B.I.G. Tips – Three in a Row: Better Than Expected Retail Sales
Bespoke’s Morning Lineup – 11/16/21 – Retail Detail
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“If everybody is doing it one way, there’s a good chance you can find your niche by going exactly in the opposite direction.” – Sam Walton
Home Depot (HD) and Walmart (WMT) are on the tape this morning as earnings season winds down. Both companies reported better than expected results on both the top and bottom lines. WMT even raised guidance citing strong results in its eCommerce unit. In reaction to the reports, both stocks are modestly higher with gains of between 1.0% and 1.5%.
Retailers are dominating the earnings headlines this morning and Retail Sales will dominate the economic data as well. There are a number of other reports on the calendar for today (Import Prices, Capacity Utilization, Industrial Production, Business Inventories, and Homebuilder Sentiment), but Retail Sales will kick the day off and likely be the most important release for investors.
Ahead of all the data, US equity futures are flat to modestly higher on the morning, treasury yields are modestly lower, and crude oil is back above $81. The real action this morning has been in the crypto space as most major currencies are down at least 5%. Bitcoin briefly dropped below $59K and tested its 50-day moving average but has rebounded back above $60K since. Factors being cited for the move include the stronger dollar and another round of regulatory crackdowns in China as the government refers to crypto mining as ‘extremely harmful’.
Read today’s Morning Lineup for a recap of all the major market news and events from around the world, including the latest US and international COVID trends.
We reached the mid-point of Q4 yesterday, and it’s hard to find much to complain about if you are a bull. Besides the fact that SPY is already up nearly 9%, four sectors have rallied by double-digit percentages. Looking at these four sectors, though, they aren’t necessarily ones you would look at as typically rallying in unison with each other.
With inflation being the number one concern of investors these days, the fact that Materials and Energy are near the top of the list in terms of performance shouldn’t come as much of a surprise, but the fact that they are accompanied by Consumer Discretionary and Technology is a bit surprising. Consumer Discretionary is a sector that typically underperforms during inflationary periods, but it’s actually the top-performing sector so far this quarter. Similarly, Technology, which is usually associated with growth stocks that should come under pressure when inflation is a concern as future earnings are discounted at a higher rate, has rallied nearly 12%.
Given some of the enormous market caps of some of the largest stocks in the S&P 500, some of the sector performance figures are skewed a bit. Consumer Discretionary is a perfect example. With Tesla’s (TSLA) market cap topping a trillion dollars recently, the stock’s weight in the sector is above 15%, so the fact that it has rallied more than 30% already this quarter (even after dropping 18% in less than two weeks) is a big reason for the sector’s outperformance. Within the technology sector as well, some of the largest stocks in the index have much more reasonable valuations than many other smaller names within the sector and given their dominant positions, they also have attractive earnings profiles.
On the downside, there is none so far this quarter, but the only two sectors that are up less than 5% so far on the quarter are Communication Services (XLC) and Health Care (XLV).
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Daily Sector Snapshot — 11/15/21
Chart of the Day: Longer Term Overbought Equity Readings
NY Fed Current Conditions and Expectations Split
The New York Fed put out the first regional reading on manufacturing this morning with a big upside surprise. The Empire State Manufacturing Survey jumped from 19.8 to 30.9 in November versus a much smaller expected increase to only 22. As shown below, November’s level is indicative of a historically healthy growth rate for Northeast manufacturing and acceleration relative to October. While growth picked up in November, it remains in the middle of the range of readings from the past several months.
Although it was generally a strong report, one striking element was massive declines in optimism, specifically regarding the six-month expectation indices of General Business Conditions (red line above), New Orders, and Shipments. The month-over-month drop in each of those indices ranks in the bottom 5% of all monthly moves. While that may sound scary, the readings were pretty much outliers relative to the rest of the report. Current condition indices and most other expectations indices remain strong with the vast majority sitting in the upper decile of their historical range; a couple (Prices Received and Number of Employees) even hit record highs.
Current conditions for demand were historically strong and improving in November with New Orders rising 4.5 points to 28.8 while Shipments saw a huge 19.3 point leap to 28.2. That move brought the index from the 38th percentile all the way up to the 92nd. In spite of those improvements, responding firms took a sharply negative turn with regard to outlook. Like the headline index, expectations for new orders, and shipments took sharp turns lower in spite of the improvements in current conditions. The last time that all three of those indices experienced as large of declines simultaneously was back in March 2018. Back then, the catalyst for the big hit to sentiment was a rollercoaster of headlines regarding the trade war with China.
Supply chains remain strained as evident from the extremely elevated reading on Delivery Times. That being said, the index did pivot lower off of a record high in November. That improvement was likely a factor in the big increase in current conditions for shipments. Again though, the outlook is less optimistic with Delivery Time expectations surging back up to one of the highest readings on record. As with current conditions, that could be a part of the reason expectations for shipments coincidentally plummeted.
Given longer lead times, prices resumed their rise this month. Prices Paid came in only a half point below May’s record high while expectations rose to the fourth highest reading on record; the highest since July 2008. Prices Received, meanwhile, set a new record high for current conditions and expectations came in at the second-highest level on record behind July’s level.
Another part of the survey that saw big opposing moves in current conditions and expectations concerned employment. Six-month expectations for Number of Employees fell to a new short-term low of 30.6 as the current conditions index set a new record high. Average Workweek also increased and is now slightly below the September high.
While expectations for hiring people may have been on the decline, companies appear to be offsetting that with an increase to other spending. As shown below, both CapEx and Tech Spending were higher this month with the former notching the strongest reading since January 2018. Before that, it was over a decade ago that Capital Expenditures was as elevated as it was this month. Click here to view Bespoke’s premium membership options.
Small and Mid Caps Gain Ground
Equities broadly have been in rally mode so far this quarter, but in the month of November smaller market caps have generally outperformed. Month to date, the small-cap S&P 600 ETF (IJR) has gained 5.88% as of this morning while the mid-cap S&P 400 ETF (IJH) has risen 4.21%. Large caps as proxied by the S&P 500 (SPY), meanwhile, are up less than 2% MTD. While there is plenty of time left in the month for things to change, the spread between the month-to-date performance of small and mid-caps versus large caps is on pace to be on the wider side of all months of the past twenty years. As shown in the charts below, IJR is currently outperforming SPY MTD by 4.05 percentage points, and that reading is 2.37 percentage points for IJH versus SPY. Those rank in the 91st and 86th percentiles, respectively, of all months of the past twenty years. That also marks the first month with significant outperformance of smaller market caps relative to large caps since the stretch of large-cap underperformance that ran from the fall of last year through this past February. Prior to that, you would have to go back to March 2018 to find the last time that small and mid-caps both outperformed large caps by as much as they are this month. Click here to view Bespoke’s premium membership options.
Bespoke’s Morning Lineup – 11/15/21 – Earnings Season: The Final Stretch
See what’s driving market performance around the world in today’s Morning Lineup. Bespoke’s Morning Lineup is the best way to start your trading day. Read it now by starting a two-week trial to Bespoke Premium. CLICK HERE to learn more and start your trial.
“The challenge of the retail business is the human condition.” – Howard Schultz
We’re heading into the final days of earnings season this week, and so far the results have been very positive. Whether earnings season ends on a positive note or not will depend on how the market reacts to a slew of high profile earnings reports from the retail sector – most notably Walmart (WMT) and Home Depot (HD) on Tuesday, Lowe’s (LOW) and Target (TGT) on Wednesday, and then Kohl’s (KSS) and Macy’s (M) on Thursday. Consumers still appear to be in a strong financial position but as last week’s sentiment report from the University of Michigan showed, they aren’t feeling particularly optimistic. And as the quote above implies, consumer sentiment is the key to retail sales.
Futures are higher to kick off the week, and it’s a slow day for economic data with Empire Manufacturing the only report on the calendar, and it came in better than expected. The 10-year yield is modestly lower this morning and WTI is down over $1 and back below $80 per barrel.
Read today’s Morning Lineup for a recap of all the major market news and events from around the world, including the latest US and international COVID trends.
Speaking of oil, the recent pattern for WTI has been interesting. With the commodity having basically doubled over the last year, it’s hard to say anything negative about its performance, but we would note that the most recent peak in late October coincided right with its trendline of higher highs since the beginning of the year. Since that peak, though, the recent pullback has seen WTI break its short-term uptrend line from the most recent low in August. As it attempted to bounce back in mid-November, the rally stalled out right at that former uptrend line. The key level to watch going forward will be right around $78.50 which would represent a lower low. As long as that level holds in the short-term energy bulls probably don’t have a lot to worry about, but it’s a level that should be kept on the radar.
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Bespoke Brunch Reads: 11/14/21
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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The Future of Labor
Trapped in the Metaverse: Here’s What 24 Hours Feels Like by Joanna Stern (WSJ)
This video gives you an idea of what the world of working inside the offering of Meta (nee Facebook) might be like. [Link; paywall]
Six questions that could shape the future of the U.S. labor market by Jonnelle Marte (Reuters)
The COVID pandemic has driven a big shift in how the US labor market works. Here are some indicators and concepts to keep an eye on as the economy continues to evolve away from the pandemic recession. [Link]
DIY
How To Make A CPU – A Simple Picture Based Explanation (Robert Elder)
Ever curious where the chips which are fowling up so much of the global economy with their shortages come from? Here’s a step-by-step walk-through of how to make them from rock to final installation. Best of luck actually doing this yourself! [Link]
I Have Achieved a Glorious Victory Against the Music Industry and Twitter by Mark Joseph Stern (Slate)
While DMCA takedowns create all sorts of nuisance for social media users, there is a way to fight back; the author demonstrates the successful way to prove a point about fair use and copywrite laws. [Link]
Petty Crime
Scammer Convinced Instagram That Its Top Executive Was Dead by Joseph Cox (Vice)
In an illustration of how absurd the current management of social media networks has gotten, a scammer successfully managed to convince Instagram that their boss had died using a fake obituary. [Link]
‘It’s a great big mess’: Catalytic converter thefts rampant in the Bay Area by Michelle Roberson (SFGate)
An insurer reports thousands of catalytic converters (which prevent smog) are being stolen from California automobiles, with thefts more than doubling over the past year. [Link]
Conspicuous Consumption
The Mystery of the $2,000 Ikea Shopping Bag by Silvia Bellezza and Jonah Berger (Harvard Business Review)
Luxury brand Balenciaga offers a $2000 version of the ubiquitous reusable bags offered by Ikea, offering a fascinating insight into the psychology and branding of super high-priced goods. [Link]
The open secret to looking like a superhero by Alex Abad-Santos (Vox)
An investigation into the rampant use of steroids by men in Hollywood, which has become part of the cost of starring in shows or movies; the increase in steroid use also speaks to broader trends in mounting social pressures on men to conform to a specific body image. [Link]
Supply Chains
Bottlenecks: causes and macroeconomic implications by Daniel Rees and Phurichai Rungcharoenkitkul (BIS)
A helpful analysis about the macroeconomic effects of the pandemic and resulting bottlenecks in supply chains. [Link; 9 page PDF]
Thanksgiving Dinner Staples Are Low in Stock Thanks to Supply-Chain Issues by Stephanie Stamm (WSJ)
Turkeys, pies, and other Thanksgiving staples are hard to find on grocery store shelves this year as supply chain disruptions ripple through the economy. [Link; paywall]
Ancient Cooking
Culinary Detectives Try to Recover the Formula for a Deliciously Fishy Roman Condiment by Taras Grescoe (Smithsonian)
Romans were obsessed with a condiment called “garum”, which is similar to modern Asian fish sauces but involves a slightly different process. The umami-rich additive has finally been reproduced after falling out of favor over a thousand years ago. [Link]
Unintended Consequences
Investors Pushed Mining Giants to Quit Coal. Now It’s Backfiring by Thomas Biesheuvel (Bloomberg)
As larger, publicly-traded companies abandon coal under pressure from investors, smaller private companies willing to mine the carbon-heavy energy resource are stepping in to the fray. [Link; soft paywall]
YOLO
Rich Millennials to Financial Advisers: Thanks for the Golf Invite, but You Can’t Invest My Money by Rachel Louise Ensign and Peter Rudegeair (WSJ)
Aggressive, liquid young investors are forgoing traditional money managers in favor of running their investments themselves. As the old aphorism goes: everyone’s a genius in a bull market. [Link; paywall]
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Have a great weekend!