Inflate

361 Capital Market Commentary | February 22nd, 2021

This balloon is about to launch. Jerome has the flame at full throttle. Janet is loading up a second tank. And the White House and Congress are about to fire up a second burner. Meanwhile, the vaccine rollout and COVID data improvements are happening at such a rapid pace that travel and leisure stocks have been sent into their own orbit with many stocks near or through their 52-week highs. And interest rates are following everything up. Pay close attention to the financial markets right now. There is a major rotation going on and portfolios are shifting rapidly. The liquid markets are telling us what the economic outlook will look like in 9-12 months and from where I sit, it looks like the future is going to be great.

The economic data last week was on fire with January retail sales and building permits up, up, and away. And while vaccine production continues to accelerate, new studies on the Pfizer/BioNTech vaccine show that maybe one dose is effective enough to let the others loose early into the population. This was great news for spring and summer travelers as well as any stock that benefits from consumers leaving their homes. Even the economists and strategists grabbed their leis, flip flops and mai-tais and raised their GDP estimates significantly. Now the questions begin about how much lift is in this balloon. With all the stimulus, pent up savings, and lack of capital spending, why couldn’t a 4% GDP turn into an 8% GDP? And if so, how much of an impact on prices could this create. Most of us have not been witness to any kind of economic boom like we could possibly have on the horizon.

It is beginning to set for investors that inflation could matter this year. Even the threat of inflation is sending bond investors into a frenzy right now as the 10-year Treasury yield moves through 1.35%. Maybe this is a year to lose returns in bonds. But will it be a little or a lot? At what yield will investors want to buy bonds again and take duration risk? While bond investors are losing, other investors are winning. Look at bank stocks which are now leading the markets. Ditto for commodity stocks as names like Freeport-McMoran melt through all price targets. There are plenty of winners and losers as this market rotates. I hope that you are well positioned for what will no doubt continue to be an interesting year in the markets as stocks and bonds try to surf this recovery.

Great looking COVID numbers continue…

@COVID19Tracking: Our daily update is published. States reported 1.2 million tests, 58k cases, 56,159 COVID-19 hospitalizations, and 1,286 deaths.

Nationwide COVID-19 Metrics

More good data out of Israel on the effectiveness of the Pfizer/BioNTech vaccine…

The chart below shows the effectiveness after the second dose, but a new study suggests that the vaccine is 85% effective 15-28 days after just one dose. So maybe another reason for possibly delaying the second dose of vaccine to cover more people?

Vaccine Effectiveness
(@ariehkovler)

Another week and another bump higher in future vaccine availability…

@johnfraher: The US vaccine supply is poised to surge in coming months.

By summer, Moderna, J+J and Pfizer may be supplying enough to vaccinate 400 million – more than is needed for all of the U.S.

Great number crunching from @ArmstrongDrew and @tsrandall

Vaccine Progress Points to a Spring Surprise

More vaccines, less COVID and travel optimism increases…

“…we’re estimating about 500 million doses of vaccine between now and the end of June. So we think there’s going to be good supply and it should begin to open up in April.” – CVS (CVS) COO Jon Roberts

“We certainly have seen traffic on TripAdvisor, people planning or thinking about trip, not go down nearly as much as travel actually went down. So in that sense we’re a leading indicator that people still want to travel. They’re still searching, they’re still coming back. Are you, you drop — unique user drop, again, a lot less than our revenue drop, because they’re not yet booking, but they’re — thinking of it, they’re dreaming” – TripAdvisor (TRIP) CEO Steve Kaufer

“We are, for the first time since COVID-19 began, seeing association in corporate activity pick up for 2022 and beyond. And we have early signs that we will actually host corporate meetings as early as the second quarter of 2021.” – Hyatt (H) CEO Mark Hoplamazian

“In January, we had a very strong month for group bookings in 2022 and beyond.” – Marriott (MAR) Group President Stephanie Linnartz

(@TheTranscript_)

Could we do better than the Roaring 20s?

Tweet from @awealthofcs

Travel and leisure stocks legging higher should be a megaphone to your ear right now…

Travel and Leisure stocks

The New York Times is now talking a post-COVID boom…

The growing optimism stems from the confluence of several factors. Coronavirus cases are falling in the United States. The vaccine rollout, though slower than hoped, is gaining steam. And largely because of trillions of dollars in federal help, the economy appears to have made it through last year with less structural damage — in the form of business failures, home foreclosures and personal bankruptcies — than many people feared last spring.

Lastly, consumers are sitting on a trillion-dollar mountain of cash, a result of months of lockdown-induced saving and successive rounds of stimulus payments. That mountain could grow if Congress approves the aid to households that President Biden has proposed.

When the pandemic ends, cash could be unleashed like melting snow in the Rockies: Consumers, released from their cabin fever, compete for hotel rooms and restaurant tables. Businesses compete for employees and supplies to meet the demand. Workers who were sidelined by child care responsibilities or virus fears are drawn back to the labor force by suddenly abundant opportunities.

“There will be this big boom as pent-up demand comes through and the economy is opening,” said Ellen Zentner, chief U.S. economist for Morgan Stanley. “There is an awful lot of buying power that we’ve transferred to households to fuel that pent-up demand.”

(NYTimes)

Front row ticket prices are likely to set records once the venues open up again…

@lena_popina: Personal savings have skyrocketed to 14% of nominal GDP. H/t @LeutholdGroup

Demand in Waiting

Shortages, higher prices, out of stocks, full capacity, rinse, and repeat…

“Given supply constraints, our in-stock suffered significantly during portions of the year.” – Walmart (WMT) CEO Doug McMillon

“…prices for key raw materials such as steel, have risen significantly over the last quarter, while freight and logistics costs have also experienced upward pressure.” – Deere & Company (DE) CFO Ryan Campbell

“…we’ve added production, we’ve added some shifts in some of our large facilities, places like Waterloo, for example, and in some of our facilities in South America as well. So, we have made those adjustments. The real challenge and Ryan mentioned this, is on the supply side, there are components and parts that continue to be tight, from a supply point of view. So, we’re managing those really tightly. Supply management group is working really hard with suppliers day-to-day, some components are week-to-week in terms of what we’re seeing from an availability point of view ” – Deere & Company (DE) Director, Investor Relations Josh Jepsen

“…it turns out actually there are limits to how Elastic Compute actually is. We got a call we never thought we’d get, one of the providers calling us to let us know that they were out of servers.” – Palantir Technologies (PLTR) COO Shyam Sankar

“…then the demand curve has just been, I — you talk about the loss of words and superlatives. Mike’s running out of things in the thesaurus here — every time we write these prepared remarks, we’re trying to figure out how else to describe what we’re seeing, because it’s — it is — it’s really something.”
“…in terms of capacity where we’re at and have been at full capacity here at our plants in Wisconsin, where we make most of those products really, since the pandemic hit…we did announce we’re opening another plant in South Carolina. That’ll be online here in the next several months. But we can’t make them fast enough. And we’re doing everything we can to supply more product into the market…There’s, there’s just a backlog of everything…Lead times are long, but we don’t see a ton of cancellations, it’s very sticky backlog. To answer your question about as compared to when we exited 2012 into 2013, after Sandy. It’s orders of magnitude higher, hundreds of millions.” – Generac (GNRC) CEO Aaron Jagdfeld

(@TheTranscript_)

Supplier bottlenecks appear to be worsening…

Markit US Manufacturing PMI

Which is driving manufacturing input pricing…

Manufacturing Input Pricing

Dr. Copper!

Base metals stormed higher on Monday, with copper rallying above $9,000 a ton on bets that increased demand driven by the recovery from the pandemic will spur a historic deficit, putting the economic bellwether on course for a record run of monthly gains. Nickel topped $20,000 a ton.

Copper climbed more than 3% on Monday and is heading for an unprecedented eleventh monthly rise in February. Metals are on tear on expectations that post-crisis demand will outstrip near-term supply. That may both reinforce speculation about a new commodity supercycle and stoke concern about rising price pressures as the world economy recovers from the pandemic.

(Bloomberg)

Red Metal Run

And even oil is running into shorter supplies…

@carlquintanilla: GOLDMAN: We now forecast that oil “will rally sooner and higher .. Brent prices will reach $70/bbl in 2Q21 and $75/bbl in 3Q ($10 above our prior forecasts). We expect this rally to be driven by both rising long-dated prices as well as a sustained steep level of backwardation.”

Excess inventories continue to fall more than we expected

And don’t forget about the ongoing semiconductor chip shortages which Texas just made more difficult…

Texas Deep Freeze Derails Chip Fabs
While I am usually ranting ad nauseum about the fragility of the global semiconductor supply chain related to the extreme concentration of manufacturing in Taiwan, now Texas is in the crosshairs. The brutal cold caused Samsung to take down all of its Austin capacity at a time when the industry is already experiencing significant chip shortages. You cannot simply reboot an advanced chip fab, so the capacity could remain offline beyond the current inclement weather in Texas. The WSJ reported that Austin represents 28% of Samsung’s chip capacity (according to a Citi analyst), but that number strikes us as much too high of an estimate (this report in Semi Engineering puts it at 5%). Samsung is mulling a $17B capacity expansion in the state, but they might want to look West for warmer weather. Regardless of how much capacity Samsung (not to mention many other chip companies) have in Texas, the point remains the same: the world is too exposed to an overly fragile semi supply chain.

(NZSCapital)


What a week of economic data…

Here was January building permits jumping +10.4% versus a negative estimate.

US Building Permits
(CompoundAdvisers)

And January retail sales also jumped off the chart…

@jsblokland: BOOM! US retail sales rose by 7.4% year-on-year in January. The fastest pace since September 2011!

US Retail Sales

With all the better data, news and more stimulus on the way, GDP estimates must be raised…

Tweet from @JimPethokoukis

Five percent? Do I hear six percent!?

@biancoresearch: Economists have been rapidly increasing their 2021 forecasts. It is nearly 5%. This is booming growth for the US. 5% is more associated with a developing economy.

2021 US GDP Forecast

How about eight percent!?

Tweet from @JimPethokoukis

Even the Federal Reserve Banks are getting in on the action…

@ISABELNET_SA: The New York Fed’s US GDP Nowcast stands at 8.3% for 2021:Q1

NY Fed's US GDP

Hot-lanta moves to a nine handle for the Q1 GDP estimate…

Evolution of Atlanta FED GDP
(FRBAtlanta)

Interest rates rising is an obvious worry to fixed income investors…

US 10yr Government Bond Yield

Could this be the worst year for bonds?

Barclays Aggregate, Total Return
(CompoundAdvisers)

Small investor looking for a bid on their bond portfolio…

Tweet from @carlquintanilla

I still don’t know anyone overweight Bank or Financial stocks…

@allstarcharts: Do you want to make yourself laugh. Just say out loud, “Regional Bank Stocks Are Leading The Market Higher”

Regional Banks vs S&P500

Institutional investors moving quickly to inflation protect their portfolios…

Signs that inflation is making a comeback are unsettling big investors.

Past periods of high inflation have weighed heavily on real returns from stocks and bonds, which have flourished over the past decade when inflationary pressures have generally remained muted.

But inflation forecasts are now rising following massive increases in government spending and the torrent of liquidity unleashed by central banks in response to the coronavirus pandemic.

Asset managers are now facing a barrage of questions from clients over the risks of inflation and are rushing to shore up portfolios from inflationary risks, fearing that a resurgence threatens to spoil the party again for investors…

Ugo Montrucchio, head of multi-asset investments for Europe at Schroders, said clients of the £526bn UK asset manager were asking “more and more questions about inflation”.

“Inflation is at the forefront of the minds of our large institutional clients but less so for retail investors,” said Montrucchio. He has been increasing allocations to commodities, US financial stocks and short-term government bonds as hedges against rising inflation.

(FinancialTimes)

Balanced portfolios have a tricky time navigating higher and rising inflation…

60/40 portfolios

(Goldman Sachs)

Look at this chart and tell me that you are not impressed…

One of the most exciting things for me personally about our acquisition by Hamilton Lane is the ability to look into their private asset database of nearly 100,000 private companies covering over 50 years of deal making across 10,000 general partners. Much of this data is shared by them with their advisory clients and customers. Last week they released their 2021 Market Overview and this was one of the most exciting charts for me in their deck.

What it shows is the individual deal level performance grouped by sector across all deals with available data from the 2007 to 2017 time frame. Thus, a private equity deal that started in the year 2017 and sold in 2020 will have its actual gross IRR included in its sector box. And all private equity deal strategies are included here so Buyouts, Venture Cap, Growth, Value, etc.

What it tells me is that even with all the capital raised and deployed over the last 15 years, the individual deal returns have been incredibly good. And also, in the worst years to deploy capital into equity (think 2007 right before the Great Financial Crisis collapse), the average deal still managed a double-digit IRR. Some sectors like Tech and Healthcare have had structural tailwinds and consistently outperformed. Energy sector deals have consistently underperformed I would guess due to the overpaying of assets and lower prices realized from the collapse in energy prices. But from a stock geek standpoint, I love this return breakout and look forward to diving into the database further.

Just in the U.S., there are 7x more private companies than public companies on a revenue basis. These companies obviously do not have much in the way of Wall Street research coverage nor do they have a WSB/Reddit page with Robinhood traders flipping their equity on a daily basis. Now expand this to a global level and think of how many more interesting equity investments there could be out there that are yet to be discovered. I am fired up. Enjoy the chart.

Performance-Deal Level

(Source: Hamilton Lane)

Janet throws shade…

Clearly the Secretary of the Treasury needs to allow more criminal transactions into her daily life.

Quote from Janet Yellen

Have you ever seen a $10 bill trade for $60?

Churchill Capital IV raised a bit more than $2 billion in an initial public offering last summer by selling shares for $10 a piece, the standard price for most blank-check companies. Those shares now trade at $58, even before the SPAC has agreed a takeover or said what the terms of a deal might be. SPACs are listed vehicles used to acquire promising companies, thereby taking them public. Most trade close to $10 at least until they’ve announced a merger, so what’s going on with Churchill?

Bloomberg News reported last month that Klein’s SPAC is in talks to merge with electric-vehicle company Lucid Motors Inc. Lucid hasn’t begun delivering vehicles yet, or disclosed financials, but its fans think it could mount a serious challenge to Tesla and Mercedes-Benz in luxury electric cars.

There are signs that a deal is near, with Reuters reporting that Lucid will be valued at about $12 billion and that Churchill has begun talks with investors about a concurrent capital-raising transaction, known as a PIPE. But Lucid and Churchill haven’t confirmed any of that yet, so investors bidding up the SPAC’s shares are taking a punt.

(Bloomberg)

SPAC Bubble

Who is going to start the list of products or companies that won’t exist when his 14-year contract ends?

Fernando Tatis Jr. could have the first sports contract that will outlive U.S. gasoline pumps, their stations and even their ICE cars. Think about that.

Tatís, the 22-year-old shortstop widely viewed as baseball’s brightest young star, agreed to a 14-year deal with the Padres worth $340 million Wednesday night, possibly tying himself to San Diego for most or all of his career. In terms of total dollars, Tatís’s deal ranks third all-time, trailing only Los Angeles Dodgers outfielder Mookie Betts (12 years, $365 million) and Los Angeles Angels outfielder Mike Trout (10 years, $360 million).

In one crucial way, Tatís’s contract stands alone. Betts inked his pact at the age of 27, with six strong seasons for the Boston Red Sox and a MVP award on his résumé. Trout had already established himself as the undisputed best player on the planet when he signed his deal to remain in Anaheim the rest of his professional life.

Tatís, born in the Dominican Republic, has played just two major league seasons. He hasn’t even become eligible for salary arbitration yet, which for most players comes after they accumulate three years of service. Barring a significant structural change to baseball’s economic system in the next collective bargaining agreement, Tatís wasn’t due to become a free agent until after the 2024 campaign. No player has ever received such a large contract this early in his career.

(WSJ)

Finally, some movie title confusion: not Up, but Sideways

Tweet from @CAGisMe

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