Top Shelf on Ice

361 Capital Market Commentary | December 28th, 2020

No messing around with getting rid of 2020. The good bottles are going on ice Thursday night as we all look forward to a New Year. While it may have been a great year for stock pickers and for equity investors, it sure was a lonely one. Nine months of having the office and a 14-story building to myself was too much ‘me’ time. Only the security guard or occasional visitor to the office to say ‘hello’ to. Thank goodness for Zoom. I know my kids hated using it for school, but at least it gave me the chance to keep in touch with my associates, friends and family members. If ever there was a test for living on Mars or on a space station, this was it.

The big news to report over the Christmas week was that the U.K. and the E.U. reached some agreements on a Brexit deal. And equally important to this side of the pond, the President decided to sign the 2021 budget + stimulus agreement after leaving for Florida without signing it. No one yet knows which 3D chess move was in play that caused the back and forth, but I am guessing some reporter will get the scoop over the next week and fill us in. The signing delay to Sunday will mean that 14 million Americans will miss out on $300 in unemployment insurance benefits. (Maybe they can backdate a few checks?) The good news is that much needed aid will be rolling out over the next two months to a lot of individuals and small businesses that need help. Airlines, theater workers and other COVID-affected industries will also find support.

The markets enjoyed the news today, and risk assets spiked higher led by the travel and leisure names. Tech stocks also did well showing that the year-end Santa rally looks to be on cruise control as many professional investors look to check out and take a break until next week.

Enjoy the long weekend and Happy New Year. Also, I will be hosting a webcast reviewing 2020 and providing an outlook into 2021 on January 13. Register Now. And thanks for reading.

Something that we can mostly all agree upon…

2021 It Has to Get Better
(MorningConsult)

As the vaccines rollout across the U.S. and world, some countries may be well on their way toward national immunity…

If the U.S. is already 25% immune, then significant immunity by the end of summer looks very doable with 1-2m arms getting poked daily.

Estimate Population Shares with Immunity
(Goldman Sachs)

Goldman raised U.S. GDP forecasts as soon as the POTUS indicated that he would sign the Stimulus Aid bill…

Our economists raise our forecast for 2021Q1 US GDP growth to +5.0% (vs. +3.0% previously), while leaving our forecast for sequential growth in Q2-Q4 unchanged at +8.5%, +5%, and +4%, and update our 2021 annual growth to +5.8% (vs. +5.3% previously). The higher growth expectations comes on the back of President Trump’s approval of a COVID relief package worth roughly $900bn (4% of GDP) over the weekend, which is slightly higher and earlier than expected, and also includes a $600/person payments to individuals which we had not assumed in our prior forecast. The stimulus checks imply a large increase in disposable income in Q1 followed by a sequential decline in Q2 and Q3. Our GDP growth forecast for 2021 as a whole is now 1.9pp above consensus on a full-year basis (+5.8% vs. +3.9%) and 2.1pp above consensus on a Q4/Q4 basis (+5.6% vs. +3.5%).
(Goldman Sachs)

Our New Growth Forecast Brings Us Even Higher Relative to Consensus

As we head into year end, it looks like tech stocks will have contributed over two-thirds of gains for the S&P 500. Include AMZN, FB, GOOGL and NFLX and you are at 100% of gains…

@hsilverb: IT accounted for 69% of the YTD 2020 $SPX total return, as the $SPX 16.71% return would have been 5.18% without it; the top 3 issues, $AAPL, $AMZN & $MSFT account for 56.9% of the return, ex them YTD declines to 7.91% fr 16.71%; absent the top 24 the index turns negative (-0.11%)

S&P 500 Total Return Sector Contributions

Wise words to listen to as many companies move into super-valued ranges…

Tweet from @ChrisBloomstran

There are some super-valued ETFs in the market and they have performed very well…

ARK Innovation ETF

(@hmeisler)

They have also taken in an enormous amount of assets, which is used to buy more of the same stocks in the strategy…

ARKK US Equity

(@kgreifeld)

This ETF owns many great companies…

Just be mindful of the current valuations of the underlying holdings. Amazon was a great company in the year 2000, but its stock price still declined 90%.

ETFs

(Morningstar)

I like Tesla as much as most car enthusiasts, but it will have to get into many more businesses to justify its current valuation…

Market cap of select auto manufacturers

(Axios)

Difficult to read stories like this…

Mortgaging houses to buy call options on margin is not what wealthy people do.

Mary Roberts made her first big investment last year, using some spare cash and a leftover retirement account from a previous job to buy up shares of Tesla. Like Mr. Burnworth, her investment portfolio swelled in value this year as the electric-car maker’s stock ran up, leading her to dabble in options trading for the first time using margin debt. “Having [shares of] Tesla enabled me to do all of this stuff. This was life-changing,” said Ms. Roberts, who is 53 years old and lives in Vancouver, Wash. She and her husband run a chemicals-distribution business that she says has struggled because of Mr. Trump’s trade war with China. Between her investments and her spouse’s, their combined portfolio is now worth seven figures, with two-thirds of that consisting of Tesla stock, Ms. Roberts said.

She says she doesn’t think she will see another year of gains quite like 2020 soon. But she has no plans to sell any of her Tesla stock either and is open to the idea of borrowing more against her portfolio.

“This is what wealthy people do,” Ms. Roberts said.

(WSJ)

Now over in boring stock land…

Consumer staples stocks rarely trade at 10x sales which is why it is difficult for investors to lose money in them over long periods of time.

Global Staples have never lost money in any 5yr period
(@lhamtil)

I wonder how a long XOM + MO vs. short TSLA + ROKU trade will perform in 10 years?

@ISABELNET_SA: Value vs Growth
Is it time for investors to favor value stocks vs growth stocks?

Cheaper value stocks have underperformed for over a decade

Meanwhile, cyclicals now make up only 25% of the S&P 500…

@MichaelKantro: Cyclicals’ weight in the S&P 500 ticked higher last month – now at 24.2%. We expect a small amount of convergence in 2021. Expect index valuations to remain high, largely due to index composition.

S&P 500 Index Composition Matters

The 10-year T-Note yield continues to tell us that future economic growth is picking up…

CBOE 10-Year US Treasury Yield
(@hmeisler)

This continues to be an excellent time to get a mortgage for an appreciating housing asset…

@charliebilello: 30-Year Mortgage Rate in the US moves down to 2.66%, another all-time low.

30-Year Fixed Mortgage Rate

Housing supply continues to dry up due to COVID demand and demographic shifts…

US Existing Home Sales Months Supply NSA

Inventory is evaporating, which will lead to higher prices on land and all new builds…

And we have heard this from the builders and see it in their flattening stock prices.

Housing Investory: Active Listings

Companies like Ryan Air are using the COVID crisis as an opportunity to expand…

Airlines are facing their worst crisis in a generation and Michael O’Leary is in no mood to waste it. As rivals have collapsed and retreated, the Ryanair chief executive is on the hunt for opportunities to increase the Irish airline’s dominance of European airspace. “I have never in my 30 years in the industry seen such a clean-out,” Mr O’Leary told the Financial Times in an interview. “The real seismic change from Covid will be the growth opportunities across Europe. They are much greater than after the financial crisis or 9/11.”

Airline capacity has been gutted during the pandemic, creating a window for survivors to fill the gaps once people start flying again. Thomas Cook and Flybe have collapsed while Norwegian — until recently a big operator in the European market — has entered administration.

Mr O’Leary predicted that 100m of his competitors’ seats would be taken out over the next 18 months, around a 15 per cent reduction on normal passenger traffic.

(FinancialTimes)

Ryanair has grown to become Europe's largest airline

In the energy sector, Chevron’s asset base and balance sheet have helped it to survive…

Chevron weathered the awful storm that 2020 brought to the oil industry better than most of its competitors because it had prepared for low oil prices ahead of time. Chevron CEO Mike Wirth was early to a trend that has now taken hold throughout the industry: the era of production growth is over, and a new era of frugal spending has arrived. Unlike its big European counterparts like BP (BP), Chevron didn’t cut its dividend in 2020 and probably won’t have to do it next year absent another enormous shock to the industry. Its dividend yield is slightly more than 6%.

To shore up its balance sheet as oil prices plunged, Chevron drastically cut its capital expenses. It started 2020 expecting to spend $20 billion this year, and reduced that to $14 billion. This month, Chevron announced plans to spend $14 billion to $16 billion from 2022 through 2025, down from prior expectations of $19 billion to $22 billion. For investors, those spending limits offer hope that companies can better navigate the oil industry’s historic boom and bust cycles.

(Barrons)

For many who crossed the digital divide this year, there will be no going back…

Nationwide Mutual Insurance Co., in Columbus, Ohio, illustrates the shift. Shortly after the pandemic hit, Nationwide had 98% of its 28,000 employees working from home. The initial impetus was safety, but chief executive Kirt Walker said it accelerated pre-existing plans to rely on virtual operations. Before the pandemic roughly 15% of employees worked from home and the company now plans for half to eventually do so permanently.

Mr. Walker used to hold town halls with employees in the auditorium at the company’s Columbus headquarters, which can hold up to 350. Now, he has regular companywide broadcasts attended by thousands of employees. They submit questions and vote on which Mr. Walker should answer using Slido, a live-polling application startup just bought by Cisco Systems Inc.

“We looked at major occurrences in the U.S.: the Great Depression, recessions, world wars, and what we found is that American reacted in two different ways,” Mr. Walker said. “First, they were forced to try new things and in many ways. Those new things became habits. Two, people became more value-conscious.”

Nationwide is closing 17 offices across the country, keeping four main campuses, reducing its real estate needs by roughly 1.1 million square feet and saving about $100 million, which it says will be used to reduce policyholders’ premiums.

Some companies, Mr. Walker said, wrote off 2020 as a lost year. “For us it was an accelerator, and got us closer to some long term objectives.”

(WSJ)

Speaking of going digital, this is a must read on AWS from an engineer on the inside…

If you are responsible for your company’s data and don’t use Amazon Web Services today, then after reading this interview you might soon become a migrating customer and have Snowmobile show up at your internal data center very soon.

Amazon is on a mission to own the infrastructure of our lives. The second-largest private employer in the United States after Walmart, the company captures $4 out of every $10 spent online. They have a vast network of fulfillment centers, and they are rapidly buying more real estate; in September 2020, they announced plans to open 1,500 more distribution hubs in suburbs across the country. Retail is only one of their many businesses, however: for many Americans, it would be impossible to commute from home to school or the office without passing into view of a Ring, Amazon’s “smart” home surveillance camera. Moreover, Amazon Web Services (AWS) controls nearly half of the public cloud market, and the company is pouring money into a number of other ventures, from entertainment to advertising. We talked with an AWS cybersecurity engineer about how to think about the behemoth and how it feels to work inside it.

(LogicMag)

RV production can’t keep pace with current demand…

It will be interesting to see what happens in the second half of 2021 when many of us want to run to NYC to see a Broadway show and revisit Gotham. Can you park a 45 foot RV in Times Square overnight?

Borderland recreational vehicle retailers are experiencing the same national trend as local residents fill their showrooms buying up motorhomes and RVs, leaving lots almost empty. “As units are coming in, it’s like eight to 12 days that they last on the lot,” said Ale Camacho, general sales manager at Holiday World of Las Cruces. “Normally our stores usually sit with 188 to 200 units.” Inventory has gone as low as 44 RVs.

With the pandemic in full swing nationwide, many RV retailers are seeing a rise in first-time buyers this year. “A good number… I would say, probably 60%, maybe 70%,” Camacho said.

Most buyers are purchasing larger units, called bunkhouse models, that can sleep up to 10 people…

Since the start of the COVID-19 pandemic, people have been avoiding traditional ways of travel in attempt to reduce their chances of contracting the coronavirus. Air, bus, train and even car travel have taken a backseat for many.

As a result, RV sales have skyrocketed by 31.2% since September 2019, according to the RV Industry Association’s September 2020 survey of manufacturers. The organization represents some 400 manufacturers and suppliers who produce 98 percent of all RV’s made in the U.S. and about 60 percent of RV’s worldwide.

(Borderzine)

20x sales seems difficult to reconcile with a 29 reliability score from Consumer Reports…

The three car brands with the highest reliability scores are all from Japan with Mazda ranked top with 83 out of 100. Toyota came second with 74 while Lexus, its luxury vehicle brand, rounded off the top-three with 71. Buick was the first U.S. name on the list with 70 while one European brand, Porsche, was present in the top-10 with a score of 55. That was still better than its parent company Volkswagen which came third last ahead of Tesla.

(statista)

America's Top-Scoring Car Brands for Reliability

Sports viewership sure did not work out like we thought this year…

Even during the darkest days of the 2020 sports shutdown, industry insiders and observers were optimistic about the potential for ratings growth once live events returned, suggesting that sports-starved fans stuck in their homes due to the pandemic would devour hours of competition on TV.

Those hopes failed to materialize, dashed by double-digit year-over-year viewership drops for marquee events such as the NHL’s Stanley Cup Final, the NBA Finals and MLB’s World Series. The pandemic’s negative impact on sports ratings could be seen as recently as this month’s Army-Navy game, for which viewership dropped 36 percent from the year before amid uncharacteristic competition from a crowded slate of college football matchups.

(MorningConsult)

Major Sporting Events Took Viewership Hits in 2020

Some reasons as to why…

Americans Answer Why They're Watching Sports Less Frequently Amid Pandemic

Good work Disney. Now can you save Gotham and Metropolis?

Please buy the D.C. comic universe from AT&T before they grind Batman and Superman into the sand like they did Wonder Woman. And while you are at it, could you save Westeros and all of the Seven Kingdoms from their steamroller also?

Soul

New Years Eve 1918?

Wear a Mask

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