Pro Perspectives 2/22/21

February 22, 2021

Back in April of last year, a couple of weeks after the decision by policy makers (Fed and Congress) to go "nuclear" in response to the health crisis and economic shutdown, we discussed what this would mean for prices. 

Here's an excerpt from my April 14 note …

"With trillions of dollars of relief/aid/stimulus money beginning to work it's way into the economy, the early stages of the global “asset price reset” is under way.

When global policymakers print money and drop it on your doorstep, the purchasing power of the cash in your pocket goes down. Inflation." 

This is where we began talking about this theme:  the "global reset of asset prices."  Practically all asset classes have gone up (dramatically) in price since.

This is creating the mirage of wealth.  That's revealed in household net worth, which has returned to record levels. 

But the reset of prices has yet to be felt at the every day consumption level.  It's coming.  And that is what will put the policy response into perspective.  Even with an improving job market, the rise in everyday prices will expose the wealth effect of rising asset prices, as a mirage — especially after another $2 trillion is poured onto an already heating up inflation situation.  The consequence will be a lower standard of living. 

Adding to the inflation pain, will likely be the fact that not many, still, are expecting it — as you can see in the chart below …

As we discussed much of last year, you don't want to hold cash in this environment.  The value is being explicitly destroyed.  Hard assets have a history of being the best protection in times of inflation, followed by commodities.  On that note, we've talked about the historically favored inflation hedge, gold.  We talked about the buying opportunity in gold last week, on the dip into the $1,775 area.  Gold was a good mover today, back above $1,800. 
 

Pro Perspectives 2/19/21

February 19, 2021

We talked about copper yesterday.  What was the biggest mover in global markets today?  Copper. 

Copper was up 4% on the day. 

Here's another look at the chart, comparing this move to the move from the depths of the global financial crisis…

If we compare the absolute price move, it projects a move to the mid $5 area (another 30% higher).  If we compare the percentage move, it projects a move to $7.67 (87% higher).  

Considering the glut of currency being printed and the unending deficit spending, this time relative to the post-financial crisis response, I would argue the extreme of the two projections, is in store for the price of one of the world's most important metals.  This aggressive repricing in copper should be a good warning of where broad consumer prices are going in the coming years. 

Now, this sharp rise in copper prices has put a fire under the profitability of producers.

Here's a look at the Freeport McMoran chart, the world's largest producer of copper. 

As you can see, you get leveraged exposure to these commodities through the producers.  Freeport stock has gone up 8-fold on a just double in the price of copper.  

As we discussed on Wednesday, I suspect gold miners may be set up for a similar opportunity, to get leveraged exposure to gold prices, which have pulled back 14% from the August highs — disconnected, at the moment, from this inflation theme.

Pro Perspectives 2/18/21

February 18, 2021

Building on the inflation theme we've been discussing, we had more price data this morning (import and export prices).

Both came in hotter than expected.

Export prices were up 2.5%.  As you can see in the chart below, that's the biggest monthly change on record.  

The monthly jump in import prices was the biggest jump since 2012. 

What's the driver of the hot prices?  For imports, it's oil.  Fuel import prices were up 7.4% from December to January.  So, we're in the early stages of seeing the impact of Biden energy policies on fuel prices.  As we discussed, the "clean energy" plan puts OPEC back in charge of oil prices.  We will still buy a lot of oil.  We will just buy more for foreign sources, and at higher prices. 

On the export front, the hotter prices are driven by agricultural exports.  

Remember, we've talked about China's buying spree of global commodities.  They bought record volumes of crude oil, copper, iron ore and coal in 2020.  They also imported a record amount of corn, wheat and soybeans. 

What happened to commodity prices the last time China went on a commodities binge in a global recession (a decade ago)?  Prices spiked. 

What's happening this time?  Prices are spiking.  And it's far from over. 

Let's look at corn prices …

And let's revisit the chart of copper prices, which traded to nine-year highs today …

Pro Perspectives 2/17/21

February 17, 2021

With rates on the move, now back to pre-pandemic levels, what's the difference between now and February of last year?  

We have an economy producing about the same level of output, utilizing about the same level of capacity.  Household net worth is at record highs.  And by the end of the year, the CBO (Congressional Budget Office) is projecting the U.S. economy will grow at a 3.7% annualized rate (hotter than pre-pandemic growth).  They also project that unemployment will fall to 5.3% this year, about right at the average unemployment rate of the past 50 years.
 
But corporate net worth is down, about $1.2 trillion from last February.         

U.S. government net worth is down $2.2 trillion as of the end of Q3.  We know that number continues to rise. 

So, how do politicians and central banks fix this discrepancy?  Inflation.  Inflate the nominal value of assets and output … and inflate away the cost of debt.  That's happening, and there is more to come.  

With that, most charts you pull up these days look like a nice 45 degree line from the bottom left to the top right of the screen (if not a hockey stick).  These charts clearly demonstrate the “inflating” of assets.  

What's not participating in this “inflating everything” market?  The one market that should be on fire, given the situation laid out above:  gold. 

Gold has had five consecutive lower daily closes, now trading down to $1776.  That's down 14% from the August 2020 record highs. 
Given the explicit devaluation of cash (through unlimited Fed QE and seemingly unlimited deficit spending aspirations), this is a correction to buy. It’s a second chance.
 

How do you play it?  Get leveraged exposure to gold through gold miners, or track the price of gold through an ETF, like GLD. 

Full disclosure, we are long Barrick Gold in my Billionaire's Portfolio. 

Pro Perspectives 2/16/21

February 16, 2021

We talked last week about a few things that bubbled up in the news today.

First, we talked about China executing from its post-financial crisis playbook, taking advantage of another global economic crisis, and depressed commodities prices, to hoard commodities. 

 
They are doing it.  And today, the FT reports that China thinks it can "hobble" the U.S. defense industry by restricting exports of rare earth materials – of which they control about 80% of the world's rare earth refining capacity.

Remember, the Trump administration flatly called the Chinese Communist Party "the greatest threat to everyone in the free world."   The Biden administration calls the CCP just a cut-throat economic competitor.  The news of the day supports the Trump position, over the Biden position.  And it's clearly very important to be positioned correctly on this. 

Next, we talked last week about the Biden "Clean Energy Revolution" plan on oil prices (and prices in general):  Increased regulation, retrofitting, choking off funding to oil and gas, it's all part of the plan to "stop the worst consequences of climate change" (in the words of the administration).  And they believe these worst consequences to be coming in "nine years."  That's a very precise and aggressive timeline, which means radical change.  

As we've said, we'll be using a lot of oil in the interim.  And with funding for new exploration choked off, foreign oil producers will be in the driver’s seat, and they will command higher prices.  Today, oil traded over $60.  That's up 64% since election day. 

 
With the above dynamic, get ready for $4 plus gas.  It will be self-fulfilling, and yet it will become the justification for the move to "clean energy" (just as high gas prices were in the Obama era). 

Finally, we've been talking about inflation.  While the Fed claims to ignore the influence of food and energy in their inflation measure, they have a history of acting when oil moves sharply (i.e. oil prices drive inflation).  With that, the interest rate market is beginning to price in the consequences of, not just another massive deficit spending ("aid") package, but also rising oil prices. 

 
As oil prices crossed $60 today, the 10-year yield traded to 1.3%.  That's the highest level for the benchmark on market interest rates, since February of last year (pre-pandemic).  This will be the spot to watch.  The speed of the move in interest rates will be key for stability in stocks.           

Pro Perspectives 2/12/21

February 12, 2021

With the Senate likely wrapping up the impeachment show by this weekend, the focus will turn next week to the negotiations on Biden's massive "answer" to an economy so troubled that it is, likely as I write, already producing a new record high in economic output. 

Remember this chart …

The peak in economic output prior to the pandemic was $21.7 trillion.  A year later (by Q4 2020), the economic output had already recovered to $21.5 trillion.

That's a near full recovery, and that was before the new $900 billion in aid was disbursed (and this disbursement is still in early stages).   

Still, the Biden team is painting a grim picture of the economy, demanding that they "go big" on new aid.

"Go big" is what the Trump administration already did, in March of last year.  Within eleven days of the "stay-at-home" orders, a $2.2 trillion plan that protected the balance sheets of consumers and businesses was signed into law.   That's why we have the chart above.  And that's why we have this chart of unemployment …
So, despite what the economic data say, next week the democrat Congress will cram through another $1.9 trillion to "rebuild" the economy.  When the massive deficit spending doesn't match the needs, there will be pain.  In this case, it doesn't appear that the pain will be in the bond market anytime soon.  But the pain is clearly coming in the devaluation of the dollar (and paper currencies globally) relative to asset prices.  Stocks, record highs.  Housing prices, record highs. Bitcoin, record highs.  More markets to come. 

Pro Perspectives 2/11/21

February 11, 2021

How hot is the market for SPACs? 

Last year, was unimaginably hot.  There were 248 shell company IPOs, that raised over $83 billion. 

We are just a little more than a month into 2021 and there has already been 135 listings, and over $42 billion raised (better than 50% of the volume of last year). 

These blank check companies can take up to 24-months to combine with a target company, but some of come out of the gates very hot, even as they explore potential targets.  The common characteristic of good performance in these SPACs is leadership. There is a who's who of powerful activist investors involved in this space. 

Bill Ackman's SPAC, Pershing Square Tontine (PSTH) is up about 38%.  This is pre-acquisition – still a shell.

Larry Robbins has a SPAC called Longview (LGVW).  It's up 160%, pricing in the coming acquisition of a medical technology company called Butterfly Network.
With the above in mind, if we look back at the Obama allocated stimulus (following the failure of Lehman Brothers), the institutional money followed the government money into "new technology" — Silicon Valley startups, early stage companies and private equity were the big winners.  

In this next massive tranche of stimulus coming down the pike from the Biden administration, it looks like the public markets will be the big winners, as institutional money flows into growth stage companies, through these SPAC structures (many related to the more capital intensive "clean energy" movement). 

Pro Perspectives 2/10/21

February 10, 2021

Yesterday, we talked about the value in European stocks, relative to a U.S. stock market that hangs around record highs.

Another foreign market we've been talking about is China.  As we've discussed, the biggest winner in the recent U.S. election was China. 

Under the new U.S. administration, they will go back to the business that got them so close (pre-Trump) to becoming the global economic superpower — ramping up the global supply chain and manipulating the currency to ensure they maintain global dominance in exporting.

With that, as you can see the Shanghai Composite is breaking out, maybe to new five-year highs by tonight …

No surprise, Chinese ETF assets are growing at a rapid rate. And it's early days.  According to ETF.com, there are over 1,300 U.S. ETFs (trading in U.S. securities) controlling $4.3 trillion in assets.   Clearly some of that consists of big Chinese ADRs (Baba, JD.com, etc).  But there are only 54 China-specific ETF traded on U.S. markets, representing just $28 billion in assets.

Safe to assume there will be major growth there. 

The most recent China specific ETF launch is said to be the Nasdaq (100) of China (high tech and biotech), Kraneshares SSE Star Market 50 Index (symbol KSTR) – small today (in aum), but likely to grow aggressively over the next few years.     

Pro Perspectives 2/9/21

February 9, 2021

In a world of inflating stock markets, there remains good value in European stocks.  

U.S. stocks are now 16% higher than the pre-Pandemic highs. Meanwhile, Europe has broadly lagged the recovery in the U.S. and Asia.  As such, stocks in Europe have also been slower to bounce back.  

Germany (the economic leader in Europe) only recovered to pre-Pandemic levels in the Dax last month.  The French stock market remains underwater — about 7% off of the pre-Pandemic highs.  And the weaker spots in the euro zone, Spain and Italy, still have a ways to go to recover the losses in the equity markets over the past year. 

With that, we have a new government being formed in Italy, and it is likely to be led by one of the key players in the Global Financial Crisis recovery, Mario Draghi (former ECB chief).  

If there is a catalyst in Europe for stocks, this might be it, at least for Italy.

Let's take a look at the chart on Italian stocks … 

Stocks are still down 9% from the Feb 2019 highs. 

What have Italian sovereign bond yields done since the speculation started that Draghi would lead a new Italian government?  Yields have gone down, to near record lows (bond prices have gone up).  In the current environment, that translates as a vote of confidence in Draghi (to stimulate economic growth and manage the heath crisis).  

How do you play it?  The ETF EWI tracks an index of top large and mid cap Italian stocks (representing about 85% of the total market cap of the Italian stock market). 

As you can see, if we look at a longer term perspective, this market is still in the early stages of recovering from the damage of the global financial crisis — but the technical picture is compelling, nearing a breakout. 

Now, investing in European stocks is only as good as your outlook on the euro.  And given the profligacy of U.S. fiscal policy (about to get much worse), the damage being done to the dollar makes a bull case for the euro.

 

And as you can see in the next chart, that fundamental outlook aligns with the technical picture (i.e. working on a new long-term bull trend in the euro) …

Pro Perspectives 2/8/21

February 8, 2021

With the S&P 500 breaking 3,900 today, let's take a look at valuation.

First, when we entered earnings season, the expectation was for another deep decline in year-over-year earnings. 

Given that Q4 2019 registered a near record high on quarterly earnings for S&P 500 companies, the idea of beating such a number in Q4 2020 (in the midst of a Pandemic and a government throttled economy) wasn't even on Wall Street's radar. 

But we might get it. 

With about 85% of companies now reported, about 8 out of 10 have beat on estimates, and the change in earnings compared to Q4 of 2019 is now projecting a +3.6% growth.  That compares to what was expected to be a 9.3% contraction.

With that, if we look at the earnings projections for full year 2021, the forward P/E on stocks (the S&P 500) comes in around 22.  

That's well above the long run average P/E (ttm), which comes in around 16. 

But, we're not just in a low rate environment, we are in the extreme of all low rate environments — zero rates.  And historically, when the 10-year is below 3%, stocks tend to trade at a P/E north of 20.  Why? The low rate environment does what is intended to do, force people "out on the risk curve" (i.e. force them to accept additional risk in pursuit of higher required returns).  That means, out of bonds, and into stocks (which drives higher multiples).   

So, a forward P/E of 22 could still be cheap in this rate environment, especially with the Fed's aggressive QE program/stance.

But I suspect this multiple will become cheaper and cheaper, as we begin to step through 2021 earnings.   The full-year estimate for this year is looking for 23% earnings growth.  That number may be crushed. 

Remember, these companies will be reporting against a very, very low earnings base, especially from the first half of 2020.  As we know, corporate America always takes the opportunity to put all of the bad news on the table in a widespread crisis.  It's safe to say that any loss or writedown they could take, they took last year (when things were broadly very bad and uncertain).  That sets up for big growth in y-o-y earnings for 2021 – even bigger than Wall Street's full year estimate of 23% growth.  And a higher "E" in the P/E, drives down the valuation on the broad stock market.  

Bottom line:  Even at a forward P/E of 22, in this (global) rate environment, stocks may still be relatively cheap.  And it's likely that valuation will be getting cheaper, especially with more stimulus dollars coming down the pike to stoke economic growth.