JACK FARLEY: Welcome to the Daily Briefing. I'm your host, Jack Farley. It's Monday, December 21. First I'm going to be joined shortly by Peter Boockvar from Bleakley Advisory Group. But first, with the day's stories, Haley Draznin.
HALEY DRAZNIN: Hey, Jack. Markets wavered Monday, as a new strain of the coronavirus emerged in England and prompted fresh travel restrictions across Europe. The worsening cases served as a wake-up call, after enthusiasm about COVID-19 vaccines has pushed stocks to record highs in recent weeks. The Dow end higher Monday afternoon, but the NASDAQ and the S&P 500 were both down. Oil producers, airlines, and cruise lines were all hit by the resurgence of COVID-19 fears. Shares of Tesla even fell in their S&P 500 debut on Monday. 10 of the S&P 500's 11 sectors were actually in negative territory on Monday.
The only sector to post gains was financials, which got a boost after the Fed said on Friday that it would allow banks to resume share buybacks. Some investors saw today's markets as a buying opportunity, also because of the big support around the $900 billion stimulus bill that's expected to pass in Congress on Monday. Americans could start receiving checks as early as next week. That's direct payments of $600 to most Americans, and $300 per week for those enhanced unemployment benefits.
It also includes $284 billion for the Paycheck Protection Program, which provides those forgivable loans to small businesses, and more money, too, for airlines, vaccine distributions, schools, universities, food aid, and many other provisions. The package can help prevent a double dip recession and boost GDP. At forestalls a double dip recession almost, some would say. Investors may also be seeking to lock in profits from this news, with only just two trading weeks left in 2020.
The S&P 500 is up more than 13% for the year, while the Dow has risen about 5%. And the NASDAQ has rallied more than 40% this year, as investors favor those high growth tech companies. It is important to note that many of the stimulus protections will expire in the first quarter. So additional relief could be needed by March. And this will be under the Biden administration.
While the COVID-19 vaccine rollout is expected to pick up by the spring, the sectors most impacted by the pandemic are unlikely to approach full reopening until later in the year. I'll let Jack and Peter dive into all of that more. But just on a personal note, ahead of the holidays, I want to thank all of you for tuning in to RVDB. You've all been supportive of my journey on camera here since I started this summer. And I read your comments and continue to work on improving in my content and delivery. So I wish all of you and your families well this holiday season. Thanks again, and here's Jack.
JACK FARLEY: Thanks, Haley. Welcome, Peter.
PETER BOOCKVAR: Thanks, Jack, for having me.
JACK FARLEY: Of course, as always. So Peter, we-- it's one of the busiest news days this year. We've had-- Tesla is the first time trading in the S&P 500. There was recently discovered, a new strain of COVID in the United Kingdom. The stimulus bill, it's announced that it will be passed. The vote on that will be passed shortly after this interview films.
What do you make of this day of intense and abundant news flow?
PETER BOOCKVAR: Well, for sure, the news out of the UK was the main focus. I consulted with Dr. Google over the weekend, when I started reading about these extra mutations. But supposedly, viruses mutate. So I think that there is, as the day progressed in the US, maybe a growing relief that the existing vaccines will be able to address a lot of these mutations.
So I think that is sort of bringing the theme that has been in place for a while, particularly since November 9th, when Pfizer came out their news, that we're looking past COVID. And we're not going to, certainly, I don't want to say obsess, because there is obviously terrible health consequences to this. But from a business perspective, trying to look particularly at those companies that are going to benefit tremendously from the other side.
JACK FARLEY: Right. So how would you say the market is evaluating the risk of COVID-19? And how are you evaluating that risk, as we move into 2021?
PETER BOOCKVAR: Well, the markets are, again, looking to the vaccine and everything that-- all the benefits that come with it. If you look at the stocks that have been hammered the most this year because of COVID, well they've had a sharp rebound since November 9th. I've looked at this year as sort of a tale of two markets-- pre-November 9th and post March 23rd, third you had tech and then work from home beneficiaries. And then you had everything else. And then everything else certainly benefited since November 9th, where tech and some areas have taken a breather, and other areas have continued to exploit higher.
But at least from a market perspective and the indices, it's looking to the other side. And [INAUDIBLE] understand what the market is focused on. And that is a world with a vaccine and post-COVID, and not one without a vaccine in the middle of COVID. Now of course, there's a huge swath of the US economy-- small businesses, those in leisure and hospitality, that will suffer, unfortunately, for the next couple of months, with many not coming out of it. But I'm looking at the market. We're obviously dealing with very companies that had access to the capital markets, that will have a better chance of making it through.
JACK FARLEY: Right. Peter, I want to know what your outlook is on this growth versus value trade for 2021. As you said, since November 9th, we've had a big rotation away from those high flying growth stocks, into the more beaten down sectors-- the industrials, the cruise liners, the airliners, the energy companies, commercial real estate, I might add. What's your asset-- what's your outlook on those assets for the new year?
PETER BOOCKVAR: Well, I'm in the belief in the inflation [INAUDIBLE] that it's not only coming, but it's here, and is only going to increase as the next year or two progresses. And I'm not talking about going from 1 and 1/2% to 2% to maybe 2 and 1/4%, 2 and 1/2% inflation. I'm talking about 3/10, 4/10 monthly CPI increases, and that we're going to see 3%, 4%, essentially 5% year over year increases in inflation. Now granted, part of that is an easy comparison. Because you're comping it against a COVID world.
But I think even if you normalize it, you're still going to see a surprise to the upside, which means that it will be the bond market, the long into the bond market, that will be tightening rates for the Fed. Because we know they're going to overstay their welcome and keep rates at 0% forever, it seems, and that this is going to lead to a compression of multiples for these fast growing companies that are great companies. But I think that there will just be a rethink in what to pay for them.
So the value side has embedded in them low expectations. So I think investors will focus more on benefit they derive from a better economy, and will be least impacted by what I think is a compression and multiples. So I guess bottom line to 2021 is trying to figure out what that right p multiple is. Because I think that the economy is not going to have a sharp rebound with a vaccine. And the 10 year yield [INAUDIBLE]. I'm expecting a 10 year yield that's going to go to 1 and 1/2% to 2% next year, because it'll be the long end of the curve that tightens for the Fed, in response to faster growth. And what I foresee is much higher inflation.
So what's the right multiple to pay on that? Right now, we're trading at 22 times 21 earnings, and 18 plus on 22. And if I'm right on inflation, if I'm right on long rates, I would think that multiple likely compresses. Now there's also a huge swath of the market-- not just in the US, but overseas-- that are trading at lower multiples that I think will be more immune and have the potential of outperforming. So I'm really more calling out the negative valuations of stocks that are trading 30, 40 times sales, or 100 to plus 200 times sales. And people have to understand that, again, compression of a multiple with no change in earnings could be a big influence on the direction of that stock.
JACK FARLEY: Right. Just to explain, Peter, your thesis, to some of the folks at home, you're thinking that the price to earnings ratio, which is the price of the stock relative to the earnings per share, or the price of that-- how much it's worth in market cap, relative to its net income, you think that is going to decrease, and that as inflation picks up, investors are going to anticipate that inflation, and on their long bonds their year 30 year treasuries they're going to sell those off, which will increase the yields? Is that what you're saying, pretty much?
PETER BOOCKVAR: Specifically in the bond market, if I'm right, you'll start to see the monthly prints of 3, 4, or 5/10, which I know some people are going to watch this and think that I'm crazy. But I think between a combination of easy comparisons and the rise that we're seeing in goods prices, and part of that commodity prices, and that when you get the economy-- hopefully this summer, with broad inoculation-- that the service side is going to see a rebound in inflation again, after seeing some compression in 2020. [INAUDIBLE] side, we've seen sharp declines in rents and some of the major cities. But with home prices gaining 6%, 7%, 8% annualized, you're going to see a rebound in rents.
So in response to that, the short end will remain pinned by the Fed. So the long and what is going to reflect that higher inflation, in addition to what I see is continued weakness in the dollar, which will import inflation, and therefore cause a rethink in the high multiple parts of the market, that will see a downdraft in those multiples. Even though maybe their businesses continue to do well in 2021, I think what investors are going to pay for that stream of earnings will be lower than they are today.
JACK FARLEY: Right, OK. So throughout this year, since April, I should say, we've seen break-evens go ever higher, and real rates go lower. So you're telling me that you think that this trend will continue? And I assume that is very bullish for commodities. What's your view on commodities and those stocks that trade in those, IN commodities?
PETER BOOCKVAR: So I happen to be very bullish on commodities and commodity stocks. And to be specific, I think energy stocks are setting up for a really nice move higher in the next year or two. Agriculture in particular-- I like the fertilizer stocks in that space. Copper, which has already had a nice run, I still think has a lot more to go, I mean about 350, 360 a pound-- I think we're going to see 4 and 1/2 dollars a pound. And copper stocks will obviously be a beneficiary from that.
And then also precious metals, which are partly commodity, partly a currency, that I think will see further upside gains. And also, in addition, you can play the commodity currencies, like the Aussie dollar, the Canadian dollar [INAUDIBLE]. I think that after 10 years of US equity market performance, a lot of it having to do with technology, relative to the rest of the world, I think we're going to see that [INAUDIBLE] the other way, particularly emerging Asia and even parts of Europe. And parts of Europe or basically a value stock wasteland, for better or worse, with a lot of financials that I think will benefit from a steeper yield curve, if I'm right on inflation, and also a better economy, and plenty of cheap bank stocks that have essentially been killed by the ECB, but maybe can benefit in the face of that. And also, there's, particularly on the UK market, a lot of commodity type names like BP and Royal Dutch and BHB. That I think will be beneficial from right on the commodity trade.
JACK FARLEY: Right. So you're very bullish on energy. You just listed a few stocks, as well as the fertilizer space. Can you tell us-- I'm not very familiar with the fertilizer space. What are some of the biggest players in that market?
PETER BOOCKVAR: Mosaic and Nutrien are the two biggest, at least in the US. But think about what drives the demand for fertilizer. Fertilizer, obviously, a need to basically enhance the productivity of one's land. So on farming, soybeans, and corn, if all of a sudden-- well, I need fertilizers every year. But if corn and soybean prices are low, I have less money to pay for fertilizer. And maybe I skimp on it, which then impacts the yield, which then impacts, the prices which then eventually go up. And then once crop prices start to go up, well I have more income. I can afford more fertilizer. I can better treat my land. And I think that's what we're beginning to see now, in addition to a lot of supply responses that we've seen in some of these fertilizers, have also helped. And Mosaic and Nutrien have literally close plants, even though we've seen some supply in Saudi Arabia and Morocco and some other places.
But I think overall, when it comes to agriculture, as long as the world's population is growing, you can get the global demand for food pretty much right, and steadily goes up. It's getting [INAUDIBLE] that is sort of a marginal issue when it comes to both crop prices and also on the fertilizer space. And I think that we've seen a nice move toward the corn prices of late. And I expect them to head higher, which will then also help the demand for fertilizers.
JACK FARLEY: Thanks, Peter. Just switching gears a little bit, you talked about the assets that you were bullish, on which you expect to increase in value. Where do you expect that liquidity to come from? You expect it to come from the FAANG names, which are perhaps a very, very plump now? Or do you think that it's going to come from the IPO and SPAC models, which are a lot of people are saying are reminding them of the dotcom era bubble? Where are you seeing the risks in this market?
PETER BOOCKVAR: Well, keep in mind, when it comes to flows, it's-- for every buys, there's a seller. So for every seller of that FANG stock, there is a buyer. So to me, it's going to be more of where people are going to crowd in or crowd out of. And it is a good question. I mean, I think with the energy sector, 2 and 1/2% of the S&P-- and I don't think it's ever been that low as of that market-- all you need to do is get back to 4% to 5%, and you have a rather sharp increase in these stocks.
And so I come off a long term bull in crude oil. But I think we've seen, over the last couple of years, some starvation in the investment and in commodities, and in pulling-- Shell, obviously, had a big 2019. But offshore drilling has had a sharp reduction in the pace of investment. And I think a lot of Shell it may take years before we get back to that 2019 level of production, if ever. And also globally, a lot of projects have been canceled, ever since oil prices collapsed back in 2014.
I don't think we've had enough silver mines found, and copper mines, and that and that this dollar shift to technology, and FANG, all these others, have literally deprived the actual mining capital for higher prices. And you combine a vaccine, and an improved economy in 2021-2022, and that is the formula for higher commodity prices.
JACK FARLEY: So that's the formula for higher commodity prices. I guess what I want to know from you, Peter, is what's your outlook on the Snowflakes of the world, the Teslas of the world, the Nikolas, the Neos, Airbnb, companies like that? I assume, but because you omitted if, you assume it's not something that you are bullish on. But do you see a major risk in those assets for investors?
PETER BOOCKVAR: Well I'm excited for the fundamentals of a lot of these businesses. I just get a nosebleed when I look at their valuation. And particularly Snowflake, which I have no position in either way, that's trading and I think 200 times sales, and maybe 100 times next year's sales. And I'm sure it's a great company, and I don't fully understand what they do. [INAUDIBLE]. There's a lot of room for error. And there are many, many, many, many, many years of growth that you need to have to grow into that valuation.
Now with respect to the overall market, I know you wanted to touch upon sentiment. I don't know if you want me to sort of segue into that. Because this ebullient sentiment is what is helping to inflate a lot of these multiples. And the question is how long that can last.
JACK FARLEY: Absolutely. So you mentioned sentiment. And we should definitely transition to that. There's a chart you sent to me, which is the Citigroup Panic/Euphoria model. And it's a very interesting chart. Because it shows how in March, we very-- we dipped into that panic mode. But now we are much more in euphoria mode than we are in panic mode. What can you tell me about what this chart is saying? And specifically, how is this thing calculated?
PETER BOOCKVAR: Well, I want to start by saying that I don't like to look at one. I like to look at-- because I want to see them corroborate each other. Because some sentiment gauges measure just how you feel. You bullish, bearish, or neutral? Others are measuring what is actually taking place by investors, which is reflected in the call ratio, advanced decline, up volume, down volume, where the VIX is, where credit spreads are, where indexes are relative to their moving averages, to see how extended we are. So there are a multitude of these.
So the Citi Panic/Euphoria, for which I get from Barron's every weekend, they have their own proprietary metric. And that includes a bunch of inputs. And anything above 0.4 is considered euphoric. And everything below, I forget which is the downside, is a measure of panic. And when it gets into one of those sort of-- those boxes, it is predictive of what the market performance will be over the next 12 months.
So right now in the panic euphoria index, the euphoria is at 1.65. That is 4 times the threshold line where you reach into euphoria, 0.41. So that's how extended you are. And then it's actually above where you were in the late 1990s and early 2000s. So now it can stay there, for sure. But according to Citi, it's highly predictive of a down market 12 months from now.
And you combine that with investors' intelligence, where there's almost a 50 point spread between the bulls and bears, with the bulls side in particular well above 60. That's considered extreme. You have, in the AAII measure of individual investors, where bulls are well above bears. You have the Citi Fear/greed index, that reached [INAUDIBLE] a couple