Making sense of the markets this week: June 14


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

Meme stocks: They’re back…

I thought new investors would get tired of losing money. But I guess not. 

Crowd co-ordinated investing in companies specifically to drive the stock prices higher is back. Of course, Reddit’s army of investors gave us one of the more interesting stories of early 2021. With the GameStop washout behind them, they continue to meet in a forum called WallStreetBets (or WSB to insiders). 

Now they’ve got a taste for fast food by way of Wendy’s—the takeout giant’s “tendies” in particular, they believe, are both a menu item and an investment opp. That CNN Money post explains the double entendre: 

“…some Reddit users also were quick to point out the delicious irony of the fact that Wendy’s investors were generating big “tendies” — a term that is both WSB code for trading profits as well as a nickname for Wendy’s chicken nuggets.”

What could go wrong? Chicken tendies mean juicy profits. It’s built right into the recipe. 

One problem might be that Wendy’s does not make a lot of money at today’s stock prices. According to Seeking Alpha, even the forward P/E ratio (based on how much money they’re forecast to make) is over 39. That’s more expensive than the U.S. stock market as measured by the S&P 500. 

Perhaps the only thing that will help current investors is more investors ordering up Wendy’s to drive the price higher. I guess that’s the general idea. 

It’s known as a pump-and-dump trade. And it will likely end poorly for the investors left holding the bag. 

It’s not the end for GameStop

GameStop, a video game retailer that has seen better days, was the Redditors’ original target. And they are playing at it again. 

GameStop shares were recently driven back to the highs reached in the glory days of February 2021. Here’s a chart courtesy of Seeking Alpha. 

Source: Seeking Alpha

The company reported earnings this week. Well, what they reported is that they don’t make money. From the GameStop earnings report as per Seeking Alpha: 

“Net loss of ($66.8) million, or ($1.01) per diluted share as compared to net loss of ($165.7) million, or ($2.57) per diluted share, in the fiscal 2020 first quarter. Adjusted net loss of ($29.4) million or ($0.45) per diluted share, compared to adjusted net loss of ($157.6) million or ($2.44) per diluted share in the fiscal 2020 first quarter…”

A stock up almost 1,500% in one year, for a company that does not make any money? 

On Wednesday, June 10, after digesting earnings, GameStop is down over 14% into Thursday as I write this post. 

And I thought that traders and investors might take the Summer off. Perhaps they need more distractions? 

I’ll stick to investing in companies that make a lot of money and often pay some attractive dividends. 

U.S. tech is expensive, but not 2000 expensive

Along with the fear of inflation, a leading headline grabber in 2020 and into 2021 has been the expensive U.S. stock market, and especially the tech sector. Investors have been willing to pay up for those mega tech leaders such as Apple, Alphabet, Microsoft, Netflix and Google. Those big techs have achieved status akin to utilities stocks, and they combine the same kind of growth history and growth potential. That’s an appealing combination, and investors have driven those stocks to expensive levels. 

A report from Bank or America analyst Savit Subramanian suggests the U.S. tech sector will no longer have a monopoly on growth moving forward through 2021 and perhaps into 2022. 

 

Scott Barlow offered this from Subramanian’s report:

“…valuations are not attractive relative to the S&P 500 as a whole. Earnings forecasts for technology and communications services are lower than the benchmark—energy, industrials, consumer discretionary, materials and financials are all expected to grow profits more quickly—and yet technology stocks trade at a premium valuation to the index.”

So perhaps moving forward, tech is not where they keep the growth in the U.S. market. There are more current earnings and more growth potential, according to analysts, in the total market outside of the tech darlings. 

Value stocks (greater current earnings) have been outperforming the market for many months.  

Also, the report suggests that while the tech sector is expensive, is not 1999 dot-com crash era expensive. That high valuation level in the late 90’s led to the lost decade for U.S. stocks. 

From Barlow in The Globe and Mail… 

“In Monday’s “The U.S. equity investor’s guide to Tech stocks” research report, Ms. Subramanian noted that technology stocks are now less obscenely valued than in 2000. Then, the forward price-to-earnings ratio for technology stocks and communications services stocks was 53 times and 34.1 times respectively. Now, it’s 25.0 and 22.5.”

That might provide a floor under any kind of tech correction or tech crash that might occur. 

For index investors, that potential broad strength across many sectors is good news. It would be more than welcome if companies and sectors (other than tech) took the reins for a while. 

For those investors who select their own stocks and ETFs, there might be an opportunity to swing away from tech or build positions and overweight to those other sectors. 

The inflation watch: big numbers

We’re watching inflation on both sides of the border, and around the globe. On Thursday morning, June 10, we had the CPI (consumer price index) report in the U.S. for the month of May

From that government site link… 

“The CPI increased 0.6% in May on a seasonally adjusted basis after rising 0.8% in April, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 5.0% before seasonal adjustment; this was the largest 12-month increase since a 5.4% increase for the period ending August 2008.”

From that link, you can see the inflation levels by sector. 

On Twitter, Daniel Lacalle, economist at Tressis SV, offered… 

 

There was nothing in the set of numbers to spook the markets. They were off to a positive start on Thursday. Politicians and central banks and the stock markets are looking for “just enough inflation.” Enough to suggest the economy is firing up, but not getting too hot. 

But mostly, many market pundits are suggesting the stock and bond markets are buying that transitory argument. Inflation might spike, but it will be temporary. Time will tell, of course.

Also in the U.S., jobless claims declined for the sixth straight week. From Reuters… 

“Layoffs are abating, with employers scrambling for labor as millions of unemployed Americans remain at home because of trouble securing child care, generous unemployment benefits and lingering fears of the virus even though vaccines are now widely accessible.”

Will Canadian employers face the same challenges in hiring? We’ll keep an eye on the labour story in Canada as many provinces begin their reopening plans. 

Also in Canada, our central bank is holding steady. Here was their headline this week …

“Bank of Canada will hold current level of policy rate until inflation objective is sustainability achieved, continues quantitative easing.”

MoneySense threw that one at me on Twitter… 

 

Readers of this column will already know the gist of my response. On Twitter… 

“The Bank of Canada anticipates 3% inflation through the summer, but have a 2% target. Transitory? Who knows? That’s a big guess. I’d suggest investors consider hedging and not guessing like central banks.” 

Investment inflation hedges continue to shine. 

Yahoo! Finance’s Emily McCormick offered a preview of this week’s economic data.  

From that Yahoo! Finance post… 

“‘The inflation narrative is secondary for the taper discussion, but it is still a consideration. With inflation pressures rising, the risk assessment has likely shifted a bit,’ Michelle Meyer, head of U.S. economics at Bank of America, wrote in a note on Friday. “The concern for Fed officials is less about strong core CPI prints and more about the drift higher in inflation expectations coupled with signs of a wage-price push. This can make the temporary gains in inflation more persistent.”

China’s inflation surges…

China might continue to take centre stage in the recovery and on the inflation watch. There, wholesale prices rose 9% in May, the fastest clip in over a decade. From that link … 

“Then, there’s the growing momentum in China’s economy in 2021. According to Oxford Economics, exports in the last three months are up at an annual rate of 32.3% in U.S. dollar terms and will remain robust for the rest of the year as the world economy recovers.

“Meanwhile, consumer spending soared in April to record levels, driven by higher tourism and travel spending. ‘In China, almost all consumers have already returned to normal out-of-home activities, and 97 percent of respondents report working outside the home’,” says a recent McKinsey report.

A look at emerging markets, on the other side of the pandemic

Emerging markets can be a wonderful portfolio diversifier for Canadian investors. You might consider the equity ETFs and the fixed-income side as well. 

In this space, I’ve suggested investors give emerging markets a look on many occasions, including that post from November of 2020. From a Forstrong Global Asset Management report quoted in that post… 

“Today many investors are experiencing their own existential struggle with emerging Asia’s economic rise. On the one hand, the region—which we classify as China, India, Taiwan, Korea, Indonesia, Malaysia, Philippines, Thailand and Vietnam—has created enormous growth around the world. China alone has delivered roughly half of all global GDP growth over the last decade. This has been a crucial prop to a growth-deficient world.”

And here is a very good emerging markets primer, courtesy of Pimco. I recommend you give that a read. 

From that blog post … 

“As an expected wave of re-openings sweeps the developing world, a serendipitous set of external dynamics could fuel the post-pandemic recovery in the EM asset class. A broad index of commodity prices (Commodity Research Bureau) has returned to levels not seen since mid-2015, following a 68% yearly rebound—a potential key economic driver for the many emerging markets that rely on commodity exports. Also, real short-term U.S. interest rates have recently fallen to 50-year lows, a situation likely to support EM investments by fuelling capital flows to the developing world as investors search for yield.”

We’ve often discussed commodities and REITs as inflation-friendly assets, but certain stock markets (such as those found in many emerging market economies) can offer another layer of inflation and currency hedging. 

You’ll find some global and emerging market equity ETF options in the Best ETFs in Canada for 2021

On the fixed-income side you can look to Horizons actively managed emerging market bond ETF, HEMB, and iShares offers XEB. BMO offers the emerging markets bond ETF, ZEF

Looking at total ETF holdings for Canadians, emerging markets are not well represented in portfolios. Emerging market equities and bonds might be a nice one-two growth and diversification punch for your portfolio. 

It offers favourable demographics and, as is often stated “demographics is destiny.” 

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

 

The post Making sense of the markets this week: June 14 appeared first on MoneySense.





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