Spring Blossoms

Market Commentary | April 6th, 2021

The cherry trees in Tokyo and Washington, D.C. are not the only things blossoming right now. The S&P 500 Index has blown through 4,000. Global mergers and acquisitions for the first quarter of 2021 set a record of $1.3 trillion in deals being announced. Friday jobs data posted over one million jobs created in March with the January/February revisions. More surprising was that virus-sensitive job gains were only half of the total, suggesting that America is recovering broadly across many industries. Of course, we still need 10 million more to get back to the pre-COVID trendline but with vaccinations happening at over four million shots per day, the April to July job gains should be even stronger. Can I get a two million plus non-farm payroll estimate yet?

Besides cherry blossoms, Washington, D.C. is also working overtime to make sure that structural job gains continue into the long term as ‘Infrastructure Week’ finally arrives. The executive office put up an opening bid of $2.25 trillion. Who knows how much will stick and be paid for with an increase in taxes on corporations and high earners, but given what this administration did with their stimulus plan, I think it’s possible for them to get the majority of what they want. Both Congress and their constituents want a big infrastructure package. It will bring high paying jobs, new roads, bridges, broadband, water pipes, and green energy projects to everywhere in America.

Here are some of the big parts of the Biden infrastructure plan that I think will easily get through Congress and which businesses and jobs will benefit:

  • $600B for road and highways. Big equipment players, construction & engineering firms (who also tend to own/lease the big equipment), aggregates players (rocks, cement, gravel pits, oily asphalt), many good paying jobs here.
  • $100B for water. Pipes, pumps, engineering services.
  • $100B for broadband. Wireline & wireless will benefit. Fiber, towers & engineering/deployment services.
  • $275B for electricity. Wind on the east coast, solar, EV charging stations, and tax incentives to get greener.

I know many other things are being discussed and I hope some big projects make it (Sec. Pete Buttigieg, get us a bullet train!), but there is a lot that needs to be fixed, so let’s see what makes it to film and what ends up on the cutting room floor.

The markets continue to push higher as the U.S. economic recovery accelerates and worries about higher inflation and interest rates remain mute. Enjoy the ride but continue to monitor your targets and allocation percentages. The sentiment and valuation data for public equities and credit has moved into “WandaVision” territory. This is not to say that it can’t get even more extreme, because we know that it can. Keep your eyes wide open for the signs. Archegos was a survivable test. Future mishaps might have a bit more push behind them. So, a big slate of economic data this week. Then earnings for the Q1 reports start next week. In the meantime, we will all be watching the airline labor shortages and ketchup price hikes as your favorite condiment goes on allocation. Have a great week!

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While the number of jobs added on Friday was impressive, the breadth was even more awesome…

A V-shaped rebound from last year’s pandemic shutdowns flattened last fall as stimulus faded, infections rose and restrictions returned. The V is now back: Almost every key labor market indicator turned green in March. Payrolls, both total (+916,000) and private (+780,000) rose strongly and by more than economists expected, prior months were revised up, unemployment fell to 6% from 6.2%, and labor-force participation rose a tad to 61.5% from 61.4% as more people felt safe looking for work. Almost every major sector grew, led by leisure and hospitality (+280,000) as restrictions were lifted, government (+136,000) as in-person teaching resumed in many states, and construction (+110,000) after February’s weather-induced drop. The average work week lengthened to 34.9 from 34.6 hours.

Everyone liked the numbers…

MORGAN STANLEY: “A very strong employment report with improvement in not only the pace but also the breadth of job gains… the labor market appears poised to deliver a potentially even more robust pace of job gains in the months ahead.”

@PantheonMacro: “We expect payrolls to rise by well over 1M in April, and then by 2M-plus in May and June. .. The job growth we expect over the next few months should easily push the unemployment rate below 5%.” ⁦

Indeed’s job postings are accelerating as airlines cancel flights and restaurants close early due to lack of workers…

@JedKolko: New!
Job postings on @indeed continue to climb:
16.4% above pre-pandemic baseline as of last Friday 4/2, another big 3-point weekly gain
broad-based increases across sectors and regions

Job postings on Indeed, United States

Those that are back to work are spending…

@JavierBlas: CHART OF THE DAY: US new vehicle sales jumped in March to 17.75m (SAAR), the highest since Dec 2017 and an unusual high level over last 20 years.
What’s selling? “Everything,” said a Ford dealer. “Cars are 2021’s version of toilet paper in 2020”

US Auto Sales Total Annualized

Drivers with used cars might find it more lucrative to sell their cars…

@SoberLook: The year-over-year price gains on auctioned used vehicles in the US hit the highest level in decades.

Manheim US Used Vehicle Value Index

The ISM Manufacturing PMI is exploding like a box of Peeps left on a car dash…

ISM Manufacturing PMI

The ISM Services PMI is equally good. Think transports, construction, leisure, retail, and financials…

“The Services PMI® registered an all-time high of 63.7 percent, 8.4 percentage points higher than the February reading of 55.3 percent. The previous high was in October 2018, when the Services PMI® registered 60.9 percent. The March reading indicates the 10th straight month of growth for the services sector, which has expanded for all but two of the last 134 months.”

“Residential new home construction demand continues to outpace supply. Building material delays, discontinuations and shortages are beginning to develop. Shipping delays at the L.A. and Long Beach ports have contributed to longer lead times. Cold weather in Texas has hurt several component manufacturers for building materials. We have encountered the ‘perfect storm’ for building material shortages and price increases.” (Construction)


Chicago Business Survey near all-time highs…

MNI Chicago Business Barometer

Kansas City Fed now posting its best ever strength…

Tweet from @UPFINAcom

And now comes ‘Infrastructure Week’. Really…

President Joe Biden’s proposal to spend $2.25 trillion could unleash a “supercycle” of spending last seen in the 1950s, according to Morgan Stanley. With Democrats in control in Washington, the infrastructure floodgates could finally open.

At 10% of current gross domestic product, doled out over eight years, the plan reads like a Rooseveltian blueprint for economic and social engineering. More than $600 billion would go to conventional projects like roads, bridges, and public transit. There is $374 billion for tech, according to Goldman Sachs, including rural broadband, modernizing the electric grid, clean-energy storage, and electric vehicles.

U.S. manufacturing and research and development would receive subsidies and incentives worth $480 billion. And $500 billion would go for the caregiving economy and workforce development…

“It’s an important step to addressing a structural challenge—generating sufficient demand to keep the economy at full employment,” says David Wilcox, a senior fellow at the Peterson Institute for International Economics. “I’m not alarmed by the price tag,” he adds, noting that a 10-year Treasury yield of 1.7% is still historically low.


The poker playing has begun in Congress. But given the last round, we already know who holds the cards…

@carlquintanilla: FUNDSTRAT: Getting enough #infrastructure votes thru reconciliation “could be a challenge”, but “it would be a mistake to bet against the team of Biden, Schumer and Pelosi. The chances of some version of infrastructure passing by fall are at least 75%.”

@stevenportnoy: “In a radio interview with @HoppyKercheval, Sen. Manchin signals there are circumstances under which he won’t vote to get onto the infrastructure bill. ‘As the bill exists today, it needs to be changed,’ Manchin says. … Manchin says more revenue needs to be collected from high income earners, but he says the corporate tax rate should be at 25%. He says he would not support raising the corp tax to 28%.”

All this economic rebound plus infrastructure talk has the basic and industrial industry ETFs flying…

Tweet from @carlquintanilla

The infrastructure package has the support of voters…

Recent polling from Navigator shows at least 70% of Republican voters support increased funding for highway and bridge construction, new job-training programs, expanding broadband access and making childcare more affordable for families.

Half of Republicans surveyed in the poll said they support government investment in clean energy.

And polling by Morning Consult and Politico shows 54% of voters support Biden’s infrastructure plan with tax increases on corporations and Americans earning more than $400,000 — including 32% of Republicans.


Voters also want to spend on clean energy capex because they have studied the data…

It should come as no surprise that the cherry blossoms in Tokyo and Washington D.C. are blooming earlier than ever and that Bill Gates book on ‘How to Avoid a Climate Disaster’ is on the bestseller list in the same month.

Global temperatures and public attitudes

Speaking of cherry blossoms, this data series happens to be one of the best that we have to monitor global climate change…

Amid an exceptionally warm March in Japan, the cherry blossoms in Kyoto peaked Friday, the earliest in more than 1,200 years of records. The record bloom fits into a long-term pattern toward earlier spring flowering, a compelling indicator of climate change, experts say.

The March 26, 2021, peak bloom date surpassed the previous record holder of March 27, 1409, nearly a century before Christopher Columbus sailed to America. The long-term record dates back to A.D. 812, about 12 years after Charlemagne was crowned Holy Roman Emperor.

“The Kyoto Cherry Blossom record is incredibly valuable for climate change research because of its length and the strong sensitivity of flowering to springtime temperatures (warmer springs = earlier flowering, typically),” Benjamin Cook, a research scientist at Columbia University who specializes in reconstructing climate data from the past, said in an email.

Unique for its longevity, the cherry blossom time series shows the average peak bloom date was relatively stable for about 1,000 years, from about 812 to 1800. But then, the peak bloom dates slope abruptly downward, revealing a shift earlier and earlier in the spring.


Peak bloom day of cherry blossoms, Kyoto, Japan

As for our local climate…

It looks like eastern Colorado, Kansas, Nebraska and Texas have dodged a worst-case drought scenario due to the February and March storms. The western slope of the southern Rockies was less lucky which means Lake Powell and Lake Mead could be dried out puddles this summer.

U.S. Drought Monitor

Two vaccine days at four million. Now let’s do five million…

Vaccine Rate

Much more importantly, the number of COVID deaths in the U.S. has fallen to near 200…

@NateSilver538: Just 222 COVID deaths reported in the US yesterday, which is the fewest since March 23, 2020.

Daily new confirmed COVID-19 deaths

Europe is lagging and it is going to hurt them…

Seriously, if they do not pick up the pace of vaccinations, they will not only have a fourth wave, but they will miss the entire summer tourism and vacation season. This is not good news for the global airlines.

COVID-19 Vaccine

If the global bankers are grounded, at least they will have plenty of work to do this year…

Bankers, lawyers and dealmakers are mostly in a celebratory mood, if they can actually believe their eyes. “The rebound from a year ago is more dramatic than anything we’ve ever seen in M&A recovery — full stop,” Cary Kochman, co-head of global mergers and acquisitions at Citigroup, told the FT.


Global dealmaking hits record in Q1 2021

When Barry Sternlicht talks, you should listen…

Barry Sternlight

The Archegos unwind continues to baffle many market participants…

Should a single investor be able to secretly accumulate one-third of the market cap of a company with no announcement or filing necessary? The Viacom board members will earn their directors fees this year! The regulators will also have a full plate deciding on whether to regulate off balance sheet swaps and derivatives.

Trading at roughly $12 a little over a year ago, ViacomCBS’s stock rose to about $50 by January. Mr. Hwang kept amassing his stake, people familiar with his trading said, through complex positions he arranged with banks called “swaps,” which gave him the economic exposure and returns — but not the actual ownership — of the stock.

By mid-March, as the stock moved toward $100, Mr. Hwang had become the single largest institutional investor in ViacomCBS, according to those people and a New York Times analysis of public filings. The people valued the position at $20 billion. But because Archegos’s stake was bolstered by borrowed money, if ViacomCBS shares unexpectedly reversed he would have to pay the banks to cover the losses or be quickly wiped out.

On Monday, March 22, ViacomCBS announced plans to sell new shares to the public, a deal it hoped would generate $3 billion in new cash to fund its strategic plans. Morgan Stanley was running the deal. As bankers canvassed the investor community, they were counting on Mr. Hwang to be the anchor investor who would buy at least $300 million of the shares, four people involved with the offering said.

But sometime between the deal’s announcement and its completion that Wednesday morning, Mr. Hwang changed plans. The reasons aren’t entirely clear, but RLX, the Chinese e-cigarette company, and GSX, the education company, had both spiraled in Asian markets around the same time. His decision caused the ViacomCBS fund-raising effort to end with $2.65 billion in new capital, significantly short of the original target.

ViacomCBS executives hadn’t known of Mr. Hwang’s enormous influence on the company’s share price, nor that he had canceled plans to invest in the share offering, until after it was completed, two people close to ViacomCBS said. They were frustrated to hear of it, the people said. At the same time, investors who had received larger-than-expected stakes in the new share offering and had seen it fall short, were selling the stock, driving its price down even further.


Gillian Tett suggests replacing the battery in your emergency avalanche transmitter…

The good news is that this avalanche does not appear to have created serious systemic risks, since the banks seem able to absorb the blow. That is a small victory for regulators who raised capital requirements after the 2008 global financial crisis.

But the bad news is that the episode exposes broader vulnerabilities in the financial system. After all, as any back-country skier knows, avalanches do not usually occur just because of an idiosyncratic shock, but because the underlying snowpack is unstable.

Last week’s debacle indicates that the system today is plagued with multiple half-hidden cracks. For one thing, there is alarmingly little transparency about family offices, even though these have recently exploded in size and influence. There is even less clarity about the derivatives that Archegos used to make bets…

So was Archegos an anomaly? Or a trend? No one can tell for sure, given the lack of transparency in the shadow banking world. But I believe the latter. After all, family offices are not the only part of the financial sector to have escaped effective oversight; just look at what the recent Greensill scandal shows about supply chain financing. Viacom was certainly not the only stock displaying peculiar prices swings; gyrations in the GameStop price have been far wilder.

Indeed, if you scan the financial landscape, you can see multiple pockets of bizarre price behaviour — or froth. Take bitcoin: the price of a coin has had a ninefold increase in the past year. Crypto evangelists argue this makes sense given inflation threats to fiat currency, and increased mainstream acceptance of crypto assets. Possibly so. But the sheer scale of the rally suggests some big unseen speculative plays are at work too…

But the key point is this: the Archegos rubble shows that years of excessively loose monetary policy have not just left asset prices elevated but created half-concealed pockets of leverage, too. When the two collide, disaster can erupt. And the big headache today is that while price froth is visible, it is frustratingly hard to tell where the pockets of excessive leverage lie, or how exposures are interconnected, since the shadow banking sector is so untransparent.


Look at the billions of dollars going into semiconductor capex…

Taiwan Semiconductor Manufacturing Co. plans to spend $100 billion over the next three years to expand its chip fabrication capacity, a staggering financial commitment to address booming demand for new technologies.

TSMC, the world’s leading manufacturer of advanced semiconductors, already planned a record capital expenditure of as much as $28 billion this year, but recent trends and developments have pushed for even more capacity. Now at the center of a global chip supply crunch, Taiwan’s biggest company has pledged to work with customers across industries to overcome a deluge of demand.

“TSMC expects to invest USD$100b over the next three years to increase capacity to support the manufacturing and R&D of advanced semiconductor technologies,” the company said in a statement responding to local media reports. “TSMC is working closely with our customers to address their needs in a sustainable manner.”



We saw earlier that the ISM and most business surveys are currently flying higher…

This is usually the time that the Fed thinks about stepping in and changing out the Kool-Aid which is what typically puts a pause in the future returns of equities. Of course, 2021 is not a typical year so this one will be interesting to watch play out. We are going to need more popcorn.
@LizAnnSonders: Historically, when ISM Manufacturing’s level > 60 (as it is now), 3-6m forward returns for S&P 500 were negative. @GoldmanSachs

ISM Index

The market is now pricing a 50%+ chance of two rate hikes next year…

Of course, this is not what the FOMC’s forecasts and Powell’s statements show.

Fed Rate Hikes

High-yield credit and stocks are moving in tandem…

@lisaabramowicz1: Spreads on U.S. junk bonds have fallen to the lowest since 2007.

Bloomberg Barclays US Corporate High Yield Average

Among sovereign debt, only one country made you money in the Q1…

Best Performers

Nearly impossible not to make money in equities in the Q1…

(S&P Global Market Intelligence)

The small investor looks like it’s going ‘all in’ right now…

@mark_ungewitter: Bob Farrell rule #5: “The public buys the most at a top and the least at a bottom.”
@sentimentrader: Mom and pop have finally, after a year, decided to pretty much go all-in.

AAII Allocation

Does anyone have more paper?

@ukarlewitz: $SPX up >5% in each of the last 4 quarters for the first time since 1995. 1996-97 was a banger. Momentum is your friend but sentiment quite different this time


Not cheap. There, I said it…

S&P 500 valuation measures

Leslie Norton notes how difficult it has become to get broad exposure to corporate America…

Diversification in a stock portfolio has become harder to achieve in recent years. Companies have chosen to stay private for longer, reducing the number of publicly traded stocks. The Wilshire 5000, the broadest U.S. stock market index, held more than 7,500 companies in 1998; it now contains about 3,500 stocks.

Private investments increase the number of companies that investors have access to. They also have shown themselves to be better diversifiers. In a recent study, Cambridge Associates found that including cash and a higher allocation to private investments may “hold greater appeal” to endowments, foundations, and private wealth investors as the challenges to the 60/40 model increase.

While the Yale University endowment’s 50% allocation to private investments is probably too aggressive for the rest of the world, most endowments are upping their exposure to private markets. “It is unbelievable, the continued appetite for alternatives writ large,” says Edwin Conway, global head of BlackRock Alternative Investors, which oversees $276 billion, including $76 billion in hedge fund assets.


There is a big new buyer competing against you for that just-listed home for sale…

A bidding war broke out this winter at a new subdivision north of Houston. But the prize this time was the entire subdivision, not just a single suburban house, illustrating the rise of big investors as a potent new force in the U.S. housing market.

D.R. Horton Inc. built 124 houses in Conroe, Texas, rented them out and then put the whole community, Amber Pines at Fosters Ridge, on the block. A Who’s Who of investors and home-rental firms flocked to the December sale. The winning $32 million bid came from an online property-investing platform, Fundrise LLC, which manages more than $1 billion on behalf of about 150,000 individuals.

The country’s most prolific home builder booked roughly twice what it typically makes selling houses to the middle class—an encouraging debut in the business of selling entire neighborhoods to investors.

“We certainly wouldn’t expect every single-family community we sell to sell at a 50% gross margin,” the builder’s finance chief, Bill Wheat, said at a recent investor conference…

“You now have permanent capital competing with a young couple trying to buy a house,” said John Burns, whose eponymous real estate consulting firm estimates that in many of the nation’s top markets, roughly one in every five houses sold is bought by someone who never moves in. “That’s going to make U.S. housing permanently more expensive,” he said.

The consulting firm found Houston to be a favorite haunt of investors who have lately accounted for 24% of home purchases there.


Meanwhile, guess which major metro is seeing a volume surge in housing activity?

A survey of major employers by the business group Partnership for New York City found that 10% of Manhattan office employees had returned to their desks by early March. Survey respondents said they expected 45% of workers to be back in the office by September, but Mr. Miller said he believes many will accelerate that timeline given the quickening pace of the vaccine rollout.

“When corporate America comes back, and those buildings, instead of being 80-90% empty, are 15-20% empty, that will go a long way in the housing market,” he said.

Signed contracts in Manhattan in the first quarter surged to 3,700, up 58% from the same quarter in 2020. It was the highest total for the first quarter since 2007, according to real-estate brokerage Corcoran Group. Sales were strongest on the borough’s west and east sides and downtown, while upper Manhattan and Midtown saw lower sales, compared with last year.


Equality also made a new all-time high last week as several corporations stood up to do the right thing…

Ken Chenault is a one of the most outstanding people that I have ever met. Not only an incredible business leader at American Express, but also well liked and an all-around good guy. Last week may not have happened without his and Ken Frazier’s leadership. Other corporations, states, cities and elected officials had better be paying attention right now.

At first, Delta, Georgia’s largest employer, tried to stay out of the fight on voting rights. But after the Georgia law was passed, a group of powerful Black executives publicly called on big companies to oppose the voting legislation. Hours later, Delta and Coca-Cola abruptly reversed course and disavowed the Georgia law. On Friday, Major League Baseball pulled the All-Star game from Atlanta in protest, and more than 100 other companies spoke out in defense of voting rights.

The groundswell of support suggests that the Black executives’ clarion call will have an impact in the months ahead, as Republican lawmakers in more than 40 states advance restrictive voting laws. But already, the backlash has been swift, with Mr. Trump calling for boycotts of companies opposing such laws, and Georgia lawmakers voting for new taxes on Delta.

“If people feel like it’s a been a week of discomfort and uncertainty, it should be, and it needs to be,” said Sherrilyn Ifill, the president of the NAACP Legal Defense and Educational Fund, who has been pushing companies to get involved. “Corporations have to figure out who they are in this moment.”


The summer movie season starts early with a kaiju-sized BOOM!

Okay. That was a hell of a lot of fun. A big new action-packed film that got the family fired up for a normal Hollywood summer. Who cares if much of the science did not make any sense? This is a Godzilla AND King Kong movie. We want more. Please deliver “Black Widow”, “Bond 25” and “Dune” next.

Moviegoers sent a message to Hollywood over the weekend: We’re ready to return to theaters — and will buy tickets even if the same film is instantly available in our living rooms — but we want to leave our grim world for a silly fantasy one.

“Godzilla vs. Kong,” a throwback monster movie in which a lizard with atomic breath battles a computer-generated ape on top of an aircraft carrier (before everyone decamps to the hollow center of the Earth), took in an estimated $48.5 million at 3,064 North American cinemas between Wednesday and Sunday. It was the largest turnout (by far) for a movie since the pandemic began.

The PG-13 movie was not even an exclusive offering to theaters. “Godzilla vs. Kong,” produced by Legendary Entertainment, was also available on HBO Max, a streaming service that sells monthly subscriptions for $15, less than the cost of one adult ticket at cinemas in major cities.


Godzilla vs Kong
(Warner Bros.)

Finally, this is such a great read… “Why Animals Don’t Get Lost”

What makes this striking is that we are living in a golden age of information about animal travels. Three hundred years ago, we knew so little about the subject that one English scholar suggested in all seriousness that storks spent their winters on the moon. Thirty years ago, a herd of African elephants, the largest land mammals on earth, could still stage an annual disappearing act, crossing beyond the borders of a national park each rainy season and vanishing into parts unknown. But in the last few decades animal tracking, like so much of life, has been revolutionized by technology, including satellites, camera traps, drones, and DNA sequencing. We now have geolocation devices light enough to be carried by monarch butterflies; we also have a system for tracking those devices installed on the International Space Station. Meanwhile, the study of animal travel has acquired tens of thousands of new contributors, in the form of amateurs who use cell phones and laptops to upload observational data points by the billions. And it has also acquired—perhaps unsurprisingly, given the enduring, “Incredible Journey”-esque appeal of the subject matter—a spate of new books about advances in animal navigation.

Two main lessons emerge from those books—one tantalizing, one tragic. The first is that, although we are developing a clearer picture of where animals go, we still have a lot to learn about how they find their way. The second is that the creatures with a credible claim to being the worst navigators on the planet have steadily reduced the odds of all the others getting where they need to go, by interfering with their trajectories, impairing their route-finding abilities, and despoiling their destinations. Those feckless creatures are us, of course. While other animals lend this field of study its fascination, we humans distinguish ourselves chiefly by adding existential undertones to the fundamental questions of navigation: How did we get here? And where, exactly, are we going?


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