Bigger Faster Stronger

 

I went into my office for the first time in over a year. My company is moving offices, so I went to gather my personal belongings, mostly junk. There were literally 5-10 small items that I thought about wanting to grab over the last year. The office was 99% empty. Mostly just security and building staff. The air on my floor was stale and warm. I’m glad I went in before the heat of summer. I did notice most desks were also exactly the same, and I feel bad for the women with a closet full of shoes under the desks. They’re going to need an international travel suitcase to move their desks. With all that, being in the office made me miss my colleagues a bit. We have a great working environment in our Times Square office, but I feel it will never be the same. People will go into the office less, and most of us will be like ships passing in the night. Not commuting 90 minutes each way to NY has been amazing, but this short visit to an empty office made me realize that I’ll probably be going back more often than I initially thought.

Another week of fun in the markets. I mean you had to expect it with all the big names reporting. Though in the end, performance of major North American equity indices was mixed. It was a week dominated by Earnings news, but Economic data was prevalent in market performance as well.

The Fed, as expected, made no change to rates. Jay Powell talked about a positive picture for the US economy, but stopped short of any change to the monetary policy. He seemed to think we’re a far way from a complete recovery. I hope you did not play a drinking game when someone mentioned “thinking.” The Bank of Japan also held steady, as well, with no change in their rates. The rest of the numbers out of the US last week were strong. US Consumer Confidence had a nice upside surprise. GDP was slightly higher than the Reuters poll, 6.4% vs 6.1%. Retail Sales surprise to upside. A huge jump in Personal Savings this month for the US. It went from 2.47B in February to 6.04B in March. This would have been unheard of before the pandemic, but this is the second such jump in the last 12M.

President Biden unveiled his Tax Plan and a new spending plan. That’s $6T, yeah Trillion with a T, in spending plans in his first 100 days in office. With all those positive numbers, inflation talk has increased again.

The week really wrapped up on Saturday with the broadcast of the Berkshire Hathaway annual shareholder meeting. This was the second year the pilgrimage to Omaha was put on hold and things were done online via Yahoo Finance. The meeting was, as this quote in a Reuters news article states, "kind of what you come to love about Berkshire," said Steve Haberstroh, a partner at CastleKeep Investment Advisors in Westport, Connecticut. "It's a little bit less about learning new things and more about being reminded about the old things."

Earnings Watch 

Last Week

• Alphabet was very positive. Net Income was up by an obscene 160%, revenue up more than 30%. YouTube, which I link to a couple of times below was a standout.

• Microsoft’s Q3 revenues of $41B were up 19% YoY and they guided higher for Q4.

• Apple beat analyst estimates by more than 40% on the bottom line and more than 50% on the top line. Q2 revenue was $89B, and grew by $31B YoY.

• Amazon was even better than Apple. EPS beat by 65% and grew by more than 200%. It’s revenues beat by just 3% but grew by about 44% or $38B.

These four companies average a $1.8T market cap and are 19% of the S&P 500. That level of growth from companies this large is unreal.

Then there’s Tesla. It beat on the top and bottom line. When you look at the sources of those numbers, things become a bit of a question. The reason they beat was mostly carbon credits and a sale of 10% of their Bitcoin holdings. I’m not the only one who found this a bit questionable.

The growth rates for large caps have been huge, but we’re not seeing much of a reaction to positive earnings. More than 80% of companies that have reported have beat, but we’re not seeing much in terms of positive reactions. Misses have been punished.
Q1 Revenue Growth, YoY % Change...

This week
There’s no break from the barrage of earnings. Another 25% of the S&P 500 names are reporting, but not as much in terms of market cap. That was really last week. Small Caps come into focus this week with more than one third of the Russell 2000 names and about 40% of the market cap are reporting. Canadian names are also reporting in force this week. Almost 100 names amounting to about 30% of the TSX index market cap. In total, across the US & Canada there are another 1,200 plus listed names reporting. Of the bigger names, the ones I’ll be watching are Paypal, GM, and Moderna.

Equity Capital Markets
Endeavor Group (EDR) had a strong performance on the week after a little blip in its first few hours of trading. It ended it’s 2 days of trading up 15%. Aveanna Healthcare did not have as much luck and it’s a busted IPO now. The IPO market is light this week in the US. There are a few, but the only one that’s of any size is Honest Co at about a $400M offering.

Looking forward
Economic data is lighter this week than it was last week. So as of now, earnings will look to be the driver of the week. As we’ve seen though, the docket at the beginning of week differs from what actually moves markets at the end. One last thing to be aware of, Friday brings us the “rank day” for the Russell indices. This day marks index membership eligibility for 2021 Russell Reconstitution determined from constituent market capitalization at market close. It’s the first step leading into the June rebalance.

Best of the Week:

I didn’t have a standout easy choice this week. I chose this Zerohege article that highlights a couple of charts from BofA and Morgan Stanley, because inflation is a big topic driving investment right now. The Fed says there’s no inflation yet, but commodity prices are rising and a lot of companies seem to be bringing up the topic on conference calls. Rather than look this up myself, I’m taking the words of BofA research. There’s also some info in here on mentions of ‘Cost Pressure’ from Morgan Stanley transcript analysis as well. The article also shows the many other ways cost increases are hitting companies.

"Buckle Up! Inflation Is Here!"

Best of the Rest:

I thought this was a Tweet worth sharing. John points out the lack of changes from the last FOMC statement.
The new #FOMC statement, same as the old statement save for very minor upgrades to description of economy

This one really talks most about the causes for the spike in Lumber prices from an environmental standpoint. After seeing these next three links, I’m starting to think it might not be a “good” time to buy a new fence for a long time.
Why Dead Trees Are ‘the Hottest Commodity on the Planet’

These two are putting out some educational and funny content. If you haven’t seen any episodes, I recommend all of them. They’re short, funny and mostly educational. This one goes through the lumber price spike in a different way.
Lumber prices skyrocket – will they go "TIMBERRR?"?  - Watch time: 12 minutes

I don’t love sharing content from a competitor, but this episode of the Odd Lots podcast had a very good guest and was relevant to the articles above. Hearing from a Lumber market maker is extremely beneficial to formulate an opinion and figure out where the knock on effects might come into play.
Why the Price of Lumber Has Soared Day After Day After Day - Listening time: 60 minutes

RCM Alternatives does a good job of highlighting the CTA world for the rest of us. CTA, or Commodity Trading Advisor is commonly managed futures or trend following. Most of these firms trade dozens of different markets, but Lumber doesn’t tend to be one of them. The article notes the most common response was the market is too small.
WHERE ARE THE LUMBER TREND FOLLOWERS?

This is not a shameless plug for Refinitiv content. I’ve got a whole blog where I can do this anywhere. First, Roger Hirst is an amazing treasure of knowledge. This episode touches on a lot of things that are important in the global macro markets. I did also like the comments from Bruce Alway, Refinitiv's Metal Research, on the copper trade.
Commodity Prices, Margin Debt & Inflation | The Big Conversation - Watch time: 17 minutes

Phil Mackintosh, NASDAQ’s Chief Economist, has had a couple of good market structure articles the past two weeks. They’re both related to the impact retail is having on institutional trading. I missed the odd lots article last week, but as odd lot trades increase, it’s factoring in a bit more. The article is a bit detailed, but still interesting for those that follow market structure.

Odd Facts About Odd Lots

The dark trades article is another useful article for those in the trading realm. The off exchange volumes are basically wholesalers and dark pools (see below). Phil does note that while off exchange turnover is high, it’s lower than volume. He mentions that retail fills are more commons in low-priced stocks. This is a relatively short article, but a ton of great charts help tell the story here.

A Deep Dive into Dark Trades

I looked at the FINRA data on ATS volume, related to the above article. You can see which Dark pool did the most volume for the first week of April. What surprised me here was how high the DealerWeb volume was and with only a small number of trades.

https://otctransparency.finra.org/otctransparency/AtsData

Phil also links to an excellent article around the effects of retail volumes on trading. It’s from February of this year, so it’s not all that old.I high recommend looking at this one if you trade equities. There’s some more good charts in this.

Meme Stocks: Inaccessible Trading Share, Trading Cost, and Risk

The host, Phil, renamed his podcast when he set out on his own. This is a replay of a Jan 2020 interview with an ETF vet, Dan McCabe. Dan walks through some of the pains of the ETF business. Dan started Precidian, which is the non-transparent ETF shop. He also goes through some things around ADRs and currency hedging. I shared a few things on equity market structure above, and this is a little more around how things work under the hood.

Dan McCabe: Market Structure & Innovation - Listening time: 36 minutes

Value traps are one of the biggest pains of value investing. They’re basically the difference between great performance and average to bad performance. Jack gives some of the negative screens to use to limit seeing these names in your portfolio. He gives six criteria to add, but two really stood out to me. Cash Flows not keeping up with earnings and high debt.

The Challenges of Avoiding Value Traps – And Some Criteria That Might Help

One for the road

Almost five years ago Money.net was featured in Forbes as the next great challenger in the desktop space. Working for the number two player in this industry, I see how hard this business is to break into. If you read the Forbes article, Downey is not really wrong with any of his thoughts. Knowing the weaknesses of an opponent and exploiting them are completely different though. This makes me think about boxing. If you know your opponent cannot guard against a good left hook, but you’re not strong there and they pressure you so much you barely get a chance to throw that punch, it makes that weakness irrelevant. Now, Money.net has filed for bankruptcy.

Money.Net Is Trying To Kill Off The Bloomberg Terminal
Money.Net files Chapter 7 bankruptcy amid lawsuit

Thanks for reading. I hope you have huge week. 

Michael