Financial Research

The Wall Street Debrief

The S&P 500 closed at an ATH of 4,232.60 which was up from 4,181.17 last Friday. The big news on Friday was a pretty massive miss on non-farm payrolls. It came it significantly below expectations but markets shrugged it off and understandably so given that it takes a lot of pressure off the Fed to begin ‘thinking about thinking about’ Tapering. Jay Powell’s life was probably made significantly easier by this morning’s miss, particularly after Janet Yellen talked out of school on rates recently. Source: Page Six That being said, we think this number is usually prone to noise in normal circumstances and even more so in the anomalous times we live in. Normal markets are like the blues; steady, relatively repeatable, and predictable progressions. If you’re a musician you know that you can jam with anyone as long as you both know the 12 bar blues and your scales. This is not the case with jazz. In environments like this (blues-like or markets dominated by endogenous cycles) Wall Street that has a special advantage in a more normal environment as computing power and math are particularly valuable in these tamer cycles in making sense of data. The markets we’re living in today in the hopefully soon-to-be post-COVID-19 reality are much more like jazz. Staggered, changing tempos and things just happening when you might not expect it. The smooth consonance and steady back-beat of the blues stands in stark contrast to the sometimes dissonance or some might even say shrillness that can instantly grab your attention in an unexpected and pleasant way as the more erratic and random character of Jazz tunes are prone to rapid, sometimes uneven changes. We see this as an imperfect but useful metaphor in today’s markets. It should come as know surprise that dislocations in the labor market are occurring. Labor dislocations have happened in the wake of plagues since before the Black Death. Similarly, inflation in commodities has regularly occurred. The prices of lumber, steel, and many food items are surging. Another unique event where the Entertainment Industry and Wall Street are converging this week is the much-anticipated episode of Saturday Night Live which is featuring Tesla and Space-X CEO Elon Musk as the host along with Miley Cyrus as the musical guest and will air on May 8th. The price of some more speculative crypto assets may partially be surging in anticipation that Mr. Musk may give some shout out to the legions of retail investors who idolize him. The initial ad featured him and Miley Cyrus capitalizing on their somewhat mutually shared image as rebels and iconoclasts. However, as this video demonstrates of Ms. Cyrus, beyond all the hype and image she is an incredibly talented singer. You can take the girl out of Nashville but you can’t take the Nashville out of the girl. We think despite the hype of this Episode it will likely be two very talented people putting on an entertaining episode. We certainly don’t see it as anything more or less. This earnings season has been incredibly strong, so why have there been such lackluster performance in so many names that shatter expectations? My colleague Tom Lee will answer this delicate question below. Despite some stocks not moving as investors might like, strong earnings are strong earnings. Sell-side analysts are repeatedly upgrading earnings for the S&P 500. 87% of companies outperformed expectations which is significantly above the historical average of 65%. Energy lead in sales outperformance and was the only sector to have double digit surprise in the area. We held a webinar this week in which Tom Lee and Tom Block discussed how the re-opening of the world’s largest economy should affect stocks and which sectors should benefit most. The replay is available here. We want to thank our family of loyal and inquisitive subscribers for tuning into this event in droves. The whole team is honored by your support. The re-opening is here. Hilton’s CEO noted that “April bookings for the summer are exceeding 2019 peak levels by 10% in the US.” Folks are beginning to offices and retail properties are filling up again. This SNL episode is not a shoeshine boy moment but it does suggest Lorne Michaels might also being paying attention to on of our favorite investing themes which is the economic rise of millennials. Like Mr. Michael’s ratings, we are the stock market benefits from this rise and from the looks of it that is already occurring. Stock holdings are now 41% of household levels, the highest level on record. We think this is the beginning of a longer-term bullish trend for equities. Millennials don’t like bonds. They like crypto and stocks and as they inherit trillions of dollars they will increase holdings. Of 431 companies that have reported so far (88% of the S&P 500), 85% are beating earnings estimates by a median of 16%. On the top line, 77% are beating by an average of 7%.

S&P 500 Ends Week at All-Time High Despite Mid-Week Turmoil

S&P 500 Ends Week Flat Again, Energy Leads Weekly Gains

Earnings season is well within its stride. So far, of the 287 companies that have reported so far 87% of these companies have beaten earnings estimates by a median of 15%. We’ll elaborate on which sectors stand out below. The S&P 500 closed at 4,181.17 which was exactly one point higher than it closed last week. It is the third week in a row that the market is essentially flat. However, the leadership of defensive names seemed to be broken. Despite some weakness on Friday, the 5D gains were led by Energy and Financials. There has been a lot of strong earnings across diverse sectors. Many Epicenter names like Cleveland Cliffs ($CLF) and Harley-Davidson ($HOG) have shown how Epicenter stocks can surprise dramatically to the upside. You may have noticed that despite record earnings at the best of the FAANGs, prices didn’t move all that much. However, on Friday Energy led the losses losing 2.53% on the day. Despite eight sectors being negative, the volume wasn’t very strong. Even though the market shrugged off the earnings of the oil majors, we saw a lot of strength there. Exxon Mobil had its first profitable quarter after four in the red. Chevron also noted that it could maintain 10% FCF growth at $50 Brent. What would happen to Energy companies at $80 brent? Commodities appear to be booming across the board. The Chicago PMI reading this morning had its highest reading since 1983. In another sign of the coming boom, there is a shortage of hospitality workers as restaurants and hotels try to hire all at once. Southwest and American airlines are bringing back flight attendants and pilots. Consumer bookings, and consumer spending is rising handsomely. Amazon recorded its greatest quarter, sales-wise, ever, hitting a record of $108.5 bn. Apple’s results were called “borderline unbelievable” by Morgan Stanley. Credit Suisse hiked its price target on the S&P 500 to 4,600 because the broader earnings season boasts the ‘strongest revisions and surprises ever.” They boosted their 2021 EPS to $200 from $185 for the index. Of course, there were negative surprises too. Ford reported a pretty shocking interruption in production as a result of the chip shortage. It will be interesting next week to see how this issue has affected other US automakers. Ford will produce 1.1 million less cars in 2021 than it initially planned to. US GDP surged to 6.4% growth on a sequential basis, slightly lower than anticipated. You may have noticed that despite record earnings at the best of the FAANGs, prices didn’t move all that much. Despite the tiredness in some mega-cap names, we think that earnings season so far is showing that the narrative behind the Epicenter trade is definitely coming to fruition. The other thing is that from the looks of many of the best performing Epicenter names this earnings season, the gains and outperformance has legs and will likely keep coming. This is after all, very much in line with what we predicted. Tech stocks, even if they do everything perfect, may have a lot of the good news already baked in. The names that are considered boring by institutional investors sure do grab attention when they show triple digit gains in operating leverage and significant and seemingly sustainable earnings growth. It is hard for Wall Street right now because it largely relies on historical data and careful quantitative analysis of endogenously dominated economic cycles which are relatively more predictable than the wild times we live in. Thus, we see a lot of opportunity in the Epicenter stocks that are doing amazing things this earnings seasons and will likely continue to. The recovery will be uneven, and some things may never be the same. While we certainly have great statistics like the fact that personal income soared a record 21.1% in March as a result of government stimulus, we also must remember that millions of medium and small sized businesses are forever wiped out. There are some indications that elements of the ‘work from home’ reality may stay past the pandemic. According to a University of Chicago Beckder Friedman Institute study that sampled 30,000 Americans, 20% of full workdays are now predicted to be supplied at home. This is a four-fold increase from the pre-pandemic period This means more dollars will be spent in the suburbs and less dollars in urbans centers than before the pandemic. So, it may not be as simple as saying everybody wins, and we certainly don’t think every Epicenter name will. However, as we have been showing strong and dedicated management teams are creating impressive turnaround on behalf of shareholders that would have been unimaginable in different times. We think the best risk/reward tradeoff is in Epicenter. We’re excited to report on the rest of this incredibly strong earnings season and the re-opening likely to follow it!

S&P 500 Ends Week Flat, Friday Action Led By Small Caps

The market took a somewhat volatile and meandering path this week to close essentially flat. The S&P 500 closed at 4,180.17 which was ever so slightly down from the 4,185.47 it closed at last Friday which was an all-time-high. It looked like going into the close we might close at a third consecutive ATH on Friday in a row, but the tape ended just short. Thursday saw a good old fashioned Capital Gains scare that seemed to continue carrying over to crypto into Friday. You’ll be happy to hear our veteran Washington Policy Chief Tom Block discuss his reasoning on why he thinks you won’t be seeing that rate move anywhere anytime soon. The disproportionate power of moderates given the closely divided House and Senate is Wall Street’s friend in this case. The Epicenter trade has stalled over the past weeks as case data went sideways, lockdowns in Europe reemerged, the deteriorating situation in India and in addition to all of this there has been a lot of talk that markets are ebullient and need a breather. We disagree. Some names have put up strong earnings and markets didn’t appear to react as strongly as one would think, prompting some to theorize that the unprecedented economic boom we think is coming has already peaked. The data, coming in from all across the economy would appear to reject the assertion that economic momentum has peaked. Beyond the numbers, there is a once in a lifetime desire to connect and gather and we think this coupled with the leanest companies from an operating leverage perspective in modern history is what engenders the higher alpha in Epicenter names. There’s a lot of big earnings coming up next week. While we don’t doubt that many technology names will put up impressive earnings and that these businesses are great to own (see our Granny Shots for which ones we like best), we also don’t think that these guys have the same capacity to positively surprise consensus like the Epicenter names do. Take for instance the subject of our Signal From Noise this week, Harley-Davidson ($HOG). It put up earnings of $1.68 a share when the Street was expecting .90 cents and its management has slashed costs and boosted efficiencies. We hope you check out the article but even if you don’t we want to sear an image from the company’s earnings report into your memory. Source: Harley-Davidson Q1 Reports. If you thought Epicenter was a good post-pandemic trade that has petered out and won’t be able to exceed pre-pandemic highs we have a pretty stark piece of evidence here that would contradict that line of thinking. If a company with as many secular headwinds as Harley can make such an impressive turnaround there are a lot of companies that might surprise investors too reliant on dated understanding of historical data and trends, that have often been altered, broken or significantly accelerated by the most significant exogenous event markets have faced since the Second World War. Look at what Harley-Davidson did on Operating Income. This is a motorcycle manufacturing company that is known for the opposite of cost-efficiency. It also made very impressive progress on gross margins YoY, going from 29% to over 34%. There were a lot of other impressive earnings that showed similarly remarkable achievements by Epicenter management teams that significantly outperformed expectations; the thing is we think this is only the beginning. Zooming out from the company level we are seeing diverse signs from all over the economy that momentum has not peaked at all but rather that it is building. Bank earnings were significantly propped up by them releasing Loan Loss Provisions, signaling that from a credit default perspective, they think the worst is behind us. JP Morgan found that travel and entertainment spending was up a stunning 50% from February to March. Fitch Ratings recently slashed its forecast for 2021 high yield bond defaults to a mere 2%, a recent low. Even shopping malls, surely one of the worst affected pandemic casualties saw beginnings of a robust recovery; but surely not the peak of momentum. Placer. ai monitored the traffic in 50 major malls across the United States and found that traffic was up 86% YoY and down less than 25% from 2019 levels. These are the most promising levels since the pandemic began. Freight rates have reached their highest levels in a decade and the Empire Index (prices paid by manufacturers) just gave its highest reading since 2008. The boom is accelerating like a Six Flags roller coaster whether you are positioned for it or not. Sure, there are headwinds and uncertainties. If you have a crypto portfolio the Biden capital gains tax rate sure reminded you of that. We know it was a volatile week for some crypto investments but that’s par for the course. Hear Dave Grider explain market action this week here.

S&P 500 Ends At Another ATH, President Hosts Japanese PM

The market melted higher for much of the week as earnings started off pretty strong at most of the large banks. The S&P 500 closed at 4,185.47 up from 4,128.80 last Friday which was also an all-time-high. Other positive economic data continues trickling in. Growth rates are projected to be quite high in Q2. Despite the highs, we have seen Epicenter underperform over the last month, which was led by Technology. Health Care actually led this week with a 5D gain of 3.35%, followed by Materials at 2.91% and Utilities at 2.74%. The leadership struck us as odd, but we’re confident that Epicenter will pleasantly surprise when they report. Vaccination progress is immense and should permit a return to normal, perhaps a bit sooner than consensus thinks. We know there’s been some pain in the Epicenter names, however, we still remain confident that these names contain the highest upside based on their capacity for upside Earnings surprises. We have upgraded our stock lists last week and added some names to the Power Epicenter list, be sure to check it out. We think some of the best names in the worst affected industries will begin flexing their new operating leverage in ways that will show unexpected strength to a wary consensus that seems perpetually enamored with Growth. We think this boom will be more smokestack-ey. My colleague, Tom Lee will provide analysis as to why he believes the Energy sector will continue its impressive outperformance stretch after cooling off as of late, likely due to profit taking. As you can see, demand for key leading petroleum products is a lot higher than you might think given the current situation. Demand is nearing normal levels. President Biden hosted Japanese Prime Minister Yoshi Suga at the White House under the backdrop of a more assertive China. It’s not an accident that even though there’s more Russian troops amassed on the Ukrainian border than on the eve of the annexation, the Biden Administration chose to make its first state visit one that sends a powerful message to China. In 1989 Francis Fukuyama wrote an essay called “The End of History’ in which he postulated that the defeat of the Soviet Union constituted the final episode in the ideological struggle on the global stage. In other words, democracy had vanquished its final foe and that its history would forever more be dominated by democratic governance. Seems from this week’s event’s he may have jumped the gun a little bit, no? Despite the fact that the Chinese economy grew northward of 18% in the 1st quarter and that the US should soon be growing at one of the highest annual rates in many decades, their competition in the new “Great Game” of global power politics is ominously casting its shadow over the coming boom. An assertive President Xi’s recent power-grab in Hong Kong has elevated concerns that he might try the same in the disproportionately important island of Taiwan, where more and more of the world’s semi-conductors are being made. We explore a company that, despite being thousands of miles from Shenzen or Silicon Valley is right at the very middle of this emerging Sino-American technological competition. Be sure to check out this week’s Signal From Noise: ASML: The Jewel of The Empire. This may well be the most important company in the world that you’ve never heard of. Look folks, here’s the bottom line. This coming earnings season will be different from the last four for a few reasons. Firstly top-line growth is expected to be solidly up YoY making for potential fireworks (due to March 2020 being ‘easy comps’). Company visibility should be considered stronger for 2021 compared to 3 months ago. It looks like the economy will also be largely open by early summer so companies are finally near that long foretold light at the end of the tunnel. In other words, why would you sell your Epicenter stocks right before they’re about to likely do what you bought them for in the first place? We are all about having a balanced portfolio and our new Granny Shots picks will be out very soon, but we continue to firmly believe that many Epicenter names are poised for once in a generation tail-winds on the top and bottom line. Cyclicals are also leading the upward earnings revision, which bodes very well. At the risk of sounding rather obvious, we think that it’s likely Epicenter leads the gains in this coming earnings seasons by virtue of the fact that it has been leading positive revisions so far in 2021. Visibility has been improving and the country is opening and we’re only 3 months into 2021. Our bet is that the positive earnings revisions that have been led by Epicenter YTD continues throughout the rest of the year, at least. As you can see, since the start of April, Epicenter stocks have been performing well, except for Energy which is down since the start of the month. We expect Energy to recover and we expect a lot of positive surprises this earnings seasons from strong names in Epicenter sectors. We are always on the lookout for a change in momentum and despite some recent bumps in the road, especially for Energy, we are still confident that you want to put your money to work in cyclical names.

S&P 500 Ends Week at All-Time High, QQQ Leads Gains

Well, the first full week of Q2 is over. The S&P 500 closed at an ATH of 4,128.80. The indexes really move when those large-cap names experience price appreciation. AMZN’s stock had a great day as the vote for unionization in Alabama came down in the company’s favor. Apple and Microsoft were up 2% and 1% respectively today. Despite the leadership of Growth/Defensive names in the beginning of Q2, we are not changing our call that we think the leadership baton, in terms of alpha, will soon be passed back to the Epicenter and cyclical names that are on the verge of meeting the greatest economic boom in living memory with ultra-streamlined business models. Bitcoin roughly doubled in value over the quarter. Coinbase is now officially the most profitable exchange ever. So, for those of you who feel like you missed out on Growth stocks, we have something for you to find alpha in. My colleague Tom Lee said at an international Bitcoin conference in Istanbul right before the pandemic changed all of our collective lives that once the market-cap for crypto-currency reached about $2 trillion, or approximately 1% of investable assets that institutional adoption and capital would begin occurring at an exponential pace and lead to rapid and astronomical price appreciation. The good news is we just hit $2 trillion and we believe there is plenty of alpha left for those willing to brave the risks of crypto. A Newsweek article this week posed the question, “Is Bitcoin Too Big Too Fail?” Boy, that’s certainly a change of tune from “Is Bitcoin a Ponzi scheme?” Crypto is here to stay and we want to help those astronomical returns you’ve been reading about create wealth for you. If you haven’t started learning about crypto, now is the time. We understand a lot of people are worried about something and that the world has changed rapidly. There’s still a lot of fear as we enter the first Spring after one of the most significant events in global history that led to millions of people losing their lives. Markets are up so much since the lows they reached during the depths of pandemic-induced fear. How could they possibly go up more? Well, they could go up if there was a blowout earnings season. We think some of the upside surprises for cyclical and Epicenter names will start to become evident in the fast approaching earnings season. It seems every day that someone is highlighting some special indicator that is showing how overstretched valuations are and that a nasty market crash is imminent. Well, we don’t think it makes much sense that the market would crash on the eve of what are predicted to be the highest rates of economic growth in nearly half a century. Here’s the problem though. The type of forced liquidations and rapid price drops that bubble-spotters love to foretell typically don’t happen when there’s epic amounts of dry powder on the sidelines. We think that the recent flight to Growth/Defensive will be short lived and we think the earnings performance of Epicenter stocks as the economy re-opens will attract more and more capital to them. Volatility is at the lowest levels since the pandemic began. My colleague, Tom Lee, will also discuss in his note below that, if we were on the verge of an impending correction, we would likely see evidence of that materializing in credit. Instead, we are seeing the exact opposite in credit markets. As we’ve been repeating in these pages the situation we are in does not lend itself very well to analysis based on historical correlations in economic cycles dominated by endogenous factors. What we are entering is a period that resembles the post-war rebuilding and in that environment the smokestack, cyclical, old-economy names grow at rates higher than the rest of the economy, not the technology high fliers. Economists now expect the second quarter growth rates to be as high as 10%. The year of 2021 may see an annual growth rate as high as 7%. To put this into perspective, prior to what just happened a 3% GDP growth rate would have been considered incredibly high. Bank of America’s credit card data showed an enormous 67% surge in card spending over the past week as consumers use their unemployment and stimulus. Last week’s better than expected jobs data and other datapoints from around the economy are simply contradicting the assertion that economic momentum has peaked. If you’re trading like the best is not yet to come, you may want to reconsider based on what’s on the horizon. If you want to brag about being first into a ‘Growth’ name that now seems obvious to everyone as a good investment than keep chasing TAM projections and the next disruptive technology. We think there will always be time to pick out amazing stocks and companies that are changing our lives with innovation and entrepreneurship. However, a lot of old-fashioned companies are meeting a unique moment in history where they are as efficient and streamlined as they’ve ever been and they’re going to meet unprecedented demand for what they’re selling. These top and bottom-line tailwinds rarely occur more than once in a lifetime. Don’t miss it trying to be the smartest guy in the room. Last week Jamie Dimon, a guy who actually is probably often the smartest guy in the room, said as much. The scale and scope of the economic boom we’re approaching is greater than consensus is currently accounting for. The man who is the CEO of America’s largest bank has a pretty good perch upon which to opine on the US economy. Here’s what he said below. We agree. “I have little doubt that with excess, savings, new stimulus savings, huge deficit spending, more QE, a new potential infrastructure bill, a successful vaccine and euphoria around the end of the pandemic, the US economy will likely boom. This boom could easily run into 2023 because all the spending could extend well into 2023,’ said Dimon. In such an environment, we are big believers that Wall Street analysis which is largely based on historical data is almost by definition liable to underestimate the scale of the boom coming because there is no recent historical precedent. Make sure you take the time to do a little ‘Spring Cleaning’ of your portfolio if it’s too heavily weighted for growth names. We happen to have just updated our key Epicenter stock lists for the occasion. Epicenter Power Trifecta 35 List Epicenter- Stocks With Uncommon Value During Uncommon Times

S&P 500 Crosses The 4,000 Mark, Rates Settle, Tech Rallies

The S&P 500 closed Thursday at 4,019.87 at an all-time-high. Despite this, there have been a lot of bears pronouncing the top for any number of reasons. We are encouraged by the ample bearish sentiment that is out there. All-time-highs are all-time-highs. The market speaks in terms of price. We see plenty of bullish catalysts that should drive the market higher from here. Not only are all-time highs great but something that was particularly encouraging about today’s rally is that it was led by Technology and Energy simultaneously. This has been rather anomalous compared to the market dynamic over the past few weeks. Vaccine penetration continues to be ahead of schedule and the prospect of the healthcare system being overwhelmed, the reason for commerce-interrupting lockdowns diminishes by the hour with each jab administered. My colleague Tom Lee spoke about how institutions have been raising cash. Dry powder is accumulating to power the next leg higher. We think the S&P 500 hits 4,300 in 1H2021. ISM numbers today and other data from not only the United States but around the world continue to suggest an unprecedented economic boom, the likes of which has not been seen since maybe the middle of the twentieth century. Importantly, as we keep reminding our subscribers the setup for Epicenter stocks who have been patiently sharpening their knives while waiting for pre-pandemic levels of demand to return has the best risk/reward tradeoff in our estimation. Investing in Epicenter names is more than a trade, what you’re buying is lean, mean companies that have undergone a mandatory restructuring courtesy of the worst disaster of our lifetimes. The interruption of demand we saw makes the severely adverse scenarios in the Federal Reserve’s stress test for supervised banks seem like a walk in the park. Yet these companies have survived to fight another day and that day is FAST approaching. Again, little trickles of info keep painting the picture. Yesterday, Delta finally lifted it’s middle seat ban. Vaccine penetration continues rising. States are easing restrictions paving the way for a return to economic normalcy. Vaccines will be available to all who want one soon according to current plans. In past economic contractions US corporates have proven themselves adept at slashing costs which has enabled many companies to exceed prior peak EBIT with far fewer revenue dollars. For instance, we showed in our past research that the Consumer Discretionary sector managed to achieve 20% higher EBIT by 2010 than the prior peak with 10% fewer revenue dollars. Given that the depression in 2020 was significantly worse than any economic devastation we’ve seen in our lifetimes, we expect that the ability of companies to adapt and cut costs will only have increased to meet the gravity of the situation they together faced. We think given the severity of the low, it is quite possible that, correspondingly, the highs to come as re-opening begins to hit its stride will exceed previous records and surprise many investors who think of these stocks as obsolete. We conducted a theoretical forecast below for four of the five Epicenter sectors. We chose to exclude Financials since they do not have a typical revenue line (it is ‘net of credit cost’) and therefore comparing EBIT is apples and oranges. Nonetheless, we think it is a credible path for the EBIT of the four sectors included. Source: FSInsight and Bloomberg If Epicenter 2022E EBIT could potentially average about 120% above 2019 levels than shouldn’t the stock prices make a corresponding move? We think so. The operating leverage that stems from such an EBIT margin recovery is quite staggering. We think the Street is dramatically underestimating 2022 revenues for Epicenter names. The consensus estimates see 2022 revenues about 8% above 2019 revenues. However, if we apply the above 14% EBIT model above then EBIT would be about $111 billion by 2022, or roughly 120% above the 2019 levels. This is exactly our point. Epicenter operating leverage is likely to come in far higher than what current consensus estimates are on the Street. We also think there’s potential for topline upside as well. Adding this together, we think investors who think that 2019 highs are some sort of a ceiling for stock prices are completely incorrect. We do not think valuations of Epicenter names are stretched at all based on our work. Source: FSInsight and Bloomberg Institutions have also raised cash levels by almost $130 billion since December 2020 and cash balances have not been higher since June 2020. Despite widely cited BofA surveys pointing out ebullient bullishness, our direct experience with institutional clients has shown a lot of bearishness. Everyone is being kept up at night about something and generally folks are very worried. Tick data shows that stocks have been falling in the final hour which is typically a measure of institutional activity. So, despite the numerous ‘signs’ of an impending top, we continue to follow what the market and the data are saying. A great economic boom is coming.

S&P 500 Ends Week at All Time High, NASDAQ/IWM Strengthen

It was a year ago this week that our Head of Research, Tom Lee, made what is easily one of the best contrarian market calls of the last ten years. In the depths of the pandemic-induced market crisis Tom said that you should buy stocks at the ‘Epicenter’ of the crisis, or those closest to the social and economic consequences of COVID-19. Since the depths of that crisis, the market went up around 75%, led by the Epicenter sectors. In March 2020, even if an investor expected financial markets to survive they bought what was working and what was safe. We’re convinced that what will be known by posterity as ‘The Great Reopening’ has begun. We think in the future to indicate how good an investment is, someone might say something like it’s as much of a no brainer as buying travel & leisure and energy stocks before the GREAT REOPENING. These stocks are not rentals, they are not a trade. A lot of valuation is about survivability and these companies have proven they’re unkillable in the face of the greatest exogenous shock of our lifetimes. Here’s the other thing, real profits today are not discounted. And those profits are coming for the poised, waiting and revamped Epicenter stocks that are under-owned and likely lead indexes higher. They haven’t been sitting around doing nothing while the interruption of demand and revenue occurred; they’ve been waiting for this moment and we think they’re poised to pleasantly surprise us. The shift of focus of the consumer wallet from the digital to the long foregone ‘real-economy’ and social interaction/event driven stocks will likely be rapid, violent and be coming up against streamlined and updated business models. Stocks closed on Friday at an all-time-high of 3,973.54, rising from 3,913.10 last week. A market rally of significant strength and breadth occurred in the last hour of trading. The moves in the Nasdaq and Russel 2000 were particularly notable reversals that made a somewhat sour week end on a sweet note. The market bifurcation continues. Rotation into Cyclical/Value/Epicenter continued this week but Technology also rallied at the end of the week despite the 10 YR settling just north of 1.67%. In the past few weeks, it seemed the FAANG names were having problems around the 1.60% mark. The fact that these areas still finished strong despite the 10YR being at this level is encouraging and supportive of our base case, which remains that we have likely seen the lows for 1H2021. Nonetheless, markets behaved erratically and sloppily around the quadruple witching expiration and there’s probably some rebalancing activity that was also a likely culprit. Still, we see many positive catalysts and signs from the market that we are poised for a significant rally to be led by Epicenter. Indeed, these sectors have led since the depths of the crisis last year, even more so than Tech. While analysts are discussing scenarios around TAM for Growth names and why Zoom will have 18 billion users soon (exaggeration) a beast is rumbling beneath that will make itself known violently to those not paying attention. Fund managers who may be discussing value/cyclical/Epicenter names as dinosaurs may be horrified to realize that they are a lot more Jurassic Park than museum fossil. It can be seen popping up in alternative data here and there. A news story here and a news story there of an old company with a new spin on things, new efficiencies and protocols developed to get through a year without revenue. Some people have gotten wise to what’s going on and to some of the unique opportunities developing. There’s a reason that Barry Diller and IAC with a chest full of cash and the world as their oyster chose to deploy a significant amount of it to invest in MGM, the subject of this week’ Signal From Noise, and help shepherd their nascent and incredibly promising efforts in i-Gaming and online sports betting. The combination of the digital and the powerful brick and mortar business they have is a ‘once-in-a-decade’ opportunity according to Diller in a letter to his shareholders. The stories of the great growth names are legitimate, inspiring and they likely have many great stories ahead of them. Apple’s had amazing earnings, they’re moving toward a more lucrative revenue model and they’re even in talks to make a car. However, we think if you’re looking for alpha in the coming quarters, maybe even the coming years, you should be paying attention to stories that seem a little out of place but are giving a hint of what’s to come, like the domestic auto manufacturers having production interrupted by a shortage of advanced semi-conductors. Consider the stalwart previously boring Energy name that we featured last week Schlumberger, they are opening a carbon negative energy plant with Chevron and Microsoft. The American Petroleum Institute just agreed to a carbon taxing scheme. There is a future nearer than the one projected by the valuations of many of the best performing stocks over the last decade and their lofty multiples. Many of the same technologies and business models that resulted in those high multiples are being adopted by older industries with powerful effects in many cases. Red-headed step-children of a growth-obsessed Wall Street are emerging from a long purgatory-period with once-in-a-generation tail winds on both the top and bottom line! Look, we get it. Nobody Gets Fired For Owning Coke. That used to be a saying on Wall Street. Now, nobody gets fired for owning FAANG. Investors, to us, seem to be eagerly awaiting a return to a status quo that is rapidly eroding despite people’s natural, almost reflexive fear of refulgent, but improbable risks. For example, we’re sure when you heard about the new lockdowns in Europe you got an almost traumatized reaction of it must be happening again. This is natural and understandable of course. It’s easy to flash back to a year ago when everyone was panicking and the many credible sources were wondering out loud whether or not civilization might effectively collapse as we knew it. However, the data says markets will likely go up from here. Europe’s lockdowns are a blunt but effective instrument but more importantly US vaccine penetration is making re-opening a fast-approaching reality that your portfolio should be poised for.

Choppy Week Marked by Rate, Inflation Fears

The S&P 500 closed last Friday at 3,943.23 last Friday and closed slightly down for the day at 3,913.10 this afternoon. The small differential hides a rather eventful week marked by more consternation over inflation expectations and just when exactly ‘lift-off’ will occur in terms of the Federal Funds Rate. Inflation expectations are also rattling markets. However, the Fed held the line and projected continuing dovishness and accommodation. We’ve included the ‘dot plot’ from the Summary of Economic Projections that the Fed releases quarterly. It is anonymous projections of Federal Open Market Committee members on what rates will be in the future. As you can see, four unknown Governors forecasted rate rises in 2022, although we could probably guess who at least some the hawks are we’ll spare you. Source: Federal Reserve Inflation and rates seem to be dominating markets. What a lot of people may forget on market-days like Thursday is that the source of the market turmoil is actually a relatively good problem considering the fact that we are coming out of one of the worst episodes of the modern age. The Fed being too dovish in the face of the best economic projections in decades is a good problem. The steady hand and disciplined messaging of Chairman Jerome Powell’s FOMC is beginning to be doubted by the bond markets partially because of the overwhelmingly positive economic expectations accompanying the ahead-of-schedule progress on vaccinations. The Fed’s zero rate policy will be hard to maintain in the type of unprecedented economic expansion, the skeptics reason. For those wishing to speculate on rates we’ve compiled a little poem below for you. We’d suggest leaving it to Fed members! We’ll tell you once, But not more than twice, Guessing future interest rates is a fool’s game, You have got better odds with dice, Look we know market days like Thursday are tough and sloppy. They produce a full-range of negative emotions; fear, panic, self-doubt and anger are just a few that we can think of. We’ll also let you in on a little secret. We’re feeling those same feelings with you. However, part of what we provide is rigorous analysis anchored in data that gives us clarity from these lesser impulses that distract us from our goal of attaining superior risk adjusted returns. Keeping a cool head grounded in the data during market turmoil is perhaps one of the most priceless lessons we can convey to our subscribers and the institutions we serve. The last thing you want to do when you get these impulses is try to time the market on your own (without the aid of some serious computing power). Let us explain why. How often do we hear about the investment mishaps of the economic minds we have all come to revere and cite? They tend to emphasize their successes, so not very often. The truth is, though, some of the people who shaped our modern understanding of markets only arrived at those conclusions after suffering the fate that is often a prerequisite to success in the world of investing; failure and losing a lot of money. Nobody beats the market all the time. Very few people correctly time when it is going to go down, and even if they are right it can still be hard to make money. John Maynard Keynes and his partner O.T. Falk had divided a fund of theirs to get more specialized in the late 20s. OT Falk’s fund got bearish too early on New York and piled back into American stocks on the eve of the crash against the advice of his astute partner, Keynes, and was wiped out. Keynes’ fund was doing better from his commodity trading. However, as most investors know, if panicked selling is bad enough, all correlations move toward one, and nearly all asset prices go down. He was margin called just like the guy next to him who didn’t have his gift of disciplined reason. Keynes lost 75% of his wealth in 1929 despite having a well-timed Bearish view on US equities. Market timing is tough. Picking a stock is hard too, but not as hard as timing the market especially if you have time to wait for the benefits to accrue. If Keynes had that outcome with a well-timed bearish view on US equities in 1929, how do you think you’ll do? This is why we advocate investing. Let the asset of equities work for you over time. Like we’ll say to the grave, equities have almost always been one of the best places to put your money over time. Definitely better than bonds. Sorry Fixed Income guys, we know it’s tough times for you guys. May the best asset-class win! Our Vice President of Digital Assets, Leeor Shimron has his weekly crypto piece picked up by Coindesk. com so be sure to check it out. Look, guys we know there’s a lot of uncertainty and doubt out there. We are just coming out of a traumatic an overwhelmingly negative global pandemic. However, our analysis of VIX data suggests volatility will be subdued. This means cyclical stocks and we think most of all our ‘Epicenter’ picks should fly quite high based on historical relationships. Remember the data is better to listen to than that little devil on your shoulder telling you to sell.

Dow and S&P Make New Highs, Growth/FAANG Retreat Fri.

The S&P 500 closed last Friday at 3,841.94 and closed at new high of 3,943.23 this afternoon. This is a gain of 2.5% from last Friday, but it’s significantly higher than the bottom experienced in the wake of the mini-tantrum associated with Fed Chairman Powell’s comments last week. Encouragingly, vaccine progress has been increasing and President Biden suggested a return to normalcy by the 4th of July is possible. Re-opening is the word of the day. Epicenter stocks and sectors did more than just hold their battlements in the recent turmoil, they gained. Look, it may sound like touting are own horn which is unbecoming, but we’d like to as humbly as possible point out that our Head of Research Tom Lee once again called a bottom in the height of market-fear within hours. Re-check your email from last Friday and you’ll see that our intraday flashes are pure gold! Oops, that’s pretty passe’, we meant pure Bitcoin, which was north of $57k at close! It seems that prices and markets and data are saying ‘risk-on’ and many investors are nonetheless skeptical and skittish. This is actually a great opportunity and it’s why despite what you may think we are enamored with top-callers and permabears. We love those who doubt cryptocurrency too. Investing ahead of the crowd is how you get returns and if you can spot something that everyone else will think is pretty, but may not yet, then that’s when the great returns some in. In that vein, we think you should start paying more attention to crypto because the rest of Wall Street certainly is starting to. Check what our own Dave Grider’s proprietary valuation indicator implies. Get ahead of them. Bitcoin getting to 100K before the end of 2021 is looking very doable! So, if you’re impressed with Tom Lee’s calls, I can personally tell you that our staff is as well. Voodoo and Santeria might be alleged by some, but we can assure you that it’s analytical discipline, hard work, and also course correcting when we make wrong calls, which we, like everyone else, do make as well. We want you to remember that we’re never predicting the future and never claim to be; we diligently and through multiple lenses look at what the market and relevant data is saying. We try to teach our subscribers to listen as well. One thing that we really take pride in about our research is that it is a lot more than stock lists; we try to impart the framework that guides our analysis and macro price targets. Excitingly, in light of the recent ‘upside breakout’ our base case is now that the S&P 500 will likely rally about 10% in the first half of 2021. My colleague Tom Lee will expand upon this below. Well the ‘rate-mageddon’ or mini-tantrum that occurred last week definitely shook the faith of many investors. In what could have been a significant reignition of those fears, the 10-YR auction on Wednesday was rather met with sufficient demand to appease markets. The market enjoyed an incredible recovery from the lows of last week. Importantly, Technology which comprises so much of the market regained its legs much to the glee of the many fund managers who were sweating bullets over the last few weeks. There appears to be a mismatch in the level of bearishness and pessimism out there and what we see occurring in the healthcare and economic data. We’ll give you a brief summary of the Fed’s Beige Bookin our FedWatch section below. All and all, we think the bearishness is a bit peculiar given the fact that businesses, economists and now national political leadership all appear laser focused on a re-opening that occurs to be beginning in earnest whether people want to believe it or not. Be sure to keep an eye on the newly added point #3 in our daily updates which keep track of re-opening at the state level across the United States. It’s an interesting new perspective to analyze and will likely gain importance in the coming months. A $1.9 trillion stimulus was passed which will result in large amounts of money getting to consumers who need it in relatively short order. Also, a neat little fact is that the Federal Reserve reported the highest recorded reading for US household wealth ever. A not inconsequential source that contributed to that record was the nearly 5 trillion added to consumer balance sheets by equity gains, significantly higher than less than a trillion added by the appreciation of Real Estate assets. So remember, over time Equities have been one of the best possible stores of wealth. There’s a company trading that hasn’t missed a dividend payment since the War of 1812, so stocks can handle all the adversity and turmoil that we as human beings can muster—if you pick the right ones.  We’d also like to point out that some investors do not appear to be hearing us about Energy. Again, we would point to the fact that the more cyclical the stock, given this environment the better. Performance has so far shown this to be the case. As the twitter of a great market mind I spotted once recently said; Epicenter = Good, Energy = Gooder!

Volatility Reigns All Week, But Friday Ends Strong

The S&P 500 was down on the week. It closed at 3,906.71 last Friday and closed at 3,841.94 today. If you’re reading this today and haven’t paid much attention to markets throughout the week those numbers seem like it was a tame week. However, we can officially say that this week was a humdinger. The bond and equity market experienced considerable volatility. The stalwart Growth/FAANG names actually led the downside for a change. My colleague Tom Lee will discuss the significance of this. If you remember, for most of the year when markets have been down the big Growth names that largely act as bond proxies when rates are ultra-low were a safe-haven. You might have missed that this morning’s jobs report was actually a smash outperformance to the upside. In the first Jobs Report of the Biden Administration the economy added an impressive 379,000 jobs in February. This was leaps and bounds more than the 49,000 added last month and more than double than the 175,000 that economists predicted. Does that sound like something the happens right before a market crash? Markets are entering a confusing transitory period where strategies that have worked for a decade or more, in terms of generating alpha, will likely begin to change. The American consumer have significantly more savings than they have had at any point in recent history. They have cabin-fever, they have a strong fundamental desire to reconnect and re-engage with parts of the economy that have been suspended for the last year. One of the confusing things about this period is that the force of the pandemic on markets in the economy was so significant that it broke the normal economic cycle. We’re about to enter the great reset, both in terms of corporate operating leverage for many of our favorite stocks and sectors are set to dramatically outperform as their new lean businesses meet pent-up demand and flush consumers. So, the economic re-opening is happening outside the normal business cycle. The massive cost-reset and re-orientation of businesses to meet pent-up demand mean the Cyclical companies are the new ‘growth stocks.’ While the economy during the pandemic was defined by historical overspending in digital areas and on goods, we see a massive reversal coming where pent-up demand will unleash a torrent of demand that pushes earnings and growth rates higher than the rest of the economy for many neglected and embattled sectors and industries. Similar to the post-war economic recoveries of the nations who had to engage in massive rebuilding in the wake of war, the need to rebuild and reconnect will push consumption to be concentrated in ‘Epicenter.’ This is why we think that the main story, being partially hidden by volatility among Growth/Defensives, is that Cyclical stocks are taking leadership in the market in dramatic fashion. The business cycle is not in its typical sequence. This is evidenced by the fact that Financials and Energy, which typically lead returns at different stages of the business cycle are now leading returns together YTD in 2021. We think that in the coming economic recovery, sectoral leadership will not follow the typical sequence. What does this mean? In summary, we think investors should look at the message from markets, rather than try to force their view on the market. The equity markets are showing a very different leadership in 2021 and we think that this phenomenon will endure. The bottom line is that we are, and think you should, still be buying ‘Epicenter’ stocks. They are about a third of stocks and we think you should be overweight. The amazing thing is that the institutional rush we foresee into the ‘Epicenter sectors has scarcely begun, particularly in the Energy Sector. It is the most popular underweight behind only cash and bonds despite its exceptional performance so far. The rush by institutions chasing returns that we think will occur into this and other ‘Epicenter’ sectors means there is a lot of upside is left. We want our subscribers to keep in mind that a very different frame of mind is ahead of us than that which was behind us. We have posed a few questions to make our point. When theme parks are filled with flush consumers who have cabin fever do you want to buy more Netflix? Probably not. Do you think consumers would rather sit on a Peloton at home or commune in reopening gyms? Everyone is going to be going on vacation and re-acquainting themselves with the experiential economy, thus we’d rather own a cyclical name than Zoom. So, you can see, there will be a shift in the minds and wallets of consumers.

Tech Suffers, Bond Market Highly Volatile, Energy Gains

The S&P 500 was essentially flat on the week. It closed at 3,906.71 last Friday and this afternoon it ended the week at 3,811.15. This decline of about 2.5% was very unevenly distributed though. As my colleague Tom Lee pointed out in his note this morning Epicenter sectors all gained despite the high-flying Growth stocks weighing down the major averages. All eyes were on Washington early in the week as Federal Reserve Chairman Jay Powell made bi-cameral appearances to address monetary policy. As we predicted last week, he stuck to the script, was very dovish and did his best to assuage markets, although they may not have been fully convinced from the looks of it. We’ll give you the scoop below in our Fed Watch note and try to explain to you why Jay Powell can so confidently get up in front of Congress and tell them he’s not afraid of inflation even when debt markets seemed to be doubting him. You see the correlations that previously justified preliminary action to prevent inflation from overheating have long-since broken down. The breakdown of the correlations that long underpinned monetary policy have occurred throughout multiple business cycles, rate environments and political administrations. The return on 30-YR US Treasury Bonds minus inflation has declined over the decades. It averaged 5.9% in the 1980s and fell all the way to 1.6% in the 2010s. Some think the aging of the workforce in developed economies could be the culprit of the declining natural rate of interest. As Baby Boomers increased their savings as they approached retirement their savings rose, which all else being equal will push rates down. Some economists cite inequality, others cite the slowing growth rate of productivity or the internationalization of labor markets. Whatever the culprit, or combination thereof, one thing is clearly the result of this undeniable secular trend is that it has facilitated a very welcome ‘free lunch’ of sorts in terms of borrowing. Since rates have been nearly as low as they can go, and economic growth is expected to pick up substantially, the current levels of debt do not appear unsustainable because they are highly unlikely to crowd out private sector spending as long as the rate of economic growth is high enough. That’s why we can be on the verge of passing a $1.9 Trillion stimulus package and the 10-YR only spikes to 1.6%. You see what we did there? Glass half empty to glass half full. We have a lot to be grateful for. We passed a somber milestone this week; over half a million Americans have now perished because of COVID-19. The only other mass-casualty event in US history that now exceeds the human toll from this monstrous scourge is the American Civil War and it took four painful years to reap such numbers. Compared to that defining event the economic and social interruption has been mild; certainly much more mild than the doomsayers were predicting back in February and March. The reality of our situation is this; we are bruised, we are battered, and we have suffered a global depression that was utterly unimaginable only 12 months ago. Many companies failed and bankruptcies have certainly occurred in large numbers for smaller businesses. However, many publicly traded companies have proved their meddle in a way never seen in the modern age. JP Morgan Economist Bruce Kasman now estimates that the economic recovery in the United States will now likely supersede the one that has recently occurred in China. Imagine that, higher growth rates over here than over there. We’re truly entering a situation that most people alive have never witnessed. We have been advocating Energy as one of our favorite sectors for 2021. So far, our call has been dead-on and we want to show you some of our analysis that supports why we are still likely in early stages of a secular bull market for the Energy sector and a mean-reversion to more a historically appropriate weighting in the S&P 500. As my colleague will discuss below, it seems that institutions are still vastly underweight energy despite its outstanding performance on a weekly and YTD basis. That means there’s all the more alpha for those willing to jump into the ring. Remember, on the institutional side, if you come back to your investors with sub-par returns compared to your competitors, then you very well may not have any investors left soon. So, the pile-up that will occur into energy as the great chase—of returns that is—will likely result in some very significant upside for those who got into the trade early. We released an article on Six Flags, which just reported earnings and seems well-positioned for the re-opening. I, for one, think a lot more people could use some rollercoasters, funnel cake and fun than ever before. Our Lead Digital Asset Strategist, Dave Grider also released a report on IOTA 2.0, an alternative Distributed Ledger Technology platform. Be sure to check both articles out!

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