Super Bowl and Markets: Experience vs Youth!

The  America's National Sports Day (aka Super Bowl) is here. Last year ignorance about virus already spreading in US was a bliss. The festivities of SuperBowl including family and friends gathering went on in normal ways. This year all of us would be watching Super Bowl in our homes with only families staying together. It's better this way to be safe....to bring life back to normal.

This year's Super Bowl is a match between Experience (Brady - 43 years old and already 6 time Super Bowl winner) vs Youth (Mahomes - 25 years old and one time Super Bowl winner). Both quarterbacks have completely different styles. Brady is classic quarterback and one of the greatest of the game. Mahomes is anything but traditional quarterback and one the greatest in making. Tom Brady had proven that even at age 43 he could be in Super Bowl with a different team. That's what greatness is about. Mahomes had proven that last year's Super Bowl win was no fluke....in recent history other than Patriots (with Brady), not many teams have made to back to back Super Bowl. That's greatness in making. I am personally split between whom to support - I like Brady for his experience and maturity. I like Mahomes for his youth, energy and risk taking. So I am going to be neutral and just enjoy the game. It would be a great game either way.

In markets also, interesting dynamics between experience (old world companies) and youth (new age companies) are at play. If we just look at 2021, GM and Ford are investing in EV and making commitments to completely change their fleet to EV in next two decades. Disney had already proven that it can reinvent in new streaming world...Comcast, AT&T and Viacom are doing same. Big retailers like Walmart, Target and Costco had proven that they can stand against Amazon and serve customers efficiently during pandemic...and some of the new age companies of dot.com era (Amazon, Google...) are in fact demonstrating that experience of over 2 decades is important to stand against new age companies like Shopify, Zoom and Snowflake...

Finally the "games" around GME, AMC, MAC and other heavily shorted stocks are subsiding..as expected. Every bubble has expiry - some takes few months and some get over in few weeks. Hopefully these companies can take advantage of elevated stock prices to raise funds and survive to see another day..

That's all for now...Enjoy the game!

/Shyam

"Million" $ Teslas!

Year 2020 was interesting in many ways...one of those is that many of my friends and colleagues (some of you are readers of my blog) are now  driving "Million" $ Teslas! Let me explain what I mean by "Million" $ Teslas and investing lessons one can derive from this....

At start of 2020, well equipped Tesla car was around $70-80K and Tesla company valuation was $76B. At end of 2020, Tesla car is depreciated and may be worth about $60K. And at end of 2020, Tesla company is valued over $800Billion. Just imagine if one of you who bought Tesla car at start of year would have instead bought Tesla stock, your portfolio would have $800K and some change to buy Tesla car you always wanted (provided you had not sold it - more on this later). And imagine someone buying Tesla car back in 2009 vs buying Tesla stock at IPO price of $20. By some calculations they are driving "10 million$" Tesla (assuming they still kept those cars).

So what's investing lesson from this.

Buy Product; Buy Stock; Keep Stock as long as you are using the Product!

This is the lesson I am telling my kids time and again since personally I did not follow this. I have many examples to empirically prove that this simple investing lesson works. Many of you would be able to connect with following examples.

• Amazon - Ordering for last 20 years
• Apple - bought almost every product since first iPOD in 2001...
• Netflix - since they had DVD by mail in early 2000
• Google - since it became dominant and only search engine..also using Youtube, docs, gmail..
• Facebook - while it was still only on college campuses..
• Disney - have been visiting Disneyland since mid 90s..and watching movies even before that
• Microsoft - since early 90s
• Costco - must be using for over 20 years
• Comcast - for last 10+ years as internet provider
• Twitter - have been active for few years
• Tesla - while personally I did not buy Tesla car, I was waiting for affordable version of Tesla (and still waiting...)
• T-mobile - I was using AT&T for 20+ years but switched to T-mobile couple of years back..

The last example brings 2nd lesson:

Sell the stock when you stop using product for extended period of time!

While many examples are about consumer product companies, one can apply same for B2B companies also such as Salesforce, TSMC, Amazon (for its dominant AWS unit) or companies which went out of existence (like SUN Microsystems, Silicon Graphics and so on).

While looking back is always 20:20, there would be many opportunities in future to apply these simple lessons..some recent examples would be:

• UBER
• Spotify
• AirBNB
• Snowflake
• Peloton
• or even finding out winners in old media companies (just check out how many streaming services you signed up and use many times during week)

So the lessons from "Million" $ Teslas is:

Buy Product; Buy Stock; Keep Stock as long as you are using the Product!

Sell the stock when you stop using the product for extended period of time!

Have a great MLK Day and Congratulations to President Biden and Vice President Harris for taking charge of US leadership on Jan 20!

/Shyam

Happy and Healthy 2021!

World has started celebrating end of 2020 and start of new year 2021. While 2020 was an interesting year, I am not going to list down all the aspects of 2020 - you can read my previous blogs for that. Let's look at 2020 report card on my predictions and recommendation I made in "2020!" and make new ones for 2021.

2020 Report Card:

Macro Predictions:

All the macro predictions were thrown out of the window since start of COVID pandemic in March. Interest rates are close to zero after multiple cuts by Fed, economy went into shortest recession, unemployment is near 7%. Despite all of these, S&P managed to beat my prediction of 3450 by nearly 10%. And Biden not only became nominee but also won well deserved US Presidency.

Stock Recommendations:

When it came to stock recommendations, I would say I must have gotten lucky since even I did not expect the way sone of the stocks like NIO, ZS, ROKU and even bigger ones like AMZN, APPL, NFLX, MSFT performed. If one had invested equal amount in each stock and held thru all ups and downs, the performance would have been as follows (not counting any dividends). Overall portfolio return would have been 115%. Disclaimer: I personally did not had the discipline of holding these (sold NIO way too early) so my personal portfolio did not do as well (but did manage to beat S&P handily)

Symbol	Total Chg %
NIO	1418%
ZS	329%
ROKU	155%
AMD	95%
AMZN	78%
AAPL	72%
NFLX	66%
SMH	59%
XBI	54%
IGV	49%
MSFT	41%
DIS	32%
SAGE	20%
NTNX	1%
GE	-8%
NKTR	-15%
BIIB	-16%
MYGN	-27%
CLVS	-43%
ITA	-58%
Total	115%

I don't expect this to repeat. It was part of luck and part of pandemic related market advances.

Let's make some 2021 predictions and recommendations:

Macro predictions:

• COVID infections would be around 150-200M worldwide
• Developed countries would be 60% vaccinated and rest of the world would be less than 50% vaccinated
• Fed would hold interest rates at current level for all of 2021
• 10 year yield would be between .9 to 1.4%
• Unemployment would be between 5-7%
• US GDP growth would be between 3-5%
• President Biden would try to push for another stimulus in first half of 2021
• In-class schools and colleges would open partially in late Spring and fully in Fall 
• Officially Pandemic may be over by end of 2021
• S&P would cross 4000 during the year but would end year with single digit return (6-7%)

Stock/ETF recommendations:

This time the theme is similar to BEST with some changes:

• Biotechs and Banks: I continue to believe in Biotechs and banks would finally do well as economy recovers
• CLVS ($5), TBIO ($18)
• WFC ($28), SQ ($200)
• Entertainment and Energy: Both industries are going thru major transformations and provide good growth and value plays
• OKE ($36), XOM ($39), VLO ($50), NIO ($40)
• VIAC ($34), CMCSA ($50)
• "Streamlining" of Economy: There are many sectors like malls, cruislines provide good value bet on survival and economy opening up
• WMT ($140), SPG ($80), MAC ($10), CCL ($19), BA ($200)
• Growth Tech with Reasonable Value: Compared to recent IPO valuations of 50-100 price to sales valuations, these growth stocks look reasonable.
• AAPL ($125), CRM ($220), BABA ($220), AMD ($85), UBER ($45), TWTR ($50)
• ETFs: This is best way to invest to avoid single stock risk and still get good exposure.
• XLK ($125), XLE ($36), XLF ($28), XBI ($130), SPY ($350), IWM ($180)

 Same as last year, I have provided target buy prices which are lower than what they are trading because I strongly believe that markets are near all time highs right now and in first quarter, there would be enough opportunities to buy these recommendations at prices mentioned. So one has to be just patient. As always, usual disclaimers apply. Do your own due diligence before investing.

Have Safe, Healthy and Happy New Year 2021!

/Shyam

Paradox of Highs!

Last month fo 2020 started with Paradox of highs! Here is why I consider it as Paradox:

COVID:

• US daily COVID infections are at all time highs (above 225,000)
• US daily COVID related death rates are all time high (above 2500)
• US hospitalizations is over 100,000 - in some regions ICU capacity reaching 85%
• Many regions are announcing "shelter-at-home" (aka lockdowns) phase
• Europe is also seeing high number of infections and deaths
• Asian nations which handled virus quite well (South Korea, Japan) are also seeing increased infections
• In summary - third wave seems to be lot worse than first two waves and going to get worse before it gets better due to winter and holiday gatherings

Markets:

• All 4 indexes (DOW, S&P, Nasdaq and Russell 2000) reached all time highs on Friday - last time it happened was in 2018
• Markets across the world are making new highs 
• Bitcoin reached all time high; Gold is very close to all time high
• Even 10 year treasury yield reached 1% (pandemic high)
• US Housing prices are at all time highs
• Cloud companies are selling at triple digit price-to-sales (Snowflake at over 100 P/S ratio)

One would have expected markets to go down significantly given grim news on virus front. But exactly opposite is happening. That's why I consider this as "Paradox of Highs". Let's look at reasons for this Paradox. I had covered some of these in my blog "Markets V Factors"

• Vaccine - UK became first western country to approve first COVID vaccine. US will follow it next week. With two effective vaccines (from Pfizer/BioNtex and Moderna), US could vaccinate 20 million people before 2020 is over. That would be record by any standard in terms of new vaccine approval and rollout. By Spring, we could see 1/3rd of US population getting vaccinated.
• Employment - November report showed that employment slowed down from over 660,000 to 245,000. That's bad news for economy. But markets treated this bad news as "good" news because now politicians must act on stimulus front
• US Stimulus - Finally politicians from both parties started talking about a reasonable compromise on immediate stimulus plan around $1 Trillion. It could come as early as middle of Dec - just in time for holidays. This would be followed by another one in Feb/March after Biden takes charge.
• Interest Rates - FED is committed to maintain very low interest rates and accommodative fiscal policies well into 2022/2023.
• Earnings - Q3 results came out strong with very few dis-appointments. Corporates are holding record cash (over $2.1 Trillion). That money is going towards buybacks and acquisitions (Salesforce/Slack, S&P/IHS)
• Economy - two biggest economies (US and China) recovered much faster than expected and would reach pre-pandemic levels in 2021
• P/E expansion - Markets are willing to pay higher multiple for each $ of earnings. e.g. in 2013, S&P  P/E was 13; in 2017 it was 17 and in 2021 it would be 21. So while earnings may not be expanding as fast, due to P/E expansion, markets continue to make new highs. This may be due to lack of alternatives for money to be invested (given that 10 year yield has gone down from 3% to 2% to under .5 this year)

Given these data-points, it is possible that this "Paradox of Highs" would continue till normalcy returns in 2H2021. As fas as investing is concerned, I would recommend mixing ETF of dividend paying value stocks (XLE/XLF) as well as reasonably priced growth stocks (XLK/CLOU). So my earlier recommendation of "ETF" still holds even if energy and financials have gone up by 20-30% in last few weeks

/Shyam

 

Market's "V" Factors!

As we are approaching holiday season and end of 2020, markets seem to have already moved into 2021 and as incorporating likely outcomes in 2021 with continued upward movement. Markets are trading close to all time highs (even after discounting last few days of sideway moments). Let's look at the 5 "V" Factors which are at play.

Virus: COVID-19 virus would continue to dominate our lives well into 2021. We are into 3rd wave and this wave is even stronger than first two waves. Daily infections in US are over 150,000 and hospitalizations are also increasing at alarming rate. Various states and local governments are going back to curfews and partial lockdowns. Restaurants which saw some signs of life are being shut again. Even Thanksgiving holiday would be different this time with limited attendance at dinners and "no rush" Black Friday to start the most important holiday shopping season. Lack of coherent policy and fatigue of staying at home is causing this surge. This is negative V factor

Vaccine: Last two Mondays, markets got boost because of extremely good news on efficacy of vaccines (95%) by Pfizer/BioNTech and Moderna. Both use mRNA technology and with expedited approvals, both can start supplying vaccines in Dec. In next 3-4 months, nearly 100 million people can get vaccinated if governments can co-ordinate and everyone involved in healthcare make this as priority. This is one thing which was done well with Operation WarpSpeed by Trump administration. If 50% of US population gets vaccinated by Spring'21, economy can start returning to normal by Summer. This is positive V factor

Victory: While President Trump keeps on fighting the election results, Joe Biden's victory was convincing (306-232) and as due process of state by state certifications happen, Trump would realize that his efforts are futile. As I wrote in congratulatory blog, President Joe Biden can convert his victory into VICTORY agenda when he takes charge of the office. In all, this is positive V factor

Volatility: Despite so many market moving events like Pandemic, biggest economic downturn since depression, elections and unpredictable President, after initial March swoon, volatility in markets have been normal. This is indicated by VIX which is around 22. Once in a while it shoots up to 30-40 range but then returns to normal range of 15-25. Watch out for this to get a sense of overall market mood. This is positive V factor

Vehicles: Electric Vehicles have taken the leadership role in markets. With Tesla's inclusion in S&P and nearly 500 billion valuation (which is more than 4 largest auto companies Toyota, Volkswagen, GM and Ford combined), markets have voted that there is major shift taking place. In fact some of the Chinese EV companies have outperformed even Tesla's 400% gain (NIO is up by more than 1200% this year - this was one of my 20 picks as recommended in 2020 blog at start of year. That time NIO stock was at $3.3 and now its close to $50). Would the trend continue in 2021? If we go back 100 years, 1920's was the decade of auto companies and GM was #1 company. Decade of 2020's would repeat the pattern - only change is IC engine is replaced by batteries. However this time Chinese EV auto companies (NIO, LI Auto, XPEV and tens of other companies) would take lead along with Tesla. No wonder GM has committed to invest $27 Billion in next 5 years in EV. This is positive V factor.

In all, 4 out of 5 are positive factors. That's why markets are near all time highs. When you look past 1H2021, things look much better in 2H2021 and beyond.

Happy Thanksgiving!

/Shyam

President Joe Biden's VICTORY!

Congratulations to President-Elect Joe Biden and Vice-President-Elect Kamala Harris for winning the historic 2020 elections with highest vote count (~75 million). Congrats to American voters for participating with highest turnout (% of eligible voters) since 1900. This is what makes democracy and nation stronger. President Trump - despite his style got over 70 million voters (second highest of any candidate received ever). There was no blue wave as predicted by pollsters losing their credibility once more. Democrats lost few seats in house and did not flip senate yet. Georgia is new battleground with 2 runoff senate races on Jan 5 which would decide control of senate. That could become $300 million election. Georgians have the power to decide the course of nation for this decade.

Joe Biden's VICTORY can also be his agenda for next 4 years! Let's break it down the VICTORY agenda

Virus Control: COVID-19 Pandemic changed the world, narrative of the election and American President. Without Virus and President Trump's handling, Biden had little chance of winning the election. Now that Biden is going to be president, he would have all the power to implement the policies of healthcare professionals and experts. He should seek out experts like Dr Fauci, Bill Gates and many others to really bring this virus under control (without shutting down the economy - more on this later). Unfortunately while Americans were electing their new President, they also saw highest number of infections (over 130,000) per day. So ending Pandemic should be #1 priority for President Biden.

Infrastructure and Immigration: Two most important bills President can pass would be Infrastructure bill to rebuild America's infrastructure and generate most needed jobs. This would be an excellent stimulus for American Economy. On immigration, 11 million immigrants are still waiting. Do what President Reagan did in 1986 and create a consistent policy for skilled immigrants. Both these bills would do a world of good for both America and World.

Climate: Earth needs America to take lead in climate control. Join the Paris Accord and implement nationwide policies which progressive states like California are already implementing. While it does have short-tern pain for some industries (like oil and coal), help the companies and people to transition. His statement about transition to green economy in 2nd debate almost costed him election. Now make it happen.

Trade: President Trump did identify the problem of world taking advantage of easy American trade policies. There used to be lot of dumping of steel, cars and many other goods costing real jobs. He tried to fix it by his abrupt policies and tough anti-China and anti-Europe stance. He questioned WTO for right reasons. Now that the door has opened, Biden should continue to be tough to implement reciprocal trade policies but also encourage free and fair trade across the world. Trade generally is good as long as its fair and reciprocal. Any soft stance on this would open the door for criticism (which would be fair) and revival of Trumpism during 2022 elections.

Opening the Economy: Candidate Biden needs to transition to President Biden when it comes to shutting vs opening the economy. Controlling virus would be easiest if you shut down the economy for 3 months. But that has major costs to livelihoods of working people (non high-tech). Many experts praised Europe on how they locked down the economies and controlled the virus. As of now, Europe is seeing twice the number of infections and hospitalizations compared to USA despite locking down major economies at expense of major costs to jobs and economy. So President Biden needs to avoid the temptation of nationwide lockdown and keep the economy open with sensible policies of mask, social distancing to control the virus.

Respect: One attribute which was missing during Trump presidency was respect. It was due to Trump's personality - ego, selfishness, divisive nature. I was most hurt when Trump called India filthy in 2nd debate. Last 4 years, world lost respect for American President and America. Joe Biden had always shown respect thru his nearly 5 decades of career. President Biden can restore the respect and honor of office of President of United States of America and also offer respect to all people despite their race, gender, income, sex and country of origin. President Biden had to work hard to regain the trust, confidence and respect from world.

Yes We Can: I still remember the fond memories of Obama's 2008 slogan "Yes We Can". Simple but elegant. It's time for President Biden to mobilize and unite the country with "Yes We Can" slogan. As Americans, we can all come together and Make America Normal and Great Again!

Happy Diwali to All!

/Shyam

Empire(s) "Ready to" Strike Back!

As history has taught us, empires rise and fall. We had seen this with Roman empire, British Empire, Ottoman empire and many more. Same can be said for companies. But even fallen empires or companies can rise if they can learn from their falls and innovate to prosper the new changing world. Apple had proven this when it came back from its almost bankrupt status in 1997. Let's look at some of companies which have been under decline for years for many reasons - some of which were their own mistakes (GE and Boeing), changing industry (Oil to green), disruptive new industries and behaviors (streaming, online advertisements) and some of them were just unlucky due to COVID which no one was prepared for. Now that companies and populations have learned to live with COVID and 2020 is 2 months away from ending, let's look at some of the companies (old empires) and see how they may perform in months ahead. Basic filter I used to define "empire" is that company must be at least 50 years old and has more than 50 Billion revenue.

• Disney (DIS $128) - The company got hit on multiple fronts - its theme parks/cruises/hotels are closed, its normally billion $ movies cannot be released since theaters are closed. The entertainment industry is  getting disrupted where people are getting most of their entertainment via streaming networks like Netflix. Sports world is barely functioning reducing the value of ESPN franchise. However despite all these challenges, Disney is going to be winner in new world. As I have written in Aug 2019 about "Streaming Wars", Disney+ has been a success with over 60 million subscribers in less than one year. Disney also got Hotstar which is very popular in India. With Disney+, Hotstar, Hulu, ABC/ESPN, Disney has multiple streaming channels to reach world. It also has rich content library and assets like Pixar, Marvel, Starwars and so on. It should think of creating "Disney Family" on lines of Amazon Prime and provide incentives for families to be lifetime members (access and discounts to theme parks/hotels/cruises, all streaming channels, early access to movies and so on). Disney has potential to be a big winner in decades to come
• Walmart (WMT $143) - At the rate Amazon and online shopping was taking off, it was just a matter of time Walmart would have gone the same way as Sears and K-Mart. Fortunately Walmart acquired Jets.com and created online presence just in time...they got lucky that they were ready when COVID hit. Now programs similar to Amazon Prime and in-store experience, Walmart can hold its market leadership in retail. Walmart management is ready to experiment with Flipcart, Tik-Tok type of strategic investments. This empire is surely ready to pull some punches.
• Boeing (BA $166) - There are only 2 companies which can make planes of all types (Boeing and Airbus). Unfortunately Boeing had its own problems with 737MAX crashes and eventual grounding and then COVID virtually stopped 80% of air traffic and hence all new plane orders. However you can't create another Boeing like you can create a software company. The technology take decades and as MAX experience had shown, even small mistakes could cost lives and tens of billions of losses. Boeing will survive - MAX flying again by end of year and airline traffic resuming slowly, Boeing stock could be flying high again in 2021
• General Electric (GE $7.6) - Under Jack Welch's leadership, GE reached most valued company status. Now it's valuation is 1/10th of peak valuation. The new GE is also very different. Under new leadership, GE has shedded assets in financial, energy, lighting, home appliances and returning to its core strengths - aviation, healthcare and power turbines. CEO Larry Culp had proven that he can turnaround a troubled empire by making it smaller and nimble. The stock is trading in single digit for most of the year due to potential bankruptcy risk. But GE is the most promising turnaround, leveraged vaccine and economy normalizing play and stock could return to double digit in next couple of years
• Exxon (XOM $34)/Chevron(CVX $72) - Exxon was most valuable company just 10 plus years back. However the world has changed in last 10 years and unfortunately Exxon is still stuck in 20th century of "drilling" and big oil projects. At current price, it's dividend yield is nearly 10%. With Biden clearly suggesting that "oily" days are over, Exxon needs to transform itself quickly if it wants to survive past 2050. But as immediate term returns, Exxon and Chevron could provide double digit returns in 2021
• IBM (IBM $116) - The Big Blue continues to transform itself and despite its best efforts, continues to shrink. On Wall Street, its popular to compare any new-comer to "valued more than IBM". This year Zoom zoomed past IBM valuation few months back and now worth nearly 1 and 1/2 times of IBM. For its credit, IBM's new CEO has realized the valuation gap and trying to split into two companies - slow growing services company and hopefully fast growing cloud and software company. It's possible that this would play out and benefit investors in coming years
• AT&T (T $28) - AT&T is another company which keeps on transforming itself and at times make big mistakes (like acquiring DirecTV when cord-cutting was gaining momentum). But if they can spin off DirecTV, then new AT&T can focus on three valuable franchises - wireless, internet connectivity and media. With HBO, it already has close to 100 million subscribers. Warner Brothers assets and HBO brand can be leveraged to expand internationally. It's healthy dividend, 5G upgrade cycle and streaming/media assets could help it strike back.

These old "Empires" could transform and strike back at new "Empires" which were born in 1990's. Governments may help by starting proceedings (like its lawsuit against Alphabet) but don't count on it (since last real breakup happened in 1984 when Ma Bell was broken). These empires need to learn, innovate and transform themselves at warp-speed. Even banks like C ($44), BAC ($25), Wells Fargo ($23) and JP Morgan ($100) would eventually recover and be relevant in world disrupted by FinTech companies like PayPal and Square.

Happy Dussehra to all readers. 

/Shyam

What Matters? 4Es: Economy, Employment, Earnings and Elections!

The 2nd surge of COVID infections is gaining momentum across many countries with US continuing to lead in number of cases and deaths. President Trump's COVID and outbreak at white house in last two weeks demonstrated that even highest and most secure facility in world could not prevent COVID penetration..the blame goes to administration for not taking precautions (the way they would take against terrorist threats). It feels that our own personal house is more safer than White house. 

Markets had their best week since July when similar summer surge was happening and it continued to make highs till end of Aug. It a way markets are delinking from COVID story. We are at similar juncture and 4 factors would matter most for future direction.

Economy:

Q3 economy should show ~25% growth compared to Q2 (when it went down by 30+ % due to sudden lockdowns in March). That would be highest growth ever recorded for US economy. Over weekend, I visited St. Pedro's Square in San Jose Downtown for a quick pizza night. And the place was packed with outdoor dining - people enjoying dinner while watching game 5 of NBA finals all while maintaining social distancing and masks. That means people are tired of sitting at home and having quiet dinners on Friday evenings. They want to get out, spend their savings and enjoy a nice evening out. Its good sign for economy as long as precautions are taken to avoid covid surge. Expect Q3 economic bump to continue in Q4 and into 2021. Stimulus talks are going back and forth and eventually both parties would agree to $2 Trillion stimulus which is desperately needed to keep the steady progress on economic front. 

Employment:

The dreaded double digit un-employment is over. With latest readings, US is on its way to recover to full employment (generally considered when unemployments falls below 4%) in about 2 years (currently it's at 7.5%). While it's good sign, there are still millions of people un-employed or have stopped looking for work. In absence of stimulus bill, airlines and many businesses in travel, retail, hotel industry would have to go thru another round of layoffs to survive. But politicians would come together after elections and pass the bill no matter the results of elections. Steady progress but more is needed

Earnings:

If there is one E which is doing extremely well, its corporate earnings. Q3 earnings cycle will start next week and by all indications it would be repeat of Q2. Expectations would be beat by majority of companies due to lower expectations. WFH companies (SAAS companies, online retail etc) would continue to do very well. Even economically sensitive companies (energy, financials) would start showing some green shoots. The earnings would benefit due to generally lower costs of operations and no impact on productivity. With over $10 Trillion worldwide stimulus, businesses are able to minimize impact on topline.

Elections:

While more October surprises could come, markets are realizing that Biden win is over 85% secured. Trump has very small chance of winning 2nd term. In fact I won't be surprised if Biden ends up with decisive win with over 300 electoral votes. That would remove post-election chaos. Markets would love to have divided government with GOP holding slim margin in senate but won't mind blue wave similar to 2008 elections. Democrats controlling all three branches mean more stimulus which in short term would be good for economy. So "contested election" risk had gone down significantly. People are so tired of 2020 that they just want to feel normal and Biden as president feels normal. So this time vote would be not for Biden but for "return to normal".

With this backdrop of 4Es, how should one position? Here is one suggestion. Invest in "ETF" ETFs

ETF - Energy (XLE: $30.60), Technology (XLK: $122), Financials (XLF: $25.25)

One can decide to split the investment equally or go for 30:40:30  or 25:50:25 depending on one's risk/reward profile. Energy and Financials are down significantly and trading at historic discounts to S&P (SPY) but could recover in 2021 when things become normal. Technology has gone up significantly and could continue the momentum in 2021 as a bet on future.

/Shyam

October Surprise(s).....

In American political jargon, an October surprise is a news event deliberately created or timed or sometimes occurring spontaneously to influence the outcome of an election, particularly one for the U.S. presidency (Source: Wikipedia). Well... it started last week due to unfortunate timing of death of Supreme Court Justice Ruth Bader Ginsberg. President Trump and GOP senate members wasted no time in starting the process of nominating conservative judge Amy Coney Barrett. This by far could become most important election issue and hence can be qualified as October Surprise. Once justice Barrett is confirmed, Supreme Court would be 6-3 with conservative majority (first time in 100 years) and could have long term implications on many key decisions. This is one of the most important policy power Presidents and Senate members have and hence winning these elections matter so much. President Trump is the only president in recent history who got to nominate three Supreme Court judges in his first term. Nov 3rd would tell us if he gets second term or not. The polls suggest that Biden is going to be most likely winner unless election becomes contested and it goes to Supreme Court similar to what happened in 2000. And during Gore vs Bush election, Supreme court was 5-4 with narrow conservative majority and rest is history....

Let's look at market landscape... as predicted in previous blog "Fall is Coming", markets did start its September Swoon after reaching high on Sept 2. Since then S&P is down by 8% and Nasdaq is almost in correction (close to 10% down). Many high-flying tech stocks (FAANG group, Tesla) are down by 20% or so. Energy and Financials are still in doghouse and keep going down...As overall market, indexes are down for 4 consecutive weeks. However at same time IPO and SPAC market is bubbling like its 1999...So how would October which is known for major market crashes (1929, 1987, 2008) play out? And that too with so many unknowns like elections, Q3 earnings, virus surge, economy opening/closing, vaccine news and potential of busted holiday shopping season....

My prediction is that markets would bottom out in next few days and then trade sideways for rest of Oct. The tech earnings would be repeat of Q2 and companies which continue to show double/triple digit growth would be rewarded (Zoom is up by 11% last week and worth almost same as many big tech companies). Zoom, Peloton, DOCU, Cloud companies, Tesla, FAANG would regain their footing and start their march towards all time highs again by end of year.

Energy and Financials would continue to struggle but most likely won't go down much since most of the bad news is already priced in. Healthcare would have major ups and downs due to success and failure of COVID-19 vaccines. Healthcare is also very sensitive to election news since it can have outsized impact on policies like Obamacare...but in general markets would incorporate most of these October Surprises(s) and would be well positioned to recover and resume its march towards all time highs no matter who wins the Presidential election. S&P could be around 3500 by end of 2020. Interesting times....In the meantime, enjoy the sports season with College Football, NFL and IPL...

/Shyam

Let the Games Begin.....

As mentioned in previous blog, Sept started with its reputation and markets did had some volatility with Nasdaq near correction territory (10% down from peak). In a way its healthy so that some froth is out from market and newbie day-traders can get the lesson that markets do go down also! Apple is back below historic 2 trillion market cap and Tesla is back to pre-split "reasonable" valuation. More on this later...

Sept also means start of football (American football...not to confuse with Soccer) season. Normally fall weekends are filled with college football on Saturday and NFL on Sunday. Unfortunately most of the college football is shut down (for legit reasons... no in-person classes..so it doesn't make sense to have in-person games). NFL is taking lessons from NBA bubble season and starting games with almost no crowd. Let's see how it plays out. At least there would be something to watch on Sunday afternoons and Monday/Thursday nights and follow the teams. This year Fall also brings delayed season of Cricket's most watched franchise (maybe world's most watched franchise of any sports) Indian Premier League (IPL). Normally it happens in Spring but due to COVID-19 pandemic, it got moved to Fall and is being hosted outside India (in UAE). While same enthusiasm will be missing, it's always fun to watch IPL games. Personally I am rooting for Mumbai Indians to continue their winning streak.

But the biggest game in the world for next 8 weeks would be American Presidential Election. It has entered in penultimate phase after nearly 2 years of primaries and usual election drama. This election is  going to be one of the most important election in recent history and will decide the fate of America for next decade. The candidates could not be more diametrically opposite (other than their age and race) in terms of policies. Recent polls give clear advantage to Joe Biden but in battleground states, race is narrowing. Is absence of any October surprise, US will have change of guard in Jan 2021. But polls have been completely wrong in 2016. So one can never know till all the votes are counted. This time declaration of winner could take weeks due to higher than normal voting by mail. In 2000, results were declared after US Supreme court decision in mid-Dec. During that time, S&P went down by 5%

So how would markets behave till end of year? Sept/Oct would be choppy as we have many unknowns like Q3 earnings, economy opening, vaccine progress,  holiday season spending, uncertain elections and frothy markets. On top of that, everyone from big players like Softbank to Robinhood day-traders are playing options. All of these are going to add extreme volatility and potential of big gains or losses. So my advice would be to be disciplined and buy stocks of quality companies which have real products people love (e.g. if you have to buy EV player, buy Tesla and don't even touch Nikola which does not even have a single vehicle on road and shorts are circling the company stock). How times have changed....Warren Buffet who likes to buy only stocks of companies which make real products which he can touch or experience is buying stock of Snowflake (symbol: SNOW) in IPO. The Oracle of Omaha had finally acknowledged that software and cloud are real businesses and its time to participate in companies which are building 21st American Century.

Congratulations to Citibank for appointment of first woman CEO of major American Bank. Hopefully 2020 would set the course for first woman President of USA before the decade is over.

/Shyam

Records Galore and Fall is Coming.....

Congratulations Joe Biden and Kamala Harris for Democratic Nomination for President and Vice-President and Best of Luck for winning the elections!

Exactly six months earlier S&P reached all time high - that happened in BC (Before COVID). World changed with record unemployment across most of the countries, many folks who have jobs are working from home and close to 800,000 people died due to novel virus COVID-19. But markets don't seem to care...it took 3-4 weeks to lose 34% from Feb 19 to Mar 23 and since then it has not looked back. If you want to see what V-shaped market recovery looks like, just look at S&P chart. It has recovered all the losses and some more and reached all time high last week. And it all can be attributed to select few companies - many of them happened to be in Bay Area. Paradoxically instead of celebrating these with dot.com type excitement, we are all holed up in our houses and packing our bags in case we have to evacuate due to fires burning across Bay Area. In this record market run, one company made its own record - Apple became first $2 Trillion market cap company in American History (most likely world history). And it did not stop there. Last week, it was adding market cap equivalent of that of Boeing ($95 B market cap) and some change in a single day. Other stock which is not in S&P is having its own record run - Tesla crossing $2000. Along the way, I even lost track of how big Tesla has become. Must be bigger than Exxon, Chevron, GM and Ford combined! What's point in keeping track of these major market cap shifts when valuations seems to be defying logic.

Well - we had seen this movie before! In 1999-2000, only thing companies need was .com in their name and they could do IPO with billion $ valuation and first day gains of 100-200%. 20 years later, .com is replaced by covid-19 vaccine (e.g. CureVac, Novax, Moderna), Electric vehicles (Tesla, Nikola, Workhorse), Online shopping/betting (Overstock, Wayfair, Etsy, Meli, Shopify, Draftking). When things become normal (and they would), we would have to see how many of these companies can hold/grow into their outsized valuations.

That brings me to question - when would things become normal? If we look at calendar, we are in final dog days of summer and fall is about to start. Going back to 2009, check out this CNN article of market action on Oct 1, 2009. This year, it would be almost replica of this and I won't be surprised to see similar articles coming in Oct. 3rd quarter would end with double digit gains. And hen election blues will take over the market. Markets would start going sideways over next 3-4 weeks and have short-term pain in Sept/Oct. Only after US presidential elections, markets would get some clarity on policy. By that time, politics of how to handle COVID crisis would have reached peak. Whoever wins the white house need to decide next steps in the virus crisis since it's going to stay with us at least for another year. If Trump wins, it would be usual chaotic, fragmented response and declare victory too soon. If Biden wins, it would be cautious, shut-down-country type of response. In either scenario, US would have close to 10 million infections and quarter million deaths before it all settles down. Till then, stay safe and healthy!

For all Indians, Happy Ganesh Utsav!

/Shyam

Tale of Two Pandemics and Economic Crisis: 2009 and 2020!

Almost every article you may have read regarding current COVID pandemic, you would see references to  Spanish Flu Pandemic of 1918-1919. But I was surprised to read that just 11 years back, we had similarly wide-spread Swine Flu pandemic in 2009. The CDC site gives very detailed information and timeline about this pandemic.  Let's look at some of the comparisons and timelines and learn/predict the course of COVID pandemic

H1N1 Pandemic 2009:

• First case detected in USA on Apr 15. CDC reported to WHO 3 days later
• 2 weeks later, WHO declared that Pandemic alert
• The distribution of tests started by CDC in May
• Jun 11: WHO officially declared it as Pandemic (less than 2 months after first case)
• Jun 25: Infections reached 1 million
• July: Reached peak of first wave and Vaccine trials begin
• Oct: Vaccine approved and second wave started
• Some school closures but not wide-spread
• Nov/Dec: 5 vaccines approved and CDC put orders of 100 million doses
• Aug 11, 2010: WHO officially declared end of H1N1 Pandemic (14 months duration)
• Total infections: US only: 60 million; World-wise: 700 million to 1.4 Billion; Deaths: US: 13000; Worldwide:300,000
• First year of Obama Presidency

COVID Pandemic 2020:

• First case detected in Wuhan, China sometime in Dec 2019
• China informed WHO on Dec 31, 2019
• WHO declared Pandemic on March 11 (3 months later). The delay of one month and lack of preparedness by most governments (central and states) can be attributed to significant deaths.
• Current stats: US: Over 5 Million infections and 175,000 deaths; 21 million infections and over 700,000 deaths and unfortunately counting
• Over 100 vaccinations in trials and Government ordered over 500 million doses from multiple companies
• Over 50% schools moved to online only
• Last year of Trump's first (and most likely last) term and election year

The financial crisis of 2008-2009 was already wrecking US and world economies when Pandemic came. 

The US and world economies were riding high when COVID 2019 Pandemic came. COVID Pandemic caused the wreckage of US economies with unemployment reaching depression levels

In both cases, markets tanked and reached bottom in March only to recover sharply. Given there are so many similarities, what do we expect in next few months:

• Multiple vaccinations will be approved in late 2020. There would be campaign to vaccinate world population (similar to Apr 2010 campaign is US)
• The COVID-19 Pandemic will end (as declared by WHO) in second half of 2021
• Multiple stimulus would be passed to support the economy and unemployed population
• Fed will keep all its schemes and interest rates low for foreseeable future
• Markets would continue to go up given the fiscal and monetary stimulus support as well as potential of economy rebounding sharply

So as investor, I would recommend continue to make slow but steady investments and don't chase bubble stocks. Last 2 weeks had demonstrated that markets are broadening and sector rotation has started. Small caps are up by 7% while S&P is struggling to break thru all time high of 3386. Check out IWM (small caps) and MDY (mid-caps) ETF. They have higher potential to catch up to rally of big-caps and hence outperforming larger brother SPY

For my Indian friends, Happy Independence Day!

/Shyam

1720-2020: Human's desire to chase Bubbles!

Early Aug of 1720, stock price of South Sea company reached 1000 pounds (from 100 pounds at start of year).  The year was marked with many companies with lunatic, dubious and fraudulent business plans were formed and their stock prices increased many-fold. One company's plan was "For carrying-on an undertaking of great advantage but no-one to know what it is”...sounds very similar to 2020's SPAC IPOs which are coming to market. By 1720 year end, many of these companies stock were worthless. Even South Sea stock returned to gravity and ended year with price close to 100 pounds. Many aristocrats, parliamentarians and even King George I lost money. Talking about gravity, even Newton could not resist the temptation of quick money and invested in the South Sea company and lost significant amount of his fortune.

So why is this relevant today? First of all, its 300 year anniversary of that historic bubble! Second, humans don't change/learn even after multiple such bubbles. We see so much parallels in this year's micro-bubbles. We see SPAC coming out to acquire companies with no products and only business plans. Companies adding "electric" to their existing businesses to get EV valuations. If we look at just last 20 years, we had so many such bubbles - dot.com bubble, housing bubble, crypto bubble, CBD (aka weed) bubble and now EV bubble. Many experienced as well as new investors tend to rush towards these bubbles and get burned. So my advice is: We can learn from Newton and resist the temptation of making the mistake he did when it comes to investing in bubble stock 300 years ago. Remember gravity. It applies to stock prices also!

Next week is marked with many market impacting events:

• Earnings of major companies - Alphabet, Amazon, Apple, AMD to name few
• Fed meeting and its policy going forward especially when COVID infections are jumping across the nation
• Progress and agreement on stimulus talks which would decide fate of unemployment benefits
• Start of phase 3 of COVID vaccine trials
• And one of the most anticipated: Return of the NBA to finish the season. We are missing the sports action for nearly 5 months. I am also happy that finally IPL2020 will happen later in the year. That would cheer up India.
• Final leg of US election phase (less than 100 days away) - it's about time Biden makes his choice for running mate. I strongly appeal to him to select American-African woman as his running mate to demonstrate that he really cares and will also help in invigorating his base and help win presidential election

Markets have been slowly rotating from high-flying high-tech stocks to other sectors of economy like energy and financials as well as from large caps to small caps. Markets always bring the equilibrium in the long-run. We will see some stabilization in markets for next 2-4 weeks before it becomes nervous for the historically bad months of Sept/Oct. S&P would continue to be range bound between 2900 to 3300. Given S&P is at over 3200, it may be worthwhile to stay on sidelines and wait for right opportunity.

I plan to check out movie "Radioactive" (on Prime Video) based on life of Marie Curie. 

/Shyam

Changing of the Guard

Changing of the Guard refers to a ceremony during which soldiers or other officials guarding a major government building or state residence, especially Buckingham Place in England, are replaced by a new shift. It also means a group of individuals or organizations is replaced with another individuals or group.
(source Wikipedia). Last few weeks of market action has demonstrated that similar trend of "Changing  of the Guard" is gaining momentum in valuations of sectors and groups of companies. The trend is always there but gets momentum when major shift happens (like in dot.com era and recently has been expedited due to COVID pandemic). 

"Sector" Changing of The Guard:
Looking at two market bottoms - March 2009 and March 2020 illustrate on how S&P sector weightage has changed just in 11 years.

Mar 2009:

1. Information Technology: 18%
2. Healthcare: 15.1%
3. Energy: 13%
4. Consumer Staples: 12.8%
5. Financials: 10.8%

Mar 2020:

1. Information Technology: 30.3%
2. Healthcare: 15.2%
3. Financials: 13.8%

• Consumer staples has fallen to #5 with 8.2% and Energy had fallen to #10 with only 2.4%

That means a single company like Microsoft is worth twice that of entire energy sector which includes some of the biggest companies like Exxon Mobil, Shell, Chevron and many other energy giants

And in last three months, the disparity in valuations had only grown.

While IT sector had been winner in last 20 years, there has been "Changing of the Guard" happening within the sector. Technology is all about innovation and disruption. The companies which have been most innovative in terms of disrupting the older model have been richly rewarded.

In just last few weeks, market cap of New Guard companies overtook Old Guard companies.

Here are some examples

• Netflix is worth more than Disney, Comcast, AT&T and Verizon
• Nvidia became most valuable semiconductor company overtaking Intel 
• Salesforce overtook Oracle's market cap. Their rivalry is famous in tech industry
• Tesla overtook Toyota as most valuable auto company on planet.
• Paypal is worth almost same as Citibank and Wells Fargo Combined!
• Amazon is worth 4 times of biggest retailer Walmart

There are many such examples. Only two companies from "Old Guard" have reinvented themselves dramatically to become part of New Guard - Apple and Microsoft. Even these companies were written off as old guard multiple times. It takes someone like Satya Nadella or Steve Jobs/Tim Cook to re-invigorate the innovation spirits and willing to bet the company in complete pivot for the future. 

Would some of the "Old Guard" companies repeat the Apple/Microsoft story by disrupting their own businesses and reinventing themselves. Walmart and Disney had shown initial success with their online and streaming businesses. 

What about sectors?

In 20th century, Oil was the blood of the Economy!

In 21st century, Software and Data is the blood of Economy!

And this shows up in the S&P sector valuations. Top 5 most valuable companies in S&P has are from IT and command nearly 20% weightage.

The "Changing of the Guard" is continuous process. In 2030 maybe some of the old guard would become new guard and today's crop of new guard would be disrupted by old guard or New New Guard!

Next week would be start of earnings season with earnings from banks, Netflix and United Healthcare. It would be harbinger for rest of earnings season. So get ready for roller coaster ride for next few weeks!

/Shyam

Economy: Quarantine or Rebound?

The "Irrational Exuberance" which markets were showing got taken out little bit during usual "June Swoon". Now what? It all depends on if Economy is going back to "Quarantine" mode or continuing its path to "Rebound". Let's look at some factors which would decide this.

• Trajectory of COVID-19: Various states (Texas, Florida, California, Arizona etc) have shown increase in infections and positive test ratios. Part of it is due to increased testing,  relaxed norms as well as opening of bars, restaurants and public places. Many nations especially in Asia (India) and Latin America (Brazil) have shown significant pickup in infections. Even China had shown outbreaks in some clusters.
• Hospitalizations and Death Rates: While infections have increased, rate of hospitalizations is lower than infections and mortality rates have also improved due to increased understanding on how to treat COVID patients. Hospitals and health care system is much better prepared than in March/Apr. 
• Progress of Vaccine: Over 100 trials are in progress to find the vaccine at war-footing. Some of the leading trials (by Moderna) are expected to start phase 3 as early as next month
• Fiscal and Monetary Stimulus: Almost all central banks (US FED being the most proactive and innovative) have come up with various schemes to support economy. Many  governments have also opened up their wallets to spend without worrying about fiscal deficits. Even Germany which has always been very conservative is discussing and supporting EU wide fiscal stimulus. Despite political differences, US will end up having another trillion $ stimulus package done next month.
• Employment: In US nearly 1/3 of working population has filed unemployment claims in last 3 months. While there was some positive news in May employment report due to PPP program, the cliff is coming. Unless US government comes up with another stimulus to help small businesses, we will see unemployment spike up in summer and fall.
• Health of Corporates: Q2 will be over next week and earnings season will start in 2 weeks. Almost no one is in position to predict how earnings would come out and what's in store for future. Everyone knows that 2020 is going to be wash when it comes to earnings. It would all depend on would normalcy return in 2021? Corporates have been prudent to raise billions during Apr/May rebound. Even airlines and cruise companies raised billions to navigate next few months to survive and see 2021.

So many factors are at play if economy will go into "Quarantine" or "Rebound". As investor, one has to decide which path economy will take and make selective investment. Here are some ideas for both groups. (Caveat: You need to decide yourself what camp you fall into and do your own due-diligence before investing)

Quarantine:

• WFH: Zoom, Cloud ETF (CLOU), Security ETF (IHAK/BUG/CIBR)
• Retail: Amazon, Walmart, Costco
• Entertainment: Netflix, Spotify, Peloton
• Food: Chipotle, McDonalds, Starbucks
• Vaccine/Cure: Moderna, Gilead, Translate Bio, Sanofi

Rebound:

• Retail: Simon Property Group, Macy's, SL Green 
• Entertainment: Dave&Busters, Disney
• Travel: Southwest Airlines, Expedia, Norwegian Cruise
• Energy: XLE (ETF), XES (ETF), XOP (ETF)
• Banks: Wells Fargo, Citibank, KBE (ETF)

If one cannot decide which way economy will go, do monthly recurring investments in SPY (S&P ETF), MDY (Midcap ETF) and IWM (Small-cap ETF). Keep your investing simple and enjoy the summer - Either in your own backyard or outdoors by following all social distancing norms and 

wear the mask and help save lives!

/Shyam

Irrational Exuberance?

Last week would be marked as one of the historic week in America. The brutal murder of George Floyd by Minneapolis Police in plain-sight brought centuries of racism in US to the fore-front. The peaceful protests were just and warranted to bring attention to this ongoing pandemic in US society (and many other countries). Some of the protests turned into riots due to opportunistic looting by some criminal elements. It's time for US to root out the silent racism and reform the police departments across the nation! And looking at Amy Cooper's infamous racist video, we all must internalize and root out whatever un-conscious or silent racism which we may have!
Exactly in same week, markets were ignoring all of these events and almost partying like it's late 1990s-2000. That reminds me of the famous speech by former US Fed chairman Alan Greenspan's about "Irrational exuberance" in Dec 1996.

As Yale Prof Shiller wrote in his 2000 book (source: Wikipedia)

Irrational exuberance is the psychological basis of a speculative bubble. I define a speculative bubble as a situation in which news of price increases spurs investor enthusiasm, which spreads by psychological contagion from person to person, in the process amplifying stories that might justify the price increases, and bringing in a larger and larger class of investors who, despite doubts about the real value of an investment, are drawn to it partly by envy of others' successes and partly through a gamblers' excitement.

We are seeing exact same behavior in the markets. Markets are looking at if COVID-19 spread is over, economies fully opened up, unemployment again making records (on reaching low) and want to resume its upward journey where it left off on Feb 19. There are some positive news about opening of economy going better than expected, containment of COVID spread and unemployment report is not as bad as feared (expectations were 20% unemployment. It came at 13.3% which is still much higher than 2008-09 great recession). The Fed actions and giant stimulus by US government replaced/supported nearly 50-60% of GDP which is more than one quarter GDP loss due COVID. The cheap and plentiful money has to go somewhere and equity markets is the only bet which can provide some return in ultra-low or negative interest rate world.

So what's direction for markets for rest of year and what should individual investor do?
Here are my market predictions (which could be way off the mark if another black swan event comes)

• After going up by some more (S&P around 3300), markets would trade side-ways till Q2 GDP and earnings clarity. 
• Once earnings are out and state of economy openings become clear, markets would be looking at Nov elections. As of now Biden is leading Trump by defensible margin. It would come down to if Democrats control all three branches (President, House and Senate) or GOP is able to hold at least 1 or 2 branches. If GOP is able to retain either President or house or senate, markets would be ok since split government is always better than one party rule.
• Before year-end markets would regain all time highs. It could come as soon as summer before it takes pause or go down by 5-10% before elections.

So in these frothy markets, I would recommend following.

• Don't chase the market highs
• Take out some of the gains for future opportunity
• Even in these exuberant markets, one can still find many opportunities for slow and steady returns. To uncover such opportunities, apply "Shyam's Rule" - more details on this in next blog!

Looking back at history, 2020 would be like 1968. In 1968, world had to face H3N2 (also known as HongKong Flu) Pandemic, civil unrest and protests against US-Vietnam war, assassination of Dr. Martin Luther King and Robert Kennedy and election year. Despite all of this, In 1968, the S&P 500 fell 9% from January to March, rallied 24% off of the bottom, and finished the year with a total return of 10.8%

As Mark Twain said, “History Doesn't Repeat Itself, but It Often Rhymes”

/Shyam