Crescent Park & Recreation – Inflation, Buybacks and Plastic Pollution

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Dear Partners and Friends,

This is our first Crescent Park & Recreation mailer of 2022. It has been a busy year already as we come to the end of yet another volatile quarter for markets. Rising inflation, as well as the war in Ukraine, has resulted in increased market nervousness about the potential for an economic slowdown. On March 28, the 5-year and 30-year Treasury yields inverted (albeit briefly) for the first time since 2006. Historically, there has been a correlation between inverted yield curves and recessions, albeit often with a long lag time.

We thought we would share a few articles of interest on these topics (and more) as well as a reminder to file your taxes (for our partners in the United States).

I. Interest Rates and Inflation

Rising energy, food and services prices pushed U.S. inflation to a 7.9% annual rate in February 2022, a four-decade high. There are additional oil and commodity market disruptions related to the Ukraine crisis which could add yet more cost pressures to consumers. Excluding energy and food prices, the Labor Department reported that consumer inflation rose at a 6.4% annual rate in February, up from 6% the prior month. What this all means for the Federal Reserve and interest rate policy has become relatively clear. On March 16, the Federal Reserve raised interest rates for the first time since 2018, opting to push rates up by a widely anticipated 25 basis points. While most market participants anticipate further interest rate hikes to come, there is some debate as to the magnitude. On March 25, Citi economists said they expect the Fed to boost rates by half a percentage point during each of their next four meetings.

II. Share Repurchases

Share buybacks have continued in 2022 from a record level (c. $850 billion) in 2021. Firms in the S&P 500 outlined buyback plans valued at $238 billion through just the first two months of 2022, according to data from Goldman Sachs Group Inc. Further, Goldman Sachs analysts recently raised their 2022 forecast for buybacks to a record $1 trillion, which would represent a 15-20% rise from last year. Share buybacks may support stock prices by reducing a company’s share count, boosting its per-share profit, and improving sentiment by suggesting executives are optimistic about their companies’ prospects and financial position. On the other side of the coin, some investors worry that significant buyback activity redirects corporate spending away from capital expenditures, research and development, and wages, advancing stock prices in the short run at the expense of long-term growth. Regardless of your view, buybacks should continue apace.

III. Plastic Pollution

We have discussed Crown Holdings, Inc. (“Crown”) with many of you as it is a core position in both our hedge fund and long-only product. One of the pillars of our thesis on Crown is the notable market share that aluminum beverage can manufacturers stand to gain at the expense of plastic bottle manufacturers over time. The following table highlights the size of each respective market. As you can see, plastic bottles still represent a massive share of the beverage container market (particularly for water). However, stories like the attached article will, in our view, continue to lead governments worldwide to consider the negative externalities created by plastic pollution. Aluminum is one of the most recycled, and recyclable, materials in use today.

IV. Taxes

Just a friendly reminder to file your personal taxes (or extensions) by April 18.

All the best,
Pete

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