Financial Research

Your Weekly Roadmap

Your Weekly Roadmap

The S&P 500 was essentially flat on the week. It closed at 3934.83 last Friday and this afternoon it ended the week at 3,906.71. There was a lot of attention on Washington this week as the House Financial Services Committee conducted a hearing on the now infamous ‘Reddit Rebellion’ that shook the financial system severely, at least in terms of how capital was positioned. Was I the only one doing double takes trying to figure out whether Vlad Tenev was himself or ‘Roaring Kitty’ and vise versa? The coincidence in haircuts is one of those mysteries we’ll sadly likely never understand. Both probably are sick of hearing from the SEC. Our Washington Policy Expert, Tom Block, will discuss the hearing and its consequences or lack thereof. Hint, when House Financial Services Chairman Maxine Waters says something is ‘not political theater’ it might be best not to take her at face value. The overall drop in markets wasn’t what we anticipated based on last week’s VIX drop but behind the mostly negative market moves this week there was significantly positive developments for the cyclically sensitive ‘Epicenter’ stocks that we have been recommending for coming on a year now. My colleague, Tom Lee, will discuss some of the intricacies of this past weeks market action. The Growth stocks that led during the dog days of the pandemic because of their massive resources and seeming invulnerability to economic devastation that occurred in other sectors of the economy had a pretty lousy week and dragged the indexes down due to their prodigious market caps. We know there’s a lot of reasons to be fearful of the future, however, we must remember that is quite literally always the case. When you try to focus on the data alone there were some real positives this week. Retail numbers came in significantly higher than projected. Financials seem to be giving the ‘all clear’ signal as well. Certainly, one of the things that spooked markets this week was a significant upward move in long-term interest rates. The US 10-YR made a post-pandemic high as did the 30-YR. Some market participants obviously have fears that inflation will get out of control and prompt preliminary corrective action from the Fed. The problem with this thesis is that Jay Powell keeps saying as loudly as he can, and as many places as he can, that the Federal Reserve is specifically aware of this risk and is taking great steps to mitigate it. He stressed over and over again that markets will get ample warning before rising rates are even considered. His messaging has been deliberately consistent and the guy just won’t miss an opportunity to ooze dovishness. If you’re looking for bad news from the Fed anytime soon, we think you’ll be disappointed. Yes, debt levels are historically high compared to GDP but remember that Japan’s Central Bank’s experience proves that the size of the Fed’s balance sheet is manageable, if not ideal. Generally, it looks as the current rate environment makes the risk of the interest service on the Federal debt from crowding out private investment. We should all thank our lucky stars for this. Despite acrimony and division throughout our government and country we’d like to single out the financial authorities for pretty concerted, coordinated and effective action. So, we think news out of Washington will largely be positive over the next week. This paired with the solid earnings and sales performance we’ve been seeing makes us reiterate our call that despite some potential over-extension in some corners of the market, generally the Value/Cyclical names we’ve primarily been recommending have been outperforming on earnings and sales. Check out the sales numbers. Four out of five cyclicals have beaten their consensus sales estimates by an average of 5.4%. Again, one of the key thrusts of our analysis in why you should buy these stocks is that they will be entering what will likely be the most robust economic recovery of our century with the bare-bones operating leverage that was necessarily achieved by surviving the pandemic. With the Fed not turning the music down anytime soon and healthcare data continuing to improve we don’t see a lot getting in the way of markets continuing to move higher. However, we can never predict the future all we can do for our subscribers is take the best information at hand and deduce the most probable outcomes. Despite all the distractions and the litany of reasons you thought markets should go down since the alarming revelation of a global pandemic that would cause unprecedented cessations in economic activity, markets have gone up. That fact, to us, is a more powerful assertion than any one human being can make. While we normally recommend larger stocks, we think we found an exciting small-cap opportunity with an outsized history called Real Networks. You may be familiar with the name if you’ve followed Tech since the 1990s. Their CEO was referred to be Robert H Reid in Architects of the Web as the man who ‘broke the web’s sound barrier’. He’s pivoted his company away from the languishing digital media business toward a very exciting AI application to biometrics. We’re very happy to offer our subscribers coverage of a smaller cap name that isn’t covered extensively elsewhere. Our Vice President of Digital Strategy, Leeor Shimron also wrote a fascinating piece on the first blockchain-enabled diamond commodity. Be sure to check both of these pieces out.

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US Stocks Fall Sharply in Volatile Bear Market Trading

Ursa major, the bear, has arrived, supplanting what had been a furiously fast correction in prior weeks. Indeed, it was a wild, volatile descent, and the fastest in history into a bear market. Just 16 trading sessions, from an all-time high (Feb. 19), was all it took. Having lived through three major bear markets, including a down 23% day in 1987, and a few near bears in between, I thought I had seen everything. Yet I have never seen the kind of selloff, in terms of speed of momentum reversal, even though 2008-2009 was scarier (so far) and 1987 was basically one day. In the case of the latter, the market had been going down already for over two months before dropping precipitously. This grizzly is unexpected and unprecedented. It has been coming only for days. Make no mistake: The bears will tell you it was in the cards, but don’t be fooled. No one but no one absolutely knew the coronavirus would appear, and more so, that the market would take it so badly. Unfortunately, a lot of price damage has been done this week to the U.S. equity market, as well as emotional, economic and technical harm. For more on the latter see Rob Sluymer’s comments on page 9. For the week, the Standard & Poor’s index fell to 2,711, or down about 9% on the week. The SPX entered a bear market Thursday, which was the second worst single market day in history, so at least you can tell your children. I’ve experienced the top two. The MSCI global stock market index had the worst day on record. The Dow is off 22% from its Feb. 12 record, while the S&P 500 and Nasdaq are 20% and 18% from their Feb. 19 peaks, respectively. There have been times when the market has been able to recover (see page 9) but also times when it has not. In the 1987 bear, stocks returned to new highs in 22 months. But I don’t have to tell you what happened in 1929. For the record, on average, a bear market for the DJIA lasts 206 trading days, while the average bear period for the S&P 500 is about 146 days, according to Dow Jones Market Data. Now there are several reasons investors have abandoned stocks, but they are all connected to the spread of the coronavirus, because there is likely to be a global economic slowdown. How deep is hard to tell. Some expect a global recession, some do not. Investors left stocks for bonds because of the travel ban to Europe, announced by President Donald Trump and what’s viewed as his poor response to the virus spread; the precipitous drop in oil prices to around $31 per barrel from $53 in mid-February; and the declaration of a global pandemic by the World Health Organization Wednesday. Whether the latter proves to be the bottom marker if stocks recover remains to be seen, but that’s my bet. What the Federal Reserve will do continues to be a big investor concern. Markets are expecting an outsized response soon from the Fed. For more on this see page 6. The president has called for the FOMC to drop the Fed funds rate to zero. What gives me some pause for the near term is that the market tried to mount rallies more than once last week, and that of Friday’s in particular basically fizzled. I have to admit it’s not very encouraging. As my colleague Tom Lee says in his report below, investors are looking for signs on the trajectory of this pathogen. Will it fade fairly quickly with few fatalities and minor economic disruption or not? The market typically makes knee-jerk emotional reactions, shooting first and asking questions later. Our shop believes the outbreak will be in months not quarters. Once the peak has been reached, the market can make a better assessment of the economic damage. It’s a given that the first and second quarters will be hurt. According to The Wall Street Journal, economists sharply cut forecasts for the U.S. economy this year, predicting it will contract in the second quarter and raising expectations for a recession as the coronavirus spread around the world. For more on this see page 6. Perhaps investors will give corporates a pass in 2Q EPS when all the CEOs likely line up to say how bad coronavirus was on profits. Seems discounted already. Lawmakers and the Trump administration are nearing an agreement on legislation aimed at aiding Americans affected by the COVID-19 spread. For more on this see page 11. As of Friday, according to the John Hopkins Center for Systems and Science Engineering, compared to one week ago there were about 137,500 confirmed cases of COVID-19 vs. 101,000 last week and 84000 the week before; deaths are 5,100 vs 3,460 and 3,000, respectively, with the overwhelming majority of both in China. Questions? Contact Vito J. Racanelli at vito. racanelli@fsinsight. com or 212 293 7137. Or go to

Markets Take Jagged Path Over Week To New Highs

The S&P 500 closed last Friday at 3,886.83 and rose to close at 3,934.83 this afternoon; a weekly gain of exactly 48 points. That’s about a 1.2% gain but it was a somewhat arduous path to get there. Markets were largely sideways, or down for much of the week. Despite this, my colleague Tom Lee discusses why there is more than meets the eye to the tumultuous market action. There was definitely some attention distracted from the Street as the second impeachment trial of Donald Trump began. While this was stealing the show in terms of publicity, positive developments in a massive fiscal package that Democrats appear poised to unilaterally pass were occurring behind the scenes. It now seems virtually assured, as my colleague Tom Block will discuss, that Biden’s $1.9 tn Covid-19 relief package will pass in some form by March 14th. This is in addition to the continued aggressive monetary posture of the US Federal Reserve, which should support the move higher we expect markets to take. If you noticed your semi-names pop it’s because President Biden issued an executive order aimed at identifying and fixing choke-points in the manufacture of semi-conductors. Shortages are causing manufacturing delays in everything from cars to cell-phones. One thing you usually don’t hear about before a market-crash is burgeoning semi-conductor demand causing a shortage. Still, the bears will always have a reason to refute what the data says. We often see bearish theses long on emotion and short on fact. Bubbles here, bubbles there, bubble everywhere. There’s a lot of talk going around about the ‘Reddit Rebellion’ episode signaling a market top. Surely, the unadulterated ebullience that characterized the reality defying rise in the market caps of certain names signals a top; like when the famous shoe-shine boy was giving stock tips. Maybe, you can derive some fleeting insights from some of the old adages you constantly are hearing that shows ‘the crash’ that so many perma-bears predict is just around the corner. We like to think of ourselves in the business of betting on human ingenuity, not against it. That is why we prefer to pay attention to what the market is telling us. We have forever sworn off trying to tell the market what to do. Once you make the same oath, we assure you you’ll get better returns. How do we see what the market is telling us? We look at data. We do not pay attention to supposed ‘signs’ that a market is at its top unless it’s an excessive and irresponsible accumulation of leverage by investors, or some kind of severe exogenous risk, or another firm and demonstrable reason. In other words, we try as much as possible to let the data do the talking. So, when you hear that ebullient millennials surely must be the ‘greatest fool’ and there’s no one else to buy because everyone is so bullish, maybe check out some of the data to see if it jives with what you’re hearing. So, we are very big on covering the generational factors the affect markets. We are big believers that millennials will define and change the markets of tomorrow. However, for the time being, Baby Boomers still reign supreme in terms of their portion of total retail capital. So, when everyone says how blindly bullish everyone is, remember this important investor survey that we like to use as a great indicator of how retail investors that actually control a lot of capital feel about markets. The answer is, they turned significantly more bearish in recent weeks in the wake of the ‘bloodbath’ that occurred for long/short hedge funds in single-stock shorts. This week we highlighted and an ETF we use as a proxy for many ‘Epicenter’ stocks called the S&P 500 High Beta fund called SPHB: Getting to Alpha By Way of Beta. Be sure to check it out. In other big news, Tesla and America’s oldest bank, BNY Mellon announced that they will be buying Bitcoin in a big way. The growing acceptance of cryptocurrency among issues is in very early innings and will likely have incredibly positive effects on the price in the future. If you’ve been interested in cryptocurrency but have been waiting for something; we’d tell you there’s not much more to wait for. It looks now definitively like cryptocurrency is here to stay. Be sure to check our Lead Digital Assets Strategist Dave Grider’s note this week entitled Tesla Bitcoin Buy Only The Beginning of Corporate Crypto Demand. If you are lost on how to value to Bitcoin be sure to also check out our industry-leading crypto valuation tools as well as Tom Lee’s 10 Rules of Investing in Bitcoin. We’d like to point out that Dave’s proprietary Grider Ratio is particularly effective for helping those with an equity background understand how to find good entry and exit points into this undeniable source of alpha. As my colleague Tom Lee pointed out, it is probably just as likely that recent retail participation represents increasing interest in stocks. After all, as we have said, US households are synthetically short stocks and have piled into bonds. We think that trend will change and stocks will have serious inflows that make past years look very light. Equity as an asset class has a lot of things going on right now.

S&P Closes Week at All-Time High, Correction Now Unlikely

The S&P 500 closed last Friday at 3,714.24 and closed at 3,886.83 this afternoon. That’s a 4.6% gain. Wow, what a difference a week and the biggest institutional de-leveraging event since March 2020 can make. The S&P 500 put/call ratio got to its highest point since the panicked selling early in the pandemic; it was only about 5% below this one year high, but then it subsequently collapsed quickly. The current level of nearly 30% off the highs does not support the conclusion that markets are overstretched either, rather it suggests indexes are poised to move higher. When investors are anticipating a crash one is much less likely to happen. There is a lot of downside protection which means when there are downside moves the profits from those moves to those holding protection are swift and often re-invested long. This softens moves downward and helps the market hold key levels. As my colleague Tom Lee will discuss below, the extraordinary events of last week have resulted in a significant change to our base case and we are calling off the mid-bull market correction we predicted between February and April. We are relieved that the distractions of the last few weeks have subsided, and that volatility has returned to more normal levels. Aside from sensational and very ‘clickable’ headlines, there are some undeniably positive fundamentals developing on the healthcare and economic front. My colleague Tom Block will discuss the rosy prospects for the passage of $1.9 T in new stimulus. That will provide extra fuel to consumers, who already are saving for economic normalization, to unleash a torrent of pent-up demand. While there is happy news on the equities front, we do have some sad news to report. Our Head of Technical Analysis Strategy, Rob Sluymer, will be departing our firm. Rob has been an integral part of our team, has provided timely and industry-leading analysis regularly to our institutional clients and retail subscribers and is a true gentleman of the highest character. Please join our team in thanking him for his tireless work on your behalf and wishing him well in his future endeavors. We have been recommending Energy as one of our top three sectors for 2021. It went up quickly this week as volatility collapsed. In that vein be sure to check our Signal From Noise this week. We highlighted a single-stock name this week from the sector we highlighted last week. The stock we highlighted is also one of the newest additions to our ‘Granny Shots’ list, Exxon Mobil (XOM). Our Vice President of Digital Strategy, Leeor Shimron, also did a fascinating interview with the mayor of Miami, Florida. These last couple weeks have been a wild ride. There are also a lot of new investors in the market and we noticed misinformation on markets seems to be plentiful. As professional equity analysts, we could not help but notice some of the more ridiculous and sensational commentary we heard going around recently. One item we wanted to directly refute was that P/E ratios were made up by Wall Street to sell stocks. Valuation doesn’t matter we heard over and over again in the mass media. However, we do understand that investors can sometimes get overly reliant on fundamentals alone. They are only one piece of the valuation puzzle. We wanted to explain briefly, with the help of John Maynard Keynes why it is so hard to value equities, and why diligent research can result in overperformance. A lot of people get tripped up on valuation because they examine 10-Ks or fundamentals and decide what a stock is worth it or isn’t. They then buy or sell. We say this is only one piece of the puzzle because the other piece is how many people will be willing to buy what you’ve purchased at what price in the future? That’s a mouthful. It can also get complex pretty quickly. John Maynard Keynes devised his famous Keynesian Beauty Contest. A behavioral economist named Richard Thaler ran a test in the Financial Times to illustrate the concept Keynes was referring to. Readers pick a number between zero and one hundred. The winner is the contestant with the number closest to 2/3 the average of all numbers entered in the contest. Since the number has to be 2/3 of the number selected, we can deduce that it is lower than 67 since if everyone picked 100, unlikely as it may be, any number above 67 doesn’t meet the criteria of a winner. Since you know the participants are rational and have same info as you could assume they will likely not pick 67 since it’s the highest permissible number. So maybe 2/3 67 which is 45 then? But wait how smart are the other contestants? That might be too high, maybe you should do 30 which is 2/3 of that. But how are you supposed to know what the other will guess? The average of the numbers received in the 1997 Financial Times exercise was 19. The winning number, which is 2/3 of that number was 13. You see, this is what we are trying to do at FSInsight. We are trying to help you get to thirteen. Our knowledge of institutional investors gives us an edge in knowing what other market players will ‘guess.’ We know the market participants and have the analytical firepower to give you an edge in this process. It’s not a case of choosing those which, to the best one’s judgement, are really the prettiest, nor even those which average opinion genuinely thinks the prettiest… We devote our intelligences to anticipating what average opinion expects average opinion to be. -John M. Keynes

S&P Loses 2% On Week But Data and Earnings Largely Positive

The S&P 500 closed last Friday at 3,841.47 and closed at 3,714.24 this afternoon. This was the worst weekly performance since October’s pre-election jitters. It was certainly a wild week on the street. All and all though, when we look at the data and earnings, we are still convinced of our base case; stocks will consolidate in a mid-bull market correction down to around the 3,500 level for the S&P before resuming their upward trend and finishing the year significantly higher than current levels. Of the 154 companies that have reported so far 82% are beating earnings estimates by a median of 13%. On the top line, 78% are beating by an average of 9%. We’re going into the new year with a fresh rise in household income and savings. Do we think anything that happened this week suggests a watershed moment marking the beginning of a bear-market? Certainly not. We find elevated retail participation to be generally a good thing. More buyers and sellers ultimately should mean better markets. One thing that we think is incredibly important is to listen to markets and the very definitive language they speak in: price. Shouting at the market can end up being a rather expensive habit; best to stick to slogging it out on the links. We want you to remember something very crucial; the moment you think you have markets nailed is probably when you’re about to lose money. Mr. Market is fickle, he always has been and likely always will be. Markets are messy and they can provoke rage, joy and nearly everything in between. Despite all our collective team has experienced over the years, from crises and bull markets to new regulatory frameworks and founding new companies, we find the most important guiding principle is consistent analytical discipline. Check out a quote from the first title ever written about stock markets. It is aptly called The Confusion of Confusions and was published in 1688. The setup is a philosopher asks the shareholder to explain to him this new trend he has heard of; stocks. This is how the shareholder responds in a way that’s simultaneously meant to be funny while also accurately describing the, at the time, new innovation of markets to a layman. This is how De La Vega’s shareholder responds: I really must say that you are an ignorant person, friend Greybeard, if you know nothing of this enigmatic business [stocks] which is at once the fairest and most deceitful in Europe, the noblest and most infamous in the world, the finest and the most vulgar on earth. It is the quintessence of academic learning and a paragon of fraudulence; it is a touchstone for the intelligent and a tombstone for the audacious, a treasury of usefulness and a source of disaster, and finally a counterpart of Sisyphus who never rests as also of Ixion who is chained to a wheel that turns perpetually. Confusion of Confusions, Joseph de le Vega, 1688 We also want you to remember that when you feel like you have a monopoly on being confused about stocks, that people have been confounded by markets since their inception. Joking aside, there is a perennial element of truth in this quote. If stocks are making you feel confused this week, or any week for that matter just know that you are not alone. We think an anchored analytical approach grounded in the data is a better and more consistent way of getting returns than any other. Markets are always evolving. In the 1970s, there was a shortened trading week due to a ‘Paper Crunch’, meaning there was literally too big of a backlog of paper orders. Back then, people speculated whether Wall Street would be able to continue growing. One of our major strategic themes in our ‘Granny Shots’ portfolio, which was rebalanced this week, is the rise of the Millennial generation to their economic peak. This process has clearly begun, but it is also only in its early stages. Will there be some bumps along the road, inefficiencies, and mistakes at the hands of novice investors? Sure, there will be, but the shift of markets being comprised of a new generation inevitably happens with time and there are some compelling reasons to think that the economic ascent of the most educated, and now largest generation on Earth will be majorly positive for the equity asset class as a whole and the valuation of major indexes. We are big fans of the stock market. We are also big fans of retail investors which is exactly why we started FSInsight. We have a unique product-structure and groups of stock lists that are produced for self-directed investors. We like to focus on explaining why stocks will be beneficiaries of major economic forces and educating our readers to think about markets like those who study them for a living do. We also think that there are more reasons to be excited and optimistic about the future of stocks than there has been in a long-time. My colleague will discuss why he thinks the decade-long trend of capital favoring bonds over equities could be coming to an end.

Stocks Gain Nearly 2% As Virus Continues Receding

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.

Epicenter Off to Strong Start; Signs of Economic Recovery

Markets wrapped up their first full week of 2021 and after a sloppy stumble on Monday, the S&P 500 managed to recover and close up 1.2% for the week. There has already been a substantial bifurcation of sector performance. Energy is up 9.3% YTD. And of the Epicenter sectors, five out of five are up on a YTD basis. Equities seem to be telling us to expect a pretty vigorous economic recovery in coming months. And we can see this possibility, given the continued ramp in vaccinations and along with better seasonal weather (starting March), COVID-19 cases could turn down sharply. Nevertheless, COVID-19 is unpredictable and the renewed post-holiday surge in cases reminds us that the virus remains prevalent. Daily cases came in at 261,571 on Thursday, a new all-time high and up +41,113 vs one week ago. Keep in mind that the holiday effect is going to cause distortions for several weeks. Over Thanksgiving, it was not until a full two weeks later that underlying trends were visible. This will be the case with current data, meaning mid-Jan is when we can start to get a better handle on trends. On the vaccine front, the developments this week were clear: vaccinations are ramping up. Yesterday about 580,000 doses were administered in the US. This is an impressive daily rise of 31% and inches the US closer to achieving one million per day, at which point about 30% of citizens would be vaccinated by early April. The vaccines have proven effective in trials, but the real world test is whether infections slow after a region has vaccinated >30% or more of its residents.  The nation to watch is Israel.  As data below nearby shows, the % of citizens vaccinated is 17% (up from 6% a week ago) and is on course to hit 30% within 2 weeks. So, this is the real test. Cases in Israel should begin to slow dramatically in coming weeks. And if they do, we see a roadmap for the end of the pandemic. If cases do not slow, this is worrisome and could be an indication that the vaccine does not work. STRATEGY: Epicenter off to strong start to kick off the year There have been some gains posted by Energy stocks YTD, and the sector is the best performing so far, up ~9.3% YTD (short year so far). But take a look at the 10-year price history of Energy vs S&P 500 nearby. The surge in Energy stocks YTD is a mere blip. Even getting to parity with the start of 2020 levels means a +70% more in Energy stocks. And look at the decline over the past decade. Needless to say, if Energy proves to be a leader in 2021, this is just the beginning. Here are the nine stocks that we consider the Energy trifecta that are rated Overweight by each of the three macro teams: HP, NOV, SLB, EOG, PXD, HFC, MPC, PSX, XEC. But the story does not end at Energy. Five out of five Epicenter stock sectors are in the green on a YTD basis and I continue to view this as a favorable place to deploy capital. That is not to mention that the current economic data has been robust and supportive of the rally in epicenter stocks. Both December ISMs (manufacturing and services) posted very solid beats for the month and are up versus November. In fact, I’d consider these levels to be arguably boomy. Source: FSInsight, Bloomberg Furthermore, investor sentiment remains cautious. The latest AAII Bulls less Bears survey, which is a reliable way to measure retail investor sentiment for older Americans, came in at 12.5 which is a middle of the road reading, and not really indicative of ebullience. And more importantly, expectations for future volatility, as measured by the VIX futures market remain stubbornly high over the next 9 months. As we wrote in our 2021 outlook, periods of high volatility tend to be followed by a collapse in volatility which is supportive for equity markets and suggests a rise in institutional investment. Bottom Line: Investors are not as bullish you may think. Equities seem to be telling us to expect a pretty vigorous economic recovery in coming months and I continue to favor Epicenter stocks. Figure: Way forward ➜ What changes after COVID-19Per FSInsight Figure: FSInsight Portfolio Strategy Summary - Relative to S&P 500** Performance is calculated since strategy introduction, 1/10/2019

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!

Stocks up 1.3% on Week; Seasonal Surge Underway

The positive seasonal trends for December are underway. Despite a shaky start to the week on Monday with the market opening higher and finishing lower, the S&P 500 rallied hard on Tuesday (12/15) right in typical seasonal fashion and posted a strong close on Friday - finishing up 1.3%. on the week. And given headlines from Washington around the fiscal relief package and government shut down, I’d consider this a win. On the COVID-19 front, the virus is retreating in (in large numbers) everywhere except the United States. And when the US finally reaches its apex on Wave 3, we should see COVID-19 globally rolling over. Looking at daily cases per 1mm residents, the US ranks #9 in the World. But it is the highest of major nations. For context, Lithuania and Croatia are top of the list with 1,129 and 966 cases per 1mm which is roughly in line with the massive spread we saw in North Dakota and South Dakota. And if there is one State holding the US back from rolling over it is California. The Golden State reported upwards of 50,000 cases in a single day this week. At current levels, this accounts for about 25% of all daily cases in the US. California only represents about 12% of the population. And looking at daily cases per one million, California’s are approaching 1,000 which is nearly double what New York State saw at its peak. Wow. So, clearly something is going very bad there. Cases are rising in the face of very strict lockdowns. Excluding California, COVID-19 is rolling over in the other 49 states.  Well to be more precise, it is also rising in some other states, but none are seeing an outbreak of this size and scale. And as we are still in the holiday season, the threat of a renewed spread remains high. Strategy: 2021 Year Ahead --> Pause that refreshes leads to ~25% rally It is natural instinct to think a 'boom' in 2021 is too optimistic. One can point to healthy levels of spending already. Or one can cite the destruction of the US economy. But overall, I think there are several reasons that 2021 should resemble the performance we have seen in the second half of 2020. But I don’t think it will be a straight ride up. History says stocks are likely to correct in February -April 2021 with a 10% dip to 3,500. The 1982 and 2009 bull markets provide useful context. Both saw prodigious stock gains in the first 12 months. And then a deep pullback. If we mirror the 1982 analog, the correction starts in February 2021. If we mirror the 2009 analog, the correction starts in February 2021. In other words, there is going to be a period of major market turmoil. Be ready for this. And using our analogs, history says stocks are likely to correct in February – April 2021 with a 10% dip to S&P 500 3,500. So, I’d recommend accumulating some dry powder in January 2021 to capitalize on that sell-off and allocating to 'epicenter' stocks. But overall, I expect 2021 should be more of the same as 2H2020 and see a strong stock market, the economy surging, an easy Fed, and cash coming off sidelines. That is not to mention: (i) COVID-19 is waning and there have been positive developments on the vaccine front, (ii) there will be a massive unleashing of pent-up demand (consumer + capex), and (iii) a falling VIX that is likely to average below 20 through 2021 and 2023. Once through this period of market turmoil, I see the combination of these factors pushing the market up 25% in the second half of the year to S&P 500 4,300. So, where to put that dry powder to work in January? I like Consumer Discretionary, Energy, and Industrials. And yes, you heard that correctly, Energy. And no, I am not saying that I think oil is going to become more and more popular. But I do see strong demand recovery on the horizon, and context is important. Valuations are far from being stretched: Compared to the other GICS 1 sectors, Energy is at the bottom from a 2021E Price to Book (P/B) perspective and at rock bottom Price to Sales Ratio (P/S). And oh yeah, the price charts from the Energy sector have not been this bad since roughly the Moby Dick era so it certainly a non-consensus strategy. Bottom Line: The December seasonal surge is underway. Looking forward to 2021, history says stocks are likely to correct in February -April. Overall, I expect 2021 should be similar to 2H2020 and see the most opportunity within Consumer Discretionary, Energy and Industrials. Figure Comparative matrix of risk/reward drivers in 2020Per FSInsight Figure: FSInsight Portfolio Strategy Summary - Relative to S&P 500** Performance is calculated since strategy introduction, 1/10/2019

COVID-19 Case Rollover Tentative; Next Week’s Data = Critical

Equities faced some new headwinds this week. (i) Vaccine supply in the US is being questioned, as the White House passed on buying more Pfizer doses (but US has ordered 700 million doses), (ii) the stimulus relief package seems stuck in the Washington quagmire (iii) The Federal trade commission and multiple state attorney generals brought anti-trust charges to Facebook and (iv) there is a natural questions of whether the AirBnB and Doordash IPOs created a lot of new supply. And if these were not enough, COVID-19 cases are surging widely in the US, hospitalizations are at record levels and deaths are elevated. Nevertheless, I think there are still several reasons that stocks and epicenter stocks in particular have solid runway through year end and into next year. More on this below. The absolute number of COVID-19 cases continues to set new records. Thursday daily cases were 213,446, but the 7D delta (leading indicator) is slowing and excluding California (which has ~30,000 per day), this 7D delta is now negative. Hence, I see this as a tentative rollover, as post-Thanksgiving cases can again surge. Next week we will be clear of those post-holiday distortions so if the 7D delta remains negative, the rollover is confirmed. One of the key questions we all want to know is when will COVID-19 have diminished enough to be out of our lives. This week, we highlighted research from one fairly credible researcher, Youyang Gu. He has created a new model to look at herd immunity. We have referred to his work in the past, because he had built some big-data models that really well explained COVID-19 forecasted deaths -- in fact, more accurately than the IHME. And in summary he estimates a “return to normal” by June/July 2021. His rationale is straight forward. There are basically three moving parts to his model: (i) Herd immunity threshold exceeding 60% of US population, (ii) Population already infected (ergo, immune) exceeding 30% by June 2021, and (iii) required vaccinated population exceeding 30% by June 2021. Stay tuned for more on this. We are going to try to arrange a call with him for you in the coming weeks. Strategy: Is a recovery in 2021 Epicenter stock earnings too optimistic? Over the past few weeks, a number of our clients have wondered whether a 2021 recovery in Epicenter stock earnings is too optimistic.  Mostly, many think revenues levels will not recover to pre-COVID-19 levels in 2021, thus, for earnings to rebound, this requires a major margin recovery.  There are two reasons we think margins will recover quickly: First, in 2020, these companies massively cut costs and restructured operations, at a scale they never had to in history. The sheer collapse of the economy warranted this action. Second, in past expansion, Cyclicals, aka, Epicenter, saw pre-recession margin recovery within 12 months- hence, in 2021, we should see EBIT margins at or above pre-2019 level Take a look at the chart above.  As you can see, the baseline is that EBIT margins for epicenter stocks are at the troughs seen in 2009 during the Great Financial Crisis (GFC).  So, we have seen a complete 12-year round-trip on profit margins.  This is due to a sales collapse. And importantly, look at the massive rise in EBIT margins per the chart above in the 2002 and 2009 recoveries. This is during a time when I do not think companies were nearly as desperate.  In 2020, with a pandemic and global shutdown, these companies would have been forced to cut and rationalize expenses at a far greater rate. And if this is indeed the case, we should see an even sharper rebound in margins. Demand recovery could be fierce in 2021 and plus, post-GFC, margins recovered within 4 quarters. So, my guess is this rebound will surpass GFC -- I think that is reasonable. And to capitalize on this rebound, we have updated our Trifecta Epicenter stock list this week. These stocks were hit the hardest by the pandemic and have the greatest operating leverage to a re-opening. I encourage you to our Friday note for the full updated list. Bottom Line: I do not think that a recovery in epicenter stock earnings in 1021 is too optimistic. Companies have undertaken major cost cutting overhauls, and based on prior cycles, improving EBIT margins should be strongly supportive. Figure Comparative matrix of risk/reward drivers in 2020Per FSInsight Figure: FSInsight Portfolio Strategy Summary - Relative to S&P 500** Performance is calculated since strategy introduction, 1/10/2019

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