Who’s Ready to Go?

361 Capital Market Commentary | March 8th, 2021

Grandma has out vaxed us and is now buying handfuls of passes and tickets for the whole family. Disneyland, then a Dodgers game, then Sea World, then the new Bond movie, followed by a SpaceX trip around the planet. Line up everything because I want to do it ALL!

With the continued good news on the vaccine rollouts and the COVID hospitalization data, it is tough to hold back on wanting to get out and gather. Three million people vaccinated in the U.S. on Saturday! Today’s news from the CDC on vaccinated people being allowed to gather indoors without masks should further cause an acceleration in vaccine appointments, because who doesn’t want to lose their mask? Theme parks, sporting venues, Broadway, movie theaters, and restaurants are all opening further. This will get the millions still unemployed back to work quickly, and hopefully at wages well above whatever their state’s minimum wage might be.

All of this good news about the economic recovery is continuing to worry the bond and growth stock markets which have now become mirror correlated. No one knows how the inflation spikes will play out in the future as we head back to full employment. Until there is more certainty about prices, expect the markets to remain volatile. Of course, if you are concentrated in cyclical, value, and commodity-exposed securities, then grab a poolside lounger and enjoy your day in the sun. The market has made fun of you for way too long, so let me get you an umbrella’d tropical drink. Now, what time should I arrange an Uber to take you to the James Bond premier?

The CDC gives everyone a shot of good news today…

The Centers for Disease Control and Prevention said people who are two weeks past their final shot face little risk if they visit indoors with unvaccinated members of a single household at low risk of severe disease, without wearing masks or distancing. That would free many vaccinated grandparents who live near their unvaccinated children and grandchildren to gather for the first time in a year.

The CDC also said fully vaccinated people can gather indoors with those who are also fully vaccinated. And they do not need to quarantine, or be tested after exposure to the coronavirus, if they have no symptoms.

(WashingtonPost)

Always under-promise and over-deliver…

The White House is going to crush COVID expectations when in April, every American who wants the vaccine will either be vaccinated or have a near-term appointment to do so.

Most Americans expect there to be widespread access to coronavirus vaccines in their local area in the next six months, though people vary in their expectations over exactly when supply will meet demand. Overall, 35% think most people in their area will be able to get a vaccine in four to six months; almost as many (33%) forecast a quicker timeline and expect this level of availability in one to three months, and 12% think it will be even faster. Still, nearly one-in-five Americans see a much longer timeline: 12% expect it to take seven to 11 months until there is widespread availability, and 6% say this will take a year or more.

(PewResearch)

Covid Vaccines

Companies are making plans to have customers again…

“…people are anxious to see family, they’re anxious to see their friends, they’re anxious to take a real vacation again. And we think that as the vaccination rates increase, as infection rates moderate, as borders and travel restrictions are eased, that we’ll see a pretty healthy resurgence in personal travel.” – Mastercard (MA) Chief Product Officer Craig Vosburg

“We know that consumers in the U.S. have a considerable amount of pent-up demand. We know many of them have also been able to accumulate some additional savings over this past year as they’ve suspended many of their activities. I expect they’re going to be ready to get their lives back this summer.” – Delta (DAL) CEO Ed Bastian

(@Transcript_)

Who isn’t excited to see Disneyland reopen?

LOS ANGELES (Reuters) – California health officials set new rules on Friday that would allow Disneyland and other theme parks, stadiums and outdoor entertainment venues to reopen as early as April 1, after a closure of nearly a year due to the coronavirus pandemic…

Theme and amusement parks would be permitted to restart on April 1 with severely limited capacity, but only if the counties where they operate are removed from the “purple” tier of California’s color-coded COVID-19 restrictions, the system’s most stringent classification.

Masks and other safety measures would still be required, and the parks initially would be open only to state residents. Attendance would range from 15% to 35% of normal capacity.

Outdoor stadiums, ball parks and performance arenas would also be allowed to welcome back live audiences starting April 1, though at a fraction of maximum seating and subject to the same tiered system of constraints.

(Reuters)

And the Las Vegas shows are also reopening…

LAS VEGAS (AP) — Democratic Gov. Steve Sisolak has signed an emergency order adjusting the minimum distance between performers and audience members that previously challenged the return of productions in Las Vegas.

The tourist destination built for excess and known for bright lights, big crowds, indulgent meals and headline shows has slowly begun to reopen after the pandemic halted business in March. Businesses, especially on the Strip were struggling because of limited air travel, lack of mid-week convention business and an absence of arena events and entertainment options.

Previously, performers were required to maintain 25 feet (7.6 meters) of space between the audience as a precaution against the coronavirus. But some smaller venues could not accommodate that restriction.

Sisolak signed the new emergency directive on Friday, updating the minimum distance to 6 feet (1.8 meters) if performers are wearing masks and 12 feet (3.6 meters) when performers are unmasked.

The order is effective immediately and applies to all live entertainment and performances at all sizes of public gatherings and events.

(APNews)

Expect to see every state start opening their restaurants to full capacity very soon…

Connecticut is lifting all capacity limits on offices, retail shops and restaurants in the state’s most expansive rollback of restrictions since the Covid-19 pandemic began.

The restrictions, which currently cap capacity at 50%, end on March 19, according to state officials. Capacity limits at gyms, bowling alleys, libraries and houses of worship will also be lifted on that date. Personal-service businesses like barber shops and salons can also fully reopen.

(WSJ)

“Bond. James Bond.”…

@NYGovCuomo: NEW: Movie theaters in New York City can reopen on March 5 at 25% capacity, with no more than 50 people per screen. Assigned seating, social distancing and other health precautions will be in place.

Dining is recovering even before the full re-openings so tell Sysco to start ordering even more food supplies…

Open Table Dining Out

At the same time, the weather is about to get spectacular on the East Coast…

Temperature Roller Coaster
(@Accuweather)

On the jobs front, we still need about 10M to get back onto the pre-COVID trend…

We should get there quickly with the ongoing vaccine ramps and the new stimulus. Don’t be shocked to see some positive seven-figure non-farm payroll numbers in future months.

Jobs

Even the United Kingdom is joining the party as kids return to school…

This will be good news for all parents who work in the communications department of ‘The Institution’.

Millions of students returned to schools in England on Monday for the first time since January, as the country takes its first major step out of lockdown restrictions.

Ending a two-month bout of learning from home for most pupils, younger students aged 5 to 11 headed back to their classrooms on Monday, with a phased re-entry for older pupils over the coming week.

Prime Minister Boris Johnson on Sunday described the move as bringing the country “closer to a sense of normality,” adding that it marked “a truly national effort to beat this virus.”

(NYTimes)

It still appears that the U.S. and the U.K. will be recovering faster from COVID…

This lag of Western Europe will almost make certain that U.S. travelers will remain stateside this year and that European travelers will find it difficult to visit the U.S. In other words, the lines at Disneyland and Disney World will be much longer than those at EuroDisney.

Advanced Economics on Course for 60-70% Immunity
(Goldman Sachs)

And we are seeing the acceleration in the U.S. economic data over that of Europe…

@carlquintanilla: JPMORGAN: The spread between the US and European recoveries continues to widen, driven by “more concentrated fiscal support in the US. … The pending $1.9tn fiscal relief package in the US should exacerbate the divergence in growth.”

US and Euro area retail sales

This economic difference is beginning to weigh on the Euro…

Dollar is hitting 3-month highs as Vaccine Delays May Dent Europe’s Outperformance.
(JonesTrading)

Euro extends losses

The strong March jobs data and new stimulus package is giving investors a lot to think about…

“Overall this was a pretty good report, and we expect even better numbers in coming months as the incredibly powerful tailwind of reopening should support some rather large job growth figures.”
(J.P. Morgan)

With the current pace of vaccinations, new fiscal stimulus and “spring weather right around the corner, .. it’s hard not to imagine an economy that’s on fire later this year. .. In short, the recession is effectively over.”
(Morgan Stanley)

“The economy is off and running. … real GDP expected to rise nearly 7% … payrolls by well over 6 million … herd immunity no later than July 4 … things could turn out it even better … if other countries can ramp up their vaccination programs”
(Moodys Analytics)

“… our end-2021 unemployment rate forecast of 4.1% is the lowest [in Bloomberg consensus survey]. … Looking ahead, we expect the unemployment rate to decline to 3.7%/3.4%/ 3.2% at the end of 2022-2024, eventually falling below last cycle’s 50-year low.”
(Goldman Sachs)

“Basically I think rates have temporarily made the most of the move and should be more stable in the next few months, which makes it safer to be in stocks for now.”
(Appaloosa Management’s David Tepper)

What a great time to be needing capital…

Airbnb on Tuesday announced a $2bn convertible deal, the biggest of the year so far, on the heels of Twitter, which announced a $1.25bn convertible bond issue on Monday and Spotify, which priced $1.3bn in notes last week. Beyond Meat increased the size of a convertible bond issue on Tuesday from $750m to $1bn.

All four companies will pay no interest at all on the debt, and investors agreed to conversion prices at hefty premiums to current share prices — ranging from 47.5 per cent in the case of Beyond Meat to 70 per cent at Spotify. For companies, a higher premium means less dilution for existing shareholders if the debt converts; for investors, it means the option to convert is more likely to prove worthless.

“We’ve never seen pricing like this ever in the convertible market,” said Michael Voris, head of convertible bond financing at Goldman Sachs.

The low interest rate environment, coupled with high equity valuations and high volatility in markets amounts to a “triumvirate” that leads to “very attractive convertible pricing”, he said.

(FinancialTimes)

Convertible debt issuance

It has even become too easy to sell a flying car taxi company…

The numbers tell the story. In 2019, 59 SPACs raised $13.6 billion. In 2020, those figures leaped to 248 and $83.3 billion. So far this year, the totals are already at 226 SPACs and almost $73 billion, with SPACs making up more than 70% of the IPO market…

Archer’s good fortune is a testament to SPACs, also known as blank-check companies. SPACs have a lot of wiggle room in valuing the businesses they buy. Unlike traditional IPOs, where financial results are in focus, SPACs can base entire deals on projections.

When I reached out, a spokeswoman for Archer said it’s been testing an 80%-to-scale prototype at private airfields in California. It hasn’t carried pilots or passengers. The company says it will turn out 500 flying taxis by 2026. United Airlines has promised to buy at least 200, provided a range of conditions are met, to spirit passengers from Hollywood to Los Angeles International Airport. Archer says it’s the only company in its space — that is, electric vertical takeoff and landing aircraft, or eVOTL — that has secured a commercial contract for orders. It also has a major auto manufacturing partner with plans to make electric cars.

That, essentially, is enough for a SPAC.

The math is jaw-dropping. Only last April, a round of seed funding valued Archer at $16 million. Moelis’s deal has placed a higher value on the company: $3.8 billion. In other words, in less than a year, the valuation has jumped 23,650%.

(Bloomberg)

Of course, the recent stock performance of flying car taxi companies is a whole different story…

@LizAnnSonders: Perhaps profits do matter … @GoldmanSachs basket of non-profitable Tech stocks has fallen 23% from its high last month [Past performance is no guarantee of future results]

Non-Profitable Tech

Andy Kessler has some valuable thoughts on when the “Boom Turns to Bust”…

How do these bull bashes end? When the last skeptical buyer finally sees the light and buys into the dream that every car will be electric, that crypto replaces gold and banks, that we overindulge on vertically farmed “plant-based steaks” while streaming “Bridgerton” Season 5 before we hop on an air taxi for our flight to Mars. Those last skeptics (maybe already) convince themselves there’s no longer any downside. And then boom, it’s over.

Bull markets need fuel. When the marginal buyer is done, there are no more greater fools to buy in, no matter how well companies actually perform. The dream is priced in, and firms can only meet, not beat, expectations.

For those lulled by today’s bull market, remember that you own a piece of paper. Low-yielding U.S. Treasury bills and bonds are safe because they are backed by the U.S. government, by cash flow of tax dollars and by the country’s assets (think land, not Fort Knox). Stocks are backed by expectations of future earnings, but if you overpay during periods of high expectations (like today), then your downside is huge. Crypto is backed simply by the faith of those who proclaim it is a store of value. Even art and exotic cars and silly NFT tokens are backed only by faith the wealthy will overpay for uniqueness. Faith becomes scarce when the selling starts.

(WSJ)

Do not forget that the momentum strategy is a dynamic one…

That high growth stock makeup of today’s momentum portfolio is going to change significantly through March and April. Don’t be surprised when Disney, Viacom and Avis begin to replace everyone’s favorite technology and biotech stocks. If the Momentum ETF’s and Mutual Fund strategies can keep their AUM through the spring months, then these travel and leisure companies might see a further surge higher as portfolios re-weight into them.

Momentum has been largely residing in expensive Growth, but now it is increasingly moving to Value as the cycle accelerates and we approach economic reopening. The upcoming Equity Quant / Smart Beta portfolio rebalancing process during months of March and April will likely amplify this composition shift as Momentum undergoes a significant turnover in names and relative momentum stock rankings in favor of laggards.

(J.P.Morgan)

Value-Growth Rotation Back on Track

Speaking of momentum, let’s check in on the last big change made to the Dow Industrial…

Remember that Salesforce.com replaced Exxon Mobil at the end of August. The signal was obvious.

Exxon Mobil Corp
(@HumbleStudent)

Growth Stocks
(@lhamti)

Bond Yields Matter More Than Ever
(@WSJ)

Fed Chair Powell reiterated last week that he would seal the recession casket once full employment was reached…

Powell said that it would take “actual progress, not forecast progress” toward the Fed’s goals before they would slow the pace of asset purchases, and that it would take “some time” to achieve “substantial further progress.” He emphasized that the Fed would communicate its sense of progress “well in advance of any decision.” When asked about the possibility of extending the duration of its future asset purchases, Powell said that the Fed thought the current purchase plan was “appropriate.”

(Goldman Sachs)

Meanwhile, the 2-Year is watching the Fed while the 10-Year is watching commodity prices…

Rates and Spreads

Investors don’t know where the economy will be in 3-5 years, so we can only watch the current trajectory…

Economy
(@enlundm)

As for commodities, OSB prices straight up…

US Oriented Strand Board Composite Price

Steel up…

COMEX Midwest Domestic Steel

Oil up…

ICE Brent

Beans in the teens…

CBOT Soybean Futures

Food prices globally are much higher…

Prices are not yet at levels seen during the food crisis of the late 2000s, but the trajectory was a concern, said analysts. “It could become a big issue for less prosperous countries which depend on imports for food,” said Abdolreza Abbassian, senior economist at the FAO.

China is seeking to restore its grain reserves, as well as keeping a lid on domestic prices while it rebuilds a hog herd that was decimated by African swine fever. The pandemic has also prompted countries reliant on imports for staples to boost government-held inventories in grains and oilseeds such as soyabeans, as well as sugar.

Food prices have also been affected by dry weather in South America, a leading supplier of corn and soyabeans to international markets, while expectations of a rise in export tariffs in leading wheat exporters such as Russia have also pushed prices higher.

The continued disruption in the shipping industry is another factor: freight prices for grains and oilseeds are at their highest levels since October 2019 according to the International Grains Council, a global body.

(FinancialTimes)

Global food prices jump

Found another top private asset chart to share from J.P. Morgan using Hamilton Lane data…

This one is special because it looks at the past downside risk from owning two of the top private asset strategies: Buyout Equity and Private Credit. So even in the lowest rolling five-year annual performance since 1995, both private asset classes produced positive returns and beat their public asset benchmarks.

Lowest five-year annualized performance
(J.P.Morgan)

Getting local: The lack of metro Denver residential listings is sending prices soaring this year…

Gone are the days of selling properties for the listed price when many listings are getting 5+ offers.

“The feeling of frustration and exasperation is present throughout the real estate community,” Abrams wrote.

DMAR’s report also notes that some listings are seeing more than 100 showings in a weekend and receiving upward of 20 offers. Abrams himself recounted writing two separate offers on behalf of clients that were $101,000 and $90,000 above asking price. Neither of those offers ultimately won out.

Despite the difficulties facing many buyers, homes still traded hands in February — 3,641 to be exact (including both detached properties, such as single-family homes, and attached properties, such as condos), up 3.7% from February 2020. Another 4,706 sales were pending at the end of the month.

The median closing price for a single-family home was $530,000, up 21.84% year over year. For an attached home, the median price was $337,250, a 12.79% increase from a year ago.

(DenverBusinessJournal)

Windy Wyoming has a new clean growth engine…

“The old joke in Wyoming is all you need to use to go coal mining is a three-iron. People were told that coal will always be here, that these are lifetime jobs,” said Rob Godby, an economist at the University of Wyoming. “We’re at a crossing the Rubicon moment — it went from ‘It’s never going to happen’ to ‘Now it’s happening.’”

In the midst of this economic despair, Carbon County, on the edge of the Red Desert, ended last year as one of only three counties in the state with budget surpluses, largely thanks to tax revenues from wind projects.

“If it wasn’t for wind farms, we’d be in terrible shape,” said Mr. Weickum, who recently became mayor of Rawlins, the windiest city in the state by some measures and the Carbon County seat.

The high desert landscape with vistas that stretch to the horizon makes Wyoming one of the best spots in the nation for wind. Some of the strongest, most regular gusts in America blow down from the Rocky Mountains, so fierce that freeway signs flash with warnings of gales of more than 60 miles per hour, so strong they yank sideways at cars and trucks driving down the interstate.

(NYTimes)

How long will it take until Georgetown’s 3rd grade computer science class reprograms the neighborhood commission’s web server to use as a Transformer video streaming device?

The neighborhood commission — ANC 2E, which covers Georgetown, Burleith and Hillandale —unanimously rejected Newton Howard’s request for a permit to keep two large sculptures of the iconic Transformers in front of his $4 million home on Prospect Street NW. They stand just a few blocks from Georgetown University, where he works as a research professor in computational neurology and functional neurosurgery. (That’s brain science for the rest of us.)

The reason given for the denial had less to do with the Transformers themselves than it did with process; the commissioners ruled that Howard first had to get the approval of the Old Georgetown Board, the federal body that weighs in on pretty much anything that happens to properties or public space in the neighborhood’s historic district.

(DCist)

Transformers

And since it is International Women’s Day…

Female-led countries have lower rates than male-led coounties

(@BofAML)

Catch up on past Weekly Research Briefings >