Time to Fly

Market Commentary | April 27th, 2021

So where to go? Maybe start with the I’s: Italy, Ireland, and Iceland? As announced on Friday, the E.U. is now opening this summer to U.S. tourists. So, grab a roller bag and your proof of vaccination because it is time to hit the skies. I would expect the U.K. to follow very soon in allowing U.S. visitors so that they can fill Heathrow and Gatwick airports and grab some the U.S. tourist dollars gushing like Trevi Fountain.

U.S. economic data continues to surge. The U.S. PMIs and regional Fed manufacturing data continue to fly to record highs while delivery times fall to record lows. As a result, input prices are also surging to record highs. Semi shortages are still partially to blame for the shortages and manufacturing pauses, but lack of labor is catching up as a concern. New home sales remain incredibly hot and prices are now jumping at mid-teens rates. Existing home sales are weak because of low inventory. Commodity prices continue to surge for basic metals and agriculture. This means if you want to build/remodel that new home, you are looking at average material prices which are +20% over a year ago. These my be the best of times for the recovery as we accelerate and quarter-over-quarter gains look to peak out in Q2. Growth rates might only be downhill from here, but the economy should continue to roar higher, just at a slower rate.

There is plenty of horse trading going on in Washington, D.C. right now. Congress is now negotiating what to put in the infrastructure package (or packages?) and how to fund it. We know that taxes will need to go higher to pay for it, we just don’t know the specific dials that will be turned. Even with the uncertainty, the markets have done fairly well, so Congress doesn’t seem to be too concerned. Of most importance to the markets today is the first quarter earnings and future guidance. There too, the numbers have been remarkable. And even with cautionary language around rising costs and the ability to raise prices, future estimates have continued to rise. Earnings will remain the focus this week with over one-third of the S&P 500 Index reporting including the big four tech giants.

Congrats to “My Octopus Teacher” for winning the Oscar on Sunday. One of the best things that my family watched over the last year, and the easy consensus pick among everyone that I knew to take home some metal.

Earnings beats are setting records this quarter…

Overall, 25% of the companies in the S&P 500 have reported actual results for Q1 2021 to date. Of these companies, 84% have reported actual EPS above estimates, which is above the five-year average of 74%. If 84% is the final percentage for the quarter, it will tie the mark (with Q2 2020 and Q3 2020) for the highest percentage of S&P 500 companies reporting a positive EPS surprise since FactSet began tracking this metric in 2008. In aggregate, companies are reporting earnings that are 23.6% above the estimates, which is also above the five-year average of 6.9%. If 23.6% is the final percentage for the quarter, it will mark the largest earnings surprise percentage reported by the index since FactSet began tracking this metric in 2008.

More importantly, future earnings estimates are accelerating higher…

S&P 500 EPS growth expectations

This is peak earnings reporting week…

1Q21 Reporting by Week
(BofA Global Research)

J.P. Morgan’s U.S. equity strategy team thinks it might be time for a breather…

For the last twelve months, we have been aggressively pushing the upside case for equities (Market Update Mar’20). Going into this year, we argued for a continued melt-up with S&P 500 reaching 4,000 in 1Q and the majority of the upside to our year-end PT of 4,400 being realized during 1H, see 2021 Outlook. While we think the equity and business cycles should remain intact on global reopening and strong earnings recovery, easy equity gains for the broad market are likely behind us. Our bullish conviction is now lower. As the second phase of global reopening gets confirmed by a pickup in mobility and pent-up demand, we expect yields to retrace higher thereby constraining the equity multiple with S&P 500 entering a period of consolidation.
(J.P. Morgan)

Looks like investors are taking a breather with their equity investing…

When gauging market sentiment, it’s always good to look at where money is going (or not going). Cash flows into equity funds and exchange-traded funds are decidedly less positive since they reached “peak flow” a few weeks ago.


Both Goldman Sachs and the consensus forecasts look for Q2 to be the peak in quarter-over-quarter GDP growth…

Goldman Sachs remains more optimistic than consensus in 2021 and expects US economic growth to peak this quarter

US economic growth should peak this quarter

Transportation stocks are taking full advantage of the peak economic growth…

Dow Jones Transportation Average

In fact, the transports have never been stronger…

Tweet from @bespokeinvest

Bitcoin has been a good performer, but have you looked at the REITs?

Always good to look at the risk-adjusted returns to see which assets have been out/under-performing. I was surprised to see REITs at the top of the list, which helps explain why it is moving rapidly into the momentum ETFs this quarter.

Market Performance
(Goldman Sachs)

So, what you are telling us is that the top executives are exiting the company with the entire August 2020 market capitalization?

It is a lucrative time to be leaving GameStop Corp.’s C-suite as the run-up in the videogame retailer’s share price has enabled four executives to depart with vested stock now valued at roughly $290 million.

Separation agreements between GameStop and the four executives, including Chief Executive Officer George Sherman, have provisions that let stock awarded during their tenure to vest when they leave. While such a handling of leadership transitions isn’t atypical, it does potentially allow the executives to sell their shares near GameStop’s historically high levels…

GameStop has said that Mr. Sherman will step down by July 31 and that it is searching for his replacement. His exit agreement calls for the accelerated vesting of more than 1.1 million GameStop shares, according to filings, valued at roughly $169 million as of Friday’s close.

So many positive earnings comments this week. Many noting the ‘best of times’…

“I saw some commentary sort of questioning demand. Demand out there is absolutely phenomenal, across almost every sector. Very, very strong and it would appear to be there for the rest of this year going into next…So we see strong demand, tight supply, record low supply chain inventories across the space.”
– Steel Dynamics (STLD) CEO Mark Millett

“The Biden administration has set a goal of deploying 30,000 megawatts of offshore wind power by 2030. This could require as much as 8 million tons of steel.”
– Nucor (NUE) CEO Leon Topalian

“And you heard us before talking about consumer demand, to be honest, in all the years I’ve been doing the earnings call, this is probably the year that I’m most bullish about mid-and long-term consumer demand trends in North America. So I’m not worried about consumer demand. ”
– Whirlpool (WHR) CEO Marc Bitzer

“In addition to actual like chips and rubber and things like that, there’s also the issue with labor shortages. We do hear from a lot of our customers that if they had qualified people to fill jobs that they would be at higher production levels.”
– Reliance Steel & Aluminum (RS) President Karla Lewis

“Is lumber pricing here to stay? I think a lot of it was driven by mills shutting down during COVID. I do think as they reopen these mills and increase the capacity to deliver wood, you’re going to see some improvement, some – a little less pressure on it. I think opening up international trade may relieve some pressure on it. But right now, to date, the demand is so strong.”
– D.R. Horton (DHI) CEO David Auld

“I think as you see the vaccine spread, this economic dam is really starting to burst and it’s going to be widespread in terms of an increase in activity and revenues across most businesses.”
– The Blackstone Group (BX) COO Jon Gray


Prologis continues to increase its rental rate outlook as demand for industrial real estate outstrips supply…

“The robust demand from the fourth quarter has carried into 2021 and is as strong as I have seen in my career,” said Hamid R. Moghadam, chairman and CEO, Prologis. “Global supply chains are pushing to keep pace with accelerating economic activity, retooling for faster fulfillment and resilience. With our well-positioned portfolio, differentiated customer offerings and abundant investment capacity, we expect to continue to outperform while delivering exceptional customer service.
(Prologis Inc.)

Expect electronic product shortages in the future…

The deepening global chip crunch is spreading to makers of smartphones, televisions and home appliances, according to suppliers in Asia, as companies boost stockpiles of in-demand semiconductors.

Chip supplies have tightened due to booming demand for electronics during the Covid-19 pandemic and outages at large production facilities.

But the shortage has been worsened by hoarding by sanctions-hit Chinese groups, which has made it harder for some companies to secure components for everyday electronics such as washing machines and toasters.

South Korea’s Samsung Electronics and LG Electronics are among the groups feeling the pinch from manufacturing delays that are forecast to last into 2022.


Costs are currently an issue…

But will they remain an issue as more manufacturing restarts from COVID shutdowns?

For the roughly 25 per cent of companies in the S&P 500 that have reported their first-quarter results so far, the rise in commodity prices has become one of the most-cited headwinds to what is otherwise shaping up to be a lavish earnings season. Earnings per share is on course to be up 33.8 per cent from the first quarter of last year, the highest annual increase in a decade, according to FactSet data…

In a survey last month, the National Association of Manufacturers found that 76 per cent of its members saw increased raw materials costs as their biggest challenge in 2021.

Dara Mohsenian, Morgan Stanley’s consumer staples analyst, last week described the commodity price environment as the worst he had seen in 25 years of covering the sector, translating to particular cost pressure on household products companies where he expects substantial negative earnings revisions for the full year.


Why work at a restaurant when Costco starts new employees at $16 an hour?

Franchisee owners are likely putting in 100+ hour weeks right now. Probably not the best of times.

U.S. restaurants increasingly are seating and serving customers again, after a year when quarantining and seating restrictions forced many to launch online-only food brands or rely on takeout business. Sales at bars and restaurants rose 13.4% in March compared with February, the biggest month-over-month increase since June, Commerce Department figures show.

But servers, hosts and line cooks aren’t similarly rushing back, restaurant owners say—whether because they are fearful of Covid-19, have moved on to other industries or remain on unemployment benefits. Other sectors of the U.S. economy also are scrambling to staff up, with manufacturers, live-events coordinators and other companies wrestling with labor shortages.

Diners can see the effects. Some restaurant owners have said they are having to pass along some of the wage increases to customers in the form of higher prices, as other costs rise at the same time. Consumer prices for fast food in March grew 6.5% compared with last year, the biggest year-over-year increase since at least 1998, Labor Department data show.

The labor crunch is affecting service. Some McDonald’s and Pizza Hut restaurant owners said they are closing some locations earlier in the evening than they would have if they were fully staffed, cutting off potential sales. Subway franchise owners are working behind the counter to help. Some IHOP owners said they can’t bring back late-night service because of a lack of servers.


InterContinental CEO sees a significant travel bounce in the second half of 2021…

“If a market is open for travel we are seeing surges in leisure demand,” he says. “Talking to airline CEOs, and seeing our industry data, you’re seeing rapid demand for luxury resorts, for normal resorts, hotels and leisure destinations too. It will clearly be a leisure-led recovery underpinned by essential business travel.”

IHG’s Six Senses resort in the Seychelles has just opened and Barr says it is running at 80% occupancy at record average rates, prompting him to warn about capacity constraints.

“I think leisure demand could outstrip supply in some markets in the short to medium term,” he says. “Talking to some of the airlines they’re concerned about their ability to get capacity fast enough, if things really do open up.”…

“We’re seeing, and this is U.S. data, that as vaccine continues to ‘move down,’ bookings literally surge by age,” he says. “First it was over 65s and now we’re getting into 50s. And when you think about the trillions of dollars of savings that consumers have had banked in the past year they want to spend it on travel. People are calling it revenge travel and I’ve heard ‘vaccications.’…

IHG data show that 50% of its frequent travelers have already rebooked their travel that they canceled last year.


U.S. airlines are now going on a massive hiring spree…

American Airlines statement

But, will the Maui Four Seasons valet park your family’s U-Haul truck?

As the state reopens and many tourists return, there are not enough rental cars to meet the demand.

That’s driving up the price of rentals and leading some visitors to get creative.

Some are even turning to U-Hauls to get around the islands.

“The uptick from tourism, the uptick from companies opening back up, from the economy restarting — everybody seems to need a vehicle,” said U-Haul Marketing President Kaleo Alau.

Alau said Hawaii U-Haul facilities are the busiest they’ve been in years…

Alau said visitors are calling to ask for pickup trucks, cargo vans and even box trucks.

Morrell is worried there may not be enough vehicles for people who actually need them for hauling.

“They don’t have any box trucks today because I wanted to rent one. So, I guess they’re all out with tourists,” he said.

Alau said he is doing what he can to encourage using his trucks only for moving.


Apartment rent prices have bottomed…

Rising rents add to the mounting evidence that the economy is rapidly gaining strength. Analysts are forecasting that the U.S. economy could grow around 7% in 2021, which would be one of its strongest years in decades.

Higher rents could play a role in an anticipated rise in inflation, unleashed by waves of stimulus checks, low borrowing rates and pent-up demand after months when the pandemic damped consumer spending. Rent accounts for about one-third of the consumer-price index, which economists expect to tick higher in the months ahead.


Rent's Return

Housing costs begin their upward pressure on CPI going forward…

As PIMCO reminds us, rental prices are a component of CPI, not home prices.

Housing prices

Meanwhile, existing home prices were +17.2% in March…

Median Existing Home Price y/y

New home sales are soaring because there is little inventory of existing homes…

Solid rebound in March new home sales, +20.7% vs. +14.2% est. & -16.2% in prior month; level has now retaken January high and is at highest since 2006 … median price +0.8% y/y to $330,800; average selling price at $397,800 … months’ supply fell to 3.6 vs. 4.4 prior

US New One Family Houses Sold

New Floridians are watching their income tax savings move to the insurance industry…

Property insurance companies do not like to write new business when a 10-year storm happens every other year.

Florida’s property-insurance market is in trouble, as mounting carrier losses and rising premiums threaten the state’s booming real-estate market, according to insurance executives and industry analysts.

Longtime homeowners are getting socked with double-digit rate increases or notices that their policies won’t be renewed. Out-of-state home buyers who have flocked to Florida during the pandemic are experiencing sticker shock. Insurers that are swimming in red ink are cutting back coverage in certain geographic areas to shore up their finances…

“The industry is in a panic because it is losing so much,” said Barry Gilway, chief executive of Citizens Property Insurance Corp., a state-backed insurer of last resort that is growing rapidly as private-sector insurers retrench. Barring changes, he said, “rates will continue to skyrocket and it absolutely will have an impact on the real-estate market.”

Eric Firestone, a 37-year-old teacher who lives with his wife in the Miami area, received a letter from their insurance company in February saying their policy wouldn’t be renewed because the carrier was no longer servicing their area. When their insurance agent shopped for an alternative, the cheapest one she could find had a $9,644 annual premium—an 85% increase over their most recent premium of $5,205.


This explains why the growth rates and multiples of the private asset industry companies have overtaken the mutual fund companies…

The Blackstone Group Inc (BX): …the opportunity is enormous. There is an estimated $6.5 trillion of private markets AUM today compared to nearly $250 trillion of public equity and debt markets globally.


This survey suggests that allocations to private assets may increase…

US New One Family Houses Sold

“Travel is about the gorgeous feeling of teetering in the unknown.” (A. Bourdain)

Got my 2nd Pfizer shot today. Raising hands
Felt like appropriate reading this evening.

World Travel book cover

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