Pro Perspectives 4/27/21

April 27, 2021

Goldman Sachs has called copper "the new oil." 

Let's talk about why …

In a world where global powers have come together and committed to transform global energy, by supplanting fossil fuels with "clean" energy, there are clearly winners and losers. 

We've talked a lot about what it means for fossil fuels:  long-term a loser, short-term we will see much higher prices. 

What about the price outlook on the key inputs for "renewables?"

Same outlook:  Higher prices! 

Among the most important commodities in the clean energy movement is copper. 

With that, as the pandemic and economic crash of last year telegraphed a Biden presidency (which assured a climate action agenda), here's what has happened to the price of copper (it's gone straight up) …  

Expect this trajectory to continue for copper.  Why? This metal plays a key role in everything from solar energy, to wind energy, to electric vehicles.
 
Consider this:  Conventional cars use 18-49 pounds of copper.  Battery electric vehicles use 183 pounds of copper.  So 4 to 5 times the amount of copper will be needed battery cars.

For the above reasons, the head of the biggest copper pruducer in the world says we will see "meaningfully higher copper prices," in a world where "the outlook for copper has never been better."    

How do you play it? Join my premium service (here) and I'll send you all of the details on the stock that gives you leveraged performance to the price of copper.

Best,

Bryan 

Pro Perspectives 4/26/21

April 26, 2021

Stocks trade on record highs as we enter a big week for earnings.

With a quarter of S&P 500 companies already reported for Q1, 84% have reported positive surprises, and earnings growth is running +34% on average.

These are big numbers, and expect this to be the trend for the quarter and for the year — big numbers and big positive surprises, both in earnings and in the economic data.

That said, the big tech stocks will report this week, and they will have a hard time competing with the eye-popping earnings beats of the more "traditional economy" stocks. Why? The big tech numbers will be compared to a much higher base of a year ago. Remember, when the economy was in various forms of shutdown, these companies (Facebook, Apple, Amazon, Google) did even better. With that, we may find that these stocks get some tough love from investors this week, on less exciting numbers (and maybe some profit taking).

Let's take a look at the charts on big tech…

Google (Alphabet) heads into earnings on record highs.
Microsoft heads into earnings on record highs.
Apple heads into earnings about 8% off of record highs. 
Facebook heads into earnings 4% off of record highs. 
And Amazon heads into earnings about 4% off of record highs.

In an investing world where investors are searching for pockets of value, it’s the earnings surprises outside of big tech that are providing some opportunities. And we are unlikely to see something equally exciting materialize in big tech. Add to that, these stocks are all priced as monopoly powers, and the political scrutiny has plenty of reasons to check that power in the coming months. 

 

With the above in mind, I like big tech stocks lower on earnings this week.  

Pro Perspectives 4/23/21

April 23, 2021

The Biden Climate Summit of the past two days has looked a lot like the World Economic Forum of the past several years.

The cast of characters is the same, including Bill Gates, who was a featured speaker today.

As we discussed in my note yesterday, as the world leaders and influencers have been working to sell the climate action initiative over the past two days, the stocks in the industry they are trying to kill (fossil fuels) can be catalyzed by the growing attention to this theme.

Why? Because people realize that the strong-arm of government can curtail supply easier than they can curtail demand. And until the clean energy initiative can produce viable energy alternatives at scale, we will still be using a lot of oil — even as it gets more and more expensive.

With that, since this movement was well telegraphed with the Biden election, it has been oil and gas stocks that have been the big movers.

The biggest energy ETF (symbol XLE) is up 61% since election day. The biggest clean energy ETF (ICLN) is up only 22% over the same period.

Exxon is up 68% since election day.   Chevron is up 40%. ConocoPhillips is up 63%. Phillips 66 is up 62%.  EOG resources is up 103%.  Still, as we discussed yesterday, many of these oil and gas stocks have dipped in recent months. That dip is a buying opportunity. 

Pro Perspectives 4/22/21

April 22, 2021

Biden kicked off his two-day Climate Summit this morning.  The participants included world leaders, major bank heads, the largest pension fund in America, and even the Pope.

As we discussed yesterday, we should expect this summit to kickstart the promotion of "climate action" in the media.  What are the top four stories this afternoon on the New York Times website?  Climate.

With that pretty easily telegraphed, in my note yesterday we looked at opportunities to buy a dip in three clean energy stocks (FSLR, TPIC, CREE) — as the climate-action-theme gets moved to the front-burner for markets.  All three stocks were up big by mid-day.

Oddly enough, another winner that could be catalyzed by today's event is oil.  As part of Biden's speech, as a means of promoting a jobs narrative, he said he can "see workers capping hundreds and thousands of oil and gas wells" around the country.

As we've discussed, this vow to kills fossil fuels only builds a moat around the existing producers.  And it ensures much, much higher oil prices. Demand for oil isn't going away anytime soon. 

Let’s take a look at the chart …

Similar to the clean energy stocks we looked at yesterday, you can see oil has taken a breather in the past month or so.  You can also see in the chart, the run that oil prices made after the election. 
 
With that, similar to the clean energy stocks, oil is a dip to buy on this escalation of the climate action narrative (oil and gas stocks, too).  

Pro Perspectives 4/21/21

April 21, 2021

The White House has been relatively quiet about the multi-trillion dollar energy transformation plan the past few weeks.  This will change tomorrow.

Biden will host his "Climate Summit." This will be a virtual meeting, and is scheduled to run through Friday.  There will be over thirty global leaders. 

This will be as much about building the case for global energy transformation, through the media, as it will anything else.  So we should expect the media to carry the water for the global politicians, by firing up the doomsday climate change narrative, beginning tomorrow.  As for the politicians, in this summit, they will be making big and bold promises about how quickly they will get to "carbon neutral."

The Biden Plan calls for a "100% clean energy economy" and "net-zero emissions no later than 2050."  This is a huge bet to make with the economy (and people’s lives).  But he has an aligned Congress to fund it and execute on it. 

So, this will of course come with higher regulations and massive government spending, which will drive even hotter and more persistent inflationary pressures.

There has already been gobs of money thrown at clean energy companies.  And a lot more is coming.  With that said, with somewhat of a lull in this theme in recent weeks, let's take a look at a few "clean energy" stocks that head into this summit with a dip to buy …

This is First Solar, an American manufaturer of solar panels.  This is 23% off of the highs of January. 
 
The chart above is TPI Composites, manufacturer of wind blades.  The stock is 33% off of the February highs. 
Cree makes materials and devices for electric vehicles.  The stock is 15% off of the February highs. 
 

Pro Perspectives 4/20/21

April 20, 2021

There were broad losses in global stock markets today.  That said, we continue to step through a strong earnings quarter, and the dip is a buying opportunity. 

The biggest loser on the day, across markets, was lumber. 

We've talked about this chart in lumber.  It's been on a tear coming out of the initial lockdown period for the economy.  

Lumber prices are up six-fold from the lows of April of last year.  

Why?  Has demand for housing run wild?  Yes.  Is the supply-chain broken and still in the process of mending?  Yes. This tends to be a formula for higher prices. 

But, six-fold?  The supply of standing trees (called stumpage) is abundant.  The timber growers are getting no more today for a ton of stumpage than they were decades ago.  What gives? 

 

Reading about this from various viewpoints in the supply chain, it appears that there is some legitimate capacity constraints at the mills, turning timber into final product.  But there also seems to be some healthy price manipulation (speculated by industry participants as third party buyers that are hoarding supply). 

Bottom line:  This parabolic price rise in lumber will be short-lived. 

The lumber futures price put in a technical reversal signal today (an outside day).  It may be a good time for profit taking, if you've been lucky enough to benefit from soaring lumber prices. 

Pro Perspectives 4/19/21

April 19, 2021

On Friday we took another look at the lost decade(+) for stocks.  Despite the more than six-fold move in the S&P 500 from the bottom in 2009, the benchmark stock index has, still, yet to return to the path projected by its long-term growth rate. 

If we compounded an 8% return from the 2007 pre-Great Recession peak, we would be 10% higher than current levels.  And by mid-year 2022, the S&P 500 would close in on 5,000.  That's 20% higher than current levels. 

The good news, the gap between the post-financial crisis trajectory, and the long-run growth trajectory is closing.  And it's closing because, unlike the post-financial crisis decade, we are finally going to get some huge economic growth to compensate for a deep recession.  That's how recoveries historically work: economic contraction, followed by big (above-trend) growth.  In this case, we are throwing trillions and trillions of dollars of fiscal stimulus at it.  So we will get the big growth. 
 

Here is a look at what the six years were like following the Great Depression … 

At this point, the projections for 2021 growth are running around 7%.  Given the scale of the government spending, my bet is that it will be bigger (maybe much bigger).

We will get clues on just how underestimated growth is, as we continue to step through Q1 earnings.  At this point, with just about a tenth of companies reported, earnings growth is at 30%, and 84% of companies are beating estimates.  Expect more of it.  And when we get to Q2, the earnings numbers will be far, far bigger, as we compare to an ultra-low base of Q2 of last year (when the economy was mostly shutdown).  

So we have the recipe for a big bounce back in growth.  That is being reflected in stocks, and that will continue.  But after we clear the next year or so, it will be a matter of how much of the growth is being eaten by inflation.  We will see. 
 

Pro Perspectives 4/16/21

April 16, 2021

For long time readers of my daily notes, you'll know we've looked at this following chart over the past five + years. 

This is my analysis on the long term trajectory of stocks, and what it would take to put us back on path of 8% annualized, from the pre-global financial crisis peak of 2007. 

In the chart, the blue line represents what the S&P 500 would have looked like had it continued its long-run annualized growth rate of 8% from the 2007 pre-Great Financial Crisis peak.  The orange line is the actual path of stocks. 

Through the years of looking at this chart, there has been plenty of chatter about the performance and status of the stock market — plenty of bubble and overvaluation talk.  But the reality is, we were knocked off of the path of the long-term trajectory of stocks (the orange line).  And that path of a long-term 8% annualized appreciation has never been regained (the blue line). 

What can we attribute this gap to?  Post-recession recoveries are typically driven by an aggressive bounce-back in growth, to return the path of the economy to "trend growth."  We didn't get it.  Instead, the post-Great Recession growth environment was dangerously shallow and slow.  Trump stepped in and focused on the economy.  Growth was beginning to return to near trend growth — still not enough.  And then, Covid. 

So now, as we know, both the Fed and Congress have had the clear appetite to fire the bazooka of monetary and fiscal policy to pop growth.  As such, we are finally beginning to see this gap (between the orange line and the blue line) close. 

Still, we have another 10% to put us back on the path.  And the long-term growth path for stocks would project a move to 4,999 by mid-next year.  

Bottom line:  The outlook for stocks remains very compelling. 
 

Pro Perspectives 4/15/21

April 15, 2021

We heard from JP Morgan, Goldman Sachs and Wells Fargo yesterday.  They all crushed estimates and put up huge earnings growth, compared to the same time last year.  Today, we heard from Citibank and Bank of America.  Same story.

As we discussed, the banks have a war chest of loan loss reserves that they will continue to move to the bottom line at their discretion.  That means they have a large inventory of positive earnings surprises they will present to us for several quarters to come.  Stocks like positive earnings surprises.  That said, the initial moves in a few of these stocks have been down, as bank CEOs are doing their best in the earnings calls to avoid an overexuberance in the outlook.  It just creates a little cheaper levels to buy from.

Remember, we've talked what the confluence of huge government spending, ultra-easy Fed policy, and vaccinations will do to both earnings and economic data this year, as we compare it to the lockdown data of last year.  As I said, the numbers are going to be "mind-blowingly big." 

With that, we had the retail sales report this morning from the month of March.  The April to March growth was 10%.  The March 2021 to March 2020 growth was 28%.  Wait until we get to the year-over-year economic data for the quarter.

The data will continue to be a fire under stocks.  And despite the Fed's best efforts recently to quell inflation fears, the inflation hedges look to be on the move again, after a pause.  Here's another look at the line in gold we've been watching.  Gold is bouncing …

Meanwhile the dollar has been steadily making lower lows since the new quarter/month started.  

This market observation, combined with the big economic and earnings data growth ahead of us, is a formula for another leg higher in the "global reset of asset prices."  
 

Pro Perspectives 4/14/21

April 14, 2021

First quarter earnings have kicked off today with the big banks.  We heard from JP Morgan, Goldman Sachs and Wells Fargo this morning. 

Not surprisingly they are putting up huge numbers.  Remember, last July, as we were prepping to hear from the banks on Q2 earnings 2020 as the damage from the pandemic economy was just unfolding, we talked about the likelihood that the banks would take the opportunity to put all of the bad news they could muster on the table. 

Indeed, the banks threw in the kitchen sink on loan loss provisions (i.e. guesses on what losses would materialize in the future).  This, as the Fed had already put up a fortress around the banks, defending them from big losses, AND given them a position of strength to print profits in the bazooka-stimulus world.  And they did, as early as Q2 of last year.  Still, they managed down those earnings, setting aside a huge loan loss reserves.  

What does it all mean?  It means the banks laid the groundwork last year to come out of the pandemic economy with a war chest of capital (labeled as loan loss reserves), that they can move to the bottom line (earnings) at their discretion.  We're in the early stages of seeing it.  

The banks are a buy.