S&P 500 Ends Week at All Time High, NASDAQ/IWM Strengthen

It was a year ago this week that our Head of Research, Tom Lee, made what is easily one of the best contrarian market calls of the last ten years. In the depths of the pandemic-induced market crisis Tom said that you should buy stocks at the ‘Epicenter’ of the crisis, or those closest to the social and economic consequences of COVID-19. Since the depths of that crisis, the market went up around 75%, led by the Epicenter sectors. In March 2020, even if an investor expected financial markets to survive they bought what was working and what was safe.

We’re convinced that what will be known by posterity as ‘The Great Reopening’ has begun. We think in the future to indicate how good an investment is, someone might say something like it’s as much of a no brainer as buying travel & leisure and energy stocks before the GREAT REOPENING. These stocks are not rentals, they are not a trade. A lot of valuation is about survivability and these companies have proven they’re unkillable in the face of the greatest exogenous shock of our lifetimes. Here’s the other thing, real profits today are not discounted. And those profits are coming for the poised, waiting and revamped Epicenter stocks that are under-owned and likely lead indexes higher.

They haven’t been sitting around doing nothing while the interruption of demand and revenue occurred; they’ve been waiting for this moment and we think they’re poised to pleasantly surprise us. The shift of focus of the consumer wallet from the digital to the long foregone ‘real-economy’ and social interaction/event driven stocks will likely be rapid, violent and be coming up against streamlined and updated business models.

Stocks closed on Friday at an all-time-high of 3,973.54, rising from 3,913.10 last week. A market rally of significant strength and breadth occurred in the last hour of trading. The moves in the Nasdaq and Russel 2000 were particularly notable reversals that made a somewhat sour week end on a sweet note. The market bifurcation continues. Rotation into Cyclical/Value/Epicenter continued this week but Technology also rallied at the end of the week despite the 10 YR settling just north of 1.67%. In the past few weeks, it seemed the FAANG names were having problems around the 1.60% mark. The fact that these areas still finished strong despite the 10YR being at this level is encouraging and supportive of our base case, which remains that we have likely seen the lows for 1H2021. Nonetheless, markets behaved erratically and sloppily around the quadruple witching expiration and there’s probably some

rebalancing activity that was also a likely culprit. Still, we see many positive catalysts and signs from the market that we are poised for a significant rally to be led by Epicenter. Indeed, these sectors have led since the depths of the crisis last year, even more so than Tech.

While analysts are discussing scenarios around TAM for Growth names and why Zoom will have 18 billion users soon (exaggeration) a beast is rumbling beneath that will make itself known violently to those not paying attention. Fund managers who may be discussing value/cyclical/Epicenter names as dinosaurs may be horrified to realize that they are a lot more Jurassic Park than museum fossil. It can be seen popping up in alternative data here and there. A news story here and a news story there of an old company with a new spin on things, new efficiencies and protocols developed to get through a year without revenue. Some people have gotten wise to what’s going on and to some of the unique opportunities developing. There’s a reason that Barry Diller and IAC with a chest full of cash and the world as their oyster chose to deploy a significant amount of it to invest in MGM, the subject of this week’ Signal From Noise, and help shepherd their nascent and incredibly promising efforts in i-Gaming and online sports betting. The combination of the digital and the powerful brick and mortar business they have is a ‘once-in-a-decade’ opportunity according to Diller in a letter to his shareholders.

The stories of the great growth names are legitimate, inspiring and they likely have many great stories ahead of them. Apple’s had amazing earnings, they’re moving toward a more lucrative revenue model and they’re even in talks to make a car. However, we think if you’re looking for alpha in the coming quarters, maybe even the coming years, you should be paying attention to stories that seem a little out of place but are giving a hint of what’s to come, like the domestic auto manufacturers having production interrupted by a shortage of advanced semi-conductors.

Consider the stalwart previously boring Energy name that we featured last week Schlumberger, they are opening a carbon negative energy plant with Chevron and Microsoft. The American Petroleum Institute just agreed to a carbon taxing scheme. There is a future nearer than the one projected by the valuations of many of the best performing stocks over the last decade and their lofty multiples. Many of the same technologies and business models that resulted in those high multiples are being adopted by older industries with powerful effects in many cases. Red-headed step-children of a growth-obsessed Wall Street are emerging from a long purgatory-period with once-in-a-generation tail winds on both the top and bottom line!

Look, we get it. Nobody Gets Fired For Owning Coke. That used to be a saying on Wall Street. Now, nobody gets fired for owning FAANG. Investors, to us, seem to be eagerly awaiting a return to a status quo that is rapidly eroding despite people’s natural, almost reflexive fear of refulgent, but improbable risks. For example, we’re sure when you heard about the new lockdowns in Europe you got an almost traumatized reaction of it must be happening again. This is natural and understandable of course. It’s easy to flash back to a year ago when everyone was panicking and the many credible sources were wondering out loud whether or not civilization might effectively collapse as we knew it. However, the data says markets will likely go up from here. Europe’s lockdowns are a blunt but effective instrument but more importantly US vaccine penetration is making re-opening a fast-approaching reality that your portfolio should be poised for.