Weekly Research Briefing: Towering New Heights

January 23, 2024

All-time new highs in the S&P 500 on Friday as the market finally broke through its previous peak from two years ago. There were many contributors to the market's good mood, but Taiwan Semiconductor's earning results and forward outlook was a big catalyst. TSMC is the big manufacturer for many of the top fabless chip companies. So, when TSMC gives increased confidence in their outlook, the world of investors listens closely. And last week, TSMC waved the big green flag.

Joining the Taiwan Semi news was a continued stream of good and improving data for the economy. More falling inflation datapoints in residential rental prices and used car prices. Weekly jobless claims fell to their 2nd lowest level since 1969. Walmart said that it is raising store manager pay by +9.4%. December retail sales crushed the estimates. University of Michigan consumer sentiment surveys surged on Friday. Pending home sales posted their 2nd biggest jump in two years. Now it is time for earnings estimates to stop falling and move higher. With 70% of the S&P 500 companies reporting over the next two weeks, let's see how forward estimate revisions move. Stock prices have moved in anticipation of rising 2024 and 2025 estimates, but now it is time to begin delivering those better numbers.

This week, we will be watching Friday's December PCE inflation figures, Thursday's 4Q23 GDP report, and earnings from 40% of the S&P 500. Expect the ramp in IPO filings to increase as private companies take advantage of the new public market highs. The momentum in the mergers and acquisition activity should continue as rebounding credit markets are allowing corporations to borrow at tight spreads while even leveraged lending is finding several checkbooks lining up. Could good times be here again? Stay tuned. Have a great week.

The S&P 500 recorded its first record close in two years on Friday...


Mega-cap tech continues to count for most of the big indexes move...

@bespokeinvest: As of January 19th, NVIDIA $NVDA and Microsoft $MSFT had accounted for about 75% of the S&P 500's gain this year, while the 20 largest stocks in the index accounted for 110% of the index's upside move. The remaining ~480 stocks were acting as a drag.

But still plenty of other stocks hitting new all-time highs as of Friday's close (which hit 75 stocks)...

As you can see in the list below, plenty of technology names, but there is plenty of diversity in this list through the Financials, Consumer Discretionary, Healthcare, and Industrial sectors. At the time of this writing, Monday's list was almost 50% larger running through 110 names.


An interesting map of the market by forward P/E multiple...

Some pockets of green (cheaper P/E stocks) that could become the next market leaders if the market broadens out. And yes, I double checked, BMY does trade at less than 7x 2024 earnings estimates. Patent cliffs are no fun for big pharma stocks.


Solid jobs and wages, falling prices and a strong stock market are now making its way through the consumer sentiment surveys as Friday's results showed...

The University of Michigan’s index of consumer sentiment jumped up 9.1pt to 78.8 in the January preliminary report, well above consensus expectations for a 0.4pt increase. This was the strongest reading since July 2021 and—after rising 8.4pts in December—the largest two-month increase since 1991. The survey's current economic conditions (+10.0pt to 83.3) and consumer expectations (+8.5pt to 75.9) components both rose.

Commentary from the University of Michigan indicates that sentiment improvement was broad based and was supported by both confidence that inflation has turned a corner and by strengthening income expectations. They also noted that Democrats and Republicans alike showed their most favorable readings since summer of 2021 and that sentiment is now just 7% below the historical average since 1978.

Goldman Sachs


Here is a great survey statistic showing that consumers are feeling better than pre-COVID about their current probability of income for retirement...

The Daily Shot

So, with consumers feeling much improved, the December retail sales report topped expectations last week...

The Daily Shot

And just in time for the spring selling season, Fannie Mae released its improved outlook for mortgage rates...

Following the Fed "pivot" in December, an anticipation of more dovish policy, and the recent decline in interest rates, our mortgage rate forecast has been revised meaningfully lower this month. We expect the FRM30 rate to average 6.1 percent in 2024 and 5.6 percent in 2025.

Fannie Mae

Lower rates have made builders more optimistic which tends to lead to a rise in new home sales...

@RenMacLLC: Homebuilders feeling better about the outlook. Single-family new home sales will likely advanced in the next few months. The NAHB Housing Market Index future sales (next six months) sub-index advanced to 57 in January, the highest level since July 2023.

Manufacturing surveys remain a mixed bag. But even inside the Philly Fed, many positives arose last week...

The Philadelphia Fed manufacturing index increased by 2.2pt to -10.6 in January from a downwardly revised -12.8 in December, below consensus expectations for a larger increase. The composition of the report was strong, however, as the new orders (+4.2pt to -17.9), employment (+0.7pt to -1.8), and shipments (+5.0pt to -6.2) components all increased. The prices paid (-13.0pt to +11.3) and prices received (-5.9pt to +6.3) measures both declined.

Goldman Sachs

Now here is a great example of the falling PPI dynamic in action at Pittsburgh Plate Glass Company...

PPG's Q4 margins expanded +260 basis points on 4% sales growth. Now let's see what they will do as input prices accelerate lower. The stock price reaction to last week's earnings tells me that PPG will be forced to cut prices and pass along the falling raw material costs. More good news for car and paint buyers, as well as the Fed.

PPG Investor Relations

But not all companies will cut their prices as input prices and wages retreat which will push their margins higher...

Through the lens of our margin model, upside risk to S&P 500 ROE could materialize in 2024 if EBIT margins benefit from faster cooling of input costs. Changes in margins have historically tracked the relationship between inflation and unit labor costs (Exhibit 5). If input costs, including wages, decline at a faster pace than prices charged, then EBIT margins could expand by more than currently forecast. A cooler PPI print in December reflects the ongoing trend of decelerating input costs.

Goldman Sachs

The beige book reporting on the Fed's 12 bank districts looked solid...

In a word, the report was boring. But in a good way. The report shows that U.S. economic growth is moderating, but not falling off a cliff. The Beige Book release revealed that economic activity moderated nationwide in recent weeks, especially compared to the blowout growth seen over the summer. Eight of the 12 federal bank districts reported little or no change in economic activity since the last report published in December. Of the four districts that differed, three reported modest growth and one (Boston) reported a moderate decline.

Manufacturing activity decreased in nearly all districts, but consumer spending "delivered some seasonal relief over the holidays by meeting expectations" in most districts. Three districts, including New York, noted strong holiday spending. That certainly seems to back up today's retail sales report.


Our first look at the U.S. Q4 2023 GDP drops this week...

The Atlanta Fed GDPNow model is pointing to a +2.4% figure. The average economist estimate is closer to 1.5%.

Latest estimate: 2.4 percent -- January 19, 2024

The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the fourth quarter of 2023 is 2.4 percent on January 19, unchanged from January 18 after rounding. After this morning's existing-home sales report from the National Association of Realtors, the nowcast of fourth-quarter real residential investment growth decreased from -0.4 percent to -0.6 percent.

Atlanta Fed

The bond market retreated last week as some investors believed that the economy was too strong for the Fed to cut rates...

But keep in mind that inflation is falling faster than whatever the economy is doing right now. Imagine if the economy begins to print some negative prints when the shelter components rollover. How could anyone justify keeping the Fed Funds rate above 5%? Here are Goldman's thoughts:

Rate cuts are fast approaching:

  • Despite a modest bump in December, inflation news remains very favorable, with global core inflation averaging just 2.0% annualized over the last 3 months.
  • The US has led the way on disinflation, and we now expect that core PCE inflation will average just 1.9% annualized over the 6 months through December.
  • With the labor market and inflation expectations also back in balance, we expect the Fed to start cutting the funds rate soon, probably in March.
  • We expect consecutive 25bp cuts in March, May, and June, followed by quarterly cuts from Q3 onwards (for a total of 5 cuts in 2024).
  • We expect both the ECB and the BoE to closely follow with per-meeting cuts beginning in Q2, and to cut by 150bp each this year.

Goldman Sachs

As of Monday, the market is thinking no Fed cut next week, then a coin flip for a cut in March...

Still looking for a 4% Fed Funds rate by year end 2024.

CME Group

Commercial bankruptcies remain subdued...

Goldman Sachs

As a result, investors continue to pour money into fixed income and credit fund vehicles...

@GunjanJS: Huge inflows to high-grade corp debt to kick off the year, sending spreads close to the tightest levels since the 2008 global financial crisis. HG bond spreads at 110bp are just 2bp wide to the post-GFC tightest level. We’re not saying this is a floor for spreads, but it does highlight just how much good news is priced into the market currently" --JPM

Investors into high grade credit have pushed yield spreads to two-year lows...

Note that this credit spread chart is just an inverse of the S&P 500 chart.

The Daily Shot

Issuers see the ravenous demand for corporate credit and have their bond issuance machine operating at 100% right now...

If you are an investment grade CFO/Treasurer with a balance sheet need, or have an acquisition locked and loaded in the barrel, then you are probably talking to a banker this week.

US corporate bond markets are “on fire” as companies have sold a record $150bn of debt since the start of this month, the busiest opening to the year for more than three decades.

Investment-grade groups have issued $153bn worth of bonds this month, according to data from London Stock Exchange Group, the highest year-to-date figure for dollar-denominated debt in records going back to 1990.

Borrowers are rushing to lock in lower interest costs, while investors are keen to buy new bonds before policymakers start cutting US interest rates later this year.

“The market is just on fire,” said Richard Zogheb, head of global debt capital markets at Citi.

Financial Times

Even buyout lending is seeing increased activity with some former players (banks) rejoining the discussions...

Direct lenders are vying with banks to finance a potential buyout of DocuSign Inc. with a debt package totaling as much as $8 billion, according to people with knowledge of the matter...

The proposed loan would be the largest ever direct-lending deal by roughly $3 billion, according to data compiled by Bloomberg, and comes at a time when the competition between banks and direct lenders is reaching a fever pitch.

Conditions in the broadly-syndicated loan and junk-bond markets — where private equity firms have traditionally looked to finance multi billion-dollar buyouts — have improved in recent months, in part due to mounting speculation the Federal Reserve’s aggressive interest-rate hiking cycle is over. That could make a debt package arranged by banks more attractive compared to private credit and increase the rivalry between the two sets of lenders.


Now onto earnings, when a $500b mkt cap company beats numbers and its stock pops up 10%, we want a closer look...

Also, TSMC is a leading semi manufacturer for many of the top fabless companies (Apple, AMD, Broadcom, NVIDIA) so we want to pay close attention to how they are doing. What we see is healthy inventories, solid foundry revenue guidance of 20%, good gross margin guidance and increased contribution from AI into the future. With the stock trading at a mid-teen’s P/E, any forward guidance increase drops right into the stock price which is what happened last week.


Cloud hardware company Super Micro reported great numbers and outlook last week...

Super Micro is important because it is the single largest weighting in the Russell 2000 index...

The largest component in the IWM now has a market cap greater than $22b. Expect SMCI to get a call up into the Russell 1000 at the next meeting. So, if you run large cap money, grab the earnings release for your next train ride home.


Some other key points from earning releases and calls last week give us a few more datapoints to chew on for the general economy and our reads on credit...

Fastenal with double beat. "We experienced higher unit sales in Q4 2023 primarily due to growth at our Onsite locations, particularly those newly opened in 2023 and 2022, and with large customers"

JB Hunt misses EPS, beats on revs. "YoY demand trends for our intermodal service improved throughout the quarter largely driven by seasonal activity, that was absent in the prior-year period, and strong performance by our rail providers during the quarter"

"Credit quality remains strong...Modest net charge-offs of 15 basis points remained below our normal range…We observed some normalization in general middle market and corporate banking as rates pressured customer profitability. These normalization trends drove a slight increase in the allowance for credit losses to 1.40% of total loans. Non-performing assets increased, but still remain historically low." - Comerica Incorporated CFO Jim Herzog

Credit quality metrics were flat quarter-over-quarter, with criticized commercial and non-accrual loans at very low levels. As mentioned in the mid-quarter update, charge-offs began to normalize in Q4, but we still see no significant weakening in any portfolio sector." - Hancock Whitney CEO John Hairston

"Credit outlook continues to track expectations. CRE general office is being carefully managed. Losses are being absorbed in net charge-offs. It's relatively predictable with few surprises so far. Away from that, credit quality is strong." - Citizens Financial Group CEO Bruce Van Saun

The Transcript

This is a very big week with nearly 40% of the major index reporting numbers...


Last week's earnings also gave us insight into how the capital markets are improving...

"Corporate confidence will ultimately drive the cycle forward, and we are encouraged that CEO and boardroom optimism is growing evidenced by the build of our advisory and IPO pipeline." - Morgan Stanley CFO Sharon Yeshaya

"I'm encouraged by capital markets activity. I'm not going to say it's running back to 10-year averages right away, but it has materially improved. I do think you're going to see some more meaningful IPOs in 2024, and we are just across debt and equity issue and see more activity, more engagement. At the end of the day, people had done a lot of funding that takes them out for a period of time, but they've got to start thinking about their capital structures and accept the reality of the market, and we're seeing that come through." - Goldman Sachs CEO David Solomon

"It's not just private equity and venture -- private credit is booming. And for every bank that complaints about what's going to happen with regulation and the fact that it's pushing activity out of the banking system that's going right into the private credit area, and we should be the beneficiary of that growth." - State Street CEO Ronald O’Hanley

The Transcript

Speaking of M&A, another small-cap Russell 2000 company exits the stage to the far, far left...

Sekisui House Ltd. announced a $4.9 billion agreement on Thursday to buy MDC Holdings Inc. — a purchase that will help it meet a key target in its ambitions to diversify beyond Japan. It’s likely the biggest US purchase of a homebuilder by a Japanese company, according to investment banker Margaret Whelan...

Sekisui House Chief Executive Officer Yoshihiro Nakai said at a briefing Thursday that the company was done with large-scale acquisitions for the time being. Since 2017, the Osaka-based company has snapped up US builders including Woodside Homes, Holt Homes and Chesmar Homes. Other large Japanese builders like Daiwa House Industry Co. and Sumitomo Forestry Co. have also been active in the market in recent years.

Shares of Sekisui House rose as much as 2.9% on Friday morning in Tokyo. The stock has gained 40% in the past year. MDC closed up 18% in New York Thursday.

As part of the Sekisui deal, MDC shareholders will receive $63 a share, or about 19% more than the closing price on Wednesday. The purchase, slated to close in the first half of this year, will give Sekisui House operations in heavily populated states including California, Texas and Florida.


And a $2b market cap energy pipeline company looks to merge into the $6b market cap Sunoco LP...

Sunoco, a U.S. distributor of fuels, agreed to merge with NuStar Energy in an all-stock deal valued at $7.3 billion.

NuStar shares jumped 22% in premarket trading to $21.95. Sunoco stock slipped 2.7%. Coming into the session, Sunoco had gained 30% over the past 12 months. NuStar is a liquids terminal and pipeline operator.

Sunoco said it has secured a $1.6 billion bridge loan to help the transaction, which it expects to close in the second quarter.


In other words, if the public market is going to ignore all our hard work, then we are going to take our company private and share the upside with some private investors who do value our progress...

The market cap has been cut by two-thirds since 2018 to $650m so a growth-oriented defense and aerospace PE firm is helping management to go private while the public stock indexes plow into the Magnificent Seven.

Kaman Corp. (NYSE:KAMN) (“Kaman” or the “Company”) today announced that it has entered into a definitive agreement to be acquired by Arcline Investment Management, L.P. (“Arcline”), a growth-oriented private equity firm with deep experience investing in technology-driven, meaningful-to-the-world industrial businesses, in an all-cash transaction with a total enterprise value of approximately $1.8 billion. Upon completion of the transaction, Kaman will become a privately held company.

Under the terms of the agreement, Kaman shareholders will receive $46.00 per share in cash. The per share purchase price represents a premium of approximately 105% over Kaman’s closing share price on January 18, 2024, the last full trading day prior to the transaction announcement, and a premium of approximately 110% over the volume weighted average price (VWAP) of Kaman common stock for the 90 days ending January 18, 2024.

“Following robust engagement with Arcline and careful evaluation of other potential value creation opportunities, we are pleased to have reached this agreement,” said Ian K. Walsh, Kaman Chairman, President and Chief Executive Officer. “Given the rigorous review of alternatives we recently completed, we are confident this transaction maximizes value for shareholders and is in the best interest of Kaman as well as our employees, customers and other stakeholders.”

Mr. Walsh continued, “Over the last several quarters, we have made significant progress executing our strategy by transforming our portfolio, through investing in innovation, pivoting to new growth technologies, and optimizing the Company’s cost structure. Arcline recognizes the strength of Kaman’s leadership and team, product portfolio and outstanding employees, and we look forward to benefitting from increased resources, expertise and flexibility as a private company post-closing. We thank Kaman’s many valued employees for helping us reach this important milestone in the Company’s history.”...

Kaman Corporation, founded in 1945 by aviation pioneer Charles H. Kaman, and headquartered in Bloomfield, Connecticut, conducts business in the aerospace & defense, industrial and medical markets. Kaman produces and markets proprietary aircraft bearings and components; super precision, miniature ball bearings; proprietary spring energized seals, springs and contacts; wheels, brakes and related hydraulic components for helicopters, fixed-wing and UAV aircraft; complex metallic and composite aerostructures for commercial, military and general aviation fixed and rotary wing aircraft; safe and arming solutions for missile and bomb systems for the U.S. and allied militaries; subcontract helicopter work; restoration, modification and support of our SH-2G Super Seasprite maritime helicopters; support of our heavy lift K-MAX® manned helicopter; and development of the KARGO UAV unmanned aerial system, a purpose built autonomous medium lift logistics vehicle.


And in the world of real estate, Blackstone increases its presence in North American single-family rentals in buying Tricon Residential for $3.5b cash at a 30% premium to its pre-deal close...

[TCN] Blackstone to take Tricon Residential Private at $11.25/shr in cash, valuing it at $3.5B - Announced that they have entered into an arrangement agreement under which Blackstone Real Estate Partners X together with Blackstone Real Estate Income Trust, Inc. (“BREIT”) will acquire all outstanding common shares of Tricon (“Common Shares”) for $11.25 (approximately C$15.17) per Common Share in cash. The Transaction price represents a premium of 30% to Tricon’s closing share price on the NYSE on January 18, 2024, the last trading day prior to the announcement of the Transaction, and a 42% premium to the volume weighted average share price on the NYSE over the previous 90 days, and equates to a $3.5 billion equity transaction value based on fully diluted shares outstanding.


Came across this chart over the weekend to remind us of the attractiveness of investing outside of the public markets...

(Merrill/BofA. Data as of September 30, 2023, spanning 07/01/2005 – 09/30/2023. Sources: Bloomberg, Refinitiv EIKON, eVestment, Cliffwater, National Council of Real Estate Investment Fiduciaries (NCREIF).)

If you need some materials or insights into the private markets, I know a good resource...

Hamilton Lane

I am a massive fan of plug-in hybrid cars...

30 free miles on every charge suits me for all my daily driving and works for any vacation where you can plug in overnight. Renting Chrysler hybrid minivans on the family vacations made me a believer in the halfway transition. And sorry, but I do not have time to worry about charging stations on a long trip. Someday the U.S. will be built out with charging station that work 100% of the time, but until then, give me a plug in.

As Teslas and other electric vehicles dazzled car buyers with futuristic technology and dreams of a gasoline-free future, hybrid cars began to seem like yesterday’s news. Sales of the Toyota Prius, the standard-bearer for hybrids, fell 85 percent over a decade.

Now, a slowdown in the growth of electric car sales has led General Motors, Ford Motor and Volkswagen to walk back ambitious targets for those vehicles. And sales of hybrids are robust, underscoring what may be the enduring reality check of 2023: Many Americans are hugely receptive to electrification, but they’re not ready for a fully electric car...

Americans bought a record 1.2 million electric vehicles last year, a gain of about 46 percent and a 7.6 percent share of all new car sales, according to Cox. But hybrid sales rose even faster, up 65 percent to more than 1.2 million, lifting their market share to 8 percent from 5.5 percent, according to Edmunds. Throw in plug-in hybrids, and nearly one in 10 new cars pairs a gasoline engine with electric motors to save fuel and boost performance.

NY Times

And if you think that your only option for a plug-in hybrid is a minivan or a Prius, then you have no idea on what you are missing...

This is Porsche's newest entry. And BMW is killing it with the X5.


SI's final pitch...

Many of us in the financial services industry attribute their love of numbers and statistics to some early relationship with sports. For me it was studying the local paper's daily box scores and inhaling the weekly stories in Sports Illustrated. The U.S. Department of Education probably owes something to SI just for elevating the literacy of all boys for the last 70 years because if not for their magazine, we would not have read anything outside of schoolwork. Henry Luce saw the future in sports writing and created the giant that had no competition until broadband became pervasive and SI faced unlimited competition. Thanks for all of the ink.

There was no large-base, general, weekly sports magazine with a national following on actual active events. It was then that Time patriarch Henry Luce began considering whether his company should attempt to fill that gap. At the time, many believed sports was beneath the attention of serious journalism and did not think sports news could fill a weekly magazine, especially during the winter. A number of advisers to Luce, including Life magazine's Ernest Havemann, tried to kill the idea, but Luce, who was not a sports fan, decided the time was right.

Many at Time-Life scoffed at Luce's idea; in his Pulitzer Prize–winning biography, Luce and His Empire, W. A. Swanberg wrote that the company's intellectuals dubbed the proposed magazine "Muscle", "Jockstrap", and "Sweat Socks". Launched on August 9, 1954, it was not profitable (and would not be for 12 years) and not particularly well-run at first, but Luce's timing was good. The popularity of spectator sports in the United States was about to explode, and that popularity came to be driven largely by three things: economic prosperity, television, and Sports Illustrated.

The early issues of the magazine seemed caught between two opposing views of its audience. Much of the subject matter was directed at upper-class activities such as yachting, polo and safaris, but upscale would-be advertisers were unconvinced that sports fans were a significant part of their market.


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