2021 Market Outlook – Part 1

Despite Ongoing Uncertainties about the Pandemic, the Economic Recovery and Global Events, the Stock Market is Poised to Move Higher in 2021.

The financial markets turned in a stellar performance in 2020, the year of COVID-19, when real GDP probably fell about 3.7%.  Both stocks and bonds had a great year.  The S&P 500 was up 16.3% on price, 18.5% with dividends.  The Bloomberg Barclays U.S. Aggregate index, the broadest measure of U.S. fixed income securities performance, delivered a 7.5% total return.

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The Employment Situation and Outlook – December 2020

Yesterday, the Bureau of Labor Statistics estimated that nonfarm payroll employment declined by 140,000 in December.  The estimate for November was increased by 135,000.  The level of employment for December was therefore virtually unchanged from the November report.

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An Uncertain Outlook for Housing

2020 was a surprisingly solid year for housing in light of the pandemic and the havoc that it wreaked in other parts of the economy.  December data will not be reported until later this month.  I project that single-family housing starts will total 971,700 units in 2020, up 9.5% over 2019 and new residential sales will be 804,000, up 17.9%.  That is pretty remarkable, considering that single-family starts and sales were down double-digits in March and April.

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Colony Credit Real Estate 20Q3 Update

Shares of Colony Credit Real Estate (CLNC) have surged over the past six weeks, nearly doubling from a low of $4.37 on Oct. 29 to a high of $8.11 on Nov. 25.  Since then, CLNC’s share price has been trading in a range, closing most recently at $7.75 (on Dec. 8).

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Diversified Healthcare Trust (DHC): Weaker Than Anticipated 20Q3 Results

Diversified Healthcare Trust reported 2020 third quarter normalized funds from operations (FFO) (according to my definition) of $11.0 million or $0.05 per share, well below results for 19Q3 and 20Q2 and also below my projection of $27.8 million or $0.12 per share.  The decline reflects the impact of pandemic-related costs and occupancy declines on its senior housing operating portfolio (SHOP) business.

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GE: 2020 Third Quarter Earnings Review

General Electric reported a 2020 third quarter GAAP loss of $1.16 billion or $0.13 per share on revenues on revenues of $19.4 billion, down 17%.  In the 2019 third quarter, the company reported a comparable net loss of $1.3 billion of $0.15 per share.

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Wells Fargo: Still Under a Regulatory Cloud, Wading Through the Pandemic

Shares of Well Fargo have been under a regulatory cloud ever since the Federal Reserve placed a cap on its total assets in April 2018.  To lift the cap, the company must demonstrate that it has implemented an effective remediation plan that guards against a repeat of the abusive sales practices that led to the creation of millions of deposit and credit card accounts without customers’ consent.

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GE 20Q3 Earnings Preview and Outlook

Shares of GE have underperformed both the broader market and GE’s industrial peer group since the onset of the COVID-19 pandemic.  The weak performance reflects primarily the company’s exposure to the aviation business, which prior to the pandemic was GE’s most profitable by far.  With both the suspension of production of Boeing’s 737 Max aircraft and more recently the sharp drop in air travel due to the COVID-19 pandemic, GE Aviation’s profitability has collapsed.  At this point, the consensus view, as articulated by Boeing in its 20Q2 conference call, is that air traffic will not return to pre-pandemic levels for three years.  Some see a permanent reduction in air travel demand.

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Housing Market Update

Despite continuing elevated unemployment and dampened consumer confidence, the housing market has been surprisingly strong in the months following the onset of the COVID-19 pandemic.  According to the U.S. Commerce Dept., single-family housing starts for August were estimated at the seasonally-adjusted annual rate (SAAR) of 1.01 million units, up 4.1% from July and 12.1% from August 2019.  This represented the highest level for single-family starts since May 2007.  Similarly, new home sales for July were estimated to be 901,000 units, up 20% from June and 36.3% from July 2019, the highest level for new home sales since April 2007.

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Debt Refinancing Eliminates Risk of Default; But Diversified Healthcare Trust Will Need to Raise Equity Eventually

Diversified Healthcare Trust (DHC) reported 2020 second quarter normalized funds from operations (FFO) (according to my definition) of $52.8 million or $0.22 per share, down 33% from $81.1 million or $0.33 per share in the prior year quarter.  The decline was driven mostly by the 2019 restructuring of its lease agreements with its affiliate, Five Star Senior Living (FVE), and also by the impact of pandemic-related restrictions on its business.

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