Weekly Research Briefing: Rare Air

"The basket of magnificent 7 stocks are up +50%, compared to the S&P up +28%, and the rest up +20%."

@biancoresearch: And the Mag 7 accounts for ~55% of the 2024 gains in the world stock market cap.

Relative to the United States, the country has never been cheaper on a relative P/E basis. The P/E gap versus the US stands at 6.3 points (16.1 vs. 22.4), which we have never seen in the data. You would think the country's profitability (ROE) would be fading, deteriorating, struggling, but the opposite is happening. At 14.4%, Sweden has one of the highest countrywide profitability figures in the world.

@_rob_anderson: Health Care ( $XLV ) vs. S&P 500 ( $SPY )

@hsilverb: $SPX Q3,’24 buybacks decrease 4.0% from Q2 as 12-months are up 16.7%; impact to EPS ticks up as expenditure buys fewer shares of higher-prices stocks; buyback tax reduced Q3 operating earnings by 0.42% and 12-months by 0.45%

Titans of the business world are rushing to make inroads with the president-elect, gambling that personal relationships with the next occupant of the Oval Office will help their bottom lines and spare them from Trump’s wrath.

In the weeks since the election, Trump and his advisers have been flooded with calls from c-suite executives who are eager to get face time with the president-elect and his team at Mar-a-Lago, the private Florida club where the transition team conducts much of its planning for the second term. A business consultant close to Trump is advising corporate clients to engage with Trump in any way they can and emphasize common goals, such as tax and regulatory changes. Clients are already angling for spots on whatever business advisory panels the new president may form.

Already, Mark Zuckerberg’s Meta has donated $1 million to Trump’s inaugural fund, and Jeff Bezos’ Amazon has also planned a $1 million contribution.

The day before Thanksgiving, Zuckerberg, the billionaire CEO, dined with the president-elect on a patio at Mar-a-Lago... Bezos is planning to meet with Trump next week. Bezos will travel to Trump’s club with his fiancée, Lauren Sánchez, and have dinner with Trump, according to people familiar with the matter... Earlier this week, Sundar Pichai, CEO of Google, met with Trump at Mar-a-Lago, according to a person familiar with the situation.

‬GOLDMAN: Market optimism “has lifted the share of the highest valuation pockets of the US equity market to levels only previously experienced in 2021 and the late 1990s Tech Bubble. .. The share of market cap represented by stocks with EV/sales above 10x has climbed to 27% ..” [Kostin] (‪@carlquintanilla.bsky.social)‬‬‬‬

‬@RyanDetrick: Weak breadth, inflation heating up, bears saying they are sorry, etc, have all been listed as reasons for the recent weakness. Or maybe it is perfectly normal for stocks not to do much the first half of December, before an end of year rally? Let's not give up on Santa yet.

$BAC CEO Brian Moynihan last week: "First, the consumers are spending money at about a 4% growth rate over last year. The period around Thanksgiving Black Friday, Cyber Monday was up 10-ish percent, which is strong...consumers are pretty good shape"

RH CEO: "The positive inflection of our business continued to gain momentum with third quarter demand increasing 13% despite operating in the worst housing market in 30 years"

@KevRGordon: In October, a net -5% of small businesses had a positive outlook on the economy ... in November, that moved up to a net +36%. That +41 percentage-point swing was the largest in NFIB survey history.

This is how the NFIB series for asking executives whether this is a “good time to expand” has moved over the last 10 years. In a nutshell, if Trump is in power or about to return to it, then it’s time to expand; otherwise, it isn’t.

Small business owners matter greatly. They may or may not be right to have such confidence that a Trump administration will improve the environment for them. And it’s possible that they’re simply loyally telling pollsters that things will be better now. But animal spirits like this, in a crucial sector of the economy, should be a great tailwind for Trump. If companies think it’s safe to invest and do so, that’s the administration’s battle won, no matter what policies they eventually enact.

The US is experiencing a surge in corporate and research spending on the back of the Artificial Intelligence (AI) revolution—a dynamic not seen in other developing nations or even China. This “AI boom” is structural, widespread and pervasive, ranging from investments by tech giants in the development of AI itself to the infrastructure supporting it, from semiconductor design and manufacturing to the building of data centers, increased energy generation needs, and further automation of supply chains.

This is again very unique to the US and different from what can be seen in the rest of the world. There is no AI boom in other developed countries. As shown in Exhibit 7, there are more data centers in the US than in all other major countries combined.

"MTB noted that conversations have gotten most positive post the election, noting they are positive on the economy growing 2.5-3% next year and see loans growing at a similar pace in 2025. MTB also highlighted they have started to make CRE loans again and plan for growth across the entire loan portfolio looking forward in 2025, with CRE leveling off mid-year before growing in 2H25. Additionally, MTB noted they have changed their credit box to grow with what the market will allow them in 2025, leading them to believe they will go alongside GDP."

Investors and managements expect animal spirits will spill over into the M&A market, where deal-making momentum is expected to jump in 2025. As we noted in our 2025 Outlook, we expect solid economic and earnings growth, relatively loose financial conditions, and rising CEO confidence will drive a 25% year/year increase in the number of completed US M&A transactions. Indeed, we have already seen a recent uptick in the number of announced mergers. The number of announced US M&A deals increased by 18% month/month in November in contrast with three consecutive quarters of declines.

The potential for less regulation in certain industries post-election should also support merger activity. Investors believe President-elect Trump’s pick for the next Chair of the Federal Trade Commission (FTC), Andrew Ferguson, will be friendlier to M&A than the current head while maintaining firm antitrust pressure on the tech giants. Many management teams offered optimistic commentary on the M&A backdrop during this week’s 35th annual GS Financial Services Conference (Exhibit 5). Our equity analysts note that managements expect M&A volume to grow in 2025, given improving CEO confidence, narrowing bid-offer spreads between buyers and sellers, as well as strength in the equity markets. They argue that sponsor activity is set to rise given high levels of uncommitted equity capital and LPs demand for a return of paid-in capital.

"The universe of companies in listed equity markets in the West has been contracting in this century due to a combination of factors. They include growing investor short-termism, bureaucratic listing requirements, and excessive regulatory scrutiny. These have been augmented lately by the share buyback boom that enhances earnings per share, the contracting pipeline of IPOs that means fewer growth companies seeking a listing, and cheaper availability of capital elsewhere, as interest rates plunged in the last decade. There are fewer public companies now than there were 40 years ago, and they are, on average, much larger and older." (Finnish pension executive)

Amin Rajan of CREATE-Research, who authored the report, offers numbers from the PitchBook data service to give an idea of how the universe of options for US investors has changed since 2000. Back then, public companies far outnumbered private ones, and the orthodoxy was to go public as soon as feasible. Now, it’s the other way around. You have far more choice away from public markets...

Rather than leave public markets as the engine of growth then, with capital directed by the wisdom of crowds and market efficiency, the prevailing notion now is that the best entrepreneurial decisions are made via private negotiations between a few individuals. With companies choosing to become unicorns and wait many years before attempting to go public (OpenAI, whose ChatGPT is arguably the key innovation of our time, is still private, for example), managers have a sense that if they want to capture growth, they cannot afford to wait until the IPO. Investors who bought Amazon.com at IPO were well rewarded; it’s hard to imagine similar profits when today’s unicorns go public.

"In the US, the number of unicorns (private companies valued at $1 billion or more) stands at around 750. It would take 10 years for them all to go public if they list on public markets at the same rate seen over the past decade." - Goldman Sachs

Apollo Global Management Inc. Chief Executive Officer Marc Rowan said he expects larger mega-deals from private credit providers could happen in the coming year amid a more business-friendly regulatory environment and growing investor demand.

“It will not surprise me this year to see your first $15 or $20 billion deal in the private markets,” Rowan said on Wednesday at a Goldman Sachs Group Inc. conference in New York. “I think it’s coming.”

The CEO pointed to Apollo’s $11 billion deal with Intel Corp. this year to fund a plant in Ireland as a model. Appetite from other insurers for long-term assets that have elements of debt and equity gave Apollo the confidence to agree to such large deals, Rowan said.

More non-technology companies are likely to follow the example of firms like Stripe, OpenAI and Spotify that have stayed private for longer, Rowan said. This in turn will create opportunities for investors to invest in so-called hybrid assets that fall between credit and equity, he added.

“I think we’re going to end up with a whole universe of companies that are private,” he said. “We will own equity that is private rather than private equity.”

This week’s public market debut for tech startup ServiceTitan Inc. brought big windfalls for early investors — including returns of more than $1 billion for Iconiq Growth and over $800 million for Bessemer Venture Partners, according to people familiar with the matter.

ServiceTitan, a Glendale, California-based software provider for the home services industry, finished its first day of trading at $101 a share on Thursday, a 42% boost from its listing price. The company has a fully diluted valuation of about $10 billion, according to Bloomberg estimates...

The successful public offering is a cause for celebration for venture capital investors writ large. Venture-backed IPOs have been scarce in recent years, starving VC firms of returns and casting a pall on the industry. But ServiceTitan’s success on Wall Street could encourage more tech companies to follow.

“As a result of this IPO going super well, I would expect a lot of companies to go public in 2025,” said Nina Achadjian, a partner at Index Ventures, which also invested in the startup...

Since its founding in 2007, ServiceTitan has raised about $1.5 billion in total funding according to PitchBook data. It was valued at $9.5 billion during the pandemic boom years, but raised money at a discount in the bust that followed, making a deal that included terms that encouraged it to go public sooner. Its valuation is now higher than it was at its pandemic peak.

Japan’s Nippon Life Insurance has agreed to acquire Bermuda-based Resolution Life Group Holdings for about $8.2 billion, marking its latest multibillion deal as it seeks growth abroad amid a shrinking population at home.

Nippon Life said Wednesday that Resolution Life’s strategic partnership with asset manager Blackstone would continue after its buyout.

Blackstone said it would remain Resolution Life’s investment manager for certain key areas, including private credit, real estate and asset-based finance markets.

Resolution Life has operations in the U.K., the U.S., Australia and other markets and focuses on the acquisition and management of portfolios of life insurance policies.

Patterson Cos. stock rose sharply Wednesday after the company announced it would be acquired by private-equity firm Patient Square Capital in a $4.1 billion deal.

Shares of the healthcare distributor jumped 34% to $31.10, marking the largest same-day percent increase on record, according to Dow Jones Market Data.

Patterson, a distributor specializing in equipment for the animal health and dental markets, went up for sale after posting mixed earnings for its second fiscal quarter ended Oct. 26. President and Chief Executive Don Zurbay acknowledged the “challenging end market environment” in a news release last week.

Under the terms of the deal, shareholders will receive $31.35 in cash per share, representing a 49% premium to the company’s 30-day volume-weighted average price ended Dec. 4.

Walgreens is in talks to sell itself to a private-equity firm in a deal that would take the pharmacy chain off the public market after its shares have been on a downward slide for nearly a decade.

Walgreens Boots Alliance and Sycamore Partners have been discussing a deal that could be completed early next year, assuming talks don’t fall apart, according to people familiar with the matter.

Walgreens’s market value reached a peak of over $100 billion in 2015 but had since shrunk to around $7.5 billion as of Monday. Mounting pressures on both its pharmacy and retail businesses had helped send its shares down nearly 70% so far this year before The Wall Street Journal reported on the deal talks Tuesday.

Billionaire investor Paul Singer’s Elliott Investment Management scored a quick win on its biggest-ever bet on a single stock, with industrial conglomerate Honeywell saying it would consider separating its aerospace business.

The move came about a month after our Crystal Tse, Liana Baker and Brooke Sutherland first reported that Elliott had built a $5 billion-plus position in the company, pushing for a breakup. The $153 billion-market cap company’s stock rose more than 3% on Monday.

Whether Honeywell actually proceeds with a breakup is still to be determined. But the strategic review is still a coup for Elliott, with the firm applauding the move in a statement, describing Honeywell’s portfolio transformation as the “right course.”...

The push at Honeywell appears incredibly well timed. Wall Street dealmakers are bullish on M&A coming back in a big way and the IPO market opening up under the Trump Administration, which is viewed as being more merger friendly in certain sectors. That includes industrials.

When M&A is riding high, activists have the option of pushing for a sale or breakup—a favorite outcome. Amid the merger blitz of the past decade that left many companies bloated, over-diversified and unfocused, public equity investors have shown a preference for simpler, streamlined businesses.

Warner Bros. Discovery said it is restructuring into two operating divisions, one focused on the legacy cable TV business and the other on streaming and studios, a move that could set the company up for dealmaking down the road.

Warner said Thursday it will merge the unit that currently houses its Max and Discovery+ streaming services as well as HBO with another division that includes its Warner Bros. movie and TV production operations...

Warner Bros. Discovery Chief Executive David Zaslav said in a statement that the new structure “better aligns our organization and enhances our flexibility with potential future strategic opportunities across an evolving media landscape.” Warner shares climbed 15% in Thursday trading.

Goldman Sachs Asset Management has agreed a more than €2bn deal to acquire drugmaker Synthon from BC Partners, according to people familiar with the matter, as it hopes to capitalise on demand for off-patent versions of complex medicines.

Private equity group BC Partners, which acquired a majority stake in the business in 2019 at an enterprise value of €750mn, will retain a roughly 25 per cent stake in the group after the Goldman Sachs deal, one of the people said.

Goldman Sachs’ investment arm beat rival bidders including the US private equity group TPG and London-based Permira, the people said. The current deal’s €2bn enterprise valuation takes debt into account...

The sale of Synthon by BC Partners takes the investment group’s exited positions to about €13bn in the past 18 months.

Berkshire Hills Bancorp and Brookline Bancorp have agreed to merge in an all-stock deal valued at about $1.1 billion, the regional lenders said on Monday, in yet another sign of increasing consolidation within the industry.

Regional lenders that were at the heart of the banking crisis in 2023 have been cutting more deals this year to expand their geographic foothold and better compete with rivals, extending a wave of deals...

Both Berkshire Hills and Brookline are headquartered in Boston, Massachusetts and each hold around $12 billion in assets. The deal is set to create a $24 billion bank with a geographic footprint across five states.

In the inventory-starved real-estate market of Aspen, Colo., a pair of spec mansions is coming on the market—one for $45 million and another for $36.5 million—in an unusual double offering for the affluent ski area.

On Aspen’s Red Mountain, the $45 million home is roughly 7,200 square feet with six bedrooms, while the $36.5 million home spans about 5,600 square feet with five bedrooms in Aspen’s West End. The sellers are father-daughter developers Robert Scannell and Lauren Scannell Cooke. The two also have a third Aspen project under way, which will be completed this summer...

After initially hoping to sell the spec homes for around $4,000 a foot, Scannell and Cooke are now aiming for more than $5,600 a foot.

“There was a huge risk in doing it,” she added, “but I do believe our efforts will pay off.”

Earlier this month, Patrick Dovigi, a former hockey player, entrepreneur and real-estate investor, sold a mansion in downtown Aspen for $55 million, $6.25 million more than he paid for it in April. This spring, he sold a mansion overlooking downtown for $108 million after buying it for $72.5 million in 2021.

In very simple terms the more useful a quantum computer is, the more qubits it has.

However a major problem with the technology is that it is prone to errors - a tendency that has previously increased the more qubits a chip has.

But Google researchers say they have reversed this and managed to engineer and program the new chip so the error rate fell across the whole system as the number of qubits increased.

It was a major "breakthrough" that cracked a key challenge that the field had pursued "for almost 30 years", Mr Neven believes.

He told the BBC it was comparable to "if you had an airplane with just one engine - that will work, but two engines are safer, four engines is yet safer".

Errors are a significant obstacle in creating more powerful quantum computers and the development was "encouraging for everyone striving to build a practical quantum computer" Prof Woodward said.

But Google itself notes that to develop practically useful quantum computers the error rate will still need to go much lower than that displayed by Willow.

How will quantum computing make bitcoin obsolete?

Answer: Quantum computing poses a significant threat to Bitcoin due to its potential to break current cryptographic algorithms. Quantum computers could perform tasks like transaction hijacking and private key guessing, which are currently infeasible with classical computers. Shor’s algorithm, for example, could factorize large numbers, undermining Bitcoin's security if a quantum computer with sufficient qubits is developed1. While quantum-resistant encryption is being researched, Bitcoin may need to adopt these new protocols to remain secure against future quantum threats.‬

In September, Adrian Wojnarowski announced his retirement from media, abruptly walking away from ESPN (and a $7.3 million annual salary) to return to his alma mater, St. Bonaventure, in the newly created position of general manager of the men’s basketball program (and $75,000 a year). The New York Times covered it. So did CNN, Fox News and CNBC. On ESPN, the network’s remaining news breakers—Adam Schefter, Pete Thamel and Jeff Passan—hit the airwaves to pay tribute. On social media, millions of followers with alerts set for his posts—Woj bombs, as they became known—fired off some version of the same question: Why?

After all, this wasn’t a job. It was the job, the kind sports journalists spend a career working for. Wojnarowski—Woj for the purposes of brevity and character count—did. He sharpened his reporting chops in the ’90s covering Jerry Tarkanian’s dysfunctional Fresno State program for the Fresno Bee before spending a decade as a columnist with The Record in New Jersey. In 2007 he pivoted to the NBA beat, first with Yahoo Sports and later ESPN. He’s dined with Kobe Bryant, consulted with owners on coaching hires, done the walk-and-talk—the act of sidling up to a player during his trip from the locker room to his car or the team bus, a reporting technique that if Woj didn’t invent, he most certainly made trendy—more times than he can remember.

He revolutionized what it means to be a reporter, harnessing social media to disseminate breaking news to an audience with an insatiable appetite for it. What began as an experiment—“This is your new spot for Adrian Wojnarowski and Johnny Ludden’s breaking NBA news,” read Woj’s maiden tweet the day before the 2009 draft. (Ludden remains at Yahoo Sports, where he is the editor in chief.)—evolved into a platform with a Wembanyama-like reach.