The first manufacturing data for May came out this morning with the release of the New York Fed’s Empire State Manufacturing Survey.  General business conditions remain at historically strong levels although there was some slowing in May as was expected.  After hitting the highest level since October 2017 last month, it was expected to fall to 23.9 in May.  The index did in fact decline, but only to 24.3.  While lower, that is still around some of the strongest levels (excluding last month) in three years as more businesses continue to report improvements in business conditions than weakness.

Breadth in this month’s report was pretty mixed; namely with regards to current conditions versus expectations. Every index is still showing an expansionary reading with particular strength out of the indices for the present situation.  In fact, most of those indices still sit in the top decile of their historical range with a few like those for unfilled orders, delivery times, and prices even at or just off of record highs.  But there were a handful that moved lower: delivery times, inventories, and number of employees.

Regarding expectations, it was much harder to find an increase. Delivery times and technology spending were the only two of these indices to rise month over month.  While many indices for expectations still sit at historically strong levels, there are more that are middling within their respective historical ranges. Overall, the report showed that New York area firms have seen a peak in optimism even as they continue to report strong conditions.

Demand certainly appears to be one area without much in the way of weakness.  New orders rose 2 points month over month to 28.9.  That is the highest level in just over 15 years and the only other readings as high occurred throughout late 2003 to mid-2004.  Those orders are making their way out the door at an increased rate too as shipments climbed to 29.7.  That index has been making a vertical climb since the winter as it reached its highest level since August 2007.

Despite this, NY area firms are not fulfilling orders fast enough.  Last month saw the Unfilled Orders index rise by one of the largest amounts in a single month on record, and it continued to climb albeit by a much smaller 0.2 points in May.  The only month on record with a higher reading in unfilled orders was September 2001. Inventories were one of the few current condition indices to fall in May, although the reading still indicated growth. In other words, those unfilled orders are not necessarily drawing down on inventory levels.

Supply chains are one of the main areas that are likely holding things back. Higher readings in the delivery times index mean that businesses are reporting that it takes longer for products to reach their destination.  Even after falling 4.5 points in May off of the April record, the current level sits well above the prior record high of 16.2 from March 2018.

In addition to taking longer for products to get to where they are going, the price point is on the rise.  Both indices for prices paid and received rose to record highs in May. In fact, over the past two months, there has not been a single respondent to have reported a decrease in prices paid.  That is the first time that has occurred since February and March 2012.

Last week saw a blockbuster job openings report and the Empire Fed survey is showing a similar willingness to take on more workers.  The current conditions index for the number of employees continues to show that businesses are on net increasing their workforce, though at a slowed pace from April. Additionally, the index is at a much less elevated part of its range (the 81st percentile) relative to other indices within the report, but the much more elevated reading in expectations (98th percentile) would indicate the businesses would like to take on far more workers. That is, there appears to be a bit of a disconnect between the actual number of new hires and businesses’ expectations to take on more workers.  Potentially as a result of an inability to hire enough workers, the average workweek has continued to climb.  At 18.7, the index is at its highest level in a decade. Click here to view Bespoke’s premium membership options for our best research available.

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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Papers

The 15-Hour Week: Keynes’s Prediction Revisited by Nicholas Crafts (Warwick Economics Research Papers)

Longer life expectancy in retirement and longer retirement periods mean that non-work hours have risen 60% over the last 90 years or so, meaning Keynes was right about his prediction for less work but wrong about the distribution of when that time would be enjoyed. [Link; 17 page PDF]

School Reopenings, Mobility, and COVID-19 Spread: Evidence from Texas by Charles J. Courtemanche, Anh H. Le, Aaron Yelowitz & Ron Zimmer (NBER)

A new paper argues that reopenings of Texas schools drove 43,000 new COVID-19 cases and 800 deaths in the first two months of reopening for districts, with changes in adult behavior that school reopenings allowed playing significant contributing role in the overall increase. [Link]

Defense Contracts

Luxury jet makers battle over lucrative spy plane niche by Allison Lampert and Tim Hepher (Reuters)

Lower operating costs make Gulfstreams popular platforms for militaries operating intelligence-gathering platforms that sniff around foreign radar and communications networks looking for signals intelligence. [Link]

The Pentagon Inches Toward Letting AI Control Weapons by Will Knight (Wired)

US military leadership is currently considering if they should allow machines to decide whether weapons are used and what they’re aimed at. [Link; soft paywall]

Post Pandemic

Many Vaccinated Americans Are Still Uncomfortable Returning to Public Activities. The U.S. Economy Needs Them by Alex Silverman (Morning Consult)

People who have received a vaccine are at lower risk than their peers, but are still less likely to eat in a restaurant, travel abroad, or go to the gym as concerns that lead them to seek vaccination aren’t totally solved by the dose. [Link]

The people who want to keep masking: ‘It’s like an invisibility cloak’ by Julia Carrie Wong (The Guardian)

Masking has been a necessary step to preventing the spread of COVID, but has also served to keep people anonymous and discrete, which for some holds an appeal that will last long past the pandemic. [Link]

Risk Appetite

New Amazon bond rivals yield on US Treasuries in record-breaking sale by Joe Rennison, Dave Lee and Camilla Hodgson (FT)

Amazon borrowed at a record low spread to Treasuries this week, part of a staggering decline in the risk premiums offered to investors in the US corporate bond market. [Link; paywall]

What Happens to Stocks and Cryptocurrencies When the Fed Stops Raining Money? by Greg Ip (WSJ)

The latest in a long line of opinion columns asking the question “is the Fed entirely responsible for elevated asset prices across financial markets”. [Link; paywall]

From Dutch Tulips to Internet Stocks, How to Spot a Financial Bubble by Jon Hilsenrath (WSJ)

The soaring prices of extremely speculative assets in 2020 and 2021 bear much in common with similarly speculative manias of the past. [Link; paywall]

Malfeasance

Colonial Hacker Group Seeks to Shift Blame for Ransomware by Alyza Sebenius and Ryan Gallagher (Bloomberg)

The hack which has left much of the US Southeast without gasoline may have been conducted by an affiliate group of the hackers whose software was used to execute the attack. [Link; soft paywall]

Crypto Fraudsters Made a Big Bet on Dogecoin, New York Claims by Olga Kharif (Bloomberg)

An NYAG suit alleges a crypto trading platform misused funds by betting the house on Dogecoin, a crypto that started as a joke and has since exploded higher. [Link; soft paywall]

Semiconductors

Your Car, Toaster, Even Washing Machine, Can’t Work Without Them. And There’s a Global Shortage. by Alex T. Williams (NYT)

A detailed look at the global semiconductors shortage and some policy proscriptions for how it might be fixed longer-term. [Link; soft paywall]

Middle East

The War That Shouldn’t Have Been by Neri Zilber (Newlines)

An insightful look at the roots of the most recent flare-up of violence in Israel and Palestine: internal political realignments within both Gazan and Israeli politics have seeded and exacerbated the conflict. [Link]

Education

Catholic Schools Are Losing Students at Record Rates, and Hundreds Are Closing by Ian Lovett (WSJ)

The United States had almost 6,000 Catholic schools before the pandemic, but hundreds have closed and enrollment is falling, with urban dioceses especially pressured by a declining prevalence of Catholicism nationally and difficulties among parents meeting the cost of an education within the faith. [Link; paywall]

Natural World

Groundbreaking effort launched to decode whale language by Craig Welch (National Geographic)

Whales have a language, but knowing it exists and translating it into something that humans can understand (let alone speak back) is a massive challenge for scientists. [Link; soft paywall]

Are These Two Men Going After the Holy Grail of Himalayan Climbing? (Climbing)

There’s speculation brewing that two of the most accomplished climbers in the world are considering a double-ascent of Everest and nearby peak Lhotse in one climb. [Link]

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Have a great weekend!

Stocks with extreme valuations have taken a serious haircut since the space peaked on February 22nd. On that date, 59 stocks in the Russell 3000 had a price-to-sales multiple north of 100x. That group had a median price-to-sales multiple of more than 311x on that date. Today, those 59 stocks have a price-to-sales multiple that’s 53.6% lower than it was February 22nd. That compares with a median price decline of 25.4% among the 59 stocks, or -22.5% weighted by market cap. In other words, while prices in this group have been hit very hard, their valuation has compressed substantially more.

Below we show the 20 stocks out of the 59 that have seen the largest drops in price since February 22nd. Among this worse-performing subset, the median stock has plunged 51%, in-line with the median 58% drop in price-to-sales since February 22nd. Despite the huge drops in prices over the last few months, these names are still very aggressively valued at a median price-to-sales multiple of 90x. Virgin Galactic (SPCE) has actually seen an infinite price-to-sales multiple after reporting zero revenue in its most recent quarter. From a valuation perspective, it’s still hard to call any of these stocks attractive.  Click here to view Bespoke’s premium membership options for our best research available.