Bespoke Stock Scores — 5/16/23
Homebuilders Sentiment and Stocks Still On the Rise
As we noted last week on the release of the latest mortgage purchase data, housing activity appears to have finally stabilized after plummeting earlier in the tightening cycle. That improvement in housing markets is flowing through to builders as this morning’s release of homebuilder sentiment from the NAHB rose to 50 versus the expectation of it remaining unchanged at 45. While the index still has a long way to go to get back to pre-pandemic levels, let alone the record highs from the first two years of the pandemic, in May it hit the highest level since last July.
The higher reading in the headline index was a result of improvements across the board, including increases in present and future sales and traffic. As for regional sentiment, homebuilders have gotten more optimistic across most of the country. Everywhere save for the Northeast have seen steady improvements to homebuilder sentiment over the past several months. As for the Northeast, that is not to say sentiment has not improved. The reading has rebounded off of the worst levels but remains below the recent highs of 46 from February and March.
Homebuilder stocks continue to be even more impressive. Proxied by the iShares Home Construction ETF (ITB), homebuilders have been trading in a steady and uninterrupted uptrend. In fact, the ETF has been overbought every day for a month now.
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Chart of the Day: No Love for Dividend Stocks
B.I.G. Tips – Retail Sales – Bad Breadth
Bespoke’s Morning Lineup – 5/16/23 – Weak Retail Sales
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“Try to decide how good your hand is at a given moment. Nothing else matters. Nothing.” – Doyle Brunson
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There’s a modest amount of risk-off mentality in the markets this morning, and it started last night with weaker-than-expected economic data in China followed by a weaker-than-expected report on economic sentiment in Germany from ZEW. This morning in the US, Home Depot (HD) is trading more than 2% lower after reporting a sales miss and lowering guidance. That weak report didn’t bode well for April Retail Sales at 8:30 where economists are forecasting a m/m increase of 0.4%. Looking ahead, we’ll get Industrial Production and Capacity Utilization at 9:15 followed by Business Inventories and Homebuilder sentiment at 10 AM.
The release of April Retail Sales was mixed. At the headline level, sales increased just 0.4% compared to forecasts for an increase of 0.8%. Stripping out autos, though, the report was right in line with forecasts (0.4%), and ex-autos and gas, sales actually increased at triple the rate of expectations (0.6% vs 0.2%). In addition, last month’s report was revised to a worse than initially reported number, so there was something for everyone in this report.
After slicing right through the psychologically critical threshold back in September, the yield on the 2-year US Treasury found support multiple times at the 4% level. After the last bounce in early February, the yield looked as though it was going to launch into a new higher range above 5%, and being short bonds looked like a winning hand.
Within a month, though, the failures of SVB Financial, Signature Bank, and later, First Republic caused a rush to safety, and yields quickly erased all of the February spike. Since then, the 4% level has been acting more like resistance (or a magnet) as the yield hasn’t been able to convincingly get back above the 4% level and is trading right around there this morning. With the 50-day moving average (DMA) continuing to roll over and the 200-DMA starting to follow suit, the 2-year yield runs the risk of breaking down below 4% turning what was the nuts into a bad beat.
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Daily Sector Snapshot — 5/15/23
NY Fed Plummets
The economic calendar was light this morning with the Empire Fed Manufacturing survey the only release of note. Whereas last month saw a solid reading of 10.8 implying expansionary activity in the NY Fed’s region, expectations were set low as the index was forecasted to fall down to a contractionary reading of -3.9. Instead, the index plummeted all the way down to -31.8, the lowest since January when the index reached a slightly worse -32.9. Additionally, the monthly decline in the headline number ranks as the second largest drop on record behind April 2020. Overall, the index has been quite volatile in recent months bouncing from historically contractionary readings to modest contraction or even growth.
As shown below, the month-over-month declines across many categories were nothing short of historic in May. For example, New Orders saw an astounding 53.1 point decline (just short of a record decline similar to the headline index). Shipments wasn’t much better with a 40-point decline. However, expectations for both of those categories rebounded with New Orders being a particularly big uptick, ranking in the upper decile of all month-over-month increases. That being said, the indices remain in the bottom deciles of their historical ranges while all other categories (like unfilled orders and inventories) saw declines in expectations alongside declines in current condition indices. Again, while recent months have seen some volatility in these survey results, the findings would imply responding firms have observed a significant slowdown in their businesses.
One silver lining relative to post-pandemic trends is that the report has shown a complete reversal in readings on prices and delivery times. As shown in the first chart below, the average of the two current conditions indices has been rolling over and is now basically right in line with the historical median. Balancing out the more normalized level in supply chain readings, firms also appear to be reporting massive pullbacks in hiring capital expenditures, and plans for tech spending. During the past two recessions, this average has turned negative, and at the moment, it is only barely positive at 3.43.
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Chart of the Day – Narrow Ranges
Bespoke’s Morning Lineup – 5/15/23 – Positive Vibrations
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“If any of my competitors were drowning, I’d stick a hose in their mouth.” – Ray Kroc
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After five straight days of losses and declines in nine of the last ten trading sessions, bears are making way for the positive day in the Dow, as futures are firmly in positive territory. Whether the bears stay out of the way for the entire session, though, is another question. Not helping matters for the bulls this morning is the just released Empire Manufacturing report which came in at -31.8 compared to forecasts for a reading of -1.8 and last month’s reading of 10.8. Going back 20 years, today’s report was the third weakest relative to expectations on record trailing the reports from April 2020 and August 2022. This weakness comes against the backdrop of Atlanta Fed President Bostic saying that inflation is not coming down very quickly and that rate cuts do not factor into his near-term plan.
If the maritime analogy were to be applied to markets, it has been a bit of a slack tide in the last week as there wasn’t much in the way of a major current in the market’s direction. While the S&P 500 was down fractionally, and most sectors were lower, there is a lot of disparity. Heading into the new week, seven sectors are neither overbought or oversold, three sectors are overbought, and just one sector (Energy) is oversold. In general, sectors that had been performing the worst YTD, did the worst last week and vice versa. Take the Energy and Communication Services sectors, for example. Energy has been the worst-performing sector YTD; it was the worst performer last week and it is further below its 50-day moving average (DMA) than any other sector. Conversely, Communication Services is the top-performing sector YTD, was the best-performing sector last week and it is further above its 50-DMA than any other sector.
Looking in more detail at the Energy sector, it has been stuck in a downtrend since last October, and after a steep sell-off to kick off the month, the sector looks to be trying to stabilize. Whether this attempt proves successful remains to be seen, but it is worth noting that this most recent low has taken place on lower levels of volume compared to the one in March.
Communication Services has been in a steady uptrend since its Q4 lows. While it has consistently been making higher lows, the ETF that tracks the sector (XLC) has stalled out at resistance multiple times this year. If it can break above $60, there’s no short-term resistance above.
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Bespoke Brunch Reads – 5/14/23
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.
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Retail
Tipping at Self-Checkout Has Customers Crying ‘Emotional Blackmail’ (WSJ)
Since when did paying for a cup of coffee warrant a 20% tip? Consumers are being inundated with gratuity requests, so their employers don’t have to pay them as much. [link]
Wendy’s, Google Train Next-Generation Order Taker: an AI Chatbot (WSJ)
The next time you go to the drive-through to order French Fries it may be a bot that takes your order. This is one way to solve the labor shortage. Will we have to tip the bots too? [link]
Investing
Robinhood to Launch 24-Hour Trading on Weekdays in Stocks and ETFs (WSJ)
Just what we need more to time to trade illiquid markets. Robinhood announced last week that it will offer “round-the-clock trading between 8 p.m. ET Sunday and 8 p.m. ET Friday in 43 securities, including some popular stocks such as Amazon.com, Apple and Tesla.” [link]
Investment App Commonwealth Hits Big With Mage’s Kentucky Derby Win (Front Office Sports)
Shareholders of Commonwealth made a $170,000 investment in Kentucky Derby winner Mage. That stake is now worth over $5 million, a 30x return for shareholders. [link]
EVs
The Executive Who Keeps Tesla Rolling Isn’t Elon Musk (WSJ)
A profile of Tesla’s CFO, Zach Kirkhorn, who many have credited with shoring up the company’s financial strength. Unlike Musk, who has over 100 million Twitter followers, Kirkhorn has 63. “He doesn’t take the limelight from Elon”. Many analysts who cover the stock have never even had a one-on-one conversation with him. [link]
Lithium is becoming more crucial in a warming world, but Maine’s huge deposits may never be mined because of environmental concerns. (Boston Globe)
Lithium deposits near Newry, Maine may be the largest in the country which would provide a strong boost to the state’s economy, but environmental regulations have prevented any development of the deposits. Too bad. Guess it’s back to burning coal and gasoline. [link]
End of a love affair: AM radio is being removed from many cars (Washington Post)
Due to interference from electric batteries, many EVs are being made without AM radios. But now where will we go for our political talk radio? [link]
Science and Nature
The Untold Story of the Boldest Supply-Chain Hack Ever (Wired)
The backstory behind the 2020 SolarWinds hack, which is considered the boldest supply chain hack ever. [link]
Before Smartphones and the National Weather Service, There Was Grandma’s Knee (New York Times)
Borrowing from ‘old school’ methods, researchers have developed a new weather forecasting model that mimics the flexibility of animal joints and the movement of clouds, potentially improving prediction accuracy. [link]
Hammerhead sharks are first fish found to ‘hold their breath’ (Nature)
It’s not just people that hold their breath underwater. This article on hammerhead sharks describes why as well as other traits of the unique shark. [link]
Sports
NFL schedule 2023 winners, losers: Jordan Love takes center stage; Colts shut out of prime time (The Athletic)
Only the NFL can manage to drum up so much excitement for the release of the next season’s schedule. Teams with the easiest expected schedules include the Dallas Cowboys and Los Angeles Chargers, while the Philadelphia Eagles and New Orleans Saints appear to have the toughest road to the playoffs. [link]
Economy
How soon and at what height will China’s economy peak? (economist)
Estimates vary, but at some point between 2025 and 2040, the Chinese economy is expected to peak and an aging population and rising levels of debt pose long-term challenges to country. [link]
Moving Out of a Flood Zone? That May Be Risky! (NY Fed)
Just because you move out of a ‘flood zone’ doesn’t necessarily mean your house won’t flood. This article discusses the potential risks of relocating out of flood-prone areas and explores potential policy solutions to help homeowners make informed decisions about relocation and mitigate the risks of flooding. [link]
The Monetary-Fiscal Policy Mix and Central Bank Strategy (St. Louis Fed)
Hawkish Federal Reserve member James Bullard describes why the Fed needs to counter easy fiscal policy, and that while continued disinflation is likely, it is not guaranteed. [link]
Mother’s Day
How Mother’s Day became its founder’s worst nightmare (National Geographic)
Ever wonder about the history behind Mother’s Day and how it ultimately became commercialized? [link]
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