After a weak start to the week on the economic front, homebuilder sentiment for the month of May surprised to the upside.  According to the NAHB, homebuilder sentiment rose from a level of 68 (which was also the consensus expectation) to 70, which marks the second highest monthly reading of the recovery.  The table to the right and charts below break out this month’s report by region and category.  In terms of sales and traffic, homebuilders are seeing and expecting a pickup in sales, even as traffic declined slightly.  In the case of Future Sales, sentiment hit its highest level since June 2005, so a cycnic could still argue that the majority of the improved sentiment is built on optimism rather than actual conditions, although we would note that the gauge of Present Sales is also near a high.

On a regional basis though, every region besides the Midwest saw a pickup in sentiment this month.  The biggest gain this month was in the Northeast as the spring selling season kicks into gear.  That said, sentiment in this region is still well off its highs of the cycle.  The only region of the country where homebuilder sentiment hit a new cycle high was in the South.

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Wall Street analysts — the people that make all those buy/sell/hold recommendations — take a lot of heat.  Over the years, investors have become more and more skeptical of analyst calls, which these days are viewed more as lagging indicators than anything else by the self-proclaimed “smart money.”

For whatever reason, though, analysts have been right on the money so far in 2017.  In the chart below, we’ve broken up the S&P 500 into deciles (10 groups of 50 stocks each) based on a stock’s consensus analyst recommendation at the start of the year.  Decile 1 all the way to the left of the chart contains the 50 stocks that were most loved by analysts at the start of 2017.  Decile 2 contains the next 50 most loved stocks, and so on and so forth until you get to decile 10, which contains the 50 stocks that were the least loved — or most hated — by analysts at the start of the year.  For each decile, we’ve calculated the average year-to-date percentage change of the 50 stocks.

As shown in the chart, the 50 most loved stocks by the analyst community at the start of the year are up an average of 11.37% YTD.  The next four deciles have posted strong average YTD gains as well, and then once you cross into the bottom half of the S&P 500, performance gets weaker.  In fact, the 50 most hated stocks by analysts at the start of the year are actually down an average of 0.74% YTD.

So has the analyst community suddenly gotten a lot smarter and much better at picking stocks?  Or is this an example of the popular saying that “correlation does not imply causation?”

Our best guess is that analysts are not doing anything differently this year than they’ve always done.  They still like the stocks with the healthiest fundamentals and/or growth prospects and dislike the stocks with the weakest fundamentals.  It’s just that investors this year are buying the stocks with the healthiest numbers and avoiding the stocks with the weakest numbers.  We’ve indeed seen a huge spike in investor optimism since the election last November based on a number of surveys, and this probably means that more investors are putting money to work.  Surely, some of this new money on the retail side could be flowing into the stocks that their brokers’ analysts like most, so that could also be a factor.

Again, for whatever reason, the analyst community is off to a hot start in 2017, so some back-patting is warranted.  We have a hunch, though, that eventually these numbers will mean revert, just like most strategies always do.

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It was a nice run while it lasted.  Following a surge in optimism on the part of New York Manufacturers in the wake of November’s election, sentiment in the region has now given up all of the post-election gains and moved back into negative territory.  In this month’s Empire Manufacturing survey, the index of current general business conditions dropped for the third straight month.  While economists were expecting the headline index to come in at a level of +7.5, the actual reading came in at -1, which was the lowest level since last October.  While General Business conditions declined, manufacturers are still optimistic as expectations were pretty much unchanged at 39.3.

What was really disheartening about this month’s report was that there were really no bright spots.  The table below breaks down this month’s report by each of the survey’s sub-indices.  As shown on the left side of the table, in terms of current conditions, every category declined month/month.  To find the last time that happened, you have to go back exactly four years to May 2013.  Expectations didn’t fare much better as just four categories showed an uptick while five declined.  This is certainly not the type of economic data you want to see to kick off the week.

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Following an agreement between OPEC and Russia to extend oil production cuts out to March 2018, crude oil prices are trading at their highest levels in two weeks and also back near $50 per barrel.  From a technical perspective, though, today’s price action is much more noteworthy.  After failing to break out above resistance in late February (point A in chart), crude oil prices fell sharply, bounced at trendline support (point B), then made a lower high (point C).  Following that lower high, oil sold off again, but this time that trendline offered little in the way of support (point D).  Normally, when that type of support breaks, it turns into resistance going forward, but as crude oil prices have rallied overnight, the commodity is poised to move not only back above that trendline, but also back above its 50 and 200-day moving averages all in one shot.  If it holds, that would be killing three birds with one stone!

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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.

Fiscal Matters

Trump’s Biggest Hurdle on Tax Cuts? Congress’s Daunting Calendar by Sahil Kapur (Bloomberg)

Large-scale tax reform (or any tax reform for that matter) is threatened by the cluttered schedule facing Congress, especially the Senate. [Link; auto-playing video]

Macron calls for radical reform to save euro by Ferdinando Giugliano and Sarah Gordon (FT)

Not a new story (dated to 2015) but an illuminating one on how the new President of France views the prospects for European fiscal integration. [Link; paywall]

New Tech

Apple Will Announce Amazon Prime Video Coming To Apple TV At WWDC by John Paczkowski (BuzzFeed)

Banned since 2015, Amazon’s video streaming platform for Prime customers will once against be available for Apple TV users. [Link]

Tesla’s Solar Roof Sets Musk’s Grand Unification Into Motion by Tom Randall (Bloomberg)

Elon Musk’s Tesla is taking deposits for roof tiles that operate as solar panels, moving closer to a full suite of transportation and home products that are entirely off the grid. [Link; auto-playing video]

Bonkers

There Are Now More Indexes Than Stocks (Bloomberg)

Remarkably, there are more indices of US stocks than there are US stocks, with more than 5,000 different indices flooding the market. [Link]

Inside VW’s Campaign of Trickery by Jack Ewing (NYT)

Astounding details on how deep and pervasive the effort to deceive US emissions tests was at Volkswagen, with the key decisions dating back as early as 2006. [Link; soft paywall]

Banking

Watch out Wall Streeters: Your jobs are moving to North Carolina (Reuters/Business Insider)

Swiss investment bank Credit Suisse has announced it will move 1200 jobs to the land of the Tar Heel, supported in part by grants from the NC government. [Link]

JPMorgan Tells Banks to Partner Up as U.S. Deposit Drain Looms by Matthew Monks (Bloomberg)

With the Fed considering an end to reinvestment of the QE bond portfolio, excess reserves are expected to fall and with them deposits. [Link]

Diet

Why Everything We Know About Salt May Be Wrong by Gina Kolata (NYT)

Studies done on Russian cosmonauts indicate that consuming higher volumes of salt actually leads to weight loss rather than weight gain. [Link; soft paywall]

49^th Parallel

We Could Have Been Canada by Adam Gopnik (New Yorker)

What if the American Revolution hadn’t happened? Could we have ended slavery sooner, avoided the Civil War, and ended up more like Australia or Canada? [Link]

Correcting Frameworks

The Robots Have Taken Over (Our Brains) by Matt Busigin (New River Investments)

The current obsession over job-stealing robots isn’t grounded in economic data and completely fails to see the forest for the trees. [Link]

Web Design: First 100 Years by Maciej Cegłowski (Idle Words)

A brilliant talk that illustrates the importance of diminishing marginal returns and functional design while giving an excellent blueprint for the future. [Link]

Sports

A Home Playoff Game Is A Big Advantage — Unless You Play Hockey by Neil Paine (538)

Astoundingly, home playoff hockey teams win at a lower percentage than regular season home teams. [Link]

Have a great Sunday!

Monday, May 8th marked the six-month point since Trump was elected on 11/8/16.  Below is a look at our asset class performance matrix, which highlights the total return of a wide variety of ETFs.  The three time frames used in this edition of the matrix are since the election (11/8/16), year-to-date, and this week.

As shown, equities in the US faded a bit this week, but they’re still up massively since the election.  Performance for foreign markets was scattered this week, with Brazil surging 5.7% and Spain falling 3.6%.  Commodities had a bounce back week, but they’re still down since the election with the exception of UNG.  Treasury ETFs saw a slight week-over-week bounce, and they’re now solidly in the green on the year even though they’re still down since the election.

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