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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The Times They Are A-Changin’

A Decade of Urban Transformation, Seen From Above by Emily Badger and Quoctrung Bui (NYT)

An incredible survey of the changing landscape of America, detailed with breathtaking satellite pictures of towns, cities, and the shifting physical environment of the country. [Link; soft paywall]

New York is losing residents at an alarming rate by Carl Campanile (NY Post)

Annual Census estimates saw New York State’s population fall 0.4% with over 180,000 residents shipping out for other states over the course of the year. [Link]

Market Calls

Dennis Gartman Says Goodbye With One Last Stock Market Warning by Mark Hulbert (Barron’s)

After 30 years of publishing, the widely read Gartman Letter is no more, and its publisher has a parting shot at markets which have defied numerous bearish predictions from Gartman over the years. [Link; paywall]

Almost Everything Wall Street Expects in 2020 by Sam Potter and Jeremy Scott Diamond (Bloomberg)

Your one stop shop for almost everything analysts and strategists are saying about what to expect from the markets and economy in the coming year. [Link; soft paywall]

College Football

Who’s Highest Paid In Your State? by Charlotte Gibson (ESPN)

A rundown of the highest-paid public employees by state, which in most parts of the company is the coach of the college football team at a state college. [Link]

Rise of the inverted Tampa 2: Clemson goes B12 on Ohio State by Ian Boyd (Sports Treatise)

An extremely detailed and well-informed rundown of the critical defensive adjustment that Clemson made at halftime which allowed it to stop the bleeding against Ohio State and ultimately shut down the Buckeyes’ offense in the second half. [Link]

Iran

How a Chase Bank Chairman Helped the Deposed Shah of Iran Enter the U.S. by David D. Kirkpatrick (NYT)

Amidst the current international conflict between the Islamic Republic and other regional powers, this critical piece of history deserves attention: an American banker engaged in a plot designed to prevent the re-election of the sitting President by sparking confrontation with Iran. [Link; soft paywall]

Online Flight Tracking Provides A Look At The US Build Up In Middle East Following the Attack on US Embassy In Iraq by Stefano D’Urso and David Cenciotti (The Aviationist)

Using publicly sourced data from flight tracking websites, enthusiasts have been tracking the logistics of US troop deployments into the Middle East and Persian Gulf. [Link]

The Sentence That Enabled Our Endless War Turns 17 Today by Gregory D. Johnsen (Buzzfeed News)

War powers are supposed to be the domain of Congress, but broad language open to interpretation passed by the House and Senate in the wake of the 9/11 attacks have given three administrations basically unconstrained power to wage war without asking for permission from Congress. [Link]

Medicine

Google AI Beats Doctors at Breast Cancer Detection—Sometimes by Brianna Abbott (WSJ)

While doctors still beat machines in some cases, Google’s health research unit has developed a system that can double-check their work and reduce errors. [Link; paywall]

China pneumonia outbreak raises spectre of SARS as number infected jumps to 44 by Laurie Chen, Christy Leung, Zhuang Pinghui, and Josephine Ma (SCMP)

A rising number of patients in China are exhibiting symptoms of a new viral strain that causes pneumonia and may be fatal. Human-to-human transmissions have not been confirmed so far. [Link]

Personal Essays

I ignored warnings from friends and family not to marry my husband. Was I making a big mistake? by Nancy French (WaPo)

A personal essay that finishes with an incredible twist, sure to get any reader laughing. [Link; soft paywall]

Pokemon Go

How Canada’s military reacted to seeing Pokemon Go players trespassing on its bases by Brett Ruskin (CBC)

Canadian enthusiasts of the Pokemon mobile game accidentally trespassed on military bases in an effort to catch rare finds, per new documents released by the Canadian Armed Forces; a uniquely Canadian military drama. [Link]

Renewables

Floating Wind Farm Starts Generating Power Off Portugal’s Coast by Will Mathis (Bloomberg)

A new project in the relatively shallow waters off Portugal is a test case for a form of wind power that could be more widely used around the world as countries race to develop zero-carbon electrical generation capacity. [Link; soft paywall]

Incarceration

Violence at Parchman, other Mississippi prisons: What we know by Harold Gater (Clarion Ledger)

Mississippi prisons have entered a prolonged lockdown as a series of inmate deaths caused by understaffing and gang activity prevents the orderly function of a prison system bursting at the seams and under-funded. [Link; soft paywall]

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Have a great weekend!

Please click the image below to view our January 2020 market calendar.  This calendar includes the S&P 500’s average percentage change and average intraday chart pattern for each trading day during the upcoming month.  It also includes market holidays and options expiration dates plus the dates of key economic indicator releases.  Start a two-week free trial to one of Bespoke’s three research levels.

What’s the bright side to the market weakness from news overnight that a US drone strike in Iraq killed Iranian General Qassim Soleimani?  It took all the focus off of the December ISM Manufacturing report which came in weaker than expected and was all around bad just about any way you look at it!  At the headline level, economists were expecting the ISM Manufacturing index to rebound from 48.1 up to 49.0, but instead of a bounce, we actually saw a decline to 47.2, which was the lowest level since June 2009.

Commentary in this month’s report was also weak.  Outside of Textile Mills, where the outlook is positive, commentary around every other sector highlighted was negative with descriptions like shrinking, sluggish, and on the defensive dominating the commentary.

Below we break down this month’s report by each of the individual sub-indices.  The biggest decliners relative to November were Production and Employment while Prices Paid saw the largest decline.  Weak activity with rising prices?  That’s not an optimal combination!

As mentioned above, Production saw the largest decline in December, falling to 43.2 from 49.1.  That’s the largest m/m decline since January 2012 and the lowest overall reading since April 2009.

New Orders were also weak this month, and while the m/m decline wasn’t large (less than a point), activity hasn’t been shrinking at this rate since April 2009.

On the employment front, activity also contracted from 46.6 down to 45.1.  Employment in the manufacturing sector hasn’t been this weak since January 2016.

As if the weak activity in the Manufacturing sector wasn’t bad enough, it was accompanied by rising prices.  As shown in the chart below, the Prices Paid component increased five full points to 51.7 in what was the largest m/m increase in over two years (September 2017).  All in all, this was just a lousy report!  Start a two-week free trial to Bespoke Institutional to access our quarterly Equity Market Pros and Cons report, economic calendar, and all of our other research tools.

In Tuesday’s Pros and Cons report, we cautioned that we enter 2020 with investor sentiment—using the AAII survey as a gauge—having gotten somewhat extended.  Bullish sentiment recently moved back above 40% which were some of the strongest readings of the past couple of years.  This week there was a bit of mean reversion as bullish sentiment fell to 37.2%.  While that is the biggest one week decline in bullish sentiment since November, the percentage of investors reporting as optimistic is now only back to where things stood in the first half of December.

While bullish sentiment fell rather sharply, the difference did not shift towards outright bearishness.  Bearish sentiment rose to 21.9%; just a 0.3 percentage point increase from last week. In fact, that was the smallest absolute weekly change in bearish sentiment since October, leaving it at the lower end of its range over the past several years.  In other words, while some declines in the past week dampened investor confidence, it was not by much as there still is much more outright bullishness than bearishness.

Neutral sentiment, rather than bearish, took from those losses in bulls this week. Rising 4.33 percentage points, neutral sentiment is now at 40.9%.  That is the highest reading since April 25th when it reached 46.31%.

Back in April, as is the case now, was also the last time that neutral sentiment rose to over 1 standard deviation above its historical average.  This week marks just the 80th week in the history of the survey that neutral sentiment has gotten extended in such a way while bullish and bearish sentiment remains within a standard deviation of their historical averages. As shown in the charts below, although this may suggest indecisiveness amongst investors, after some underperformance the S&P 500 tends to outperform other periods on average six months to one year out and returns are consistently positive. Start a two-week free trial to Bespoke Institutional to access our quarterly Equity Market Pros and Cons report, economic calendar, and more.

2019 was surely a banner year for US equities.  With a total return of 31.5%, the S&P 500’s gain in 2019 was nearly three times the historical average 12-month return of 11.7%.  That’s strong!  In the chart below we compare the S&P 500’s annualized returns over the last one, two, five, ten, and twenty years to its average annualized returns over those same time frames since 1928.  While the one-year return sticks out like a sore thumb, we would note that the S&P 500’s annualized returns over the last two, three, and ten years are also above average.  Almost as notable as the fact that the one year return has been so much stronger than average is that the S&P 500’s two-year return is less than two percentage points above its historical average.  That just shows how bad 2018 was!  Looking further out, the only time frame where returns are below average is over the last twenty years where the 6.1% annualized gain is almost five percentage points below the historical average. Over a full twenty years, that’s a difference of tripling your investment versus making eight times your investment!

The chart below compares how current returns during the above time frames rank on a percentile basis relative to all other periods.  The S&P 500’s one-year return ranks in the 85th percentile which is pretty extreme.  For the two, five, and ten year periods, though, current returns are much more middle of the road.  Conversely, as stretched as extreme to the upside that the one-year return is relative to all other periods, the twenty-year return is even more depressed to the downside.  At just 4.6, more than 95% of all other 20-year periods have been better than the last 20.

Finally, as mentioned above the last year has certainly been a strong one, and it follows a year where returns had been abnormally poor.  The chart below shows the rolling 12-month total return for the S&P 500 going back to 1990.  The gain of 31.49% over the last year was the strongest for the S&P 500 in six years coming up just shy of the 32.39% gain in 2013.  Last year at this time, though, the S&P 500 was down over 4% on a total return basis in the prior 12 months.  Start a two-week free trial to Bespoke Institutional to access our full suite of research tools and analysis.

Jobless claims for the final week of 2019 came in at 222K. That compares to forecasts of a drop to 220K from an upwardly revised 224K last week (originally 222K).  Claims have now dropped in each of the three weeks since the large spike up to 252K.

Although the seasonally adjusted number has continued to fall, the four-week moving average just keeps moving higher.  This week’s increase is the result of the very low print of 203K from the week of November 29th rolling off the average to be replaced by this week’s 222K.  Now at 233.25K, the moving average is at its highest level since the end of January 2018.

Given the moving average is at its highest levels in some time, it is also now 31.75K above the current cycle low that was put in place in April at 201.5K. That is the widest spread between a cycle low and the moving average since September 2017. Looking at the time period since the end of the last recession (June 2009), while there have been other times this cycle where the spread has been even wider, such as once each year from 2011 to 2013, the amount of time that the moving average has remained above its low has gotten more extended at 37 weeks (second chart below). For the current cycle, that makes for the second-longest streak without a new cycle low in the moving average behind a 42-week long streak that came to a close at the end of 2012.

On a non-seasonally adjusted basis, claims rose this week up to 312.1K from 287.3K as claims near their seasonal peak.  In spite of that week-over-week increase, claims are down versus the comparable week last year and the average for the current week of the year since 2000. Start a two-week free trial to Bespoke Institutional to access our interactive economic indicators monitor and much more.

The Dogs of the Dow strategy is a simple, hands-off investment approach that says to buy the 10 highest yielding stocks in the Dow 30 at the start of each year.  With the calendar turning over from 2019 to 2020, below is a look at how the Dogs strategy performed in 2019.  As shown, the 10 Dogs posted a total return of 19.38% in 2019, which was below the 25% return for the Dow and well below the 28% that the 20 non-Dogs returned.  The biggest winner in the Dogs in 2019 was JP Morgan (JPM) with a gain of 47.27%, but Pfizer’s (PFE) decline of 6.92% really hurt overall performance.

The 20 non-Dogs were led by Apple (AAPL), Microsoft (MSFT), Visa (V), and United Tech (UTX), while Walgreens Boots (WBA) and 3M (MMM) were the two non-Dogs that fell in 2019.  Start a two-week free trial to Bespoke Institutional to access our Trend Analyzer tool and track key trends in individual stocks and major ETFs.

Moving on to 2020, below is a list of this year’s Dogs of the Dow.  Eight of the ten Dogs from 2019 remain on the list, while 3M (MMM) and Walgreens Boots (WBA) — the two non-Dogs that fell in 2019 — have replaced JP Morgan (JPM) and Procter & Gamble (PG) — the two biggest gainers of the Dogs in 2019.  Dow Inc. (DOW) is the highest yielding Dog at 5.12%, followed by Exxon (XOM), IBM, and Verizon (VZ), which all have dividend yields above 4%.