Frozen Too

361 Capital Market Commentary | February 16th, 2021

I don’t like negative temperatures either. I often tell the kids there is no such thing as bad weather, only bad clothing. But below zero, there is just little reason to be outside. Add in COVID and that was a stuck at home three-day weekend. The only good news is that when the temps move into the 30s, it will feel like t- shirt weather. Be safe Texas.

Given the holiday, this is a short week. While the weather disruptions have taken center stage, take note of the most important improvements in the COVID datapoints. Kids are returning to schools while adults are increasingly booking travel and getting on airplanes. And from the images of the airport customs and immigration lines in Cancun this weekend, it looks like many needed the sun, beach and cerveza. Excelente!

Instead of the beach, the POTUS will hit the road this week to sell his $1.9 trillion COVID relief plan. The GOP leaders would still like a number closer to $0.6 trillion, so now we will get to see the horse trading that develops to get a deal done quickly with a Democratic majority. The $15 per hour national minimum wage probably won’t survive in the package and expect further eligibility requirements for the distributed stimulus checks. I’d look for the final cost to arrive in the $1.4 to $1.7 trillion range. And with Senator Manchin as a key swing vote, let’s see if the Space Force HQ gets re-re-located to West Virginia and if the Mountaineer mascot will change into an astronaut.

With economic growth rebounding, another stimulus on the horizon, earnings reporting better than expected and credit spreads at historic lows, animal spirits are running wild across many financial markets. Some areas are justified like energy and Japanese stocks, junk bonds or many basic industrial metals. But for me, it has become difficult to recognize the daily equity top volume listings. Plenty of Bitcoin, cannabis and SPAC entities. Maybe only 15% of the daily list is something that I have owned once in my 30+ years of investing. While this is not a normal environment, it is very good news for the U.S. economy that the capital markets are so free and loose. The VIX tapped 20 last week and by most measures, the stock market is looking overbought. A pullback could come at any time. And it will likely be rebought until enough investors begin to weigh the scale between the economic rebound and a future Fed tapering. The punch bowl is full, it is spiked and there will be a hangover. As stock prices continue to run, watch your target prices and continue to hunt for areas with more upside. The economic recovery will be fun to invest alongside, but valuations will not run forever. If only I was a Bitcoin investor, then I wouldn’t need to worry about valuation and investing would be so much easier.

A summer of fun becomes clearer…

More than 27.6 million Americans have tested positive, likely giving them some degree of immunity. A rising number — 11.8% of the population — has now received at least one dose of a vaccine. And data gathered from mobile phones suggest people are being more cautious day-to-day. If cases keep falling, it could buy time for the vaccination effort to take hold in the warm summer months ahead, potentially underpinning a long-sought economic recovery…

At the present vaccination rate, enough doses will have been administered by Spring Break in mid-March to cover about 15% of the U.S. population with two doses, according to the Bloomberg vaccine tracker. By Easter Sunday, that will rise to about 20% and by Mother’s Day enough shots could be given to cover close to 30% of Americans. And these estimates, based on vaccination rates over the last week, should rise substantially as more vaccine supply becomes available.

(Bloomberg)

A Shot on Goal

If anyone needs a job or some big extra money, check in with your local pharmacy…

The vaccination drive in the United States is entering a new phase this week, with the start of a federal program that will send more doses of Covid-19 vaccines into drugstores and grocery store pharmacies.

In preparation, pharmacy chains are in the middle of a hiring spree, competing to quickly recruit pharmacists and support staff to inoculate customers.

Pharmacies are turning to universities for help finding vaccinators. Training programs are enrolling record numbers of students and workers looking to learn how to give vaccines. And pharmacists like Maurice Shaw have been inundated with job opportunities.

“For a two-week period, the same numbers kept calling and calling and calling,” said Dr. Shaw, who lives near Springfield, Ill. “It’s like the job market flipped overnight.”…

Dr. Shaw signed on with CVS to give out vaccines on weekends, earning about $51 an hour, while keeping his full-time job. He said getting involved felt like his duty. “If you’re in the Army and war breaks out, are you going to say, ‘No, I’m going to sit this one out’?” he said.

(NYTimes)

COVID cases down by 2/3rds and hospitalized cut in half…

Nationwide Covid-19 Metrics(TheCOVIDTrackingProject)

Vax in, Wheels up!

TSA checkpoint travel numbers
(TSA)

Southwest Airlines seeing increases in bookings…

Tweet from @carlquintanilla

Several top polls want the minimum wage discussion to occur outside of the COVID aid relief bill…

And now with Sen. Romney and Sen. Cotton proposing their own bill to raise the $15 minimum wage over four years, expect it to be voted independently.

“What’s important is whether or not it’s directly related to short-term Covid relief. And if it’s not, then I am not going to support it in this legislation,” Sinema said in a telephone interview this week. “The minimum wage provision is not appropriate for the reconciliation process. It is not a budget item. And it shouldn’t be in there.”

Sinema’s opposition is a blow to Democrats’ hopes of bumping up the federal minimum wage through budget reconciliation to avoid a GOP filibuster, complicating follow-through on a campaign promise from Democrats and President Joe Biden.

(Politico)

Did someone say pool party?

Goldman Sachs sees consumers having nearly $2.4 trillion in savings by summertime. That will buy many pink flamingo floaties.

Excess Savings

Speaking of pool party…

Eleven months ago, the cruise ship companies were looking into the abyss 10 months ago and had to post their ships as collateral while signing loan shark type rates on their lifeboat bonds. But today, their newly sold bonds have a five handle and come with umbrellas in their drinks. Oh, how the world has changed.

In 2020, Carnival was the first company in really bad shape to demonstrate just how much the Federal Reserve had underpinned capital markets. A $4bn bond backed by the company’s cruise ships set a template that corporate America soon followed: pledging prized assets to unlock funding.

That April 2020 deal also offered investors a chunky 11.5 per cent coupon.

This week, Carnival paid exactly half that amount: just 5.75 per cent. Oh, and did we mention that their latest bond is not secured on any assets whatsoever?

While a return to normal life still feels very far away for most DD readers, in corporate debt markets, it’s like the pandemic never happened.

(FT Due Diligence)

Money flows to the riskiest US companies
(FinancialTimes)

Bond issuance + Tighter credit spreads > The rise in interest rates

@Schuldensuehner: The chart highlights what is at stake should the bond bubble burst. The value of global bonds has just hit a fresh ATH of $67.6tn.

Value of Global Bonds

Buy. Buy. Buy?

@Schuldensuehner: YEAH! We’ve never had it so good: Stock markets have topped the next mark! Global equities now worth >$110TRILLION – and so we -, the highest value in human history, and equal to 126% of global GDP.

World Total Stock Market Cap

As good a reason as any other…

Tweet from @FerroTV

Goodbye Goldilocks?

Do you even remember how the bedtime story with rising inflation ends? The Fed and Treasury has ways of dealing with inflation but reading those books before bed might require pharmaceutical accompaniment.

Feb FMS shows Goldilocks consensus has peaked

Speaking of inflation, J.P. Morgan’s big call last week was on the upcoming commodity super cycle…

We believe that the new commodity upswing, and in particular Oil up cycle, has started and list its likely drivers in Figure 2. Mostly it will be the story of a postpandemic recovery (‘roaring 20s’), ultra-loose monetary and fiscal policies, weak USD, stronger inflation, and unintended consequences of environmental policies and their friction with physical constraints related to energy consumption and production.

Over the past several years, financial flows are having an increasing role in asset pricing (e.g. vs. fundamentals). This is a consequence of the electronification of liquidity provision, increased use of leverage, and rise of systematic trading strategies and related flows. During the last downturn, this exacerbated the size and velocity of price moves both in commodities and related equities. We believe that these financial flows can have a similar impact on prices in the up cycle, and below we qualitatively
and quantitatively (where possible) discuss the financial flows that will impact commodity and related equity prices.

(J.P. Morgan)

@carlquintanilla: JPMorgan’s Kolanovic doubles down on his view that a new commodity supercycle — particularly in oil — has begun.
Potential drivers of the new commodity supercycle

A swing every 12 years?

Oil supercycle and its drivers

Even without this week’s drop in temperatures, oil is ripping higher…

It’s all about increasing demand and restricted/more expensive supplies.

Light Crude Oil

Energy stocks have been a decade long house of pain for their investors…

So, of course it would be ironic if they were a top performing group under ’46’.

Energy Select Sector

From oil to copper…

@jsblokland: Goldman Sachs expects another 15% upside for #copper in the coming 12 months. #commodities

Copper Future (COMEX)

And to steel…

US steel prices have more than doubled in under six months
(FT)

And to tin…

Tin prices have soared to a seven-year high after a manufacturing-driven buying frenzy that has drained physical stocks of the commodity.

The dark grey metal, usually associated with cans, has become a key material for the global electronics industry. It is used to make solder — the substance that binds together circuit boards and wiring. The shift to working from home has boosted demand for computers and other electronic devices, while China has also been stockpiling the metal to meet its goal of self-sufficiency in semiconductors, according to traders.

That has created a supply crunch for a global market that produces 360,000 tonnes a year. The price of tin for delivery in three months on the LME — the smallest by volume of the six main markets offered on the London Metal Exchange — has been driven up more than 70 per cent from its 2020 low to almost $23,400 a tonne.

(FT)

LME Tin Spot

And to the grains and meats…

There are signs that the food inflation that’s gripped the world over the past year, raising prices of everything from shredded cheese to peanut butter, is about to get worse.

The Covid-19 pandemic upended food supply chains, paralyzing shipping, sickening workers that keep the world fed and ultimately raising consumer grocery costs around the globe last year. Now farmers — especially ones raising cattle, hogs and poultry — are getting squeezed by the highest corn and soybean prices in seven years. It’s lifted the costs of feeding their herds by 30% or more. To stay profitable, producers including Tyson Foods Inc. are increasing prices, which will ripple through supply chains and show up in the coming months as higher price tags for beef, pork and chicken around the world…

The last time grains were this expensive was after the U.S. drought of 2012, and meat prices saw a dramatic run-up. Now, meat is again poised to become a driver of global food inflation, and part of the intensifying debate over the path of overall inflation and exactly what central banks and policymakers should do to aid economies still working to recover from the pandemic.

Vaccinations promising a return to normal life and fiscal stimulus programs amounting to trillions of dollars are already expected to unleash pent-up demand and drive a surge in consumer prices. U.S. and European bond markets are sending signals that inflation is back. Americans’ one-year inflation expectations last week rose to the highest since 2014.

(Bloomberg)

Pricey Feed

Meat Costs Rising

If inflation continues to run and you need to reduce your allocation to wine, I am always willing to host a ‘Get Liquid’ party in your name…

@SoberLook: This chart shows the correlation of real financial assets with inflation since 1950.

Real Assets

Soaring commodity prices will continue to benefit the Canadian economy which has the second biggest footprint on (and under) the earth…

Russia leads in size, but I’ll let you have all the fun with that one.

USD/CAD inverted

Speaking of land, when was the last time that $15M condos sold like hotcakes?

Caroline Wozniacki, the retired professional tennis player, and her husband, former New York Knicks player David Lee, have sold their Miami-area condominium for $16.25 million, less than a month after listing it for $17.5 million, according to the listing agents on the deal.

Jill Eber of Coldwell Banker Realty, one of the listing agents, said the apartment went into contract after a single showing, an uncommon occurrence even in one of the country’s hottest luxury housing markets.

“It was very fast,” she said. “I had a buyer that was looking for a big unit and I was already really thinking about them when we listed it. I pretty much took them there right away, and that was it.” She declined to comment on the identity of the buyer.

The roughly 8,400-square-foot apartment is in the Palazzo Del Sol development on tony Fisher Island. It has five bedrooms and roughly 2,500 square feet of terrace space.

(WSJ)

Condo Image

Limit up markets include the Treasury yield curve. Main street bankers are finally smiling…

@lisaabramowicz1: The gap between 2-year and 10-year Treasury yields is the widest in almost four years.

US Government 10 Year

I don’t even know where to go with this one…

I wish I had a time machine to go back and invest on other days when some thought that Buffett had lost his investment skills.

“Nobody’s going to listen to Buffett,” Palihapitiya, the founder of Social Capital, said in a Bloomberg “Front Row” interview. “But there has to be other folks that take that mantle, take the baton and do it as well to this younger generation in the language they understand.”

The language, of course, is social media. That’s where the 44-year-old billionaire talks up his deals, trolls the establishment and hypes “all things Chamath.” Recently, he stoked speculation he might run for governor of California. Occasionally, he tweets out shirtless selfies to his 1.3 million followers. His feed is a digital stream of consciousness.

With Twitter as his bullhorn, Palihapitiya has become the undisputed king of special-purpose acquisition companies, the hottest thing on Wall Street. Together with Ian Osborne, a public-relations soothsayer turned financier, he has sponsored six SPACs, raised a total of $4.34 billion and acquired businesses in space travel, health insurance, financial services and real estate.

(Bloomberg)

While everything appears perfect, the bottleneck in the semi production process will not be quickly solved and will restrict some growth engines…

So the chip-shortage fallout—swift and global—has cast a pall on the industry, exposing structural problems for car makers as semiconductors become more integral. Chip makers and auto manufacturers largely don’t expect the situation to normalize until at least the second half of the year. Some industry officials and analysts expect chip shortages could remain a problem into next year. Ford CEO Jim Farley said on an earnings call this month: “We cannot afford to be in the situation we are with semiconductors right now.”

The White House this week said President Biden was working to remedy chip shortages in the auto industry.

German Economy Minister Peter Altmaier has been in contact with his counterpart in Taipei since January to urge the Taiwanese government to ensure the country’s semiconductor industry provides more chips to German auto makers, according to the two governments. Chinese regulators met with chip makers to address the issue on Tuesday, asking them to allocate more production to China, said the country’s Ministry of Industry and Information Technology, adding that they “recommended that auto chip suppliers attach a great importance to the Chinese market.”

(WSJ)

But outside of the semi issue, earnings estimates continue to advance which has lifted many stocks…

  • When 4Q 2020 earnings season began in early December 2020, when a select few companies started to report their quarters ending in November, Wall Street was anticipating 4Q 2020 vs. 4Q 2019 S&P 500 EPS growth to be down -11.02%.
  • With 374 companies in the index now having released results, and collectively reporting a +7.51% rise in earnings from last year, the blended 4Q 2020 S&P 500 EPS growth expectation is now showing slight positive EPS growth!
  • What is even better is 1Q 2021 EPS estimates are rising at rate higher than how next quarter EPS estimates rose in 3Q 2020 earnings season.

(@EarningsScout)

S&P 500 EPS growth estimate changes

And not just in the U.S. but earnings have been beat around the globe…

Solid breadth of earnings beats across regions
(@ISABELNET_SA)

An important chart for all advisors…

80% of wealth held in households with over 60s
(@BofAML)

If only there was a way to incentivize people to eat less, eat well and not smoke…

In 2016, US health-care spending attributable to modifiable risk factors was US$730·4 billion (95% uncertainty interval [UI] 694·6–768·5), corresponding to 27·0% (95% UI 25·7–28·4) of total health-care spending. Attributable spending was largely due to five risk factors: high body-mass index ($238·5 billion, 178·2–291·6), high systolic blood pressure ($179·9 billion, 164·5–196·0), high fasting plasma glucose ($171·9 billion, 154·8–191·9), dietary risks ($143·6 billion, 130·3–156·1), and tobacco smoke ($130·0 billion, 116·8–143·5). Spending attributable to risk factor varied by age and sex, with the fraction of attributable spending largest for those aged 65 years and older (45·5%, 44·2–46·8).This study shows high spending on health care attributable to modifiable risk factors and highlights the need for preventing and controlling risk exposure. These attributable spending estimates can contribute to informed development and implementation of programmes to reduce risk exposure, their health burden, and health-care cost.

(TheLancet)

Attributable spending by risk factor and aggregated age category

Speaking of eating less. I know the study only included mice, but who is up for living longer and saving the planet?

The retardation of aging in mice by dietary restriction: longevity, cancer, immunity, and lifetime energy intake. (R Weindruch, R L Walford, S Fligiel, D Guthrie)

Survival of Mice
(PubMed)

“Free Britney”

Anyone involved with Estate Planning, Guardianship or Conservatorship should keep an eye on this case being reopened. Maybe you will also find it head scratching that a 39-year-old who can make $1M a week performing three days in Las Vegas would need to have her Dad approve a purchase at Starbucks.

Tweet from @nytimes

Netflix seems to be doing a good job at producing content that its users want…

Not only did Netflix Inc.’s original films and TV shows dominate last week’s Golden Globe nominations, but they also led the service’s U.S. Top 10 list throughout January, underlining the platform’s ongoing promotion and popularity of its original programming. Daily Morning Consult analysis of the service’s U.S. Top 10 rankings found that 62 percent of the titles were Netflix originals. Netflix calculates the list based on how many accounts watch at least two minutes of a show.

(MorningConsult)

Netflix

Finally, thank you CNBC…

Tweet from @BullyEsq

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