M12 BARRON’S February 15, 2021
Broker/Dealer Index Looks Bullish
Momentum Strategies Report
Clif Droke Market Analysis
clifdroke.com
Feb. 11:Strength continues to be seen in
some of the most important and financially
sensitive areas of the market. Of particular
significance, broker-dealer stocks are quite
strong and have led the charge so far this
week. The NYSE Securities Broker/Dealer
Index (XBD) closed up nearly 1% on
Wednesday to finish at a new high.
The rationale behind the outperformance
of the broker-dealers is plain enough to see.
Armed with a steady supply of stimulus
checks, home-bound millennials have discov-
ered the joys of equity trading and are open-
ing brokerage accounts for what they hope
will be quick-and-easy profits...
While many analysts are worried that this
increase of “new blood” in the stock market
is a sign that a major top is imminent, I
would instead argue that the return of the re-
tail trader is more of a sign that upside moves
in stocks will likely accelerate from here be-
fore the final “blow-off” phase of the bull
market is complete. If anything, the onrush of
new traders will bring a welcome element of
dynamism to the market and will cause up-
side moves in equities to become conspicu-
ously magnified. This will make it easier on
the bulls to move in and out of the strongest
stocks before the final top has arrived.
Strength and leadership in XBD is a
green light for the bulls. Only if XBD breaks
decisively under its 15-day moving average
will there be cause for concern over the mar-
ket’s immediate-term (1-4 week) trend.
—CLIFDROKE
Energy Stocks: Still Undervalued
Equity Research
Wells Fargo
wellsfargo.com
Feb. 11:As Energy (and U.S. E&P) has been
one of the best performing sectors in the
market since November 2020, many investors
may fear that the “value” opportunity is
over. We disagree. Our view is that this is
just the start of a potential multi-year ex-
pansion of market value for the sector as it
benefits from the 3 “Rs”—Recovery, Refla-
tion, and Rotation. Adherence to Shale 3.0
moderates U.S. oil and gas supply growth
while demand should recover, albeit gradu-
ally, to pre-Covid levels (“recovery”). Fur-
thermore, while the regulatory and socio-po-
litical environment for fossil fuels is likely to
remain challenged, we see “Energy Transi-
tion” as a near-term tailwind for E&Ps [ex-
ploration and production companies] as in-
frastructure build-out could increase
demand for traditional energy sources
above our current outlook (“reflation”). Fi-
nally, we believe even generalist investors
will be “forced” to pay attention to the dif-
ferentiated free-cash-flow story for shale,
complemented by cyclically low costs and
high operating efficiencies (“rotation”)...
Following the outperformance of smaller-
cap, levered names since mid-November, we
are focusing on quality names with balanced
commodity exposure in 2021 and beta to
higher commodity prices. Given those con-
straints DVN [DevonEnergy] remains our
top pick, with PDCE [PDC Energy]asa
top choice among SMID-Cap [small- and
mid-cap] names. We are also constructive on
BCEI [BonanzaCreekEnergy], PXD [Pi-
oneerNaturalResources], XEC [Cimarex
Energy], FANG [Diamondback Energy],
and MRO [Marathon Oil]. For gas expo-
sure we prefer CNX [CNX Resources],
EQT [EQT], COG [CabotOil&Gas], and
RRC [Range Resources].
—NITINKUMAR,TOMHUGHES,JOSEPHMCKAY
Spain’s Red-Hot 50-Year Bond
UBSHouse View
UBS
ubs.com
Feb. 10:Spain on Tuesday attracted 65 billion
euros ($78.6 billion) of orders for a €5 billion
50-year bond, according to the Spanish Trea-
sury. Other recent long-dated bonds, includ-
ing a 50-year bond sale from Belgium, have
also attracted strong demand from investors.
Spain’s government priced the new debt at 13
basis points over its outstanding July 2066
bonds, which closed Monday at a yield of
1.658%. The news underlines the willingness
of investors to assume duration and credit
risk in pursuit of higher yields for portfolios.
Despite continued easy money from central
banks, we see opportunities for yield, includ-
ing in U.S.-dollar-denominated emerging-
market sovereign debt.
—MARKHAEFELE ANDTEAM
Comparing Central Bank Policies
Morning Briefing
Yardeni Research
yardeni.com
Feb. 10:Nearly a year into the pandemic, the
economies of theEuropean Union(EU),
Japan, and China face divergent circum-
stances. Renewed surges of Covid-19, contin-
ued containment measures, and vaccine de-
lays threaten the V-shaped recoveries of
Europe and Japan. China—where the virus
has been contained—is the only major world
economy that expanded last year.
Accordingly, the central banks of each
country—the European Central Bank
(ECB), theBankofJapan(BOJ), and the
People’sBankofChina(PBOC)—have re-
sponded differently to the pandemic’s eco-
nomic effects. The ECB and BOJ view too
little ease as riskier than prolonged accom-
modation, so in Europe and Japan monetary
policy remains easy and could get easier. In
contrast, the PBOC perceives asset bub-
bles—a result of too much liquidity built up
during the pandemic—as its big challenge,
so in China monetary authorities are testing
tightening to cool markets down.
Fiscal policymakers are acting in kind:
The European Union (EU) awaits broader
stimulus measures. Japanese authorities are
working on a fourth supplementary fiscal
budget to save the economy. Chinese fiscal
authorities, in contrast, are trying out drain-
ing market liquidity and increasing regulation
in risky sectors.
Not long from now, as vaccinations prolif-
erate around the globe, taking risk off the ta-
ble will become the focus of authorities in the
EU and Japan, as it is currently in China.
China is a bellwether of sorts, which we’ll be
watching for indications of what happens
when authorities unwind massive amounts of
stimulus after a pandemic. Our guess is that
doing so won’t be easy for any country.
—EDYARDENI
A Boffo Earnings Season
Market Perspective
Suntrust Advisory Services
truist.com
Feb. 9:Although there are frothy segments
of the market that are detached from funda-
mentals, we do not see bubble conditions
more broadly. Instead, we see a stock mar-
ket that is trading at a premium to histori-
cal valuations—partly justified by low rates,
a shift in sector composition toward higher-
valued growth sectors, supportive monetary
and fiscal policy, and cheaper access to mar-
kets (i.e., secular decline in commissions and
fund fees). There is little debate that the
S&P 500’s current valuation is elevated rela-
tive to history. What may be less understood
is that the S&P 500’s P/E has been range-
bound since June. Since then, earnings have
been the key driver of the market’s roughly
25% return...
The recent corporate earnings season re-
inforces the underlying earnings strength.
With 300 of the S&P 500 index companies
having reported, 81% are exceeding ana-
lysts’ earnings estimates. This is on track
for the third-highest beat rate in our data-
base going back to 2001, only behind the
last two quarters. Notably, 78% percent of
companies are also exceeding sales esti-
mates, which is on track for a record. Con-
sequently, companies are beating earnings
estimates by an average of 15% this quarter,
more than double the historical norm.
—KEITHLERNER,SHELLYSIMPSON
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“Armed with a steady supply of stimulus checks, home-bound millennials have discovered the joys of
equity trading and are opening brokerage accounts for what they hope will be quick-and-easy profits.”
—CLIFDROKE,Momentum Strategies Report
Market View
This commentary was issued recently by money managers, research firms,
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