Earnings Up, Happy Weekend - Your Money October 22nd 2021

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I don’t know where to start this week. We had so many stories and themes swirling across the news tapes, I am not sure investors truly knew what to do. Crude oil continued its climb cracking through $84 per barrel but we got barely a whisper of gains for Canadian investors. Mind you, I have a feeling, international investors, as well as local ones, cannot believe the near draconian CO2 emission targets set by our globe trotting Prime Minister. Industry has been working towards a target date of 2030 to honor reductions in CO2 and now out of the blue, Trudeau has decided he wants them met by 2025. You cannot just waive a magic wand and say “abracadabra, emissions are now 40% lower”. It probably takes engineers 18 months just to redesign the rigs and refineries, then the equipment must be designed, built, and installed while at the same time trying to keep production schedules at static levels. Otherwise there are no profits to pay for the changes.

Yes I know that industry can work harder at reducing gas flaring, but according to Energy Now, Canadian producers were able to reduce flaring by 49% between 2014 and 2019. To put that in perspective, the industry managed to increase its total oil and gas output by 25%. If industry seeks to reduce further flaring, they will either have to capture and transport it to refineries which means tasking energy companies with building the necessary infrastructure on the hope of finding a new commercial deposit. But let’s move on.

This week the street was abuzz with the launching of the first US Bitcoin ETF that allows investors to indirectly own Bitcoin futures that trade in Chicago. I wouldn’t call it a feeding frenzy, but according to one report I read today, the vehicle has almost reached its maximum number of contracts (2000) permitted by the CME. Furthermore, there are several more new ETF products ready to join them. Meanwhile despite the avalanche of ETFs trading this week, the price of Bitcoin actually dipped slightly. Who knows what will happen next week.

Turning to bonds, I imagine most Wallstreet traders are reaching for their antacids and antianxiety medications after Jay Powell reiterated his plan to start tapering his monthly bond buying program aka quantitative easing. There is no doubt in my mind the $8.3 Trillion in bonds purchased by the Federal Reserve has resulted in record breaking stock prices. With interest rates at near zero, where else do you put your investable dollars (did I mention Bitcoins)? Well the party is about to end. Mr. Powell confirmed today that the Federal Reserve should start to reduce the monetary stimulus before the end of the year to curb inflationary pressures bubbling to the surface. As you know I believe inflation may not be transitory in nature and could put the central bank in a trap. Time will tell but 10 year bond yields may be basing at 1.6% versus 1.3% a couple of months ago. If inflation pops, those yields will likely jump too. Stay tuned.

Finally, this week’s action was clearly motivated by earnings and woe betide the company that misses. Snap Inc. saw its stock price hammered 26% today. Beyond Meat did not even report, they just gave a warning for the next quarter and the stock plummeted 12%.

On the other hand, you must admire the panache of Mr. Musk. On Wednesday Tesla reported third quarter earnings of $1.44 (it would have been higher except they booked a $51 million dollar loss on their Bitcoin holdings) and by Friday the stock had rallied nearly $45 bucks to $909 per share. (Its forward P/E is still 162 times).

Meanwhile, American Express saw their quarterly earnings jump 25% to $2.27 per share (21 times earnings) and the stock moved up $9 dollars or 5.4%.

Next week over 950 companies report so its anybody’s guess as to which way things will move. Most of the big-name meg caps will dominate the headlines. However, I should point out that investors will keeping an eye on some key economic stats that could spook investors despite a run of earnings beats. Third quarter US GDP will be out on Thursday just behind consumer confidence and new home sales on Tuesday and ahead of an inflation stat on Friday. Stay tuned.

Happy trading.

Stay Safe.

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Steve Bokor

Steve Bokor

Portfolio Manager