Winter Solstice

361 Capital Market Commentary | December 21st, 2020

Lots of good news this week, starting with the fact that the days will begin to get longer from here. During the darkness of the weekend, Congress agreed to a $900 billion fiscal aid package to help millions get through the next few months of COVID shutdowns. Also, Moderna began shipping its vaccine across the U.S., which should help get the country toward 5% penetration of first shots in arms by year end. And so, we are on our way to 25%+ vaccinated by the end of Q1, 50%+ by the end of Q2, followed by outdoor parties resuming in Q3.

Of course, it is not all a straight line up as the U.K. gets added to the world’s naughty list for its incubation and spread of a faster-transmitting virus. Also Brexit. And also, for the fourth season of The Crown, which I finished watching over the weekend. (That Windsor family is a tough house!) The U.K. will get past this as the vaccine, and antibody shots get into their arms. This is not another level of rocket science. The bigger question is, how will the world and the U.S. respond to the newest surge in Russian hacking? IT budgets are about to blow open on software and hardware security spending. But something will need to be done at the Government level. No one wants to wake up one day and have a zero balance in their online banking account. Or worse, deletion of all of their likes and follows from their Facebook feed.

Some good news late Friday for the big banks as the Fed says the light at the end of the tunnel on COVID is bright, and it looks like banks have adequate capital to survive a worst-case scenario. They are lifting the capital restrictions on the banking industry so that it can restart buybacks and dividend increases. Also, Nike’s earnings on Friday afternoon highlighted what is happening at many companies during COVID, which is the rush to digitalization at light speed. Nike now has one-third of their business as digital, and it grew +84% in the last quarter. Just do that!

Remember, the U.S. market is a half day on Thursday and closed on Friday. Have a Merry Christmas.


It took forever, but we finally have a fiscal aid package…

Here is a visual as to how the dollars will get deployed. Lots of broad help to get many in need down the road for another month or two. Checks are going out next week.

Emergency Relief Package
(WSJ)

Guess who can’t wait for 2020 to be over more than you…

Tweet from @BorisJohnson

This poster is from 102 years ago…

The Next to Go Wear a Mask poster
(@TimAeppel)

The race to green…

Happy to see that Colorado is deploying quickly. Follow the vaccine tracker in the link below to see how your state is doing.

Vaccines Across America
(Bloomberg)

Sounds like a good plan…

Tweet from @BullandBaird

Big banks get to turn on the rewards to shareholders…

On Friday night, the Federal Reserve said that the big U.S. banks are well capitalized to make it through COVID. As a result, they can begin to distribute their excess capital via stock buybacks and increased dividends. We have been waiting for this.

Based on the new distribution policy, the six biggest U.S. banks could buy back as much as $11 billion of shares in the first quarter, assuming fourth-quarter earnings come in at the levels analysts estimate. That would roughly triple their shareholder payouts.

Wall Street banks have been largely on the sidelines during this year’s stock market rally as they’ve eagerly awaited permission to boost capital distributions.

Fed Vice Chairman for Supervision Randal Quarles said the banking system has been “a source of strength during the past year,” adding that the second round of stress tests “confirm that large banks could continue to lend to households and businesses even during a sharply adverse future turn in the economy.” None of the largest banks fell beneath their capital minimums under the Fed test’s hypothetical scenarios.

(Bloomberg)

Bank Buybacks to Resume

Banks are also going to get help from the steepening yield curve going forward…

Yield curve likely to further steepen in 2021
(@ISABELNET_SA)

Higher, longer interest rates have yet to put a dent in housing as noted by Lennar Corp last week…

Executive Chairman Stuart Miller started the 4Q conference call by saying that the housing market was very strong, and that demand for homes was greater than the limited supply. “It has simply never been this easy to sell as many homes as we would like in every market and every price range across the country.”

(TheNisiReport)


First mortgage applications at fifteen-year highs…

First-lien mortgage origination

The FOMC met last week and the Fed still has the market’s back…

Fed Meeting Notes from Jerome Powell
(@mark_ungewitter)

Lower rates, higher multiples…

@LizAnnSonders: Very, very long-term look at Schiller P/E ratio, which is hovering near its all-time high excluding tech bust; alongside long-term interest rates, which are near all-time lows
@biancoresearch @RobertJShiller

Long-Term Interest Rates

Don’t fight the feds…

Stocks benefit when the majority of central banks are easing
(Ned David Research)

Always interesting to line up the rallies…

@ISABELNET_SA: This chart puts into perspective the greatest of all time US stock market rally of 2020

The GOAT Stock Market Rally of 2020

Even with the market’s bounce, the VIX cannot break 20…

Tells me that there is a lot of protection and hedges being bought against those long equity portfolios.

As the market has rallied, the VIX has not fallen below 20

Barron’s sums the 2021 outlook well…

Even though U.S. stocks are at all-time highs today, market strategists see the S&P 500 index rising further in 2021, propelled by a stronger economy, robust profit growth, and still-massive stimulus from governments and central banks, which paved the way for this year’s advance by keeping interest rates near zero. Even better, the market’s leadership could broaden well beyond big tech stocks to encompass financials, industrials, and other economically sensitive shares left behind by 2020’s rally.

As the year unfolds, however, expect more talk on Wall Street about the potential consequences of the government’s largess, namely resurgent inflation and an eventual rise in rates, which could put a lid on the market’s ebullience in 2022. But that’s getting ahead of the story, just when the plot is about to improve.

Barron’s recently surveyed 10 market strategists and chief investment officers at large banks and money-management firms on the outlook for 2021. Averaging their year-end S&P 500 forecasts, which range from 3800 to 4400, the group expects the index to rise some 9% next year, to about 4040. Add a dividend yield of around 2%, and U.S. stocks could return a total of 10% to 11%—no mean feat after this year’s 17% return, which lifted the S&P 500 to 3700 through Friday.

(Barron’s)

Bank of America uses the low cash levels at fund managers as a trigger to throw up a red flag on the market…

Optimistic about a return to economic growth, fund managers have been slashing their cash positions and embracing risk assets to an extent that’s raising red flags for strategists at Bank of America Corp.

Money managers overseeing $534 billion in total are underweight cash for the first time since May 2013, with levels down to 4%, according to a BofA survey that took place Dec. 4 through Dec. 10. Investors are the most bullish on stocks and commodities — the so-called “risk-on” assets — since February 2011, while the Bitcoin rose in the list of the most crowded trades, according to BofA. The plunge in cash exposure is setting off the broker’s sell signal for equities.

(Bloomberg)

December FMS cash levels fall

Hedge funds have had a very challenging year…

Tweet from @GunjanJS

Small Caps have responded well to a post-COVID world…

@G_krupins: $IWM vs. $SPY super impressive strength continuing for the little guys. Wow

Small Caps

Software security stocks have a big hand at their backs right now as the world tries to protect against future hackers…

Reuters: MICROSOFT PRESIDENT BRAD SMITH-“LATEST CYBER-ASSAULT IS EFFECTIVELY AN ATTACK ON THE UNITED STATES AND ITS GOVERNMENT AND OTHER CRITICAL INSTITUTIONS”

Software Security Stocks

Many great names on this list for 2021…

Tweet from @carlquintanilla

If only chess were a monopoly inside of a stock ticker…

It’s been a big year for chess. The surging popularity of chess spurred by the success of Netflix’s “The Queen’s Gambit” is now spilling over from retail to websites and streaming services, adding to the growth of chess content online during the pandemic. Chess channels on Twitch—an online live streaming platform—continue to grow their following through virtual tournaments among gamers that increase viewership and subscriptions to channels of famous chess figures like American grandmaster Hikaru Nakamura (who streams as GMHikaru).

Chess.com, a social network and chess server website, has added around 1 million new members each month since the lockdowns began in March, and around 2.8 million in November alone. In the same month, over 78 million standard chess games took place on lichess, a free online chess server, compared to half as many in November 2019.

(Bloomberg)

Millions of Chess Newcomers

Finally, have a great week…

And if you haven’t watched The Queen’s Gambit yet, find time to watch the seven episodes. And then I dare you not to log onto Chess.com.

Tweet from @tombutton

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