8 - 12 November 2021: Weekly Roundup

Summary

As we approach the halfway mark for the last quarter of the year, the major stock market indexes notched the first negative week after 5 back-to-back weeks of gains (but still positive November to date). Combined with the massive October gains, quarter-to-date the S&P 500 is up roughly 8.5%, while the Nasdaq Composite index is up nearly 9.5%, closely followed by the Russell 2000 with the Dow Jones Industrial Average bringing up the rear with its better than 6% gain, again, on a quarter-to-date basis. We see the market's move this week as a rather natural one, one of "digestion" following the massive move higher in October that was predicated by better-than-expected quarterly earnings, continued money flow into equities, and calming narrative from the Federal Reserve. 

This week marked another data point from inflation (CPI), which was hotter than expected, reignited inflation fears. The term you'll likely hear being discussed is "stagflation" which indicates the fear of raging inflation yet slowed economic growth. We're not there yet but many economists warn that we might head in that direction. Core CPI reading, which takes out food and energy prices, rose 6.2% year over year in October, well above the expected 4% and marking the greatest increase since November 1990. Notable line items in the October report include the 5.4% year-over-year jump in food prices, with the protein complex (meat) up nearly 12% year-over-year. Energy prices rose 30% over the last year and used car prices jumped more than 26% vs. year-ago levels. 

Brent crude futures and WTI crude finished the week lower for the third consecutive week, due in part to speculation President Biden's administration may release oil from the U.S. Strategic Petroleum Reserve to help drive both oil and gas prices lower. The Baker Hughes (BKR) weekly rig count report showed the number of active U.S. rigs drilling for oil rose to 454 this week. That followed increases in each of the previous two weeks, including a climb of six oil rigs last week. Increased drilling will lead to improved supply, which should dampen the supply/demand imbalance that has been making oil prices go higher for the past few months. We think oil prices have topped here, and a decline in oil price will be seen as positive for the stock market, given the current fears of inflation.

Inflation

Chart of the week: Watch the Volatility Index

Moving forward, we want investors to follow the Volatility Index (VIX) to try to predict declines in the equity market. You should read more about what the VIX exactly means, but in short, market buys the VIX when they think volatility is ahead for the market, as a hedge for when market thinks stocks will decline. Because of that nature, generally when VIX goes up, market goes down, and vice versa. However, there is not always a concerted move between the VIX and the market, and any inconsistencies should be used to predict where market will go next. For example, one expects as the market moves up higher, VIX should go down; however, if market moves higher but VIX is peaking up, this signals a decline in the market is coming. The other side is true, as one expects as the market moves down, VIX should go higher; however, if the market is moving down but VIX starts to also go down, we can try to put a bottom in for the market.

Portfolio Overview:

This week was a relatively flat week for our portfolio. Advanced Micro Devices (AMD) and Ford Motor (F) soared on Monday but afterwards pulling back with the broader market, albeit still holding at elevated levels. The worst performing positions were PayPal (PYPL) and Disney (DIS) which reported earnings and were followed by a ~10% decline. While we had to cut our position in PYPL in half, the pullback in DIS was a buying opportunity for us, and we added to our DIS position with a 2022 horizon. This week we brought Skyworks Solutions (SWKS) into our portfolio - a semiconductor manufacturer which is sitting at ~20% discount from its all time high (see our initiation post here) - and we bought shares of the European car manufacturer Volkswagen (VWAGY) which is very cheap (7x forward earnings) compared to the traditional automakers such as Ford and General Motors (10x and 8x forward earnings, respectively). 

Amazon (AMZN): Amazon is reported to be in preliminary talks to settle European Union antitrust investigations. Amazon announced a deal with PayPal (PYPL) that would allow for the use of Venmo on Amazon.com beginning in 2022 and expanded its relationship with Buy Now Pay Later company Affirm Holdings (AFRM). Evercore ISI reiterated it bullish stance on AMZN shares. Finally, this week brought the IPO of EV company Rivian Automotive (RIVN), which Amazon owns a reported 20% stake; exiting the week that stake was worth more than $20 billion. Next week we'll be eyeing the non-store retail sales data for October contained in the monthly retail sales report. 

Apple (AAPL): Apple shared Johnson & Johnson (JNJ) Chief Executive Alex Gorsky will join the company's board, a move we find interesting given Apple's growing focus on health and related diagnostic data. And while the company's chip partner Taiwan Semiconductor (TSM) reported a 12% YoY jump in October revenue, another Apple partner - Foxconn - shared it sees the global chip shortage running into the second half of 2022 and that its December quarter revenue for electronics, including smartphones, would fall more than 15%. 

Advanced Micro Devices (AMD): AMD started the week with favorable developments at the company's virtual accelerated Data Center event. The event showcased AMD's new DC CPU/GPU products and cloud partnerships, the company announced that Meta (FB) is adopting AMD CPUs for the cloud/Metaverse,  making them AMD's latest hyperscale customers, joining the ranks of Amazon (AMZN), Alibaba (BABA), Microsoft (MSFT), and Alphabet (GOOGL) among others. Management also updated its server CPU roadmap with new product launches targeted for the first half of 2022. All in all, the event was a very positive one for AMD as it confirmed the company not only continues to win share but its end market is also expanding. Milan-X is planned to launch in 1Q22 with server OEMs like Cisco, Dell, Lenovo, HPE, and Supermicro planning to utilize Milan-X in their machines. 

Salesforce (CRM): With enterprises still migrating their business into the cloud and adopting productivity and customer service applications, Salesforce's cloud business looks poised to prosper. Bloomberg Intelligence sees this increased spending pushing Salesforce's current remaining performance obligation above 20% and close to 25% including Slack, which it sees growing 35%-40%. Salesforce will report its quarterly results on Nov. 30. 

Cisco Systems (CSCO): During the week, the company was named a 'trusted sources' from the National Cyber Security Coordinator (NCSC). Also this week, Cisco shared that Meta Platforms (FB) will utilize its Silicon One Chip, and that news spurred on positive comments on CSCO shares from Evercore ISI and Wells Fargo Securities. Cisco will report its latest quarterly results on Nov. 17 after the market close. 

Disney (DIS): This week Disney reported quarterly results that confirmed our view on the Parks business rebounding but fell short of "expected" Disney+ subscriber additions for the quarter. We used the pullback in DIS shares to add to our holdings. On Friday the company held its Disney+ Day to coordinate deals across Disney's offerings, release some new programming on the service itself, and drop trailers and other sneak peeks of new shows and movies to be had in coming quarters. As part of the campaign, both "Shang-Chi" and the "Legend of the Ten Rings" and "Jungle Cruise" will be available to stream at no added cost. We see Disney using this to jump start excitement and new subscriber interest in the platform following what has been a relatively quiet period of fresh content over the last few months. Our view remains people vote with their feet and wallets for content they want to watch, and given its stable of content brands, we see content investment today bearing fruit in the coming quarters. 

Ford (F): According to a filing with the General Services Administration, Ford Motor won a government contract worth $8.56 billion for 2022 light vehicles to include sedans, light trucks and SUVs. The higher profile news this week was the IPO of EV company Rivian Automotive (RIVN), which Ford owns ~ 12% stake in. By end of the week, that stake is worth more than $12.5 billion. We tried to compare the valuations of Ford and Rivian here, making the case for our continued conviction in Ford Motors. 

Google (GOOGL): Bloomberg Media shared it sees a "windfall" of digital advertising spend in the second half of the year, especially so in the current quarter. We see this benefitting the company's core Search business as well as YouTube. Speaking of YouTube, it continues to launch new content and this week YouTube TV added the Hallmark Channel, Hallmark Movies & Mysteries and Hallmark Drama. Next week YouTube will host a weeklong live streaming event, Holiday Stream and Shop, where select social media stars will sell their own merchandise and brand name products directly on the platform. This is part of the company's larger efforts to become a shopping destination, capturing the continued shift to digital shopping, as well as shoring up its digital advertising. Also this week, Google lost its appeal of a 2.4 billion euro ($2.8 billion) antitrust fine for allegedly thwarting smaller shopping search services. The EU General Court in Luxembourg ruled that the company breached competition rules and deserved the penalty doled out by the European Commission in 2017. While the amount of the fine is a relatively easy swallow for Google and its parent Alphabet, the larger concern is this could put the eurozone's growing effort to regulate Big Tech one step further on that path. 

Microsoft (MSFT): Facebook Workplace -- now called Workplace by Meta -- will soon integrate Microsoft Teams for live-streaming video into Workplace groups, and it will allow employees using Teams or Workplace to view and react to meetings in real time without having to switch between the apps. Teams will also arrive on the Meta/Facebook Portal device in December, allowing people to use the video-chat hardware for video calling in Teams. Also this week Microsoft's Security group reported a surge in malware campaigns using HTML smuggling to distribute banking malware and remote access trojans (RAT). While HTML smuggling is not a new technique, Microsoft is seeing it increasingly used by threat actors to evade detection, 

Nucor (NUE): After passage of the Biden infrastructure bill over last weekend, shares of Nucor gapped up ~6% on Monday, giving us an opportunity to sell, which proved to be a right move given shares of Nucor failed to hold that level for the remainder of the week. During the week, Citigroup raised its price target on NUE shares to $120 from $105, but reduced its rating to Neutral from Buy.

Paypal (PYPL): PayPal shares reported top and bottom line disappointing numbers (see post here). We cut our position in half, and put PYPL in the penalty box for the months to come (meaning we are not acting until we see more data points from this company).

Morgan Stanley (MS): The company was named as the Wealth Manager Platform of the Year in the 2021 Money Management Institute (MMI)/Barron's Industry Awards. This news continues to strengthen our investment thesis in MS with their subscription-like revenue stream, deserving a higher multiple than the money-center banks.

Wells Fargo (WFC): There was no company-specific news this week. The financial sector, especially money-center banks, are holding their 2021 high levels given the prospects of 2022 rate hikes. We will be out with a detailed post about bond tapering, interest rate hikes and how they will benefit the banks in the coming days.

Eli Lilly (LLY): There was no company-specific news this week.