Weekly Research Briefing: No Jacket Required

August 03, 2021

However, it is looking increasingly likely that one will need both a vaccine card and a mask to join others indoors for a night out on the town. Both Broadway and the top NYC restaurants have moved toward such requirements for the upcoming months. Expect the movie theaters, sports venues, and chain restaurants to soon follow. Last week, most major U.S. employers also made more restrictive moves and delayed their office re-openings as we watched the COVID Delta variant accelerate its way across the U.S. So, while masks back indoors will be a drag, it is a necessary evil to reduce the spread among the vaccinated and to keep the unvaccinated out of the hospitals.

It will be interesting to see how the new restrictions and pauses in returning to work will affect the U.S. service economy. So far, the U.S. manufacturing data is not showing many signs of slowing. Maybe a longer Delta presence will give the Fed an even longer leash to begin its taper of bond purchases and hike in the Fed Funds rate? We will learn much more from the Fed later this month from Jackson Hole. And we will know much more about the Delta variant’s progress in a few weeks as kids begin to return to the classroom and this current COVID spike peaks.

Finally, the U.S. will have its Infrastructure Week in Washington, D.C. as Congress looks to approve a $1 trillion package to build and fix our nation's bridges, roads and broadband. With 2,700 pages of spending plans, there is not one page of new or increased taxes. Both the Senate and the House are expected to vote on it before the end of the week. The White House will need several boxes of pens to hand out at its final signing because it took many deal makers at the table to put this transaction together.

We are now past the peak week of earnings for the S&P 500. I am still getting through many of the individual company details, but to sum up, I think it was a pretty good turnout for the big caps. Q2 revenues and earnings beat handily, helped by some monster margins. I can’t imagine future margins staying as high as they are given the increase in prices and wages, but maybe unit volumes and pricing continue to be strong into Q3? We will have to wait to see how the Fall plays out with COVID, supply chain bottle necks and the slowdown in Asia. Then again, if you are Chipotle, AMD or Google and you are crushing the top line, margins are a lesser worry.

With the bulk of big earnings behind us now, the infrastructure deal headed for a vote and Jackson Hole coming up at the end of August, I wouldn’t be surprised if the markets get very quiet. Volumes could easily challenge their holiday lows. Family and personal time will take priority for much of August. Hopefully you have some plans to turn off the screens and do some thinking instead of clicking and scrolling. And of course, find a mountain, lake or ocean to enjoy.

Unfortunately, it now takes soaring COVID data to get the unvaccinated in for their first shot...

Now that we know that the virus resides in the nose and that vaccinated people can just as easily spread the virus as unvaccinated people, shots in arms should accelerate in August. Fingers crossed that August 2021 will be the final peak for all U.S. cities.

@MiamiHerald: IN TODAY’S MIAMI HERALD: Our reimagined newspaper features an in-depth look at how the COVID pandemic has roared back to life with astonishing speed and frightening virulence, crushing hopes for an end to the epidemic and presenting new challenges for public health officials.

Miami Herald cover-COVID

If Las Vegas wants to surpass their 2019 visits, they will need to adopt mandatory vaccines and masks...

Otherwise, the 70-80% of the population in favor will stay away until next year.

Las Vegas Visitors


With the bulk of earnings in the rear-view mirror, that was a much better Q2 than we expected...

Even some pickups in estimates for Q3 and Q4, which is why stocks stayed strong the last few weeks. Now, we will start building our 2022 models in more detail and accuracy.

S&P 500 EPS growth estimates

Talk about an incredible two-year jump in profits for the big techs...

Tech Giants Crush Profit Records in Q2


So many earnings reports last week, but tough to find one better than Google's...

The acceleration in the Q2 numbers is laughable. How could you not stand and clap for them?



Some top earnings call comments and also a thought from the Fed to help better frame up where we might be headed...

"…roughly 100 aircraft per week have returned to service over the past four months, making the active fleet now approximately 80% of its previous size with single-aisle activity levels slightly above twin-aisle. And although utilization rates and load factors are increasing in some areas, they are still below historic levels, which means airlines are flying around 70% of their normal capacity at the global level."
- Boeing (BA) CEO David Calhoun

"Semiconductor constraints will remain even though we expect the production situation to improve from this summer. Steel and other raw material prices will hike. And we will face a further shortage of containers due to the normalization of shipments by each company. Because of those risks, the environment surrounding us remains unstable."
- Mitsubishi (MMTOF) CFO Koji Ikeya

"I think, in my view -- and I may be wrong here -- at some point, demand and supply need to start settling itself out. There's a lot of demand, there's not enough supply based on all the V-shape recovery with the congestion in the ports, et cetera. And until that stabilizes itself out, I think we are going to continue to see inflation."
- 3M (MMM) CFO Monish Patolawala

"Inflation has increased notably and will likely remain elevated in coming months before moderating....I would say in the near term that the risks to inflation are probably to the upside...If we saw signs that the path of inflation or longer-term inflation expectations were moving materially and persistently beyond levels consistent with our goal, we’d be prepared to adjust the stance of policy."...
"We’re clearly a ways away from considering raising interest rates. It’s not something that is on our radar screen right now...We’re not at full employment, but we are having high inflation."
- U.S. Federal Reserve Chair Jerome Powell


The jump back in semiconductor stocks tells me the market wants again to reward growth cyclicals and feels better about the supply chain bottlenecks...

@hmeisler: It's been quite some time since the SOX outperformed Naz like it did last week

S&P Dow Jones Indices

With July now in the books, here are the major contributors/detractors for the S&P 500...

Energy, REITs and financials might have the best YTD returns, but tech still contributes more due to the sheer size of the industry.

S&P Dow Jones Indices


The Q2 earnings season has helped improve the health of the market...

Stocks Above 50-Day Moving Averages


But while the market has inched higher, participation across all stocks continues to be a bit punk...

@WalterDeemer: Advance-decline line now sitting 2682 net advances below its July 2nd high. Breadth divergences can be and often are resolved in due time, but the longer they persist the more concerning they are.

NYSE Advance-Decline Line

Forward valuations remain stretched also...

@FactSet: The forward 12-month P/E ratio for $SPX of 21.2 is above the 5-year average (18.1) and the 10-year average (16.2).

S&P 500 Forward 12-Month P/E Ratio

Market cap to P/E is beyond extreme, but should improve a bit as trailing Q4 GDP improves...

Tweet from @LizAnnSonders

Across the liquid asset classes, here is how the major market segments have performed YTD and in 2020...

I would bet that not many would have picked gold and Asian equities as their worst performing asset classes at the beginning of the year.

Major Indices


Do you see the alligator's jaws waiting to bite?

This divergence likely will not continue. Too difficult for housing prices to run faster than wages for long. Something will snap this shut, either a change in demand or a change in supply.

Housing Price Index


This chart shows that new home prices are at a relative low as compared to existing home prices, so maybe it will be the homebuilders that crash the party?

@SoberLook: The ratio of US new to existing home prices is below one. This trend doesn’t bode well for existing-home price appreciation. (Source: @MizuhoAmericas)

Ratio of New to Existing Single-Family Home Prices

U.S. manufacturing data remains solid...

July PMI data from IHS Markit signalled the most substantial improvement in operating conditions across the U.S. manufacturing sector on record. Overall growth was supported by stronger expansions in output and new orders, with the latter increasing at the second-fastest pace since data collection began in May 2007. Unprecedented supplier shortages and delays continued to exert upward pressure on input costs and stymie firms' ability to process incoming new work. As a result, cost burdens rose at a record-breaking rate and the accumulation of backlogs accelerated.

U.S. Manufacturing PMI


But China manufacturing data is beginning to slow with new orders actually showing a retreat...

Caixin/Markit China Manufacturing PMI

And the rest of Asia is also showing a slowdown...

ASEAN Manufacturing PMI

If you want me to turn ghost white, just tell me that you see credit problems...

In fact, you don't even have to say it in a scary voice. I started out as a bank stock and high-yield bond analyst, so I have seen the problems that bad credit markets can bring. I do not know exactly what is happening to the Chinese real estate and lending markets, but when I see credit investors run like this, I tend to back away from the table.

Bloomberg Barclays USD China HY YTW

When one of the world's largest investors is making big portfolio adjustments, you take notice...

Much of this will be the timing date of March 31, which was near peak fear in COVID, but still, a 1200 basis point change in asset allocation is a big deal.

Japan’s Government Pension Investment Fund made a record cut to the weighting of Treasuries in its portfolio last fiscal year as the world’s safest asset led a global debt selloff.

GPIF, as the world’s biggest pension fund is known, lowered U.S. government bonds and bills to 35% of its foreign debt holdings in the 12 months ended March, from 47% previously, according to an analysis by Bloomberg of the latest data. The weighting pivot comes largely from the Japanese fund increasing investments into European sovereign debt.

The rebalancing comes with the fund now over a year into a new investment plan that’s reduced dependence on Japanese government bonds and shifted focus toward higher returning equities and overseas debt. While GPIF offers little commentary on annual changes in its portfolios, even small adjustments reverberate through world markets given its total investments of about $1.7 trillion.


Along the same lines, here are the top 15 commitments into private market funds for the first half of 2021...

This is over $16 billion being put to work by some of the top pension plans. Interesting to see which strategies, sectors and GPs they are committing to. Buyout is the top strategy chosen here because that is where you will find the largest funds.

The top 15 known private equity commitments made by investors


Venture capital funds are also seeing significant inflows helped by the big jump in exit deals in 2021...

As more companies stay private longer, the VC asset class is one way to invest in younger, faster growing enterprises.

Rock-bottom interest rates, a rush to diversify their portfolios and a string of successful exits have also prompted global investors to set aside more money for venture capital funds this year.

U.S. venture capital funds raised $70 billion in the first half of the year, a 65% increase from a year earlier, according to Refinitiv data. Asian and European funds raised $16.1 billion and $8.2 billion, respectively, much higher than in 2020.

"This record breaking year for venture capital funding globally is the result of the creative economy being a legitimate asset class and investors knowing they need to have an allocation," said Jeff Ransdell, managing director of Miami, Florida-based Fuel Venture Capital said.

"Companies are simply staying private longer than ever before, so the wealth creation is largely in the private sector at the moment."

Global venture capital deals by month


The Nikola CEO is arrested for catfishing suckerfish...

If you ever find a CEO spending more time manipulating their stock price than managing their business, drop everything you are working on and run as far away as possible.

Nikola CEO


If your company culture is looking for a caffeine shot, look no further than the Seattle HQ of Starbucks...

If there’s a “secret sauce” to Starbucks’s in-house management training, it’s that employees are expected to think beyond the bottom line, Lis says. If that’s not a fit, she says, new employees usually don’t last long. “We were taught to integrate and balance results with not just what you did, but how you did it,” says former Starbucks executive Adam Brotman. Now chief executive officer of restaurant technology company Brightloom, in which Starbucks has invested, Brotman left the coffee chain in 2018 to become co-CEO of clothing retailer J.Crew Group Inc. “It’s all about trying to change the nature of the role of a public company.”

That deeply embedded ethos has made Starbucks headquarters ripe for recruiters. Chipotle Mexican Grill Inc. has two former Starbucks executives in its nine-person C suite. Other notable alumni include Leanne Fremar, chief brand officer at JPMorgan Chase & Co., and Tony Matta, chief growth officer at Clorox Co. In May, Pinterest Inc. hired Christine Deputy as its new chief people officer, and though her most recent employer was Nordstrom Inc., she spent more than a decade rising through the ranks at Starbucks first.

“Experience in a company that does seem to get the culture piece right more often perhaps than others historically is something that other companies are keen to learn from,” recruiter Parker says.


A pin-up for all the HVAC service operators on my distribution list...

I remember 40 years ago when very few houses in Denver had air conditioning. Now, you couldn't live here without it.

Top Ten Energy Users In Your Home


Just another fully vaccinated employee returning to work for his first day in the office...

Tweet from @packers


The author has current equity ownership in: Google Inc. & 3M Corp.


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