This morning’s NFIB Small Business Optimism Index showed disappointing results.  The index was expected to show small businesses had less optimism with the index forecasted to fall 0.1 points month over month down to 93.6.  Instead, the decline was much more dramatic as it fell down to 91.2; erasing all of the summer gains. One factor likely at play that we have noted in the past is political sensitivities.

Historically speaking, NFIB data has tended to hold a positive bias during Republican administrations and vice versa. Put differently, optimism rises when Republicans are in power or are expected to be voted in, and optimism falls when Democrats are in power or are expected to win an election. In reaction to last month’s report, we discussed how the recent surge in optimism earlier this summer was concurrent with the rising odds of former President Trump winning back the presidency.  This latest data, on the other hand, would capture that the Presidential race is looking tighter than it did previously, and optimism seems to have moved lower in turn.

Looking under the hood of the report, there wasn’t much to like. Of the inputs to the Optimism Index, only two rose month over month: Plans to Make Capital Outlays and Job Openings as Hard to Fill.  The latter of those is by far the strongest category of the report with the August reading in the 92nd percentile of all months.  Outside of that, there are four inputs to the optimism index and another three non-input categories that now rank in the bottom decile of readings.  Some of those like Actual Earnings Changes and Expectations for Higher Real Sales also fell significantly month over month with bottom decile monthly moves.

As noted above, one of the weaker inputs to optimism was actual earnings changes and other “actual” categories are similarly weak.  In August, that index fell 7 points month over month.  That is the largest decline in a single month since last October when it fell 8 points. More impressively, that drop results in the index falling below the spring 2020 lows for the worst reading since March 2010. Among other categories for observed (rather than expected) conditions, employment change reached a new near term low of -6. That is the weakest reading in this index in two years. As we showed in the Morning Lineup, combined with other labor market categories, the report is consistent with a further weakening labor market.

Circling back on the weak change to earnings, the report details a handful of reasons that small businesses are reporting lower earnings.  As shown below, the most common response in August was increased costs; up 2 percentage points to 16%.  The next most common reason was sales volumes which was unchanged sequentially at 13%.

While those responses would indicate that an uptick in inflation has been hurting the bottom line of small businesses, the report’s inflation gauge was somewhat contradictory. There continues to be more companies reporting that prices are higher versus lower than they were three months ago. However, that higher prices index has been improving dramatically. The index dropped to a new low of 20 in August which is the lowest level since January 2021. While that is also still elevated ranking in the 81st percentile of all months on record, that is well below the peak from two and a half years ago and is consistent with decelerating inflation.  Additionally, the share of businesses reporting inflation as their biggest problem ticked down modestly to 24% from 25% and is well below the highs near 35%.

When you think of the major cloud infrastructure providers, Amazon.com (AMZN), Alphabet (GOOGL), and Microsoft (MSFT) are the first names that typically come to mind.  Given that their market caps are all well into the trillions, it makes sense, but one name saying “don’t forget about me” is Oracle (ORCL).  If you compare the performance of the four stocks since the launch of ChatGPT, ORCL’s 74.6% gain lands right in the middle of the pack, ahead of GOOGL and MSFT but trailing AMZN’s gain of 82%.

This year, though, ORCL has been the clear leader. With a gain of over 35%, it has doubled AMZN’s 15.2% move and more than quadrupled the gains of GOOGL and MSFT. What’s most impressive about ORCL’s performance is that it’s still right near its highs of the year even as the other three stocks are in drawdowns of 12%-20%.

Making ORCL’s performance even more impressive is that the company has reported weaker-than-expected sales in each of its last four earnings reports.  Last September and December, those weaker-than-expected revenues were not met kindly by the market as the stock experienced one-day declines of 12.4% and 13.5% which were the two largest one-day earnings declines since at least 2001!  Following its March and June reports, though, the company still reported weaker-than-expected sales, but each of those reports were followed by one-day gains of 13.3% and 11.8% – ranking as the third and fourth strongest one-day gains in reaction to earnings since at least 2001. While no investor ever wants to see a company report weaker-than-expected sales, they were able to look past that shortfall as the company reported a new cloud partnership with Google, 50%+ growth in its cloud infrastructure services unit, and a higher-than-expected backlog.

Even as shares of ORCL have kept pace with the three major cloud providers since the launch of ChatGPT and outperformed handily so far this year, from a valuation perspective, shares trade more in line with the market. At 22.6x estimated earnings for the current year, ORCL’s multiple is slightly more than three turns higher than GOOGL, and well below the multiples of AMZN and MSFT.  With a market cap of nearly $400 billion, ORCL is far from an under-the-radar company, but it still doesn’t get the same attention as many of its peers.  Its performance this year illustrates that the best returns in the market don’t always come from the places everyone else is already looking.

Welcome to Bespoke Brunch Reads — a linkfest of some of our favorite articles 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.

Nixon Pardoned: On September 8th, 1974, President Gerald Ford made the controversial decision to pardon his predecessor, Richard Nixon, for any crimes he may have committed during the Watergate scandal. As the scandal unfolded, Nixon faced impeachment for obstruction of justice, abuse of power, and contempt of Congress, eventually becoming the first US president to resign on August 8th, 1974. Just a month later, Ford issued the pardon, hoping to bring an end to the national strife caused by Watergate. Ford believed that prolonged legal proceedings against Nixon would only deepen divisions within the country. While most supported Ford’s decision as an effort to move the nation forward, others saw it as a betrayal of justice, accusing Ford of shielding Nixon from accountability.

Economic Trends

New Argentine Currency Launched to Offset Milei’s Shock Therapy (BNN Bloomberg)

La Rioja, one of Argentina’s poorest provinces, has taken drastic measures in response to President Javier Milei’s economic policies. After federal funding was cut, the province defaulted and entered a deep recession, prompting Governor Ricardo Quintela to introduce a local currency called the “chacho” to help workers make ends meet. Though shopkeepers were encouraged to accept chachos, many are wary of holding too much of the currency, while residents are rushing to spend them before they potentially lose value. [Link]

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