The price to sales ratio is a valuation metric that is calculated by dividing market cap by annual sales.  In a normal market environment, a company with a lower price to sales ratio looks more attractive than a company with a higher price to sales ratio.  Based on the price action we’ve seen recently, however, this is not a normal market environment!  Lately, the higher the price to sales ratio, the higher the share-price return.

Looking at the S&P 500 as a whole, the index’s current price to sales ratio is just under 3 at 2.89.  That’s about 75% above the S&P’s average price to sales ratio of 1.65 seen since 1995.  The S&P 500 Technology sector’s price to sales ratio has climbed to 7.03.  That’s more than double the average price to sales ratio of 3.12 of the Tech sector since 1995.

As shown below, the S&P 500’s price to sales ratio is currently solidly above the peak reading it saw in March 2000 at the top of the Dot Com boom.  The Technology sector’s price to sales ratio has not quite made it to its Dot Com peak of 7.87, but it’s getting close.  Click here to view Bespoke’s premium membership options for our best research available.

While a number of economic indicators have seen tremendous rebounds off their COVID lows, one that sticks out as a major outlier has been Consumer Confidence; that remained the case in January as well.  In this month’s report, overall confidence rose from 87.1 up to 89.3 compared to expectations for an increase to 89.0.  As illustrated in the chart below, after the initial plunge last Spring, Consumer Confidence has been bouncing up and down for the last ten months at levels well below the pre-Covid peak.

Whether you look at consumer sentiment towards present conditions or the future, it’s a similar picture.  Expectations were already much lower heading into COVID, so they didn’t fall nearly as much, but after the plunge in the Present Situation Index, consumers feel roughly the same about the present as they do about the future.

With all the positive news about the vaccine rollout and the market at record highs, why aren’t consumers more confident?  Chalk it up as a case of “It’s a recession when your neighbor loses his job; it’s a depression when you lose yours.”  As shown in the chart below, the gauge of “Jobs Plentiful” embedded in the Consumer Confidence report remains extremely weak, and if you look closely, it’s also showing some signs of rolling over.  When consumers are worried about hanging on to their jobs, it’s going to be hard for them to be confident.

There have been some crazy moves in the stock market, so we were surprised to see that consumer optimism towards the stock market actually fell this month.  In this month’s survey, just 34.8% of consumers said they expect stock prices to increase, while nearly an equal number expect stock prices to decline.  In this survey, at least, it doesn’t appear as though consumers are anywhere close to irrationally exuberant.

Lastly, we wanted to highlight where consumers expect interest rates to go.  Back in April at the height of the pandemic, the percentage of consumers expecting interest rates to rise was nearly equal to the percentage that expected rates to fall.  Since then, though, we’ve seen a steady increase in the percentage of those expecting rates to rise.  Granted, when rates are at or near zero, it’s hard to expect rates to go any lower, but with little improvement in both overall confidence and the percentage of consumers viewing the job market as getting better, you wouldn’t expect to see half of all consumers anticipating a higher rate environment. Click here to view Bespoke’s premium membership options for our best research available.

Just like yesterday’s reading out Dallas, this morning’s release of the Richmond Fed’s Manufacturing survey was disappointing relative to expectations.  Forecasts were calling for the index to hold steady at the December reading of 19. Instead, it fell 5 points to the lowest level since July. Like the Dallas Fed’s survey, this reading points to a still-growing but also decelerating manufacturing sector in the Fifth District that also goes contrary to other strong readings like those from Markit and the neighboring Philly Fed; both released last week.

That decline in the headline number was shared in most of the underlying components.  Of the 17 sub-indices, 12 were lower month over month.  For some of these, those declines were historically large and brought the indices to the bottom percentiles of historical readings. Currently, there are now four indices indicating contraction. Two have to do with expenditures, one with finished good inventories, and the other for the availability of skills. As for the indices for future expectations, breadth was similarly weak.

New Orders erased all of the move higher from December as it came in at 12, just as it did in November.  With New Orders growing at a slower pace, the Backlog of Orders likewise grew at a more muted pace.  That index fell to 6, the lowest reading since August.  The 11 point MoM drop was also in the bottom decile of all monthly moves.  Given the deceleration of these two, Shipments likewise pulled back. The index for Shipments fell to 10, the lowest reading since the last contractionary reading back in June.  While that slowdown in shipments is likely in part due to some slowing in demand, supply issues also appear to be a potential issue.  Higher readings in the Vendor Lead Time index means that suppliers’ products are taking longer to reach the surveyed manufacturers. This month, the index rose to a reading of 39. That is in the top 1% of all readings in the history of the survey.  The only higher readings came early in the survey’s life in December of 1994 (282) and January of 1996 (75).

As orders still grow, manufacturers are taking on more employees.  The index for the Number of Employees rose from 20 in December to 23 in January. That ties the pandemic highs from September and October for the highest reading since August of 2018.  Similarly, the index for expectations for Number of Employees made its way higher in January. At 34, the index has only been higher once back in September.  Although employers are taking on more people and expect to keep doing so at a historic rate, both of the indices for Wages and the Average Workweek were lower.  Regardless, they both remain at historically strong levels and consistent with further growth. Additionally, one of the components of the report that is the most at an extreme is the index for Availability of Skills. The index dropped another 10 points in January and now sits in the bottom 3% of all readings since the series begins just over a decade ago.  In other words, firms are experiencing a historic shortage of labor with desired skills.

Contrary to the increase in employment, firms are cutting costs elsewhere. For the current conditions indices of the three expenditure related topics, each one was lower in January with Equipment and Software Expenditure and Business Services Expenditure both falling into contractionary territory.

Finally, just as we have seen in other manufacturing surveys, prices are showing further acceleration for both prices paid and received. Prices paid came in at the highest level since April of 2019 and prices received at the highest level in 11 months. Click here to view Bespoke’s premium membership options for our best research available.

Following very strong readings from the Philly Fed and preliminary Markit PMIs last week, the Dallas Fed’s Manufacturing report released this morning disappointed.  The headline index came in at 7 compared to forecasts of a reading of 12 and last month’s adjusted reading of 10.5. That reading is still consistent with overall growth in the region’s manufacturing sector, but at a slower pace as the index fell to the lowest level since August.

The index for General Business Activity was far from being the only one to fall month over month.  As shown below, breadth in this month’s report was terrible.  Of the 17 different indices for current conditions, 13 fell month over month. That brought several of these readings from the top decile of historical readings down to the middle of their historical ranges. While the pullbacks were significant, only inventories remain in contraction.  Meanwhile, breadth was a little bit better for the indices for future expectations.

One area that saw declines across the board were the indices concerning demand.  As shown below, the indices for New Orders, New Order Growth Rate, Unfilled Orders, and Shipments were all lower in January. All of these are now at the lowest levels since June, or July in the case of order growth rate. These lower readings are still indicative of growth, but at a slower rate.

Just as we have seen in other recent manufacturing reports, survey respondents are reporting price increases.  The index for prices paid rose to a reading of 55 from 50.8 in December.  That is nearly in the top decile of all readings as the index sits at the highest level since April of 2011.  The index for future expectations similarly ticked higher reaching its highest level since March of 2012.

While prices paid were higher, the same sort of acceleration in prices was not observed for prices received.  The index for prices received fell from 19 down to 13.9.  Although lower month over month, that is still around some of the highest levels of the past couple of years.  Additionally, expectations are calling for prices received to follow the path of prices paid.  The index for future prices received rose to the highest level since 2017 which was also in the top 5% of all readings.

Similar to prices received, the current conditions index for wages and benefits fell this month, but the index for future expectations rose much more sharply and to one of the highest readings of the past couple of years. In other words, although price hikes were not observed, they are foreseen on the horizon.  For wages and benefits, that expected uptick comes as hiring continues with the index of employment remaining in expansionary territory.  Additionally, hours worked rose this month from 9.5 to 12.6; the highest in September of 2018.  Click here to view Bespoke’s premium membership options for our best research available.

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.

While you’re here, join Bespoke Premium with a 30-day free trial!

Alternative Energy

Batteries Hidden Across New York Give the City a Backup Boost by Dimitra Kessenides (Bloomberg)

With disruptive natural disasters on the rise and battery prices on the fall, “microgrid” battery power facilities can be shoehorned in to cities like NYC to provide a backup to the traditional power grid. [Link; soft paywall]

Money Managers Look to Blue Seas for Green Investments by Julie Steinberg and Joe Wallace (WSJ)

As green energy capex scales up, investors are diving into all corners of production to try and make a buck, including owning and financing the ships which build and service offshore windfarms. [Link; paywall]

Chilly This Winter? Cozy Up to the Computer That’s Mining Bitcoin by Sarah E. Needlemen (WSJ)

Bitcoin mining operations are extremely power intensive and as a result of their massive processing activity send off huge amounts of heat. That byproduct is being repurposed to keep pets, vegetables, or even whole houses warm. [Link; paywall]

Housing

The Housing Market Boom Gets Another Boost From Biden by Conor Sen (Bloomberg)

Fiscal stimulus gives households who might not have the chance at owning a home a shot at cobbling together a down payment, with the possibility of reducing student loan burdens another tailwind for home buyers. [Link]

Scholarly Pursuits

The evolution of the Offshore US-Dollar System: past, present and four possible futures by Steffen Murau, Joe Rini, and Armin Haas (Journal of Institutional Economics)

A helpful review and primer of the mechanical foundations of the global financial system, focused on the role of the offshore US dollar market. [Link]

Platform Civics: Facebook in the Local Information Infrastructure by Kjerstin Thorson, Mel Medeiros, Kelley Cotter, Yingying Chen, Kourtnie Rodgers, Arram Bae, and Sevgi Baykaldi (Digital Journalism)

This paper uses quantitative and qualitative methods to identify what happens when Facebook replaces local media, with unsurprisingly toxic results. [Link]

History

What We Found in Robert Caro’s Yellowed Files by Dan Barry (NYT)

An amazing trip through the office of legendary biographer of Robert Moses and LBJ, including a fascinating anecdote about the desk that cured his bad back. [Link]

Investing

Up Is Good. Down Is Bad. by Jason Zweig (CreateSend)

Making the case that much-derided (in professional circles, anyways) traders are in fact pursuing the same sort of strategies that “fancy” quantitative investors do. [Link]

Data Security

Intel says hacker obtained financially sensitive information by Richard Waters (FT)

Hackers were able to access an infographic that was part of Intel’s earning release, forcing the company to publish the whole kit and kaboodle before the market closed. [Link; paywall]

COVID Vaccination

Israel COVID-19 ‘R’ reproduction number dips below 1 in first since vaccine drive (Reuters)

With more than one-quarter of the country vaccinated, the fastest vaccine effort in the world has helped push the previously raging COVID pandemic down in Israel. [Link]

Career Changes

Neuberger Berman’s Segal Is Retiring to Teach High School by Miles Weiss (Bloomberg)

A Neuberger fund manager that has held his seat since 1999 is retiring to pursue a masters in teaching and eventually working as a math teacher in New York. [Link]

Pay Your Lawyers

German online retailer Mytheresa valued at $3bn after US listing by David Carnevali and Sujeet Indap (FT)

Neiman Marcus acquired German online retailer Mytheresa for $200mm back in 2014, and now sits on a an impressive gain after the investment was kept remote from creditors during the company’s bankruptcy. [Link; paywall]

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Have a great weekend!

Of the several strong economic data points to have been released today, perhaps the strongest relative to expectations was the Philadelphia Fed’s monthly survey on the region’s manufacturing sector.  The headline index was expected to rise from 11.1 to 11.8. Instead, it more than doubled expectations rising to 26.5.  That is the highest reading since last February just before the pandemic’s full impact was felt.  Overall, the report showed the region’s manufacturing sector experienced strong growth in January with accelerating growth in demand, prices, and employment.

In the table below, we break down the various sub-indices of the report. Nearly every component experienced a month over month increase that ranks in the top few percentiles of their respective histories.  That also left most indices in the top decile of their historic ranges. That compares to last month in which most readings were far more moderate. Although most indices for current conditions saw impressive readings, the indices for expectations were much more mixed with a larger number falling than rising MoM. Given every one of these indices remains positive, though, the region’s manufacturers still have an overall optimistic outlook.

Of all the sub-indices, the New Orders index saw one of the most significant increases in January rising 28.1 percentage points from a barely expansionary reading of 1.9 to a much stronger reading of 30.  Going back over the past couple of years, the only times this index was higher was in October (32.9) and February (30.7) of last year. That indicates very strong new order growth after a slowdown in December.

Similarly, the index for unfilled orders was the only index in contractionary territory (those below zero) last month, but there was a massive improvement this month as the index surged to a reading of 25.6.  Both the level of the index and the monthly change stand in the top 1% of all readings going back through the history of the survey which began in 1968. The only times the index has been higher was in August of 1972 (26) and January (29.6) and March (45.1) of 1973.  In other words, New Orders remain strong while Unfilled Orders are bouncing back at a historic rate,

While the unfilled orders index reached one of the highest readings on record, the index for Delivery Times actually hit a new record.  The index rose 12.7 points to a record high of 30; surpassing the previous record of 21.3 from October of 2017.  Higher readings in this index indicate that supplier lead times are longer and vice versa for lower readings. That means a historic number of respondents are seeing delays in their supply chains.

Perhaps to get ahead of the growing demand and longer lead times, businesses are also reporting higher inventories.  That index rose to the highest level since September of 2019 which also stands in the top 5% of all readings in the history of the data.

Given the stronger demand and tighter supply lines, prices have also been accelerating. Both Prices Paid and Prices Received experienced some of their largest monthly increases on record after rising 20.5 points in January.  At 45.4, the index for Prices Paid is at its highest level since August of 2018. Those price increases are also getting passed along to customers as the index for Prices Received is at the highest level since February of 1989. These results echo some other hints of more inflationary conditions like the New York Fed’s readings last week and the ISM services and manufacturing report earlier this month. Click here to view Bespoke’s premium membership options for our best research available.

Housing closed out 2020 on an extremely positive note as both Housing Starts and Building Permits topped forecasts by more than 100K.  Since 2002, there have only been ten other months where both reports topped forecasts by more than 100K, and today’s report was the third time it happened in the last 12 months!

The table below breaks down the details of the December report in terms of both single and multi-family units and regions.  One of the clear areas of strength was in single-family starts and permits.  On a y/y basis, both were up over 25%, and relative to November, starts were up 12% while permits rose 7.8%.  Multi-family units, meanwhile, both saw declines with notable weakness in multi-family starts.  On a regional basis, most areas of the country saw strength although starts and permits were down m/m and y/y in the Northeast.

Given its overall size, you can easily make the case that as goes the housing market, so goes the economy, and history tends to bear this out.  The top chart shows the 12-month average of Housing Starts going back to 1967 with recessions overlaid in gray.  With the exception of the latest downturn, every prior recession was preceded by a rollover in Housing Starts.  Given the sudden onset of the pandemic, housing played no role in the current recession, but once the lockdowns started, the residential housing market wasn’t immune to the weakness. Whatever weakness there was didn’t last long.  As shown in the second chart below, less than a year after the recession started, both the 12-month average of Housing Starts and Building Permits have now moved back above their pre-pandemic highs.

While Housing Starts and Building Permits are both at new multi-year highs, on a population-adjusted basis, they’re still closer to levels typically associated with recessions than expansions.  After adjusting for population growth, Housing Starts would need to come in above 1.9 million just to keep up with population growth.

As for the stocks of homebuilders, the performance of the iShares Home Construction ETF (ITB) tends to track trends in Housing Starts and Building Permits pretty closely, so it’s no surprise that it also traded to a new all-time high on Thursday for the first time in three months.  As long as interest rates don’t see a sudden spike higher, trends in place for the residential housing market remain positive.  Click here to view Bespoke’s premium membership options for our best research available.

Last week, there was a reporting error in weekly sentiment from the AAII. To account for this, the previous week’s readings (week of January 7th) have been adjusted. This week, reporting is back to normal with bullish sentiment coming in at 42.5%. That is down from the prior adjusted reading of 45.2%. Bullish sentiment has now fallen twice in a row and is at the lowest level since the first week of November. Granted, that is still elevated at 4.5 percentage points above the historical average.

While bullish sentiment has declined, bearish sentiment has been on the rise.  Bearish sentiment rose to 34.5% from 31.7% in the most recent week. That is the highest level of bearish sentiment since the end of October. Just like bullish sentiment, it is also slightly above the historical average reading in the bearish sentiment of 30.6%.

With the inverse moves in bullish and bearish sentiment, the bull-bear spread has continued to moderate.  This week it sits at 8 which is the lowest reading since the first week of November. Even though it has moved lower, this week was the eleventh consecutive week in which the spread was positive meaning bullish sentiment has outweighed bearish sentiment. This week’s reading is slightly higher than the historical average reading of 7.35 indicating that overall sentiment continues to favor optimists but not to as historically extreme of a degree as the past couple of months.

With bullish and bearish sentiment experiencing nearly identical sized moves, neutral sentiment went little changed this week falling 0.1 percentage points.  At 23%, neutral sentiment has declined in back to back to back weeks and is now at the lowest level since the week of November 12th when it dipped below 20%. Click here to view Bespoke’s premium membership options for our best research available.