Looking for Green

361 Capital Market Commentary | November 30th, 2020

Your Thanksgiving turkey may have been replaced by a Cornish game hen last week, but your portfolio grew by a pterodactyl during November, so only your belly lost. The major U.S. indexes ended the month rising by double digits, while small caps jumped nearly 20%, and the energy sector exploded up 30%. Your portfolio was most thankful for the vaccination, as scientists have moved at light speed to get the new shots moving before Christmas; and also to American voters who split up the U.S. Government into a mile-long rope of tug of war.

It was a big month of outperformance. And while some returns are stretched in the short term, last month’s big move is letting you know that there is a wind at our backs, as long as the news flow continues to be positive. I’d bet that any pullbacks will be bought quickly as investors look to position into 2021. And that positioning should include looking past COVID to better sales and earnings. Cyclical stocks that are positioned for a quick rebound should benefit the most. Economic data could remain a mess, as those individuals and companies positioned on the downward leg of the ‘K shaped’ recovery, will hold back a complete recovery. It will be up to those on the upward leg of the ‘K’, as well as the very easy financial conditions in the markets, to return this economy to its normalized growth rate. Financial stimulus from Washington D.C. would help, but it looks like Congress is frozen now until the inauguration.

So, bring on the final month of 2020. Let’s find some more green returns for our accounts and put this wreck of a year behind us. And then let’s begin the planning for how we are going to cook a turkey the size of an ostrich next year for our makeup Thanksgiving. We might need to contact Ball Corp. to see if we can get a double-sized turkey fryer made out of aluminum.

Inject the vaccine into my vein right now…

100% effective is a mic drop. Now where does the line begin?

This morning, MRNA updated data from its Phase 3 study for its vaccine, announcing that the primary efficacy is coming in at 94.1% and that it would apply for an Emergency Use Authorization (EUA) from the FDA today, becoming the second company to do so. Perhaps most encouragingly, MRNA’s vaccine was 100% effective in preventing severe cases of COVID-19 in its trial (i.e., none of the participants that received the vaccine in the trial contracted a severe case of COVID-19).

(Goldman Sachs)

With each week, the vaccine preparedness schedule seems to slide forward…

United Airlines is allocating planes for distribution. Refrigerated warehouses and containers are being placed all over the country. And now the U.K. says that they are ready to begin injecting Pfizer’s vaccine with their purchased allocation. This will put the U.K. in the lead for rollout.

@carlquintanilla: GOLDMAN’s vaccine forecast: “High-risk groups, mostly health care workers and individuals with comorbid conditions, will likely receive the first available doses from mid-December .., followed by widespread vaccination from early April.”

Baseline Forecast

For the U.S. stock market, it was a good month…

Smalls, Mids, Bigs, Nasdaqs all made big money in November.

U.S. Stock Market

And not just in the U.S., as the global markets break to new highs on vaccine news and an improved global trade outlook…

Tweet from @Schuldensuehner

Even more surprising is the new all-time highs occurring with little help from company stock repurchases…

Of course when repos do return, that piston in the engine will only add more horsepower to the market.

Tweet from @ISABELNET_SA

Agree strongly…

@TimmerFidelity: My take is that #investors will keep looking past the uptick in COVID-19 cases toward the prospect of rosier days in 2021+. If the output gaps continues to narrow, it suggests value, #smallcaps & non-US #equities could continue to outperform #growth, large caps & US equities.

Style Rotation & the Earnings Cycle

Energy is a big component of the cyclical/value stock universe which as Morgan Stanley points out, has significant leverage to higher oil prices…

US E&P still offers an 8% median ’21 FCF yield at current $45 WTI, which is ~2x the broader market. ’21 FCF yield rises to 12% at $50 WTI, and 19% at $60 WTI.
(@TheMarketEar)

E&P FCF Yield

Expect more firms to shift their equity attractiveness toward Europe to take advantage of the quicker COVID recovery combined with the lower valuations…

“Eurozone is attractively valued, trading at a greater than typical 15% P/E discount to the US, and could benefit from the style switch into Value. Relative earnings trends have favoured US over Eurozone for a while now, but a potential bounce in relative earnings of Eurozone could be on the cards. Peripheral spreads are well behaved, further fiscal stimulus in the region is forthcoming, and any easing in trade uncertainty will benefit Euro area, too”
(J.P.Morgan)

The time is right for some changes in equity leadership…

E&P FCF Yield

Small caps have had a good month but let’s see just how far they are going to run this long-ignored style…

Tweet from @hmeisler

Semis just always seem to outperform…

They act like Tech when Cyclicals are down, and they act like Cyclicals when Tech is down. Impressive.

Semiconductor Index
(@hmeisler)

South Korea is beginning to act more like its old self which was to copy the Semi group…

South Korea vs S&P 500
(@adaptiv)

Knock on wood right now…

Because the financial conditions could not be more perfect. This is important for any company or small business that needs money right now. It is what has helped COVID from becoming a complete financial disaster for our nation and blue marble.

@SnippetFinance: The Goldman Sachs Financial Conditions Index hit an all time low. NB it does incorporate equity values, as part of a broad measure of financial conditions. #stocks

Financial Conditions Index

Consumer spending looks like it began recovering going into the all-important holiday shopping week…

@LONGCONVEXITY: BAC-Credit card spending accelerated +9.1 YoY in the week leading up to Nov21

Daily total card spending

Speaking of consumer spending, take a look at how Alibaba grew year over year on Single’s Day…

China's Single's Day set another record

Companies continue to wrestle with how to return to work without a vaccine…

Or maybe more importantly, how often should employees be in the office?

Deutsche Bank AG is weighing a new policy that would allow most employees to permanently work from home two days a week as the lender draws lessons from the coronavirus pandemic.

Germany’s largest bank has been discussing the changes for several months and the two-days rule has emerged as the preferred scenario, people familiar with the matter said. Some regulatory questions still need to be answered and any policy won’t be applied uniformly to all staff, the people said, asking not to be identified discussing private information.

Deutsche Bank is still waiting for lawmakers in several countries to finalize new remote-work legislation, one person said. It’s also not clear yet how to deal with issues including enforcing confidentiality in a private setting, and such regulatory concerns will likely result in diverging policies for some staff and some countries, the people said…

“As publicly known, we are exploring what positive lessons Deutsche Bank can learn from the Covid-19 crisis about how we work as a bank in the future,” Christine Peters, a spokeswoman for the bank, said by email. “We are working on a hybrid model that will combine working from home as well as in the office. No decision has been made yet.”

(Bloomberg)

In just 10 years, it will become too hot to work in India without some form of cooling…

Millions of lives and billions of dollars are at risk
Based on a district-by-district geospatial analysis of population urbanicity, we estimate that, under our “inherent risk” scenario, 160–200 million people could be living in urban areas in India with a non-zero annual probability of experiencing a lethal heatwave as soon as 2030. Today, air conditioner penetration in India is about 10 percent. Under business as usual air conditioning growth, only about half will have protection from air conditioning. The average annual probability of a lethal heatwave in those regions is projected to be about 5 percent, meaning the probability of at least one heatwave occurring during the decade centered around 2030 could be about 40 percent. By 2050, the number of people living in at-risk regions will increase to 310–480 million. If historical growth rates continue, it is expected that most people in India will own an air conditioning unit by 2050, and so will have a degree of protection against this risk. It is important that ways to reduce air conditioner carbon footprint are identified in the near term, to prevent large-scale air conditioner growth from exacerbating underlying climate risk.

(McKinsey)

Extreme Heat India

I bet a few companies are kicking themselves today for passing up on buying DeepMind when they had the chance…

DeepMind, the UK-based artificial intelligence company owned by Alphabet, has said it can predict the structure of proteins, a breakthrough that could dramatically speed up the discovery of new drugs.

Scientists have spent decades trying to work out how proteins, which begin as strings of chemical compounds, fold into three-dimensional shapes, which then define their behaviour.

Identifying the shape of even a single protein can take years, but DeepMind said its AlphaFold system was able to provide accurate results, to within the width of an atom, within days.

“This advance is our first major breakthrough in a longstanding grand challenge in science,” said Demis Hassabis, founder and chief executive of DeepMind, adding that he hoped it would have “a big impact on our ability to understand disease and the biology of life”. DeepMind was acquired by Google in 2014 for £400m.

(FinancialTimes)

Time to take a look at seaweed farming…

Reducing methane from livestock, and cows in particular, has long been a goal of scientists and policymakers but is especially tricky: How do you change a fundamental fact of animal biology in an ethical way that doesn’t affect milk or meat?

In lab tests and field trials, adding a small proportion of this seaweed to a cow’s daily feed — about 0.2 of a percent of the total feed intake in a recent study — can reduce the amount of methane by 98 percent. That’s a stunning drop when most existing solutions cut methane by about 20 or 30 percent.

Meanwhile, growing seaweed used for the feed supplement could also help sequester carbon dioxide, another greenhouse gas, and reduce ocean acidification, because the plant sucks up carbon in the water as food.

(WashingtonPost)

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