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  by Dennis M.
  O’Connor
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Past Commentaries

01/06/2021

Current Commentary

To My Clients, Friends & Observers:

Looking Ahead

We are always optimistic in principle. The outlook for 2021 is positive regardless. The development of effective vaccines in such a short period of time by Moderna and Pfizer is truly amazing and worthy of great acclamation. Back in May I read a feature article in Boston magazine about the scientists at Moderna in Cambridge and it was riveting. These people are truly heroic, working around the clock to pursue a cure. It is reminiscent of the all the great NASA teamwork that achieved the moon landings. There are other vaccines in the works also, most notably one from Johnson & Johnson expected within the next few weeks and rumored to be storable at room temperature.

These breakthroughs were largely financed by Federal commitment of $24 billion. Ironically, the success of the vaccines does not necessarily translate to bottom line profitability. Manufacturers have committed to keep margins slim and after the virus is defeated the product life cycle ends. JNJ knows how to monetize a product and I have enlarged our holdings.

As the economy regains positive momentum we can reasonably expect more financial activity, more manufacturing and higher commodity prices. Bank lending should increase and at higher rates and spreads. Analysts’ consensus for 2021 corporate profits are already 30% to 38% gains year over year. The global economy, which has suffered far worse than the States, will likely outperform as it rebounds. Technology should continue to outperform the broad indexes.

So the sectors and some of the companies we are overweighting are financials (JP Morgan, Federal Agricultural Mortgage, Citizens Financial, Regions Financial,); industrial manufacturing (Eaton, Emerson Electric, 3M, Lockheed Martin); and commodities/materials (Air Products and Chemicals).

In tech the names to own remain Apple, Amazon, Nvidia, and Skyworks. We own the whole sector by way of the Nationwide NYSE ARCA Tech 100 Index Fund.

We have built a significantly expanded position in Alphabet (GOOGL) over the last few weeks since it was reported that revenues from digital advertising have surpassed all other media combined. I don’t consider Alphabet a tech company anymore but they are the largest digital advertising platform by far, a position they should continue to hold with significant barriers to entry. And GOOGL has become extremely profitable.

There is very strong institutional support for the stock market. Unfunded public pensions and profit sharing plans are relying on strong equity performance. As interest rates move up the importance of positive returns increases. The Federal Reserve has loudly broadcast its support. In a recent conference call with Ned Davis Research Mr. Davis mentioned, anecdotally, that the Fed recently purchased Apple bonds. Apple used the proceeds of the sale to buy back its own stock. While I disagree with the Fed’s posture, its significance is not lost on me. There remain over $5 trillion in cash and money market assets looking for investments.

The S&P 500 Index trades at 38 times trailing 12 months (TTM) earnings. If expectations are met for corporate earnings gains, the Index should trade at approximately 25 times a year from now.

Looking Back

Between the viral epidemic and election uncertainties 2020 was a very difficult year in which to manage portfolio risk. The Brae Head aggregate performance returns were 6.77% size weighted and 8.84% equal weighted, reflecting significant increases in aggregate cash. The surest way to reduce market risk is to allocate away from it, to get out of the market. The S&P 500 is our proxy for the market and it represents 100% of the risky asset. It is invested at 100% risk, 100% of the time. It returned 16.3% for the year, largely the result of a handful (literally) of tech stocks in the Index. It is never prudent to ignore risk. We manage risk.

Best regards.

Sincerely,


Dennis M. O’Connor