Get Bespoke’s 2017 Outlook Report with a 30-day free trial to Bespoke’s premium research!  Click here to learn more.

Short interest figures for the end of November were released after the close on Friday.  As one might expect given the market’s rally during the month, negative bets declined pretty much across the board.  One notable aspect of the month end data, though, concerns the Energy sector.  At a level of 9.88%, the average level of short interest as a percentage of float (SIPF) for energy stocks is the highest of any sector, but it marks the first time in more than a year that the sector’s average SIPF level has been under 10%.  The chart below compares the Energy sector’s average SIPF level to its price going back to 2007.  While the sector has always had one of the highest average short interest levels, heading into 2015, its average SIPF level was closer to 7%.  As oil prices plunged, average short interest levels surged and peaked at 12.55% just as oil prices were bottoming earlier this year.  Since then, shorts have been steadily covering as prices have risen.  Based on the sector’s historical levels of short interest, though, there is still plenty of room for these levels to decline as along as oil prices remain stable.

Despite the sub-10% average level for the entire sector, a number of energy stocks still have extremely elevated levels of short interest.  The table below lists the eighteen stocks in the sector where short interest levels exceed 15% of the individual stock’s float.  Of these eighteen, seven have more than a quarter of their float sold short, including large cap Transocean (RIG) at 26.98%.  The stock has rallied 28% this year, but because crude oil prices remain below levels where offshore exploration is deemed profitable, the stock still has more than its fair share of skeptics.

Get Bespoke’s 2017 Outlook Report with a 30-day free trial to Bespoke’s premium research!  Click here to learn more.

Strong equity markets haven’t just been confined to the US in the last several weeks.  In fact, Russian equities (cue conspiracy theories) have put up more than twice the gain of US equities since the election with the Micex up over 10%, and the US ETF of Russian stocks (RSX) up over 14%.  Last week, European equities entered the fray as the STOXX 600 broke out above resistance around the 350 level to its highest level since the opening days of 2016.  The chart for the STOXX 600 is looking quite constructive these days as the index looks to be breaking out of a multi-month consolidation range after breaking its downtrend back in August.

Although European stocks have been rallying, it has been on the back of a weaker currency.  Therefore, if you are a US investor holding European stocks, the gains in prices have been offset by a weaker currency.  Two years ago, the Euro was at 1.25 versus the dollar.  Since then, it has declined over 15% to around 1.05 versus the dollar.  This morning, the currency has seen a bit of a bounce at the 1.05 support level, but just like resistance weakens the more often it is tested to the upside, support also tends to lose strength the more often it is tested to the downside.

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.

Investing

Is the Yale Model Broken? by Alexandra DeLuca (AI-CIO)

A sure-fire method of outperforming used to involve some exposure to stocks and bonds but much heavier bets on illiquid private investment. While still working for some allocators, cheap beta and a dearth of alpha are turning many away from that angle. [Link]

Hedge Funds Get Big or Go Home by Lisa Abramowicz (Bloomberg)

A basic summary of the hedge fund industry landscape, with large firms attracting more flow of investment capital and charging less. [Link]

A Better Theory to Explain Financial Bubbles by Noah Smith (Bloomberg)

An overview of the “extrapolative expectations” theory of asset pricing, one that breaks the traditional assumption of modern economics (rational expectations). [Link]

Ratings

S&P Just Demolished One Big Distinction Between Emerging and Developed Markets by Sid Verma (Bloomberg)

The stability of developed market politics has always been a reasonable argument for higher ratings on bonds issued by those governments. But now, S&P sees little distinction from the chaotic evolution of politics in rich countries versus those in faster-growing, lower-income nations. [Link]

AAA Grades Return for Securities Backed by Riskier Mortgages by Matt Scully (Bloomberg)

In a significant post-crisis landmark, bonds linked to newly-issued mortgages without a government guarantee are being given a AAA rating. However, borrowers are hardly the subprime customers whose loans were stuffed in MBS in the mid-2000s; the average FICO for this deal is 712. [Link]

Foreign Affairs

What’s Bundespraesidentenstichwahlwiederholungsverschiebung? (BI/AP)

Austria’s word of the year, struck in famously compounding and confounding German, is “postponement of the repeat of the runoff of the presidential election”. [Link]

Hayao Miyazaki blasts animators on NHK over AI-generated ‘zombie’ clip by Roland Schichijo (Tokyo Reporter)

In a remarkably candid response to an animator’s experiment, famed Japanese animator Miyazaki (Spirited Away, Howl’s Moving Castle, Princess Mononoke) was incensed by the creation of a hypothetical creature that could feel no pain and thus walked using its head as a limb.  [Link]

Decay

Has Appalachia Lost Fewer People Than East Germany? by Lyman Stone (Medium)

We’ll admit that we know not everyone likes reading enormous, data-driven demographic discussions about population, economic outcomes, and regional destinies. We do from time-to-time and if you do too you’ll enjoy this. [Link]

U.S. life expectancy declines for the first time since 1993 by Lenny Bernstein (WaPo)

The CDC announced this week that death rates spiked for a number of demographics and causes across the country, sending the overall life expectancy for the US population down (marginally) for the first time in nearly a generation. [Link; paywall]

Property Taxes

Rationale for Texas’ Largest Corporate Welfare Program was a ‘Typographical Error’ by Patrick Michels (Texas Observer)

Back in the early 2000s, Texas decided to charge companies a lot less in property taxes, and the decision to do so was likely made because of a typographical error in a little-read business journal. [Link]

How Big-Box Retailers Weaponize Old Stores by Shannon Pettypiece (Bloomberg)

Assessing going concerns at the market value of shuttered stores elsewhere in a state is causing havoc on the finances of small towns and counties across America. [Link; auto-playing video]

Politics

Trump Team Broadly Backs Efforts to Rein In Fed, Hensarling Says by Rich Miller (Bloomberg)

Congressional Republicans are fired up about the idea of restricting monetary policy to a rule of the Fed’s own choosing. The specific tack a Trump administration takes towards the Fed is still an open question, though. [Link]

Google Looks for ‘Conservative Outreach’ Manager After Trump Election Win by Mark Bergen (Bloomberg)

Google is hiring a lobbyist (the role of its “Public Policy” team) in DC. Given the size and scale of the company’s operations, that’s probably not a horrible idea…though there’s no word on the impact on efforts to drain any swamps. [Link]

Strange News

On the Internet, to Be ‘Mom’ Is to Be Queen by Jessica Bennett (NYT)

Who knew that parents were cool? For many in the burgeoning post-Millennial generation, mothers are especially viewed as a symbol of cache. [Link; soft paywall]

Sofía Vergara sued by her own embryos by Emily Smith (NYP Page Six)

A former fiancé is suing the “Modern Family” star on behalf of two fertilized embryos. We’re still having a hard time keeping the ins and outs of this one straight. [Link]

Sterling Flash Crash

Citi trader deepened October’s pound ‘flash crash’ by Katie Martin and Caroline Binham (FT)

While not causing the sudden drop in GBP a couple months ago, Citi’s desk definitely made volatility in the seconds that sterling spent at multi-decade lows worse. [Link]

Pounded By The Pound: Sports Direct’s Hedges and the Cable Flash Crash by Josh Giersch (Josh Reviews Everything)

A former FX options traders’ analysis of one corporate hedge that went decidedly sour thanks to the huge sterling plunge described above. [Link]

Trade

The (No Longer) Almighty Soybean by Brad Setser (Council on Foreign Relations)

Starting with soy but moving on elsewhere in the US goods trade universe, Setser makes a compelling case that the US trade deficit is getting ready to widen quite dramatically in coming months and quarters. [Link]

Each month, Bespoke runs a survey of 1,500 US consumers balanced to census.  In the survey, we cover everything you can think of regarding the economy, personal finances, and consumer spending habits.  We’ve now been running the monthly survey for more than two years, so we have historical trend data that is extremely valuable, and it only gets more valuable as time passes.  All of this data gets packaged into our monthly Bespoke Consumer Pulse Report, which is included as part of our Pulse subscription package that is available for either $39/month or $365/year.  We highly recommend trying out the service, as it includes access to model portfolios and additional consumer reports as well.  If you’re not yet a Pulse member, click here to start a 30-day free trial now!

Below we highlight the results of questions we ask regarding current views of the stock market, which is just one of literally hundreds of data points included in each monthly report.  The first chart shows this month’s reading with each response broken out for the subset of respondents who report themselves as investors and their view of the stock market.  While roughly 45% of respondents have a neutral view of the market, about 38% have a positive view and only about 15% have a negative view.  It is worth noting the breakdown of these responses because although this month’s reading is the strongest we’ve seen in our survey’s history, it is still only slightly above neutral.

The second chart shows our highest ever unrounded tracker reading (3.274) with only two readings from spring of 2015 matching this number on a rounded basis.  Previously, those high ratings for stock market optimism occurred right near an intermediate term peak in the market that stood for over a year.  Based on our survey’s history and the recent price action since the US elections, we think it’s fair to describe this enthusiasm for equities as a contrarian signal that things might be getting carried away.  Whether it’s the election of a Republican, simply price action, positioning or seasonality, the current run higher in equities seems slightly excessive and the enthusiasm shown by our respondents seems to confirm that suspicion.  However, again it is worth taking into account that although this is the strongest reading we have seen to date, it still comes in only slightly above 3, which is a neutral rating.