Markets Exceed V-Shaped Recovery

On Tuesday, all eyes were on tech stocks and new breakout darlings, such as Zoom Video Communications (ZM) and CrowdStrike (CRWD), but there was another source of market excitement -the economic rebound.

Most Wall Street experts said a V-shaped recovery was impossible, and it turns out they were right, although they were wrong. 

More and more economic data are creating checkmarks. The latest example was from the Institute of Supply Management (ISM) Manufacturing data, which crushed consensus. Powered by a surge in new orders (the most important component), manufacturing climbed to the highest level since January 2019:

• New Orders: 67.6 from 61.5
• Production: 63.3 from 62.1
• Employment: 46.4 from 44.3
• Inventories: 44.4 from 47.0
• Prices: 59.5 from 53.2
• Latest Headline Purchasing Managers Index (PMI): 56.0 from 54.2

To see the chart, click here.

Observations from the report:

• "Business is very good. Production cannot keep up with demand. Some upstream supply chains are starting to have issues with raw material and/or transportation availability." (Chemical Products)
• "Airline industry continues to be under great pressure." (Transportation Equipment)
• "Current sales to domestic markets are substantially stronger than forecasted. We expected a recession, but it did not turn out that way. Retail and trade customer markets are very strong and driving shortages in raw material suppliers, increasing supplier orders." (Fabricated Metal Products)
• "Homebuilder business continues to be robust, with month-over-month gains continuing since May. Business remains favorable and will only be held back by supply issues across the entire industry." (Wood Products)
• "We are seeing solid month-over-month order improvement in all manufacturing sectors such as electrical, auto and industrial goods. Looking to add a few factory operators." (Plastics & Rubber Products)
• "Rolling production forecasts are increasing each week compared to prior forecast." (Primary Metals)

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Buyers Fan Out

Market breadth improved. Although the overall volume remains light, there were finally more winners than losers on the NY Stock Exchange.

There was also a noticeable jump in 52-week lows on the NASDAQ, underscoring the ‘haves and have-nots’, an element of the market that has been lost in the media narrative of mass hysteria.

The Message of the Market

The rotation out of old-school havens into Technology and Communication Services continues, but Industrials and Materials attracted significant buying as well.

An eclectic mix of names topped the list of the biggest percentage winners, suggesting we are buying lingerie, shopping online with Walmart, and still think nothing beats cocooning (forced or otherwise) with Netflix. While it’s not sexy, the jump in chemical names was the best news for the broad economy.

Portfolio Approach

Yesterday, we added to Consumer Discretionary, and today we are adding a new position in Technology in our Hotline Model Portfolio.

Today’s Session

Equity futures have been higher all morning, powdered by familiar names, and even a couple of surprising names.  But there is concern about the ADP Employment Report, which came in well below consensus.  The street was looking for 1.17 million, the actual number was 428,000.  Small business job creation is particularly worrisome. 

To see the chart, click here.

Don’t Bury Me Yet

Guess (GES)

-Loss $0.01 per share vs -$0.58 consensus

-Revenues -40% $398.5M vs $384.82M

-Gross Margin 36.9% vs 29.6% consensus

-Operating margin -0.2% vs 7% y/y

-Resumed dividend

-No guidance

Macy’s (M)

-Loss $0.81 per share vs -$1.80 consensus

-Revenue -35.9% $3.56B vs $3.51B

-Comps (ex-licensed departments) -34.7% vs. consensus of -34%

-Gross margin of 23.6%, an improvement of approximately 650 basis points from first quarter 2020

-No guidance