The Weekend Edition # 13

Welcome to another issue of the Weekend Edition. 

Thank you to all who’ve read and subscribed to the newsletter this week!

Now, let’s grab a cup of coffee ☕️, while we take a look at what happened in the markets this week. 

Here’s what we cover:

• Market Recap - Confirmed Uptrend?

• Chart of the Week - Clean Energy ETFs

• Earnings of Week - BlackRock, Alcoa, JP Morgan, Taiwan Semi, Domino’s, Delta Air, Del Taco

• Around the Markets - Gitlab, Stripe, Boeing

• The Week Ahead

• Closing Thoughts - allocation to Real Estate

Let’s dive in ⬇️

Market Recap - 11 Oct 2021 - 15 Oct 2021

Finally, the week closes in green across the board.

We had CPI numbers come out higher than expected on Monday and the FOMC minutes that more or less confirmed a taper by December and a fast one at that, ending in 7 months. The energy crisis persists, inflation persists yet, the market seems to have turned around.

Earnings season started with most of the banks reporting blow out quarterly numbers. Add to that a nice set of PPI & Retail Spending numbers and we were off to the races. The market seems to have moved into an uptrend since Thursday. Rates have settled back down nicely and the Vix is also down for the week.

Is this the beginning of another rally? Maybe, but it sure will be a choppy rally. The banks have outperformed but, I still see a lot of negative issues emerging from earnings results in the next few days. We will see more of the same themes emerging and this time getting stronger with some of the companies:

1. Supply chain pressures + higher commodity prices + wages  ➡️ Rising costs

2. Can these costs be passed on or are margins getting compressed?

3. Debt and Cash sufficiency - Balance Sheet Strength

4. Spending and Demand  ➡️ How is that coming back? Is Demand outstripping Supply? Are companies having to price their products higher?

5. ESG considerations

As I look through earnings this quarter, this is what I will be looking for and the strategies the companies are employing to deal with these issues.

Chart of the Week - Clean Energy

We never do anything about a problem until it becomes urgent. That’s basic human nature; you don’t buy home insurance until you see your neighbor getting robbed. Well, over the last couple of weeks, with the energy crisis hitting us hard, and the price of oil soaring, people have been turning their attention to the Clean Energy players. And what better way to get exposure to a sector, than through ETFs!

As you can see, October has been a hot month for these ETFs. The money flow has been positive for all except FAN (the Wind Energy ETF). Most of the companies are mix of clean energy, with TAN and ICLN focused on Solar. Both QCLN and PBW include TSLA so that skews the performance a little. ACES is managed by Alps, a boutique investment firm and I don’t know much about them but, looks like they’re faring quite well.

Last year was a fantastic year for these ETFs. Full year 2020 performance for these ETFs were all up in the triple digits, except for FAN, which seems to be a little out of favor. The best performer during 2020 at +234% was TAN, Invesco’s Solar ETF.

Granted, this year has not been great for these ETFs. They’ve all had negative returns. But,

1. I think more and more companies are going to start thinking about exposure to the clean energy sector and,

2. More money managers will allocate clean energy ETFs to portfolios (as was clear from the BlackRock conference call earlier this week).

Given the dismal performance, this may be a good time to get in at a decent price. This is not investment advice, just a friendly alert for a sector to watch!

I always like to know what’s in the ETFs I buy, not just the top 10 holdings. I use Atom Finance for this because they give me a full list of all the stocks. Typically, I research every stock in the ETF, even if it’s just looking at high level performance and I’d recommend you do the same.

Earnings of the Week

As I said earlier, this time I’m looking at earnings through the themes I highlighted earlier. So we’re going look less at performance metrics and more at macro effects & strategy.

Supply Chain & Sourcing

• Alcoa discussed a shortage of Magnesium and Silicon, which is essential to the production process. 70% of the world’s Magnesium and 80% of Silicon comes from China, and this is creating massive pressure. Alcoa isn’t worried but it’s certainly an issue for the industry.

• Taiwan Semiconductor stated that the supply chain for autos is complex and they contribute to only 15% to auto ICs (integrated circuits). They see wafer shortages easing by the third quarter but the end of OEM (original equipment manufacturers) shortages will need a few more quarters. They added “we expect TSMC's capacity to remain very tight in 2021 and throughout 2022. This is because of our technology leadership position.” So this chip shortage is not going to be resolved soon.

• Domino’s saw a 1.9% decline in US same-store sales, breaking their 41-quarter growth streak. The primary headwinds were lower ordering because of the challenging staffing environment, with shorter store hours or customer service. They’ve also see challenges in finding drivers in particular for delivery services. Del Taco has increased wages and reduced operating hours as well to deal with staffing challenges.

• Delta Airlines is bringing back 8000 people to work this year.

Inflation, Margins & Pricing

• Energy consumption for Aluminum production is enormous and most of the European smelters are unable to operate under these conditions due to the higher energy costs, reducing worldwide aluminum output.

• For Domino’s input cost pressures were more due to staffing than commodity costs which they have been able to control relatively well given their bargaining power.

• Del Taco has increased pricing across their menu by 5% to cover food inflation costs of 4%. They expect inflation costs to increase to 5% in Q4 and menu prices to increase in tandem to 5.5%

Demand, Spending & Pricing

• Demand for Aluminum has dropped off in China but, has picked up in other parts of Asia and around the world. Aluminum prices have soared due to elevated input costs and lower supply but, since the majority of Alcoa’s sales are not spot, they haven’t been passing the cost onto customers yet. They have started conversations around pricing for 2022.

• Domino’s also cited lower stimulus spending as impacting their sales. Domino’s may consider menu price increases in 2022, if cost pressures persist.

• Delta is seeing flights pick up drastically. They expect October sales to be restored to 65% of pre-pandemic levels, and Nov-Dec to be at 75%. This is good news for travel. 

ESG

• Alcoa talked about moving their smelter to clean energy. They’ve got a target of net zero carbon emission and they’re determined to fulfill.

• BlackRock spoke extensively about their “green” initiatives and the clean energy ETFs - ICLN in the US and INRG listed on the London Stock Exchange.

Other Notable Quotes:

BlackRock - Larry Fink: “society needs to rapidly invest in innovation to offset inflationary pressures associated with the transition to a net zero economy. We need to make sure that we are pushing just as hard on the demand side as we are on the supply side. Otherwise, we risk supply issues that drive up the cost for consumers, especially for those who can least afford it.”

JP Morgan - Jamie Dimon - “I'm not focused on inflation. We simply are pointing out, well, first of all, you have inflation. It's 4%. It's been 4% now for the better part of a couple of quarters. And in my view, unlikely to be lower than that next quarter or the quarter after that. The only question is, does it start to ease after that with supply chains and wages, more people looking for work. Or does it continue to go up? And of course, we prepare for probabilities and eventualities.”

Goldman Sachs - David Solomon - discussed 4 key challenges - wage inflation; the Delta Variant uncertainties; economic policy surrounding the infrastructure deal, debt ceiling and taxes; US-China relationship.

Around the Markets

We’ll keep this brief:

• Gitlab (GTLB) started trading on Thursday Oct 14, 2021, opening at $94 well above their increased pricing of $77. They raised $810m in their offering and the stock closed $115 on Friday. While the company is overvalued at these prices, I still they are worth a look once the prices settle.

• Payments company, Stripe, has announced that they are re-entering Bitcoin and is the process of building out a “crypto team”. Stripe announced plans for a listing in early 2022.

• Boeing (BA) - JPMorgan analyst Seth Seifman lowered the firm's price target on Boeing to $265 from $270 and keeps a Neutral rating on the shares. The company's Q3 delivery report came in below the analyst's forecast and so his 2021 cash flow estimate came down. In other news, Boeing is also struggling with yet another set of issues with their 787 planes and their former Chief Technical Pilot has been indicted for fraud on the 737 Max debacle.

The Week Ahead

• More earnings…(I’m already a little dizzy!)

• Economic Calendar - Housing Stats

• Bitcoin ETF may launch on Monday!!

Closing Thoughts

Interestingly, the second best performing sector this week was real estate. XLRE hasn’t performed poorly but, with inflation going up I would’ve thought more people would be putting their money into alternative asset classes. I suppose the gains in real estate still pale in comparison to commodities and stocks.

But, the landscape maybe changing as inflation is not being seen as transitory anymore and commodity prices are volatile. BlackRock said: “As they reach for yield, institutions are turning to BlackRock for private credit, real estate and private equity solutions.” So, it may be time to start looking at some REITs.

Here’s wishing you a happy weekend and safe investing. 

Sincerely yours,

Ayesha Tariq, CFA

There’s always a story behind the numbers

None of the above is Investment Advice. I may or may not have positions in any of the stocks mentioned. I have a long position in $JPM, $GS, $BA as of the date of publication of this newsletter. I have no affiliation with any of the companies that are mentioned.