For a PDF version of the below commentary please click here Weekly Letter 9-13-2021

Callahan Capital Management

Weekly Commentary | September 13th, 2021

 

Major Theme of the Markets Last Week: Anyone need a job?

 

Last week was a holiday-shortened trading week with the U.S. markets closed on Monday for Labor Day, but that did not stop some key economic news releases or the markets’ reactions to the releases. Employment was a key focus for the financial markets last week as the conundrum of employers needing employees and being unable to find any continued to cause issues in the economy. On Wednesday last week, the Bureau of Labor and Statistics released the latest JOLTS Job Openings figure for the month of August. The markets had been expecting a reading of about 10 million openings, but the actual number came in very close to 11 million openings. JOLTS Job Openings attempts to measure the open job positions on the last day of a month. The jobs can be full time jobs, part time jobs, seasonal jobs or almost any other type of job that an employer is looking to have filled. With 11 million job openings at the end of August, there are now more open jobs than there are people who are unemployed in the U.S. as that figure was 8.7 million during the month of August. The difference between people looking for a job and the open positions continues to be a concern for some economists and is being closely watched by the Federal Reserve. Many employers are reporting that they cannot find qualified candidates for the open positions, or that prospective employees are not motivated to get a job as they are making money in the gig economy or taking advantage of unemployment benefits.

 

Unemployment benefits is one area of the picture that is changing significantly as the enhanced unemployment benefits ended last week for many Americans still covered by them. These enhanced benefits made it more advantageous for some people to stay home rather than work as they could make more money from unemployment than they could working. We may have started to see a shift in this mentality last week as the initial jobless claims report on Friday came in at 310,000, which is the lowest level that we have seen since March of 2020, when the pandemic really started to adversely impact the economy. The current labor situation will likely take a while to resolve itself, which is one of the key reasons the Fed is not in a rush to start tapering or raising interest rates, provided inflation doesn’t get out of hand.

 

Inflation data last week came in hotter than expected by the markets and was a bit of a headwind for the markets on Friday. Both the Producer Price Index (PPI) and the Core PPI were released, and both came in higher than expected. The year-over-year PPI was perhaps the most concerning as it was 8.3 percent while the Core PPI on a year-over-year basis came in at 6.7 percent. More than 25 percent of the gain in PPI came from health, beauty and optical goods, which is a segment of the index that recently has relied on the reopening of the U.S. economy. The 8.3 percent reading on the PPI was the fastest rate of inflation measured on the index since at least 2010 and continued to put doubts in investors’ minds about the current inflation being transitory, as the Fed keeps repeating.


Financial News Impacting the Markets

Last week, the ECB beat the U.S. Federal Reserve in the start of a tapering, although it did not officially call it a tapering. ECB President Christine Lagarde explicitly said that “The lady isn’t tapering.” What did the ECB change? The ECB announced that it would be trimming its emergency bond purchases over the next quarter. While no exact figure was provided, three sources with knowledge of the talks within the group said the ECB will be trimming the current 80 billion euros per month back down to somewhere between 60 and 70 billion euros per month. President Lagarde’s exact term was, “What we have done today … unanimously, is to calibrate the pace of our purchases in order to deliver on our goal of favorable financing conditions.” While stating that Europe is finding its financial footing, she also called out the fact that COVID-19 is far from over in Europe and that progress on the vaccination program and further stemming the spread of the disease around the world will be crucial going forward. While the ECB made the policy shift, it also raised its growth expectations for the EU for 2021 up to 5 percent and increased its expected inflation rate for 2021 up to 2.2 percent. Lastly, the ECB kept its primary key interest rates unchanged at the meeting.

 

Politics made several headlines last week that impacted the financial markets as there seems to be mounting uncertainty over what will be able to be passed in Washington D.C. over the coming weeks and months. Last week, West Virginia Senator Joe Manchin made it known that he was willing to support a smaller Democratic spending bill, something on the order of $1 to $2 trillion, but not the requested $3.5 trillion. On Sunday, Senator Manchin he told NBC’s “Meet the Press” that he could not support the spending plan and that things need to slow down as there is no need to rush this legislation through. With Manchin effectively saying no, it will be difficult for the Democrats to pass the spending legislation on its own as they control just 50 seats out of the 100. But there is another political football being tossed around currently in Washington D.C. and it is the debt ceiling. Treasury Secretary Yellen has repeatedly said that the extraordinary measures she is currently using to pay the debts of the U.S. government will be exhausted by the end of October, but that warning doesn’t seem to be catching many ears in Washington D.C. as the debate still has a very long way to go before getting to the point of being able to be voted on and the clock is quickly ticking away.

Market Statistics

 

  • Equities: Equity markets in the U.S. had a rough week last week, despite it being a holiday-shortened trading week. All four of the major U.S. indexes posted declines on each of the trading days last week and the NASDAQ was the only index that didn’t fall into a 5-day slide when looking back to the end of the previous week. The losses were not extreme, and the market action was not bad, it was just a slow and steady decline. Volume, as was expected, remained very low on a weekly basis, but even adjusting the weekly data to take into account that there were only four trading days last week, volume was still extremely low.

 

  • NASDAQ (-1.61%) – Below Average volume
  • S&P 500 (-1.69%) – Below Average volume
  • Dow (-2.15%) – Below Average volume
  • Russell 2000 (-2.81%) – Below Average volume

 

  • Sector Performance: There were no equity sectors last week that posted positive returns. The top performing sectors are the sectors that lost less than the others. Semiconductors turned in the best performance as demand for the sector’s products has been increasing. Consumer Discretionary, Consumer Goods and Consumer Services took the next three spots as all three sectors continued to benefit from Americans spending money, albeit at a slowing pace when compared to a few months ago. Rounding out the top performing sectors last week was the Medical Devices sector, which is still experiencing an uptick in demand as people around the world return to more elective surgeries for various ailments.

 

The sectors that made the bottom five performing list last week each had a difficult week, falling by more than 3 percent. Real Estate and Home Builders were two of the bottom performers last week as home builders seemed to be hit abnormally hard by a small rise in interest rates during the week. Storm damage assessments throughout much of the south and east also seemed to hamper the performance of the groups. The Multimedia Networking sector took a hit last week from several of the big players in the relatively small sector, as Netgear, Juniper Networks and Inseego all posted declines in excess of 4 percent. Healthcare Providers and Pharmaceuticals rounded out the bottom performing sectors last week as both sectors are experiencing a slight decline due to falling numbers of routine patient visits due to the current COVID-19 wave.

 

  • Top Sectors: Semiconductors, Consumer Discretionary, Consumer Goods, Consumer Services, Medical Devices
  • Bottom Sectors: Pharmaceuticals, Healthcare Providers, Home Construction, Multimedia Networking, Real Estate

 

  • Commodities: Commodities were all negative except for oil as the Goldman Sachs Commodity Index (a production weighted index) posted a loss of -0.12 percent. Oil was a significant offset to the negative performance seen across nearly all other commodities as oil gained 0.29 percent last week on increasing global demand for gasoline. Metals were mixed last week, with Gold and Silver declining by 2.27 and 3.89 percent, respectively. Copper was the gainer of the group, posting a gain of 2.35 percent last week as China picked up its demand for imports of copper. Agriculture overall declined by 2.52 percent, driven by a decline of 3.62 percent in Livestock and a drop of 2.13 percent in Grains.

 

  • GS Commodity Index (-0.12%)
  • Oil (0.29%)
  • Livestock (-3.62%)
  • Grains (-2.13%)
  • Agriculture (-2.52%)
  • Gold (-2.27%)
  • Silver (-3.89%)
  • Copper (2.35%)

 

  • International Performance: Global index performance last week was mixed, with 59 percent of the global indexes moving lower while 42 percent advanced. The average return of the global indexes last week was -0.33 percent. When looking at the global indexes, most of the major global regions experienced losses for the week with the exception of Asia, which saw several of the key indexes in China and other neighboring countries post gains for the week.

 

  • Best performance (3rd week in a row): Mongolia’s MSE Top 20 Index (8.06%)
  • Worst performance: Estonia’s Tallinn Index (-7.51%)
  • Average: (-0.33%)

 

  • Volatility: With the markets posting declines on a daily basis during trading last week, it was not surprising to see that the VIX increased over the course of the week. For the week, the VIX gained 27.67 percent, which was the largest weekly gain for the fear gauge since the middle of June. The VIX closed out last week over 20, also for the first time since the middle of June, and seems to be implying that the markets could be in for some more choppy action over the next 30 days. With a reading of 20.95, the VIX is implying a move of 6.05 percent over the next 30 days but, as always, the direction of the movement is unknown.

 

Model Performance and Update

 

For the shortened trading week ending on 9/10/2021, returns in the hybrid and quant hypothetical models* (net of a 1% annual management fee) were as follows:

 

  Last Week YTD 2021 Since 6/30/2015

(Annualized)

Aggressive Model -1.67% 4.90% 6.21%
Aggressive Benchmark -1.10% 12.63% 8.58%
Growth Model -1.33% 4.64% 5.30%
Growth Benchmark -0.86% 9.76% 6.95%
Moderate Model -0.96% 3.88% 4.37%
Moderate Benchmark -0.61% 6.93% 5.25%
Income Model -0.81% 3.73% 4.07%
Income Benchmark -0.31% 3.44% 3.03%
Quant Model -2.45% 21.20%
S&P 500 -1.69% 18.70% 13.25%

 

*Model performance does not represent any specific account performance but rather a model of holdings based on risk levels that are like hybrid model’s actual holdings. The hypothetical models are rebalanced daily to model targets and include dividends being reinvested. Performance calculations are my own.

 

There were no changes in the hybrid models over the course of the previous week. For the week, the top performing holdings in the hybrid models were the hedging positions, Marriott and Walt Disney. The largest detractors of performance last week were The Trade Desk, Aptar and VF Corp. In watching several potential positions on the buy list, a few are much closer after declining last week than they have been over the past few months, but the trigger points to initiate positions were not hit. On the flipside, none of the triggers to sell or trim existing positions in the hybrid models were hit during the declines seen last week. We are in a seasonal period during which there will be a lot of jostling around in the markets and with such movements there will likely be some adjustments made to the hybrid models.

 

Looking to the Future

 

  • Politics: The political morass in Washington D.C. is likely to get much louder
  • COVID-19: Holiday weekend and kids going back to school could prove to be a major test of the U.S. healthcare system

 

Interesting Fact: Clean Energy Targets

 

Thirty states and more than 100 cities have adopted clean electricity targets—most ambitiously, Oregon’s legislature recently passed a clean electricity standard of an 80% reduction in power emissions by 2030.

 

Source: vox.com https://www.vox.com/22579218/clean-energy-standard-electricity-infrastructure-democrats

 

Have a great week!

Peter Johnson

 

A referral from a client is a tremendous compliment and a huge responsibility that can never be taken lightly.

 

For a PDF version of the below commentary please click here Weekly Letter 9-7-2021

Callahan Capital Management

Weekly Commentary | September 7th, 2021

 

Major Theme of the Markets Last Week: Same old same old

While there was some semblance of normalcy returning to many Americans’ lives this summer, there was a constant undercurrent of uneasiness and uncertainty in the financial markets even as they continued a slow march higher. Last week was no exception to this trend, as the S&P 500, NASDAQ and S&P 400 midcap indexes all posted new all-time highs, while the small caps and the Dow lagged all time high levels. The same old headwinds were in place for the markets; the economic data was mixed and could be taken as either positive or negative depending on how one looked at the releases. COVID-19 and the Delta variant continues to spread through many parts of the U.S. and is permeating the classrooms of students that have gone back to school. The labor market produced mixed data last week as payroll growth was below expectations while the overall unemployment rate declined.

 

Financial markets remained fully entrenched in summer trading last week as traders and large institutional money mangers enjoyed the final full week of summer trading, which unofficially comes to an end following Labor Day. Concerns for near-term market performance abound as August was the 7th consecutive month of monthly gains for the S&P 500, the 10th month in a row without a 5 percent correction and a month that saw more than half of the trading days of the month end with the S&P 500 at a new all-time record high level. Volume, however, remained light during much of the month and market participation was uneven as there was a small group of stocks driving the majority of the indexes’ returns. Rotational trading forces played a role last week, as we have seen over the past several weeks, as growth outperformed value, led higher by large cap technology companies.

 

Financial News Impacting the Markets

Consumer confidence was the single largest piece of financial news that made headlines last week as the Conference Board Consumer Confidence index unexpectedly fell from 125.1 in July down to 113.8 for the month of August. As depicted in the chart to the right from Investing.com, the 113.8 reading is the lowest reading of the index over the past 6 months. This caused concern that consumer spending may lighten from the quick pace the economy has been enjoying throughout much of the summer. Delta was one of the factors pointed to in the release when economists were attempting to come up with reasons for why the reading was so far off from their expectations, with the other primary reason being the conclusion of enhanced unemployment benefits adversely impacting the ability of some Americans to spend as they had over much of the summer. During September, consumer confidence and spending will be very closely monitored by the financial markets as a downward trend could have negative implications on the upcoming holiday shopping season, which would have adverse economic ramifications throughout the U.S. economy.

 

With August ending and so much uncertainty last week, the financial media spent a lot of time forecasting what the markets could do in September. As is typical, the range of forecasts was wide with some economists forecasting the markets to keep running higher while others had a more ominous warning about a looming correction (the same correction they have been talking about for months). September is the most difficult month for the financial markets when looking back at historical movements of the S&P 500. On average, the S&P 500 has lost money during September over the past 20 years. However, with such a small sample of Septembers during the past 20 years, it is the large declines (greater than 7 percent losses) that have occurred 4 times that skew the data decidedly negative. Seasonality also plays a role in the market movements of September as traders return from summer and start to adjust their positions, which in turn adds to volatility. The increase in volatility during September is not exceptionally large, but it is a noticeable increase from the general lack of volatility that is typically experienced during summer trading in August. The current bull market is certainly getting long in the tooth, but it could continue this way for the near future as it has been doing over the past several months.

 

The Federal Reserve’s upcoming tapering program made some headlines late during the week, especially following Friday’s jobs report. Going into the jobs report, the consensus thought was that the Fed would be announcing its tapering program at the late September FOMC meeting. The taper wasn’t necessarily going to start immediately, but a hard date of when the tapering would begin was expected. On Friday, the Bureau of Labor Statistics released its August jobs data, which badly missed expectations. Expectations had been for nonfarm payrolls to increase by 750,000 jobs and nonfarm private payrolls to increase by 665,000 jobs. The figures released were 235,000 and 243,000, respectively, missing expectations by a combined 943,000 jobs. This is wide of the worst gap between expectations and actual readings that we have seen in a very long time and caused the markets to, at least temporarily, put the idea of the Fed tapering program being announced on hold. Markets now expect the tapering decision to be kicked out into early next year as the Fed continues to wait and monitor the current economic situation unfolding before making any announcements. The idea of a delay in the Fed tapering was seen in both bond yields last week as well as the U.S. dollar, which both moved a meaningful amount on the release.

 

Market Statistics

 

  • Equities: Markets were mixed last week as large cap technology companies were once again in the lead. The NASDAQ, Russell 2000 and the S&P 500 all made it two weeks in a row of gains while the Dow fell a little short, thanks in large part to a decline of nearly 4 percent for Dow Inc. and a 5.5 percent slide for American Express, which saw a slowdown in usage during the month of August. Volume, as mentioned above, remained anemic but was expected going into the long holiday weekend.

 

  • NASDAQ (1.55%) – Below Average volume
  • Russell 2000 (0.65%) – Below Average volume
  • S&P 500 (0.58%) – Below Average volume
  • Dow (-0.24%) – Below Average volume

 

  • Sector Performance: Sector performance was an odd set of sectors last week when looking at the top performing sectors. Real Estate turned in the best performance thanks to the idea that interest rates will remain lower for longer than expected thanks to the jobs report. Medical procedures in the U.S. appear to have not slowed down as much as anticipated in the face of Delta. With the development, the Medical Device, Biotechnology and Healthcare Provider sectors took three of the top five performing sectors last week. Consumer Discretionary rounded out the top five performing sectors last week as the hope of the reopening trade continued to play out.

 

When looking at sectors that underperformed last week, three of them—Regional Banks, Financial Services and Insurance—underperformed due to the movement in interest rates and the idea that the tapering program is now on hold for a while longer. Aerospace and Defense came in third from the bottom last week as many of the firearm manufacturers came under pressure from potential political risk that is building in Washington DC. Rounding out the underperforming sectors last week was the Energy sector which moved slightly lower as damage assessments were starting to come in from Hurricane Ida in the Gulf of Mexico and the refining industry near Louisiana.

 

  • Top Sectors: Real Estate, Medical Devices, Biotechnology, Healthcare Providers, Consumer Discretionary
  • Bottom Sectors: Energy, Insurance, Aerospace & Defense, Regional Banks, Financial Services

 

  • Commodities: Commodities were very mixed last week as the Goldman Sachs Commodity Index (a production weighted index) posted a gain of 0.31 percent. Oil was a significant driver of the index’s gain as oil increased by 1.06 percent, thanks to a pickup in demand for gasoline and diesel in Europe that has been building as restrictions due to COVID-19 have been lifting. Metals were mixed last week, with Gold and Silver advancing by 0.51 and 2.46 percent, respectively. Copper was the laggard of the group, posting a decline of 0.28 percent last week in very low volume trading. Agriculture overall declined by 1.29 percent, driven by a decline of 3.19 percent in Grains and a drop of 2.37 percent in Livestock.

 

  • GS Commodity Index (0.31%)
  • Oil (1.06%)
  • Livestock (-2.37%)
  • Grains (-3.19%)
  • Agriculture (-1.29%)
  • Gold (0.51%)
  • Silver (2.46%)
  • Copper (-0.28%)

 

  • International Performance: Global index performance last week was mixed, with 62 percent of the global indexes moving higher while 38 percent declined. The average return of the global indexes last week was 0.75 percent. When looking at the global indexes, most of the major global regions experienced gains for the week with the exception of Africa, which saw several of the key indexes within the region post declines for the week.

 

  • Best performance: Mongolia’s MSE Top 20 Index (7.39%)
  • Worst performance: Kenya’s Nairobi All Share Index (-4.13%)
  • Average: (0.75%)

 

  • Volatility: The VIX last week had a very slow week trading in a range of 2.2 percent for the entire week. The VIX ended up posting an increase of 0.12 percent for the week as there wasn’t enough going on in the underlying options contracts to move the fear gauge around. With the VIX at 16.41, it is implying a move of 4.74 percent on the S&P 500 over the next 30 days but, as always, the direction of the movement is unknown.

Model Performance and Update

 

For the trading week ending on 9/3/2021, returns in the hybrid and quant hypothetical models* (net of a 1% annual management fee) were as follows:

 

  Last Week YTD 2021 Since 6/30/2015

(Annualized)

Aggressive Model 0.50% 6.70% 6.52%
Aggressive Benchmark 1.12% 13.89% 8.80%
Growth Model 0.45% 6.05% 5.54%
Growth Benchmark 0.87% 10.71% 7.12%
Moderate Model 0.37% 4.90% 4.54%
Moderate Benchmark 0.62% 7.59% 5.37%
Income Model 0.37% 4.57% 4.22%
Income Benchmark 0.31% 3.76% 3.09%
Quant Model 0.57% 24.25%
S&P 500 0.58% 20.75% 13.60%

 

*Model performance does not represent any specific account performance but rather a model of holdings based on risk levels that are like hybrid model’s actual holdings. The hypothetical models are rebalanced daily to model targets and include dividends being reinvested. Performance calculations are my own.

 

There were no changes in the hybrid models over the course of the previous week. For the week, the top performing holding in the hybrid models was Canadian National Railway (CNI) which jumped more than 15 percent last week as it now looks like the company will not be purchasing Kansas City South (KSU) due to the Surface Transportation Board’s decision to not allow the merger. The largest detractor of performance last week was TJX Companies as it posted a loss of 3.5 percent thanks to uncertainty over future in-person shopping due to COVID-19.

 

Looking to the Future

 

  • Post Labor Day trading: With Labor Day now behind us, we should see a slow but steady increase in overall trading volume
  • COVID-19: Delta variant continues to be the main concern of the financial markets
  • Israel: Traders will be closely monitoring the next wave of COVID-19 starting in Israel as the country has one of the highest overall vaccination rates of any country in the world

Interesting Fact: Energy from Snow?

 

According to a 2019 study in the journal Nano Energy, engineers and chemists from the University of California, Los Angeles (UCLA) have developed a device made of silicone that can harness a charge from static electricity. “Snow is positively charged and gives up electrons, while silicone is negatively charged and accepts the electrons,”  IFL Science explains. “So, as the snow lands on the silicone, a charge is produced and then captured.” Think of it like the spark of energy you create when you rub a balloon against your hair.

 

Source: Science Direct

 

 

Have a great week!

Peter Johnson

 

A referral from a client is a tremendous compliment and a huge responsibility that can never be taken lightly.

 

For a PDF version of the below commentary please click here Weekly Letter 8-30-2021

Callahan Capital Management

Weekly Commentary | August 30th, 2021

Major Theme of the Markets Last Week: Jackson Hole

Conflicting opinions at the Fed were on full display last week as several Fed officials spoke to the media and Chair Powell gave his highly anticipated Jackson Hole speech on Friday morning. Early in the week last week, Fed Presidents Bostic and Kaplan gave their opinions that tapering should start sooner rather than later. While both Kaplan and Bostic want the taper to start soon, Kaplan would like it to be a gradual taper while Bostic prefers the taper be as fast as possible “so the economy can stand on its own.” The Hawkish comments early in the week were quelled a little as Fed Vice Chair Clarida made comments that while progress has been made in many areas of the economy in the fight against the economic hardships caused by COVID-19, there is still a long way to go. With conflicting comments abound, all eye and ears were on Fed Chair Powell and his speech to the virtual Jackson Hole Summit, which he gave on Friday morning.

Market participants wondered just how hawkish or dovish Chair Powell would be during his prepared remarks. Chair Powell’s speech provided no additional information, and he nearly perfectly walked the line between being too hawkish or too dovish. Chair Powell started his speech saying that the U.S. economy has met the test of “substantial further progress” as both the labor market and the Fed’s targeted inflation rate have both meaningfully improved when compared to where they were at the depths of the COVID-19 downturn. With this in mind, and having been the primary trigger of when a tapering of asset purchases would begin, it is now clear that the Fed will begin tapering its asset purchases (currently $120 billion per month). However, the exact date of the commencement of the tapering remains unknown. Fixed income markets are predicting that the tapering program will begin directly after the September FOMC meeting that is to be held on September 21st and 22nd. Chair Powell immediately followed up his comments about the potential for tapering to begin with comments that tapering does not mean that an interest rate hike is imminent. This seemed to alleviate some fears in the fixed income markets, not because of what was said but because there was no surprise in the language, meaning that a rate hike is still a way into 2022 at the earliest. Chair Powell, in true Fed speak, also hedged everything he said during his speech when he said that while the incoming data for the recent months has been very positive, the Fed is closely watching the impact of the Delta variant on the U.S. economy. One thing that is clear from Chair Powell’s speech is that he and the Fed learned a lot from the taper tantrum of late 2013 and are not willing to make the same mistake and surprise the markets with a tapering program again. The next tapering program will probably be the best telegraphed taper that a central bank has ever undertaken.

Financial News Impacting the Markets

Hurricane Ida, the 5th strongest hurricane ever to hit the mainland United States, made many headlines last week that had far reaching impacts on both the U.S. and global financial markets. The most direct impact was on the global oil market as U.S. producers were forced to shut down about 96 percent of offshore oil and natural gas production in the Gulf of Mexico last week as Ida started to enter the gulf. It was not only oil and gas production that was taken offline; there is also a significant amount of refinery capacity in the area that was also shut down. As of Sunday evening, approximately 9 percent of the oil refinery operations in the U.S. were offline due to Hurricane Ida. In addition to the shutdowns last week, the government released a report showing that demand for oil had climbed to the highest level since the start of the pandemic. In total, global oil prices increased by more than 10 percent last week with U.S. WTI crude oil jumping to more than $68 per barrel. One positive on the situation is that the oil and gasoline prices are elevated currently, but we are starting to move into a seasonal slowdown in demand for gasoline as many kids around the country head back to school and there is less driving occurring in the U.S. The Insurance sector took a hit from Hurricane Ida and while it doesn’t appear that the damage is as catastrophic as Hurricane Katrina was 16 years ago, there is still billions of dollars in damage in Louisiana. One company benefitting from the storms is Generac as there is sometimes a pop in demand for portable generators in the wake of very large natural disasters such as hurricanes.

 

COVID-19 and the ever-present Delta variant made headlines last week as the spread of the more contagious strain of the virus continued. On Monday, it was announced that Pfizer had received full authorization for its COVID-19 vaccine created using mRNA technology. The vaccine had been administered under the emergency use authorization given last year, but it now has gone through the full FDA testing and received full authorization for use in people over the age of 12. Markets took the approval as a sign that it may entice some people who were uncertain about the safety of the shot to get the shot. With the vaccine now fully authorized, some companies may find it easier to mandate the vaccine for their employees’ continued employment with the company. Delta continues to be one of the biggest ongoing concerns for the U.S. financial markets as it is now back-to-school season and many areas of the country have kids headed back to school while still unable to be vaccinated.

 

Economic data last week was mixed, but overall the data came in as expected. U.S. GDP for the second quarter of 2021 was released on Thursday and posted a gain of 6.6 percent, only one tenth of a percent below expectations but still one tenth of a percent ahead of the first estimate, which was revised upward. Durable goods orders for the month of July came in very close to market expectations and had no noticeable impact on the markets. The PCE Price index, the Fed’s index of choice when evaluating price inflation, posted an overall reading of 4.2 percent, while Core PCE prices gained 3.6 percent on a year-over-year basis. This above 2 percent reading was acknowledged by Fed Chair Powell, but he is sticking with price inflation remaining transitory, as he has been saying for the past few months. The University of Michigan consumer sentiment index for the month of August rounded out the economic releases for the week last week as it was released and met market expectations.

 

Market Statistics

 

  • Equities: Market movements last week were quite the opposite of where they were two weeks ago. Fears over COVID-19 variants seemed to abate as the media focused on the Fed’s Jackson Hole meeting as well as recoveries in oil and other areas that had been beaten down recently. Volume remained anemic with three of the four major indexes posting approximately 70 percent of normal trading volume. Despite the low trading volume, we did manage to hit two new milestones during the week last week with the NASDAQ crossing 15,000 for the first time ever while the S&P 500 broke 4,500 for the first time.
    • Russell 2000 (5.05%) – Below Average volume
    • NASDAQ (2.82%) – Below Average volume
    • S&P 500 (1.52%) – Below Average volume
    • Dow (0.96%) – Below Average volume

 

  • Sector Performance: Many of the sectors that were top performing two weeks ago were bottom last week and many of the bottom performers two weeks ago were top last week. Oil prices spiked higher last week as U.S. Gulf of Mexico production ground to a halt as Hurricane Ida came roaring into the Gulf. This sent Oil prices rocketing high. Moving along with Oil were the Oil & Gas Exploration, Energy and Natural Resources sectors, which took three of the top five performing spots. Semiconductors and Regional Banks rounded out the top five sectors as investors continued to push semiconductors higher on ever increasing global demand forecasts. Regional Banks had a good week last week as yield on government fixed income increased throughout much of the week, only giving back a little on Friday following Chair Powell’s speech to the virtual Jackson Hole meeting.

 

Yields moving higher was one of the major driving factors in the underperformance of some sectors last week, including Real Estate, Consumer Staples and Utilities, all of which are sectors that are seen as very interest rate sensitive. Healthcare and Pharmaceuticals saw investors pull some short-term profits out last week as gains from the past several weeks were sold and gains were booked.

 

  • Top Sectors: Oil & Gas Exploration, Energy, Natural Resources, Semiconductors, Regional Banks
  • Bottom Sectors: Real Estate, Consumer Staples, Healthcare, Pharmaceuticals, Utilities

 

  • Commodities: Commodities were almost all positive last week as the Goldman Sachs Commodity Index (a production weighted index) posted an advance of 7.52 percent (gaining two percent more than it gave up the two weeks ago). Oil was a significant driver of the index’s gain as oil jumped by 10.87 percent, the largest gain in the price of Oil on a weekly basis since June 5th, 2020. As mentioned above, the spike in the price of Oil was due to Hurricane Ida and the oil production and refinery shutdowns in the area. Metals were positive last week, with Gold, Silver and Copper advancing by 2.09, 4.59 and 4.92 percent, respectively. Agriculture overall advanced by 2.55 percent, driven by a gain of 2.27 percent in Grains. Livestock made it two weeks in a row of gains, advancing by 0.58 percent.

 

  • GS Commodity Index (7.52%)
  • Oil (10.87%)
  • Livestock (0.58%)
  • Grains (2.27%)
  • Agriculture (2.55%)
  • Gold (2.09%)
  • Silver (4.59%)
  • Copper (4.92%)

 

  • International Performance: Global index performance last week was heavily skewed toward positive, with 82 percent of the global indexes moving higher while 18 percent declined. The average return of the global indexes last week was 1.82 percent. When looking at the global indexes, all of the major global regions experienced gains for the week. The indexes that did post declines last week (there were 17 of them) were one-off indexes moving for very country- and company-specific reasons.

 

  • Best performance: Mongolia’s MSE Top 20 Index (27.3%)
  • Worst performance: Portugal’s PSI All-Share Index (-2.01%)
  • Average: (1.82%)

 

  • Volatility: Aside from a very small and short-lived spike upwards on Thursday in the VIX following news of the bombing at the Kabul airport, the VIX had a steady week of slowly stepping lower. The VIX ended the week at 16.39 after declining by 11.69 percent over the course of the week. A VIX reading of 16.39 implies a move of 4.73 percent over the course of the next 30 days for the S&P 500 but, as always, the direction of the move is unknown.

Model Performance and Update

 

For the trading week ending on 8/27/2021, returns in the hybrid and quant hypothetical models* (net of a 1% annual management fee) were as follows:

 

  Last Week YTD 2021 Since 6/30/2015

(Annualized)

Aggressive Model 1.06% 6.16% 6.45%
Aggressive Benchmark 1.82% 12.63% 8.63%
Growth Model 0.63% 5.57% 5.48%
Growth Benchmark 1.42% 9.75% 6.99%
Moderate Model 0.50% 4.51% 4.50%
Moderate Benchmark 1.01% 6.92% 5.28%
Income Model -0.06% 4.18% 4.17%
Income Benchmark 0.51% 3.44% 3.04%
Quant Model 1.98% 23.54%
S&P 500 1.52% 20.06% 13.54%

*Model performance does not represent any specific account performance but rather a model of holdings based on risk levels that are like hybrid model’s actual holdings. The hypothetical models are rebalanced daily to model targets and include dividends being reinvested. Performance calculations are my own.

 

There were no changes in the hybrid models over the course of the previous week. Top performing holds last week included the S&P 500 High beta ETF (+6.12%), Buffalo Small Cap fund (+5.84%) and The Trade Desk (+4.41%). Laggards in the hybrid models last week included Walmart (-3.26%), Johnson and Johnson (-3.05%) and McCormick (-2.67%). The markets have been rotating back and forth between growth and value over the past few weeks and, in doing so, many of the holdings currently on the watch list for sale or purchase have essentially been moving around in a tight trading range. Once we get through summer trading and maybe find a catalyst or two, we could see an uptick in action being taken in the hybrid models.

 

Looking to the Future

 

  • Last of Summer trading: This is the last trading week before the Labor Day holiday
  • COVID-19: Delta variant is a major concern as back-to-school season gets under way

 

Interesting Fact: Hurricane Ida

Hurricane Ida came ashore in Louisiana on Sunday, exactly 16 years to the day from when hurricane Katrina hit in nearly the same spot (45 miles to the west). While it is yet to be officially confirmed, Hurricane Ida is either the 5th or 6th strongest hurricane to hit the mainland U.S. in modern history. Hurricane Ida was powerful enough to reverse the flow of the Mississippi river when it came ashore, sending the river briefly flowing back upriver to the north.

 

Source APnews.com

 

Have a great week!

Peter Johnson

 

A referral from a client is a tremendous compliment and a huge responsibility that can never be taken lightly.

For a PDF version of the below commentary please click here Weekly Letter 8-23-2021

Callahan Capital Management

Weekly Commentary | August 23rd, 2021

 

Major Theme of the Markets Last Week: Economic Data and Uncertainty

Last week was a pretty slow week for the markets in terms of new developments. COVID-19 and the various variants that abound continued to spread and call into question much of the reopening that we have seen both here in the U.S. and in many parts of the world. But with this topic not being new to the markets, it seemed to have less impact than normal, with investors opting to look at the economic data released instead of COVID-19 data. The economic data, however, was certainly impacted by COVID-19.

 

Retail sales for the month of July were released last Tuesday with investors and economists alike expecting a slight gain of 0.1 percent on the core retail sales figure; a slight decline was anticipated in the overall retail sales figure of 0.3 percent. However, core retail sales posted a decline of 0.4 percent while overall retail sales dropped 1.1 percent. There were a few theories about why both figures came in below expectations, with the main one being that the Delta variant of COVID-19 is starting to adversely impact people’s willingness to go to stores and restaurants in person and spend money. A second theory is that some Americans that have been enjoying enhanced unemployment benefits are now coming to the end of the line for these extra cash infusions as most of the extra benefits expire in early September. With the extra cash flow coming to an end, some U.S. consumers could have decided to pull back on living beyond their means, which would be seen early in the retail sales figures. Whatever the reason for the slow down, retail sales did turn lower during the month of July and the markets seemed more concerned than normal about this economic data point.

 

Other economic data produced a more mixed picture about the U.S. economy last week. The New York Empire Manufacturing Index for the month of August posted a reading of 18.3, down nearly 25 points from the astronomic 43 print seen in July. U.S. Housing starts increased less than anticipated in July, while building permits increased more than anticipated. On the labor front, initial jobless claims from last week came in better than expected at only 348,000 new claims compared to the anticipated 363,000 claims. In total, the economic data presented an unclear picture of how the U.S. economy will do going forward and it is just that uncertainty that everyone will be watching for at the Federal Reserve’s Jackson Hole Economic Policy Symposium taking place at the end of this week.

 

 

 

Financial News Impacting the Markets

 

 

The Federal Reserve’s Jackson Hole Economic Policy Symposium is a once-a-year meeting of central bankers from the U.S. Federal Reserve as well as other central banks from around the world, at which a wide variety of academic papers and theories are discussed. The event is always capped off by the Chairperson of the Federal Reserve giving the closing speech. It is in this speech that in past years major shifts in Fed policies or policy changes have been outlined or new ideas on changes in the Fed’s thinking have been disseminated. This year, a statement has already been made and the event has not even started yet. Late last week, news broke that Fed Chair Powell would not be traveling to Jackson Hole for the meeting but would rather be giving his address to the group via video conference. This was quickly followed by an announcement that the Symposium would be moving to an all-digital platform and that there would be no in-person gathering in Jackson Hole. Markets took this as a sign that the Fed is very concerned about the spread of Delta and more concerned than many economists and Fed watchers had thought. This thought somewhat fed into what others were thinking that the markets were becoming a little too lackadaisical with the impact that this variant, and the countless other variants that are likely to follow, could have on the overall markets. In terms of numbers, the Delta variant is still spreading quickly in several areas of the U.S. and around the world. Some epidemiologists think that the “wave” we are currently experiencing will start to slow down in the northeast and the South in the next few weeks with the peak in other parts of the country not occurring until the middle of September. By that point, we should have clear economic data about the impact the variant is having on the U.S. economy, and we could also have a clearer plan as to what the Fed is thinking about doing next.

In the Federal Reserve meeting minutes from the late August meeting, released last week, there was a clear consensus building that tapering needed to be started by the Fed sooner rather than later. Markets took this in stride as it wasn’t new and the Fed Chairman himself said as much in his press conference following the August FOMC meeting. The meeting minutes also made it clear that just because the Fed starts to taper its asset purchases, it doesn’t mean the Fed will necessarily be raising interest rates any time soon. Dallas Fed President Kaplan made headlines last Friday when he said he was watching Delta closely and while he had yet to see a material impact on the economy, things are “unfolding rapidly” and if they start to deteriorate, he may need to “adjust” his view on reducing the support for the economy. In layman terms, if the Delta variant gets worse and hurts the economy, he may not be for starting tapering. This was a monumental change for the Fed official who is often the most hawkish official in the group, and a large reason for why the market rebounded so much on Friday, erasing almost half of the week’s losses that had built up over the prior four trading days.

 

China made headlines last week as Beijing continued its rampage against sectors and companies that are not thinking and acting as they should, according to the political party in control of China. China went after several high-profile technology companies over the past few months, causing great losses in their stock prices. China has also gone after online education companies and electronic gaming companies. Last week, it was liquor stocks that took a hit because of a state media report that said the State Administration for Market Regulation was considering new regulations for the industry. Healthcare companies also moved significantly lower after a report from the state media indicated that China was looking at curbing profits with new regulations for the sector. All of this is causing a large amount of uncertainty within China and for foreign investors who are afraid of being on the wrong side of the Chinese government with virtually no notice or ability to move out of positions before it is too late. China’s government is in the middle of a very fast show of economic force, a show that is intended to let all companies operating in China know that nothing happens in China without political support, no matter how big and powerful a company may have become. So far, it is at least partially working as there have been consistent outflows of foreign investments in the country’s financial markets these past few weeks as foreign investors assess just how big a threat the Chinese government could be to them. These actions by China are not new; what’s new is how brazen China’s government has become in establishing how beholden companies are to the government. President Xi released a statement last Wednesday, making it clear that he is working toward “common prosperity,” making sure that the rich do not benefit any more than the poor during the next economic cycle in China.

 

Market Statistics

 

  • Equities: Markets moved lower last week, notching their worst week since mid-July on continued low trading volume. Healthcare was the leader when looking at sector performance last week. With that in mind, it was not surprising that the S&P 500 was the best performing index of the four major indexes as the index has a sizeable weighting to healthcare (13.44 percent). NASDAQ came in second place also largely due to the weighting of healthcare in the index. The Dow came in third last week as Boeing was the anchor dragging along the ground once again as it has been so many times over the past two years. Bringing up the rear last week was the small cap Russell 2000 as investors moved toward the perceived safety of large, more well capitalized companies in light of the uncertainty around COVID-19. As mentioned above, volume continued to be very weak last week as we remain in the heart of summer trading season, something that will likely last for another two weeks; then we should see a gradual pick-up in trading volumes as we move into fall and winter.

 

  • S&P 500 (-0.59%) – Below Average volume
  • NASDAQ (-0.73%) – Below Average volume
  • Dow (-1.11%) – Below Average volume
  • Russell 2000 (-2.50%) – Below Average volume

 

  • Sector Performance: Sector performance last week was mainly driven by three different factors: the risk-off trade, the large decline in oil prices and the outstanding performance of healthcare. When looking at sectors that performed well last week, Healthcare as well as smaller subsectors of Medical Devices and Healthcare Providers took three of the top five performing spots. This was largely driven by an increase in healthcare visits by Americans as many people get back to life as it was prior to COVID-19. The risk-off trade was the driving force behind the last two sectors that made the top five last week, those being Utilities and Real Estate, two sectors of the market that historically have done well during times of rising interest rates and overall market uncertainty.

 

When looking at sectors that underperformed last week, Oil price action single handedly took down four of the bottom five sectors as Materials, Natural Resources, Energy and Oil & Gas Exploration all made the list thanks to the fall in oil prices. Consumer Discretionary rounded out the bottom five performing sectors last week as the unexpected large decline in retail sales on Wednesday seemed to take investors by surprise and make them think that discretionary spending could be slowing down faster than any one was expecting.

 

  • Top Sectors: Medical Devices, Healthcare Providers, Utilities, Healthcare, Real Estate
  • Bottom Sectors: Consumer Discretionary, Materials, Natural Resources, Energy, Oil & Gas Exploration

 

  • Commodities: Commodities were almost all negative last week as the Goldman Sachs Commodity Index (a production weighted index) posted a decline of 5.64 percent. Oil was a significant driver of the index’s decline as oil fell by 8.43 percent, the largest decline in the price of oil on a weekly basis that we have seen since late October of 2020. The decline in the price of oil came about because of increasing global oil supplies as well as increasing uncertainty over future near-term demand due to COVID-19 continuing to spread. Metals were mixed, with Silver and Copper declining by 2.82 and 5.13 percent, respectively, while Gold moved in the opposite direction, gaining 0.19 percent. Agriculture overall declined by 2.53 percent, driven by a drop of 6.02 percent in Grains. Livestock broke its three-week trend of declines as the general Livestock commodity index advanced by 1.46 percent.

 

  • GS Commodity Index (-5.64%)
  • Oil (-8.43%)
  • Livestock (1.46%)
  • Grains (-6.02%)
  • Agriculture (-2.53%)
  • Gold (0.19%)
  • Silver (-2.82%)
  • Copper (-5.13%)

 

  • International Performance: Global index performance last week was heavily skewed toward negative, with 66 percent of the global indexes moving lower while 34 percent advanced. The average return of the global indexes last week was -0.59 percent. When looking at the global indexes, there were no general regions of the world that experienced gains for the week. The weakest areas of the global markets were in Asia, led lower by China which declined in excess of 3 percent as the country continues its crackdown of businesses that are not towing the party lines.

 

  • Best performance: Costa Rica’s Costa Rica Index (10.34%)
  • Worst performance: Peru’s Peru General Index (-7.39%)
  • Average: (-0.59%)

 

  • Volatility: The VIX last week saw a strong gain of more than 20 percent following several weeks of aimless wandering. It was the first move of more than 20 percent either up or down since late June. Despite the gains, the VIX remained under 20 at the close of the week, ending the week at 18.56. Ongoing concerns about the Delta variant seemed to be the primary driving force behind the gains in the VIX as COVID-19 continued to cause concerns about the reopening efforts currently under way in many areas of the world. A VIX reading of 18.56 implies a move in the S&P 500 over the next 30 days of 5.36 percent but, as always, the direction of the movement is unknown.

 

Model Performance and Update

 

For the trading week ending on 8/20/2021, returns in the hybrid and quant hypothetical models* (net of a 1% annual management fee) were as follows:

 

  Last Week YTD 2021 Since 6/30/2015

(Annualized)

Aggressive Model -0.75% 5.04% 6.29%
Aggressive Benchmark -1.64% 10.61% 8.34%
Growth Model -0.44% 4.90% 5.39%
Growth Benchmark -1.27% 8.22% 6.77%
Moderate Model -0.13% 4.30% 4.48%
Moderate Benchmark -0.91% 5.85% 5.12%
Income Model 0.07% 4.24% 4.19%
Income Benchmark -0.46% 2.91% 2.97%
Quant Model -3.23% 21.13%
S&P 500 -0.59% 18.25% 13.30%

 

*Model performance does not represent any specific account performance but rather a model of holdings based on risk levels that are like hybrid model’s actual holdings. The hypothetical models are rebalanced daily to model targets and include dividends being reinvested. Performance calculations are my own.

 

There were no changes to the hybrid models over the course of the previous week, as no purchase or sell triggers were hit on current holdings or holdings that are on the watch list for purchase. There were three core equity positions that reported their quarterly earnings last week: Walmart (WMT), TJ Maxx (TJX) and Jack Henry and Associates (JKHY). All three companies beat both earnings expectations (by more than 20 percent) as well as revenue expectations (by more than four percent) as they all turned in very strong quarters, helped in large part by the reopening of the U.S. economy. WMT was the major earnings announcement last week with the company winning share in the grocery segment as well as online sales, while at the same time seeing same store sales increase each month of the quarter. WMT stock, while positive for the week as the general markets declined, was held back slightly by concerns about rising inputs costs, something the company has been reluctant to pass along to shoppers. The company can continue to take the input price increase itself, but the question is how long it will do so before having to raise prices. TJX had a blowout quarter as the reopening of the economy, combined with summer outdoors spending, sent many consumers into the stores around the country to find deals on new clothes and accessories. JKHY got a boost during the quarter from consumers returning to in-person banking as well as continued migration of back-office banking systems to their cloud technology platform.

 

Looking to the Future

 

  • Federal Reserve: The Fed’s annual Jackson Hole summit will take place later this week with many economists and market watchers listening closely to the virtual meeting
  • COVID-19: Delta variant is a major concern as back-to-school season gets under way
  • Afghanistan: Evacuations have been going pretty well, but will the Taliban in power become a force for destabilization in the region?

 

Interesting Fact: The First Star Wars Was Expected To Be A Flop

The original 1977 Star Wars had a budget of $8 million, which distributor 20th Century Fox was reluctant to give to director/writer George Lucas, so he accepted a lower salary in order to keep the budget. The movie went on to make $775 million around the world, and Disney picked up the entire franchise for $4 billion. For comparison, Star Wars: The Last Jedi, which was released in 2017, had a reported budget of $317 million.

 

Source: Insider.com

 

Have a great week!

Peter

 

 

 

A referral from a client is a tremendous compliment and a huge responsibility that can never be taken lightly.

 

For a PDF version of the below commentary please click here Weekly Letter 8-16-2021

Callahan Capital Management

Weekly Commentary | August 16th, 2021

 

Major Theme of the Markets Last Week: Bipartisan Politics

Last week was indeed a rare phenomenon in Washington D.C. as both political parities came together and voted in favor of the nearly $1 trillion infrastructure spending bill in the U.S. Senate. The final vote count was 69 Senators voting for the bill while 30 voted against. The most notable Republican voting in favor of the bill was Senate Minority leader Mitch McConnell from Kentucky, who previously had declared that his number one priority was stopping President Biden’s agenda. Some of the bullet points from the bill that was passed includes $550 billion in new government spending in addition to other spending that was already in place. The new funds will come from a variety of places including unused economic relief packages, antifraud enforcement funds related to unemployment and a delay in the Medicare Part D rebate rule. In total, a rough outline of the spending is as follows:

 

$110 billion      Roads, bridges and related projects

$66 billion        Railroad improvements

$65 billion        High Speed Internet to all Americans

$55 billion        Clean Drinking Water

$46 billion        Flood wildfire and drought mitigation

$42 billion        Ports and airports

$39 billion        Public transportation

$28 billion        Power grid infrastructure

$21 billion        Environmental remediation

$15 billion        Electric Vehicles and chargers

$11 billion        Making roads safer

$1 billion          Reconnecting communities

 

While it is nice that the bill has passed the Senate, there will still be work that needs to be done in order to get the measure over the finish line with the House. Speaker Pelosi has said that she will not bring the bill up for consideration or a vote until the Senate passes a larger $3.5 trillion social policy bill, which is all but certainly dead in the Senate as there are several conservative Democrats who will not be willing to vote for such a bill. With the Senate split 50/50 along party lines, the Democrats cannot afford to have even one Senator break from party lines on the vote or it is certain to fail. It was for this very reason that the markets seemed to have a very muted response to the passage in the Senate last week, but we did see a small updraft in the materials companies that would be supplying much of the raw materials for many of the large-scale projects.

 

Financial News Impacting the Markets

 

Aside from the Infrastructure spending bill, investors last week were closely watching earnings season despite the season starting to draw to a close. The following table shows some well-known companies that announced last week and the percentage by which they either beat or fell short of expectations (companies that beat by more than 10% are highlighted in green while companies that missed expectations are highlighted in red):

 

Air Products and Chemicals -3% Coinbase Global 158% Sysco 25%
Airbnb 77% eBay 0% The Trade Desk 38%
BioNTech 55% Palantir Technologies 0% Walt Disney 40%

 

According to FactSet research, through Friday last week, we have seen about 91 percent of the S&P 500 component companies report their results for Q2 2021. Of the 91 percent that have reported, 87 percent (no change from last week) of companies have beaten earnings expectations while 3 percent (1 percent higher than last week) have reported inline earnings and 11 percent (one percent higher than last week) have fallen short of expectations. The figures add up to 101% this week due to rounding by FactSet. The percentage of companies beating expectations remains the best on record if we end the quarter at these levels. When looking at revenues, we have seen 87 percent (same as last week) of companies report either meeting or exceeding expectations, while 13 percent (same as last week) have fallen short of expectations. 87 percent of companies beating revenues expectations is the highest on record going back to when FactSet started to collect data in 2008. The overall blended earnings growth rate for the second quarter of 2021 currently stands at 89.3 percent, an increase of more than 25 percent from the 63.1 percent that was expected for the quarter on June 30th, 2021. With the reporting season now more than 90 percent complete, it is becoming more and more difficult for the above numbers to change in a material way. Overall, the quarter has been a stellar quarter.

 

This week will be all about big retailers posting their results as Walmart, Target, TJ Maxx, Home Depot and Lowe’s all report. The following table shows some of the more well-known companies that are reporting earnings this week with the ones highlighted in green having the greatest potential to impact the overall markets:

 

Applied Materials Home Depot Target
Cisco Systems Lowe’s Companies TJX Companies
Deere & Company Nvidia Walmart

With the big retailers reporting their results this week, it officially marks the end of the “standard reporting season.” Thus, next week will be the final week that the second quarter 2021 reporting season will be covered in this commentary.

Economic data last week made many headlines on both the inflation and the consumer front. The inflation data last week came in the form of the Consumer Price index (CPI) as well as the Producer Price Index (PPI). On Wednesday, the CPI kicked things off with a year-over-year reading of 4.3 percent when looking at the Core CPI index. While this seems very high, it was slightly below the 4.5 percent that was seen during June and seems to indicate that prices could start to come back down. This is inline with what Federal Reserve Chairman Powell has been saying, that the inflation we will see will be transitory. The biggest increases in the Core CPI figures during July were for services such as travel and restaurants. The PPI showed a slightly different picture as a 1 percent year-over-year rate was released, which was higher than the excepted 0.5 percent rate but unchanged from the June level. The big surprise of the week came in the form of Consumer Confidence, which was released on Friday and badly missed market and economist expectations. The University of Michigan’s Consumer Sentiment index for the month of August (preliminary) posted a reading of 70.2, a significant miss when expectations had been for a reading of 81.2, the same as the July reading. An equal size decline was seen in the Consumer Expectations index also released by the University of Michigan. The primary reason for the decline in sentiment and expectations was the Delta variant of COVID-19 which has been spreading quickly around the world.

 

Market Statistics

 

  • Equities: Equity markets in the U.S. were mixed last week as the large industrial focused Dow led the way higher followed by the more diversified S&P 500. Both the technology heavy NASDAQ as well as the small cap Russell 2000 posted declines for the week, something that has rarely occurred so far this year. Most of the time this year there has been a rotation out of large cap technology stocks and into smaller stocks, or vice versa, leading to one of the indexes gaining at the expense of the other. Last week, however, with both declining, it seemed to represent a movement toward more value focused companies. Overall trading volume was the lowest we have seen so far this year and posted even lower trading volume than some holiday shortened trading weeks.

 

  • Dow (0.87%) – Below Average volume
  • S&P 500 (0.71%) – Below Average volume
  • NASDAQ (-0.09%) – Below Average volume
  • Russell 2000 (-1.10%) – Below Average volume

 

  • Sector Performance: Sector performance last week was a hodgepodge of sectors that moved primarily due to individual stock performance driving the overall sector to move. When looking at sectors that performed well last week, Basic Materials, Home Construction and Materials overall took three of the top five sectors as there was a bit of a bounce seen following several weeks of underperformance. The infrastructure spending bill also appeared to have a noticeable impact on the Materials sectors as there will likely be a significant amount of government funding spent on the materials needed for large scale infrastructure projects. The Insurance sector made the top five list thanks to a blowout earnings quarter by National Western Life Insurance company and the ensuing gain of more than 15 percent helping direct the direction of the overall sector. Transportation rounded out the top five performing sectors last week but there was a massive divide within the sector as the airlines all lost ground last week with ongoing concerns about COVID-19 variants. More than making up for the lost ground was the railroad subsector as all of the major railroads enjoyed very strong performance last week thanks to increased shipping of goods and products around the U.S. and on the hopes of even more shipping to come due to the infrastructure spending bill.

 

When looking at underperforming sectors of the markets last week, much of the movements appeared to be profit taking as some of the best performing sectors of the past few months—and also since the bottom back in March of 2020—were the hardest hit last week. Semiconductors turned in the worst performance as the sector is still very behind on keeping up with global demand for chips and the backlog is starting to impact many areas of peoples’ lives. Healthcare providers seemed to move lower on fears of COVID-19 in one form or another starting to limit people’s willingness to go in and see their doctors for routine visits. Biotechnology seemed to trade in sympathy with the healthcare providers throughout much of the week. Multimedia Networking came in fourth from the bottom last week, drug down by CommScope and Infinera Corporations, each falling by more than nine percent, in the very small sector. Rounding out the bottom performing sectors last week was the Oil and Gas Exploration sector which moved in lockstep with the decline in the price of oil.

 

  • Top Sectors: Basic Materials, Home Construction, Insurance, Materials, Transportation
  • Bottom Sectors: Oil & Gas Exploration, Multimedia Networking, Biotechnology, Healthcare Providers, Semiconductors

 

  • Commodities: Commodities were mixed last week as the Goldman Sachs Commodity Index (a production weighted index) posted a small gain of 0.32 percent. Oil was negative last week, falling 0.29 percent in what turned out to be one of the most stable weeks for oil of the past three months. Metals were mixed, with Gold and Copper advancing by 1.06 and 0.37 percent, respectively, while Silver went the opposite direction, falling by 2.44 percent. Agriculture overall advanced by 2.38 percent, driven by a gain of 3.50 percent in Grains. Livestock made it three weeks in a row of declines as the general Livestock commodity index declined by 0.58 percent.

 

  • GS Commodity Index (0.32%)
  • Oil (-0.29%)
  • Livestock (-0.58%)
  • Grains (3.50%)
  • Agriculture (2.38%)
  • Gold (1.06%)
  • Silver (-2.44%)
  • Copper (0.37%)

 

  • International Performance: Global index performance last week was heavily skewed toward positive, with 76 percent of the global indexes moving higher while 24 percent declined. The average return of the global indexes last week was 0.81 percent. When looking at the global indexes, Europe was the region that saw the best performance, while the Middle East saw the worst regional performance.

 

  • Best performance: Lebanon’s BLOM Stock Index (8.80%)
  • Worst performance: Taiwan’s Taiex Index (-3.84%)
  • Average: (0.81%)

 

  • Volatility: The markets’ fear gauge last week indicated a small reduction in fear as it declined by 4.33 percent, ending the week back below 16 for the first time since early July. With overall trading volume and market movements being low last week it was not surprising to see a very muted move in the VIX. With the VIX currently at 15.45, it is implying a move of 4.46 percent in the S&P 500 over the next 30 days but as always, the direction of the movement is unknown.

 

Model Performance and Update

 

For the trading week ending on 8/13/2021, returns in the hybrid and quant hypothetical models* (net of a 1% annual management fee) were as follows:

 

  Last Week YTD 2021 Since 6/30/2015

(Annualized)

Aggressive Model 0.74% 5.83% 6.44%
Aggressive Benchmark 0.60% 12.45% 8.66%
Growth Model 0.69% 5.37% 5.49%
Growth Benchmark 0.46% 9.61% 7.02%
Moderate Model 0.65% 4.44% 4.51%
Moderate Benchmark 0.33% 6.82% 5.30%
Income Model 0.65% 4.17% 4.20%
Income Benchmark 0.16% 3.39% 3.06%
Quant Model 0.40% 25.18%
S&P 500 0.71% 18.95% 13.46%

 

*Model performance does not represent any specific account performance but rather a model of holdings based on risk levels that are like hybrid model’s actual holdings. The hypothetical models are rebalanced daily to model targets and include dividends being reinvested. Performance calculations are my own.

 

There were no changes to the hybrid models over the course of the previous week, but there were two core equity positions that reported their most recent quarterly earnings: Disney (DIS) and The Trade Desk (TTD). Both companies beat earnings expectations by about 40 percent while TTD managed to beat revenue expectations by 7 percent and DIS beat revenue expectations by 1 percent. Disney really had a blowout quarter that it reported last week with the company doing very well in many different lines of business. Disney+ was the shining star of the quarter, having added 12.4 million new subscribers during the quarter, well ahead of both Netflix (added 1 million) and the new NBC stream product Peacock, which added 12 million, thanks in large part to the companies’ rights to streaming the 2021 Olympics. A few of the driving forces behind the strong Disney+ figures were the release of Cruella and Luca during the quarter, as well as Marvel’s Loki. Also being very accretive to the quarter was Disney’s parks, which returned to profitability during the quarter with revenues jumping more than 300 percent when compared to a year ago. TTD had a strong quarter, posting revenues that increased 101 percent when compared to a year earlier as the company’s largest segment, digital advertising, came in as expected, driven largely by their internet video streaming platform. Both TTD and DIS had bullish outlooks for the future, but DIS did caution on the investor call that they were watching the spread of COVID-19 variants closely.

 

Looking to the Future

 

  • COVID-19: Delta variant will remain in focus
  • Afghanistan: Much uncertainty now that the Taliban has taken over the country
  • Malaysia: Prime Minster and government resigned, leaving many things about the future for the country uncertain

 

Interesting Fact: The first iPhone wasn’t made by Apple

 

The first mobile device to be called an “iPhone” was made by Cisco, not Apple. It allowed the user to use the voice functions of Skype without a computer. Apple announced its own product just 22 days later, and Cisco sued for trademark infringement. The lawsuit was ultimately settled out of court and both companies were allowed to keep using the name. However, you’ve probably never heard of the Cisco iPhone.

 

Source: Cnet.com

 

Have a great week!

Peter

 

 

 

A referral from a client is a tremendous compliment and a huge responsibility that can never be taken lightly.

For a PDF version of the below commentary please click here Weekly Letter 8-9-2021

Callahan Capital Management

Weekly Commentary | August 9th, 2021

 

Major Theme of the Markets Last Week: Summer trading, earnings in spotlight

Summer trading remained in full swing last week with many of the major U.S. equity indexes trading in a very tight 1.5 percent trading range over the course of the week. With little going on in the financial media, investors turned once again to the ongoing blowout earnings season for motivation to keep markets moving higher. The following table shows some well-known companies that announced last week and the percentage by which they either beat or fell short of expectations (companies that beat by more than 10% are highlighted in green while companies that missed expectations are highlighted in red):

 

Activision Blizzard 19% Cigna 17% Nintendo 11%
Alibaba Group 25% ConocoPhillips 5% Novo Nordisk 46%
Amgen -1% CVS Health 36% Public Storage 20%
Bayer 12% Duke Energy 3% ROKU 170%
Becton Dickinson 7% Eli Lilly & Company 209% Siemens 59%
Booking Holdings 12% General Motors 4% Sony 2%
BP 6% Honda Motor 10% Toyota Motor 8%
Carvana 49% Moderna 6% Uber Technologies 271%

 

According to FactSet research, through Friday last week, we have seen about 89 percent of the S&P 500 component companies report their results for Q2 2021. Of the 89 percent that have reported, 87 percent (one percent lower than last week) of companies have beaten earnings expectations while 2 percent have reported inline earnings and 10 percent (one percent higher than last week) have fallen short of expectations. The percentage of companies beating expectations remains the best on record if we end the quarter at these levels. When looking at revenues, we have seen 87 percent (one percent lower than last week) of companies report either meeting or exceeding expectations, while 13 percent (one percent higher than last week) have fallen short of expectations. 87 percent of companies beating revenues expectations is the highest on record going back to when FactSet started to collect data in 2008. The overall blended earnings growth rate for the second quarter of 2021 currently stands at 88.8 percent, an increase of more than 25 percent from the 63.1 percent that was expected for the quarter on June 30th, 2021. With the reporting season now nearly 90 percent complete, it is becoming more and more difficult for the above numbers to change in a material way. Overall, the quarter has been a stellar quarter. The question now becomes whether companies can keep up the momentum or whether this quarter is representative of peak corporate earnings, as was alluded to by T. Rowe Price economists last week.

 

This week is an extension of the rapid decline in the number of companies reporting earnings as less than half the number that reported last week will do so this week. The following table shows some of the more well-known companies that are reporting earnings this week with the ones highlighted in green having the greatest potential to impact the overall markets:

 

Air Products and Chemicals DoorDash Rocket Companies
Airbnb eBay Sysco
Baidu NIO The Trade Desk
Brookfield Asset Management Palantir Technologies Walt Disney

 

Disney will be one of the more closely watched earnings releases this week as the company spans both a return to normal aspect as well as benefitting from lock downs due to COVID-19. The amusement park side of the business, while entertaining, will play second fiddle to the Disney+ numbers released in the earnings. Disney+ has quickly become one of the major players in the streaming wars being waged for consumers’ TV viewing time. New television shows such as LOKI and premier access movies such as Raya and the Last Dragon and Jungle Cruise could have played a big role in new subscriber numbers during the second quarter. DoorDash was a COVID-19 darling company as the company provides online food ordering and delivery. With 56 percent of the total market, it is the largest food delivery company in the U.S. It will be interesting to see if users have slowed their use of the app now that restaurants are reopening for in-person dining and many parts of the country are less restricted than before.

 

Financial News Impacting the Markets

The U.S. fixed income markets were in the financial media a significant amount last week as we saw continued large movements in the 10-year yield. The 10-year opened the week with a yield of 1.27 percent, went down to an intraday low of 1.132 percent on Tuesday (the lowest level since February 11th, 2021) and then bounced higher toward the end of the week, closing the week at 1.303 percent. The movement in bond yields of course sent the financial and banking related sectors on a roller coaster as these sectors are the most interest rate sensitive. The turn in bond yields last week on Tuesday appeared to coincide with comments from both the Federal Reserve Vice-chair Richard Clarida and one of the newest Federal Reserve Governors Chris Waller who both made hawkish comments to the financial media about their willingness to start tapering sooner than the markets are anticipating. Later during the week last week, several other Fed officials signaled their willingness to potentially be more hawkish if the economic data continues to be strong and warrants the Fed taking action. August could be a big month for Fed watchers as the annual Jackson Hole Symposium hosted by the Kansas City Federal Reserve will take place toward the end of the month. The reason this is significant for the markets is that it has been at this symposium in the past that Feral Reserve Chairs have outlined changes to their thinking. This time, it could be Chair Powell outlining how the Fed could begin its tapering program, a program that could get underway as early as the end of September. These actions could be taken despite there still being a way to go for the Fed to reach its dual mandate of price stability and full employment.

 

Oil made headlines last week as prices declined by more than 6 percent. Oil declined on fears of slowing demand for oil coming out of China, which panicked a bit last week as cases of the Delta variant of COVID-19 began showing up in large numbers in various regions of China, including the city of Wuhan where the first cases of COVID-19 came to light. China locked down more than 10 million residents last week, but it was not called a “lockdown” this time as there were fears that the term could scare residents. Instead, the local governments said they were adopting “closed-off management” of residential areas. In other areas, residents were told to “rest at home for 3 days” and, in other cities, large numbers of people were just outright “banned” from leaving a residential compound for any reason other than a medical emergency. Goldman Sachs was quick to release a report in which it downgraded China’s growth rates for the remainder of the year as a result of the new measures being taken to stop the spread of COVID-19 within the country. In the U.S., the most notable impact of the developments in China was on the oil market as China’s demand for global oil is very high and should the country lessen its demand, even for a month or two, it could have far reaching impacts on the global oil market. The increase in COVID-19 cases is still being seen around the world and is still a significant concern for investors.

 

In Europe, while a reopening continues to be underway as different countries see higher cases of new COVID-19 variants, they are reconsidering just what restrictions can afford to be removed. In Germany last week, the Health Ministry advised that the general public should continue to wear masks on public transportation and in confined spaces such as shops. This compares to a country such as France which recently announced that it would begin allowing travelers form the UK to come to the country without the need to quarantine if the traveler has been fully vaccinated. Much like the U.S. Federal Reserve, last week the Bank of England took a more hawkish standpoint when talking about when interest rates could start to be moved up by the central bank with a slight increase now expected during 2022 and more of a hike in rates coming in 2023.

 

In Chinese markets last week, bottom-fishing investors came to the rescue and pushed the markets higher for the first time in several weeks as damage from government comments about publicly traded companies took its toll on many companies. China’s PMI figures for the month of July were released last week, coming in weaker than expected and signaling a slowdown in economic momentum. This is very concerning to some Chinse financial market watchers as the news came out for a time period prior to the jump in new COVID-19 cases that is causing alarm, meaning that August could prove to be even worse as some areas of the country are under lockdown.

In the U.S., outside of earnings, investors saw some positive developments out of Washington D.C. regarding the significant infrastructure spending bill that has been in the works now for several months. Over the past weekend, the U.S. Senate took a few crucial steps toward what will likely be passage of the $1.2 trillion infrastructure spending bill that has now garnered support from several key Senate Republicans. In the new bill, about one third of the money is going to roads and bridges in disrepair in many parts of the country. There are also funds allocated to ports, waterways, railroads, airports and broadband communications networks. Once the bill is passed by the Senate, it will be taken up by the House of Representatives where it will likely easily pass since Democrats have a majority control of the House. Following House approval, the bill will be sent on to President Biden’s desk where he will sign it into law. Up next now in Washington D.C. will be the debt ceiling fight once again. Last week and earlier today, Treasury Secretary Yellen warned Congress that they needed to take immediate actions to stop the U.S. from hitting the debt ceiling and forcing the Treasury to resort to “extraordinary” measures to pay debt payments that are coming due. In her letter on Monday, Secretary Yellen said she has already had to start these extraordinary measures and does not know how long they can last. The debt ceiling fight has been a political football for years with lots of political posturing every time it comes up, but ultimately a deal gets reached to keep the U.S. government paying the bills. Defaulting on the government’s debt obligations would be a catastrophic error and something that could adversely impact a generation of Americans.

 

Market Statistics

 

  • Equities: Markets moved higher last week, but did so in a pretty slow and methodical manner as the trading ranges for the major indexes were very narrow. Volume, as anticipated, remained low with below average weekly levels being seen across the board. Large cap technology took the lead last week as investors moved broadly into the small group of companies. Small caps showed signs of life last week, coming in second place when looking at the four major indexes, with the S&P 500 following closely behind. Bringing up the rear last week was the Dow, which was held back by declines seen in Amgen, McDonald’s and Visa.

 

  • NASDAQ (1.11%) – Below Average volume
  • Russell 2000 (0.97%) – Below Average volume
  • S&P 500 (0.94%) – Below Average volume
  • Dow (0.78%) – Below Average volume

 

  • Sector Performance: When looking at sectors of the markets that turned in the best performance last week, four of the five top performing sectors made it onto the list due to the movement in bond yields. Regional Banks, Financial Broker Dealers, Financials and Insurance all benefitted the most from the run up in bond yields at the end of the week. Biotechnology was the odd sector out on the list last week as the sector benefitted greatly from the largest company in the sector (Moderna) posting a gain of more than 17 percent as positive news emerged about potential boosters for the company’s COVID-19 vaccines.

 

When looking at sectors of the markets that underperformed last week, Residential Real Estate led the way lower as the sector was adversely impacted by rising bond yields as well as signs of overall slowdown in the once red-hot U.S. housing market. Healthcare Providers came in second from the bottom as fears rose that Americans would start to pull back on going to their doctors in light of the current increase in cases of COVID-19. Basic materials made the poor performing list as it was drug down by the slide in oil. Consumer Goods and Multimedia Networking rounded out the bottom performing list as both, much like Healthcare Providers, were caught up in fears over the current wave of COVID-19 getting worse before it gets better here in the U.S.

 

  • Top Sectors: Regional Banks, Biotechnology, Broker Dealers, Financials, Insurance
  • Bottom Sectors: Multimedia Networking, Consumer Goods, Basic Materials, Healthcare Providers, Residential Real Estate

 

  • Commodities: Commodities were mostly negative last week as only Agriculture and Grains managed to post positive returns for the week. Overall, the Goldman Sachs Commodity Index (a production weighted index) posted a loss of 3.50 percent. Oil was negative last week, falling 6.10 percent as global demand was called into question with the rising number of COVID-19 Delta variant cases. Metals were negative, with Gold, Silver and Copper declining by 3.05, 4.70 and 3.07 percent, respectively. Agriculture overall advanced by 1.23 percent, driven by a gain of 1.32 percent in Grains. Livestock made it two weeks in a row of declines as the general Livestock commodity index declined by 0.21 percent, led lower by a decline of more than 5 percent in lean hogs during the week.

 

  • GS Commodity Index (-3.50%)
  • Oil (-6.10%)
  • Livestock (-0.21%)
  • Grains (1.32%)
  • Agriculture (1.23%)
  • Gold (-3.05%)
  • Silver (-4.70%)
  • Copper (-3.07%)

 

  • International Performance: Global index performance last week was heavily skewed toward positive, with 81 percent of the global indexes moving higher while 19 percent declined. The average return of the global indexes last week was 1.17 percent. When looking at the global indexes, nearly all major geographic regions of the world saw positive performance last week with Europe and China leading the way higher.

 

  • Best performance: Mongolia’s MSE Top 20 Index (6.25%)
  • Worst performance: Jordan’s Amman SE General Index (-4.60%)
  • Average: (1.17%)

 

  • Volatility: Last week, the VIX followed the same pattern that we have seen over the past several weeks, a pattern that starts with a spike higher to start the week followed by a methodical decline in the VIX over the following trading days of the week. The spike last week, however, was less than 7 percent, and the declines seen last week were higher than previous weeks. The VIX overall for the week posted a decline of 11.46 percent, ending the week just above 16. A VIX reading of 16.15 implies a move in the S&P 500 of 4.66 percent over the next 30 days but, as always, the direction of the movement is unknown.

Model Performance and Update

 

For the trading week ending on 8/6/2021, returns in the hybrid and quant hypothetical models* (net of a 1% annual management fee) were as follows:

 

  Last Week YTD 2021 Since 6/30/2015

(Annualized)

Aggressive Model -0.01% 5.04% 6.33%
Aggressive Benchmark 0.87% 11.79% 8.58%
Growth Model -0.02% 4.63% 5.39%
Growth Benchmark 0.67% 9.11% 6.96%
Moderate Model -0.05% 3.75% 4.42%
Moderate Benchmark 0.48% 6.48% 5.26%
Income Model -0.08% 3.48% 4.10%
Income Benchmark 0.24% 3.22% 3.04%
Quant Model 0.50% 24.67%
S&P 500 0.94% 18.12% 13.38%

 

*Model performance does not represent any specific account performance but rather a model of holdings based on risk levels that are like hybrid model’s actual holdings. The hypothetical models are rebalanced daily to model targets and include dividends being reinvested. Performance calculations are my own.

 

There were no changes to the hybrid models over the course of the previous week. There were two more core equity positions that reported their most recent quarterly results last week, Marriott International (MAR) and Zimmer Biomet (ZBH), both of which beat expectations on both earnings and revenues. During the quarter, MAR saw a strong pick up in travel on the leisure side of its business as well as a modest increase in business travelers.  ZBH, like MAR, saw an uptick in use during the quarter as patients saw medical professional more often and got their lab work completed that may have been delayed during COVID-19. This week, there are two more core equity positions that report their results, The Trade Desk and Disney.

Looking to the Future

 

  • COVID-19: Delta variant will remain in focus
  • Infrastructure Spending: Infrastructure spending bill will likely get passed this week in the Senate and moved over to the House

 

Interesting Fact: Youngest Olympians of all time

The Summer Olympics concluded in Tokyo Japan yesterday and, with them wrapping up, some people questioned the ages of some of the contestants, specifically the 12- and 13-year-olds that took second and third in the female skateboarding competition, which consisted of only teenagers. While they certainly are young, they are not the youngest athletes to ever win medals at the summer Olympics. The youngest person to medal was a 10-year-old Greek gymnast named Dimitrios Loudras, who won his medal as part of a three-person team in 1896.

 

Source:topendsports.com

 

Have a great week!

Peter

 

 

 

A referral from a client is a tremendous compliment and a huge responsibility that can never be taken lightly.

For a PDF version of the below commentary please click here Weekly Letter 8-2-2021

Callahan Capital Management

Weekly Commentary | August 2nd, 2021

 

Major Theme of the Markets Last Week: Earnings continued to be strong

With one third of the S&P 500 and one third of the Dow 30 reporting their most recent quarterly earnings last week, this was the primary driver of market movements during the week. As we had seen going into last week, earnings were very strong due to easy comparable quarters from a year ago when COVID-19 had much of the U.S. shutdown. Cost savings from decisions made during COVID-19 also continued to be a tailwind for many of the larger publicly traded companies. While the earnings numbers may have been exceptionally strong last week for large cap technology companies in particular, the market reaction was not. In looking at the performance of some of the biggest large cap technology stocks that reported last week, on average the companies posted declines in the stock prices in the day following their announcements. The following table shows some well-known companies that announced last week and the percentage by which they either beat or fell short of expectations (companies that beat by more than 10% are highlighted in green while companies that missed expectations are highlighted in red):

 

3M Company 15% Chevron 11% PayPal 2%
Advanced Micro Devices 17% Comcast 25% Pfizer 10%
Airbus Group 132% Exxon Mobil 8% Procter & Gamble 5%
Alphabet 37% FaceBook 19% Qualcomm 15%
Amazon com 24% General Electric 67% Raytheon Technologies 12%
Anheuser-Busch InBev -21% Glaxo SmithKline 46% Starbucks 31%
Apple Inc 30% Lockheed Martin 10% Stryker 6%
AstraZeneca 0% Mastercard 13% Tesla 61%
Boeing 162% McDonald’s 12% Thermo Fisher Scientific 2%
Bristol-Myers Squibb 3% Merck & Company -2% United Parcel Service 11%
Caterpillar 9% Microsoft 14% Visa Inc 12%

 

According to FactSet research, through Friday last week, we have seen about 59 percent of the S&P 500 component companies report their results for Q2 2021. Of the 59 percent that have reported, 88 percent of companies have beaten earnings expectations while 2 percent have reported inline earnings and 9 percent have fallen short of expectations. The percentage of companies beating expectations remains the best on record if we end the quarter at these levels. When looking at revenues, we have seen 88 percent of companies report either meeting or exceeding expectations, while 12 percent have fallen short of expectations. 88 percent of companies beating revenues expectations is the highest on record going back to when FactSet started to collect data in 2008. The overall blended earnings growth rate for the second quarter of 2021 currently stands at 85.1 percent, an increase of more than 20 percent from the 63.1 percent that was expected for the quarter on June 30th, 2021. If we see the 85.1 percent earnings growth rate hold through the end of the quarter, it will represent the second highest on record behind the 109.1 percent experienced during the fourth quarter of 2009, as the U.S. was recovering from the depths of the Great Recession.

 

This week is the start of the slow down for quarterly earnings as the number of companies reporting results as well as their potential impact on the markets overall diminishes rapidly. The following table shows some of the more well-known companies that are reporting earnings this week with the ones highlighted in green having the greatest potential to impact the overall markets:

 

Activision Blizzard CVS Health Moderna
Alibaba Group Diageo Novo Nordisk
Amgen Duke Energy Regeneron Pharma
Becton Dickinson Eli Lilly & Company Siemens
Booking Holdings Emerson Electric Sony Group
BP General Motors Square
Cigna HSBC Toyota Motor
ConocoPhillips Illumina Uber Technologies

 

Moderna will be closely watched by the markets this week as the company has a significant amount of information about COVID-19, the new variants and how well the vaccinations are being distributed both in the U.S. and around the world.

 

Financial News Impacting the Markets

 

Aside from earnings last week, all eyes were on the Federal Reserve’s July FOMC meeting and on economic data that was released throughout the week. As expected, the Federal Reserve made no changes to interest rates or the various asset purchase programs currently being utilized by the Fed. In looking at the two Fed statements side by side, the June and July statements are very close to the same with the most significant change coming in the section discussing the progress being made toward the Fed’s dual mandate of full employment and price stability. The statement now says that “Progress has been made” toward the two goals but that there is still work that needs to be done before the Fed gets to the point of beginning to taper asset purchase programs which are a precursor to the Fed starting to increase interest rates. As has been the case for every FOMC meeting for the past 18 months, the Fed continued to call out the future path of the virus as the biggest wildcard for the U.S. economy moving forward.

 

Economic data last week had a muted impact on the financial markets as earnings overshadowed the majority of the releases. The preliminary reading for second quarter GDP was released last week and missed expectations, coming in at 6.5 percent, a full 2 percent below consensus estimates of 8.5 percent. The biggest drag in the GDP figure came from a decline of 3.5 percent in gross private domestic investment (including declines in inventories as well as residential investment), rising import prices and a 5 percent decline in federal government spending. On the flipside, personal expenditures increased by 11.8 percent and represented 69 percent of all economic activity during the quarter. Much of this spending was funded by Americans spending money they had in savings, as shown in the more than $2 trillion decline in savings that was seen during the quarter. Durable goods orders for the month of June missed growth expectations while the PCE price index for the month of June came in slightly below expectations and the annualized change was only 3.5 percent, also slightly below market expectations. Employment related economic news releases last week came in close to market expectations and had no noticeable impacts on the overall financial markets.

China made headlines last week as the Chinese government continued to threaten to crack down on technology companies focusing on education within China, some of which are publicly listed here in the U.S.  Several Chinese listed companies that the government is cracking down on saw their values drop by more than 50 percent in just a few trading days last week. On Wednesday, Chinese security regulators held a virtual meeting with many of the global investment banks, trying to calm fears over what the Chinese government may do next, including taking actions such as forcing U.S. listed companies to delist, leaving investors with potentially nothing. There has been a “fundamental shift” in the mentality of Chinese authorities, according to DBS Chief China Economist Chris Leung. He said the crackdown on private education shows that the country’s policy design now takes social factors into account, beyond financial and economic considerations. He explained that the government is trying to tackle high education costs, which discourages Chinese couples from having more children. The volatility in the Chinese markets comes at the same time when China is starting to see a wave of new COVID-19 infections

Market Statistics

 

  • Equities: As large cap technology companies tumbled following strong earnings releases, the small cap Russell 2000 appeared to be the primary beneficiary as the index diverged from the other indexes in posting a gain for the week. The Dow and the S&P 500 traded in sympathy with the NASDAQ, falling about a third of a percent despite strong earnings reports. The NASDAQ was the laggard of the major indexes last week thanks to large cap technology underperforming, specifically Amazon, as the company has a significant weighting in the overall index and was down 9 percent last week. eBay, PayPal and Activision Blizzard didn’t help the technology index with all three of the companies being down in excess of 7 percent for the week. Volume, despite the elevated number of companies reporting results, remained well below the average weekly levels as we are in the height of the summer trading season.

 

  • Russell 2000 (0.75%) – Below Average volume
  • Dow (-0.36%) – Below Average volume
  • S&P 500 (-0.37%) – Below Average volume
  • NASDAQ (-1.11%) – Below Average volume

 

  • Sector Performance: Sector performance last week was largely driven by earnings from key and heavily weighted companies in various sectors. Oil prices have rebounded strongly since the bottom seen last year, helping to drive the performance of Basic Materials, Natural Resources and the overall Energy sector last week as companies posted strong results on the back of higher oil prices and an easy comparable quarter from a year ago. Home Construction benefitted from strong earnings and increased outlook by Meritage homes last week that sent the company’s stock price up by more than 12 percent, enough to push the small sector into the top five performing sectors for the week. Semiconductors rounded out the top five sectors last week as AMD posted strong gains and jumped more than 15 percent for the week, Qualcomm also helped the sector with strong earnings resulting in the stock price increasing by 3.4 percent for the week.

 

When looking at sectors that underperformed last week, most were once again earnings related, but a few were also driven by economic and COVID-19 data released during the week. Consumer Discretionary and Services as well as Transportation all seemed to be adversely impacted by the growing wave of COVID-19 Delta variant cases spreading across the U.S. and other parts of the world. Technology and Telecommunications were both dragged down by earnings with Technology struggling to get past poor stock performance from Amazon, Facebook, Apple and Microsoft.

 

  • Top Sectors: Semiconductors, Basic Materials, Natural Resources, Energy, Home Construction
  • Bottom Sectors: Consumer Discretionary, Consumer Service, Technology, Telecommunications, Transportation

 

  • Commodities: Commodities were mixed last week as gains in Oil were partially offset by losses in Agriculture and Livestock. Overall, the Goldman Sachs Commodity Index (a production weighted index) posted a gain of 1.56 percent. Oil was positive last week for the second week in a row, gaining 2.41 percent as global demand for oil-based products such as jet fuel continued to climb despite the rising number of COVID-19 Delta variant cases. Metals were positive, with Gold, Silver and Copper advancing by 0.75, 1.20 and 1.17 percent, respectively. Agriculture overall declined by 0.96 percent, driven by a gain of 1.12 percent in grains. Livestock took a hit last week, falling by 1.14 percent as the U.S. is only about a month away from starting to end the outdoor grilling season.

 

  • GS Commodity Index (1.56%)
  • Oil (2.41%)
  • Livestock (-1.14%)
  • Grains (1.12%)
  • Agriculture (-0.96%)
  • Gold (0.75%)
  • Silver (1.20%)
  • Copper (1.17%)

 

  • International Performance: Global index performance last week was almost exactly balanced between gains and losses, with 51 percent of the global indexes moving higher while 49 percent declined. The average return of the global indexes last week was -0.03 percent. When looking at the global indexes, the Middle East and Eastern Europe turned in some of the strongest performance. Weakness last week was seen throughout Asia, led lower by China.

 

  • Best performance: Lebanon’s BLOM Stock Index (7.33%)
  • Worst performance: Tanzania’s Tanzania All Share Index (-6.35%)
  • Average: (-0.03%)

 

  • Volatility: The VIX last week continued with its recent pattern of spiking higher early in the week and then fading throughout the rest of the trading week. Last week, the spike higher at the beginning of the week was slightly lower than it has been in recent weeks as the spike failed to move the fear gauge over 20. For the week, the VIX did manage a gain, advancing by 6.05 percent and ending the week at 18.24. A VIX reading of 18.24 implies a move in the S&P 500 over the next 30 days of 5.27 percent, but as always, the direction of the movement is unknown.

Model Performance and Update

 

For the trading week ending on 7/30/2021, returns in the hybrid and quant hypothetical models* (net of a 1% annual management fee) were as follows:

 

  Last Week YTD 2021 Since 6/30/2015

(Annualized)

Aggressive Model 0.40% 5.04% 6.36%
Aggressive Benchmark -0.36% 10.83% 8.46%
Growth Model 0.28% 4.65% 5.41%
Growth Benchmark -0.28% 8.38% 6.86%
Moderate Model 0.17% 3.80% 4.44%
Moderate Benchmark -0.20% 5.96% 5.19%
Income Model 0.09% 3.57% 4.13%
Income Benchmark -0.10% 2.97% 3.01%
Quant Model 0.67% 24.04%
S&P 500 -0.37% 17.02% 13.25%

 

*Model performance does not represent any specific account performance but rather a model of holdings based on risk levels that are like hybrid model’s actual holdings. The hypothetical models are rebalanced daily to model targets and include dividends being reinvested. Performance calculations are my own.

 

There were no changes to the hybrid models over the course of the previous week but there were many core equity positions that reported their earnings including: Republic Services Group (RSG), McDonald’s (MCD), Proctor and Gamble (PG), Arthur J. Gallagher & Co (AJG), Church & Dwight (CHD), Aptar Group (ATR), VF Corp (VFC) and Otis Elevator (OTIS). While the performance was different for each and every core position, on average the companies beat earnings expectations by 25 percent and beat revenue expectations by 4.5 percent. ATR was the only company that missed on either earnings or revenues when the company missed earnings expectations by 6 percent while beating revenue expectations by a little more than 4 percent. Overall, in reading through all of the numbers, all of the reports were largely positive. Some of the companies are further through their respective recoveries than others yet there was nothing alarming in any of the releases and conference calls. This week is a much slower week for earnings reports from core positions as there are only two: Marriott International (MAR) and Zimmer Biomet (ZBH).

 

Looking to the Future 

  • COVID-19: Delta variant will remain in focus
  • Earnings season: Peak earning season was last week so we are starting the slow slide to the end of earnings season this week

Interesting Fact: Do you have a fabella?

If you were under the impression that the human body had finished evolving, think again. It turns out that some people have a bone in their knee called a fabella. And while this particular little bone with an unknown purpose was once fading away, over the last century and a half, it’s gotten more common. Back in 1875, nearly 18 percent of people examined had a fabella. That number dropped to 11 percent by 1918. However, by 2018, 39 percent of individuals had this mysterious bone.

 

Source: https://www.the-scientist.com/

 

Have a great week!

Peter

 

 

A referral from a client is a tremendous compliment and a huge responsibility that can never be taken lightly.

For a PDF version of the below commentary please click here Weekly Letter 7-26-2021

Callahan Capital Management

Weekly Commentary | July 26th, 2021

 

Major Theme of the Markets Last Week: Delta and Olympic Games

Last week, COVID-19 once again came into focus as the markets assessed the Delta variant and the potential impact it could have on the U.S. and global economy. The Delta variant is one of several strains of COVID-19 currently spreading around the world, but it is traveling the fastest and causing the most concern among medical professionals. Over the prior weekend, news about Delta making up more than 80 percent of new infections and news that current vaccinations are less effective against the variant converged and sent investors running for the hills. Adding to the global awareness of COVID-19 was the fact that the Summer Olympic Games were just about to begin in Tokyo, already a year delayed, and there were several high-profile athletes that were forced to drop out of the games due to positive COVID-19 tests, despite being fully vaccinated and living inside the “Olympic bubble” for several days or even weeks.

 

Global financial markets declined on Monday, which isn’t new. Mondays have been difficult days for the markets over the past few months, but the magnitude of the decline was a little surprising. At one point on Monday, the Dow was down close to 800 points while the Russell 2000 and the S&P 500 both fell by more than 1.5 percent. The NASDAQ turned in the best performance, falling a little more than 1 percent as investors found comfort in the large cap technology names that had performed well during COVID-19 last year. The decline in oil on Monday also contributed to the overall weakness experienced in the markets as oil saw the largest daily decline since April of last year thanks to the announcement of the OPEC+ production deal that will be in place for several years, allowing for more oil to be pumped by the cartel. The market decline was short-lived last week as all four of the major U.S. indexes bounced back on Tuesday and Wednesday and, by the end of the week, three of the four indexes were making new all-time highs on a daily basis. Drivers of the rebound in the indexes were unclear but there was a plethora of earnings that were very strong during much of the week.

 

Financial News Impacting the Markets

 

Last week, 16 percent of the S&P 500 component companies reported their most recent quarterly results, and the results were strong. Of the top 20 companies (ranked by market cap) that reported earnings last week, only 1 company missed earnings expectations. On average, the same group of companies beat earnings expectations by an average of 44 percent, thanks in large part to a 600 percent beat by Snap. Other notably strong reports included Coca-Cola, Intel, SAP and American Express, beating by 19, 20, 40 and 70 percent, respectively. American Express was watched closely by investors and analysts alike as the company touches many individuals and small businesses both here in the U.S. and around the world. The second quarter of 2020 was a horrible quarter for AXP as many small businesses were shut down and consumers were hunkered down at home. Fast forward one year to 2021 and AXP had one of the best quarters on record. Earnings increased by 866 percent from a year prior while revenues increased by 33 percent. In a show of confidence, the company also lowered its loan loss reserves by $866 million during the quarter. Spending by card members during the second quarter of 2021 was higher than pre-pandemic levels with growth being seen in the younger users, those that are Millennials and Gen Z consumers. During the quarter, there remained an overweight toward experiential and services spending as consumers got back to their old ways of life. American Express is seen as a bellwether stock for the overall economy and for earnings season moving forward, so with their blowout numbers reported last week, we could be in for a strong remainder of earnings season.

 

According to FactSet research, we have now seen 24 percent of the S&P 500 component companies report their earnings. Of the 24 percent of companies that have reported results, 88 percent have beaten earnings expectations, 1 percent have reported earnings in-line with expectations and 11 percent have fallen short of expectations. The percentage of companies beating earnings expectations (88 percent) is the highest ever since FactSet started collecting data back in 2008. When looking at revenues, 86 percent have beaten expectations while 14 percent have fallen short. The current blended earnings growth rate stands at 74.2 percent, above the estimate for the quarter (63.3 percent back on June 30th). This week will provide a significant amount of insight into how the quarter will ultimately run out in terms of earnings as one third of both the S&P 500 and the Dow are set to report their results. The most anticipated companies to report results include four of the five FAANG stocks: Apple, Amazon, Google and Facebook. The table below shows some of the better-known companies that are reporting earnings this week (green are the most likely to impact the markets):

 

 

3M Company Charter Communications PayPal
Advanced Micro Devices Chevron Pfizer
Agilent Technologies Comcast Procter & Gamble
Airbus Group Exxon Mobil Qualcomm
Alphabet FaceBook Raytheon Technologies
Amazon General Electric Starbucks
American Tower Glaxo SmithKline Tesla
Anheuser-Busch InBev Lockheed Martin Thermo Fisher Scientific
Apple Mastercard T-MOBILE
Boeing McDonald’s United Parcel Service
Bristol-Myers Squibb Merck & Company Visa
Caterpillar Microsoft Volkswagen

 

Economic data presented a mixed picture to investors last week as housing and labor market data showed a little weakness while PMI data continued to be strong. Building permits for the month of June declined by 5.1 percent as demand for new homes appeared to be slowing. Housing starts, on the other hand, remained on the upswing as they increased by 6.3 percent. Building permits is usually a leading indicator of what housing starts will be doing in future months. Initial jobless claims increased by 419,000 last week, a new weekly high going back 9 weeks. We could see some big changes in these unemployment figures over the next month or two as there are some significant changes coming to enhanced unemployment benefits. The Fed continues to say that while progress has been made in the labor market there is still a significant way to go before the Fed reaches its mandate of full employment. Manufacturing PMI (preliminary July data) provided for some positive news last week as the index posted a reading of 63.1, the highest on record going back to early 2021. The manufacturing PMI data would have been even better had it not been for the global microchip shortage which has adversely impacted automobile production in many parts of the U.S. The Services PMI for the month of July (preliminary) saw its growth rate slow slightly during July, as consumers started to indulge in less services following a huge spike earlier this year when stimulus checks were flowing and consumers were coming out of restrictive COVID-19 environments. There was no significant inflation related economic news releases last week so the market will be closely listening to what Chair Powell has to say at this week’s press conference following the conclusion of the July FOMC meeting on Wednesday.

The fixed income market made headlines last week as the 10-year U.S. government treasury bond briefly hit a yield of 1.133 percent on Tuesday, the lowest yield since February of this year. Much like the equity markets, however, the bond yield recovered throughout the rest of the week, only falling a slight amount on a weekly basis. When considering where bond yields are today, even at 1.27 percent on the 10-year treasury, the real yield on those bonds is certainly negative as real yield is the bond yield minus the expected inflation rate. This means that a purchaser of a 10-year treasury bond today will lose purchasing power over the next 10 years if they hold to maturity as inflation will outpace the amount they earn. This phenomenon is being seen across nearly all areas of the fixed income market where investors are currently choosing to invest in assets that have return free risk, whereas historically they have produced risk free returns.

 

Market Statistics

 

  • Equities: Equity markets staged an impressive comeback last week following a negative week two weeks ago that spilled over into Monday’s trading. On Monday last week, we saw the steepest declines in the equity markets that we have seen since the start of the pandemic. The equity markets overcame this adversity and marched higher almost each of the final four trading days of the week. The Russell 2000 was the only index of the major U.S. indexes that had a negative day in the final four days of trading. While it was an exciting week for equity price action, the overall weekly trading volume remained solidly in summertime trading, meaning below average weekly volume. The technology-heavy NASDAQ took top honors as large cap technology names once again took over the leadership position for the overall market. With the gains last week, the NASDAQ managed to close at a new all-time high on Friday. The same cannot be said for the small cap Russell 2000, which gained more than 2 percent last week. However, this was less than half of what was lost the prior week. Both the Dow and the S&P 500 managed to retake their previous high levels late in the week and both joined the NASDAQ in closing at an all-time high on Friday.

 

  • NASDAQ (2.84%) – Below Average volume
  • Russell 2000 (2.15%) – Below Average volume
  • S&P 500 (1.96%) – Below Average volume
  • Dow (1.08%) – Below Average volume

 

  • Sector Performance: The top performing sectors last week were led by the home builders as earnings were positive from a few builders and the sector benefited from the falling lumber prices that have now been dropping since May 7th. Semiconductors took second place last week, moving higher but remaining in the trading range it has been stuck in since the middle of January when the global microchip shortage really started to impact the sector. Biotechnology and Medical Devices made it into the top performing sectors list last week as investors looked to areas of the markets that were still lagging the major indexes in hopes of the sectors playing catch up in the near future. Consumer Services rounded out the top performing sectors last week as cruise lines turned in very strong performance, as did several of the large auto dealership companies that are publicly listed and currently benefitting from sky high used and new car prices.

 

When looking at sectors of the markets that underperformed last week, it is difficult to look past the Insurance and Regional Banking sectors, with both falling significantly on Monday and not recovering much on Tuesday as the 10-year bond yields dipped all the way down to 1.13 percent. Infrastructure came in third from the bottom as Congress is still haggling over how much to spend and how to get the money for a large infrastructure spending bill. Energy came in fourth from the bottom last week as the OPEC+ deal means that it is unlikely that oil prices will continue to move much higher without something external to the oil markets making them move higher. Supply will slowly start to ramp back up and, if demand stays constant, that should mean falling oil prices. Utilities rounded out the bottom performing sectors last week as the sector came under pressure from investors who wanted to sell equities and move into the fixed income markets.

 

  • Top Sectors: Home Construction, Semiconductors, Biotechnology, Consumer Service, Medical Devices
  • Bottom Sectors: Insurance, Regional Banks, Infrastructure, Energy, Utilities

 

  • Commodities: Commodities were mixed last week as gains in Oil were offset by losses in precious metals and Grains. Overall, the Goldman Sachs Commodity Index (a production weighted index) posted a gain of 0.94 percent. Oil was positive last week, gaining 0.67 percent as a deal was announced by OPEC+ that isn’t a big enough change to warrant a large move in either direction in the global price of oil. Metals were mixed, with Gold and Silver declining by 0.50 and 1.77 percent, respectively, while Copper, the more industrially used metal, gained 2.73 percent. Agriculture overall was a tailwind for the second week in a row with a gain of 2.50 percent, driven by a gain of 1.24 percent in Livestock. Grains took a hit last week, falling by 1.89 percent as much of the US remains in the heart of the growing season.
    • GS Commodity Index (0.94%)
    • Oil (0.67%)
    • Livestock (1.24%)
    • Grains (-1.89%)
    • Agriculture (2.50%)
    • Gold (-0.50%)
    • Silver (-1.77%)
    • Copper (2.73%)

 

  • International Performance: Global index performance last week leaned positive, with 64 percent of the global indexes moving higher while 36 percent declined. The average return of the global indexes last week was 0.45 percent. When looking at the global indexes, the U.S., Europe and Africa turned in some of the strongest performance. Weakness last week was seen in Southeastern Asia.

 

  • Best performance: Tanzania’s All Share Index (6.56%)
  • Worst performance: Hong Kong’s Hang Seng Index (-2.98%)
  • Average: (0.45%)

 

  • Volatility: The VIX last week had a very wild ride as it spiked higher for the fifth time in the past three months. This most recent spike was a bit more pronounced, however, and quicker on the upside. The VIX at one point was up more than 35 percent on Monday, touching briefly above 25 after closing the previous Friday below 18.50. This jump in the VIX on Monday corresponded to the dramatic decline seen in the U.S. financial markets as investors were spooked by something that remains unclear. The VIX proceeded to give back all of the spike and then a little more over the following two trading days. On Thursday and Friday, the VIX seemed to meander aimlessly around below 17, ultimately closing out the week at 17.2 for a weekly decline of 6.78 percent. A VIX reading of 17.20 implies a move in the S&P 500 of 4.97 percent over the next 30 days but as always, the direction of the movement is unknown.

Model Performance and Update

 

For the trading week ending on 7/23/2021, returns in the hybrid and quant hypothetical models* (net of a 1% annual management fee) were as follows:

 

  Last Week YTD 2021 Since 6/30/2015

(Annualized)

Aggressive Model 1.29% 4.63% 6.31%
Aggressive Benchmark 1.00% 11.23% 8.55%
Growth Model 1.00% 4.35% 5.38%
Growth Benchmark 0.78% 8.69% 6.94%
Moderate Model 0.69% 3.62% 4.43%
Moderate Benchmark 0.56% 6.18% 5.25%
Income Model 0.54% 3.47% 4.12%
Income Benchmark 0.28% 3.08% 3.03%
Quant Model -0.58% 23.21%
S&P 500 1.96% 17.46% 13.36%

 

*Model performance does not represent any specific account performance but rather a model of holdings based on risk levels that are like hybrid model’s actual holdings. The hypothetical models are rebalanced daily to model targets and include dividends being reinvested. Performance calculations are my own.

 

There were no changes to the hybrid models over the course of the previous week, but there were a few core equity positions that reported their most recent quarterly results. Last week, results from Johnson & Johnson (JNJ), Coca-Cola (KO), Canadian National Railway (CNI) and Quest Diagnostics (DGX) were all released with each company beating market expectations of earnings. Coca-Cola posted the strongest earnings, beating expectations by more than 19 percent. When looking at revenue expectations, all of the companies, except for Canadian National Railway, reported better than expected results. CNI missed by 1.99 percent as ongoing impacts from COVID-19 continued to hamper the business a little more than expected.

 

This week is the busiest week for core equity positions reporting earnings as there are eight of the 22 core positions reporting their results. Companies that report results this week include Republic Services Group (RSG), McDonald’s (MCD), Proctor and Gamble (PG), Arthur J. Gallagher & Co (AJG), Church & Dwight (CHD), Aptar Group (ATR), VF Corp (VFC) and Otis Elevator (OTIS). With all of these announcements this week, it could make for a very interesting week of market reactions.

 

Looking to the Future

 

  • FOMC July Meeting: Meeting is expected to result in no action being taken
  • COVID-19: Delta variant will remain in focus
  • Earnings season: Busiest week of earnings season this week with one-third of companies reporting results.

 

Interesting Fact: Russia is banned; who is ROC?

 

With the Summer Olympics having just started late last week, there is some confusion over whether Russia is participating in the games or not since the country is officially banned from all international sporting events from December of 2020 through December of 2022 for repeated state sponsored doping. This is where ROC comes into play, with ROC meaning the Russian Olympic Committee. Russian athletes competing in the Olympics in Tokyo are not competing for Russia, but rather for the ROC directly. ROC athletes cannot wear any symbols of Russia, such as the Russian flag or depictions of the Russian Bear. The podium song for these athletes is not the Russian National Anthem, but rather a piece composed by Russia composer Tchaikovsky.

 

Source: NBC Sports

 

Have a great week!

Peter

 

 

A referral from a client is a tremendous compliment and a huge responsibility that can never be taken lightly.

 

For a PDF version of the below commentary please click here Weekly Letter 7-19-2021

Callahan Capital Management

Weekly Commentary | July 19th, 2021

 

Major Theme of the Markets Last Week: Inflation rockets higher!

Last week, there was a lot of hype about Sir Richard Branson beating Amazon founder Jeff Bezos into space aboard a private spacecraft, achieving a few minutes of weightlessness and excitement. Down on Earth, in the U.S., most people aren’t dealing with timetables and launch schedules for their ride to outer space; they are dealing with prices that are rocketing higher all around them. Federal Reserve Chairman Jerome Powell continues to insist these price increases are “transitory.” However, one key part of his thinking that caught investors by surprise last week: he has never said how high they could go during this “transitory” time.

 

There were several different inflation-related headlines last week that captivated investors, with the first coming on Monday when the Federal Reserve Bank of New York released its projection for inflation one year from now being 4.8 percent. This number is significantly above the Fed’s target rate of 2 percent. Officials have been saying we will see inflation above this rate for some time as it has been below 2 percent for such a long period of time. It seemed investors were thinking the inflation rate would be just above 2 percent, maybe pushing up near 3 percent, but that was about as high as anyone thought. When a 4.8 percent annual rate was printed, many investors took notice. On Tuesday, the Consumer Price Index (CPI) for the month of June was released and held yet another inflation surprise for investors. Going into the print, economists had been expecting a monthly reading of about 0.4 percent on Core CPI and a year-over-year change of 4 percent. The monthly change printed at 0.9 percent, with the year-over-year change coming in at 4.5 percent, but one must remember that Core CPI takes out the movement in food and fuel prices, which are greatly impactful to consumers.  Those factors, plus a few others, are included in the overall CPI, which printed a monthly gain of 0.9 and an annual gain of 5.4 percent. Both core and overall CPI were significantly higher than anticipated and signaled that the U.S. consumer had better be ready for a signficnat amount of inflation during this “transitory” time.

 

It just so happened that as the inflation readings were being released last week, Chair Powell was testifying before Congress in his semiannual address about the state of the U.S. economy. Chair Powell said during his remarks and question and answer period that the rate of inflation did surprise him a little, but that he still thinks the inflation is temporary and will come back down relatively quickly. He pointed out bottlenecks in the global supply chain and in shipping of global goods as reasons outside of Fed actions that inflation could be running hotter than expected. During his testimony, he did not change his view that there is “substantial further” progress needed to be made by the Fed when looking at their full employment and price stability goals. The bond market saw yields drop on the back of the Chairman’s comments as the yield on the 10-year U.S. treasury bond declined below 1.3 percent. The bond market is seeming to say that the Fed is incorrect in its assessment of how inflation will play out over the coming months and the potential adverse impact it could have on the economy and equity markets alike. We did not see an adverse impact on retail sales last week, which were released for the month of June and which posted a gain of 1.3 percent when looking at core retail sales and 0.6 percent when looking at full retail sales.

 

Financial News Impacting the Markets

COVID-19 once again took many of the headlines, both in the financial media as well as the general news media. The biggest headlines focused on the Delta variant as it is spreading quickly here in the U.S. among the unvaccinated population as well as around the world. The variant originated in India and has quickly become the dominant strand of the virus. The mutation comes at a time that many countries and regions are pulling back on the COVID restrictions and finally reopening. In the U.S. last week, we saw some areas reimpose some restrictions and others delay removing restrictions. The biggest announcement last week came when the county of Los Angeles (L.A.) announced that it was once again requiring masks to be worn in the county for both vaccinated and unvaccinated individuals. L.A. county is the second largest county in the U.S. and there are sure to be other counties around the country that follow L.A.’s lead in reimposing that masks be worn. Travel and leisure companies were hard hit on the announcement as many of the cruise lines had just begun sailing for the first time in more than eighteen months and now have to consider that the plug may be pulled on cruises at any point in the future over COVID fears. Over the weekend, we also saw the American Academy of Pediatrics recommend everyone attending or working in schools over the age of 2 be required to wear a mask. Financial markets do not like the uncertainty that is building surrounding the continued spread of COVID-19 and if we get more negative headlines, it is likely that volatility will pick up.

Something else that was picking up in the media last week was the second quarter earnings season, which got fully underway last week with the large financial institutions reporting their results. In total last week, 8 of the country’s largest financial institutions reported their results and they were very strong results. On average, among the 8 companies, they beat earnings estimates by 28 percent and revenue estimates of 7.3 percent. Bank of America was the only one that missed on either earnings or revenues when it missed revenue expectations by 1.4 percent. Following the Fed’s stress tests from a few weeks ago, the results last week added to the optimism for the financial sector. However, this optimism was short-lived as falling bond yields provided a formidable headwind to the sector. According to FactSet research, we have now seen 8 percent of the S&P 500 component companies report their earnings. Of the 8 percent of companies that have reported results, 85 percent have beaten earnings expectations while 15 percent have fallen short. When looking at revenues, 90 percent have beaten expectations while 10 percent have fallen short. While it is certainly a strong start to the reporting season, we are still a long way away from the end and a lot can happen between now and then. The current blended earnings growth rate stands at 69.3 percent above the estimate for the quarter of 63.3 percent.

 

The oil markets caught investors by surprise last week as the price of oil slid from post pandemic highs, posting a weekly decline for the first time in several weeks. Much of the decline was on fears over slowing global demand on concerns that travel could once again be restricted due to COVID-19. Energy remains the top performing sector of the markets on a year-to-date basis despite the recent stumble, but the tides could be turning on the sector. Toward the end of last week, there were rumors in the media that OPEC+ had come to an agreement over future oil production, allowing for an increase in production. This was not confirmed until over the weekend when the organization officially announced that they would be increasing production by 400,000 barrels of oil per day for the next two years. This is a decision that the group will have to quickly revisit if global demand really starts to move lower as they certainly do not want to see a flash crash in the price of oil again like we saw last year when oil printed at a negative price here in the U.S.

 

 

Market Statistics

 

  • Equities: Equity markets all moved lower last week as investors were spooked about inflation as economic readings came in well above what most investors were thinking would happen. While the market movements may have been outsized on some of the indexes, trading volume remained below the weekly average, as expected, being that it is the middle of summer. Boeing was a problem for the Dow last week, accounting for nearly all of the index’s total decline by itself as there was yet another problem found with the production of one of its plane models.

 

  • Dow (-0.52%) – Below Average volume
  • S&P 500 (-0.97%) – Below Average volume
  • NASDAQ (-1.87%) – Below Average volume
  • Russell 2000 (-5.12%) – Below Average volume

 

  • Sector Performance: Sector performance last week was largely driven by the rotation out of equity markets as well as inflation “safety investments” coming back into fashion. Sectors that outperformed last week included many that have high dividends relative to other sectors and bonds, including Utilities, Residential Real Estate, Consumer Staples and Telecommunications. Healthcare was the odd sector in the top five performing sectors last week. When you look at the company weightings in the sector, the jump of more than 23 percent by Moderna on news of the Delta variant quickly spreading around the world was enough to drive the overall sector performance.

 

When looking at the underperforming sectors last week, most were sectors that seemed threatened by the ongoing COVID-19 pandemic if there are future travel restrictions that could greatly impact the demand for oil, hence the large declines seen in the Oil & Gas Exploration sector, Natural Resources sector and the overall Energy sector. Rumbling at the end of the week last week that OPEC+ had reached a production deal also put downward pressure on the price of oil. Aerospace and Defense was sunk by the decline in Boeing, of more than 9 percent for the week, sending the sector to the fourth worst performing spot. Rounding out the bottom performing sectors was the Semiconductor sector as demand remains significantly higher than supply around the world with no end in sight.

 

  • Top Sectors: Utilities, Residential Real Estate, Consumer Staples, Healthcare, Telecommunications

 

  • Bottom Sectors: Semiconductors, Aerospace & Defense, Natural Resources, Energy, Oil & Gas Exploration

 

  • Commodities: Commodities were mixed last week as declines in oil were offset by gains in soft commodities. Overall, the Goldman Sachs Commodity Index (a production weighted index) posted a loss of 0.63 percent. Oil was negative last week, falling by 2.52 percent on fears of slower global demand and a potential deal having been struck within OPEC+. Metals were mixed, with Silver and Copper declining by 1.74 and 0.51 percent, respectively, while Gold, the more commonly expected inflation protecting metal, gained a small 0.12 percent. Agriculture was the surprise tailwind behind the commodity index last week, offsetting a large percentage of the decline seen in oil prices. Overall, Agriculture advanced 3.73 percent, driven primarily by a jump of 6.62 percent in Grains (grains are still net negative over the past two weeks). Livestock advanced by 2.48 percent as consumers increased their volume of meat purchases over fears of large amounts of price inflation coming in future months and the idea that some COVID-19 restrictions may be put back into place.

 

  • GS Commodity Index (-0.63%)
  • Oil (-2.52%)
  • Livestock (2.48%)
  • Grains (6.62%)
  • Agriculture (3.73%)
  • Gold (0.12%)
  • Silver (-1.74%)
  • Copper (-0.51%)

 

  • International Performance: Global index performance last week was nearly perfectly balanced, with 49.47 percent of the global indexes moving higher while 50.53 percent declined. The average return of the global indexes last week was -0.18 percent. When looking at the global indexes, emerging Asia, Eastern Europe and Africa turned in some of the strongest performance. Weakness last week was seen in both North and South America.

 

  • Best performance: Czech Republic’s Prague Stock Exchange (3.58%)
  • Worst performance: USA’s Russell 2000 Index (-5.12%)
  • Average: (-0.18%)

 

  • Volatility: The VIX last week closed about 14 percent higher than it started the week and ended at the highs of the week in a sign that volatility could be elevated at the start of next week. As equity markets became more concerned about inflation being significantly higher than expected, even if Chair Powell does turn out to be correct and it is transitory, investors became concerned that market valuations were too lofty and a correction could be coming. The VIX closed out the week at 18.45 which is still significantly below the previous four spikes of the last three months, so the fear gauge is not implying that a correction or volatility that comes with a correction is imminent, just that options traders are adjusting slightly for the possibility. At 18.45, the VIX is implying is a move of 5.33 percent in the S&P 500 over the next 30 days but as always, the direction of the movement is unknown.

 

Model Performance and Update

 

For the trading week ending on 7/16/2021, returns in the hybrid and quant hypothetical models* (net of a 1% annual management fee) were as follows:

 

  Last Week YTD 2021 Since 6/30/2015

(Annualized)

Aggressive Model -1.02% 3.28% 6.10%
Aggressive Benchmark -0.55% 10.13% 8.40%
Growth Model -0.60% 3.32% 5.22%
Growth Benchmark -0.43% 7.85% 6.82%
Moderate Model -0.18% 2.90% 4.32%
Moderate Benchmark -0.30% 5.59% 5.17%
Income Model 0.07% 2.91% 4.04%
Income Benchmark -0.15% 2.78% 3.00%
Quant Model -0.99% 23.92%
S&P 500 -0.97% 15.20% 13.05%

 

*Model performance does not represent any specific account performance but rather a model of holdings based on risk levels that are like hybrid model’s actual holdings. The hypothetical models are rebalanced daily to model targets and include dividends being reinvested. Performance calculations are my own.

There was one change to the hybrid models over the course of the previous week and it was lightening up on the exposure to the small cap value ETF, ticker IWN.  Small caps had been closing the gap in performance between themselves and large companies for much of the third and fourth quarter of 2020 and even into the start of 2021. However, with fears of price inflation as well as potential COVID-19 measures coming back into place in various parts of the world, we have started to observe a rotation back out of small caps and into large companies. The rotation is still very early and getting close to technical support levels, thus only half of the position was sold with the remainder being watched very closely for signs of further deterioration, which if it occurs will lead to the position being closed out. With the markets looking frothy, the proceeds from the sale of IWN last week were moved into cash and will be deployed at a later time.

 

This week is the start of earnings season for the core equity positions in the hybrid models as we are expecting the results from Johnson & Johnson (JNJ), Coca-Cola (KO), Canadian National Railway (CNI) and Quest Diagnostics (DGX). As mentioned last week, the year-over-year comps for many companies reporting this quarter are very low hurdles to make it over, so this should be a very positive reporting season for the core equity positions in the hybrid models.

 

Looking to the Future

 

  • COVID-19: Cases in the U.S. and other parts of the world have begun to pick up pace with the delta variant being the dominant strain of the virus
  • Earnings season: Corporate earnings over the next week include many industry leaders and their results could set the tone for the season moving forward

 

Interesting Fact: Business is changing quickly

 

COVID-19 had far reaching impacts on the US economy, but it was small businesses that in many cases bore the brunt of the hardship. According to the latest numbers from the Census Bureau, however, this trend of struggling may be turning a corner. In June of 2021, there were 448,553 EIN applications filed with the IRS. This means more than 400,000 small businesses were formed, a 59 percent increase from the level seen in June of 2019.

 

Source: Wolfstreet.com and Census Bureau

 

Have a great week!

Peter

 

 

A referral from a client is a tremendous compliment and a huge responsibility that can never be taken lightly.

For a PDF version of the below commentary please click here Weekly Letter 7-12-2021

Callahan Capital Management

Weekly Commentary | July 12th, 2021

 

Major Theme of the Markets Last Week: Bond yields dropped

Last week was a holiday-shortened trading week due to the Fourth of July being observed on Monday the 5th, making it a slow week for investors in terms of economic data, trading volume and other news to drive the markets. While the equity markets bounced around on Tuesday and Wednesday, the fixed income market started to see yielding move lower, before diving a bit on Thursday and recovering some of the decline on Friday. The movement in the fixed income markets drove the performance of the equity markets during the final two trading days of the week.

 

The 10-year U.S. government bond is a kind of benchmark for the overall fixed income markets as it is one of the most liquid and most traded bonds available anywhere in the world. 10-year bond yields have been as high as near 15 percent back in the early 1980s to as low as 0.55 percent back in July of last year at the height of the pandemic. Typically, falling bond yields indicate that the fixed income market sees slower growth ahead for the economy, while higher yields are indicative of high potential economic growth ahead. This year, we started the year with the 10-year bond yielding just under 1 percent and experienced a steady rise in yield up to 1.74 percent by mid-March. From March through the middle of May, the 10-year bond yield moved around in a pretty tight range of between 1.74 and 1.55 percent.  However, starting in late May, yields started to decline with the decline accelerating last week, turning into one of the sharpest declines we have seen this year. At first, the yield dropped to 1.35 percent and investors seemed to be positive about the move as it provided fuel for the equity markets to continue to advance as the market yield was more attractive relative to the new lower bond yields. Then Thursday came around and yields continued to decline with the 10-year bond falling to a yield of 1.246 percent on an intraday low (a 5-month low yield). For whatever reason, the decline in the yield seemed to spook investors into wondering what it was that the bond market knew that the stock market did not. With bond yields falling so much, it could only mean difficult economic times ahead and investors sold equities in response to the move in the bond yields. The decline in the equity markets was led by small caps, which are the most adversely impacted during an economic slowdown. Through Thursday, the Russell 2000 was down more than 3 percent while all of the other major U.S. indexes posted a decline of 1 percent or less. On Friday, the 10-year treasury caught a bid and the yields increased from about 1.3 percent up to 1.36 percent. Investors cheered the move as a sign that the previous move downward was just an overshoot and not a signal of more difficult times ahead for the economy and, in turn, the equity markets. It is amusing how just a few hours can change the sentiment of the markets during a very low trading volume time of the year.

 

Financial News Impacting the Markets

 

Economic data released last week played a role in the overall market movements as we saw a mixed picture emerging for the U.S. economy. The Markit Composite PMI, which measures manufacturing activity in the U.S., remained strong, posting a reading of 63.7, but it showed signs of slowing down as the previous reading had been 68.7. The same slowing down was also seen in the ISM Non-manufacturing PMI (services) data, which posted a 60.1 reading down from 64.0 the previous month. The ISM Non-Manufacturing Employment index slipped into a small contraction with a reading of 49.3 during the month of June. One potential reason for the slowing and reversing of the progress made in many of the economic data series is that the gains were almost entirely driven by government stimulus checks and we are now seeing the impact of those checks starting to wear off. The FOMC meeting minutes from the June FOMC meeting were also released last week and held nothing of significance to the markets. In aggregate, the FOMC members do not think they have fulfilled their goal of “substantial economic progress” following the downturn caused by COVID-19. There was also no consensus view as to when the Fed should begin tapering their various asset purchase programs. This was seen as slightly positive for the markets because a tapering is not imminent while also keeping the eventuality of tapering a wild card as no one is sure as to when it will begin. This upcoming earnings season is one thing the markets appear to be very certain about and they are expecting big things.

According to FactSet Research, the expected growth rate of earnings for the S&P 500 during Q2 2021 is 64 percent. The expected 64 percent has been steadily increasing since the end of March, when the expectation for Q2 2021 was only 52.1 percent. If we see the 64 percent come to fruition, it would be the highest quarterly earnings growth rate since Q4 2009 when the growth rate was 109.1 percent. We start to get the earnings picture this week as the big banks kick things off on Tuesday and Wednesday when JP Morgan, Bank of America, Wells, Fargo, Morgan Stanley, Blackrock and Goldman Sachs all report their results. These releases will likely set the tone for the rest of earnings season for many sectors, not just the financial sector.

 

Around the world last week, COVID-19 continued to make headlines and the news was not very positive and may have been one of the driving factors behind the early week selloff in the equity markets. The Delta variant continues to be the primary focus after spreading much more quickly than other variants of the virus. Japan last week confirmed that there will be no spectators for the upcoming Olympic games, while parts of Europe continue to extend COVID-19 safety procedures. Here in the U.S., we are seeing upticks in new COVID-19 infections in under-vaccinated areas of the country and in people who are younger. While the hospitalization rate remains low, along with the death rate, many medical professionals are warning that we could be seeing the start of yet another wave of COVID-19. Financial markets will be sensitive to this type of headline, as the gains experienced in the equity markets over the past year are predicated on the U.S. economy reopening and everyone returning to very close to pre-COVID-19 normal. Markets have been ignoring the possibility of another serious wave of COVID-19, but as more data comes out, we could very well see the markets’ thinking change. An early sign of the change could be a rotation back to the “stay at home” trades that worked so well during the pandemic. We have started to see a little of this behavior in the recent weeks as small cap stocks have been greatly lagging behind larger companies with large cap technology companies once again taking the catbird seat, in market leadership during both up and down days. COVID-19 may also be a topic on many of the upcoming quarterly conference calls and management’s views of the virus could become apparent, and thus impact the movements of stocks.

 

Market Statistics

 

  • Equities: Equity markets had a bit of a wild ride during the shortened trading week last week as all four of the major U.S. indexes were down during the first three trading days of the week. A Friday rally managed to pull three of the four major U.S. indexes into positive territory for the week, with only the small cap Russell 2000 posting a weekly decline. Volume, as was expected, was some of the lowest weekly trading volume that we have seen all year as many investors took time off and extended their three-day holiday weekend well into last week.

 

  • NASDAQ (0.43%) – Below Average volume
  • S&P 500 (0.40%) – Below Average volume
  • Dow (0.24%) – Below Average volume
  • Russell 2000 (-1.12%) – Below Average volume

 

  • Sector Performance: Interest rate movement was the primary driver of several of the top moving sectors, both to the upside and the down. Residential Real Estate was the top performing sector last week as falling interest rates on the 10-year government bond here in the U.S. spelled a decline in mortgage rates. When mortgage rates decline, that Is typically a positive driver for the real estate market as rates play a very large role in the overall U.S. housing market. The Utilities sector benefitted from the falling interest rates as well as the yields on many utilities because more attractive when the 10-year yield fell below 1.3 percent. Technology took second place when looking at top performing sectors as investors rotated back into the perceived safety of large cap technology stocks throughout the trading week as more chatter was coming up about the various variants of COVID-19 that are spreading around the world currently. Infrastructure finally posted a good week after lackluster performance the last few weeks following the news out of Washington D.C. that a smaller infrastructure bill may be coming in the next few months than first expected. Medical Devices rounded out the performing sectors last week, led by oxygen concentrator Inogen which jumped more than 8 percent last week on fears that global demand for oxygen will continue to be elevated with COVID-19 picking back up in some parts of the world.

 

With no deal being agreed to at the OEPC+ meeting, it was not surprising to see that Energy and Oil & Gas Exploration turned in the worst performance of the week as uncertainty is never a good thing in the oil markets where projects are very long term and costly. Home Construction made the bottom performing list because falling rates on mortgages means increasing demand at a time when the home builders are already building at capacity. Semiconductors made the bottom performing list last week as the shortage in raw materials for the industry continues and is really starting to adversely impact the sector’s overall production numbers. Rounding out the bottom performing sectors last week was the Financial Broker Dealers, which took a hit as rates declined on the full fixed income yield curve as lower rates means lower potential margins for the sector.

 

  • Top Sectors: Residential Real Estate, Technology, Utilities, Infrastructure, Medical Devices

 

  • Bottom Sectors: Broker Dealers, Semiconductors, Home Construction, Energy, Oil & Gas Exploration

 

  • Commodities: Commodities were negative last week with the exception of Gold and Copper, which both bucked the trend. Overall, the Goldman Sachs Commodity Index (a production weighted index) posted a loss of 1.60 percent. Oil was negative last week on the announcement that no deal had been struck at the OPEC+ meeting, as supplies of oil coming out of the Middle East are now very much uncertain. Metals were not the primary driver of commodity performance, as the price movements were mixed; Gold and Copper advanced by 1.15 and 1.02 percent, respectively. Agriculture was the surprise headwind behind the commodity indexes last week as the related agricultural commodities reversed all of their gains from two weeks ago as they pushed lower. Overall, Agriculture declined 3.49 percent, driven primarily by a slump of 7.49 percent in Grains. Livestock declined by only 0.67 percent as price inflation at the grocery stores continues with U.S. consumer demand staying elevated.

 

  • GS Commodity Index (-1.60%)
  • Oil (-1.02%)
  • Livestock (-0.67%)
  • Grains (-7.49%)
  • Agriculture (-3.49%)
  • Gold (1.15%)
  • Silver (-1.47%)
  • Copper (1.02%)

 

  • International Performance: Global index performance last week was mixed, with 54 percent of the global indexes moving higher while 46 percent declined. The average return of the global indexes last week was -0.09 percent. When looking at the global indexes, there were no specific regions of the world that saw strong performance. Weakness last week was seen in Southeastern Asia as well as Southern Europe and Northern Africa.

 

  • Best performance: Palestine’s PSE Al Quds Index (4.13%)
  • Worst performance: Vietnam’s Ho Chi Minh Stock Index (-5.15%)
  • Average: (-0.09%)

 

  • Volatility: Despite there being only four trading days last week, the VIX still managed to have a pretty wild week. There was a spike in the fear gauge over the first three trading days of the week as the equity markets pushed lower. In total, the VIX jumped more than 26 percent in the three days only to fall back by more than 14 percent on Friday, ending the week with a gain of 7.4 percent. This was the third spike for the VIX since the beginning of May, with each spike having gotten successively smaller than the previous. In terms of technical analysis, this pattern would signal that the VIX will ultimately continue to move in a downward trend that it has been on since early May, which should be positive for the equity markets.

 

Model Performance and Update

 

For the shortened trading week ending on 7/9/2021, returns in the hybrid and quant hypothetical models* (net of a 1% annual management fee) were as follows:

 

  Last Week YTD 2021 Since 6/30/2015

(Annualized)

Aggressive Model 0.08% 4.36% 6.30%
Aggressive Benchmark -0.13% 10.74% 8.53%
Growth Model 0.11% 3.95% 5.34%
Growth Benchmark -0.10% 8.31% 6.92%
Moderate Model 0.14% 3.09% 4.37%
Moderate Benchmark -0.07% 5.91% 5.24%
Income Model 0.16% 2.84% 4.05%
Income Benchmark -0.04% 2.94% 3.03%
Quant Model 0.76% 25.16%
S&P 500 0.40% 16.33% 13.28%

 

*Model performance does not represent any specific account performance but rather a model of holdings based on risk levels that are like hybrid model’s actual holdings. The hypothetical models are rebalanced daily to model targets and include dividends being reinvested. Performance calculations are my own.

 

There were no changes in the hybrid models over the course of the previous week as trading volume was extremely light and none of the trigger points to either buy or sell specific positions were reached. While earnings season officially kicks off this week with the big banks reporting their results, there are no core equity positions in the hybrid models set to report their results until the following week. Earnings are expected to be very strong overall as the comparisons on a year-over-year basis are very favorable to the second quarter of 2021 as much of the second quarter 2020 saw the U.S. in lockdown due to COVID-19.

 

Looking to the Future

 

  • COVID-19: Cases in the U.S. and other parts of the world have begun to tick higher with the delta variant being the dominant strain of the virus currently
  • Inflation indicators: This week, both the CPI and the PPI figures for the month of June are set to be released
  • Retail sales: Retail sales for the month of June are set to be released at the end of the week

Interesting Fact: Most common letters of the English alphabet

According to the 11th edition of the Oxford Dictionary (2004), the most commonly used letters in words are as follows:

The percentage in the table above represents the percentage of all words in the dictionary that contain each letter. For example, “E” is the most common, occurring in more than 11 percent of all words. The third column represents proportions, taking the least common letter (q) as equal to 1. The letter “E” is over 56 times more common than Q in forming individual English words.

 

Source: Lexico.com

 

Have a great week!

Peter

 

 

A referral from a client is a tremendous compliment and a huge responsibility that can never be taken lightly.