In an earlier post, we noted the improvement to small business sentiment per the latest data from the NFIB.  The report also includes survey responses as to what small businesses perceive to be their biggest problems. The July report showed that small businesses have begun to take notice of easing inflation.  As shown below, throughout 2022 and into portions of 2023, inflation has ranked as the number one problem among small businesses.  But in July, Quality of Labor retook the number one spot as it had temporarily back in May.  Meanwhile, there has been a rise businesses saying that government requirements and red tape are their number one problem, tying cost of labor for the fourth most pressing issue.

Obviously, as it still occupies the number two spot, inflation remains a major problem. Even though it is a big improvement from 37% exactly one year ago, there continues to be 21% of firms that report inflation as their biggest problem. That is also well above any reading observed pre-pandemic.

On a combined basis, cost and quality of labor are the most commonly reported problem for small businesses at 33% of responses.  Unlike inflation which is hitting new lows, that is in the middle of the past few years’ range.

Historically, the NFIB survey has had sensitivities to politics with a bias towards being more optimistic during Republican administrations and vice versa.  Since the Biden Presidency began, government related problems have been on the backburner given that inflation has been playing a more pressing role.  However, there has been a steadily rising number of responses once again reporting government red tape or taxes as their biggest issues. That has come hand in hand with an increase in the survey’s Economic Policy Uncertainty Index which experienced a pronounced 4 point jump month over month in July.

Finally, we would note very few firms are reporting sales as their biggest problem. That is a significant disconnect from the index on actual sales changes which hit new lows in July.

Small business sentiment from the NFIB’s monthly survey rebounded in July with the headline index reading 91.9 versus expectations of it rising only 0.3 points to 91.3.  As shown below, small businesses are still reporting much weaker optimism than pre-pandemic or even in the first year of the pandemic, but sentiment has been making steady improvements in recent months.

In the table below, we break down each category of the NFIB’s survey. Again, the headline index remains historically low in the 14th percentile of readings. However, that is up from the 9th percentile last month.  Most other categories that contribute to the optimism index also rose month over month, albeit there were multiple that went unchanged. As a result of those moves, most categories remain at the low end of their historical ranges with a couple of exceptions: Plans to Increase Employment and Job Openings Hard to Fill. Each of those readings are in the 76th and 94th percentiles, respectively. However, as we noted in today’s Morning Lineup, overall this survey’s employment metrics have pointed to softening of labor market activity.

While several categories saw stronger readings in July, none rose more than Outlook for General Business conditions which jumped by 10 points month over month.  That is the second 10 point increase in a row which makes for the largest two month increase since May 2020. Although that reading showed an increase in optimism which coincides with continued improvement in the number of firms reporting that inflation pressures have eased, readings on small businesses actual operations were less rosy. Even though sales expectations were up, actual sales changes hit a new low of -13, the weakest since the spring of 2020, resulting in earnings changes to also drop.

Treasury yields at the long end of the curve are once again rising today with the yield on the 30 year up 3.3 bps as of this writing. That is in the context of what has already been a dramatic move higher in yields of long term Treasuries. As we discussed in Friday’s Bespoke report, the ETF tracking longer-dated Treasuries, the iShares 20+ Year US Treasury ETF (TLT), fell 1% or more three days in a row last week (prices fall when yields rise).  Meanwhile, that move higher in long end yields has also been observed in other places of the world like Germany, as discussed in today’s Morning Lineup.

Given the steep rise in yields and hence a drop in the price of TLT, the ETF is trading at extremely oversold levels.  While it has come back slightly and is currently 2.66 standard deviations below its 50-day moving average, at the most oversold reading last Thursday, TLT traded 3.84 standard deviations below its 50-DMA. In its over 20 years of history, that is the most oversold reading on record.

As shown above there have only been a handful of other periods in which TLT has fallen at least three standard deviations below its 50-DMA as it did last week. In most circumstances, when an asset reaches such extreme levels of oversold, the thinking is that some upside mean reversion can be expected. However, the exact opposite has played out for TLT historically.  As shown below, across the prior seven instances in which TLT got 3+ standard deviations below its 50-DMA, the ETF was lower a year later four times.

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:
Oppenheimer’s Deadly Toy.  On August 6, 1945, the US dropped the first atomic bomb on Hiroshima, Japan.  The blast killed an estimated 80,000 people, and another 60,000 perished over the next year due to the fallout, but many military experts believe that more lives were saved as the bomb effectively ended the war.  Nuclear arms remain the number one issue on the geo-political stage, but the US is still the only country to use an atomic bomb in a military conflict.

Strange But True

Sailing Boat Rescued by the Götheborg (Götheborg of Sweden)
A small 8-meter sailboat sent out a distress call after losing a rudder, and much to the surprise of those on the vessel, the signal was received by an 18^th century, 50-meter, three-masted wooden ship, the largest in the world. To be lost at sea and encounter such a ship would surely make you think you had traveled back in time, as these sailors did! [Link]

Murder, Money and the Battle for a Pharmaceutical Empire (Bloomberg)
Barry and Honey Sherman, founders of drug company Apotex, are one of the wealthiest and most prominent couples to be murdered. In the ensuing investigation, details about their lives came to the surface and the empire they left behind. [Link]

Real Estate

A property owner returns to CT, finds a new $1.5M house on his land. Now police are involved (CT Insider)
A landowner in Fairfield, Connecticut had planned to pass on a plot of land he purchased years ago to future generations of his family. However, he was shocked to discover that the land had been sold without his knowledge in an elaborate scam, and a 4-bedroom house was built on it. This article details the nightmare situation and what is being done about it. [Link]

Rate-Locked Homeowners Nearly Twice as Likely to Not Consider Selling (Zillow)
Homeowners are experiencing what is called “rate lock” now that mortgage rates have risen significantly since lows in 2020.  Rate lock keeps homeowners with low rate mortgages locked into their homes in order to avoid taking on the additional cost of higher rates in a new home. The phenomenon is having some effect on housing supply, and therefore upward pressure on price. [Link]

Local Malls, Stuck in ‘Death Spiral,’ Plunge in Value (WSJ)
America’s regional malls have deteriorated in value while online shopping changes the landscape of shopping habits everywhere. Crystal Mall in Waterford, Connecticut is one example of what’s going on, a mall worth $153 million in 2012 sold in June at a foreclosure auction for $9.5 million. [Link]

CT home sells for $139M, sets new record (CT Insider)
A 50-acre estate on Greenwich’s coast sold for $139 million, the most expensive ever sold in the State, which will benefit the town and state nicely. Long rumored to be the home of billionaire Bridgewater founder Ray Dalio, the property features almost every luxury imaginable. [Link]

Technology

AI-assisted cancer screening could cut radiologist workloads in half (Engadget)
Using AI in mammogram cancer screening can reduce radiologists’ workloads by almost 50% without increasing false-positive results. The AI’s recommendations were found to be comparable to two radiologists working together, with a substantially lower workload. [Link]

First New Vogtle Nuclear Reactor Enters Operation, Making History (The Atlanta Journal-Constitution)
New nuclear reactors at Plant Vogtle in Georgia entered service this week, marking the first made from scratch in more than 30 years. Despite delays and cost overruns, the reactors are seen as a step forward for the industry and a crucial element for U.S. climate goals and energy independence. [Link]

Apple has joined Pixar’s push to standardize 3D content creation (The Verge)
Apple, Adobe, Pixar, Nvidia, and Autodesk have formed the Alliance to promote open standards for 3D tools and data interoperability. Pixar’s Universal Scene Description (USD) technology will be the focus of the alliance, enabling 3D content creation applications. Apple, with its upcoming Vision Pro mixed reality headset, views OpenUSD as crucial for the next generation of AR experiences. [Link]

Sports Memorabilia

Trading Card Wars Escalate With Antitrust Lawsuit Against Fanatics (WSJ)
Sports collectibles company Panini America filed a federal antitrust suit against rival Fanatics, alleging the latter’s aggressive entry into the trading card market violated federal antitrust law. Fanatics shocked the industry in 2021 by securing exclusive deals with major sports leagues and players’ unions, leading to concerns of market lockout and monopolistic behavior for decades. [Link]

10 Takeaways from The National Sports Collectors Convention (Action Network)
The National Sports Collectors Convention (NSSC) is a gathering collectors of sporting cards, autographs and other types of memorabilia. The industry remains strong as the all-time attendance record was broken with a significant number of young attendees. In person autographs are still popular, along with the growth of game-used items. [Link]

Government Spending

IRS aims to go paperless by 2025 as part of campaign to conquer mountains of paperwork (PBS NewsHour)
The effort to go paperless through the “paperless processing initiative” is being financed as part of an $80 billion infusion of cash for the IRS over ten years. By 2024, most people will be able to submit everything except their tax returns digitally, and by 2025, the IRS plans to process everything, including tax returns, digitally. [Link]

The worst US bridges are getting fixed (Construction Physics)
The article discusses the condition of US bridges, a good metric as the country’s infrastructure becomes an increasingly problematic issue. Despite the aging infrastructure and increasing traffic, the number of bridges in poor condition has steadily declined, while the sufficiency rating has improved. Overall, the focus on repairing or replacing heavily damaged bridges has made the bridge infrastructure safer, even as it gets older and handles more traffic. [Link]

Retirement

US workers estimate they need $1.8M to retire: survey (The Hill)
According to a survey from Charles Schwab, workers in the US believe they will need to save around $1.8 million for retirement, up 6% from last year’s estimate of $1.7 million. Inflation is fueling anxieties over savings, and stock market volatility is also seen as an obstacle. With the rise of AI, a staggering 95% of respondents prefer human professional advice over AI for financial planning. [Link]

History of Bonds

How bonds ate the entire financial system (The Financial Times)
This article is a short but surprisingly comprehensive history of tradable debt, which has built the foundations of not only capital markets but the physical and state infrastructure of the modern world. From a four-hundred-year-old dike to the aftermath of World War 2 and the modern colossus that is the global fixed income market, this article is everything you didn’t think you needed to know about bonds. [Link]

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Have a great weekend!