Investments for the Post-Covid Economic Recovery
The US economy is going to grow impressively in 2021. How long will the recovery last? What are some investments for the post-Covid economic recovery? These questions came to mind after we saw a thoughtful article in The Washington Post about the possibility of the U.S. economy growing at a seven percent rate for the rest of 2021. Bottled up demand and the ability to get people back to normal work are likely to help drive an impressive economic recovery this year. But, what happens in the years to come? Your choices of investments for the post-Covid economic recovery will be based on whether we have a short burst of economic steam or if things like infrastructure investment drive the GDP up for years.
Will the Economy Boom After Covid-19 Is Gone?
According to the Post article, Goldman Sachs is predicting a 7% growth of the U.S. economy this year. This would be the best rate of growth since the middle of the Ronald Reagan presidency. However, the bulk of this year’s recovery will come from rescue and stimulus spending and a return to normal as vaccines drive the virus from our everyday lives. The answer will lie in the following round of legislation and spending. While the Democrats at least are on board with the current rescue package, the following round of legislation may be more contentious.
Will America Invest in Infrastructure?
Once Congress passes the proposed $1.9 Trillion rescue package, in whatever form, the Biden administration is set to introduce more legislation mean to repair U.S. infrastructure and create lots of jobs in the process. The legislation will also be strong on domestic manufacturing, clean energy and care for children and the elderly. Every one of these will have a major focus on creating jobs. Those who are already lining up to oppose such legislation say that it will drive the deficit too high and cause inflation. The inflation will cause higher interest rates which will, in turn, cause another recession. What the Biden administration, the Fed, and the new Secretary of the Treasury are saying is that now is not the time to think small. Our bet is that the second stimulus round, as opposed to the rescue plan, will pass in some form.
How Long Will the U.S. Economic Post-Covid Recovery Last?
A prolonged economic recovery would be likely if Biden’s plans for spending on infrastructure in all of its forms as well as domestic manufacturing work out. How prolonged might have to do more with who holds political power than the economics of what is planned. Democrats believe that they “went small” in the stimulus measures coming out of the Great Recession. Their “half-measures” resulted in a weak recovery and the loss of the House of Representatives and seven seats in the Senate. They would prefer not to repeat their mistake.
The Democrats’ plan is to bring the economy back, create jobs, bring “Trump Democrats” back into the Democratic fold and maintain or increase majorities in Congress at least through Biden’s first time and then beyond. In our opinion, the likelihood of a sustained and impressive economic recovery will depend on the U.S. government getting behind programs that make the economy more efficient and are driven by jobs at home. This will be possible if congress “bites the bullet” and passes not just the current rescue package but a substantial stimulus bill to follow.
In addition, the Biden administration is likely to allow increased immigration similar to what Reagan did. Reagan loosened immigration rules and offered paths to citizenship for illegals. It was the biggest surge of immigration since the 19th century and coincided with a U.S. economic boom.
Will Stimulus Spending Cause Inflation?
Economists like Larry Summers (former Treasury Secretary) warn that too much government spending will dump too much money into the economy and drive up inflation. Then the Fed will be forced to raise interest rates and that will cause a recession. However, according to Jerome Powell, the Fed chairman, they are in no hurry to raise rates if their stated 2% inflation target is passed and that the preferable course today is to spend and bring the economy back.
What Are Some Investments for the Post-Covid Economic Recovery?
We have written about this already. Investments based on eventual recoveries of the hospitality and travel sectors should do well in the short term as Covid-19 recedes and especially if the proposed rescue package goes through. Infrastructure-related investments and investments tied to an increase in domestic manufacturing will do better if the proposed stimulus bill passes with all of the infrastructure and green energy bells and whistles attached. For more thoughts about investments for the post-Covid economic recovery follow these links.
Infrastructure Implications of Biden Agenda
When Will Travel Stocks Recover?
Your Investments When Interest Rates Rise
Energy Investments for 2021
Clean Energy Investment Specifics: Battery Production
Carbon Sequestration Investments
Investments for the Post-Covid Economic Recovery – Slideshare Version
Carbon Sequestration Investments
Exxon Mobil is going to make $3 billion in carbon sequestration investments over the next five years. Exxon Mobil has gotten a lot of criticism for not branching out into green energy solutions. This is their first move towards fighting global warming and a greener earth. Aside from buying stock in the oil company, how can you invest in as part of your ESG investing and profit from this activity. Exxon’s approach will be to capture carbon dioxide from industrial plants and storing it so that it does not enter the atmosphere in the first place. There will be many ways to reduce carbon dioxide and potential carbon sequestration investments go forward.
What Is Carbon Sequestration?
The short version is that carbon sequestration is getting carbon dioxide out of the atmosphere and putting it somewhere. The actual version is a lot more complex as you can see by browsing the USGS report about Baseline and Projected Future Carbon Storage in the Great Plains. This forty page document discusses land use, reforestation, planting trees on unforested land, and preserving wetlands as well as giving a nod to technologies for storing carbon dioxide.
As noted in an informative article by EcoWatch, there are many ways to accomplish carbon sequestration. Planting trees works because they take carbon out of the air and turn it into wood. The sort of approach that Exxon Mobil is aiming at is already in use as EcoWatch notes in a power plant in Decatur, Illinois by Archer Daniels Midland, the agricultural and ethanol-production giant. They capture the carbon dioxide as it is created by burning fossil fuels, concentrate it into liquid, and inject it into deep rock formations. Alternatively, the CO2 can be captured and used in the creation of plastics or concrete.
A way to sequester carbon that does not require burying it far beneath the surface of the earth is to create biochar, this is partially burned material which is still rich in carbon. This material can be spread on agricultural land where it enriches the soil.
Direct Carbon Capture Technology
A process that shows long-term promise was developed by a University of Arizona professor, Klaus Lachner. It captures CO2 directly from the air which means it can be set up anywhere. At the current time the process takes a lot of energy and costs about $30 for each ton of CO2 it captures. It has the potential to remove a hundred million tons of CO2 per day from the air but that would cost $3 billion a day or about $1 trillion a year! But, this sort of approach set up with solar or wind power could collect CO2 day and night without using any fossil fuel or nuclear energy to power the process.
Modern society adds about 40 billion tons of CO2 to the atmosphere. Removing 110 million tons a day would take out 36.5 billion tons a year which would make a serious dent in the yearly increase of CO2 in the air.
Climeworks, a Swiss company, is using this process at the current time. Their costs at this time make the process too expensive but they aim to reduce how much it costs to do this and hope to start making a dent in global emissions by 2025.
Companies Employing Carbon Sequestration Technology
Your carbon sequestration investments will be targeted at companies employing one or more of the effective technologies and developing new ones. Today these include Exxon Mobil, NRG Energy, Fluor Corporation, Dakota Gasification Company, and Chevron in the USA. Carbon Engineering Ltd. is located in Canada. Others are Shell in the Netherlands, Total in France, Equinor in Norway, ADNOC Group in the UAE, and China National Petroleum Corporation in China.
As with all developing technologies the race may not be won by the one that invents a process but those that adapt it and employ it efficiently. As the USA gets back into promoting and enforcing energy policies aimed at reducing global warming, those companies that best-comply with existing regulations will also benefit the most.
Carbon Sequestration Investments – Slideshare Version
Carbon Sequestration Investments -DOC
Carbon Sequestration Investments – PDF
Clean Energy Investment Specifics: Battery Production
As we have noted, ESG investing is on the rise. One branch of this investment method is targeted at green and clean energy. When investing to help create a greener world and to make a profit along the way, you need to delve into the specifics, one of which happens to be battery production. As the world pivots to electric vehicles, solar and wind farms, and other green methods of generating electricity, battery storage is essential. Unfortunately, the USA lags far behind Europe and China and will be in a position of having to rely on foreign supply chains for essential tools in green energy development.
Government Programs for Green Energy
The Energy Efficiency and Renewable Energy branch of the US Department of Energy currently offers funding following evaluation of energy projects.
Through cooperative agreements, EERE provides financial or other support to stimulate the development and deployment of renewable and energy efficient technologies authorized by federal statute. Under cooperative agreements, the government and recipients share responsibility for the project direction.
However, these programs and the amounts of money involved need to increase greatly in the area of battery production if the USA is not to fall farther behind China and Europe.
Unfortunately, green energy programs withered during the Trump administration, leaving the USA further behind like what happened with solar panels and 5G. As we noted in our 5G article, none of the industry leaders in developing 5G are US companies employing US workers.
Battery Production as Part of Clean Energy
The Washington Post writes about clean energy jobs and how the USA is far behind its competitors.
As the Biden administration promises to jump-start the clean-energy economy, it faces an uphill climb: The United States has fallen behind Asia and Europe in the race to produce the central technology, the high-tech batteries that power electric cars and store solar and wind energy.
The Post goes on to explain that China has ninety-three huge factories manufacturing lithium-ion battery cells while the USA has four. If current plans are followed, China will have one hundred thirty such factories by 2030, Europe will have seventeen, and the USA will have ten. This will leave the USA in a vulnerable position if supply chains are interrupted, will continue to terrible balance of payment issues that the USA currently has with China, and will cause the USA to miss out of a gold mine of clean energy jobs and investments!
Taking Advantage of US Research and Development
The USA is the leader in early stage battery research via federally funded universities and national laboratories. What the USA does not do is support local efforts to convert this edge in technology into modern, high-tech, industrial capacity that creates jobs, provides investment profits, and helps maintain US technological and modern industrial leadership in the world.
Clean Energy Investment Opportunities in the Biden Administration
If you read the clean energy proposals to be put forth by the Biden administration you will see that funding will go toward the sort of investments we are discussing.
Power Sector: Move ambitiously to generate clean, American-made electricity to achieve a carbon pollution-free power sector by 2035. This will enable us to meet the existential threat of climate change while creating millions of jobs with a choice to join a union.
The problems in the way include the Covid-19 pandemic, rescue funds for struggling businesses and families, and getting enough folks vaccinated to get the economy back to a semblance of normal. Then, the estimated price tag of $2 trillion will cause concern. However, much of that can be financed with long term bonds guaranteed by the federal government and paid for over many years at historically low interest rates. What remains to be seen is if Biden and congress will be able to work together to get this done. If so, there will be substantial investment opportunities in the green energy sector staring with production of batteries in the USA.
Clean Energy Investment Specifics: Battery Production – Slideshare Version
Energy Investments for 2021
The economy is going to start to recover and green energy will benefit from government policy. Both factors will affect your energy investments for 2021. Energy investing today is much different from what it was years ago. It used to be that you could buy an energy stock like Exxon Mobil, sit back, collect the dividends, and watch it grow over the years. For example, Exxon Mobil sold for $3.91 a share at the end of 1981 and rose to $93 a share by December of 2007. And during all of those years, it paid a dividend. But, prior to the Covid-19 crisis, the stock sold for $69 a share and it fell to $32 a share by November of 2020. The path back of a company like Exxon Mobil will be a mix of success as the economy recovers and energy consumption increases and the drag that green energy policy and competition have on its market. What are your best investment choices for 2021?
Energy Stocks With the Most Momentum
If you want to invest profitably, don’t invest in the biggest energy stock but rather the one most likely to grow. Because recent success is commonly a good predictor of future success, look at energy stocks with the most momentum coming out of 2020. The Motley Fool writes about the best energy stock for 2021.
Solar energy was one of the biggest growth stories of 2020. The Invesco Solar ETF (NYSEMKT:TAN) returned roughly 14 times more than the market last year. Wind energy also shows promise. And there remains value in oil and gas stocks, which have rebounded nicely so far this year.
NextEra Energy (NYSE:NEE) is the largest U.S. utility by market capitalization. The majority of the company’s earnings come from fossil-fuel-based sources, but it’s investing heavily in renewables — so much so that renewable capacity could eclipse its fossil-fuel capacity by 2024. Here’s why NextEra could be the best energy stock for 2021.
As noted by their discussion of NextEra, investing in wind and solar can be profitable as shown by their five-fold increase in stock price over the last ten years. Because they use both renewable energy sources and traditional sources like natural gas, they will benefit from the pivot to green energy as well as the resurgence of traditional energy sources as the economy recovers.
Nuclear Power Stocks 2021
The USA currently generates thirty percent of its baseload of power (generated at any time) from nuclear power plants. Twenty-five percent of current capacity comes from nuclear plants and the USA imports 95 percent of its uranium. (Investor Intel) This explains why uranium stocks are doing well. These include Appia Energy Corp., Energy Fuels Inc., Fission Uranium Corp., Ur-Energy Inc., and Western Uranium & Vanadium Corp. These stocks are up because investors think that the USA will use more nuclear power in order to reduce greenhouse gas emissions.
The costs of nuclear power generation are largely in the construction of plants. The low cost of operation allows for money to be put aside for storage of spent fuels. Nuclear can run even when the sun does not shine and the wind does not blow. And, it does not create greenhouse gases. As such, nuclear plants will be part of the picture going forward and are likely to benefit from any phasing out of fossil fuel plants.
A major player is Exelon whose stock has gone up from $39 a share to $43 a share since Biden’s election. This stock sold for $6 a share back in 1981 but peaked at $90 a share in 2008 before the financial crisis. It stayed in the $30 to $40+ range during the last decade. Nuclear will probably be part of the puzzle going forward but not the most profitable piece.
Oil and Natural Gas Stocks
As we noted at the beginning, oil and natural gas stocks used to be solid investments. Even today we might expect stocks like Exxon Mobile to recover a bit as the economy improves and their new oil in the water off Guyana comes on line. But, the world is moving towards renewable energy, electric cars, and the like. The election of Joe Biden has accelerated this movement. Our take on the situation is that stocks like Exxon Mobil will do well over the next year or two as the economy comes back but will face significant headwinds unless they diversify into green energy as well as their current fossil fuel products.
Energy Investments for 2021 – Slideshare Version
Energy Investments for 2021 – DOC
Energy Investments for 2021 – PDF
Your Investments When Interest Rates Rise
As vaccines take hold and the economy begins to return to normal, the Fed, at some point will raise interest rates. We look a few months to a year down the line at your investments when interest rates rise.
Interest Rates and the Stock Market
Investors worry about interest rates for good reasons. When the Federal Open Market Committee of the US Federal Reserve raises the target interest rate for federal funds, that action raises rates across the entire economy. While the full effect on the US economy will typically take a year to settle in, the stock market anticipates these effects and reacts immediately. Interest is what companies pay to borrow money and thus the effects of higher rates are greater on highly leveraged enterprises with large debt loads.
High Interest Rates and the Economy
Overall, when interest rates go too high, companies borrow less and spend less. This tends to slow the economy and the higher interest rates go the more pronounced the effect is. When the economy enters an inflationary trend, the Fed will raise rates to “cool off” the economy. And, when the economy slows, the Fed will lower rates to help stimulate spending and the economy. Because of the severity of the Financial Crisis, rates stayed down for years. And, with the Covid-19 crisis and a projected k-shaped recovery, they are likely to stay down again until the economy starts to revive.
Low Interest Rates and the Bull Market
Interest rates went down with the 2008-9 financial crisis and stayed at near to zero until 2015. They rose 2.4% by the end of 2018 and then fell to near zero again with the Covid-19 pandemic crisis. With bonds paying little or no interest, investors put their money in the stock market driving prices up.
What Happens to the Market When Interest Rates Go Up This Time?
The stock market has gone up after the initial shock of the Covid-19 crisis despite high unemployment and a weak economy across many sectors. Companies have gotten used to borrowing at extremely low interest rates. When the economy starts to recover as vaccinations start to overcome the virus, the Fed is likely to raise interest rates a bit at a time. What happens to your investments when interest rates rise?
Companies with no cash reserves and large debts will be in trouble. Companies that have leveraged their stock price growth with expectations of huge gains eventually may find themselves cut off from funding and suffer financial collapses. This could include promising ventures like Tesla whose stock went up more than four-fold this year as it saw its first profitable year in 18 years of existence. However, much of its profit came from the sale of emission credits to other automakers!
Banks will do well as interest rates go up, as they always do unless higher rates drive the economy back down.
Normally, during a recession, stocks are down almost across the board. That is not the case this time and that confuses the issue a bit. As the virus subsides and the economy improves, stocks in the travel and hospitality sectors will start to recover. They are not over-priced and will have some room to run before higher interest rates hurt them. But, the current high-flyers may experience long-awaited corrections.
Worst-hit Stocks When Interest Rates Go Up
The worst-hit will probably be those investments that have been prone to speculation such as those involved in the recent retail investor frenzy and perhaps bitcoin as well. When rates go up the dollar will get stronger on the Forex markets and interest-bearing investments will return to favor.
As always, over the long term, companies with the ability to keep making profits through good times and bad will prosper. Those who purchase such investments when prices are low will do especially well and those who try to get the last bit of profit out of the bull market before higher interest rates force a correction will get hurt.
Your Investments When Interest Rates Rise – Slideshare Version
Predicting the Next Retail Investment Frenzy
The retail investor frenzy is pivoting from Gamestop to silver. Because little of this is based on fundamentals, is retail frenzy sentiment prediction possible? We noted in our article about market sentiment data that you used to be able to predict stock price changes by watching what information people were searching for on Google the week before. That time frame has shortened and the focus today is on social media like Reddit where retail investors share their trades and pile on to promising trades like Gamestop.
Trading and Investing Based on Market Sentiment
The usual clues to changes in market sentiment are to be found by following the VIX index, put to call ratios, the market aversion of or love for safe haven assets like the US dollar, and the breath stock prices. And, in a normal stock trading environment, investors and traders have time to consider their moves. That breathing space is getting shorter due to the emergence of a social media-driven feeding frenzy that has just pivoted from Gamestop to silver according to Reuters.
Silver broke above $30 an ounce for the first time since 2013 on Monday as an army of retail traders stormed into the metal after betting billions of dollars on stocks last week, triggering risks of a multi-asset melt-up in global markets.
The action in silver, following thousands of Reddit posts and hundreds of YouTube videos suggests that a rise in the physical price could hurt large investors with bearish bets, also marks a foray into a much bigger and more liquid market than individual stocks.
This new force in the investing world has the power to drive prices on chosen targets higher in a big hurry only to leave the chosen target in a precarious position once the herd of retail investors moves on to their next target. Because all of this happens outside of the world of fundamentals, traders are left with the analysis of very short term market sentiment as their only recourse, other than avoiding these trades completely.
Investing According to You Tube and Reddit
Reddit calls itself the front page of the internet and includes a group of online “communities.” Prevalent among them during the stock trading frenzy are Wall Street Bets, Robinhood, investing, stock market, and options forums. Retail investors who follow these forums, share their trades, and invest based on the most recent posts managed to drive Gamestop to stratospheric levels before moving to other targets. Some of the posts offer reasoned explanations and some simply are opinions. The sentiment that they produce drives markets and can have huge impacts as more and more readers pile on. Investors post videos on You Tube as well in which they explain their reasoning, hoot about their profits, and try to convince more people to get into the game.
How Much of This Is Pump and Dump?
We wrote about the bitcoin pump and dump at the end of 2019. To the extent that someone has the money to trade, can afford to lose it, and have a professional skill set, they are welcome to bet on this sort of trading. Our concern is that those who are simply betting on stock or silver price rises and basing their bets on a quick look at a You Tube video, are more likely to get hurt in the end than make money. FOMO (fear of missing out) seems to be a big motivator in this situation. If you are going to make money in the midst of a retail investor frenzy you will need to move quickly, accept a reasonable profit, and leave before the rest of the crowd. Otherwise, you will be like too many who put the second mortgage on their home in order to buy bitcoin at $19,000 before it fell back to $6,000 or bought at $40,000 before it fell back to $33,000. In regard to silver, some of us still remember when the Hunt brothers tried to corner the silver market and Silver Thursday when the precious metal fell from over $100 an ounce back to $10 and later back to $6.
Predicting the Next Retail Investment Frenzy – Slideshare Version
Should You Invest in Gamestop?
The video game retailer, Gamestop, was once ubiquitous in malls across America. Recently it has been struggling and its share price had fallen. That was until the end of December of 2020 at which time its share price was $17. It peaked to $347 on January 25 and has fallen to $217 as of January 28. Should you invest in Gamestop? For that matter, what happened with Gamestop (GME). The New York Times offers a bit of insight into Gamestop’s rise and what it tells us about today’s stock market. Keep in mind that Gamestop sold for $3.84 a share a year ago.
Dumb Money Beats Hedge Funds
As Gamestop stock started to go up over the course of 2020, money managers and hedge funds started to short the stock. Then mom-and-pop retail investors piled in and started to buy. The resulting rise in price resulted in a short squeeze that drove the price even higher. Why did all of those “dumb money” investors buy Gamestop and increase its market value from $2 billion to $24 billion in just a couple of days? The answer lies in the power of social media in today’s stock market.
We wrote about Robinhood investing and the risks involved. Since the Covid-19 pandemic began, many have started to trade stocks and options with apps like Robinhood due to being off work and with time on their hands. Stocks that have benefitted include BlackBerry which is up 280% and AMC which is up 840%.
According to the Times, the credit (or blame) for Gamestop’s rise and the losses incurred by hedge funds and others goes to Wall Street Bets which is a page on the Reddit social media site. The page put out the call to buy Reddit when it became apparent that it was being heavily shorted. And, when lots of small (dumb money) investors purchased the stock the price went up and those with shorts had to buy at a loss, further driving up the price.
What Happens Next with Gamestop?
The stock has already fallen from its peak price and, if left alone, should drift toward its intrinsic value price. But, if the shorts start up again, don’t be surprised if the same pattern repeats itself. Now we see that folks like Elon Musk are posting on Twitter about Reddit. It may well be that accurate market sentiment data will have to include everything said on Reddit about stocks!
Does Tribal Investment Activity Endanger the Market?
When investors have to bail out of their short positions they often have to sell their winners to find the cash. When there are enough short squeezes it could be that over-priced but otherwise solid stocks could be affected. The S&P 500 shuddered a bit after the Fed said that the economy is not doing so well. The sort of perfect storm that starts a market crash could be triggered by a “side show” like Reddit readers ganging up on the Wall Street hedge funds.
Where Does Intrinsic Stock Value Fit into this Picture?
If you are a long term value investor and believe that a stock like Gamestop is worth more than its current price based on its forward-looking earning potential, you will buy it. If you think it is over-priced right now you will sell. If you are a short term trader, the Gamestop situation afforded you with a golden opportunity to make money, provided that you could predict that all of the “dumb money” would go “all in on the stock.” For many who thrive on social media this all makes perfect sense. So, should you invest in Gamestop today? For those who are not glued to their smart phones all day long, this could be dangerous.
Should You Invest in Gamestop? – Slideshare Version
When Will Travel Stocks Recover?
The travel and hospitality industries have suffered greatly from the Covid-19 pandemic and economic crisis. They are part of the lower limb of the k-shaped recovery. As the vaccine rollout gains momentum we can hope to see the pandemic recede. How soon will that happen and when will travel stocks recover. Specifically, when will financials look better for airlines, cruise lines, aircraft manufacturers, and those who support the travel industry and when will their stocks recover?
Covid-19 Pandemic and the Travel Industry
Although science has miraculously provided us with vaccines within a year of the Covid-19 outbreak, there are variants of the virus appearing as mutations. At a certain level, there will be a race to get vaccines into people’s arms before mutations create new strains that require new vaccines. Our assessment of when travel stocks will recover is based on the assumption that the current vaccines will continue to work and that vaccination will progress as fast as or faster than we have seen so far.
Airline Stock Prices
As an example, United Airlines Holdings (UAL) fell from $85 a share to $21 a share at the onset of the pandemic. The stock has come back to the $43 range but in the fourth quarter of 2020 UAL reported a loss of $1.9 billion instead of the $641 profit they reported in the same quarter in 2019. They are paying on debt and not flying enough planes full of people. According to an article in Forbes, United Airlines says they need 70% occupancy in order to break even. They are nowhere near that at this time so the recovery in stock price is a measure of investor optimism instead of a response to improving financials.
Herd Immunity and Full Airplanes
KHN reports that the US could reach herd immunity by summer. “Herd immunity” is when more than 70% of the population has been immunized or already had the disease and recovered. The experts at Moderna say they expect Pfizer and Moderna vaccines to be administered to enough people by mid-summer to significantly reduce the spread of the disease. Their prediction does not appear to include the Johnson & Johnson vaccine expected to be available in February or any other vaccines that may become available.
It is worrisome that the new Biden administration reports that their predecessors did not have a plan for vaccine rollout and that they are starting “from scratch.” Nevertheless, it would appear that the mid-summer prediction is solid. That situation will lead us to full airplanes, renewed profits, and a cascade of economic improvements.
Investments for a Recovering Travel Industry
Airlines like Delta, United, and Southwest are likely to recover to pre-pandemic levels when we reach herd immunity and they can fill all of their planes again, probably before the end of the year. Orders will pick up at Boeing. Cruise lines like Carnival will resume operations with full boats at least by next winter. Hilton, Marriott, and others will start filling their hotels again, and companies like Expedia will resume their normal level of activity connecting passengers with travel opportunities.
There will be two key factors in this recovery. Companies are burning through their cash and many will be severely damaged by the time they could have resumed normal operations. Those with healthier reserves will probably become dominant in their sectors as others struggle to compete, are taken over, or simply go out of business. The other issue is how companies will adapt to the post-Covid-19 world. Unless the Biden administration is able to stimulate the economy, there will be less money for travel. And, companies have learned that work from home and teleconferencing work just fine, thank you. This, by itself, could reduce some of the volume of business travel which will affect airlines, hotels, restaurants, etc. Those that more-successfully adapt will do better over the longer term. And, eventually, share prices will be determined by quarterly financials and not the expectation of recovery.
When Will Travel Stocks Recover? – Slideshare Version
Why Invest in Banks?
Why invest in banks? Banks are generally a good avenue for value investing, dividend stocks, and intrinsic stock value. When the economy goes into a recession, bank stocks fall in price. However, when you look at their intrinsic stock value, these investments are generally bargains. This is because, over the years, banks are money-makers. They are usually dividend stocks as well. And, if you are interested in investing in Canada, Bank of Canada, Bank of Nova Scotia, Canadian Imperial Bank, and Toronto-Dominion Bank have all been paying dividends without fail for more than a century.
Value Investing in the Banking Sector
Investopedia offers a useful discussion about value investing in the banking sector. Value investments are secure with steady growth potential. Because banks pay dividends, you will have steady income. Because banks tend to be undervalued when the economy weakens they sell at bargain prices for the long term. A good example is Wells Fargo which sold for $1.27 a share forty years ago and sells for $32.78 today during the Covid-19 recession. This stock sells for $50 to $60 a share during normal times. And, it provides a 1.22% dividend yield.
What Is Value Investing and Why Apply It to Bank Stocks?
Investors who choose stocks with strong long term earning potential but low share prices are engaging in value investing. They look past the fear and greed-driven market sentiment of the day to the money that a company will generate over the long haul. These investors, like Warren Buffett, tend to buy when others are selling and bail out of the market when others are pushing it to extreme (and temporary) highs.
Because bank earnings are sensitive to interest rates, their earnings and stock prices fall during a recession. However, banks have reserves and tend to survive difficult times. Then, when interest rates go up, they become money-making machines again. The value investor can see this and will invest in bank stocks when rates are low only to see their investments double and triple in value when the economy and interest rates come back.
Investing in the Banking Sector
Retail banks, investment service firms, and insurance companies have a huge impact on the economy. They provide the credit that helps drive modern commerce. And, they make money on the interest they charge on loans and for various services. A well-managed, successful bank pays dividends to reward its investors and will commonly continue dividend payments even when stock prices fall. It is important to recognize that a failing bank may have a very high dividend rate so that can be a warning sign as well. Nevertheless, banks can be good long term investments and will be especially good when you pick them up when prices are depressed during an economic recession.
Can You Time Your Investments in the Banking Sector?
You can invest in solid banks when their stock prices are depressed and sell when prices go up. But, if you have money to invest on a regular basis, a better approach may be dollar cost averaging. With this approach you will be buying fewer shares when prices are high and more shares when prices are depressed. If you adhere to this approach you will also avoid having fear and greed drive your investment decisions. To the extent that you want to time investments in the banking sector, use intrinsic stock value as a guide and buy when intrinsic value is substantially greater than the current stock price.
Why Invest in Banks? – Slideshare Version
Investment Implications of Biden Agenda
What are the investment implications of the Biden agenda? President Biden will introduce a stimulus plan aimed at defeating the covid-19 epidemic and driving the US economy to an impressive recovery. How will it affect your investments? Because the Democrats will control the White House and both houses of Congress, we expect initial Biden proposals to pass. We have written about investing during the Biden administration and the potential for a Biden bull market. Now that the next President has laid out his plan with the details, there is speculation that foreign direct investment in Asia may rotate back to the USA and that infrastructure, ESL investing, health care, and especially clean energy investments will be the greatest beneficiaries.
Investment Winners from the Biden Stimulus Plan
Business Insider looks at Democratic control of Congress and the Presidency and Biden’s programs to turn back the covid-19 crisis, heal the economy, and set a new direction going forward. The first order will be to send the remainder of $2,000 to individuals and extend protections against evictions, etc. Like the stimulus last spring, this will help families across the country and put much-needed cash into circulation to the benefit of businesses small and large. But, Biden intends to go farther by promoting long-needed infrastructure spending with American companies and workers having first shots at contracts and jobs. There will be a push for a $15 an hour minimum wage and attempts to redo the tax code so that 90 of the largest American companies don’t get by without paying any Federal income taxes. Small businesses will be the first focus for much of the proposals. Green energy, health care with strengthening of the Affordable Care Act, and tech startups with increased regulation of today’s big tech will all be beneficiaries. America is likely to become a magnet for foreign capital again as the world’s largest economy begins to remake itself.
ESG Investment Boom Will Continue under Biden
Yahoo Finance writes about how ESG investing has boomed during the covid-19 crisis. These folks expect to see that trend continue, especially in regard to green investments and impact investing. Biden will rejoin the Paris climate agreement as soon as he assumes office and companies in this niche like Digital Turbine, Enphase Energy, and Tesla are likely to continue to benefit from this situation. Companies like Blackrock continue to invest in the ESL niche, driving stock prices higher and higher.
Investment Capital Will Rotate Out of Asia and into the USA
Following foreign direct investment is always a good way to spot investment opportunities. As the USA struggled with the covid-19 crisis and Asian nations had greater discipline and success, investment capital has flowed into emerging markets in Asia according to CNBC. They note that JPMorgan expects this trend to reverse as Biden’s proposals become law and the long-needed emphasis on US infrastructure takes hold.
According to James Sullivan, head of Asia ex-Japan equity research at JPMorgan :
“Most investors were very positive on Asia and emerging markets relative to the U.S.” before details of the latest rescue package were announced, Sullivan told CNBC’s “Street Signs Asia” on Friday.
“We’ve seen over 18 consecutive weeks of fund inflows into Asia ex-Japan over the course of the last couple of months,” he said, adding that it is “highly likely” that funds start to rotate out of emerging markets in Asia back to the U.S. as a result of the boost to economic growth from Biden’s plan.
Not only will Biden’s plan help us through the covid-19 crisis and shorten it but his proposed measures will provide much needed stimulus to accelerate the US economy and put it on a healthier track in the long term.
With Biden’s $1.9 trillion plan now coming in at more than twice the amount expected by JPMorgan, the analyst said it will be a “positive surprise” for the market as well as for overall levels of economic growth in the U.S.
The folks at JPMorgan expect to see China be the first affected by these changes.
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