Mechelany Advisors' WEEKLY MARKET REVIEW highlights the salient feature of the past week, details specific issues of the moment and reviews the Mechelany Advisors' MODLE PORTFOLIO
Last week saw global equity markets push to all-time highs again, led by the MSCI World Index and the Dow Jones Industrial trading a tad under 35’000, a 91 % increase from its March 2020 low and almost 22 % higher than where it started 2020.
Last week was marked by a strong sell-off on Tuesday as Janet Yellen talked about raising rates, and a strong uplift on Friday as US employment numbers assuaged concerns of investors about inflation and an overheating US economy.
Global Equities ended the week up 1.72 % and commodities recorded another strong week as investors are piling into the space. Coffee added almost 9 % on the week, Copper rose 5 % to a new high and Corn was up 4.4 %.
The US economy is strong and the employment figures published on Friday revealed 750’000 job creation last week, the strongest since June 2020. But the number came well below expectations.
Europe was in recession in Q1 2021 and its is yet too early to be bullish on growth as long as partial lockdowns and restrictions are in place.
Japan’s economic activity appears to have held up well so far in Q2, despite daily COVID cases close to record highs at the nationwide level. The Japanese government announced an extension of the state of emergency until the end of the month that will include more regions of the country. As such, activity there should weaken over the coming weeks and we continue to forecast a stagnation in GDP this quarter.
China is still powering ahead with much stronger exports than anticipated, testifying of the momentum of the global recovery.
India, however, is going through a major health crisis that threatens the solidity of the Modi Government and is staring to have an impact on the economy.
As seen in the numbers, the global recovery is still very dependent on the containment of the virus, the rate of vaccination and the return of activity to normalcy. New variants are still appearing and cases seem to appear out of nowhere in some regions, as was the case in Japan or Singapore.
The global macro-economic picture can be summarised as a strong global recovery in Q1 2021, but where momentum is ebbing and remains very dependent on health issues and Government stimuluses.
At the same time, asset and commodity inflation fuelled by un-necessarily easy monetary policies is taking its toll on the inflation gauges as food and construction prices are flying.
The US CPI for April to be released next week is expected to increase by 3.6 % year on year, while the PPI for Final Demand should climb to 5.8 %, elevated numbers not seen since 2011.
By all measures, with interest rates at zero abd artificially kept bond yields at 1.6%, the Fed is way behind the curve and is fueling asset and commodity inflation while the velocity of money is at a historical low and demand for credit remains very subdued.
But Commodity prices are not the only cause of inflation…
Labor costs are rising as well… US Average Weekly Earnings have now risen at a rate of 4 to 6 % year on year, levels unheard of since 2007.
Corporate earning have been above expectations in the 1st quarter fo 2021, but have not been the main factor behind the rise in asset prices, as testified by the poor showing of technology stocks in the face of bumper earnings.
Finally, regardless of the outcome on Joe Biden’s Tax plans, taxes will ultimately have to be raised in the US in 2022, or even before, with a significant impact on corporate earnings and even, potentially, on the stock market as investors sitting on massive unrealised profits may decide to cash-out and realise their gains to avoid being taxed at higher rates on capital gains.
On the whole, the current debate in the financial markets is a tug of war between the liquidity driver that is pushing assets to extremes of valuation, and a sharp return of cost-push inflation driven by both commodity prices and Labor costs.
In other words, how long will the FED be able to pursue its reckless monetary policies in the face of rising inflation …
As seen with the sharp reaction of the markets to Janet Yellen relatively mundane remarks last week, any signs that inflation is getting out of control will send jitters into extremely overvalued equity markets.
Norway, Canada and several other countries have started to normalise monetary polices and it is only a matter of time before the FED sees mounting pressures forcing its hand.
Next week could be crucial in that respect and the recent push of the SP500 to a new marginal high is in line with our preferred scenario of a correction starting now and unfolding into early summer.
MODEL PORTFOLIO AT RECORD HIGH
Equities and commodities were not the only things to record new all-time highs last week…
Our Model Portfolio rose +2.56 % last week delivering +28.89 % for the year and a new record high with its NAV at 393.39
Over the past 7 years and four months, our Model Portfolio delivered +293.39 % cumulative performance and a compound average of +20.54% per annum.
Our Model Portfolio outpaces each and every stock index in the world, including the US Nasdaq that only delivered +17.69 % per annum over the same period.
Our Model Portfolio delivered 3.70 x more performance than the MSCI World Index.
Precious Metals were a significant positive contributor last week as metals delivered breakout signals and our ETFs’ have risen between 9 and 17 % on the week.
Conversely, our short Copper, soft commodities and Oil have worked against us as we are in what we see as the last phase of the mania, but our exposure there is way smaller. We may actually increase our shorts next week.
Our large exposure to Bonds saw them rising by 0.57 % on the week.
Our US Portfolio of special situations was a marginally positive contributor as Quantum scape and Intercept Pharmaceuticals fell sharply, despite the excellent results published by Intercept Pharmaceutical on May 6th.
Conversely, Epyzime rose by 20 % on Friday on upgrades by analysts, Viatris is gaining traction as the cheapest stock in the US investable universe and Echostar released strong results _ Revenues + 4 %, EBITDA + 24 % and Margin increasing to 42 % – despite a small decrease in the overall number of subscribers. Raymond James re-iterated its STRONG BY rating increasing its target price to US$67.
We find the stock extremely attractive at this level.
Our European Portfolio was down last week as Valneva resumed trading after its US IPO and the stock digested the new supply of shares.
In our HK-liste Chinese stocks, the big story was in our Chinese Deep value stocks where China Minsheng Bank, China Port Holdings, China Mobile and Bank of Communications all rose strongly while our domestic Chinese tech stocks fell.
The noises made by the Biden administration about keeping sanctions of Chinese-military related stocks could actually act as a boost for those stocks as the Chinese themselves pile into them.
IQIYI is still suffering reaching an all-time low of 13.74 as some Archegos positions are still being unwound.
Our US SHORT PORTFOLIO was a positive contributor as all of them fell on the week with Tesla losing another 5 % but we were negatively impacted by the sharp reversal in our Volatility Index tracker.
Last week we took our 31 % profits on SInopharm and re-instated our exposure to Gold Miners on a strong Buy signal and lower than where we initially sold them a few weeks before.
In term of equities, the Portfolio is Neutral with 76 % Long and 76 % short, still holding 57 % in US Government Bonds, 13. 57 % in Commodities and short 7 % Bitcoins.
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