This commentary was issued recently by money managers, research firms, and market newsletter writers and has been edited by Barron’s.
What’s Next for Exxon?
May 27: The vast majority of the upstream and integrated oil equities have delivered negative absolute returns over the last 10 years, while all have significantly underperformed the major indices. Over the last decade, Exxon Mobil’s (ticker: XOM) share price returned -30%…Do you want more activism? Because that is certainly the path to more activism.
The dust has not fully settled in Las Colinas, Texas. Thus, we cannot be certain of the magnitude of change coming to Exxon’s board of directors. From the initial results, the activist slate picked up two seats. We do not see an accelerated renewables shift coming to Exxon’s strategy as the activists will not constitute a majority regardless of the final tallies. At the margin, there will likely be more renewables chatter and investments, but a wholesale embrace of wind and solar would appear unlikely. Expect more bio/renewable fuels efforts and initiatives to come forward and a more extensive marketing of carbon-neutral products of all kinds. (Exxon’s super-major peers are already doing this)…
Dividend, dividend, dividend: From our experience, the retail holders of Exxon Mobil are laser-focused on the dividend. We are most interested to hear about the board of directors’ commitment to the dividend. We believe a declarative statement in favor of the dividend in coming days and weeks is important. The market has generally reacted unfavorably to oil and gas companies that cut their dividend payouts.
—Roger D. Read, Lauren Hendrix Walker, Thomas Link
The Future of Movie Theaters
May 26: Movie theaters took the brunt of the hit from Covid-19, which forced the shutdown of theaters for an extended period of time. This allowed studios to experiment with new business models such as PVOD (pay video on demand), where a movie intended to be released in a theater is released directly to a streaming service for home viewing.
The current consensus is that theaters will likely survive. However, movies that run in a theater will likely be blockbuster types with the potential to generate several hundred millions of dollars of revenues. Lower-budget and lower-potential-revenue movies will most likely be released directly to a streaming service.
In addition, the period of time a movie plays in a theater will likely be significantly shorter, around 30 to 45 days, as roughly 90% of a movie’s box-office receipts occur within the first 30 days. After this period, the movie would be released to a streaming service. Streaming services need new content to help retain and attract subscribers, so gaining quick access to blockbusters will be an important factor.
S&P 500 Target: 4620
U.S. Investment Policy Notes
May 26: CFRA has raised its 12-month target price for the S&P 500 to 4620, representing a 10.3% projected price appreciation from the May 25 closing value. This forecast incorporates historical precedent, fundamental forecasts, and technical considerations. This updated prediction was largely influenced by CFRA equity analysts’ cap-weighted target-price differentials for stocks under coverage in the S&P 500. Equity prices should continue to be propelled by increasingly encouraging global GDP and earnings-per-share growth projections, as the worldwide economy continues to emerge from the Covid-clampdown. Enthusiasm will likely be tempered, however, by a downsized infrastructure package, a trailing-off of inauguration-year optimism, and ongoing concerns surrounding inflation and interest rates.
R.I.P., Tech Price Deflation
May 25: The chip shortage is adding to inflationary pressure and turbocharging the recovery of East Asian exporters. Although a secular demand shift is under way—embedding semiconductors into the price of a much wider array of goods and services—integrated-circuit capex and prices are still highly cyclical. The boom will be followed by disinflationary price pressure, as new production comes online. Looking beyond the cycle, as the chip supply chain splits and Moore’s Law slows, a 20-year secular deflationary trend for semiconductors and the devices that use them is likely to halt and may even reverse.
Semiconductor price gains have further to run. Industry estimates put the worst of the shortage in Q3/Q4 2021, with supply/demand broadly in balance by Q2 2022. Pricing power will remain with chip producers as demand normalizes at a higher postpandemic level, with end users of all types carrying much higher inventories and capacity expansion still in its early stages…
Moore’s Law, the observation that the number of transistors in an integrated circuit doubles about every two years, drove most of the quality-adjusted price decrease. Performance doubled every two years, with marginal increases or even falling manufacturing costs owing to offshoring of production. Moore’s Law is coming to an end; as semiconductors get smaller and denser, the technical and capital intensity needed to improve performance has increased dramatically. Technical advances are possible but the 50% decline in quality-adjusted prices from the late 1990s to the present day will not be repeated.
Politicization of production will also add costs. We think it likely that the rising economic and national security importance of semiconductors, coupled with superpower rivalry, will cause a bifurcation of the current supply chain and eventually chip production into U.S. and China blocs. Optimizing supply chains for geopolitical security is evidently less efficient than a purely market-driven process. The cost of building and operating a fab in the U.S. is 40% greater than in China and 30% higher than in Korea or Taiwan. Taken together, political and technology changes may end a secular deflation force, just as semiconductors become a much more important input to economic activity.
Australia’s Investment Allure
The Leuthold Group
May 25: Like most international stock markets, Australia has been trailing the U.S. for much of the past decade. A few key indicators now suggest that Australia may be poised to take the lead soon…
Versus the U.S., the Australian economy is more cyclically oriented and more sensitive to commodity prices. During the past year, all three of the components that make up the Aussie Indicator—the relative performance of U.S. cyclical stocks over technology stocks, the Aussie/U.S. dollar exchange rate, and the S&P 500 GSCI Commodity Price index—have been rising. The U.S. dollar has weakened considerably relative to the Australian currency; U.S. cyclical stocks have done better as U.S. tech stocks have struggled; and commodity prices have spiked around the globe.
Is something different this time? From 1996 forward, there has been a very close relationship between this indicator and the relative performance of Aussie stocks. The favorable environment—a weak U.S. dollar, cyclical stock leadership, and higher commodity prices—could make Australia a good place to park some of your portfolio.
—James W. Paulsen
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