Rounding the Corner

361 Capital Market Commentary | December 14th, 2020

We are almost to the end of this COVID-19 nightmare, but just like that end of day drive home from the ski slopes, we are going to have to take this last dark, icy, corner slow and with both hands on the wheel. We just need everyone to get to the vaccine before getting exposed in these last few months to the virus. This is it. The final stretch. We can’t let our excitement get ahead of our safety. How exciting was it to see those ice packs leave Kalamazoo on Saturday or to see the first healthcare workers get their shots today? I can’t wait to get jabbed by this flu shot.

While the vaccine is on its way and we have good visibility to the sharp economic bounce coming in the 2nd quarter, the current situation is a mess. Denver and Boulder are both completely shut down to any excess indoor economic activity right now. And with the temps in the 30s this week, you can’t sit outside unless you are a Wookie. So, it is pretty grim for most retail and restaurants unless they have an outstanding takeout or curbside pickup business right now. Between this and the entire travel and entertainment industry explains why Congress is still in session and trying to strike a year-end deal to get some assistance to those caught on the downward side of the ‘K’-leg of the economy. These people just need to make it 3-6 more months and then they will be ramping up into a flurry of activity that will carry into 2022.

For the markets, as the year-end corporate news flow winds down, investors will hit their favorite reading chairs next to the fireplace with their stack of 2021 market outlooks. Expect the outlooks to be rosy. And as typical, the Santa Claus rally could again grab the market by the collar and pull it higher as investors position for better times next year. I continue to believe that investors will position toward the more unloved and out of favor sectors, geographies and styles rather than those that have worked so well. Areas of the market that continue to respond well to life after COVID include: small caps, cyclicals, energy, credit and foreign equities to take advantage of a weaker U.S. dollar.

Have a great week and holiday. We will write shorter briefings over the next few weeks as the news flow and its importance to the market dictates. Shoot us an email if you have something that you need help with in the markets because we are always around. If the market is open, we are open. And it’s not like we can travel anywhere. Have fun and be safe.

When was the last time that you heard crowds cheer FedEx and UPS trucks driving side by side?

Tweet from @pfizer

The easy pick for the CEO of the Year…

Mr. Bourla gave his go-ahead a week later, at one of Pfizer’s first leadership meetings on the program. When vaccine researchers at a follow-up meeting in mid-March forecast a coronavirus vaccine in the middle of 2021, Mr. Bourla spoke up.

“Sorry, this will not work,” he said. “People are dying.”

Mr. Bourla demanded a vaccine by October, when it looked like a second wave of the pandemic would be peaking.

Growing up in Greece, Mr. Bourla never envisioned a career running one of the world’s biggest drugmakers. He trained to be a veterinarian. At Pfizer, Mr. Bourla gained a reputation for his friendliness and achievements, brightly chatting up colleagues and rescuing troubled products. He took the helm of Pfizer in 2019.

“I’m a true believer that people, they don’t really know their limits,” Mr. Bourla said in an interview. “And usually, they have the tendency to underestimate what they can produce.”


Picture of Pfizer CEO

Half of the U.S. population vaccinated by April would be incredible…

Hiring a caterer now for a May party would be such a bold move. Who’s in?

Tweet from @carlquintanilla

While the light at end of the tunnel looks blinding, we still have to get past this third wave…

The good news is that most of the hard-hit Midwest states had peak cases in November. They are still battling a stack of hospitalizations, but should get past that as long as they do not have a fourth wave after the holidays. Be safe Tennessee.

New confirmed cases

Who isn’t planning a 2021 vacation right now?

“60% of our people that we surveyed are going to kick trips from planning 2020 into ‘21. And we’re seeing increase in our consumer travel bookings, not necessarily in our corporate bookings.” – American Express (AXP) CEO Steve Squeri


Even United knows that the demand for personal travel will come roaring back…

United Airlines Holdings Inc. predicted that sales will rebound next summer as vaccines take hold, even as the company echoed rivals in warning that surging coronavirus cases have caused near-term demand to weaken over the past month.

Bookings for the third quarter of 2021, the heart of the airline industry’s peak season, will only be 40% below pre-pandemic levels, United said Friday in a regulatory filing. By comparison, the carrier expects a 70% decrease this month and next.

“Recent positive results in vaccine development and efficacy show an encouraging line of sight to the other side of the pandemic,” United said in the filing. “While it will take time for the vaccine to be widely distributed, the company’s confidence is even stronger in the recovery and the trajectory of the rebound in 2021 and beyond.”

To get there, however, the Chicago-based airline will have to endure a worsening short-term slump. The increase in Covid-19 cases has caused a “continued deceleration in forward bookings,” United said, and fourth-quarter sales will be down about 70% from a year earlier.


And when social distancing ends and travel begins, the demand on fuel will rocket…

In a world that’s expecting to see travel recover sharply next year, crude has become a hot Covid-vaccine trade.

“Oil is the cheapest of all reflation assets,” said Amrita Sen, co-founder of London-based consultant Energy Aspects Ltd. “With vaccines slowly rolling out, we expect investors to start returning to the oil sector and for prices to continue firming.”

In some corners of the world, the recovery in demand is almost complete. India’s largest refiner said last week its plants are processing at full capacity and it’s expecting a v-shaped rebound in fuel use. Consumption of gasoline is also at or near pre-Covid levels in China and Japan, the world’s second and fourth biggest oil consumers.

European motorists are hitting the roads again as governments relax national lockdowns in countries including the U.K., Spain, and France, according to an index of road usage and traffic compiled by Bloomberg News. Road freight is sharply higher as companies rebuild inventories and the Christmas shopping season gets in full swing.

As demand is recovering, the Organization of Petroleum Exporting Countries and its allies are keeping tight limits on production. The group canceled January’s 1.9-million-barrel-a-day supply hike and will instead add no more than 500,000 barrels a day to the market each month in the new year. Estimates for U.S. shale oil output are still falling.


Vaccine Rally

Even with potential future energy stock dividend cuts, this chart is too extreme…

@TaviCosta: Mind boggling. Energy stocks now pay more dividends than utilities. A lot more. $XLE vs. $XLU dividend yield spread is over 600bps. Have to say: Commodities have never looked so attractive.

Dividend Yield: Energy vs. Utilities Stocks

Consumers are staying optimistic…

U. Michigan Consumer Sentiment Index

Consumers are still spending, but most of it is online or over the phone for curbside pickup…

“As far as the holiday season…We’re seeing really strong consumer spending. The question will be how much of that has been pulled forward, how much of did that have we’ve already seen, how much of that is to come. And so that story won’t be totally written till December of 24th. But like everybody else, we’re seeing big increases in online spends, consumers have shifted their behavior.”
– American Express (AXP) CEO Steve Squeri

“…it’s true that customer expectations are also at an all-time high because ecommerce is exploding. In fact, an annual holiday report that’s powered by Adobe Analytics predicts that online holiday spending will reach $189 billion, which represents 33% year-over-year growth.”
– Adobe (ADBE) CEO Shantanu Narayen


These rental prices will bottom in the Q1, so if you are mobile and always wanted to live in Gotham, now is your chance to strike a very big deal…

Apartments in Manhattan haven’t been this cheap to rent in 10 years.

The median rental price plummeted 22% in November from a year earlier to $2,743 a month, according to a report Thursday by appraiser Miller Samuel Inc. and brokerage Douglas Elliman Real Estate. That’s the lowest in data going back to October 2010.

Tenants see few reasons to sign leases in the city’s costliest borough while its nightlife is muted and employers are not yet requiring a return to the office. In response, landlords are doing what they can to keep units from going vacant, giving away free months of rent on top of lowering prices to levels not seen since the financial crisis.


Rental Rewind

Even the CEO of Toll Brothers is telling you that NYC sentiment is improving…

“I am not telling you it’s back, but it is improving. We’re hearing that buyers with the talk of vaccines are now thinking about living in New York. We’re hearing a few stories of some that render the suburbs, that are coming back to take a look. But that doesn’t mean I am ready to start a high-rise in New York, because it’s very different from the farm fields.”
– Toll Brothers (TOL) CEO Douglas Yearley


Washington’s easiest lever in 2021 is to create millions of jobs…

Is there any issue—any initiative—you could turn to with hope it might bring together the disparate pieces of this fractured system?

One word: Infrastructure.

Yes, unsexy infrastructure. Roads, bridges, airports, subways, broadband networks, windmills, solar farms. Infrastructure just might be the vehicle that could smash through the political roadblocks in Washington, and perhaps demonstrate that, yes, things can get done. It isn’t dramatic, but maybe we’ve all had enough drama for a while.

In conversations in recent days it seems that the Biden team and legislators in both parties see the potential for bipartisan action here. “If we have willing partners in the other chamber, we can do it for sure,” says Sen. John Barrasso, a Wyoming Republican. He notes that the public works committee he led last year unanimously passed a highway and infrastructure bill, though it later fell apart in the House over how much to push green-energy projects.

Indeed, the prospects for a big infrastructure deal seemed pretty good last year until President Trump stormed out of a meeting with Democratic congressional leaders in a feud over their investigations of him and his campaign. Still, the broad support that fueled hopes then continues now.


If history is any guide, Santa Claus tends to show up for investors in the second half of December…

The Second Half of December Brings Santa

Forward stock market seasonality looks great from today…

Tweet from @bespokeinvest

Some market measures looked stretched, but this is not always a reason to sell…

@RenMacLLC: We hear claims that the high percentage of issues above their 200-day moving average is bearish, but the data doesn’t support that conclusion. Sure, in the near-term, there’s often a pause, but it’s a better intermediate momentum indicator than sell signal.

S&P 500 Index

Of course if you are looking at software stock valuations, then that requires a completely different conversation…

Valuation at All Time Highs

Say you wanted to trim some of your extreme valuation in software stocks and were looking for another sector, John Authers, of Bloomberg, and BofA have an idea…

Much attention has been devoted to the extreme optimism surrounding the FANGs. But we learned again this year that shorting stocks in the grip of speculative excess can be dangerous to your wealth. It might be more appealing to look at the other side of the trade. The following charts, from Savita Subramanian of BofA Securities Inc., show the sectors that are in and out of favor with the buy-side (looking at long-only funds’ positioning) and the sell-side (looking at the change in the number of brokers offering earnings estimates). Financials are spectacularly out of favor:

What's out of favor by the buyside and the sellside? Financials

Interesting comparison…

With the vaccine should come more economic activity, higher interest rates and steeper yield curves, all of which would be good for banks. Meanwhile, another chart from Subramanian makes a perhaps rather hopeful comparison with positioning in tech stocks:

Financials today


You could probably throw darts at any international financial paper’s stock table and come up with a list that would outperform the U.S. averages…

@StrategasRP: Two big bases for 2021.

MSCI Emerging Markets ETF

As Jurrien Timmer points out, a falling U.S. dollar will help you make money overseas…

For EM to outperform both cyclically and secularly we will need to see the dollar head lower. After all, for a US-based investor, currency risk is an important part of the mix if you’re invested in non-US markets.

With the US embarking on what might potentially become a long period of fiscal/monetary coordination (some might say MMT-lite*), it is possible we will see the dollar head lower in the months and years ahead.

And if the dollar heads down (as it has been consistently doing since March), emerging market currencies (below) should be on the other side, as indeed they have been.


Currencies: US dollar vs. EM

Congrats to every investor who backed up the truck to buy Disney when the theme parks and professional sports leagues were shutting down in March…

Tweet from @levie

With Disney’s big streaming push last week, the average movie theater is done…

Walt Disney laid out its plans to dominate the streaming wars in a four-hour-long investor day presentation on Thursday. The House of Mouse is putting up a lot of cash. It expects to double annual spending on original streaming content to $15bn by 2024 and increase original series and films to the tune of 100 a year. It has a new target to sign up 300m streaming subscribers in three years.

Ambitious? Very. Streaming leader Netflix has about 195m subscribers at the moment.

But Disney has reason to be confident. Backed by a large catalogue of content that ranges from Marvel to the hit live-action Star Wars series The Mandalorian, its flagship Disney Plus streaming service has amassed almost 87m subscribers since its launch in November 2019. That puts it three years ahead of schedule.

Add in subscribers to Hulu and ESPN+, and Disney’s streaming services boast a combined 137m subscribers, or 70 per cent of Netflix’s global customer base.


Disney Plus

The farmers in the central valley of Oregon must be killing it this year with COVID-19 driving everyone to drink pinot noirs while emptying their bank for a Christmas tree…

The Christmas tree shortage has its roots in the global recession of more than a decade ago. During those years, a glut of Christmas trees caused prices to tumble, and some farmers planted fewer or switched to other kinds of crops. Other farms just closed. Wild fires on the West Coast also wiped out a number of Christmas tree farms.

Casey Grogan, owner of Silver Bells Tree Farm, a 700-acre Christmas tree farm in Silverton, Ore., said his trees typically take between eight and 12 years to grow. He estimates the smaller supply has pushed up prices by about 30% over the last four years.

“We have retailers asking us to go out and cut more trees, which we are not doing because we have to save some for next year,” he said…

This year, fewer Christmas trees have been shipped abroad from growers in the U.S. because the pandemic has given a boost to domestic sales.

Swedish furniture giant IKEA, a popular destination for buying Christmas trees in Hong Kong and Singapore, has run out of them in those cities after meeting with overwhelming demand.

That has shoppers lining up for hours to buy trees from nurseries with incoming shipments, or turning to online sellers ordering lookalikes from China. In the local flower market in Wanchai, Hong Kong, six-foot trees are going for about $1,500, about seven or eight times what they sold for a year ago. Knee-high bundles of branches shaped like trees are going for $100 apiece.


Christmas Tree farm

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