Bespoke’s Morning Lineup – 5/18/23 – A Facebook Anniversary
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““This was not our finest hour, we’re not happy with our performance.” – Robert Greifeld, Nasdaq CEO May 2012
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In addition to Walmart (WMT) earnings, which were released earlier this morning, we have a busy day of economic data. Jobless claims and the Philly Fed were just released, and at 10 AM we’ll get the release of Existing Home Sales and Leading Indicators. Existing Home Sales are expected to decline from 4.4 million down to 4.3 million, and Leading Indicators are also expected to decline 0.6 points continuing what has been a miserable stretch for that series.
Jobless claims were modestly lower than expected on both an initial and continuing basis, and the Philly Fed report was less bad than forecast, coming in at -10.4 versus forecasts for a reading of -20.0 and last month’s very weak reading of -31.3. In reaction to the reports, futures have sold off modestly, and are currently pointing to a flat open.
Eleven years ago today, officials from the Nasdaq, as well as reporters from every business network and many other mainstream news outlets, flew to Menlo Park for the “remote” IPO of Facebook. The company raised $16 billion in what was the largest technology offering of all time. In the 11 years since its launch, Facebook (FB) – now Meta Platforms (META) – has rallied 538% for an annualized gain of 18.3%. Over that same period, the S&P 500 gained ‘just’ 290% which works out to an annualized gain of 13.2%. Based simply on the performance of the stock relative to the S&P 500, the Facebook IPO was a huge thumbs up.
It hasn’t been a smooth ride for the company, though – both in and out of the market. Right from the start of the company’s life as a public company, Facebook has had more than its fair share of drama. On the day of the IPO, trading was delayed by over a half hour due to a technical glitch, and while the stock initially rallied, it quickly sold off and struggled to hold its IPO price by the close of trading. Without underwriter support, the stock wouldn’t have held its IPO price on its first day of trading which is considered a cardinal sin for underwriters. From there, it only got worse as the stock traded steadily lower. In the first three months of trading after the IPO date, FB traded lower on over 60% of trading days for a total decline of over 60% from the intraday IPO day high. Facebook was quickly looking like the Titanic of IPOs.
Obviously, we all know with hindsight that Facebook recovered from that rocky start, and while that 61% peak-to-trough decline was extreme, it wasn’t even the largest drawdown in the stock’s history. As shown below, the most recent decline of over 75% from the 2021 high blows that initial decline out of the water. Even now with the stock up over 175% from its low last November, META is still down 37% from its all-time high, which would still rank as one of the larger drawdowns in the stock’s history.
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Bespoke Baskets Update — May 2023
Chart of the Day: Up Days Returning
Bespoke’s Morning Lineup – 5/17/23 – Optimism Over Debt Ceiling
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“Success is making ourselves useful in the world” – George Dayton, Founder of Target
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Politicians on both sides of the aisle are still talking tough regarding the debt ceiling, but there are signs of progress being made as President Biden has announced that he will cut short his trip to Asia. In response, futures were rallying ahead of the April release of Housing Starts and Building Permits. Starts were right in line with forecasts (1.401 million vs 1.400 million) and Building Permits were shy of forecasts (1.416 million vs 1.430 million). Regarding starts, though, the March reading was revised significantly lower from 1.420 million down to 1.371 million. Building Permits, however, experienced a modest upward revision. Futures are still in positive territory on the news, but off slightly from their pre-release level.
On the earnings front, retailers continue to take center stage, and after yesterday’s report from Home Depot (HD) where the company noted softer sales trends post the SVB collapse, Target (TGT) management had similar comments.
We still have another day left until Walmart (WMT) marks the unofficial end to earnings season, but this morning we wanted to take a quick look at how stocks have recently performed during the earnings ‘on’ and ‘off-seasons. The red lines in the chart below show the performance of the S&P 500 from the time of JP Morgan’s (JPM) report to WMT. While the first two earnings seasons of 2020 were not friendly for stocks, the next three were very positive periods for the market. Unlike the last three earnings seasons, performance during the current period has been remarkably sideways. On the surface, the lack of much upside during the current earnings season may be considered a negative signal. Then again, when you consider the fact that the market started to sell off after each of the last three earnings rallies, maybe the lack of an earnings rally means the odds of a post-earnings hangover are less likely.
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Homebuilders Sentiment and Stocks Still On the Rise
As we noted last week on the release of the latest mortgage purchase data, housing activity appears to have finally stabilized after plummeting earlier in the tightening cycle. That improvement in housing markets is flowing through to builders as this morning’s release of homebuilder sentiment from the NAHB rose to 50 versus the expectation of it remaining unchanged at 45. While the index still has a long way to go to get back to pre-pandemic levels, let alone the record highs from the first two years of the pandemic, in May it hit the highest level since last July.
The higher reading in the headline index was a result of improvements across the board, including increases in present and future sales and traffic. As for regional sentiment, homebuilders have gotten more optimistic across most of the country. Everywhere save for the Northeast have seen steady improvements to homebuilder sentiment over the past several months. As for the Northeast, that is not to say sentiment has not improved. The reading has rebounded off of the worst levels but remains below the recent highs of 46 from February and March.
Homebuilder stocks continue to be even more impressive. Proxied by the iShares Home Construction ETF (ITB), homebuilders have been trading in a steady and uninterrupted uptrend. In fact, the ETF has been overbought every day for a month now.
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Chart of the Day: No Love for Dividend Stocks
Bespoke’s Morning Lineup – 5/16/23 – Weak Retail Sales
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“Try to decide how good your hand is at a given moment. Nothing else matters. Nothing.” – Doyle Brunson
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There’s a modest amount of risk-off mentality in the markets this morning, and it started last night with weaker-than-expected economic data in China followed by a weaker-than-expected report on economic sentiment in Germany from ZEW. This morning in the US, Home Depot (HD) is trading more than 2% lower after reporting a sales miss and lowering guidance. That weak report didn’t bode well for April Retail Sales at 8:30 where economists are forecasting a m/m increase of 0.4%. Looking ahead, we’ll get Industrial Production and Capacity Utilization at 9:15 followed by Business Inventories and Homebuilder sentiment at 10 AM.
The release of April Retail Sales was mixed. At the headline level, sales increased just 0.4% compared to forecasts for an increase of 0.8%. Stripping out autos, though, the report was right in line with forecasts (0.4%), and ex-autos and gas, sales actually increased at triple the rate of expectations (0.6% vs 0.2%). In addition, last month’s report was revised to a worse than initially reported number, so there was something for everyone in this report.
After slicing right through the psychologically critical threshold back in September, the yield on the 2-year US Treasury found support multiple times at the 4% level. After the last bounce in early February, the yield looked as though it was going to launch into a new higher range above 5%, and being short bonds looked like a winning hand.
Within a month, though, the failures of SVB Financial, Signature Bank, and later, First Republic caused a rush to safety, and yields quickly erased all of the February spike. Since then, the 4% level has been acting more like resistance (or a magnet) as the yield hasn’t been able to convincingly get back above the 4% level and is trading right around there this morning. With the 50-day moving average (DMA) continuing to roll over and the 200-DMA starting to follow suit, the 2-year yield runs the risk of breaking down below 4% turning what was the nuts into a bad beat.
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NY Fed Plummets
The economic calendar was light this morning with the Empire Fed Manufacturing survey the only release of note. Whereas last month saw a solid reading of 10.8 implying expansionary activity in the NY Fed’s region, expectations were set low as the index was forecasted to fall down to a contractionary reading of -3.9. Instead, the index plummeted all the way down to -31.8, the lowest since January when the index reached a slightly worse -32.9. Additionally, the monthly decline in the headline number ranks as the second largest drop on record behind April 2020. Overall, the index has been quite volatile in recent months bouncing from historically contractionary readings to modest contraction or even growth.
As shown below, the month-over-month declines across many categories were nothing short of historic in May. For example, New Orders saw an astounding 53.1 point decline (just short of a record decline similar to the headline index). Shipments wasn’t much better with a 40-point decline. However, expectations for both of those categories rebounded with New Orders being a particularly big uptick, ranking in the upper decile of all month-over-month increases. That being said, the indices remain in the bottom deciles of their historical ranges while all other categories (like unfilled orders and inventories) saw declines in expectations alongside declines in current condition indices. Again, while recent months have seen some volatility in these survey results, the findings would imply responding firms have observed a significant slowdown in their businesses.
One silver lining relative to post-pandemic trends is that the report has shown a complete reversal in readings on prices and delivery times. As shown in the first chart below, the average of the two current conditions indices has been rolling over and is now basically right in line with the historical median. Balancing out the more normalized level in supply chain readings, firms also appear to be reporting massive pullbacks in hiring capital expenditures, and plans for tech spending. During the past two recessions, this average has turned negative, and at the moment, it is only barely positive at 3.43.
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Chart of the Day – Narrow Ranges
Bespoke’s Morning Lineup – 5/15/23 – Positive Vibrations
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“If any of my competitors were drowning, I’d stick a hose in their mouth.” – Ray Kroc
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After five straight days of losses and declines in nine of the last ten trading sessions, bears are making way for the positive day in the Dow, as futures are firmly in positive territory. Whether the bears stay out of the way for the entire session, though, is another question. Not helping matters for the bulls this morning is the just released Empire Manufacturing report which came in at -31.8 compared to forecasts for a reading of -1.8 and last month’s reading of 10.8. Going back 20 years, today’s report was the third weakest relative to expectations on record trailing the reports from April 2020 and August 2022. This weakness comes against the backdrop of Atlanta Fed President Bostic saying that inflation is not coming down very quickly and that rate cuts do not factor into his near-term plan.
If the maritime analogy were to be applied to markets, it has been a bit of a slack tide in the last week as there wasn’t much in the way of a major current in the market’s direction. While the S&P 500 was down fractionally, and most sectors were lower, there is a lot of disparity. Heading into the new week, seven sectors are neither overbought or oversold, three sectors are overbought, and just one sector (Energy) is oversold. In general, sectors that had been performing the worst YTD, did the worst last week and vice versa. Take the Energy and Communication Services sectors, for example. Energy has been the worst-performing sector YTD; it was the worst performer last week and it is further below its 50-day moving average (DMA) than any other sector. Conversely, Communication Services is the top-performing sector YTD, was the best-performing sector last week and it is further above its 50-DMA than any other sector.
Looking in more detail at the Energy sector, it has been stuck in a downtrend since last October, and after a steep sell-off to kick off the month, the sector looks to be trying to stabilize. Whether this attempt proves successful remains to be seen, but it is worth noting that this most recent low has taken place on lower levels of volume compared to the one in March.
Communication Services has been in a steady uptrend since its Q4 lows. While it has consistently been making higher lows, the ETF that tracks the sector (XLC) has stalled out at resistance multiple times this year. If it can break above $60, there’s no short-term resistance above.
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