Just like last week’s preliminary Markit PMIs and the first three regional Fed indices of October, this morning’s release from the Dallas Fed on the region’s manufacturing sector similarly showed a positive backdrop.  The headline number was expected to come in at 13.3, which would have been a slight decline from September’s reading of 13.6.  Instead, the index smashed those expectations rising to 19.8.  As the index did the opposite of what was expected, it has now risen for each of the past six months with each reading since August indicative of expansionary (and accelerating) activity.  At its current levels, the index for General Business Activity is now at its highest level in two years.

Breadth across the various components of the index also remains strong with only one index sitting in contraction: inventories.  While every other index continues to show expansionary readings, October numbers for Unfilled Orders, Delivery Times, Employment, Hours Works, and Cap. Ex. were all lower month over month.

New Orders continue to rise at a strong clip. Even though outlook pulled back from a multiyear higher, the index for current conditions of new orders rose to its highest level (19.9) since August of 2018 (23.3). The growth rate also ticked slightly higher to 14.3 from 13.2.  Again this was the strongest reading since August of 2018.  Shipments on the other hand experienced a more modest increase of just 0.4 points which still leaves it below its August highs.  Meanwhile, growth of Unfilled Orders showed a sizable deceleraion this month as that index fell 1.9 points to 4.1. That leaves that index at its lowest level since it exited contractionary territory back in June. Meanwhile, expectations for unfilled orders fell much more dramatically, with its 11.4 point decline in the bottom 5% of all month over month changes.

Given demand continues to strengthen, production has continued to rise.  The current indices for Production and Capacity Utilization are right around the upper decile of historical readings and at their highest levels since August of 2018. While expectations for Production fell slightly this month, these indices also have relatively rosy outlooks with both indices around multiyear highs.

One notably weaker area of this month’s report concerns employment.  Both the index for Employment and Hours Worked declined from September. For Employment, this month was the first decline since April. As for Hours Worked, October marked a back to back decline.  These readings continue to indicate that the region’s businesses are on net hiring more people while also lengthening the hours worked, but it does mark a decelaration from the past few months.  Click here to view Bespoke’s premium membership options for our best research available.

Just when we thought earnings results couldn’t get much better when it comes to beating consensus analyst estimates, the results so far this earnings season have been stronger than ever.  Through last Friday, 85% of the 271 companies that had reported Q3 results beat consensus bottom-line expectations.  That’s more than 25 percentage points above the average beat rate of ~60% seen over the last twenty years.

The top-line beat rate for revenues has been almost as strong at 78%, while the percentage of companies raising guidance (17%) is higher than we’ve ever seen.

Share-price reactions to earnings haven’t been as strong as beat rates, but the numbers are still positive.  So far this season, the average stock that has reported has gained 0.55% on its earnings reaction day (the first full day of trading after the earnings release).  To get to that +0.55% full-day gain, the average stock has actually opened higher by 0.97% and then sold off by 0.44% from the open to the close of trading.  So while we’re seeing stocks gain in reaction to earnings, underneath the surface we’ve seen a stronger initial reaction to the news and then some intraday selling.

Of the 271 stocks that have reported, 13 have gained more than 10% on their earnings reaction days.  These 13 stocks are listed below, with Align Tech (ALGN) at the top of the list after gaining 34.97% last Thursday.  Three other stocks have gained more than 20% on their earnings reaction days — Snap (SNAP), CIT Group (CIT), and Calix (CALX).  Other notables on the list of big winners so far this earnings season include Boston Beer (SAM), WD-40 (WDFC), and Logitech (LOGI).

Over at Bespoke Premium, we provide clients with the beat-rate trackers below that highlight the rolling percentage of companies beating EPS and sales estimates over the last three months.  You can see the massive spike for the rolling 3-month EPS beat rate last earnings season that has ticked even higher so far this season.  The only times we’ve seen beat rates even remotely close to these levels were in the early days of the 2003-2007 bull market and the early days of the post-Finanical Crisis bull market in late 2009.  Back then, the EPS beat rate ticked up to the ~70% level, but again, we’re a full eight points higher than that now.

We’re seeing the same extraordinary trend when it comes to what companies are saying about their future prospects.  If you follow earnings releases closely, you know that forward guidance drives share-price reactions more than backwards-looking EPS and sales results.  Below is our guidance tracker that’s also available to Bespoke Premium clients.  This tracker shows the net percentage of companies that have raised guidance (vs. lowered guidance) over the last three months on a rolling basis dating back to the early 2000s.  Here again, the guidance spread spiked dramatically last earnings season in July and August, and it has gone on to tick even higher as this season’s results have started to come in.  There has never been a period at least in the last 17 years where companies have been this positive on their outlooks relative to prior expectations.  We’ve seen spikes before in early 2004, late 2009 and early 2018, but those periods look unexceptional compared to what we’re seeing now.  Click here to start a two-week free trial to Bespoke Premium.  You’ll start receiving our actionable research in your inbox immediately and gain access to investor tools like our Earnings Explorer referenced in this post.

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.

While you’re here, join Bespoke Premium with a 30-day free trial!

Voting

Rock the Vote by Steven W. Webster (Indiana University Working Paper)

More frequent earthquakes related to fracking activity in Oklahoma led to increases in turnout of registered Democrats (who generally oppose fracking). At the least, this is a creative instrumental variable to study democratic accountability. [Link; 26 page PDF]

People are volunteering to be poll workers in record numbers in Philly and the suburbs by Oona Goodin-Smith and Jonathan Lai (Philly Inquirer)

There’s been lots of attention on voter turnout this year, but turnout for poll working positions has also been record-shattering in Pennsylvania thanks to robust voting enthusiasm. [Link]

Taxes

The IRS Reels in a Whale of an Offshore Tax Cheat—and Goes for Another by Laura Saunders (WSJ)

A private equity billionaire admitted to criminal tax evasion featuring over $200mm in income over 15 years, and another billionaire has been charged with hiding $2bn in income offshore. These are relatively rare cases of IRS enforcement on the highest income earners. [Link; paywall]

SEC Issues Record $114 Million Whistleblower Award (SEC)

In a payout likely (based on our speculation) linked to Goldman Sachs’ 1MDB settlement, the SEC paid out $114mm to a whistleblower that led to an undisclosed enforcement action. [Link]

Paul Singer’s Elliott Management moving headquarters to Florida: Bloomberg News (Reuters)

Elliott, which operates in special situations and activist investing, is moving to Florida despite keeping hundreds of employees on its payroll in New York City. [Link]

Sustainability

Microsoft finds underwater datacenters are reliable, practical and use energy sustainably by John Roach (Microsoft)

Earlier this fall, Microsoft announced the results of a project designed to create more reliable data centers by sealing them in metal cylinders with nitrogen and dropping them on the sea floor, which maintains a very cool and stable temperature profile. That stability helps improve performance and longevity. [Link]

Geothermal energy is poised for a big breakout by David Roberts (Vox)

An overview of geothermal energy technology, which offers the opportunity for an abundant, if technologically challenging, energy source that is entirely renewable and can actually act as baseload power (unlike the daily rhythms of solar power, or the fickle weather-sensitivity of wind). [Link]

The paradox of lithium pricing in the Tesla era by David Stevenson (FT)

While a shift to large-scale battery use will lead to absolutely massive lithium demand, the price of lithium has been falling thanks to new production and disruptions from trade disputes. [Link]

Investing

‘Our Recent Performance Sucks.’ Here’s Your $10 Billion Back. by Jason Zweig (WSJ)

A large Philly-based value shop recently closed and returned $10bn in capital to investors after a 30 year track record of strong returns. Recent results were simply too poor to justify continued operations. [Link; paywall]

People Fear a Market Crash More Than They Have in Years by Robert Shiller (NYT)

The combination of COVID and elections have US investors extremely anxious about the possibility of a major equity market decline per data collected by Shiller and the International Center for Finance at Yale. [Link; soft paywall]

Real Estate

Hamptons real estate prices break records as New York City wealthy flee to the beach by Robert Frank (NBC)

As COVID hit New York, the wealthy decamped for more spacious accommodation on Long Island, driving the average sales price for Hamptons homes up almost 50% in Q3 versus Q2. [Link]

Scandal

Leon Black’s Epstein Links Threaten Apollo’s Fundraising by Heather Perlberg and Sabrina Willmer (Bloomberg)

After PE giant Apollo Global Management head Leon Black was reported to have links to sex offender Jeffrey Epstein, clients started to halt investments with the company. [Link; soft paywall]

Reopening

Disney Denounces California’s Theme-Park Reopening Plans by R. T. Watson (WSJ)

Eager to resume operations, Disney is chafing under California regulations that require “minimal” community spread before a theme park can be re-opened in the state. [Link; paywall]

Entrepreneurship

How a tiny peanut butter company grew to $500k per month in sales by Zachary Crockett (The Hustle)

Too much of a good thing can swamp a business, and that was the experience of Nerdy Nuts, a home-based peanut butter company that started as the pandemic hit. [Link]

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Have a great weekend!

You may not realize it, but while the Tech-heavy Nasdaq Composite is up a ridiculous 28% so far in 2020, the Dow Jones Industrial Average is still in the red on the year.

Below is a table showing the Dow and Nasdaq’s annual percentage change since 1972 when the Nasdaq came into existence.  Were the year to end now, the Nasdaq would be outperforming the Dow by 28.65 percentage points.  This would be the third strongest outperformance for the Nasdaq on record and the strongest since 1999 when the spread was 60 percentage points!

Below are all years since 1972 in which the Nasdaq outperformed the Dow by at least ten percentage points.  The Nasdaq has posted an annual gain of 20%+ in seventeen different years, but never in a year when the Dow was in the red.  Probably the year that most resembles 2020 in terms of the performance spread is 1979 when the Nasdaq rose 28.11% and the Dow rose just 4.19%.  Following that year in 1980, both the Dow and Nasdaq surged again and the Nasdaq outperformed by another 18.9 percentage points.

Interestingly, of the twelve years where the Nasdaq outperformed the Dow by more than ten percentage points, the Nasdaq went on to beat the Dow again in the next year eleven out of twelve times.  The only time we’ve seen the Nasdaq crumble versus the Dow in the following year was in 2000 after 1999’s outperformance.  In 1999, the Nasdaq beat the Dow by a humongous 60 percentage points.  After that large gap, though, the Nasdaq ran out of gas in 2000 and underperformed the Dow by 33 percentage points when the Dot Com Bubble finally burst.  Click here to view Bespoke’s premium membership options for our best research available.