Weekly Watch | 3/29/2021
Overall Outlook:
Market continues to be all over the place despite a 1.9 trillion stimulus package being passed by Congress. The outlook for many of these individual state economies should continue to improve with mask mandates and lockdowns beginning to come to an end for many states. Industrials have been a shining point throughout all this recent turmoil as investors continue to remain bearish on tech stocks due to a struggling bond market. Investors have rapidly been reallocating portfolios into more value-oriented stocks in general and away from the growth-oriented ones. Small-Cap stocks (IWM) and other newer ETFs (ARKK) have been taking the hardest beating this past week for obvious reasons. The Federal Reserve has remained very hesitant about considering a new action as they still believe the worst is yet to come as overall spending has been the core of a slower recovery. Janet Yellen still believes we won’t reach full employment pre-pandemic until 2022. Powell seems to be optimistic about future inflation, but many economists would argue that inflation could begin to explode in the next year. Word from Congress has talked about creating another entirely new stimulus package, which could be detrimental if imposed too soon. Much of the larger problem with the most recent $1,400 check has been a majority of people have been investing it improperly as to what the government had expected.
On another note, GameStop reported earnings on Tuesday, with a massive selloff dragging into Wednesday, until another major short squeeze on Thursday with the stock bouncing from the $115 dollar range back to $220 on Friday. It seems as though GameStop is starting to represent almost like a new version of the VIX, with these massive intraday swings that are far out of the control of simply the original group of Redditors who blew it up to begin with. Cryptocurrencies' have been very stagnant as bitcoin has been trading for the most part in the $56,000-$65,000 range. Time will tell if Bitcoin could face serious regulations as Ray Dalio (the billionaire who founded Bridgewater, the world’s largest hedge fund) has been very pessimistic on the future outlook of Bitcoin. Geo-political issues such as the blockage of the Suez Canal (One of the most important global trading routes in the world) by the Evergreen shipping vessel should begin to shake up markets even further going into this week. There has been little done to alleviate the situation as it stands, as it could take serious time to fix the problem if emergency protocols require an entire offload of the massive cargo ship. We personally think this will be especially detrimental to oil prices as they have been taking a beating the past month. Another influential factor, was on Sunday the 28th, when Balongan: a major oil refinery in Indonesia, exploded out of nowhere. Currently, there are no sources attributable to this massive explosion
The Suez Crisis:
It has been six days since the Ever Given container ship ran aground in the Suez Canal and it is just now being reported that it is being freed. Over 10% of all global trade at sea goes through the Canal, thus resulting in the backlog of roughly $9.5 billion worth of goods each day it has been stuck there. Ships that would normally use this route are being diverted around Africa, adding nearly twelve days to their trips as well as significant costs. The global supply chain network cannot operate without this ship being freed and although there is recent news of the ship shifting, the consequences of this event could be drawn out for months. There are all kinds of goods on this ship, everything from specialized chemicals to coffee and vehicles. Covid-19 has already wreaked havoc upon supply chains, and now this debacle is only going to extend and intensify the problems caused by crowded ports and large backlogs.
Oil prices, as well as shipping rates, are rising because of the crisis as well as many other different commodities. Costs for containers on these massive ships from Asia to Europe have risen to nearly $8,000 a day because of the pandemic, but they are now estimated to cost over $15,000 a day because of the blockage. Maersk, Hapag-Lloyd, and Nordic American Tankers say that trips around Africa will drastically increase prices due to the longer voyages reducing the efficiency and effectiveness of their world fleets and the need for extra security personnel to defend against pirates. All eyes will be on the Ever Given and the shipping in this region as the prices of all sorts of goods and commodities rely on this narrow waterway. However, even though it has just been freed, the effects are going to be felt in the coming months because of the massive backlog it has caused.
Lululemon Athletica (LULU):
This week - Lululemon, the Canada based clothing company, is expected to post a better than expected earnings with the EPS estimated at $2.48 and the revenue of $1.6 billion. We have a positive outlook for the future as the company already reached its pre-pandemic levels and has an average incremental revenue of 12% qoq. With the robust stimulus plan and historic vaccine roll-out, we assume that this will bring in record volume of buyers instore and online. The reopening of the economy and public interaction will only boost its existing excellent numbers.
Margin Call Fallout:
Hedge Fund manager Bill Hwang is making headlines this morning for all of the wrong reasons. After being banned from many banks for illegal trading charges in 2012 and banned from trading in Honk Kong in 2014, Hwang can add economic unrest to his list of mishaps. Yesterday, Hwang’s family firm, Archegos Capital Management, got margin called which sent waves throughout the financial industry. Noruma and Credit Suisse are currently selling off roughly $20 billion in U.S. and Chinese stocks while their own share price have fallen 13.99% and 12.35% respectively. Archegos was reportedly receiving four times the leverage from Nomura that we’d typically see for a firm of this size. This leverage was put to work in all the wrong places. Hwang was heavily invested in major Chinese technology companies and U.S. media conglomerates. ViacomCBS and Discovery were some of the biggest losers that began the unraveling. Archegos was also long on GSX Techedu Inc which is one of our few shorts here at City Street. U.S. banks including Morgan Stanley and Goldman Sachs also sold billions in the wake of this collapse.