Demand Push Inflation; Buybacks On Deck

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In his Daily Market Notes report to investors, while commenting on demand push inflation, Louis Navellier wrote:

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Q1 2021 hedge fund letters, conferences and more

Buybacks On Deck

The foundation under the stock market remains strong.  As an example, The Wall Street Journal recently reported that through May 7th, $504 billion in stock buybacks have been authorized this year, which is the fastest pace for stock buybacks in 22 years!  Obviously, this is great news, since the WSJ pointed out that cash rich companies in the S&P 500 buying their stock back naturally outperform the overall S&P 500.

Corporate America continues to aggressively issue corporate bonds at ultralow rates to refinance their existing debt as well as add to their cash reserves.  Since the average Return on Equity (ROE) at most S&P 500 companies is much higher than money market rates, the Chief Financial Officers at these companies tend to use their excessive cash to buy back outstanding stock to boost ROE and underlying earnings per share.

For the second quarter, the analyst community is estimating that our Large Cap Growth stocks are forecasted to post 62.6% average annual sales growth and 57.1% average annual earnings growth.  Furthermore, since our Large Cap Growth stocks also are characterized by an average analyst revision of 17.8% in the past three months, they will likely continue to sustain big earnings surprises.

The Atlanta Fed is currently estimating second quarter GDP at a 10.1% annual pace (will be revised on Thursday, May 27th).  There are still a lot of details in the pipeline that will determine second quarter GDP growth.  The primary factor that must continue to stimulate overall economic growth is that the “velocity of money,” which is how fast money changes hands, must continue to accelerate, so both business and consumer confidence remains crucial.

Demand Push Inflation

We are now in the midst of “demand push” inflation with soaring commodity prices, shipping bottlenecks and a growing labor shortage for some jobs.  Higher prices, especially for food and energy, essentially act like a tax and can hurt consumer confidence.  Multiple Fed officials have commented that they were surprised that the consumer price index (CPI) surged to a 4.2% annual pace in April.  However, the Fed seems more obsessed with achieving their unemployment goal, which I think is 4%.

The latest Federal Open Market Committee (FOMC) minutes revealed that some Fed officials are ready to discuss “tapering” and possibly reducing their quantitative easing in the upcoming months.  However, key short-term interest rates are likely to remain unchanged well into 2022 as the Fed has previously provided guidance.  So a “Goldilocks” environment of low interest rate and strong earnings persists, which is ideal for continue stock market appreciation.

The stock market is now in the midst of “refocusing” after being distracted by military confrontations, wild crypto currency gyrations and continued tax uncertainty.  Regarding taxes, The Treasury Department recently proposed a 15% global minimum corporate tax of 15% after Britain rejected its call for a 21% minimum tax.  Essentially, Treasury Secretary Yellen is trying to get our global allies to agree on a lower global minimum corporate tax, which then she could increase in subsequent years.  It is odd for the U.S. to negotiate taxes with our allies, but since the European Union was challenging U.S. companies headquartered in Ireland, there should be some sort of agreement on corporate taxes amidst our allies. 

In the meantime, I continue to stick by my previous statement that Senator Joe Manchin remains the most powerful person in Washington D.C., since he represents the swing vote in the Senate regarding taxes.   As a result, any increase in corporate taxes, individual tax rates, plus qualified dividend and capital gains taxes, remains in the hands of Senator Joe Manchin.  One factor that caused tax negotiations to stall is the continued debate about state and local tax deductions (SALT), especially within the Democratic party.  The bottom line is most tax reform takes at least a year to negotiate and since 2022 is a mid-term election year, at the current pace of negotiations, I do not expect significant tax increases.

Stock Market Distractions

In summary, the stock market is easily distracted, but recent distractions, like military events, cryptocurrency gyrations, surging inflation, an international disagreement on corporate taxes, plus reassurance that the Fed will keep key interest rates low until its unemployment mandate is achieved, bode well that the Goldilocks environment will continue.  I was wrong about corporate sales and earnings peaking in the first quarter.

The second half of June should be characterized by quarter-end window dressing that should benefit our growth stocks.  The 90-day realignment for most ETFs should represent the grand finale of institutional buying pressure and window dressing at the end of June.

As we move into July, I expect investors to be in a good mood, since investors typically rally heading in holiday weekends.  Commencing in mid-July, the second quarter announcement season commences and amazingly, both sales and earnings momentum is expected to persist.  That is the good news.  The bad news is that August through early September is a seasonally weak period for the stock market, so there could be some “air pockets” ahead.

Launching Pad For Growth Stocks

As the stock market gets bumpy in late summer months, I expect a flight quality and for the breath and power of the overall market to narrow.  Typically, since our growth stocks are characterized by strong forecasted sales, earnings, positive analyst revisions and big earnings surprises, many should “break out” out and lead the overall stock market.  The stock market’s recent rotation into some value stocks, briefly expanded the stock market’s breath and power.  This essentially built a “launching pad” for another explosion in growth stocks to resurge in the wake of their better than expected second quarter announcements.

In the first quarter, Large Cap Growth stocks posted an average earnings surprise of 31.2%, and since the analyst community have revised their average annual earnings estimate 17.8% higher in past three months, I am expecting another round of big earnings surprises.

I am often asked about what can go wrong to derail the stock market.  The Biden Administration will likely have to comment on the Defense Department’s UFO report in June on the “tic tac” vessels that have been tormenting the Navy.  Frankly, I am surprised that Hollywood has not made a move about these UFOs, but maybe that will happen next year.  An extraneous event, like shocking UFO news, a major West Coast earthquake or the Yellowstone volcano erupting are about all that I can foresee that could potential derail the stock market in the upcoming months amidst a robust global economic recovery.

Tax Reforms

The Biden Administration is now fighting the Democratic Party over proposed tax changes (e.g., the SALT deduction), military aid to Israel, the border chaos, infrastructure spending, so the honeymoon is over because the infighting in Washington D.C. is escalating.  As a result, I do not expect any significant tax reform until early 2022, if at all.  West Virginia Senator Joe Manchin remains the most powerful person in Washington D.C., since he represents the swing vote on any tax reform.

Why has the institutional buying pressure fizzled for some stocks? In the case of Chipotle Mexican Grill, the institutional buying pressure could have ebbed due an acute labor shortage (of low paid workers) and/or the growing chicken shortage (the roosters are less productive according to Tyson Foods).  Regardless, of what caused institutional buying pressure to ebb, I do not want to argue with the institutional herds, so I strongly recommend selling good stocks to buy better stocks with higher quantitative grades and more persistent institutional buying pressure.

Speaking of arguing, you might have noticed that ARK Investment’s Cathie Wood has been aggressively defending Coinbase, cryptocurrency investing and setting wild price targets for Tesla and Bitcoin.  This against the backdrop of China banning financial institutions and payment companies from facilitating transactions in Bitcoin and other cryptocurrencies.  Finally, setting a price target for Tesla is just a wild guess, especially in light of the company’s problem with April sales disappointments in China and Europe as well as the fact that Stellantis declared it will no longer buy carbon tax credits from Tesla, which have accounted for virtually all of Tesla’s earnings for the past several quarters.

In general, don’t argue with institutional analysts, news media and other catalysts that trigger institutional buying pressure.  The stock market is really a manic crowd and we do not want to be stampeded by institutional investors that follow the analyst community and new media.