October 1
Markets and Stocks
Selling in the Treasury market is overdone. Yields will stabilize and equities will rally. At the margin, I think big technology is attractive and will reassert market leadership. The fundamentals for my big four-Alphabet-Google, Apple, Facebook and Microsoft remain outstanding and their valuations remain attractive relative to the market.
Expectations for inflation remain well anchored.
I think the residential housing space is attractive for investment. Potential buyers complain about prices, but they are paying up.
I continue to like the oil and natural gas trade, but short term, a few weeks, I think the stocks in the sector will trade sideways. The oil and gas space is characterized by “fast money,” speculation is rampant. I top-sliced my position in FANG. But the oil and gas sector remains very attractive as an investment.
The transition to a green economy will be slower than most anticipate. Demand for oil and gas will remain strong. But supply of oil and gas will remain constrained by government regulatory policies and by the green energy movement.
Natural gas is especially attractive as an investment. The US is a low cost producer of gas. Exports of natural gas via pipe to Mexico will grow. Exports of liquified natural gas to Europe and Asia will also grow. I think Cheniere, LNG is an outstanding long term investment.
The high cost of energy is weighing on manufacturing in China. The Wall Street Journal reports that: “China’s manufacturing sector contracted in September ending an 18-month expansion that powered the country’s recovery from the pandemic. China’s manufacturing purchasing managers index fell to 49.6 in September. That marks the gauge’s first drop below the 50-mark that separates an expansion of activity from contraction since February 2020, when the metropolis of Wuhan and surrounding Hubei province were shut down to contain the fast-spreading coronavirus. China’s strong pandemic recovery has recently been beset by regional Covid-19 outbreaks, a global semiconductor shortage, port shutdowns and supply-chain disruptions, a widening regulatory campaign against many sectors of the economy, and soaring commodity prices. Most recently, power outages and a downturn in the real-estate market have added to the list of worries.
In Europe, high energy prices are also causing manufacturing facilities temporarily to stop production.
I continue to like the steel stocks. Demand for domestic steel remains strong. Prices are high. Political risks are exaggerated. The steel tariffs are not going to be removed. Bloomberg says that when President Donald Trump slapped 25% tariffs on foreign-made steel in early 2018, roiling markets and rankling allies, American steel was hurting. Employment numbers in the industry had hit a new low the previous year, annual mill usage was hovering near just 70% of capacity, and cheaper imports were flooding the US. “We must protect our country and our workers. Our steel industry is in bad shape,” Trump tweeted in March 2018. “IF YOU DON’T HAVE STEEL, YOU DON’T HAVE A COUNTRY!”
Three and a half years later, the sector is in a very different place. America’s steel mills have been producing at their highest levels since the Great Recession, and their owners are on track to book their fattest profits ever, thanks to record high prices. As the global economy bounces back from its pandemic lows, sales of steel-made products ranging from paper clips to cars to dishwashers are through the roof. Wall Street analysts predict that 120-year-old US Steel will earn $5.5 billion in 2021 by one closely watched measure, more than it did in all of Trump’s presidency. Nucor, the biggest North American producer, could earn $9.3 billion—more than double its previous best year and on pace to be a larger annual haul than either Nike or Netflix is expected to report.
I like CLF, X and NUE.
Briefly, I want to note what Wall Street is saying about three stocks that I like.
Bank of America says it sees free cash flow upside for General Electric.
“We would not be surprised to see GE raise 2021 Industrial FCF guidance with 3Q results, as we see multiple drivers for the FCF ramp up through 2023. The broader commercial aviation recovery gains hold, GE shares should benefit from upward EPS revisions as well.”
Wells said it feels more comfortable about the housing market and its effect on Home Depot after a meeting with the company’s management.
“We hosted a constructive round of investor meetings on 9/28-29 with HD CFO Richard McPhail, Merchandising Chief Jeff Kinnaird and the IR team. While go-forward trend commentary was limited, we walked away increasingly comfortable in the underlying housing backdrop, LT opportunities via strategic initiatives, and ability to navigate a host of well documented supply chain and inflationary challenges being felt across retail.”
Barclays reiterates Target as overweight saying Target’s Shipt delivery service is a “sleeping giant” and may be worth as much as $15 billion.
“Shipt, acquired by Target in 2017, has been a meaningful contributing factor to TGT’s omni-channel excellence and has helped TGT meet the step change in demand for grocery delivery during the pandemic.”
GE is a play on the commercial aircraft market and a great long term investment in a green economy. GE makes the engines for Boeing. GE has a 50 percent market share in land based wind turbines.
Over the upcoming holiday season, both HD and also TGT will have inventory. Both will charge full margin. Both will sing “ka ching” at Christmas.
Economics
The Democrats social welfare bill is bad policy. It will discourage work. It will add to the deficit and it will make the country poorer.
Here are a couple of charts showing hours worked and rates of labor participation.
Economic policies should focus on incentives for work. Increase the earned income tax credit. Tie childcare support to work.
As I have written many times before, at his blog, Mankiw cites research on how welfare and high taxes are disincentives for work. Two summaries of supporting research follow.
Americans work more than Europeans. Using micro-data from the United States and 17 European countries, we document that women are typically the largest contributors to the cross-country differences in work hours. We also show that there is a negative relation between taxes and annual hours worked, driven by men, and a positive relation between divorce rates and annual hours worked, driven by women. In a calibrated life-cycle model with heterogeneous agents, marriage and divorce, we find that the divorce and tax mechanisms together can explain 45% of the variation in labor supply between the United States and the European countries." See work by Professor Indraneel Chakraborty.
And at his blog, Mankiw summarizes new economic research on the work disincentive of a guaranteed basic income.
Here is a fascinating new paper by Mikhail Golosov, Michael Graber, Magne Mogstad, and David Novgorodsky on the effects of winning the lottery. The bottom line on what people do with their good fortune: "On average, an extra dollar of unearned income in a given period reduces pre-tax labor earnings by about 50 cents, decreases total labor taxes by 10 cents, and increases consumption by 60 cents."
In other words, people use their extra wealth not only to buy more goods and services but also to buy more leisure. As a result, "the introduction of a UBI will have a large effect on earnings and tax rates. For example, even if one abstracts from any disincentive effects from higher taxes that are needed to finance this transfer program, each dollar of UBI will reduce total earnings by at least 52 cents."
I believe in data, peer reviewed research and common sense. Where is the data showing that more welfare leads to more work and increased national prosperity?
There is no such data. The facts speak for themselves. The Democrats social welfare bill is bad economic and social policy.
Moreover, economic equality is not a pressing issue for most Americans. Americans do care about opportunity and do want to alleviate true poverty, but few of us want equality as a policy goal.
Professor John Cochrane of Stanford’s Hoover Institute summarizes a very recent opinion survey on attitudes toward equality, opportunity and poverty.
Reducing inequality, "there should be no Billionaires" is only the top issue for a quarter of people. Equality of opportunity, and help for those on the bottom garner about 60%. The demographic consistency is interesting. Yes, the young and the credentialed skew more left -- our education system is passing on its values. But not nearly as much as you'd think. Minorities are not much different than the rest. Redistributionist opinions are a bit of a luxury belief, but again not as much as you'd think. See Archbridge Institute.
POLITICS
Manchin is not going to budge on the Democrats’ social welfare bill. On Wednesday he explained that: starting new programs that shut off a few years from now is akin to making them permanent; Congress will never be able to shut them off.
And he wants to means test as much of the new spending that Congress comes up with as possible, another goal that clashes with his more progressive colleagues.
“Once you start doing something, it becomes ingrained in it. We want to do it and do it right and finance it,” Manchin said. “I just don’t want our society to move to an entitlement society.”
And for Manchin, the timetable is months, not days or weeks. He said he would also focus on extending the child tax credit that expires at the end of the year, a strong signal that Dec. 31 may be the true deadline for passage of a reconciliation package even as congressional leaders desperately try to force action this fall.
“Do you know how convoluted the tax system is? Do you really understand? We don’t have a one-week, two-week deadline, I don’t believe, on this. Because everything’s covered,” he said. “There’s nobody going to go without. The child tax credit ends at the end of the year and everything else goes to 2023. That’s why I said, ‘let’s do a pause,’ and really take time to work with it.”
“I want to do a tax overhaul. One thing you understand that all Democrats agreed on, there’s not a lot of things we all agree on, is that the 2017 tax cuts are unfair and weighted toward the high end. Let’s fix that. That’s the reconciliation,” Manchin said. “I think we can get a good bill done. I really do, if we work in good faith.”
SOCIOLOGY
Truth and rational thought matter. But our political leaders in order to gain power, abandon truth and rational thought; instead our leaders appeal to our basest tribal instincts. That behavior by our leaders is tearing apart the nation.
Professor Larry Sabato of the University of Virginia is doing research on America’s political polarization. He and his team report that:
The University of Virginia Center for Politics has partnered with Project Home Fire, a new initiative dedicated to finding common ground in American politics, on an innovative new data analytics and polling project to explore the social, political, and psychological divides between those who voted for Donald Trump and those who voted for Joe Biden in 2020.
Some of the key takeaways from today’s release are:
-- Majorities of Trump and Biden voters express support for several elements of the bipartisan infrastructure and reconciliation bills being debated in Congress, but there are marked differences in their levels of support.
-- Majorities -- often large majorities -- of both Biden and Trump voters express some form of distrust for voters, elected officials, and media sources they associate with the other side. A strong majority of Trump voters see no real difference between Democrats and socialists, and a majority of Biden voters at least somewhat agree that there is no real difference between Republicans and fascists.
-- Significant numbers of both Trump and Biden voters show a willingness to consider violating democratic tendencies and norms if needed to serve their priorities. Roughly 2 in 10 Trump and Biden voters strongly agree it would be better if a “President could take needed actions without being constrained by Congress or courts,” and roughly 4 in 10 (41%) of Biden and half (52%) of Trump voters at least somewhat agree that it’s time to split the country, favoring blue/red states seceding from the union.
I am disturbed and saddened by the polling data. I blame our political leaders. I blame the national media. I blame elite academic institutions. I blame social media, but most of all I blame “us.” Humans naturally cooperate. Why do we suppress our better angels and let out the darkest forces of our nature?
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