A Look to the August Stock Markets
The Delta variant – “Bonus round for buying re-opening stocks”
By now, we’re all very familiar with the most dominant strain of COVID-19 circling the globe. The initial unknown surrounding the variant spooked markets early in the month, but especially punished those stocks that are poised to benefit the most from the economic reopening. What does this all mean for investors? In my opinion, it’s a bump in the road to the inevitable return to normalcy. Does this delay things by weeks or months? Drum roll please…the answer is: I have no idea, but the beauty is that, in the long run, it doesn’t really matter! Remember we’re long term investors and I personally see this dip in COVID sensitive stocks as a second chance opportunity for those that missed out the first time around (March 2020). Although these stocks are far from their extreme lows there is still plenty of value for those that are willing to be patient. The true winners will be those investors that hold on to these stocks long after COVID becomes a distant memory. Our Chairman and my personal mentor Michael Lee-Chin uses this simple but very catchy tagline “Buy, Hold and Prosper”, which is actually a lot easier said than done. But considering Michael has invested his way onto the Forbes Billionaire list, I’d consider them words to live by.
Chinese Communist Party (CCP) – “Who’s the boss?”
Last month the Chinese Communist Party flexed its muscle yet again reminding their domestic CEOs not to poke the dragon because they might just get burned. Sure enough, fire was spewed, and unfortunately, many Chinese stocks got torched. The focus of their wrath this time was China’s largest private education firms. Their shares tanked after the government issued new regulations targeting private tutors and online educators that provide academic classes. The government’s move was largely in response to the growing costs of tuition and the increased perception of social inequality. Although the full repercussions are still unclear, the harsh action has led to heightened levels of uncertainty across the broader Chinese technology sector.
Although uncertainty still remains in China big tech, the China Securities Regulatory Commission (CSRC) has recently stated that China will continue to allow Chinese companies to go public in the U.S. as long as they meet listing requirements. The recent volatility has created an opportunity for those investors like myself who truly believe in the long-term growth story in China. Current valuations for big tech China (ex. BABA, JD & BIDU) are much less than their American counterparts, so for those that can stomach the volatility it’s probably worth dipping a toe in.
Strong Earnings Continued….Is it possible for Earnings to be too good?
Big Tech Corporate America is rocking and rolling this earnings season with some standout earnings beats! Unfortunately for these behemoths the secrets out, so they’ve been met with a lackluster responses instead of rip roaring cheering. Which for long-term investors is perfectly fine with us as we enjoyed considerable price appreciation long before the earning numbers hit the wire. Some highlights for perspective.
Alphabet Revenue up 83% YOY, 69% increase in advertising revenue, EPS $27.26 vs $19.34 (Estimate)
Microsoft Revenue $46.15 Billion, EPS $2.17 vs $1.92 (Estimate)
Facebook Revenue up 56% to $29.08 Billion vs $27.89 Billion (Estimate), EPS $3.61 vs $3.03 (Estimate)
Amazon Revenue up 27% (down from 41% YOY) to 113.08 Billion, EPS $15.12 vs $12.30 (Estimate)
What should investors take away from quarterly earnings reports anyways? In my view, it’s a lot like going to the doctor for a physical. It’s a point in time health check, an opportunity to see if everything is running smoothly or is it time to visit a specialist to figure out what’s really going on. The only real issue for these tech giants is they’ve become a victim of their own success. Their earnings have been so good, it’s becoming more and more difficult to one up themselves. To be expected, a portion of the supersonic growth pushed forward by COVID is starting to normalize and come back to earth. These are still great companies and rest assured the investment thesis behind owning them is still very much intact. For long time investors in these names I’d continue to hold on tight. On the other hand, for individuals looking to initiate a position, wait for a pullback to start accumulating as tough year-over-year comparisons dampen outlook expectations in the short-term.
The Fed – No news is good news!
Surprise surprise (sarcasm), the Fed opted to leave its extremely simulative policy unchanged with rates anchored at 0.00% – 0.025%, while continuing asset purchases at $120 billion a month. Although I poke fun at the Fed’s predictability, I actually applauded it at the same time. Fed Chairman Powell is a rock star and although he isn’t belting out billboard hits, he’s singing just the right lyrics this market and economy need to hear. For those of you with better things to do than watch his full statement and Q&A, I’ll save you the suspense and provide you with just the catchy chorus;
“Will continue to support the economy until the recovery is complete”
“Indicators of economic activity and employment have continued to strengthen”
“inflation has risen, largely reflecting transitory factors”
“not even on our radar…not even close” (referring to tapering)
Footnote: Boeing reported a surprise quarterly profit of 40 cents per share vs analyst expectations of a loss of 83 cents. Revenue also exceeded estimates, helped by higher jet deliveries as aircraft demand rebounded. The light is appearing at the end of the tunnel folks. These are the sound bites that are worth paying attention to.