Happy Earth Day

1320 words - a 4 minute read.

Today is the 52nd Anniv. of the first Earth Day, a near lifetime in some respects, a blink of an eye in others. From its humble beginnings, Earth Day today is celebrated by roughly 200 countries around the globe. Its all about Climate Speed, the telescoping of time between actions needed today to ensure we meet Climate targets of 2030 & 2050.

Its also a time of clear confusion in financial markets, across the Tri Polar World (TPW) as well as across assets. Tesla neatly marries the two. As we noted in our latest Monthly: Turbocharging the Tri Polar World, Tesla represents one of the first TPW companies, with state of three art production facilities in each main region: Asia in China, Europe in Germany and the US in the Americas. It just pulled off the very rare feat of opening two state of the art production platforms in two continents.

It also reported earnings Wednesday post close – earnings that blew away Wall St estimates while confirming plans to sustain production gains of 50% y/y. After years of losses, the company made a small profit two years ago, a multibillion profit last yr. and should smash that in the current year and for years to come. Given surging EV demand it will be able to sell every EV it can produce for years.

Here is another example of market confusion. In his comments Musk noted lithium supply as the “fundamental limiting factor” in EV adoption. One would think the Lithium ETF (LIT) would be rocking right? Wrong. It is down close to 20% from its one month high.

The market is clearly confused on how to value Tesla  – on the face it seems quite expensive vs current earnings, yet on its outlook and proven ability to produce around the globe its arguably one of a kind. It’s leading the EV revolution. How do you value that? As MS’s analyst stated: “The more we see out of Tesla, the more we are concerned about the rest of the industry’s ability to play catch-up”.

So here is where Tesla encapsulates the markets’ confusion. Down ytd, the stock was up 10% plus Thursday am as it led the broad market higher, with the S&P implying a break above recent highs and then Chair Powell lowered the boom or at least said that 50 bp rate hikes could be on the table come the May meeting.

Now this is nothing that the markets have not contemplated with many analysts calling for exactly that and not just in May either. But uncertain of how the post Covid, war time economy will respond, investors immediately sold stocks and sold them hard, such that broad indices closed down 2% Thursday & followed it up with another big down day on Friday, taking Tesla’s 10% + gain to 3% at Thursday’s close and to 2% as I write Friday.

This confusion extends throughout the TPW. In Europe, markets are pricing in both 80 bps of ECB hikes by year end as well as a recession, causing foreign investors to flee with BofA funds flow data noting 10 straight weeks of equity fund outflows. Coincident rate hikes and recession seem unlikely.

Recession and rate hike calls dominate Europe while oil & nat gas prices fall considerably from their immediate post invasion highs. At the same time, April PMIs came in much BTE on both manuf & service sides with the EU Composite at 55.8, the strongest reading since last September. Does that sound recessionary to you? It sure doesn’t to me. Nonetheless, EU equity is for sale while the 10 yr. German BUND sniffs out 1% after being sharply negative pre invasion.

This confusion has spread to Asia as well, especially so in the case of Chinese equity which investors have used for a piñata over the past few weeks. China equity has given back nearly all the gains generated by the Govt’s heavy mid March verbal intervention which sparked such market responses as a one day, 40% up move in KWEB, the China tech ETF. Arguably the follow up Govt action has been somewhat of a damp squib such as the 23 new measures which combined really don’t move the needle.

As Shanghai locked down for Covid, investors sold Chinese stocks, bonds and FX, such that China outflows likewise are setting records and the RMB has weakened to levels not seen in a few years. All this notwithstanding BTE Q1 GDP and some sense that Shanghai’s lockdown is starting to ease with Tesla and others restarting their production platforms. 

We have been constructive on all three of these areas: Innovation and Climate centric thematics, European equity and Chinese cross assets – needless to say it has not been a great week – or to put it another way, it was a great week thru mid day Thursday and then pretty lousy after that.

But which part of the week is the right one to focus on? What is Mr. Market trying to tell us? What will be the tell? After all if China is slowing in March & April and maybe May as well that should ease demand for oil and other commodities which, after quite a strong run (BofA notes 8 straight weeks of inflows to US materials funds) have been hammered this week (URNM, PICK, XLE etc.) perhaps pricing in that very China demand ebb. 

But that same demand ebb should also reduce inflationary pressures – as noted oil and gas prices in Europe have come down considerably. Gasoline prices in the US seem to have peaked a few weeks back as have used car prices etc. If so, then why all the rush for higher rates, faster?

It seems the message is one of confusion, that after several years of unprecedented events the ability of the market to pick a direction and move to it is damaged and it, like the rest of us, is trying to feel its way forward. If one zooms out a bit, one can see equities have really been range trading for months, kept upright by its twin engines of Growth & Value with Value  tending to do better as energy rallies sharply and financials do well until very recently.

It still strikes me as more of a rotation than a systemic market sell off. Days like the past few are especially tough because its not just growth that is being sold but also value and commodities seeing sharp profit taking while bonds sell off sharply – have you looked at AGG lately – wow. This does make some sense as Commodities have rallied sharply recently but again, if one zooms out, one can make a pretty strong argument that these are early innings for energy, for Value etc.

As I wrote a few weeks ago in Fever Break, it seems to me that we may be closer to the end of this confusion than the beginning. Bonds are deeply oversold & the 10 yr. UST faces resistance at the 3% round number mark. US Inflation should ebb sharply in coming months for both base effect and Covid ebb effects reasons (labor, supply chain) while Time is not Putin’s friend insofar as the Ukraine is concerned. Right now, the easy path for market participants appears to be extrapolation – of inflation, policy and market dynamics. That seems dangerous.

Perhaps earnings will guide us to true north – we continue to expect a high nominal growth environment in the months, quarters & years ahead – nominal growth that should support earnings and hence stock prices. In the interim, lets hope the queasiness one feels is akin to that the patient feels just before the fever breaks & the appetite returns.

Enjoy Tuesday’s Negocios TV interview – 7 minutes on the Fed, rates, inflation and US – EU investment opportunities.