October 5

Markets and Stocks 

Covid is the major short term issue for market performance. The news on Covid continues to improve. According to the New York Times, new cases are down 28 percent on a rolling 14 day basis. Equally important, Merck should file this week an emergency use application for its anti-viral drug against Covid. Dr Gottlieb says Merck has been submitting anti-viral data to the FDA  on a real time basis. Gottlieb anticipates approval by Thanksgiving or earlier. Gottlieb thinks the anti-viral news is profound, his word. He says the anti-viral is pan-Corona, it will be effective against all variants. 

Because the news on Covid is improving so rapidly, I remain convinced of new all time highs by Thanksgiving. Consumer confidence is improving. Consumers are flying. Delta Airlines raised guidance. Bookings for vacations over Thanksgiving and Christmas are surging. See Barron’s. Consumers have income and record wealth. The employment market is healing. The conditions are in place for robust consumption which accounts for 70 percent of US GDP. 

I continue to pound the table on big technology. When Alphabet, Apple, Facebook and Microsoft report earnings, the stocks will again be market leaders. Alphabet-Google reports October 26. Over the past four quarters, it has beaten earnings expectations by 45-60 percent. I expect another solid earnings number. I believe Alphabet will report a Q3 earnings number of over $30 a share. In 2022, I think Alphabet will earn about $130-140 a share. The market is trading at 20 times 2022 estimates. Alphabet should sell at a premium to the market. I think a 30 multiple is more than reasonable. My 12 month target is $4000, up almost 50 percent from current levels. In my opinion, the stock is bloody cheap. 

Apple reports its quarterly earnings on October 28. Consensus is for an earnings number of $1.25. Apple consistently beats consensus. I am looking for an earnings number of about $1.40. Over the next four quarters, I think Apple will earn over $6 a share. Given its superior fundamentals and fantastic balance sheet, I put a high 20s multiple on the stock. My 12 month target is $170, up about 20 percent from current levels. I would be more positive if Apple were less exposed to China. 

Facebook reports its quarter on November 4. I believe Facebook will report an earnings number of around $3.75 a share. In 2022, I think FB will earn almost $16 a share. It too deserves a premium multiple. My 12 month target is $450, up about 40 percent from current levels. 

I am not fussed about the negative publicity on Facebook. The company is not a monopoly. Its major features, Facebook, Instagram and WhatsApp are free to consumers. The Supreme Court looks at price when determining consumer harm or not. Services which are free cannot harm. As for the legislative matter, there is no consensus on legislation. And I don’t think Congress will try to regulate free speech because that would be a violation of the Constitution. 

As for the allegations that Facebook intentionally harms consumers in the pursuit of profit, I say BS. I will discuss this allegation under Sociology below. 

Microsoft reports its earnings on October 26. I think MSFT will report earnings of about $2.25 a share. In 2022, Microsoft should earn around $10 a share. The market places a higher premium on Microsoft because it operates out of the cross hairs of media and Congress. Microsoft did not destroy the business models of traditional media; therefore traditional media does not hate Microsoft, and does not carry out a vendetta against the company. See Sociology below. My 12 month target on MSFT is $350, up about 25 percent from current levels. 

I like the transportation space. Right here I like NSC, Norfolk Southern, as a play on surging demand for US coal exports. Europe is switching to coal as a base load fuel. Demand for coal in China is off the charts. The US is a low cost producer of coal. 

As investments, I like UPS and FedEx. Early in 2022 the supply chain bottlenecks will be resolved. Normal operations will return to the transport sector and profit margins will improve for both UPS and FedEx. 

FedEx at $219 is trading below pre-pandemic levels. My 12 month target is $280, up 25 percent from current levels. UPS is trading at $178, down 25 percent from its recent highs. My 12 month target is $225, a 25 percent move. I think both stocks will provide handsome 12 month returns to shareholders. 

I continue to like the steel stocks. The tariffs are not going to be removed. The Biden Administration says the domestic steel industry is a strategic resource. In addition, the US steel industry is becoming the low cost producer of steel. Energy accounts for 15 percent of the production cost of steel. The US is a low cost producer of energy. 

On the steel stocks, Barron’s says: The steel industry is enjoying unprecedented prosperity, as steel prices have nearly quadrupled in the past year to $1,900 a ton. Yet steel stocks sport some of the market’s lowest valuations. Leading companies such as Nucor , Cleveland-Cliffs ,United States Steel , and Steel Dynamics trade for two to five times 2021 estimated earnings. They could be worth far more as steel demand grows.

“We’re seeing a rebirth of the U.S. steel industry,” says Curt Woodworth, a steel analyst at Credit Suisse. “The industry is healthier than it has ever been, profitability is at an all-time high, balance sheets are in their best shape in a long time. The stocks are greatly undervalued.”

In 2022, Cleveland Cliffs should earn $6 a share and have a debt free balance sheet. My 12 month target is $36. The stock is trading at $20. I see 75 percent upside. 

Economics 

Free trade is good economic policy. Protectionism is bad policy and panders to the voter who is unaware of the benefits of comparative advantage. 

In an opinion for the New York Times, Professor Mankiw explains with supporting research that free trade is good policy and promotes national prosperity. He writes: 

When President Trump imposed tariffs on imported solar panels and washing machines, I was reminded of a line from George Orwell: “We have now sunk to a depth at which the restatement of the obvious is the first duty of intelligent men.”

While Orwell’s comment was focused on military and political issues of the late 1930s, my subject is economics, and to most people in my field, the benefits of an unfettered system of world trade are obvious. Any good student of Econ 101 can explain the logic.

But in light of the growing evidence of the Trump administration’s apparent disdain for free trade, from the recent tariffs, to a report recommending fresh quotas or tariffs on steel and aluminum, to its earlier rejection of the Trans-Pacific Partnership, it may be worth reviewing the theory, as well as the evidence that convinces economists that the theory is right.

The place to start is 18th-century Scotland. Adam Smith’s book “An Inquiry Into the Nature and Causes of the Wealth of Nations” is often credited as the beginning of economics. The case for free trade is one of its major themes.

Smith argued that trade among nations is like trade among people. No one feels compelled to sew his own clothes and grow his own food simply to keep busy. Instead, we find employment doing what we do best and rely on other people for most goods and services. Similarly, nations should specialize in producing what they do best and freely trade with other nations to satisfy their consumption needs.

This argument was expanded by David Ricardo in the 19th century. Ricardo addressed the question: What if one nation does everything better than another? His answer was that trade depends on comparative advantage — how good a nation is at producing one thing relative to how good it is at producing another.

Ricardo used England and Portugal as an example. Even if Portugal was better than England at producing both wine and cloth, if Portugal had a larger advantage in wine production, Portugal should export wine and import cloth. Both nations would end up better off.

The same principle applies to people. Given his athletic prowess, Roger Federer may be able to mow his lawn faster than anyone else. But that does not mean he should mow his own lawn. The advantage he has playing tennis is far greater than he has mowing lawns. So, according to Ricardo (and common sense), Mr. Federer should hire a lawn service and spend more time on the court.

More recently, economists have emphasized how trade affects productivity. In a model pioneered by my Harvard colleague Marc Melitz, when a nation opens up to international trade, the most productive firms expand their markets, while the least productive are forced out by increased competition. As resources move from the least to the most productive firms, overall productivity rises.

One approach to answering this question is to examine whether countries that are open to trade enjoy greater prosperity. In a 1995 paper, the economists Jeffrey D. Sachs and Andrew Warner studied a large sample of nations and found that open economies grew significantly faster than closed ones.

A second approach is to look at what happens when closed economies remove their trade restrictions. Again, free trade fares well. Throughout history, when nations have opened themselves up to the world economy, the typical result has been an increase in their growth rates. This occurred in Japan in the 1850s, South Korea in the 1960s and Vietnam in the 1990s.

After analyzing the data, Mr. Frankel and Mr. Romer concluded that “a rise of one percentage point in the ratio of trade to G.D.P. increases income per person by at least one-half percent.” In other words, nations should take the theories of Smith, Ricardo and Melitz seriously.

Protectionism is terrible policy whether promoted by Trump or Biden. Protectionism benefits the very few and harms the vast majority. Politicians have a duty to promote the general welfare, not pander to special interests, whether those favored constituents are labor or business. 

Politics 

Senator Simema will not budge. She is pushing back against progressives. Last weekend, Sen. Kyrsten Sinema skewered Democratic leadership on Saturday for delaying a vote on the bipartisan infrastructure package, calling the decision “inexcusable” and “deeply disappointing.”

In a statement, the Arizona Democrat warned that delaying the vote only reduced trust within the party. Senator Sinema further said “ that  Democratic leaders  made conflicting promises that could not all be kept — and have, at times, pretended that differences of opinion within our party did not exist, even when those disagreements were repeatedly made clear directly and publicly.” See Politico. 

Sinema’s position is good politics. She wants to be re-elected in 2024. The National Journal says: Kyrsten Sinema has angered progressive Democrats for blanching at the $3.5 trillion price tag of her party’s social-welfare proposal, to the point where some leading liberal voices are calling for a primary challenge against her in 2024. But the enigmatic freshman from Arizona understands her state’s politics better than the talking heads, and her moderate positioning has effectively positioned her well for re-election in three years.

By holding the line on excessive spending and opposing repeal of the filibuster, Sinema has spent some of her political capital on the Left to win over a critical mass of independents, as well as generate goodwill from Republicans. A newly released poll conducted by OH Predictive Insights, conducted from Sept. 7-12, shows how unique her political coalition of support is in these tribal times. Her net favorability is plus-7 (46 percent favorable, 39 percent unfavorable) in a state that President Biden carried by a single point. While just 56 percent of Democrats view her favorably, she holds an above-water (plus-6) rating with independents and an unusually high 40 percent favorability rating among Republicans.

All told, her overall favorability rating is a notch higher than newly elected Sen. Mark Kelly. He polls between 43 and 44 percent against all Republicans in next year’s Senate race. His net favorability rating is plus-4, with 47 percent viewing him favorably and 43 percent viewing him unfavorably.

Angry progressive pundits are convinced that Sinema’s independent positioning will doom her in a Democratic primary. That is a total misread of her political situation.

Sociology 

Facebook is no different from traditional media or businesses such as the Dallas Cowboys. Facebook gives its readers what they want. Readers like to read what they already believe. Readers want to be part of their self selected tribe. 

The media gives its readers and viewers what they want. FOX gives the Republican base red meat, however seasoned with mistruth. The major networks as well as CNN and MSNBC do the same. They feed the base instincts of progressives, plain facts are irrelevant. 

The typical man or woman is not interested in truth, because he or she already “knows” the truth, LOL.

In addition, the typical reader or viewer prefers bad news to good news. This is innate human behavior. Natural selection rewards the wary and suspicious. The media loved bad news. 

Further on the media, please remember that Facebook and Alphabet-Google destroyed the business model for traditional print media. So, the traditional print media is prejudiced against Facebook. I roll my eyes at print and visual media criticism of Facebook. I would like to meet an honest man or woman in Washington DC or the inner sanctums of big media. BS sells, facts and truth do not. 

Finally, on the allegation that Facebook harms the self image of teenage girls, just watch a Dallas Cowboy game. How do teenage girls feel about the cheerleaders? 

Facebook touches 2 billion people a month. I like the stock. I bought more yesterday. I am trimming my positions in traditional banks like BAC and WFC. I like the two banks, I just like big technology more. I have limited investment funds.