Inflation bets

According to a newly released 13-F regulatory filing, Green Brick Partners was Greenlight’s largest holding as of the end of June, with a stake worth nearly $400 million. Greenlight has long held the homebuilder, and Einhorn said last year that it is a good bet on rising housing prices as the economy recovers from the pandemic.

Green Brick’s stock is up 12.5 percent this year, following a 100 percent increase in 2020.

Brighthouse Financial, which has the second largest stake, is seen as a bet to profit from the recovery of equity markets and higher long-term interest rates. This year, the stock is up nearly 30%.

According to the filing, Einhorn increased its stake in Canadian mining company Teck Resources to $93 million during the second quarter. The manager recently stated that the stock is a “overlooked” copper play amid a surge in demand for green energy.

Chemours Company, which Einhorn previously stated was betting on a titanium dioxide price increase, was also among Greenlight’s top holdings at the end of June.

In August 2020, the hedge fund manager revealed his increased inflation bet, claiming that the Federal Reserve’s commitment to keeping interest rates near zero would result in persistently high inflation.

After a year, inflation has risen above the central bank’s target as the economy recovers from the pandemic. The consumer price index increased 5.4 percent year on year in July, matching the largest increase since August 2008.

Einhorn also aggressively increased his GoPro holdings. Greenlight also increased its stake in ODP Corp. The hedge fund had $31 million in shares of the office supply retailer.

Stocks repurchases 

According to a Goldman Sachs investor note released on Monday, S&P 500 share buybacks totaled $200 billion in the second quarter. According to the firm, companies authorized $683 billion in buybacks through July, the highest total at this point year to date except for 2018. It also expects that trend to continue, implying an upside risk to its $726 billion buyback forecast for this year.

“This demand should easily outweigh equity supply from IPOs, follow-ons, SPACs, and convertibles, as well as potential selling from upcoming IPO lock-up expiries,” Goldman analyst David Kostin wrote in a note.

The firm’s basket includes 50 sector-neutral stocks that have outperformed the S&P 500 by 460 basis points, or 27 percent, year to date, compared to the S&P’s 23 percent. The basket’s median stock has a gross buyback yield of 5%, compared to the S&P 500’s median stock, which has a yield of 1%.

With the increase in buyback executions that follows companies’ second quarter results, buyback stocks tend to outperform in the late summer.

In the second quarter, information technology accounted for 29 percent of total buybacks, followed by financials at 26 percent and communication services at 15 percent.

Alphabet, Etsy, J.M. Smucker, and Synchrony are among the companies on the list. Alphabet has been one of the front runners, up 57 percent year to date, as concerns about the spread of Covid-19 pushed Treasury yields lower.

Utility, energy, real estate, and industrial buybacks are still below pre-pandemic levels, though Public Storage, whose stock has gained nearly 37 percent year to date, made Goldman’s buyback list.

Stocks as defense against inflation

In an interview the finance professor reiterated his inflation forecast, predicting that product prices will be 20% higher than pre-pandemic levels in three to four years.

“That’s still nothing like the 1970s, and there will be no double-digit, hyperinflation, but it will be a lot more,” Siegel predicted. Nonetheless, he argued, “you don’t want to be in cash, bonds, or money assets.”

“Stocks are real assets,” he continues. “There will be hiccups along the way — what I call taper tremors — but ‘there ain’t no alternative’ reigns more now than ever before.”

“There is no alternative,” abbreviated as TINA, is a phrase used on Wall Street to express the belief that because yields have been so low, bonds are not a worthwhile asset class to own in comparison to stocks.

Siegel stated that he is closely monitoring economic data on consumer and producer prices to see how it affects the Federal Reserve’s monetary policy approach. Steve Liesman reported earlier Monday that there is growing support within the central bank for an announcement in September of a plan to reduce monthly asset purchases, a process known as tapering.

Some on Wall Street are concerned about the market’s reaction to the Fed’s tightening of emergency policies that have been in place since March 2020, when the Covid crisis began.

Siegel stated that if the Fed tapers faster than expected — or even raises interest rates from near-zero levels before current expectations of late 2022 or early 2023 — his desire to remain invested in assets such as stocks will not change.

“Perhaps they’ll start raising in 2022. But, with inflation at 7%, who is concerned about a 1% Fed funds rate? I’m looking for tangible assets. I’m looking for land. I’d like to buy some land… “Stocks are the ultimate real assets,” according to Siegel, author of the best-selling investment book “Stocks for the Long Run.”

Companies also appear to be able to use pricing power and pass on higher input costs to consumers, which helps protect corporate earnings, according to Siegel. “When it comes to investing alternatives, higher inflation simply argues less and less for fixed income and cash.”

The stock market this week

Although quiet trading is to be expected in August, volumes have dwindled more than usual. Given the history of August choppiness and challenging returns, this is not necessarily a negative. Market advances during traditionally weak seasonal stretches are given extra credit for the underlying strength of a trend, which should not be overlooked.

Having said that, we still have several weeks of seasonal headwinds to contend with. Some technical research indicates that the S&P 500 may be completing an upside move into the 4,500 area, possibly coinciding with monthly options maturities next week. This is where the upper Bollinger Band (a volatility-adjusted trend line) is currently located.

As of now, the main feature of this market is the relentlessness of the bid, the neatness of the rotations, and investors’ contentment to allow equity exposures to rise without selling much into it. Client stock allocations at Bank of America are at an all-time high. But it’s been that way for a long time.

August is the tenth month in a row that the S&P 500 has set a new high. There have only been three previous instances in the last 60 years. The majority occurred in the midst of a bull market. Corrections were occasionally preceded, but not by major, decisive peaks. For whatever it’s worth.

The market is generally nodding in the direction of delta slowdown effects – travel stocks struggle, Treasury yields rise but remain well-anchored – but it is not pricing in much net effect. Since the recent second-quarter GDP miss, the market has moved into a zone that assumes a more prolonged/sustainable economic upswing rather than a “run it hot” boom. Today’s weak UMich consumer sentiment triggered a defensive rotation, but many leading indicators suggest that peak case rates are imminent.”

Quality over speculative content is a recurring theme. Buyback names, health care, companies with strong margins holding up while meme stuff chops lower, and the 2020-21 class of post-deal SPACs appear to have a couple of disastrous sets of results every day. The stocks have been emptied. This week, we discussed AppHarvest. Tattooed Chef tanked this week due to poor sales. SOFI is more mature, but has had a poor showing since the SPAC merger was completed. And do you remember VIEW, the maker of “smart windows”?

Today’s market breadth was mixed to weak, but the average stock is still above water for the week.

The VIX is back near 15 and at cycle lows. Fits perfectly with the sleepy pre-weekend action, with the S&P at highs. We’ll see if this area becomes a floor again.