Private Wealth

Weekly Research Briefing: Trees, not the Forest

April 25, 2023

This week is all about the micro, not the macro. With 35% of the S&P 500 companies representing 45% of the index market cap reporting this week, we are going to get data and outlooks from every sector of the economy. So far, the numbers that we have seen have painted a picture that was a bit darker, which we expected. The lack of future earnings reductions and earnings increase has placed investors in a holding pattern. And thus, the lack of new volatility has actually held stocks near the pre-SVB highs. We had some clunker reports like CDW, Tesla, Seagate and AT&T, but we also had upside surprises from Snap On tools, Lam Research, and Intuitive Surgical. All in all, the totals look better than expected, especially at the EPS line. Also, good news out of the banking sector where it appears that deposit withdrawals have continued to subside.

Economic data reports remain equally mixed as a weaker top line Philly Fed report offset last week's very strong Empire State report. Are the manufacturers' end markets that different or is this still a Super Bowl thing? The Sixers are looking great along with the New Orders component of the Philly Fed. So look forward, not backward. Elsewhere, the housing data continues to look as strong as can be given the lack of homes available for sale. The markets are still betting on a +25bp rate hike by the Fed next week. All eyes will be looking for indications of a pause in future rate hike activity.

Enjoy the busy week of earnings. Time to test the strength of many of these trees that make up this forest that we are invested in.

What banking crisis? Flash U.S. PMI data for April shows activity expanding to multi-quarter highs...

@carlquintanilla: JPMORGAN: “The April flash #PMI showed unexpected and broad-based improvement.. suggesting further positive momentum in the US economy .. a more sustained pace of expansion .. tighter monetary and credit conditions do not appear to be significantly slowing activity at this time.”

Empire Fed > Philly Fed. But why?

@LizAnnSonders: Widest gap on record between @philadelphiafed (blue) and Empire (orange) manufacturing indexes, as former continued to sink in April while latter soared

Excluding the top line figure, the Philly Fed report looked quite good for April...

The Philadelphia Fed manufacturing index fell by 8.1pt to -31.3 in April, against expectations for an increase. However, the underlying composition of the survey appeared stronger than the headline index—which is a single, subjective question about “general business conditions” that can underperform reality when sentiment is poor—suggested. The shipments (+18.1pt to -7.3), new orders (+5.5pt to -22.7), and employment (+10.1pt to -0.2) components all increased, and a version of the index adjusted to match the ISM methodology increased by 2.8pt to 42.2. The prices paid measures fell by 15.3pt to +8.2—the lowest level since June 2020—and the delivery time component edged down 0.7pt to -25.0—the lowest level since March 2009. The 6 months-ahead business conditions index increased by 6.5pt to -1.5.

Goldman Sachs

Well respected strategist gets passive-aggressive toward Fed officials...

@EconguyRosie: Question for Jim Bullard: Do you see inflation in this chart? I’ll answer it for you. The Philly Fed prices-charged index came in at -3.3, the first dip into deflation since May 2020. But hey – keep on hiking! I’ll just buy more long bonds.

When a top player in credit and real estate speaks, we listen...

Blackstone president Jonathan Gray said that while the Fed would probably hold off from further interest rate rises because of cooler inflation, financial markets have overpriced the odds of the central bank reducing the cost of borrowing.

“The Fed is likely to pause or maybe go 25 basis points higher from here, but I think they’re unlikely to pivot as quickly as the market is expecting,” he told the Financial Times in an interview.

He added that the Fed would “hold rates at an elevated level for an extended period of time” to stamp out remaining inflationary pressures…

“I think inflation is definitely cooling. It is increasingly in the rear-view mirror and we see it in our portfolio companies,” Gray said. US inflation has eased to its lowest level in nearly two years, with the consumer price index for March up by 5 per cent year on year.

Financial Times

With less than 1/5th of the S&P 500 reported, the market appears content to see earnings outlooks maintained...

Earnings Scout

Barron's asks if the worst for the economy is in the rear-view mirror...

And for the moment, first-quarter reporting season appears to be going swimmingly. Earnings from S&P 500 companies that have reported have come in almost 5% above analysts’ estimates as of Friday, according to Evercore. While those that have topped their numbers are getting rewarded, those that miss aren’t being punished all that much. Companies that have announced earnings and sales that beat expectations have gained 2.3%, versus an average advance of 1% over the past five years. A double miss has resulted in a mere 1.8% drop, versus an average 2.9% decline.

That could be a sign that the worst for the economy is actually over. And that possibility—for the moment, at least—is showing up in analysts’ forecasts. About 76% of companies in the MSCI USA Index have seen upwardly revised earnings estimates for the next year, according to Ned Davis Research. That’s the highest level in 10 months and up from a recent low of just under 60%, and it could be a sign that estimates have bottomed and are ready to rebound.

“The increasingly positive revisions rate makes it more likely that, after close to two years of increasingly pessimistic earnings sentiment, investors will buy on expectations of better earnings ahead,” writes Tim Hayes, chief global investment strategist at Ned Davis Research.


But this is a massive week for earnings. Next week's storyline could be very different from today. Stay tuned...


The 3rd and 4th largest S&P 500 stocks are both at interesting levels on the chart and reporting this week...

A big break higher in either could cause further interest in their stocks.

A quick look at a major global economic bellwether shows that planet earth is still growing, and it wants a Coke...

"We delivered 12% organic revenue growth in the quarter. This was primarily driven by pricing actions across markets and revenue growth management initiatives to retain and add consumers. We also delivered volume growth of 3%, which is in line with last year versus 2019."
(James Quincey, Chairman and CEO of The Coca-Cola Company)

Coca Cola Company

Elsewhere in the world, we see that China's reopening continues to reward investors who have exposure...

@TheTranscript_: "In Macao in Q1 23, Market-wide visitation was ~5.0M (~48% of 2019 level)...Travel restrictions were relaxed in January 2023, allowing the recovery in travel and tourism spending in Macao to begin" - $LVS

And in Germany, Mercedes-Benz preannounced to the upside on better-than-expected margins...

Mercedes-Benz reported an operating margin of 14.8% in its flagship car division, among other quarterly highlights, after the market closed on Thursday. The surprise numbers came ahead of its scheduled quarterly results day on April 28, in line with German law that requires it to release results early if they are substantially different from the analyst consensus. For the first time in a few quarters, the operating margin compares favorably with the 11.4% level reported by Tesla on Wednesday, which would have been 9.4% excluding regulatory credits.

All of Mercedes-Benz’s divisions reported better results than expected except the unit that handles car loans and leases. Rising interest rates and falling residual values are squeezing profits from vehicle finance across the industry. The biggest beat at Mercedes-Benz was in industrial free cash flow, which came in at €2.2 billion, equivalent to about $2.4 billion, versus expectations of €1.2 billion.


Surgeons are busy once again...

Intuitive Surgical's and HCA Healthcare's results last week proved that patients are returning to the hospitals for their elective surgeries. ISRG reported +26% global procedure volumes while Abbott's device segment also beat solidly.

There is no housing inventory...

Inventory hurt by the lack of new listings as few want to sell and leave their 2-3% mortgage rate...

@LizAnnSonders: Per @Redfin, new home listings fell 23.3% year/year in March to lowest level on record (aside from start of pandemic on seasonally-adjusted basis)

Homebuilding stocks near or at all-time new highs...

Many others are running through their 52-week highs as single-family home data turns upward. Interest rates are up year over year but low by historical measures, demand for housing is high and inventories are nil. D.R. Horton reported earnings and was one of the best performing stocks in the market last week as they proved that they could produce solid results in the current environment.

So, feel free to ignore any fin-scare videos or financial tv talking heads who attempt to regurgitate quotes from 'The Big Short'. The U.S. housing market will be fine.

This is not 2008...

US households are in excellent shape, the ratio of liabilities to net wealth has declined 50% since the 2008 financial crisis, and household leverage is currently at levels last seen in the early 1980s, see chart below. If the unemployment rate rises, consumer spending will slow down, but the starting point for US households is very strong.


A defensive theme continues to play out among the all-time new high listing...

Healthcare and Consumer Staples/Retail companies send $2 trillion in large cap equities to their highest value ever.

Bears take note, there is a complete lack of excitement for equities in this weekend's Big Money poll...

Troubled times on Wall Street have given way to muddled times. Investors expect the Federal Reserve to cut interest rates later this year, but Fed officials have indicated that’s far from the plan. Economists are predicting a recession, yet unemployment is lodged near record lows. And even as companies warn of leaner days, analysts are forecasting record earnings for 2023.

No wonder trading is somnolent, and investors lack conviction. Their consternation comes across clearly in Barron’s latest Big Money poll, and was evident in conversations with many respondents. Only 36% of the professional investors we surveyed in the past month describe themselves as bullish on the outlook for stocks over the next 12 months. The same percentage say they are neutral, while the remaining respondents, 28%, put themselves in the bearish camp.


BofA fund manager survey shows a significant preference for bonds over stocks...

Investor allocation to equities relative to bonds has dropped to its lowest level since the global financial crisis as worries about a recession take hold, according to Bank of America Corp.’s global fund manager survey.

In the most bearish survey of this year — the first after banking turmoil roiled markets last month — investors indicated that fears of a credit crunch had driven up bond allocation to a net 10% overweight — the highest since March 2009. A net 63% of participants now expect a weaker economy, the most pessimistic reading since December 2022.

Still, the bearish turn in sentiment is a contrarian signal for risk assets, strategist Michael Hartnett wrote in the note on Tuesday. If “consensus lust for recession” isn’t satisfied in the second quarter, the “pain trade” would be a rally in bond yields and bank stocks, he said.


J.P. Morgan's manager survey shows an equal dislike for equities...

J.P. Morgan

But while fund managers may not like equities, others are finding companies that they like: German public company to private equity for a 50% premium...

BERLIN - Shares in Software AG jumped almost 50% on Monday following a takeover offer from private equity firm Silver Lake late last week that values the German business software developer at 2.2 billion euros ($2.42 billion)…

Software AG's shares were trading at 29.9 euros on Monday, close to Silver Lake's offer price of 30 euros per share made late on Friday after markets closed. If the takeover offer is successful, the aim would be to delist the company following the transaction, Brahmawar said. Silver Lake's offer is fully funded with equity and one billion euros in debt financing provided by JP Morgan, Brahmawar added.


Canadian public equity to UK public company for a 100% premium...

GSK plans to buy Canada-based drug developer Bellus Health Inc in an all-cash deal for $2 billion as the British drugmaker expands its bet on respiratory therapies.

The move to replenish its pipeline comes as GSK investors fret about whether there is enough in the medicine cabinet to keep the momentum going into the next decade with expected loss of patent protection of one of its key compounds...

GSK's offer of $14.75 per share is more than double Bellus' closing price of $7.26 on the Nasdaq on Monday.


100-year-old German private company to U.S. public for $10 billion plus...

Carrier Global Corp. is in advanced talks to acquire German industrial manufacturer Viessmann for more than $10 billion including debt, according to people familiar with the matter.

A cash-and-stock deal could be announced as soon as this week, assuming the talks don’t break down, the people said. The move is part of a transformation under way at Carrier, which is also working on a plan to sell or spin off its Fire & Security business segment, The Wall Street Journal previously reported.


U.S. public company to private for a 100% premium. Maybe...

Activist investor Trillium Capital said on Monday it offered to buy the shares it does not already own in Getty Images Holdings Inc (GETY.N) in an all-cash deal, valuing the stock-photo company at $3.95 billion.

Trillium, which holds over 500,000 shares of Getty Images, offered to buy the rest at $10 apiece, representing a premium of nearly 98% to the stock's last close.

Shares of Getty Images rose nearly 43% in morning trade to $7.25, much below the offer value, indicating there were concerns over the deal going through.


Meanwhile, prepare yourself for the largest U.S. IPO of 2023...

Johnson & Johnson is poised to begin a roadshow to pitch shares of its consumer-healthcare business, the producer of household names such as Tylenol, in a test for an IPO market that has been in the doldrums for the past year.

Kenvue Inc. plans to start meeting with prospective investors as early as Monday, people familiar with the matter said. The goal is to raise $3.5 billion or more in the offering at a valuation close to $40 billion, the people said. IPO roadshows typically last anywhere from a few days to a week ahead of the stock’s trading debut...

The share sale would be by far the biggest of what so far has been a quiet year for IPOs.

Traditional IPOs in the U.S. have raised just $2.3 billion in 2023 through Friday, according to Dealogic, in the worst start to a year since 2009.


No problem getting an IPO done in Japan right now...

What banking crisis? For the initial public offering of Japan’s largest internet bank, shares are flying out of the door.

Shares of Rakuten Bank, controlled by one of Japan’s largest e-commerce companies, jumped 38% on their first day of trading Friday after the bank raised $627 million from its IPO, the biggest public offering in the country since 2018.

And it isn’t the only Japanese digital bank IPO that has been doing well. Shares of SBI Sumishin Net Bank, which raised $378 million last month, are also trading 38% above their IPO price. The two deals account for around two-thirds of the value of IPOs in Japan this year so far, according to Dealogic.

The main appeal is breakneck growth—and a higher return on equity than for their stodgy bricks-and-mortar peers. Deposits at Rakuten Bank, for example, have more than tripled in the past four years to more than ¥9 trillion, equivalent to $67 billion. That is still far lower than at the so-called Big Three banks in Japan. Mitsubishi UFJ Financial, for example, has around ¥220 trillion in deposits. But rapid growth has put the internet bank ahead of many of the country’s traditional lenders.


Even the head of Goldman Sachs notes a change in the water temperature...

"I'd say as we came into the new year, there's no questions dialogs have picked up…when you think about big strategic activity, I think most big companies continue to operate from a position where they're trying to make sure they have the scale and the strength competitively to advance their strategies. And so those strategic dialogs are quite active. And if you actually look over the course of the last week or two, there have been a handful of deals that have been announced that highlight that.” - Goldman Sachs CEO David Solomon

The Transcript

You might want to take that next call discussing CRE investments in Bakersfield and Fresno...

A great University of Toronto study shows the recovery in cellphone traffic for the major North American downtown areas.

A recovery value greater than 100% means that for the selected inputs, the mobile device activity improved from the comparison period. A value less than 100% means the opposite, and a value equal to 100% means the activity did not change.

Downtown: divides the sum of downtown area's device counts of the week by the corresponding week in 2019

Downtown Recovery

A top Gotham landlord discussed the data showing how the biggest city is coming back strong...

“There is recent evidence of higher office utilization within our portfolio as physical occupancy regularly exceeds 60% on many workdays and the MTA recently announced that Metro North Railroad reached a new post-pandemic ridership record two days ago with 195,000 riders or 74% of the pre-pandemic average. And during the seven days between April 9 and April 15, Long Island Railroad carried an average of 170,000 daily commuters, the best seven-day average in over three years. There's an increasing drumbeat of optimism about return to work, and we hear it from more and more national and global companies that are mandating people come back anywhere between three to five days a week. We are building our leasing pipeline at a steady pace - the pipeline of leases now stands at 1.2 million square feet, which is up 70% from our earnings call just three months ago.”

SL Green

Another comment from the head of Blackstone highlighting the opportunities for private credit and lending in the current environment...

"The fundraising environment has become more challenging, but the breadth of our firm allows us to continue to raise scale capital, including over $40 billion in the first quarter and $217 billion over the last 12 months. We’re seeing the greatest demand today for private credit solutions given higher interest rates and wider spreads. Coupled with the pullback in regional bank activity, this is a golden moment for our credit, real estate credit and insurance solutions teams, which accounted for 60% of the firm’s inflows in Q1."
(Jonathan Gray, BX)

The Transcript

Speaking of Private Credit, it is batting 21 out of 22 years in beating its public market equivalent...

As the volume of opportunities expands in 2023, we will all be spending more time on this asset class.

Hamilton Lane

Venture Capital funding hits a six year low for the Q1...

While disappointing to some in the financial world, for those investors looking to deploy capital into new investments today, you are going to need a bigger drool bucket. This could become a repeat of twenty years ago. Incredible companies are out there and waiting for investors to find their rocket ship. Some will encounter a rapid unscheduled disassembly, but others will make it into orbit. Wouldn't you rather buy your tickets today than in 2021?


Here is a smart investor looking to expand their U.S. footprint 40% in three years while others retreat or go into the beyond...

IKEA is making its largest-ever investment in new American stores, betting on strong U.S. demand for its flat-pack furniture.

Ingka Holding BV, the biggest owner and operator of IKEA stores, said Thursday it would spend 2 billion euros, the equivalent of $2.19 billion, opening 17 new U.S. locations over the next three years. The investment will also be used to bolster its fulfillment network to improve its delivery services, the company said.

The move is the first of several phases of expansion the company plans to make in the U.S. over the coming decade, said Tolga Öncü, Ingka’s head of retail.

“The U.S. is one of our most important markets, and we see endless opportunities to grow there,” said Mr. Öncü. “More than ever before, we want to increase the density of our presence in the U.S.”


Beef and daily prices are going to get more expensive for everyone as the Colorado river dries up....

But despite news stories about drought-stricken Americans in the West taking shorter showers and ditching lawns to conserve their water supply, those efforts are unlikely to amount to much — residential water use accounts for just 13 percent of water drawn from the Colorado River. According to research published in Nature Sustainability, the vast majority of water is used by farmers to irrigate crops.

And when you zoom in to look at exactly which crops receive the bulk of the Colorado River’s water, 70 percent goes to alfalfa, hay, corn silage, and other grasses that are used to fatten up cattle for beef and cows for dairy. Some of the other crops, like soy, corn grain, wheat, barley, and even cotton, may also be used for animal feed...

The stress on the West’s water supply due to alfalfa is especially acute in Utah: A staggering 68 percent of the state’s available water is used to grow alfalfa for livestock feed, even though it’s responsible for a tiny 0.2 percent of the state’s income. Last year, the editorial board of the state’s largest newspaper, the Salt Lake Tribune, declared that “it’s time for Utah to buy out alfalfa farmers and let the water flow.”

California takes more water from the Colorado River than any other state, and most of it goes to the Imperial Valley in the southern part of the state. It’s one of the most productive agricultural regions in the US, producing two-thirds of America’s vegetables during winter months. But the majority of the Imperial Valley’s farmland is dedicated to alfalfa and various grasses for livestock.


Finally, congrats to Wrexham AFC and the Green Lantern who illuminated them for the rest of the world...

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The author has current equity ownership in: The Coca-Cola Company and Johnson & Johnson Co.

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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