Jarvis™ Newsletter: Value and Commodities Still Dominate, Risk Sectors Struggle Again

Hello and welcome to this week's installment of the Jarvis Weekly on YouTube. I'm Brian Dress, Director of Research here at Left Brain Investment Research. The Jarvis Weekly on YouTube is new for 2022. Wanted to give investors a quick video to accompany our weekly newsletter, giving context and teasing out what we think are the key points for readers to consider. The newsletter does cover a lot more ground. To receive that letter in your inbox on Saturday mornings, click the link in the description below. With that, I want to welcome our CEO and Chief Investment Officer, Nolan Langford, to the program. Nolan, welcome. Welcome.

Thank you, uh, Brian, and for all the viewers, happy New Year to everybody. And if you're in the north, hopefully you're staying warm.

Let's get right into the major stories of this week, Nolan. Um, so we'll just start with a quick market recap. Um, on the screen you'll be able to see a chart of the S&P for the last 5 days. And, uh, you know, it's down just a fraction of a percent on the last 5 days, but as you can see a big dip, a big run, and then another dip to end the week. So quite a round trip this week. The big story in the markets this week was the CPI print, Consumer Price Index. And we saw that the Consumer Price Index was up 7% year over year, which was the highest reading in the last 30 years. So definitely inflation, a big theme in today's market. We also saw some Fed speak from a couple of Fed governors. Also sort of talking about hawkish feelings in terms of monetary policy going forward. So definitely weight on markets. You know, Nolan, any thoughts on those items or anything else as we get started here?

Yeah, I think this is a, you know, it's gonna be an interesting time for investors. I think probably for most investors, they've been investing during a time where interest rates have been going lower. And in most invest— investors, that's been their entire investment career. We've been talking about rates going up, but they have not for a couple of decades. And so now we're at a crucial point where rates are finally, uh, have to go up, and the markets are adjusting. Um, so yeah, very interesting times.

Absolutely agree. I, it's hard to dispute at this point that inflation is a big, a big marker, and Rising interest rates are definitely here to stay, at least for 2022. That's had a huge impact on a number of market sectors. We've seen weakness in, you know, technology and a lot of the hypergrowth sectors. And as we've said in the newsletter the last few weeks, definitely strength in the more defensive and value-oriented sectors like energy and materials, just to name a couple. So, Nolan, I dig a little deeper into this concept. You know, what are the implications of these trends And what are some of the sectors and investments you think make the most sense in the environment that we're projecting for 2022?

Good question. I think if we take a step back and think about rates going up, it's one thing to say rates are going up. It's another thing to understand why they're going up. And they're going up because the economy itself is strong. So if we go back to 2020, there were these emergency measures that the Federal Reserve Board took during COVID really to stave off a recession, and it worked. The recession was almost the shortest one in history. But now the patient is sort of healed. We can walk on our own. We don't need to be in ICU anymore. And so what they're doing is just sort of rolling back the emergency measures at this point. And it's for a good reason. The economy is stronger. And more healthy. And so it makes sense that we don't have these emergency accommodations. And so just taking a step back, I think that makes sense. There's another thing happening. The market, in a lot of ways, almost acts as if, you know, the Federal Reserve Board is raising rates into a weak economy, or it's almost as if the market thinks if rates go up, it's going to really have a detrimental effect and really choke off either the liquidity or the premiums that the market needs to function. And so, there could be, at some point, some implications to that, particularly this inflation issue. I think part of the thing that has people a little worried, we first started to see inflation, We all know about the supply chain issues. And so we sort of tied inflation to being temporary. And then the thought was, well, hey, once production goes back up and the global economy opens back up, these supply chain issues will get resolved. And so this inflation can sort of be passing. And I think what the data says is, you know, slow down, maybe not so much. So in certain sectors, it will ease and pass, and you'll get prices to go back to normal. But in other sectors, it's, it's, it's probably going to be around a while. That does have investment implications, particularly because there are going to be certain sectors that are hurt, and we'll talk about those. But then there are also going to be certain sectors that are going to be winners. And really, in the Jarvis Weekly and at Left Brain Journal, that's our job, and that's really what we're trying to do. Is, uh, spot trends and make investment moves, um, so that we're always positioned with the winners. Absolutely.

And these are themes we're going to be addressing and diving in deeper into the newsletter. So definitely encourage, you know, those of you who are watching this video, you know, click the link in the description below and get yourself over to the newsletter and read deeper. We're going to leave aside kind of what's going to be weaker And we're going to talk more about what we've seen that has exhibited strength over the last few weeks and segue right into a discussion of commodities and especially metals and energy. First of all, a big theme that we saw in late 2021 and early 2022 was the emergency of the emergence of energy as an investment, investment thesis. And as you can see on these charts here of both crude oil, the commodity itself, And then the XLE. There's been a lot of strength over the last 3 months all through the energy sector. Momentum definitely stalled in late November and early December, but that's reversed again and resumed over the last 30 days. So, Nolan, what are your thoughts on energy? What are your thoughts of the durability of this trend into 2022? And how are you looking at playing that?

Well, first, I would just like to say for all the investors, our view is commodities are hard. They're hard, they're unpredictable. There's a lot of other variables than we would typically look at when we look at evaluating a business for investment purposes. So I'm just going to throw that out. Some of those trends can reverse relatively quickly. Some of the things that we do pay attention to, though, that has us really interested is more of the long-term fundamentals of the space. We've written about this for a while. I know, Brian, you've covered it in the weekly. But if you just take a step back and you take a look at energy, we spend— or prior to this last downturn, we spent about $260 billion a year, over $200 billion in capital expense drilling for oil and looking for oil. And because oil prices really have been in a bear market and have been weak for a very long time, You know, remember it was last year, I believe it was in, uh, in March of 2020 when oil prices went negative. And in that type of price environment, there's not a lot of extra money spent looking for new discovery, uh, new discoveries. So from a supply standpoint, the supply of oil for the most part is capped. What was really weak was demand. You know, when we were shut in for all of those months, we weren't flying or driving cars or lighting up factories. And so the demand was really weak. But now we're sort of on the other side of it. So you have demand really starting to accelerate and supply is not keeping pace. So fundamentally, there is an underpinning for oil and for oil prices at this point. Absolutely.

And I think it's similar in other materials and commodities and You know, we've seen over the last few, few months that copper and other base metals—tin, zinc, lead, and some of the others, nickel—have all been pretty strong. And then also steel. So I think that's obviously a good sign for the economy. And you can see in these charts here the strength in those commodities. We've seen that start to play in some of the stocks in the materials industry. And we're going to throw up a couple of these charts here. BHP and Nucor, a couple of companies that we've identified that have gone up. And have been strong in this, in this environment. Um, you know, with that all as a backdrop, Nolan, you know, how are you viewing the situation around materials in 2022 as an investment theme?

So materials are interesting, energy is more interesting, but I think, um, where we're going with this, if you look beneath the surface, it's the economy is strong and getting stronger. So all of these businesses that have economic sensitivity tied to a strong and growing economy is where you're starting to see, uh, the fund flows go to. And some of the areas that are going to be impacted negatively, uh, will be the opposite. You know, if the consumer has less money to spend, uh, consumer discretionary will probably be weak. Uh, and there's also sort of a rotation because there are certain sectors that were favored during the pandemic during the lockdown. Now that economy is normalizing, even with the new omni— Omicron, uh, COVID that's sort of starting to spread, we're sort of getting back to normal. And those businesses that can thrive in that environment, um, will continue to, to do well. And so the continuing theme that we always play is we like things that are fundamentally sound but we also like acceleration, and it doesn't matter from which level. One of some of the things that we move away from is deceleration. So some of these favored names that did extraordinarily well in, uh, 2020 and early '21 because the fundamentals were accelerating now are starting to stall. The fundamentals of the businesses are still— a lot of cases are still healthy, they're just no longer accelerating. Conversely, a lot of these businesses that were shut down, locked out closed down during COVID and even going back to COVID, which really had a more difficult time because there wasn't sales or earnings acceleration. They were sort of left behind. But now, as the economy reopens and the economic environment shifts, there's businesses that are getting acceleration, even if it's from a low level. The acceleration is really what drives fund flows and, um, how you can do well in the markets.

Yeah, a couple things you said there that really stick out to me and fit in with our philosophy, especially is acceleration. So as we start to look at some more value-oriented sectors and stocks, you know, we want to avoid value traps, as we mentioned last— in last week's newsletter. And we want to look for companies that are accelerating. You know, it's going to be a little bit different profile of business than what we might be used to from the left-brain perspective, but And then again, you mentioned that R-word, rotation. That was a big theme last year, and it definitely seems like it could be poised to be a big theme this year as well. So definitely keep an eye on that for investors. And then we're going to switch gears for the last segment and we're going to talk about China. You know, those of you who've been reading the newsletter for the last few months will know that we're very negative on China. We have been, you know, with a lot of the governmental regulations and, and those things along those, along those lines. Um, we have been negative on China, but we're gonna throw up a chart here of a couple of Chinese ETFs, and we're starting to see something different from a technical perspective. Um, and it's something we want to discuss here briefly. You know, China's— China, especially internet stocks, were weak in 2021 due to government intervention. Um, you can see that with the KWEB chart here, which is an ETF that covers Chinese internet. Um, you know, we're going to zoom into a 30-day chart here and let you take a look at, you know, how things look on a 30-day. You know, it was a big down move for almost all of 2021, but what we're seeing is a little bit of green shoots or something different happening, uh, over the last few weeks. And so I guess I would ask you, Nolan, um, you know, we look at certain companies like JD, Baidu, Alibaba and a few others. Are you seeing signs of bottoming here? And then if so, what are you looking for to make you want to shift your thinking to be a little bit more positive toward Chinese equities?

So you're right. They keep popping up. We really pay attention to this January effect. When the calendar turns, what happens in January, particularly the first half of January, sometimes is a really big tell. And so we really want to pay attention. And for all the investors, you'll remember, you know, China has not worked out kindly to investors the last couple of years. There's a lot of reasons for it, uh, and a lot of it has to do with these regulations. But because they're quasi-communist, they're not capitalists, so they don't always do what's in the best interest of investors. They're looking at the society as a whole, and sometimes that can be detrimental to a business and to investors. And you've sort of seen that in spades last year. What the market may be telling us is maybe these companies have bottomed, maybe the regulatory environment, we've seen the worst of it, and maybe it's priced into these stocks. Chinese stocks have always been cheaper than their American or European counterparts. We've always said they've been cheap for a reason, and you started to see that reason last year. So the market is anticipating better times ahead, and that's why we look at technicals, because it gives us foresight. What we're going to be paying attention to is the fundamental shifts. Is business getting better? The market anticipates business will get better, but will it actually? That's what will drive these stocks and make the returns sustainable. Uh, we're heading into earnings season. So if they start to report some bottoming and acceleration, even if it's from a low number, I think Alibaba several years ago was a 30%, 40% grower. And the numbers that I recall for this year is anticipate— the market anticipates 8% revenue growth. Well, hey, if the market anticipates 8% revenue growth and Alibaba prints a 10% revenue growth, those shares will get cooking. So we'll be watching the fundamentals to see, is business actually getting better? But you're right. If you take a look, the sense is the shares have bottomed. There's a little bit of green on the screen this year, not only for China, but emerging markets as a whole. And it really interests us because there is a correlation between emerging markets and oil. We'll be paying attention to see if that holds.

Again, that term acceleration comes out. And those of you who follow us will know That's one of the biggest things that we look for in any business. So keep an eye on acceleration. So, um, that's just a few brief, um, summaries of things that we're going to be talking about in this week's letter. You know, inflation and interest rates continue to be a big theme. Commodities, energy, and materials look like they might have a strong 2022, at least in the early days here. And we're looking for signs of change in the situation with the Chinese stock market. So Thanks, Nolan, for your thoughts on that. And then as we close, just a quick announcement. At Left Brain, we not only do investment research, but we also manage investment portfolios. So if you have an interest in a no-cost, no-obligation portfolio review, click the link in the description below and a member of our investment team will be contacting you shortly to schedule a meeting. Thanks. Thank you so much for joining us. And also remember again to click below for info on how to receive the Jarvis newsletter. Thanks a lot, and we'll see you again next week. Thanks, Nolan. Thank you, everybody.