Weekly Research Briefing: A Nickel For Your Thoughts?
A four hundred percent increase for such an intimate question. Getting rid of the penny has been a long overdue move. It has become such a de minimis amount that over 100 million pennies end up in landfills each year. And zinc mining and processing are quite damaging activities for the environment, so an end to penny production is a win for nearly everyone. Also, after this weekend's masterclass in how to defeat the Chief's offense, the Philadelphia Mint can likely make much more money stamping out those Super Bowl LIX World Championship Philadelphia Eagles coins. Congrats to the Birds.
The tariff threats continue. This weekend they were pointed to steel and aluminum as well as anyone who taxes U.S. imports. Higher prices on steel will hit the energy and construction industries. Tariffs on aluminum will hurt U.S. auto manufacturers and the beverage industry. But great news for aluminum can recyclers and scrap metal junkyards. The pharma, oil and semiconductor sectors are next to be threatened with tariffs along with Europe. Right now, the only new tariffs closest to being implemented are the newer 10% tariffs on China. But by the time the ink is dry on this note, Xi and Trump might have also made a deal to avoid them.
While the threats from the White House continue, we will need to wait and see what actually gets implemented before we can make any investment decisions. At the end of the day, the U.S. needs have not changed. Our country needs Canada's natural resources, Mexico's labor and China's rare earth minerals. It is one thing for a country to protect a certain strategic product or industry with very specific tariffs. But it is another thing to raise the prices for all Americans, slow down the economy and let other nation's pass by us with more advanced technology (because those robots, drones and electric vehicles don't run on fossil fuels). I still would not expect much bite for all of the barking.
The markets have moved on from the trade threats. U.S. financial stocks are at all-time highs, credit spreads remain among the tightest in 30 years, and the volatility index has returned to a 15-handle. The financial markets have called the White House's bluff. They don't believe in economic and financial self-sabotage. But corner office executives have put (non-AI) capex spending and M&A plans on a temporary hold as the tariff threats have increased. No CEO wants to announce a major new deal or project with even a hint of ground shifting.
Last week's jobs numbers punched in at decent levels with upward revisions in November and December offsetting a cooler January. The winter storms and fires likely hit the data in the first month of the year so better to trust the averages. The unemployment rate fell to 4.0% while wages were higher than expected, growing at a +3.8% y/y rate. More interesting was Friday's pop in the Univ. of Michigan's consumer inflation outlook. The survey did include the first week of tariff threats, so it was interesting seeing consumers view tariffs as a negative to their future inflation outlook.
This week we will see the January CPI and PPI data. But we will get a second inflation reading in March before the next FOMC meeting. Enjoy the week and have fun at the Philly parade.
U.S. stock prices no longer care about the tariff threats as measured by the VIX...
Prices reacted to the initial shock and awe announcements, but after seeing how quickly the Canadian and Mexican tariffs were set aside and then processing the whole chess board, investors quickly concluded that significant trade wars were unlikely to occur.
One big reason why broad global tariffs will not occur...
J.P. Morgan calculates that a White House tariff proposal to hit Mexico, Canada, China and Europe will hit S&P 500 earnings by 7-8%. This won't happen because it will hurt stock prices, dampen company investments and weigh on future economic growth. That is everything that this White House is against.
According to FactSet, analysts estimate S&P 500 EPS will grow 13.0% to $272 in 2025 and 13.8% to $309 in 2026. So the announced tariffs could have a meaningful impact on earnings. And keep in mind that President Trump has discussed imposing tariffs beyond what’s been announced.
"We estimate that the current tariffs explicitly mentioned could result in an EPS headwind from first order effects of $7.50, $6.10 and $2.60 from Mexico, Canada and China tariffs, respectively,” JPMorgan’s Dubravko Lakos-Bujas wrote. “If we were to presume that Europe would face a 10% tariff, that would be another $3.60. In short, this could impact up to 2/3 of S&P 500 EPS growth this year from just the currently announced tariffs."
Another big reason is that China extracts 60% of the world's rare earth minerals...
Tungsten is one of those minerals. The U.S. would be at a major technological disadvantage if tungsten, and many other defense/battery/semiconductor component metals disappeared from the marketplace.
The phone has been ringing off the hook for Lewis Black after China imposed export controls on tungsten, a niche metal mined by his firm that’s crucial to weapons manufacturing.
The chief executive officer of North America’s Almonty Industries Inc. said his customers are in a “state of disbelief” following Beijing’s move on Tuesday, one of a suite of measures announced as a riposte to tariffs placed on Chinese goods by the Trump administration.
China accounts for about 80% of the world’s tungsten output, and there are concerns the government could add measures around tungsten scrap that would further constrict its availability. Almonty’s stock in Toronto has soared 41% over the last two days as investors price in scarcer supply of the super-dense material used in armor-piercing munitions, as well for engine parts and chip making.
“It’s the warning shot, because we cannot exist without it,” Black said in a phone interview from his base in New York on Thursday. “Our economy, manufacturing, defense, everything, is so dependent on it. And yet, Russia, China and North Korea have about 90% of the output.”
The other big news last week was that the Treasury let it be known that they are laser focused on the 10-year Treasury yield...
Good to know that there is a high priority on the top borrowing rate anchor. This should tell us also that our leaders are watching inflation and growth closely and will not be rocking the boat.
Treasury Secretary Scott Bessent said the Trump administration’s focus with regard to bringing down borrowing costs is 10-year Treasury yields, rather than the Federal Reserve’s benchmark short-term interest rate.
“He and I are focused on the 10-year Treasury,” Bessent said in an interview with Fox Business Wednesday when asked about whether President Donald Trump wants lower interest rates. “He is not calling for the Fed to lower rates.”
Bessent repeated his view that expanding energy supply will help lower inflation. For working-class Americans, “the energy component for them is one of the surest indicators for long-term inflation expectations,” he said.
“So if we can get gasoline back down, heating oil back down, then those consumers not only will be saving money, but their optimism for the future will” help them rebuild from the recent years of high inflation, Bessent said.
Speaking of inflation, this set of numbers woke up on Friday...
Now let's all remove tariff from 'the word of the day' and return to a consumer only thinking about egg inflation.
Yardeni: "Exacerbating Friday's stock and bond market selloffs was news that the one-year expected inflation rate jumped to 4.3% this month from 3.3% in January, according to the University of Michigan's latest consumer survey. The interviews for the survey concluded on February 4, just days after the Trump administration announced 25% tariffs on Mexico and Canada, which were quickly delayed by 30 days...The jump in expected inflation reduces the likelihood that the #Fed will be cutting the federal funds rate again anytime soon. For now, we remain in the none-and-done camp in 2025 regarding Fed rate cuts."
@neilksethi
Foreign stock markets are also ignoring the U.S. tariff threats...
With the U.S. dollar flat YTD, the major ETFs are little changed from the local index performance. As this YTD heat map shows, Europe is significantly outperforming the U.S. S&P 500. And for all the threats thrown at China, their stocks are barely changed. Pay close attention to when stocks go up or stay flat on bad news.
Financials are now at all-time highs and outperforming the SPX by 1,600 basis points since July 1st...
If the U.S. was about to enter an economy damaging trade war, financial stocks would not be doing this. Bank stocks are the first to run into a cave at the sign of a credit crisis. Remember Silicon Valley Bank and March 2022?
Speaking of credit, high yield credit spreads remain stellar...
There have been no positive sales surprises by the Mag-7 this earnings season. Maybe helps to explain their underperformance?
@borrowed_ideas: early days in 2025, but it's interesting that after the recent earnings, only 2 companies in mag7 are beating the index so far YTD, and the rest are, in fact, negative!
Or maybe investors want to see more future earnings visibility on all that AI-cloud spending?
@TheTranscript_
Costco's January sales show that it continues to have the hot hand in selling to the American consumer...
Costco Wholesale carried its winning streak into the new year, with January sales continuing to rise at a fast clip... Traffic was strong in January, with comparable-store traffic up 7.1% worldwide, the company said. Same-store sales rose 7.5% year over year, slightly increasing from December’s 7.4% rise.
Stripping out currency and gas price fluctuations, Costco’s same-store sales rose 9.8% year over year. The first month of the year is often slower for retailers following the busy holiday season, but Costco’s strong results keep proving that it is no ordinary retailer. The warehouse club has been firing on all cylinders lately, attracting budget-conscious shoppers across the income spectrum. It has also continued to ramp up its online business. E-commerce same-store sales were up 13.6% year over year, Costco said.
Robert Half had positive things to say about the global labor markets...
$RHI Robert Half CEO on labor markets: "Global labor markets remain resilient with US job openings significantly above historical averages, a clear indicator of substantial pent-up demand for talent."
@TheTranscript_
For investors in U.S. apartment assets, sounds like a much-improved supply/demand situation in the years ahead...
The tariff threats have frozen the M&A market...
Let's hope that this is just a temporary pause. The dominoes are lined up and just waiting for the catalyst that will knock over that first one.
US dealmaking has suffered its worst start to a year in a decade after policy volatility following Donald Trump’s election and escalating rhetoric over tariffs put a sudden chill on activity.
The overall number of US mergers and acquisitions collapsed nearly 30 per cent in January to 873 deals compared with a year ago, the lowest level since 2015, according to LSEG data. In dollar terms, deal activity fell 18 per cent compared with a year ago.
Dealmakers said the drop in activity reflected anxiety about the new US president’s economic and trade policies, which had tempered some of Wall Street’s early enthusiasm after his election in November...
The mood shift marks an injection of caution since early November, when Trump’s election — and the hope of lighter antitrust scrutiny — prompted dealmakers to revive transactions they worried could be blocked by the Biden administration. “After Trump won we had a flood of calls from CEOs demanding that we get deals previously put on pause back on track . . . it was full-on animal spirits, it was amazing,” said one banker who asked to stay anonymous to avoid irritating the president. “We’ve gone from full-on animal spirit to cautious optimism among CEOs, there’s too much chaos and uncertainty.”
A top rainmaker, who asked not to be named for fear of being attacked by Trump’s associates, cited the “turmoil and seemingly scattershot pronouncements” since the president started his new term, including “the whole tariff imbroglio”.
It made for “kind of a challenging moment to bet one’s legacy and pull the trigger on something bold”, the person said.
One small weekend M&A deal shows that Hyatt Hotels is content to increase its Mexican peso exposure right now...
Hyatt Hotels has agreed to acquire Playa Hotels & Resorts for roughly $2.6 billion, including $900 million in debt.
The purchase will expand the Chicago hotel operator’s portfolio of all-inclusive resorts, it said Monday. The company entered the all-inclusive space with an investment in Amsterdam-based Playa Hotels in 2013, launching its Ziva and Zilara brands.
Under the terms of the deal, Hyatt will acquire all outstanding shares of Playa Hotels that it doesn’t already own for $13.50 apiece, representing a total cost of about $2.6 billion, including about $900 million of debt.
The company currently owns about 9.4% of Playa Hotel’s outstanding shares. Playa Hotels owns and operates all-inclusive resorts in Mexico, the Dominican Republic and Jamaica.
And this complimentary deal of a great long time public small cap acquiring a private competitor of similar size was hitting the tape just as we went to press...
Columbus McKinnon to Combine with Kito Crosby Delivering Compelling Value Creation
Business combination materially improves scale and product scope, advancing Columbus McKinnon's strategy as the holistic provider of intelligent motion solutions in materials handling
Complementary portfolio enhances strategic positioning in attractive verticals and target geographies, delivering an even stronger portfolio of products
Transaction valued at approximately $2.7 billion at a ~8x TTM Adjusted EBITDA multiple post-synergies
Expected to create ~$70 million in annual net cost synergies, improving Adjusted EBITDA Margins to greater than 23% and is expected to more than double revenue and triple Adjusted EBITDA on a pro-forma combined basis
Significant combined cashflow generation expected to enable de-leveraging to Net Leverage Ratio of approximately 3.0x within two years post-closing
The transaction is expected to be funded with $2.6 billion in committed debt financing and an $0.8 billion perpetual convertible preferred equity investment from CD&R
And Honeywell decides to split into three after seeing the success at GE's breakup and getting a strong nudge from Elliott Management...
Now the better focused three units can more easily eat or be eaten. A win for the M&A markets and public equity investors now and private equity investors later.
The public and private markets continue to converge...
It won't be long until the private credit markets become as liquid as the junk bond markets at the beginning of my career. I would expect the private equity markets will not be far behind as one of the major exchanges crosses over to help private companies trade their employee shares.
Apollo Global Management Inc. is seeking to build a marketplace that would allow investors to buy and sell high-grade private assets more easily, while encroaching further into terrain once dominated by the biggest Wall Street firms.
The alternative asset manager is in discussions to partner with banks, exchanges and fintech firms to deliver real-time information and intraday prices for private credit deals, according to Eric Needleman, head of Apollo Capital Solutions.
Such a marketplace would allow Apollo to trade and syndicate the debt it originates on a bigger scale and be the first of its kind in modern-day private markets, where assets are typically held with the buyers and prices are rarely disclosed publicly.
“We are engaging daily with top-tier counterparties, deepening market connectivity, and expanding liquidity solutions and offerings,” Needleman said. “The conversations have been highly constructive at the highest levels.”
The Caitlin Clark effect is real...
@carlquintanilla.bsky.social: Everyone moving to Indy.
Expect to see this quote a lot this year...
“You cannot be great without the greatness of others.”
(Philadelphia Eagles head coach Nick Sirianni after winning Super Bowl LIX)
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The author has current equity ownership in: Costco Wholesale Corp.
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