Forget Netflix watch IBM - Your Money April 23rd 2021

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So even though most eyes will be on the release of 900 odd companies earnings, bond investors will be paying close attention to Durable Goods, Consumer Confidence and First Quarter GDP which is expected to come in 4.3%. That is hot but it is also coming off a low base and as the year progresses, expect the rate to moderate. Perhaps of greater significance is the way in which investors are shaking off the love affair with the Biden Administration. Vaccine rates are well on the way to the targeted “herd immunity” level but with CEO’s from both Pfizer and JNJ confirming future booster shots, means the effects of the pandemic are not going away anytime soon. Good news for pharma companies not so good for densely populated cities not just in the US but in countries like India and Japan as well.

Meanwhile, one cannot stop and wonder whether US Corporate earnings will support current stock prices. Since the recovery that started a year ago, investors seem to be conditioned to large stock market gains that currently defy gravity. The fact that PE multiples are trading significantly above their five year average suggests that we are living in a fantasy world compounded  by the implicit actions of various central banks. Economic cycles end when growth rates stall as demand for raw materials drive prices beyond the rate at which companies can increase prices. Inflationary pressures drag interest rates to unsustainable levels and business conditions stall. Debt gets consolidated leaving banks with holes in their balance sheet, pull in credit and wait for the cycle to restart.

But Not anymore.  With central banks guaranteeing virtually all of the debt in the market place, corporations and governments spend with impunity because they know they will get bailed out if something goes wrong. It’s akin to renting a car, taking out no deductible insurance and then driving recklessly down the highway. Risk behaviour is distorted with investors “going all in” aka “buy the dip” regardless of potential losses. This may end badly when foreign creditors stop buying government issued debt, currencies crash and bond yields spike.

But on to happier things. Not all companies missed on their earnings this week. In fact quite a few of them beat earnings estimates and their stock prices improved dramatically. And if the economic stats do indeed beat expectations, stock prices could set record highs yet again. We definitely take solace in the price of crude oil as it finished north of $62. More significantly, copper hit a 10 year high as investors jump on the EV gravy train. I recall seeing a stat showing a near doubling of copper usage in an electric vehicle versus a gasoline version and with a number of older mines running out of ore and the Chinese stock piling, the cycle is on fire. Even gold companies can benefit especially those that mine sulphide deposits with copper, lead, zinc and gold.

So fasten your seatbelts, put your trays in the upright position and smile as we prepare for lift off.

Stay Safe.

Happy trading.

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Steve Bokor

Steve Bokor

Portfolio Manager