FSI Macro

• Signal from Noise

Jan 14

In a world where Elon Musk is building electric cars and spaceships and launching his cars into space with his spaceships, Ford may seem like your father's grand-fathers, and you can't say this for many companies, but maybe even great-grandfather's stock. We think this sentiment couldn't be further from reality. Aside from ample idiosyncratic tailwinds, which we will discuss further below, we also believe that Ford is bringing to fruition the fate we have predicted for so many ‘Epicenter' stocks; booming post-pandemic demand for their products, significantly better operating leverage, and thus earnings per share, and the type or do-or-die cuts and restructuring that only true crises can engender. Ford has an exciting lineup of new models, credible plans to expand internationally, has made impressive and tangible strides in innovation, and its prodigious lending arm, Ford Credit, just had its best year in well over a decade. The last point: Ford’s massive financial services subsidiary has been the lynchpin in bearish arguments for why the company would falter. In what will likely be a very hot post-pandemic economy with a steepening yield curve, this supposed albatross will likely create significant upside that is not predicted by historically informed forecasts. Everybody knows the dated narrative still pervasive among some investors; the Big Three of the American auto industry are uncompetitive, saddled with expensive legacy costs and dilapidated factories, and late to the party on electric vehicles. The narrative almost has a 'Fall of Rome' quality to it—Of course, once Rome stopped paying off the Visigoths (Or the UAW in Detroit’s case), it fell. Investors who lump Ford into this narrative would have been wrong for decades now. If you examine Ford’s financial statements closely, you'll see that their worst quarter of the pandemic was fortuitously hedged by a $3.5 billion gain from investments in AI and self-driving technology. Does that sound like a management team that has allocated capital poorly? Last quarter, the company reported that it had organic margin expansion via rising prices because of unexpectedly healthy demand. Its new products are in even higher demand than existing ones. Thus, this trend will likely only accelerate as the pandemic recedes, and Ford's primary consumers have their balance sheets bolstered with robust stimulus. This suggests that historically informed forecasts for demand are likely too low. Source: Trefis, Thinkorswim As you can see, with slightly more optimistic assumptions than those which are informed by historical data, the implied valuation is significantly augmented. New Product Lineup: BEVs (Battery Electric Vehicles) Are Great Alone, But Better with ICE (Internal Combustion Engines) Our Head of Research, Tom Lee, got his start as a wireless analyst in the 1990s, and he has said that he sees multiple parallels between electric vehicles now and wireless in the nascency of his career. So, we undoubtedly have faith in electric vehicles’ eventual dominance. That doesn’t mean there isn’t exuberance in some names. With Ford, you get a two for one. Not only are you getting exposure to the multiple-expanding, very 'growthy' electric vehicle market; you are also getting a flagship 'Epicenter' stock that is poised to outperform the market because of a once in a lifetime cost reset. This, coupled with the impressive and trustworthy management, which the current products reflect, makes us think that Ford still has much upside even though it is near new highs for the year. The pace of EV’s gains in market-share will eventually be heightened by multiple secular tailwinds. Right now, there are still many obstacles to achieving the type of full-scale ICE substitution that some valuations would suggest; one of them is the power grid's inability to support such a reality currently. The point is that particularly in the domestic American market, which is by far Ford's largest, demand for old-fashioned gas burners will remain foreseeably intact. Even if you’re worried about that trend in the future, Ford seems to be on top of it. The all-electric Mustang Mach-E just won the award for Best SUV of 2021, and the F-150 simultaneously won for Best Truck, the first time two of the three awards have gone to the same brand since 2014. The new lineup of Ford Broncos is already saturated with pre-orders, and post-COVID-19 consumer trends actually appear to work in Ford’s favor. It will be poised to grow its base business in ICE in size and profitability while also being a major player in the shift to all-electric (including the all-electric F-150). This goldilocks zone that Ford occupies means reaping great margins from very in-demand and high-margin ICE models while also being exposed to EV’s ascent.  Ford can do better than many people think in the EV world for a few reasons. Firstly, Ford still qualifies for the $7,500 tax credit that TSLA has long-since outgrown. This will have a measurable effect on a product subject to very elastic demand, particularly when the quality is now confirmed to be about equivalent to chief competitors (and is already profitable for the company). The other thing is that many Americans still don’t want to buy an electric vehicle. We think Ford’s bet that they can entice consumers to give electric a chance using flagship brands and high-quality vehicles while also taking the company to have recurring revenue streams from software and AI is exactly what the company should be doing. This should positively affect Ford's multiple over the coming years. Source: Company reports. Valuations for auto manufacturers are notoriously discounted due to the ever-present risk of fickle consumer attention to brands and products. Ford has suffered as much from this over the years as any automaker. Still, it’s the impeccable management team and steady, transparent strategy seems to show that leadership is ahead of the curve and has the re-invigoration of one of America's most treasured brands well-in-hand. Exciting Management at Ford We are fans of the record and energy that Ford’s new CEO, Jim Farley, brings to the table. Farley, whose first cousin is the late, great Chris Farley from SNL, is an absolute car fanatic whose first conversation with Bill Ford upon exploring his potential ascent to the top job was telling the company’s patriarch that a condition of him accepting was that he is not prevented from his dangerous hobby of racing cars. He may understand the relationship between vehicle and consumers better than anyone in Detroit since Lee Iacocca. Jim Farley may not build spaceships, but nobody in the world knows how to sell cars better. In fact, some of Toyota's most impressive inroads against the American automakers were at his direction; he led the formation of Toyota's luxury brand, Lexus, and led marketing efforts on some of their best-selling vehicles.  Betting against Jim Farley and Ford's most exciting lineup in years seems unwise to us. Farley is the guy who can finally make Ford shine. A Toyota man running Ford, we like the sound of that. The Bottom Line Ford is one of our ‘Trifecta’ Epicenter stock picks, meaning that all three of our research departments recommend it. We see it benefitting from the same forces that attract us to 'Epicenter' and multiple idiosyncratic factors unique to Ford. The company’s valuation risk is significantly less than all-EV companies and we think its Price/Cashflow and Price/Book indicate that the stock is still a bargain even at new highs. Source: Morningstar Where We Could Be Wrong Ford recently had to shut down production in some factories due to a shortage of microchips. Shortages in other components and rising commodity prices could hurt margins. However, our thesis's largest risk is still the unpredictable path of COVID-19. Since production has already been shut down for significant periods this year, further delays in production or the failure of the demand to continue recovering because of adverse healthcare outcomes are primary risks. 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• FSI Blast

Jan 13

Click HERE to access the FSInsight COVID-19 Daily Chartbook. We are shifting to a 4-day a week publication schedule: MondayTuesdayWednesdaySKIP THURSDAYFriday STRATEGY: China economy = boom now.  Energy stocks need to catch-up to Oil + CopperDaily COVID-19 cases are rolling over --> hopefully for real now that holidays are behind us... Daily COVID-19 cases fell -3,031 compared to 7D ago.  This is the first drop since December and coming during a potentially clean week -- a period that is not impacted by holiday closures/etc.  This is interesting and potentially positive, because it could be COVID-19 cases are finally rolling over in the US.- if cases are rolling over now, AND the vaccine works, we could see a sharp decline in US cases in the coming weeks- but we need to see multiple days, and hopefully weeks, of negative 7D delta to affirm this- so for now, it is a good thing, but a mere artifact, at the moment Source: COVID-19 Tracking and Fundstrat  Big data showing boomy conditions in 2021... Even as COVID-19 spreads rapidly around the world, the global economy is staging an impressive recovery.  The contemporaneous data shows this -- recent PMIs, etc -- and many forward looking indicators.  In fact, the steepening of the 30Y less 10Y is one of the strongest signals for continued strength.  Our clients recall that we have shown that since 1987, the 30Y less 10Y curve has led the ISM by 17 months, pointing to strengthening growth in 2021. Deep Macro, the big data macro intelligence firm, has alternative data that is also suggesting boomy conditions in 2021.  Deep Macro is one of our favorite independent economic providers, and is led by Jeff Young.  Their data shows that global manufacturing is on the upswing and this growth is accelerating.- yes, global GDP growth is accelerating, not peakingBelow is their datasets for NO (nitrogen oxide concentrations) and is showing YoY change. The regions for China and global are shown.- The China data shows a massive surge YoY, reaching >20% in November and continuing positive in Jan- Global NO is accelerating in January, and looks to surpass the November levels- If the global data is correct, GDP growth globally is gaining strength STRATEGY: Copper and Oil suggest a big catch-up trade in Energy ahead... Deep Macro data suggests that cyclical strength stronger than consensus expects.  In fact, Copper is up +27% since the start of 2020, and as many know the adage, Dr. Copper is smart and rises when economic growth is accelerating.  So the natural question is, what is the obvious trade?- Long Energy- Long CyclicalsThere could be a considerable catch up trade for Energy in 2021.  Look at Energy and Energy Services compared to Copper and Oil. Since the start of 2020:- Copper        +27% - Oil                  -5%- Energy          -38%- Oil Services  -39%Notice the gap?  Energy companies have SLASHED costs.  - operating leverage higher- EPS potential greater If there is a bull market starting in Energy, we may be in the earliest days.  Below is the price performance of Energy stocks in the various bull markets since WWII.  The current bull market is marked in light blue:- Bull runs seem to last 3 years or more- Typical gain is 5,000-7,500bp relative to S&P 500- So far, 2,500bp. - Could be early days? Source: Fundstrat and Bloomberg and FAMAEnergy remains one of our top 3 sectors for 2021... Thus, we see a catch-up trade coming.  Energy remains one of our top 3 sectors for 2021 (others are Industrials and Discretionary).  But as we warned, Energy is the least consensus and most risky/tricky. - Energy is 2.5% of the S&P 500 index- Anything above 2.5% of your portfolio is an overweight in Energy- Most institutions have ZERO weight, so there is upsideBelow is our trifecta stock lists (*) for Energy and Basic Materials (since copper up).  These are trifecta because it is OW by: DQM (quant by tireless Ken), Global Strategy (Rauscher) and Technicals (Sluymer). Energy (9 stocks):HP, NOV, SLB, EOG, PXD, HFC, MPC, PSX, XECBasic Materials (11 stocks):LYB, EXP, MLM, CF, MOS, ESI, NEU, NUE, RS, SON Source: Fundstrat and Bloomberg and FAMA (*) These 20 Energy+Material Trifecta stock ideas are the subset of the Epicenter Trifecta stock list we published on December 11th, 2020. To view the full list of stock idea, 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. 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), Sluymer (Technicals)- Biden vs Trump  -->   based on correlation to either candidate odds Granny Shots:Full stock list here --> Click hereTickers: AAPL, AMZN, AXP, BF.B, CSCO, EBAY, GOOG, GRMN, GWW, INTC, KLAC, LEN, LOW, MNST, MSFT, MXIM, NVDA, OMC, PM, PYPL, QCOM, TSLA, XLNX Trifecta Epicenter (*):Full stock list here --> Click hereTickers: AN, GM, F, HOG, GRMN, LEG, TPX, PHM, TOL, NWL, HAS, MAT, PII, MGM, HLT, MAR, NCLH, RCL, WH, WYND, SIX, DRI, SBUX, FL, GPS, LB, CRI, VFC, GPC, BBY, FITB, WTFC, ASB, BOH, FHN, FNB, PB, PBCT, RF, STL, TFC, WBS, PNFP, SBNY, NYCB, MTG, AGNC, EVR, IBKR, VIRT, BK, STT, SYF, BHF, AGCO, OC, ACM, WAB, EMR, GNRC, NVT, CSL, GE, MMM, IEX, PNR, CFX, DOV, MIDD, SNA, XYL, FLS, DAL, JBLU, LUV, MIC, KEX, UNP, JBHT, R, UBER, UHAL, HP, NOV, SLB, EOG, PXD, HFC, MPC, PSX, XEC, LYB, EXP, MLM, CF, MOS, ESI, NEU, NUE, RS, SON, STOR, HIW, CPT, UDR, KIM, NNN, VNO, JBGS, RYN Biden White House vs. Trump White House: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: Cases rolling over again (for REAL?)... daily cases 205,408, -3,031 vs 7D agoThe latest COVID-19 daily cases came in at 205,408, down -3,031 vs 7D ago.  - After being positive for two weeks, the 7D delta in daily cases finally turns negative today- as we wrote previously, the holiday effect was going to cause distortions for several weeks- and based on previous experience, it normally takes two full weeks before the underlying trends were visible- We were expecting mid-Jan is when we can start to get a better handle on trends. As we are gradually approaching mid-Jan, the trend starts to become more visible.- We expect the 7D delta in daily cases will continue to be choppy for a few days until Friday when the holiday data distortion should fade away. Source: COVID-19 Tracking Project  and FundstratThe 7D delta finally turned negative today- if you look at the chart closely, you will find the two days with the highest 7D delta are Jan 1st (7D following Christmas) and Jan 8th (7D following New Year's Day).- although 7D delta in cases is supposed to be impacted by the holiday distortion for another two or three days, the negative reading is a good sign Source: COVID-19 Tracking and Fundstrat  If one thing really worries me, it would be those epicenter states in Wave I and II still have the highest daily cases. Especially for the epicenters in Wave II, aka F-CAT (FL, CA, AZ, TX), they are all among the top 5 states with most daily cases today.- #1 CA 36,487- #2 TX 22,110- #3 NY 15,214!!!- #4 FL 14,896- #5 AZ 8,559  Source: COVID-19 Tracking and Fundstrat  Source: COVID-19 Tracking and Fundstrat  POINT 2: Vaccinations reach 8.9 million today. The pace slows due to several states without stats updateAccording to the CDC vaccination tracker, 330,054 more vaccinations were given today. This number is relatively low compared to the sharp surge in daily vaccines administered in the past few days. This is primarily because 10 states (AR, FL, IA, KY, MD, ME, NE, NY, VA and VT) did not update their stats on CDC website. However, we do not believe these states suddenly stop giving vaccines to their people. Instead, this is more likely a data issue and tomorrow there should be a catch-up update for these states. Hence, we still expect US to reach 1 million vaccines administered per day this week.- 8.9 million Americans have received a vaccination- a week ago, 4.3 million, so 2X in 1 week- we still believe the pace is ramping up sharply.- we expect US to reach 1 million per day this week Source: CDC and Fundstrat Source CDC and Fundstrat45 states have more than 2% of the population vaccinated... Below we have plotted the cumulative vaccination rate (% population vaccinated) by states and sorted high to low.  - so far, 45 states have more than 2% of the population vaccinated.- WV, SD, ND and AK are the states with the highest cumulative vaccination rate, >5%.- AZ, MS, GA and AL are falling behind with less than 2% of the population vaccinated. Thus, the good news is the US is now getting ahead of the curve on vaccinations. Source: CDC and FundstratWeekly % of the population vaccinated by countries... UAE has 6% of its population vaccinated every weekYesterday, we showed the implied weekly pace that state's population is getting vaccinated. and recall, this is based on:- reported vaccinations for the last 3 data points- converted to the weekly rate- calculated as % of the populationBelow we have used the same methodology and plotted the implied weekly vaccination pace for countries.- UAE: 6.2% of the population in UAE are getting vaccinated every week. And according to the table below, UAE also did a great job protecting its people from catching COVID. So far, only 9% of its population is ever infected.- Israel: current vaccination pace for Israel is 3.3% per week and 22% of its population are already vaccinated. More comments are below.- US: compared to other countries, US's pace is actually not bad especially as the vaccination pace in US is ramping up. If US could achieve 1 million doses per day by this week, then the implied weekly vaccination rate would increase to 2.2% (7 million doses / 323 million population), just below UAE and Israel. Source: Our World in Data, CDC, and FundstratIsrael's daily COVID cases development might be the most worth-tracking chart in the worldWe currently estimate about 23% of Israel's population infected COVID already (table below). As shown below, about 22% of Israel's population have been vaccinated. Hence, in 4-5 weeks (if Israel maintains the current vaccination rate), Israel should be able to reach the 60% infection + vaccination threshold. The level of 60% is widely viewed as the level to achieve herd immunity. Therefore, COVID vaccination development in Israel is worth watching. If the daily new cases in Israel start to slow down dramatically, it would be a roadmap for the world to end this pandemic. Source: Johns Hopkins, Our World in Data and FundstratBelow is the detail of the COVID vaccination progress by countries. The table is sorted by the implied weekly vaccination rate. And US is currently #5. Source: Our World in Data, CDC and FundstratPOINT 3: Capital storming turned into super-spreader event? Lawmakers are testing positive for COVID-19 Last week's takeover of the Capital shocked the world, even as financial markets ultimately shrugged its shoulders.  But the storming of the capital created multiple conditions to become a superspreader event:- thousands of people entered the Capital building, many of whom were not practicing mitigation measures- lawmakers were sequestered into crowded safe rooms, many shoulder to shoulder- many lawmakers and staff refused to use masks while in these roomsThe VOX is reporting that already 5 lawmakers have tested positive for COVID-19. Source: /2021/1/12/22227047/lawmakers-positive-coronavirus-capitol-lockdown-laturner-jayapal-coleman-schneiderThe list of those is below and is more Democrats than Republicans.  This could be an issue if those lawmakers are incapacitated in any upcoming votes. Source: /2021/1/12/22227047/lawmakers-positive-coronavirus-capitol-lockdown-laturner-jayapal-coleman-schneiderAnd if you are wondering how this happens.  As the abstract below notes, many refused masks.  Now I realize not everyone agrees that masks prevent spread.  But we can all agree that being in tight quarters raises the risk of transmission.- So ultimately, we can blame the protestors for creating this superspreader event- more cases might emerge in subsequent days Source: /2021/1/12/22227047/lawmakers-positive-coronavirus-capitol-lockdown-laturner-jayapal-coleman-schneider

• Macro Videos

Jan 12

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