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Evergrande Has Put A Chill On Chinese Names

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

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Q3 2021 hedge fund letters, conferences and more

Tenuous Start

As the new year begins, the screen opened up green across the board, as expected, and then pulled back to slightly red before heading north again.  As optimistic investors at large want to be, and are traditionally as each year begins, this is no “normal” year.

Chinese Chill

The news out of China than Evergrande, the largest property developer in the world who has defaulted on its debt, has stopped trading its stock in Hong Kong with no reason given has put a chill on Chinese names which already had a tough 2021.

Perhaps the more challenging part of the first day of the new year is that US interest rates have jumped up; the 10 year is up 10 basis points to 1.60%, the 30 year up 8 to 1.97%, even the 2 year is up 6 to 0.79%. Rates rising is logical and expected given the Feds announced policy changes, but reality is always harder to swallow than jawboning. Nevertheless, despite all these concerns, equities are still the only game in town, with cash and bonds offering negative real returns, and equities forecasted with double-digit earnings growth and record stock buybacks anticipated.

Spectacular January

We’ve climbed bigger walls of worry than we face today, so stay long.   I am expecting a very strong January, characterized by higher trading volume as well as stunning fourth-quarter sales and earnings announcement.  Interestingly, thanks to political gridlock, the private sector is expected to dominate GDP growth in 2022.  Inflation is expected to persist, but may moderate somewhat in the second half of 2022.  Ironically, the current inflationary environment is helping to boost our growth stocks, which remain a great inflation hedge.

In my opinion, the Fed will remain accommodative in 2022 and the Goldilocks environment will continue.  The U.S. dollar is strong because compared to Europe and Japan, the U.S. has stronger GDP growth as well as higher absolute interest rates.

Although the Fed is in the early innings of Modern Monetary Theory (MMT), which is the seemingly unlimited money printing that both Japan and continental Europe have pioneered, we still have positive interest rates in the U.S. which is attracting foreign capital and helping to strengthen the U.S. dollar.

This international buying pressure represented 69% of the bids at the most recent 10-year Treasury auction, which is why the Fed can steadily reduce their quantitative easing in the upcoming months.

Something Fishy

The is one more important tidbit to mention.  Amidst all the reports that billionaires, like Elon Musk and Microsoft Corporation (NASDAQ:MSFT)’s CEO, are selling a record amount of stock, what is not being reported is that stock buybacks hit a record high in the third quarter and were also likely strong in the fourth quarter.   Wall Street does not care if it sells stocks or bonds.  Right now, due to dismal post IPO performance in 2021, it appears that new stock offerings will suffer, but corporate bond offerings will likely remain robust, so stock buybacks are expected to remain strong.                                     

As any stock market climbs higher, the leadership typically becomes more narrow.  So the institutional buying pressure is anticipated to chase fewer stocks as year over year comparisons become more difficult.  Fundamentally superior growth stocks are poised to continue to break out as market leaders.  Superior fundamentals are important as the stock market becomes more selective.  Some stocks with superior fundamentals that have broken out include:  Alpha & Omega Semiconductor, Cadence Design Systems, Calix, Celsius Holdings, Clearfield, Digital Turbine, Enphase Energy, Fulgent Genetics, IDEXX Laboratories, KLA Corporation, Nvidia, St. Time Corporation and United Microelectronics have appreciated in excess of 100%.  Many more growth stocks should be breaking out in the upcoming months.

What was most impressive about the NASDAQ rebound since December 20th is how our growth stocks rebounded on light trading volume, which brings up the question how will they perform on higher trading volume?  I expect nothing less than a spectacular “melt up” on higher trading volume in January.

In late 2022, the stock market will become increasingly distracted by the mid-term elections, where the leadership in Congress is expected to change.  Ironically, if the Biden Administration decides to cooperate with the new Congress like Bill Clinton worked with Newt Gingrich, it could save Joe Biden’s legacy.  In the end, Wall Street loves gridlock and the political environment is suddenly becoming especially favorable for growth stocks.

Coffee Beans

Fish rained from the sky in Texarkana, Texas during a recent storm. Animal rain is a phenomenon that occurs when small water animals like frogs, crabs, and small fish are swept up in waterspouts or drafts that occur on the surface of the earth. They are then rained down at the same time as the rain. Source: UPI. See the full story here.