361 Capital Market Commentary | August 31st, 2020

If you lived in Denver this August, you missed both the big fluffy clouds, as well as the mountains. Late last week was the first time all month that we were able to see both—as the smoke from both our forest fires and the California fires subsided. Granted, the sunrises and sunsets were incredible each day as it felt like you were viewing them from Mars or Tatooine. But given all of the acres burned, and the carbon we inhaled, it definitely wasn’t worth it.

Luckily, we had the markets to look at in August where not only did cloud stocks crush their numbers and send their valuations back up to the top of the technology food chain, but their ascent also lifted many other stocks to atmospheric valuations. If you can withstand the bouts of lightheadedness in owning these names, then your portfolio has benefited. Not to be left out, even the Dow Jones Industrial Average got into the game by adding a 70+ P/E multiple stock (Salesforce) into the index to replace its split-adjusted and shrinking Apple Inc. position which only has a 32 P/E multiple. Onward and upward.

Last week the Fed pulled a reverse-Volker and took the choke collar off of its inflation targets. They have been moving in this direction for a while, but last week Jerome Powell brought the stone tablets down from the mountain to give us proof where it is written. And as you would have expected, the Treasury Bond market did not like the news. If the inflation hawks are allowed to sleep in their cages, future bond and yield moves will likely be much more volatile than in the past. Just another reason why friends don’t let friends buy long Treasury bonds. At the same time, a little bit more inflation in the economy will not hurt the depressed prices of many down-and-out value/cyclical companies.

Meanwhile down the street, Congress is still working on the Cares Two Aid Bill. The ranges of aid have narrowed and maybe Pelosi and Meadows can make a $1.5 trillion deal this week. No doubt both sides of the negotiations are watching the summer furloughs become permanent layoffs this week as the 18,000 employees of MGM Grand and 19,000 employees of American Airlines learned last week.

As expected, the COVID cases, hospitalization and fatality data continue to improve. We are seeing the expected college town spikes, but hopefully they will be contained enough to prevent a third wave from occurring as the weather cools and people head indoors. There is so much happening with vaccination trials, new testing tools, and increased mask wearing that the markets continue to increase their confidence that this pandemic is going to be in the rear-view mirror for the U.S. by the first or second quarter of 2021.

More evidence from earnings reporting last week that economic activity around the world has been correlated to success in managing the virus…

HP’s experience below also helps to explain why Carnival will be sailing before year end in Europe and Asia but not the U.S.

“In many Asian countries where the situation is much more under control. We see volumes close to where they were before the crisis. In the US and in some of the Americas country, where the impacts of the virus is still stronger. They are still behind significantly more behind that number. And Europe is on place in the middle in the countries where economic activities almost back to normal, we see usage levels not at their previous level, but very close to that. And what I’m talking is really the impact on the commercial side.”
– HP (HPQ) CEO Enrique Lores
(TheWeeklyTranscript)

If the Fed is going to let inflation run, you want to trade the dark blue line for the mustard line…

Jackson Troll
(BofA Global Research)

Last week, all areas of the U.S. market did well…

Value stocks were helped by the Fed, while growth stocks were helped by Salesforce earnings and the Apple/Tesla stock split excitement.

Asset Class Performance
(@bespokeinvest)

Speaking of Tesla…

Tweet from @bespokeinvest

And speaking of Salesforce: The Dow Jones Industrial Average committee picked a good component to add…

Salesforce market share is increasing at the right time as the world gets digital as fast as they can. Unfortunately, the DJIA missed last week’s 30%+ move after their earnings report.

Salesforce CRM

Goldman Sachs commented on the strong tech earnings last week and their impact on the market…

Both CRM (240bn market cap, up 30% for the week) and WDAY ($57bn mkt cap, up 28% for the week) posted surprisingly strong results and were rewarded by investors as if it was the first time either of these companies ever exceeded expectations (see Heather Bellini’s “CRM: New business trends show consistent improvement; F2Q21 Results” and “WDAY: Better demand environment drives strong F2Q21 results”). The enthusiasm carried over to the FANGMAN complex where the average stock was up 5% for the week led by FB gaining almost 10%. Secularly advantaged Tech continues to benefit from the ‘lower forever’ sentiment around rates, as well. Yields on 10-year Treasuries rose this week to 0.72% but still sit at ultra-low levels.
(Goldman Sachs)

Cloud alert…

@EconguyRosie: I realize who Powell actually is: the doctor with the blood pressure monitor at the hot dog eating competition! Investors gorge, get obese, but won’t die. The S&P 500 market cap/GDP ratio, at 132%, just took out the 2000 peak. We know how this ends, we just don’t know when.

S&P 500 Market Cap-to-GDP Ratio

But while some stocks have P/E multiples in the clouds, others have relative dividend yields in the clouds…

Record 79% of S&P 500 members

Another very big week for housing as the July new home sales data was released…

@barronsonline: “This past week, the U.S. Census Bureau reported that new-home sales surged 13.9% on a month-to-month basis in July to a seasonally adjusted annual rate of 901,000, a 14-year high.”

New Home Sales Soar

Good times for Stanley Works + Black & Decker…

Any company that supplies into the housing or home remodeling industry is seeing the boom. Here is SWK raising guidance last week.

The Company is updating its 2020 organic revenue planning assumptions versus the prior assumptions shared on July 30, 2020. This revised assumption is a result of stronger Tools & Storage demand across several geographies and channels, modest improvement in store inventory levels in US retail, and stronger trends within Security & Industrial. Our third quarter 2020 planning assumption is now high-teens organic growth in Tools & Storage versus the prior planning assumption of low to mid-single digit organic growth. For the total Company, this results in a third quarter 2020 planning assumption of 7% to 10% organic growth and a second half assumption of low to mid-single digit organic growth, above the high end of the prior second half range of -7.5% to flat. Additionally, as a result of this revised sales assumption, we currently expect improved operating leverage that will likely result in full year operating margin excluding M&A related and other charges to be relatively flat versus prior year.
(TradeTheNews.com)

But will housing demand sustain itself if interest rates rise?

Consumer sentiment is trailing the excitement of the home builders significantly.

Consumer Sentiment
(@HayekAndKeynes)

If you need a broad, general read of the U.S. economy, gasoline demand is a pretty solid indicator…

US gasoline demand

Some countries are just skipping right past COVID. Here is Norway not missing a beat…

Norway Retail Sales Ex Vehicles MoM

Do solar investors know something about the November 3rd elections?

The Solar ETF price is on top, while on the bottom is the Solar vs. Energy ETF.

Invesco Solar ETF

When mochi ice cream is better than See’s candy…

Five venerable Japanese companies were sitting in the bargain bin in plain sight. It took a 90-year-old Warren Buffett to scoop them up.

Mr. Buffett celebrated his 90th birthday on Sunday—Monday Japan time—by disclosing Berkshire Hathaway Inc. investments of 5% each in conglomerates that have histories longer even than his own legendary career as a value investor. Berkshire bought stakes in ItochuCorp., Mitsubishi Corp., Mitsui & Co., Sumitomo Corp. and Marubeni Corp.

Tokyo investors and analysts described the move as classic Buffett, finding companies that trade at a discount, pay healthy dividends and might offer less risk than is commonly perceived…

“Japanese trading companies are unique but they are not easily understood,” said JPMorgan Chase & Co. analyst Tatsuya Kikkawa. “There has been a discount in the trading companies, but that discount could disappear with this kind of attention.”

Analysts said the valuations of the companies were so low that they likely attracted Mr. Buffett. As of last week, all except Itochu were trading at 0.75 times book value or less, according to Goldman Sachs. Book value is what a company’s assets are worth after subtracting liabilities, so Mr. Buffett could put down 75 cents and get a dollar of net assets in return.

Despite the term trading company, the five companies are more like investment banks or private-equity firms. Analysts at Western investment banks said the five were increasingly acting like U.S. private-equity firms by focusing on operating profits and looking for undervalued consumer businesses that could supply steady cash flow, if not spectacular growth…

Increasingly, the trading companies resemble none other than Berkshire Hathaway itself, analysts said, since the Omaha, Neb., conglomerate also has a variety of holdings in energy, mining and consumer goods, sometimes owning companies outright and other times taking smaller stakes.

(WSJ)

Wonder if Warren will add any strudel and macaroons to his dessert tray?

European equities
(@ISABELNET_SA)

Looks like the ladies are showing the gentlemen how to pick stocks this year…

At the stock level, female-managed funds have higher relative exposure to AMZN, AAPL, MSFT, ABBV, and TSLA but lower exposure to BRK.B, WFC, V, UNH, and XOM. While all five FAAMG stocks are underweight by both female and male portfolio managers, female-managed funds are significantly less underweight in AMZN (+99 bp difference), AAPL (+74 bp), and MSFT (+49 bp). TSLA has soared 379% YTD and ranks as the fifth highest stock in positive allocation difference, with female-managed funds overweight by 8 bp vs. the Russell 1000 Index compared with an 18 bp underweight by their male counterparts.

(Goldman Sachs)

Performance vs benchmark

There are not enough cans…

Demand for cans is booming during the coronavirus pandemic, propelling can makers to boost manufacturing capacity to prevent shortages and capitalize on a trend they bet will stick.

As bars and restaurants closed across the U.S., consumers rushed to buy large packs of drinks—typically sold in cans—in supermarkets, say executives. Sales of canned food also jumped.

That is accelerating a continuing shift in favor of aluminum drinking cans, which were already taking share from glass and plastic bottles. Manufacturers attribute their growing popularity to cans being lighter and more robust than glass, and having higher recycling rates than glass and plastic. The growing popularity of hard seltzers, usually packaged in cans, has been another factor…

“Every company that makes anything in the 12-ounce can has been challenged to some degree by the global can shortage,”’ said [MillerCoors] Chief Executive Gavin Hattersley on an investor call. He flagged demand in the U.S. as being especially strong after restaurants and bars closed. “Demand for kegs in the U.S. went to zero and conversely demand for cans went through the roof.”

(WSJ)

…but way too many nuts….

Nut prices have fallen to multiyear lows as fears over the pandemic and lockdown measures crunch big buyers such as airlines, hotels and pubs, creating a supply glut that has left sellers in limbo.

Benchmark US almond prices have been hit hardest, plunging about 40 per cent this year to levels not seen in a decade, while walnuts are down 18 per cent and cashews have lost 10 per cent, according to commodity data company Mintec.

During the initial stage of lockdowns, hoarding caused higher demand for shelf stable nuts, but the drop in demand for out-of-home snacking and from the food service sector led to a steep drop in consumption, according to Ashok Krishen, head of the edible nuts business at agricultural commodity trader Olam.

Coupled with expected bumper harvests in many of the nut varieties this year, the fall in demand has led to an oversupply of nuts in the market and a sharp fall in prices.

(FinancialTimes)

Pinterest follows REI and bets on a more mobile workforce…

And they are writing a $90m check to get out of a new building obligation in San Francisco.

Pinterest Inc. canceled a large office lease at a building to be constructed near its San Francisco headquarters, marking one of the most significant moves yet by a big tech company to scale back real estate plans in the city amid the Covid-19 pandemic.

“As we analyze how our workplace will change in a post-Covid world, we are specifically rethinking where future employees could be based,” Todd Morgenfeld, Pinterest’s chief financial officer and head of business operations, said in a statement Friday.

The social-sharing service is paying an $89.5 million termination fee to terminate its lease for 490,000 square feet (45,500 square meters) of space. It will keep its existing offices in the city.

(Bloomberg)

Office Building
(TMG PARTNERS)

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