With such a lack of seemingly high-quality new issues, it’s hard to get excited about the IPO market these days. It’s worth remembering, though, that all of today’s largest companies got their start somewhere. For the largest publicly traded company in the world, that start was 37 years ago today. That’s right, Apple Computer (AAPL) began its life as a publicly traded company on 12/12/1980, just after Ronald Reagan was elected President and a month before the Iran hostage crisis came to an end. A lot has changed over the last 37 years, and there have been some major swings for Apple and the US stock market, but at this point, things have never been better for either of them.
The chart below shows the performance of Apple’s stock since its IPO in December 1980. Not including dividends, the stock has rallied more than 33,500% from a split-adjusted price of 51 cents to its current price of $172 in what has been called one of the greatest wealth-creating engines of all time. Earlier in this century, as the iPod’s popularity peaked and the iPhone took off, the term “Apple Millionaire” was coined as thousands of investors saw their net worth surge by simply buying and holding the stock. Where Apple will ultimately top out or what new product they will launch next is anyone’s guess, but even if the returns are good for the next 37 years, they will never match the last 37 years. The question is, what stock will be the Apple of the next 37 years? With so few IPOs, the pickings are slim.
While Apple’s 37-year run of gains has been nothing short of breathtaking, bitcoin enthusiasts can’t be bothered with such pedestrian returns. As just another sign of how out of this world the rally in bitcoin has been, the chart below compares Apple’s performance since its IPO to bitcoin, going back to just 2010. Back in July 2010, bitcoin was trading at seven cents per share compared to today’s price of $17,148. That’s a gain of 24,497,327%! You read that right- almost 25 million! When you compare Apple to bitcoin, Apple just looks like its moving along the zero line. With a market value of $290 billion, bitcoin is still less than half of the market cap of Apple, but it has done all of this in just over 7 years compared to 37 years for Apple.
There’s a big tide of optimism sweeping the nation’s small businesses. While individuals seem to hate the current GOP tax plan as much as they disliked ObamaCare when it was first passed, small business owners are the most optimistic they have been since the early 1980s in the days of “Stranger Things.” In the most recent release today, the NFIB’s Small Business Optimism Index spiked from 103.8 up to 107.5. That was well ahead of consensus expectations and took out the post-2000 high of 107.4 from November 2004.
The NFIB (known to be politically biased towards the right) summed up the optimism pretty succinctly in the release earlier today:
Not since the roaring Reagan economy has small business optimism been as high as it was in November, according to the National Federation of Independent Business (NFIB) Index of Small Business Optimism, released today.
“We haven’t seen this kind of optimism in 34 years, and we’ve seen it only once in the 44 years that NFIB has been conducting this research,” said NFIB President and CEO Juanita Duggan. “Small business owners are exuberant about the economy, and they are ready to lead the U.S. economy in a period of robust growth.”
In each month’s report, respondents are asked what the number one problem is that they face in their business. Once again this month, Taxes is the number one problem facing small business owners, but that will likely start to abate once/if Congress passes their current tax reform package. Behind Taxes, business owners continue to have problems finding qualified candidates to fill job openings, but that doesn’t seem to be as big an issue as it was last month. Among specific industries, though, the NFIB reported that Labor Quality is the number one problem being faced by Construction and Manufacturing firms. Government Regulations were cited by 16% of small business owners as their number one problem, while just 11% see Poor Sales as the biggest issue they face.
Finally, the commentary section of this month’s report closed out with the optimistic forecast that “The NFIB indicators clearly anticipate further upticks in economic growth, perhaps pushing up toward 4 percent GDP growth for the fourth quarter.” 4% growth? Wouldn’t that be nice!
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Below is a historical chart showing the annual cost of insuring against default for 5 years (5-year CDS) for three major US banks and brokers — Morgan Stanley, JP Morgan, and Citigroup. The price is in basis points, and basically the price shown is the cost in dollars per year to insure $10,000 of debt against default for five years. Large bondholders use credit default swaps (CDS) to hedge risk, but CDS also attract speculators as well. During the Financial Crisis, hedge funds betting against the banks made billions buying and selling CDS as prices to insure against default spiked.
We’re highlighting this chart today because of how low CDS prices have gotten again in the Financial sector. At this point, CDS prices for most of the major US financials are at the same levels they were trading at in July 2007. Back then, CDS prices had begun to rise a bit for the sector as some of the sub-prime mortgage companies were starting to go under, but prices didn’t really start to spike until late 2007.
You can see the moves a little better in the chart if we cap the price on the Y-axis at 300 basis points.
Even though the Financial sector appears to be on better footing now than it was prior to the Financial Crisis, the cost to insure against default remains more elevated than it was in the early to mid-2000s. In hindsight, the levels that CDS prices traded at prior to the crisis were way too low, and the negative result of those low prices that “the market” experienced during the collapse appears to have lifted the price level that is now considered “normal.”
The S&P 500 is up nearly 20% in 2017 after gaining 9.5% in 2016. The chart below highlights the annual price change of the S&P 500 since the current bull market began in 2009.
Contrarian investors might be prone to think that the market is likely to fall after a big up year, while momentum investors like to trade on strength one year turning into strength the next year. But if we look at the correlation between returns one year to the next, we find that there is none.
Below is a scatter chart showing the S&P 500’s move one year versus its move the next year. If the contrarian bet were true, you’d see a trend-line in the scatter chart that goes from the upper left to the lower right. If the momentum bet were true, you’d see a trend-line that goes from the lower left to the upper right. In reality, the trend line is flat as a pancake, meaning market returns one year have no correlation with market returns the next.
Our 2018 Bespoke Report market outlook is the most important piece of research that Bespoke publishes each year. We’ve been publishing our annual outlook piece since the formation of Bespoke in 2007, and it gets better and better each year! In this year’s edition, we’ll be covering every important topic you can think of dealing with financial markets as we enter 2018.
The 2018 Bespoke Report contains sections like Washington and Markets, Economic Cycles, Market Cycles, The Fed, Sector Technicals and Weightings, Stock Market Sentiment, Stock Market Seasonality, Housing, Commodities, and more. In this year’s edition, we’ll also be featuring a Bitcoin/Crypto section as well as an ETF Trends report.
We’ll be releasing individual sections of the report to subscribers until the full publication is released on December 22nd, 2017. Today we have published the “Credit Markets” section of the 2018 Bespoke Report, which looks at both high yield and investment grade bonds and credit spreads. Movements in the credit markets are often viewed as leading indicators for the stock market, so knowing how they’re trending and why is important for any equity investor.
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Even with all the rotation we have seen in equity prices over the last couple of weeks, the S&P 500 still managed to close at an all-time high on Friday and is just half of a percent below its intraday record high. Following all the relatively big swings (up and down) in various groups, there’s been a lot of movement in where the S&P 500’s industry groups stand relative to their 50-DMA. As shown in the table below, practically every industry group closed last week above its 50-DMA. Leading the way higher, Food & Staples Retail, Transportation, Retailing, and Banks are all at least 6% above their 50-DMAs, while the only two groups below their 50-DMAs are Drugs and Biotech and Semis. These two groups are also less than 1% below their 50-DMAs, so all in all breadth is really strong. YTD market performance has also been strong this year, as the only two industry groups in the red are Telecom Services (-10.5%) — which is made up of just three stocks — and Energy (-8.1%).
The chart below shows the daily reading of the percentage of S&P 500 industry groups trading above their 50-DMAs. At the current level of 91.7%, the percentage is currently not only right near its highs for the year, but also near its highs of the bull market. While there have been times when this percentage was higher, anytime you are in the 90s in terms of percentages, there’s only so much higher you can go.
Welcome to Bespoke Brunch Reads — a linkfest of the favorite things we read over the past week. The links are mostly market related, but there are some other interesting subjects covered as well. We hope you enjoy the food for thought as a supplement to the research we provide you during the week.
A prince not a pauper: the truth behind the UK’s current account deficit by Stephen Burgess and Rachana Stanbhogue (BoE Bank Underground)
An argument that rather than incurring new liabilities, the UK’s current account deficit is a spending-down of accumulated national wealth. [Link]
Putting a Value on the Ecosystem Services Provided by Forests in the Eastern United States: Case Studies on Natural Capital and Conservation by Dan Kraus and Brian DePratto (The Nature Conservancy)
An attempt to demonstrate the economic value of forests across the East Coast of the United States, with a range of values per acre and methodology for how biological resources were assigned financial worth. [Link; 29 pages]
Tax Reform and the Trade Balance by Brad W. Setser (Council on Foreign Relations)
A rundown on likely macroeconomic account impacts from tax reform, focusing on the shifts in foreign taxation that will drive a re-alignment of the current account including the trade balance. [Link]
Long Online/Short Stores ETF (ProShares)
Just in time for a huge rally in traditional retail stores over the last few weeks, ProShares has created a custom index of traditional retailers to short and online retailers to be long, similar to Bespoke’s Death By Amazon index (link to more information). [Link]
Judge bars Starbucks from closing 77 failing Teavana stores by Lisa Fickenscher (NYP)
Starbucks has been ordered to keep stores open under the theory that closing them is a bigger burden on their landlord (Simon Property Group) than it is on Starbucks to keep the stores open. [Link]
Want a Vintage Metallica T-Shirt? That’ll be $1,000 by Jacob Gallagher (WSJ)
Vintage t-shirts from across the musical spectrum are flying off the shelves of stores that specialize in digging up old tour merch for a new generation. [Link; paywall]
A new fitness tracker that’s fully waterproof, lasts days without a charge, and is worn around…your finger. [Link]
Nothing Protects Black Women From Dying in Pregnancy and Childbirth by Nina Martin and Renee Montagne (ProPublica)
A heartbreaking story about the post-partum death of a CDC researcher which serves as an example of the horrific inequality in mothers’ mortality in the United States. [Link]
Millions Are Hounded for Debt They Don’t Owe. One Victim Fought Back, With a Vengeance by Zeke Faux (Bloomberg)
Debt collectors are hounding consumers for payments on debts they never incurred, but one man they chose to threaten over an invented balance decided to fight back. [Link]
Napoleon was the Best General Ever, and the Math Proves it. by Ethan Arsht (Towards Data Science)
Using methods that will be familiar to any hard-core baseball fan, Arsht ranks generals and attempts to determine how well they performed relative to the typical general. [Link]
The Conflict in Jerusalem Is Distinctly Modern. Here’s the History. by Mona Boshnaq, Sewell Chan, Irit Pazner Garshowitz, and Gaia Tripoli (NYT)
Background on the history of Jerusalem, helpful in the context of President Trump’s decision to move the US embassy to that city this week. [Link; soft paywall]
Private equity investors are paying through the nose for midsize companies by Matthew C. Klein (FTAV)
An update on the P/E market, which looks a little bit excessive these days given huge war chests and extreme valuations. [Link; registration required]
Bloomberg’s rising terminal count signals hope for the beleaguered bond trader by John Detrixhe (Quartz)
After recording only its second subscriber count decline in history last year, Bloomberg’s terminal business saw its customer count rise in 2017. [Link]
I Made My Shed the Top Rated Restaurant On TripAdvisor by Oobah Butler (Vice)
In a frankly hilarious stunt, a journalist listed their shed as a restaurant then gamed TripAdvisor to make it the highest ranked restaurant in all of London. [Link]
This Mining Company Soared 159% After Saying It’s Buying a Crypto Firm by Camila Russo (Bloomberg)
All a company needs to do these days is change a part of its name to something bitcoin-related. [Link; auto-playing video]
There’s an $814 Million Mystery Near the Heart of the Biggest Bitcoin Exchange by Matthew Leising (Bloomberg)
In any investing fad there is inevitably fraud, and it looks like the combination of tether and the crypto exchange Bitfinex are gunning for the poll position in the blockchain’s tally. [Link; auto-playing video]
SEC Targets Initial Coin Offering ‘Scam’ by Paul Vigna (WSJ)
The first enforcement action against an initial coin offering has been dropped by the SEC, and it could be important in setting precedent for how ICOs are handled by US regulators. [Link; paywall]
Bitcoin miner: ‘I haven’t paid for heat in three years’ by Krystal Hu (Yahoo Finance)
A North Carolina man who mines bitcoins hasn’t needed to turn on his heat thanks to the huge volume of heat thrown off by CPUs on rigs he uses to mine. [Link; auto-playing video]
A Bitcoin Frenzy Like No Other Is Gripping South Korea by Kyungji Cho, Yuji Nakamura , and Narae Kim (Bloomberg)
Roughly 21% of trading in bitcoin globally takes place in Korean won, and thousands of speculators in the relatively small country have piled in to the surge. [Link; auto-playing video]
Meet CryptoKitties, the $100,000 digital beanie babies epitomizing the cryptocurrency mania by Evelyn Cheng (CNBC)
An explainer on the strangest fad you’ll read about this weekend. [Link; auto-playing video]
Have a great Sunday!
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Most bitcoin miners have been living the good life as bitcoin’s price goes parabolic, but now with the launch of futures trading, their lives may have gotten even better. Unlike traditional miners, bitcoin miners aren’t digging through dirt. Instead, they’re running specialized hardware devices day in and day out in order to obtain small chunks of bitcoin over and over again.
Setting up a bitcoin mining operation requires a little technical know-how and a bit of money (competitive bitcoin mining devices retail for about $3,000, although the sudden spike in demand for them has pushed prices as high as and above $6,000 for a single mining device). However, once the devices are up and running they can operate 24/7 with just occasional maintenance, generating “free bitcoin” with the primary cost being the electricity it takes to run them. The more mining devices you have, the more electricity you’ll use, but the more bitcoin you’ll be able to mine. When bitcoin prices rise, the mining operation becomes more profitable.
Suppose a bitcoin miner wants to reduce his exposure to bitcoin and sells a futures contract to lock in profits. Considering how wildly the prices swing, locking in some profits early may not be a bad idea for many of these miners who have high electricity and equipment costs to consider. Just how high are these electricity costs, and what does the profitability look like for bitcoin mining operations? Below is a table illustrating an example setup for a small-scale bitcoin mining operation:
|Mining Unit||Antminer S9|
|Cost per unit ($)||3000.00|
|Watts per unit||1400|
|Electricity cost ($/kwh)||0.12|
|Total Antminer electricity use (Watts)||28000|
|Total Antminer cost ($)||60,000.00|
|Cooling fan cost ($)||550.00|
|Cooling fan electricity use (Watts)||598|
|Internet cost per month ($)||35.00|
|Video surveillance ($)||100.00|
|Network Equipment ($)||100.00|
|Maintenance costs ($/month)||100.00|
|Total 1 time cost ($)||60,950.00|
|Daily cost ($)||86.86|
An operation using the parameters above would generate approximately 0.056 bitcoin per day, but this amount varies depending on the number of other active miners on the bitcoin network. An estimate for the bitcoin mined per day can be calculated quite simply. First, divide the total hash rate of the mining operation by the total hash rate of the network. The resulting figure is the bitcoin operation’s % of the total hash rate. Multiplying this by the sum of total bitcoin mined per day and total fees collected per day gives a rough estimate of how much bitcoin that mining operation should produce per day. Total bitcoin mined per day is fixed (there is a standard reward that is halved periodically), and the fees may vary day to day.
Many miners also opt to join a mining pool, which allows small miners to earn income directly from the contribution of hash power, rather than relying on the “luck” required to successfully mine a bitcoin. The mining pool operator will collect 1-2% in fees from the miners, and in return, the miners get an income stream of small frequent payouts, instead of the large but inconsistent payouts they would receive mining alone.
Below is a chart showing the break-even point for the mining operation above. To lose profitability, bitcoin would have to fall over 85% from current price levels. On the other hand, if bitcoin moves up to $20,000, this mining operation is making over $1,000/day in profits. Not bad!
If bitcoin stayed around its current price of $15,500, the total network hash rate would have to multiply by a factor of 10 for this mining operation to become unprofitable. That’s a total of 10x as many miners as there are now!
If mining is so profitable, why isn’t everyone doing it? The demand for mining equipment has risen so rapidly that supply hasn’t had a chance to keep up. The original price of the Antminer S9, the most efficient and popular bitcoin miner, was $2,100. Now you’d be lucky to find one on Amazon or any other re-seller for less than $6,000. Even at $6,000, though, it’s still a very profitable operation as long as bitcoin prices remain high. However, as the supply of mining hardware expands, miners’ profit margins will begin to shrink; all miners compete for a finite supply of bitcoin.
With the new futures contracts, institutions who previously could not trade bitcoin due to a lack of regulation will now have a regulated avenue to be long or short bitcoin. How this might affect the price or compare to the volume of hedges by miners remains unknown, but we do know that the futures market will offer hedging opportunities for miners and change market dynamics.
Below is a chart showing profit per day with 10x the miners that there are now. Break-even point is around $15,500 per bitcoin.
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