1 - 5 November 2021: Weekly Round-Up

Published 7 Nov 2021

The S&P 500 advanced this week to yet another all-time high. The news flow was a busy one as strong macroeconomic and labor market data was met with solid corporate earnings and a Federal Reserve who threaded the needle in explanation of their plan to separate tapering from tightening. Then on Friday, the "reopening" trade came back in full force after Pfizer said its COVID-19 oral antiviral treatment reduced the risk of hospitalization or death by 89%. Friday, the Bureau of Labor Statistics reported that nonfarm payroll employment increased by 531,000 in October, a strong print versus the 450,000 consensus.  

That improving outlook led the market to shrug off any potential taper tantrum this week as the Federal Reserve affirmed its commitment to continuing to reduce market support to the tune of approximately $15 billion a month, depending on circumstances. All told, the Fed expects to conclude its tapering around July 2022 and the expected reductions are to be come in the form of $10 billion reduction of Treasury securities and a $5 billion reduction in Mortgage Backed Securities (MBS). While acknowledging that inflation is indeed running higher than the 2% target, the Fed maintains that many factors attributing to these increases are a result of the Coronavirus impact and response and are, indeed, transitory. The Fed further went on to state that, essentially, as supply chain and employment issues are resolved (partially due to increased vaccination rates) it expects inflation pressures to ease. 

In terms of news reported from companies, we heard good news from Lyft and Uber about their ability to bring drivers back to the workforce. We also heard good news from gaming companies that reported strong demand for gaming going into the holidays.   

All in, it was a very positive week on the macroeconomic front as economic activity is picking up and the job market is strengthening. While supply chain congestion and labor shortages remain the primary headwinds holding us back, the economy is clearly ahead of where investors thought it was coming into the week. 

To top of a week of incredible news, the House of Representatives finally passed the $1 trillion infrastructure bill after months of negotiations and uncertainties. The bill would put $550 billion in new funding into transportation, broadband and utilities. The package includes $110 billion for roads, bridges; $66 billion for passenger and freight rail; $39 billion for public transit. It would also put $65 billion into broadband (internet access), and an investment of $55 billion into water systems. You can read about details of this bill here. In terms of portfolio companies that will be put into spotlight, we expect the major benefactor to be Nucor (NUE), because all of these projects would prop up steel demand for years to come. Also, a question that often gets asked is whether this $1 trillion bill includes catalysts for electric vehicle companies (think for Ford), whether it be through EV tax credits for car buyers, infrastructure for EV chargers, or .... We don't see these major catalysts in this bill, however, keep in mind, the other major piece of President Biden's agenda called "Build Back Better Act" remains to be passed. That piece would be the major driver for EV companies, and Congress has promised it will be sorted out by the end of this month. 

A quick look at some of the broader market measures that we like to keep an eye: We see the dollar index is hovering around the 94 range, gold has advanced to the low-$1,800s region, WTI crude prices are holding in the low-$80s per barrel region and the 10-year Treasury yield has pulled back to the mid-1.4% level.

Portfolio Overview:

Notable gainers for the portfolio this week included a chip-facing position of Advanced Micro Devices (AMD) and Ford Motor (F). Laggards include PayPal (PYPL) , which reports its quarterly results early next week.

During the week we trimmed back our positions in Advanced Micro Devices (AMD) and Ford Motor (F) to realize ~40% gains, exit out of NVIDIA (NVDA) with a 50% gain. The proceeds from those trades were funneled into our additions of JPMorgan (JPM) and Cisco Systems (CSCO), adding to our stake in Morgan Stanley (MS) and Walt Disney (DIS). 

Next week we will get quarterly results from PayPal (PYPL) and Walt Disney (DIS).

Amazon (AMZN): Early this week, Amazon shared it will launch the first satellites from its Project Kuiper Internet effort in the fourth quarter of 2022. Citi Research named Amazon as a key beneficiary of the 2021 holiday shopping season following a consumer survey report. Next week, the electric car maker Rivian will go public with an approximate ~60-70$ billion valuation. Amazon has ownership stake in this company, and will likely benefit if the valuation of this IPO gets hyped.

Apple (AAPL): We heard about a number of reported Apple Black Friday deals to come later this month, but it was the bullish quarterly earnings report from Apple supplier Qualcomm and the sequential uptick in revenue guidance from Skyworks that suggest the worst of Apple's supply chain woes may be over. During the week, Nikkei Asia reported Apple is shifting production to favor iPhones over iPads this quarter, something we confirmed in visiting several Apple Store locations.  

Advanced Micro Devices (AMD): While there was no company specific news this week, the upward move across tech stocks and chip ones in particular lifted AMD shares past our target price for 2021. While we continue to believe in CEO Lisa Su and her ability to deliver growth for AMD, we believe shares have gotten too much ahead of itself. Additionally, given the uncertainty of the Xylinx acquisition, we trimmed our shares and utilized them into newer positions for the portfolio. We would be buyers on future dips regarding this acquisition. 

Salesforce (CRM): There was no company-specific news this week

Cisco Systems (CSCO): Investment Thesis: We have a favorable outlook on Cisco and its positioning to the recovery in Enterprise IT spending after the company reported 10% YoY order growth in its fiscal third quarter. This result represented the strong demand the company has seen in nearly a decade, and it is being driven by substantial growth opportunities in hybrid work, digital transformation, and the cloud. In addition to positive industry trends, the company's ongoing transition from hardware to more software/subscription sales is a price-to-earnings multiple expanding opportunity. Not only does this transition expand margins, but the recurring nature of the sales also reduces the volatility of earnings. Lastly, we like how management consistently returns a ton of cash to shareholders. Share repurchases are typical quarter after quarter, and the current stock price offers investors an attractive dividend yield. Management has increased its dividend payout for seven consecutive years. 

Disney (DIS): Middle of the week we added to our Disney holdings ahead of the company's upcoming earnings report and the resumption of vaccinated international travelers into the U.S. On Friday shares got a boost after news from the Pfizer's Covid pill. We continue to see that resumption driving visitors to Disney's theme parks, hotels and restaurants as well as paving the way for favorable merchandise sales. It's not lost on us that Disney has prepared for this with recently announced theme park price increases. When Disney reports its September quarter results on Nov. 10, we expected an updated movie slate and content update for Disney+ but also management to address the recent closure of Shanghai Disneyland. 

Ford (F): Early this week Ford reported its October U.S. sales results fell just 4% year-over-year but climbed 12.2% month-over-month with SUVs having their best October in 21 years. EV sales for the month were up sharply to 14,062 vehicles, while SUVs rose 17.4% to just over 70,000 units. We'd note Mustang Mach-E retail sales jumped 76.9% for the month, with 21,703 vehicles sold year-to-date. Also this week, Ford shared it intends to repurchase up to $5 billion of its high-yield junk bonds as it works to pay off the debt that the company took on during the pandemic. The source of funds for that effort will be the $31 billion in cash on hand exiting the September quarter. Ford has been diligent in removing that leverage, with it falling to $23.8 billion exiting the September quarter and this next step should further improve its prospects of regaining an investment grade rating. The incremental reduction in interest expense should also drop more to the company's bottom line in 2022. The combination of the week's news drove F share higher leading us to prudently trim back the position even as we boosted our 2021 price target to $21 from $19. 

Google (GOOGL): During the week, GOOGL shares touched a new record high of $3,000 before trading off. Reports indicate Google is looking to get into the mix for the giant Defense Department cloud deal that will replace the $10 billion, $10-year JEDI contract that was terminated this past July. Contracts for this new cloud deal are likely to be awarded early in 2Q 2022. Also this week, Google Cloud struck a deal with CME Group (CME) to move core trading systems to the cloud. 

Microsoft (MSFT): During its Ignite conference this week, Microsoft shared that several key trends - hybrid work environments, hyperconnected businesses and every business not only becoming digitized but also requiring security - are the key drivers behind its cloud services business. The company also touched on its own Metaverse efforts, including that in the first half of 2022 it will be rolling out an update to its Teams chat and conferencing platform that includes digital avatars for users and allowing users to share PowerPoint presentations and Office documents and files in a virtual setting. Also this week, Microsoft and Virgin Money UK, the sixth largest bank in the UK, will partner on a cloud based platform that will see Virgin Money move workloads from on-premise data centers to Microsoft Azure. 

Nucor (NUE): During the week, Nucor announced additional price increases and the U.S. Trade Representative reportedly told steel executives she is very supportive of updating U.S. anti-dumping laws and looks to engage China on its industrial policies and unfair competition. Late on Friday (after the market has closed out for the week), the U.S. infrastructure spending plan was passed by Congress, and will drive incremental demand for Nucor's products. It would not be surprising if analysts come out and change their estimates for Nucor. Remember, analysts are forecasting a ~1/2 cut in earnings for Nucor next year. 

Paypal (PYPL): PayPal shares came under further pressure this week following Square (SQ) coming up short with its September quarter results, primarily for its Cash App and lower than expected bitcoin related transactions. While PayPal has a track record of beating its consensus expectations, its June quarter revenue fell short of expectations. We'll see how conservative the company's "soft" September quarter outlook that calls for revenue of $6.15-$6.25 billion and EPS of $1.07 is conservative is when PayPal will report its quarterly results on Nov. 8. In that report we will be paying close attention to growth in active accounts, transactions per active account and potential room for margin improvement as well as in-story payment initiatives and Merchant Services growth. 

Morgan Stanley (MS): While there was no company-specific news, we added to our position in MS this week. From a fundamental perspective, we continue to like the fee income nature of the asset management business, the operating leverage to be had from the robust IPO and secondary issuance market, as well as the M&A business. 

Wells Fargo (WFC): There was no company-specific news this week.

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