Red and Green

361 Capital Market Commentary | December 7th, 2020

With seventeen days left of trading for 2020, what is the stock market trying to tell us as it registers new all-time highs? First, it is telling you that the world will be in a much better place in 9-12 months. Today’s new highs in cases, hospitalizations and fatalities will be behind us early in the first quarter. Shelter-in-place restrictions work as France has proven. The loss of this month’s holiday parties and family gatherings will turn this into a different kind of year end, but it will be worth it because you will not want to miss 2021. As the vaccination rollouts ramp through the first half of the year, you will see and feel the excitement build into the summer. This will lead to a ramp of economic activity during Q2 in anticipation of an explosion of consumer consumption and business resumption through summer and into fall. The restaurants left standing will have lengthy reservation lists, resort hotels and airplanes will fill with vacation travelers and kids will be lining up their back-to-school shopping early to get ready for September classes to resume. If the stock market had a volume dial, it would be turned up to 11 right now.

2021 will be very exciting. I can only imagine that the resumption in social activities will be similar to how people felt after World War II. Parties in the streets. Live music at every open establishment. And bartenders in action flipping bottles in the air with smiles on their faces once more. There will be shortages in 2021. Some that you can predict now, and some that you do not yet see. Jobs will return quickly. If anyone wants to work, there will be plenty to choose from. Commuters will return to their subways and trains. Drivers will return to collect Uber and Lyft fares. And business travelers might even get on planes again to go visit clients (but this will probably be slower to recover). I do think white collar workers are looking forward to returning to the office although like business travel, it won’t come back to 100% anytime soon. We have all learned that we can get a lot done remotely so a good portion of that will continue into the future. And just as everyone is done running away from the big cities, they will likely turn into an oasis for the younger generation this summer. With the families and kids now living in the suburbs or having moved to Florida, New York City will become ground zero for the biggest party of 2021.

So yeah, the year ahead will be fun. But before the year ends, we still have a few big things on the 2020 calendar to work through. This week it is nearly given that the ECB will expand its QE program in some form. So, more fuel to help Europe get to the economic orgy that will be dropping in 2021. Sometime this week or next, the FDA should approve both the Pfizer and Moderna vaccines to begin distribution in the U.S. And the stock market likes vaccine news datapoints. Next week is the last Fed meeting of the year. The Senate also adjourns on the 18th which means we will get a Congressional COVID aid package of maybe $900B before next Friday. On the 21st, Saturn and Jupiter will cross paths in the sky, while Tesla is added to the S&P 500 Index. Don’t put it past Elon to do something interesting on this day to further memorialize the event.

As for the new highs in the market, I’d continue to expect any pullbacks to be followed by more all-time new highs. So much good news and things to look forward to in 2021, combined with a healthy banking system and all-time narrow credit spreads. The central banks have our backs and it looks like Congress is going to play ball and get some more aid to those whose jobs are currently displaced. Future uncertainties and the volatility indexes are both trending lower while optimism rises. Look at small caps outperforming big caps. Energy stocks now leading the S&P 500. Copper prices and Semiconductor stocks both telling us that economic activity is strengthening. Even the Airline Index hit a post-COVID high last week. So, go ahead and enjoy this market. You deserve it.

True, by backward-looking measures the market looks rich. But do you think the forward-looking estimates have accurately predicted the 2021 and beyond figures? I don’t.

@ISABELNET_SA: On an absolute basis, equities look expensive by historical standards, but relative valuations appear attractive, as cash flow yield and ERP look cheap

Cross-asset valuation for the US

And Ryan will tell you that big monthly moves typically lead to continued strength…

Tweet from @RyanDetrick

High grade, mid grade and low grade credit spreads are all near historically tight levels which is great for risk taking…

BofA Merrill Lynch Index Spreads

RenMac will point first to credit tightness as a reason to own this market…

@RenMacLLC: Since March, it has been and continues to be about credit not COVID. Today HY spreads are at their lowest levels since the outbreak. If the perma-bears were right, credit would not be this firm…..they’re just wrong.

HY Spread to Treasury

Same story overseas where riskier country debt is trading at all-time low yields…

Tweet from @lisaabramowicz1

Don’t fight Dr. Copper right now…

Copper rallied on Tuesday to a seven-year peak after strong economic data from Asia as Goldman Sachs said the world’s most important industrial metal was in the first leg of a bull market that could carry prices to record highs.

Benchmark copper prices on the London Metal Exchange hit $7,719 a tonne in afternoon trading, the highest level since March 2013, after readings on manufacturing activity in China and South Korea surpassed market expectations.

Copper is used in almost all construction projects and major appliances. The metal has risen 25 per cent this year, boosted by supply disruptions, hopes for a wave of “green” economic stimulus and China’s rapid recovery from the pandemic…

Mr Snowdon said the 23m-tonne-a-year refined copper market was facing its tightest conditions in a decade, with demand projected to exceed supply by 327,000 tonnes next year, followed by 153,000 tonnes in 2022.

Against a backdrop of low inventories and net zero carbon pledges from countries including China, Japan and South Korea, Mr Snowdon believes significantly higher copper prices will be needed to incentivise new supply and balance the market.

“We believe it highly probable that by the second half of 2022, copper will test the existing record highs set in 2011 [$10,162],” he said. “Higher prices should ultimately help defer peak supply and ease market tightness, but this first requires a sustained rally through 2021-22.”


Goldman Sachs says copper has entered a new bull market

Stocks strong, Copper strong, Euro strong…

Tweet from @bespokeinvest

Thought this was a great read last week about the impact of rising Treasury yields…

Renewed optimism about U.S. stimulus talks pushed the benchmark 10-year yield to a high of 0.96% on Wednesday, a move which if continued could spark a domino effect across risk assets trading at all-time highs thanks to low interest rates. At issue is whether the jump in yields is accompanied by an economic recovery and moderate levels of inflation that would allow the Federal Reserve to keep rates low.

So far it seems investors are positioning for that scenario, with the Treasury curve — often a gauge of growth expectations — steepening and U.S. stocks holding near record highs. Ten-year breakevens — a market-based gauge of inflation expectations — though highest since May 2019 remain well below last year’s 2.2% peak.

A 10-year yield of 1% to 2% “is certainly possible, and it would have wide implications across everything from emerging Asian currencies to commodities,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank Ltd. in Singapore. “It’s likely a matter of when — not if — yields will climb.”


Paul Tudor Jones is also optimistic about 2021 and the markets…

“I think the stock market’s on a combination of fiscal monetary pulse that we’ve never seen before in history, nothing like this,” Jones told Yahoo Finance in an exclusive interview on Wednesday. For that reason, stock multiples are frothier than in the year 2000, when the tech bubble sent the Nasdaq to its first historic high.

And he anticipates a COVID-19 vaccine will jumpstart economic growth, which may have potential political implications.

“The vaccine’s going to bring us back. We’re going to have an incredible growth rebound,” the investor predicted, as pent-up demand from the last year gets carried forward in a big way.

“I have four kids in their 20s. And, it’s like a horse at the beginning of a race,” Jones said. “They’re so ready to get to see their friends, to get to restaurants, to vacation. They’re just ready to get out and go crazy, like I think everyone else in the world,” he added.

For that reason, the investors sees “a second-quarter explosion” in retail, and virtually every other level.


Several good recovery datapoints and comments from execs at virtual conferences and on calls last week…

“In a sense, you could say the near-term has gotten a little bit worse because the virus statistics have gotten worse, but the medium and long-term has gotten a little bit better because the optimism around a vaccine is that much stronger, I think, we can sit here and say with a greater level of confidence than maybe a month or two ago that sometime in 2021, we should see a shift towards the environment in which the virus is receded into the rear view mirror, and we’re then looking at, okay, what the demand aspects look like”
– Marriott (MAR) CEO Arne Sorenson

“On the personal front, we feel like there’s a fair amount of pent-up demand. And individuals are looking for what I would call those glimmers of hope to try and get out there and figure out when they feel safe and secure to travel again”
– Mastercard (MA) CFO Sachin Mehra

“While we’re continuing to amplify categories that are relevant with customers during the pandemic, we believe that over the medium to long-term, there will be pent-up customer demand, particularly around occasions like travel or in-person social events.” – Nordstrom (JWN) CEO Erik Nordstrom

“China domestic travel has mostly reached full recovery, as we shared earlier. Domestic hotel and air booking have both turned positive growth since August, and especially the high-end business and short-haul travels have recovered well.”
– (TCOM) CEO Jane Sun

“If you look at China right now where things are pretty much back to normal, you will see our businesses are performing well there, people are socializing outside the home again”
– Diageo (DGEAF) CEO Ivan Menezes


J.P.Morgan excited holiday shopping optimism with these stats last week…

JPMorgan Chase & Co. said it processed 15% more card payments during Black Friday weekend than it did a year earlier, a sign that the pandemic did little to curtail spending as the holiday shopping season began.

The jump was driven by a surge in purchases on Cyber Monday, when the biggest U.S. bank processed a record 27% more online and mobile payment authorizations than it did on the same day last year, according to data to be released Friday. That countered a 12% drop in in-store payment authorizations over the weekend as shoppers avoided malls due to concerns about Covid-19.

The figures from JPMorgan, which bills itself as the country’s biggest e-commerce payments processor, offer a glimpse into the state of the U.S. consumer as the pandemic continues to hurt the economy.


Another reminder that consumers are ready to spend as soon as COVID restrictions end…

@SnippetFinance: Lowest reading ever of the debt service ratio, positive for consumers.

Consumers' Debt Service Ratio

Last week’s jobs figures were light due to the third wave of COVID data hitting new highs. But just wait until you see Q2 and Q3 nonfarm payroll job growth…

Consumers' Debt Service Ratio

These two lines will converge in 2021/2022…

Activity will resume and all construction will not be homebuilding in the future. If you are a non-residential builder or input into that industry, save some higher margin capacity for the second half of 2021. You will be rewarded with better prices than giving out all your capacity today at low bid, no margin contracts.


Given the interesting debates this weekend in Georgia, we now must open an eye to upcoming U.S. Senate races…

With one incumbent not even bothering to show up for his debate, and questions surrounding who might actually vote in the final runoffs, the 2021 control of the Senate is now a question mark. This actually matters given that the Dems are only two Senators away from a tie with the tilt going to VP-elect Kamala Harris. Will Stacey Abrams turn Georgia and Washington D.C. blue?

Georgia's regular Senate election

Lots to consider as this wave of millennials moves through the U.S. economy…

One of my reasons for medium- and longer-term optimism is the favorably demographic situation in the U.S. For years, we have been sinking into the demographic hole left behind as the Baby Boomers retired. The situation is now changing.

Traditionally, peak earning years begin in the early- to mid-40s. Beginning now, we are climbing the demographic hill where each succession year a larger population enters its prime earning years. For comparison, this is pretty much the same type of hill we were climbing in the 1990s when the Baby Boomers were aging into their peak earning years.


US population by Age

After 9/11, the young people ran to join the military. Now they are rushing to apply to medical school…

Stanford University School of Medicine reports a 50% jump in the number of applications, or 11,000 applications for 90 seats. Boston University School of Medicine says applications are up 27%, to 12,024 for about 110 seats.

“That, I think, may have a lot to do with the fact that people look at Anthony Fauci, look at the doctors in their community and say, ‘You know, that is amazing. This is a way for me to make a difference,'” said Kristen Goodell, associate dean of admissions at the school of medicine at BU.

Medical school admissions officers have started calling this the Fauci Effect.


And if young people are squeamish about blood, have them look closer at jobs in the solar industry…

Look at the change in solar and wind energy in recent years. Just 10 years ago it wasn’t even close: it was much cheaper to build a new power plant that burns fossil fuels than to build a new solar photovoltaic (PV) or wind plant. Wind was 22%, and solar 223% more expensive than coal.

But in the last few years this has changed entirely.

Electricity from utility-scale solar photovoltaics cost $359 per MWh in 2009. Within just one decade the price declined by 89% and the relative price flipped: the electricity price that you need to charge to break even with the new average coal plant is now much higher than what you can offer your customers when you build a wind or solar plant.


The price of electricity from new power plants

The movie theater industry forever changed for the better last week…

Goodbye stale popcorn, sticky floors and seats that don’t recline. Time to fire up the HBO Max subscription for how we will watch big movies in the future.

Much of what has befallen the movie-theater business is about secular change related to technology. But the industry has done itself no favors by offering terrible customer service, ever-higher prices and precious little in the way of innovation, even as home theater experiences have drastically improved.

While several of Mr. Kilar’s underlings tried not to answer the question of whether the Warner 2021 movie-slate move was temporary or permanent — one called it a “unique, one-year plan,” and the always shifty term “hybrid model” was tossed around — it’s just a feint to protect a lie that Hollywood has told itself for far too long. Which is that it can no longer avoid the wrenching changes to its business fueled by the rise of digital technologies and changing consumer practices. These have been clear to anyone who has watched the relentless and impressive march of Netflix…

Warner is not the only one. There have been increasingly aggressive efforts to put streaming in the lead by the Walt Disney Company, which took the well-timed plunge with its Disney+ service earlier this year. Disney just reported an impressive 73.7 million subscriber tally, helped by its creative “Mandalorian” franchise. And it is making its live-action remake of “Mulan” available to subscribers after having experimented by charging $30 extra to watch it on the service.

By making these dramatic shifts, Disney and Warner may be giving up hundreds of millions in box office revenue from theaters, of course, but it’s pain that is necessary, even if it means complaints from those owners.


A once in a millennium event for the propane tank industry?

Supplies of propane tanks are being depleted in the US with demand rising 75 per cent year on year, as the coronavirus pandemic drives entertainment outdoors.

Hardware stores, petrol stations and big-box retailers cannot keep the portable steel tanks in stock. The scarcity is another way that the pandemic has jolted energy markets, along with depressed or reshaped demand for jet fuel, petrol and electricity.

Demand for propane sold in retail-size cylinders is likely to reach about 500m gallons this year, up from 284m gallons in 2019, according to the Propane Education & Research Council, a group backed by vendors and producers of the fossil fuel…

At the Strosniders Hardware chain in the Maryland suburbs of Washington, purchases of propane tanks trebled last month. The largest store sold 1,000 tanks, said Bill Hart, a partner.

“All the restaurants around here are using outdoor patio heaters,” he said. “There’s probably 300-400 restaurants within a square mile of that store.”


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