The Week Ahead: The Effect of Our Changed Habits

I'm Chris Versace Tematica as Chief Investment Officer in joining me to break down the last week and the coming week to put it all into perspective for you is my pal Lenore Hawkins Tematica as chief macro strategist Lenore?

Lenore Hawkins  00:25

First off, how about we look at what happened with the end of the first quarter of 2021?

Chris Versace  00:31

How about we let's do that. Let's jump right into it. I know we got a lot to cover. And even though it's a holiday week, so let's go.

Lenore Hawkins  00:38

Okay, so the first quarter of 2021 it closed is a positive week for the US. But just like the majority of the days, it didn't really end on a positive note. The s&p 500 did finish the day in positive territory. But last hour set off like we've been seeing all along last quarter, clip the games pretty solidly. So when you look over the quarter, how weak is the last hour of trading really been? Well, throughout the first quarter, despite the s&p trading higher on 54% of all trading days, the last hour of trading was only positive 31% of the time, kind of interesting trend.

Chris Versace  01:16

So how do we finish up with a quarter and I think it's gonna be very different than what we saw in 2020. setting the stage 2020 was, I mean, arguably, all about the NASDAQ. And that's very different this time around.

Lenore Hawkins  01:30

Big tech was all big tech and q1, not so much. q1 saw the return on the small guy with the Russell 2000 gaining 12.4% in the first quarter. In comparison, the NASDAQ composite was only up 2.8%. The Russell did so well the 51 year change is up nearly 100%. But the NASDAQ composite, it's still pretty good in there. It's up 73.4%. Over the past year, the s&p 500 in the first quarter gained just shy of 6%. And for the whole year, the s&p 500 is up about 56%. Now what I think is really interesting, if you look at the equal weight, versus the equal weight, s&p versus the market cap weight, which the the when you look at the s&p that's just standard, s&p, it's actually market cap weighted, right. And when if you look at the equal weight, right, so that's going to take it's going to dilute those really small, or sorry, those really big names, they're not going to have as much of an impact on returns. And names that you don't really think about that much. Those are the those guys will have more of an impact. In the first quarter, the equal weight was actually much stronger than the market cap weight. s&p was up 11%. Where as the market cap weight was up only 5.8%. So does that. Does that fit with what we saw with the NASDAQ right now? Is that versus the Russell because the NASDAQ was seeing a lot of those big high flyers? Does it does that tell you that the move in the market therefore was a little more broad based? Based on the equal weight?  Yeah, it was less led by those big names the Fang stocks that you know that we all heard about that are we're on such a tear, we're now starting to see the little guy starting to perform. Well, why don't we shift into sectors and kind of dig a little deeper into that? Why don't you tell us who were the high fliers. And then let's talk about just for a second who might be which sectors might be poised to do a little better. In this new quarter. Yep. The big winner, hands down was energy up just under 30%. financials. Obviously, when you've got rising interest rates, financials are going to do well. But they did about half as good as energy. They were at 15.4% and then industrials. Well, everything started to open up, we're hearing all about manufacturing being so strong. That was up 11%. Whereas the weakest sectors were consumer staples, not a huge surprise of half a percent infotech big surprise because that infotech right, that took a completely switched instead of being the leader now it's a laggard at 1.7 and utilities actually beat tech up 1.9% but obviously, you're gonna get hit with interest rates. Right.

Chris Versace  04:11

Right. So I you know, I think just to put something in perspective, I think energy there were potentially some one time items in there during the quarter that helped pop it up. Same thing with financials. I agree with you with rising interest rates, but remember to the Fed is allowing banks and other financial institutions to reinstitute dividends and buybacks come June so they're they're trading up on that excitement, consumer staples. I think that as the Biden stimulus or relief payments hit, I think we'll see that pick up a little bit. I agree with you 100% on information tech, and I think some of that is part of the the negative side of the reopening trade or some of the darlings of last year, your zooms are kind of giving back and utilities, you know, other than that, one week of severe February winter storms. It's been a really To be mild winter.

Lenore Hawkins  05:01

It has. And with that combined with rising rates, that's not going to be good for the utility. What I did find, though kind of a big macro picture that's interesting is to see what's going on with the US dollar right now, the US dollar has actually been gaining strength, and that is a double headwind for emerging markets. Because with the US dollar gaining in strength and rates going up, that's a double headwind for those emerging markets. And so those guys, we've been waiting to see that because eventually, em, they've been struggling for so long, that's going to be a great investment, but not yet.

Chris Versace  05:38

So one of the things that we've noticed, too, over the last couple months is the stock market has, you know, powered ahead coming out of the early stages of the pandemic, is smaller investors are kind of, you know, wanting to get once again, be back in the market, you know, and while some of us would say, Oh, that's, you know, that can be a sign of a top. You know, there's even talk about, you know, taking pieces of the relief checks and sticking it right in the market. But there's another gauge to watch. And I know, it's one that you you've been talking about, which is options activity.

Lenore Hawkins  06:12

Yeah, it's really interesting to see is that options volume over the past 18 months was something we've never seen before. It was mostly all about call purchases, and most of this was buying by small investors. And that's thanks to a lot of easier ways for just average Joe to get involved in trading. That's, you know, we heard a lot of that with what was going on with GameStop. Right. But that boom and option trading has really been faded with total options, volumes, about half of what they were at the peak. And that has had a really interesting impact on the VIX, because as the volume of options falls this dramatically, the VIX has been falling as well. And that's if you kept everything else equal. If you really dropped the volume of trading, it has an impact on effect next. So that's something to keep in mind, noting that the VIX dropped significantly this past quarter.

Chris Versace  07:05

Now it did you're you're absolutely right. I mean, I think from a fundamental perspective, we can attribute that a little bit to rising vaccines little more comfort with the reopening. I think we're gonna see how that pans out coming out of the Easter holiday weekend, which you know, in some parts could be another gathering, II super spreader event, which is you know, given where you are lockdowns are still within.

Lenore Hawkins  07:29

Yes, over here. In a way we are still in draconian lockdowns, good times.

Chris Versace  07:36

Well, let's let let's quickly talk about some of the

Lenore Hawkins  07:39

lockdown, then Apple leisure, were talking about earnings from last week.

Chris Versace  07:46

Well, we could do that I think you're kind of hitting on Lulu lemon. So we'll start with that. No surprise, they had a wonderful quarter direct and consumer net revenues increased 94% year over year, that's just over half of their net revenue for the quarter up from about almost a third a year ago. So you know, clearly benefiting from that shift to digital commerce. But But I think was far more interesting is what's going on with their mirror strategy. And mimir is literally just that it's a mirror that you use to do interactive workouts with and some just some of the quick tidbits here and I'll save the real juicy one for last. You know, they are counting on this to be a big contributor or a bigger contributor. They're seeing revenues grow 50 to 65% year over year to roughly 250 275 million. So a big investment with a big payoff for them, they do not think that the workout from home trend is going to end anytime soon. So much so that they're adding more production studios, they're adding more classes, more instructors. And they've added two interesting features. One is the community camera feature. So people who are working out can see the instructor during the workout. Interesting, but not as interesting as this one, which they call the face off feature, which means that two people working out can go head to head in a class. Now, I don't know about you, but you know, when I was on it, when I would be on a treadmill, I would pick someone out around me who is working out. And I would be like, I'm going to catch that person.

Lenore Hawkins  09:19

So this just screams to me a major growing pole for me because then you just do not want me to face off against another person and have to compete because I'm gonna push it way too hard. But it's interesting, they're doing that because that's a lot of what we've seen with a lot of these work at home. What I want to know though, is them a versus a, what is it? Total, right total private company, they just closed another round of funding, it'll be really interesting. So we don't have as much information on total given that it's private. It'd be interesting to see how those two go head to head because total also is similar. It's got the mirror but what total adds is two pulley arms were You've got like, you can basically do pretty much any kind of exercise you want. And it is able to give you weights on those arms. Right? electronically, right, not with actually a weight stack. So it'll be, it'll be interesting to see where these go because the mirror is a bit more of a robot kind of thing versus tonal is more weight.

Chris Versace  10:18

So one of the things I like about this, and it's not something we've actually discussed in public, but here it is, I love all these machines, for the simple reason that the amount of data that they are going to collect and share and put across the network is going to be huge. And that that sits right in line with our digital infrastructure and connectivity index. So but so I think it's great.

Lenore Hawkins  10:43

The one the one thing we know is that while we don't know which one of these is going to end up being the killer thing, and like three years, what we do know is they all mean more and more data, correct. Alright, let's

Chris Versace  10:55

Let's keep moving. Online pet supplier, chewy again, crushed it, just like we were saying, with Lulu lemon, it's the accelerated shift towards digital shopping just another excuse me another proof point. But I can attest to this as an owner of three dogs. The auto ship customer is where it's at. sales were up 46% year over year to 1.4 billion. That's roughly 68% is auto ship. So to use that language, from other industries, that's a huge percentage of recurring revenue, either every month or every quarter, depending if you're getting food, pet supplies or something else. So that's, that's just huge. Certainly,

Lenore Hawkins  11:38

I understand that maybe going forward. PayPal is gonna help you pay for those toys, maybe using little crypto.

Chris Versace  11:46

That is absolutely true. They're added they added checkout with crypto, which will automatically appear in your PayPal wallet if you want to use cryptocurrencies and will automatically convert the cryptocurrency holdings to fiat currency at checkout, which is pretty slick. You know, that that was one of the huge pushes that we saw. Regarding crypto VESA also announced that will allow the use of cryptocurrency, the USD coin to settle transactions on its payment network as well. And for those who may not have heard of the USD coin, it's a stable coin cryptocurrency whose value is pegged directly to the US dollar. Now Lenore, talk to me a little bit about what micron is saying. And then I want to talk about us silica on the inflation front, just because I think with silica with us, silica announced really speaks to what's been fanning the flames of inflation and helping prop the tenure up over the last several weeks.

Lenore Hawkins  12:42

Well, Microsoft micron had better than expected earnings. They're both our APS and our revenue Rose 30% year over year, that was matching consensus forecast, their DRAM revenue jumped 44%, year over year, while they ndnd revenue Rose 9%. And the company noted that the this is I think, where you're going with the SEC, driven by artificial intelligence and five G, as well as, quote, innovation across the data center and intelligent edge. Absolutely right.

Chris Versace  13:13

I love it. I realize it's little patting ourselves on the back for the digital infrastructure product. But you know, we can't do it here. Where can Where can we do it. The other thing that we heard last week was more auto shutdowns. Ford once again, touting that its production lines, and its profits are going to be impacted by the automotive chip shortage. But that's actually again positive. Last week, we talked about the big magnet Intel was making $20 billion. And then this week, Taiwan semiconductor says it's going to spend get this 100 billion with the D dollars over the next three years to expand its chip fabrication capacity. And I love it again, not not to be self serving. But this is what Taiwan semiconductor said, quote, We are entering a period of higher growth as the multi year mega trends of 5g and high performance computing are expected to fuel strong demand for our semiconductor technologies in the next several years. So I just need a day to day to baby. I. I simply love those proof points. All right. Talk to us strap on your economist hat us silica and what it means. Yep, so they announced because of ongoing and significant inflationary pressures from raw materials, packaging, logistics and maintenance expenses, they announced a price increase beginning on May 1 for some of their products up to 15%. Now, what do you think about that?

Lenore Hawkins  14:47

If man, skyrocketing prices are going to go up? I know you're not there. I'm not calling inflation.

Chris Versace  14:55

Okay. All right. That's fine. That's fine. All right. So that was last week this week. We're getting after the Easter holiday. What do we have? Well, we've got Greenbrier which is railcar manufacturer we're going to see what really their order and backlog levels are lamb Weston, which I believe is the big french fry company. Their comments are going to be rather interesting on the opening of restaurants and the like MSC industrial, this is going to be a great fit for the industrial economy. Simply good foods that ties with our cleaner living investment theme is demand continuing to pick up our people opting for healthier alternatives.

Lenore Hawkins  15:35

And speaking of healthier alternatives, constellation brands reporting on Thursday, be interesting to see because I think during the pandemic, one of the surprising things was that the hard alcohol consumption went up much more both wine and hard alcohol went up significantly. But hard alcohol went up much more significant. It'd be interesting to hear what their outlook is now that we are we are seeing the light at the end of the tunnel.

Chris Versace  15:59

Agreed and with that when conagra reports are they starting? What's their expectation? Do they see a more normalized trend, video predominantly frozen fruit for frozen food portfolio compared to what they saw during the pandemic, but you know, and confirming whether or not we all might have put on a couple pounds during the pandemic. Let's hear what Levi Strauss has to say about their outlook for denim demand over the coming months. That's why we got the lulu lemon right?

Lenore Hawkins  16:27

One puts it on the other one takes it off.

Chris Versace  16:30

Well, how about we try to be fair, I think those yoga pants help people hide it a little bit too.

Lenore Hawkins  16:36

I mean, they're not for wine drinking. So how about we take a quick look at the economic data from last week. So Thursday of last week, we had great PMI data out of Europe, which pretty much everything was higher than expected. The Eurozone as a whole hit a record high. So that's all great on the manufacturing side, not a surprise, given, you know, really tight lock it up, and you're gonna get, you're gonna get production that's a lot stronger than expected. Now, I'll point out though, that China saw their manufacturing disappointed, actually to the downside getting kind of close to flatline. And also keep in mind, we're looking at this pain on my data. It's a coincident indicator, not a leading indicator. What I thought was also really interesting last week was the Thursday, the weekly jobless claims. After the week before we'd seen a new low, there was expectation that we would see a bit of an increase, right, because we saw this record low, we were going to have a higher one, it was going to increase about 17,000. It actually Rose 61,000 to 719,000 for the week. And to put that in context. Prior to the pandemic, the highest we've ever seen ever was 695. And now we're pretty much constantly over 700.

Chris Versace  17:59

Now, as we're recording this before the march employment report comes out. I will note that the I think over the course of the week, the expectations for that report have kind of come down I think early in the week, there were some forecasts for like, like a million jobs being created. And I and this morning before the weekly jobless claims. I think the consensus range was 620 to 680,000 jobs created in March. I suspect that number is going to come down.

Lenore Hawkins  18:28

Yeah, they because they the ADP private payroll report for March, which we got last Wednesday, it came in slightly below expectations and things just taking a step back to you. One of the things to be looking at with this is that a lot of the jobs that we're seeing be added are actually lower paying jobs, which is not good for the economy overall, your higher paying jobs and replacing them with lower paying jobs. Right.

Chris Versace  18:51

But does this in some way confirm that the reopening is happening?

Lenore Hawkins  18:56

It the reopening is happening? That's definitely there. But the reality check is just how cool how long is it going to take for us to get back to where we were? And even more importantly, how long is it going to take for us to get to where we would have been had we not had the pandemic right, because it's one thing to get back to your ago levels. It's another thing entirely to get back on the path that we were. If we were to look at just marches pace for job additions, it's going to take another 17 months to get back to where employment was before the pandemic. And it's even more so it's gonna take more like 14 months to get back to where we would have been had the pandemic job 10 line not been hit

Chris Versace  19:43

on the job like way over. I think what you're saying is that that Biden relief check is not the reality check you're looking for. Yeah, now

Lenore Hawkins  19:50

Exactly. People want that. What's interesting, putting out that that check. So the Atlanta fed one more time dropped its estimate for q1 GDP. keep in mind at the start of march estimate for the first quarter was at a 10% growth then it was dropped to 8.3 in the middle of march well a week prior or week after that it was down to 5.6 and now atlanta fed is saying 4.7% and that is after uncle sam has doled out about $2.8 trillion in just four months which is about 15% of gdp

Chris Versace  20:24

hmm that's crazy that is crazy now you were telling me something about general mills

Lenore Hawkins  20:33

yeah um so going through this announcements or new reports what we're hearing seeing what's everyone's saying what are these these company executives saying when they look out general mills is actually thinking that dining out is going to recover more slowly than people are expecting in fact the ceo said i would envision an environment where demand is not as high as it is today for in home eating but it's higher than it was pre pandemic and i think some investors and some analysts feel as if the volume is just going to go snapping back to the way it was before the pandemic and what we've seen outside of the us and what we're currently seeing in our current channel will lead us to believe that any return to normal will be more elongated and that the return to normal will eventually into the return to a normal that will eventually be different

Chris Versace  21:17

that to me says like they're banking on you continuing to eat cocoa puffs that's what that sounds like

Lenore Hawkins  21:22

well it's like we've seen with a lot of things it's we're never going back to 2019 exactly you know the work from home some form of working from home or working near home is going to continue the exercising from home more that is going to continue and the dining out versus dining in we've all gotten to be better chefs

Chris Versace  21:41

true but i you know there were some comments from the landry's ceo this week they're they're a private company they own organs and alike and they were saying that they're their business is booming and i think some of that might be because people want to get out but i also think that that high end dining which tends to be a little more insulated will probably come back sooner than day to day regular eat out like you might to go out to iop for breakfast or something okay now biden what about biden biden biden

Lenore Hawkins  22:12

yeah so i think looking at the biden plan and there's a lot of details to get hashed out but one of the things to keep in mind if this thing is looking more likely to pass is while that 2.2 5 trillion in spending is going to come out over an eight year period the plan is to hike corporate tax rates from 21 to 28% immediately and that's going to really hurt earnings that's a pretty significant increase it will cut profits by about 150 billion for the economy per year for the coming decade

Chris Versace  22:43

well here's the other thing about that if the corporate tax hike is immediate it means that you're going to have like you're saying company's gonna have less but let's talk about the timing for these infrastructure projects i think we learned you know what was it six eight years ago no such thing shovel ready projects which means that it's going to take time to get approved time for the spending to be unleashed time for the actual projects to be built and then time for them to be done to realize the benefits

Lenore Hawkins  23:17

yeah exactly the time to actually for that spending to affect the economy in a positive way it that's elongated and the time for the benefit of having that better infrastructure that's really far out but the pain is today and i think that that is going to be a really tough one to pass because you're saying i'm still dealing with a pandemic i'm going to actually hurt the economy today in the middle of a pandemic with a promise that at some point in the future it's gonna be better that's gonna be a tough call yeah

Chris Versace  23:44

well look i don't think we i think we agree that something needs to be done on infrastructure i think the replace the rock and the hard place for biden is that he has to explain how to pay for it after all the stimulus that's already been unleashed

Lenore Hawkins  23:57

not going to be easy so what do you look for

Chris Versace  24:00

well i think we can agree more to be had on this in the coming weeks

Lenore Hawkins  24:04

this is not going to be in talking about like slim margins and house and senate this is going to be it's going to take a while this is not something that's going to get passed easily and quickly paper thin is my prediction so you're about to see what are we looking for

Chris Versace  24:16

this week in terms of economic data look we're we're we're gonna get the follow on to the manufacturing pmi that you were talking about so we'll get a lot of services data this week principally from the for economic horseman that's going to be japan china the eurozone in the us and then really after that the only report that i'm really other two there's the february consumer credit report because we want to see how how consumers are faring but the other one is gonna be the march ppi report just to keep a tab on inflation is it really running hot or not it wasn't there an app like that my heart does not

Lenore Hawkins  24:56

swipe left swipe right i can't remember

Chris Versace  24:58

which swiping i don't know you You seem to go there pretty quickly.

Lenore Hawkins  25:02

Also looking at inventories, because we have been hearing from companies that were shifting away from this whole just in time manufacturing more towards a just in case. We're seeing so much disruption with the overall supply chains.

Chris Versace  25:21

Well, I think that Lenore brings us to where we get to say that's the week ahead

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