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.

Fed Papers

The Role of Global Supply Chains in the Transmission of Shocks: Firm-Level Evidence from the 2011 Tōhoku Earthquake by Christoph E. Boehm, Aaron Flaaen, and Nitya Pandalai-Nayar (FEDS Notes)

A summary of the impact on output at the firm level following the huge 2011 earthquake which temporarily brought Japan’s economy to its knees. [Link]

Understanding the New Normal: The Role of Demographics by Etienne Gagnon, Benjamin K. Johannsen, and David Lopez-Salido (Federal Reserve Finance and Economics Discussion Series)

The authors introduce a demographic model of the US economy that explains almost all (1 and 1/4 points) of the real GDP and neutral real rate declines since 1980. [Link; 74 page PDF]

Brexit

Theresa May’s game of Brexit chicken by John Springford (Prospect)

An optimistic read on the approach Prime Minister May has taken to her pre-Brexit negotiations ground-work laying. Game theory suggests that the hand she’s trying to play is extremely weak, but those are the cards she’s been dealt by her predecessor, the British public, and even the markets. [Link]

Rude Awakening in the U.K. Over Brexit Cost Sends Pound Down by Simon Kennedy (Bloomberg)

An overview of the brutal weak that was for GBPUSD, with rhetoric from the ruling Conservatives heating up as the party tries to figure out just how it will negotiate. [Link; auto-playing video]

Uber

Uber sets its sights on long-haul trucking and brokerage markets by Jeff Berman (Logistics Management)

With the purchase of a small self-driving truck start-up, the transportation unicorn has set eyes on a $700 billion market in truckload brokerage. But as with its other ventures – self driving cars, even Uber Eats – can the deployment of new tech be scaled? [Link]

How Uber Plans To Conquer The Suburbs by Priya Anand (BuzzFeed)

The appeal of ride-hailing is obvious in Manhattan, but what good does it do where there are already almost as many cars as people? Solving this question is not only a marketing problem, but also one of infrastructure. [Link]

Trouble In The Valley

The Not-So-Wholesome Reality Behind The Making of Your Meal Kit by Carolina O’Donovan (BuzzFeed)

Any business expanding capacity rapidly in a short period of time is going to face challenges. In that respect, we think the travails that Blue Apron has faced are wholly unremarkable. That doesn’t make them any less eye-opening or illustrative of the challenges that exist scaling a physical business, though. [Link]

Meal-Delivery Startups Show Tech, Disrupted by Conor Sen (Bloomberg View)

Building on O’Donovan’s original article, Sen explores the implications of challenges for scaling venture-backed companies in a physical, rather than digital, world. [Link]

Do We Really Need 2,000 Subscription Box Services? by Polly Mosendz and Kim Bhasin (Bloomberg)

Food, dog treats, clothing, beauty products, shaving gear, accessories, the list of subscription goods services never ends. Our own Facebook, Instagram, and Twitter feeds are filled with ads that promise happiness is a monthly box away…but how far will this trend go? [Link]

Sam Altman’s Manifest Destiny by Tad Friend (The New Yorker)

The man running a tech bootcamp more exclusive than Stanford is a pretty unique character. Efforts to lift the veil on a simulation we’re all supposedly living in, “guild of hyper-capitalist entrepreneurs who will help one another fix the broken world”, and so-forth. [Link]

NFL Ratings

NFL’s ‘Monday Night Football’ Keeps Dropping In Ratings by Brandon Katz (Forbes)

It’s been less than two seasons since football viewership made new all-time highs, but that’s reversed spectacularly in the 2016 season. [Link; auto-playing video]

Fewer NFL Viewers Force TV Networks to Give Away Ads by Gerry Smith and Lucas Shaw (Bloomberg)

More statistics on the soft viewership numbers for the league, including a summary of more bulk discounts for large buyers of commercial air time. [Link]

Idiosyncratic Risk

Sell-off in European banks fails to hit US peers by Ben McLannahan (FT)

Better-capitalized, more liquid, and subjected to more aggressive stress testing, US banks are holding up much better than European peers recently. [Link; paywall]

Hurricane Matthew has potential to trigger cat bonds & ILS: RMS (Artemis)

An overview of the potential market impact for Hurricane Matthew. While the storm took a much less serious path than it was initially expected to (40 miles difference in the path of the eye wall made a huge difference), the post is still a fascinating look at how the catastrophe and insurance-linked bond market works. [Link]

New Frontiers

After War and Tumult, the Palestine Stock Market Joins the World by Sharon Wrobel and Fadwa Hodali (Bloomberg)

48 companies trade on the tiny Palestine Stock Exchange Al Quds Index, which recently was added to FTSE’s list of Frontier market indices, a major accomplishment for the tiny and nascent Palestinian state. [Link]

Indexing

BlackRock Cuts ETF Fees by Sarah Krouse (WSJ)

Widely-held index ETFs run by BlackRock are seeing fee reductions from 7bps or 8 bps to 4 bps in an effort to reduce costs as far as they’ll go. It’s never been cheaper to get broad exposure to financial assets, that’s for sure. [Link; paywall]

The ETF with the 0.00% Fee by Jason Zweig (WSJ)

While BlackRock has dropped fees to 4 bps, others are already at 0.  And why stop there?  Will funds one day offer negative fees that pay their invest? [Link]

Labor Markets

JetBlue Is Turning Supermarket Clerks and Baggage Handlers Into Pilots by Mary Schlangenstein (Bloomberg)

Facing a shortage of 15,000 aviators over the next ten years, the airline industry is scrambling to invest in qualified pilots, increasingly from scratch. [Link]

Investing

Shiller’s Powerful Market Indicator Is Sending a False Signal About Stocks This Time by Justin Lahart (WSJ)

A look into methodological issues with the Shiller CAPE, which is exposed to changes over time in how companies are told to run their accounting due to shifting rules and guidelines. [Link; paywall]

Here’s what Warren Buffett knows about people that you should too by Jonathan Burton (MarketWatch)

A look at the shifting psychological tone of Buffet’s letters to investors over the years and how pre-suasion can be used more broadly. [Link]

Media Matters

Q&A: The journalist who outed bestselling author Elena Ferrante by Pete Vernon (Columbia Journalism Review)

An Italian investigative reporter recently revealed the previously secret identity of an Italian woman using the pen name Elena Ferrante, selling novels by the millions. [Link]

In our Q4 Outlook report released last week, we highlighted the fact that while valuations for equities were high, there is case to be made that relative to alternatives, equities were attractively valued.  The TINA (There Is No Alternative) argument, as it’s called, suggests that even with equities trading at rich valuations, they are attractive compared to yields on fixed income securities which are at or near historic lows.  The fact that more than 60% of the stocks in the S&P 500 pay a higher dividend yield than the 10-Year US Treasury illustrates one example of this idea.

The problem with the so-called TINA argument is that when interest rates rise as they have this week, the alternatives can quickly start to look a lot less attractive.  A case in point is the Utilities sector.  Over the last several days, as the long end of the curve has steepened, high-yielding stocks like Utilities have been under steady selling pressure, and as of yesterday’s close the sector finished in the red for the tenth straight trading day.

Going back to 1989, the current ten-day losing streak for the Utilities sector is tied for the longest on record.  As shown in the chart below, the only two other times the sector traded lower for ten straight days was in January to February of 1992 and August to September of 2002, so it is basically a once in a decade occurrence.  Looking at the long-range chart, both of those periods proved to be pretty good long-term buying opportunities, but when we look at them in more detail, the ten-day streak did not correspond to an exact low.  In the 1992 period, the sector declined another 3% over the course of the following two-months (to 4/8/92), while in the fall of 2002 the sector fell another 24% over the ensuing month (10/9/02) before it finally made its low.  We would note that the 2002 streak coincided with a period of overall weakness in equities and in the aftermath of the accounting scandals of Enron and WorldComm, which were two of the worst accounting scandals in US history.  With those events, you could understand why Utilities and utility-like stocks weren’t exactly viewed in the best light.

The basic takeaway from the recent decline in stocks typically known for their dividends is that stocks with high dividend payouts are attractive until they aren’t, at which point they can quickly fall out of favor.  So when you are considering an investment in a dividend paying stock, if your only reason for the decision is because “it pays a good dividend,” you should probably look elsewhere.  To this end, we take a different approach to dividend paying stocks in our Dividend Model Portfolio.  Rather than focusing on the highest payers, we look at those stocks that have above average payouts relative to other dividend payers in their sector and have a history of consistently not only maintaining, but also increasing, their dividends.  Additionally, the percentage of earnings that they pay out in the form of dividends has typically been low or at a reasonable level (less than two-thirds of earnings).  Finally, in an attempt to avoid stocks that have high yields because of falling stock prices, we also incorporate a filter to weed out stocks that have been poor performers relative to the overall market.

Our Dividend Model Portfolio was launched in July 2014 and has returned 23.34% on a total return basis since inception compared to a total return of 14.39% for the S&P 500.  To view the current makeup of the portfolio, become a client by signing up for a monthly Bespoke Premium membership and get 10% off for life ($89/month).  (As always, past performance is not a guarantee of future results.)