Weekly Research Briefing: Guardrails

Two weeks before Trump takes office, his aides are still discussing plans to impose import duties on goods from every country, the people said. But rather than apply tariffs to all imports, the current discussions center on imposing them only on certain sectors deemed critical to national or economic security — a shift that would jettison a key aspect of Trump’s campaign pledge, at least for now, said the people, who cautioned that no decisions have been finalized and that planning remains in flux. The people spoke on the condition of anonymity to describe private conversations.

The potential change reflects a recognition that Trump’s initial plans — which would have been immediately noticeable in the price of food imports and cheap consumer electronics — could prove politically unpopular and disruptive. But consideration of universal tariffs of some kind still reflects the Trump team’s determination to implement measures that can’t be easily circumvented by having products shipped via a third country.

Exactly which imports or industries would face tariffs was not immediately clear. Preliminary discussions have largely focused on several key sectors that the Trump team wants to bring back to the United States, the people said. Those include the defense industrial supply chain (through tariffs on steel, iron, aluminum and copper); critical medical supplies (syringes, needles, vials and pharmaceutical materials); and energy production (batteries, rare earth minerals and even solar panels), two of the people said.

"I am sure many in the room have reviewed the most recent report released in November, but I will briefly summarize some key findings. Households and businesses appear to be in good shape and can service their debt, which is at manageable levels overall. In terms of financial-sector leverage, high levels of capital and liquidity in the banking system are a key source of resilience. Funding risks in the banking system have declined somewhat: Smaller banks have replaced some of their uninsured deposit funding with brokered and reciprocal deposits, which are less prone to runs but are still less stable than core bank deposits. Some nonbank financial intermediaries (NBFIs), including some large hedge funds, do have high leverage. NBFIs may also be exposed to liquidity stress that could be brought on by, among other things, bouts of market volatility. Valuations are elevated in a number of asset classes, including equity and corporate debt markets, where estimated risk premia are near the bottom of their historical distributions, suggesting that markets may be priced to perfection and, therefore, susceptible to large declines, which could result from bad economic news or a change in investor sentiment. Prices of some commercial properties have fallen substantially since 2022, particularly office buildings. I continue to be attentive to developments here."

"In Sept, three of 19 Fed officials thought the risks to their core PCE inflation forecast were weighted to the upside (if wrong, it was likely to be too low). Today, 15 or 19 judged the risks around the forecast (which they raised) were weighted to the upside. When's the last time we saw that?!"

If in another six months inflation is at or near 2%, a very real possibility, then great things are possible. This is the necessary condition for optimism. But disinflation has stopped, and the historical experience has been for inflation to come in waves.The startlingly hawkish tone adopted by Jerome Powell last month showed that the Federal Reserve itself must be somewhat concerned about this.

If inflation does make a return, then the consequences would be higher fed funds rates and bond yields. December’s reverse for the stock market after Powell’s “hawkish cut” was ample reminder that that a return to rate hikes will almost certainly mean lower share prices. It would also mean a higher dollar, which would tend to choke off Trump 2.0’s attempt to improve US competitiveness by levying tariffs.

How quickly will we know? Price rises would need to pick up again for these bad things to start happening. The latest reading for core CPI was 3.3%. Should this return to 4% by spring, then the bullish scenarios will be in serious danger. It’s more likely to fall to 2%, in which case we can all enjoy ourselves; but the point is that it’s necessary.

“We are fully aware that we’re not there yet,” Federal Reserve Board Governor Adriana Kugler said Saturday in relation to the recent inflation rate, which remains above the central bank’s 2% annual target. “No one is popping Champagne anywhere—not close to us. And we are fully committed and working hard to make sure we get there.”

Kugler spoke on a panel with San Francisco Fed President Mary Daly at an American Economic Association event. Although inflation, as measured by the personal consumption expenditures price index, has cooled significantly from its peak of more than 7% in June 2022, the annual rate of price growth was a still-elevated 2.4% as of November.

Kugler says she’s keeping a close eye on housing inflation, which poses a particular challenge for policymakers. The consumer price index’s shelter index showed a slowdown month to month in November, but housing inflation still measured 4.8% year over year.

Kugler noted that the low 30-year mortgage rates that many Americans locked in during the Covid-19 pandemic has caused many households to hold on to their existing homes rather than sell them. That has reduced the supply of housing and kept prices, and price growth, elevated. Kugler cited this trend as one of the “unusual things” that occurred during this business cycle that probably led to monetary policy working its way through the economy in a somewhat different way than in past episodes.

‬The Conference Board index of consumer confidence decreased by 8.1pt to 104.7 in December—well below consensus expectations— from an upwardly revised November level (+1.1pt to 112.8). The expectations component (-12.6pt to 81.1) and the present situation component (-1.2pt to 140.2) both declined. The labor differential— the difference between the percent of respondents saying jobs are plentiful (+3.4pp to 37%) and those saying jobs are hard to get (-0.4pp to 14.8%)— increased (+3.8pt to 22.2), around 8pts below 2024Q1 levels and noticeably below the pre-pandemic level. The conference board noted that “mentions of tariffs increased in December” and a special question “showed that 46% of US consumers expected tariffs to raise the cost of living while 21% expected tariffs to create more US jobs.”

‬@Marcomadness2: The lowest home affordability in 30-years, especially those homes financed with 30Y fixed rate mortgages @bsurveillance

"Overall, the economic environment, which we believe last quarter was constructive for the homebuilding industry, has certainly turned more challenging as longer-term interest rates, along with mortgage rates, have climbed steadily since our last earnings call. While underlying demand for new homes remains very strong and the supply of available dwelling remains chronically short, a combination of wavering consumer confidence and elevated cost of acquisition have challenged the customer’s desire and ability to transact. While there continues to be considerable traffic of customers looking for homes, the urgency to actually transact has quieted as customers adjust to a new normal...While consumers remain employed and are generally confident that they will remain employed and their compensation will rise, higher interest rates and inflation have outstripped their ability or desire to act. While strong employment often goes hand in hand with a strong housing market, interest rates have put many with need on the sideline." — Lennar CEO Stuart Miller

Commercial Metals Co. - CMC - "We are very encouraged by our recent conversations with customers and the optimism they have voiced about the coming quarters. Key indicators of the construction pipeline also point in a positive direction. Outside of construction, measures of both big and small business confidence have improved significantly over the last two months. The palpable shift in sentiment gives us confidence that current softness is transient and that we should soon enter a period of renewed strength in our core markets."

@mark_ungewitter: Intermarket study: SPX has nearly exhausted the amount of time it's been able to rally against falling TLT. A new SPX up-leg seems unlikely without the support of bond prices.

Microsoft Corp. plans to spend $80 billion this fiscal year building out data centers, underscoring the intense capital requirements of artificial intelligence.

More than half of this projected spending through June 2025 will be in the US, Microsoft President Brad Smith wrote in a blog post Friday. Recent AI progress is thanks to “large-scale infrastructure investments that serve as the essential foundation of AI innovation and use,” Smith wrote...

In the previous fiscal year ending in June 2024, Microsoft spent more than $50 billion on capital expenditures, the vast majority related to server farm construction fueled by demand for artificial intelligence services.

"I think people are feeling stronger on the company side in the sense that the regulatory changes will be favorable. The ability to get deals done in the M&A side, including in our industry is favorable. And just that certainly will give them a little more aggressive as rates come down a little bit...the M&A pipelines are very full. The amount of activity is taking place is very high. The IPO market looks to be stronger than it was predicted to be 60 to 120 days ago. So I think people are enthusiastic." — Bank of America CEO Brian Moynihan

Nordstrom will be taken private by members of its founding family and El Puerto de Liverpool of Mexico, the company announced Monday. The deal values the luxury department store retailer founded in 1901 at $6.25 billion, ending a nine-month saga and giving Nordstrom a chance to right the ship as a private entity. Per the agreement, Nordstrom common shareholders will receive $24.25 per share, up from the $23 apiece offer made in September. The proposal is a premium of about 42% to Nordstrom's "unaffected closing common stock price" on March 18, the last trading day before media speculation regarding a potential acquisition, per the release. The deal will be financed with a combination of rollover equity by the Nordstrom Family and Liverpool, cash commitments by Liverpool, and up to $450 million in borrowings under a new $1.2 billion ABL bank financing.

Stryker (NYSE: SYK), a global leader in medical technologies, announced today a definitive agreement to acquire all of the issued and outstanding shares of common stock of Inari Medical, Inc. (NASDAQ: NARI) for $80 per share in cash, representing a total fully diluted equity value of approximately $4.9 billion. Inari, which was founded in 2011, will bring a leading peripheral vascular position in the fast-growing segment of venous thromboembolism (VTE) to Stryker. Inari’s innovative product portfolio is highly complementary to Stryker’s Neurovascular business and includes mechanical thrombectomy solutions for peripheral vascular diseases such as deep vein thrombosis and pulmonary embolism.

Bankers and analysts are expecting a flurry of listing announcements in the first half of 2025, after blockbuster gains by US stocks in 2024 and on hopes president-elect Donald Trump will cut regulations and taxes.

Investors and bankers have also been encouraged by strong share price gains following recent deals. Shares in nine of the 10 largest IPOs of 2024 ended the year above their listing price, with half of them — led by social media group Reddit — recording triple-digit gains.

“Successive improvement and more activity, that’s the headline,” said Eddie Molloy, global co-head of equity capital markets at Morgan Stanley. “With an [economic] backdrop that is a bit more certain, more of a pro-business bent to regulatory policy and the Fed [cutting interest rates], we should be busier for sure.”

The expected rush of US IPOs comes after a drought in the past three years as the Federal Reserve’s campaign of sharp rate rises, which began in 2022, curbed investor demand for new listings.

Databricks has raised $10bn in the biggest venture capital deal of the year, giving the US data analytics and artificial intelligence company a valuation of $62bn.

The company raised the cash from some of the largest and most active technology investors in the US, including Thrive Capital, Andreessen Horowitz, Insight Partners and Iconiq Growth.

The funding round for the 11-year-old company is exceptionally large by the standards of venture capitalists, who historically have funded early-stage start-ups at much lower valuations. The deal is a reflection of how VCs are shifting tack as private markets balloon...

The “vast majority” of the $10bn will go towards helping employees at the start-up cash out lucrative stock options and to pay the taxes they incur when those options vest, according to Hankes. He compared the deal to Stripe’s $6.5bn raise last year, which allowed the payments company to meet billions of dollars of tax liabilities associated with employees’ stock units...

Databricks has grown rapidly in the past year and was expecting annualised revenue to hit $3bn by the end of next month, the company said on Tuesday. It also expects to record positive free cash flow for the first time at the end of January.

That has pushed Databricks’ valuation up from $43bn in September last year.

The new capital and increasing revenue meant Databricks is not in a rush to go public, said CEO Ghodsi. “The absolute earliest we would go public is next year, but we have flexibility now.”

John Rogers, founder of Ariel Investments and portfolio manager, who is a longtime value-stock-focused manager, enters 2025 with a lot of conviction, even though value stocks have been an afterthought for much of the past two decades.

“Large-cap growth stocks have gotten extraordinarily expensive versus small-cap value,” says Rogers. “So the theme I have is: Buy smaller companies and buy value companies within the small-cap universe.”

The Russell 1000 Growth Index had returned 35% in 2024, more than double the 14% result for the corresponding value index.

Rogers also says he expects the new administration’s rollback of regulations for businesses offers an opportunity for some companies. “Boardrooms and many people have delayed deals, scuttled deals or didn’t get involved with deals because of the regulatory environment,” he says. “The biggest change is going to be less regulation.”

If those themes dovetail as Rogers expects, he says that should help smaller-cap financial firms such as Lazard and private-equity firm Carlyle Group. “Private equity is going to do really well in this environment,” Rogers says. “You’re already seeing it in the number of deals that are being talked about.”

Alico, a citrus grower that supplies oranges to Tropicana, said it will wind down its citrus business after hurricanes and disease have made it difficult to see a profitable future.

The company announced Monday that it will stop investing in citrus and become a more diversified land and agriculture company. Alico has been producing citrus in Florida since the 1960s.

The move comes as oranges have become harder to grow and Americans are drinking less orange juice. “We’ve explored all available options to restore citrus operations to profitability, but the long-term production trend and the cost needed to combat citrus greening disease no longer supports our expectations for recovery,” Alico CEO John Kiernan said in a Monday morning call with analysts and investors.

Today, we’re sharing our new cutting-edge research with Swiss Re, one of the world’s leading reinsurers, analyzing liability claims related to collisions from 25.3 million fully autonomous miles driven by Waymo... The study compared Waymo’s liability claims to human driver baselines, which are based on Swiss Re’s data from over 500,000 claims and over 200 billion miles of exposure. It found that the Waymo Driver demonstrated better safety performance when compared to human-driven vehicles, with an 88% reduction in property damage claims and 92% reduction in bodily injury claims. In real numbers, across 25.3 million miles, the Waymo Driver was involved in just nine property damage claims and two bodily injury claims. Both bodily injury claims are still open and described in the paper. For the same distance, human drivers would be expected to have 78 property damage and 26 bodily injury claims.

A real-estate developer in Los Angeles is testing a new blueprint for affordable housing: stack apartments on top of a Costco.

Thrive Living is planning to begin construction in early 2025 on an 800-unit affordable-housing complex with the megaretailer on the ground floor in the Baldwin Village neighborhood of South Los Angeles. The project, which includes a rooftop pool and fitness center, would have 184 apartments for low-income households.

The property would be the first residential development in the U.S. with a built-in Costco, which is best known for its fiercely loyal customers who load up carts with everything from bulk pickles to gold bars. The rent that Costco Wholesale pays Thrive will help the developer rely less on government subsidies for the affordable housing, according to Thrive’s founder, Ben Shaoul...

The Baldwin Village location would give Costco access to a densely populated urban market as well as an automatic customer base in the apartments upstairs. Many residents might join the tens of millions of Costco members who pay fees to shop there.