The Downhill

361 Capital Market Commentary | January 25th, 2021

COVID-19 datapoints for the U.S. have peaked and are now going to accelerate to the downside. We are past the holiday gathering spike and the vaccine rollout is occurring at a one million plus per day injection rate. This will accelerate towards two million as new vaccines get approved and manufacturing ramps up. New weekend data from Israel shows that the population hospitalization rate for those over 60 goes into a freefall after the second vaccines get into arms. This will be a good roadmap for other countries to follow.

If a vaccine injection ramp begins to have a similar effect on the U.S. data, the question will be increasingly asked if the Government still needs $1.9 trillion in aid pumped into the economy. Maybe there will be a shift from aid to added infrastructure spending. It will be a good problem to have if fewer people are getting hospitalized, lockdowns end earlier, and the economy comes back faster. Not sure if that will take the upside pressure off interest rates—especially if inflation spikes up as the economy surges back. Again, all good problems to have. But the politicians will have their work cut out for them over the next six weeks trying to determine the right amount of aid and stimulus to drop.

The economic and corporate reporting data continues to look strong. The U.S. and Global PMIs put up solid reports last week even with the year-end jump in COVID. And the U.S. housing market is still red hot as inventories continue to fall, hitting a record low of only 1.9 months of available supply. We will have about a quarter of the S&P 500 report this week with most of the Big Cap Tech/FANG dropping. Netflix helped the sentiment of the bigs last week when they let the world know that they felt good with their production capex and laid out a plan for future free-cash-flow generation. The banks had equally good things to say about the outlook for their customers and ability to restart their stock buybacks; but given the big year-to-date moves in their shares, most stocks declined after their reports.

There has been some extreme excitement hitting some pockets of the stock market which many have been asking me about. It is not typical that stocks post double-digit percentage gains, or even triple digit, in a day with no new corporate or industry news. Clearly the animal spirits are running high. This is not a bad sign for the overall market and will hopefully take some of your stocks to their target prices sooner than expected. Don’t feel bad about taking some profits when your targets are hit. There are plenty of other good opportunities to rotate into other areas of the market that don’t have fan clubs on Reddit. The new pool of SPACs is also deploying capital at a fevered pace. Good news if there is a SPAC in a private company that you want to own. Incredibly good news if you are a private equity investor in the targeted company. When will some of these frenzies end? My first answer would be when interest rates go up, but I think we are twelve months away from that. Another answer would be when a few bad SPAC acquisitions get done, but it will likely take a few quarters for few new deals to run into a wall, and for investors to figure that they overpaid. As for the Reddit investor boards, well, hopefully the activity will die down once everyone gets their vaccine and elects to go hit the town with some of their GameStop profits versus spending too much time on their trading account.

We are finally past the big peaks…

@COVID19Tracking: Our daily update is published. States reported 1.7M tests, 143k cases, and 1,940 deaths. 110,628 people are currently hospitalized in the U.S., the fewest since December 14.
Nationwide COVID-19 Metrics

New cases are falling in all U.S. regions…

@COVID19Tracking: Except for Christmas day, today’s case number is the lowest since December 1. Cases are now declining across all regions of the country.
COVID-19 Cases Per Million People

Vaccine shots in arms are now over one million per day…

Daily Vaccinations in the U.S.
(Bloomberg)

And corporate America is getting much more involved in accelerating the rollout…

Tweet from @fxmacro

Israel seeing significant declines in hospitalizations as they head toward 100% vaccinated…

How quickly will COVID-19 wards start to see the benefits of vaccination?

The decrease in hospital admissions is swift after vaccination, Maccabi suggests in its latest data, finding that hospitalizations start to fall sharply from Day 18 after people receive the first shot. Galia Rahav, head of infectious diseases at Israel’s largest hospital, Sheba Medical Center, described the data as “very important.”

By Day 23, which is 2 days after the second shot, there is a 60% drop in hospitalizations among vaccinated people aged 60-plus, Maccabi revealed after monitoring 50,777 patients. It compared their hospitalization rate at that point with their hospitalization rate soon after receiving the vaccine, using 7-day moving averages.

(TimesofIsrael)

Shot Shift
(Bloomberg)

Even with the January virus peak, U.S. PMI data is clocking in some great figures…

The Markit U.S. flash Manufacturing PMI climbed 2.0 points to 59.1 in January, a record high level. Factory output grew at the fastest pace since August 2014. New orders, including export orders, rose at the quickest rate since September 2014. Greater demand drove up order backlogs, which led to firms expanding their workforce at the fastest rate in two years. Supplier deliveries slowed, a sign of strengthening demand, although in the current COVID-impacted environment vendor performance has also slowed because of supply chain delays and raw material shortages.

The Markit flash Services PMI jumped 2.7 points to 57.5, its second highest level since March 2015, reflecting a notable pickup in business activity. But new order growth softened, as COVID restrictions weighed on demand. Employment growth also eased, with firms reporting both cost cutting efforts and difficulty finding workers with the right skills.

(@NDR_Research)

Markit US Manufacturing PMI

And U.S. housing sales will not let up, causing national inventory to be depleted and prices soaring…

Existing Home Sales for December rose +0.7% to 6.76M, topping the 6.550M estimate and came in above the prior 6.710M (revised from 6.690M); median home price for existing homes $309,800, +12.9 pct from dec 2019; inventory of homes for sale 1.07 mln units, 1.9 months’ worth.
(Hammerstone Report)
NAR US Existing Home Inventory

New building and permit activity for single family homes is going to continue to accelerate…

@GregDaco: US#Housing starts +5.8% in Dec 2020 to 1.67mn: strongest pace since Sep 2006
> Single-family starts +12.0% to 1.34mn (high Sep’06).
> Multi-family starts -13.6% to 331k

US: Housing starts

Housing and building material stocks are again taking notice…

Tweet from @hmeisler

Basic material prices are getting help for U.S. housing and Asian manufacturing demand…

U.S. commodity producers have benefited as well from strengthening global prices and increasing demand, particularly for aluminum. Its cash price on the London Metal Exchange is up 39% from its April low, according to S&P Global Platts. The domestic price for prime steel scrap used to make new steel has risen 60% since November, aided by increased overseas demand. Turkey has sought out U.S. exports, and lately so too has China, which is importing scrap for the first time in nearly a decade.

“We can sell everything we have,” said Brad Serlin, president of United Scrap Metal Inc., near Chicago. “Steel mills that were out of the market all of a sudden are doing big orders.”

(WSJ)

Chicago region prime industrial scrap monthly price

Construction equipment inventory is also in short supply according to Goldman Sachs…

Used construction equipment inventories continued to tighten during 4Q20
(Goldman Sachs)

Restaurant volumes are still down year-over-year, but traffic is improving…

Restaurants – For the second week of January (ended Jan. 10), our SSS survey suggests casual dining industry comps declined -20.0%, consisting of guest traffic of -19.8% and price mix of -0.2%. This week improved by 200 bps vs. the first week of January and was a vast improvement over the -35.8% decline for the final week of December. We are increasing our full month of January SSS estimate to -22.0% from -28.0%. This compares to SSS of -29.9% in December, -22.1% in November, -14.5% in October, and -14.8% in September.

(Loop Capital)

Part of the help may be due to the last round of stimulus checks…

Restaurants chains say they are getting a sales bump from the latest round of stimulus money going to households but spending patterns from the first batch of checks earlier in the pandemic suggest the lift can fade quickly.

The roughly $900 billion coronavirus aid package signed into law last month provided a second round of stimulus payments––$600 per adult and $600 a child. While the amounts are lower than the $1,200 and $500 delivered last spring, they are having an impact, at least short-term, according to some restaurant executives and industry data.

Church’s Chicken, Checkers Drive-In Restaurants Inc., Noodles & Co. and TGI Fridays are among the companies crediting higher sales to the stimulus, according to executives. Some McDonald’s Corp. restaurant owners also attributed strong January sales to the recent checks, as did fine-dining chain Fogo de Chão.

(WSJ)

The Fed is watching the tidal wave of consumer deposits and how it might impact inflation…

Between the closed theaters and restaurants, the prices slashed by airlines and half-empty hotels, and the government benefits paid or in the pipeline, Americans may have as much as $2 trillion in extra cash socked away by this spring.

For the Federal Reserve, that is both blessing and curse: fuel for the economic recovery once coronavirus vaccines take hold and people can travel and shop freely, but also the possible spark for a surge in prices that policymakers already are bracing to explain.

Fed policymakers have little doubt that costs for many goods and services will jump this year, a bitter pill for consumers if gasoline, travel and other prices start to rebound from sharp declines last year. But, Fed officials argue, that’s part of getting back to normal, not the start of a more persistent inflation problem.

“As people return to their normal lives … there could be quite exuberant spending and we could see upward pressure on prices,” Fed Chair Jerome Powell told a Princeton University seminar earlier this month.

“The real question is how large is that effect going to be and will it be persistent?” Powell said. “A one-time increase in prices … is very unlikely to mean persistently high inflation.”

(Reuters)

Plenty of corporate earnings datapoints last week showing that the economy is in a good position…

“So far in January, volume demand remains extremely strong, and the cost to serve our customers remains elevated. Rail velocity and congestion has improved for now, but labor challenges and increased demand will continue to impact rail velocity as the year goes on.” – J.B. Hunt Intermodal President Darren Field

“…the month of December was felt really good. It actually felt like kind of pre-COVID environment.” – Comerica CEO Curtis C. Farmer

“Throughout the quarter, we have seen real-time consumer and business spending data that’s been encouraging. For example, for the month of December, our customers debit card spending was 11% more than a year ago month of December and credit card spending which has often been negative when compared to the year-ago period, went down in part by travel and entertainment spending was slightly positive from the same month a year ago” – Zions Bancorporation CEO Harris Simmons

“Total payments in the month of December hit a high of $304 billion up 8% year-over-year driven by a record volume of holiday spending. Full-year payments reached a new high of $3.1 trillion, up 2% year-over-year.” – Bank of America CEO Brian Moynihan

“…at-risk industries, they have actually held up I think better than what we would have expected coming into this.” – Comerica Executive VP & Chief Credit Officer Melinda Chausse

“There is enormous fiscal stimulus. Our rates remain very low. I think the global economies are recovering. And I think the vaccine; if we get in the U.S. to a million doses a day for the next 150 days would be spectacular.” – Morgan Stanley CEO James Gorman

(@TheTranscript_)

Interesting times when the most expensive stocks are the ones getting the bulk of investor interest…

Tweet from @carlquintanilla

The November election was like a big green light to own the most at-risk names in the market…

No investor wanted to be on the opposite side of increased Fed, Treasury and Government spending.

Is This the Biggest Short-Squeeze in Market History
(@biancoresearch)

Netflix saved the Nasdaq last week from negative year-to-date returns…

Nasdaq

Plenty of big Nasdaq breakouts now as the other giants pull up to the earnings plate this week…

Nasdaq breakouts

Speaking of Earnings, those companies with increasing EPS estimates after their reports have tended to outperform this month…

1Q2020 EPS estimate changes
(@EarningsScout)

Another big week with 20-25% of the S&P 500 reporting…

Most Anticipated Earnings Releases
(@eWhispers)

Merger Monday is all about SPAC involvement today…

SPAC news…
1. Bill Foley’s SPAC Foley Trasimene Acquisition Corp. (WPF) is near a deal to take U.S. benefits services provider Alight Solutions public at a valuation of $7.3b including debt, Reuters reported.

2. IACAU announced it will merge with a wholly-owned subsidiary of Taboola in a deal valued at approximately $2.6B and it will trade under the new symbol TBLA.

3. LCY signed a merger agreement to take The Hillman Group, a hardware and home improvement company, public at an implied valuation of $2.642B.

4. SPRQ, a Chamath Palihapitiya-led PIPE partnered with APO, announced it will merge with Sunlight Financial, a residential solar financing platform; TSIA entered into a definitive merger agreement to bring Latch public in a transaction valuing the Company at an equity value of $1.56B.

(Hammerstone Report)

SPACs have plenty of capital to hunt with right now and more are being created every week…

The 2020 SPAC IPO boom has continued into early 2021
(Goldman Sachs)

SPACs want growth. Don’t waste your time looking for a tobacco or retail SPAC…

Many of the 287 SPACs currently hunting for targets are looking for deals in hot sectors such as technology or electric vehicles, according to figures from data provider SPAC Research. Blank-check firms often seek deals valued at least five times as large as they are when including debt. That means deals adding up to several hundred billion dollars are likely to be completed in the coming months, analysts say, setting SPACs up to be a powerful force in markets. When a SPAC is launched, it has to merge with a target within two years, so the effects of this wave will continue for a while.

(WSJ)

SPAC Spree

The Euro Stock Index is at the same level as 20 years ago…

SPAC Spree

But if you are looking for individual stocks in Europe, Barron’s (with the help of Barclays) put together a good hunting list of names to work through…

Stocks Lagging Estimates

(Barrons)

The strong bounce in Australian economic data has gotten help from the Asian economic recoveries…

And nice to have all that raw material and commodity-based exposure.

Markit Australia Manufacturing PMI

The Australian stock market has been one of the world’s best recoveries…

EWA

Investors are strongly biased towards owning more emerging markets…

Asset allocation to EM at all-time high
(BofAML)

A good time as emerging markets have done nothing for a dozen years…

@mark_ungewitter: $EEM has vaulted its 13-year sideways no matter how thick your crayon. Relative strength, in this case vs. $NDX, is also constructive but not yet posting higher highs and higher lows.

MSCI Emerging Markets Free Index

If commodity and materials exposures become more important, here is a good chart of where the land mass is concentrated…

Earth's Surface
(VisualCapitalist)

A smart move by Jason Bourne…

Trading the Los Angeles suburbs for New York City is a great idea right now.

Actor Matt Damon is listing his Zen-inspired home in the Pacific Palisades area of Los Angeles for $21 million.

According to listing agent Eric Haskell of The Agency, Mr. Damon is selling because he and his family recently decided to make New York City their primary home. In 2017, The Wall Street Journal reported that Mr. Damon was buying a roughly $16 million Brooklyn Heights penthouse at a condominium project known as the Standish.

“They really love it there, even with everything going on with Covid,” Mr. Haskell said.

(WSJ)

Matt Damon

Guessing that the Green Bay Packer coaching staff did not have time to read last week’s NYTimes Sports section…

Mason Crosby is a great Colorado Buffalo, but I must think that even he would have sent in Aaron Rodgers on 4th down. Congrats to the Chiefs, the Bucs and the GOAT. Looking forward to the big game.

There will always be a place for the punt on fourth-and-15 from the shadow of a team’s own goal posts. And in a league full of traditionalists who still chant mantras like “establish the run” and “defense wins championships,” no strategy is likely to disappear overnight. But gradually, coaches will begin to wonder why they are replacing their multimillion-dollar quarterbacks in high-leverage situations with the player most likely to walk through a parking lot tailgate unrecognized, and why they preach aggressiveness all week during practice, only to timidly, and voluntarily, give the ball to their opponents with the game on the line.

As soon as the tough guys and mathematicians finally agree about punting, they can start debating in earnest about settling for field goals.

(NYTimes)

San Francisco 49ers Punter

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