The Closer – AI Infrastructure vs. Utes, Residential Construction – 5/16/24
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Looking for deeper insight into markets? In tonight’s Closer sent to Bespoke Institutional clients, we begin with a look into the latest earnings and Fedspeak (page 1). We then dive into a look at the performance of our AI Infrastructure basket and data center stocks (pages 2 and 3). Next, we review the latest industrial production data (page 4) followed by a rundown of the latest residential construction revisions and April figures (pages 5 -8).
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Bespoke’s Morning Lineup – 5/16/24 – Bright Lights on Wall Street
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“The sports page records people’s accomplishments, the front page usually records nothing, but man’s failures.” – Barbara Walters
Below is a snippet of commentary from today’s Morning Lineup. Start a two-week trial to Bespoke Premium to view the full report.
Equity futures remain in modestly positive territory even after a slug of economic data that was more of the same. Initial and continuing jobless claims came in slightly ahead of forecasts, Housing Starts and Building Permits were both weaker than expected, the Philly Fed Manufacturing report missed forecasts, and the only area of strength was in Import Prices. Essentially, every data point went the opposite of what you would want to see in a strong economy. To be fair, outside of Housing Starts and Import Prices, the deviation from consensus forecasts wasn’t very large.
The snapshot below from our Trend Analyzer shows the performance of each S&P 500 Sector SPDR ETF so far this year and where each one is trading relative to its trading range. The ETF for the Utilities sector (XLU) tops the list with its gain of over 15% on the year. Even more amazing is that while no other ETF closed more than 4.2% above its 50-day moving average (DMA) yesterday, XLU finished more than 10% above its 50-DMA. Outside of one day in April 2022, the last time the sector traded further above its 50-DMA was in 2003!
The chart for XLU looks parabolic with a heavy helping of green. At one point last week, the sector closed higher than it opened in 16 out of 17 trading days, and on a 15-day rolling basis, the only time there was anything near that level of consistently higher closes than opens over three weeks occurred in January 2020.
With the sector performing so well lately and outperforming the S&P 500, you would think finding winners would be like shooting fish in a barrel, but that’s not the case. The chart below shows the YTD performance of the 31 stocks in the S&P 500 Utilities sector, and outside of three stocks, there hasn’t been much in the way of outstanding performance in the sector. While Vistra (VST), Constellation Energy (CEG), and NRG Energy (NRG) have all surged more than 60% this year, only five other stocks in the sector have outperformed the S&P 500 YTD. An additional way to show the disparity in performance this year can be seen in the fact that stocks in the sector have rallied an average of 16.2% this year, while the median gain has been just 8.1%.
Along the lines of Barbara Walters’s comment above, while VST, CEG, and NRG would be on the back page of the NY Post under a headline like “Nuking the Competition”, more stocks from the Utilities sector would likely find themselves on the front page under a headline like “Dim Bulbs”.
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Fixed Income Weekly — 5/15/24
Searching for ways to better understand the fixed income space or looking for actionable ideas in this asset class? Bespoke’s Fixed Income Weekly provides an update on rates and credit each week. We start off with a fresh piece of analysis driven by what’s in the headlines or driving the market in a given week. We then provide charts of how US Treasury futures and rates are trading, before moving on to a summary of recent fixed-income ETF performance, short-term interest rates including money market funds, and a trade idea. We summarize changes and recent developments for a variety of yield curves (UST, bund, Eurodollar, US breakeven inflation, and Bespoke’s Global Yield Curve) before finishing with a review of recent UST yield curve changes, spread changes for major credit products and international bonds, and 1-year return profiles for a cross-section of the fixed income world.
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No New Orders and No Spending in the Empire State
Among this morning’s data releases was another weak NY Fed manufacturing report. The Empire State Manufacturing Survey’s headline reading came in at -15.6. That compares to -14.3 for April and expectations of an improvement to -10. That miss relative to forecasts means the indicator has been weaker than expected three months in a row. The last streak of weaker-than-expected readings that lasted as long was in the first quarter of 2022.
The negative reading in the headline index indicates a contraction in the Northeast’s manufacturing economy that came with weak breadth among the report’s categories. Only three categories for current conditions are currently expanding: Prices Paid and Received and Inventories. Most other categories are in the bottom quintile of historical readings.
One of the weakest areas of the report has been New Orders. The January report saw this category fall to one of the weakest readings on record. While things have improved since then with little change in May, the current reading remains in the sixth percentile of all months. Perhaps more impressive is that this was the eighth month in a row with a contractionary reading in this index. As shown in the second chart below, that is one month away from tying the record of nine months in a row set in 2008/2009 and again in 2015/2016.
In addition to the ugly new orders picture, one area that is just as bad is spending plans. Overall, expectations indices are a bit more of a mixed bag, but the indices for number of employees, capital expenditures, and tech spending are historically low with readings ranging in the 3rd to 12th percentiles. Averaging across these three indices shows that the region’s manufacturers have some of the most pessimistic spending plans for labor or capital in the survey’s history. The reading edged up only slightly in May and sits roughly 0.1 point above the post-pandemic low set one year ago. On the whole, that reading is in the bottom 6% of readings.
Bespoke’s Morning Lineup – 5/15/24 – Light CPI
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“The world has been very well served with low tariffs and free trade.” – Darren Woods
Below is a snippet of commentary from today’s Morning Lineup. Start a two-week trial to Bespoke Premium to view the full report.
April CPI was just released, and the headline reading came in at 0.3% which was lower than consensus forecasts for an increase of 0.4%. Core CPI was right in line with forecasts as were both the year/year readings for headline and core. That’s the good news. The less good news was that both Empire Manufacturing and Retail Sales came in weaker than expected. Equity futures have rallied sharply in reaction to the news and treasury yields are lower.
On the same day that CPI came in lighter than expected, copper prices, which we will discuss in a report later, are just the latest commodity to rally to an all-time high after prices have gone parabolic in the last few weeks.
With respect to the market, the S&P 500 is firmly back at overbought levels and at 1.3 standard deviations above its 50-DMA, it hasn’t been this overbought since April Fools’ Day. Is that a good or a bad sign?
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Small Businesses Sit Out Growth
Earlier in the day on 5/14, the NFIB published the results of its latest survey of Small Business Optimism. While economists expected a modest decline, the index rebounded from 88.5 in March to 89.7 in April. As shown below, albeit higher month over month, current levels of small business optimism remain historically depressed, even lower than at the height of COVID.
While the optimism index sits in the bottom decile of historical readings, the 1.2 point month-over-month jump ranks in the top quartile of monthly moves, and it was on account of a wide number of categories. In fact, the only categories not rising were expectations for the economy to improve, expected credit conditions, and expansion outlook. As we discussed in today’s Morning Lineup, the six different labor market series in aggregate rebounded following a large drop in March.
As previously mentioned, one of the few areas to decline month-over-month was expectations for the economy to improve. The drop was small at just 1 point, and as shown below, the reading is still progressing in the right direction over the past two years. However, the progress has been painfully slow as the reading remains below anything observed before the past few years. In addition to the weak economic outlook, only 4% of businesses consider now a good time to expand. That was unchanged versus March, and current levels are consistent with the past two recessions and lower than the two before that!
The NFIB provides greater detail into why small businesses are reporting optimism or lack thereof. As shown below, economic conditions are overwhelmingly blamed for the negative expansion outlook. Headed into the final six months before the election, another 11% point the finger at the political climate. Next up, with each at 7% of total responses, are interest rates and the cost of expansion.
Below we plot those reasons for negative expansion outlooks over the past decade. Although it remains the biggest problem, the percentage of respondents reporting a poor economy as a reason for not growing their businesses has come down significantly over the past couple of years. Similarly, interest rates are not as big of an issue as it was only a few months ago. However, as another negative on the inflation front, cost of expansion is back to swinging higher. At 7% in April, the reading matches previous highs of the past decade.
Bespoke’s Morning Lineup – 5/14/24 – Here Come the Inflation Reports
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“He can’t have his own way, so he’s causing chaos” – John Lennon
Below is a snippet of commentary from today’s Morning Lineup. Start a two-week trial to Bespoke Premium to view the full report.
There’s little change in futures this morning ahead of the April release of PPI, and the only action seems to be in the meme stocks where the rally in GameStop (GME) from an X post of a guy sitting in a chair has that stock up more than 100% on the week. The results of April’s PPI showed a hotter-than-expected m/m reading with the headline reading rising 0.5% versus forecasts for a 0.3% increase, while the core reading also increased 0.5% compared to estimates for a 0.2% increase. That’s the bad news. On a y/y basis, though, the readings were much closer to expectations as March’s report was revised down to negative 0.1% on both a headline and core basis. The initial reaction from the market was for equities and bonds to both sell-off, but when you consider the revisions, the report was right around expectations.
Just when you think you have it all figured out, life has a way of changing. A lead story in the Wall Street Journal highlighted how Walmart (WMT) is laying off hundreds of employees in its corporate unit and asking staff in remote jobs and small offices throughout the country to relocate to larger central hubs. If we didn’t all live through and experience it we wouldn’t believe it, but less than four years ago the centralized hub approach to work seemed like a bygone relic of the pre-Covid world and companies couldn’t find enough workers to fill open roles. In June 2020, a story in Forbes titled “The Remote Office Is The New Normal” summed up the zeitgeist of the time. Some companies were even encouraging their employees to move wherever they wanted. That became awkward when the same companies ordered those workers back to California or Seattle (or wherever the corporate headquarters was). When times are good and the money’s flowing, the boss doesn’t care where you work, but when things start slowing down, that’s when it starts to get real.
We’ve all heard about complacency lately; investors are too bullish on the market and banking on a soft landing in the economy. Both those outcomes certainly aren’t out of the question, but don’t tell that to the 1,300 households comprising April’s Survey of Consumer Expectations (SCE) from the New York Fed released yesterday. We covered the report in more detail in yesterday’s Closer, but three charts are worth highlighting.
First, the stock market. Just 38.7% of those surveyed expect the stock market to be higher a year from now. That’s more than one percentage point below the survey’s historical average dating back to June 2013.
Sentiment towards the economy was even worse. Just over half of those surveyed said they could find a new job within three months if they lost their job. That reading hasn’t been this low since April 2021, and before Covid, you have to go back to 2014 to find a comparable reading.
While unemployment remains near historically low levels, consumers aren’t particularly confident regarding their finances. Just under 13% reported that they could not make the minimum payment required to keep current on their debts. It’s just one survey, but the results from this month’s SCE from the New York Fed didn’t show complacency towards the market or a ‘booming’ economy.
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Shorts Surge
Thanks to a single tweet marking the return of the poster child of 2021’s meme stock mania, shares of GameStop (GME) are back in the news thanks to a soaring share price. As shown below, the stock that was at the center of the 2021 short squeeze is once again flying with gains of well over 70% in today’s session.
As always, one day does not make a trend. Although the massive rally in GME today is impressive, overall, highly shorted stocks have not done much since their heyday from a few years back. Below we show an index comprised of the 100 most highly shorted Russell 3,000 members, rebalanced monthly over the past five years. As shown, while there have been a couple of higher lows in the past six months, the index has been rangebound at best over the past two years. Perhaps more importantly, current levels are still well below those from 2021.
Moving back to the present, today’s outperformance of the most highly shorted names is remarkable. Below we break down the Russell 1,000 into deciles based on their levels of short interest. Decile 1 represents the 100 stocks with the least short interest while decile 10 is made up of the stocks with the most heavily shorted names.
As shown, whereas the average Russell 1,000 stock is up 31 bps today, the average gain of the 100 most shorted members is 3.5%. Of course, that includes GameStop (GME), but even when that one name is removed the average gain is still an impressive 2.75%. Moving down the line, performance gets much less impressive. As shown, stocks in deciles 1 through 6 are all averaging declines today while deciles 7, 8, and 9 are averaging modest gains. The surge in GME, though, has caused traders to pile into other heavily shorted names in hopes of additional squeezes.
Late last week, the latest short-interest data was published with readings through the end of April. Below we show the Russell 1,000 members with the highest levels of short interest per that data. Medical Properties (MPW), Petco (WOOF), and Kohl’s (KSS) top the list as each one has more than a third of its float sold short. Each of those are rallying hard today, but only MPW is up on the year. Moving further down the list, there are multiple clean energy-related names—Lucid (LCID), ChargePoint (CHPT), Plug Power (PLUG), and Sunrun (RUN)—falling in the top ten most heavily shorted names. Right behind those names is, of course, GameStop (GME). Worth noting is that after today’ gain, GME joins MPW and only a handful of others on this list that have year-to-date gains.
Bespoke’s Morning Lineup – 5/13/24 Meow!
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“When stocks are rising for no better reason than that they have risen, the greater fool is at work.” – Seth Klarman
Below is a snippet of commentary from today’s Morning Lineup. Start a two-week trial to Bespoke Premium to view the full report.
Stock futures are higher to kick off the week as the S&P 500 looks to build on the last three weeks of gains and fully erase the declines of April. There will be a lot of news and events investors and traders will have to contend with this week, but so far, the pace of news has been slow. Where things aren’t slow is in GameStop (GME). The stock has rallied sharply, but this morning, it is trading up about 40% on headlines that – wait for it – “‘Roaring Kitty’ returns from three-year hiatus!” That’s right, “Roaring Kitty” returning to X for the first time in a long time with a sketch of someone leaning forward in a chair, is enough to push a stock up 40%!
Last week was another strong one for US stocks, but they took a backseat to Europe. As shown in our snapshot below, the S&P 500 tracking ETF (SPY) rallied a respectable 1.87%, but European equities took the pole position and rallied over 3%. While stocks on both sides of the Atlantic gained, performance in Asia and Emerging Markets was more subdued, and, in some cases, certain areas of those regions were even lower on the week.
Not only did Europe outperform the US last week, but the STOXX 600 managed to break out to a record high and fully roundtrip the declines of April.
The S&P 500 remains just shy of its March highs, and with a busy week of inflation data on tap, everything is going to have to go right in order for to follow Europe to new highs.
While the new high in European stocks is tempting, we’d note that on a relative strength basis, Europe still has more to prove than the US. The chart below shows the relative strength of the STOXX 600 versus the S&P 500, and during that time Europe has underperformed the US (as has been the case for well over ten years now). More recently, European stocks have shown slight signs of life after several months of sideways performance versus the S&P 500. While encouraging, less than a year ago we saw a similar pattern playout only to see European stocks pass the baton back to the US. That doesn’t mean Europe is doomed to the same fate again, but it still has more to prove.
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Brunch Reads – 5/12/24
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.
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On This Day in History:
Environmental
Los Angeles Just Proved How Spongy a City Can Be (WIRED)
In response to the extreme rainfall from an atmospheric river, Los Angeles captured 8.6 billion gallons of stormwater using its “sponge city” strategy. This includes transforming impermeable surfaces to permeable ones and expanding spreading grounds to collect water. As urban areas globally face increasing flood risks, LA’s approach utilizes stormwater as a resource rather than a liability, integrating green spaces to enhance water absorption and reduce urban heat. [Link]
Giant Batteries Are Transforming the Way the U.S. Uses Electricity (NYT)
California leads the nation in harnessing solar energy but does have issues as solar output declines at sunset, coinciding with peak electricity demand. To address this, California has dramatically expanded its installation of large-scale batteries, now second only to China in capacity. These batteries store excess solar energy during daylight and release it in the evening, contributing to the state’s power supply and reducing reliance on fossil fuels. The rapid growth of battery technology suggests a future where batteries help stabilize grids and extend the use of renewable energy across the United States. [Link]
Wind and solar are ‘fastest-growing electricity sources in history’ (Carbon Brief)
Renewable energy sources like wind and solar are set to initiate a decline in fossil fuel electricity generation and emissions starting this year, according to Ember’s global electricity review. In 2023, renewables met a record 30% of global electricity demand, despite a drop in hydropower. However, to align with the Paris Agreement’s 1.5°C climate target, renewable energy deployment needs to triple by 2030, a goal that would significantly reduce power sector emissions by nearly half. [Link]
Investments
Stocks Trade for 390 Minutes a Day. Increasingly, Only 10 Matter (Bloomberg)
A substantial portion of S&P 500 trades are now executed in the final 10 minutes of trading. About a third of all trades occur in this brief window, up from 27% in 2021. This concentration of trades at the close is tied to passive funds aligning with daily benchmark prices, but it raises concerns about potential price distortions and the broader impact on market dynamics. [Link]
Buffett Rules Out ‘Eye-Popping’ Returns. But Investors Aren’t Listening. (WSJ)
Warren Buffett has tempered expectations for Berkshire Hathaway’s future performance, noting that the conglomerate is unlikely to achieve “eye-popping” growth due to its size. Despite this, Berkshire’s shares have outperformed the market, with Class B shares increasing by 12% this year. This success comes as Buffett navigates the company without his long-time partner Charlie Munger, and ahead of the annual shareholders’ meeting in Omaha, dubbed “Woodstock for Capitalists.” [Link]
Give This Rich Dude $1 or The Onion Disappears Forever (WIRED)
Jeff Lawson, the co-founder of Twilio, recently acquired the satire website The Onion through his new company, Global Tetrahedron. Despite leaving Twilio after being pressured by activist investors, Lawson’s move into media will focus on The Onion’s independence from traffic-driven revenue models. He introduced a unique funding approach by asking readers for voluntary donations. With plans to explore various business models without a hard paywall, Lawson will try to preserve the essence of satire. [Link]
Health & Wellness
Hacking the immune system could slow ageing — here’s how (Nature)
Stem-cell researcher Carolina Florian witnessed elderly mice rejuvenate after treatment with a drug that modifies the protein organization inside hematopoietic stem cells, which are crucial for the immune system. This treatment, verified across multiple labs, not only improved the mice’s physical attributes but also extended their lifespans by altering the balance of immune cells. These findings, detailed in studies from 2020 and 2022, suggest that targeting immune system aging could broadly rejuvenate bodily functions. While the promise of applying these results to human aging is compelling, researchers proceed cautiously due to the complexities of manipulating the immune system. [Link]
Texas dairy farm worker’s case may be first where bird flu virus spread from mammal to human, scientists say (STAT)
A recent report highlights a potential first case of bird flu (H5N1) transmitting from a mammal to a human in the United States. This unique case involved a Texas man possibly infected through exposure to sick cows on a dairy farm, where no prior animal testing for the virus had occurred. Previously, H5N1 transmission to humans was known only through direct contact with infected birds. Despite the man displaying only mild symptoms, primarily conjunctivitis, this incident worth taking note of. [Link]
Smartphone Bans, Student Outcomes and Mental Health (Norwegian Institute of Public Health)
This study investigates the effects of banning smartphones in Norwegian middle schools. It finds that such bans lead to significant mental health improvements, particularly in reducing psychological issues and bullying among students. Additionally, the bans boost academic performance, especially for girls, by improving GPAs and increasing the likelihood of pursuing an academic track in high school. The study suggests that smartphone bans could be an effective and low-cost policy to boost student outcomes and well-being. [Link]
AstraZeneca withdraws Covid-19 vaccine citing low demand (CNN Business)
AstraZeneca has announced the withdrawal of its Vaxzevria COVID-19 vaccine from the European market due to a large decrease in demand. Despite the vaccine’s substantial role in global vaccination efforts, with over 3 billion doses distributed, it has not been commercially viable since April 2023. The company plans to work with regulators to withdraw the vaccine in other regions where no demand is projected. [Link]
Policy & Law
Swiss Army Knife Goes Blade-Less as Weapons Regulations Tighten (Bloomberg)
Victorinox, known for its Swiss Army Knife, plans to introduce a version without a blade in response to tighter global weapon regulations. CEO Carl Elsener highlighted the company’s adaptation to laws in countries like the UK and Japan, where carrying knives is restricted. The new design will feature tools catered to cyclists among other additions, moving away from the knife’s traditional image. This change addresses increasing legal challenges while maintaining the utility and iconic status of the Swiss Army Knife. [Link]
CFTC Wants to Ban Trades Tied to Elections, Sports and Awards Contests (WSJ)
Regulators are moving to ban derivatives contracts based on outcomes like political elections and sports, aiming to distinguish between gambling and legitimate financial market activities. The Commodity Futures Trading Commission proposed new rules with a 3-2 vote, highlighting concerns about election integrity and the potential for market abuse. While the market for event contracts is relatively small, it has seen significant growth since 2021, prompting this regulatory scrutiny. The proposal, which is still months away from potential enactment, seeks to prohibit bets on elections, sports, and awards within the financial markets, preserving the integrity of both the elections and the financial system. [Link]
Investments
China Is Buying Gold Like There’s No Tomorrow (NYT)
As gold prices soared to record highs, driven largely by geopolitical and economic turmoil, Chinese consumers like Xena Lin have eagerly participated in the market by purchasing small, affordable gold “beans.” With waning confidence in traditional investments like real estate and stocks, and significant purchases by China’s central bank aiming to diversify away from US dollar dependence, Chinese demand has played a crucial role in the sustained high prices of gold. [Link]
Retail investors snap up triple-leveraged US equity ETFs (Financial Times)
In April, retail investors demonstrated a strong appetite for high-risk financial products by directing approximately $5.2 billion into the top 22 leveraged US ETFs. This surge in interest, tracked by VandaTrack, follows previous withdrawals from passive funds amidst record highs in the S&P 500. The uncertainty surrounding US interest rates and new geopolitical tensions spurred investors to engage with these leveraged ETFs, intensifying potential gains and losses. Despite making up a small portion of the $8.9 trillion US ETF market, the growing popularity of these funds, particularly among retail investors, raises concerns about heightened exposure to market volatility and potential losses. [Link]
Economic Trends
VC Investor: ‘Half the White-Collar Staff at Google Probably Does No Real Work’ (WebProNews)
David Ulevitch, an investor at Andreessen Horowitz, criticized the tech industry for harboring too many “irrelevant” and “BS jobs.” In an interview, he supported the notion that many tech companies are overstaffed, echoing the concerns of CEOs who admit to employing workers who contribute little to no meaningful work. Ulevitch highlighted that removing these surplus roles could benefit companies by reducing unnecessary interference in operations. He also pointed out the broader economic implications, noting that such jobs not only misallocate corporate funds but also detract from shareholder profits, impacting pensioners and retirement accounts. [Link]
Pandemic Savings Are Gone: What’s Next for U.S. Consumers? (San Francisco Fed)
Recent data suggest that American households have depleted the excess savings accumulated during the pandemic by March 2024. Initially, these savings surged due to governmental financial support and reduced spending during lockdowns, reaching a peak of $2.1 trillion in August 2021. However, these funds dwindled over the next two and a half years, with households using up about $70 billion monthly. Looking ahead, the future of consumer spending will likely depend on continued employment stability, utilization of non-pandemic savings, and potentially increased consumer debt, despite higher interest rates that make the cost of using credit higher. [Link]
Technology & AI
‘Worst commercial ever’: Apple faces backlash for new iPad ad (Mint)
Apple’s new iPad Pro advertisement, which showcases the device’s creation through the destruction of various creative objects, has sparked significant backlash on social media. The ad, featuring a giant press crushing items like pianos and guitars to form the ultra-thin iPad, was criticized for its negative symbolism. High-profile figures like Hugh Grant and Justine Bateman voiced their disapproval, with Grant commenting on the “destruction of the human experience” and Bateman questioning the impact of tech on the arts. Social media users suggested that a reversed depiction, showing creative items emerging from the iPad, might have been more positively received. [Link]
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