SP500

• Your Weekly Roadmap

Apr 16

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

• Your Weekly Roadmap

Apr 9

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

• Your Weekly Roadmap

Apr 1

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