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January 11, 2021 Payne’s Perspective

Beast Mode

Just as we were settling into the notion of a more orderly and less stressful New Year, all hell broke

loose. Heartbreaking images from the week will stay with us forever. I hope at some point, we’ll use this

as a rallying cry for solutions rather than fodder for more division.

The stock market had a moment out of the gate that had folks wondering if the special rally moved on

with Father Time. The first day of trading began with a monster swoon rivaling record first-day declines

in history. They all climbed off intraday lows to finish down by only 1.5%.

The buy-on-dips crowd was still waiting in the wings, so when the dust settled on the week, the market

was still in Beast Mode.

Major Indices S&P 500 NASDAQ Dow Jones Russell 2000

Jan 4th 3,700 12,698 29,881 1,945

Jan 8th 3,824 13,201 31,097 2,091

Week Change +1.83% +2.43% +1.61% +5.41%

Message of the Market

The overarching message of the market for the week continues to be the resolve we witnessed last year.

But another trend of the market is the narrowest of the rally. And the concentration of extreme winners

and losers.

Last week was thematic, as a lot of cash poured into sectors that should be big winners when

$3,000,000,000,000 comes cascading into the economy via more stimulus and an infrastructure plan.

Consumers will have even more cash to go with the more than $2.5 trillion in savings and record low

household debt to disposable income. Big winners:

Consumer Discretionary

• Financials

A two trillion-dollar infrastructure plan means cash pouring into the economy. Big winners:

• Materials

• Industrials

Meanwhile, traditional safe havens were negative for the week. Technology and Communication

Services shares were held back by the growing belief there will be an increase in legislative pressures

that would cost billions of dollars in fines and fees and possible breakups and divestments.

I was surprised Utilities didn’t fare better, as a lot of infrastructure money will flow into the coffers of

Utilities.

S&P 500 Index +1.83%

Communication Services XLC +0.01%

Consumer Discretionary XLY +4.98%

Consumer Staples XLP

-0.82%

Energy XLE +9.29%

Financials XLF +4.88%

Health Care XLV +3.48%

Industrials XLI +1.20%

Materials XLB +5.69%

Real Estate XLRE

-2.46%

Technology XLK +0.57%

Utilities XLU

-0.59%

Come on in…The Water’s Fine

Market breadth was beyond strong. For the NASDAQ, advancers outpaced decliners three to one, and

the up volume was 14 million shares higher than down.

New highs versus new lows were remarkable – on Friday, there wasn’t a single new low on the NYSE.

Market Breadth NYSE NASDAQ Composite

Advancers 2,103 2,983

Decliners 1,127 916

New Highs 649 955

New Lows 27 69

Up Volume 16.0 billion 24.5 billion

Down Volume 9.7 billion 10.3 billion

Last year, market winners barely got above 300, even after the rally began to broaden. This year has

started with more winners, although a hefty number of names are still in the red:

S&P 500 Winners

• 336 average gain: +5.61%

• Top twenty average gain: +17.82%

S&P 500 Losers

• 167 average loss: -2.54%

• Bottom twenty average decline: -5.77%

As the table above suggests, there are a lot more winners as a percentage of the NASDAQ than losers,

although the latter sees big average declines:

NASDAQ Winners

• 753 average gain: +7.87%

• Top twenty average gain: +37.88%

NASDAQ Losers

• 232 average loss: -3.88%

• Bottom twenty average decline: -15.37%

There is a lot of room for more winners. I think 2021 will be another year of ‘the haves and the have

nots’ with the difference being the average gain versus the average loss. There will be some huge

winners in 2021, and they won’t just come on high Beta tech names. Watch for a lot of usually boring

stocks to rock big time.

Disingenuous Indices

Be very careful when you hear financial media talk about “the market,” especially when using the Dow

Jones Industrial Average (DJIA) of the proxy. It is not the market - while the S&P 500 has more names,

that index is weighted by market capitalization, which means the most valuable companies have the

largest weighting and influence.

There will be sessions this year where “the market is down,” but there will be more winners than losers.

The goal is to make sure your portfolio has those winners.

Right now, the top five names in the S&P 500 have an average weighting on the index of 6.7% or 21.7%,

collectively. It was always skewed. Now, with the addition of Tesla (TSLA) and its big daily moves, look

for even more disconnects between headline S&P performance and what’s happening.

The good news is the Big 5 peaked last September, and the index is still higher.

Experts Bringing Up the Rear

Last year, the experts and their friends in the financial media wrote off the stock market rally as the folly

of Robinhood traders, looking for action when sports were shut down. Then sports began to come back,

but the flood of investors didn’t stop.

Then the narrative shifted to the notion the market was ahead of itself, and there were pleas to these

individual investors to get out because “this will not end well.”

Well. Guess who’s rushing into the market now?

A couple of weeks ago, we learned that global money managers were holding the least amount of cash

ever, as they were rushing to get long stocks.

This week, we learned institutional investors have also begun rushing into the stock market. It reminds

me of the old joke when a stock gets hit, and the broker wants the client to buy more.

“Ms. Jones, we liked it at $50.00, so we have to love it at $25.00.”

Except the smartest folks on the planet. They eschew it at $50.00, but now love it at $75.00. That’s cool.

We need them and the trillions they manage to bid up out of positions.

Moving Away from Fear

The Citibank Panic/Euphoria scale is off the scales, signaling too much optimism among investors. But I

have to say one of the main components, the American Association of Individual Investors (AAII) survey,

has seen bullishness moderate. I will say there are pockets of the market that have become euphoric,

but not the broad market.

I actually think it’s a great thing that money continues to come out of the bond market and into equities.

Net Flows ($, mm) AUM ($, mm) % of AUM

U.S. Equity 2,479.60 3,060,489.73 0.08%

International Equity 536.21 1,066,661.82 0.05%

U.S. Fixed Income -1,147.95 968,794.63 -0.12%

International Fixed Income 213.45 124,271.95 0.17%

It appears those funds are not going into large-cap stocks, but mid-cap and small-cap names:

• S&P Mid-Cap: iShares Core S&P Small-Cap ETF (IJR) +4.83%

• S&P Small-Cap: iShares Core S&P 500 ETF (IVV) +6.33%

• Long-term Treasury Bonds: ProShares Ultra Telecommunications (LTL) -4.3%

Economic Drivers & Investing Opportunities

Manufacturing Renaissance

The IHS Markit U.S. Manufacturing Purchasing Managers Index (PMI) was revised higher to 57.1 in

December from the preliminary read of 56.5 and 56.7 in November.

The Street was looking for 56.3.

HIS Markit US Manufacturing PMI

The Institute for Supply Management (ISM) Manufacturing PMI for the U.S. rose to 60.7 in December

from 57.5 in November. The Street was looking for a read of 56.6. The higher beat is usually seen as a

plus for the U.S. Dollar (DXY), which saw the DXY make a noticeable bounce.

ISM Manufacturing PMI

It was the seventh straight month of rising manufacturing activity and the strongest month since August

2018. The five sectors carry varying weights: New Orders 30%, Production 25%, Employment 20%,

Supplier Deliveries 15%, and Inventories 10%.

There is strong optimism among manufacturers reflected in higher commodities prices and the fact

none were in short supply. Note: the ISM Services Report also crushed Wall Street’s consensus.

ISM Report

Services

Manufacturing

Segments December PP Change December PP Change

Headline 57.2 +1.3 60.7 +3.2

Business Activity/ Production 59.4 +1.4 64.8 +4.0

New Orders 58.5 +1.3 67.9 +2.8

Employment 48.2 -3.3 51.5 +3.1

Supplier Deliveries 62.8 +5.8 67.6 +5.9

Inventories 58.2 +8.9 51.6 +0.4

Prices 64.8 -1.3 77.6 +12.2

Backlog of Orders 48.7 -2.0 59.1 +2.2

New Export Orders 57.3 +6.9 57.5 -0.3

Imports 51.8 -3.2 54.6 -0.5

COMMODITIES REPORTED UP/DOWN IN PRICE AND SHORT SUPPLY

Commodities Up in Price

Copper Products; Copper Wire; Construction Contractors (3); Diesel; Disinfectant Supplies (4); Exam Gloves (3); Freight; Gasoline; Gloves; Labor;

Labor — Construction; Medical Supplies (11); Nitrile Gloves (4); Oriented Strand Board; Personal Protective Equipment (PPE) (11); PPE — Gloves

(3); PPE — Gowns (3); Plastic Products (3); PVC Products (4); Shingles; and Steel (4).

Commodities Down in Price

None.

Commodities in Short Supply

Construction Contractors (3); Disinfectant Supplies (2); Electrical Components; Exam Gloves (3); Gloves; Labor; N95 Masks (10); Needles &

Syringes; Nitrile Gloves (7); Personal Protective Equipment (PPE) (11); PPE — Gloves (9); PPE — Gowns (9); Plastic Products; PVC Products (3);

Steel; Steel Products; and Sterile Water.

Note: The number of consecutive months the commodity is listed is indicated after each item.

GDP Trends

Although it’s down from mid-December, the Atlanta Fed still sees a robust fourth quarter (4Q20) Gross

Domestic Product (GDP) growth of 8.7%.

Some say the Atlanta Fed is generally too optimistic and to take a look at what Goldman Sachs (GS) sees

for 2021. The firm sees the GDP growth of 6.4% against a consensus of a 3.9% growth.

2.2

11 11.2 11.1 11.1 11.3 11 11.1 11.210.4

8.6 8.6 8.9 8.7 8.5 8.7

4Q 2020 GDP Estimate Atlanta Fed

Long Ideas Based on Manufacturing and GDP Growth

• Nucor Corp (NUE)

The company pioneered the mini-mill concept, allowing it to survive the purge of U.S. Steel (X) that was

unfairly achieved through massive Chinese subsidies to state-owned operators.

In the third quarter, there was a strong bounce in total steel sales - 4.44 million tons, helping sales climb

to $4.93 billion from 3.75 million, and $4.32 billion respectively in the third quarter. The company has

beaten the Street in each of the last four quarters. And now, the 2021 earnings consensus has climbed

to $3.49 from $2.82.

Earnings History 12/30/2019 3/30/2020 6/29/2020 9/29/2020

EPS Consensus 0.31 0.95 0.13 0.51

EPS Actual 0.52 0.99 0.37 0.65

Difference 0.21 0.04 0.24 0.14

Surprise % 67.70% 4.20% 184.60% 27.50%

• Westrock (WRK)

The global paper and packaging giant has amazing growth potential beyond an expanding global

economy. E-commerce and eco-trends offer chances for innovation. Meanwhile, execution has been

fantastic, and earnings trends continue to improve.

EPS Trend Dec 2020 Mar 2021 FY 2021 FY 2022

Current Estimate 0.53 0.79 3.36 3.8

7 Days Ago, 0.53 0.77 3.28 3.58

30 Days Ago, 0.53 0.76 3.24 3.47

60 Days Ago, 0.53 0.76 3.15 3.55

Three Months 0.52 0.6 2.59 2.69

Container Wars

Don’t look now, but container prices are rising rapidly. This brings to mind those tanker stocks that were

so hot a couple of decades ago. There was talk of ignoring traditional transportation sectors. Those

names imploded with a global economic meltdown and a ton of debt (those ships ain’t cheap).

• Star Bulk Carriers (SBLK)

One of the largest dry bulk shippers with a diversified fleet of 116 carriers, ranging in size from

SupraMax to NewcastleMax, and three recently acquired Capesize ships with a total 540,000

deadweight capacity.

These names can be tricky in part to the wild changes in fortunes for the industry. Moreover, the

company earnings have been inconsistent, but management has delivered back-to-back earnings wins

and earnings consensus has begun to take off.

The Street now sees $1.321 from $1.08 three months ago.

The chart suggests the stock has the potential to $70s. I would settle for a lot less.

The Squeeze Play

Last year, the shorts were absolutely crushed. These are folks that borrow stock and sell it, hoping the

price will move lower, and they can buy it back for a substantial profit.

Professional shorts have been running roughshod over the market for years, often targeting companies

with little brokerage support and short selling the share into oblivion. That said, these are generally

smart folks. And from time to time, they discover companies that are trading at artificially higher prices

that are not justified fundamentally.

The problem with the shorts is they want total destruction. They are not looking for a trade, but for

grand slams, which means a lot of people lose a lot of money on the other side of the trade.

When companies see their shares move higher on fundamental news or a general sense shares are

oversold and undervalued, the move is also known as a short squeeze.

I love short squeezes.

For those that are interested in looking for such trades, take a look at publicly traded stocks with the

highest percentage of the public float that has been sold short.

I have put the stock symbols in bold of the names I think currently have the best chance of a near-term

short squeeze.

Symbol & Name % Float Shorted Public Float Industry

GME GameStop Corp. 136.07% 50.07M Retail

SPCE Virgin Galactic Holdings Inc 74.67% 53.65M SPAC

AMC AMC Entertainment Holdings Inc 68.20% 55.84M Motion Pictures

LGND Ligand Pharmaceuticals Inc. 64.70% 15.43M Biotechnology & Drugs

FIZZ National Beverage Corp. 63.79% 11.64M Non-Alcoholic Beverages

BBBY Bed Bath & Beyond Inc. 61.21% 118.88M Retail

SPWR SunPower Corporation 50.84% 80.92M Semiconductors

SKT Tanger Factory Outlet 49.67% 90.14M Real Estate Operations

AXDX Accelerate Diagnostics Inc 46.19% 29.75M Scientific & Technical Instruments

TR Tootsie Roll Industries, Inc. 45.07% 16.11M Food Processing

https://www.highshortinterest.com/

Note: shorting involves higher risks and potentially unlimited losses. It requires a special risk tolerance

and trading discipline.

Conclusion

The nation is still dealing with Covid-19 and a sloppy start to vaccinations. I think the January 4th sell-off

was sparked by headlines of draconian shutdowns in Scotland - then the UK, just as new variants were

being detected around the United States.

The good news is more help is on the way from new vaccines and treatments. Meanwhile, cases and

deaths have started to trend lower.

Those lockdowns have had devastating consequences for leisure and hospitality. It’s heartbreaking in

part because no science justifies many of the actions taken against the industry.

The nation took a giant step backward last week, and more than likely, calmer voices will be drowned

out, which means further division.

The stock market is hinting the nation will be fine and is positioned for huge financial growth this year.

The other growth in maturity and love and compassion remains an elusive pipe dream.

Be Safe. Be Blessed. We. Are. Going. To. Win.

Founder, CEO, & Principal Analyst Wall Street Strategies

WWW.WSTREET.COM

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