Barron’s Weekend Summary: Over three days in late July, America’s tech giants put on an impressive show. Apple, Microsoft, Alphabet, Amazon.com, and Facebook had thrived in the pandemic, and their latest earnings reports hammered home the point.
* Cover Story: -Over three days in late July, America’s tech giants put on an impressive show. Apple, Microsoft, Alphabet, Amazon.com, and Facebook had thrived in the pandemic, and their latest earnings reports hammered home the point. The five companies generated a combined $332 billion in revenue from April to June, up 36% from a year earlier. All of their profits were better than expected. The twist is that all of their stocks, save for Alphabet’s, sold off on the news. The negative reaction reflects the paradox surrounding America’s Big Tech complex. Their products are being used more than ever, just as the companies have become increasingly disliked.
* Tech Trader: -Palantir Technologies is one of the world’s quirkiest tech companies, and last week the story got weirder than ever. But beneath the surface, there’s an oddly compelling case for the business and the stock. Palantir (PLTR) provides data analytics software to both commercial and government clients. The 18-year-old company has two primary platforms—Gotham, for government applications, and Foundry, for commercial customers. Palantir has a long history of serving U.S. military and intelligence agencies, but lately it’s been building out its sales team to bulk up its commercial business. That plan seems to be getting traction.
* The Trader:
-Walmart (WMT) entered the week of its earnings release having gone almost nowhere this year, gaining just 5.8%, even as the S&P 500 had risen 19%. Comparing it to other retailers is even worse. Target (ticker: TGT) gained 50%. Home Depot (HD) It rose 28%. The SPDR S&P Retail exchange-traded fund (XRT) jumped 49%. But this looked to be Walmart’s quarter. Its stock had gained 6.9% in the month before the earnings announcement, and R5 Capital analyst Scott Mushkin was so sure of the results that he upgraded the stock to Buy from Sell one day before the release.
-Semiconductors might be the new oil—and that could make the 2020s the new 1970s. Back then, the world ran on oil—and any change in supply had a massive impact on demand. When OPEC embargoed the U.S. in the 1970s, the price of crude rose from about $3 a barrel at the beginning of the decade to $13 a barrel by its end. The U.S. even issued gas ration coupons in 1974.
-Tapering, the term used to describe the winding down of the Federal Reserve’s bond purchases, was the big topic of conversation this past week—even though we all knew that quantitative easing is living on borrowed time. Still, we read The Wall Street Journal article gathering all the hawkish Fedspeak in one place this past Monday, and waited for the minutes from the Fed’s July meeting on Wednesday, even though we all had a pretty good idea what they’d say.
* Interview: -This week, Barron’s interviews Claudia Sahm. She is best known as a former section chief at the Federal Reserve Board of Governors, a top economist in the Obama administration, and, from 2019 to 2020, director of macroeconomic policy at the Washington Center for Equitable Growth. Sahm is also the inventor of the so-called Sahm Rule, a real-time indicator that determines whether an economy has entered a recession. But Sahm stirred up controversy last year on a different topic: She is the author of the popular blog macromom, where she published an incendiary post detailing the indignities suffered by women and other underrepresented groups in the economics profession. Sahm argued that a lack of diversity and inclusion is degrading economic knowledge and policy advice. Today, Sahm is senior fellow at the Jain Family Institute and runs her economics consultancy, Stay-At-Home Macro. Barron’s asked her about: when people are getting back to work, her outlook for inflation, and the need for diversity.
* Features:
-1) Beneficiaries of Social Security are likely to get the biggest percentage bump in 40 years after the announcement of the 2022 cost-of-living adjustment thanks to inflation that has surged amid the pandemic recovery. With inflation subdued in 2020, Social Security recipients received an increase of 1.3% in January, which resulted in an estimated average benefit increase of about $20 per month, according to the Senior Citizens League, a nonpartisan advocacy group for seniors.
-2) Jefferies Financial Group (JEF) may be first among investment banks to report earnings each quarter, but it is rarely the first to come to mind when people think of Wall Street. With a market value of $8.4 billion, Jefferies is less than a tenth the size of Goldman Sachs Group (GS) or Morgan Stanley (MS). Yet this well-managed investment bank is increasingly able to take on its bigger, better-known rivals. And there’s plenty of growth potential in the stock, even after a 38% gain this year.
-3) Investors should count on Covid-19 being a lasting threat. This means that a substantial market for vaccines and booster shots could persist for many years. That would help justify the sky-high valuations of companies like Moderna (MRNA) and BioNTech (BNTX) and give support to the Pfizer (PFE) bulls who say the company’s shares should be getting more credit for its Covid-19 vaccine. It also means that there are substantial opportunities for companies like Roche Holding (ROG. Switzerland), AstraZeneca (AZN), and others that are working on Covid-19 treatments, an area that has seen significant commercial success despite the relatively modest scientific progress made so far.
* Europe: -It’s time to look at Swatch Group (UHR). The shutdown of international travel and the closure of shops due to the pandemic hurt luxury watchmakers—an industry that has been slow to develop its online business. In 2020, Swatch, which owns such brands as Omega, Longines, and Tissot, posted its first annual loss since 1983 and cut its dividend by 37%. But there are signs of improvement, with solid demand in Greater China, which accounts for 40% of Swatch’s global sales. The company’s stores are reopening in the U.S. and Europe, and despite the uncertainty of the Delta variant, the stock has gained 45.5% over the past 12 months to 291.80 Swiss francs ($317).
* Emerging Markets:
-China wants a piece of Afghanistan’s $1T worth of natural resources. In the past years, China has scoured the globe for natural resources to feed its prodigious growth, sinking billions into Peruvian oil fields or cobalt mines in the Democratic Republic of Congo. Now it can look to next door, Afghanistan. The Taliban’s now control billions of dollars’ worth of strategic minerals. A decade-old U.S. government report estimated a $1 trillion-plus mother lode of valuable metals and stones beneath Afghan soil, some of which are particularly interesting, including posited reserves of rare earth metals, essential for modern electronics and weaponry, and lithium, the basic ingredient in electric-vehicle batteries. A declassified Defense Department note described Afghanistan as “the Saudi Arabia of lithium.”
-A policy paper from the Washington-based Peterson Institute for International Economics attempts to gauge the macroeconomic consequences of the plans to reach carbon neutrality by 2050 or 2060, as already pledged by countries representing some 70% of the world’s gross domestic product and carbon emissions. The paper issues a sobering warning: The green transition will be costly, it could amount to a global economic shock comparable to the oil crisis of the early 1970s, and governments should start preparing their public opinions for what could be a painful few years before the world embarks on a new, cleaner and greener type of growth.
* Commodities: -Iron-ore prices touched record highs this year, but look to suffer their biggest monthly loss ever as China’s curbs on carbon emissions include limits on the output of steel, hurting demand for the raw material used to produce it. “The market is not short iron ore, but short in terms of consumption as steel mills have their hands tied in a market where global steel demand is healthy and yet mills find themselves unable to produce,” says Rhys Pittam, head of ferrous operations at Marex.
* Streetwise: -This week, Jack considers the question of whether “stocks are still attractive” in his podcast. He answers listeners’ questions to determine whether investing has fundamentally changed and how.