In our latest Bespoke Report newsletter sent to subscribers last Friday, we provided a helpful illustration on the rise of the “mega-caps” over the last decade or so.  Below is a look at the market caps of the 25 largest S&P 500 stocks ten years ago versus today.  Take a close look.  The 25 largest stocks in the S&P 500 now make up nearly 50% of the index versus just over a third ten years ago.  Back in November 2013, the three biggest stocks all had weightings below 3%, while four stocks now have weightings above 3.75%, including Apple at 7.3% and Microsoft at 6.9%!  Apple, Microsoft, Alphabet, and Amazon had a combined market cap of about $1.3 trillion ten years ago.  Now each is larger than that combined number!  As you also might notice, stocks 8 through 25 on the current list have weightings relatively close to their weightings from ten years ago, so it’s really just the biggest of the big stocks that have ballooned.  This also tells you that virtually all the market’s gains in the last decade have come from these handful of stocks, so if you haven’t owned either these stocks or “the market,” you’ve likely lagged “the market” badly.

Below is a graphical representation of the market caps for every stock in the S&P 500 today versus ten years ago, sorted from the smallest stock in the index on the left to the largest stock in the index on the right.  Look at that parabolic rise of the mega-caps!

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:

Selfie in Space: On November 12th, 1966, astronaut Buzz Aldrin took the first space selfie. Nope, the selfie isn’t just a popular 21st century phenomenon! The famous photo was taken during the Gemini 12 mission, the last of the Gemini program and the precursor to the Apollo missions that would eventually land a man on the Moon. The four-day mission, which launched on November 11th, aimed to perfect techniques for future lunar landings. During the mission, Aldrin performed three EVAs (extravehicular activity) to demonstrate the ability of astronauts to work outside the spacecraft. During one of those procedures, Aldrin snapped a space selfie with a camera attached to the craft, showing himself in his spacesuit posing with the curvature of the Earth in the background. The momentous photograph captured the technological advances of the time and humanity’s expanding capabilities in space exploration.

Real Estate

The $2 Million Coal Mine That Might Hold a $37 Billion Treasure (WSJ)
Former Wall Street banker Randall Atkins unknowingly bought a coal mine in Wyoming for $2 million containing what might be the largest rare-earth deposit in the US. It’s now valued at approximately $37 billion. His company, Ramaco Resources, is exploring this discovery, which could lead to the first new rare-earths mine in the US since 1952. This deposit, essential for green-energy products like electric vehicles and wind turbines, marks a significant shift from Ramaco’s traditional focus on coal. [Link]

Overdue commercial property loans hit 10-year high at US banks (Financial Times)
US banks are experiencing the highest level of delinquent commercial real estate loans in a decade, driven by factors such as higher interest rates, economic uncertainty, and the rise of remote work. This increase, including a significant jump in the third quarter, signals mounting pressure in the property market, especially in the office sector. The recent bankruptcy of WeWork, a major office tenant, further complicates the situation, allowing them to terminate leases and adding more stress to building owners. [Link]

Buying a House Isn’t Happening, So They’re Spending and Saving Differently (WSJ)
As rising mortgage rates and high home prices deter prospective buyers, many are redirecting their savings toward other investments or lifestyle enhancements. People are opening more 529 college savings accounts, undertaking expensive renovations on their current residences, and indulging in lavish vacations. This shift in spending reflects broader economic and social changes as traditional pathways to financial stability, like homeownership, become increasingly challenging. [Link]

AI & Technology

Can AI Rescue Recycling? (WSJ)
Recycling facilities in the US are facing worker shortages and rising costs, leading to a decline in recycling rates. Many are turning to artificial intelligence (AI) to improve efficiency. AI-driven robots and optical sorters can sort recyclable materials much faster than humans, with robots picking around 80 pieces a minute and optical sorters sorting up to 1,000 pieces. AI also offers long-term cost savings and the potential to improve recycling economics through data collection and machine learning. [Link]

Pretraining Data Mixtures Enable Narrow Model Selection Capabilities in Transformer Models (arvix.org)
The study delves into the remarkable in-context learning (ICL) capabilities of transformer models, particularly large language models (LLMs), which can adapt to new tasks using just input-output examples, without additional training. It reveals that these models exhibit strong unsupervised model selection skills, effectively identifying and learning new tasks that align with their pretraining data. [Link]

EVs &… Blimps?

EV Makers Turn to Discounts to Combat Waning Demand (WSJ)
EV makers are offering significant discounts and incentives to combat slowing demand and a build-up of unsold inventory. Major automakers like Tesla, Hyundai, and Ford have reduced prices, with some models seeing substantial cuts, narrowing the gap between EV and gasoline vehicle costs. These price reductions are putting pressure on smaller EV startups and altering market dynamics. While beneficial for consumers, this trend poses challenges for automakers who have heavily invested in EV production and now face unexpected demand fluctuations. You can check out recent Conference Call Recaps from Ford and Tesla to hear the story right from the source. [Link]

Electric Vehicles Might Not Yet Have Replaced as Much Car Mileage as Hoped (Scientific American)
Recent research reveals that EVs in the US are driven significantly less than gasoline cars, with a yearly average difference of about 4,500 miles. This finding is crucial for shaping climate models and emissions regulations, as it challenges assumptions that EVs and gasoline cars have similar usage patterns. The study also noted that higher-range EVs, particularly Tesla models, tend to be driven more, suggesting that infrastructure and vehicle range are key factors in EV usage. [Link]

Inside Google billionaire’s 400ft airship that’s just been cleared for flight (The US Sun)
Google co-founder Sergey Brin’s company, LTA Research, is heralding a new era for blimps with the creation of Pathfinder 1, a 400ft “lighter than air” aircraft. It’s capable of carrying up to 200 tons of cargo and requires minimal infrastructure for take-off and landing, making it ideal for disaster relief. However, there’s speculation about its ultimate use, given Brin’s wealth, with concerns it could become more of a luxury item than a humanitarian tool. [Link]

Economic Trends & Financials

The Lube That Greases the Economy Says Beware 2024 (Bloomberg)
A niche market within the oil industry, specifically lubricants, is signaling concerns about the global economy’s health for 2024. Lubricants, essential in everything from engine oil to industrial machinery, are seeing declining demand, indicative of a broader industrial slowdown. In the US, lubricant consumption has dropped to its lowest in over 42 years, partly due to structural economic shifts but also hinting at a cyclical downturn. Weakened lubricant demand in Europe, India, and China also aligns with a global trend of reduced industrial activity. [Link]

China’s ICBC, the world’s biggest bank, hit by cyberattack that reportedly disrupted Treasury markets (CNBC)
The US division of China’s ICBC bank recently suffered a ransomware cyberattack, disrupting its US Treasury trades. ICBC Financial Services isolated impacted systems and is working with security experts and law enforcement on recovery and investigation. The attack, which used the LockBit 3.0 ransomware, highlights the increasing threat of such cyberattacks, particularly on financial institutions. LockBit, known for its “ransomware-as-a-service” model, is behind a significant portion of global ransomware attacks. [Link]

Why Banks Are Suddenly Closing Down Customer Accounts (DNyuz)
In an alarming trend, banks are increasingly closing customer accounts without warning or clear reasons, leaving individuals and small businesses in financial limbo. This practice, known as “exiting” or “de-risking,” is done by banks in order to combat fraud, often based on vague suspicions. The article highlights individual accounts of those unexpectedly cut off from their financial resources, amidst a surge of over 1.8 million suspicious activity reports filed in 2022, raising questions about fairness and transparency. [Link]

Warring Billionaires, a Rogue Trader, a Divorce: One Hedge Fund’s Tale of Woe (DNyuz)
Two Sigma, a major hedge fund known for its advanced algorithms and secrecy, is facing internal strife. Co-founders David M. Siegel and John A. Overdeck’s deteriorating relationship, now a significant risk to the company, together with an employee’s unauthorized changes to trading models that have caused regulatory concerns, and Overdeck’s personal troubles involving a contentious divorce and allegations of moving billions into trusts, further compound the firm’s issues. These revelations challenge Two Sigma’s long-standing privacy and highlight potential risks to its future stability, investor confidence, and regulatory compliance. [Link]

A child-care center lost its funding. Here’s what happened next. (Washington Post)
The role of childcare in supporting the economy and working families is critical yet often overlooked. This article illustrates the impending crisis as pandemic-related child-care subsidies end, putting numerous childcare centers at risk of closure. It’s a domino effect of job losses in child-care centers, disrupted work schedules for parents, and consequent challenges for their employers. [Link]

China suffers its first foreign investment deficit as US tensions and anti-spying laws spark a western exodus (Yahoo Finance)
For the first time in 25 years, China reported a foreign direct investment deficit, indicating challenges in reviving its economy post-stringent COVID-19 lockdowns. The news comes amid rising tensions between the US and China, as well as new anti-spying laws. Many companies, especially from the US, are diversifying away from China as Beijing cracks down on foreign firms and strict capital controls. These investment trends are occurring alongside broader economic issues in China, including stagnant GDP growth, the threat of deflation, high youth unemployment, and ongoing crises in the property sector. [Link]

Is Pepsi punting on US rates falling? (Financial Times)
Pepsi recently sold $2.5 billion in debt, including a $1 billion one-year floating-rate note. This decision is unusual because Pepsi, a company with an A+ credit rating, typically wouldn’t have difficulty extending its debt maturities, especially in the current economic environment where the yield curve is inverted. Pepsi also sold two fixed-rate bonds with shorter maturities.  Whether these decisions were made based on thoughts regarding the direction of rates or something else is unknown. [Link]

Environmental

Republicans Propose One of the Year’s Most Interesting Climate Bills (Heatmap News)
Senators Bill Cassidy and Lindsey Graham have proposed a new climate policy, the “foreign pollution fee,” which imposes tariffs on imports from high-emission countries, notably targeting China. This policy, distinct from a carbon price, only affects imported goods, aiming to enhance US competitiveness and address global emissions. The bipartisan appeal of this proposal underscores the merging of climate policy with geopolitics. [Link]

The 20 Farming Families Who Use More Water From the Colorado River Than Some Western States (ProPublica)
A majority of water from the Colorado River used in the Imperial Valley of California, a crucial resource in the arid Southwest US, is being used by just 20 farming families in that region. These families consumed about one-seventh of the river’s flow in 2022, causing worry particularly as the region faces drought and climate change challenges. Yes, the district emphasizes the importance of their crops for the American food supply, but much of the water is used for growing hay for livestock feed, not direct human consumption. [Link]

Private World of Wealth

Behind the Gates of a Private World for Only the Wealthiest New Yorkers (DNyuz)
New York City’s wealthy are creating a private, exclusive world within the city. This includes members-only clubs, personal staff like house managers and rotating nannies, private chefs, and laundry specialists. Health and wellness have become luxury commodities too with services like at-home IV drips and concierge emergency care. The emergence of these services is allowing the rich in NYC to navigate the city in a bubble of exclusivity and convenience, far removed from the daily experiences of average New Yorkers. [Link]

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Have a great weekend!

Even for a volatile asset class, it has been quite a week for crypto-related assets. With a gain of nearly 8% for the week, Bitcoin rallied to 52-week highs and crossed above 35K, 36K, and 37K in the process. Year to date, the largest cryptocurrency is up over 125%, but looking at the chart below, all of the year’s gains have been confined to a handful of trading days in January, March, June, and now.

Ethereum had an even bigger week, rallying by over 14.5% and nearly doubling the gain in Bitcoin. Unlike Bitcoin, Ethereum was trading just shy of its YTD high from back in April.

The fact that Bitcoin is at 52-week highs today is ironic given the fact that its all-time high of just below $69K was exactly two years ago today.  Given where prices are now, it doesn’t seem likely that those highs will be tested again any time soon, although stranger things have happened.

The chart below shows Bitcoin’s drawdowns from all-time highs over time. Perhaps the most notable aspect of Bitcoin’s rally is the fact that even after rallying more than 100% this year, the current drawdown of 45% is deeper than the average drawdown of 40.4% for all days since 2016.  Just to get back to that historical ‘average’ drawdown, Bitcoin would need to rally back above $40K.

The S&P 500 and Nasdaq have extended their impressive winning streaks and that has resulted in a surge in bullish sentiment.  The latest weekly AAII sentiment survey showed that 42.6% of respondents reported as bullish this week. That is now the highest level of bullish sentiment since the first half of August and perhaps more notably, a major turnaround from last week’s multi-month low of 24.3%.

As shown below, bullish sentiment’s 18.3 percentage point rise week over week is a historically large jump in optimism, especially in more recent years.  That week-over-week increase ranks as the 22nd largest in the survey’s history. It also just barely edged out the 17.88 percentage point increase in November 2020 for the largest one-week increase since July 15, 2010, when it had risen 18.43 percentage points.

The surge in bullish sentiment borrowed heavily from those formerly reporting as bearish.  Bearish sentiment jumped above 50% last week, the highest reading since last December, but was nearly cut in half this week as it came in at only 27.2%

Whereas the jump in bullish sentiment was historically large, the resulting drop in bearish sentiment is even more significant ranking as the fourth largest on record.

Given there were historic moves across both bullish and bearish readings, the bull-bear spread in turn has experienced a top 1% week-over-week move. Only one week ago, the spread indicated that bears outnumbered bulls by a wide margin of 26 percentage points. Rising an astounding 41.4 points week over week, that spread is back in favor of bulls at 15.4.

The S&P 500 is fighting (unsuccessfully at this point) for its eighth positive session in a row today (the longest winning streak for the index in exactly two years). But looking under the hood at the past two sessions, there has been some underlying weakness.  Although Monday and Tuesday saw the S&P 500 rise 17.5 bps and 28.4 bps, respectively, net daily breadth (advancers less decliners) was negative on both days.  Whenever we hear talk of weak breadth on market up days, comparisons are usually made to the 1999/2000 period right before the Dot Com bubble’s peak.  While it has been very uncommon for the S&P 500 to be up on back-to-back days when breadth was negative, not all (or even most) of the prior occurrences were isolated to just the period leading up to the Dot Com peak.

In the table below, we show 19 prior times that the S&P 500 rose in back-to-back sessions with negative daily breadth readings on both days and no other occurrences in the prior three months.  The most recent occurrence was back in June 2021, and one thing that stands out is just how bad breadth has been in this period.  On Monday and Tuesday, cumulative breadth was at -267, and the only prior instance with worse breadth over the course of the two up days was in July 2015.  While returns were outright negative for the following six months after that July 2015 occurrence, as a whole, these past occurrences with gains on negative breadth have not been an especially bearish or bullish signal. On both an average and median basis, performance was generally in line with the S&P 500’s performance for all periods since 1990.

In looking at the table above, on most of the days when the market was up and breadth was negative, the magnitude of the gains was very small, and in many cases, the S&P 500 didn’t even move a tenth of one percent (10 bps) on either day.  With that in mind, we filtered the table above to show only days when the S&P 500 was up at least 10 bps on each of the days when breadth was negative.  Adding in that criteria, the 19 prior occurrences get whittled down to just six, and in this case, four of the six occurrences were in the months leading up to and after the Dot Com peak.  While forward returns over the next week were positive all six times, average and median returns over the next one and three months were actually negative.  Longer-term, six and twelve-month returns were split with a wide variance between average and median performance.  These past examples suggest that while weak breadth on back-to-back positive days for the S&P 500 is not an outright negative, it’s hardly a positive indicator either.