November 9, 2020

As we open the week, markets are pricing in a high probability that Biden will get to inauguration day. 

Add that perception of relative certainty (right or wrong), to a very well placed announcement of vaccine success, and you get a glimpse of what asset prices and financial markets will look like, when trillion of dollars of new money around the world (from fiscal and monetary bazookas), meet visibility on a fully open and functioning global economy

The emergency fiscal and monetary policies around the world were an explicit devaluation of cash against asset prices.  And with that, we've already seen lift-off in prices over the past seven months.  And as we've seen today, the bull market in asset prices is still in the early days.  

But with today's news on a vaccine, we may have seen the catalyst to mark the end of a bull market in a very, very long trend in a very, very important asset class:  Bonds, specifically U.S. Treasuries. 

Investment in U.S. Treasuries has represented the safest parking place for global capital, in the world.  But now we have a environment in the United States that certainly doesn't look as safe and stable as it once did.  And we have a brew for inflation, with the clear risk that it may turn into very hot inflation.  

It's a formula for higher rates.  And we may see global treasury owners making their way to the exits.

November 6, 2020

As the hallmark of a Biden presidency would likey be the transformation of the U.S. economy, via the Green New Deal, let's take a look at some stocks that would benefit. 

As a spoiler, they've already benefited, dramatically.   Clearly there has been a lot of confidence, since the onset of covid, in the election outcome we are seeing. 

Here's a look at the charts on the top five constituents in the biggest clean energy ETF (ICLN):

The Biden Plan calls for a "100% clean energy economy" and "net-zero emissions no later than 2050."  He would need an aligned Congress to get funding for a such massive "change the economy" undertaking. 

And he might get it, given Georgia Senate races are going to a run-off.  

But his plan also says he would take Executive Action, day one, to ramp up regulations and efficiency standards.  Either way you look at it, the cost of living would go UP — prices going UP. 

November 5, 2020

Stocks are pricing in a Biden presidency, and a split Congress.  This is looking like a goldilocks scenario for stocks. 
Maybe the best gauge of this, is how the 10-year yield is behaving.
Coming into the election, as the odds makers were pricing in a "blue wave," interest rates started pricing in a hotter inflationary future (driven by big government spending/clean energy package).  With that, we had this aggressive move UP in in interest rates …

With the results of the past two days indicating a split Congress, yields have fallen back sharply.  

A split Congress means an increase in corporate taxes and capital gains taxes becomes unlikely (at least until mid-term elections).  It also means the big government spending package (i.e. funding for the clean energy transformation) becomes unlikely, with a Republican-led Senate.
Again, this is the "not too hot, not too cold" scenario:  a continued economic recovery, while reducing the risk that the Fed will have to choke it off (at some point) to deal with a spike in inflation. 


This scenario adds visibility and certainty. Stocks like both. 
That said, this view on Congress may be changing.  The Georgia Senate races, which have looked like wins for Republican incumbents, are now looking like they both may go to a run-off.  That would entail another vote to take place on January 5.  And that clearly puts the prospects of a continued Republican-led Senate in the jeopardy.

That would put the "higher inflation" scenario back into focus (and would be a cue for lift off in the interest rate market). 

November 4, 2020

Predictably, the election has become a drawn out process.  

And predictably, in a world where few things have made any sense over the past ten months, we are now seeing the Presidential election count paused in mid-action last night, held overnight, and flipped on its head today.

The predictable reason: ambiguous mail-in ballot discovery and counting. 

So, after an endless "whatever it takes" effort to get rid of Trump, over a four year period, the ultimate overthrow appears to be coming from a global pandemic-rationalized mail-in voting strategy, which entails dumping ballots on the doorstep of key toss-up states, in the middle of the night, to be counted after the known majority of Trump votes had been cast and counted. 

We will now see how the disputes play out. And there will likely be many states in the mix. 

That said, I suspect the media will be happy to call Michigan and Nevada for Biden and set Biden in motion for an acceptance speech.  Meanwhile as the Trump team is out fighting for justice, the pressure will build on him to step aside and allow the country to move forward, so that Biden can "get to work on the virus and the economy." That's my view. 

With a split Congress, as we've discussed, I would expect Biden to push for an economic shutdown, to contain the spread of the virus — following the lead of France, Germany and the UK. 

That would give him the purpose to turn to Congress and force a massive "relief" package.  And from there, he would be flush with, at least, a trillion dollars to plow into his clean energy economic transformation plan.  We will see how it all plays out. 

November 3, 2020

Big day.  And global asset prices are soaring.  

Are markets anticipating a Biden win, blue wave and, consequently, a $3 trillion slush fund coming down the pike?

Are markets anticipating a Biden win, and subsequent economic shutdown, for the purpose of forcing Congress to relent on a $3 trillion dollar "relief" package? 

Are markets anticipating a Trump win, and the immediate removal of the political noose that has choked off the full reopening capacity of the U.S. economy? 

Are markets simply anticipating the end of a very long period of uncertainty, which will ultimately, at minimum, give way to a recovering economy with trillions of dollars of monetary and fiscal stimulus still floating around? 

Any way you look at it, the common theme is that the election represents an unlocking of the liquidity deluge from the policy response earlier this year (and possibly even adding to it).  

The next question to ponder, just how much inflation is ahead? 

With the Fed openly willing to sit on zero interest rates until they see inflation run sustainably north of 2%, if Biden were to come in and pile on a multi-trillion government spending program, on  top of the this chart below, inflation would explode higher — and the Fed would be caught well behind, and chasing it.  As we've discussed for a long time, you don't want to hold cash in this environment, you want to be long asset prices

With that said, on the election outcome front, for the states that will determine the winner, the national polls have Biden up by only 2.3 points going in.  

Assuming there are no surprises in Florida and Texas, a win for Trump in Pennsylvania would probably get him over the finish line. And the three pollsters that correctly predicted his win in Pennsylvania in 2016 have him winning PA again (Big Data Poll, Susquehanna, and Trafalgar).  

On a final note, as we've discussed here in my daily notes, the stakes are extremely high in this election. China is on the doorstep of overtaking the United States as global economic superpower, and they won’t be looking to spread democracy – rather, they have a clear goal of world domination.

As we know, Trump has been a wrecking ball for the Chinese Communist Party’s grand plan. And with that, it’s safe to say they would do anything and everything to get rid of him.  We’ve seen just that.  On the other hand, Biden seems very likely to follow the “humble foreign policy path” that has enabled China’s ascent.   

With that above in mind, maybe the most articulate description of Trump’s role as a wrecking ball, what has taken place over the past four years, amplified in the past 10 months, and what is at stake with today's vote, is in this speech (from a prominent NY money manager).  It's worth taking the time to listen. 

November 2, 2020

As we head into tomorrow's very high stakes election, global asset prices were up on the day.  The broad stock market was up over 1%.  

But big tech was down.

Amazon was down 1.8%.  Apple was down 1%.  Facebook, down 1.4%.  And Twitter was down another 5% (after getting taken apart on Friday for more than 20%). 

Remember, last week we talked about the big technical break down in the key tech stocks, following a day that the leaders of Google, Facebook and Twitter were grilled by the Senate.  And we talked about the potential valuation tipping point for big tech, as we've now breached the 1999 levels of tech representation in the S&P 500 index.  Will this election serve as the catalyst, or "pin" to prick the bubble in big tech?  Maybe.

This sets up for a rotation.  In a Trump win, a rotation into energy, infrastructure and value stocks.  In a Biden victory, a rotation into the stocks that benefit from the democrat “clean energy” plan.

Let's talk about the probable scenarios from the election: 

In the case of a Trump win, we should expect a more aggressive opening up of the economy.

In the case of a Trump win, and an aligned Congress, we should expect a more aggressive opening up of the economy AND another stimulus package that would fund an aggressive infrastructure spend, with “bringing the supply chain home” as the centerpiece.

In the case of a Biden win, in a “blue wave” we will, no-doubt, get a monster, multi-trillion-dollar second stimulus package, to fund his/their very aggressive economic transformation/ “clean energy” plan.

In the case of a Biden win, and split Congress, I suspect he may hold the economy hostage, through tighter virus mitigation, so that the Republican-led Senate will relent and do a second stimulus package (which will fund the clean energy plan).

In the case of a pro-longed period of uncertainty, surrounding a contested election, we will likely get more Fed action, and a second stimulus package.

The common theme in these four scenarios is:  economic fuel.

October 30, 2020

We talked earlier this week about the test of the big technical trend line in the S&P 500. 

Here's how the chart looked on Monday …

And here's how it looks today …

And we've been watching Apple's test of a similar line, as the proxy for big tech and for the broader stock market …

As we discussed yesterday, that line gave way too, after an earnings beat on Thursday. 

Amazon?  Same chart …

Same chart for Facebook.  Also worth noting, while the Twitter looks a bit different, was down 21% on the day.  

So did the Senate hearings this week pour cold water on the big tech trade?  Or is a top IN for big tech, and is there a changing of the guard coming? 

For those that believe a Trump victory is coming, the big tech regulatory noose looks to be in the cards, which would certainly challenge the lofty multiples these companies have enjoyed. 

For those that believe a Biden victory is coming, the global capital that has fueled the lofty multiples in big tech, will likely be moving OUT, and IN to the next big secular trend to be determined by big government "stimulus" allocations.  That is, the “clean energy revolution.”   Just as Obama blessed this eras tech giants with gobs of money from the 2009 Recovery Act, Biden would do the same with the Heroes Act – allocating as much as a trillion dollars to clean energy companies, and in the process anointing the winners and future billionaires (if not trillionaires). 

October 29, 2020

Yesterday a few of the most powerful people in big tech were getting grilled by the Senate.  Today they reported earnings.

If you needed more convincing that big tech is eating the world, seeing their earnings through a government-imposed "work at home world" should do it.

Google grew revenue by 14% compared to the same period a year ago.  And they grew operating earnings by 22%. 

Facebook grew revenue by 22%, with operating earnings up 12%.  

Twitter grew revenue by 14%, and grew operating earnings by 27%.  

Keep in mind, this is a quarter where most companies, while beating dialed down estimates, are still only putting up only a fraction of the revenues and earnings of a year ago. 

So, these numbers hit as Congress is mulling over ways to tame these platforms, and as the DOJ is suing Google (Alphabet) for abusing its dominant position in search. 

This only amplifies the scrutiny.  As we discussed earlier this week, this all sets up for higher regulatory costs coming down the pike, and less "wild west" in their business models.  That is a threat to the lofty multiples on these stocks.  And this comes at a time where technology, as a sector, has recently exceeded its 1999 proportion of the S&P 500.   

With all of this said, picking a top in big tech has been a fool's errand.  The billionaire investor David Einhorn, has many wounds to lick from his failed attempts at shorting his "bubble basket" of tech stocks.  But he wrote in his recent investor note that he’s convinced the bubble has finally burst – as of September 2.  We will see. 

As a key barometer of tech, remember we looked at this Apple chart earlier in the week …

This big line that comes in from the March lows, has broken in after hours trading, following an earnings beat

October 28, 2020

Stocks, commodities, and currencies were all down big today.

Was it news that Germany and France might be moving toward another lockdown? 

Was it because three of the most powerful big tech CEOs were being grilled by the Sentate today, with the future of their business models in jeopardy?

A bit of both.

Plus we get this big technical break in stocks today.   

This is an 8% decline in stocks since October 12 (just twelve trading days).  

Now, with two of the top five S&P 500 constituents (Google and Facebook) at risk of being regulated down to mere mortal status, it would make sense that the market might consider how these companies would be valued if the liability shield of section 230 were to be taken away (which was the topic of discussion at today's Senate hearing). 

This is contemplated at a time when the techology sector has recently surpassed 1999 levels in sector composition within the S&P 500.  According to the WSJ, tech made up 37% of the S&P 500 market cap in 1999.  It is now 40%.  

As for the Senate hearing today, if you've listened to any of these (today or in the past) it is perfectly clear that these platforms are too big to manage, with unintended consequences that are dangerous to society (if not an existential threat).  We have former computer programmers, turned entrepreneurs, turned information gatekeepers, turned (some of) the most powerful people in the world. 

The leaders of these companies (in most cases, founders) don't know how to tame the monsters they've created.  Zuckerberg, of Facebook, admits it.  Dorsey, of Twitter does not.


The politicians: they don't know how to regulate them.

October 27, 2020

Tomorrow all eyes will be on the Senate hearing with the heads of Facebook, Google and Twitter. 

The hearing is titled, "Does Section 230's Sweeping Immunity Enable Big Tech Bad Behavior?"

Arguably, the last U.S. election was won by Trump's use of Twitter.  And this time around, he may lose it by the use of social media against him. 

Here is what is protecting big tech from any recourse from bad behavior on behalf of the actions of their users, or from bad behavior their own actions. 

This is from Section 230 of the Communications Decency Act …

This was written in 1996. Clearly, the world, technology and the internet have changed a bit. There was about 45 million people in the world using the internet when this law was written.  Today, that number is 4.5 billion. 

If these companies lose this privileged status, the business model changes.  That means the multiple changes (i.e. lower multiple).  Right now, Google trades at 35 earnings (ttm).  Facebook trades at 35 earnings (ttm).  Twitter trades at around 27 times earnings (pre-crisis full 2019 earnings). 

But this would be far from the end of the big tech giants. Ironically, if this rule were to be revised, to hold these big platforms accountable, it would only strengthen their competitive moat.  There will never be another dorm room startup that could conceive of competing with them.  The cost of regulatory compliance, in house content management and enforcement, and the liability would preclude any new competition.