Grab Your Shades

361 Capital Market Commentary | March 22nd, 2021

It is finally time to roll out of the house. I think that Zack Snyder’s epic superhero film this weekend will mark the end of our COVID shut-in. I see that many of you have already hit the road for Spring Break. Some in Hawaii. Some in Florida. And some up in my mountains enjoying that fresh snow. There were some rumors going around Colorado today that the mask restrictions might come off, which would be a great thing for not only psychology but also for my mask-chapped lips.

Okay, so it was a big week for news and data. Core economic data remained strong as America returned toward normal activity. Some of the February datapoints stunk last week, but much of the housing and industrial numbers were slammed by the storms and power outages in Texas. Supply disruptions at the West Coast ports and inside of the chip factories continues to be a negative for manufacturers. Inside of D.C. last week, the FOMC met, and Chairman Powell spoke reiterating to us that it will take an inflation hammer to the big toe before they begin to raise interest rates. And this will be preceded by plenty of forewarning, which will also be preceded by additional forewarning. In other words, they are going to let this economy roar. Twenty-two Fed speakers are on deck this week so expect lots of reiteration of the same language.

Then today, we were dropped the new $3 trillion infrastructure and rebuilding plan by the White House. We knew it was coming but now the real politicking in Washington D.C. begins because not only will everyone fight for their pet projects, but they will also fight to make others pay for it. Three trillion is a big ticket. Who knows what will get passed, but something big will make it to the finish line. This should get you focused on how this spending will get paid for. It is going to affect your future taxes especially as it pertains to capital gains and estate taxation.

We know that corporate taxes will be raised, but what about for family-run businesses? And how much will the capital gains tax be raised and to whom? For estate taxation, how much will the one-time exemption amount be lowered? And will they eliminate the step up in basis upon death? Where will the estate tax rate move to? So many questions with no answers right now. It is probably safe to say that there will be no better time than the past to take that very large capital gain. Tax accountants and family estate planning lawyers will have their work cut out for them this year.

As for the markets, we are in a slower Spring Break mode right now with many taking time off and the earnings info train quieted until the 2nd week of April. Investors could use this slow time to think about the markets next move as it continues to rotate from growth to cyclicals/value. Helping this move over the next few weeks will be the rotation and rebalancing of many indexes in the momentum space as they increase their holdings of the financials, industrials and energy sector. Bloomberg wrote last week that this momentum rotation would be one of the largest on record. Between the Fed’s assistance and the healthy credit markets, equities still look like they could have more room to run. But, there could be some significant differences among the sector returns as we look into the second quarter.

Note to Readers: In January, Hamilton Lane announced their intention to acquire 361 Capital with the closing expected to occur on or about April 1st, 2021. Soon you might notice some changes to the look of the Weekly Research Briefing, but rest assured, Blaine Rollins will continue as the author, sharing his must-read news of the week.

Put five dollars down for me on this survey series going to the 70’s…

@LizAnnSonders: Evercore ISI’s company surveys have surged to 57.4, highest since August 2005 … arrival of stimulus has certainly helped

Evercore ISI Company Surveys

Welcome to the Roaring 20’s on steroids…

“I’d rather travel than do almost anything,” said Betsy Cole, 81 years old, who booked a flight to Boston to see family and friends in late spring and hopes to visit the British Virgin Islands for a sailing trip later this year. She also booked two international trips for next year. She looks forward to camping in the Sahara and riding a camel in Morocco, as well as enjoying time on the water in the Greek Isles.

Ms. Cole, of Naples, Fla., said she is finally comfortable with the prospect of traveling again after avoiding crowds, restaurants and trips throughout the pandemic. She said she is more at ease now that she is fully vaccinated and many others are as well. “I want to get going and get traveling again because I’m not sure I’ll be doing quite as much when I’m 90,” she said.

Economists surveyed by The Wall Street Journal this month raised their average forecast for 2021 economic growth to 5.95%, measured from the fourth quarter of last year to the same period this year, from a 4.87% projection in February’s survey. The higher figure would mark the fastest such pace in nearly four decades.

“You’re looking at the biggest surge in economic growth that most people who are working today have ever experienced in their working lives,” said Tim Quinlan, senior economist at Wells Fargo Securities. He expects consumer demand and trillions of dollars in built-up savings to propel economic growth “in a manner that’s going to take people’s breaths away.”


Credit-and debit-card spending

Every travel and leisure company is seeing the bounce…

“The real story for the quarter, kicked in about, five or six weeks ago when we started to see bookings pickup. And that coincided, clearly, with confidence in the marketplace. People are starting to book their spring and summer plans”
– Delta Air Lines (DAL) CEO Ed Bastian

“We’ve seen a significant increase in people booking over the last few weeks, both March and into the spring and summer,” – JetBlue (JBLU) CEO Robin Hayes

“We’re thrilled with the response we’re seeing from our guests in terms of future reservations,”
– Disney (DIS) CEO Bob Chapek

“People have been locked up at home, and they don’t have a chance to go with families, friends and basically get what they want to do with travel”
– Mastercard (MA) Executive Chairman Ajay Banga

“We did see a big improvement in restaurants and travel. We said that they were both up almost five points, more than five points versus the prior quarter.”
– Visa (V) CFO Vasant Prabhu


And I see you flying on Spring Break…

@conorsen: Air travel was almost 70% of 2019 levels yesterday:

TSA checkpoint travel numbers

Out here in Denver, our restaurants are packed right now…

@RenMacLLC: According to OpenTable, seated diners at restaurants running at or slightly above 2019 levels in Miami and Las Vegas. On the other hand, seated diners at restaurants in Honolulu have been improved but still running about half of 2019 levels (lack of international tourism?).

Open Table

New York is now officially open for business…

Tweet from @ericripert

According to our Apple mobile phone data, Americans are moving…

Mobility Trends

Gasoline prices are lifting off, even with everyone buying electric cars and trucks…

Tweet from @carlquintanilla

And we are going back into the offices…

Microsoft announced Monday that it would begin allowing more workers back into its headquarters in Redmond, Wash., starting on March 29.

In this stage of reopening, which Microsoft described as Step 4 in a six-step “dial,” the Redmond campus will give nonessential on-site employees the choice to work from the office, home or a combination of both. Microsoft will also continue to require employees to wear masks and maintain social distancing.


Whoever wants a job will be able to get a job in 2021…

Job postings on @indeed U.S. are 10.7% above pre-pandemic baseline, as of last Friday 3/19.
Big two-point gains each of the last two weeks — slightly faster than last summer’s rapid pace.


Job postings on Indeed

Waste Management sees its early indicator business comping positive year-over-year…

[WM] CEO: Our construction business has historically been a leading indicator for the economy and it has bounced back strongly now running up 5% after being down more than 40% last year. – CNBC – Source

The Philly Fed Outlook is near record-breaking territory…

@LizAnnSonders: Incredible strength for March @philadelphiafed Index; headline shot up to 51.8 (highest since 1973) vs. 23.3 est. & 23.1 in prior month; prices paid surged to 75.9, new orders up to 50.9, employment stronger at 30.1, & delivery times up to 29.5 … 6m outlook very strong at 61.6

Philly Fed Outlook

But not all is perfect as Nike mentioned in their earnings last week that North American sales were 10% lower than expected due to supply chain challenges…

Logjams at U.S. ports are spreading beyond Southern California’s choked gateways, and shipping officials are projecting the backups will continue into the summer.

“The congestion has been significant in Long Angeles and Long Beach, but other ports are also congested,” said Rolf Habben Jansen, chief executive of German container line Hapag-Lloyd AG , which diverted some ships to Oakland in recent weeks. “Bookings are up dramatically and we are trying to avoid congested ports, but it’s not easy.”

The backups that started building up late last year have grown during a normally slack period in shipping demand, tying up inventories for weeks in some cases as ships wait to reach berths while offloaded containers sit for long periods at packed freight terminals.

Delays that have stretched from docks to rail yards, truck terminals and distribution centers have rattled supply chains for companies from big auto manufacturers to mom-and-pop retailers, straining assembly lines because of parts shortages and leaving store shelves empty.


Waiting Boxes

Speaking of transportation, some significant consolidation in the oldest of industries…

The Canadian Pacific (ticker: CP) offer of $275 a share for Kansas City Southern (KSU) amounts to a 23% premium above the U.S. rail company’s share price of $224.16 on Friday.

The cash-and-stock deal values Kansas City Southern at around 30 times projected 2021 earnings and almost 18 times estimated 2021 cash flow, as measured by earnings before interest, taxes, depreciation, and amortization, or Ebitda.

The $29 billion deal (including $3.8 billion of assumed debt) values Kansas City Southern at a significant premium to peers and could cause investors to assign higher valuations to the three major publicly traded U.S. railroads: CSX (CSX), Norfolk Southern (NSC), and Union Pacific (UNP). The fourth big U.S. railroad, Burlington Northern Santa Fe, is owned by Berkshire Hathaway (BRK.A)…

Union Pacific is now valued at $141 billion, double that of Norfolk Southern at $65 billion and CSX at $69 billion. BNSF would likely be worth about the same value as Union Pacific if it were a stand-alone public company.


The Fed took up its economic projections, but stayed on the inflation outlook…

FOMC Economic Projections

The FOMC output could not have been more dovish…

At the March FOMC meeting today, the median participant projected a 3.5% unemployment rate and 2.1% core PCE inflation at the end of 2023, but no rate hike. In contrast, we had expected the median to show 2.1% inflation alongside one rate hike. The market took this outcome as dovish, as many investors likely interpreted it to mean that the median FOMC participant has a dovish reaction function that puts the inflation bar for liftoff above 2.1%.

(Goldman Sachs)

And so, the market cooled its bets on a 2022 rate hike…

Probability of Liftoff in 2022

Instead, the market is now thinking the rate hikes will occur in 2023…

Rate Hikes

The FOMC meeting added only more uncertainty to the outlook for long Treasury prices…

Treasury Prices

And so, if the Fed is going to let the Roaring 20’s play out, you want to find those companies with operating leverage…

Being positioned correctly paid off in the previous recoveries. Time to repeat the playbook.

Operating Leverage

Well look at that, COVID is no longer the number one worry…

A year ago, COVID-19 was named a global pandemic on March 11th. COVID-19 has been named for the last 12 months as the #1 investor “tail risk.” This month however, for the 1st time since Feb’20, it is no longer the largest risk. Inflation (37%) & taper tantrums (35%) are now seen as bigger risks.

(BofA Global Research)


But, I do see ‘Tail Risk’ for those trading in penny stocks…

“The only relevant historical precedent seems to increasingly be the days before the Great Depression,” he said.

Penny stocks occupy a low-rent district of Wall Street, a world rife with fraud and chicanery where companies that don’t have a viable product, or are mired in debt, often sell their shares. Traded on the lightly regulated over-the-counter, or O.T.C., markets, penny stocks face fewer rules about publishing information on financial results or independent board members. Wall Street analysts don’t usually follow them. Major investors don’t buy them.

But last month, there were 1.9 trillion transactions on O.T.C. markets, an increase of more than 2,000 percent from a year earlier, according to data from the Financial Industry Regulatory Authority, a self-regulatory group that oversees brokerage firms.

The lack of oversight makes penny stocks easy targets for scammers, which has long accounted for their unsavory reputation. But risk can also be a draw for thrill seekers or those who fear they’ve missed a market boom that is creating wealth all around them.

And now it’s easier than ever to get in on these stocks: Commission-free trades and the proliferation of online trading platforms mean small investors don’t have to go through a traditional broker.


Trading Volume

A reminder that new highs are good for the outlook of the stock market…

@RenMacLLC: The danger when 52-week highs are prolific….is not being BULLISH! Red distribution shows 3M returns after 52-week highs > 20% for SPX vs all other 3M returns back to 1927. Returns +48% STD -33%. $SPY $SPX #knowthedata #degraaf

Outlook for the stock market

And as we know, the credit market often leads the stock market. And right now, the flag is green…

Credit leads stocks

The German automakers are investing to lead on EV…

Audi expects profits from its latest electric models to match those from traditional vehicles in as little as two years as the premium brand embarks on a bold battery car offensive designed to steal a march on Tesla.

The premium brand’s newest electric car, the Q4 E-tron, will have the same margins by 2023 or 2024 enjoyed by its combustion engine equivalent, the brand’s chief financial officer Arno Antlitz told the Financial Times…

Audi expects a third of its annual sales, which last year were 1.7m, will be fully electric by 2025.

Its battery car push is tied to parent group Volkswagen’s ambitions to dominate electric sales, with recent plans for six battery gigafactories in Europe alone and a total of 20m global electric sales by 2030.

Rival BMW also set out its electric strategy recently, with half of all sales to be electric by the end of the decade, and the Mini nameplate to become a battery-only brand in the early 2030s.


A correction to my comments about the EV market last week…

Team UBS reached out to me and let me know that my 2025 market numbers were incorrect. I mistakenly grabbed the global sales data for the auto motor market, not the auto market. So, a big difference.

According to McKinsey and IHS, global sales of autos in 2025 should be about $2.75 trillion. Thus, if all the currently public SPAC EVs make it to $10 billion in revenues, they would only amount to about 2% of industry revenues. So very doable. I’ve seen recent bullish numbers that Tesla could do $500 billion in auto revenues in 2025 so they would make up almost 20%. Of course, this still means that the incumbents are going to be ceding much market share to the new players. And as the article above points out, the Germans are planning on investing to maintain and gain share. So, clear the battlefield.

It took Google eight years to reach $10 billion in sales, the fastest ever for a U.S. startup. In the current SPAC frenzy, a spate of electric-vehicle companies planning listings are vowing to beat its record—in some cases by several years…The forecasts for record-setting growth illustrate the extent of the fervor for electric-vehicle startups, particularly for those going public by merging with SPACs, which are shell firms that list on a stock exchange with the sole purpose of acquiring a private company to take it public. More than 10 electric-vehicle or battery companies that struck deals with SPACs have been valued in the billions of dollars before producing any revenue, as amateur traders and many traditional investors have flocked to the buzzy sector.


EV Market

Finally, thank you Zack for bringing us the Superhero movie that we all needed right now…

“Zack Snyder’s Justice League,” out now on HBO Max, bears very little resemblance to the version of “Justice League” released by Warner Bros. in 2017.


Justice League
(HBO Max)

Catch up on past Weekly Research Briefings >