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8.7% profit on Chvron in our upside view

Chevron Corp CVXexit

Chevron Corp is offering to sell about 73,000 acres (29,540 hectares) of oil and gas properties in New Mexico, according to documents viewed by Reuters, as oil firms accelerate divestitures in a rebounding oil market.

Chevron Corp All Sessions 20210421 18.02

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19.2% profit on Virgin Galactic in our downside view

Virgin Galactic Holdings EXIT

Virgin Galactic drops after Branson sells shares worth $150 mln.

Virgin Galactic Holdings Inc Ord 20210407 16.34

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5.4% profit on Zoom Communication in our downside view

Zoom Video Communications InEXIT

Zoom Says Investigating Issues With Streaming Zoom Meetings And Webinars.

Zoom Video Communications Inc All Sessions 20210324 15.33

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Has the Fed Rewritten the Laws of Investing?

The only way to argue that stocks aren’t wildly expensive is to say that something fundamental has changed about the market environment.

Thanks to the Federal Reserve, such a change might actually have occurred but investors could pay a heavy price if they turn out to be wrong.

The S&P 500 trades at 22 times analysts’ expected earnings—its most expensive level since the dot-com bubble. It also trades at its richest multiple to its inflation-adjusted earnings over the past decade—the valuation method popularized by economist Robert Shiller —in nearly 20 years. The total value of U.S. stocks as a percentage of the U.S. economy, which Warren Buffett once called “the best single measure of where valuations stand at any given moment,” is now higher than at any point during the dot-com years. One argument for stocks may not be as expensive as they seem is that interest rates are extremely low. When the 10-year Treasury note yields just 0.95%, today’s P/E multiple looks less outlandish than it would at a 5% yield. 

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There is a problem with this sort of thinking, however. The 10-year Treasury largely reflects investor expectations of what the overnight rates set by the Fed will average over the next decade. The Fed responds to what is going on with the economy, setting rates higher when it is trying to cool things down, lower when it is trying to heat things up.

But the Fed this year revamped how it sets policy, abandoning its practice of pre-emptively raising rates to head off inflation. In its efforts to help the economy recover, it has committed to hold short-term rates near zero until inflation reaches 2% and “is on track to moderately exceed 2% for some time.” That means that rates over the next several years will be lower than they would have been under the Fed’s previous policy. Perhaps stocks can carry higher multiples and still be reasonably valued. The rules of investing have changed in the past, after all. Investor and financial historian Peter Bernstein noted how veteran Wall Streeters blanched when the dividend yield on stocks fell below the yield on the 10-year—a sure sell signal, they told him. What they missed was the phenomenon of companies reinvesting more of their earnings rather than paying them out. It would be a half-century before dividends surpassed Treasury yields again.

4.06% profit on Carrefour SA in our upside view

Carrefour SA exitCarrefour SA 20210420 16.35

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6% profit on Centrica PLC in our upside view

Centrica PLC 20210203 10.41

Citigroup resumes coverage on Britain's largest energy supplier with a "buy" rating and 75p target price.

Centrica EXIT 6

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6.2% profit on Ford Company in our downside view

Ford Motor EXIT

Ford warns chip shortage to halve Q2 production.

Ford Motor Co All Sessions 20210326 15.37

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5.2% profit on Alphabet Inc in our upside view

Alphabet Inc EXIT

U.S. Supreme Court hands Google a major victory, ruling that its use of enterprise software provider Oracle Corp's software code to build the Android operating system that runs most of the world's smartphones did not violate federal copyright law ...
The ruling, which comes after the two cos have been at loggerheads since Oracle sued GOOGL for copyright infringement in 2010 in San Francisco federal court, spares Google of a potentially massive damages verdict.

Alphabet Inc A All Sessions 20210303 21.57

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Bond-Market Tumult Puts ‘Lower for Longer’ in the Crosshairs

A series of Federal Reserve officials have said the climb is a healthy one, reflecting investors’ improving expectations for a vaccine- and stimulus-fueled economic recovery. Many portfolio managers say they believe rates are likely to flatten out in coming days as yields finally reach what they see as attractive levels.

But there are signs, such as unusually soft demand for recent Treasury debt auctions, that selling may not be over and yields may have further to rise. Some traders warn that bond markets are signaling a powerful economic recovery that could upend the dynamics that have held borrowing costs low while powering stocks to records.

The seven-year note was sold at a 1.195% yield, or 0.043 percentage point higher than traders had expected—a record gap for a seven-year note auction, according to Jefferies LLC analysts. Primary dealers, large financial firms that can trade directly with the Fed and are required to bid at auctions, were left with about 40% of the new notes, about twice the recent average.

The tepid demand concerned investors because the government is expected to sell a huge amount of debt in coming months to pay for the stimulus efforts that undergird the recovery. Further poor auction results could fuel additional selling in bond markets and undermine the tone in other markets, such as those for stocks, investors said.

The Fed’s rate cuts during the past year helped fuel a wave of home sales and refinancings, but the recent climb in yields drove mortgage rates to their highest level since November this past week, and applications have dropped. That forces banks and other holders, such as real-estate investment trusts, to sell Treasurys to offset losses in mortgage bonds that happen when consumers stop refinancing.

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Moves in market-based measures of inflation are also prompting concerns. Rising prices dent the purchasing power of bonds’ fixed payments and could force the Fed to raise rates sooner than expected. While inflation has remained muted for years, usually below the Fed’s 2% target, some worry that the economic reopening and stimulus efforts by the Fed and Congress could spark an acceleration. The five-year break-even rate—a measure of expected annual inflation over the next five years derived from the difference between the yields on five-year Treasurys and the equivalent Treasury inflation-protected securities—hit 2.4% in recent days, the highest since May 2011.

At the same time, the recent uptick in Treasury yields hasn’t only reflected increasing inflation expectations, as was essentially the case earlier in the year. Over the past two weeks, yields on Treasury inflation-protected securities—a proxy for so-called real yields—have also shot upward, with the 10-year TIPS yield rising from roughly minus 1% to minus 0.7%. That move has caught investors’ attention because many credit deeply negative real yields with helping power stocks to records, pushing yield-seeking investors toward riskier assets. Real yields were around zero percent or higher from the middle of 2013 through the start of 2020, meaning they might have more room to rise even after their recent move. 

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New ETFs, Forced to Chase Trends, Shorten Their Own Lives

Last year brought yet more evidence of how hypercompetitive the ETF marketplace has become: Of the 277 exchange-traded products that shut down in 2020, one-quarter of them had been trading for less than three years, according to CFRA Research. One fund was just four months old when it shut in December: North Shore Dual Share Class ETF (DUAL).

The shortening ETF life cycle has implications not only for fund sponsors, according to a new academic study, but also for investors. The researchers found that, because many newly launched ETFs are risky attempts to capitalize on the latest trend, they end up investing in overvalued stocks. One consequence is that such funds on average can be expected to lag behind the broad market’s returns over at least five years after launch—if they even live that long. 

Screenshot 18

The study was conducted by Itzhak Ben-David and Byungwook Kim of Ohio State University, Francesco Franzoni of the University of Lugano in Switzerland and Rabih Moussawi of Villanova University. In interviews and emails, these researchers point out that it’s nearly impossible for a newly launched ETF to compete on price against any of the large, well-known ETFs that are benchmarked to one or more broad market indexes. The ETFs from Vanguard Group and Charles Schwab Corp. that are benchmarked to the total U.S. stock market, for example, each sport an expense ratio of just 0.03%, or $3 per $10,000 invested.

So, to attract sufficient assets to give a newly launched ETF any hope of survival, fund sponsors tend to focus on increasingly specialized sectors and investment themes that are currently capturing investors’ attention. While that may help new funds attract an inflow of cash, another likely consequence is that they will own a large number of overvalued stocks.

One theme that is hot now is cybersecurity, for example, and no fewer than five new ETFs that focus on this theme have started trading over the past year. The newest is WisdomTree Cybersecurity Fund (WCBR), launched in late January. According to the fund’s website, its current average forward-looking price/earnings ratio is 77.2, more than three times the S&P 500’s 22.2. This new ETF’s price-to-sales ratio is nearly four times that of the S&P 500.

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