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Frequent Contributor

From Barron’s, August 3, 2020 (Part 1)

 

 

[Italics-bold within the brackets are my additions/elaborations] [New M* Discussions doesn’t allow any colors for cut-and-paste from WORD]

 

Pg M1, Trader: Investors are wary/suspicious of many companies easily beating depressed Q2 earnings expectations; with 300 of SP500 companies reporting, 85% easily beat earnings estimates [by +22%, very unusual]. However, since the earnings season began, DJIA is down -2%, SP500 is flat, and Nasdaq Comp is up +1% [with some fantastic tech earnings]. Among the FAAMNG, 3 are up, 3 down; this is similar for the rest of the market where about half of the companies reporting are up and the other half down. Investors have realized that cloud isn’t as hot as they thought, and industrials [aerospace, autos] aren’t recovering as quickly as they thought. There are clearly winners and losers in this market, and it is better to focus on companies with improving prospects.

EVs are Wall Street’s Wild West [+160% YTD]. Many trade above analyst targets and they now have worst-, base- and best- case estimates; many are not even followed by analysts. Companies include TSLA [valued at $750K per vehicle delivered; rumors about inclusion in SP500], WKHS [proposing to build EV Postal-vans], NKLA [no product yet], latest IPO LI.

 

The CME FedWatch tool is based on current fed fund futures quotes around the FOMC meetings and the assumption of gradual fed fund rate changes.

ZIRP [0-0.25% fed fund rate] through March 2021 FOMC meeting.

http://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html ]

 

For the week [index changes only], DJIA -0.16%, SP500 +1.73%, Nasdaq Comp +3.69%, Russell 2000 ) +0.88%. DJ Transports +2.72%; DJ Utilities +0.61%. [AAPL +14.73%]. US$ index (spot) -1.01%, oil/WTI futures -2.47%, gold futures +3.45%.

YTD [index changes only], DJIA -7.39%, SP500 +1.25%, Nasdaq Comp +19.76%. [AAPL +44.74%]

 

Pg M4, Europe: UK bike [33% of sales] and auto-parts [67% of sales] retailer Halfords Group [HFD.uk/HLFDY] is now also providing routine installation services [AMZN cannot do that]. Biking picked up during Covid-19 lockdowns and auto maintenance is growing with lifting of lockdowns.

 

Pg M4, Emerging Markets: Brazilian stocks are struggling [EWZ -30% YTD]. There is progress in economic front. Covid-19 related stimulus will cause deficit to be 20% of GDP and public debt at 100% of GDP; but overall C-19 response has been poor. Economic reform will be slow. Government may have to raise taxes or cut spending.

 

Pg M6, Commodities: Silver has rallied [+25% in July!] but it may still be undervalued as gold-silver ratio remains high 80 [it was 4,000-yr high at 126 on 3/18/20]. Silver bullion ETF is SLV.

 

Pg M5, Options: Investors have made lot of money in stocks and bonds in these difficult times. Some want to hedge but hedging is expensive. Buffett/BRK bought more BAC [-30% YTD] even as others are hedging their positions. Selling BAC puts is recommended [to be with Buffett/BRK]. [News: BRK has been cleared by regulators to own 24.9% of BAC; it now owns 11.8%]

[SP500 VIX 24.46, SKEW 141.56 ] [Yahoo Finance data]

[10-Yr T-Note futures-options based TYVIX has been discontinued; last quote 5/15/20. A new TLT-options-based TICKER? will replace it in Fall]

 

Pg M22, M28: A bad week in Europe [Denmark –1.55%, Spain -5.76%] and a bad week in Asia [Taiwan +3.03%, Japan -4.79%]. The equity CEF index [data to Thursday] outperformed the DJIA and its discount was -8% [wide fluctuations between -4% to -16% over the last few weeks].

Treasury rates 3-mo yield 0.09%, 2-yr 0.11%, 5-yr 0.21%, 10-yr 0.55%, 30-yr 1.20% [Treasury data*]. Dollar fell, DXY 93.46, -1% [M31; -6% since April]. Gold [Handy & Harman spot, Thursday] rose to $1,965, +4% [9-yr high; +30% YTD]; the gold-miners rose [M34]. [^XAU was at 154.53, +2.55% for the week]

*Treasury Yield-Curve https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=y...

Top FDIC insured savings deposit rates*: Money-market accounts 1.00%; 3-mo Jumbo CD 0.50%, 1-yr CDs 1.00%; 5-yr CDs 1.29% [M29].

*For local rates https://www.depositaccounts.com/banks/rates-map/

 

Pg 13: Cover Story, “SPACs Are All the Rage, but These Private-Equity-Like Vehicles are Complicated. Here’s What You Need to Know”. SPACs are blank-check companies that raise money via IPO first and decide in 2 years what business(es) to buy. Examples are PSTH.U [largest; from Bill Ackman], GSAH.U, TXAC, IPOB, IPOC; post-SPAC examples are NKLA, DKNG, SPCE, VRT. Retail investors should stay away from this complex area; they cannot participate in the lucrative IPO.

 

Pg 7, Up and Down Wall Street: $2.3 trillion from CARES Act and $5 trillion pumped in by the Fed prevented a worse outcome than -32.9% [annualized] decline for Q2 GDP. The government stimulus in Q2 [total $7.3 trillion] well exceeded normal/typical quarterly GDP of $4.85 trillion. Interestingly, market-cap of stocks also increased by +$7 trillion to 2x GDP, a new record [prior record was 1.87x GDP in 2000/Q1 dot.com bubble]. While personal income grew due to government stimulus, personal spending collapsed, and personal saving increased. Some of the savings went into online gambling and stock speculation – Eastman Kodak [KODK] was the latest hot stock for speculators as it ventured into pharma chemicals using a government loan. FB, AAPL, AMZN, GOOGL had good Q2 reports as their businesses benefitted from Covid-19. Jobs report this week would be good. State and local governments [10% of GDP] continue to struggle. Fitch revised its outlook for US sovereign credit rating to negative but kept AAA rating for now. But there is complacency in DC as the next stimulus is delayed.

Traditional 60-40 is revisited for the ZIRP environment. But rather than increasing %stocks, it is suggested to look into unloved value and financial stocks.

 

Pg 9, Streetwise: Bitcoin has been very volatile, but it is rising again; some point to falling dollar [-7% since mid-May, a huge quick drop for currency], others to profits from other cryptocurrencies being parked in Bitcoin. Gold has moved up too. Lower dollar helps exporters and multinationals with high foreign sales [MCD, CL]. There isn’t much inflation although inflation expectations [ = nominal Treasury yield – TIPS yield] are up to 1.5%. Euro is benefitting from huge stimulus in the euro-zone; now the EU is doing some borrowing on behalf of the euro-zone states [previously, each euro-zone state had to borrow on its own]. But Ed Yardeni [Yardeni Research] doesn’t see much downside for dollar, a reserve currency; he is optimistic about Covid-19 outcomes and treatment in the US; he is OK with owning some gold but not Bitcoin. US big techs had hearing via videoconferencing, but investors don’t seem to be worried – the lawmakers traded barbs among themselves and also confused FB and TWTR.

 

More later….

YBB
2 Replies
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Participant ○○

Re: From Barron’s, August 3, 2020 (Part 1)

THANK YOU, Yogi!

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Explorer ○○○

Re: From Barron’s, August 3, 2020 (Part 1)

Thanks YOGI  ...

Now that the so long overlooked  MSFT (M) is now more commonly included in the previous FAANG  acronym will the Robin Hood and other "slice" traders make it a significant part of their own custom built virtual ETF  ?  Maybe the likes of PRMTX will have to promote MSFT from their top 25 holdings (1.6% weighting) to the top 10?  Aside from the AMZN being +13% that fund has the rest of the usual FAANG suspects at avg 5% allocations.  

The mostly always overlooked EV / GREEN themed stock in Canada continues not to make these lists.  So I will add a flyer NFYEF Now getting a ST knock down like BA, not finding it's BUS sales and order backlogs so strong of late. A decent "Value" stock persisting in a 5.5% dividend yield.  

Does it matter that much where the major averages END the week ?  Last week we had 2 day back to back sessions with near 80 S&P point swings.  The trading range bound marketS continue on.  No good news is continuing to fall on deaf ears as the US economy seems stuck in limbo.  The weakening DXY briefly drove the Loonie to .75 before it backed off to end near .746 .  The rally in Canadian utilities with US exposures continues to out pace the US DJ Utilities index.  Values of the stocks rise with a stronger Loonie as do their tax advantaged dividends.  Since early June TRSWF US$ priced has tacked on a 10% gain.  The markets are not just stuck in the same trading ranges ?

Brazil continues getting to the table a bit too late.  The country continues to be plagued with abject poverty.  Now that they rival Venezuela with their deep water offshore oil and Gas reserves that market has collapsed.  Brazil may continue on as a fungible market  for Western hemisphere grains. Besides what they produce domestically soybeans do not come stamped "MADE in USA".  The over zealous continued harvesting and clearing of their rain forests pose a global risk to the control of carbon dumping into the atmosphere.  Continued destructions of wildlife habitat.  Ethanol  prices are down about 35% YTD and while Sugar is near flat YTD it is down 15% off it's Feb peaks. 

If you think silver is headed significantly higher you may get your convictions better served with the AGQ ?

I sat on the beach LAST Summer explaining how the FED chickening out in the 2018 4th qtr on a Q/E exit strategy, was going to have to eventually deal with $2400/ oz Gold.   AUY has joined NEM in promising significant participation this time in the gold price windfalls by way of dividend increases.  Gold miners burned their shareholders in 2011 choosing to reward the Jrs by buying up proven reserves usually in the hinterlands and also buying lower grade ore resources.  Below 6grams/ton you can make money mining gold at these prices but not so much very strong payoffs for the costs of the infrastructure costs to get access to reserves in the hinterlands 500 to 800 miles away from the nearest roads and power lines.  Gold  & Silver miners in 2011 chose immortality over the participation of their shareholders in the gold and silver price spikes.  Yamana had a little price dip Opp when they announced a $700 million bond offering.  But this debt will have legs in the long term for it's lower interest rates and longer maturities.  The Fed caused the 2011 PM spikes by not acting broadly enough creating a financial panic where no one knew what was safe to own.  This time as usual they have conically ramped things again by acting too Broadly in bailing out too many things and sectors that were not systematically threatening.  This time the run up in PMs is likely to run into a longer term trend vs the economic fundamentals of over zealous creations of excess US$ Fiat currency.  The Fed is in an increasingly perilous situation vs their abilities to control medium and especially LT rates.  Gold will hit $2400 and then go on from there and Powell will continue to proclaim, "Pay no attention to that man behind the curtain". 

Since BRK is so keen on BAC some of those replacement strategies for the zero bound bond markets could be something like the BAC-K.  If you are retired and take distributions on the 1st or 15th the BAC-K pays out on 1/24, 4/24, 7/24 and 10/24 which can bolster the income in the generally sparse dividend payouts on Feb, May, Aug and Nov.  GS -J another of that ilk.  Other BAC preferrds... "Relatively safe" TBTF bank preferreds pay tax advantaged dic=vidends and can be used in an alternate strategy of moving your 40% or 60% bonds over into a barbell with +30 % preferreds on the long end and FDIC insure for "THE BUCK" 1yr to 3 yr CDs.  The combined yield may be close to 3.5% . Bank shares will do quite well into a rising rate environment which will enhance the safety of their preferreds vs any small decays in your cost basis' as they approach their call dates or feel the effects of higher LT rates beginning to assert.    In dips you can sniff out any that have less than 2 yrs to call that drop below the usual $25 par.  The WFC-L continues to lay on more sail in the gale without any apparent ill effects and only very temporary dips below $1300.  

UHT Ohhh! There is already a news blurb on KODK 's executive chairman engaging in an insider trading of options the day before the deal for them to produce vital Pharma chems was announced.  Just when Joe was getting even more traction in his campaign and Trump was imitating Putin on postponing elections we now have another special procecutor in the wind? 

 

 

 

 

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