Orange Whip?

361 Capital Market Commentary | March 1st, 2021

“Who wants an Orange Whip? Orange Whip? Orange Whip? Three Orange Whips.”

Growing up in California, and being thirteen when The Blues Brothers was released, I thought an Orange Whip was the Chicago name for a drink you found at Orange Julius. Plus, I didn’t think that Illinois State Troopers could drink on duty. Well, I still don’t know if I have ever tasted a real Orange Whip, but my classmates and I quoted the line for decades and it never gets old.

So anyway, drink requests are about to go around to 300 million Americans as we leave our houses for some actual table service. Vaccine shipments this week are going to jump by 40%. And UPS said last week that 6% of their volumes will be boxes of vaccines. Johnson & Johnson’s single-shot COVID vax was approved over the weekend which puts Novavax’s vaccine next on deck. It is now looking increasingly likely that most adults who want a vaccine shot will be able to find one by April.

With post-COVID life looking like it will return to normal faster-than-expected, and the economy continuing to hit on most cylinders, the financial markets are getting twitchy. The U.S. bond market just had a two standard deviation move as its investors contemplated incidents of rising inflation and the Federal Reserve’s future moves. The Government is narrowing in on a $1.5+ trillion aid package which is causing further inflationary concerns. While cyclical stocks are happy to see the stronger economic recovery, the bond market meltdown last week gave stocks a temporary brain freeze. It is safe to say that the straight-line move higher in equities since the November election is over, and for the rest of 2021 stocks are going to have to work for their gains. Future upside will be even more stock specific as investors will be paying close attention to the cost side of their equations as supply chain bottlenecks and labor cost pressures increase. No more free greenlights.

Fun fact: Berkshire Hathaway now owns Orange Julius.

Daily vaccine numbers are about to have a ‘3’ handle…

J&J expects to ship more than 20 million doses by March and 100 million by midyear, enough to vaccinate nearly a third of Americans.

COVID-19 Vaccine Numbers

Nurses are going to be working around the clock for this well-paying and fun job…

Tweet from @NateSilver538

Sounds like Dr. Gottlieb is saying that it’s nearly time to blow the doors open…

Tweet from @ScottGottliebMD

Satisfaction will be running 50+ once we get into the summer…

@LizAnnSonders: U.S. citizens’ overall satisfaction jumped from 11% in January (one of lowest levels on record) to 27% in February; back to levels seen later last year. @Gallup

U.S. Satisfaction Recovers After Recent Decline

Fed Chair Powell knows that a consumer-spending tsunami is about to hit the economy…

There’s no doubt the economy is poised for a growth boom in 2021 as the pandemic eases. Pent-up savings by consumers and pent-up animal spirits are bound to be unleashed as the vaccine rollouts spread and lockdowns end.

That was certainly Mr. Powell’s view on Tuesday as he responded to Sen. Pat Toomey’s question about rising interest rates: “if you look at what the market is looking at, what markets are looking at, it’s a reopening economy with vaccination, it’s fiscal stimulus, it’s highly accommodated monetary policy, it’s savings accumulated on people’s balance sheets. It’s the expectations of much higher corporate profits, which matters a lot for the equity markets.”


Bond investors are deservedly freaked out…

@bespokeinvest: As of last week, the long-term Treasury ETF ($TLT) experienced its largest 50-day drawdown since just after the 2016 election.

iShares 20 Plus Year Treasury Bond ETF

Which explains why no one showed up at the Treasury’s seven-year note auction last week…

Tweet from @biancoresearch

Stocks do not like big moves in interest rates…

Both nominal and real rates rose by two standard deviations last month which explains the increase in equity uncertainty (i.e., 2 std. dev. = 40bps for nominal rates and 30bps for real rates.)

Equities typically struggle when Treasury yields rise by 2 stdev
(Goldman Sachs)

The bond bear market is now one of greatest of all time…

Since Aug 4th, the annualized price return from a 10-year US govt bonds is -28%.

Current bond sell-off rivals the greats

The bond giants have thoughts…

Pimco chief investment officer David Ivascyn, one of the most powerful US bond managers, warned of an “inflation head fake” where misplaced concerns about a rise in consumer prices spark an increase in bond yields. (FT)

Franklin Templeton’s fixed-income chief is back with another big bet that rising inflation will prolong the slump in U.S. Treasuries. Emboldened by last week’s historic bond rout, Sonal Desai says the 10-year yield could jump above 1.75% by the end of the year. (Bloomberg)

“And bonds are not the place to be these days. Can you believe that the income recently available from a 10-year U.S. Treasury bond – the yield was 0.93% at yearend – had fallen 94% from the 15.8% yield available in September 1981? In certain large and important countries, such as Germany and Japan, investors earn a negative return on trillions of dollars of sovereign debt. Fixed-income investors worldwide – whether pension funds, insurance companies or retirees – face a bleak future.” (Berkshire Hathaway CEO, Warren Buffett)

Years of bond coupon income being wiped out monthly…

@ChrisBloomstran: When Mr. Buffett says bonds are NOT the place to be, this is what he means. The 30-year UST dropped 16.3% in price in 3 months to Thursday. That was TEN years of coupons. The 10-year UST gave up 7 years of income. Think about that. And this is with no credit risk. Duration, baby.

30-year UST

We thought stocks were expensive, yet all of the flows have been allocated into bonds…

@TimmerFidelity: Is the current #equities market a bubble? This chart offers some perspective. Look at where money has been invested since the March 2009 bottom. The bets on equity funds and #ETFs are dwarfed by the inflow for #bonds. So, where’s the bubble?

What Bubble?

Even GMO doesn’t think that bonds are a good place to hide for future positive returns…

7-Year Asset Class Real Return Forecasts

Speaking of broken assets…

@LMT978: It doesn’t take too much analysis to size up the trend in #Gold.


Australia started the weekend off with some solid manufacturing data…

“Manufacturers noted especially strong demand from customers in the agriculture and home building sectors. The building materials sector recorded its first expansion since August 2019, with respondents noting strong customer demand due to state and federal government stimulus programs. Some respondents reported that the instant tax write-off for business assets helped to increase their orders, particularly for Australian-made machinery & equipment.”

Manufacturing production rose sharply in February
(Goldman Sachs)

And the strength rolled on to Europe…

@jsblokland: Eurozone Manufacturing #PMI – final: 57.9, highest in three years!

IHS Markit Eurozone Manufacturing PMI

Then the U.S. manufacturing for February jumped at the fastest pace in three years and materials costs the most since 2008…

Select ISM Industry Comments…
“Things are now out of control. Everything is a mess, and we are seeing wide-scale shortages.” – Electrical Equipment, Appliances

“Supply chains are depleted; inventories up and down the supply chain are empty. Lead times increasing, prices increasing, (and) demand increasing.” – Chemical Products

“Steel prices have increased significantly in recent months, driving costs up from our suppliers and on proposals for new work that we are bidding.” – Transportation Equipment

“We are still struggling keeping our production lines fully manned.” – Food, Beverage & Tobacco Products

“We have seen our new-order log increase by 40 percent over the last two months. We are overloaded with orders and do not have the personnel to get product out the door on schedule.” – Primary Metals

“Logistics times are at record times. Continuing to fight through shipping and increased lead times on both raw materials and finished goods due to the pandemic.” – Fabricated Metal Products

“Prices are rising so rapidly that many are wondering if (the situation) is sustainable. Shortages have the industry concerned for supply going forward, at least deep into the second quarter.” – Wood Products



Residential construction spending is surging. Now just wait until non-res and public join…

January construction spending jumped +1.7% m/m and all three areas of spending are running above their 2006-2009 peaks.

Construction Spending, SAAR

Housing price gains could be the biggest story of 2021…

Mr. Zandi, at Moody’s, said he wasn’t yet anxious about a looming disaster like the last housing bubble. But he says it is already worrisome that rising prices have boxed out many first-time and moderate-income home buyers, who for years to come may lose out on the benefits of locking in interest rates below 3 percent.

“I don’t think it’s red flares; I think it’s yellow flares,” Mr. Zandi said. “But if we have another year like we had in the past year, we’re going to have a lot of red flares going up.”

For now, it’s not clear what can shake loose more inventory. Building more would help, but it will take years to catch up to the supply a healthy housing market needs. The pausing of payments through mortgage forbearance relief will end at some point after June, and that could perversely create more inventory through things like foreclosures. Baby boomers will get vaccinated and may decide to make a move.

It’s also possible that some of the millions of single-family homes that were converted to rentals over the past decade could be put back on the market now, as their owners see steep profits to be made from selling them.


Housing Gains

But as prices fly, watch the gap with income gains…

Income Gains

With today’s new data, the Atlanta Fed’s GDPNow growth estimate for Q1:2021 moves to into double digits…

Evolution of Atlanta Fed GDPNow

All this fighting over a $15/hour minimum wage that Domino’s Pizza is exceeding…

“…we’re not paying the federal minimum wage anywhere. You can’t go out there and hire people at that rate. Anyway, we’re above the minimum wage, you know, both for our folks that work inside the stores and our tip drivers on the road and then in our supply chain business, you know, we’re in excess of fifteen dollars an hour everywhere we operate.” – Domino’s (DPZ) CEO Ritch Allison


The consumer savings dam is going to break once vaccines go in and masks come off…

Consumers saved a larger portion of their income in January, with the personal saving rate spiking to 20.5% from 13.4% at the end of last year. While this is lower than the saving rate early in the pandemic, it is higher than at any other time in history. Part of it is forced saving, as the economy is not yet fully open. But part of it is also precautionary saving, as consumers try to protect themselves from future economic shocks. Additionally, the less discriminate nature of the stimulus for the sake of speed provided support not only to those who needed it, but also to those who kept their jobs or are in the upper income brackets. They tend to spend a smaller share out of their earnings than people in the lower income brackets, contributing to the rise in the saving rate. To the degree that accumulated savings represent pent-up demand, they have the potential to boost consumer spending growth this year.

(Ned Davis Research)

Travel and Leisure companies will be selling everything in their inventory this year…

“Bookings and rebookings of weddings into the second half of 2021 and 2022 have been very strong, and we’re seeing rebookings of group into the second half of 2021 and all of 2022 as well…We’re very encouraged about how well group is shaping up for 2022 at this point.” – Pebblebrook Hotel Trust (PEB) CEO Jon Bortz

“…we are very encouraged and very pleased by the strong booking activity driven by pent up demand across all three brands for 2022 voyages…For the first half of 2022 and for all of 2022, in fact, our load factor is currently well ahead of pre-pandemic levels.”
“…this is a finite capacity business. I can’t cruise with 150% occupancy. So there’s going to be a squeeze play here. That demand is going to exceed supply…you got less supply, you’ve got pent up demand. You’ve got people with money in their pocket. I think this is just the making of a boom time for the cruise industry. And since we can’t expand, supply any faster than it’s coming online, pricing is what’s going to dictate the day. And we’re seeing it. I mean, it’s astonishing to me in the 25-plus years, I’ve been in this business.”
– Norwegian Cruise Line (NCLH) CEO Frank Del Rio


Live Nation expects that concerts will return this summer…

“All our data continues to show that there is substantial pent-up demand for concerts on the consumer demand side. Surveys demonstrate the high demand for concerts globally, with 95% of fans likely to attend a show when restrictions are lifted. This is proving out in fan behavior as well, with 83% of fans continuing to hold onto their tickets for rescheduled shows. It appears that the timing to release the pent-up supply and demand is now approaching. While the timing of our return to live will continue to vary across global markets, every sign points to it beginning safely in many countries sometime this summer and scaling further from there”.



Think of the starting bonuses that travel and leisure companies will need to pay to find workers this summer…

The head waiter has become a grocery manager. The conference coordinator works at a software company. And the hotel-sales boss is now in marketing.

Workers at America’s hotels, restaurants, bars and convention centers have been among the hardest hit during the Covid-19 pandemic. Lockdowns and the lack of travel have caused many gathering places to close or reduce their staff. Since February 2020, the leisure-and-hospitality sector has shed nearly four million people, or roughly a quarter of its workforce. As of January 2021, 15.9% of the industry’s workers remained unemployed; more than any other industry, according to the Bureau of Labor Statistics.

As a result, millions of hospitality workers—a group that includes everyone from front-desk clerks to travel managers—are trying to launch new careers. Some have transitioned to roles that tap skills honed over years of public-facing work in high-pressure environments. Others have seized the moment to remake themselves for different occupations.


As we look at the markets, this study suggests that as the beginning of the year goes, so goes the rest of the year…

If the S&P 500 Index is up more than 4% for the year on February 14, the rest of the year tends to be quite strong. In fact, the rest of the year has been higher an incredible 24 out of 26 times, for a very solid 13% average return. Given 2021 was up close to 5% on Valentine’s Day, history would say continued gains over the rest of the year are likely.


The Valentine's Day Indicator

But you also need to read and consider Jared’s thought that the market is factoring in a lot of good future news…

But there is a general principle of investing that you want to buy the rumor and sell the news. Hedge funds and big institutions have been buying the rumor of a coming economic surge for some time now, and the trade is very crowded and nearly fully priced, as evidenced by the shares of companies owning airlines, cruise ships and theme parks. What will happen once the boom materializes?

There is a chance that stocks actually drop in the second half of the year even as people dine out, throw parties and spend the savings that they accumulated during the pandemic. Remember what we learned during the throes of the pandemic: the economy was getting worse but stocks were going up. All through the rally the talking heads repeated the cliché that the stock market is not the economy — and it’s not. Almost every recession in history, though, has been accompanied by a decline in the stock market.

That works both ways. If the stock market is not the economy, it is possible for stocks to go down while the economy vastly improves. Such an outcome now is likely, even probable, regardless of what the Federal Reserve does or whatever fiscal stimulus the government is contemplating. Why? Sentiment. More important than charts, data and fundamentals is how people feel about stocks and how they’re positioned. The pattern where an idea gradually becomes the consensus just as the thesis makes the most sense appears over and over again in markets. This always leads to something called the caboose: the person who is the last to learn of a trade and piles in at the highs.


I thought this was very interesting…

Big, volatile moves always have a story to tell. Is the Dow up, Nasdaq down trying to send us a signal?

Nasdaq: 1986-2021

Energy stocks are now outperforming, and the ETF still has a 4.4% yield!

Energy Sector

Speaking of energy stocks, the end of new gas stations begins…

In the California city of Petaluma, which covers less than 15 square miles, there are currently 16 gas stations. But there will never be another one, even if one of the existing stations goes out of business. The ones that are left also can’t ever expand the number of fuel pumps, either, though they can add electric charging stations and hydrocarbon pumps. City officials recently approved a permanent ban on new gas stations in a move that climate activists say is national first, and a crucial step towards curbing our reliance on fossil fuels…

Across the country the number of gas stations has been steadily declining, as big businesses like Costco, Sam’s Club, and Safeway have been adding gas stations to their existing stores. This can run smaller gas stations out of business—but also creates large environmental repercussions. “If they go out of business, there’s no one to pay for the cleanup or to offer new services like transitioning to electric charging or hydrogen,” Krogh says.


Healthcare stocks are at an important level…

Health Care Select Sector SPDR Fund

I hope they do not break down as there are several pharma and device names that are attractive…

Some have big dividend yields and many could do better as hospitals return to elective procedures.

Industry Groups
(Goldman Sachs)

Bummer, but it was fun while it lasted…

@LizAnnSonders: Spread between S&P 500 earnings yield & 10y Treasury yield has collapsed; to early 2018 level (low prior to that was early 2010)

S&P 500 Earnings Yield
(Goldman Sachs)

Utilities look like bonds for a reason…

Dow Jones Utility Average

A reminder of the 25-year correlations between sector performance and real interest rates…

Higher rates: own Financials

With credit quality stable, rising interest rates could continue to take bank stocks higher…


Speaking of a healthy credit environment, the department store chain, Belk Inc., just set a land speed record for emerging from bankruptcy…

Belk Inc., the department store chain owned by Sycamore Partners, won court approval of its plan to slash $450 million of debt less than one day after filing for Chapter 11 bankruptcy.

U.S. Bankruptcy Judge Marvin Isgur said in a hearing Wednesday he would approve the retailer’s bankruptcy plan, paving the way for Belk to emerge from Chapter 11. If the Charlotte, North Carolina-based company exits court protection this afternoon as planned, the case would be the fastest ever pre-packaged bankruptcy, Matthew Fagen of law firm Kirkland & Ellis said on behalf of the company.


An update on the largest financial stock this weekend concluded that the best thing to buy was itself…

Warren Buffett’s Berkshire Hathaway Inc. bought back a record $24.7 billion of its own stock last year and said there’s more to come, as the conglomerate struggled to find other ways to deploy its enormous pile of cash.

The company’s purchase of $9 billion of shares in the fourth quarter matched a record set in the previous three-month period, Buffett said Saturday in his annual letter to investors.

“Berkshire has repurchased more shares since year-end, and is likely to further reduce its share count in the future,” Buffett, 90, said in the letter. “That action increased your ownership in all of Berkshire’s businesses by 5.2% without requiring you to so much as touch your wallet.”…

“The math of repurchases grinds away slowly, but can be powerful over time,” Buffett said. “The process offers a simple way for investors to own an ever-expanding portion of exceptional businesses.”


Snapping Up Stock

Speaking of Berkshire Hathaway, Charlie Munger has decided to pass on the upcoming Robinhood Markets IPO…

“I hate this luring of people into engaging in speculative orgies,” Mr. Munger told The Wall Street Journal from his Los Angeles home. Robinhood “may call it investing, but that’s all bullshit.”

He added, “It’s really just wild speculation, like casino gambling or racetrack betting. There’s a long history of destructive capitalism, these trading orgies whooped up by the people who profit from them.”…

…Mr. Munger said he believes “you should try and make your money in this world by selling other people things that are good for them.”

“If you are selling them gambling services, where you rake profits off the top like many of these new brokers who specialize in luring the gamblers in, I think it’s a dirty way to make money, and I think that we’re crazy to allow it,” Mr. Munger continued.

Asked later Wednesday where he saw excess in the financial system, Mr. Munger said it is most egregious “in the momentum trading by novice investors lured in by new types of brokerage operations like Robinhood.”

“I think all of this activity is regrettable,” he said. “I think civilization would do better without it.”


Digging further into my Hamilton Lane data box for some more private asset info to share…

Last week, I looked at private equity deal level returns by sector. This week I am moving up to see the forest and not the trees. The charts below show the return by private asset class as compared with their public asset equivalent. If you do not work with private assets then you might be surprised to see that they have historically outperformed their public asset benchmarks over most timeframes. And not just by a little bit of outperformance, but by a lot of outperformance. You can see in the chart below that the only public asset benchmark to outperform its private asset class in any timeframe is the Barclay’s AGG index—beating private credit in the three-year window ended 9/30/2020. Of course, this may not be the case in a current lookback given the five-month decline in the Bond Index. But still, how can you not be impressed with the private equity outperformance even in a 3-, 10- and 15-year rip in the major equity indexes?

Risk-Adjusted Returns¹…
• Based on the following charts, you can see that the private markets have outperformed public market benchmarks on an absolute and risk-adjusted basis in the long-term (even after de-smoothing volatility). (Charts 4-5)
• Over a shorter time frame, private equity and private real assets outperform on an absolute and risk-adjusted basis (even after de-smoothing volatility). The benchmark and timeframe you use matters. (Chart 6)
15-Year Asset Class Risk-Adjusted Performance

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