Market Commentary | April 20th, 2021

“I’m haunted by my 2020 capital-gains tax.” (WSJ)

Could there be a more epic quote for the current state of the financial markets? I could not stop thinking about this quote all weekend. I wish that I could time machine this trader back to 2008 or 2000 and have him experience an 80-90% drawdown in a world-leading company. We are so past closing time for this speculative merry-go-round. But as we all know, the ride can last longer, and the quotes can get more outrageous so keep the tapes rolling.

If you had a chance to look at all the economic and corporate earnings data from last week, it would be tough to not conclude that we are about to enter a full-scale recovery to the upside. The manufacturing indexes are limit up along with cost pressures and labor hiring intentions. And corporate earnings were pretty spectacular with mostly significant beats to the top and bottom lines relative to expectations. Earnings estimates will need to be upward adjusted, and stocks should want to follow those revisions higher. For now though, we will enjoy the lift, but at some point, the question will be asked, “How strong and for how long?” Right now, everything seems perfect, including valuations. It won’t always be this way.

It will be another massive week of corporate earnings so plenty more to look at. More industrials and tech companies this week after the heavy banking and financial reports last week. Expect increasing questions about input costs and price increase plans. Enjoy the busy week. Hope to see you on Thursday for our webcast.

The Q1 reporting season has started off strong thanks to the big banks…

As of Friday afternoon, about 42 companies in the S&P 500 have reported Q1 earnings with 78% beating EPS forecasts by an average of >50%, although that latter number is being skewed by the banks (GS beat by ~190%, WFC by 117%, C by 117%, PNC by 103%, CFG by 101%, and JPM by ~92%). Some stocks spiked on back of their reports (like PPG, which led the SPX on Friday), but in general there were more post-earnings slumps than rallies over the last 5 days.
(Jones Trading)

And earnings expectations are flying higher both for Q1 and future quarters…

S&P 500 EPS growth

So many worthwhile comments in the earnings releases and on the calls…

Jamie Dimon, Chairman and CEO of JPMorgan Chase, said in the company’s earnings release on Monday morning: “With all of the stimulus spending, potential infrastructure spending, continued Quantitative Easing, strong consumer and business balance sheets and euphoria around the potential end of the pandemic, we believe that the economy has the potential to have extremely robust, multi-year growth. This growth can benefit all Americans, particularly those who suffered the most during this pandemic. If all of the government programs are spent wisely and efficiently, focusing on actual outcomes, the benefits will be more widely shared, economic growth will be more sustainable and future problems, like inflation and too much debt, will be reduced.”

Daimler says Q1 results came in “significantly above market expectations…”
“Favorable sales momentum at Mercedes-Benz Cars driven by all major regions, especially China, strongly supported the product mix and pricing in the first quarter 2021.”

(DGAP News Service)

“I’d state quite clearly, and I said in the prepared remarks, that we think that we’re going to have very, very robust economic growth in the second half of 2021 into 2022 as vaccines continue to accelerate, as we come out of the pandemic, as we move forward. There’s no question that there is meaningful consumer pent-up demand.”
– Goldman Sachs (GS) CEO David Solomon

“The first quarter was a record dollar amount of money moved by Bank of America consumers. The trend is fully on track, even though the economy is not yet fully reopened. March was a record month of spending by Bank of America consumers and led to the highest ever quarter of consumer spending.”
– Bank of America (BAC) CEO Brian Moynihan

“What we’re experiencing, almost daily is a regeneration of the cities. New York, San Francisco, LA, Boston are all recovering incrementally and measurably, almost every day. Companies are beginning to announce return to office programs that are actually a little more robust, I would say, than we expected. The housing demand in the cities is now back. The prices are lower, which is a quite stimulating demand, which is good and rentals are down. And that’s pulling people back in as well.”
– First Republic Bank (FRC) CEO Jim Herbert


Between 20-25% of the S&P 500 Index should report this week…

Most Anticipated Earnings Release

Even with all the economic and corporate strength, there has been an interesting bid to the bond market…

@bespokeinvest: During one of the best 3-week stretches for economic data in memory, the 10-year yield has steadily trended lower.

10-Year US Treasury Yield

One reason could be foreign investors buying U.S. bonds…

We can see that the Japanese have taken up their purchases. The Europeans may have also since on a currency hedged basis, they could actually make a decent yield versus their own Government bonds.

Japanese investors buy most overseas bonds since November

If you have an asset or a business that you aren’t in love with long term, now is the time to sell it…

The U.S. financial conditions are now the most favorable in years. The ability to finance an asset is unlikely to get significantly better than it is today. So, if you own a piece of real estate, business, stock or even an unused car that you do not want to own in the future, now is your time to let it go. Also, capital gains tax rates could be moving higher in the next year or two which is something that you may also have to consider.

GS US Financial Conditions Index

There is a time to be a buyer and time to be a seller…

It is pretty easy to see where we are in the credit cycle right now. It is highly likely that many distressed businesses are being kept going today only because of the easy financial conditions and easy access to credit. If in the future, interest rates continue to creep higher and credit becomes more difficult to attain, some unsustainable distressed companies will not make it. Now is the time to sell those assets.

US HY CCC-B spread

Speaking of easy financial conditions…

We thank David Einhorn at Greenlight for pointing out this small example of financial excess.

Financial Conditions

The SEC is taking a much closer look at accounting within the SPAC universe…

Critical comments from regulators appear to be scaring off some investors and new offerings. Until last month, roughly five new SPACs hit the stock market every business day in 2021. In the past three weeks, 12 new SPACs have started trading, SPAC Research data show…

Over the past two weeks, the Securities and Exchange Commission, which was largely silent about SPACs through most of last year, questioned the optimistic revenue projections used by startups that are merging with SPACs. An SEC warning that could require some SPACs to restate their financial results put the brakes on some new offerings.

“The SEC effectively has now come in and stopped the party,” said Matt Simpson, managing partner at Wealthspring Capital and a SPAC investor.


SPAC ETF Largest Holdings

The newest Federal Reserve member uses the term “rip” for the first time ever to describe the U.S. economy…





Much better-than-expected U.S. retail sales last week gave a big boost to Q1 GDP estimates…

US Consumers show a strong bounce in their step
#Retail sales surge 9.8% in March w/ core sales +6.9%

US: Retails sales springs back to life in March

The better retail sales numbers could even help some brick-and-mortar retail make it through 2021…

JEFFERIES: “The Macro Set-Up Favors the Discretionary Retail in Malls. .. Apparel is Hot Again.” Our Consumer Discretionary Foot Traffic Index “has increased from 90% of normal to nearly 120%. Meanwhile, online retail traffic is moderating YTD ..”

But also, shortages, shortages, shortages…

@SoberLook: Manufacturing price pressures show no signs of easing.

Empire Manufacturing Prices Paid

J.P. Morgan still sees consumer inflation numbers as contained…

Tweet from @carlquintanilla

Some areas where companies are identifying future price increases…

Companies Expect to Raise Consumer Prices in Coming Months, Sometimes Substantially
(Goldman Sachs)

And the global chip shortage is not going to get any easier if it doesn’t rain in Taiwan…

The worst drought in half a century is hitting Taiwan, adding strain to an island that is home to two-thirds of the world semiconductor manufacturing capacity during the worst global chip shortage in recent memory.

The drought’s impact on semiconductor producers, which require voluminous quantities of water to churn out chips, is so far modest as the government creates exceptions for these manufacturers. But companies are starting to make adjustments, and officials have warned that the water shortage could worsen without adequate rainfall.

Taiwan’s semiconductor wafer-fabrication factories, or fabs, account for 65% of global production, according to the research firm TrendForce. Most of that capacity belongs to Taiwan Semiconductor Manufacturing Co. TSM -2.85% , the world’s biggest contract chip maker.

“Taiwan is the center of gravity for semiconductor manufacturing,” said Syed Alam, global lead of the semiconductors practice at Accenture. “This is one thing you don’t need adding more pressure on the situation.”


High school and college kids are about to learn about the backup in the global supply chain…

Leadway International, another large boba supplier in Hayward, also said its stock of tapioca was low because shipments were coming in slower than usual. The company’s business development director, Edward Shen, said he did not want to call it a “shortage” over fears that might spook boba shops into hoarding tapioca and make matters worse.

“Store owners get panicked, so they probably order more than what they need,” Mr. Shen said.

Ms. Hansen said she expected supply to return to close to normal by the summer.

In the meantime, anxious boba store owners are scrounging for tapioca anywhere they can.

“It’s very stressful — no boba means no sales,” said Aaron Qian, the owner of Tea Hut, a boba store with three locations in the Bay Area. “If you don’t have boba, they don’t want the tea. They just leave.”


Boba Shortage

Lumber prices continue to have one direction…

V-shape in inflation

Limit Up!

May Lumber Futures Rise by Exchange Limit

The other big economic surprise last week was in housing…

@LizAnnSonders: Incredible strength for March housing starts, +19.4% vs. +13.5% est. & -11.3% in prior month (rev down from -10.3%); building permits up +2.7% vs. +1.7% est. & -10.8% in prior month…both levels still strong, with starts reclaiming losses from last month (not case for permits)


Home Depot CFO, Richard McPhail, on the state of the current housing market and how home price appreciation is more important to Home Depot than housing turnover…

Home Depot CFO statement

A good chart to accompany what Home Depot is saying…

@RickPalaciosJr: Homeowners starting to raid the piggy bank called HOME a bit. Surging cash out refinance activity.

Net Equity Cashed Out in Refinance of Prime Conventional Loans

Speaking of shortages, Goldman made a big call on increased structural demand for copper coming from our many moves toward green…

Demand: While global coordinated economic recovery following the pandemic marks the near term leg of demand strength, we expect that green demand will drive the tightest copper balances in history over the next decade. Our colleagues expect that by 2030, copper demand from the transition will grow nearly 600% to 5.4Mt in our base case. Underpinning this view in 2030 is 1.5Mt of copper demand from solar, 1.3Mt from wind, 2.4Mt from EVs and 0.2Mt from electric vehicle charging points. In short, the annual average demand growth from these green technologies could be on par with that from China during a period of high growth in the 2000s.

Acceleration in green electrification trends
(Goldman Sachs)

So, who wants to return to the office?

It sure looks like many want to work from home. Good luck corporate travel.

Work from Home

Speaking of, the major air carriers are going to be challenged by a 20-35% drop in business travel…

Sales calls are more likely to fully return to in-person meetings because of the competitive nature of winning business. But internal company training sessions could become virtual rather than in-person. Multiplying the estimates of lost trips by the share of business travel in each of our seven categories gave an overall estimate of trips lost: 19% to 36%.

Business travel has a disproportionate effect on airlines: The top 10% to 15% of customers at global carriers typically account for about 40% of revenue. Overall, Bank of America estimates business trips contributed $334 billion to the entire travel industry’s $1.1 trillion in revenue last year.


Speaking of cutting back on travel, I know that Amazon has saved my house much more than 75 hours just driving in the car to go shopping…


Turning to the markets, welcome to the 3rd biggest rip of all time…

Jump in US stock prices

Just turning to 2021, here are your leaders in the S&P 500…

Oil, corn and copper in the commodity camp. Energy, financials and small caps in the equity camp.

Sector leaders

At J.P. Morgan, Marko says time to watch value shift into a higher gear…

Global markets may have reached an inflection point with value shares set to outperform growth ones for a significant period, according to JPMorgan Chase & Co. chief global markets strategist Marko Kolanovic.

The rebound in value driven by the recovery from the pandemic, falling volatility and fiscal and monetary policy support is set to last for some time as the various factors work their way through the system, Kolanovic said in an interview. These could trigger a long-term investment shift toward being more cyclical and reflationary, he said.

“We might be at a more significant turning point rather than just historically what were blips that reverted back to the growth investing style,” New York-based Kolanovic said April 9. “We think this recovery can last longer and be more profound and have more of an impact on investor styles and flows than people appreciate.”


On average, value beats growth for about 2 3/4 years when it works…

Of course, given this last beatdown, maybe value can ring up a longer time of outperformance.

Value cycles

Where are portfolio managers currently most worried?

@Callum_Thomas: Biggest Tail Risks = Taxes & Taper

COVID-19 is no longer the biggest tail risk

Morgan Stanley sees perfection now and worries ahead…

@carlquintanilla: MORGAN STANLEY: “Headwinds approaching and the market ‘gets it.’ Rising cost pressures/supply shortages .. peak rate of change on economic data .. We continue to recommend .. skewing more defensively as earnings season proves to be a sell-the-news event.” [Wilson]

Strong economic data is no longer a surprise to markets

And the higher risk Nasdaq and small caps are also becoming narrower in their outperformance…

Nasdaq and small caps

Healthcare sector finally breaking higher…

The sector remains one of the only to trade near its historical forward P/E levels. With an increase in elective surgeries post COVID and the long-term demographics working in their favor, probably one of the better hunting grounds for stock pickers and investors. Plus, if a high-quality business stumbles, active investors are ready to jump as we saw with GlaxoSmithKline and Elliott Management last week.

Health Care Select Sector SPDR Fund

David Rubenstein got the Fed’s Jerome Powell to talk about bitcoin last week…

“They’re really vehicles for speculation,” the central bank leader told The Economic Club of New York in a virtual interview with David Rubenstein, co-founder of the Carlyle Group. “They’re not really being actively used as payments.”

Powell compared crypto to gold.

“For thousands of years, human beings have given gold a special value that it doesn’t have” as an industrial metal, he said.


Tough to pay for gas and groceries when your currency moves 20-50% in days…

@charliebilello: Crypto correction from recent high…
Bitcoin $BTC: -18.6%
Ethereum $ETH: -22.4%
Binance Coin $BNB: -32.7%
XRP $XRP: -41.7%
Dogecoin $DOGE: -50.5%

Bitcoin to US Dollar

The CEO of Fairfax Financial Holdings, Prem Watsa, also dropped a few bitcoin comments…

“Bitcoin and cryptocurrency. Yes, yes. The Bitcoin is — I talked about it, $1 trillion. There’s nothing in it. It’s like gold. People are buying it. It’s supply and demand. And more recently, I just saw all of the Bitcoin companies that have gone public, and up 5x, 10x…My instinct is, I’m not going into too much about it, there’ll be a lot of pain with this. Anything that goes up so fast tends to come down as fast. We don’t know when that will happen. But for us, we stay away from all of that, just because we don’t understand it. People who do understand it, then it might be a nice way to participate. But we don’t understand it, and we think we have to be very careful because they’ve gone up a lot.”


And believe it or not, major newspaper readers also have comments about bitcoin…

Comments on bitcoin

Ok, who said private asset returns were boring?

If you need help benchmarking your clients’ private assets, let me know.

Looking at the 10-year annualized time weighted return, we see an overview of how specific strategies and asset classes have performed over the past decade. By leveraging Cobalt, we’re able to make assumptions about what asset class and/or sub- strategy can provide the strongest returns for a potential investment. This is especially helpful for clients who are looking to diversify their portfolios and commit capital to specific strategies.

10-Year Annualized Time Weighted Returns


Both private and public capital learned a hard lesson investing in the promises of shale energy…

A vital source of funding for the US oil sector is drying up as private investors retreat, prompting stricken operators to make “last gasp” efforts to boost production and cash flow to lure in buyers.

The exodus mirrors shale’s experience in public markets, where even before last year’s crash investors had soured on an industry notorious for poor returns and weak environmental, social and governance performance…

Now scores of oil producers are “dying on the vine”, said Ben Dell, managing partner at rival Kimmeridge, as they are left without the regular cash infusions to bankroll the capital spending needed to keep on drilling.

The private flight comes despite oil’s recovery to $60 a barrel — a price that allows many operators to break even and has raised investors’ hopes of a profitable final exit from the sector…

But the tail of weak assets across the shale patch is long — and was exposed by last year’s price crash.

Private money is behind as many as 500 producers in the US, accounting for about a third of total American oil output in recent years. The bulk are now lossmaking and will never repay the cash ploughed into them, said Waterous.

“We think about 80 per cent of them are illiquid,” he said. “There is no bid. So 400 of the 500 are unsaleable.”

US private equity is ditching shale


Now to ESG: Plant-based meat revenues grew 45% last year, and are still only 1% of U.S. meat consumption…

Each year the Plant Based Foods Association and the Good Food Institute — the two main groups that advocate for meat and dairy alternatives — publish a state of the industry of sorts, analyzing how these products actually perform in grocery stores. It’s a useful zoom-out that helps put the blitz of plant-based food development into perspective.

Their latest report looked at 2020 sales figures and found that — as with the previous year — plant-based food retail sales grew much faster (27 percent) than the total US retail food market (15 percent). And this wasn’t just on the coasts; there was more than 25 percent growth in all US census regions.

Plant-based meat sales grew by 45 percent and plant-based milk sales were up 20 percent from 2019.

Total U.S. plant-based food dollar sales and dollar sales growth by category


Super League*

When you get PSG, Bayern Munich and AFC Richmond to join, then we will remove the asterisk.

Europe's Footballing Elite PLans Breakaway League

Finally, Buck O’Neil teaches us about the ‘Jackie Robinson Economy’…

Tweet from @nut_history

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