Behind The Street - Issue #9
December 27, 2021
December 27, 2021
Behind The Street Newsletter
Merry Christmas to all and to fresh record highs for the S&P 500. The S&P closed todays trading at 4,791.18 breaking out from a month-long digestion that started on November 5, 2021. The Dow Jones Industrial Average is not far behind, just 250 points away from new record highs closing today’s trading at 36,302.69. Finally, the NASDAQ Composite closed at 15,871.26, just 2.15% away from breaking its record high set on November 22, 2021.
It appears the Santa Claus rally is alive and well in the last trading week of the year. I would not be surprised to see all major indexes at record highs come December 31. Last week all three indexes finished in the green, but volume fell on the Nasdaq and NYSE probably due to the Christmas holiday. More positive news followed with improved breadth.
Most of the S&P sectors were higher and rising stocks outnumbered decliners by 2 to 1 on NYSE and Nasdaq. Over the past month we have been experiencing an extremely “thin” market with most stocks breaking below their 50 – day moving averages and indexes being held up only by mega cap tech stocks. Watch for a rotation out of Mega cap tech and back into growth.
In this weeks Behind The Street I want to explore three trends that I will be following heading into 2022. Now, these trends are not guaranteed to happen, however I believe the odds are stacked in favor of these trends playing out. The first trend we will explore is the trend of people going back to work. I believe we will see a wave of people heading back to work as new data emerges that Americans are now eating into their savings.
Second, we will talk about the trend of interest rates remaining low throughout 2022. The Federal Reserve has announced a minimum of two rate hikes for 2022, however I believe we will see one rate hike, maybe. Third, I see the semiconductor and chip boom continuing well into 2022 as EV’s, 5G, AI and machine learning pick up steam.
The personal savings rate as a percentage of disposable income fell off a cliff to 6.9% down from pandemic highs of 33.8% in April of 2020. Please see chart attached at the bottom of the Newsletter that showcases the personal savings rate dating back to 1959. To me this sends a signal that we will begin to see thousands of people returning to the workforce in 2022 as people eat into their pandemic savings while inflation is running at its highest level in years.
The core PCE deflator hit 5.7% in November, a 39 year high. Please see article: PCE inflation: A key price measure just hit a nearly four-decade high - CNN. With inflation ramping forcing Americans to pay more for everyday goods and services combined with dwindling savings, people will be forced to reenter the workforce to keep up with inflation.
So, what does this mean? Well for one it could mean the end to the labor shortage that businesses have been dealing with in 2021. Businesses have been paying out huge sign on bonuses and even retention bonuses just to keep people onboard. I do not think this will end all at once, but I would not be surprised to see the tables turn a little bit and put some of the power back to the businesses that had to raise the bar just to attract talent in 2021.
I would look to change jobs right now in search for higher pay and ask for that raise before the tables turn. I’m serious. History always has a funny way of completely flipping the scrip on people. I can see it now, the Wall Street Journal headline that reads “Employees Search to Pick up more Hours as Millions of Americans Return to Work.” Start today while the odds are still in your favor. Ask your boss for that raise, put in a few job applications at a competing firm, you just may land a 20% pay increase with a nice sign on bonus.
Do it now before the tables turn.
The Federal Reserve stated at its last meeting that it will dial back its asset purchase program at a faster rate than anticipated and raise interest rates at least two times in 2022. Since the start of the pandemic the Federal Reserve has been buying U.S. Treasuries and Mortgage-backed securities to keep money flowing through the system sparking growth in the economy.
The Fed also has interest rates parked near zero with negative real rates kicking off a housing boom across the country as investors and speculators take advantage of nearly free money to acquire assets and single-family homes. You would think with record low housing supply and unprecedented demand that the Federal Reserve would stop buying MBS altogether, but at least they claim they will dial back on the asset purchases. I guess we will wait and see.
Keep in mind that 2022 is the year for mid-term elections. The Biden administration will probably be putting pressure on Fed Chair Jerome Powell to hold interest rates steady going into a mid-term election when approval ratings are at record lows. Remember, it’s the economy stupid! I have a funny feeling that the Federal Reserve will not raise rates before the elections. This is purely speculation, but I have a feeling that the Fed will be all talk and no action, and the markets know it.
We just experienced a “taper tantrum” in my view. High beta growth stocks were hammered with many names down over 50%, perhaps the rate hikes are already priced into growth for now. Fed Chair Jerome Powell didn’t even have to raise rates to get the result he wanted. We must remember that the market is a discounting mechanism, a way of trying to figure out what a future stream of cash flow or earnings is worth today. When interest rates go up, those future earnings and cash flows are now worth less, today.
The higher interest rates go, the lower the present value of future earnings. In my view the Federal Reserve will be forced to keep interest rates near zero throughout 2022, and this may present an opportunity for money to flow back into the growth stocks that were hammered over the past two months.
2022 should continue to be the year of the semiconductors. The technological innovations of the next five years create the perfect storm for a super cycle in precious chips. Did you know that the average electric vehicle has about 2,000 chips? This is double the amount of chips in non-electric vehicles.
President Joe Biden says that his goal is for half of new vehicles to be electric by 2030, for this goal to be achieved there will need to be significant investment into the semiconductor production. This is just one small example, chips are used in almost every electronic device we use in our everyday life including smartphones, tablets, game consoles, and even medical equipment.
Let’s take a look at Broadcom $AVGO a chip designer that designs analog integrated circuits for telecom, industrial, automotive, and computing markets. They just announced a $10 billion stock buyback after a record-breaking earnings report. In Q4 EPS rose 23% to $7.81 a share while revenue vaulted higher 15% to $7.41 billion. The stock is up 51% this year alone with a dividend yield of 2.5%. Looking out to 2022 earnings and revenue estimates. $AVGO expects to earn $32.91 in FY 22 up from $28.01 in FY 21. Revenue is expected to grow to $30.6 billion in FY 22 up from $27.5 billion in FY 21.
NVIDA designs, develops, and markets three-dimensional graphics processors and related software. The company offers products that provides interactive 3D graphics to the mainstream personal computer market. (Bloomberg) Having a look at earnings and sales estimates paints a similar positive picture for the trend going into 2022. FY 22 revenue is slated to come in around $26.7 billion up from $16.7 billion in FY 21. Earnings are expected to explode to $4.34 from $2.50 in 2021. $NVDA is expected to report EPS of $1.22 on revenue of $7.4 billion in Q4 that will close out the FY. Management said that data center sales were up 55% to $2.9 billion from $1.9 billion in the same quarter last year. This growth was driven by customers such as Amazon AWS, Microsoft Azure, and Google Cloud.
All spending that should continue to increase next year. I remain bullish on semiconductors for the foreseeable future as we see increased spending on innovation in the most cutting-edge technology, I am long.
This week we have housing reports due. Pending home sales for November will be released on Wednesday. This should give us an idea as to whether housing demand will remain strong going into 2022. We will be able to see homes under contract, which occurs a month prior to sale closure. Home sales tend to cool heading into winter months and pick back up during the spring and summer buying season.
VIX Update:
The VIX has now collapsed back into the teens settling at 17.69 as of todays close. On December 3, 2021 we had an explosion in volatility sending the VIX to a high of 35.27. As we have talked about in previous Newsletters, it is usually a good idea to go short volatility and buy stocks when we have a major spike in the VIX. So far, its looking like we made a good decision by buying the dip over the past few weeks. You can look at the VIX here: VIX Index (cboe.com)
As of June 29, the following are the five largest S&P 500 index constituents by weight:
1) $AAPL - 5.89%
2) $MSFT - 5.63%
3) $AMZN - 4.07%
4) $FB - 2.32%
5) $GOOGL - 2.03%
Bitcoin:
The crypto asset is still sitting below its 50 – day moving average but managed to break back above $50,000 over the holiday weekend. The 50 – day should act as resistance for Bitcoin but on the bright side, it seems as if the long-term trend is still intact as Bitcoin found support right at its 200 – day moving average. So long as an asset remains above its 200 – day moving average, the long term trend is up.
Barron’s 2022 Survey!
Here is a link to Barron’s annual investment survey. Feel free to answer the questions for a chance to win two free years to Barron’s and dinner in NYC with any Barron’s employee. Good Luck! Take Barron’s Annual Quiz: What’s Ahead for 2022. | Barron’s (barrons.com)
Distribution Days: (Days where index sells off in heavier volume than previous day. Signaling institutional selling. 5 - 6 distribution days in the span of 4 weeks signals market weakness) Investor’s Business Daily
Current Distribution Count: Uptrend Resumes
Leaders up in volume: $SIMO, $CTAS
Leaders down in volume: $KMX
Thank You