LBA Monthly View | March 2023


• The Fed’s “discount window” is seen as a lender of last resort. There are negative implications for those forced to use it, including punitive interest rate charges. Nonetheless, use of the discount window has soared to all-time highs this year as stress has materialized in the banking system.

Source: Reuters

• Historically, usage of the Fed’s discount window has been a harbinger of tighter lending standards.

The ratio of job openings to unemployed workers remains above 1.75, suggesting the labor market remains tight. However, the labor force participation rate has been recovering, suggesting more workers may be returning to the labor market.

Blackstone CEO Stephen Schwarzman likely made history after receiving the largest W2 on record—$1.27B—for his 2022 wages and dividends. However, all is not well with Blackstone, the nation’s largest landlord. The company has been blocking customer withdrawals from the REITs it manages, and it defaulted on a $562M property-backed CMBS (Commercial Mortgage-Backed Security) in early March.

According to Goldman Sachs, banks with less than $250B in assets account for 50 percent of US commercial and industrial lending, 60 percent of residential real estate lending, 80 percent of commercial real estate lending, and 45 percent of consumer lending.

• Before and After the Era of Loose Money: Venture Capital Edition.
Over the last decade, record low interest rates have fueled an explosion of venture capital investments. When money is cheap, so are the consequences of failure, so why not cast a wide (but perhaps shallow) net to increase the chances of success?


Company Highlights

American Tower (AMT)
In 2022, AMT set a record by building towers on nearly 7,000 new sites—many in international markets, where AMT continues to invest for growth. Domestically, the shift to 5G continues and AMT reported record growth in both colocation (i.e., sharing tower space with other carriers) and amendment (i.e., adding equipment/functionality to existing structures) in the most recent quarter, which was up 50 percent year over year.

• Amazon (AMZN)
AMZN plans to launch its first internet satellites into space in the first half of 2024. There will be three different antennas to connect customers and satellites, and the standard antenna will provide internet speeds of 400 megabits per second—roughly twice as fast as competitor Starlink’s (operated by SpaceX) service.

Alphabet (GOOGL)
YouTube TV is raising prices by 12 percent to $72.99/month. It is the streaming service’s first price increase in three years.

S&P Global (SPGI)
In February, the company launched the S&P GSCI Climate Aware Index, the first commodity index to incorporate environmental metrics. Relying on data from a proprietary dataset, the Climate Aware Index reallocates the weights of companies included in its parent index, the longstanding S&P GSCI, to align with long-term environmental initiatives such as fossil-fuel reduction and water conservation.

ConocoPhillips (COP)
The Biden Administration granted approval to ConocoPhillips’ Willow project on the North Slope in Alaska, which is expected to generate ~180K barrels of oil per day. The project is now slated to use three drilling sites, down from the five initially proposed. Even at this reduced scale, the project, when complete, will generate roughly 1.5 percent of total US oil production each year.

On Our Minds

Choosing Purpose Over Panic

“Investing is not a game where the guy with the 160 IQ beats the guy with the 130 IQ. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.” – Warren Buffet

Our global financial system has been predicated on low interest rates since the 2008 financial crisis. The speedy reversal of this low-rate environment started last March; since then, the Federal Reserve (Fed) has raised interest rates nine consecutive times to combat the worst inflation we have seen in forty years. The era of “free” money—and the heightened risk-taking that loose financial policy encourages—may be over, but its fallout, which includes the SVB and SB failures, is just beginning.

In January, we commented on the uncertainty pervading financial markets due to conflicting economic signals from leading economic indicators; since then, the uncertainty has only increased. Until very recently, financial markets had been primarily concerned with inflation, labor market strength, and the US economy’s resilience amidst a historic rate hike cycle. These concerns were quickly overshadowed, though, as stress appeared in the banking system and the FDIC closed Silicon Valley Bank and Signature Bank. In response, the Fed and US treasury (once again) rushed to provide liquidity to the system regardless of cost—and despite ongoing quantitative tightening (QT) efforts. In just a few days, the Fed unwound roughly half of the QT progress it had made since last June, when the cycle began.

In less than three months, the market has cycled through multiple narratives, including (1) a “hard landing” (recession and high unemployment), (2) a “soft landing” (modest slowdown and lower unemployment), (3) a “big flip” (reacceleration of inflation and economic strength), and most recently (4) a potential banking crisis. The effect of these dramatic and sudden changes is best illustrated by the fluctuating yield on the 2-year US Treasury: it started February at roughly 4.1 percent, rose around 100 basis points (bps) in just one month to over 5 percent (for the first time since 2007), then rapidly declined back to 4 percent, shedding 104 bps in just three days—its largest drop since the crash of 1987.

Source: FactSet

It’s easy to get carried away with the latest market narrative or dramatic headline but for long-term investors, it’s important to remain focused on the strategies and processes that have succeeded over time. Many market participants are shocked to learn that the S&P 500 index is currently trading at levels similar to last May (2022). Unaccustomed to significant volatility, swaths of inexperienced traders, such as those focused on meme stocks, have exited the market altogether.

Here at LBA, we are comfortable with volatility because we understand its context. We remain committed to our long-term strategy of investing in companies with durable competitive advantages and strong balance sheets-companies that generate economic profits throughout business and economic cycles. This proven strategy prevents us from chasing market fads; it also helps us avoid companies with high leverage and unquantifiable risks, like banks. While it isn’t the most exciting strategy on a short-term basis—and especially during periods of “free” or “loose” money—our objective is to protect and grow our clients’ capital over the long term. We do not change course in reaction to headlines or market narratives. Be assured that we will continue to focus our efforts on adhering to our long-term approach, which has withstood many turbulent periods over the last few decades.

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