The Closer — Bounce Over, Valuation Divergence, Bond Yields Down — 11/12/18

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Looking for deeper insight on markets?  In tonight’s Closer sent to Bespoke Institutional clients, we focus on the US equity market, with a number of decile analyses, valuation discussions, and historical summaries based on the current market. We also take a look at a significant technical development in the long bond.

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What Election Rally?

It’s days like this where the major US equity exchanges should take a page out of the fixed income market playbook and just stay closed on bank holidays.  It’s bad enough that stock traders all have to work while their fixed income counterparts enjoy the three-day weekend, but to come into the office for this?  Thanks a lot!  Looking at the chart of the S&P 500 following today’s decline, it is now back below its downward sloping 200-DMA and has erased more than all of its post-election rally from last Wednesday.  Big rallies followed by even bigger more drawn out declines is not something you would normally associate with bull market behavior.

While the moves of the market over the last couple of days are not particularly encouraging, it is interesting to see that of the S&P 500’s 60+ industries, just as many are hitting 52-week highs today as are hitting 52-week lows.  On the upside, Food & Staples Retail and Power & Renewable Electricity both hit 52-week highs earlier today.  Food & Staples Retail is made up of names like Walmart (WMT), Costco (COST), and CVS, while some of the larger components in the latter group include NRG and AES.  While Food & Staples Retail is a relatively large group accounting for about 2% of the S&P 500, Power & Renewable Energy is puny.

On the downside, the two groups hitting 52-week lows today are Energy Equipment & Services, which is made up of names like Schlumberger (SLB), Baker Hughes (BHGE), and Halliburton (HAL), and Industrial Conglomerates.  When you think of Industrial Conglomerates, General Electric (GE) is usually the first name that comes to mind, but given its declines over the last two years, it is now actually a smaller percentage of the index than 3M and Honeywell (HON).

General Electric (GE) Nearing Financial Crisis Lows

General Electric (GE) is trading down another 5% today as it flirts with a share price below $8.  It’s been as painful as it gets for GE and shareholders for the last two years.  Since peaking just above $30 in mid-2016, the stock has been straight down.  At its current level, the stock is just 55 cents (7%) above the price it closed at on March 9th, 2009 when the S&P 500 made its low of the Financial Crisis.  Below is a price chart highlighting the destruction.

What makes the stock’s recent drop more painful than its drop in the mid-2000s is that this time around the rest of the market has been surging.  Below is a relative strength chart of GE compared to the S&P 500.  When the line is rising, the stock is outperforming the S&P 500, and vice versa for a falling line.  As shown, relative strength for GE versus the broad market has plunged to new multi-decade lows.

Below is a table showing the worst performing current S&P 500 members since the March 9th, 2009 low for the S&P 500.  (This is simple price change and doesn’t include total returns.)  As shown, GE is the 13th worst stock with a gain of just 7.45%.  There are actually nine current S&P 500 members that are down since 3/9/09, so at least GE is still up!

Once the largest company in the world, there are now concerns regarding GE’s current financial status, and as the stock’s price continues to shrink, it doesn’t provide much of a boost to investor sentiment towards the broader market.

Inflation Expectations Surveys

Below is a chart showing inflation expectations across a number of key economic surveys dating back to 2013.  Across the market, there are lots of inflation headwinds for businesses at the moment, but core inflation has likely peaked out for the time being.  Consumers are still reporting steadily (albeit modestly) rising inflation expectations.  On Friday, the University of Michigan released their preliminary consumer confidence data on inflation expectations.  For the period of 5-10 years ahead, median inflation expectations sit at 2.6%, a joint-high dating back to March of 2016.  Other gauges of inflation expectations are also gradually picking up, which should give the Fed some confidence even if core inflation takes a breather into the start of next year.

Markets seem to be coalescing around the view that the Fed is set to hike in December, twice more next year, and then pause for an indeterminate period (possibly the rest of the cycle).  If you hold the view that the economy is not likely to start rolling towards recession in late 2019 or early 2020, then in our view three more hikes for the cycle isn’t a likely outcome.  Of course, it’s important to keep in mind that the Fed is highly dependent on economic data, so shocks (either positive or negative) could roll over in the next year to significantly change that outlook.

This Week’s Economic Indicators – 11/12/18

Last week was a relatively quiet one for economic indicators with only 17 releases.  Below is a list of the releases with the actual versus estimated readings.  The ISM Non-Manufacturing Index and Markit Service PMI kicked off the week beating estimates but were still lower from the prior month.  Thursday’s FOMC rate decision was a snooze-fest with everything coming in as expected.  Friday capped off the week with a PPI release way above estimates.  This was the only notable surprise of the week and was one factor in market declines on Friday.  Rising inflation pressures have been increasingly mentioned in earnings calls this season, and it seems that we are starting to see the effects. Higher inflation is not a good sign for markets and will certainly lead to more hawkish policy.

Moving on to this week, the US economic data slate will be a little bit heavier with 24 releases on the docket.  Since today is Veteran’s Day, there are no scheduled releases.  The bond market is also closed.  Tomorrow will kick off the week with small business optimism from the NFIB.  On Wednesday we will see if last week’s higher than expected PPI will be passed along to consumers through the CPI release.  Thursday will be the busiest day of the week with Empire Manufacturing, Philly Business Outlook, retail sales, export/import price indices, and claims all releasing.  We round out the week with industrial and manufacturing numbers.

Trend Analyzer – 11/12/18 – Back to Oversold?

The major US Index ETFs that are tracked through our Trend Analyzer tool moved higher within their trading ranges last week.  The Dow 30 (DIA) gained enough to push back above its 50-day moving average, but all of the other ETFs highlighted remain below their 50-DMAs.  Smallcaps have struggled the most recently and are trading the furthest below their 50-DMAs.

Bespoke’s Asset Class Performance Matrix

As we enter another trading week, below is a snapshot of our asset class performance matrix.  For each ETF shown, we highlight its performance last week, since the 9/20 peak for the S&P 500, and year-to-date so far in 2018.

The S&P 500 (SPY) ended up gaining 2.16% last week, while the Dow (DIA) gained 3.02% and the Nasdaq 100 (QQQ) gained 1.26%.  Smallcaps were essentially flat, while Health Care (XLV) outperformed every other sector with a gain of 4.13%.  Communication Services (XLC) was the only sector down last week with a drop of 1.03%.

Outside of the US, Brazil (EWZ) and China (ASHR) both fell 5%+ last week, while other countries like Hong Kong (EWH), Mexico (EWW), Russia (RSX), and Italy (EWI) were all down 1%+.  Australia (EWA) and Spain (EWP) both gained 1%+.

Commodities fell sharply last week as well with the exception of natural gas (UNG), which spiked by 13%.

Bespoke Morning Lineup: 11/12/18

As if the stock market being open on a bond market holiday isn’t bad enough, pre-opening futures are making bulls feel even worse as all three major averages are set to open lower on the day.  Futures aren’t down by a large amount, but they are getting progressively worse as the morning goes on.  One catalyst for the weakness is a profit warning from iPhone supplier Lumentom (LITE), which cited a decline in orders from “one of our largest Industrial and Consumer customers” as the reason for the shortfall.  Outside of that, though, there is little data on the schedule and the bond market is closed for Veterans Day, so don’t expect much in the way of major news to come.

Although higher on the week, US equities finished Friday with a thud leaving the S&P 500 well below its 50-day moving average and down just under 6% from its recent highs.  While equities remain in a bit of a funk, they have plenty of company.  As shown in the graphic below, of the 29 major global indices highlighted in our Global Index screen, all but two (Brazil and Switzerland) are below their 50-day moving average, and the average distance from recent 52-week highs is over 13%.  It may be bad here, but it could be worse.  Like the US, most indices aren’t quite oversold, but they are also below their 50-DMAs, so it’s a little bit of a holding pattern in search of a catalyst.

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Bespoke Brunch Reads: 11/11/18

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, try a two-week free trial to Bespoke’s premium stock market research!

First off, our week 10 picks.


Why Does It Take So Long To County Ballots? (Arizona Secretary of State)

Given vote tabulations are still under way in a number of states, four days after election night, this explanation of what takes Arizona specifically so long to count is very helpful. [Link]

An 82-year-old Texas woman voted for the first time. Then she died. by Lindsey Bever (WaPo)

The heartwarming story of a North Texas woman who managed to make it to the polls for the first time in her life just days before she passed away. [Link; soft paywall]

How Fox News Called the 2018 Midterms Before Rivals by Brian Steinberg (Variety)

Fox News got way ahead of the rest of the field in calling that the House would be won by Democrats on Tuesday night; here’s a the story of that early call. [Link]


Mike Bloomberg and Tom Steyer become kingmakers for Democrats as both billionaires mull a 2020 run by Brian Schwartz (CNBC)

Billionaire former New York mayor Mike Bloomberg saw 21 of the 24 House candidates his PAC supported win on Tuesday, while Steyer helped flip at least 12 races with his support. [Link]


Did Scott Walker And Donald Trump Deal Away The Wisconsin Governor’s Race To Foxconn? By Dan Kaufman (The New Yorker)

This piece was published a few days ahead of the midterm elections and race for governor in Wisconsin, but it was prescient as Walker lost his re-election bid at least in part thanks to the catastrophic boondoggle Foxconn’s new factory is turning into. A cautionary tale about the race to the bottom attracting large employers. [Link]

Their Soybeans Piling Up, Farmers Hope Trade War Ends Before Beans Rot by Binyamin Appelbaum (NYT)

It’s worth pointing out that soybeans can be stored for years without rotting, so the headline to this story is a bit excessive, but the general gist of pain in the farm economy exacerbated by tariffs is noteworthy. [Link; soft paywall]


Why ‘Free Trading’ on Robinhood Isn’t Really Free by Alexander Osipovich and Lisa Beilfuss (WSJ)

By receiving a rebate for directing trades to specific venues, Robinhood makes it possible to execute trades commission free, but that creates hidden costs for customers which aren’t immediately clear. [Link]

Spicy Distributions by Jamie Catherwood (Medium)

One of the best dividends ever: mace, pepper, and nutmeg handed out to investors in the Dutch East India company when it couldn’t come up with cash. [Link]

3 Things to Know About Factor Investing, an Increasingly Popular Way to Invest by Evie Liu (Barron’s)

Passive investors have started to shift invested dollars towards factors, which seek to generate active outperformance coupled with passive costs. [Link; paywall]


Where to Find Treasury Buyers? Not Asia by Daniel Kruger (WSJ)

Investors in Asia are much less interested in US Treasury debt than they have been previously, with foreigners buying Treasury debt at half the pace they did last year worldwide despite a huge uptick in issuance. [Link; paywall]

Once an Optimist on U.S.-China Relations, Henry Paulson Delivers a Sobering Message by Greg Ip (WSJ)

On Wednesday in Singapore, Paulson warned that “a long winter” could be brewing between the US and China, despite a long career aimed at bolstering engagement between the two countries. [Link; paywall]

China Telecom’s Internet Traffic Misdirection by Doug Madory (Internet Intel)

Large amounts of internet traffic (including US-US traffic) have been filtering through China Telecom, in a possible (but not definitive) effort to intercept traffic; the more speculative Naval War College paper (link; 11 page PDF is also worth a read). [Link]

Tech Troubles

Facebook Portal Non-Review: Why I Didn’t Put Facebook’s Camera in My Home by Joanna Stern (WSJ)

When even technology reporters are skeptical about the idea of letting you into their home to review your products, you may have a public relations problem. [Link; paywall]

Instagram Can’t Hide Behind Facebook Anymore by Scott Greer (Medium)

While the larger Facebook brand has been hit by privacy concerns, Instagram has been bulletproof, but the parent company’s concerns may trickle down along with the massive ad load. [Link]

The Tech Backlash Just Hit San Francisco. Where Next? by Nitasha Tiku (Wired)

A review of the current tug-of-war between tech and politics, especially popular politics, after the passage of Prop C (which taxes revenue of roughly 400 companies in order to double San Francisco’s homeless services budget). [Link]

Amazon Said No to Cactus, Yes to Data in Hunt for New Office by Olivia Carville and Spencer Soper (Bloomberg)

Instead of bestowing a brand new headquarters on a single city and becoming a lynchpin of the local economy, Amazon split the difference between either end of the Acela Corridor in Washington, DC and New York City. [Link; soft paywall, auto-playing video]


Dubai police training on flying motorbikes ahead of planned 2020 launch (Sky News)

Ever wanted to get into a high speed chase in three, rather than a boring old two, dimensions? Head to Dubai, where cops will start flying hoverbikes in 2020. [Link]

About (Caselaw Access Project)

CAP is trying to publish every piece of American law from 1658 to 2018, machine-readable and full of metadata. [Link]


You Do the Math: Can May Get Her Brexit Deal Through Parliament? by Robert Hutton (Bloomberg)

In order to confirm the possible Brexit deal currently being negotiated UK PM Theresa May she’ll have to fight for roughly 85 votes which currently look very hard to win. [Link; soft paywall, auto-playing video]


The Power of Explanation by nifteynei (Foolproof Ink)

A review of systems of information and how they help us think about the world, as well as how they can help reveal other truths. [Link]

Meet the Press: Survey Evidence on Financial Journalists As Information Intermediaries by Andrew C. Call, Scott A. Emett, Eldar Maksymov, and Nathan Y. Sharp (SSRN)

A large study of financial markets reporters, which shows incentives to produce original information, largely informed by sell-side analysts, and further incentives for accurate, timely, and informative reporting while also having incentives for quid pro quo with sources at companies. [Link]

Read Bespoke’s most actionable market research by starting a two-week free trial today!  Get started here.

Have a great Sunday!

2018 Week 10

Week 9 Results: 6-6, Overall: 68-52 (56.7%)

Outside of financial markets, we’re also sports fans here at Bespoke.  With new legal sports betting avenues now available across the US, we figured we’d have some fun and pick each NFL game versus the spread this season (as of Saturday evening).  Let’s see how we do…on to Week 10.  (Lines as of 8:45 PM ET on 11/10/18.)

We were 6-6 in week 9, bringing our overall record through 9 weeks to 68-52 (56.7%).

2018 NFL Week 10 Bespoke Picks:

Buffalo at NY Jets (-7): Buffalo +7

Atlanta (-6) at Cleveland: Cleveland +6

New Orleans (-5.5) at Cincinnati: Cincinnati +5.5

Washington at Tampa Bay (-3): Washington +3

New England (-6.5) at Tennessee: New England -6.5

Miami at Green Bay (-10): Green Bay -10

Jacksonville at Indianapolis (-3): Jacksonville +3

Detroit at Chicago (-7): Detroit +7

Arizona at Kansas City (-16): Arizona +16

LA Chargers (-10) at Oakland: LA Chargers -10

Seattle at LA Rams (-9.5): Seattle +9.5

Dallas at Philadelphia (-7): Dallas +7

NY Giants at San Francisco (-3): NY Giants +3

2018 NFL Week 9 Bespoke Results:

Chicago (-10) at Buffalo: Buffalo +10 (Loss)

Kansas City (-8) at Cleveland: Kansas City -8 (Win)

NY Jets at Miami (-3): NY Jets +3 (Loss)

Detroit at Minnesota (-5): Detroit +5 (Loss)

Atlanta at Washington (-2): Atlanta +2 (Win)

Tampa Bay at Carolina (-6.5): Tampa Bay +6.5 (Loss)

Pittsburgh at Baltimore (-2.5): Pittsburgh +2.5 (Win)

Houston at Denver (-1): Houston +1 (Win)

LA Chargers at Seattle (Even): LA Chargers (Even) (Win)

LA Rams (-2) at New Orleans: New Orleans +2 (Win)

Green Bay at New England (-5.5): Green Bay +5.5 (Loss)

Tennessee at Dallas (-5): Dallas -5 (Loss)

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