6th Round, 199th Pick

361 Capital Market Commentary | February 8th, 2021

Genius in motion. That was just masterful. If only Amy Trask could have convinced Al Davis to sign the QB from Michigan, I might not be suffering through an 18-year Super Bowl drought. Congrats to the Bucs for another one-sided NFL Championship victory.

While the stock market does not care about the winner of the Super Bowl, it does care about the impact of the vaccine on COVID datapoints, the size of Biden’s COVID stimulus package, and accelerating corporate earnings outlooks. And, last week showed strong progress on all three items. Most importantly, a bigger stimulus outlook in Washington D.C. made gains, as Congress cleared a path toward passage, and Democratic and Republican leaders came together to work on details. Working together and trading horses. So nice to see.

I still think that Congress should be working at a running pace right now if they want to pass a big stimulus package. Because at some point in March or April, some very big economic datapoints are going to start hitting the tape that will make passage of any financial aid more difficult. Even this weekend, Larry Summers warned that doing a major stimulus plan today could trigger an inflation run that could destabilize the U.S. dollar. The White House was not happy with Larry’s pen, but he is making a good point. Just look at the U.S. Treasury bond market which is feeling more pressure than Patrick Mahomes yesterday. While Friday’s jobs data was weaker than expected, corporate earnings guidance and forward-looking economic survey data is much more optimistic. The global economies are beginning to pile up the spot shortages and price spikes. It is only a matter of time before the labor markets benefit. Meanwhile, the Fed continues to throw doves, but for how long?

How best to invest right now? In my opinion, the easiest thing would be to avoid Treasuries and other riskless debt with long durations. I would continue to favor cyclical equity exposures over defensives. If you can find good companies with commodity links to a global growth upswing those should outperform. I believe small caps should continue to lead large caps helped by the overall risk appetite and their higher balance sheet leverage. Emerging market and international exposures should lead domestic exposures, as the U.S. dollar becomes an anchor. Cheap credit and free equity are today curing all ills and keeping the zombies standing. But I do not want my portfolio to be the savior of all assets. Only the best ones. As stock prices continue to surge through the end of this earnings period, I would watch your price targets closely and take some chips off the table where appropriate. And, if a company didn’t experience the leverage that you hoped to get in the quarter with few signs of potential improvement in the future, then move that capital to another stock that will benefit. There were plenty of outstanding earnings reports over the last month. No need to stick around with a less than outstanding one unless you have a tax reason.

Have a great week and let me know if I should put down another pre-season bet on Tampa Bay to win it all again next year. Thanks Tom.

U.S. vaccine deployment remains up and to the right…

Seven-day Rolling Average

Kroger/King Soopers helping to accelerate the vaccine rollouts beyond their pharmacies…

The Kroger company announced it will provide a one-time payment of $100 to all employees who receive the full manufacturer-recommended doses of the Covid-19 vaccine.

In addition to the vaccine payment, the company is also giving a “Thank You” reward to associates, including a $100 store credit and 1,000 fuel points for hourly frontline grocery, supply chain, manufacturing, pharmacy, and call center associates.

Associates who are not able to take the vaccine due to medical or religious reasons will have the option of completing an education health and safety course to receive payment, a company news release said.


Vaccine data up, COVID data down…

Nationwide COVID-19 Metrics

In other words, the U.S. economic orgy will be raging in April…

Tweet from @SquawkCNBC

Even Wynn Casinos is helping to get people back to Vegas safely…

“…this month we will be opening our COVID testing lab, which is a PCR based lab that will have the ability to process between 5,000 and 7,000 tests a day. That opens this month. And the idea is that when we talk to groups or when we’re talking to the state leaders about entertainment, about nightclubs, about conventions, that will have the ability for customers to have health passport, whereby they can say and show that they’ve been vaccinated, or they’ve been tested in our lab onsite, and it’s been turned around within six hours.” – Wynn Resorts (WYNN) CEO Matt Maddox

Romantic dinners in NYC will begin earlier than planned…

Tweet from @jessemckinley

But there is absolutely no love for Treasury bond investors…

@hmeisler: Rate on Ten Year. Who doesn’t see this line?

CBOE 10-Year US Treasury Yield

When a bond legend speaks, listen…

Famed bond investor Dan Fuss recollects how spiking inflation in the 1940s and 1950s led to a sevenfold jump in the value of his family home. For him, a key trigger of that bout of price pressure is evident now.

The precedent is the way the Federal Reserve and Department of the Treasury are prioritizing cheap debt-financing costs to fund huge spending, the difference being the money is paying for once-in-a-generation pandemic relief rather than a war effort.

“Interest rates are very very low, much lower than in my lifetime, and I was born into the Depression,” Fuss, vice chairman of Loomis Sayles & Co., said in an interview. Bond investors should keep their powder dry given the risk of faster inflation, the 87-year-old said, adding “there’s no outstanding value in the fixed income markets.”

For now, markets are pointing to moderate price gains as the world recovers from the health crisis. One key gauge signals expectations for an average rate of about 2.2% in the U.S. over the next decade. The challenge for investors is protecting portfolios if inflation becomes a bigger problem — possibly heralding monetary tightening — given that many view bonds and stocks as already richly valued…

Fuss said the comparison with postwar markets is imperfect but still relevant. Stocks performed reasonably well in the 1940s before accelerating in the following decade. Yields on the most highly-rated corporate credit held steady after World War II but rose as much as 2 percentage points during the 1950s to 4.58%


One would have to be very negative about the world outlook to want to buy 10-year Treasuries with a negative real yield…

Breakeven inflation near post-crisis highs, real rates near lows
(Goldman Sachs)

Quickest read of the data from a bond market investor…

Tweet from @Fullcarry

Morgan Stanley also sees an acceleration in Q2 and Q3…

@ISABELNET_SA: Morgan Stanley expects US GDP to return to pre-COVID-19 GDP path by 3Q21

High Pressure Economy Will Emerge

Economic outlook up, money cheap and high yield credit becomes low-yield…

@SoberLook: US junk bond yields are hitting record lows –

Bloomberg Barclays US Corporate High Yield YTW

Credit upgrades being handed out like Kansas City yellow flags…

Tweet from @lisaabramowicz1

You want more stimulus? How about consumers tapping the equity on their double-digit percentage increase in housing values…

US mortgage refinancing activity rebounded strongly last week. Mortgage Bankers Association (MBA) data showed that the refinance index increased by 11.4 percent in week ended Jan. 29 (v -5.0 percent w/w prior). US mortgage refinancing activity reached the highest since March 2020 and was up 59.5 percent compared to the same week one year ago.

Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting, said “after increasing for three consecutive weeks, the 30-year fixed mortgage rate dropped 3 basis points to 2.92 percent. The one-week reversal in the recent upswing in rates drove an increase in both conventional and government refinance activity, as borrowers continue to lock in these historically low rates“. The rebound in refinancing activity will be another tailwind for households after the Congress passed a $900 billion stimulus in December.


Housing Values

Larry blows the whistle and throws a yellow flag on the size of the Democrat’s stimulus proposal…

Lawrence Summers, who served as Bill Clinton’s treasury secretary and Barack Obama’s top economic adviser, warned that Biden’s plan was excessive and that it might trigger “inflationary pressures of a kind we have not seen in a generation, with consequences for the value of the dollar and financial stability”.

Summers’ scepticism, delivered in a Washington Post op-ed on Thursday, clashed with the nearly universal backing among left-leaning economists for Biden’s argument that the US needed to “go big” with massive government support to tackle the still-raging pandemic…

Speaking to the FT on Friday afternoon, Summers defended his stance. “I’m all for fiscal stimulus. I am very much a believer that the dangers of doing too little are greater than the dangers of doing too much,” he said.

“That’s not an argument to justify any level of fiscal stimulus and, for the reasons I articulate in my piece, a $1.9tn programme on top of the $900bn programme passed in December raises concerns about inflationary pressures and about limiting space for profoundly important public investments”, he added.


A solid guess on when public taper talk will begin by the Fed…

What is the earliest time to actually have a tapering discussion? We won’t have visibility on “substantial progress” in the labor market until sometime after June. At that point though we should have some sense on where unemployment will end for the year. Assume it looks like that “substantial progress” will be made and will put a 1Q22 tapering on the table. Powell has said the Fed will provide a long communications runway to any tapering. I take this to mean at least a quarter of warning, but that is certainly up for debate. Assume it is at least a quarter and the earliest taper would be at the January 2022 FOMC meeting. In that case, the Fed would want to begin the public tapering discussion toward the end of the third quarter or the beginning of the fourth. Assuming further that Powell will take the lead in the discussion. Altogether, it suggests to me that the natural earliest time that Powell would begin that discussion is at the late-August Jackson Hole conference. That gives us some breathing room.


Revisiting which stock sectors should benefit from rising interest rates…

Sensitivity of industry group relative to returns to nominal 10-year UST yield
(Goldman Sachs)

Guess which metric bank stocks like more than any other…

A rising spread between short and long rates means the economy is expanding, credit is in good shape and lending is more profitable.

US 2-10 year yield curve

All sectors gained last week led by the cyclicals…

Weekly Sector Performance

Speaking of earnings, it was a very good reporting season for raising guidance…

Tweet from @PeterMallouk

Follow the blue line…

Earnings revisions have moved sharply higher during the most recent earnings period thus confirming the recent trend higher in the S&P 500 (the red line). Stocks always lead.

Rate of change to S&P 500 EPS ests

Okay then. Everyone is in the pool…

Of course, this means that up to 38% is still in fixed income instruments so maybe there is much more room to run?

GWIM equity allocation as % AUM

Oil prices breaking higher not just because of demand, but also supply…

Behind oil’s rally: Huge stockpiles that accumulated in the early stages of the pandemic have winnowed down faster than many people expected. Traders say that could pave the way for further price gains if demand, which has already recovered in China and India, picks up in developed economies.

The fall in inventories is largely down to efforts by the Organization of the Petroleum Exporting Countries and its allies, led by Russia, to restrain production. Since agreeing to the cuts at the peak of the crisis in energy markets in April, producers have held back a cumulative 2.1 billion barrels of oil, OPEC said last week.

U.S. companies have also helped to prevent production from swamping demand. Global appetite for oil remains below pre-pandemic levels despite a pickup in consumption of gasoline, naphtha and fuel oil, which is used to heat homes and power ships.

American producers are pumping 17% less crude than they did on the eve of the pandemic, according to the Energy Information Administration.

All this has pulled the amount of crude oil and petroleum products stored around the world down by about 5% since its peak in 2020, according to Morgan Stanley analyst Martijn Rats.


Gasoline prices have now recovered and are accelerating upward…

Gasoline Prices
(Jones Trading)

Transportation logjams are a mess…

It is one thing to air freight semiconductors or pharmaceuticals. But this is some pricey transportation cost when you are putting Peloton bikes in the belly of aircraft.

Peloton pledged it would spend $100m on air freight and expedited ocean freight to improve its “longer than acceptable wait times” over the next six months. “While this investment will dampen our near-term profitability, improving our member experience is our first priority,” Peloton told shareholders.

Finance chief Jill Woodworth said the cause of the delays extended well beyond manufacturing woes.

“There’s container shortage . . . extended time of container ships sitting out on the ocean, there is a backlog to get those containers unloaded,” she said. “And so this investment is essentially to circumvent all of those issues.”

Chief executive John Foley apologised to frustrated customers who have taken to social media complaining of multi-month delays and poor communication. He pledged that bike products would return to a sub-four week delivery window by June.


Many other signals of economic strength and inflationary pressures from the calls and reports last week…

“We expect prices to be positive based on all the inflation that we are seeing.” – 3M (MMM) CFO Monish Patolawala

“We have a situation right now in the supply chain…There’s a huge capacity issue, where there’s not enough capacity, and we know they’re going to have to — they’re going to start spending money around steel, iron ore, mining, copper, plastics, all these things.” – Emerson (EMR) CEO David Farr

“I just want to say that the most interesting thing that’s happening is the rate at which demand has increased. We’ve never seen an increase in demand happened as quickly. And that combined with COVID and the pandemic has really stretched the supply chain…The supply base is generally tight, not just semiconductors, which has gotten a lot of press, but many of our components, are on longer lead times. Our suppliers and we are struggling with absenteeism due to COVID.” – Cummins (CMI) President & COO Livingston Satterthwaite

“I would tell you on the new car side, we lost unit sales, because…we couldn’t replace the inventory…in December, we had many stores below a 20-day supply and that’s a 20 day supply across all model line. So individual hot models you didn’t have any day supply…we sat here a quarter ago and thought by the end of the first quarter days supply would be back up to normal. But because what’s going on with the microchips and some other things, it’s probably going to bleed well into the second quarter before inventories gets back.” – Asbury Automotive Group (ABG) CEO David Hult

“…we expect that the constraints we are currently seeing are likely to continue through much of calendar year 2021 and possibly into calendar year 2022…there is no slack in the system. Everything that gets built, get shipped, there’s absolutely no slack in the system.” – Microchip (MCHP) CEO Steve Sanghi

“It is difficult for us to increase production of the PS5 amid the shortage of semiconductors and other components. We have not been able to fully meet the high level of demand from customers (but) we continue to do everything in our power to ship as many units as possible to customers who are waiting for a PS5.” – Sony (SNE) CFO Hiroki Totoki


Qualcomm’s release last week was a sign of how serious the chip shortages had become…

Qualcomm Inc., the world’s largest smartphone chipmaker, warned it is struggling to meet demand, signaling that a global semiconductor shortage is spreading.

“The shortage in the semiconductor industry is across the board,” said incoming Chief Executive Officer Cristiano Amon.

Like most chipmakers, Qualcomm outsources production to companies such as Taiwan Semiconductor Manufacturing Co. and Samsung Electronics Co. These suppliers are trying and so far failing to adjust to a vigorous rebound in demand. The auto sector has complained about this recently, but Qualcomm’s comments show the problems are broader.


The semiconductor shortage is messing with automaker build schedules…

German carmakers are considering building up semiconductor stockpiles to prevent a repeat of the crippling chip shortages that brought assembly lines to a standstill and stalled the production of hundreds of thousands of vehicles worldwide.

The move could prompt an overhaul of the industry’s finely tuned “just-in-time” supply chain, which has been used for decades and relies on daily deliveries to preserve cash. The system also allows for last-minute bidding wars between parts makers.

The bosses of Mercedes-Benz maker Daimler and Volkswagen’s Porsche told the Financial Times that their companies were looking at the change to prevent further bottlenecks.

“We do have to think about increasing inventory,” said Porsche’s Oliver Blume. “But inventory costs money, so that is the last option to take.”

Daimler’s Ola Källenius said: “If it makes sense in the future to go into more levels of safety stock, it is something we would entertain.”…

Volvo Cars chief executive Hakan Samuelsson said on Thursday that the Swedish group had secured chips supplies for the next four weeks, but that it was “very difficult” to predict what happens afterwards because they are buried within the supply chain.


The chip shortages will be wide reaching until semi production can be ramped up…

Carmakers appear in direst straits and have spurred the United States and German governments to come to their aid – General Motors this week was forced to mothball three North American plants and Ford Motor is bracing for a 20 per cent drop in near-term output.

But more industries have lately copped to shortages, emphasising how Covid-19 and a boom in a new breed of 5G-ready smartphones like the iPhone 12 is exacerbating a shortage of capacity plaguing the entire consumer industry.

Chip shortages are expected to wipe out US$61 billion (S$81.4 billion) of sales for automakers alone, but the hit to the much larger electronics industry – while tough to quantify at this early stage – could be far larger.

Apple, a major Qualcomm customer, said recently that sales of some new high-end iPhones were hemmed in by a shortage of components. Europe’s NXP Semiconductors and Infineon Technologies – whose roles near the top of the supply chain grant them visibility over global chip flows – have both indicated the constraints are no longer confined to autos. And Sony said last Wednesday (Feb 3) it might be unable to fully sate demand for its new gaming console in 2021 because of production bottlenecks.

“The virus pandemic, social distancing in factories, and soaring competition from tablets, laptops and electric cars are causing some of the toughest conditions for smartphone component supply in many years,” said Mr Neil Mawston, an analyst with Strategy Analytics. He estimates prices for key smartphone components including chipsets and displays have risen as much as 15 per cent in the past three to six months.


The gas station’s end of life could happen quicker than movie video rental stores…

If you thought Ford and GM were quick to leave gasoline motors, look at what Porsche said this weekend.

By the end of this decade, more than 80% of all vehicles sold by Dr Ing hcF Porsche AG will be electric, Chief Executive Officer Oliver Blume told Bild am Sonntag in an interview published Sunday.

This will include fully electric and hybrid variants, while Porsche will continue to offer its 911 model with internal combustion engines, albeit able to handle synthetic fuels, the newspaper cited the executive as saying.

Porsche said earlier that it expects about half of the cars it sells by 2025 will be electric.



Take a guess at just how much copper is inside of an electric car…

Tweet from @WillieDelwiche

Speaking of rising home equity values…

By the end of last year, more than 30% of U.S. homeowners were considered equity-rich — meaning their property was worth twice as much as the underlying mortgage, a report showed.

Helped by low interest rates, the count of equity-rich properties in the fourth quarter of last year rose to 17.8 million of the 59 million mortgaged homes in the U.S., according to the ATTOM Data Solutions fourth-quarter 2020 U.S. Home Equity & Underwater Report released Thursday. That’s up from 26.7% in the fourth quarter of 2019.


Seeing this in every major market now…

Tweet from @DavidSchawel

I couldn’t agree more. If you are in your 20’s and starting a career, run to a big city right now…

Apartment rents in high-cost metro areas like San Francisco, New York, Boston and Seattle have fallen more than 20% compared with pre-pandemic levels, while rents have actually risen modestly in low-cost areas like Albuquerque, New Mexico and Fresno, California. Narratives have sprung up about the future of the technology industry being in places like Austin, Texas, or even Miami.

But with a large price adjustment already behind us, and millions of doses of vaccines being administered every week, 2021 might actually be a once-in-a-generation opportunity for ambitious young people to get bargain pricing on the best cities in America — places like New York, which were expensive for a reason.

The argument for New York isn’t quite as strong as it was a year ago, but for those early in their careers it remains a compelling one. Working remotely or from a lower-cost metro is great for the right person, especially one in a more established phase of life — I’ve been working remotely for eight years now — but that’s probably not the case for someone in their 20’s who’s early in their career and trying to build their network and skills. For that, nothing beats the experience of in-person contacts and being exposed to countless other people in one’s industry from whom they can learn and grow.


The Former Speaker of the House John Boehner must have an ears-wide grin by now…

@SoberLook: Cannabis stocks have gone vertical in response to M&A activity and expectations that prohibition will end soon.

Cannabis stocks

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