Below is analysis included in today’s Morning Lineup.  You can receive the Morning Lineup in your inbox each day with a Bespoke Premium or Bespoke Institutional membership.  Click here to start a two-week free trial.  Last night we got a couple of interesting data points about the state of the global economy. The first is near-real-time in the form of Korean trade data for the first 20 days of the month of July.  As shown in the chart below, YoY rates of change bounced huge in June after enormous declines in April and May.  Unfortunately, the bounce is not continuing, and preliminary trade data continues to run at a -13% YoY pace for the month.

That’s consistent with slightly more lagged alternative indicators that tend to do a good job following the global economic cycle. Swiss watch exports data updated last night showed a very large decline of about one-third YoY; that’s a huge improvement on the two-thirds decline in May, but between that and still-weak performance of Macau’s casinos, it’s hard to find a data point suggesting a robust recovery in economic activity volumes and animal spirits across the global economy.

Where there’s room for hope is in capital expenditures as proxied by the machine tool orders data released each month by Japan’s trade association of manufacturers in that category.  This data is very timely, with the revised June numbers showing a little more detail than the headline release a couple of weeks ago.  As shown below, Chinese orders have surged while American customers are also stepping up to by at a much faster clip than the last couple of months.  While the EU bounce looks small, even that amounts to 10% sequential improvement. These series have a long way to go to get back to “normal” but they’re at least on that path for now.  We went into further detail on contribution to total earnings as well as YTD gains in last night’s Closer report, which is available to Bespoke Institutional members.  Click here to start a two-week free trial.

Yesterday after the close, IBM reported second-quarter results.  Big Blue beat on both the top and bottom line with EPS coming in at $2.18 compared to estimates of $2.09 and revenues were $401.9 million above estimates. Although IBM beat on both the top and bottom line this quarter, EPS and sales have been grinding lower over the past several years as shown in the charts from our Earnings Explorer below. In fact, this quarter still marked EPS down 31% YoY and sales down over 5% YoY.

When it comes to stock price reaction, that beat comes during what has historically been the strongest quarter for IBM.  Q2 earnings days have averaged the largest gains of any quarter in terms of the gap up, open to close change, and full-day change.  Not only does Q2 experience the largest gains but it is also the quarter that IBM trades higher the most frequently.  IBM has traded higher on Q2 earning days 72% of the time.  Conversely, IBM has only seen shares trade higher on its Q1 report in April just 21% of the time.

Turning to today, the stock was trading up as much as 6.85% post-market shortly after earnings came out but has reversed some of those gains overnight and is now looking to gap up by 4.75%. That would make for the seventh-largest gap up on earnings for IBM since at least 2001.  None of those other largest gaps up happened on a Q2 earnings report.

Looking through the history of IBM in our Earnings Explorer database, IBM has beaten both EPS and revenues 30 times.  On average, the stock has gapped up 0.67% to be met with minor selling during the day to finish up 0.65%.  Of those 30 times, the 6 occurrences in Q2 have seen even stronger returns which seems to be holding true today.

As for where today’s gap up will leave IBM, the stock has been trading in a range for the past few months. In early June, there was a breakout of that range which never held.  After returning to the bottom end of said range, IBM has been rallying into earnings closing yesterday at the top of the range and just below its 200-DMA. The gap up on earnings is looking to bring the stock out of that range, above its 200-DMA for the first time since early June, and back up to levels just below its June 8th high.  Click here to view Bespoke’s premium membership options for our best research available.

By just about all accounts, Monday’s breadth was extremely weak for a day on which the S&P 500 rallied 0.84%.  In terms of sector performance, just three sectors were up over 1%, while four declined more than 1%.  If you account for rounding, the 0.96% decline for Consumer Staples would make it five!

The chart of sector performance doesn’t even tell the entire story.  While Consumer Discretionary was up the most yesterday at +3.14%, when Amazon.com (AMZN) comprises more than a quarter of the entire sector, it’s 8% rally can mask a lot of underlying weakness.  The chart below shows the percent of stocks in each sector that finished the day in positive territory.  As shown, barely a third of Consumer Discretionary stocks were even up yesterday!  Technology and Communication Services were the only other sectors that outperformed the S&P 500 yesterday, and while breadth was extremely positive in tech-land, in Communication Services things weren’t much better than they were in the Consumer Discretionary sector.  Besides Technology, Health Care was the only other sector that managed to see more than half of its components finish the day in positive territory.

Looking at breadth among sectors can show a bit of a misleading picture as so much market cap is concentrated into just a few sectors, while four other sectors (Energy, Materials, Real Estate, and Utilities) all have weightings of 3% or less in the S&P 500.  Broadening out the picture a bit more, the chart below breaks down Monday’s performance by Industry Groups.  At this level, breadth was still weak on Monday but not as bad as the picture on the sector level suggests.  While five industry groups finished the day up over 1%, there were still seven that finished the day down over 1%.  Still a large number, but not quite as extreme as the sector numbers would suggest.  Like what you see? Click here to view Bespoke’s premium membership options for our best research available.

The S&P 500 finished up 0.84% on Monday and the index had mega-cap stocks to thank for its gains as the majority of stocks in the S&P 500 actually finished the day lower.  In fact, Amazon (AMZN) was the best performing stock in the S&P 500 having its best day since 12/26/18 rallying just under 8%.  That gain alone was responsible for nearly 40 basis points of the S&P’s 84 bps gain.  That means Amazon accounted for just under half of the S&P 500’s gains today. That compares to the rest of the trillion-dollar club—Microsoft (MSFT), Apple (AAPL), and Alphabet (GOOG)—which added a collective 45.81 bps to the S&P 500. Again that is an impressive contribution when compared to the other 174 stocks that rose today, which collectively only added 53.13 bps. The remaining stocks dragged on the index by 54.45 bps. The stocks that dragged the index down the most included energy names like Exxon Mobil (XOM) and Chevron (CVX), Medtronic (MDT), Philip Morris (PM), and Coca Cola (KO). In other words, big days for the largest stocks helped to dramatically boost performance masking what was overall mediocre day for most stocks.  Click here to view Bespoke’s premium membership options for our best research available.

Last week was a strong one for economic data with more than half of releases either beating estimates or improving from the prior period for those with no forecasts. The Treasury’s monthly budget statement was the only release on Monday, and it showed a massive increase to the deficit. Small business optimism tipped back above 100 the following day, also coming in above expectations of 97.8. CPI was the other major release on Tuesday.  More inflation data followed up with import and export prices on Wednesday. Both showed further declines in June.  The New York Fed’s Manufacturing reading for July exceeded estimates, rising to 17.2 while the neighboring Philly Fed showed a slight decline from 27.5 24.1. June’s Retail Sales report for June showed strong growth in sales across the board with both the headline and core measures beating estimates. Homebuilder sentiment was also strong in a later release that same morning, rising from 58 to 72. Some disappointing housing numbers rounded out the week with misses for both starts and permits.

This week, economic data will take a backseat with a lighter calendar as earnings take center stage. Although there was nothing released today, there are a dozen releases scattered throughout the rest of the week. Included in these releases will be more housing data in the form of new and existing home sales and FHFA home prices, claims, the Kansas City Fed’s activity index, and preliminary Markit PMIs. Click here to view Bespoke’s premium membership options for our best research available.

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.

While you’re here, join Bespoke Premium for 3 months for just $95 with our 2020 Annual Outlook special offer.

COVID

Consumer Appetite for Cars, Homes Bolsters U.S. Economy by Sarah Chaney (WSJ)

Recent data has suggested strong demand for items that are typically financed thanks to rock-bottom interest rates like 30 year mortgages, which fell below 3% for the first time ever this week. [Link; paywall]

As Europe’s Economies Reopen, Consumers Go on a Spending Spree by Liz Alderman (NYT)

Payroll subsidy programs in Europe designed to function similarly to – though typically more comprehensively than – the US PPP program have helped keep consumers primed for a recovery in spending. [Link; soft paywall]

Booze

Teens are dressing up as mask-wearing grandmas to try to score alcohol by Marisa Dellatto (NY Post)

With masks making it harder to identify each other, underage drinkers have kitted themselves out as the elderly in an effort to obtain drink. [Link; auto-playing video]

Diageo to launch Johnnie Walker whisky in paper bottles in 2021 (Reuters)

Paper bags are out, paper bottles are in. Diageo will ship plastic-free whiskey bottles starting next year as the company tries to cut down on plastic waste; the bottles are fully recyclable. [Link]

Media

You’re Doomscrolling Again. Here’s How to Snap Out of It. by Brian X. Chen (NYT)

Bad news related to politics, COVID, or other negative events can be a semi-addictive pursuit, but there are ways to break out of the parade of darkness that so easily dominates social media feeds. [Link; soft paywall]

Newsroom or PAC? Liberal group muddies online information wars by Alex Thompson (Politico)

A new initiative is working to push liberal perspectives into social media feeds via targeted advertising, giving the appearance of being an unbiased news source. [Link]

Amenities

Desperate for a pool? You can now rent a private one by the hour by Diana Olick (CNBC)

A new app offers users the opportunity to rent out backyard pools for a price, giving families the opportunity for a little fun in the sun without laying out five figures to re-make their backyard permanently. [Link]

Connecticut Bet Big on the Suburbs. That Might Finally Pay Off. by Joseph De Avila and Jon Kamp (WSJ)

Connecticut faced years of challenges as residents opted not to live in suburbs near New York, but the COVID shock is putting new life in the leafy greenery of and spacious living that were shirked in the post-crisis years. [Link; paywall]

Regional Affairs

Why North Carolina Is the Most Linguistically Diverse U.S. State by Dan Nosowitz (Pocket/Atlas Obscura)

North Carolina’s geography has driven a unique milieu of regional English dialects which are in the process of flattening towards more standard regional or national accents. [Link]

Chance of big San Andreas earthquake increased by Ridgecrest temblors, study suggests by Rong-Gong Lin II (LAT)

Recent earthquakes in Ridgecrest may be dangerous signs about the chance of further earthquakes around the San Andreas fault, specifically the Garlock fault which runs along the Mojave Desert. [Link]

Investing

The False Bargain of Passive Investing (Applied Finance Capital Management)

An argument that passive indices generate negative alpha compared to other options, which may hold water but ignores the problem of identifying outperformance ex-ante as opposed to via backtest. [Link]

COVID

Universal Masking to Prevent SARS-CoV-2 Transmission—The Time Is Now by John T. Brook, Jay C. Butler, and Robert R. Redfield (JAMA Network)

The authors use mask orders for health care workers and later all persons in-hospital to identify changes in transmission rate thanks to masks. Simply put, universal masking makes a huge difference for transmission rates even in environments with high viral load. [Link]

Weird News

155-Acre College Campus (Maltz Auctions)

Ever thought of owning your own college? For the low price of $3mm (minimum bid), you can have a 155 acres in rural Vermont complete with library, solar panels for power, a biofuel heating system, and more! [Link]

Comedy

Desus And Mero Have Conquered Comedy by Carrie Battan (The NYer)

A profile of the dynamic Bronx duo whose unique brand of rapid-fire, familiar, and self-conscious comedy has achieved legendary status. [Link; soft paywall]

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Have a great weekend!