Weekly Research Briefing: More to Look Through

@carlquintanilla: BMO: “.. The March retail sales report shows on-going strength and resilience of the U.S. consumer despite aggressive monetary tightening .. also raises the prospect that U.S. economic growth this year will continue to exceed expectations.”

"Net sales for March came in at $23.48 billion, an increase of 9.4% from $21.46 billion last year. This year's retail month of March was impacted by the shift in the timing of Easter. The shift positively impacted total and comparable sales by approximately 0.5%. Reported comparable sales for March were as follows: in the U.S., it was at 7.3%; Canada, 8.9%; Other International, 8.6%; total company, 7.7%; and E-commerce, 28.3%" - Costco IR VP David Sherwood

The Conference Board’s consumer confidence survey asks households if they plan to travel to a foreign country, and the chart below shows that a record-high share of US consumers are planning to go on vacation to a foreign country within the next six months.

Because of the significant rise in the stock market and significant cash flows from fixed income, US households have more money to travel on airplanes, stay at hotels, eat at restaurants, go to sporting events, amusement parks, and concerts, and that is why inflation in the non-housing service sector continues to be so high.

"Demand continues to be strong, and we see a record spring and summer travel season with our 11 highest sales days in our history, all occurring this calendar year. Spending on services recently to pass goods for the first time in 5 years, and there is further runway to return to their long-term trends" - Delta Airlines CEO Ed Bastian

@alexandraandnyc: Bank of America: "If inflation is sticky because of momentum in the economy, that's not necessarily bad for stocks."

@ernietedeschi: The "excess" core CPI inflation right now is much less broad than what we saw in 2022. In 2022, inflationary pressures hit many categories. In contrast, right now, only two are stronger than we'd expect under 2% PCE pre-pandemic: housing--the lion's share--and auto insurance.

Inevitably markets reacted to US consumer price inflation headlines, but the details did matter. There is very strong evidence against inflation stickiness. Aside from rents and fictitious owners’ equivalent rents, there is deflation in almost every consumer price subcategory somewhere in the US. With collapsing clothing prices in Tampa or plunging communication prices in Chicago, it is difficult to argue that structural inflation stickiness exists when every key sector has deflation somewhere in the country.

If the rising price of homeowners insurance were factored into the US Consumer Price Index — a key metric of inflation — it could have added 80 basis points, or about 0.8%, to last year’s CPI increase of 3.4%, according to an analysis from Bloomberg Intelligence.

By not including home insurance, the CPI “ignores climate costs,” writes BI senior analyst Andrew Stevenson in his April 9 note.

Homeowners insurance costs in the US hit roughly $175 billion in 2023, up 21% over the previous year, according to insurance brokerage Policygenius. The increase is in large part due to climate change, which is driving more extreme fires, floods and storms. The US endured a record 28 weather and climate disasters that caused at least $1 billion in damage last year. As insurers incur higher costs, homeowners are facing higher premiums. Inflation itself is also making it more expensive to pay out claims.

The average cost of insuring a US home last year was $1,905 — 50% higher than the average of $1,272 in 2019, according to the National Association of Insurance Commissioners and Policygenius.

“We continue to see strength in the U.S. economy. Spending patterns of consumers using our debit and credit cards remain generally consistent and continue to grow year-over-year. Consumer credit is performing as we expect, wholesale credit continues to perform well, and our views around commercial real estate have not significantly changed since last quarter. These are all positives.” - Wells Fargo CEO Charles Scharf

Fastenal Co., a distributor of factory floor odds and ends, unofficially kicked off the first-quarter industrial earnings season on Thursday with weaker-than-expected results. Sales of fasteners, the company’s namesake product line, fell 4.4% relative to the period a year earlier, the third straight quarter of declines and the worst performance since 2020 during the height of the pandemic shock to the industrial economy. Fasteners are most commonly used to manufacture new equipment, making them an important proxy for underlying industrial production trends.

“The core issue remains sluggish demand,” Fastenal Chief Executive Officer Dan Florness said on the company’s earnings call. Overall daily sales at Fastenal increased just 1.9% in the first quarter, roughly half the pace the company was expecting heading into the period, he said. Fastenal’s smaller customers in particular are bearing the brunt of the effects of higher interest rates and inflation. Sales to local, regional and government customers fell 4.5% in the first quarter, while revenue linked to larger, national accounts rose 6.3%.

@bluff_capital: $KMX CarMax misses. "We believe vehicle affordability challenges continued to impact our fourth quarter unit sales performance, with ongoing headwinds due to widespread inflationary pressures, higher interest rates, tightened lending standards and low consumer confidence."/p>

@wallstengine: $STZ | Constellation Brands Q4 Earnings Highlights:
EPS: $2.26 (Est. $2.21)
Revenue: $2.3B (Est. $2.1B)
Beer Business Net Sales Growth: Nearly 11%
Beer Business Oper. Margin: Increased 30bps to 34.4%
Wine and Spirits Sales: Down 6%

A lot rests on companies predicting that earnings will be even better in future quarters, because the market as a whole is priced for unusually fast growth. The S&P 500 trades at a multiple of 21 times predicted earnings 12 months ahead, a level exceeded only during the dot-com bubble and the pandemic rebound.

The good news is that a stronger-than-expected economy should be good for profits. The bad news is that a stronger-than-expected economy means fewer rate cuts this year, and perhaps none, which hurts the valuation of future profits.

This showed up on Wednesday, when inflation again came in ahead of predictions, bond yields jumped and stocks fell sharply. Futures markets are now priced for a 12.5% chance of no rate cut this year, by far the highest yet, according to the CME FedWatch Tool.

Wednesday aside, investors overall are still betting that higher profits will more than offset the hit from rates being above where they previously thought.

@eWhispers: #earnings for the week of April 15, 2024

• Encore Wire (WIRE -$4b mkt cap - R2000/SP600 holding) Prysmian (PRY.IT) has proposed to acquire Encore Wire for $290.00 per share in cash for a total enterprise value of approximately €3.9 billion, representing a multiple of 8.2x EV/2023A EBITDA and 6.3x EV/2023A EBITDA, including run-rate synergies
• Blackbaud (BLKB - $4b mkt cap - R2000 holding) Clearlake Capital offered a non-binding proposal to acquire all its outstanding shares for $80 per share.
• Snap One (SNPO - $600m mkt cap - R2000 holding) Resideo (REZI) has agreed to buy Snap One Holdings for about $821 million; Resideo said the transaction, which it expects to complete in the second half of the year is worth about $1.4 billion including debt.
• Medical Properties Trust (MPW - $2.4b mkt cap R2000/SP600 holding) said it received $1.1B of cash proceeds from the sale of a majority interest in five Utah hospitals through a newly formed JV ($886M) and secured debt placed in conjunction with the transaction ($190M).
• French lender BPCE will acquire Société Générale’s professional equipment financing business for $1.2B
• Brookfield Asset Management is in advanced talks to buy a majority stake in private credit manager Castlelake for over $1.5B
• Salesforce (CRM) is in advanced talks to acquire data-management software provider Informatica (INFA - $11.3b mkt cap - R1000 holding)
• Reportedly ADNOC took a look at BP Plc (BP - $111b mkt cap) as a potential takeover target, but decided that it was not a good fit after preliminary talks
• Vertex (VRTX) enters into agreement to acquire Alpine Immune Sciences (ALPN - $4.2b mkt cap - R2000 holding) for $65/shr in cash, valuing it at $4.9B
• Lok'n'Store (LOK.UK) offered to be acquired by Shurgard Self Storage (SHUR.BR) at £11.10/shr in £378M deal

The majority owner of Motel One Group has taken full control of the budget hotel chain in a transaction that values it at €4.1bn, the latest sign of a return to dealmaking in the hospitality sector following the end of the pandemic.

Proprium Capital Partners, a real estate private equity group, has sold back its 35 per cent stake in Motel One to the company’s majority shareholder, One Hotels & Resorts, according to a statement on Tuesday.

Proprium is selling its stake for €1.25bn, having acquired it for €65mn in 2007, providing the company with a more than 20-times return on invested equity when dividends are taken into account. The deal values Motel One at €4.1bn including debt, said Proprium.

To get a better sense of this effect, we collected all the changes that occurred in the S&P 500 since 2019. This accounts for five years of constituent changes, specifically only looking at stocks that underwent changes where companies were chosen by the committee.

Adds: Specifically, stocks poised for inclusion in the S&P 500 tended to outshine the broader index by about 2.6% in the two-week run-up to their addition. However, once officially added, these stocks often fell short of the index and on average they underperformed by 4.7% over the next 12 months.

Drops: Conversely, companies on the verge of removal experienced an initial downturn, selling off before their actual exclusion. Yet, once removed, these stocks frequently started to recover, outpacing the index by nearly 5% on average in the following six months and by almost 16% over the next 12 months.

This pattern we see around the rebalance of indexes underscores how the explosion of passive investing and index changes can have long lasting impacts for adds/drops to the index.

AustralianSuper, the country’s largest pension fund, plans to almost double its private equity assets over the next four years as deals pick up following a lull spurred by higher borrowing costs.

The fund, which oversees A$330 billion ($215 billion) of assets, is seeking to boost its private equity allocation to as much as 9% of its portfolio from 5% currently, Chief Investment Officer Mark Delaney said in an interview. That will eventually lift total volumes to around A$35 billion, he said.

The goal compares with a previously announced 7% target two years ago that AustralianSuper hoped to achieve by 2024. The shortfall in reaching that underscores the pressure facing institutional investors in securing attractive deals as higher interest rates weighed on transactions.

Now, Delaney expects activity to increase, while valuations will also begin to climb after a shallow pullback. “We’ve seen the lows in private equity prices,” he said. “Prices haven’t gotten as cheap as in previous downturns.”

"It's going to be difficult to accelerate the breakthroughs that we need if the power requirements for these large data centers for people to do research on keeps going up and up and up. By the end of the decade, AI data centers could consume as much as 20% to 25% of US power requirements, Today, that's probably 4% or less." - Arm CEO Rene Haas

Homicides in American cities are falling at the fastest pace in decades, bringing them close to levels they were at before a pandemic-era jump.

Nationwide, homicides dropped around 20% in 133 cities from the beginning of the year through the end of March compared with the same period in 2023, according to crime-data analyst Jeff Asher, who tabulated statistics from police departments across the country...

If the trend continues, the U.S. could be on pace for a year like 2014, which saw the lowest homicide rate since the 1960s. But police officials and researchers cautioned that crime trends aren’t always consistent and future homicide rates are difficult to predict.

The mathematics professor and hedge fund manager Edward Thorp rocketed to fame in the early 1960s by showing readers how to best casinos in blackjack. His book Beat the Dealer laid out a groundbreaking system of card counting, followed by guides to roulette and other gambling games. Thorp also invented or perfected a number of the quantitative hedge fund strategies being used today, and he delivered 30 years of 20% annual returns for the hedge funds he operated, with only a handful of down months, none large.

Less well known is that Thorp has devoted his talents as much to health and longevity as to beating casinos and markets. At 91 he’s remarkably healthy and vigorous. Although he’s no longer running marathons or doing serious weight training, Thorp jogs and works out at the gym regularly. He weighs 155—2 pounds above his weight at age 17—and can do two chin-ups and 15 pushups. He analyzes scientific literature and manages his regimen carefully.

We sat down with Thorp to distill his wisdom on the subject.

@NewYorker: A cartoon by Hilary Allison. #NewYorkerCartoons http://nyer.cm/A86Cb8v