Financial Research

The Wall Street Debrief

The S&P 500 closed last Friday at 3,768.25 and closed at 3,841.47 this afternoon. The week started out promising enough when Goldman Sachs shattered expectations. Other financial earnings appeared to show that the financial industry, based on the adjustment of its Loan Loss Provision (LLP) sees the worst of the economic downturn behind us. Boy, we sure hope they are correct. In other positive news, the Philadelphia Federal Reserve’s business condition index jumped to 26.5 in January from 9.1 in December. The January reading was expected to be significantly lower. The unexpectedly positive reading marks the highest level since February before the effects of COVID-19 stunned us all. Manufacturing activity being so positive certainly lends credence to the thrust of our three research departments, that 2021 will primarily be a year of robust economic recovery. The ISM factory index also hit 60.7% the highest level since August 2018. Our Head of Research Tom Lee noted that these levels are in fact, ‘boomy.’ That being said, manufacturing was significantly stronger in the Philadelphia region than in New York where activity receded 3.5 this month. My colleague Tom Lee mentioned shortly after the pandemic struck that even if all of the companies that were direct ‘social distancing casualties’ were to permanently shut their doors that it would only account for about 7% of total US GDP. However, as we have continually noted, most of these stocks did not perish and in fact, proved they have survivability far beyond what many investors may have expected. Many of these stocks, which were at the ‘Epicenter’ of the COVID-19 crisis will likely have significantly greater earnings power as they made necessary cuts to stay solvent through periods of significantly depressed demand. A new administration was successfully sworn in on the steps of the United States Capitol that only weeks ago were overrun with rioters. The plan introduced by the Biden administration, certainly on its’ face, seems like it has the potential to assist us in vanquishing the virus earlier than the current course; however, it is far too early to tell. We will be continuing to monitor progress with regards to vaccinations and the progress of the virus in an attempt to keep our investing family a step, or two, ahead of the crowd. We received some questions about the new administration’s attitude about energy and whether it changes our recent bullishness on the sector. Tom Block assures us the political situation in Washington, the number of jobs in the energy sector (as well as which states they are prominent in), and the fact that oil is very much still the necessary oxygen that a heating-up economy will need to consume should be supportive to our existing thesis. Comparisons of Energy as in a position reminiscent of Steel or Coal has some valid analogs but breaks down when you consider the utter centrality of oil to so many industries that have had demand severely depressed as a result of the virus. One thing is sure, the coming economic boom will be run on oil or nothing at all. As inflation expectations and risks continue to edge up, so will the profitability of many firms now trading at or near replacement cost. Our Head of Global Portfolio Strategy, Brian Rauscher, gave his 2021 Outlook webinar this week. Refer below to his note for a link to the replay. He has some exciting new insights for investors derived from his process-oriented research. Brian is known as ‘Rocky’ around the office for his proclivity in stock picking so pay careful attention to his webinar. In a matter of weeks, we will also be launching a new stock list called ‘Brian’s Dunks’ which we are very excited about. Stay posted in your email for updates. Our Senior Crypto Analyst, Dave Grider, also issued a much-talked about price target on one of our favorite ‘Blue-Chip’ cryptocurrencies, Ethereum. He sees upside of over 600% on this dynamic and exciting new asset. Remember folks, as inflation may rear its ugly head significantly for the first time in decades that cryptocurrency has some exciting properties, and an impressive track record, as a hedge against inflation. Also, please don’t forget that we were the first major Wall Street research firm to cover cryptocurrency. We think we made the right call. If you’d like a more equity-centric discussion of inflation risk and how certain industries will be affected, then be sure to examine Tom Lee’s January 20th blast which includes a comprehensive discussion on the macro-economic effects inflation would likely have on different sectors/industries of the wider economy. When inflation risk is being discussed on Tik-Tok, it means it might be time for you to begin thinking about what the issue could mean for your portfolio in the future. We have some great strategies for dealing with this silent killer of returns.

Stocks Down 1.5% on Week; Light at End of Tunnel on Virus

Equity markets struggled this week with the S&P 500 opening at 3,803.14 on Monday morning and closing 3,768.25 on Friday afternoon. The doldrums may partially reflect the fact that Initial Jobless Claims posted their biggest weekly gain since the pandemic hit markets in March. For those of you with short positions, we wouldn’t get too excited. While a healthy pullback and chop are expected by all three of our research departments, we also expect that this will be shallow and short. For long-term investors, the predicted pullback can be a good opportunity to lower your cost basis. Coincidentally, our research team also looked into the performance of the market by day of the week. The general message we found is that it can be a bad idea to over-react to Monday’s market action, which has been anomalously bad as of late. We’ll address the chatter this week that came up about the Fed tightening earlier than expected. Hint, we still don’t think you’ll see a rate rise or the tapering of asset purchases anytime soon. There are signals all over the economy of an impending economic boom the likes of which may not have been seen in the twenty-first century. Semi-conductor producers, which are usually considered an ultra-cyclical indicator, are having trouble keeping up with demand. Our Head of Research, Tom Lee, will also discuss some alternative economic data, amongst other bullish harbingers, that seem to suggest GDP growth is accelerating and not peaking. The newly introduced $1.9 trillion stimulus package should also help with that! It is certainly an interesting time to be alive. We take no pleasure in our prediction of heightened violence in US cities coming to fruition so early in the year. Our thoughts and prayers go out to all those affected and we are of course very much hoping and praying that no further violence occurs. That being said, history would suggest that recent elevation of crime rates is unlikely to be a temporary aberration. Please peruse some of Tom Lee’s blasts from the week to get acquainted with some of the stocks we suspect may benefit from this trend. The Capitol Riot was undoubtedly a tragic and deplorable event. However, subsequent activities of social media giants have become a major story in the wake of some considerable de-platforming activity, including of President Trump. Some in the financial media are wondering whether a chink in the armor of some of the years’ best performing stocks has permanently developed. Certainly, it doesn’t help some of these firms to have detractors on both sides of the aisle on Capitol Hill. Scrutiny over the practices of some of these firms is heightened. Our Vice President of Digital Strategy, Leeor Shimron wrote a piece on how this trend ties directly in with some of the trends occurring in the digital assets and cryptocurrency space. You can find his piece here. Additionally, we released a Signal From Noise on Ford Motor Company. We consider this a flagship Epicenter that will likely benefit from its successful investment in Electric Vehicles, its massive financial services arm and impressive new management. We think this is a good way to get exposure to ascent of Electric Vehicles without valuations that can make even the strong queasy. Hopefully you caught our Head of Technical Analysis, Rob Sluymer’s, webinar this week. If you did not please see the homepage where you can find a replay. We’re also excited about our Head of Global Portfolio Strategy, Brian Rauscher’s presentation on January 20th, be sure to reserve a seat! One thing that we want to urge our subscribers to remember over the coming months is that the stock market is a giant discounting machine. If you own a stock that is worth fifteen times earnings then you own SIXTY quarters of future growth. Since the vaccine progress is now picking up there is less and less chance that the majority of those quarters earnings will be effected at all by COVID-19. So, as we continue through a dark and unsettling winter remember that stocks can go up in the midst of bad news as long as it is better than the original worst-case scenario. Remember, when COVID-19 first roiled markets in March many forecasts predicted millions of US deaths. As awful as this pandemic has been, it does seem that the initial worst-case scenario has been taken off the table. By the way, if you have a chance to get a vaccine please get it!

As Wild Year Ends, We See 15% SPX Gain Yearend 2021, to 4300

As the year turns, many—if not most—of us are saying, “Good riddance to one of the worst years in recent history.” In my 35 years of observing markets, I can say I’ve never seen the like of it. Put the market aside for a moment. Almost 20 million Americans have tested positive for the coronavirus (COVID-19), with over 340,000 dead. Around the world, the numbers are, respectively, 82 million and 1.8 million. Devastating. When is COVID going to release its grip on the world? Good question and look for some guidance below from Tom Lee, our head of research, who’s had an incredibly prescient track record. And if you do look at the stock market, you have to remember the ulcerous stomach tension of March 2020, when the market fell 35% in a matter of days from the February high. America’s vaunted GDP crashed as many states, like New York and California, locked down their economies—more than once to stem the virus—to little avail. Then the US conducted a rancorous presidential election, with citizens much divided over both the response to COVID-19 and the economic way forward. The US is as riven as I have ever seen, and I voted for Gerald Ford way back when. And yet, the stock market roared its way to a resilient and roughly 16% annual gain. The Standard & Poor’s 500 index was around 3738 with a few hours of trading left on Dec. 31, 2020, up from 3231 tsl12 months before. It hit an all-time high of 3756 Tuesday! Notable moments include the addition of Tesla (TSLA) to the SPX, after a huge run, from $84 to $715 per share, something few predicted. The IPO market, after the WeWork IPO disaster in September of 2018, opened up again. Wow. If you are an investor lucky enough not to have contracted COVID then you have to be happy. So now what? Tom Lee, our head of research, has recently published his equity roadmap for 2021. If you are a subscriber you can find the report and webinar replay on the website, but we will summarize below. Remember one thing, Tom nailed it in 2020. Don’t take our word for it. Nearby is a powerful tweet from a subscriber, Zack Guzman. OK what about 2021? Tom Lee sees 2021 as a “Cycle reversion” year, much as 2020 was about “symmetry.” He expects reversions in the VIX, in profit margins, capital spending, and consumer demand, as well as in Value stocks vs. Growth stocks. The latter have outperformed the former for years. Lee expects the new year to be the start of a new economic expansion. Pent-up demand plus massive relief and celebration of an expected pandemic finale could lead to substantially stronger than expected GDP recovery. This is what the resilience of equities in 2020 seems to suggest. As we have been saying, the Epicenter (aka Cyclical) profit margins will likely outperform consensus in 2021-2022 due to massive cost re-engineering this year. Moreover, real interest rates are -6.0% in 2021-2022, the lowest in more than 60 years. This looks like a massive tailwind for asset heavy companies and best time to outperform Growth. “You gotta be cyclical and the profit margins story will quell doubts,” Tom Lee says. Volatility is seen declining in 2021-2023, with VIX sinking below 20, which history shows is a major risk-on signal for Cyclicals (aka Epicenter) with 84% win-ratio. One note of caution is that we expect “a pretty big speed bump” in the 1H21, that the S&P 500 index could stall between Feb.-April and correct ~10% to 3,500 before surging into YE 2021 and our target of 4300. That’s based on a PE of 20.5X-21.0X 2022 EPS of $204-$210. Our top 3 favorite sectors are: Industrials, Consumer Discretionary and Energy. Tom’s long shot sleeper is Energy because of capital scarcity. Restructuring and cost cutting will improve margins, and an expected continuation in the U.S. dollar drop will boost earnings per share. We see $141-$145 SPX EPS in 2020 and $177 in 2021, though that could be conservative. This is a solid backdrop if rates and inflation stay low. The acceleration of growth is due to the anticipated recovery in PMIs both US and globally. As is the case any time with financial markets, plenty can go wrong and here are a few of many that Tom Lee has singled out: COVID-19 could mutate; election turmoil redux; vaccine doesn’t work; USD crashes; interest rates surge; sudden Biden health issues; and an IPO bubble; among others. Bring on 2021!

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