4-Nov Comments: Market Reaction Post Tapering, Portfolio Actions, Rebuttal To Ford Bear 

4 Nov 2021

Mike Le and Hailey Nguyen

Market Notches Another All-Time High After Fed Announcement Of Tapering

Yesterday afternoon, Fed FOMC meeting concluded with the decision to start tapering of bond purchase this month, and will continue next month at adjustable paces according to the status of the economy. In addition, as expected, Fed Chairman Powell reassured the market about the distinction between tapering of bond purchase (slowly removing stimulus) and raising interest rates (tapping the brake on economic growth). Chairman Powell did a phenomenal job stating that at the moment, the Fed is not at all discussing the prospects of raising rates, and all expectations of rate hikes are from the market, not the Fed themselves (currently the market is expecting first rate hike in June 2022).

Read the report by CNBC here.

On the back of the tapering news, market notched a new record high across multiple sectors. However, we want to state our view that this is not the time to all of a sudden become more bullish. The fact that market went higher after the news does not mean something unexpectedly good was announced; in fact, the event occurred as expected. We believe the move up was based on the following merit: We're entering a seasonally strong period for the market. However, with this risk event being the way, many funds wanted to wait until after the event to buy (including us). When nothing unexpectedly bad was announced, the Fed event was out of the way, people who have been on the sidelines finally came in.

Market Needs To Digest Recent Gains     

We predicted the September swoon using a slew of indicators. However one indicator that has been working like a charm since last fall until now is the trendline that the market has been in (most relevant for S&P 500 and Nasdaq 100). This has worked particularly well at predicting near-term tops.

Let's take a look at the chart of the S&P 500 since September of last year. You can see a well-defined upper trendline, which allowed us to predict the recently occurred September swoon (we wrote about it multiple times, too). We're now basically very near that trendline. Additionally, to the bottom of the chart is the Relative Strength Index (RSI). Looking at the RSI graph, every time we approach this level, we've pulled back. This indicates a consolidation/pullback is imminent. 

However, it doesn't mean we need to go back down immediately tomorrow. We think there's a little bit of juice to squeeze out of this rally until we actually touch that upper trendline (we're only near it now, not having touched it yet). Once we touch the trendline within the next few days, we think the market will stay elevated and "hug" this above trendline for some time, given the seasonally strong period we're entering. We're predicting the S&P 500 will end 2021 having touched 4800. Multiple analysts have this price target too, not just us.

Portfolio Actions 

The saying "buy low, sell high" doesn't have to be more complicated. Given the market is at all-time high, it's always prudent to do some selling. We did just that yesterday, having sold shares of Advanced Micro Devices (AMD), Ford (F) and Eli Lilly (LLY). 

Using the capital allocated, we added to our PayPal (PYPL) position, as we said before that PayPal is a strong buy at this depressed level. We also added to our position in Facebook, or Meta Platforms (FB), given the stock is about 10% from all-time high, sitting on the 200-day moving average. As always, you can see details about our positions here.

In the coming days, we will have our eyes on buying more shares of Google (GOOGL). We believe Google will be a beneficiary when the supply chain issue dampens, as companies will do more advertising when they have more products to sell. In addition, we're working to add more exposure to the financial sector. Given the imminent raise of interest rates next year, we believe money-center banks will do very well. In terms of financials, we currently own best-of-breed wealth management (Morgan Stanley) which is not necessarily rate-sensitive, and only a turn-around money center bank (Wells Fargo). What we lack is a best-of-breed money center bank, like JPMorgan Chase or Bank of America. However, we need to find good price levels to enter; else we would have to be happy with our current holdings. 

Rebuttal to a Ford (F) Bear (Work by Hailey Nguyen)

https://finance.yahoo.com/news/ford-shares-downgraded-nomura-based-111745554.html

As this article summarizes, Nomura analyst Anindya Das downgraded Ford from neutral to sell with a price target of $13. We would like to have some rebuttal against his arguments as we see Ford’s recent uptrend does reflect the outstanding performance of Ford in Q3. Furthermore, it also aligned with the 2021 outlook for Ford.

"Ford's stock is up 104% year-to-date. By comparison, Ford's peer group (the likes of GM, Stellantis, Toyota, Honda, and Nissan) is up 23%, while the S&P 500 is also up 23%," said Das. Even though Ford (F) has rocketed more than 100% YTD, we believe the climb is rooted in strong fundamentals, which make the recent upmove fairly valued.

In April (Q1 earnings), Ford forecasted its adjusted pretax profit for the year to range from $5.5 billion to $6.5 billion, including an adverse effect of about $2.5 billion from the semiconductor shortage.  Sales volume is expected to increase by about 30% from the first to the second half of the year. Surprisingly, in July (Q2 earnings), Ford raised its EBIT guidance for the year by about $3.5 billion, to between $9 billion and $10 billion, after reporting a surprise profit in the second quarter, saying demand for profitable new vehicles such as the Ford Bronco SUV will boost its performance. 

As soon as last week (Q3 earnings), for another time Ford raised its guidance for full-year 2021 adjusted EBIT to between $10.5 billion and $11.5 billion Ford's ability to continuously increase 2021 guidance indicates the company is very certain of its performance this year. 

In the Q3 earnings release, Ford did not say anything about the “weak wholesales outlook for 2022 due to difficulty in securing sufficient chip supplies". Therefore the argument from Das is not valid.

The global semiconductor shortage still remains a challenge for a lot of businesses, but Ford’s chip “improved from the second quarter, propelling sequential increases in wholesale shipments and revenue of 32% and 33%, respectively. Improvement in semiconductor supplies in North America in the third quarter helped lift regional product shipments 67% from Q2”.  

It’s also impressive to see the company balance continued investments in Ford+, electric vehicles, batteries, and autonomous technology with return of capital to shareholders. Ford's management recently decided to reinstate its quarterly dividend, equivalent to a ~2% yield, starting in Q4. 

We think the reason for Ford to receive positive reaction from investors is thanks to the efficient management of Jim Farley. Since he stepped up as the CEO, there has been a considerable change in the business. The business strongly accelerates the transition from traditional automakers to EVs. 

Some folks might argue that GM and other automakers also make a transition to EVs, but why only Ford draws the attention of customers? We think that Ford has surpassed some automakers in terms of its heavy investment in EVs and autonomous vehicles. In Spring 2022, Ford will deliver ALL-ELECTRIC FORD F-150 LIGHTNING in four series and two battery options at more than 2,300 EV-certified Ford dealers across the country, with the option for fleet customers to access Ford’s complete ecosystem of connected data and telematics services via Ford Commercial Solutions. F-150 is also the best selling truck in America for the last 40 years and there is a high chance that F-150 will secure this position with the EV version. 

“This is the most exciting Ford lineup I’ve seen, but what matters is that customers love our new products and services – and we’re just getting started,” said President and CEO Jim Farley. “The trajectory of our business gives us huge confidence in Ford+, and we’re obsessively turning the plan’s promise into reality.

In Q3 release, General Motors (GM) beat expectations, but the stock was punished 5% to the downside because there was no change to the full-year guidance. Compared this to Ford, which increased its full-year guidance, it's clear why Ford continues to march higher, while GM is still stuck in a range.

Bottom line, we believe the Ford downgrade from Nomura analyst Anindya Das was not based on strong merits.