Weekly Research Briefing: Welcome to Peak Week
If you are a team sports fan, this is your week. World Series, NFL, NBA, NHL, College Football and Global Soccer to fill all 24 boxes of your ESPN+ screen. If you are a political junkie, this is also your week as the candidates make their final pitch into next week's final decision. If you are a freak of the financial markets, then this is also your week as the economic data hits hard with Q3 GDP and October jobs figures dropping to give the Fed one last reading before their rate decision next week. Stock geeks also get a dream week as 1/3 of the companies in the S&P 500 report earnings with mega-caps Apple, Amazon, Microsoft, Meta and Google getting the most attention. And for kids, the year's best holiday is on Thursday with record high temperatures in store for most of the nation's youth. Better bring an extra pillowcase for the long night of trick or treating.
Looking backward, it was another strong week of earnings reports and reporting stocks continued to respond. Also strong was the light week of economic data with the Philly Fed and the S&P Global Services PMI both coming in stronger than expected. You can see the U.S. Treasury market pull on its tight shirt collar with each and every strong datapoint. The 10-year Treasury note yield touched 4.3% on Monday which is now up from the September low of 3.6%. Great news for the credit markets that the economy continues to strengthen, but tough love for the equity markets which don't want to see rising risk free rates competing with equity earnings yields. One new potential source of consumer strength and corporate earnings upside could be coming from this weekend's news out of the Middle East where Israel and Iran might be entering a cooling period. Hopefully Monday's 5% pullback in crude oil will be a continuation of this year's lower trending energy prices. Enjoy the busy week.
The corporate sales and earnings beats continue, and the stocks are being rewarded...
@MikeZaccardi: BofA: It’s a stock picker’s paradise. Reactions so far have been much bigger than history, with beats outperforming the S&P 500 by 248bps the next day (vs. avg. 148bps)
This is a VERY big week of earnings. Be thoughtful of your equity research analysts...
(@eWhispers)
Plenty of comments on the earnings calls and in the releases confirming that the consumer remains in a good state and is willing to spend...
@Trade_The_News: $GM CFO: GM's average transaction price per vehicle, which Wall Street has been monitoring for signs of weakening, remained over $49,000 from July through Sept; The consumer has held up remarkably well for us; Nothing we see has changed from where we’ve been for the last several quarters- CNBC (General Motors Company)
A top furniture manufacturer noted that retail inventories are in a good place, and they hope that the consumer is ready to spend into year end...
"I actually spent a good portion of the last three, four weeks, actually visiting retailers across the United States. And the vast majority of them are in really good inventory positions....All that said, I mean, what we're still consistently hearing from retailers is that traffic levels are down, business is down and most retailers are cautiously optimistic that once we move past the uncertainty of the presidential election, we'll see our normal kind of seasonal kind of pick up going into the holiday season." – Flexsteel Industries CEO Derek Schmidt
There is luxury retail and then there is Hermes...
What an unbelievable company. Most of the luxury goods companies have tripped this year, but not the saddle maker.
Hermes reported a rise in sales for the third quarter as the Birkin handbag maker continued to defy a slowdown in demand for luxury goods that is harming most of its rivals.
The French luxury company said it achieved quarterly sales of 3.70 billion ($3.99 billion), up 11% at constant exchange rates compared with the year-earlier period... Growth has decelerated from 13% in the second quarter and 17% in the first, but the figures suggest a sectorwide slowdown didn’t hit Hermes as hard as many of its peers. Analysts credit the company’s relative resilience to its greater reliance on wealthier clients...
Analysts at Bernstein said Hermes’s sales growth was stronger than expected as the company ploughed through the sector’s difficulties and delivered double-digit growth in all regions except Asia.
The final UofM Consumer Expectations outlook before the election is nearly identical to four years ago...
You can hear James Carville yelling "It's the economy stupid", but it looks like it will be a reduced factor for next week's vote.
Philadelphia Fed district services companies feeling the most optimistic in two years...
@LizAnnSonders: October Philly Fed Services index up to +6 vs. +4.1 est. & -6.1 prior … strongest reading since May 2022
The economic surprise indexes continue to set higher levels which is bringing angst into the Treasury market...
Stock prices are also pointing to a strong economy in the future...
@KevRGordon: “An S&P 500 gain as large as 30% over a one-year period has usually been a sign that an economic downturn is not imminent. In 19 of the 21 previous cases, any recession was more than a year away.” @LeutholdGroup
A strengthening economy is leading to lower default rates which is what Moody's highlighted last week...
"The spec-grade default rate has actually been declining, and we expect that to decline further into next year. That means that spreads should remain tight. They are very, very tight right now. Spreads are near their all-time lows. The expectation of lower interest rates and combine that with tight spreads, that's going to give a very, I think, favorable environment for new issuance and also for some refi." – Moody's CEO Rob Fauber
And my favorite chart in the market tells me that it is okay to be long risk right now...
If I only had access to one chart in the financial world to hit my 'BUY' and ‘SELL’ button from, this would be it. Right now, it shows little risk which means that I want to own equity and credit exposures in the public and private markets.
Public equities are no longer moving in lockstep. Time to add specific company alpha...
This is what Goldman Sachs was writing about last week. Time to expand your security allocation beyond the passive indexes that are concentrated into a handful of companies.
The correlation between the average stock (equal weight index) and the S&P 500 has declined substantially this year. Stock pickers could benefit from this dislocation.
Penciling it out further on Goldman Sachs concentration risk of the largest equity index...
- The Magnificent Seven companies employ 2.3m people.
- Assuming 2/3 of this employee base works in America, then a little less than 1% of those employed in the U.S. work for the Mag-7.
- The Mag-7 accounts for 29% of the S&P 500 market cap.
So, does a fiduciary seeking broad economic participation of the U.S. economy hit their goal if they are exposed to a very concentrated employee base? What happens if one of the seven trip? What about if they are no longer allowed to grow through M&A?
I love the success of the mega-cap companies, but how fast will they continue to grow from here?
@bespokeinvest: The mega-caps have 10-bagged their market cap in the last 10 years. From $1.4 trillion ten years ago to $15.8 trillion today.
Healthy credit and equity markets are leading to an acceleration of M&A and IPO activity in October 2024... 
(Goldman Sachs)
One of the world's largest insurance brokers is putting significant M&A capital to work...
@TheTranscript_: Marsh McLennan is on track for its largest M&A year. "We are on track record for the largest M&A year in Marsh McLennan's history, with nearly $10 billion of capital committed to acquisitions year-to-date" $MMC
And a big IPO monetization last week as Ingram Micro returns to the public listings...
Oct 24 (Reuters) - Ingram Micro notched a valuation of $6 billion after shares jumped 15% in their market debut on Thursday, signaling strong investor demand for one of the world's largest technology distributors.
U.S. initial public offerings have staged a comeback as investor sentiment improves and stock markets hover near record highs. With uncertainties surrounding the presidential election and future rate cuts expected to ease next year, analysts anticipate more companies will move forward with their listings.
Ingram and its private-equity owner Platinum Equity together sold 18.6 million shares in the IPO to raise $409.2 million. The IPO valued the company at $5.18 billion after the deal was priced at $22 per share, within the targeted range of $20 and $23. The stock opened for trading at $25.28 apiece...
Ingram distributes IT products ranging from Apple's iPhone to Cisco's network equipment and counts big-tech giants such as Microsoft and Nvidia among its suppliers.
And in Japan, not even a bullet train could beat the success of its railway IPO...
Tokyo Metro Co.’s stock price surged 45% on Wednesday in its trading debut after the initial public offering drew strong demand from investors looking for a steady stream of dividends from the firm.
The shares closed the trading session at ¥1,739 and rose as high as ¥1,768 after the operator of one of the world’s biggest subway systems sold them at ¥1,200 ($8) a piece, raising ¥348.6 billion in Japan’s largest IPO since mobile carrier SoftBank Corp. listed in
2018. The deal was oversubscribed more than 15 times, according to several of the lead underwriters...
A high dividend yield for Japan and the firm’s earnings outlook are making Tokyo Metro shares attractive, investors and analysts said. The company’s business is concentrated in an urban area and is less affected by Japan’s declining population.
The share price of Japanese companies that have gone public this year has risen 34% at debut on average, according to data from Ichiyoshi Securities Co...
The IPO comes after legislation required the government to sell shares in Tokyo Metro by March 2028 to repay debt sold in the aftermath of the 2011 earthquake and tsunami. The combined shareholding of the Japanese government and the Tokyo metropolitan government will halve following the offering.
More M&A also means that US LBO loan volume is rising which is good news for growing credit and lending appetites...
Just no need for growth companies to go public to fund their future growth...
When I started in the financial world 35 years ago, growth companies would have needed the public markets to raise a fraction of the capital that Waymo raised last week. Now they just make a few phone calls to a list of interested parties and do it quickly via the private markets.
Waymo, Alphabet Inc.’s autonomous driving unit, raised $5.6 billion from investors, its largest-ever funding round.
The investment was led by Google parent Alphabet and included participation from Andreessen Horowitz and big-name finance firms Fidelity Investments, T. Rowe Price Group and others, Waymo said in a statement on Friday.
Waymo is one of a large pack of companies pursuing robotaxi services in the US. It runs a commercial ridehailing platform in San Francisco, Phoenix and Los Angeles, where it charges fares for trips in self-driving cars. Waymo also recently partnered with Uber Technologies Inc. to offer rides through its app in new markets Austin and Atlanta, starting next year.
Earlier this year, Alphabet pledged to invest as much as $5 billion over several years to help the startup build its autonomous driving technology. Waymo didn’t specify how much of this round Alphabet accounted for. Waymo’s valuation was not disclosed.
The CEO of Ford is a fan of his Chinese EV. Now what?
@Birdyword: Ford's CEO, Jim Farley: "I drive the Xiaomi (SU7)... we flew one from Shanghai to Chicago and I've been driving it for six months now and I don't want to give it up"
Interviewer: "That's an extraordinary thing to say, isn't it"
Jim Farley: "Yes"
You knew it was coming: The office sector may be starting to turn...
"The office sector hit an all-time high in vacancy this quarter, but I'm becoming somewhat optimistic that we're about to see a turn. The rate of increase in vacancy is slowing to a crawl. One important lead indicator, sublet vacancy is now clearly falling. Another leading indicator, total availability is already falling. The spread between vacancy and availability is shrinking, usually an indication of early signs of recovery." – CoStar Group CEO Andrew Florance
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