Need More Green

361 Capital Market Commentary | September 14th, 2020

This summer can’t end fast enough for our nation’s forests. If only there were a way to redirect the five current tropical storms in the Atlantic to the west coast. Where are Frozone and Storm when we need them most?

The Nasdaq is having its own adverse weather event this month as the index tagged into correction territory last week. Of course, the index was up 40% year to date before the September mark down. The new volatility should be listened to and where you have stocks with little upside to target, you should consider diversifying away into other areas of the market with more upside. The recent SoftBank/Robinhood/BigTech euphoric blowoff should be considered a gift to your portfolio and you should unwrap it and return some expensive stocks for some better valued companies that will outperform in a post-COVID world.

The backdrop for the markets remains mostly positive with the global economy flat-to-strengthening and over three dozen COVID vaccines in current trials. As Pfizer said today, one of these vaccines will make it out of trial and into needles by year end which will help further save lives and slow the transmission of the virus. With near-term interest rates low and the risk markets open wide, companies are issuing paper at record speed. And as we saw this weekend, they are using this paper to make significant M&A transactions to acquire new products or business lines. Now if only we could encourage the companies to expand and drop money on capex and new hiring.

Until the U.S. returns to hiring millions of employees each month, the worries surrounding housing payments and consumer spending will continue. The election is now less than 50 days away.

As COVID winds down, don’t expect these gains to continue…

Chemicals, Transports and Industrial stocks are now outperforming. The market is moving to bet on a world past COVID-19. The companies on this list will continue to do well. But that doesn’t mean that their stock prices have not already discounted that

Jon Erlichman Tweet

Take note Dow Theorists…

The Transportation Index is outperforming.

Adaptiv
(@adaptiv)

And a good time for asset manager firms to hire a basic materials analyst…

Chemicals vs SP500
(AllStarCharts)

September is often a time for change for the markets…

SP500 Historically

It only took one week of criticism for SoftBank to consider going private…

SoftBank executives have revived discussions about taking the technology group private as the Japanese conglomerate seeks to redefine its strategy after a series of big asset disposals, people with direct knowledge of the matter said.

The talks are driven by frustrations over the persistent discount in SoftBank’s $115bn equity valuation compared with the value of its individual holdings, which continues even after an asset sale programme targeted at closing that gap.

The latest disposal was the $40bn cash-and-stock sale of the UK’s Arm Holdings, the chip designer, to US chipmaker Nvidia.

The deal will make SoftBank the largest shareholder in Nvidia, the Financial Times reported on Saturday, adding to its portfolio of minority holdings that include stakes in Chinese ecommerce group Alibaba and SoftBank’s listed Japanese telecoms unit.

The take-private discussions have also been accelerated by what people close to the company’s senior management say are a number of fundamental changes to SoftBank’s long-term business strategy since it launched the $100bn Vision Fund in 2016.

Core to those, said two people familiar with the situation, is that the company sees itself increasingly as an investor and asset manager rather than a direct operator of businesses as it has been for its 39-year history.

Intense shareholder scrutiny of SoftBank’s recent aggressive bets on US technology stocks — which saw the Japanese group dubbed the “Nasdaq whale” for its outsized equity options trades — have also bolstered the appeal of becoming a private company, the people said.

(FinancialTimes)

The FAMAG pickle for large cap growth funds…

As we have pointed out in the past, unless a large cap growth portfolio bought its FAMAG stocks at lower prices, it could not replicate its benchmark today. So, a bet on a large cap growth mutual fund remains a bet against the markets top five stocks.

In practical terms, for 75% of the assets in a portfolio, no individual position may account for more than 5% of the overall assets of a “diversified” fund. The remaining 25% of the assets are not subject to the 5% individual position limit. However, the sum of all positions with a weight greater than 5% of AUM may not exceed 25% of total assets.

The three largest stocks in the Russell 1000 Growth index comprise 30% of the benchmark. If it were to register as a diversified fund, the index would fail the SEC’s concentration restrictions. However, non-diversified, passive, and index funds are not subject to the diversification requirements.

(Goldman Sachs)

Russell 100 Growth Index

Housing deflation coming?

While the CPI and PPI continue to surprise on the upside, one component is missing out on the party, housing rental cost. Why? Junior is moving back to the basement. Families trading the big city homes for less costly burbs and towns. And no-kid households leaving the apartment and living the life of an Airbnb gypsy on wifi.

CPI's regular rent inflation

(@SoberLook))

Subleases in Manhattan being offered at over 50% off…

As a result of employees shifting to less than five days in an office, all office space prices are under downward pressure.

Tweet from @DonnaHWalker1

My building remains only 15-20% occupied at its peak during the day…

And looking out my window, I can see one of the top new builds in Denver which is now not going to be filled by its major prospective tenant. Companies just don’t want the cost of unused space anymore.

Commercial RE Demand Collapses
(@SoberLook))

Denver’s 2nd largest co-working landlord filed for bankruptcy last week…

Several entities that operate Regus shared-office locations in the Denver area have filed for Chapter 11 bankruptcy protection, citing declines in occupancy and demand for temporary office space as a result of the pandemic, according to court filings.

Regus is one of the largest coworking operators in the Denver metro, according to Denver Business Journal research. As of late 2019, Regus leased 520,000 square feet in the Denver area, second only to WeWork. Regus’ 28 Denver-area locations were the most of any coworking operator.

Typically, each Regus location in the U.S. is operated by a separate business entity affiliated with the company. Regus itself is a subsidiary of Switzerland-based IWG.

On Thursday, nearly 50 of those Regus affiliates across the U.S. filed for Chapter 11 bankruptcy protection, which allows the entities to continue operating while undergoing a reorganization of debts.
It was the largest wave of bankruptcy filings since the start of the pandemic for Regus, which has had more than 70 affiliates around the U.S. file for bankruptcy protection since July 30.

(DenverBusinessJournal)

Less than 50 days left…

Voting has already begun in some states. Not too much change in the overall polling from a couple of months ago but some shifts in state by state. The swing states still have a blue-colored feel to them as pictured below.
Swing State Showdown
(CNBC)

The Fed has done their job…

Taking short-term rates to zero has pushed corporations to inhale capital at low interest rates and high valuations. Now the companies and the Government need to spend to encourage companies to spend on capex, R&D and plenty of new employee hiring.
Issuance Activity

Your weekly reminder to think about gold…

@mark_ungewitter: Buy, sell, or gold? In gold terms, global equities topped in 2018. One reason to hold at least some gold, as long as it maintains an uptrend versus your national currency.
Gold

Not many companies have surfed the COVID storm better than Peloton…

“In the fourth quarter, workouts reached 76.8 million, up 333% year-over-year, equating to nearly 25 average workouts per connected fitness subscription per month, compared to 12.0 workouts per subscription per month in the fourth quarter of last year.”

(Peloton Interactive CEO, John Foley)

Average Monthly Workouts Per Sub

It looks like Airbnb will also be a COVID winner versus their major hotel competitors…

Weekly Spend at Marriott and Airbnb
(Axios)

At some point, part of the California population is going to leave the state unless the forest fire situation can be better controlled…

Besides the health issues of breathing in all that carbon, at some point the property/car insurance companies will just give up on the state making the cost too burdensome for those remaining to pay.

In a matter of weeks, California has experienced six of the 20 largest wildfires in modern history and toppled all-time temperature records from the desert to the coast. Millions are suffering from some of the worst air quality in years due to heat-triggered smog and fire smoke. A sooty plume has blanketed most of the West Coast, blotting out the sun and threatening people’s lungs during a deadly pandemic.

California is being pushed to extremes. And the record heat, fires and pollution all have one thing in common: They were made worse by climate change. Their convergence is perhaps the strongest signal yet that the calamity climate scientists have warned of for years isn’t far off in the future; it is here today and can no longer be ignored.

“What we’ve been seeing in California are some of the clearest events where we can say this is climate change — that climate change has clearly made this worse,” said Zeke Hausfather, a climate scientist at the Breakthrough Institute, an Oakland-based think tank. “People who have lived in California for 30, 40 years are saying this is unprecedented, it has never been this hot, it has never been this smoky in all the years I’ve lived here.”

(LATimes)

Colleges might be able to get by with one year of a double-digit decline in enrollment…

But they will be hard pressed to see any further declines and probably even need a double-digit bounce into the 2021/22 school year to keep their long-term financials from digging a deep red hole in their State budget or endowment.

New freshman enrollment at CU Boulder declined 12.3% from last year, dipping from 7,113 students to 6,235, according to a presentation during Thursday’s CU Board of Regents meeting. CU officials sounded the alarm about enrollment last week, but didn’t announce numbers at the time.

Enrollment also dropped significantly compared to last year among international students, with undergraduate international student enrollment plummeting 22% on the Boulder campus and international graduate student enrollment falling 11.4%.

CU Boulder, the largest higher education institution in Colorado, will lose $25.2 million more than campus leaders anticipated in their June budget projections due to those enrollment drops, for a total budget hit of around $66 million below where the school’s budget was last year — largely due to the drastic toll COVID-19 has taken on higher education finances.

“Where did these students go?” asked CU Regent Jack Kroll, D-Denver, during the presentation. “Are we looking at some sort of massive amount nationally of students that just forewent a college education? That’s troubling not just for us but society as a whole.”

(DenverPost)

CU Boulder

Finally…

@JFrankensteiner: Stanley Kubrick zoom call

Stanley Kubrick Zoom Call

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