Fired up, ready to go!
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Fired up, ready to go!
The Curious Investor - Apr 05, 2021
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What the Market?
Mr. Market hasn’t been known to be a soulful fella but it sure looks like he’s found his spark and he’s jazzing. The U.S. COVID response is picking up steam (so much so to induce some envy from Canada, eh?). Economic data continues to trend positive, the economic pre-workout juice (a.k.a the stimulus) is starting to kick in, and a long-term infrastructure plan could boost the U.S. economy and labor market through next year. Suffice to say, with all the good news, Mr. Market was unphased by a potential corporate tax raise as the S&P hit an all time high 4.000 points this week.
How come?
March Jobs Report: Start your economic engines because the U.S. economy created 916k jobs (vs. estimated 650k) in March. The labor force participation rate rose to 63.3% (vs. 61.5% in February), and even with more people looking for jobs, the unemployment rate fell to 6.0%... the lowest it’s been since before the pandemic! Furthermore, the hospitality and leisure sectors which are crucial to recovery showed the strongest growth... Yipee Kay Yey, Mr. Market!
Say hello to the American Jobs Plan: Last week President Biden announced his $2.25tn infrastructure plan to be rolled out over 8 years to reshore jobs and stimulate regional economies through infrastructure, industrial, manufacturing, R&D, and clean energy projects.
Incoming Corporate Tax Rate Hike: On Wednesday, President Biden put forth a tax plan to offset the cost of his infrastructure priorities. The initial proposal aims to raise the statutory corporate tax rate from 21% to 28%, eliminate offshoring and fossil-fuel tax breaks, as well as repealing incentives to move jobs and assets offshore that were created by the Trump tax law and its precedent. Investors have taken the news in stride as it is unclear when these tax hikes could come into action.
What’s an investor to do?
Investor mindset
The U.S. is rolling out vaccines like Johnny Appleseed. Nearly a third of the nation is vaccinated as numerous states have increased general eligibility. Meanwhile, as the U.S. economy begins reopening, Europe is bracing for a new wave of lockdowns which is boosting capital flow into American equity. As more evidence points to economic recovery and corporate growth, sectors may begin to rise. However, with increasing investor confidence and expectations minor blows could mean larger pullbacks.
Portfolio management
Can you believe it? Q1’21 is a wrap which means earnings season is once again upon us. Expect volatility to uptick, the positive economic outlook will undoubtedly put high expectations on earnings growth. Reopening sectors will look to demonstrate that the recovery is well on its way (e.g., hospitality, airlines, consumer cyclicals). As a recovery consolidates and yields continue rising, investors will likely look to boost positions in value stocks that lagged growth in the past. There is still time and room to switch from high-growth, speculative plays to smaller value plays in recovering sectors.
Keep an Eye on the Economy
Federal Reserve commentary: Returning from the long weekend, analysts will be turning to the Fed for guidance going forward. Investors will be looking out for the FOMC meeting minutes and the speech from the Fed’s Chairman, Jerome Powell. After the Fed’s sharp, positive revisions last month regarding forecasted economic growth and unemployment for 2021, Powell reiterated that interest rates would remain on hold at near-zero levels through 2023. With economic data suggesting a faster recovery across the board, analysts are disagreeing with the Fed’s forecast. Expect clear signals towards a tightening monetary policy, starting with a significant reduction of the Fed’s asset purchasing program in the near future.
Inflation tracking: As yields continue rising and inflation fears mount, analysts will look to how input prices may be rising. To date, there has been little evidence of inflation ramping up. Analysts expect a minor uptick to 60.2 vs. the February reading of 60.0, while PPI figures are expected to stay inline with February at 0.5%. Any significant upticks may accelerate inflation talk, although this is highly doubtful.
The Curious Investor:
Biden Infrastructure plan: The $2.25tn American Jobs Plan will help boost regional economic activity across multiple verticals that will aid job creation for the best part of the coming decade. , If successful, analysts have estimated its impact around 0.5-1.0% GDP growth for 2022. Likely the first of a two-part infrastructure recovery package that could total near $4tn will focus on transportation infrastructure, domestic manufacturing, modernization of the electric grid, broadband access and research and development in clean energy. The administration expects to pass the infrastructure plan before the fall, so it may be an interesting long-term opportunity:
Broadband Internet Access: the infrastructure plan aims to invest over $200bn in broadband internet access nationwide. Consider large players like CCI and AMT who may benefit in the short and long-term as communications infrastructure companies see capital inflows.
Traditional infrastructure: such as roads, bridges, and public transport are expected to receive over $620bn in capital investments. Crane and hoisting equipment companies, consider long-term value investments in companies such as: HRI, VMC, DE, CAT
Green energy: Research and development of green tech and housing infrastructure investments are expected to rake in over $480bn with a strong focus on water conservation and the elimination of lead from the American water system. Consider exposure through ETFs: PHO and AWK.
If you haven’t gotten the memo yet, 2021 is the year of value and reopening stocks. Check out our watchlist for: Value ETFs, industrials, consumer cyclicals, airlines, hospitality, commodities, real estate, construction, and energy ideas to capitalize on the reopening and value sectors.
Trickle-down bank banging: Archegos Capital, led by renowned investor Bill Hwang, wrote a check they couldn’t quite cash and got caught with their pockets empty.
What happened? Archegos borrowed billions from Wall Street banks and used the funds to make a number of highly leveraged and speculative trades. No one knew quite how exposed Archegos Capital was to any given position because shares were mostly held in deritivates (e.g., options, equity swaps). Turns out, Bill Hwang owned more than $20bn in shares of ViacomCBS making him the media company’s largest institutional shareholder. As ViacomCBS shares dropped substantially, Hwang’s lenders came calling for their money back or more collateral (a.k.a a margin call).
Pay the Piper: Archegos wasn’t able to meet the bank’s calls for more collateral leading the lenders such as Goldman Sachs, Nomura, and Credit Suisse to seize Archegos Capital’s assets and begin selling them off to recoup their losses. In the end, the banks may lose over $6bn this quarter.
Rubbing salt on the wound: As the banks declared their losses, investors began dumping the banking stocks, as well those exposed to substantial positions by Archegos.
Significance and fallout: The near overnight collapse of Archegos Capital is the largest implosion of an investment firm since the financial crisis and has revealed some major gray areas in the markets. Following the Gamestop/Melvin Capital ordeal, add Archegos’s derivatives trading and shady operating structure as a highly leveraged family office to the things that should change in the global financial system. Regulators certainly have their work cut out for them in 2021.
What’s an investor to do? This may be a nice entry point after a relative pullback in bank stocks. Consider a broad-based approach through: ETFs like KBE and FTXO
Economic Calendar:
Monday: U.S. PMI, Services employment index, factory orders, Japanese household spending
Tuesday: Eurozone unemployment rate, Bank of Australia interest rate decision, Australian and Chinese PMI
Wednesday: IMF Spring meeting, Japanese leading economic index, Eurozone PMI, FOMC Minutes
Thursday: IMF Spring meeting, ECB monetary policy meeting accounts, Fed Chairman speech, U.S. Jobless Claims
Friday: IMF Spring meeting, Chinese PPI and CPI, U.S. PPI,
If you didn’t know, now you know
The insurgency in Cabo Delgado which has left more than 2,500 dead and over 700K people displaced since fighting began in 2017 just escalated. ISIL besieged the town of Palma in Mozambique, attacking outposts, police stations, banks and beheading civilians. The government’s military response has been largely ineffective and slow. Those that were trapped in the city, facing starvation and execution, have made numerous attempts to flee with the aid of security forces. At the moment, ISIL has looted, burned, and seized control over Palma as government forces plan to retake the city.
This summary only covers the surface of the conflict. To read more, click here.
What we’re vibing:
Soul by Pixar: Is all this living really worth dying for? That’s the question behind Pixar’s latest inspiring gem that will leave you wanting to live every minute of your life. A box of tissues is recommended.
Understanding Exposure by Bryan Peterson. One of the most popular photography books ever written, and probably the clearest one we’ve seen. An easy-to-read book for amateur photographers to truly amp their game with clear explanations of photographic theory and how to use them to your advantage.
New York expunges all Marijuana criminal record as the state legalizes recreational use
Parole officer empathy training lead to a 13% drop in returning offenders
Resources
WTM Mentions Performance Tracker
A content guide to investing (books, books, books!)
Disclaimer
This writing is for informational purposes only and the author/s undertake/s no obligation to update this article even if the opinions expressed change. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. It also does not offer to provide advisory or other services in any jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. The author/s expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.