There’s Something About June 29th
There must be something about June 29th. Besides being a significant day of the year from a seasonal perspective (as discussed in Wednesday’s Chart of the Day), two crucial events related to some of the most significant business stories of the past two decades took place on this day, two years apart. The first involved Bernie Madoff, who infamously orchestrated the largest Ponzi scheme in history, although it is worth noting that Madoff once described the Federal Government as another Ponzi scheme, so by his logic, he would have only overseen the second largest Ponzi scheme ever. On this day in 2009, Madoff, once a highly respected and well-loved figure on Wall Street, stood alone in a Manhattan courtroom, devoid of any familial or friendly support, and received a sentence of 150 years in prison.
On a much brighter note, two years earlier in 2007, Apple fans lined up and, in some cases, camped outside of stores for days to be among the first to get their hands on the first-generation iPhone. The fact that people were willing to pay over $500 for a heretofore unproven smartphone should have been all we needed to see to know that this was going to usher in a revolution in the entire computing industry.
Given the success of the iPhone and the scandal of Madoff, you would think that the launch of the iPhone would have been a positive market event and the Madoff sentencing would be associated with a negative market environment. As the chart below illustrates, though, the exact opposite was the case. The first iPhones didn’t just go on sale within four months of any ordinary market peak; the formal launch preceded a 56%+ peak-to-trough drop in the S&P 500 that was the largest drawdowns since the Great Depression. Conversely, Madoff’s sentencing came less than four months after that same largest drawdown since the Great Depression ended.
We’ve said it before and we’ll say it again, but investing based on the headlines can be one of the worst investment strategies known to man.
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Bespoke’s Morning Lineup – 6/29/23 – Strong Economic Data
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“You speak an infinite deal of nothing.” – William Shakespeare
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While Micron reported a wider-than-expected loss and gave mixed guidance after the close last night, commentary from the company suggesting that the semiconductor market bottomed has provided a boost to futures, especially in the tech space, and that has overshadowed any hawkish commentary from Fed Chair Powell.
There’s a decent amount of economic data this morning. GDP was revised much higher coming in at 2.0% versus 1.4% expected. Personal Consumption was stronger than expected (4.2% vs 3.8%), and the GDP Price Index was lower than expected at 4.1% vs 4.2% expected. All these numbers are backward-looking from Q1, though. Timelier was jobless claims, and on both an initial and continuing basis, they came in lower than expected. Initial Claims were especially strong, dropping to 239K versus forecasts for a level of 265K, and that has pushed the yield on the 10-year from 3.74% up to 3.8%.
In Asia overnight, equities were generally flat with a negative bias, although economic data was mostly better than expected. Ironically, Europe is trading with a more positive tone even as economic data in the region hasn’t been particularly market-friendly.
Within the commodities space, one of the only bright spots in an otherwise dark sector had been precious metals, but even this area has started to weaken.
In early May, gold looked like it was on the verge of a breakout, but more hawkish commentary by the Fed and pricing out of rate cuts this year has reversed that positive momentum, and over the last two weeks we’ve seen a downside break of the uptrend off the October lows.
It’s a similar story for platinum which was also trading at 52-week highs in the spring but has since broken down in an even more dramatic way than gold. Right now, it’s on the verge of making a lower low.
Silver traditionally has a connotation of playing the bridesmaid role, but while the commodity has pulled back from its spring highs and traded at a series of short-term lower highs and lows, it is the only one of the three commodities here where the uptrend off the October lows remains intact.
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Chart of the Day – It’s (One of) the Most Wonderful Time of the Year
Fixed Income Weekly: 6/28/23
Searching for ways to better understand the fixed income space or looking for actionable ideas in this asset class? Bespoke’s Fixed Income Weekly provides an update on rates and credit each week. We start off with a fresh piece of analysis driven by what’s in the headlines or driving the market in a given week. We then provide charts of how US Treasury futures and rates are trading, before moving on to a summary of recent fixed-income ETF performance, short-term interest rates including money market funds, and a trade idea. We summarize changes and recent developments for a variety of yield curves (UST, bund, Eurodollar, US breakeven inflation, and Bespoke’s Global Yield Curve) before finishing with a review of recent UST yield curve changes, spread changes for major credit products and international bonds, and 1-year return profiles for a cross-section of the fixed income world.
In this week’s report, we discuss high yielding investment grade bonds.
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Bespoke’s Morning Lineup – 6/28/23 – Waiting on Powell
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“It is better to be roughly right than precisely wrong.” – John Maynard Keynes
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Futures are mixed with a negative bias as the Nasdaq is leading the losses on reports that the Federal government will expand export curbs on certain semiconductors to China. Apart from China, most global equity markets have been rallying overnight in follow-through from yesterday’s US rally. Chinese stocks were more subdued and that comes after reports that industrial profits well 18.8% on a YTD basis as the government cited ‘insufficient demand’. Even after the PBoC intervened in markets overnight, the yuan was under pressure and fell to a seven-month low versus the dollar.
In the US, mortgage applications increased 3% last week, and just in time for the opening bell, Fed Chair Powell will speak at an ECB panel in Portugal at 9:30 AM.
We’ve discussed the rally in the Nasdaq a lot in recent days, and through the fourth to last trading day of the first half, it is up 29.5% which ranks as the third-best first-half performance through this point in the first half trailing only the 39.6% rally in 1983 and the 44.3% surge in 1975. If there’s one thing we’re confident of, it is that this year won’t overtake those two years between now and the end of the week. As wild as this year’s first half seems, it’s even crazier when you consider the fact that last year’s performance through this point in the year was the second worst in the Nasdaq’s history.
Given the strong gains so far, we were curious to see how the Nasdaq performed in the last three trading days of the first half after rallying 10% YTD. In the 24 prior years when the Nasdaq was up by double-digit percentages YTD heading into the last three trading days of the first half, its median rest of month performance was a gain of 0.89% with positive returns 79.2% of the time. That’s a pretty impressive three-day average, but compared to all years in the Nasdaq’s history, it’s actually right in line with the norm.
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Chart of the Day – The Long Stock Market Nightmare is Over
Bespoke’s Morning Lineup – 6/27/23 – Durable Goods Rally
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“College isn’t the place to go for ideas.” – Helen Keller
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While stocks have traded heavily over the last several trading days, the weakness hasn’t been enough (yet) to move the Nasdaq out of overbought territory (one or more standard deviations above its 50-day moving average). As shown in the chart below, Monday was the 34th consecutive trading day that the Nasdaq closed at overbought levels.
That sounds like a long stretch, but for the Nasdaq it is not especially uncommon to trade at overbought levels for an extended period. Since the start of 2013, for example, there have been six other periods where it traded at overbought levels for at least six weeks, and the longest was over ten weeks back in early 2021. For the Nasdaq’s entire history, there have been even longer streaks. In 1997, for example, there were 69 straight days of overbought readings, and back in September 1980, the Nasdaq traded at overbought levels for 95 straight trading days- that’s almost five months!
Naturally, when you see such an extended streak of overbought readings, it’s natural to expect a pullback. After all, stocks can’t go up forever. But if all it took to anticipate a pullback was an extended streak of overbought readings, we’d all be rich. In the chart below, we show a chart of the Nasdaq since the start of 2013 and have included red dots to show each time it traded at overbought levels for 30 straight trading days. In a number of these periods, the market kept rallying with little in the way of a pullback, and the only period where a significant pullback was almost immediate was after the January 2021 streak. But even then, the streak lasted more than another month before the Nasdaq was no longer overbought again.
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Chart of the Day – Positive Days: The Less Routine the Better
Bespoke’s Morning Lineup – 6/26/23 – All Quiet After a Busy Weekend
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“The debt is like a crazy aunt we keep down in the basement. All the neighbors know she’s there, but nobody wants to talk about her.” – Ross Perot
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3 points. After a wild but ultimately oddly quiet weekend on the geo-political front, US futures are just modestly negative to the tune of three points this morning, and crude oil is only marginally higher. Not necessarily what you would have expected to see on the Monday after a weekend where we saw what looks like an attempted coup in a country that holds one of the world’s largest nuclear stockpiles and happens to be the third-largest producer of crude oil.
Bulls are looking to regroup this morning after a negative week, and as we head into the last week of what can only be considered a strong first half for equities. The only economic report on the calendar this morning is the Dallas Fed Manufacturing report, which is expected to be firmly in negative territory (-22.5) but not quite as weak as last month’s reading of -29.1. We’ll be watching the Prices Paid and Prices Received components for confirmation of the pattern we’ve seen in other regional fed reports where pricing pressures have been easing substantially.
While last week was negative for stocks, remember how strong the period was that preceded it was. As noted in Friday’s Bespoke Report, the market still hasn’t broached the prior highs from last August, so the bulls still deserve the benefit of the doubt.
The picture for international stocks doesn’t look nearly as positive. Less than two weeks ago, the MSCI All Country World Ex US ETF (CWI) broke out above resistance to new 52-week highs. Like US stocks, though, the ETF faced pressure all last week and on Friday broke back below its former resistance as well as its 50-day moving average (DMA). So, from the perspective of a US equity investor, it could have been worse.
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Brunch Reads: 6/25/23
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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Wealth and Investing
Americans Say They Need $2.2 Million to Be Considered Wealthy (Bloomberg)
According to Charles Schwab’s 2023 Modern Wealth Survey, 48% of respondents said they’d feel wealthy with an average net worth of $560,000. Defining this idea of wealth is dependent on several factors discussed in this article including peer lifestyle influence, relationships, generation, the economic environment, region, and more. The results are quite surprising based on intuition. [link]
The Great Convergence (Foreign Affairs)
Global inequality, measured as the income differences across countries fixed for price differences, is at historic low levels as measured by the Gini coefficient. China’s growth in recent decades has contributed most to global equality and economists are looking to African countries to be the next great contributors towards global equality as their countries develop. [link]
ChatGPT Told SoftBank’s Masayoshi Son His Ideas Are Great. Now He’s Investing Big in AI (WSJ)
Softbank’s CEO is ready to shift the bank’s investment stance toward technological advancements in AI. Son has been exchanging back and forth with the chatbot to brainstorm ideas for new inventions and developments amid the new AI frenzy. [link]
FDIC accidentally reveals details about Silicon Valley Bank’s biggest customers (Yahoo)
The FDIC accidentally released an unredacted document to Bloomberg News listing SVB’s largest depositors at the time it went under. So, Bloomberg published it, and one of the largest depositors – with over $1 billion in the bank – was Sequoia Capital. [link]
Geo Politics
Beijing Plans a New Training Facility in Cuba, Raising Prospect of Chinese Troops on America’s Doorstep (WSJ)
Chinese and Cuban officials are discussing the establishment of a new joint military training facility in Northern Cuba. The discussions are not finalized as officials are traveling between the countries negotiating terms. [link]
Urban Decay
US murder rate declines dramatically in 2023 — but you probably haven’t heard about it (Popular Information)
This article highlights a 12% YTD decrease in US murders in 2023 for more than ninety cities, attributed to various factors like the end of the pandemic, increased funding for violence prevention programs, and a decline in gang activity. [link]
Science and Technology
Apple Watch Alerts 29-Year-Old Cincinnati Woman to Blood Clot in Lungs While Sleeping (9to5 Mac)The Apple Watch can measure your heart rate and recognize if something isn’t normal. This woman is crediting the feature for saving her life, calling attention to the fact that the technology can do the same for everybody and continue to save lives in the future. It’s an example of how someone literally couldn’t live without their Apple Watch. [link]
AI models feeding on AI data may face death spiral (Tech Xplore)
Researchers studied the learning capabilities of AI and found that AI training could lead to a collapse of the model. AI responses are sometimes flawed, but the models use these answers, misinterpret reality, and reinforce their own beliefs. Could AI collapse just as quick as it rises? [link]
Rampant Groundwater Pumping Has Changed the Tilt of Earth’s Axis (Scientific American)
Groundwater extraction, primarily for agriculture, has led to an uneven distribution of water across the globe, resulting in a redistribution of Earth’s mass and a change in its rotation. This shift underscores the far-reaching and unintended consequences of human activities on the Earth’s dynamics. [link]
USDA Approves First ‘Lab-Grown’ Meat to be Sold to the Public (Fox Business)
The USDA approved cultivated meat, or meat grown in a lab from fertilized eggs. Cultivated meat is environmentally friendly as it does not require extensive land or water like traditional slaughtering practices. This new method is costly, meaning mass market sales are still a ways off. [link]
Economy
American Companies Held Hostage by the Whims of Tik Tok (WSJ)
Tik Tok trends have become so popular that companies are changing production processes to meet the latest Tik Tok trends. Some new or small businesses, like Dave’s Gourmet Pink Sauce, have only emerged and grown as a result of latching on to a Tik Tok trend. Other established brands, like Chipotle, are keeping menu items out of fear of backlash on Tik Tok. [link]
Tesla Has the Top 4 Most American-Made Cars, Only American Automaker in Top 10 (Electrek)
Remember when Tesla was a niche brand just a few years ago? It now produces the top 4 most American-Made cars thanks to their vertical integration approach. Tesla produces many of the parts for its cars itself and relies on local rather than international supply chains. Other automakers in the Top 10 were Honda, Acura, and Volkswagen. [link]
Brands Wanted to Cut Out Stores. Not Anymore. (WSJ)
New brands are discovering how hard it is to attract customers online with the flood of ads and online data tracking regulations. Brands are returning to retail stores and partnerships to gain brand exposure and spark sales. Some major brands, like Nike, have returned to retail locations such as Macy’s after pulling their products in prior years. [link]
There Were Fewer Homes for Sale in May Than Any Other Month on Record (Redfin)
Home prices continued to rise in May, but at a slower pace compared to previous months. Inventory levels remained low, leading to increased competition among buyers, and mortgage rates also experienced a slight increase during that period. [link]
First the Choco Taco, And Now This Ice Cream Favorite Has Been Yanked (Mercury News)
Say goodbye to the popular Good Humor Toasted Almond bar. The longtime favorite ice cream’s discontinuation has sparked disappointment among those who have enjoyed it since the 1960s. [link]
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Have a great weekend!