Winter is here

Quick Hits From Grit

Happy Friday Everyone 👋

SIX things you need to know this week in 60 seconds.

1. “Not so fast” - Joe Manchin

2. Records were meant to be broken shattered

3. Earnings beats mean nothing in December

4. Winter is here

5. Jack vs. Web3

6. Artists are cashing in their music

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1. MACRO

“Not so fast” - Joe Manchin

Economic growth forecasts for 2022 are being revised downward after Sen. Joe Manchin shut down Biden’s $2T Build Back Better spending package this week. The move came as a shock to many Democrats who have been negotiating on this for 5 and a half months.

So what’s his problem?

Manchin is worried the plan will exacerbate rising inflation and contribute to the national debt. He’s also concerned that it’s forcing the U.S. into clean energy sources “faster than technology or the markets allow”.

Goldman Sachs dropped their Q1 2022 GDP forecasts to 2% from 3% on the news and Zandi is predicting a sharp slowdown to less than 1.5% in Q4 2022 if the plan doesn’t get approved.

GRIT’S TAKE: The good news is this should be a drag on inflation. The bad news is it leaves the economy more vulnerable to shocks (like a new highly contagious variant).

GRIT’S ACTION: Long the stock market! The economy is not the stock market. Please read that again.

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2. DEALS

Records were meant to be broken shattered

What do you get when you combine a boatload of (historically cheap) capital, strong equity markets, high levels of CEO confidence, and sky-high valuations?

You get a 63% increase in global mergers and acquisitions (M&A) activity for a record total of $5.63T on the year (so far)! The previous record was $4.42T in 2007. Here are the top 3 deals:

• AT&T x Discovery - $43B

• The leveraged buyout of Medline Industries by Blackstone, Carlyle, and Hellman & Friedman for $34B

• Canadian Pacific Railways buys Kansas City Southern for $31B

M&A isn’t the only thing at record highs — U.S. stock buybacks have doubled from a year ago to $234.6B thanks to companies that are flush with cash (over $2T) and possess healthy balance sheets.

GRIT’S TAKE: Dealmakers are likely to keep their foot on the gas next year, but with interest rates (probably) rising soon a repeat of 2021 is unlikely.

GRIT’S ACTION: Cash is flush. Amazing deals to be done. Except SPACs… stay away from those.

3. STOCK MARKET

Earnings beats mean nothing in December

According to Bespoke, December is normally the calmest month for markets, but in 2021 it’s been the most volatile.

Thanks to this volatility, the average one-day change for the 116 stocks that had reported through last Friday was -1.68%.

That’s in spite of the fact that 75% of those companies beat both consensus EPS and sales estimates. Companies that beat their sales estimates averaged a one-day drop of 0.34%.

GRIT’S TAKE: The good news is that forecasts for 2022 are calling (again) for higher-than-expected earnings.

GRIT’S ACTION: Long stocks. Mainly the less overvalued ones ; )

4. COMMODITIES

Winter is here

Back in October, we warned that winter was coming and that there may not be enough natural gas to keep everyone warm. E.U natural gas prices had already spiked nearly 500% YoY and forced many businesses to come to a screeching halt (more than 2 dozen U.K. energy suppliers have gone broke this year).

The energy crunch has only gotten worse since then. Wholesale European gas prices are now up more than 800% in 2021 after the stoppage of a key Russian pipeline flooded the market with buyers trying to lockdown supplies.

On Tuesday, energy prices did their best meme-stock impression and jumped more than 20% for the day!

GRIT’S TAKE: “The faster we get to renewables, the less exposed we are to price spikes coming from imported fossil fuels.” — Margrethe Vestager, E.U. Commission executive VP.

GRIT’S ACTION: Cost of cleaning up the environment is going up in tandem. Long carbon credits!

5. CRYPTO

Jack vs. Web3

Web3 is supposed to democratize and decentralize, well, everything. Twitter Square Block CEO Jack Dorsey disagrees. On Monday, he tweeted:

“You don’t own ‘web3.’ The VCs and their LPs do. It will never escape their incentives. It’s ultimately a centralized entity with a different label. Know what you’re getting into…”

The shot appeared to be aimed at Andreessen Horowitz, which has been both Web3’s biggest cheerleader and biggest stakeholder with billions invested in the space.

All doubt was removed after Elon Musk asked his followers “Has anyone seen web3?”. Jack replied that “It’s somewhere between a and z”, referring to a16z (Andreessen Horowitz’s nickname).

Marc Andreessen did the mature thing and blocked Jack (the creator of Twitter) on Twitter.

GRIT’S TAKE: I honestly have no f****** clue what’s going on here.

GRIT’S ACTION: Web3.0 = (Web1.0 x Web2.0)^infinity

6. ENTERTAINMENT

Artists are cashing in their music

Major music conglomerates and private equity firms have been pouring billions of dollars into music and song rights ever since Bob Dylan sold his catalog to Universal last year for $300M.

The latest megastar to cash in on their musical legacy is Bruce Springsteen who sold his recordings and songwriting catalogs to Sony for an estimated record $550M. According to Billboard, Springsteen’s music brings in around $17M per year after costs.

Springsteen wasn’t the only one to make a deal this month — ZZ Top Just Got Paid $50M by KKR and BMG for their music interests too! Others who have recently sold their work include Paul Simon ($250M), Mötley Crüe ($150M), Neil Young ($150M) Red Hot Chili Peppers ($140M), Stevie Nicks ($100M), and Tina Turner ($50M).

GRIT’S TAKE: An economist who specializes in pricing music interest on behalf of investors said he did 300 valuations in the last year alone totaling over $6.5B!

GRIT’S ACTION: NFT royalties will transform the entire industry. Get ready!

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*SOURCES

1. Bloomberg

2. Reuters, Bloomberg

3. TheMarketEar

4. FT

5. Bloomberg

6. NYT, WSJ

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