MARKET UPDATE subscribe at sandyleeds.com November 23, 2020 – Market Update Table of Contents I. Stocks A. Barron’s Summary (Barron’s) (Barron’s) B. Other Stories About Stocks II. Bonds and Interest Rates III. The Economy A. COVID B. The Fed C. Judy Shelton D. Jobs and Benefits E. Education F. Other Economic Indicators and Economic News IV. Politics sandyleeds.com 1 I. Stocks A. Barron’s Summary (Barron’s) (Barron’s) 1. Last week: DJIA -.7%; S&P 500 -.8%; Nasdaq +.2%; Russell 2000 +2.4% a. Market being saved by good vaccine news i. Moderna’s preliminary data shows 94.5% efficacy rate ii. AstraZeneca said their vaccine was safe and seems to work w/ older adults iii. Pfizer’s full data shows 95% efficacy rate 1. Asked FDA for an emergency use authorization 2. Could have been a much worse week: a. Economic data disappointed i. Retail sales increased just .3% in Oct (forecast .5%) ii. Jobless claims increased 31K to 742K iii. Philadelphia Fed and Empire State manufacturing indexes disappointed iv. JPM forecasting economic contraction in 2021 Q1 b. Covid cases spiked i. 73% increase to 187K ii. 1,962 deaths on Nov. 19 c. Treasury Dep’t said it would let five of Fed’s special lending facilities expire at year end d. Ratio of insider sales to insider purchases increased to 58 to 1 i. Gartman calls this “stunningly high and consistent w/ interim peaks” 3. Greatest future risk may be disruption in distribution of vaccine 4. Still have long-term issues: a. An uneven economic recovery b. Climate change c. Deep political divisions 5. We’re seeing widespread bullishness a. BAC’s survey of portfolio managers showed: i. They anticipate strongest profit performance in 20 years ii. Boosting equity allocations to greatest overweighting since Jan. 2018 iii. Cut cash holdings to lowest levels since April 15 b. Investor’s Intelligence found that 59.6% of advisors it polled were bullish i. Up from 59.2% in previous reading ii. Bears fell from 19.4% to 182% iii. The 40%+ spread between bulls and bears tends to be seen at market tops 6. Seeing signs of speculation: a. Tesla up 20% for week – after being added to S&P 500 b. Bitcoin rose a similar amount i. $18K is 3X March low c. Junk bonds yielding less than 5% d. Money flowing out of gold ETFs sandyleeds.com 2 B. Other Stories About Stocks Strength of market – crushing the shortsellers (Bloomberg) 1. Despite lots of reasons to be bearish, short sellers are getting killed. 2. Some of the data: a. Currently, this is the fifth best November on record. b. Fewer than 50 stocks in the S&P 500 have fallen this month and 98% are higher since March 23. c. The Russell 2000 is up 16% in 15 trading days and value stocks are reviving. d. A GS basked of “most-shorted” stocks is up 19% this month (and 27% YTD). e. Bears are giving up – the median S&P 500 stock had outstanding short interest accounting for just 1.6% of market cap, the lowest level since at least 2004. 3. Signs of exuberance: a. BAC is showing that fund managers are the most optimistic that they’ve been since Jan. 2018. b. The Investment Company Institute shows that mutual funds and ETFs had $20B of inflows from Nov. 5 – 11, the largest in four years. 4. Even the Treasury-Fed spat didn’t push the market down. a. Maybe the message from the spat is that the Fed is unlikely to turn off the spigot and this is great news. Markets and a dark winter (Bloomberg) 1. Markets often look through bad news in the present for good news in the future. a. But, if the future good news is priced in, bad news in the present can derail the market. 2. The tremendous number of Covid cases will cause terrible suffering prior to the widespread distribution of the vaccine. a. NY is closing their schools (impacting NY traders). b. Around 12MM Americans will lose their emergency unemployment benefits by year-end. i. This includes 9.4MM on PUA and 4.1MM on PEUC. ii. Realize that the government didn’t let extended unemployment benefits during the Great Financial Crisis expire until the end of 2013 – and that affected 1.3MM people. Small caps have started doing well (WSJ) 1. Russell 2000 is up 4.5% this year, vs. 11% for S&P 500 and 32% for Nasdaq. a. Since Pfizer news, Russell has beaten Nasdaq by 8.52% -- greatest margin since 1986. b. Also helped by Biden – greater stimulus. 2. In the short-term, the risk is that more lockdowns will hurt the small-caps. sandyleeds.com 3 Momentum is hurt by rotation (WSJ) 1. Momentum funds were hurt by vaccine news. 2. Momentum funds typically do well until there’s a turning point. 3. Performance is also hurt when turning points are short-lived. Tesla will be added to the S&P 500 (WSJ) 1. Tesla is going to be added to the S&P 500 on Dec. 21. 2. Inclusion requires four consecutive quarters of profit. a. Tesla has strung five together. b. The company has posted a profit in the first three quarters of 2020. c. Tesla’s Q3 profit of $331MM was helped by $397MM in regulatory credits. 3. Tesla’s shares jumped 14% on the news. Tesla and indexing (WSJ) 1. There is ~$11T indexed to the S&P 500. 2. The company has a $400B market cap and it will be one of the ten largest companies in the index. 3. S&P is considering adding Tesla in two tranches so that it does not disrupt the markets. Tesla – is inclusion a bad sign? (Bloomberg) 1. Yahoo found its way into the index in Dec. 1999, four months before the collapse of internet stocks. a. Real estate stocks were added shortly before the subprime crisis. 2. Tesla is trading at 113X earnings and 49.5X EBITDA. a. Tesla produced $556MM of income over the past 12 months. b. If they got to $10B of income and sold for 20X earnings, the market cap would be cut in half. Airbnb is going public (WSJ) 1. Planning to go public in mid-December a. Doing a traditional IPO (had considered a direct listing) b. Nasdaq ticker: ABNB c. Underwriting is being led by Morgan Stanley and Goldman Sachs d. Employees will be allowed to sell up to 15% of their shares 2. Expected to have a market cap of $30B (had been $31B in 2017; had been $18B earlier this year) 3. Key financial data: a. 4MM hosts i. 7.4MM+ listings of home rentals b. Revenues in Q2 were 72% lower YOY; but Q3 revenue was down just 18% YOY (with $219MM profit) c. Accumulated losses since 2008 founding: $2.1B through Sep. 30 4. Risks for Airbnb: a. Pandemic b. Zoning restrictions on short-term rentals c. Difficulty policing crime sandyleeds.com 4 II. Bonds and Interest Rates Treasuries: Higher real rates, lower breakeven inflation, and a higher term premium (WSJ) (WSJ) 1. Breakeven inflation (10-year UST yield – 10-year TIPs yield) has dropped a bit: a. August: 1.796% (.692 - -1.104) b. November: 1.722% (.88 - -.842) 2. Treasury yields have been a bit higher even though no one is predicting that the Fed is going to be raising rates soon. a. This means that the term premium (the extra compensation that you need for holding a longer-term bond) is increasing. b. In this case, it means that the term premium is becoming less negative (and just recently positive) according to the NY Fed model. Real yields on investment grade bonds are low (WSJ) 1. Real yields on investment grade bonds are ~.2% and this is pushing investors out the risk continuum into junk bonds. 2. Junk bonds are now trading at a 4.27% spread to Treasuries. a. Junk bonds have also been helped by promises of a vaccine. Some Chinese AAA corporate bonds have defaulted (WSJ) 1. In China, approximately half of onshore corporate bonds are rated AAA (compared to just MSFT and JNJ in the US). a. The main explanation in China is government support. 2. But recently, several companies owned by local governments defaulted. a. Even more disturbing was the fact that key assets were moved out of the defaulting companies prior to the default. Alternatives to the 60/40 portfolio? (Barron’s) There continues to be concern that a 60/40 portfolio does not offer much return going forward (given that bond yields are so low) 1. Equity valuations and bond prices are high (low yields) a. And higher yields could push P/Es down 2. Possible solutions (none of them great): a. Hedge stocks with out-of-favor sectors i. Value stocks, financials, industrials, small-caps b. Substitute gold or TIPs for traditional bonds i. Could benefit from negative real rates of interest c. Incorporate more equity-like bonds and bond-like stocks i. High-yield bonds, convertible bonds, REITs, utilities sandyleeds.com 5 III. The Economy A. COVID U.S cases are rising (Johns Hopkins) 1. The U.S. has had more than 12.1MM cases and ~256K deaths a. Globally, there have been 58MM cases and ~1.4MM deaths 2. On Nov. 20th, we had 192K new cases (CDC) CDC says we shouldn’t travel (WSJ) 1. The CDC urged Americans to not travel for Thanksgiving. 2. It took 96 days in the spring for the US to log 1MM cases (we did have less testing), but we logged another million cases between Nov.