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From Barron’s, July 27, 2020 (Part 2)

 

 

Pg 6, Up and Down Wall Street: 5 biggest SP500 stocks [FAAMG: FB, AMZN, AAPL, MSFT, GOOGL] cannot rise forever, and when that stops, they will take down the rest 495 stocks with them. FAAMG now account for 22% of SP500 market-cap. Economic recovery may also cause rotation from growth to cyclicals [i.e. economically sensitive stocks]. Weaker dollar has provided boost to gold and other assets. The Fed will continue to be supportive with easy monetary policy, but the next fiscal stimulus has been delayed due to dithering in DC – a market selloff would put pressure on politicians. Real-time data on short-term indicators such as travel and restaurant reservations show stall due to rising Covid-19 cases.

The Fed has forced Dan Fuss [aggressive multisector LSBRX] to change his game. Besides distorting the corporate bond market, Fed’s purchases of recently fallen angles has also distorted the HY bond market. Fuss is now buying Treasuries [22%] and high-yielding stocks [10%, but the limit was recently increased to 20%].

Pg 8, Streetwise: Cigarette maker PM [yield 6%] described its ESG activities in 192-page long supplement to its 138-pg annual report. It is unclear if many ESG funds will be convinced. Tobacco company shares [MO, etc] were in decline until vaping took off. PM instead focused on smoke-less IQOS heating system and oral tobacco Snus. Author Hough also would like to claim credit for being a do-gooder as he once let a turtle cross the bike path and he once returned a shopping cart to the cart station.

 

Pg 10-11: FOMC Statement and Powell’s press conference on Wednesday [ZIRP is expected through 2022].

What is an average stock? For SP500, average market-cap is $60 billion; on average, 21 analysts cover a stock; % buy-rating is 53%; % sell-rating is 7%; FDX is an average SP500 stock. Numbers are different for DJIA but average there is JPM. Not bad!

Indy Autonomous Challenge [Indy 50] will be in October 2021. Race will have 20 laps around 2.5-mile track and the finish time should be under 25 minutes [i.e. average speed of 120 mph]. Many universities are competing for $1.5 million top prize and other lesser prizes. But real-life autonomous cars are far from reality.

 

Data this week [bad reports keep coming but some may be better than expected]: Durable goods report, Dallas Fed Texas manufacturing outlook on Monday; consumer confidence on Tuesday; pending home sales on Wednesday; Q2 GDP growth [-34%] on Thursday; ISM Chicago PMI, personal income & spending, UM sentiment on Friday.

 

Bullish Recommendations: PG&E [PCG; undervalued post-bankruptcy; no dividends until earnings threshold is reached may be in 2023; looking for a permanent CEO; 22% owned by Wildfire Victims Trust; future liabilities from forest wildfires capped as it (and other CA utilities) can tap into a $21 billion state fund; state may also takeover in future at a fair price; much of $25.5 billion in bankruptcy settlement was financed with new debt (total debt now $40 billion) although it issued $9 billion in new equity (institutional holders include Appaloosa Management, Fidelity Investment and Management, Third Point, Zimmer Partners); pg 13];

biotechs [NVS, CRSP (no sales yet), GBT, BLUE, AGIO, EDIT, SGMO, BEAM, NTLA, EMMA, VRTX; gene-therapy is yielding results for Sickle Cell (inherited) and that gives hopes for other diseases, etc; pg 14].

 

Bearish Recommendations: See other stories.

 

Pg 9: Drug pricing issue is resurfacing as there are some positive developments for Covid-19 vaccine [PFE (+BNTX), AZN, MRNA (+NIH), MRK, JNJ, etc]. Fair pricing would include cost plus profit. It is unclear how often the vaccination may be required.

 

Pg 12: Oil sector has been hurt badly by the pandemic. While M&A may be expected, many companies don’t have resources to buy and targets don’t want to sell at deeply depressed prices. So, CVX + NBL deal is atypical. CVX has a very strong balance sheet with net debt only 13% of capital; NBL is at 57% discount from Jan 2 high. NBL cash flow may even help support CVX 5.7% dividend. Some potential targets at deep discounts include MTDR, WPX, LPI.

 

Pg 16: Cover Story, “Electric Trucks Are the Future. The Stocks are for the Bold”. In the heavy-duty electric truck market, several companies are in preliminary stages [even proposal stages] – TSLA, NKLA, BLDP, WKHS, Hyliion [bought by SPAC SHLL and to be re-tickered as HYLN]. Batteries for heavy-duty trucks also pose a challenge [current trial range is only 300-500 miles]. When available, electric truck prices may be $150K-200K. Beware that some are multibillion-dollar Unicorns without a product yet. Competition will be tough from traditional heavy-duty trucks with established players CMI, PCAR, VWAGY, NAV, VLVLY, DMLRY [some of these may acquire failing newcomers]. Current 18-wheelers can go million miles before major overhaul; fully loaded, 6-7 miles/gallon; range 1,000 miles; operational cost $1.80/mi [with driver and insurance] but only $1/mile truck cost; drivers work 11 hours ON [probably cover 600 miles] and then 10 hours OFF schedule, and there are many husband-wife teams that can go for longer stretches; average unit cost $100K; annual sales in 2019 350K units, but may be only 170K units in 2020. Unlike cars, heavy-duty trucks aren’t impulse purchases.

Pg 21: Hydrogen fuel-cell stocks are in a bubble – PLUG, BLDP, BE. Commercial viability of fuel-cell power is years away.

 

Pg 22: Daniel Shaykevich of active EM bond VEMBX has been buying EM bonds on selloffs. Fund has outperformed indexed VWOB and EMB. He focuses on macro and security level risks and avoids extreme risks. In crisis, he buys better quality EM bonds that are selling off rather than bottom-fish for crashing low-quality EM bonds.

 

Pg 24: With money-market fund yields almost nil, consider ultra-short-term bond funds [FCONX, UUSTX; MINT] and FDIC insured money-market accounts [Ally, Capital One 360, Citi, Marcus, etc].

 

Pg 25: Highflying tech stocks are deflating as their Q2 earnings have come out. Investors have only themselves to blame for bidding them up so high [and analysts obliging with aggressive targets] during the pandemic, global recession, unprecedented unemployment and social unrest. NFLX provided an example that pandemic boost for the at-home group of stocks may be over and that may not be good news for PTON, ZM, SHOP, TDOC, etc. Cloud can be hyped only so much as the results from IBM and MSFT showed and that may impact AMZN, GOOGL, etc. And what happened to the former chip leader INTC? Its integrated in-house chip design and production model has failed it; competitors [AMD, etc] are now months/years ahead with their own chip designs but outsourcing production to TSM; INTC CEO said that it may have do some of that to catchup.

 

Pg 26: Beware of risks of high yielding leveraged mREITs; those specializing in nonagency MBS [CIM, etc] are riskier than those with agency MBS [#1 NLY (yield 13.5%), #2 AGNC (yield 10.5%), etc; both cut payouts recently]. FTSE mREITs index is down -38.7% YTD; it fell -60% from Feb high to Mar low and has since rebounded.

 

Pg 27: 32 million are losing federal unemployment benefits under the Cares Act this week [they have already ended in many states as they go by full weeks (ending on Saturday or Sunday) before July 31]. That will be bad for them and for businesses that they shop at. Gross employment compensation plus unemployment benefits in May were +3.5% higher than in February and that has avoided economic pain and resulted in V-shaped recovery for retail. The next stimulus is still stuck in DC and there is no agreement on extension of expired/expiring federal unemployment benefits either.

 

Pg 28: Joyce Chang, Chair of Global Research at JPM. Don’t fight the central bankers; since March, there is $6 trillion in G-10 central bank balance sheet expansion and $11 trillion in fiscal stimulus, and more is on the way. We have to be prepared for the worst case that is a 2nd wave of Covid-19 in Fall. Almost 70% of global government bonds [$32 trillion] have yields below +0.5%; recently fallen-angel HY [recent HY] are $145 billion YTD and may reach $215 billion in 2020. Equity returns will also be muted but at least there will be some real return. Old 60-40 hybrid may become new 80-20 hybrid with more diversified equities [global], bonds [HY, FR/BL, CLOs, convertibles, EMs] and including some commodities [gold, etc] and alternative assets; i.e. having many equity-like assets beyond pure equity and bonds [seems like a push for aggressive multi-asset allocation funds]. Chinese debt is going into global bond indexes this year; long-term, Chinese debt is also headed towards zero yield. Chinese growth will slow – for 2020, China has target of +6% but JPM has it at only +2%, and it may be somewhere in between. Covid-19 has hastened big paradigm shifts – very low Treasury yields; low liquidity [on March 13, only $12 million Treasury could trade while that is $19.2 trillion market]; high volatility; unconventional monetary policies [the Fed has purchased 8% of GDP, 11% of public debt outstanding, and there isn’t any exit strategy] and fiscal policies [deficit may be 13.8% of GDP]; US-China frictions that may lead to China-Plus-One strategy [but complete uncoupling will be impossible, and despite harsh rhetoric from both sides, an uneasy truce may be in mutual self-interests]; deglobalization and populism.

 

Pg 30: Patrick Pizzella, Deputy Secretary of Department of Labor [DOL]. Main street should also have access to private-equity; so far its access is limited to wealthy and a few remaining DB pension plans. Many companies are remaining private for longer. The DOL wants DC plans [401k/403b] to include private-equity option; actually, the plan sponsors already can do that but have chosen not to do so due to some perceived legal risks. The DOL wants the DC retirement plans to do what they can already do.

 

Extras from Friday – I try to guess on Friday which features will make it in the weekend edition but the following guesses didn’t make it. Almost 75-80% of the weekend edition is now available by 9:00 PM Central on Friday. Barron’s revised website has “Interests” tabs similar to columns topics and that makes it easier to find potential items for the weekend edition. This is also the reason for earlier postings on Saturday – I do wait for my paper delivery [typically between 5:00-6:30 AM Central] to fill in some data.

If polls indicate Democratic sweep, companies may react by issuing special dividends ahead of possible tax increases. Double-taxation of dividends plus state taxes make effective tax on dividends quite high. On the other hand, munis would benefit.

Nominations of Judy Shelton and Charles Waller for Fed governors now move to full Senate.

Ray Dalio of hedge-fund Bridgewater is cutting staff because the firm can manage with fewer people working from home and using newer technologies. Firm’s AUM shrank from $164 billion in February to $138 billion in April.

M* sustainability ratings of funds reveal some oddities – many ESG funds have low or below-average ratings. Some of it is due to a change in methodology by M* owned Sustainalytics that produces these ratings. Many small companies are not covered by Sustainalytics and that may lead to lower ratings. It is suggested that lower-rated funds shouldn’t be overlooked [ARFFX, DMCRX, HGOYX, LMVTX, MSEQX, etc].

YBB
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Re: From Barron’s, July 27, 2020 (Part 2)

Thanks, yogi, for your Saturday reads.

"The Fed has forced Dan Fuss [aggressive multisector LSBRX] to change his game. Besides distorting the corporate bond market, Fed’s purchases of recently fallen angles has also distorted the HY bond market. Fuss is now buying Treasuries [22%] and high-yielding stocks [10%, but the limit was recently increased to 20%]." 

Seems times are changing in Fuss' court.

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Re: From Barron’s, July 27, 2020 (Part 2)

Thanks Yogi..

Dennis Gartman has often observed that a thing, something like TECH will keep going up until that stops. Gartman it seems for some time has been bullish on Gold.  It would be hard to see or find a way that a market sell off would put even more pressure on the politicians than what Trump has been doing. Cortez in her public statements of her reactions to inappropriate social irresponsibility from "BOZO" , came off as very eloquent.  I personally don't like her or her political agendas but she struck a cord with me as a mother's son, a wife's spouse and as the father of our daughter.

"ZIRP is expected... 2022... " , in plain English ZIRP will be everlasting until some glaring economic dislocation unhinges it.  PG 28.  "....and there is no exit strategy".  On the other hand Bits and Pieces of Eight of silver coins and gold coins probably worth more like +$500 today as $50 gold pieces and Guineas were once in common use.  A Guinea usually had 1/4 oz of gold content, maybe today more valuable than $500 for it's foggy numismatic value? One of the latest FED board candidates was questioned on their previously alleged endorsement of a return the Gold Standard, which of course they now staunchly deny.  Bill after all never inhaled. 

I'm Glad I got the Bonds instead of the stock out of the PG&E resolution.  Two longer maturity higher coupon bonds for one old PG&E bond. Some speculating in the markets sometimes does work out for everybody.  I thnk I would stick with my Canadian renewables themed Utes rather than play in and dig deeper in the CA sandbox.  

M&A in OIL?  maybe Concho is another takeover suspect.  Over in E&G Utes there is a rumor developing on OGE ?  I had, had EVERG and NJR as the latest two most eligible to get offers.   In O&G RRC got some late in the week up side pressure.  

You would have thought INTC had dropped to a low $40 handle.  The various media analysts being interviewed universally hated it .  

Vetoing the extensions of Unemployment benefits came back to bite Bush 41 when one of his re-election slogans became,  "I feel your pain",  as he campaigned against Buchanon in the primaries, and Bill in the ensuing election during a recessionary period around the country.   WE must put his pledge of "NO NEW TAXES" to the test against Biden promising not to target any families with less than a $400 K income for enhancing tax revenues.  If it turns out that some of these flagging mortgage REITs indeed have valid mortgage deeds, at some point the survivors will regain their pre-foreberance valuations or become targets for acquisition at least 50% higher than their recent values.  There may be some great Opps in College town rentals going to the block.  

Don't fight the Central Bankers ?  But we might find ways to stay out of their way.  The evil men do in their lives lives AFTER them, while the good is often interred with their bones.  Sometimes we must measure what we might lose in the ST by what may be preserved to be later put to use, to make strong gains in the future.  I consider all of my Calls and maturities in fixed income of late, to be the  foundational basis for building my next bond ladder when we return to risk being properly compensated for, in that market.  Let the Central Banks shrug off $2400 US$s for gold and then $3K.   Let them go on measuring for the CPIs, everything that does not get hit by inflation.  "Oh but that we could see ourselves as others see us", "LAMENTED" the poet philosopher.  When in reality a half hour of Fred Flintstone  reveals such, as actually being a curse.  I am going to keep re-inventing the Ropadope.  

Tax changes on dividends may benefit "SOME" munis but forthcoming Federal and Fed aid to States and cities that are the most profligate /in the worst fiscal and actuarial nightmarish shape may use their newfound largesse as just an encouragement to continue sustaining the unsustainable.  Where will revenues expected to provide the basis for P&I on muni bonds be guaranteed as being senior to "other state and local" obligations.   IF Mortgagees can be stiffed despite having a previously valid Mortgage DEED contract, and The Fed can violate the Federal Reserve Act by buying uncollateralized debt , why can't the states and cities take even the revenue for bond P&I on REVENUE bonds as well as that intended for GOs'  P&I ?

  

 

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Re: From Barron’s, July 27, 2020 (Part 2)


@NomasDOZ wrote:

.....Dennis Gartman has often observed that a thing, something like TECH will keep going up until that stops. Gartman it seems for some time has been bullish on Gold.....


Barron's attributed "If something cannot go on forever, it will stop" to economist Herbert Stein who was the former Chair of CEA under Presidents Nixon and Ford. Wiki says that the quote is from 1976.    https://en.wikipedia.org/wiki/Herbert_Stein

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Re: From Barron’s, July 27, 2020 (Part 2)

As Lou should have responded to Bud, I say. "EXACTLY".  But without Lou responding to the Statement with a Question there would be no classic comic baseball parody.

So we wait and watch for what is going to happen to the NYC transit authority Pension Trust.  DITTO the State pensions in NJ, KY, Illinois, PA, MD, and others.  Among so many other, others with less than $6 billion in underfunded pension obligations but that have less than 2 million populations. What is their per capita scale of underfunding vs Illinois with a 17 million population or NJ with a 9 million pop ? 

If the profligacy and disregard of generally accepted accounting standards for making actuarial projections continues on in the public sector until it stops, who but the future pensioners and current employees and pensioners with the lowest wages and annuity benefits will end up the most damaged?  WAGE and Benefit DE-compression is just inconsistent with equal pay for equal work.    The bailout nation of the 2008-09 fiascos barely touched "THE MORAL HAZARD" of what is being attempted this time around.   In Ruwanda Clinton did nothing, in Bosnia he did at least a something.  A something that has turned out to be much more in the Best interests of the USA than what the War Criminal Dumya accomplished disregarding the moral hazards "DEFENSE" Secretary CHENY clearly outlined for the over kill in SW Asia.  

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Re: From Barron’s, July 27, 2020 (Part 2)


@yogibearbull wrote:

<snip>

M* sustainability ratings of funds reveal some oddities – many ESG funds have low or below-average ratings. Some of it is due to a change in methodology by M* owned Sustainalytics that produces these ratings. Many small companies are not covered by Sustainalytics and that may lead to lower ratings. It is suggested that lower-rated funds shouldn’t be overlooked [ARFFX, DMCRX, HGOYX, LMVTX, MSEQX, etc].


I didn't know what it meant, so I did a M* search for 'sustainability ratings'. One of the articles explained -

The Morningstar Sustainability Ratings and the underlying Portfolio Sustainability Scores give us an opportunity to look at the relationship between ESG ratings and portfolio volatility. The Morningstar Sustainability Rating for funds uses company ESG ratings from Sustainalytics to assess how well the holdings in a portfolio are managing the ESG issues most relevant and material to their businesses. The Portfolio Sustainability Score is an asset-weighted roll-up of company ESG scores with deductions made for company involvement in ESG-related controversies. A fund’s Sustainability Rating reflects its Sustainability Score relative to its Morningstar Category peers.

Funny that with all the issues with the M* web site and M* data, that they are introducing new metrics like this.

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Re: From Barron’s, July 27, 2020 (Part 2)

@PN , in the middle of Quote/Portfolio page, you see Sustainability Ratings as quantitative score [value, %rank] as well as representation as number of Globes: 5 Globes - Highest, 1 Globe - Lowest. See for example, PRBLX that has ESG among its strategies, but not in its name, has 5 Globes,    https://www.morningstar.com/funds/xnas/prblx/portfolio

VFINX [SP500] has 3 Globes.

Funny that Barron's called them M* globe-ratings!

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