The Research Bulletin for August 17, 2021 includes commentary from our Portfolio Managers and Head Trader. View online, or download the printer-friendly version.

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The Outlook for Equities
from Nancy Tengler, Chief Investment Officer

Jobs: The jobs report for July was excellent—a change in nonfarm payrolls of 943K versus expectations of 870K. Add to that, the June number was revised upward by almost 100K jobs. We believe part of the reason more individuals returned to work is the cessation of supplemental benefits in many states. I split my time between Nevada and Arizona. Arizona stopped the Federal supplemental benefits on July 10—not a help wanted sign to be seen. In Incline Village, virtually every establishment has a help wanted sign in the window—gas stations, grocery stores, the post office, pet stores, coffee shops, you name it. Supplemental benefits are still in place in Nevada. But forget the anecdotal evidence. Check out the chart below from Dan Clifton at Strategas.

States that have ended the supplemental benefits are reporting significantly lower continuing claims. Since the Job Openings and Labor Turnover Survey (JOLTS) number came out on August 9th exceeding expectations at 10,073M open jobs, we are hopeful that the supplemental benefits will be allowed to expire, which will nudge people back into the job market to fill the very large level of openings.

In my 35 years in the business I have learned a few things. The consensus will eventually be wrong, and it is rarely “different this time.” However, it is important to constantly check your biases and your assumptions. Below are some things we are thinking about.

Growth: While we continue to believe the second half in the U.S. will produce robust growth, 2022 is another story. The rate of change will decline—it’s just math—but that does not mean growth will be moribund. That said, in May we began shifting our portfolios to a more growth at a reasonable price bias in high quality companies that had not kept pace with the market year to date. We bought selective tech names, added to others, added to industrials and materials, and selected consumer discretionary names. We still believe the secular trend is toward growthier stocks—not growth at any price but growth at a reasonable price. Also a focus: dividend growers. Dividend increases have been impressive.

PMIs have flattened, though they are still expansionary. The June report revealed a big gap between production and new orders, resulting in depleted inventories—a 25 year low—which bodes well for second half activity. Add to that CEO confidence is high, supply chain bottlenecks should ease, and companies are sitting on cash and tons of unused credit.

There is plenty that can still go wrong (the Delta variant refuses to peak as it has in other parts of the world, bad policy out of DC, tensions escalating in the Middle East), but it is likely the second half of 2021 will result in double-digit real GDP growth, and this will be good for markets. This does not, however, remove our expectation that we will get a correction—markets are overdue—but given the strong underlying fundamental picture, we believe a correction will be an opportunity to add to high-quality companies.

Inflation: The Fed has been wrong about inflation for over ten years. Their tools were unable to move the needle on inflation—the deflationary trends of the last five years, driven largely by tech and incremental productivity improvements, were more influential than Fed policy in trying to achieve 2% inflation. Earlier this year, the Fed told us inflation would be transitory (which meant a few months). They were surprised by inflation’s strength and were forced to raise their inflation target. We believe inflation will be stronger for longer and stickier than the Fed continues to anticipate.

Why we do not believe the Delta variant will derail the economic recovery: With the advancement of COVID treatments and the increase in vaccinations in the U.S., we take great comfort in the chart below, which shows a dramatic decline in the death rate to new cases since the start of COVID tracking and since the surge in the Delta variant. Pervasive lockdowns are unlikely.

Source: Strategas, August 11, 2021

Bonds & Fixed Income
from Jason Weaver, CFA®, Head Trader & Portfolio Manager

The FOMC, though increasingly leaning on its “transitory” inflation stance is closely being pushed toward setting out a timeline for the inevitable “taper” or slowdown/end to its purchases of treasuries and mortgage-backed securities (“MBS”). While timelines have a way of changing in response to conditions, we would be surprised if we are not given an estimate from the fed before the end of 3Q, with an end to MBS purchases expected in early 2022. However, we note that Powell & Co. rate very hesitant to move too early and risk a 2013 taper tantrum that may erode much of the progress made, or even worse, a 1937 mistake that could risk another recession. What does this mean? JPMorgan expects the cumulative effect of quantitative easing since early 2020 to be worth approximately 44bp on the 10Y treasury yield. While 1.70% on the 10Y does not seem extreme in the slightest, the main thing to remember is that, looking back into history, these predictions are almost universally WRONG, and the knock-on effects from a rapid rise in rates poses painful potential risks for many asset classes – namely equities.

Convertible Securities
from Stan Rogers, Senior Portfolio Manager

News/Earnings of note:
Akamai Technologies (AKAM) reported Q2 earnings and revenue that were both above consensus and raised the lower range of Q3 and FY21 guidance. While the underlying trends in the content delivery and security business are solid, the growth outlook seemed to disappoint some investors. We are optimistic that the Edge computing and cloud-based security growth will exceed expectations.

Booking Holdings (BKNG) reported earnings that were light versus estimates while revenues were above expectations. Room nights sold and total bookings were well above previous guidance. Management expects continues improvement, with European trends showing signs of strength.

Western Digital (WDC) had a very impressive Q4 report. Earnings and sales were above consensus and the company raised guidance for Q1 sales and earnings. Hard disk drives (HDDs) and NAND flash memory were both strong, driven my data center and PC/notebook demand. Margins also expanded for HDDs.

Becton Dickinson (BDX) released Q3 numbers where earnings and sales were above estimates, and the company also raised expectations for the year. However, management expressed some caution regarding the Delta variant’s impact on elective procedures and announced the retirement of CFO Christopher Reidy. He will remain on board until a successor is in place.

Viacom CBS (VIAC) released Q2 numbers showing earnings a penny light and revenues above estimates. Paramount+ streaming service added over 6 million subscribers, and advertising revenue grew as marketers spent more after the slowdown in 2020. An agreement was reached with SKY to launch Paramount+ in European markets in 2022.

Illumina (ILMN) produced another solid quarter. Earnings and sales were above estimates, and the company also raised guidance for the remainder of their fiscal year. Placements of their NextSeq sequencing systems were very strong.


Becton Dickinson (BDX) stock was weak following their Q3 earnings report and the CFO retirement. As a result of the weakness, the mandatory convertible preferred cheapened on a sum-of-the-parts basis, and we added approximately 60 bps points to our existing position.

Upcoming maturities/redemptions:

  • CNP.B 7% mandatory convertible preferred went ex on 8-12, so we will sell after the last remaining dividend and prior to the 9-1 maturity date.
  • IFFT 6% mandatory convertible preferred goes ex on 9-11 and matures on 9-15, and we will try and sell in this narrow window.
  • NI 7.75% mandatory is a replacement candidate for the CNP position.

Equity Hedging
from David Jeffress, Portfolio Manager

While most of our discussion in this section revolves around buying and (potentially) selling put options against the SPY ETF, there has been an interesting development lately in another corner of the options market that often goes unnoticed.

Covered-call writing, or buy-writing, a strategy that involves selling calls against a portfolio of equities to generate additional income, reduce risk, or both, has been gaining in popularity and has seen the highest inflows, based on publicly available fund-flows, since 2012.

While not a guaranteed market indicator by any means, this trend could signal additional caution ahead. We expect the market to climb higher for the remainder of 2021 based on strong earnings, improving fundamentals, and expanding guidance, but being cautiously optimistic never hurt anyone.

We are 80% allocated to put options on the SPY as of 8/13/2021 and have been waiting for an opportune time to deploy the remaining capital in the hedge strategy for the quarter to call options on the VIX Index, as we have done previously. The long-term trend on the VIX suggests that anything below 12 would be an ideal entry point. However, we pride ourselves in being flexible and have revised our target. Should the VIX stay at or below 15 in the coming days we anticipate making this final trade for the quarter.

Global Revolution
from Jonathan Berkowitz, Securities Analyst

Can Ethereum Solve the Energy Debate?

Over the past months, environmentalists have been attacking Bitcoin due to its high energy consumption. According to the Cambridge Center of Alternative Finance (CCAF), Bitcoin currently consumes around 110 Terawatt Hours per year, which is 0.55% of global electricity production. To put that in perspective, Bitcoin’s energy draw is equivalent to the annual draw of small countries like Malaysia or Sweden; however, Bitcoin is not the only fish in the sea. It isn’t even the biggest fish.

Ethereum is currently the world’s most used blockchain, but what is it? According to its founder Vitalik Buterin, Ethereum is a technology that lets you send cryptocurrency to anyone for a small fee. It also powers applications that everyone can use, and no one can take down. It is the world’s programmable blockchain.

In a recent study done by the Ethereum Foundation, Ethereum’s proof-of-work mechanism uses 45 Terawatt Hours per year, but Ethereum’s recent breakthrough could reduce energy consumption by 99%. As early as the end of this year, Ethereum plans to switch from proof-of-work to proof-of-stake. Instead of depending on miners, proof-of-stake relies on validators who stake their Ether (ETH). This allows for better energy efficiency, lower barriers to entry and reduced hardware requirements.

The question about whether cryptocurrencies are detrimental to the environment will continue, but there is no question that Ethereum is doing its part.

Food for thought:

Galaxy Digital compared the Bitcoin network’s energy consumption with that of the banking system as well as the gold industry, since the largest cryptocurrency is often compared with the two. The report found that banking and gold consume around 263.72 TWh per year and 240.61 TWh per year, respectively.