For a PDF version of the below commentary please click here Weekly Letter 6-21-2021

Callahan Capital Management

Weekly Commentary | June 21st, 2021

 

Major Theme of the Markets Last Week: June FOMC meeting

Last week was the June FOMC (Federal Open Market Committee) meeting for the Federal Reserve and it was a closely watched event for many investors. Going into the meeting, there was a steady stream of economic data pointing toward hotter inflation than many Fed officials have been expecting. However, the higher inflation rates were always categorized as “transitory” by the central bank officials and not something that would require the Fed to take action to slow. The surprises last week came from a few different angles around the Fed meeting. First, the overall sentiment was more hawkish than investors were expecting, meaning the Fed looks likely to raise rates and take other actions sooner than expected. Second, Powell characterized the meeting as Fed officials “talking about talking about tapering.” Tapering is the official term for when the Fed slows down or reverses course on the bond buying programs put in place during the pandemic to ensure there was enough liquidity in the U.S. financial system. The third surprise of the week from the Fed came in the form of the dot plot projections in the Summary of Economic Projections released following the meeting. In the previous dot plot projections, there was a slight chance for a single rate hike by the end of 2023. With the revisions released last week, there are now two expected rate hikes by the end of 2023. What’s more is that, on Friday, St. Louis Fed President Bullard told the media that he expects a rate hike by the Fed to come in late 2022, as opposed to waiting until 2023 for the first move upward. This took the markets by surprise and sent the U.S. markets to one of their worst single day declines that we have seen during 2021.

 

Why does this potential action by the Fed matter to the markets? It matters greatly because the Fed flooding the U.S. economy with money during the pandemic was perhaps the only thing that stopped many American businesses from panicking even more and causing greater long term economic damage to the system. By making money cheap and by purchasing bonds, and even some equities and derivative investments, the Fed ensured that if a company needed funds at reasonable rates, the company would get the needed funds. Lower interest rates helped more than just businesses as they also pushed rates down on mortgages and other floating rate debt, helping people save more of the money they earned. The downside to all of this is that at some point it has to come to an end and the Fed will need to “normalize” its policy actions and interest rates. Inflation readings provide the Fed with the biggest signal that it is time to shift policies and it is the inflation that we have been seeing that has caused the uneasiness in the U.S. financial markets. During the press conference following the FOMC meeting, Chair Powell did not commit to any specific timetable for when asset purchases may be slowed and when interest rates may be increased, leaving the door open to speculation by investors, which is partially why we saw the VIX spike upward as much as it did at the end of the week. Chair Powell also made it clear that the Fed “will do what it can to avoid a market reaction” when it comes time to start tapering. This was not reassuring for the markets which, by the end of the week, had all posted declines with the small cap indexes leading the way lower, falling by more than 4 percent. The Dow also had a particularly difficult week, declining by 3.45 percent, the largest weekly decline that we have seen for the index since October 30th of 2020.

 

Financial News Impacting the Markets

Economic data impacted the markets last week, in addition to the Fed, as retail sales for the month of May were released with overall retail sales posting a worse than expected decline of 1.3 percent. Core retail sales declined by 0.7 percent. As seen in the chart to the right from investing.com, retail sales over the past year have varied widely. We have seen five of the past 12 months experience declines and 7 months experience increases in retail sales. The biggest factor for the swings in retail sales on a month-to-month basis over the past year has been government stimulus checks. In months directly following Americans receiving stimulus checks, we have seen bumps in sales, but these months seem to be doing little more than pulling purchases forward, which is why, following a strong gain, we have seen retail sales decline. Interestingly enough, during the month of May, retail sales declined not only due to a lack of consumers wanting to spend, but also on limited inventories of items in strong demand. Many electronics, such as newly released gaming systems, are in short supply due to the global chip shortage that is adversely impacting volumes of everything from small electronics to automobiles.

 

Commodities had a particularly hard week last week with metals taking the brunt of the damage. Gold and Silver were down 6 and 7.6 percent, respectively, while the more industrially used Copper posted a 9 percent decline. The precious metals dropped on the FOMC meeting conclusion with a more hawkish Fed while Copper dropped as industrial output both here in the U.S. and in other countries such as China was called into question. Oil was a bright spot in the commodities markets last week as prices increased only slightly as the U.S. rig count numbers continued to increase while the crude oil inventories in the U.S. declined by more than 7 million barrels. While supply has been declining and working off the pandemic buildups, demand for oil has been increasing as more and more people become increasingly mobile, travelling by car and planes more frequently.

 

COVID-19 continued to make headlines last week, mostly outside of the US as the UK announced it was delaying the full reopening from June 21 back to July 21st as the Delta variant of the disease is increasing quickly in the country. In the EU, Spain and Portugal’s plans for recovering from COVID-19 have been approved by the European Commission, which is in charge of doling out funds from the European Commission on recovery. Italy has a plan under review that could be approved later this week. Despite having plans in place, many parts of Europe are still struggling with a general lack of vaccines to distribute which, until more doses are available, will continue to impede progress in the region. Japan eased some of the COVID-19 restrictions last week ahead of athletes starting to arrive for the delayed Tokyo Olympic games. The COVID restrictions in Japan have not seemed to hamper exports from the country as exports for May on a year-over-year basis were shown to have increased 49.6 percent, the fastest growth rate since 1980, as cars and car parts were the most exported items from the country.

 

Market Statistics

 

  • Equities: Equity markets in the U.S. tumbled a little last week following the latest FOMC meeting, discussed above. The market movement was not a taper tantrum, like we saw a few years ago when the market quickly dropped by more than 10 percent, but there was downward pressure on the markets following the FOMC statement and press conference. Volume was average on three of the four major U.S. indexes and above average on one, as Friday was a very heavy volume day with quadruple witching taking place.

 

  • NASDAQ (-0.28 %) – Above Average volume
  • S&P 500 (-1.91 %) – Average volume
  • Dow (-3.45 %) – Average volume
  • Russell 2000 (-4.20 %) – Average volume

 

  • Sector Performance: There were only three sectors last week that managed to post positive returns for the week: Medical Devices, Software and the broader Technology sector. The positive movements in the three sectors were all driven by one-off movements of large component companies. For Medical Devices, it was jumps of more than 5 percent for several different cardiovascular focused companies such as Abiomed and LeMaitre Vascular. Within the Software sector, MEME stock MicroStrategy popped by more than 25 percent while cyber security firms such as Cloudflare, DataDog and Splunk also gained more than 5 percent. It was gains in some of the big data software companies that ultimately drove Technology overall to a small gain for the week. Healthcare and Home Construction rounded out the top five performing sectors of the equity markets last week, despite both sectors moving slightly lower.

 

The prospect of rising rates from the Fed was the primary driver behind the bottom five performing sectors last week as the debt-heavy Energy sector as well as rate sensitive Insurance and Regional Banking sectors all took a hit.

 

  • Top Sectors: Medical Devices, Software, Technology, Healthcare, Home Construction
  • Bottom Sectors: Energy, Insurance, Oil & Gas Exploration, Basic Materials, Regional Banks

 

  • Commodities: Commodities were all lower last week with the exception of Oil. Overall, the Goldman Sachs Commodity Index (a production weighted index) posted a loss of 2.57 percent. Oil was not the primary driver of commodity performance, as it typically is, as Oil gained 0.6 percent for the week, pushing prices up to more than $72 per barrel for the first time since late 2018. Metals were the largest drag on the commodity indexes last week as Gold declined by 6.15 percent while Silver and Copper dove by 7.69 and 9.06 percent, respectively. Agriculture posted a large decline of 5.36 percent for the week, driven primarily by a decline of 7.02 percent in Grains and a drop of 2.6 percent in Livestock, with price inflation pressures being the main reason for the declines. As prices increase, people buy incrementally less.

 

  • GS Commodity Index (-2.57%)
  • Oil (0.60%)
  • Livestock (-2.60%)
  • Grains (-7.02%)
  • Agriculture (-5.36%)
  • Gold (-6.15%)
  • Silver (-7.69%)
  • Copper (-9.06%)

 

  • International Performance: Global index performance last week was largely negative, with 76 percent of the global indexes moving lower while 24 percent advanced. The average return of the global indexes last week was -0.96 percent. When looking at the global indexes, there were no clear regions of the world that were strong last week. There were only about 20 indexes in total that turned in a positive return. The U.S., China and Africa were weaker than the other regions of the world.

 

  • Best performance: Cyprus’s General Market Index (5.36%)
  • Worst performance: Namibia’s Namibia Overall Index (-7.42%)
  • Average: (-0.96%)

 

  • Volatility: The VIX last week started the week at the low end of its recent trading range near 16. During the first four days of the trading week, the VIX slowly moved through its trading range, topping out near 18 before breaking out of the range to the upside on Friday. On Friday, when the markets were selling off, the VIX was moving in the opposite direction and jumping higher. Adding to the movement in the VIX was the fact that it was quadruple witching day for the markets, a day that sees four different derivative trading contracts expire for many different types of investments. On Friday, the VIX jumped more than 16 percent to close out the week above 20 for the first time since the middle of March. With the VIX currently at 20.7, the “fear gauge” is implying a move in the S&P 500 of 5.98 percent over the course of the next 30 days. As always, the direction of the movement is unknown.

Model Performance and Update

 

For the trading week ending on 6/18/2021, 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 -2.53% 1.20% 5.82%
Aggressive Benchmark -1.70% 8.31% 8.21%
Growth Model -2.00% 1.47% 4.97%
Growth Benchmark -1.32% 6.45% 6.68%
Moderate Model -1.45% 1.33% 4.10%
Moderate Benchmark -0.95% 4.60% 5.07%
Income Model -1.19% 1.43% 3.84%
Income Benchmark -0.46% 2.31% 2.95%
Quant Model -2.03% 18.91%
S&P 500 -1.91% 10.93% 12.51%

 

*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. With the possibility of inflation rising faster than two percent in the near to mid term future, the hybrid models’ core equity positions have been stress tested for a rising rate environment. Looking back at periods of higher inflation, the core equity positions have held up well compared to the overall markets, primarily due to the over weighting in Consumer Staples, which have strong pricing power. The hybrid models have also performed well during previous taper tantrums as the majority of the core positions have strong financial balance sheets and are not encumbered by large amounts of debt that have to be rolled into new higher interest rate paper.

 

Looking to the Future

 

  • Uneventful week: This week is uneventful in terms of political and market releases
  • Volatility: With markets declining and volatility spiking higher last week, it could make for an interesting week this week

 

Interesting Fact: Airline food may not actually lack taste

You lose up to 30 percent of your taste buds during flight. This might explain why airplane food gets such a bad reputation. The elevation in an airplane can have a detrimental effect on our ability to taste things. According to a 2010 study conducted by Germany’s Fraunhofer Institute for Building Physics, the dryness experienced at a high elevation as well as low pressure reduces the sensitivity of a person’s taste buds to sweet and salty foods by about 30 percent. Add that dry cabin air affects our ability to smell, and our ability to taste is reduced further.

 

Source: NBCnews.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 6-14-2021

Callahan Capital Management

Weekly Commentary | June 14th, 2021

 

Major Theme of the Markets Last Week: More inflation readings, again

Inflation concerns were the major theme of the financial markets last week in the U.S. and in several other key areas of the world. For much of 2021, the focus of investors and market watchers has been on inflation because we are in unprecedented times and inflation could play a significant role in the future movements of the stock market and in impacting economies around the world. On Thursday last week, the U.S. Bureau of Labor and Statistics (BLS) released the May 2021 data for the Consumer Price Index (CPI), one of a few indicators the Federal Reserve looks at when considering what to do with monetary policy moving forward. Last week’s release came in at a 0.6 percent gain on a monthly basis for overall CPI, which was slightly ahead of the expected 0.4 percent gain. On a year-over-year basis, the reading was 5 percent, higher than the anticipated 4.7 percent rate and above the April reading of 4.2 percent. This 5 percent reading is the highest reading in the U.S. in 13 years. The biggest driver of the inflation seen in the overall CPI was Energy, which jumped more than 28 percent thanks to a jump of more than 50 percent in energy commodities with oil fuels and gasoline both increasing more than 25 percent on a year-over-year basis. Some of these gains have to do with demand imbalances seen during May of 2020 at the heart of COVID-19 restrictions. With people starting to drive and travel significantly more than a year ago, energy inflation is also significant. Released in the same report was the latest readings on food inflation, with overall food costs increasing at more than 2 percent. Drilling down a little more on the food costs, we find that food at home rose only 0.7 percent while food away from home has increased 4 percent. Some of these increases are due to the higher wages being paid at many restaurants, but prices have been impacted from higher raw material costs as well. With a significant amount of volatility from both food and energy, historically, the BLS also released a CPI reading excluding food and energy.

For the month of May, Core CPI posted a reading 0.7 percent on a monthly basis and a change of 3.8 percent on a year-over-year basis. The biggest factor (one third of the total gain) in this increase was the price of used cars, which increased 7.3 percent from April’s reading. Used cars are seeing their prices skyrocket because of stimulus money from the government and because of a lack of new vehicles available for purchase due to the computer chip shortage. The chip shortage and lack of vehicle production could continue to be a significant problem for more than a year to come as that is how long many of the chip manufacturers are saying it will take to work through the current shortage of chips. It was not only used cars that saw large gains during May as furniture, airline ticket prices, and clothing also experienced significant increases, many items having to do with the reopening of the US economy. The most surprising jump was in rental car prices, which is up 109.75 percent on a year-over-year basis as many car rental agencies sold their vehicles during the pandemic downturn. Now, with the chip shortage, many have no way of purchasing the same large number of vehicles. All things related to the service economy also saw strong gains in prices last month as Americans returning to pre-pandemic life spend money in ways they used to enjoy.

 

Financial News Impacting the Markets

 

Central banks are always top of mind for many economists and market participants because of their long reaching impact on the local and global economies. Last week, one of the big four central banks, the European Central Bank (ECB), held a rate setting meeting. As expected, the ECB did not adjust rates, leaving them at their effective lower bound of zero. The ECB also did not adjust its two primary bond buying programs, put in place to help the fixed income markets function in Europe. This was a little surprising as the ECB recently increased one of its bond buying programs back in March and the increase was supposed to be temporary (most economists thought it would last for only three months) but with no change to the program, it will obviously last longer than three months.

 

The Bank of Canada (BoC) was the second central bank to hold its rate setting meeting last week and, like the ECB, it decided not to raise rates or make any adjustments to its current asset purchase programs. This was significant as the central bank is known for being a first mover central bank as it tapered its asset purchases back in October of last year and again this past April. The lack of BoC change was due to recently tightened COVID-19 restrictions as the country continues with a slower than anticipated rollout of the vaccines. Both the BoC and the ECB noted that they saw signs of inflation in their economies but that the inflation would prove to be temporary and “not a reason for a shift in policy.” This week, the U.S. Federal Reserve will be taking central stage in the rotation of central bank meetings but, as has been the case for a long time, there is no expectation of rates or bond buying programs being adjusted by the Fed.

 

In China last week, the economic data held a surprise and could indicate where the US will be in a few quarters’ time on the inflation front. Last week, the Chinese Producer Price Index posted a monthly gain of 1.6 percent for the month of May. With this monthly gain, the year-over-year gain seen at the producer level in China now stands at 9 percent. Nine percent is the highest inflation reading for China since 2008 when product demand scarcity led to a spike in prices. The primary drivers of this recent price increase at the producer level in China was fuel, energy, raw material costs as well as mining and exploration costs. One oddity about the situation in China is that while prices have been spiking higher at the producer level, we have not yet seen this adversely impact China’s consumers. The Consumer Price Index for the month of May posted a monthly gain of only 0.2 percent and a year-over-year gain of only 1.3 percent. It is rare for such a large amount of inflation at the producer level to not be passed along to the end consumer, but it can happen for an extended period of time as long as the government artificially keeps prices down at the consumer level through arbitrary price controls.

 

Oil last week broke through $70 per barrel on West Texas Intermediary crude (WTI), as global demand has been pumping up the price of oil. It was less than a month ago that WTI was hovering under $62 per barrel and having a difficult time breaking out, but a few weeks of falling U.S. inventories and increasing global demand has pushed oil prices to the highest we have seen in a while. With energy playing such a large role in the recent inflation data, many economists and Fed watchers will be keeping an eye on the oil markets for clues about upcoming inflation readings and what impact the readings could have on central bank policies.

 

Market Statistics

 

  • Equities: There was an interesting rotation last week in the major indexes as investors fled industrial names such as Caterpillar, Dow and Honeywell and repositioned into small caps as well as large cap technology. This rotation was similar to rotations we have seen in the past with the big difference being the value focused names in the Dow not being picked up by investors. Small caps continued to close the performance gap that has persisted for more than 18 months but did so on below average volume. Only the NASDAQ managed to have above average weekly volume for the week last week, led by large amounts of trading in the top 5 components of the index by market cap.

 

  • Russell 2000 (2.16%) – Below Average volume
  • NASDAQ (1.85%) – Above Average volume
  • S&P 500 (0.41%) – Below Average volume
  • Dow (-0.80%) – Below Average volume

 

  • Sector Performance: With the Russell 2000 small cap index and the NASDAQ taking the top two spots in performance ranking last week, it was not surprising to see that all things Healthcare related as well as Software made up the top five performing sectors for the week. The overall Healthcare sector was boosted into the top five sectors by strong performance in the Biotechnology, Pharmaceutical, and Medical Device subsectors. These sectors were all moving as investors were evaluating areas of the markets that have underperformed recently and have the highest potential moving forward over the longer term as life gets back to normal around the world. The Software sector got a boost from strong performance last week by cyber security companies such as Cloudflare, FireEye and CrowdStrike, all of which were up more than 10 percent for the week.

 

When looking at sectors that lagged last week, many of them are considered to be value sectors of the markets, including Financials, Basic Materials, Insurance and Regional Banks. Adding to pressure on the financial related sectors was the decline in bond yields as the 10-year US government bond saw its yield drop below 1.5 percent for the first time since the end of March. Basic Materials took a hit last week as it appeared that the US infrastructure spending bill would take longer than initially anticipated to make its way through Congress as support from both sides has seemed to wane recently. Rounding out the bottom five performing sectors last week was Home Construction as high-end home builders Toll Brothers, Beazer Homes and LGI Homes, all declined more than 6 percent as the lack of homes for sale in the U.S. housing market is starting to become an issue for the builders who can’t keep up with demand.

 

  • Top Sectors: Biotechnology, Software, Pharmaceuticals, Healthcare, Medical Devices
  • Bottom Sectors: Financials, Basic Materials, Insurance, Regional Banks, Home Construction

 

  • Commodities: Commodities were mostly higher last week with the Goldman Sachs Commodity Index (a production weighted index) posting a gain of 0.95 percent. Oil was the primary driver of the index movement with a gain of 1.71 percent as both brent crude and WTI crude oil closed last week above $70 per barrel as global demand continues to pick up coming out of the global pandemic. Metals were mixed last week as Gold declined by 0.8 percent while both Silver and Copper advanced 0.35 and 0.53 percent, respectively. Agriculture posted a small gain of 0.16 percent for the week, driven primarily by a gain of nearly 0.18 percent in Livestock while Grains lagged behind, falling 0.73 percent as the U.S. is in full growth mode for many of our most important crops around the country.

 

  • GS Commodity Index (0.95%)
  • Oil (1.71%)
  • Livestock (0.18%)
  • Grains (-0.73%)
  • Agriculture (0.16%)
  • Gold (-0.80%)
  • Silver (0.35%)
  • Copper (0.53%)

 

  • International Performance: Global index performance last week was largely positive, with 78 percent of the global indexes moving higher while 22 percent declined (these were exactly the same figures as two weeks ago). The average return of the global indexes last week was 0.47 percent. When looking at the global indexes, there were no clear regions of the world that were strong last week as the distribution of strong indexes seemed very random. Weakness was seen in China last week as well as southeastern Asia.

 

  • Best performance: Ghana’s GSE Composite Index (4.24%)
  • Worst performance: Peru’s Peru General Index (-10.84%)
  • Average: (0.47%)

 

  • Volatility: The VIX had an interesting week as it started last week with a flat day on Monday and proceeded to jump by 10 percent over the next two trading days only to fall by 12 percent over the final two trading days of the week. This is indicative of summer trading when large institutional money managers are generally not as active in the markets and, specifically, in hedging risks through the use of options. The VIX ended last week at 15.65, the lowest close since February of 2020. In closing at 15.65, the VIX is implying a move of 4.52 percent over the next 30 days and, as always, the direction of the movement is unknown.

 

Model Performance and Update

 

For the trading week ending on 6/11/2021, 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 0.19% 3.83% 6.30%
Aggressive Benchmark 0.40% 10.18% 8.55%
Growth Model 0.20% 3.56% 5.35%
Growth Benchmark 0.31% 7.87% 6.94%
Moderate Model 0.19% 2.82% 4.38%
Moderate Benchmark 0.22% 5.60% 5.25%
Income Model 0.25% 2.65% 4.07%
Income Benchmark 0.11% 2.78% 3.04%
Quant Model -0.41% 21.38%
S&P 500 0.41% 13.08% 12.92%

 

*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; there were also no earnings reported by any of the core equity positions. With a general lack of direction in the markets, there were no triggers hit to purchase or add to existing positions nor a signal to exit a position. The top two performing positions in the models last week both gained more than 4 percent for the week and were VF Corp (VFC) and The Trade Desk (TTD). The bottom two performing positions last week were Church & Dwight (CHD), down 2 percent, and Canadian National Railway (CNI), down 1.5 percent.

 

Looking to the Future

 

  • FOMC June Meeting: Taking place this week
  • Retail Sales Report: Retail sales for the month of May are expected to post a slight decline over April readings
  • Congressional Items: Infrastructure spending is still a big question mark; President Biden’s first foreign trip to the G7

 

Interesting Fact: Denver may heat up this week, but is nothing like Libya

 

The hottest spot ever recorded on Earth is El Azizia, in Libya, where a temperature of 136.4 degrees Fahrenheit was recorded on Sept. 13, 1922. While hotter spots have likely occurred in other parts of the planet at other times, this is the most scorching temperature ever formally recorded by a weather station.

 

Source: theactivetimes.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 6-7-2021

Callahan Capital Management

Weekly Commentary | June 7th, 2021

 

Major Theme of the Markets Last Week: Economics

With last week being a holiday shortened trading week and historically one of the lowest volume trading weeks of the year, it was not surprising to see that the markets had little in the way of major themes to react to. When there is a general lack of news flow surprising investors, markets typically turn to the economic data being released and give that news much more attention than it would otherwise receive. This was certainly the case last week. During the first three days of trading, the economic data that was released was mixed. On Tuesday, the ISM released its May data for manufacturing, which included a positive surprise in new orders, a poor reading on manufacturing employment and a mixed inflation reading on manufacturing prices with prices having increased less than anticipated but still signaling a large amount of inflation. On Wednesday, the market latched onto the API weekly Crude oil stock report, which surprised some investors as it showed that US stock of oil declined by 5.36 million barrels during the week. This figure was higher than expected, with some of the decline being reverberations of the Colonial pipeline being shut down part of last month due to a hack attack.

 

Thursday was the start of two days of jobs related data being released by both private businesses as well as the government. The ADP nonfarm employment data was released on Thursday and showed 978,000 jobs added during May, a gain that was 50 percent higher than expected. The positivity of this release was partially offset by continuing jobless claims being more than 150,000 higher than expected and initial jobless claims coming in close to 400,000. Markit released its latest PMI figure for the US, which came in slightly higher than anticipated validating the ISM data released earlier during the week. The service PMI figure hit the highest level on record during the month of May as pent-up demand for services was strong in nearly all areas of the service industry. Through Thursday, three of the four US equity markets were slightly lower for the week and then came in the government jobs report on Friday, which pushed the markets higher for the week.

On Friday, the Department of Labor released its jobs data for the month of May and, as with most economic data releases, there were positive and negative aspects to the release. Payrolls were strong in the release with nonfarm payrolls increasing by 559,000 as opposed to the April reading of 278,000 jobs. Many of the jobs gained were in the Hospitality and Leisure sector with restaurants making up the majority of the new hires. This is the area of the US economy that was hardest hit during the pandemic and has the most room to bounce back. When looking further back in the data, the sector is still several million jobs short of where it was prior to the pandemic. Both the labor force participation rate as well as the official unemployment rate in the US came down during the month of May, with the participation rate falling to 61.6 percent while the unemployment rate declined by 6.1 percent down to 5.8 percent, a new post-pandemic low. Markets took the jobs numbers as almost being the Goldilocks’ scenario in that it didn’t force the Fed to have to act on interest rates or other monetary policy actions while at the same time providing the Fed with cover to keep rates low for longer. The jobs data also shows that it could be difficult to close the unemployment gap as we have seen several months of job openings increasing at a faster pace than the unemployment rate has been falling as depicted in the chart to the right. The problem that is arising currently is that there is a mismatch between jobs and the location of unemployed people and also a mismatch in skills, with many of the unemployed people currently not having the skills needed for the jobs that are available. Both geographic and skill labor issues are very difficult to overcome in the short term.

 

Financial News Impacting the Markets

Outside of the economic data last week, investors focused on a few other items with the OPEC meeting and the subsequent oil price movement being one of the topics. On Tuesday last week, OPEC+ agreed to stick to their plan from late last year that called for the group to slowly ease supply restraints that have been in place throughout much of the pandemic. The supply constraints were put in place so that the group could limit their production at a time that global demand fell off a cliff. It was designed to help support oil prices at a reasonable level. The supply constraints will remain in place through July of this year when the global oil situation will be reassessed by the group. OPEC+ sticking with their plan and very few members cheating is a step in the correct direction from how OPEC has managed the group historically, with members acting in their own best interest. With the OPEC announcement combined with the falling US weekly oil reserves released last week, oil prices jumped higher by more than $4 per barrel and hit a high just below $70 per barrel, the highest price since October of 2018.

 

Now that we are into June, investors are starting to gear up for the next earnings season: Q2 2021. According to FactSet Research, the expected earnings growth rate for the S&P 500 during the second quarter is currently 61 percent. This number has been steadily climbing since the end of March when it stood at 52.2 percent. If 61 percent comes to fruition, it will be the second highest year-over-year growth rate for the S&P 500 since the 4th quarter of 2009, which was when the US economy was pulling out of the Great Recession.

 

COVID-19 continued to make news last week around the world even as the US is making strides to getting back to life as normal. In the UK, a new variant, Delta (variants and new variants of COVID-19 are now being assigned a name from the Greek Alphabet by the World Health Organization), is causing some law makers to reconsider fully opening the economy. In other parts of Europe, COVID-19 remains on the decline but fears of future waves continue as the roll out of vaccinations is not as far along in many parts of Europe as it is in the US. Economic data out of Europe last week indicated that, just like in the U.S., the services sector in the region is doing very well as reopening continues. The same trend can also be seen in other parts of the world as Japan last week saw household spending increase by 13 percent on a year-over-year basis with services taking a lion’s share of the increase.

 

Market Statistics

 

  • Equities: With summer trading in full effect and last week being a holiday shortened trading week due to the Memorial Day holiday on Monday, it was not surprising to see the U.S. markets experience a lackluster week of movement. Small caps saw the strongest performance as there was a weak rotation from large cap technology into value and smaller companies, while all four indexes posted modest gains for the week. Economic news releases were the primary driver of market movements as well as “meme” stock mania once again gripping the markets.

 

  • Russell 2000 (0.77%) – Below Average volume
  • Dow (0.66%) – Below Average volume
  • S&P 500 (0.61%) – Below Average volume
  • NASDAQ (0.48%) – Below Average volume

 

  • Sector Performance: Oil moved higher, as discussed above, and with the price of oil moving higher, Energy, Natural Resources and Oil & Gas Exploration were the top three performing sectors for the week. Rounding out the top five sectors last week were Multimedia Networking and Real Estate, with both sectors benefitting from U.S. employees beginning to return to offices around the country.

 

Three healthcare related sectors took three of the five bottom performing sector spots last week, all thanks to the same catalyst. The catalyst was President Biden’s budget outline, which included the ability for Medicare to negotiate prescription and other medical costs with healthcare companies. This is thought to be very negative for healthcare companies as Medicare covers so many Americans and could have prices driven down by demands from Medicare. Transportation made the bottom five performing sectors last week as the increase in the price of oil sent airlines lower, despite increasing passenger traffic. Home Construction rounded out the bottom performing sectors as interest rates remained high and the home builders continue to build as fast as they can, but limited space for new builds combined with a lack of materials and skilled labor presented problems.

 

  • Top Sectors: Oil & Gas Exploration, Energy, Natural Resources, Multimedia Networking, Real Estate
  • Bottom Sectors: Healthcare, Healthcare Providers, Transportation, Home Construction, Medical Devices

 

  • Commodities: Commodities were mostly higher last week with the Goldman Sachs Commodity Index (a production weighted index) posting a gain of 4.05 percent. Oil was the primary driver of the index movement with a gain of more than 4 percent following the OPEC announcement and US oil inventory levels. Metals were negative last week as Gold, Silver and Copper declined 0.68, 0.46 and 2.95 percent, respectively. Agriculture posted a gain of 2.26 percent for the week, driven primarily by a jump of nearly 3.5 percent in Grains while Livestock lagged behind, advancing only 0.31 percent.

 

  • GS Commodity Index (2.39%)
  • Oil (4.05%)
  • Livestock (0.31%)
  • Grains (3.47%)
  • Agriculture (2.26%)
  • Gold (-0.68%)
  • Silver (-0.46%)
  • Copper (-2.95%)

 

  • International Performance: Global index performance last week was largely positive, with 78 percent of the global indexes moving higher while 22 percent declined. The average return of the global indexes last week was 0.98 percent. When looking at the global indexes, Asia saw the strongest performance. There were no specific regions of the world that struggled last week, with a near random smattering of negatively performing indexes.

 

  • Best performance: Costa Rica’s Costa Rica Index (11.34%)
  • Worst performance: Portugal’s PSI All-Share Index (-3.53%)
  • Average: (0.98%)

 

  • Volatility: Volatility, as measured by the VIX, had a sleepy week, but did manage to close down by about 2 percent for the week. The VIX ended last week at 16.42, the second lowest close that we have seen since before the pandemic started back in 2020. During the summer weeks of low market volatility, it is not uncommon to see the VIX meander lower as few large money managers are making any moves and a general lack of information flow leads to a lower amount of potential market surprises. At the current level of 16.42, the VIX is implying a move in the S&P 500 of 4.74 percent over the course of 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 6/4/2021, 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 0.13% 3.63% 6.28%
Aggressive Benchmark 0.65% 9.73% 8.51%
Growth Model 0.17% 3.35% 5.33%
Growth Benchmark 0.51% 7.54% 6.91%
Moderate Model 0.19% 2.62% 4.36%
Moderate Benchmark 0.36% 5.37% 5.23%
Income Model 0.21% 2.39% 4.03%
Income Benchmark 0.18% 2.67% 3.04%
Quant Model 1.51% 21.88%
S&P 500 0.61% 12.61% 12.88%

 

*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. Consumer staples lagged last week as we saw consumer data that indicated that Americans are spending more money on services and experiences currently and less on staples. This seems like it will be a temporary phenomenon, as there is a significant amount of pent-up demand to do things and go places that wasn’t possible with COVID-19 restrictions. This demand may wane as life goes back to pre-pandemic “normal” and consumer staples will once again be a well-positioned sector. In looking at the potential buy list, none of the investments being watched moved to a buy point.  Watching existing positions, none tripped sell trigger levels.

 

Looking to the Future

 

  • Summer is officially here: Markets this time of year typically slow down as there are fewer catalysts for making changes
  • Consumer Price Index: CPI is released this week for the month of May

 

Interesting Fact: Gruen Transfer

Austrian-born Victor Gruen fathered the modern-day mall—the now-iconic complex of stores teeming with fountains, food courts, and idle teenagers. Gruen’s firm built Minnesota’s Southdale Center, which opened in 1956 as the country’s first indoor mega-mall. Its designers had one chief goal: to build an environment so alluring that consumers forgot what they came to buy and made impulsive purchases. “Shoppers will be so dazzled by a store’s surroundings,” wrote Gruen biographer M. Jeffrey Hardwick, “they will be drawn—unconsciously, continuously—to shop.” This phenomenon, known as Gruen Transfer, became hugely influential in retail design and familiar to any shopper

 

Source: Pacific Standard

 

Stay safe and healthy!

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 6-1-2021

Callahan Capital Management

Weekly Commentary | June 1st, 2021

 

Major Theme of the Markets Last Week: Rotation back to growth?

Last week was a slow week for the financial markets as many investors were more focused on what they would be doing over the upcoming three-day weekend than the markets themselves. With a general lack of meaningful headlines and a lack of people watching the few headlines that did cross the markets last week, investors took the chance to move back into large cap technology companies. For much of 2021, we have seen a rotation out of large cap technology companies that have done very well during COVID-19 into more value focused areas of the markets. These value areas of the markets could outperform with the U.S. economy reopening and Americans getting back to life as normal. However, last week was the second week in a row that we have seen value lag more growth areas of the markets, as large cap technology companies once again took the lead. There was less decisiveness in the rotation trade last week as small cap stocks, and small cap growth specifically, also enjoyed a strong week, outperforming the NASDAQ. Along with the rotation seen last week, we saw the end of May, which from a seasonality standpoint is one of the more interesting months of the year for investors.

 

The age-old adage of “Sell in May, go away, come back after Labor Day” (the true holiday for historical purposes is St. Leger’s Day, a horse race in the UK which represents the last leg of the British Triple Crown and is held in Mid-September) has so far not played out during 2021. The summer trading months historically represent a stretch of the most difficult months for the global financial markets. They are a time that typically sees a “summer swoon” with the markets declining and then recovering through the end of the year with excitement around the holiday shopping season and the yearend holidays around the world. Halfway through May this year, it looked as if the adage would hold as between May 1st and May 12th we saw the major U.S. indexes all down. The Dow was down almost 1 percent, the S&P 500 was down 2.8 percent, the Russell 2000 was down 5.8 percent, and the NASDAQ was down 6.7 percent. Then in mid-May, investors turned more of their focus to earnings season for the first quarter, which was outstanding, and the hope that life could return to normal over the summer. Optimism drove the markets to recover nearly all of the early May losses by the end of the month. In fact, at month end on Friday, only the NASDAQ was still in the red for May and only by 1.5 percent. All three of the other major U.S. indexes were back in the green. So, what does it mean when May is positive? Historically, it means that while there are still bouts of weakness during the summer, the U.S. equity markets are typically slightly higher (less than 2 percent) come the end of Summer than where they started May.

 

Financial News Impacting the Markets

 

Economic data made up most of the financial news that impacted the U.S. markets last week as a lot of month-end related data was released. U.S. Housing market data was plentiful, with home prices in the US being shown to be up 1.4 percent during March and 13.6 percent on a year-over-year basis through March. While these numbers are high, they were not even close to the report from the Department of Commerce showing median home prices for a new home sold during April of 2021 were 20.1 percent higher than in 2020. This gain of 20.1 percent is the fastest year-over-year growth for the index going back to 1988. While the gains in home prices may be nice for homeowners, there are signs that the US housing market is beginning to slow. Last week, the New Home sales figure for the month of April fell by 5.9 percent and the pending home sales figure declined by 4.4 percent. Despite the decline, the news is still strong for home builders as 73 percent of the homes sold last month were under construction or yet to be started. Mortgage applications on a week-over-week basis also posted a decline last week of 4.2 percent while the average rate on a 30-year fixed rate mortgage increased to 3.18 percent. Economic data that focused on inflation, as well as Federal Reserve officials, also made headlines last week.

Inflation is something that investors are usually concerned about as it can greatly impact one’s financial longevity. Inflation also plays into the Fed’s dual mandate of price stability and full employment. It can become very difficult for the Fed to balance its dual mandate while also not allowing the economy to either run too hot or fail to maintain growth. COVID-19 was a unique situation in that it was one of the longest government-imposed shutdowns of large parts of the economy for the general public’s health. The government and Federal Reserve took unprecedented actions to ensure people still had money coming in and that the economy continued to function even while the shutdown was largely intact. Now that we are emerging from COVID-19, as a country and an economy, the Fed is in the precarious position of having to decide when to pull back on these extraordinary measures. Inflation plays into this because the Fed sets the Federal Funds rate, which is currently set to between zero and 0.25 percent. The Fed has a targeted inflation rate of 2 percent, but it has woefully missed that target rate for a long time, and the Fed said it will allow inflation to run higher than the target as long as it views the inflation as transitory. Last week, several indexes showed readings above this 2 percent target rate. The various forms of the Personal Consumption Expenditures Price Index (PCE Price Index) were released with all pointing to an inflationary environment. The overall PCE index (through May) posted a year-over-year gain of 3.6 percent while the Core PCE index (core being PCE minus some of the more volatile items such as food and fuel) posted a gain of 3.1 percent. Both of these readings were higher than the markets had expected. The University of Michigan reported the latest reading on its inflation expectations index (a consumer facing index) and the reading was 3 percent as of May. The Dallas Fed Bank released its PCE data, showing a rate of 2.4 percent. However, the data was only through the end of April, not May. At the same time that we are seeing inflation ticking up, we are seeing personal incomes decline. Last week, we saw a decline during the month of April of 13.1 percent. Much of the decline in personal income was due to a lack of government checks being sent out. We will need to see if there is another negative month during May before we jump to any meaningful conclusions. Last week, there were five Federal Reserve officials that gave their views about the economy in various settings, with one official giving three speeches during the week. Overall, there wasn’t anything new; they view inflation as temporary and called out supply chain issues as one reason for temporary spikes in inflation. Several others confirmed the FOMC meeting minutes from two weeks ago, stating that they were beginning to think about tapering some of their current programs. Overall, the markets took the inflation data and Fed officials in stride as nothing would break the markets’ concentration on the end of the week and the three-day weekend.

 

Outside of the U.S. last week, the focus remained on COVID-19. In the UK, a new variant is spreading quickly, causing France to institute a travel policy in which anyone coming from the UK to France must quarantine for 7 days, regardless of a negative COVID-19 test or not. Despite the spreading of COVID-19 in the UK, the country is still reopening and, so far, it has been going pretty well. In economic data last week, France officially entered a recession during Q1 2021 as the growth rate for the French economy was revised to a negative 0.1 percent from 0.4 percent on the preliminary estimate. The negative GDP print makes it the second consecutive quarter of decline and thus a technical recession. Considering trade, the UK isn’t the only country having issues with the EU’s trade policy. Last week, Switzerland left negotiations with the EU surrounding its own trade deal with the US. In leaving the negotiations, the two sides will likely have to revert to a trade deal that is more than 7 years old and could negatively impact the region as Switzerland is the fourth largest trading partner with the EU.

 

In Asia last week, China announced that it has fully vaccinated 500 million people within the country, leading to a jump in travel, leisure and tourism related stocks in the country. Much like here in the U.S., China is experiencing a housing boom with home prices jumping by 50 percent on a year-over-year basis in many regions of the country. Not all of Asia is doing well, however. Last week, Japan had to push out its state of emergency further due to the spreading of COVID-19. This comes at the same time that Olympic organizers are having to give the upcoming summer Olympic games either a “yes” or “no” in terms of holding them a year late, or not. It already looks like the games, if they are held, will be held without spectators, so Japan is already bracing for a massive revenue loss from a lack of foreign travelers.

Market Statistics

 

  • Equities: US equity markets turned in a nice positive week last week although it felt like a sleepy week for the markets. With gains of about one percent on both the S&P 500 and the Dow, the two indexes are now within one percent of their all-time high levels achieved back in the beginning of May. For the NASDAQ, the index is currently about three percent behind its all-time high, while the smaller cap Russell 2000 remains more than four percent below its all-time high level back in March of 2021. Volume was below average on all of the major indexes with the exception of the NASDAQ, which just barely squeaked into the average level. This low level of volume was to be expected going into a holiday shortened week this week, which officially kicks off summer trading.

 

  • Russell 2000 (2.42%) – Below Average volume
  • NASDAQ (2.06%) – Average volume
  • S&P 500 (1.16%) – Below Average volume
  • Dow (0.94%) – Below Average volume

 

  • Sector Performance: The rotation back into large cap technology, as discussed above, drove much of the sector performance last week as Semiconductors, Aerospace and Defense, Multimedia Networking and Software all benefitted from this rotation. One of the big winners last week came in the Aerospace and Defense sector with Virgin Galactic having a successful test flight over the previous weekend and looking like it will begin offering paid flights to space sooner than some analysts had expected. Virgin Galactic stock was up 48 percent last week. The odd sector out last week among the top 5 performing sectors that was not technology related was the Home Construction sector, as the sector was positive despite some less than positive economic figures related to the real estate markets released last week.

 

When looking at sectors that lagged in performance last week, it was some of the sectors that had benefitted the most from the recent rotation into value and out of technology. Consumer Staples, Utilities and Infrastructure all fall into this category. Healthcare and Pharmaceuticals rounded out the bottom performing sectors last week as earnings results have been lighter than expected at a few key companies as demand for COVID-19 related items has been on the decline.

 

  • Top Sectors: Semiconductors, Aerospace & Defense, Home Construction, Multimedia Networking, Software
  • Bottom Sectors: Consumer Staples, Healthcare, Infrastructure, Pharmaceuticals, Utilities

 

  • Commodities: Commodities were mostly higher last week with the Goldman Sachs Commodity Index (a production weighted index) posting a gain of 2.59 percent. Oil moved higher last week by 3.94 percent as we finally saw a week that didn’t have any significant surprises in transportation globally or future demand expectations being released. Metals were positive last week as Gold, Silver and Copper advanced 1.33, 1.45 and 3.54 percent, respectively. Agriculture posted a gain of 1.09 percent for the week, despite small declines in Livestock and Grains.

 

  • GS Commodity Index (2.59%)
  • Oil (3.94%)
  • Livestock (-0.20%)
  • Grains (-0.29%)
  • Agriculture (1.09%)
  • Gold (1.33%)
  • Silver (1.45%)
  • Copper (3.54%)

 

  • International Performance: Global index performance last week was largely positive, with 80 percent of the global indexes moving higher while 20 percent declined. The average return of the global indexes last week was 1.2 percent. When looking at the global indexes, Asia saw the strongest performance. There were no specific regions of the world that struggled last week, with a near random smattering of negatively performing indexes.

 

  • Best performance: Philippines’ PSEi Index (8.33%)
  • Worst performance: Colombia’s ColCap Index (-3.01%)
  • Average: (1.20%)

 

  • Volatility: The VIX moved lower nearly every day of the week last week. We started the week with the VIX over 20 but trading in a relatively tight trading range. That range was broken on Wednesday when the VIX closed below 18. By Friday, the VIX had broken through the 17 and 16 level as well, hitting an intraday low of 15.9. This was the lowest level touched for the VIX going back to February 20th of 2020. This low level of the VIX is pointing to a slow (not very volatile) summer for trading, something which most investors would enjoy. For the week, the VIX declined by 16.8 percent, ending at 16.76. A reading of 16.76 implies that over the next 30 days, the S&P 500 will experience movement of about 4.84 percent, but as always, the direction of the movement is unknown.

 

Model Performance and Update

 

For the trading week ending on 5/28/2021, 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 1.24% 3.50% 6.28%
Aggressive Benchmark 1.23% 9.02% 8.41%
Growth Model 0.75% 3.17% 5.31%
Growth Benchmark 0.96% 6.99% 6.84%
Moderate Model 0.32% 2.43% 4.34%
Moderate Benchmark 0.69% 4.98% 5.18%
Income Model 0.11% 2.17% 4.01%
Income Benchmark 0.34% 2.48% 3.01%
Quant Model 1.44% 20.06%
S&P 500 1.16% 11.93% 12.80%

 

*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 a few changes to the models over the course of the previous week. The first change was to add to the position in the VictoryShares US Equity Income Enhanced Volatility Weighted ETF (ticker CDC). The position was initiated as a partial position back in the middle of April and has now been brought up to a full weight position in the models. The second change was the addition of a new position into another ETF, the S&P 500 High Beta ETF (ticker SPHB). Much of the hybrid models are invested in low volatility areas of the markets, which makes them inherently underperform during times that value is out of favor. The S&P 500 High Beta ETF is close to the opposite in terms of allocation, investing in the areas of the S&P 500 that have the highest movement. This position is being used in an attempt to slightly move the riskier hybrid models into an area that is underrepresented and to gain more exposure to potential market movements. With the purchases last week, the hybrid models were running low on cash, so a small piece of the Schwab Short-Term US Treasury ETF (ticker SCHO) was sold to fund both purchases and cash positions in the models.

 

Looking to the Future

 

  • Holiday trading week: Shortened trading week this week
  • Infrastructure spending: Competing bills will contend for passage

Interesting Fact: Pineapple works as a natural meat tenderizer

Pineapple is packed with the enzyme bromelain, which breaks down protein chains, making it an ideal marinade for meats when you don’t have a lot of time. But for the same reason, pineapple does not work for jams or jellies, since the enzyme breaks down gelatin as well.

 

Source: How Science Works

 

Stay safe and healthy!

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 5-24-2021

Callahan Capital Management

Weekly Commentary | May 24th, 2021

 

Major Theme of the Markets Last Week: Bitcoin on the move

Bitcoin was a major theme in the financial markets last week, not only in the U.S., but around the world as well. Bitcoin has become something of an icon for the new age of high technology. With its blockchain technology and open platform, the cryptocurrency has been adopted by some people as a viable alternative to fiat currencies that are controlled by various governments around the world. One person that is able to move digital assets and currencies around is Elon Musk, who runs various different companies, doing everything from building electric vehicles, to launching rockets into space and boring huge underground tunnels for faster human transportation. Several months ago, Elon Musk announced that Tesla would be accepting Bitcoin for payment when purchasing a Tesla. He also announced that the company had purchased a large amount of Bitcoin for its own cash management. Obviously, he is one who believes in the “store of value” theory in Bitcoin in that, without a government manipulating it and with the ease with which transactions can be done, Bitcoin will stand the test of time and ultimately be a mainstream currency accepted around the world. Bitcoin has a value every second of every day and there are many online platforms that allow people to trade bitcoin and other cryptocurrencies as quickly as they would like. Bitcoin has gone from about $29,000 per bitcoin at the start of 2021 up to has high as $63,000 per bitcoin in the middle of April. Despite this growth, last week was a reminder to investors, speculators and companies dealing with Bitcoin that the playing field can change very quickly and, when it does, extreme volatility can ensue.

 

Elon Musk kicked things off for the volatility of Bitcoin last week when he announced on Twitter that Tesla would no longer be accepting bitcoin when paying for Tesla vehicles. His reason for his abrupt about face on the topic was the environmental impact that Bitcoin mining is having on the environment. Bitcoin is a digital currency and there is a finite number of Bitcoins that will ever be “mined.” Mining Bitcoin involves computers working together on very complex mathematical equations to keep the blockchain maintaining records of all transactions in an open platform. As more bitcoins are in circulation, the calculations become more difficult and more computing power is needed. Bitcoin mining farms have started to pop up in countries such as Iceland, China and even some in the US, in which thousands or tens of thousands of computers run all day every day working on mining bitcoin and are rewarded with very small fractions of bitcoin for their efforts. This mining operation draws massive amounts of power and have been known to strain local power grids. Additionally, some of the sloppier mining operations can actually be very dangerous as the computers mining are prone to overheating and, in some instances, catching fire.

 

To have the self-titled “Technoking” turn his back on the cryptocurrency shook some investors’ confidence and started Bitcoin moving lower. China jumped on the bandwagon next when, on Wednesday, the Chinese government announced it would not allow any transitions to take place in China using bitcoin, while at the same time warning Chinese investors about speculating in the digital currency. China doesn’t want its people using Bitcoin or any other digital currencies because it will be coming out with a digital version of its own currency at some point later this year and would see other cryptocurrencies as competition. In a statement, the three main banking associations in China (that speak for the government), the National Internet Finance Association of China, the China Banking Association and the Payment and Clearing Association of China, along with the People’s Bank of China, pointed to the volatility as a serious violation of asset safety for people and the potential for the currency to “disrupt normal economic and financial order.” Over the past weekend, Bitcoin was still trading wildly and China went one step further, announcing that it would begin cracking down on Cryptocurrency mining operations with its country. With China being a command-and-control government, if it says there is to be no bitcoin mining in China, it has the ability to force the power companies to stop supplying power to the operations, through severe fines and heavy punishments for people caught mining.

 

China was not the only government causing volatility last week in cryptocurrencies as the US Department of Treasury announced on Thursday that it would begin requiring all businesses to report every transaction in cryptocurrencies over $10,000 in value. The Justice Department has also recently issued John Doe summonses to several of the large crypto currency platforms requesting customer information. This is flying at the heart of the decentralized anonymous aspects of crypto currencies that have drawn many people to invest in them. With all of those headlines flying around last week with regards to Bitcoin, it was no wonder that we saw swings of more than 30 percent over the course of just a few select hours. Over the course for just 15 days, ending last week on Thursday, Bitcoin had fallen from near $60,000 to less than $30,000 prior to rebounding a little on Friday and ending the week near $36,000.

 

Financial News Impacting the Markets

 

Outside of the large movements in Bitcoin and other digital currencies last week, the financial markets had several other items to mull over, including the latest release of the FOMC meeting minutes. On Wednesday, the April FOMC meeting minutes were released with investors looking diligently for any signs that the Fed may be considering the start of tapering its assets purchases or changing course on its policy rates. The meeting minutes directly addressed this point with the following sentence “A number of participants suggested that if the economy continued to make rapid progress toward the Committee’s goals, it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchases.” While there were no more specifics, the idea that there are at least some participants beginning to think about the need to assess the Fed programs, the statement caused a little more concern among investors that the end of the ultra-easy monetary policy programs could be drawing to a close at some point in the future. When addressing inflation in the meeting minutes, the Fed continued to say that inflation pressures would be temporary and transitory, but also admitted that, due to other circumstances such as “supply chain bottlenecks,” inflation could run into potentially “unwelcome levels, before they become sufficient evidence to induce a policy reaction.” This was the Fed’s way of saying, we think we are going to be correct on inflation pressures being temporary, but if we aren’t,

  1. It is someone else’s fault
  2. We aren’t going to do anything about it quickly.

By and large, investors took the meeting minutes without much reaction in the equity markets. We did, however, see the US dollar jump about one percent against a basket of international currencies and the yield on the 10-year government bond jump up to near 1.7 percent, one of the highest points that we have seen since the global pandemic began.

 

Earnings season for the first quarter of 2021 continued to draw to a close last week with consumer-facing retailers being the primary focus of the companies that reported. The following is a table of some of the larger and better-known companies that reported results last week. Companies that beat earnings expectations by more than 10 percent are highlighted in green while those that missed expectations are highlighted in red (there were none last week in the table below!):

 

Analog Devices 6% Deere & Company 28% Target 63%
Applied Materials 8% Home Depot 27% Tencent 0%
Baidu 31% JD.com 15% TJX Companies 42%
Cisco Systems 1% Lowe’s 24% Walmart 39%

 

According to FactSet research, through Friday last week, we have seen about 95 percent of the S&P 500 component companies report their results for Q1 2021. Of the 95 percent that have reported, 86 percent (no change from last week) of companies have beaten earnings expectations while 2 percent have reported inline earnings and 12 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 76 percent (unchanged from last week) of companies report either beating or exceeding expectations, while 24 percent have fallen short of expectations. 76 percent remains well above both the one-year and five-year average of companies beating revenue expectations, but we remain out of the record setting observed on earnings. The overall blended earnings growth rate for the first quarter of 2021 currently stands at 51.9 percent (up from 50.3 percent last week). As we are now over 95 percent reported, it becomes increasingly difficult for the above figures to meaningfully change. This will be the last week that earnings reports for the first quarter of 2021 will be covered in weekly commentary.

 

Economic data last week continued to show signs of improvement here in the US with the labor figures as reported by initial jobless claims falling to 444,000, the lowest point since the pandemic began.  The manufacturing figures were a bit more mixed with the overall May PMI reading of Manufacturing in the US posting a strong 61.5 reading, while the Services PMI posted a stellar reading of 70.1. This positive news was slightly offset by the poor Philadelphia Fed Manufacturing Index for the month of May, which posted a dismal 31.5, down from 50.2 in April. Inflation concerns came up in the PMI release as the input prices for manufacturing increased to a new record high, going all of the way back to October 2009 when the index data started to be collected. Causing the most input cost increases to manufacturers during the month were PPE, fuel, metals and freight costs amid significant supplier delays.

 

Market Statistics

 

  • Equities: US equity index performance was mixed last week as NASDAQ made it to the positive for the week following a strong rally on Thursday. Technology was once again in favor with investors as there was a visible pause in the rotation out of technology and into more value-focused stocks that we have been experiencing the past few weeks. Volume overall remained well below weekly average levels, as summer trading sentiment could not be disrupted by any of the news items of the week.

 

  • NASDAQ (0.31%) – Below Average volume
  • Russell 2000 (-0.42%) – Below Average volume
  • S&P 500 (-0.43%) – Below Average volume
  • Dow (-0.51%) – Below Average volume

 

  • Sector Performance: With NASDAQ being the top performing index last week, technology related sectors made up four of the five top performing sectors for the week. Semiconductors took top honors after finally having investors move into the sector following it being down more than 15 percent over the past 2 months as a global chip shortage has been adversely impacting many different areas of the global economy. Software and Multimedia Networking came in second and third place last week as investors were bottom fishing in those two areas as well. Healthcare Providers and Biotechnology rounded out the top five sectors last week as earnings and continued progress on COVID-19 here in the US helped to boost the sectors.

 

When looking at sectors that underperformed last week, Home Construction posted the worst performance as the sector declined nearly 5 percent for the week and ended more than 10 percent below its most recent high, officially in correction territory. Home builders were heavily impacted by upward movement in interest rates during the first three days of the trading week and poor US homes sales figures for the month of April, which were released on Friday. The Transportation sector gave back some of its recent gains last week as regulatory uncertainty over a proposed railroad merger caused all railroad related stocks to move lower for the week. Helping to somewhat offset losses in the railroads were the airlines, which moved a little higher last week as passenger traffic continued to increase in the US. The Energy sector moved lower last week as the price of oil declined. AT&T almost single handedly took down the Telecommunications sectors last week, declining by nearly 7 percent after the company announced it was deeply cutting its dividend and entering into a merger deal between their Warner Media and Discovery. Regional Banks rounded out the bottom performing five sectors last week as rates moved up during the first few days of the trading week, sending the financial related sectors lower. Over the last two trading days, as rates receded, larger financial institutions recovered well while regional banks appeared to have been forgotten and failed to recover as much.

 

  • Top Sectors: Semiconductors, Software, Multimedia Networking, Healthcare Providers, Biotechnology
  • Bottom Sectors: Regional Banks, Telecommunications, Energy, Transportation, Home Construction

 

  • Commodities: Commodities were mixed last week as losses in Oil and Grains were offset by gains in precious metals and Livestock. The Goldman Sachs Commodity Index (a production weighted index) posted a loss of 1.57 percent. Oil moved lower last week as a number of futures contracts expired late in the week and global demand for oil remained uncertain. Metals were mixed last week as Gold and Silver advanced 1.94 and 0.27 percent, respectively, while the more industrially used Copper went the other direction, giving up 3.53 percent. Agriculture posted a small gain of 0.16 percent for the week, driven in large part by a 4.40 percent gain in Livestock. The gain in Livestock was partially offset by a decline of 2.34 percent in Grains as much of the US is just starting their 2021 growing season, a season that is full of uncertainty over how much product China will be purchasing under deals agreed to during the Trump administration.

 

  • GS Commodity Index (-1.57%)
  • Oil (-2.26%)
  • Livestock (4.40%)
  • Grains (-2.34%)
  • Agriculture (0.16%)
  • Gold (1.94%)
  • Silver (0.27%)
  • Copper (-3.53%)

 

  • International Performance: Global index performance last week was slightly tilted positive, with 65 percent of the global indexes moving higher while 35 percent declined. The average return of the global indexes last week was 0.33 percent. When looking at the global indexes, the Nordic region and India saw the strongest performance. When looking at indexes that struggled last week, the Caribbean and South America had some of the worst performing indexes.

 

  • Best performance: Denmark’s OMX Copenhagen 25 Index (4.57%)
  • Worst performance: Chile’s CLX IPSA Index (-10.81%)
  • Average: (0.33%)

 

  • Volatility: Last week, the VIX saw a small spike higher by about 18 percent over the first three trading days, only to have the increase dissipate by more than half over the final two days of trading. While this volatility may seem like a significant amount, on a relative basis, it was very small as two weeks ago we saw a spike of more than 70 percent followed by a crash of more than 30 percent, all in the span of just four days. Market watchers were closely watching to see if the VIX would close the week below 20, but as the closing bell rang on Friday, the VIX managed to hold above 20 for the first time since the middle of March. With the VIX reading at 20.15, the fear gauge is implying a move of 5.82 percent over the next 30 days. As always, the direction of the movement is unknown.

 

Model Performance and Update

 

For the trading week ending on 5/21/2021, 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 -1.17% 2.23% 6.07%
Aggressive Benchmark 0.31% 7.70% 8.22%
Growth Model -0.75% 2.40% 5.20%
Growth Benchmark 0.25% 5.98% 6.69%
Moderate Model -0.34% 2.10% 4.29%
Moderate Benchmark 0.17% 4.27% 5.08%
Income Model -0.09% 2.06% 4.00%
Income Benchmark 0.09% 2.14% 2.96%
Quant Model -0.17% 18.34%
S&P 500 -0.43% 10.64% 12.63%

 

*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 we did have three more core equity positions report their latest earnings results including: Walmart, TJ Maxx and VF Corporation. Walmart and TJ Maxx both beat earnings expectations by nearly 40 percent after the two companies experienced very strong quarters with American consumers coming back and shopping in force as different parts of the country were reopening at the time. VF Corp missed earnings expectations by about 10 percent with promotions being pointed out as one of the reasons for the earnings miss. Adding to the miss was the seasonality of the earnings period; very few people bought new winter outdoors gear last year and discounts were applied just to move the inventory out of stores as they reopened. When looking at revenues, all three companies beat analyst expectations with the beats ranging from 3 percent to 15 percent. Overall, all three companies continue to look well positioned for continuing to evolve as the US economy reopens.

 

Looking to the Future

 

  • Bitcoin boom or bust: Volatility in Bitcoin could remain elevated this week
  • Summer trading week: Should be a slow summer trading week
  • Q1 2021 GDP: Second estimate of Q1 GDP for the U.S. is due out

Interesting Fact: World’s smallest reptile was found in 2021

Those who think everything on the planet has already been discovered might just not be looking close enough. A tiny chameleon discovered in northern Madagascar and measuring just 28.9 millimeters is believed to be the smallest reptile on Earth.

 

Source: Nature.com

 

Stay safe and healthy!

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 5-17-2021

Callahan Capital Management

Weekly Commentary | May 17th, 2021

 

Major Theme of the Markets Last Week: What Inflation?

Last week, the US financial markets once again focused on inflation as the primary motive for pushing the markets around. Over the past few weeks, we have been seeing inflation readings in various forms show that inflation is in fact starting to pick up in the US economy. Some of that is due to timing of the calculation and the data points rolling off from last year. Some of the inflation is due to temporary government stimulus pushing up prices as consumers spend windfall cash gains. Last week, it was the Consumer Price Index (CPI) data that took the market by surprise, even though everyone knew it would be high. The problem was that expectations were for it to be high, and the actual reading blew expectations out of the water. Core CPI on a month-over-month basis looks at consumer prices and removes some of the more volatile items consumers purchase, such as food and energy, while overall CPI takes into account everything consumers spend money on and is generally a broader reading of the actual inflation consumers are feeling. Core CPI for the month of April (month over month) was expected to post a reading of 0.3 percent (the same as the reading for March) but instead the reading came in at 0.9 percent, three times higher than expected. The year-over-year Core CPI figure came in at 3 percent while expectations were for 2.3 percent. The 0.9 percent monthly jump was the largest monthly jump in the index going back almost 40 years.

 

In the same report on Wednesday, the government released the overall CPI figures as well, which showed a month-over-month gain of 0.8 percent, four times higher than the expected 0.2 percent and higher than the March reading of 0.6 percent. The kicker for the day came in the form of the overall CPI reading on a year-over-year basis, which posted a 4.2 percent reading, well above the 3.6 percent expected reading, which many people thought was far too lofty in its own right. The reaction to the very surprising figures was as expected; the S&P 500 experienced its worst trading day (-2.14%) since February 25th and the Dow posted its worst day (-1.99%) since October 28th of last year. The NASDAQ was not left out of the party, experiencing a decline of 2.67 percent, but with how volatile the technology heavy index has been recently, it was only the worst decline since March 18th and the 4th worst decline so far this year.

 

With such high readings on inflation, many investors last week wondered if it would change the thinking of the Federal Reserve and their timing for raising interest rates. Following the release of the CPI data, there was a litany of Fed officials that took to the media to reiterate how the inflation seen in the data was fully expected and would prove to be temporary. While the fixed income market remained skeptical of the officials’ statements, and a few government bond auctions last week were pricing in higher inflation for longer, the equity markets responded positively as all four of the equity indexes posted gains on both Thursday and Friday to end the week. For the week, the US equity markets saw some of the worst performance in the world, but there were signs of hope, even in the technology-heavy NASDAQ, as the index hit a decline of 8.5 percent from the recent intraday high, failing to officially enter a bear market, which is defined as a decline from a top of at least 10 percent.

 

Financial News Impacting the Markets

 

Aside from the inflation data last week, the US equity markets remained focused on earnings season as we wind down Q1 reporting season. The following is a table of some of the larger and better-known companies that reported results last week. Companies that beat earnings expectations by more than 10 percent are highlighted in green while those that missed expectations are highlighted in red:

 

Abbott Laboratories -101% DoorDash -48% Palantir 0%
Air Products and Chemicals -2% Duke Energy 2% Roblox -319%
Airbnb 20% Electronic Arts -1% Simon Property 10%
Alibaba Group -15% Honda Motor 172% Walt Disney 172%
BioNTech 23% Marriott 233% Toyota Motor 50%

 

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 Q1 2021. Of the 91 percent that have reported, 86 percent (no change from last week) of companies have beaten earnings expectations while 2 percent have reported inline earnings and 12 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 76 percent (unchanged from last week) of companies report either beating or exceeding expectations, while 24 percent have fallen short of expectations. 76 percent remains well above both the one-year and five-year average of companies beating revenue expectations, but we remain out of the record setting observed on earnings. The overall blended earnings growth rate for the first quarter of 2021 currently stands at 50.3 percent (up from 49.4 percent last week). As we are now near 90 percent reported, it becomes increasingly difficult for the above figures to meaningfully change. This week is an important week for earnings as some key retailer companies report their results, led by Walmart.

 

The rotation out of technology and into other areas of the markets that have performed worse on a relative basis since COVID-19 was apparent last week as, once again, the NASDAQ was the laggard of the four major indexes. Tesla, the epitome of the technology-led rally since March of last year (up 1,122 percent between March 18th, 2020 and January 26th, 2021) has now fallen nearly 34 percent from its all-time high, giving back more than 12 percent last week alone. There are also a few heavily concentrated technology ETFs that investors watch very closely as they own many positions like Tesla. Fund flows into these ETFs have been in the hundreds of millions, if not billions, of dollars so far this year, but we have started to see a steady decline in assets in some of them as investors are pulling money from the once high-flying ETFs in favor of other areas of the markets. Looking at a long-term investment cycle, there are times historically that the tide changes from technology to value-based investments. These cycles are typically long (more than five years). When the cycle is peaking and starting to change, there is a lot of chopping around with technology, which is very reminiscent of what we have been seeing for a few months with NASDAQ.

 

Outside of the US, many of the developed countries traded in sympathy with the US markets as fears of inflation came to life. Foreign countries and investors see what is going on with inflation in the US due to Federal Reserve policies and wonder if the same will happen to them. The US is ahead of most countries in terms of vaccinations and economics, with a few months’ lead. Other countries will have to react to our moves and follow the Fed, for being out of sync with the US economy for too long is difficult for many countries. COVID-19 didn’t help last week, as a new variant coming out of India has caused concern. The World Health Organization listed a new variant being seen in India as being “of concern” last week, while the EU halted all “non-essential” travel from the EU to India indefinitely. In Japan, three more regions were put under states of emergency due to the spread of COVID-19 in the country, even as the country tries to prepare for the upcoming Olympic Games, which (as of now) are still scheduled to start in about 65 days.

 

In China last week, the economic data continued to show improvements with auto sales being highlighted as strong, posting their 13th month in a row of increased sales, while the CPI readings for the country remains subdued and at this point are even below the recent readings seen in the US. Helping to drive the strong performance in China last week was Alibaba reporting its earnings results, which fell short of lofty analysts’ expectations, but the company still posted solid growth during the quarter.

 

Market Statistics

 

  • Equities: US equity markets all posted declines as the four major US indexes all declined by more than 1 percent for the week. Markets had to contend with high inflation indicators combined with the continued rotation occurring out of large cap technology companies and into small and more value focused investments. At one point during the week, the NASDAQ had fallen in excess of 5 percent, one of the sharpest declines for the index that we have seen thus far during 2021. Volume remained low as summer trading remains in place and could have contributed to the market movements we saw last week as trade sizes that would have normally been absorbed by an average volume market had more of an impact in the low volume environment.

 

  • Dow (-1.14%) – Below Average volume
  • S&P 500 (-1.39%) – Below Average volume
  • Russell 2000 (-2.07%) – Below Average volume
  • NASDAQ (-2.34%) – Below Average volume

 

  • Sector Performance: Pharmaceuticals led the sector performance last week as several companies reported better than expected earnings as well as a pickup in demand. The sector was led higher by Catalyst Pharmaceuticals, which jumped 14 percent for the week. Interest rates rose last week on both the fear of inflation as well as some weak US government bond auctions. With interest rates increasing, it was positive for Financials as well as Regional Banks and Financial Broker Dealers as higher interest rates mean more potential margin for companies in these sectors. Consumer Staples rounded out the top five performing sectors last week as there was a clear flight to historical safety in what investors were purchasing.

 

When looking at sectors that performed the worst last week, we had to look little further than technology-related sectors as Technology overall, Semiconductors and Multimedia Networking all made the bottom five list. Investors were booking gains in many of these sectors as they have been some of the best performing sectors over the past year, choosing to reinvest in other low volatility areas of the markets. Consumer Discretionary made the list because of the inflation scare in the numbers. While consumers may be able to spend now with government provided funds, if prices are significantly higher in the future when the government is no longer providing stimulus, the situation could be very different with discretionary income spending. Rounding out the bottom five performing sectors last week was the Home Construction sector as rising interest rates corresponded to rising mortgage rates on home loans and concerns of people being priced out of the housing market.

 

  • Top Sectors: Pharmaceuticals, Regional Banks, Financials, Consumer Staples, Broker Dealers
  • Bottom Sectors: Technology, Multimedia Networking, Consumer Discretionary, Semiconductors, Home Construction

 

  • Commodities: Commodities were mixed last week as gains in Oil and Gold were offset by losses in Agriculture. The Goldman Sachs Commodity Index (a production weighted index) posted a loss of 1.61 percent. Oil moved higher last week by 0.63 percent as the Colonial pipeline in the southeast slowly came back online and gasoline started to make it to gas stations in the area. Metals were mixed last week as Gold advanced by 0.64 percent. Silver and Copper went the other direction, giving up 0.04 and 1.5 percent, respectively. Agriculture posted a loss of 5.02 percent for the week, driven in large part by a 6.98 percent decline for grains. The decline in grains last week broke a three week win streak in which grains had risen by more than 15 percent.

 

  • GS Commodity Index (-1.61%)
  • Oil (0.63%)
  • Livestock (-2.29%)
  • Grains (-6.98%)
  • Agriculture (-5.02%)
  • Gold (0.64%)
  • Silver (-0.04%)
  • Copper (-1.50%)

 

  • International Performance: Global index performance last week was split, with 55 percent of the global indexes moving lower while 45 percent advanced. The average return of the global indexes last week was -0.28 percent. When looking at the global indexes, China as well as Eastern developing Europe saw the strongest performance. When looking at indexes that struggled last week, North America and the Nordic region had some of the worst performing indexes.

 

  • Best performance: Peru’s IGBVL Index (8.58%)
  • Worst performance: Taiwan’s TAIEX Index (-8.43%)
  • Average: (-0.28%)

 

  • Volatility: The VIX had one of the more volatile weeks that we have seen in a long time last week. The VIX ended the previous week below 17, saw a high point of 28.93 last week and ended the week at 18.81. The trading range for the VIX last week was a whopping 73 percent. The primary drivers behind the movement were the same as the equity markets, only in reverse, with inflation data being the main culprit followed by fears of rising interest rates. With the VIX ending the week at 18.81, the fear gauge is implying a move of 5.43 percent over the next 30 days. As always, the direction of the movement is unknown.

 

Model Performance and Update

 

For the trading week ending on 5/14/2021, 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 -1.62% 3.44% 6.31%
Aggressive Benchmark -1.42% 7.36% 8.19%
Growth Model -1.04% 3.18% 5.35%
Growth Benchmark -1.10% 5.72% 6.67%
Moderate Model -0.48% 2.45% 4.37%
Moderate Benchmark -0.79% 4.09% 5.07%
Income Model -0.20% 2.16% 4.03%
Income Benchmark -0.39% 2.05% 2.96%
Quant Model -1.17% 18.53%
S&P 500 -1.39% 11.12% 12.76%

 

*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 several significant changes in the hybrid models over the course of the previous week as different trigger points were hit and actions were taken. The first change early during the week was to reduce both the Technology sector ETF (ticker XLK) and the ARK Genomics ETF (ticker ARKG) by half as these two trading positions were driving a significant amount of volatility. The final half of each position was also sold last week as the technical breakdown signaled that it was time to fully exit the position. In addition to selling the two positions, the hedging positions across the models were also increased during the week last week to help offset future volatility and attempt to mitigate some of the downside risks in the models. On Friday last week, a new position was initiated in the hybrid models in the S&P 500 High Dividend low volatility ETF (ticker SPHD). The ETF is positioned well for the current economic cycle if we are seeing the start of true inflation, increasing consumer spending and eventually an increase in interest rates. The purchase of SPHD and the hedging positions were less than the amount sold last week with the difference currently being held in cash.

 

Earnings being reported also played a role in the hybrid models last week as three core equity positions reported their results. Marriott beat earnings expectations by 233 percent and fell short of revenue expectations by 7 percent, in what turned out to be a solid quarter. During the quarter, the company saw future bookings and the number of nights booked increase as many states started to ease COVID restrictions. It was almost the same story at Disney, which posted an earnings beat of 172 percent, but a revenue miss of 2.5 percent, as guests started to enjoy the Disney theme parks during the quarter and company operations started to move more toward normal. One disappointment in the Disney report was the miss in subscriber growth for the Disney+ platform during the quarter. It remains to be seen if Disney+ can continue the strong momentum enjoyed during the pandemic after it is behind us. The final core equity position to report last week was The Trade Desk, which beat earnings expectations by 72 percent and revenue expectations by 2 percent. Despite the strong numbers, the stock was caught in the rotation out of technology last week and had a difficult week. The stock remains on the watch list to be sold if we see further significant breakdown. This week is all about retail when looking at earnings releases with three core positions reporting their results: Walmart, TJ Maxx and VF Corporation.

 

Looking to the Future

 

  • Earnings Season: Retail week ahead
  • April FOMC minutes: Meeting minutes are released this week
  • Summer trading week: Should be a slow summer trading week

Interesting Fact: Speeding ticket for 8 miles per hour

According to Guinness World Records, the first person to be charged with speeding was Walter Arnold of the English village of Paddock Wood, Kent. On Jan. 28, 1896, Arnold was spotted going four times the speed limit in his 19th-century Benz—but since the speed limit at the time was just two miles per hour, that meant he was not going too fast by today’s standards. The constable had to chase him down on his bicycle, issuing a ticket for £4 7s and earning Arnold the speedy distinction.

 

Source: http://www.guinnessworldrecords.com/

 

 

Stay safe and healthy!

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 5-10-2021

Callahan Capital Management

Weekly Commentary | May 10th, 2021

 

Major Theme of the Markets Last Week: Employment

Last week, there were two major themes with the first theme running its course over the first four days of trading and a potentially larger theme starting on Friday. The first was the rotation out of big cap technology that was strong throughout the pandemic but has been showing signs of slowing down over the past few months. The second theme was the labor market data that started to come in early in the week and culminated with a very poor set of BLS data being released on Friday.

 

The labor market data started on Monday with the release of the ISM Manufacturing Employment index for the month of April, which posted a reading of 55.1, significantly under the expected 61.5 reading and below the March reading of 59.6. In the ISM report, the managers and executives surveyed pointed toward a shortage in skilled labor as well as a shortage in parts, with semiconductors being one specific part called out as reasons for the decline. Remember that some auto manufacturers in the US have had to shut down or greatly decrease production lines. On Tuesday, ADP released its nonfarm employment change index for the month of April, which showed 742,000 new jobs added during the month, slightly below estimates, but well ahead of the March reading of 565,000. On Thursday, both initial and continuing jobless claims came in very close to expectations and caused no alarm about the labor market. On Friday, it was time for the Bureau of Labor Statistics report on the US labor market.

 

The BLS report on Friday showed positive growth in average hourly earnings on both a month-over-month and year-over-year basis for the month of April. That was the positive news in the report. The payrolls data was bad with government payrolls increasing by only 48,000 jobs while the manufacturing payroll figures posted a decline of 18,000 workers during April. Nonfarm payrolls were a doozy, posting a gain of only 218,000 jobs during the month when the markets had been expecting 978,000 and the March reading was 770,000. Private nonfarm payroll figures confirmed the poor numbers with a reading of 218,000 jobs, when the market had been looking for 893,000 jobs and the previous reading was 708,000.  Both of these misses, when compared to market and economic expectations, were the worst misses going all of the way back to 1998. So why the huge miss?

 

With the economy reopening, many analysts and economists had predicted that workers would come flooding back to their jobs to get their lives back to normal. However, they failed to account for any impact the enhanced unemployment benefits may have on the leisure and hospitality industry, one of the largest industries by employee count. The problem seen in the numbers is that some workers can return to their old jobs making $12 to $15 per hour in the leisure and hospitality industry, or they can continue to collect their unemployment benefits, which have been enhanced and, in nearly all cases, amount to making more than $15 per hour. Technically, an unemployed person has to be gainfully looking for employment, so there are many interviews occurring around the country every day, and even jobs offered, but when it comes time to show up to work, there is a call saying that they are no longer interested in the job. This is a major issue for the restaurant industry, in particular, as restaurants require a lot of manpower to operate. When there is a lack of employees, the customer experience suffers greatly. By the end of the day on Friday, several economic thinktanks had begun calling for an end to the enhanced unemployment benefits, saying they were disincentivizing people from working. Additional BLS data released on Friday included the overall unemployment rate, increasing from 6 percent up to 6.1 percent during the month of April, while the labor force participation rate increased slightly to 61.7 percent.

 

On the release of the economic data on Friday, the market futures initially turned lower, but all four of the major indexes swung into positive territory for the day. The thinking was that the employment data was so bad, it could force the Federal Reserve to hold off on starting to think about raising interest rates. The expectation going into Friday last week was that at some point during the summer months the Fed would begin initial conversations about the need to potentially increase interest rates. Following the jobs report, the financial markets now think that conversation will likely not even start during 2021 and will be an early 2022 event for the market to mull over. It was a classic case of poor economic data being taken as positive because of the knock-on effects the bad numbers will have in the future.

 

Financial News Impacting the Markets

 

Aside from the labor market data last week, investors were focused on a rotation out of companies that had done well during the pandemic and into companies that had a more difficult time. Naturally, this led to a rotation out of large cap technology and into small and more value-oriented areas of the markets. A few of the true pandemic winners such as Peloton and DocuSign each declined by more than 10 percent while Zoom Communications tumbled 7 percent last week. Areas of the markets that increased last week were focused on reopening with companies like Chevron and the other significant oil companies posting gains in excess of 7 percent on the news of more people getting out and moving about. The TSA passenger screening numbers have been steadily increasing as more people travel for both leisure and for business.

 

Last week was a very busy week for the current earnings season as many widely held companies reported results that followed recent trends and were largely positive. The following is a table of some of the larger and better-known companies that reported results last week. Companies that beat earnings expectations by more than 10 percent are highlighted in green while those that missed expectations are highlighted in red:

 

Activision Blizzard 22% Emerson Electric 8% Pfizer 18%
Adidas 47% Enterprise 28% Regeneron 13%
Anheuser-Busch 6% Estee Lauder 26% Siemens -20%
Becton Dickinson 5% General Motors 121% Square 156%
Booking Holdings 28% Mercadolibre 15% T-MOBILE 67%
Cigna 7% Moderna 39% Twilio 150%
ConocoPhillips 21% Nintendo 268% Uber 25%
CVS Health 19% Novo Nordisk 11% Volkswagen 28%
Dominion Energy 1% PayPal 21% Zoetis 21%

 

According to FactSet research, through Friday last week, we have seen about 88 percent of the S&P 500 component companies report their results for Q1 2021. Of the 88 percent that have reported, 86 percent (no change from last week) of companies have beaten earnings expectations while 2 percent have reported inline earnings and 12 percent have fallen short of expectations. The percentage of companies beating expectations remains record-setting if we end the quarter at these levels. When looking at revenues, we have seen 76 percent (down 2 percent from last week) of companies report either beating or exceeding expectations, while 24 percent have fallen short of expectations. While 76 percent is lower than last week’s figure, the figure is still well above both the one-year and five-year average of companies beating revenue expectations, but we remain out of the record setting observed on earnings. The overall blended earnings growth rate for the first quarter of 2021 currently stands at 49.4 percent (up from 45.8 percent last week). We remain easily above the record of 34 percent for quarterly earnings growth, set in Q3 2010. As we are now near 90 percent reported, it becomes increasingly difficult for the above figures to meaningfully change, which means that Q1 2021 will likely go into the record books as one of the best quarters from an earnings standpoint that we have ever seen in the financial markets.

 

On the COVID-19 front, cases in the US continue to trend in the correct direction even as more and more of the country reopens. In India, the cases continue to increase. However, the rate at which they are increasing is starting to slow. Medical officials outside of India were quick to point out that the cases are likely not increasing as quickly because the medical systems are overwhelmed, and sick people are not able or unwilling to get tested. In Europe, things are going well with the Netherlands and Belgium starting to ease their lockdown measures. The European Commission announced plans to reopen the European Union’s borders again to holidaymakers from outside the bloc by June.

On Thursday last week, it was announced that cyber criminals under the group name of “DarkSide” had launched a ransomware attack on a US energy pipeline named the Colonial Pipeline, which runs from the Gulf of Mexico refinery area all of the way up to New York. Colonial was forced to take the pipeline offline to stop the hackers from being able to do any damage to the pipeline or areas around it. The pipeline moves about 2.5 million barrels of diesel, gasoline and jet fuel through its system on a daily basis, accounting for about 45 percent of the fuel coming into the southeastern United States. As of the writing of this commentary on Monday, the pipeline was still closed as the company assessed what was taken and if it was safe to reopen the pipeline. DarkSide is a relatively new hacking group, but as the FBI noted in a recent report, it is very well organized and seems to spare Russian, Kazakh and Ukrainian speaking businesses, making most cyber crime experts think the group is at least loosely associated with this region. This attack on vital infrastructure could help boost President Biden’s infrastructure plan as modernizing and securing the current infrastructure systems is a key part of the plan. The most direct ramifications from the hack could be that gasoline and other fuel costs could jump higher in the coming days in the region if the pipeline doesn’t reopen soon.

 

Market Statistics

 

  • Equities: The rotation out of large cap technology companies and into smaller and more value-oriented companies was evident during last week’s trading. For the week, the four major indexes were mixed with the Dow turning in the strongest performance, helped by strong performance in Dow Chemical, which gained more than 10 percent for the week, and Chevron, which advanced nearly 7 percent. The more diversified S&P 500 came in second last week, gaining more than 1 percent, while the small cap Russell 200 eked out a gain of only a quarter of a percent. The NASDAQ was a substantial laggard last week, declining by 1.5 percent, thanks to declines in the large cap technology companies. Volume, despite it being a heavy earnings week, was lower than the weekly average across the board on all four of the major indexes.

 

  • Dow (2.67%) – Below Average volume
  • S&P 500 (1.23%) – Below Average volume
  • Russell 2000 (0.23%) – Below Average volume
  • NASDAQ (-1.51%) – Below Average volume

 

  • Sector Performance: Energy had a standout week last week as rig operators and service companies led the group higher on increasing demand with travel in the US starting to pick back up following the downturn in COVID-19. Bakers Hughes (one of the largest oil well operators in the industry) jumped more than 22 percent last week while Schlumberger and Halliburton each tacked on more than 17 percent, taking the Oil & Gas Exploration sector up nearly 10 percent for the week. Overall Energy as well as Basic Materials also moved higher on the gains in the oil patch. Home Construction turned in positive performance for the week that was good enough for the fourth best sector as continued strong demand for new homes combined with an ultralow inventory of homes placed home builders in the sweet spot for making profits. Regional Banks rounded out the top performing sectors last week after bond yields declined during the first half of the week but recovered much of the decline following Friday’s jobs report and manufacturing numbers.

 

Looking at poor performing sectors last week, the obvious theme is technology. The Software sector led the way lower last week as some of the larger work from home companies such as RingCentral, Cloudflare, DocuSign and PagerDuty all declined between 10 and 20 percent for the week. Following closely behind last week were Biotechnology and Medical Devices, which fell out of favor with the WSB group and saw significant declines in some of the once popular names such as Eargo, Insulet and NanoString Technology, which each declined between 18 and 30 percent last week. Semiconductors rounded out the bottom performance sectors last week as the global chip shortage continues to have far reaching ramifications with no end in sight.

 

  • Top Sectors: Oil & Gas Exploration, Energy, Basic Materials, Home Construction, Regional Banks
  • Bottom Sectors: Semiconductors, Technology, Medical Devices, Biotechnology, Software

 

  • Commodities: Commodities all moved higher last week as large gains were seen in nearly all commodities prices. The Goldman Sachs Commodity Index (a production weighted index) posted a gain of 3.05 percent. Oil moved higher last week by 2.68 percent as more areas of the US continued to move toward life as normal before COVID-19. Over the weekend, it was announced that a ransomware attack had hit one of the largest pipelines in the US, a line that runs from the Gulf Coast to New York. The pipeline is currently shut down and we will have to see what happens to energy prices as a result. Metals were all positive last week as Gold, Silver and Copper advanced by 3.58, 6.08 and 6.14 percent, respectively. The move in Copper was particularly notable as the jump pushed the price of Copper past its all-time high levels last reached in 2011. Agriculture posted a gain of 5.05 percent for the week, driven in large part by a 5.82 percent gain for grains. Grains are now up nearly 20 percent in the last 3 weeks.

 

  • GS Commodity Index (3.05%)
  • Oil (2.68%)
  • Livestock (1.08%)
  • Grains (5.82%)
  • Agriculture (5.05%)
  • Gold (3.58%)
  • Silver (6.08%)
  • Copper (6.14%)

 

  • International Performance: Global index performance last week was heavily tilted to positive performance, with 76 percent of the global indexes moving higher while 24 percent declined. The average return of the global indexes last week was 1.13 percent. When looking at the global indexes, South America as well as Africa and the Middle East saw the strongest performance. When looking at indexes that struggled last week, China and Eastern Europe had some of the worst performing indexes.

 

  • Best performance: Russia’s RTS Index (6.23%)
  • Worst performance: China’s Shenzhen Index (-2.58%)
  • Average: (1.13%)

 

  • Volatility: Volatility, as measured by the VIX, declined by about 10 percent last week, ending the week at 16.69. The decline in the VIX came entirely on Friday with the poor jobs report. The market took this as meaning that the Fed may have to kick back the discussion about when to raise interest rates. It was certainly a case of bad news being taken as positive due to the impact on other factors and investors’ expectations. With the VIX reading of 16.69, the VIX is implying a move in the S&P 500 over the next 30 days of about 4.82 percent. As always, the direction of the movement is unknown.

 

Model Performance and Update

 

For the trading week ending on 5/7/2021, 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 1.00% 5.13% 6.63%
Aggressive Benchmark 1.09% 8.91% 8.48%
Growth Model 0.88% 4.25% 5.56%
Growth Benchmark 0.85% 6.90% 6.89%
Moderate Model 0.67% 2.93% 4.47%
Moderate Benchmark 0.61% 4.91% 5.22%
Income Model 0.56% 2.35% 4.08%
Income Benchmark 0.30% 2.44% 3.04%
Quant Model -0.92% 19.93%
S&P 500 1.23% 12.69% 13.07%

 

*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 we did have several core equity positions report their results: Republic Services Group (RSG), Jack Henry & Associates (JKHY), Zimmer Biomet (ZBH) and Flir Systems (FLIR). Three of the four companies beat earnings expectations, while only two of the companies beat revenue expectations. FLIR saw a notable decline in skin temperature testing equipment during the quarter, but this decline in demand was offset by strong demand in its military operations business segment. ZBH posted strong results on its lab diagnostics division while maintaining some of its lower cost operations put in place due to COVID-19. JKHY and RSG both turned in solid results on the earnings side, while missing revenue expectations by less than 1 percent. Overall earnings continued to be strong for the core equity positions in the hybrid models. This week, there is a slowdown in earnings announcements for core equity positions as only Disney (DIS), Marriott (MAR) and The Trade Desk (TTD) report their results. It will be interesting to see Disney’s results this quarter as it is the first full quarter that had at least some theme park revenue since the start of the pandemic.

 

Looking to the Future

 

  • Earnings Season: Almost done with a record setting quarter.
  • Pipeline attack: Will the colonial pipeline reopen this week?
  • Stock rotation: Large cap technology rotation to small cap value is once again under way; will the move be sustained?

Interesting Fact: Solar Power is getting more powerful

The biggest solar power plant in the world is located in the United Arab Emirates. The Noor Abu Dhabi solar project produces 1.17 gigawatts, enough electricity to power the demand of 90,000 people. It reduces their carbon footprint by 1 million metric tons a year—the same as taking 200,000 cars off the road.*

 

The largest floating solar farm in the US has been completed in the city of Healdsburg, California. The 4.78-megawatt Healdsburg Floating Solar Project floats across two wastewater treatment ponds in Sonoma County.**

 

The U.S. added a record 19.2 gigawatts of solar capacity last year and will likely continue hitting annual records for the next several years, energy tracker Wood Mackenzie forecasts.***

 

Source: * theogm.‌com 3/9/21, **PV Tech 3/4/21, ***The Wall Street Journal, Wood Mackenzie 4/11/21

 

 

Stay safe and healthy!

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 5-3-2021

Callahan Capital Management

Weekly Commentary | May 3rd, 2021

Major Theme of the Markets Last Week: Earnings are Flying High

Last week was one of the busiest weeks for the current earnings season as many widely held companies reported results that were largely positive. The following is a table of some of the larger and better-known companies that reported results last week. Companies that beat earnings expectations by more than 10 percent are highlighted in green while those that missed expectations are highlighted in red:

 

3M Company 23% Chevron -2% Qualcomm 14%
AbbVie Inc 7% Comcast 29% Raytheon Technologies 2%
Advanced Micro Devices 18% Eli Lilly -12% Sanofi-Aventis 17%
Alphabet 68% Exxon Mobil 10% ServiceNow 13%
Amazon 62% FaceBook 40% Shopify 158%
American Tower 6% General Electric 50% Sony Group 119%
Amgen -8% Glaxo SmithKline 0% Starbucks 19%
Apple 40% HSBC 27% Tesla 18%
AstraZeneca 14% Mastercard 12% Texas Instruments 20%
Boeing -31% McDonald’s 6% Thermo Fisher 8%
Bristol-Myers Squibb -3% Merck & Company -14% United Parcel Service 66%
Caterpillar 49% Microsoft 11% Vale 12%
Charter Communications -5% Novartis -3% Visa Inc 10%

 

As you can see above, there was more green than red last week, as has been the trend so far this earnings season. Big technology had a strong showing last week as Apple, Amazon, Google (Alphabet), Microsoft, Facebook and Tesla all beat earnings expectations by more than 10 percent. While the earnings results were exceptional, the stock movements following the release of the results were lackluster at best and downright poor in some cases. This was largely due to the massive moves higher that many of the technology stocks had experienced ahead of the earnings results. Everyone know the comparisons would be relatively easy this quarter due to how bad things were back in Q1 2020, so beating earnings was a given; the question became, “by how much?” On this basis, some of the companies fell a little short. When looking at the table above, it was not surprising to see Boeing leading to the downside of expectations, despite getting the 737 Max series planes back in the air. The company is still dealing with the fallout of its planes being grounded for more than a year and a general lack of passenger travel among the airlines.

 

According to FactSet research, through Friday last week, we have seen about 60 percent of the S&P 500 component companies report their results for Q1 2021. Of the 60 percent that have reported, 86 percent (up 2 percent from last week) of companies have beaten earnings expectations while 2 percent have reported inline earnings and 12 percent have fallen short of expectations. The percentage of companies beating expectations remains record-setting if we end the quarter at these levels. When looking at revenues, we have seen 78 percent (up 1 percent from last week) of companies report either beating or exceeding expectations, while 22 percent have fallen short of expectations. While 78 percent is lower than last week’s figure, the figure is still well above both the one-year and five-year average of companies beating revenue expectations, but we remain out of the record setting observed on earnings. The overall blended earnings growth rate for the first quarter of 2021 currently stands at 45.8 percent (up from 33.8 percent last week). We are now easily above the record of 34 percent for quarterly earnings growth, set in Q3 2010. However, 40 percent of the component companies in the S&P 500 have yet to report their results. Going into Q1 2021 earnings season, expectations for the growth rate of the S&P 500 earnings was 23.8 percent.

 

Financial News Impacting the Markets

 

Outside of earnings last week, many investors were watching the April FOMC meeting to see if there would be any change from the Federal Reserve, either about the health of the economy or when the Fed may start to raise interest rates. In the April FOMC statement, there were only a handful of changes when compared to the March statement. Vaccination progress and policy support for the economy were called out as two reasons for the strengthening employment market and economic activity. The statement also points out that while there are some inflationary pressures currently in the economy, they will ultimately be transitory, not impacting inflation over the medium to long term. During Chair Powell’s question and answer session on Wednesday, he pointed out that manufacturing issues could also be inflationary and that they could last longer than the temporary rolling off of old inflation data in the standard inflation measures. In the written statement, the Fed also continued to call out the COVID-19 pandemic as remaining the largest risk to the US economy at present. This is different than many of the institutional money manager surveys conducted over the past few weeks, which have moved COVID-19 down to second place when listing areas of most concern, with overheating inflation having taken the top spot. Markets reacted very little to the April FOMC meeting, as the Fed was very consistent in what it has been saying for the past several months. The fixed income market is still indicating that the Fed is incorrect on its assessment of inflation and that inflation will force the Fed’s hand into action before the FOMC projects.

 

On Wednesday last week, President Biden gave his first prime time address to a joint session of Congress, in which he outlined his “American Families Plan.” The American Families Plan is the second plan in a two-prong approach to get the US economy growing again, with the first being the infrastructure plan currently being discussed on the Hill. In his American Families Plan, President Biden would like to:

 

  • Start a nationally paid family and medical leave plan
  • Expand tax cuts for working families
  • Provide free community college
  • Initiate childcare reform
  • Reform unemployment insurance

 

In total, the American Families Plan has a price tag of approximately $1.8 trillion. As mentioned last week in this commentary, the sticking points will come down to how this plan (along with the infrastructure spending plan) will be paid for. Increasing taxes on things like capital gains and estate taxes are two areas most under the microscope to see if they can be altered to come up with the funds to pay for these large spending plans. With so much to be done in Washington DC, it seems we will be running into a time crunch fairly quickly as there are only about 24 more days that both the House and Senate are in session before their respective August recesses.

 

There was a plentiful amount of economic data released last week with most of the data pointing to a strong economic recovery. On Monday, durable goods orders for the month of March were released and showed a significant reversal from the declines seen in February. The Conference Board Consumer Confidence Index was released for the month of April and came in at a reading of 121.7, a new high since the start of the pandemic. On Thursday, the preliminary estimate for Q1 GDP was released with the figure showing that the US grew by 6.4 percent during the quarter. This figure was slightly ahead of markets’ expectations and indicated that the US economy was seeing a solid rebound as places started to reopen and consumers benefitted from the latest round of fiscal stimulus. On Friday, the picture was a bit more mixed in the economic data that was released. One of the inflation related indexes, the PCE index, showed year-over-year inflation running at 2.3 percent, while the month-over-month Core PCE inflation data showed 1.8 percent. The conflicting data indicates that measured one way ,inflation is running over the 2 percent target rate. Measured another way, it is slightly under. In reality, for many people, inflation is significantly over 2 percent due to the everyday items Americans purchase and the recent price increases. The University of Michigan’s Consumer Sentiment index confirmed the Conference Board’s figure earlier in the week, posting a very strong uptick in Consumer Sentiment as the figure hit a new post-pandemic high level.

Market Statistics

 

  • Equities: US equity markets were mixed last week as the S&P 500 was the only one of the four major indexes to post a gain. As mentioned above, corporate earnings played a significant role in the market’s movements for the week, though earnings beats did not necessarily mean the company’s stock price would appreciate. The concentration of individual weightings in the Dow helped drive the index to the bottom of the four major indexes as companies such as Apple, Amgen, Boeing, Bristol Myers and Microsoft all posted losses in excess of 2 percent for the week. Despite last week being a busy earnings week, volume remained well below the weekly average levels across all four of the major indexes.

 

  • S&P 500 (0.02%) – Below Average volume
  • Russell 2000 (-0.24%) – Below Average volume
  • NASDAQ (-0.39%) – Below Average volume
  • Dow (-0.50%) – Below Average volume

 

  • Sector Performance: Sector performance last week was largely driven by earnings results as well, with companies such as Exxon, BP, Vale, Chevron and Royal Dutch Shell propelling the Oil & Gas Exploration and Energy sectors into the top two sector performance spots. Earnings reports from smaller regional banks and financial institutions helped drive the performance of the final three top performance sector last week, led by Capital One Financial, UBS and HSBC. Also helping the financial related sectors last week was the FOMC meeting, which continued to make it clear that while things are getting better for the US economy, the Fed is still a long way away from starting to raise interest rates.

 

Some of the sector classifications are very narrow and have few companies in them with a small number of large companies driving the overall performance of the sector. This was the case with software last week as Adobe, Salesforce and Microsoft were all down more than 1 percent for the week and they make up more nearly 30 percent of the sector. Merck, Amgen, Bristol Myers, Illumina and Thermo Fisher took the Healthcare and Medical Device sectors into the bottom five performing sectors last week as the concentration in large names was the issue. Multimedia Networking, as a sector, had a tough week last week as investors continue to try to assess when workers will be heading back to the office in earnest. Until then, demand for business networking will remain muted. Rounding out the bottom performing sectors last week was the Semiconductor sector, which cannot seem to get ahead of the supply chain issues with many of the chip manufacturers struggling to produce the needed chips due to a lack of raw materials.

 

  • Top Sectors: Oil & Gas Exploration, Energy, Regional Banks, Financial Services, Financials
  • Bottom Sectors: Software, Healthcare, Medical Devices, Multimedia Networking, Semiconductors

 

  • Commodities: Commodities were mixed last week as precious metals pushed lower while the other major commodities moved higher. The Goldman Sachs Commodity Index (a production weighted index) posted a gain of 2.44 percent. Oil moved higher last week by 1.91 percent as more areas of the US began to reopen. Over the weekend, it was announced that demand on Saturday for gasoline in the US saw the highest daily demand since the start of the pandemic as more Americans are starting to become mobile once again. Metals were mixed last week as Gold and Silver declined by 0.44 and 0.54 percent, respectively. The more industrially used Copper bucked the metals trend with a gain of 2.66 percent, thanks in large part to industrial demand coming back online both in the U.S. and from countries such as China and South Korea. Agriculture posted a gain of 1.04 percent for the week, driven in large part by a 3.18 percent gain for grains. Grains are now up more than 12 percent in the last 2 weeks. This quick of a gain, if sustained, could become very inflationary for the U.S. economy as grains make up a large part of many American diets.

 

  • GS Commodity Index (2.44%)
  • Oil (1.91%)
  • Livestock (2.07%)
  • Grains (3.18%)
  • Agriculture (1.04%)
  • Gold (-0.44%)
  • Silver (-0.54%)
  • Copper (2.66%)

 

  • International Performance: Global index performance last week was split almost perfectly evenly, with 51 percent of the global indexes moving higher while 49 percent declined. The average return of the global indexes last week was 0.08 percent. When looking at the global indexes, Africa saw the strongest performance. When looking at indexes that struggled last week, South America (for the second week in a row) and Europe had some of the worst performing indexes.

 

  • Best performance: Ghana’s GSE Composite Index (9.28%)
  • Worst performance: Chile’s CLX IPSA Index (-7.57%)
  • Average: (0.08%)

 

  • Volatility: The VIX, despite increasing last week, remains very tightly rangebound. Last week, the VIX traded in a less than 1 percent trading range for the first four days of the week, only to be broken to the upside on Friday, closing out the week up 7.39 percent at 18.61. At 18.61, the VIX is right at the same level it has hit three times in the last month and each of the previous times it has corrected lower sharply as the equity markets have pushed higher. We will have to see if there is a catalyst that will cause the equity market to move higher and the VIX to push lower this time around. At 18.61, the VIX is implying a move of 5.37 percent for the S&P 500 over the course of the next 30 days. As always, the direction of the movement is unknown.

Model Performance and Update

For the trading week ending on 4/30/2021, 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 -0.15% 4.09% 6.47%
Aggressive Benchmark -0.24% 7.73% 8.31%
Growth Model -0.16% 3.44% 5.44%
Growth Benchmark -0.19% 6.00% 6.76%
Moderate Model -0.16% 3.93% 4.37%
Moderate Benchmark -0.13% 4.28% 5.13%
Income Model -0.21% 1.79% 3.99%
Income Benchmark -0.06% 2.14% 2.99%
Quant Model 0.13% 21.05%
S&P 500 0.02% 11.32% 12.88%

 

*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 we did have several core equity positions report their latest earnings results. Last week, McDonalds (MCD), Arthur Gallagher (AJG), Church & Dwight (CHD), Aptar (ATR), Canadian National Railway (CNI) and Otis Elevator (OTIS) all reported their most recent results. Five of the six beat on earnings expectations with only CNI missing slightly (two percent below). Four of the six companies beat on revenue expectations with CNI and ATR being the two that missed. There was nothing concerning in any of the quarterly materials released or on the investor conference calls. Of most concern, as mentioned last week, is CNI’s bid for Kansas City Southern, but it seems the bidding war will likely be going to court before anything is settled so we are still a long way away from knowing what the outcome of the situation will be.

 

Looking ahead to this week, there are four core equity positions that will be reporting their results: Republic Services Group (RSG), Jack Henry & Associates (JKHY), Zimmer Biomet (ZBH) and Flir Systems (FLIR). There shouldn’t be anything surprising in the earnings results this week as all are expected to post strong results. In looking at performance last week, the biggest contributors to performance were Otis (+9.25 percent) and Arthur Gallagher (+5.08 percent), while the largest detractors in performance were Jack Henry (-3.99 percent) and Church & Dwight (-2.08 percent).

 

Looking to the Future

  • Earnings Season: Running very hot; can it be sustained?
  • Politics: Political wrangling over President Biden’s plan will heat up

Interesting Fact: There’s only one letter that doesn’t appear in any U.S. state name

Twenty-five of the twenty-six letters in the alphabet are used in the 50 United States’ names. The only letter not used is the letter Q. There is a Z in Arizona, a J in New Jersey and X’s in both Texas and New Mexico.

 

Source: Reader’s Digest

 

 

Stay safe and healthy!

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 4-26-2021

Callahan Capital Management

Weekly Commentary | April 26th, 2021

 

Major Theme of the Markets Last Week: Potential tax law changes

Last week was supposed to be a week that investors focused on corporate earnings as there were more than 400 companies reporting their first quarter 2021 results. While corporate earnings did make headlines, the biggest, surprising news of the week came out of Washington DC pertaining to how much capital gains will be taxed. While then Presidential candidate Biden was on the campaign trail, he repeatedly said that he wanted to see the capital gains tax rate increased for the wealthiest Americans. However, he never specifically stated a rate. Last week, it was leaked to the media (Bloomberg was first to report) that the Biden administration is considering increasing the capital gains tax rate from the current 23.8 percent up to 39.6 percent. This high of a rate is what seemed to catch investors off guard, as it was commonly thought the rate may go up to 28 or even 30 percent. This capital gains tax is in addition to the net investment income tax of 3.8 percent, which is still around after being enacted to help pay for President Obama’s medical reform bill. Media outlets were quick to point out just how high the capital gains tax rate would be for some wealthy Americans who live in less tax advantageous states such as California (56.7% combined rate), New York (54.3%), New Jersey (54.2%), Oregon (53.3%) and Minnesota (53.3%). In fact, according to the Tax Foundation think tank group, the average combined capital gains tax for high income earners across all of the US would sit at 48 percent. Markets moved lower by about 1 percent in less than 15 minutes following the release of the potential cap gains rates.

 

The need to raise money through capital gains taxes arises for President Biden’s American Families Plan, which will likely be announced during his first address of a joint session of Congress Wednesday evening. This is not a formal State of the Union address since President Biden has only been in office about 100 days, but the speech will carry almost all of the other facets of being a State of the Union address. While the details are still unknown, the speculation is that, under his new plan, President Biden could propose free community college tuition, various childcare subsidies and plans for early childhood education and changes to the US healthcare system, which were either unchanged under Obamacare or which have not changed positively under Obamacare. This plan that could be outlined on Wednesday is the second part of a two-stage plan, with the first part being the proposed infrastructure spending bill that came out a few weeks ago. Initially, there appeared to be a lot of support for the infrastructure spending bill, but as time has gone by, support looks to fading for a very large $2 trillion infrastructure bill, with Republicans announcing their own bill last week with a price tag $568 billion. The US financial markets like the idea of spending money on tangible plans such as infrastructure spending. They seem less sure about the American Families Plan, and they certainly seem skittish about paying for either plan through increasing taxes. One area of concern is being voiced by the states at risk of wealthy Americans choosing to move out of their state to avoid paying excessively high tax rates. Already, many wealthy Americans from the Northeast have moved to places like Florida or Texas, with taxes being one of the primary reasons for the relocations. The people being targeted by these tax law changes are the people who can afford to make lifestyle changes, and they are also large sources of revenues for the areas in which they choose to live. The initial shock to the markets seems to have abated as it is unlikely that the spending bills will remain as large as they are proposed to be or that the capital gains tax rate will ultimately be as high as was leaked last week.

 

Financial News Impacting the Markets

 

Outside of news coming from Washington DC last week, the financial media focused on earnings results from some of the bellwether companies in their respective industries. The following is a table of some of the larger and better-known companies that reported results last week. Companies that beat earnings expectations by more than 10 percent are highlighted in green while those that missed expectations are highlighted in red:

 

Abbott Laboratories -1% Danaher 51% Netflix 26%
American Express 4% Honeywell 7% NextEra Energy 12%
Anthem 2% Intel 21% Philip Morris 12%
AT&T 12% IBM 6% Procter & Gamble 7%
Coca-Cola 10% Intuitive Surgical 35% ProLogis 3%
Crown Castle 6% Johnson & Johnson 12% SNAP INC 100%
CSX -2% Lam Research 14% Union Pacific -3%
Daimler 80% Lockheed Martin 4% Verizon 2%

 

As you can see above, there was more green than red last week, which carried over to the rest of the companies reporting earnings. We are still seeing a significant number of companies beat analyst expectations. According to FactSet research, through Friday last week, we have seen about 25 percent of the S&P 500 component companies report their results for Q1 2021. Of the 25 percent that have reported, 84 percent of companies have beaten earnings expectations while 2 percent have reported inline earnings and 15 percent have fallen short of expectations. The percentage of companies beating expectations remains record-setting, if we were to end the quarter at these levels. When looking at revenues, we have seen 77 percent of companies that have reported either beating or exceeding expectations, while 23 percent have fallen short of expectations. While 77 percent is lower than last week, the figure is still well above both the one-year and five-year average of companies beating revenue expectations, but we are not in record setting territory like on earnings. The overall blended earnings growth rate for the first quarter of 2021 currently stands at 33.8 percent (increased from 30.2 percent last week). We seem to be creeping close to the record of 34 percent set in Q3 2010. Going into Q1 2021 earnings season, expectations for the growth rate of the S&P 500 earnings was 23.8 percent.

 

COVID-19 made headlines last week that both the US markets as well as global markets took notice of, with the first being the resumption of distributing and giving out Johnson & Johnson’s single dose vaccine. Several weeks ago, the use of the JNJ vaccine was halted due to blood clots occurring in some young-aged women who received the shot. An FDA panel that was looking into the extremely rare occurrence concluded last week that the vaccine is still safe for use with the general public and that the benefits outweighed the risks. In other COVID news in the US, several states last week reported that they did not need their initially scheduled shipments of vaccine doses due to a lack of general public demand. It appears that in many states where restrictions of who can get the shots and who cannot have been lifted, they are running out of people who want to get vaccinated. Financial markets seemed to take this news with mixed emotions, as investors are still concerned about the spread of the virus, but they seemed to be taking some solace in the fact that a pretty sizeable portion of the US adult population has already been vaccinated or has received at least 1 of their two shots. Outside of the US, the situation with COVID-19 is very mixed.

 

India made headlines last week as the country broke above 350,000 new cases being reported per day. The health ministry in India said it expects this current wave of COVID-19 to end sometime toward the end of May and peak with about 500,000 new cases per day. If the current trends continue, the situation in India could quickly become a humanitarian crisis as many hospitals and medical facilities in India are already running out of beds and oxygen supplies. India is a key player in the global economy and if there is significant economic damage from COVID-19, we could see a slower growth in the global economy during 2021 than is currently expected. South America is the other current hot spot for COVID-19 as Brazil, Peru and many of the other countries in the region deal with outbreaks, combined with poor healthcare infrastructure and a general lack of medical supplies. Stock markets in South America were some of the worst performing globally last week as investors fled the markets for the safety of foreign markets that seemingly have COVID-19 more under control.

 

Economic data last week was plentiful, as there was data about the US and other countries. In the US, initial jobless claims for the previous week were released on Thursday and hit the lowest level (547,000) since the start of the pandemic, in a sign that the labor market in the US is getting back toward normal. New homes sales disappointed on Thursday with a decline of 3.7 percent during March. With the decline being solely due to a lack of supply, the average selling price during the month increased. Friday was PMI day with data being released about Asia, Europe and the US. The US PMI reading for April came in at 60.6, slightly better than expected and better than the March reading. The US Services PMI also posted a strong reading of 63.1, higher than previous and expected. In Europe, the composite PMI reading for April was 53.7, which represents a 9-month high, while the composite European Services PMI posted 50.3. While the 50.3 reading is a little disappointing, it was so low because during at least part of the month, much of Europe was still locked down due to COVID-19 restrictions. In Europe, the Manufacturing PMI Output Index posted a reading of 63.4, the highest level for the index going all of the way back to June of 1997.  What is clear from the PMI data is that while COVID-19 is still restricting some aspects of life, economic activity is continuing pick up and the pace with which it is picking up is accelerating at or near record levels, in many instances.

 

Market Statistics

 

  • Equities: Last week, the major US indexes turned in mixed results with the Small Cap focused Russell 2000 posting a gain while the other three experienced modest declines. Despite last week being in the heart of earnings season and there being more than 400 companies reporting their results, volume remained below average on a weekly basis. This is likely due to the US moving toward summer trading season, despite it not being officially summer.
    • Russell 2000 (0.41%) – Below Average volume
    • S&P 500 (-0.13%) – Below Average volume
    • NASDAQ (-0.25%) – Below Average volume
    • Dow (-0.46%) – Below Average volume

 

  • Sector Performance: Sector performance last week was driven primarily by individual earnings releases that helped boost overall sectors. When looking at sectors that outperformed, the Medical Device, Healthcare and Biotechnology sectors all made it into the top three with strong results and forward guidance from the likes of Johnson & Johnson, Intuitive Surgical, Danaher, HCA Healthcare and Edwards Lifesciences. With such prominent companies all posting strong quarters, and in several instances raising their forward guidance, the sectors overall moved higher on the hope of other companies having the same strong results and guidance expectations in the future. Transportation made it into the top five sectors last week, thanks in large part to the rail companies as there is a bidding war over Kansas City Southern (up 18 percent last week) helping to drive up stock prices in the sector. Rounding out the top performing sectors last week was the Residential Real Estate sector with strong demand continuing to be seen in many parts of the US, giving large landlords the ability to continually raise prices.

 

Sectors that underperformed last week included Utilities, which was driven lower by the sector’s largest weighted company, NextEra Energy, which missed revenue expectations by more than 20 percent and declined for the week. Home Construction made it into the bottom performing sectors last week as home builders are having a difficult time building homes fast enough, as evident by the decline in the total number of new home sales recently. Home builders cannot sell houses that are not built yet and with shortages in labor and materials, combined with sky-high materials prices, they are starting to feel the impact. Energy and Oil & Gas Exploration had a difficult week last week as this seemed to be one of the major areas that moved lower on the capital gains tax news that hit the overall markets. This could be due to long-term investors, that in many cases have done very well in the sector, booking gains and hoping that any changes to the capital gains rates are not retroactively applied. Rounding out the bottom five performing sectors last week was the Semiconductor sector as Intel fell by more than 8 percent for the week with 5 percent of the decline happening on Friday following the company’s soft guidance despite the global chip shortage.

 

  • Top Sectors: Medical Devices, Residential Real Estate, Healthcare, Transportation, Biotechnology
  • Bottom Sectors: Utilities, Home Construction, Energy, Semiconductors, Oil & Gas Exploration

 

  • Commodities: Commodities were mixed last week as Oil and Livestock pushed lower while the other major commodities moved higher. The Goldman Sachs Commodity Index (a production weighted index) posted a gain of 1.10 percent. Oil moved lower last week as demand out of India is being called into question following the skyrocketing COVID-19 cases being seen in the country. Metals were all higher last week as Gold, Silver and Copper advanced by 0.03, 0.21 and 3.92 percent, respectively. Agriculture posted a gain of 4.12 percent for the week, driven in large part by a 9.60 percent gain for Grains, offsetting a decline of 0.21 percent seen in Livestock during the week. Corn was one of the leading grain gainers last week as prices rose from 585 cents per bushel up to 650 cents per bushel by the end of the week.

 

  • GS Commodity Index (1.10%)
  • Oil (-1.67%)
  • Livestock (-0.21%)
  • Grains (9.60%)
  • Agriculture (4.12%)
  • Gold (0.03%)
  • Silver (0.21%)
  • Copper (3.92%)

 

  • International Performance: Global index performance last week was split almost evenly, with 47 percent of the global indexes moving higher while 53 percent declined. The average return of the global indexes last week was -0.08 percent. When looking at the global indexes, China, Africa and the Nordic regions saw the strongest performance. When looking at indexes that struggled last week, South America and India had some of the worst performing indexes.

 

  • Best performance: Mongolia’s MSE Top 20 Index (9.94%)
  • Worst performance (2nd week): Peru’s Peru General Index (-10.15%)
  • Average: (-0.08%)

 

  • Volatility: The VIX last week ended up gaining 6.65 percent for the week after moving higher by more than 12 percent intraweek after the figures for the proposed capital gains tax rates were made known. The VIX remains well below 20, indicating that investors think market volatility will not be anywhere near as high as we saw on average last year. Currently, with a reading of 17.33, investors are expecting the S&P 500 to move by about 5 percent over the course of the next 30 days.

 

Model Performance and Update

 

For the trading week ending on 4/23/2021, 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 0.04% 4.25% 6.52%
Aggressive Benchmark -0.15% 7.99% 8.38%
Growth Model 0.26% 3.62% 5.49%
Growth Benchmark -0.12% 6.20% 6.82%
Moderate Model 0.44% 2.42% 4.41%
Moderate Benchmark -0.09% 4.41% 5.18%
Income Model 0.63% 1.99% 4.05%
Income Benchmark -0.05% 2.20% 3.02%
Quant Model 0.84% 20.89%
S&P 500 -0.13% 11.29% 12.92%

 

*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 last week: the sale of the Moon-Shot ETF (ticker MOON). The fund had been on the watch list to be sold for the past few weeks as the fund hit support levels and bounced higher a few times. Last week, however, the fund broke through the previous technical support levels to the downside and the fund was sold.

 

With earnings season starting to pick up for the markets, it also started to pick up for the core holdings in the hybrid models. Last week, there were four companies that released their results: Coca Cola (KO), Johnson & Johnson (JNJ), Procter and Gamble (PG) and Quest Diagnostics (DGX). Three of the four—JNJ, PG and KO—all beat on both earnings and revenue expectations. DGX beat on revenue expectations but fell short of earnings expectations by 0.27 percent. Forward guidance was upbeat and positive for all four companies though most of the companies acknowledged that the global economy is not yet out of the woods with COVID-19. For the week, the top performing holding in the hybrid models was Jack Henry and Associates (+6.71 percent) while the stock that posted the largest decline was Canadian National Railway (-8 percent) on news that they were putting in a higher offer for KSU than their competitor Canadian Pacific Railway. I’m watching this situation closely as a bidding war for an asset between two companies rarely means the final winner actually paid a good price. More often, they end up paying more than they should.

 

 

 

Looking to the Future

 

  • President Biden: President Biden’s first address to a joint session of Congress happens on Wednesday night
  • Earnings Season: Busiest week of the season this week; 900+ companies
  • COVID-19: India is significantly struggling; will there be fallout around the world?
  • FOMC April meeting: 2-day FOMC meeting concludes on Wednesday
  • Capital Gains: Lots of government spending; now the hard part of who pays for everything, with capital gains being an easy target

Interesting Fact: Too many Real Estate Agents

 

According to Economist Sonia Gilbukh, here in the US, the latest figures show about 500,000 homes currently for sale on the market. According to the National Association of Realtors, there are 1.5 million active real estate agents living in the US. Basic math would show that for every home for sale in the US there are three agents.

 

Source: NPR.org

 

Stay safe and healthy!

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 4-19-2021

Callahan Capital Management

Weekly Commentary | April 19th, 2021

 

Major Theme of the Markets Last Week: Big Bank Earnings

Last week, the major theme for the US financial markets was the official start of the first quarter 2021 earnings season. While there was news about COVID-19 vaccinations and economic data, both positive and negative, investors took notice of earnings from the big financial institutions. Twelve of the largest financial institutions in the US reported earnings last week with the average earnings beat being 34.6 percent. The company that did the best when looking at earnings beats was Goldman Sachs as the company beat expectations by 89 percent. The company that beat by the smallest margin was Blackrock, which beat expectations by 1.7 percent. Revenue expectations were harder to beat with US Bancorp falling short of expectations. However, the average of all the banks’ revenue surprises was still 7 percent. Goldman Sachs posted the strongest revenue beat with a surprise of 47.9 percent. Trading divisions at the big financial institutions helped propel results, especially at Goldman Sachs. Other factors that led to such strong performance included investment banking revenues, lower costs of credit and some accounting wizardry.

Loan loss provisions are an accounting entry that financial institutions are required to make when they think loans on their balance sheet could become non-performing. This is typically done during financial downturns in the economy and can quickly amount to billions of dollars. Banks historically have taken larger than needed loan loss provisions as they err on the side of caution and hope things do not turn out as bad as the projections causing those large loan loss provisions. Seen in the chart below from FactSet Research, the banking industry made significant loan loss provisions during Q1 2020 with the pandemic getting into full swing in the US. This was followed by a second round of large loan loss provisions being made in Q2 2020. During the third quarter, the banks made approximately their “normal” rate for loan loss provisions at $7.2 billion. However, starting in Q4 2020, and meaningfully in Q1 2021, the banks started to unwind their loan loss provisions because the number of loans they anticipated getting into trouble failed to materialize. When a loan loss provision is reversed, the figure essentially gets added back to the company’s earnings. Thus for Q1, earnings were about $10 billion higher than they would have been without the adjustment. The adjustment becomes even more impactful when looking at a year-over-year basis as the difference between Q1 2020 and Q1 2021 was more than $40 billion. JP Morgan took the largest adjustment in loan losses during Q1 2021 at $12 billion, while Citigroup took $9 billion, and Bank of America booked a $6.6 billion difference. While these adjustments make the banks’ bottom lines look very good this quarter, they are temporary as it is unlikely that the banks will be able to take such a large adjustment to loan loss provisions again in the near future.

 

While financials were a large part of the earnings reports from last week, they were not the only companies that reported results. In the US, according to FactSet research, through Friday last week, we have seen about 9 percent of the S&P 500 component companies report their results for Q1 2021. Of the 9 percent that have reported, 81 percent of companies have beaten earnings expectations while 2 percent have reported inline earnings and 16 percent have fallen short of expectations. The percentage of companies beating expectations is extraordinarily high and well above the 5-year average of companies that have beaten earnings expectations. Looking back through the data, there have only been two quarters since 2008 when the percentage of companies beating earnings expectations has exceeded 81 percent, with both being 84 percent and occurring in Q2 and Q3 2020, following the dubious fall of Q1 2020 due to COVID-19. When looking at revenues, we have seen 84 percent of companies that have reported either beat or exceed expectations while 16 percent have fallen short of expectations. If this figure holds at 84 percent throughout the earnings season, it will represent the highest revenue beat rate in the FactSet data going back to early 2008. The overall blended earnings growth rate for the first quarter of 2021 currently stands at 30.2 percent, which is second only to Q3 2010 when the earnings growth rate for the quarter hit the record 34 percent. Going into Q1 2021 earnings season, expectations for the growth rate of the S&P 500 earnings was 23.8 percent. While we are still less than 10 percent of the way through earnings season, the earnings that we have seen reported so far are starting out very strong and getting investors excited about what may come from the remaining companies that need to report.

 

Financial News Impacting the Markets

 

Outside of earnings last week, there were a few other developments the markets took note of but, in general, it was a pretty sleepy week for the markets. COVID-19 made headlines last week as more of the US continued to open and as the FDA halted use of the Johnson & Johnson vaccine over fears of potential blood clots from the vaccine being administered. Interestingly enough, this is the same issue the AstraZeneca vaccine was having in parts of Europe and both vaccines are in the same class and type of vaccine. This concern over blood clots and the stoppage of the J&J vaccine will roll back the finish line for US vaccination efforts. However, shortly after announcing that J&J would be temporarily halted in the US, other vaccine manufacturers, mainly Moderna, said they would boost their supply of the vaccine to the US in an effort to keep the vaccination progress on track.

The current unknown for COVID-19 is how the new variants will interact with the current vaccines and what will ultimately win the race. Currently, vaccination efforts have kept the US ahead of the curve, but with case counts mounting and reopening occurring all over the place, we will have to see how this plays out.

 

Economic data last week held a few interesting surprises with the largest surprise being positive during the release of the retail sales figure for the month of March. Retail sales for March posted a jump of 9.8 percent while economists had been projecting a gain of only 5.9 percent. Much of the jump in retail sales was due to Americans receiving their third round of stimulus checks early during the month and going out and spending it. Looking into the report, spending was strong in many different areas, including a gain of 15 percent in motor vehicle sales, an 18 percent gain in clothing and a 13 percent gain for restaurants and bars. These gains were in large part due to reopening as people get ready to once again get out of their homes and return to a more normal lifestyle of being mobile. While the figure was strong, economists were quick to point out that the gain was largely fabricated by the government stimulus and without the stimulus coming again in future months, we could see retail sales fall back into a more normal range. The Consumer Price Index (CPI) for the month of March was released last week and indicated that overall consumer Prices rose by 0.6 percent during the month in what amounts to an annualized rate of 2.6 percent. Core CPI, however, posted a monthly gain of only 0.3 percent, annualized 1.6 percent during the month. This appears to potentially be the start of the inflation bump Fed Chair Powell mentioned in the recent past. For his part, Federal Reserve Chair Powell sounded more upbeat during a 60-minutes interview than he has recently. In the interview, he said the US economic outlook had “brightened substantially” and both the US economy and COVID-19 could be at a significant “inflection point.” Investors cheered this change in tone, most notably with the yield on US government debt falling by several basis points over the course of the week.

 

Outside of the US last week, China made the largest headlines as the country reported that its economy grew by 18.3 percent during the first quarter of 2021. Other strong data out of China last week included retail sales for the month of March coming in at 34.2 percent, following a combined January/February reading of 33.8 percent (China always combines January and February due to the lengthy lunar new year during the typical reporting period). While the retail sales figures were certainly positive, China’s industrial production figure caused some concerns. Historically, industrial production in China closely follows retail sales as the two are highly correlated. The January/February combined industrial production figure for China was 35.1 percent growth, but this figure fell off a cliff during March when a reading of only 14.1 percent was released. To an outsider, it looks as if either retail sales were artificially propped up to keep people in China thinking things are improving and to keep them spending money, or something is incorrect about the industrial production figures and they will need to be revised higher in future releases. Either seems as likely as the other to occur at this point.

 

Market Statistics

 

  • Equities: A strong start to earnings season combined with strong economic data released last week helped propel all four of the major US indexes higher for the week. The Dow crossed the 34,000 level for the first time ever during trading last week, despite volume being below average on all of the major indexes. Earnings season provided a bit of a boost to the S&P 500 as well as the Dow as financials were the first of the major sector to report results in a significant way.

 

  • S&P 500 (1.37%) – Below Average volume
  • Dow (1.18%) – Below Average volume
  • NASDAQ (1.09%) – Below Average volume
  • Russell 2000 (0.86%) – Below Average volume

 

  • Sector Performance: Sector performance last week was largely driven by a few outsized individual stock movements in the healthcare related sectors, but it was not the best performing sector. That honor went to Utilities. Utilities turned in the top sector performance last week as bond yields declined to a value lower than what can be achieved by investing in many of the utility companies. Medical Devices, Healthcare and Healthcare Providers all jumped in to the top five performing sectors last week, thanks to a jump by NovoCure of more than 45 percent on positive results from a clinic trial of a lung cancer treatment. Johnson & Johnson’s vaccine being put on hold by the FDA on Tuesday last week allowed for other vaccine makers such as Moderna and Novavax to jump higher by more than 20 percent, helping to drive the outperformance of all things related to healthcare last week. Basic Materials rounded out the top five performing sectors last week as big infrastructure spending combined with a jump in global oil prices helped push the sector higher.

 

Semiconductors was the only sector to post a decline last week as it fell by 1 percent on reports that the global chip shortage will likely take more than a year to straighten out. The chip shortage is starting to have adverse impacts on many industries around the world with the automotive and electronics sectors feeling the pain first. Transportation, Oil & Gas Exploration as well as Energy took a bit of a breather last week as investors weighted some of the political risks with the sector with the opportunities of a reopening US and global economy. Aerospace and Defense rounded out the bottom five performing sectors last week with Virgin Galactic proving the majority of the drag to the group as the stock declined more than 20 percent for the week after it was announced that company founder Richard Branson sold 2.5 percent of the company to help fund other businesses that he owns.

 

  • Top Sectors: Utilities, Medical Devices, Healthcare, Basic Materials, Healthcare Providers
  • Bottom Sectors: Energy, Aerospace & Defense, Transportation, Oil & Gas Exploration, Semiconductors

 

  • Commodities: Commodities were all higher last week except for Livestock. The Goldman Sachs Commodity Index (a production weighted index) posted a gain of 3.62 percent, with oil providing a significant part of the gain. Oil moved higher last week as the IAEE reported that they expected an increase in global oil demand during 2021 due to the ongoing COVID-19 recoveries. Metals were all higher last week as Gold, Silver and Copper advanced by 1.89, 2.90 and 2.84 percent, respectively. Agriculture posted a gain of 1.27 percent for the week, driven in large part by a 2.18 percent gain for Grains offsetting a decline of 4.65 percent that was seen in Livestock during the course of the week. Lean hogs fell by more than 8 percent last week as concerns about global trade between the US and China seemed to hit the pork producers hard.

 

  • GS Commodity Index (3.62%)
  • Oil (6.25%)
  • Livestock (-4.65%)
  • Grains (2.18%)
  • Agriculture (1.27%)
  • Gold (1.89%)
  • Silver (2.90%)
  • Copper (2.84%)

 

  • International Performance: Global index performance last week was largely positive, with 72 percent of the global indexes moving higher while 28 percent declined. The average return of the global indexes last week was 0.69 percent. When looking at the global indexes, Africa, the Middle East and the Nordic regions saw the strongest performance. When looking at indexes that struggled last week, China, Southeastern Asia and India had some of the worst performing indexes. China has been struggling lately with its stock market performance, as the country has been making the poor performing list for several weeks in a row.
  • Best performance: Russia’s RTS Index (5.59%)
  • Worst performance: Peru’s Peru General Index (-2.40%)
  • Average: (0.69%)

 

  • Volatility: The VIX had a very tame week last week as the markets’ fear gauge traded in a less than 5 percent range all week. The complacency in people’s fear of the market was called out as a potential yellow flag for the markets. As in the past when investors become complacent, that is typically the time the markets throw investors a curve. For the week last week, the VIX declined by 2.6 percent, ending the week at 16.25, the lowest closing reading on the VIX in more than a year. A reading of 16.25 implies that the S&P 500 will move by 4.69 percent over the course of the next 30 days but, as always, the direction of the movement is unknown.

Model Performance and Update

 

For the trading week ending on 4/16/2021, 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 0.52% 4.20% 6.54%
Aggressive Benchmark 1.61% 8.16% 8.44%
Growth Model 0.46% 3.34% 5.46%
Growth Benchmark 1.25% 6.32% 6.86%
Moderate Model 0.48% 1.97% 4.35%
Moderate Benchmark 0.89% 4.50% 5.21%
Income Model 0.52% 1.35% 3.95%
Income Benchmark 0.45% 2.25% 3.03%
Quant Model 1.77% 19.87%
S&P 500 1.37% 11.43% 13.00%

 

*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 the addition of a new fund across all of the models. The fund that was added is called the Victory Shares US EQ Income Enhanced Volatility Weighted ETF with trading ticker CDC. CDC is an equity ETF that invests in large cap dividend paying equity positions and then weights the positions based on the individual volatility of the position. The fund has an active approach to risk management as well, with the fund actively moving toward cash during significant market declines and reinvesting the cash as markets recover. The fund performed well during the market downturn in 2020, falling less than half of the major indexes, and recovered quickly following the decline. Distributions in the form of dividends are paid out monthly. Currently, the trailing 12-month yield on the fund is 3.35 percent. There is one holding in the hybrid model that closed last week very close to a sell trigger and it will be closely monitored this week for potential sale.

 

With earnings season starting to pick up for the markets, it is also starting to pick up for the core holdings in the hybrid models. This week there are four companies slated to release their results: Coca Cola (KO), Johnson & Johnson (JNJ), Procter and Gamble (PG) and Quest Diagnostics (DGX). All are expected to post good results, compared to a year ago, considering how adversely COVID-19 impacted the equity markets during the first quarter of 2020.

 

Looking to the Future

 

  • Earnings Season: Kicked off very strong last week; can the momentum continue?
  • Global PMI data: Friday is flash PMI day; will the data show economic expansion continuing to pick up?
  • COVID-19: Trends have not been positive in several key countries and regions.
  • Infrastructure: Does Washington finally get moving on the infrastructure plan?

Interesting Fact: Cord cutting is not to save money any more

Both Disney + and Netflix announced price hikes recently. With the hikes, many Americans will look and determine if the services are needed any longer. For a long time, people cut the cord with cable TV to save money. Now, according to Bloomberg, having all four of the top streaming services—Amazon, Netflix, Disney+ and the new Paramount+—would cost a household about $92 per month. This $92 is only $1.50 less than what a cable TV subscription costs ($93.50), according to S&P Global Market Intelligence.

 

Source: Bloomberg.com

 

Stay safe and healthy!

Peter

 

 

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