Inventories of materials are skyrocketing. What is behind the boom?
This commentary was posted recently by fund managers, research companies and market newsletter writers and was edited by Barron’s.
Materials Stocks Rock …
First of April: S&P 500 Materials and Industrials stocks did not wait for President Joe Biden’s $ 2.25 trillion infrastructure bill, unveiled yesterday, to start rallying. They are among the most successful sectors, since the beginning of the year, in the
index, having anticipated both the post-Covid economic recovery and the trillions of dollars that could be funneled into infrastructure spending.
Investor optimism is evident in the performance derby for S&P 500 sector returns from the start of the year through Tuesday’s close: energy (30.5%), financials (16.4 ), Industry (11.4), Materials (9.1), Real Estate (8.9), Communication Services (7.4), S&P 500 (5.4), Healthcare (2.6), Consumer discretionary (2.1), utilities (1.3), consumer staples (0.9) and information technology (0.2) ….
To really see the fireworks, look no further than the S&P 500 Steel stock index: it rose 51.1% year-to-date through Tuesday’s close, making it the best performing sector that we follow. Not far behind, agricultural and agricultural machinery, up 39.0%. The S&P 500 Copper stock index has jumped 25.6% year-to-date and the S&P 500 Construction Machinery & Heavy Trucks index has gained 20.9% in the first three months of the year alone.
… as manufacturing rollers
First of April: The ISM manufacturing index rose to 64.7% in March, above our forecast of 62.7% and the consensus forecast of 61.8%, marking the highest reading since December 1983. March was the 10th consecutive month in which the overall index was above the 50% breakout between contraction and expansion. New orders and backlogs continued to increase in March, although continued growth in order backlogs partly reflects shortages of key inputs for production and growing bottlenecks in the industry. supply chain that could slow the rate of growth in the factory sector. months to come. Price pressures remain intense, and it remains to be seen whether, or to what extent, rising input prices and higher shipping costs will eventually turn into broader measures of inflation over the next few years. month. Yet, with order books growing faster than companies can fill them, manufacturing output and employment are expected to experience further growth in the coming months.
—Richard F. Moody
Offshore wind investments
Stock Research – Industry Update
March, 31st: We believe offshore wind is moving from concept to reality in the United States, spurred on by aggressive state goals for clean energy, falling resource costs and economic development. . States’ existing offshore wind targets total 30 GW [gigawatts], representing an investment opportunity of over $ 100 billion, and over 10 GW is expected to reach COD [commercial operation date] in the mid-2020s. On March 29, the Biden administration released an offshore wind action plan that included a target of 30 GW by 2030 and a 2050 ambition of 110 GW.
Offshore wind makes sense for coastal areas where onshore renewables are insufficient to meet the state’s clean energy goals (keeping in mind that transmission is difficult to locate). However, we predict that onshore wind and solar will remain much cheaper than offshore wind for the foreseeable future (currently, around 30% of the cost, on an unsubsidized basis), and many parts of the United States are blessed with abundant renewable resources on earth. [But] some states may adopt offshore wind due to economic development / port revitalization opportunities ….
In our coverage universe, Ørsted developers and, to a lesser extent,
offer the greatest exposure to the theme, while Brookfield Renewable may get involved in the future. Other offshore wind games include strategies (
Public Service Enterprise Group
), regulated utilities (
), integrated energy companies (
Royal Dutch Shell
) and derivative games in the OFS capital goods sector (
We do not plan
enter the arena of offshore wind. Although we would never say never, NextEra has substantial competitive advantages in onshore renewables, a market that will likely remain much larger than offshore wind. We believe NextEra will continue to direct capital towards these efforts and will not pursue future offshore rental area auction opportunities.
—Neil Kalton and his team
First Quarter Results Themes
Focus on strategy
RBC Capital Markets
March 30: While it’s still early enough, the first quarter 2021 results are spilling over to companies with a quarter ending in February, as well as some leftovers at the end of the January quarter. We looked at earnings call transcripts from 11 companies that reported March 11-26 in the S&P 500 to assess the tone and common themes so far.
Five things stand out: 1) Reviews for January and February were surprisingly mixed. January is generally considered a positive month, but a few companies reported disruptions in February due to extreme weather conditions. Businesses are also divided on March trends and the outlook for the next few months, largely based on the level of comparison they make. 2) Some macroeconomic comments from restaurants and home builders suggest that mobility still varies considerably from region to region, while the housing market remains strong overall. 3) As for the outlook for 2021, the tone has been generally optimistic, with some tough comps and still expecting sales to be below 2019 levels. 4) Most companies continue to see their margins increase. As we review earnings calls this quarter, we are closely monitoring the factors that are weighing or contributing to margins. So far, extreme weather conditions have been highlighted, along with supply chain disruptions including transportation delays and low inventory levels. As expected, companies are also reporting higher input / labor / logistics costs as headwinds for margins. 5) We have noticed that companies are starting to compare their recent performance to pre-Covid levels. Most management comments on this topic highlight at least one (sub) segment returning to pre-Covid levels, while others are still uncertain about the pace of return.
No love for treasures
Weekly technical review
March 29: Sentiment towards Treasuries is about as sour as it gets. The percentage of bond bulls fell to just 20% last week, according to the Weekly Bond Traders Survey by Consensus. That’s in the bottom 1.7% of all surveys over the past 34 years. In the majority of cases [when the percentage of bulls dropped below 30%], a low level of Treasuries coincided with the weak bullish sentiment. There have been cases where Treasury bill prices have fallen to a lower level after rebounding. In early 2018, bullish sentiment fell below 30% and TLT [the
iShares 20+ Year Treasury Bond
exchange-traded fund] entered a trading range between 116.50 and 122.90 from February to July. The TLT then fell to 111.90 in November 2018. A lower low is expected in the coming months.
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