Making sense of the markets this week, October 24, 2021

Each week, Cut the Crap Investing founder Dale Roberts shares financial headlines and offers context for Canadian investors. 

The U.S. earnings beat just keeps coming 

For week one of the earnings season, 41 S&P 500 companies reported their third-quarter results, and 80% beat earnings expectations, according to FactSet. While reports have been strong, investors are looking for commentary from corporate America about supply chain issues and inflation. 

Last week’s earnings season was just the spark the markets needed, after giving back the gains of the Summer of 2021. 

And moving through the week ending October 24, that beat record ticks up to 84%. 

Of S&P companies that have reported Q3 results, 84% posted earnings that topped expectations, close to a record high. But beats were mostly shrugged off by stock traders, and misses got punished by the widest margin since Bloomberg started tracking the data in 2017. @lena_popina

— Lisa Abramowicz (@lisaabramowicz1) October 21, 2021

The S&P 500 (IVV) closed up for several sessions into this week, coming within a hair of a new all-time high. The U.S. market has wiped out its 5% pullback. 

When I track the earnings reports on Seeking Alpha, I mostly see beat after beat. 

Here’s a look at some interesting sectors and stocks: 

Airlines reported that they are still not profitable, and their load capacities are still well below 2019 levels. 

Southwest Airlines (LUV) beat on earnings (meaning they lost less than expected). Though revenue increased to $4.68B (+161.5% Y/Y) compared to a very challenging quarter in 2020. Revenues are still down 17% compared to the pre-pandemic quarter of 2019. 

Y/Y = year over year. 

Here’s a comment on Seeking Alpha from Southwest Airlines CEO Gary. C. Kelly. He suggests traffic is picking up heading into the holiday travel season. 

“Our 2022 capacity planning reflects more conservative staffing assumptions, as well, all compared to historical norms. With respect to our fourth quarter 2021 revenue outlook, while there are lingering effects from the summer COVID-19 surge and recent operational challenges, we are encouraged with renewed momentum in leisure and business traffic, revenues, and bookings—especially over the holidays.” 

And below was offered on CNBC there were some solid numbers in the consumer staples sector and healthcare. 

“Johnson & Johnson also beat third-quarter earnings expectations by 25 cents per share. The health care stock rallied 2.3%.

“Procter & Gamble continued the bullish trend with better-than-expected earnings, but its shares dipped nearly 1.2%. The consumer products giant said it is raising prices to cover rising commodity and freight costs and warned that inflation may continue.

“Elsewhere, Walmart shares gained 2.1% after Goldman Sachs added the big-box retailer to its conviction buy list, saying the stock could rally nearly 40%.”

I hold JNJ and WMT. 

And of course, all eyes were on Tesla, the superstar poster child for the electric vehicle (EV) market. 

Tesla (TSLA) reported record sales and profits, even as the company and the automotive sector faced incredible challenges due to supply chain issues. 

The automaker reports that it produced 237,823 vehicles in Q3 (+64% Y/Y) and delivered 241,391 vehicles (+73%). With new production set to come online, Tesla is certainly poised to deliver more than 1,000,000 vehicles annually in 2022 and beyond. 

It delivered earnings of $1.44 per share. 

On forward guidance, the company offered that it projects 50% annual growth in deliveries. In this space we’ve looked at Tesla and the rich valuations, but the growth story continues to dazzle Wall Street and retail investors. 

Here’s a previous look at Tesla earnings from April of 2021. 

Tesla stock is within striking distance of the all-time highs reached early in 2021. Here’s a Tesla stock performance chart. 

Source: Seeking Alpha.

In one of my wife’s accounts, we have exposure to the EV and battery market and Tesla by way of the BATT ETF. That ETF has finally started to move again in our favour. Tesla is the top holding in BATT, at 8.2%. 

Source: Seeking Alpha

Here’s a tweet from Liz Sonders at Charles Schwab that shows the performance of sectors in the U.S. market, year to date. 

In S&P Composite 1500®, only 4 industries are down YTD; Oil, Gas and Consumable Fuels in lead, +63%; Wireless Telecommunication Services most notable laggard, -11%; not surprising to see Airlines among laggards⁦@SPDJIndices⁩ ⁦@SPGlobal⁩ pic.twitter.com/c8nNDS1goa

— Liz Ann Sonders (@LizAnnSonders) October 20, 2021

The first bitcoin ETF in the U.S. 

The week ending October 24 also saw the launch of the first bitcoin ETF in the U.S. The price of bitcoin rallied to a new all-time high. 

The “problem” with the ETF is that it is futures-based. It does not hold bitcoin directly but instead holds futures contracts. In many ways the ETF is anti-bitcoin because it is anti-scarcity. 

From April of 2021, here’s a must-read, when we looked at Bitcoin, David Bowie bonds and scarcity cred. That ETF has no bitcoin street cred. 

And of course, here’s a post that will help you make sense of bitcoin. 

I checked in with bitcoin expert and enthusiast Greg Foss. Foss is a must follow on Twitter. You can also follow this guy, too (ha!). 

On the new bitcoin ETF Foss offers this in an email exchange (with me):

“A futures based ETF is better than nothing for the US market,” he writes. “The reason for approving futures versus spot is the regulatory angle. CME futures fall under a regulatory dome that globally traded BTC cash does not. Concerns of cash market manipulation (unfounded imo) are avoided with a futures product. 

“The problem is that the futures curve is in contango (upward sloping). So the fund buys three-month futures and as that future rolls down the curve towards the spot price, there is bleed. There could be substantial tracking error compared to cash markets.”

The ETF is a PR win for bitcoin but a scarcity loss. Money could flow to an ETF that does not hold bitcoin. That said, the bitcoin story is bigger than the unfortunate “bitcoin” ETF in the initial launch week. 

The demand for the ETF was incredible, even pushing the limits of futures contracts available.  

This ETF did set the table for the first bitcoin ETF in the U.S. that will hold bitcoin. Imagine what will happen when a real bitcoin ETF arrives in the U.S.? The effect will be massive IMHO. 

As readers know, Canada was first to offer bitcoin ETFs, and they continue to be very popular with Canadian investors. 

I continue to use bitcoin funds in the portfolio. It’s just another portfolio asset, now above the 5% portfolio allocation level. I will rebalance on schedule. 

In this space, we’ll be on the lookout for those real bitcoin ETFs in the U.S. 

The two greatest economic scars from the pandemic. 

One of my favourite economists is John Mauldin, who writes at Mauldin Economics. He recently offered a refreshing post on supply chain issues and a surprising economic event that looks to create a possible major economic threat: The Great Resignation, a phenomenon of the high numbers of people quitting their jobs right now. 

Here’s logistical sandpiles. 

What is fascinating—but perhaps is not surprising—is that our very sophisticated global supply chain is getting more fragile as it gets more sophisticated. It is chip (semiconductor) wafer thin and the pandemic exposed its vulnerability. 

From that Mauldin post … 

“Today’s financial system is complex but our logistical systems are, too. The modern economy that brings us so many wonderful goods and services is a breathtakingly complicated web of production, transportation, and storage capacity… and most important, the marvelously complex division of labor among millions of people around the world. When it all works, we (at least in the developed countries) have on-demand access to luxuries unimaginable even a few generations ago, and we regard it as normal.

“The problem is complex systems are inherently fragile.”

It is the supply chain issues that are greatly contributing to inflation, and that so many are hesitant to work is piling on the pressure for rising costs. The pandemic has made us rethink life and the kind of work that we want to do—or not want to do. And there are many reasons as to why there is a scarcity of workers around the globe. 

On the U.S. market, from that same post … 

“But something interesting is happening. We just came off a recession, barely recovering in a Stumble-Through Economy. But in the last 12 months, 15 million people have quit their jobs.

“Back out the ‘quitters’ and you actually get a 1.8% unemployment rate, which is incredibly tight. Now, many of the quitters will find other jobs (or already have). The Atlanta Fed tells us that the average “quitter” gets a 5.4% wage increase in the next job.

“But no matter how you look at it, not only is the labor market tight, something is clearly happening underneath the top-line data. Look at the chart on quitters below. We’ve never seen anything like this, and the same is happening around the world.”

And here’s a shocking stat from that post: 

“In studying Australia, Canada, Singapore, the United Kingdom, and the U.S., McKinsey found 40% of surveyed workers said they are likely to quit within the next six months. Wow!”

In Canada, Global News reports that Canadian firms are struggling to find workers and are willing to pay more for staffing. 

Do yourself a favour and have a read of that Mauldin post. The Great Resignation phenomenon is an event I’d guess no one saw coming in the early stages of the pandemic. 

The rippling repercussions is an event to watch. 

And this tweet from Lisa Abromowicz suggests there is more pain to come on supply chain jams. 

One of the biggest U.S. logistics companies sees supply-chain disruptions getting worse before they get better. This means higher prices and ongoing shortages ahead. https://t.co/Ixazqr5rlo

— Lisa Abramowicz (@lisaabramowicz1) October 20, 2021

Bond investors have nowhere to hide? 

This post from Yahoo! Finance delivers the hard news that bond investors are facing a year of peril with few places to hide. Factor in inflation, and we have a negative real yield for core bond ETFs. As inflation increases those bonds are set to deliver even lesser returns in inflation-adjusted terms. 

From that post: 

“Global bond investors face an old enemy—inflation—and the universe of fixed-income assets doesn’t look to offer much in the way of shelter.”

Who would want to hold an asset that is almost guaranteed to lose money over the next few years? That post continues with … 

“U.S. Treasuries, European sovereigns, U.K. gilts and emerging-market credit are all set to lose money over the 12 months through September as dwindling coupons provide little cushion against rising yields, according to forecasts from Bloomberg Intelligence. Adding to the potentially toxic environment for bonds is the prospect of major central banks unwinding debt purchases and raising interest rates.

“Government and corporate bonds globally have already lost 4.4% this year, the biggest decline for any similar period since 2005, according to a Bloomberg index.”

Global bonds are poised for their biggest annual decline since at least 2005: Bloomberg index data pic.twitter.com/Gx5iAVJtmv

— Lisa Abramowicz (@lisaabramowicz1) October 19, 2021

Mark Seed, at the very popular investment blog My Own Advisor, asked why would anyone own bonds now? 

In that post Mark answers, with very good reasons, why an investor might hold bonds: 

However, when it comes to owning fixed income I believe these three key reasons come to mind:

Bonds can help your investing behaviour—helping you ride out stock market volatility.Bonds can be used to rebalance your portfolio—helping you keep your portfolio aligned to your investing risk tolerance and therefore asset allocation (mix of stocks and bonds).Bonds can be used for spending purposes—where some fixed income is “king” for major, upcoming expenses or spending. 

We should keep in mind that our risk tolerance level does not change just because bond yields are low. If we need to manage the risks, we need to manage the risks. 

And, I would not look at bonds in isolation. 

Bonds play an important role in the portfolio. While stocks often play the offense, bonds are largely there for defense. It would be great if they could keep an eye on the stock markets while also delivering a yield above inflation, but that is not the reality today. 

And MoneySense readers know that we can create a portfolio that is ready for any economic environment, even inflation. Bonds play a role within that mix. 

You might even consider inflation-adjusted bonds that start with the underlying yield and then tack on an adjustment that matches the reported inflation. 

And yes, many keep counting the simple couch potato portfolios, but they have so far proven quite resilient. On my site, I recently offered a performance update for the wonderful all-in-one one ticket ETF options. 

The 60/40 traditional balanced portfolio is within 2% of its all-time high. Here’s the chart for iShares XBAL. 

Source: BlackRock Canada site

Teamwork. 

Dale Roberts is a proponent of low-fee investing and he blogs at cutthecrapinvesting.com. Find him on Twitter @67Dodge.

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