In an earlier post, we discussed the latest small business survey from the NFIB. Another aspect of the survey is to question businesses on what is currently their most important problem.  As shown in the table below, by far the most common response is either cost or quality of labor accounting for a combined 32% of responses. That is despite the apparent slowdown in labor markets as we discussed in today’s Morning Lineup. Another 22% of responses point to government-related concerns like taxes (13%) and government red tape (9%). Combined, that is tied with inflation for the second most pressing issue among small businesses.

While it makes up a vastly smaller share of responses at only 5%, financial & interest rates have seen their share rise significantly.  At 5%, it is the highest reading since 2010.

Furthermore, of firms reporting a negative outlook for expansion, rates rank as the second most common reason for said outlook behind political climate. While political climate holds a higher share of responses, it is worth noting that the reading has historically held a strong correlation with which party is in office (tending to favor Republicans). As shown below, after the 2016 election when Trump was elected to office, the readings tanked whereas leading up to and in the wake of the 2020 election of President Biden the reading rose sharply. Since then it has moderated, but it still remains the main reason cited by small businesses for their negative outlook.

Finally, we would note that although the October report saw a massive drop off in actual sales, few businesses appear to be overwhelmingly concerned with the issue.  Only 5% of responses credited poor sales as their biggest problem. That is unchanged for five months in a row as it was higher as recently as the summer of 2021.

This morning’s release of small business sentiment from the NFIB showed optimism fell by less than expected, coming in at 90.7. That compares to 90.8 in September and leaves the index in the middle of the past several months’ range.  Although that is not at a new low, current levels are near the lowe end of the post-pandemic recession range.

Business outlook was unchanged at a historically low -43, albeit that is off the lows from June of last year. As small businesses remain pessimistic in their evaluation of the economy, there has been a significant deterioration in sales.  Although sales expectations have risen, observed sales changes are down to -17 which outside of April through July 2020 is the weakest reading since September 2010.  That has resulted in actual earnings changes also deteriorating with current levels very close to post-pandemic lows.  In terms of prices, the index of higher realized prices ticked up to 30.

When surveyed on the most important reason for lower expected earnings, the highest share of respondents reported increased costs as the culprit. Granted, that combines input costs with increases in other aspects like taxes and finances (i.e. interest rates). While moving higher, the share reporting increased costs as their biggest reason for lower earnings is still below levels from last fall.  On the other hand, the share reporting sales volumes as the reason has been rising steadily to levels not seen since May 2021.

In the table below, we show all categories of the report as well as their month-over-month change and how those readings rank as percentiles of all months in the survey’s history.  The headline number’s further decline, albeit marginal, still leaves it in the bottom decile of historical readings. The bulk of the drop was thanks to the deterioration in actual earnings changes, but otherwise, breadth wasn’t too bad for the index’s inputs.  That being said, the month-over-month drop in earnings changes does rank in the bottom 2% of all months on record, and other non-inputs to the headline number were more mixed. Again, actual sales changes were notably weak and, like actual earnings changes, recorded a historic month-over-month decile.  That also applied to credit conditions for regular borrowers as interest rates remain elevated.

The economic data slate is light today to kick off the new week with the only US release of note being the New York Fed’s Survey of Consumer Expectations (which we will cover in tonight’s Closer), but tomorrow we’ll get the all-important CPI report for the month of October.  In the chart below, we show the daily change of the S&P 500 on each CPI release day going back to 2000.  As shown, it will be the one year anniversary of what is currently the record gain on a CPI day with the 5.54% jump last November when CPI came in weaker than expected, dramatically shifting Fed pricing.  S&P 500 reactions to CPI days have remained strong with an average daily gain of 0.30% on the last ten monthly CPI days, but that’s down quite a bit from higher readings seen this past summer.

Although last November marked an outlier of performance on CPI days, November is actually the worst month of the year for average S&P 500 daily moves on CPI days.  As shown below, ironically sandwiched between two of the best months, the average decline of 0.37% in November is the worst of any month. That is because not only does November hold the record gain in 2022, but the month also boasts the record loss on a CPI day with the 6.12% decline in 2008.  However, in terms of how actual results of CPI prints come in versus estimates, there does not appear to be any significant seasonal patterns.  Put differently, average gains on CPI days are likely a more nuanced function of the actual results of the report and market volatility of the time rather than seasonality.

In the currency markets this morning, the big story is the Japanese yen falling to a new low.  At the current level of 151.90, a dollar now buys more yen than it has at any point since June 29, 1990.  That’s not a typo. 1990!  From 1990 to October 2011, the yen rallied to as low as 75 yen per dollar, but over the course of the last 12 years, it has lost half of its value, and a dollar now buys twice as many yen as it did then.  34 years and nothing to show for it.

Like the yen, Japan’s Nikkei 225 has also had a roller coaster move in the last 34 years. After losing more than 80% from its December 1989 high to its October 2008 low, Japan’s benchmark equity index has rallied more than 350%, taking it to levels that before this summer, it hadn’t traded at since July 1990.  Again, Japan’s equity market has had its ups and downs over the last 34 years, but after all the time and effort, besides dividends, the Nikkei has nothing to show for it.  Rip Van Winkle only fell asleep for 20 years, but if a Japanese investor fell asleep 34 years ago and woke up today, they may look at the paper and not even notice.

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!