Service Sector Serving Up Winners

The epidemic of global consumption, courtesy of free money oriented Western Governments and Central Banks, continues to create all time records in almost every category imaginable. Sometimes too much of a good thing is a bad thing as Production and Delivery capacity of Supply Chains have broken down. Resulting inflation and shortages of goods and services, compounded by massive labor shortages, have been good for most stocks. However, a wall of worry for an eventual economic and investor market hangover is on the horizon. Momentum tech stocks have been joined by the reopening small business sector since the October low in the rally phase that could last until the February to March time frame. The Service Sector Purchasing Managers (below) have broken out to yet another record high despite the contraction in inventories and weak Labor growth. Perhaps the next 6 months of Central Bank tapering of its massive Bond buying program combined with a long term stall in the shrinking Biden social stimulus effort will begin to reduce the excess liquidity in the system and curtail the inflationary consumption surge. For now the broken Supply Chains will keep the fear of shortages as a major concern. That’s good news for employee wages and vocational choices. It will keep a tailwind behind the economy with pockets of stellar sales growth for nimble corporate managers that can keep their inventories higher than the competition.  With Covid impairing the Global economy for 20 months now with an unpredictable path ahead, our tea leaves favor small cap service along with travel and leisrue stocks in 2022 compared to stay at home tech.

The most followed barometer of Small Business and Service Sector representation is the Russell 2000 Index. It was a promising development when these recovery stocks soared one year ago as we were on the cusp of a mass vaccination euphoria wave. The Russell Index quickly stalled last summer as it became apparent that mandates would persist, Covid would continue to surge and many were unwilling to work in the Service sector with remote working options available. In October we saw a renewed upswing in Small Cap stocks that have broken out of a heavy 8 month consolidation phase. Should the current breakout hold, then we would expect a Bull market cycle high in late Summer to early Fall 2022.

While most stocks have rocketed to all time highs throughout 2021, the travel and leisure sector remains on the runway awaiting take-off. The airlines have recovered 85% of their domestic travel, but the profitable business travel and international routes are in a holding pattern.  Declining Covid concerns and a booming Service Sector implies that pent up demand in the travel industry is poised for a breakout in 2022.

What happens in Vegas may stay in Vegas, but not much is happening yet as travelers have preferred local entertainment and streaming video from their couches. Cheap travel deals abound, airline and hotel bookings are rising, but Las Vegas Sands (LVS) Casinos in Singapore and China are dealing with the biggest Covid wave to date. Despite being the most heavily vaccinated country at 81%, cases and fatalities are far higher than anytime since the pandemic began. The cyclical downwave of the virus by year end should reopen travel in Asia and the introduction of Tamiflu-like therapeutics in the US may keep domestic travel bookings on the upswing as well in 2022. 

Once LVS quarterly revenue can reach $3 Billion ($0.86 Billion currently), then we will feel better about confirming a more complete recovery. For now, a Holiday bump close to $2 Billion in sales will be a good sign for a sustainable breakout in this stock and the entertainment industry. However, due to their Asia exposure where Covid and related social restrictions are spreading at record rates, LVS will be a laggard. When this stock breaks above near term resistance in the 40’s, it will be a good omen for this sector.

 The Cruise industry has been one of the most troubled sectors affected by health concerns and mandates. False expectations percolated a year ago, but sank this Summer as the Delta variant surged. However, Norwegian Cruise (NCLH) claims to have been cash-flow positive during the 3rd quarter while reaching self imposed capacity of 57%. NCLH said that approximately 75% of capacity is expected to be operating by year end 2021 with the full fleet of 28 ships back in service by April 2022. Nobody knows the global status of Covid in 2022, but hope springs eternal with late 2022 bookings at all time record levels. A breakout above 47 in this stock would be a good sign that a pent up demand surge is underway.

Madison Square Gardens Sports (MSGS) stock continues to saucer with Revenues about half of pre-Covid 2019 levels and 70% less than the record 2018 peak. Once quarterly Revenues surpass $200 Million and the stock closes over 200 we feel the enthusiasm for live sports will be far more confident. MSGS states that ticket renewals are strong and the important multi-year renewal of its marquee partnership with JPMorgan provides support.

While Covid mandates and related fear levels are the overall determinant of returning small cap, travel and leisure stocks back to their old peaks, interest rates will also be a key metric to watch for portfolio allocation. As long as yields are quietly range bound under 1.7% on the 10 year, the Tech sector will jon in market leadership along with cyclical and service oriented stocks. Small company laggards and moribund travel and leisure will enter a momentum peak when interest rates enter a clear uptrend and surpass their 2021 highs above 1.7%.  We expect Q4 interest rates on the 10 Year Treasury to bottom in November near 1.4% before resuming an uptrend in yields. As Global Covid concerns and mandates fall further and yields rise in the first half of 2022, then these travel, leisure and entertainment stocks should be among the best performing equities for investors. Our exposure is increasing to the Russell 2000 (IWM), Banking and reopening stocks such as NCLH, MSGS, ABNB, UAL, NCLH, UBER/LYFT,LVS/WYNN and Live Nation (LYV).

 

 

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