Copper Under the Weather
Earlier Monday in our Morning Lineup post, we highlighted the recent short-term weakness in gold just days after it hit all-time highs. While the declines are disheartening for gold bulls, they can take comfort in the fact that at least gold has been doing better than copper.
Copper prices rallied in the second half of 2022, but that rally stalled out in early January at just over $4.30 per pound, below its highs from last May. Since then, prices have experienced little in the way of positive momentum, falling below both the 50-DMA and 200-DMA. Copper is now down over 15% from its YTD high, and it’s testing the bottom of its longer-term uptrend channel.
On a five-year basis, you can see again how copper prices are currently testing a long-term uptrend after carving out a downtrend that has been shorter-term in length.
A look at the relative strength of copper is where the relationship between the two commodities really gets interesting. From May 2018 through May 2020, copper prices consistently underperformed gold, and this was a period that included what was a US manufacturing slowdown ahead of what became a full-blown economic shutdown during COVID. As governments and central banks flooded the economy with stimulus, the roles of copper and gold completely reversed, and in the span of under a year erased two years of underperformance. Then, from late February 2021 through June 2022, the two commodities performed roughly in line with each other as there was little movement in the relative strength of the two commodities.
In the first half of 2022 as the FOMC started ratcheting up the rate hikes, copper started to lose ground versus gold, and just in the last few weeks, copper’s relative strength has dropped to its lowest level since the start of 2021! If copper’s performance is a sign of the strength or weakness in the global economy, someone better start heating up the chicken soup.
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Bespoke’s Morning Lineup – 5/22/23 – Merger Monday
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“A grain of gold will gild a great surface, but not so much as a grain of wisdom.” – Henry David Thoreau
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There were no advances in the debt ceiling negotiations over the weekend, and some might even argue that they went backward, but President Biden is set to meet with Speaker McCarthy today. That’s leading to hopes that when they’re in the same room together instead of negotiating through press conferences, they may be able to make some headway.
It’s a quiet morning in terms of economic and earnings data, but futures are trading modestly higher perhaps due to a few mergers. This morning alone, Chevron (CVX) announced a deal to acquire PDC Energy (PDCE) for $72 per share in stock. Additionally, two smaller deals were also announced involving Greenhill (GHL) being acquired by Mizuho for $550 million, and VectivBio (VECT) being taken over by Ironwood Pharma (IRWD) for $1 billion.
There may be some doubt over the ability of the US Federal government to pay its debts come June, but gold hasn’t seen any benefit from its haven status. Prices are modestly weaker this morning putting the commodity on pace for its fourth straight day of closing below its 50-day moving average (DMA). As the 50-DMA has the potential to act as short-term resistance, the uptrend from last fall’s low and the high from February in the high $1760s range is a potential support zone.
Gold’s recent weakness comes within just a month of the commodity hitting a record high of $2,085.40 back on May 4th. While the early May peak was a record high, it was only marginally above its prior highs of $2,078.00 in August 2020 and $2,078.80 in March 2022. Given that, unless prices recover relatively quickly from here, chatter of a triple top in the commodity will pick up considerably.
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Bespoke’s Brunch Reads – 5/21/23
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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Economy
IRS Weighs Creating a Government-Run Tax-Prep Option (WSJ)
The IRS is considering the creation of a government-run tax preparation option to simplify the process for taxpayers. The option aims to provide free tax preparation services for individuals with simpler tax situations, reducing the burden of hiring third-party tax preparers and saving consumers a lot of money. [link]
NYC Skyscrapers Sit Vacant, Exposing Risk City Never Predicted (Bloomberg)
NYC office vacancies hit a record of 22.7% this year, or more than twice the historical average. Worse still, is that the vacancy rate won’t drop below 19% until at least 2026. [link]
What if San Francisco never pulls out of its ‘doom loop’? (FT)
With accidental overdoses, abandoned houses, record crime, and a homeless population of 1% of the city’s entire population, San Francisco has fallen on hard times. What will it take for the city to break out of its doom loop? [link]
The ‘great resignation’ has become the ‘big stay,’ says economist: How Gen Z, millennials can benefit (CNBC)
After a year in which employees faced seemingly unlimited job opportunities, the labor market has softened. “The labor market is no longer in job switchers’ favor.” [link]
International
Nuclear Tests May Be Back on Moscow’s Agenda (Foreign Policy)
With their arsenals aging, the possibility that Russia and the United States will resume nuclear tests would undermine long-term nonproliferation efforts. Any resumption could have serious implications on arms control agreements and overall stability. [link]
Japanese Stocks Have Hit a 33-Year High. Warren Buffett Helped. (WSJ)
Foreign investors have purchased a record amount of Japanese stocks over the last six weeks, and it appears as though Warren Buffett may have started the stampede. [link]
Science and Nature
Did Scientists Accidentally Invent an Anti-addiction Drug? (The Atlantic)
An increasing number of patients taking Wegovy (aka Ozemoc) have reported that the drug has not only suppressed their appetites, but it has also reduced the urge to drink, shop, smoke, or even bite their nails. [link]
A Scientist Says He’s Solved the Bermuda Triangle, Just Like That (Popular Mechanics)
Karl Kruszelnicki claims he has solved the mystery of the Bermuda Triangle. He says that there is no evidence that mysterious disappearances occur with any greater frequency than in other well-traveled regions of the ocean. [link]
‘Planet killer’ asteroids pose no threat to Earth for at least 1,000 years (Live Science)
Well, as crazy things have become these days, we can all take comfort in the fact that a world-ending asteroid blast will not be a problem…until at least the year 3000. [link]
History
Titanic: First ever full-sized scans reveal wreck as never seen before (BBC)
The first full-sized digital scan of the Titanic, which lies 3,800m (12,500ft) down in the Atlantic, has been created using deep-sea mapping. Check out the article for some great photos. [link]
Human-evolution story rewritten by fresh data and more computing power (Nature)
New research based on large-scale computer models is moving away from the theory that humans originated from a single region of Africa. [link]
What Happened in 2022: An Analysis of the 2022 Midterms (Catalist)
A detailed and long read look at national election results for House, Senate, and Gubernatorial races in the 2022 elections. The bottom line: results defied conventional wisdom and historical trends. [link]
Food and Beverage
Why it’s okay to ignore food expiration dates (Washington Post)
Most foods have them, but how accurate are the “sell by’ dates on most foods you buy, and will you get sick if you eat something that’s past its expiration date? The bottom line is that most of the dates have nothing to do with safety. Best bet? If it doesn’t pass the smell test, don’t eat it. [link]
The Oscar Mayer Wienermobile Has Lost Its Wiener to Big Beef (Motor Trend)
Goodbye, Wienermobile. Hello Frankmobile. After nearly a century, Oscar Mayer’s iconic Wienermobile is getting a name change to help draw attention to the company’s ‘100-percent beef’ new hot dog recipe Drivers of the Frankmobile will now be called Frankfurters (instead of Hotdoggers), and Wiener Whistles will be known as Frank Whistles going forward. [link]
The Health Menace Inside Your Sandwich (WSJ)
Recent studies have found that processed meats increase a person’s risk of diseases like cancer and heart disease. The key ingredient in these products is large amounts of nitrates and sodium. Is Boar’s Head the next target of the mass tort machine? [link]
AI & Technology
Everyone should use Personal Voice; it does in 15 minutes what currently takes several weeks (9to5mac)
Apple has developed Personal Voice which is a feature that can learn your voice in 15 minutes and turn text that a user types into the interface into audio of their own voice. So, now you really have no idea if the person on the other end of the line is a person or a machine. [link]
Apple Restricts Employee Use of ChatGPT, Joining Other Companies Wary of Leaks (WSJ)
Due to concerns that workers who use these types of programs could release confidential data, Apple is prohibiting employees from using Copilot. [link]
How ChatGPT will raise the bar for millions of entry-level jobs (Fast Company)
Tools like Chat GPT will have major impacts on the labor market in the future with a particularly large impact on the entry-level jobs market. [link]
Lawmakers put on pressure to protect AM radio in vehicles (The Hill)
Following last week’s article discussing how AM radio could become a casualty of the shift to EVs, lawmakers are pressuring car companies to keep talk radio alive. “If Elon Musk has enough money to buy Twitter and send rockets to space, he can certainly afford to include AM radio in his Teslas”. [link]
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Stocks and Bonds Part Ways
Ever since the Federal Reserve started talking about hiking rates at the start of 2022, stocks and bonds have been joined at the hip. Using the iShares 20+ Year Treasury ETF (TLT) as a proxy for the bond market, the correlation between its closing prices and the S&P 500 (using SPY) has been +0.79, implying a very strong correlation. Visually, it’s also easy to see the relationship as the two sold off throughout most of 2022 and then bottomed out early in the fourth quarter. From those lows through early April, the positive correlation between the two continued, but ever since then, the paths of the two ETFs have diverged. Since April 6th, TLT is down 6.8% while the S&P 500 is up 2.7%. As the sell-off in Treasuries has picked up steam in recent days, market watchers have been expecting stocks to start following suit. Bulls, on the other hand, are hoping that this is the start of an amicable separation between the two.
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Bespoke’s Morning Lineup – 5/19/23 – Big is Better
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“Think big and don’t listen to people who tell you it can’t be done. Life’s too short to think small.” – Tim Ferriss
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Following the Nasdaq 100’s rally to a 52-week high yesterday, investors are in the buying mood once again this morning as futures are modestly higher across the board, and that follows another new high in Japanese stocks which are trading at the highest level since 1990 while Germany’s DAX is at all-time highs. There are no economic reports on the calendar this morning, so the only potential catalysts for the market this morning are various Fed speakers sprinkled throughout the morning with Powell capping things off at 11 AM when he is scheduled to participate on a panel with former Fed Chair Ben Bernanke.
In the fixed income space this morning, Treasury yields are just modestly higher while cyclical commodities like crude oil and copper are both up over 1%. Gold is also higher but only fractionally so.
With earnings season mostly behind us, we wanted to expand on a chart we showed earlier in the month summarizing the one-day performance of mega-cap stocks in reaction to their earnings reports. In the original chart, we looked only at the seven stocks in the S&P 500 with a weighting of more than 1.5% in the index. This morning we expanded the chart to the 20 largest in the index. As shown, 65% of the stocks shown rallied in reaction to their earnings reports, and the average one-day return of the 20 stocks was 2.0% compared to an average return of just 0.37% for all stocks reporting earnings since the end of Q1.
There’s been more than a lot of discussion surrounding the outperformance of mega-cap stocks this year and whether it’s deserved or not. However, when the largest stocks in the index are reporting results that result in a market reaction that’s more than five times larger than the average of all stocks, maybe that outperformance is warranted.
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Nasdaq Outperforms The DJIA By a Bull Market
Every day it seems the gap just keeps getting wider, and today the YTD performance spread between the Nasdaq and the DJIA widened out to over 20 percentage points – or the equivalent of the traditional threshold for a bull market. As of Thursday afternoon, the Nasdaq was up 20.4% YTD while the DJIA was barely hanging above the unchanged line with a gain of 0.3%. Since the Nasdaq launched in early 1972, there have only been three other years where the index outperformed the DJIA by more than 15 percentage points YTD through 5/18, but 2023 is on pace to go down as the only year where the performance gap exceeded 20 percentage points.
The question going forward is, will the Nasdaq continue its outperformance for the remainder of the year, or will the DJIA step up and play catch up? There have only been three other years where the Nasdaq even outperformed by 15 percentage points at this point in the year, but below we have provided a snapshot of both indices during those three years. For each set of charts, we show the performance of each index in the top charts where the gray shading shows the period from the start of the year through 5/18. Underneath each of those charts, we also show the relative strength of the Nasdaq versus the DJIA where a rising line indicates outperformance on the part of the Nasdaq and vice versa.
Of the three years shown, the Nasdaq continued to outperform the DJIA by a wide margin for the remainder of the year in two of them (1991 and 2020). In 1983, on the other hand, the Nasdaq actually declined 8.2% for the remainder of the year giving up all of its prior outperformance as the DJIA rallied 4.6%.
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Bespoke’s Morning Lineup – 5/18/23 – A Facebook Anniversary
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““This was not our finest hour, we’re not happy with our performance.” – Robert Greifeld, Nasdaq CEO May 2012
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In addition to Walmart (WMT) earnings, which were released earlier this morning, we have a busy day of economic data. Jobless claims and the Philly Fed were just released, and at 10 AM we’ll get the release of Existing Home Sales and Leading Indicators. Existing Home Sales are expected to decline from 4.4 million down to 4.3 million, and Leading Indicators are also expected to decline 0.6 points continuing what has been a miserable stretch for that series.
Jobless claims were modestly lower than expected on both an initial and continuing basis, and the Philly Fed report was less bad than forecast, coming in at -10.4 versus forecasts for a reading of -20.0 and last month’s very weak reading of -31.3. In reaction to the reports, futures have sold off modestly, and are currently pointing to a flat open.
Eleven years ago today, officials from the Nasdaq, as well as reporters from every business network and many other mainstream news outlets, flew to Menlo Park for the “remote” IPO of Facebook. The company raised $16 billion in what was the largest technology offering of all time. In the 11 years since its launch, Facebook (FB) – now Meta Platforms (META) – has rallied 538% for an annualized gain of 18.3%. Over that same period, the S&P 500 gained ‘just’ 290% which works out to an annualized gain of 13.2%. Based simply on the performance of the stock relative to the S&P 500, the Facebook IPO was a huge thumbs up.
It hasn’t been a smooth ride for the company, though – both in and out of the market. Right from the start of the company’s life as a public company, Facebook has had more than its fair share of drama. On the day of the IPO, trading was delayed by over a half hour due to a technical glitch, and while the stock initially rallied, it quickly sold off and struggled to hold its IPO price by the close of trading. Without underwriter support, the stock wouldn’t have held its IPO price on its first day of trading which is considered a cardinal sin for underwriters. From there, it only got worse as the stock traded steadily lower. In the first three months of trading after the IPO date, FB traded lower on over 60% of trading days for a total decline of over 60% from the intraday IPO day high. Facebook was quickly looking like the Titanic of IPOs.
Obviously, we all know with hindsight that Facebook recovered from that rocky start, and while that 61% peak-to-trough decline was extreme, it wasn’t even the largest drawdown in the stock’s history. As shown below, the most recent decline of over 75% from the 2021 high blows that initial decline out of the water. Even now with the stock up over 175% from its low last November, META is still down 37% from its all-time high, which would still rank as one of the larger drawdowns in the stock’s history.
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Bespoke’s Morning Lineup – 5/17/23 – Optimism Over Debt Ceiling
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“Success is making ourselves useful in the world” – George Dayton, Founder of Target
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Politicians on both sides of the aisle are still talking tough regarding the debt ceiling, but there are signs of progress being made as President Biden has announced that he will cut short his trip to Asia. In response, futures were rallying ahead of the April release of Housing Starts and Building Permits. Starts were right in line with forecasts (1.401 million vs 1.400 million) and Building Permits were shy of forecasts (1.416 million vs 1.430 million). Regarding starts, though, the March reading was revised significantly lower from 1.420 million down to 1.371 million. Building Permits, however, experienced a modest upward revision. Futures are still in positive territory on the news, but off slightly from their pre-release level.
On the earnings front, retailers continue to take center stage, and after yesterday’s report from Home Depot (HD) where the company noted softer sales trends post the SVB collapse, Target (TGT) management had similar comments.
We still have another day left until Walmart (WMT) marks the unofficial end to earnings season, but this morning we wanted to take a quick look at how stocks have recently performed during the earnings ‘on’ and ‘off-seasons. The red lines in the chart below show the performance of the S&P 500 from the time of JP Morgan’s (JPM) report to WMT. While the first two earnings seasons of 2020 were not friendly for stocks, the next three were very positive periods for the market. Unlike the last three earnings seasons, performance during the current period has been remarkably sideways. On the surface, the lack of much upside during the current earnings season may be considered a negative signal. Then again, when you consider the fact that the market started to sell off after each of the last three earnings rallies, maybe the lack of an earnings rally means the odds of a post-earnings hangover are less likely.
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Homebuilders Sentiment and Stocks Still On the Rise
As we noted last week on the release of the latest mortgage purchase data, housing activity appears to have finally stabilized after plummeting earlier in the tightening cycle. That improvement in housing markets is flowing through to builders as this morning’s release of homebuilder sentiment from the NAHB rose to 50 versus the expectation of it remaining unchanged at 45. While the index still has a long way to go to get back to pre-pandemic levels, let alone the record highs from the first two years of the pandemic, in May it hit the highest level since last July.
The higher reading in the headline index was a result of improvements across the board, including increases in present and future sales and traffic. As for regional sentiment, homebuilders have gotten more optimistic across most of the country. Everywhere save for the Northeast have seen steady improvements to homebuilder sentiment over the past several months. As for the Northeast, that is not to say sentiment has not improved. The reading has rebounded off of the worst levels but remains below the recent highs of 46 from February and March.
Homebuilder stocks continue to be even more impressive. Proxied by the iShares Home Construction ETF (ITB), homebuilders have been trading in a steady and uninterrupted uptrend. In fact, the ETF has been overbought every day for a month now.
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Bespoke’s Morning Lineup – 5/16/23 – Weak Retail Sales
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“Try to decide how good your hand is at a given moment. Nothing else matters. Nothing.” – Doyle Brunson
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There’s a modest amount of risk-off mentality in the markets this morning, and it started last night with weaker-than-expected economic data in China followed by a weaker-than-expected report on economic sentiment in Germany from ZEW. This morning in the US, Home Depot (HD) is trading more than 2% lower after reporting a sales miss and lowering guidance. That weak report didn’t bode well for April Retail Sales at 8:30 where economists are forecasting a m/m increase of 0.4%. Looking ahead, we’ll get Industrial Production and Capacity Utilization at 9:15 followed by Business Inventories and Homebuilder sentiment at 10 AM.
The release of April Retail Sales was mixed. At the headline level, sales increased just 0.4% compared to forecasts for an increase of 0.8%. Stripping out autos, though, the report was right in line with forecasts (0.4%), and ex-autos and gas, sales actually increased at triple the rate of expectations (0.6% vs 0.2%). In addition, last month’s report was revised to a worse than initially reported number, so there was something for everyone in this report.
After slicing right through the psychologically critical threshold back in September, the yield on the 2-year US Treasury found support multiple times at the 4% level. After the last bounce in early February, the yield looked as though it was going to launch into a new higher range above 5%, and being short bonds looked like a winning hand.
Within a month, though, the failures of SVB Financial, Signature Bank, and later, First Republic caused a rush to safety, and yields quickly erased all of the February spike. Since then, the 4% level has been acting more like resistance (or a magnet) as the yield hasn’t been able to convincingly get back above the 4% level and is trading right around there this morning. With the 50-day moving average (DMA) continuing to roll over and the 200-DMA starting to follow suit, the 2-year yield runs the risk of breaking down below 4% turning what was the nuts into a bad beat.
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