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Click here to access the FSInsight COVID-19 Daily Chartbook. We are shifting to a 4-day a week publication schedule: MondayTuesdayWednesdaySKIP THURSDAYFriday STRATEGY: S&P 500 internals getting stronger --> tracking new highs before month end, led by Energy + EpicenterIt is increasingly obvious that going forward, the relative freedom of a nation's economy will follow the...

S&P 500 internals getting stronger --> tracking new highs before month end, led by Energy + Epicenter

Energy Had “Face-Ripping” Week, S&P Closes Just Under ATH

The S&P 500 closed at 4,229.89, which is just shy of the 52-week high of 4,238.04 and is about 25 points higher than the 4,204 level that we closed at last Friday before the three-day weekend. It was its best day since May 24th. What a three-day weekend it was. There is less and less maneuvering room for those who would make you think we’re stuck in a pandemic-oriented, stay-at-home reality. The beaches were full from sea to shining to sea and across the territories. Pent-up demand that has long been suppressed by a reality dominated by COVID-19 is starting to meet goods and services long foregone. Summer has begun in more ways than one. We’re all familiar with the ways downside moves and panics can exasperate and sharpen downside moves. At FSInsight, we suspect we’re about to get acquainted with the other side of that coin on the upside as this unique moment in history converges with an extraordinarily strong, and increasingly creditworthy, US consumer. Remember folks, 70% of the powerhouse US economy is dependent on the strength and financial health of the US consumer. This bodes well for the coming quarters. Our Head of Washington Policy Strategy, Tom Block, also pointed out on our research call this morning, having been a party to many C-suite discussions on earnings releases, that there are many companies who probably chose to take a hit this quarter for a number of reasons. That makes a great earnings season seem even better. We know it was a hard week in the market for many folks. We’re not seeing a lot of our institutional clients believe in the Energy trade. We’re having people say it’s dumb money and they are just waiting for Technology’s Great Return. Well, you might be alright on longer time horizons. However, if you’re thinking that will happen now or in the next six to twelve months, we think you’ll be waiting in vain. We’re seeing strong indicators across the board that the upside and capacity for surprise is in Energy, Materials and Financials! Millennials are often talking about being in the here and now. Ok, so buy companies like EOG Resources, the subject of the week’s Signal From Noise which is called EOG: The Death of a Shalesman. These guys are paying forward their gains today directly to you. You’re benefitting from what’s going on today, not valuations that are so high they are almost inherently speculative about what will happen in a decade or more. The Nasdaq is coming back and enjoyed a three-week winning streak. Beware of the slope of hope though friends. On a gut level, and for reasons we’ve elaborated on in previous notes we think you should be wary of Tech. While recent strength is good news for the averages, relatively we still see the better risk-adjusted return in Epicenter and cyclical names. However, the tide that is coming could very well lift all boats, and it is not as if describing any of the major FAANG’s as weak would be accurate. Indeed they appear to be tripping over their own strength and have earned the ire of both sides of the aisle among their other list of potential short-term headaches. Those who thought the numbers were coming in hot and the Fed would soon have an egg on its face were disappointed by this morning’s goldilocks job number, as many are calling it. The reason this is being called ‘goldilocks’ is because the number is high enough to indicate economic strength, but low enough not to undermine the narrative that is behind the Fed’s ultra-accommodative monetary posture. Jay Powell got off easy this week, but he will have plenty of time to continue earning his already considerable meddle on uncertain and winding road of fortune that is seeming more and more littered with risks hazardous to his legacy as a shepherd of Economic stability. The meme-stock returned with the same fervor of late-January, but this time concentrated in AMC. Coincidentally, this name was recently added to our Obliterated Epicenter stock list despite the obvious detachment from fundamentals. A famous old saying goes the market can stay irrational longer than you can stay solvent. This is why we like to listen to the signals we get from the market and not lecture others, and most certainly not Dr. Market (as we call him out of extra reverence). This is why we’ve stuck with Energy and we are called silly. It has been leading all year and we’re nearly halfway through. You heard it here first. If you’re an institution who has no Energy, you’re going to have a very hard time not looking bad. This trend is not ending in Energy, the outperformance is just beginning in our estimation. As you can see, one our favorite ways to get exposure to Energy has been through OIH which, based on historic correlation to the price of oil, has a much higher implied price than the current one. We think there is plenty of upside for everyone left in this name. We focused its primary component SLB in a column some months ago as well. Be sure to check out my colleague Tom Lee’s note from June 2nd where he elaborates on an important insight for anyone investing in Energy and that those on our crypto side will already be familiar with. Do not miss out on gains – HODL!

Energy Had “Face-Ripping” Week, S&P Closes Just Under ATH

The S&P 500 closed at 4,229.89, which is just shy of the 52-week high of 4,238.04 and is about 25 points higher than the 4,204 level that we closed at last Friday before the three-day weekend. It was its best day since May 24th. What a three-day weekend it was. There is less and less maneuvering room for those who would make you think we’re stuck in a pandemic-oriented, stay-at-home reality. The beaches were full from sea to shining to sea and across the territories. Pent-up demand that has long been suppressed by a reality dominated by COVID-19 is starting to meet goods and services long foregone. Summer has begun in more ways than one. We’re all familiar with the ways downside moves and panics can exasperate and sharpen downside moves. At FSInsight, we suspect we’re about to get acquainted with the other side of that coin on the upside as this unique moment in history converges with an extraordinarily strong, and increasingly creditworthy, US consumer. Remember folks, 70% of the powerhouse US economy is dependent on the strength and financial health of the US consumer. This bodes well for the coming quarters. Our Head of Washington Policy Strategy, Tom Block, also pointed out on our research call this morning, having been a party to many C-suite discussions on earnings releases, that there are many companies who probably chose to take a hit this quarter for a number of reasons. That makes a great earnings season seem even better. We know it was a hard week in the market for many folks. We’re not seeing a lot of our institutional clients believe in the Energy trade. We’re having people say it’s dumb money and they are just waiting for Technology’s Great Return. Well, you might be alright on longer time horizons. However, if you’re thinking that will happen now or in the next six to twelve months, we think you’ll be waiting in vain. We’re seeing strong indicators across the board that the upside and capacity for surprise is in Energy, Materials and Financials! Millennials are often talking about being in the here and now. Ok, so buy companies like EOG Resources, the subject of the week’s Signal From Noise which is called EOG: The Death of a Shalesman. These guys are paying forward their gains today directly to you. You’re benefitting from what’s going on today, not valuations that are so high they are almost inherently speculative about what will happen in a decade or more. The Nasdaq is coming back and enjoyed a three-week winning streak. Beware of the slope of hope though friends. On a gut level, and for reasons we’ve elaborated on in previous notes we think you should be wary of Tech. While recent strength is good news for the averages, relatively we still see the better risk-adjusted return in Epicenter and cyclical names. However, the tide that is coming could very well lift all boats, and it is not as if describing any of the major FAANG’s as weak would be accurate. Indeed they appear to be tripping over their own strength and have earned the ire of both sides of the aisle among their other list of potential short-term headaches. Those who thought the numbers were coming in hot and the Fed would soon have an egg on its face were disappointed by this morning’s goldilocks job number, as many are calling it. The reason this is being called ‘goldilocks’ is because the number is high enough to indicate economic strength, but low enough not to undermine the narrative that is behind the Fed’s ultra-accommodative monetary posture. Jay Powell got off easy this week, but he will have plenty of time to continue earning his already considerable meddle on uncertain and winding road of fortune that is seeming more and more littered with risks hazardous to his legacy as a shepherd of Economic stability. The meme-stock returned with the same fervor of late-January, but this time concentrated in AMC. Coincidentally, this name was recently added to our Obliterated Epicenter stock list despite the obvious detachment from fundamentals. A famous old saying goes the market can stay irrational longer than you can stay solvent. This is why we like to listen to the signals we get from the market and not lecture others, and most certainly not Dr. Market (as we call him out of extra reverence). This is why we’ve stuck with Energy and we are called silly. It has been leading all year and we’re nearly halfway through. You heard it here first. If you’re an institution who has no Energy, you’re going to have a very hard time not looking bad. This trend is not ending in Energy, the outperformance is just beginning in our estimation. As you can see, one our favorite ways to get exposure to Energy has been through OIH which, based on historic correlation to the price of oil, has a much higher implied price than the current one. We think there is plenty of upside for everyone left in this name. We focused its primary component SLB in a column some months ago as well. Be sure to check out my colleague Tom Lee’s note from June 2nd where he elaborates on an important insight for anyone investing in Energy and that those on our crypto side will already be familiar with. Do not miss out on gains – HODL!

Time to 'HODL' Energy stocks

Click HERE to access the FSInsight COVID-19 Daily Chartbook. We are shifting to a 4-day a week publication schedule: Monday --> NONE THIS WEEKTuesdayWednesdaySKIP THURSDAYFriday STRATEGY: Time to 'HODL' Energy stocksEnergy is the best performing S&P 500 sector YTD, rising ~42%, easily trouncing the +12% for the S&P 500 and the +6% gain of the NASDAQ 100.  And one would think that institutional investors are Overweight Energy and enthusiastic to boot.  This is not the case. In fact, over the past 9 months, when we made Energy a focus of our research efforts, the response has been mostly blasé.  This is something that our entire research team can confirm, and even Brian Rauscher, our Head of Global Strategy, has noted this in many of his comments. Among the multitude of reasons for the skepticism:- The world is moving away from oil- Energy has been a widow maker for the past 13 years- Energy companies are terrible allocators of capital- Oil is not ESG friendly- Energy at 3% weight is less important than Tesla or Apple- Energy is boring, and Millennials and GenZ don't care- Lol, who wants to own a loser- Energy is a dirty wordSo you get the picture. In fact, institutional investor feedback on Energy reminds me of the pushback we got on Bitcoin in 2017.  Granted, instead of criminals/pirates using money the glib statement is nobody uses oilBut the set up, in our view is similar.  Energy is a sector where the capacity for positive surprise is substantial, because consensus simply has written off the group as unimportant and non-strategic for their portfolio. However, as we noted in our commentary on Tuesday, Energy executives and private equity firms in the Energy space have made the same comment. Even if one is a major advocate of ESG (all private equity is ESG focused), there is simply not enough substitution for oil, and oil demand is set to rise for the next 5-10 years.  Hence, this seems similar to our thesis for digital assets. ... Rule #5 for Bitcoin is 10 best days and this applies to Energy --> HODLFor those that follow our crypto/digital asset research, you might be familiar with our Rule #5 for Bitcoin, the rule of 10 best daysThis rule points out that Bitcoin annual returns are concentrated in its 10 best days.  In other words, despite those that want to trade Bitcoin, the Hodlers, or those that own it, have realized strong returns because Bitcoin makes its gains in 10 days. This is true for Energy stocks:- as shown below, Energy stocks also concentrate gains in the 10 best days- YTD, Energy is up 42%- the top 10 days YTD are 38% gains, hence, ex-10 best days, Energy is actually negative- Similar, in 2020, Energy 10 best days were +95%, ex-10 best days, Energy was negativeIf our call is correct and Energy can rise for next 5-10 years, then Energy is a fire and forget sector or HODL. How many can actually have the fortitude to hold for 5-10 years? ... Crude has broken to the upside, reaching to $68, and next stop is $80Take a look at WTI below.  It has decisively broken out, surging to $68.11 and taking out the $67.98 highs of February.  - the next key level is $80- despite those saying Iran deal would quash oil gains, this has not happened- consensus is generally wrong!!! ... thus, Energy sector has +40%-plus upside with key XLE resistance at $68 vs $54 on TuesdayEven the Energy sector is pushing towards 2019 highs.  As shown below, XLE at $54.22 is within stone's throw of exceeding $55.14 (Feb 2021 highs) and the next key level is really $68- how many S&P 500 sectors can we say have this much upside? And if one is seeking even greater upside, the OIH, or oilfield services sector has the most beta.  This group is capex sensitive, but as we noted in multiple prior reports, we see capex spending surging in coming years, given the structural shortfall in oil production.  - we think the key levels of OIH remain $374 and OIH was only $223 on Tuesday. In fact, as the comparative scatter below highlights, OIH is severely lagging WTI prices.  At $70 oil, OIH should be closer to $450.  And OIH was $223 on Tuesday.- hence, is it any wonder we think investors need to HODL OIH? BOTTOM LINE: We remain positive on equities, and see signs of capitulation.  Our top 3 sectors remain:- IWM set for a tactical 10 day rally, back to $235-$240 possibly- IWM needs a few more days, like 5-10 days- Top 3 sectors still Energy, Materials and Financials --> $XLE $XLB $XLF- We are cautious on Technology and recommend using strength to reduce --> $XLK $QQQ  ADDENDUM: We are attaching the stock lists for our 3 portfolios:We get several requests to give the updated list for our stock portfolios.  We are including the links here: - Granny Shots  -->       core stocks, based on 6 thematic/tactical portfolios- Trifecta epicenter  --> based on the convergence of Quant (tireless Ken), Rauscher (Global strategy), Technicals- Violence in USA --> companies that are involved in some aspect of home or personal security. We are not recommending these stocks, but rather, bringing these stocks to your attention. Granny Shots:Full stock list here --> Click here Trifecta Epicenter (*):Full stock list here --> Click here Power Epicenter Trifecta 35 (*): Full stock list here --> Click here Violence in USA:Full stock list here --> Click here(*) Please note that the stocks rated OW on this list meet the requirements of our investment theme as of the publication date. We do not monitor this list day by day. A stock taken off this list means it no longer meets our investment criteria, but not necessarily that it is neutral rated or should be sold. Please consult your financial advisor to discuss your risk tolerance and other factors that characterize your unique investment profile. POINT 1: Daily COVID-19 cases 16,219, -4,155 vs 7D ago... Case data slightly distorted due to the Memorial Day holiday..._____________________________Current Trends -- COVID-19 cases: - Daily cases   16,219 vs 20,374 7D ago, down -4,155- 7D positivity rate   2.0% vs 2.5% 7D ago- Hospitalized patients   19,653 down -16.3% vs 7D ago- Daily deaths    451,  down 12.0% vs 7D ago_____________________________- The latest COVID-19 daily cases came in only at 16,219, down -4,155 vs 7D ago. The daily case figures are distorted due to the Memorial Day holiday. Several states reported unusual low new cases - i.e. Texas reported 94 new cases and Arizona reported 4 new cases on Tuesday. Hence, we expect this data distortion could last a few more days and we could have a clearer view on the case trend next week. That said, we do not expect the holiday gatherings and other related activities would cause a resurgence in daily cases similar to what we've seen in 2020. Especially given the high combined penetration of infection + vaccinations, the current situation in US is way better than last May/June. However, the future is uncertain and COVID remains somehow mysterious.- The 7D delta chart below shows the steady trend of decline in daily cases. Monday's big decline is due to the Memorial Day holiday. Therefore, the 7D delta could jump to positive regime in the next few days as a result of the true-up. However, we believe the steady decline in daily cases will persist and US is still on its road to fully reopen this summer. 7D delta in daily cases has turned negative in the past 7 weeks... The 7D delta chart below shows the steady trend of decline in daily cases. Monday's big decline is due to the Memorial Day holiday. Therefore, the 7D delta could jump to positive regime in the next few days as a result of the true-up. However, we believe the steady decline in daily cases will persist and US is still on its road to fully reopen this summer.    Current hospitalization, daily deaths and positivity rate are at all time low... Below we show the aggregate patients who are currently hospitalized due to COVID. After a mini-surge in March, the number of patients currently hospitalized rolls over again. Positivity rate is also following the similar pattern. Currently, all three metrics - current hospitalization, daily deaths and positivity rate - are at their all time lows since the start of the pandemic.     POINT 2: VACCINE: More than half of Americans have received at least one vaccine dose and over 40% of Americans are fully vaccinated..._____________________________Current Trends -- Vaccinations: - avg 1.2 million this past week vs 1.7 million last week- overall, 40.7% fully vaccinated, 50.4% 1-dose+ received_____________________________Vaccination frontier update --> all states now near or above 70% combined penetration (vaccines + infections)Below we sorted the states by the combined penetration (vaccinations + infections).  As we commented in the past, the key figure is the combined value >60%, which is presumably near herd immunity. Several times, we have overlaid our case progress with that of Israel to demonstrate what should happen to cases once immunity reaches a certain critical level in the population.  That is, the combined value of infections + vaccinations as % population > 60%. The persistent and rapid decline in cases suggest that the US is following a similar path to Israel (see our prior notes) while nations with less penetration continue to struggle more. - Currently, all states are near or above 70% combined penetration- RI, SD, MA, ND, CT, NJ, DE, NY, IL, UT, MN, NM, NE, AZ, PA are now above 90% combined penetration (vaccines + infections)- So gradually, the US is getting to that threshold of presumable herd immunity. So long as a vaccine resistant variant doesn’t spread widely, the continued retreat of cases should continue.  Below is a diffusion chart that shows the % of US states (based on state population) that reach the combined penetration >60%/70%/80%/90%. As you can see, all states have reached 60% and 70% combined vaccination + infection. 76.5% of US states (based on state population) have seen combined infection & vaccination >80% and 48.9% of US states have seen combined infection & vaccination >90%.  As the chart below highlights, the US is seeing steady forward progress and this figure continues to rise steadily.   Over the past two days, there were a total of 1,472,814 doses administered, down 28% compared to 7D ago. We assumed the removal of restrictions for the fully vaccinated could encourage more people to seek getting vaccinated. However, the vaccination pace is slowing down. That said, we believe the current speed of vaccination is still acceptable given in many states, the levels of immunity are quite high when added to those previously infected.   89.3% of the US has seen 1-dose penetration >40%... To better illustrate the actual footprint of the US vaccination effort, we have a time series showing the percent of the US with at least 35%/40%/45% of its residents fully vaccinated, displayed as the orange line on the chart. Currently, 83.2% of US states have seen 35% of their residents fully vaccinated.   However, when looking at the percentage of the US with at least 40% of its residents fully vaccinated, this figure is 55.7%. And only 25.7% of US (by state population) have seen 45% of its residents fully vaccinated.- While 89.3% of US states have seen vaccine penetration >40%, 70.0% of them have seen 1 dose penetration >45% and 48.3% of them have seen 1 dose penetration > 50%.- 83.2% of the US has at least 35% of its residents fully vaccinated, However, only 55.7% of US has fully vaccinated >40% and 25.7% of US has fully vaccinated >45%.- This is still a small figure but this figure is rising sharply now.  This is the state by state data below, showing information for states with one dose and for those with two doses. The ratio of vaccinations/ daily confirmed cases is generally trending higher (red line is 7D moving avg) and this is the most encouraging statistic. Due to the recent collapse of daily cases, the ratio surged to 86x at one point.- the 7D moving average is about ~70 for the past few days- this means 70 vaccines dosed for every 1 confirmed case In total, half of Americans have received at least 1 dose of a vaccine.  This is a good pace and as we noted previously, implies 70% of the population by Independence Day.     POINT 3: Tracking restrictions lifting and subsequent effects in individual statesPoint #3 focuses primarily on tracking the lifting of restrictions, as states have eased the majority of mandates.  Keep in mind, easing/lifting restrictions are contingent upon state of emergency ordinances being renewed. - States in groups 1 and 2 represent states that let their emergency ordinances expire, or that never had one in the first place- Note: IL and HI are not listed. This is because restrictions lifting is determined at the county / island level, and no statewide policy will be established to lift restrictions until a full reopeningSo there is a spectrum of approaches.  Our team is listing 3 tiers of states and these are shown below.  - states that eased all restrictions in 2020: AK, OK, MO, FL, TN- states that have eased all restrictions in 2021 to now: ND, SD, NE, ID, IA, MT, MS, AZ, SC, WY, TX, GA, AR, KS, WI, IN, AL, UT, NH- states that are still easing restrictions in 2021: OR, ME, WV, WA, MN, MA, NC, KY, LA, CA, DE, PA, NM, OH, CO, NJ, VT, MD, NV, NY, CT, VA, MI, RI, DC GROUP 1:  States that lifted restrictions in 2020... The daily case trends in these states are impressive and it is difficult to say that lifting restrictions has actually caused a new wave of cases because the case trends in these states look like other states.    GROUP 2: States that have lifted restrictions in 2021 to now... Similar to the list of states above, the daily case trends in these states are impressive and it seems that lifting restrictions hasn’t caused an increase in cases.   GROUP 3: States that are still easing restrictions in 2021... These states have begun to lift restrictions, but have yet to ease all restrictions.  The date of each state’s most recent restrictions lifting is indicated on each chart.  The case trends in these states have been mostly positive.- Easing restrictions appears to have contributed to an increase in cases in several of these states, most drastically in OR, ME, WA, and MN  

Earnings Comps Distort Picture, Energy CAPEX Shortfall

In the United States a steady and persistent decline in cases continues. The 7D delta has been negative in the past 23 days. In the past few days, the &D delta has also been accelerating to the downside again. If the speed of this decline continues at its current pace then we could the daily cases drop below 20k by mid-May. As we wrote before, at this stage of the pandemic, as long as vaccinations work (evidence overwhelmingly suggests they do), eventually the successful rollout will lead to a persistent decline in cases. Based on the recent data, we think that decline has arrived. Despite what is clearly playing out in the data and the undisputable fact that with the dramatically increased immunity, particularly amongst the most vulnerable cadre, there is simply less places for the virus to go the CDC has provided a pretty strange forecast for a major spike from May to June. Their forecast is apparently due to the spread of dangerous variants that elude the immunity provided by the vaccines. However, our preferred forecaster for COVID-19 data the IHME shows no such rise. The CDC has been generally slow to lift recommendations. They are allowing sports and indoor dining but not cruises with all vaccinated passengers. Dr. Scott Gottlieb also pointed out that they were wrong on the science surrounding outdoor transmission. So, we are taking the CDC forecast with a grain of salt, while accepting that it is certainly possible that it could occur. If they are right it would be a headwind for markets. In mu opinion, and only my opinion, the CDC’s latest forecast seems to be borderline ludicrous. The IHME baseline is a continued collapse in US cases. If the IHME forecast is correct than Epicenter will rally. STRATEGY: 1Q2021 Earnings “Don’t Matter’ as Comps Not Realistic- 2Q2021, 3Q2021 Matter Way More Many clients are concerned that stocks are peaking, because stocks are not reacting to ‘strong EPS’ results, and in fact, are often selling off. I can think of at least 7 reasons that stocks do not have to react to ‘great results’- of which, only 2 are actually bad signs. But in my opinion, the main reason stocks are not ‘reacting to 1Q2021 results’ is that the year ago comparison is to March 2020 when the economy was six weeks into an unprecedented economic depression caused by a synchronized shutdown. Do comparisons vs the ‘first stage’ of the pandemic collapse, when revenues were often near zero, matter? We don’t think they matter all that much. Realistically I think the YoY vs 1Q2020 is simply going to look mental. So I would not place much weight on the results. And to me, it seems like equity markets are reacting as such. The next two quarters are more important than comps to the heights of COVID induced economic devastation. If you were wondering what the fuller list of possible reasons of why stocks do not react to EPS, here it is. Two potential bad reasons are that 1) good news is already priced in and that 2) no shorts have to cover. Two medium reasons could be 3) incremental buyer doesn’t care for earnings and thus doesn’t react and 40 market is trying to process hairs of inflation. Three good reasons for why stocks aren’t booming on good earnings could be that 5) people aren’t chasing earnings 6) which could mean retail is getting smarter and not gambling on earnings calls or 7) nobody cares about comparison to March 2020. 1Q2021 EPS had been beating estimates by 19% which would be considered extraordinary under normal circumstances. The upside has been strongest in Cyclicals (+27%) and Near-Cyclicals (+41%) as compared with Defensive (only +8%). The beats by even Defensives, let alone the others, would be considered very outstanding in normal years. STRATEGY: Structural Tailwind for Energy. Per Rystad, $300 bn of Oil Capex Taken Out Since 2020 This is one of the reasons why we continue to be so bullish on Energy. Epicenter is leading and performing very strongly. In fact, for the first time in nearly 6 months of being bullish on Energy we are finding institutional investors developing incremental curiosity about the sector. And as many readers know, Energy is a sector investors have largely ignored for the past decade and this was even more true since the beginning of the pandemic. Rystad Energy (rystadenergy. com) is an independent Energy research boutique, headed by Jarand Rystad, published a report today that points the E&P sector has cut investment (capex) by $300 bn since pandemic started. This will have lasting impact in their words. There is quite a lot of good material in this report and we hope to do a joint webinar with Rystad in coming weeks, so we can more fully explore their views an analysis. The dramatic cuts will result in a structural gap that can only be corrected by setting capex higher. North American oil production is set to fall by 3.0mbpd by 2022 alone. An additional 1mpbd will be taken off as well. That is a level on par with the annual oil production of Iraq and exceeds Iran’s and Kuwait’s production. This is a pretty stark deficit and would be hard to dismiss. This goes further to support our recently reiterated bullish call on the Energy sector. Bottom Line: Despite the diminished importance of 1Q2021 earnings due to anomalous comps, Epicenter is leading in terms of beating expectations. Energy is looking particularly appealing and has the best of alignment of supply/demand dynamics developing for a decade or more. We continue to recommend Energy and think it will be among the best, if not the best, performing sectors of 2021. 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

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!

Takeaways from Wed. DeMark webinar --> S&P 500 4,400-ish possible near-term. Energy '13' bottom. Bitcoin likely bottomed. VIX going to 13

I am sending along my takeaways from our Wednesday webinar with Tom DeMark, the founder of DeMark analytics. Tom DeMark is a widely market systemic timer and is considered one of the pioneers of technical analysis. There is no replay, at the request of DeMark. So our summary below is the only way to get the abstracts. Here is our list of takeaways: 1. A possible '13' top formed in equity markets in early April, but the 3 major indices fell out of 'alignment' so that bearish view is negated 2. S&P 500 is in an 'uptrend' and possible target of 4,400 near-term. Nasdaq has upside but less so. 3. VIX is heading to 13-ish 4. Market breadth, measured as % stocks above 50D, set to surge = broader participation, not mega-cap led 5. Energy looks like it has bottomed = upside to Energy stocks (sweet!!!) 6. WTI should be expected to exceed its prior high, or $76.90 from October 5, 2018 7. XLE and OIH should trade to levels on October 5, 2018, which is $78.36/ $526.51, respectively, or +56% and +178% upside. 8. Bitcoin sold off at a '13' but found support at an anticipated key level of $47,000-ish = new uptrend likely underway BOTTOM LINE: To me, the biggest takeaway, is the move in WTI to $76.90 and the associated ballistic rise in Energy stocks. If oil does rise to $76.90, which is consistent with Goldman Sachs' $80 projection by Summer, and Energy equities rally to 2018 levels, we expect institutional investors to massively Overweight Energy stocks before year-end. This would be a formula for a melt-up.     ...S&P 500 sold off to key level 4,137-ish and upside now 4,350-4,400DeMark cited a trifecta of factors that pointed to a pullback to 4,137 in S&P 500 in April. As these charts show, that is where the S&P 500 retraced and now the upside in play is 4,350-4,400 and a possible upside to 4,600 - a few weeks ago, there was a '13' spotted on equities, but this was negated- the alignment was not seen in Dow, Nasdaq and S&P 500- now they are 'aligned' to the upside Hence, stocks are still in an uptrend This is consistent with our view that we will see S&P 500 4,400 before mid-year, maybe in the next month or so ... VIX still heading lower towards 13.48 or lowerHe also pointed out the VIX downside target is 13.48. - the VIX could breakdown further below that level- but 13.48 is the key level to watch- VIX is 17.6 now ... Market breadth should rise = small-caps > mega-caps DeMark also sees the % stocks >50D surging. This is a breadth indicator. - if # stocks >50D goes up = small-caps Our takeaway: Megacaps likely underperform (FANG/Growth) and Small-caps likely resume leadership ... Energy (XLE) likely bottomed vs broader market DeMark also noted that Energy (vs S&P 500) seems to track DeMark signals closely, as both the combo and sequential counts work at the tops and bottoms. - XLE/SPX posted a '13' bottom and is now in an uptrend - this means Energy stocks should outperform S&P 500 ... Crude oil expected to surpass 2018 highs of $76.90, implying +56% upside for XLE and +178% upside for OIH Tom DeMark also noted that he expected Crude, when looking at the weekly chart, that it would be typical for crude to exceed the prior highs at the next '13' -- in this case, the 2018 highs of WTI of $76.90. See below. - if WTI exceeds its October 5, 2018 highs, XLE and OIH should at least re-attain its October 5, 2018 levels - XLE was $78.36 on October 5, 2018 vs $50.11 today, or +56% upside - OIH was $526.51 on October 5, 2018 vs $189.04 today, or +178% upside Takeaway: The confirms our view that Energy stocks are due to a huge catch-up to oil. The upside in XLE and OIH is way higher than many appreciate, if correct, with >100% upside for OIH and >50% for XLE. So we think Energy remains very attractive, even as we realize this group feels leaning against the wind ... Bitcoin saw a textbook 20% selloff after a '13' but now found support at ~$47,000 Bitcoin saw a textbook sell-off of >20% after a '13' qualified combo count. - downside target was $47,000 on two different models --> TDST shown below - if this holds, and is likely, given this was a level prior to the last 'sell countdown' (green 1), Bitcoin going to rally Takeaway: Not crystal clear what to expect here... Key level is $62,000 and $47,000. The daily DeMark count shows an uptrend, so that is what should be watched and a move above $62,000 affirms selloff over

7DDelta Turns Negative, Energy Poised For Turnaround

We want to revisit the progress of Israel in its battle with COVID-19. That nation now has vaccinated 62% of its population. And even with mutations being present in Israel, they have seen a drastic reduction in COVID-19 cases. The latest 7D average is a mere 26 cases per 1mm residents when it was 952 only 3 months ago. As we said before, COVID-19 looks to have been largely obliterated from Israel. The takeaway for me is that Israel’s experience does strongly argue for the effectiveness of vaccines. That nation solely relied upon Pfizer for its vaccinations. North Dakota and South Dakota have a better “daily cases per 1mm” vs. Israel at this same point and could be “obliterated by June.” Tireless Ken and his team overlaid Israel’s case results compared to North and South Dakota. Those two states have among the highest vaccination rates in the US and also the highest overall combined infections + vaccinations. And as our clients know we have looked at ND and SD as templates for the rest of the US. SD has 42% vaccine penetration so far and ND has 37%. SD daily cases are 227 per 1mm, while Israel was 803 at the same point. ND is well below Israel at the same point as well, as you can see when we overlay. Source: FSInsight, State health depts. The 7D delta in daily cases has turned negative in the past few days. After surging to +16k on Tuesday it has since retreated and as far as we know this is an organic drop. Hence, if this persists, we could see the case trend resume its downtrend. US hospitalizations are rolling over and US deaths also seem to be rolling over. Michigan is now leading states in the largest decrease in cases from 7 days ago at -1,516. Louisiana had the most new daily cases, but it was only 349. Vaccinations seem to be working and hopefully these positive trends resume. The 7D moving average for shots/cases is about 50 to 1 and this impressive figure is likely to surge even further in coming weeks. In total, about 125 million Americans have received at least 1 dose of vaccine. This is a good pace and as we noted previously, implies 50% of the population by May. STRATEGY: Epicenter stocks endured a month-long sell-off, but oil is arguing an upside breakout is ahead, Energy secular bull market could be forming. Source: Bloomberg, FSInsight Over the past month Epicenter stocks have underperformed the broader market, evident in the chart below. Economic momentum remains strong and the increase in EPS estimates steadily over the past few weeks shows the Street is still in the process of raising their forecast and outlook. There seems to be a few reasons that even in the midst of this ‘beat and raise’ environment that Epicenter and Cyclicals are still struggling. Some investors think that the good news is already baked in, and thus, Growth stocks should lead. We would counter that Epicenter/Cyclicals are projected to have 2022 EBIT >50% to 100% above 2019 levels. However, the stocks are only at their 2019 levels. The lull in interest rates rising, reason some investors, should cause Growth to continue leading. We would counter that interest rates are falling partially due to crowded positioning for the higher rate (aka “buy the rumor, sell the news” but the bottom line is this; higher growth (which is forecast by pretty much everyone) necessarily means higher rates. Finally, some investors posit that cyclicals are mere ‘rentals’ and that Growth stocks are the mightiest of the equity asset-class. Part of this is likely simply because many managers are comfortable with Growth and it’s made them rich. Paradigm changes are scary and one of Wall Street’s main weapons, historical data, is of relatively limited use compared to more normal times. Perhaps the most important thing to consider is that cyclicals have the capacity for positive surprise. To me, it seems like most investors are more comfortable buying Growth/FANG after the recent pullback. So again, we see consensus being overweight Growth, and underweight Epicenter. While the future is uncertain, we remain confident being on the other side of the consensus is the right call here. We believe we might be able to discern something about the path of Epicenter based on oil prices. WTI is currently $63 and if it goes to $70-$80 by summer what groups would lead? Based on the tight linkage between oil and Energy stocks we know they would do VERY well and likely lead the market. If oil rises meaningfully, you can expect Epicenter to follow suit. If oil strengthens to $80 this summer, XLE’s implied level would be $71, which is roughly 45% upside. The linkage between WTI and XLE is very close. In fact, they have moved in tandem for the most part. In other words, if the WTI prices do indeed strengthen, we could see a significant rise in Energy equities. Energy seems to be a very good buy here. Let’s look at the bigger picture. When you zoom out you see that Energy stocks might be finally ending a 12-year bear market in place since 2008. The current bear market is the worst ever for the sector, and secular bull markets in Energy typically have an average length of 9 yrs. If Energy is indeed bottoming, as you can see from our analysis the implied upside is 322% over the 9 yr. average which is 30% CAGR per year outperformance vs. S&P 500. As we’ve said supply/demand dynamics are good. 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

Schlumberger: A Stalwart Energy Name Well Positioned For The Coming Boom

This week we wanted to highlight a stock from our Power Epicenter Trifecta list. This list identifies the strongest stocks within our more extensive 'Trifecta' Epicenter list. We have added a 'power rating' to the stocks in the trifecta list to find stocks with the strongest price appreciation potential. Thus, the criteria for stocks within this list are positive views from a Global Portfolio Strategy perspective, a Technical perspective, and a Quantitative perspective. The trailing one-month return must be greater than the 12-month return, it must have outperformed the S&P 500 for the last six months, and its price must be above the 50 and 200 days moving average at the time of selection. We also wanted to make sure the first company we highlighted would be a good buy for at least the medium-term horizon. We landed on the largest oilfield services company in the world, Schlumberger ($SLB). This company's unique competitive advantages and position as one of the focal points for the digitization and modernization of the Energy Industry and its efforts to respond to climate concerns make us think this is a great pick. It has powerful economies of scale, the best capital efficiency in the industry, and a diversified geographic footprint and customer-base that expose it to many high-growth projects. In addition to this, Schlumberger has very impressive and noticeable earnings revision momentum. Source: Seeking Alpha Many Americans aren’t acquainted with the particular culture in the American Energy industry. Houston is the industry's capital in the United States, and the wider community can regularly feel the flagship industry's cyclical nature. Boom and bust is more so a part of Houston's life than other places and has been for a while. A big deal in the region is the pomp and circumstance of elaborate, very socially important holiday parties. Various executives of major energy firms all mix at these sometimes ornate, sometimes less so, galas. In bust years the menus are subdued, the champagne and liquor are a few notches down, and the holiday cheer isn’t quite as palpable. It might be beer and barbeque instead of caviar and cognac. In boom years, ornate displays of the energy-derived wealth like shellfish and caviar bars displayed on ten-foot mock-oil derricks are commonplace. Outsiders would have no trouble determining where the funds for the party came from. Due to its ubiquitous place in the industry if its' a party associated with an oil company, then you'd be hard-pressed not to find dozens of Schlumberger’s employees around. For the company, which had to layoff thousands of employees and suffered from the worst down-business cycle in memory, it appears that the trough has been reached. It's a great time to buy this stock in our estimation! We think you’ll certainly want to own this name for the coming recovery and beyond. This company, definitely an old dog, has learned some serious new tricks and has exposure to potential high-growth areas both in renewables and the older oil-centric segments. Suffice to say, the Holiday parties this year were subdued, if they occurred at all. Our bet is by Christmas this year, the gaudy menus and luxury items will be back in full force along with a significantly higher share price for our pick this week. If you live in Houston, you know; the bad years have always been followed by good years, and usually the worse the year, the higher and sweeter the comeback. We think this once-in-a-generation low that was disproportionately felt by the Energy industry will give way to an epic upcycle.  While there is much debate and uncertainty to the provocative claim that a commodities supercycle may be beginning, there is definitely a super-cycle coming in CAPEX by the Energy industry. No company is better positioned to benefit than Schlumberger. Schlumberger Has Best Competitive Position in Oilfield Services and Not Highly Correlated to Oil Price We have covered the massive implied opportunity in Oilfield Services in our previous work on Energy. Schlumberger is the largest holding of this fund at nearly 20%. Many investors may not like oil majors because their profitability is closely correlated to the oil price, which is influenced by many uncontrollable and unpredictable factors. One of the benefits of owning Schlumberger is that their services are needed pretty much equally if the oil price goes up or down. The trough of this capital cycle is so severe that revenue is virtually assured to expand significantly.  At its core, oilfield services companies have their revenue determined by the capital and operating expenditures at energy companies that conduct exploration and production. The capital cycles of upstream producers are, of course, influenced by the price of oil. Still, the recent-drop off in capital expenditures by those companies in the upstream segment has taken a massive hit as these companies tightened their belts to survive the worst down-cycle in the Energy business that has ever occurred. The company survived this down-period with significantly less revenue but managed to pull off $700 million in free-cash-flow in the 4th quarter. The momentum is clearly to the upside. We picked one of the Energy companies on our Power Epicenter list with many characteristics that distinguish it from some of the things many investors don’t like about Energy. We think the tired and inaccurate narrative that Energy is a broken, flawed industry with people running for the doors is shallow and not grounded in the reality that the Energy industry pulls off some of the most technologically impressive tasks the human race is capable of, much of it not possible without Schlumberger’s assets or employees. Ford and GM's experience shows that cutting-edge technology can be deployed by new and exciting Growth companies but also by established industries far later in their lifecycle. Schlumberger will profit from the inevitable rise in CAPEX and investment in modernization and efficiency of oil production, however, it also has an impressive renewable portfolio that is much more than PR. It's at the forefront of clean hydrogen production and just launched a carbon capture project with Chevron and Microsoft. The company is also developing a lithium extraction plant in Nevada The New Energy section is not an American Petroleum Institute going through the motions type of deal; the company is making real breakthroughs and real money in renewables. These are encouraging prescient moves from management, but the company also has enormous growth opportunities in modernizing a lot of existing oil infrastructure to get more efficient production. The interruption in upstream capex means that there could be unexpectedly high demand for the business's margin expanding digital services segment.  Schlumberger is the largest Oil and Gas Equipment Services company with a market cap of  $39.59 billion. Like Exxon, this number significantly understates it’s true size and influence. It’s currently trading well below its enterprise value of 54.89 billion. It announced its 4th quarter earnings and beat on EPS by $0.05 and on revenue by $288.33 M. They have had 15 upward revisions to EPS estimates by sell-side analysts in the last 90 days. All four revenue segments saw sequential growth this quarter for the first time since COVID-19 roiled markets. We Still Think There Will Be Energy FOMO: SLB Will Benefit Many institutional investors seem to have an overly pessimistic view of the Energy sector. Why shouldn’t they? Many got burned over the last years. It's almost like the industry needed an epic do-or-die restructuring. Oh, wait! That is precisely what happened. However, Schlumberger is far less dependent on oil prices for profitability and performance than, say, an oil major. It had a unique industry position as the largest oilfield services company and the most geographically diversified. It operates in many high-growth markets that don’t want the participation of oil majors but still need the vital oilfield technology they usually bring. SLB's most significant portions of revenues come from the Middle East and Africa, followed by Europe, followed by North America. Schlumberger is more dependent on business cycles within the Energy industry, particularly capex, which plummeted with demand over the last year. Source: Bloomberg As you can see the R squared for SLB is .112, for XOM it is .251 and for CVX it is .632. Coincidentally, this shows part of the reason why we prefer Exxon Mobil to Chevron.  We picked one of the Energy companies on our Power Epicenter list with many characteristics that distinguish it from some of the things many investors don’t like about Energy names. We also think SLB will be attractive to institutions when they eventually chase the outperformance occurring in the sector.   SLB Compared to Peers Source: Seeking Alpha You can see from the comparison that maturity pays off despite the current investor obsession with the new-fangled. May we suggest that this pick is a little bit of both, leading in cutting-edge energy technologies but with the established footprint, scope and size to leverage massive economies of scale. Their astute financial management is of course also appealing. An upgrade of their debt could be forthcoming with the latest quarterly results and positive revision momentum. Schlumberger has kept a relatively steady and uninterrupted profit margin partially due to its decision to divest from shale and to focus on its plethora of high-growth international assets. Like Ford and GM, SLB is becoming less dependent on assets to derive to revenue (although this is, of course, still primary) and more reliant on software, big data, and digital solutions it provides. Its revolutionary project with the Egyptian government is a prime example. Similarly, Schlumberger possesses several financial strengths and advantages over competitors that should begin to distinguish it in terms of returns as demand for its services picks up. If you include severance in free-cash-flow, it had an impressive annualized FCF yield of around 9% during the last quarter. If this is the yield in the nadir of a down-cycle, you can expect it to be significantly higher when the ‘true-up’ occurs with Energy industry capital expenditures. The relative financial stability of SLB compared to peers, as well as its geographic diversification should make it a prime pick for institutions when they eventually pile into the space! Source: Seeking Alpha Risks and Where We Could Be Wrong Schlumberger (SLB) is an established Oilfield Services company with deep relationships and penetration throughout the industry. If prices skyrocket, it could lose out on some of the high, but also high-risk, margins that can come out of a shale boom, although it does still have exposure through stock it owns. Right now, its geographic diversification is a strength but it could potentially become a weakness in the event of political instability or continued escalation of the war in Yemen as it’s largest geographic segment is the Middle East and Africa. Recent unsuccessful Houthi attacks on Saudi oil facilities highlight this major risk. However, the company is mature and has the ability to pivot. There is a risk that it overspends on unproductive capital projects in renewables. However, we think this name makes a great compliment in a portfolio to one of our other main energy recommendations, Exxon Mobil that does not have this risk as acutely. Anything related to coronavirus and demand concerns will continue to push off the restart of the Energy industry capex cycle, which will postpone the company’s return to pre-COVID EPS and revenue levels. We think the price is headed toward the neighborhood of 2014 highs over the medium-term, rather than back to COVID-19 lows.

Maintaining Bullish View; Financials and Energy Upgraded

Is anyone else tired like me after this week’s trading action in the S&P 500?  The market started the week quite strong and rallied up about 2.7% to nicely reverse last’s week down performance.  However, during the middle of the week, fears of rising interest rates began to spill over into equities and caused some down action that pulled the index down nearly 5%, which was disproportionately impacted by even larger declines by in many growthier names within Consumer Discretionary and Tech.  Investors then turned their attention Fed Chairman Powell on Wednesday and his words during an online event did not calm the bond market and further pressured stocks.  After flirting with a bigger selloff, the S&P 500 found energy on Friday from both the positive release of the monthly employment data release and some dovish Fed comments to end the week up for day and slight gain for the week.  Lots of running to make so little progress.  At the beginning of the week, we released the results of our monthly deep dive into our sector (GICS-L-1) work and have updated our FSI Sector Allocation recommendations (please see the sector section of our website).  We wanted to end the week by reiterating the main conclusions that our allocation methodology has been suggesting: 1.      Traditional defensive area (HC, Staples, Utes and RE) will likely continue their underperformance of the S&P 500 and are thus Below Benchmark sectors. 2.      Continue shifting toward Epicenter/Value/Cyclicals/Financials and away from Growth/FAANG 3.      Do not completely abandon Growth/FAANG names, and this week’s severe price corrections with CD/Tech may be creating an opportunity to selectively add some exposure.  Getting more granular, our analysis has resulted in us upgrading the Financials and Energy sectors, which were the third upgrades for both sectors over the past five months. Despite the recent market volatility our tactical indicators are favorable, which has us aligned with our ongoing medium-term bullish stance. Also, we have lowered Consumer Discretionary from Above Benchmark to Tilt Above, however, our work still shows that there are still many favorable individual stocks within the sector.  It should be noted that the sector is being overly impacted by nearly 50% weighing of AMZN, TSLA, and HD. Based on our indicators and read on the macro environment the most important underpinnings for the overall equity market and our continued expectations for even higher highs are still in place. Although there has been some anxiety coming from the bond market, it is our view that the Fed is still likely to hold on for an extended period and the recent upward move in rates was overdone. It is our expectation that a favorable liquidity environment will endure for the foreseeable future. Notwithstanding rumblings from the ‘Bond Vigilantes’, the rate backdrop remains near record lows and supportive of further equity gains. The real rate on the 10-yr when accounting for inflation is near-zero. We continue to reiterate that the earnings revision data for the broad equity market, which is a major part of our investment process (and has proved its worth in adding value over 20 years), is still quite healthy. Our expectations are that this remains the case as analysts and investors start shifting their focus to economic recovery and a powerful corporate profit cycle. Thus, we encourage investors to remain focused on the long-term the; 6 month, 12 month and 18 month time horizon for which readings are still overwhelmingly positive. When looking for risks that are out there and what we watch closely, the first and main potential concern is sudden and sharp increases in interest rates and inflation expectations may remain problematic for the short-term and may return from time to time throughout the year. There are other issues that could obviously cause increased volatility like a fourth wave of COVID-19 or increasing ubiquity of the new viral strains. The bottom line this week is that the current bout of volatility is likely creating an opportunity for investors to raise exposure in areas and specific stocks that may have begun to run away from us and to move further into the most favorable ideas that our research is flagging.  Most preferred sectors: Financials, Industrials, and Materials with Information Technology, Energy and Consumer Discretionary better than neutral Neutral sectors: Communication Services Least preferred sectors: HC, Utilities, Consumer Staples and Real Estate

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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