Don’t miss what’s lost in the Noise…
The Federal Reserve has been consistently reminding us that actual inflation prints are what they are focused on and they are expecting inflation prints to be higher in the months ahead and they are pretty sure that those higher prints are transitory.
Despite the general weakness of tech stocks vs value stocks in recent weeks, the stock price of tech giants, Alphabet (Google) and Facebook made new all-time highs last week. This is happening in the environment where most of popular press is talking about rotation from high growth tech stocks to steady value stocks as the economies around the world reopens.
US Inflation data will be released later today, and the factor that’s been weakening risk sentiment of late is higher US bond yields due to fear of rising inflation. The Federal Reserve has been consistently reminding us that actual inflation prints are what they are focused on and they are expecting inflation prints to be higher in the months ahead and they are pretty sure that those higher prints are transitory.
As such, should actual prints fall short of expectations (expected 2.5% year on year rise), fear of inflation could be soothed fairly quickly, and the tech sector could regain their lustre. Those that are making new highs in spite of the weak sentiment will likely power ahead with a vengeance.
Inflationary Pressure Builds
The disinflationary and inflationary camps have been making good arguments against the effects of unprecedented fiscal spending (leading to growth in broad money supply). A main argument of the disinflationary proponents is that there is still a lot of debt in the system and that the stimulus cheques will be used to pay debt, instead of being spent in the economy. Hence the money goes back into the banking system, leading to disinflation, as the money is not being circulated in the economy.
We believe that the growth in the broad money supply (monetary inflation) is rather substantial, and there is risk that it is enough to overcome the disinflationary structural trends (debt, demographics, offshoring, and technology) for a while as we shift out of various state partial lockdowns, especially if a big infrastructure bill is also passed in 2021 or 2022.
As the US pursues a loose fiscal and loose monetary policy, we suspect that the release valve will be a much weaker USD and assets like Bitcoin and Big Tech (companies with fortress balance sheets and pricing power) will do very well in the environment that is to come.
US Inflation data, an upside surprise in inflation (expected +2.5% YoY) could reignite fears of sooner than expected Fed hikes and push bond yields higher.
1. Currencies : Keep short USD and long NZD, & CNH. Stay patient.
2. Commodities : Uranium — Extremely Bullish. We are expressing this view through equities that are in our TrackRecord Model Portfolio.
Key risks: Spikes in US bond yields may lead to a stronger USD and weaken risk sentiment.
3. Equities :
Equity Index: : Long Nasdaq futures. Stay long.
Single Stocks: Fundamentals continue to favour the continued rally of risk assets in the weeks ahead. Don’t miss out on the asymmetric opportunities we have highlighted in our TrackRecord Model Portfolio.
Key risks : Higher US yields and inflation fears are the key risks.
WHAT HAPPENED YESTERDAY
As of New York Close 12 Apr 2021,
- Fed Chair Powell said in a 60 Minutes interview that forecasts for U.S. economic growth and jobs growth are looking strong. St. Louis Fed President Bullard told Bloomberg that the central bank will not consider tightening policy until about 75% to 80% of the U.S. population is vaccinated. According to the CDC COVID Data Tracker, about 22% of the U.S. population is fully vaccinated.
- $207 billion in new debt was issued in the Treasury market, which the market absorbed without too much trouble (Smooth auctions of three- and 10-year notes on Monday kept a move higher in U.S. Treasury yields in check as the market looked ahead to today’s 30-year bond offering). The 2-yr yield increased 2 basis points to 0.18%, and the 10-yr yield increased 2 basis points to 1.69%. The U.S. Dollar Index was little changed at 92.09. The currency market continues to trade in a relatively tight range for now.
- S&P 500 (+0.02%) eked out an intraday record high on Monday and it closed fractionally higher in a tight-ranged session as investors waited for Q1 earnings and economic data later in the week. The Nasdaq 100 (-0.2%), Dow Jones Industrial Average (-0.2%), and Russell 2000 (-0.4%) closed with modest losses on a relatively subdued trading day.
- Tesla (TSLA 701.98, +24.96, +3.7%) and NVIDIA (NVDA 608.36, +32.36, +5.6%) were some of the more influential gainers yesterday, helping to make up for the lacklustre price action in the broader market. TSLA was upgraded to Buy from Hold at Canaccord Genuity. NVIDIA raised Q1 revenue guidance above consensus and announced several new product offerings.
- Shares of Intel (INTC 65.41, -2.86, -4.2%) and Advanced Micro Devices (AMD 78.58, -4.18, -5.1%) fell noticeably on the increased competition with NVIDIA. The Philadelphia Semiconductor Index declined -1.1%.
- In other corporate news, Microsoft (MSFT 255.91, +0.06, unch) agreed to acquire Nuance Communications (NUAN 52.85, +7.27, +16.0%) in a $19.7 billion cash deal. Uber (UBER 59.44, +1.76, +3.1%) reported its highest monthly total company gross bookings in March.
HEADLINES & MARKET IMPACT
Notable Snippet: U.S. President Joe Biden met with executives from major companies on Monday to discuss the global chip shortage that has hit automakers and spurred Intel Corp to announce it plans to make chips for car plants at its factories in the next six to nine months. During the meeting, Biden said he had bipartisan support for legislation to fund the semiconductor industry. He previously announced plans to invest $50 billion in semiconductor manufacturing and research as part of his drive to rebuild U.S. manufacturing under a $2 trillion infrastructure plan.
THEMATIC CONTEXT: “Chip suppliers cannot keep up as software eats the world. This is a key theme going forward and some chip companies have the weight and influence of “Big Oil” companies like Exxon Mobil during the era of peak oil.” — 10th Feb 2021
COMMENTS/IMPACT: The Semiconductor race is one that the US cannot afford to lose, for chips will be the new spice that advanced civilizations will be built upon. Expect more fiscal spending directed at this sector and supertrends in selected Semiconductor companies. Find out what semiconductor companies we’re invested in! Sign up for our community membership to gain full access to our Model Portfolio!
Notable Snippet: The United States reported an 8% rise in new cases of COVID-19 to 490,000 last week, the fourth week in a row that infections have increased, according to a Reuters analysis of state and county data. For a seventh week, vaccinations set a record, with an average of 3.1 million shots given per day last week. As of Sunday, 36% of the U.S. population has received at least one dose and 22% was fully vaccinated, according to the CDC. New Hampshire became the first state to give at least one dose to more than half its residents.
Notable Snippet: U.S. Senator Josh Hawley, a Republican who has been a staunch critic of Big Tech, said on Monday he has introduced a bill that would ban all mergers and acquisitions by any company with a market value greater than $100 billion, a category that includes the five biggest U.S. tech companies. Hawley, who accuses the biggest social media companies of stifling conservative voices, also criticized other sectors, like pharmaceuticals, which he said were too concentrated and held too much market power.
Phan Vee Leung
CIO & Founder, TrackRecord