Happily Slipping

361 Capital Market Commentary | February 1st, 2021

Odds of a very big COVID aid stimulus package are slipping but for all the right reasons. U.S. vaccination progress is leading to rapidly falling new cases and hospitalization data. Combine this with the new one shot Johnson & Johnson vaccine, plus a Novavax approval waiting in the wings, and we are looking at a rapidly improving spring outlook for social activities. As figures continue to fall, restaurants will open further (we see you N.Y.C.), people will begin to travel more, and daily life will move towards normal. Of course, as all of this occurs, the economy will heat up and those in need may require a bit less as their paychecks restart and increase in size. With every week that goes by, the economy will get better. And this is what the weekend group of 10 Republicans know is going to happen, which is why they are proactively looking to get a $600B deal on paper for President Biden to sign. The Democratic leadership should take it now and get that ink dry this month. Because if they wait and delay until March or April, a bigger case will be built that the U.S. no longer needs a stimulus. And, after last week’s moves in the small cap stock market, I think everyone agrees that the last thing the Government needs to do right now is helicopter drop $1,400 checks into everyone’s Robinhood account.

Speaking of Robinhood, stock prices always go much higher and lower than you think. Last week was a prime example that the market is not always rational. Irrationality provides opportunities both on the buying side and the selling side. And I hope that last week a few of your holdings rapidly hit their price targets and you were able to take some gains. Like you, I was surprised to see some companies move to trade at 5-10x their fundamental values. I was also surprised to see some big hedge funds maintain short positions in stocks that were very heavily shorted. But then again, that is what makes a market. Ignore the rhetoric that this was small investors versus big investors. The smaller investors may have given some of the highly shorted stocks some momentum, but by midweek, there was billions of dollars playing on both sides of many of those rocket ships. There will be winners and losers for everyone who is playing hot potato in these names. But at some point in the future, most of those companies will return to the zero growth and non-existent profitability value that they traded at before this crazy event.

We are headed into peak earnings week right now. Few cared about all the great earnings reports last week, as the news cycle glossed right over the results instead focusing on the headlines of WSB/Reddit stocks rising 10-fold. Maybe this week the news and investors will return to what drives stock prices in the long term. To date, the earnings and outlooks have been very good with about two-thirds of companies raising forward guidance. I am looking forward to a regular week of diving through the earnings numbers and call transcripts. Have a great week.

Vaccination data continues up and to the right…

Daily Vaccinations in the U.S.
(Bloomberg)

Even the Pfizer board member is excited about the one shot J&J vaccine…

“The J&J vaccine turns in a fantastic result. We now have 3 highly effective vaccines. This vaccine showed sustained (and increasing!) immune protection over time, perhaps from a robust early induction of memory immune cells (CD4 and CD8). The protection was strong and durable – This one shot vaccine was highly effective at preventing severe disease, even with new variants. The milieu of disease now is more complex; even in U.S. – trials done today are running into more mutated cases. Make no mistake: this is an important and wonderful development”, Dr. Scott Gottlieb writes.

Efficacy of Johnson & Johnson Vaccine

(JNJ)

The data looks good. It is only one shot and it can be kept in a fridge for months…

J&J has a clear advantage: Their regimen is just one shot, while the other competitors require two. A more convenient offering makes convincing patients to take the shot less of a challenge. Just as important, the vaccine can be stored for months in an ordinary refrigerator. The J&J shot can be readily administered in traditional settings like doctor’s offices and pharmacies. And considering that demand for vaccines still vastly outstrips supply, large segments of the population, like younger and healthier patients, don’t need the strongest possible protection right away.

Mass vaccinations with J&J’s efficacy profile wouldn’t eradicate Covid-19 altogether. But considering the severe economic and social consequences of restricting normal daily life, outright eradication shouldn’t be a prerequisite to opening schools and restaurants and expanding travel capacity. Alleviating the pressure on health-care systems and workers will make the risk of reopening far less scary, even if Covid-19 is still spreading.

(WSJ)

The U.S. COVID data is all heading in the right direction. Daily deaths are soon to get cut in half…

Nationwide COVID-19 Metrics
(TheCOVIDTrackingProject)

Even more important is that the numbers are improving even more rapidly in the U.K…

FUNDSTRAT: Cases rolling over in UK/South Africa (where vaccination rates are low) shows the rollover “is essentially organic.” While data “should continue to strengthen, .. the risk is this reversing with the SA mutant strain.” Israel and SAfrica are “key to watch.”
(@fundstrat)

COVID-19 Cases

The U.K. is currently vaccinating at a faster pace which explains the drops…

With nearly eight million people, or 11.7 percent of the population, having received their first coronavirus vaccine, Britain’s pace is the fastest of any large nation in the world, with only Israel and the United Arab Emirates moving quicker.

(NYTimes)

We knew a side benefit to COVID would be a greatly reduced normal flu season, but these numbers are amazing…

The number of people suffering from the flu in England has plunged by more than 95% to levels not seen for 130 years.

Data experts at the Royal College of General Practices (RCGP) said that in the third week of January – usually a peak time for the flu – the number of flu-like illnesses reported to doctors was 0.9 per 100,000 people compared with a five-year average of 27.

It is believed that measures designed to tame the COVID-19 pandemic – as well as increased publicity about the importance of having the flu vaccine this year – are quashing influenza and many other respiratory diseases.

Out of 3.9 million patients at 385 GP practices in England monitored by the RCGP, only 35 had the flu last week.

(SkyNews)

Valentine’s Day dining in New York City!

Indoor dining will resume with limited capacity in New York City restaurants next month, Gov. Andrew M. Cuomo announced on Friday, more than a month after the governor had banned it to combat a second wave of the coronavirus.

Starting on Feb. 14, the city’s restaurants can seat customers indoors at 25 percent maximum capacity, officials said.

The announcement was a source of hope for the restaurant industry, an important driver of the city’s economic engine, which has been decimated by virus-induced restrictions that have forced many restaurants and bars to go out of business and caused thousands of workers to lose their jobs…

It did not take long for New Yorkers to seize on the good news and try to secure what will likely be a coveted reservation inside for Feb. 14, Valentine’s Day.

(NYTimes)

So, this is what the Democratic leadership in Washington D.C. is facing…

Every day that they wait to sign a stimulus deal means fewer dollars of aid. So, my advice would be to drop everything and sign a deal tonight.

Stimulus Deal

10 GOP Senators are focusing on more targeted aid in their $600B stimulus bid…

The GOP proposal jettisons certain elements that have drawn Republican opposition, such as increasing the federal minimum wage to $15 an hour.

It would also reduce the size of a new round of checks Biden wants to send to Americans, from $1,400 per individual to $1,000 — while significantly reducing the income limits that determine eligibility for the stimulus payments.

A $600 billion plan that is a fraction of the size of Biden’s proposal is unlikely to draw much if any Democratic support. However, the GOP offer presents a challenge for Biden, who campaigned on promises of bipartisanship and must decide whether to rebuff the overture or make a genuine effort to find common ground across the aisle.

“We want to work in good faith with you and your administration to meet the health, economic and societal challenges of the covid crisis,” the Republican lawmakers wrote, adding they were responding to his “calls for unity.”

(WashingtonPost)

Act quickly yes, and take the GOP bid tonight…

Tweet from @JanetYellen

Even the White House is beginning to split over the issue of more helicopter-dropped checks…

Amid the debate over targeting the checks to the most needy families comes questions about whether an influx of cash helped fuel recent stock market frenzies around GameStop Corp. and other stocks. Trading among those with annual incomes of less than $75,000 who received payments jumped 53%.

The non-partisan Center for a Responsible Federal Budget estimates that $1,400 checks will add $465 billion to the deficit, the priciest line-item in Biden’s stimulus. The center says expanding unemployment insurance payments and sending aid to state and local governments would both add roughly $350 billion to the deficit, while funding for vaccines and testing clocks in at about $160 billion.

Biden’s top aides denied this week that they’ve considered breaking the bill apart to pass the vaccine and testing provisions alone, which enjoy broad support.

(Bloomberg)

The global economy is showing few signs of slowing down right now…

Tweet from @RenMacLLC

Even Caterpillar’s global sales are about to go positive on a year-over-year basis…

The last two times CAT’s sales went from negative to positive were good times to be long the stock.
@bespokeinvest: Machinery sales at Caterpillar are at their least negative level since November 2019. $CAT

Caterpillar Worldwide Machinery Sales

Another sign of a strong global economy, soaring shipping prices…

Tweet from @Schuldensuehner

Cost outlook comments from Church & Dwight are also insightful to the strength of the economy…

Cost Outlook Comments
(@bluff_capital)

Further strong earnings comments from last week’s earnings calls…

“…it’s intriguing to me that there’s concern about the strength of the market because right now, it is absolutely incredible. I know the supply side tightness, but demand is very, very, very, strong. Automotive recovered, and it’s going to be 16 million units or so this year and probably more”
– Steel Dynamics (STLD) CEO Mark Millett

“First off, people are struggling with in-stocks, and I think you’re going to see more of that as we get into the spring with the supply chain disruption that’s out there.”
– Tractor Supply (TSCO) CEO Harry Lawton

“…our supply chain constraints…are fundamentally pandemic-driven, i.e., you have absenteeism in factories, you have labor shortage, you have component shortages, which have been significant, and we have transportation bottlenecks…we’re still having a fairly significant back order situation, slightly better than at the end of Q3, but only slightly.”
– Whirlpool (WHR) CEO Marc Bitzer

(@TheTranscript_)

Rising earnings guidance should not hurt future stock prices…

Tweet from @EarningsScout

It was a poor week to report blowout numbers…

It’s not often that Big Tech gets to slip under the radar, but nothing was normal this past week. As the investing world obsessed over small stocks, the country’s two largest companies reported their earnings. The results were tremendous, and I’m not sure many folks noticed. Chalk it up to the GameStop effect, which my colleagues have covered in Barron’s this week.

On Tuesday night, Microsoft said that its December-quarter revenue was $43.1 billion, up 17%, from a year ago, beating Wall Street’s consensus estimate by about $3 billion. Its profits came in at $2.03 a share, up 34%, topping analysts’ forecast by about 40 cents. That’s a huge beat. The stock was flat on the news.

Apple reported the next day, and its numbers were even more impressive. Revenue was a record $111.4 billion, up 21% from a year ago, beating consensus estimates by an astonishing $8.5 billion—Apple is generating $50 million in sales per hour. Profits were $1.68 a share, up 35%, and 28 cents ahead of consensus.

The biggest boost came from the iPhone, with consumers smitten over the new iPhone 12 lineup. Apple’s iPhone sales were up 17% from a year ago to $65.6 billion, $6 billion above Wall Street’s consensus.

So how did investors react to Apple’s beat? By sending shares down 3.5%. Microsoft and Apple clearly need a little more love from the Reddit crowd.

(Barron’s)

Few stocks are getting paid this quarter on their earnings beats…

Hopefully, a cleaner news cycle will allow some of these stocks to get paid this week.

S&P 500 EPS Surprise % vs Price %
(@HumbleStudent)

Peak earnings week!

Most Anticipated Earnings Releases
(@eWhispers)

It was a down week for all stock sectors…

Weekly Sector Performance

Among the big index charts, the small caps looked to be the only one that didn’t break trend…

IWM
(@hmeisler)

Look at that, someone doubled the price of Tootsie Roll last week…

So, some investors thought that a no-growth, top-line business should trade at 70-80x earnings and a 0.6% dividend yield for one day last week. They should have just invested in the bags of candy.

TR

Guess it wasn’t BlackRock buying Tootsie Roll…

“It is not surprising when you think about how much liquidity is in the system, how much policy has fueled asset prices in recent weeks and months. This looks like pockets of frothiness, some irrationality undoubtedly, some nonsense undoubtedly.” – BlackRock (BLK) Vice Chairman Philipp Hildebrand

(@TheTranscript_)

Most shorted stocks have been ripping!

Performance of most and least shorted stocks in Russell 2000
(SocGen)

And as expected, while heavily shorted stocks rip, the shorts exit stage left…

Heavily shorted stocks
(Goldman Sachs)

Spot on from Peter Cecchini…

Recent price action in OTC equity markets and in roughly a dozen names with high short interest is the culmination of a broader progression. It amplifies the observation that many markets – equity markets in particular – now have little to do with the fundamentals of underlying assets. What Bitcoin has in common with GameStop is the idea of asset scarcity paired with a vague narrative that ‘something big’ is happening. Shorts squeezes occur on limited supply. As the argument goes, Bitcoin is in limited supply. Its success, and the reason for it, has emboldened speculation in equities. Some market participants have discovered that the value of the chairs go up the fewer chairs there are. Here’s the problem: eventually there’s just one person in a chair. The rest have nada. This kind of speculation based on scarcity isn’t new. It happened in Holland in 1636 in tulips. It happened again in 1719 with the South Sea Company… and again and again.

This is more than just a sexy story about everyman beating the big dogs. It has real and broad implications. Importantly, overvaluation and mispricings in equity markets have impacted pricing in corporate credit markets. In a number of cases, companies have smartly used irrationally overpriced equities to refinance debt and maintain unprofitable operations. Reflexively, this delays the repricing in equities as bankruptcy risk is diminished. A new generation of arrogant, day traders is only partly responsible. They will eventually learn – just as we all have at some point – the hard way. We’ve seen it before, and it should come as little surprise. Whether you trade out of Mom’s basement, from a nice living room with a couple of kids running around, or in a suit on Park Avenue, markets don’t discriminate. As far
as they’re concerned, stupid is as stupid does – eventually, at least. Just wait … the game will stop. It’s a matter of when not if.

(AlphaOmega Advisors, LLC)

The Fed member with the Goldman Sachs background has the perfect take on this mess…

“If one group of speculators wants to have a battle of wills with another group of speculators over an individual stock, God bless them… if they make money, fine. And if they lose money, that’s on them. ” -Neel Kashkari, Minneapolis Fed President

Speaking of…

Tweet from @GSElevator

For the market to break down hard, future earnings estimates would have to be wrong or liquidity is about to get ripped out of the system…

Equity markets follow the EPS trend

Agree, agree!

Tweet from @TimmerFidelity

Most surprising in all of last week’s market volatility was that Treasury interest rates did not break lower…

TNX
(@hmeisler)

I see the upper Midwest GDP on the move…

CBOT Corn

What a rip up in homeownership…

Could it pause now as home prices rise double digit and rental prices become much more affordable?

U.S. Homeownership Rate
(@PlanMaestro)

A great chart of 2021 expert predictions…

Everyone is thinking that office life is going to change. I might have to take the under for that one. I think that people will want to work together again. Sorry, but I am tired of Zoom.

2021 Predictions
(VisualCapitalist)

Thank God for Schitt’s Creek…

When my wife and I needed a good belly laugh break from COVID world the last 11 months, we retreated to watching an episode or two of this comedy. Last week we finally caught up and finished the shows final run. If you loved Best in Show and the other Canadian SCTV troupe performances, then you will not be disappointed in this six-season run which only got better year after year. Enjoy it.

Schitt$ Creek
(IMDB)

Finally, we had some important news last week…

I am very excited by our announcement to be acquired by Hamilton Lane. It is a world class organization and a leader in Private Asset management, administration and information. Their firm has developed some innovative products and I am looking forward to helping them grow those products into our markets in the future.

Hamilton Lane to Acquire 361 Capital
(361 Capital)

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