Weekly Market Comment: May 8th

Quit yer hollerin’ and Yellen, ya hear?

Unlike you or I, high-powered politicians and financial leaders have their public words parsed and dissected under a microscope. While the Fed’s Jeremy Powell has not deviated from his script of accommodative monetary policy (low interest rates and continued asset purchases) and a desire for inflation over 2%, Janet Yellen contradicted that sentiment when she stated “it may be that interest rates will have to rise somewhat to make sure that our economy doesn’t overheat.” Remember, the Fed has said that any jump in inflation due to government spending would be temporary. 

After spooking stocks (tech stocks mostly), she backtracked from her faux pas, saying “let me be clear, it’s not something I’m predicting or recommending.” She added ironically, “if anybody appreciates the independence of the Fed, I think that person is me,” having ran the Fed from 2014 to 2018.  

Despite her backpeddling, inflation is a risk and we are seeing signs of it, including commodity prices.

What’s up with commodity prices?

If you’ve tried to buy a 2x4 at Home Depot you might notice prices have tripled in short order. Home improvement projects, home builders trying to catch up to demand, and restaurants building outdoor patios are all factors. But one of the largest drivers is the lack of sawmill capacity to process abundant timber supplies. Many went bankrupt after U.S. home prices crashed after 2006 and re-started facilities. Building out new mills not only takes a lot of capital and time (about two years) but staffing mills with skilled labour in the more rural areas where tree supplies grow, make it twice as difficult for new projects to get off the ground.

Copper prices haven’t been this high in a decade, having risen from below $2/lb to $4.60 in less than two years. Copper is a key input in the energy transition, including EV cars, wind turbines, as well as building out electricity networks including charging stations. At the same time, mining quality copper ore is getting increasingly difficult, with Chile seeing average ore grades falling by 30% in the past decade and a half.  New projects are increasingly difficult to find and permit, a result of mining standards rising, capital having been burned in the last commodity boom/bust cycle (the peak being 2012), and an unprecedented social aversion to the sanctioning process.

After more than a decade of commodity weakness, the stars appear aligned for many commodities as rising demand and constrained supply will continue to support prices.

In our Aggressive Growth portfolio, the boom has fueled our long-term hold of Pan Global, which continues to prove up strong economic, near-surface grades in a mining-friendly region of Spain.  We are also encouraged by our most recent gold/copper junior projects, GoldPlay, with a promising property in Portugal that used to be a mine, and Surge Copper. 

The commodities boom has been a significant factor driving Loonie strength, now at 82.2 cents. Economists have been behind the curve in their CAD forecast for much of this recent rally and see little appreciation from current levels. However, we note Dan Janis, Head of Global Multi-Sector Bonds at Manulife Asset Management, believes our currency can hit 88 cents. He’ll be right if commodity prices continue to trend higher.

Dropping the baton

Sometimes a company becomes a sort of cultural phenomenon, aided in part by some fortuitus exogenous luck. Peloton, which sells indoor stationary bikes and treadmills and virtual instructional videos, is a recent example.  The pandemic kept everyone at home and in many countries, such as Spain, outdoor exercise was not permitted.  Sales of indoor workout gear soared, as illustrated by the over doubling of Q1 revenue to $1.26 billion from a year ago.  So has the number of Peloton retail stores (there are three in Vancouver and a fourth is on its way).

But it turns out the company’s treadmills – including the 5,500 sold in Canada at about $5,500 a pop– were hazardous to little children playing behind them. One child died and several were injured. After weeks of denying the treadmills were unsafe, the company finally admitted otherwise and the CEO apologizes.

The treadmills will get repaired.  But setting that aside, Peloton derives 80% of its revenues from hardware sales. Once a customer buys the bike (well over 80% of all hardware sales) or treadmill (12%), they will own it for years.  Monthly subscriptions are a source of ongoing revenues – about 20% of overall - but at a 143x trailing PE, investors might witness their heart skipping a beat.  Especially when their recently slim earnings almost certainly turn to losses dealing with the expensive recalls (estimated by the company to cost $165 million).

Think about it: they doubled their sales thanks to the most perfect of stay-at-home storms, a storm that is clearing up before our very eyes.

Credit Suisse doubled down on their unprescient “outperform” recommendation but their risk disclosures of PTON say it best: “brand impact from recall, demand slowdown, increased cancellations, and supply issues.”

Perhaps the biggest risk is that the Western world appears to be on the back-end of this blasted pandemic.  We expect a renaissance of people getting outdoors after having been cooped up for so long. That’s a risk for companies like Peloton and Zoom.

Noteworthy links:


Musings Beyond The Markets

From Adam Grant’s essay “There’s a name for the blah you’re feeling: It’s called languishing.” Grant is an organizational psychologist at Wharton and author of “Think Again: The Power of Knowing What You Don’t Know.”  Below is the first 3rd of the essay (subsequent parts in the WMC will follow in the weeks to come):

At first, I didn’t recognize the symptoms that we all had in common. Friends mentioned that they were having trouble concentrating. Colleagues reported that even with vaccines on the horizon, they weren’t excited about 2021. A family member was staying up late to watch “National Treasure again even though she knows the movie by heart. And instead of bouncing out of bed at 6 a.m., I was lying there until 7, playing Words with Friends.

It wasn’t burnout — we still had energy. It wasn’t depression — we didn’t feel hopeless. We just felt somewhat joyless and aimless. It turns out there’s a name for that: languishing.

Languishing is a sense of stagnation and emptiness. It feels as if you’re muddling through your days, looking at your life through a foggy windshield. And it might be the dominant emotion of 2021.

As scientists and physicians work to treat and cure the physical symptoms of long-haul Covid, many people are struggling with the emotional long-haul of the pandemic. It hit some of us unprepared as the intense fear and grief of last year faded.

In the early, uncertain days of the pandemic, it’s likely that your brain’s threat detection system — called the amygdala — was on high alert for fight-or-flight. As you learned that masks helped protect us — but package-scrubbing didn’t — you probably developed routines that eased your sense of dread. But the pandemic has dragged on, and the acute state of anguish has given way to a chronic condition of languish.

In psychology, we think about mental health on a spectrum from depression to flourishing. Flourishing is the peak of well-being: You have a strong sense of meaning, mastery and mattering to others. Depression is the valley of ill-being: You feel despondent, drained and worthless.

Languishing is the neglected middle child of mental health. It’s the void between depression and flourishing — the absence of well-being. You don’t have symptoms of mental illness, but you’re not the picture of mental health either. You’re not functioning at full capacity. Languishing dulls your motivation, disrupts your ability to focus, and triples the odds that you’ll cut back on work. It appears to be more common than major depression — and in some ways it may be a bigger risk factor for mental illness.

The term was coined by a sociologist named Corey Keyes, who was struck that many people who weren’t depressed also weren’t thriving. His research suggests that the people most likely to experience major depression and anxiety disorders in the next decade aren’t the ones with those symptoms today. They’re the people who are languishing right now. And new evidence from pandemic health care workers in Italy shows that those who were languishing in the spring of 2020 were three times more likely than their peers to be diagnosed with post-traumatic stress disorder.

Part of the danger is that when you’re languishing, you might not notice the dulling of delight or the dwindling of drive. You don’t catch yourself slipping slowly into solitude; you’re indifferent to your indifference. When you can’t see your own suffering, you don’t seek help or even do much to help yourself.

Even if you’re not languishing, you probably know people who are. Understanding it better can help you help them.


Word of the Week

languish (v.)  -   to lose or lack vitality; grow weak or feeble; to suffer from being forced to remain in an unpleasant place or situation.  “Like birds, whose beauties languish half concealed, till, mounted on the wing, their glossy plumes expanded, shine with azure, green and gold; how blessings brighten as they take their flight.” – Edward Young