that these things are not important, since of course they are (see Appendix charts). But for investors, there is a remarkable consistency to the patterns shown below: equities tend to bottom several months (at least) before the rest of the victims of a recession.

Let’s start with the Eisenhower recession, which is notable for the lack of monetary and fiscal stimulus deployed in what at the time was a pretty severe recession. Equities bottomed in December 1957, while earnings did not bottom until a year later. GDP and payrolls also didn’t start to improve until the middle of 1958. You will see the same pattern during the 1970’s stagflation, the 1980’s double dip recession, the S&L crisis of the 1990’s, the Global Financial Crisis and the COVID pandemic.

J.P. Morgan

Many signs pointing towards a bottom as Ryan notes here...

DOW crushing the Nasdaq like the Astros ran past the Yankees...

@lhamtil: ~10 months through the year and it looks like this might be the best relative year for the Diamonds vs the QQQs since 2002

Of course. Helping the Dow are the energy names...


And as Barron's notes, these are not your dad’s energy names...

"Already, the transition is well under way. Renewable energy could account for 60% of power generation in Western Europe and 35% in the U.S. by 2030, up from 35% and 23%, respectively, according to S&P Global Commodity Insights. Companies everywhere are rushing to keep pace: Total capital investments in renewables in 2022 are on track to exceed oil and gas investments for the first year ever, according to Rystad Energy, a research firm based in Norway."


Why it continues to make sense to be overweight energy companies in your public equity and credit portfolios...

As long as the political and environmental pressures remain on oil and gas companies to not explore, drill and refine carbon molecules, then there will remain a shortage of oil and gas for planet earth's daily uses. Someday, we will have the solar, wind and nuclear resources to generate enough electricity to power the majority of carbon fuel users today. But it will take a few more years. In the meantime, the public energy industry will generate excess free cash flow which most players are investing to transition to clean energy. They are also returning a lot of cash to their investors. Ignore the ongoing political attacks, find your favorite management teams and settle in for the long haul.

Financial Times

No love for Chinese stocks...

US listed China stocks BABA, BIDU, JD, PDD, NTES and others tumble after the Hang Seng tumbled over 6% or 1,000 points overnight as investors dumped Chinese assets after Xi Jinping's new leadership team raised fears growth will be sacrificed for ideology-driven policies.

Hammerstone Report

But as Gavekal noted last week, there was even less discussion about the economy, reform and the markets in Xi's report to Congress...

@andrewbatson: Word counts are an admittedly simplistic tool, but I do think these accurately capture the drift of both official rhetoric and actual policy in China over the past 15 years. Xi's message is not hidden but out there in the open.

We might have to go back to 2009 to find a time when most all of the GMO expected returns were positive...

@Callum_Thomas: GMO expected return forecasts for US equities turned positive in September (n.b. they been negative for a long time).

Expect many more public companies to become private companies...

Three-quarters of large US companies that went public during the pandemic bull market are trading below their offering price, forcing some once-promising names back into private hands at fire-sale valuations.

Of more than 400 listings where companies raised at least $100mn between 2019 and 2021, 76 per cent are below the price at their initial public offering, a Financial Times analysis of Dealogic data shows. The group’s median return since their respective IPO dates is negative 44 per cent.

The laggards include such-hyped stocks as Robinhood Markets, Lyft and DoorDash, all of which went public during a market boom that ended in late 2021. The Nasdaq Composite index that contains many growth companies has fallen 32 per cent this year.

With share prices plunging, private equity groups are aggressively circling newly public companies as potential buyout targets, several Wall Street executives said. And some corporate boards have been receptive.

“When you think about the amount of private capital that has been raised that hasn’t been deployed, then look at how public equity valuations have re-rated, it feels like it’s going to be a natural pairing up,” said David Bauer, who runs equity capital markets at KKR, the investment group known for its private equity business...

With the Federal Reserve committed to raising interest rates and the economy seemingly headed for a recession, directors and shareholders of many businesses better known for breakneck revenue growth than profitability will face agonising choices over whether to accept offers from private equity firms or deep-pocketed strategic rivals looking for bargains...

As the stock market sells off indiscriminately, investors are trying to differentiate between target companies with a promise of profitability and those that simply surfed the pandemic market frenzy to achieve a listing...

Bauer said there was a split between companies that went public too early and face questionable business models and those that have a long-term future but “don’t want to have to work through growing back into those earlier valuations as public companies and would rather do it in a private context”...

“It’s really hard to be a public company these days,” said one prominent private equity investor. “Good news falls by the wayside and bad news is punished. It is the worst of both worlds.”

Financial Times

Even the technology giants are finding an increase in hostility from Wall Street these days...

Activist hedge fund Starboard Value has taken a stake in Salesforce and is calling for the cloud software group to increase its margins, arguing that the company has not taken advantage of its position as a market leader.

The $8.4bn New York-based fund, led by Jeff Smith, set out its argument in a presentation published on Tuesday. It attributed Salesforce’s valuation discount relative to its peers to a “subpar mix of growth and profitability”.

“The company’s share price has underperformed its benchmark indices, its closest peers, and the broader market over the last three years,” the hedge fund wrote in a presentation.

Financial Times

Secondary funds are the opportunistic investors in the private market world...

Volatility in the public equity and debt markets can create situations that force investors to re-adjust their portfolio allocations. You have no doubt been reading about different situations across multiple asset classes that have caused forced selling by investors who own too much of one asset class or don't have enough liquidity in another. Volatile windows like todays can create opportunities for the buyers of forced sale assets.

One area of the financial world that is finding good places to deploy capital today is the asset class of Secondary Private Market funds. Difficult investment periods like the COVID-19 meltdown of 2020 and the global financial crisis of 2008 provided opportunities to buy secondary market assets at very attractive valuations. The current environment could provide another opportunity. 

(Source: Hamilton Lane Data via Cobalt)

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Strategy Definitions

Venture Capital: Venture Capital incudes any PM fund focused on any stages of venture capital investing, including seed, early-stage, mid-stage, and late-stage investments.

Growth Equity: Any PM fund that focuses on providing growth capital through an equity investment.

SMID Buyout: Any buyout fund smaller than a certain fund size, dependent on vintage year.

Mega/Large Buyout: Any buyout fund larger than a certain fund size that depends on the vintage year.

Real Estate: Any closed-end fund that primarily invests in non-core real estate, excluding separate accounts and joint ventures.

Secondary FoF: A fund that purchases existing stakes in private equity funds on the secondary market.

Infrastructure: An investment strategy that invests in physical systems involved in the distribution of people, goods, and resources.

Credit: This strategy focuses on providing debt capital.

Private Markets: Hamilton Lane’s definition of “All Private Markets” includes all private commingled funds excluding fund-of-funds, and secondary fund-of-funds.

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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