Watching The Wheels Go 'Round and 'Round

Watching the wheels go ‘round and ‘round.  Stocks closed out a losing week in the red as lawmakers could not agree on the much-needed, yet highly elusive economic stimulus package. Sentiment is rising, according to the latest U of M survey - we like that.

N O T E W O R T H Y

Paying a premium.  Have I mentioned how energetic the recent energy rally has been? Yah, probably once or twice in the past few weeks.  It has been rather impressive, rising for 6 consecutive weeks, adding some +41% in that time period.  The industry mirrored a similar move in crude oil, which climbed +29% over the same period.  The rally was spurred on by the flurry of positive vaccine news that came throughout that timeframe.  The logic is simple.  A vaccine means that we will be back to normal soon… economically speaking. That means driving, flying, and cruising.  All of that requires oil and fuel… finally, increased demand.  Remember, West Texas Intermediate Crude was trading in a nice comfy range between $50 and $55 a barrel last year after rallying throughout 2018, driven by hopes of an end to the US-China trade war… and big promises by China to buy lots of the commodity from the US.  Then came the COVID crisis and the lockdowns.  Gasoline makes up 45% of a barrel of crude oil, followed by 25% diesel, and 9% jet fuel.  So, 79% of a barrel’s distillate is reliant on transportation which, for all intents and purposes, declined significantly with the onset of the virus.  Not shockingly, the decreased demand sent crude into a spiral, hitting a low of around $27 a barrel by mid-April. You may remember that crude oil futures actually went negative for a bit.  Indeed, sellers were willing to pay buyers to take delivery of the supply as storage was running out.  Crude climbed out of the rut slowly as some parts of the economy came back to life and producers cut supply.  As summer faded and COVID cases began to rise once again, fresh lockdowns tempered the rally, bringing prices from the mid-forty range into the 30’s.  Energy stocks followed a similar path, bottoming out for a second time in late October.  The pivot point for crude and the energy sector came with the first positive vaccine announcement from Pfizer last month.  The news sent the commodity and sector into a steep rally.  The vaccine is here… but so is the virus.  The best case scenario has enough Americans vaccinated by Fall 2021 to achieve herd immunity. Restrictions are a real thing and are expected to persist throughout the next year.  That said, has the energy sector gotten ahead of itself in the recent rally? It is too early to tell, but investors are desperately seeking potential gains after sidelining the usual-suspect FAANG stocks.  It is natural to look at sectors that appear to be cheap… like energy and financials.  A good gauge for investor eagerness is their recent willingness to buy anything which has the letters “I”, “P”, and “O” after it.  One can’t help but notice the significant first day run-ups of the past few weeks’ IPOs.  Most of them have yet to achieve any earnings and their projections appear to be… well, ambitious to put it lightly.  DoorDash, which got a lot of press last week with its public debut, ran up +85% on its first day.  The company, which has not yet been profitable has a 37.5 price to book ratio (I use that because there is no “E” to use for a more traditional PE ratio). Apple, which earned $57.4 billion in the last 12 months and is the largest company (by market cap) in the US only has a price to book ratio of 31.81.  Investors' willingness to pay such a dear price premium for an unproven entity shows just how aggressively they are seeking new ideas… or maybe Apple’s stock is just underpriced.

THE MARKETS

Stocks slipped on Friday as Congressional lawmakers could not agree on a new stimulus package.  The S&P500 slipped by -0.13%, the Dow Jones Industrial Average added +0.16%, the Russell 2000 Index fell by -0.57%, and the Nasdaq Composite Index fell by -0.23%. Bonds rose and 10-year treasury yields slipped by -1 basis point to 0.89%.

NXT UP

- The Senate is in Session while the House is off today. Lawmakers will get back to work on a potential stimulus package. The Electoral College will meet today and formally vote for President-elect Joe Biden.

- This week’s economic numbers include Industrial Production, Retail Sales, flash PMI’s for the US and abroad, Building Permits, Housing Starts, and the Leading Index.  The FOMC will announce policy and hold a press conference on Wednesday. Please refer to the attached economic calendar for details.

daily chartbook 2020-12-14

econ numbers 12_14