“Measures of consumer optimism are also weak, offering no hope of significant gains in spending as the savings rate increases. There is no exuberance to be found, a flatness in optimism pervades the economy, consistent with the plodding growth characterizing this recovery.

There is no leadership in Washington, no articulation of a path to a better future, no evidence that policy-making is coordinated or focused on promoting growth or job creation. Important government institutions are mired in scandal and inaction, voters have lost confidence (20 percent of consumers think government policy is “good”, 41 percent think it is “poor”). The prospects that strong, unifying leadership will emerge after the election appear to be poor.”

That statement above really doesn’t give you a warm and fuzzy feeling towards the economy, does it?  In spite of the weak commentary, today’s release of the monthly NFIB Small Business Optimism Index actually saw a slight bounce from last month.  After making its largest peak to trough decline of the recovery, the index rose from 92.6 up to 93.6 in April, which was 0.6 above expectations.  Even after this month’s bounce, the index remains well below its long-term average of 96.0 going back to 2000.

Within this month’s report, the two biggest problems facing small business owners are the twin threats of Taxes and Government Red Tape, which were cited by 21% and 20% of respondents, respectively.  Next on the list this month was Quality of Labor (12%), which moved into third place due to fewer business owners citing Poor Sales (11%) as their number one problem.  In terms of labor issues, 46% of respondents reported that there were few or no qualified applicants available for the positions they were looking to fill.  With fewer qualified applicants, business owners may find the need to ‘pay up’ for job candidates, and we saw some signs of this as 6% of business owners cited labor costs as their number one problem (up from 5% last month).  Finally, in this month’s Bespoke Consumer Pulse report, we saw a meaningful uptick in overall healthcare costs, including insurance premiums.  That increase in insurance costs was also evident in this month’s NFIB survey where the percentage of respondents citing “cost of insurance” increased from 8% to 10%.
 

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Stocks that did the best during the market’s surge from February 11th through April 20th have gotten slammed over the last few weeks.  Below we have broken the S&P 1500 (which contains large-caps, mid-caps, and small-caps) into 10 groups (deciles) of 150 stocks each based on stock performance during the 2/11-4/20 market rally.  Decile 1 marked as “Best” contains the 150 stocks that went up the most during the rally, while decile 10 marked as “Worst” contains the 150 stocks that went up the least during the rally.  For each group, we show the average stock’s percentage change since the April 20th high.

As shown, the 150 stocks that surged the most during the rally are down an average of 4.9% since April 20th.  That’s by far the worst performance of any decile.  At the same time, the groups of stocks that went up the least during the market’s rally are outperforming, with deciles 8 and 9 actually averaging gains.

For anyone that got long stocks that were showing the most relative strength in mid-April, it has been a painful few weeks watching them get slaughtered.  At the same time, the stocks that went nowhere during the market’s rally are all of a sudden heating up again.  This type of rotation based on performance can be extremely tough on active investors, and it’s not going to help the already high percentage of funds out there that are underperforming their benchmarks.

The direction of the US dollar and its impact on stock prices has been an area of contentious debate over the years.  On one side, you have the pro-dollar crowd, which says a strong dollar is good for the equity market as it shows confidence in the US economy and creates demand for assets denominated in dollars. On the other side of the argument, you have the anti-dollar crowd which argues that a weak dollar makes exports of US based multi-nationals more attractive on a global stage.

Looking at the recent interaction between the US dollar and equity prices, it would appear that the anti-dollar crowd seems to have the upper end of the argument.  The chart below shows a comparison of the US Dollar Index and the S&P 500 over the last six months.  As shown in the chart, as the US dollar was in a sideways range at the highs of its six-month range from November through January, US equities sold off hard.  It wasn’t until early February when the dollar started to sell off that equities managed to rally.

While the rally in equities off the February lows has been accompanied by a falling dollar, taking a little bit of a longer-term view, the inverse relationship between the two isn’t nearly as clear-cut.  Looking at the last two years, the dollar and stock prices have been more positively correlated.  This chart from Friday’s Bespoke Report shows that from mid-2014 through early-2015, both the dollar and the S&P 500 rallied and were in steady uptrends.  Then in early 2015, shortly after the dollar peaked and traded in a sideways range, the S&P 500’s rally ran out of steam.  If the weaker dollar was, in fact, a positive for US equities, instead of a period of heightened volatility during which the S&P 500 is trading right where it was when the dollar index peaked more than a year ago, one would expect to see equity strength, which has certainly not been the case.  While there are times where the opposite has been the case, in the vast majority of longer term periods, history has shown that a stronger dollar has been better for US equities than a weaker one.

More than 2,000 companies have reported their Q1 2016 numbers so far this earnings season, and below is a look at the percentage of companies that have reported stronger than expected EPS and revenues.  The first chart below shows the bottom-line earnings beat rate (% of companies posting EPS that are above consensus analyst estimates) by quarter going back to 1999.  As shown, so far this season, 61% of companies have beaten estimates.  As recently as last Monday, the beat rate for this season was tracking at 65%, which would have been the strongest reading since 2010.  But last week’s reports really brought down the overall beat-rate tally, and now this season is tracking below last season’s.

The top-line revenue beat rate is much harder for companies to massage each quarter, and that’s why many investors put more stock in it over the earnings beat rate.  So far this season, 55% of companies have beaten consensus analyst revenue estimates.  That’s six percentage points below the bottom-line EPS beat rate, but it also would be the strongest revenue beat rate since Q4 2014 if it can hold.

Wal-Mart (WMT) reports earnings in the middle of next week, and Wal-Mart’s report is the unofficial end to earnings season.  Hundreds more companies will report between now and then, so there’s still time for these readings to shift a bit.

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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.

Business Model Troubles

The Hazards of Financial Engineering by James Mackintosh (WSJ)

An overview of the efforts by various companies (including the SUNE complex and Valeant) to use debt and complexity to engineer stock gains. [Link, paywall]

This area of startup investing has fallen off a cliff by Matt Rosoff (Business Insider)

As labor markets have tightened, start-ups best described as “Uber, but for…” are seeing much lower levels of funding. [Link]

Inside Palantir, Silicon Valley’s Most Secretive Company by William Alder (Buzzfeed)

An overview of the secretive security company run founded by Peter Thiel, which has run into trouble retaining clients and generating revenue. [Link]

Kick Your New-Store Habit, Retailers by Shelly Banjo (Bloomberg)

An overview of the glut in retail square footage, which is more than twice as high per capita in the United States as in the next highest developed market (Australia). [Link]

Lending Disruption

The Uberization of Banking by Andy Kessler (WSJ)

An interview with SoFi founder Mike Cagney. Sample quote: “The overbearing regulator that was Elizabeth Warren’s brainchild thus far hasn’t come down on SoFi”. [Link]

SoFi offers equity to tempt new partners by Ben McLannahan (FT)

Running out of funding options, SoFi is hoping that lenders will offer commitments to fund new loans in exchange for equity in the fast-growing company. [Link, soft paywall]

Prosper Marketplace to Cut Jobs and Shuffle Executives by Telis Demos and Peter Rudegair (WSJ)

An online consumer lender similar to SoFi is pulling back from several markets as loan volumes decline and performance is questioned. [Link, paywall]

Autonomous Vehicles

GM, Lyft to Test Self-Driving Electric Taxis by Mike Ramsey and Gautham Nagesh (WSJ)

The age of autonomous vehicles may be closer than we think as a major ridesharing startup and one of the largest auto OEMs in the world prepare to start real-world testing. [Link, paywall]

Billions Are Being Invested in a Robot That Americans Don’t Want by Keith Neaghton (Bloomberg)

An overview of the effort to convince consumers that efforts to build autonomous vehicles are being sunk into a project that will actually be purchased. [Link]

Strange Internet

_9MOTHER9HORSE9EYES9: the mysterious tale terrifying Reddit by Leigh Alexander (The Guardian)

The extremely odd tale of a story written on Reddit, unleashed over time in the comment threads around the site. [Link]

Anonymous attack Greek central bank, warns others by George Georgiopoulos (Reuters)

Online hacking group (with anarchist tendencies) Anonymous has decided to wage a campaign against central banks. The already embattled Greek one was the first target. [Link]

Facebook pays $10,000 to 10-year-old Instagram hacker by Tuomas Foresell (Reuters)

A Finnish child discovered a major flaw in Instagram’s security. His reward was a lot of money for a ten year old but seems a bit paltry given that he may have averted a significant security issue for the company and its users. [Link]

Sports

Why NBA Players Lie About Their Height by Chris Herring (WSJ)

The peculiar sets of incentives that cajole NBA players to exaggerate or diminish their actual heights; depending on the situation, both take place. [Link, paywall]

‘We’ve Come To Win The League!’ by Wright Thompson (ESPN)

An oral history of Leicester, who were pegged at 5000-to-1 odds to win the English Premier League at the start of the season, but clinched that victory this week. [Link]

Evolving Markets

Index Investing Makes Markets and Economies More Efficient by Jesse Livermore (Philosophical Economics)

Pseudonymous blogger Livermore makes a compelling case that the markets are not made less efficient by large numbers of index-only investors. [Link]

FastMatch leading talks to create central tape for FX by Solomon Teague (Euromoney)

The current structure of FX markets are quite messy: there’s no central ledger recording the various transactions across electronic networks that support trading. A central tape would be a significant step towards transparency. [Link]

US Treasury debates new-for-old bond swap by Joe Rennsion (FT)

An interesting overview of a new plan for the US Treasury to buy back old bonds that trade at higher yields than newer issues. The result would be bigger auctions and lower cost of issuance for the Treasury with no impact on the overall size of the debt stock. [Link, soft paywall]

Regulators Want to Slow Runs on Derivatives by Matt Levine (Bloomberg)

A deep look into the regulatory and theoretical exercise around what might happen if a large financial institution had to be resolved out of bankruptcy. Wonky, but interesting. [Link]

The Book That Will Save Banking From Itself by Michael Lewis (Bloomberg)

A typically Lewisian yarn on the subject of former Bank of England Governor Mervyn King’s new book, including a summary of its themes. [Link]

Geopolitics

There Are So Many Warplanes Over Iraq That Baghdad’s Air Traffic Controllers Can’t Keep Up by Joseph Trevithick (War Is Boring)

With planes and drones running constant combat missions over Syria and Iraq, the airspace over northern Iraq is so dense that a Danish support unit is being called in with a new radar unit to help keep planes from colliding. [Link]

Royal Navy fires warning shot at Spanish patrol boat ‘hassling’ US nuclear submarine attempting to dock at Gibraltar by Julian Robinsion (Daily Mail)

The UK’s sovereignty over Gibraltar and Spain’s distaste for that particular relationship isn’t under any sort of legal uncertainty. But that hasn’t stopped a Spanish patrol boat from harassing an American nuclear submarine making a friendly visit to the British port.  This was a confusing and perplexing story given that all involved navies are NATO allies. [Link]

Why Europe’s energy policy has been a strategic success story by Time Boersma and Michael E. O’Hanlon (Brookings)

A major international effort has made Europe dramatically less reliant on Russia for natural gas. While 1/3^rd of the gas consumed in Europe comes from Russia still, new distribution networks and storage points have made the continent much more resilient. [Link]

Erdoğan gets his wish by Emad Mostaque (Governments and Markets)

An overview of the current political situation in Turkey and what could be next for the country, by Ecstrat analyst Mostaque. [Link]

Real Estate

The Hamptons Housing Market Is Getting Clobbered by Wall Street Jitters by Emily Jane Fox (Vanity Fair)

The volatility and generally trendless price action in financial markets are adding to a strong dollar’s problematic impact on housing in the elite getaways at the eastern tip of Long Island. [Link]

Affordable Starter Homes Prove Increasingly Elusive by Chris Kirkham (WSJ)

An excellent overview of the struggles homebuilders have completing houses at reasonable cost; high prices for land have pushed starter homes out to the exurban edge of most major metros. [Link, paywall]

Local Taxes

Princeton’s Neighbors Say to Heck With Freebies — We Want Cash by Elise Young (Bloomberg)

Residents of Princeton, New Jersey are suing the university. Their aim is to collect property taxes, reducing the tax burden on homeowners in the area. [Link]

CT’s top taxpayers took a big earnings hit last year by Keith M. Phaneuf (The CT Mirror)

Declining profits at hedge funds are hitting the incomes of Connecticut’s top tax filers; the lower incomes of the 50 largest filers alone could reduce income tax revenues by $217 million for this quarter alone. [Link]

Millennials

How Millennials Ended the Running Boom by Rachel Bachman (WSJ)

After years of surging race registration, many young adults are now pivoting to less competitive classes for their fitness. [Link]

This Year’s College Grads Are The Luckiest In A Decade by Ben Casselman (538)

The starting salaries and wage growth achieved by college graduates are seeing their best levels in years as labor markets tighten and the economy improves, per this excellent analysis of Census microdata conducted by 538. [Link]

Abuse

“You Want A Description of Hell?” Oxycontin’s 12-Hour Problem by Harriet Ryan, Lisa Girion, and Scott Glover (LATimes)

A frankly terrifying overview of the chemistry, economics, and social impact of Oxycontin and why it’s a prime driver being the surging prescription drug abuse problem. [Link]

Enron culprit Andy Fastow’s ugly tale and sobering warning by Cheryl Hall (Dallas Morning News)

A summary of the speaking tour currently being held by Enron co-conspirator Andy Fastow, with a full review of his story and current point of view. [Link]

China

China Evicts Investment Firms Amid Fears of Unrest (Bloomberg)

A painful summary of the efforts by Chinese regulators and overseers to keep angry customers from taking violent revenge on companies that offered high risk investments to retail investors. [Link]

Media Matters

Here’s what Business Insider employees just said about why people are leaving by Tom Kludt (CNN)

The sale of Business Insider to Axel Springer marked something of a high point in this cycle of digital media businesses. Since then, it’s been a rockier path. [Link]

Random

Putting the Tesla HEPA Filter and Bioweapon Defense Mode to the Test (Tesla)

Say what you want about Tesla as an investment (positive or negative!), but we can’t get enough of their products. What other car company has a “Bioweapon Defense Mode”?

This Is Why So Many Labrador Retrievers Are So Very Fat by Melissa Dahl

The chubby pups are just following the genetic instructions of a mutation in their genome, and that has implications for humans too. [Link]

Start a 14-day no obligation free trial to sample Bespoke’s premium research.  Our Bespoke Report newsletter sent to paid members every Friday is a great read if you’re looking for additional weekend reading.