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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Why Americans Don’t Cheat on Their Taxes by Rene Chun (The Atlantic)
High morale and faith they are paying their fair share are key reasons that the US has been able to maintain a high rate of voluntary compliance with taxes. [Link]
All Signs Point to a Housing Boom Ahead by Conor Sen (Bloomberg)
Contrary to dour outlooks for housing that have become prevalent in recent analysis as data cooled in the latter half of last year, there are some major tailwinds in place for the space. [Link; soft paywall]
A Growing Problem in Real Estate: Too Many Too Big Houses by Candace Taylor (WSJ)
After large, high-maintenance palaces in remote (albeit attractive) locations, Baby Boomers are having a hard time finding bids of properties that don’t fit the income, lifestyle, and preferences of younger buyers. [Link; paywall]
The lawyers who took on Big Tobacco are aiming at Realtors and their 6% fee by Andrea Riquier (MarketWatch)
A class action suit filed in Chicago alleges that the realtor system is a monopoly that is not legal under federal antitrust law. [Link]
Behind the curtain at China Ding Yi Feng by Jamie Powell (FTAV)
A Chinese conglomerate suspended from trading earlier this week had some…interesting ideas about how the world – especially related to finance and investing – works. [Link; registration required]
Bitcoin Is in the Dumps, Spreading Gloom Over Crypto World by Paul Vigna (WSJ)
Since bitcoin’s 2017 blow-off top, trading volumes have collapsed, miners are facing a desperate cash crunch, and the ecosystem premised on ever-expanding prices for the underlying cryptocurrency is falling apart. [Link; paywall]
The People Who Eat the Same Meal Every Day by Joe Pinsker (The Atlantic)
As many as one-third of Brits eat the same lunch every day, and the ranks of the monotonous menu brigade are large elsewhere as well. [Link]
Chicken nugget demand is flatlining — here’s what happened by Marilyn Haigh (CNBC)
The historic bedrock of kids’ menus across the nation is falling on tough times as chicken strips and health concerns keep them off consumers’ plates. [Link]
Capt. Sullenberger on the FAA and Boeing: ‘Our credibility as leaders in aviation is being damaged’ by Captain Sully Sullenberger (MarketWatch)
After a catastrophic series of accidents related to software on its 737 MAX airframe, Boeing and its regulator have some tough questions to answer; the entire US aviation industry may be in trouble as a result. [Link]
At Hedge Fund That Owns Trump Secrets, Clashes and Odd Math by Katherine Burton, Sridhar Natarajan, and Shahien Nasiripour (Bloomberg)
A hedge fund that owns the National Enquirer has a reputation as a litigious, boundary-pushing organization in its pursuit of returns. [Link; soft paywall, auto-playing video]
Buy Gold, Sell Stocks Is the ‘Trade of Century’ Says One Hedge Fund by Sarah Ponczek (Bloomberg)
Small macro hedge fund Crescat Capital thinks precious metals are the play while equity markets are poised to tumble. [Link; soft paywall, auto-playing video]
As Costs Skyrocket, More U.S. Cities Stop Recycling by Michael Corkery (WSJ)
After China decided to stop buying US recycling materials (citing too much trash mixed in), costs have surged for municipalities that offer curbside pickup. [Link; soft paywall]
This Week In Tech
Most Amazon Brands Are Duds, Not Disrupters, Study Finds by Spencer Soper (Bloomberg)
While there’s lots of speculation that Amazon could use its market power to monopolize activity within its e-commerce platform, one study shows that Amazon-branded products don’t actually perform that well with consumers. [Link; soft paywall, auto-playing video]
The Hottest Chat App for Teens Is … Google Docs by Taylor Lorenz (The Atlantic)
With laptops proliferating and Google Docs often used as a tool for collaboration or doing work on a given subject, students are starting to use the tools as a way to talk where the teacher can’t hear. [Link]
A first look at Twitter’s new prototype app, twttr by Sarah Perez (TechCrunch)
In an effort to improve engagement, Twitter is experimenting with an alternate mobile app; here are the early results of the effort. [Link]
On Class Difference by Chris Dillow (Stumbling and Mumbling)
A discussion about how natural comfort in elite institutions – thanks to the income, social status, or culture a person is used to being in – can confer both benefits and create horrific blind spots. [Link]
A shadowy group trying to overthrow Kim Jong Un allegedly raided a North Korean embassy in broad daylight by John Hudson (WaPo)
Ahead of a meeting between North Korea’s leader Kim Jong Un and President Trump, an expat dissident group ransacked the North Korean embassy in Madrid. [Link; soft paywall]
Shake Shack Tests Four-Day Work Week Amid Tight U.S. Job Market by Matthew Boesler and Jeanna Smialek (Bloomberg)
Efforts to introduce a four-day work week in the US have been resisted for decades, but one fast food company is trying to do it in response to tight labor markets. [Link; soft paywall, auto-playing video]
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Have a great weekend!
After nice gains over the past week and a half, the S&P 500 fell sharply on Friday as the yield curve inverted for the first time in more than 3,000 days. You can see the dip into negative territory in the chart below:
Along with a recap of all of this week’s economic data and major market events, we also provide an updated take on our market view. We cover everything you need to know as an investor in this week’s Bespoke Report newsletter. To read the Bespoke Report and access everything else Bespoke’s research platform has to offer, start a two-week free trial to one of our three membership levels. You won’t be disappointed!
Looking for deeper insight on global markets and economics? In tonight’s Closer sent to Bespoke clients, we recap weekly price action in major asset classes, update economic surprise index data for major economies, chart the weekly Commitment of Traders report from the CFTC, and provide our normal nightly update on ETF performance, volume and price movers, and the Bespoke Market Timing Model. We also take a look at the trend in various developed market FX markets.
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While the rest of the market was rallying and holding up, the Russell has been struggling for close to a month now. After peaking above its 50-DMA back on 2/25, the Russell has had a hard time holding onto any gains lately. Earlier this week it made a lower high when the rest of the market was making higher highs, and to close out the week, it declined 3.6% for its worst day of 2019, making a lower low. Not a pretty chart at all.
The Russell’s underperformance can really be seen in the ratio of the Nasdaq to the Russell 2000. This week, the ratio between the two really become unglued, topping 5 for the first time since February 2001.
On a longer-term basis, the only time the Nasdaq has been outperforming the Russell 2000 by such a wide margin was during the period from November 1998 through February 2001. And if you think the ratio is extreme now, during that period it got as high as 8.64 on March 28, 2000. In order for the ratio to get to that sort of extreme now, the Nasdaq would need to top 13,000 (assuming the Russell remained at the same level).
If you are anything else besides the yield curve today, the market doesn’t care. After inverting for the first time since 2007 earlier today, the spread between the yields on the 10-year and 3-month US Treasuries has sucked up all the oxygen in the room as investors, traders, and their algos fret over the ominous economic signal that an inverted yield curve historically implies. Who cares whether the onset of a recession usually comes several months or even a couple of years after the curve first inverts; investors are using this as an excuse to take profits, and take profits is what they’re doing.
Just to illustrate how captivating the yield curve has been to the equity market, check out an intraday chart of S&P 500 futures versus the yield curve since very early this morning. Moves in the yield curve are clearly leading equities. When the curve started flattening early this morning, equities started heading south with the pace of selling accelerating when the curve inverted. Then, as the curve made its intraday low right after noon, the low in equities followed less than 40 minutes later. It’s like the school playground, where the yield curve is the ‘cool kid’ and equities are the followers.
With regards to the outlook for the rest of the year, there’s no other way to describe the current STIRs market other than “getting carried away.” As shown below, the Fed Funds Futures market has moved from pricing a greater than 90% chance of no hikes in 2019 to a more than 50% chance that we will see a rate cut by the end of the year! For context, as recently as mid-October the odds of either one hike, two hikes, or three-plus hikes were all around 1-in-4. While rate hikes being taken off the table for this year makes sense given the Fed’s extremely dovish shift since financial markets collapsed and global data gave up the ghost late in 2018, markets are going considerably further.
Investors are wondering what the right number is for the market as stocks leg lower on bad global data to close the week. Without taking a view on what the “right” price for the S&P 500 is, below we show a way to organize thinking about valuation in the short-term. In the table below we show a range of EPS growth rates relative to 2018 and a range of multiples on the resulting EPS numbers. The result is where the S&P 500 should trade given hypothetical earnings and how those are valued. For example, if you estimate EPS will fall 2% in both 2019 and 2020, and you value those EPS at a multiple of 15.0x, the S&P 500 is almost 700 points above where it should be! Alternatively, if you think EPS will be stable but should be valued at a relatively aggressive 19.0x, the S&P 500 should be trading near 3100. In the grid below, we’ve highlighted ~2800 values (roughly where the S&P 500 sits right now) to show the implicit EPS growth and multiple assumptions embedded in the price. Again, we don’t know the “right” combination of multiples and EPS growth, but if you’re extremely beared up with the Friday drop or think stocks are set to surge thanks to a dovish Fed, this analysis can help you see what sort of assumptions would need to play out for that to happen.
As equities recovered losses from Wednesday’s FOMC meeting with strong gains yesterday, the major index ETFs have made another move towards overbought levels. Five index ETFs are neutral, while the other nine are overbought with one of these now to an extreme degree. Small and mid caps continue to lag behind their larger cap peers. Each of these ETFs in addition to the Dow (DIA), while still positive, have only seen modest gains of under 1% relative to other large cap ETFs gains which are all up well over 1%. The Nasdaq (QQQ) continues to blow the rest of the market out of the water with almost double the returns of the next best ETF over the last week. QQQ is up 3.5%, but these gains come with a cost as it is now in extreme overbought territory, sitting 7.57%, or more than 2 standard deviations, above its 50-DMA.
The Nasdaq’s strength comes thanks to the Technology sector (XLK). On top of outperforming YTD with a gain of over 21%, it is now up 3.79% this week and at extreme overbought levels. Additionally, Consumer Discretionary (XLY) has also rallied over 3% in the past 5 days bringing it to extremely overbought levels as well. In spite of these two sector’s outstanding performance, no other sector has managed to edge out gains that are as impressive. For example, the next best performing sector is Energy (XLE) which is only up 1.88%. On the other hand, Financials (XLF) have gotten hammered thanks to less favorable rates. The sector is now down 1.96% this week falling all the way back to its 50-DMA after sitting just barely below overbought levels last Friday.
Investors are scrambling for fixed income this morning after some truly bad economic data in Europe. 10-year bunds are back to negative yields and the US Treasury yield curve (10y vs 3m) is just 2 basis points (bps) from inversion. As you might expect, equity futures aren’t taking too kindly to the moves in fixed income and are looking to close out the week on a down note.
Please click the link below to read today’s Bespoke Morning Lineup.
Bespoke Morning Lineup – 3/22/19
As noted in our Closer report last night, one of the defining characteristics of the rally off the Christmas Eve lows for the stock market was the trend of strong buying in the last hour of trading and right into the closing bell (light blue line), which is generally considered a positive market signal. That strength stood in stark contrast to the period from 9/21 through 12/24, where the S&P 500 typically sold off towards the close (red line). Over the last two weeks, late day buying power has started to weaken (dark blue line). Up to this point, we haven’t seen it turn outright negative, but it has shifted to a more neutral trend and something that bears watching in the weeks ahead.
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Looking for deeper insight on markets? In tonight’s Closer sent to Bespoke Institutional clients, we take a look at the rally in credit which has brought it right up to resistance. Staying on the topic, we pivot towards the underperformance of banks which have been moving contrary to what credit would lead one to believe. After making note of recent late session trends, we turn to macro data with an update to our Five Fed Manufacturing Composite which—with the addition of the Philly Fed’s release—is showing strong shipments but weaker forward-looking indicators. We finish tonight covering the lackluster labor productivity in some Eurozone countries and Chinese auto sales dragging down the global metrics.
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